As filed with the Securities and Exchange Commission on May 30, 2000
Registration No. 333-30322
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
AMENDMENT NO. 1 TO FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
__________________________
CANAAN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Oklahoma 1311 73-1300132
(State or other jurisdiction of (Primary standard industrial classification code number) (I.R.S. Employer
incorporation or organization) Identification No.)
119 North Robinson, Suite 600
Oklahoma City, Oklahoma 73102
(405) 232-3222
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
Leo E. Woodard
119 North Robinson, Suite 600
Oklahoma City, Oklahoma 73102
(405) 232-3222
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
__________________________
Copies to:
Michael M. Stewart, Esq.
Crowe & Dunlevy,
A Professional Corporation
1800 Mid-America Tower
20 North Broadway
Oklahoma City, Oklahoma 73102
(405) 235-7700
__________________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE
OF THE SECURITIES TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
__________________________
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
-----------
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
__________________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
-----------
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Securities Amount to be Proposed Maximum Proposed Maximum Amount of
to Be Registered Registered/(1)/ Offering Price Per Aggregate Offering Registration
Share/(2)/ Price/(2)/ Fee/(2)/
- ----------------------------------------------------------------------------------------------------------------
Common Stock, par value $0.01 per 3,830,000 $4.4658 $17,104,014 $4,755.00/3)/
share...............
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(1) Excludes shares issued to owners of entities involved in the transaction who
have already agreed to sell.
(2) Calculated based on the book value of the securities to be received by the
Registrant or canceled in the transaction pursuant to Rule 457(f)(2).
(3) Previously paid $6,208.00
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Subject to Completion Dated May 30, 2000
CANAAN ENERGY CORPORATION
PARTNERSHIP ROLLUP TRANSACTION
Canaan Energy Corporation, an Oklahoma based oil and gas company
previously known as Coral Reserves Group, Ltd., is offering shares of common
stock in connection with a plan of combination. Under the plan:
. Canaan will acquire all of the limited partners' interests in
eight private oil and gas limited partnerships previously
sponsored by Coral Reserves, Inc. and Coral Reserves Energy
Corp., affiliates of Canaan.
. Canaan will acquire 100% of the stock of Coral Reserves, Inc. and
Coral Reserves Energy Corp.
. Canaan will acquire 100% of the stock of Indian Oil Company, an
unaffiliated oil and gas company;
. Canaan will acquire 100% of the stock of Canaan Securities, Inc.,
an unaffiliated broker/dealer; and
. Existing owners of Canaan's common stock will receive additional
shares of common stock.
The owners of each of the entities involved in the transactions will
receive shares of Canaan common stock in proportion to the exchange value of
such entity relative to the total exchange value of all entities. Limited
partners will have a right to receive cash as described in this document. A
total of 5,000,000 shares of Canaan common stock will be issued and be
outstanding after the combination transactions, less the number of shares
otherwise issuable to limited partners who elect to receive cash.
The plan of combination requires the approval of limited partners and
the plan requires that all partnerships adopt the plan. A combined special
meeting of the partnerships to vote on the plan is scheduled for__________,
2000.
Prior to this transaction there has been no public market for Canaan
common stock. Canaan has applied for shares to be quoted in the NASD National
Market System under the proposed symbol "KNAN".
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
determined if this document or the accompanying prospectus supplement is
truthful or complete. Any representation to the contrary is a criminal offense.
The combination transactions involve various risks. Please See
"Summary - Risk Factors" beginning on Page 20 and "Risk Factors and Material
Considerations" on Page 30. These risks include among others:
. Fundamental change in nature of investment.
. Elimination of cash distributions.
. No prior market for Canaan common stock.
. Conflicts of interest in establishing terms of the transaction.
. Uncertainties in valuation process.
. No adjustment for changes in commodity prices.
. Continuation or liquidation of partnerships could be more beneficial to the
limited partners.
. No independent representative of limited partners or fairness opinion.
The Information in this document is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
The Date of this Prospectus/Proxy Statement is: __________________, 2000
CORAL RESERVES NATURAL GAS INCOME FUNDS
CORAL RESERVES INSTITUTIONAL
LIMITED PARTNERSHIPS
AND
CORAL RESERVES ENERGY INCOME FUNDS
Notice of Special Meetings of Limited Partners
To Be Held ________________, 2000
To Our Limited Partners:
A combined meeting of the limited partners of the eight (8) limited
partnerships consisting of Coral Reserves Natural Gas Income Fund 1990 Limited
Partnership, Coral Reserves Natural Gas Income Fund 1991 Limited Partnership,
Coral Reserves Natural Gas Income Fund 1992 Limited Partnership, Coral Reserves
Natural Gas Income Fund 1993 Limited Partnership, Coral Reserves 1993
Institutional Limited Partnership, Coral Reserves Energy Income Fund 1995
Limited Partnership, Coral Reserves Energy Income Fund 1996 Limited Partnership
and Coral Reserves 1996 Institutional Limited Partnership, collectively (the
"Partnerships"), will be held at ____________________________, Oklahoma City,
Oklahoma 73102, on _____________, 2000 at _____ a.m. (the "Special Meeting").
At the Special Meeting, the limited partners of each of the
Partnerships will:
(1) consider and vote upon the adoption of a plan of combination
pursuant to which each of the Partnerships will merge with an acquisition
subsidiary of Canaan Energy Corporation in which limited partners and the
additional general partners will receive shares of Canaan common stock in
exchange for their interests in the Partnerships; and
(2) transact such other business that may properly come before the
Special Meeting or any adjournments thereof.
Your attention is directed to the accompanying prospectus/proxy statement and
prospectus/proxy statement supplement(s) which contain further information with
respect to the proposals to be considered at the Special Meeting.
Only limited partners of record of one or more of the Partnerships at
the close of business on ______________, 2000 are entitled to notice of and to
vote at the Special Meeting or any postponements or adjournments thereof. Each
Partnership's approval of the plan of combination requires an affirmative vote
by a majority-in-interest of the limited partners of the Partnership.
Information regarding voting and the revocation of proxies and making of cash
elections is set forth under "Special Meeting of the Partnerships".
Please see the accompanying individual partnership supplement for
additional information about the effect of the transaction on your Partnership.
Whether or not you expect to be personally present at the Special
Meeting, please be sure that the enclosed proxy and cash election form and
letter of transmittal is properly completed, dated, signed and returned without
delay in the enclosed envelope.
CORAL RESERVES ENERGY CORP.
CORAL RESERVES, INC.
Managing General Partners
By: _______________________________
Leo E. Woodard, President
__________________, 2000
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You should rely only on the information contained in this document and
the accompanying prospectus supplement. We have not authorized anyone to
provide you with different information. We are not making an offer of these
securities in any state where the offer is not permitted. You should not assume
that the information contained in this document or the accompanying prospectus
supplement is accurate as of any date other than the date on the front of those
documents.
Table of Contents
Page
---
QUESTIONS AND ANSWERS..................................................................................... 1
SUMMARY................................................................................................... 3
The Parties.......................................................................................... 3
The Combination Transactions......................................................................... 7
Method of Determining Combination Exchange Values.................................................... 8
Summary of Estimated Exchange Values................................................................. 12
Determination of Appraised Value..................................................................... 18
Risks Related to the Combination Transactions........................................................ 20
Risks Related to Canaan.............................................................................. 22
Risks Related to the Oil and Gas Industry............................................................ 22
Background and Reasons for the Combination Transactions.............................................. 23
Fairness of the Combination Transactions............................................................. 25
Alternatives to the Combination Transactions......................................................... 26
Appraisal Rights; Investor Lists..................................................................... 26
Accounting Treatment................................................................................. 27
Business After the Completion of the Combination Transactions........................................ 27
Comparative Rights of Security Holders............................................................... 28
Resales of Canaan Common Stock....................................................................... 28
Conditions to Combination Transactions............................................................... 28
Regulatory Approvals................................................................................. 29
Pro Forma Financial Data............................................................................. 29
RISK FACTORS AND MATERIAL CONSIDERATIONS.................................................................. 30
Risks Related to the Combination Transactions........................................................ 30
Risks Related to Canaan.............................................................................. 35
Risks Related to the Oil and Gas Industry............................................................ 37
BACKGROUND AND REASONS FOR COMBINATION TRANSACTIONS....................................................... 41
Background of Partnerships........................................................................... 41
Background of Combination Transactions............................................................... 43
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Reasons for the Combination Transactions........................................................ 44
Other Transactions.............................................................................. 48
THE COMBINATION TRANSACTIONS......................................................................... 49
Description of the Combination Transactions..................................................... 49
The Plan of Combination and Indian Acquisition Agreement........................................ 49
Effective Time of the Combination Transactions.................................................. 51
Consideration to be Received in the Combination Transactions.................................... 52
Issuance of Shares; Fractional Shares........................................................... 52
Limited Partner Cash Election................................................................... 53
Conditions...................................................................................... 53
Representations and Warranties.................................................................. 54
Covenants....................................................................................... 55
Indian Excluded Assets.......................................................................... 57
Termination or Amendment........................................................................ 57
Appraisal Rights................................................................................ 58
NASDAQ Listing.................................................................................. 58
Interest of Certain Persons in the Transaction.................................................. 58
Resales of Canaan Common Stock.................................................................. 59
Accounting Treatment............................................................................ 60
Expenses and Fees............................................................................... 60
METHOD OF DETERMINING COMBINATION EXCHANGE VALUES AND APPRAISED VALUES............................... 62
General......................................................................................... 62
Partnership Exchange Values and Allocation to Partners, Canaan Securities and Placing Brokers... 67
Canaan Securities Exchange Value................................................................ 68
Canaan Exchange Value........................................................................... 68
Indian Exchange Value........................................................................... 69
Summary of Allocation of Exchange Values........................................................ 69
RECOMMENDATION OF THE GENERAL PARTNERS AND FAIRNESS OF THE COMBINATION TRANSACTIONS................... 74
General......................................................................................... 74
Consideration of Alternatives................................................................... 78
Comparison of Alternatives...................................................................... 83
Fiduciary Duties of General Partners............................................................ 84
Access to Investor List......................................................................... 86
Conflicts of Interest........................................................................... 86
No Independent Representative................................................................... 87
FAILURE TO APPROVE THE COMBINATION TRANSACTIONS...................................................... 87
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SPECIAL MEETING OF THE PARTNERSHIPS........................................................................ 88
General............................................................................................... 88
Voting Rights......................................................................................... 88
Proxy and Cash Election Form and Letter of Transmittal................................................ 89
Solicitation.......................................................................................... 89
Voting Requirements................................................................................... 89
Rights of Appraisal................................................................................... 90
MATERIAL FEDERAL INCOME TAX CONSEQUENCES................................................................... 90
General............................................................................................... 90
Limited Partners...................................................................................... 91
Holders of Common Stock of the General Partners and Indian............................................ 93
Canaan Securities..................................................................................... 93
Placing Brokers....................................................................................... 93
Canaan................................................................................................ 93
Reporting Requirements of Limited Partners and Shareholders of Corporate Combining Entities........... 93
INFORMATION CONCERNING CANAAN.............................................................................. 94
General............................................................................................... 94
Costs Incurred and Drilling Results................................................................... 94
Acreage............................................................................................... 95
Productive Well Summary............................................................................... 95
Selected Historical Financial and Operating Data...................................................... 96
Management's Discussion and Analysis of Financial Condition and Results of Operations................. 98
INFORMATION CONCERNING THE GENERAL PARTNERS................................................................ 106
General............................................................................................... 106
Selected Historical Financial and Operating Information............................................... 107
INFORMATION CONCERNING PARTNERSHIPS........................................................................ 110
1990 Partnership...................................................................................... 110
1991 Partnership...................................................................................... 111
1992 Partnership...................................................................................... 112
1993 Partnership...................................................................................... 113
1993-I Partnership.................................................................................... 114
1995 Partnership...................................................................................... 115
1996 Partnership...................................................................................... 116
1996-I Partnership.................................................................................... 117
Acreage and Productive Wells for All Partnerships..................................................... 118
Beneficial Owners of Partnerships..................................................................... 120
Selected Historical Financial and Operating Data For Individual Partnerships.......................... 121
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INFORMATION CONCERNING INDIAN................................................................................ 130
General................................................................................................. 130
Costs Incurred and Drilling Results..................................................................... 130
Acreage................................................................................................. 131
Productive Well Summary................................................................................. 131
Selected Historical Financial and Operating Information................................................. 132
Security Ownership...................................................................................... 134
INFORMATION CONCERNING CANAAN SECURITIES..................................................................... 134
General................................................................................................. 134
Selected Financial Data................................................................................. 135
BUSINESS OF CANAAN AFTER COMPLETION OF THE COMBINATION TRANSACTIONS........................................... 136
General................................................................................................. 136
Costs Incurred and Drilling Results..................................................................... 137
Acreage................................................................................................. 138
Productive Well Summary................................................................................. 138
Production Summary and Prices........................................................................... 139
Marketing............................................................................................... 139
Competition............................................................................................. 140
Regulation.............................................................................................. 141
Operating Hazards and Uninsured Risks................................................................... 142
Employees............................................................................................... 143
Facilities.............................................................................................. 143
Legal Proceedings....................................................................................... 143
Capitalization.......................................................................................... 143
Credit Facilities....................................................................................... 144
Financing Plans......................................................................................... 146
Quantitative and Qualitative Disclosures about Market Risk.............................................. 146
MANAGEMENT................................................................................................... 148
Officers and Directors.................................................................................. 148
Committees.............................................................................................. 151
Compensation of Directors............................................................................... 151
Executive Compensation.................................................................................. 151
Change in Control Agreements............................................................................ 153
Compensation Decisions.................................................................................. 153
Stock Option Plan....................................................................................... 153
Profit Sharing Plan..................................................................................... 154
Certain Transactions.................................................................................... 155
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................... 155
COMPARISON OF SECURITYHOLDER RIGHTS.......................................................................... 156
Introduction............................................................................................ 156
Federal Income Taxation................................................................................. 157
Management and Compensation............................................................................. 157
Operating Strategy...................................................................................... 158
Fiduciary Duties........................................................................................ 158
Voting Rights........................................................................................... 159
Special Meetings........................................................................................ 159
Amendment to Organizational Documents................................................................... 160
Anti-Takeover Provisions................................................................................ 161
Distributions and Dividends............................................................................. 162
Liquidation Rights...................................................................................... 164
Limited Liability....................................................................................... 164
Continuity of Existence................................................................................. 165
Financial Reporting..................................................................................... 165
Redemption and Conversion............................................................................... 165
Right to Compel Dissolution............................................................................. 166
Liquidity, Marketability and Restriction on Transfer.................................................... 166
Limitations on Liability of Management.................................................................. 167
Right to Investor List; Inspection of Books and Records................................................. 168
Compensation and Distributions to General Partners...................................................... 168
DESCRIPTION OF CAPITAL STOCK................................................................................. 169
General................................................................................................. 169
Common Stock............................................................................................ 169
Preferred Stock......................................................................................... 170
Oklahoma Law and Certificate and Bylaw Provisions - Anti-Takeover Effects............................... 170
Transfer Agent and Registrar............................................................................ 174
LEGAL MATTERS................................................................................................ 174
EXPERTS...................................................................................................... 174
AVAILABLE INFORMATION........................................................................................ 175
FORWARD LOOKING STATEMENTS................................................................................... 176
DEFINITIONS.................................................................................................. 176
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INDEX TO FINANCIAL STATEMENTS........................................................................ F-1
APPENDIX A Summary of Netherland, Sewell & Associates, Inc Estimated Reserves.................... A-1
APPENDIX B Unaudited Pro Forma Financial Information............................................. B-1
APPENDIX C Combining balance sheet as of March 31, 2000 of the partnerships
combining statements of operations and cash flows for the year ended
and December 31, 1999 and the three months ended March 31, 2000....................... C-1
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QUESTIONS AND ANSWERS
Q: What is being proposed?
A: Canaan is proposing a series of combination transactions to combine eight
private limited partnerships previously sponsored by its affiliates and
Indian Oil Company and Canaan Securities, Inc. into a new publicly traded
oil and gas company.
Q: What will I receive as a result of the combination transactions?
A: Limited partners will receive shares of Canaan common stock based on the
relative value of their ownership interest in a partnership compared to the
total value of all entities involved in the transaction. The number of
shares limited partners will receive in each partnership is estimated on
page 16. The method of determining relative value is described on page 62.
Q: What happens to my partnership cash distributions?
A: The partnerships currently pay limited partners regular cash distributions.
You will continue to receive cash distributions from the partnerships until
closing of the combination transactions. Thereafter, you will receive no
further cash distributions from the partnerships or dividends as Canaan
does not anticipate paying dividends on its common stock.
Q: What if I do not want Canaan common stock?
A: A limited partner may elect to receive cash in lieu of Canaan common stock
in an amount equal to the appraisal value of his interest based on an
appraisal of the partnership assets by an independent appraiser. There is
a limit of $15 million on the amount of cash payable to electing limited
partners.
Q: What are the tax consequences of the combination transactions?
A: The combination transaction will be treated as a transfer of your interest
in a partnership to Canaan and be tax free to you, unless you elect to
receive cash. After the combination transactions, you will be a
shareholder rather than a limited partner so you will no longer receive the
pass-through tax treatment accorded to partners and you will no longer
receive a Schedule K-1. You should consult your tax advisor concerning the
Federal and other tax consequences of the proposed combination
transactions.
Q: What do I need to do now?
A: After carefully considering the enclosed information, please indicate how
you want to vote and sign and return your proxy and cash election form and
letter of transmittal in the enclosed envelope as soon as possible. Your
interest will then be voted at the special meeting in accordance with your
instructions.
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Q: What happens if I don't vote my interest?
A: The failure to vote at the special meeting will have the same effect as
voting against the combination transactions.
Q: When do you expect the combination transactions to be completed?
A: We expect the combination transactions to be completed within one or two
business days after receiving approvals of all partnerships at the special
meeting.
Q: When will shares of Canaan begin trading?
A: We anticipate that Canaan shares will begin trading on the NASDAQ National
Market System on the day after the combination transactions are completed.
Q: How do I sell my shares of Canaan?
A: Once you receive your new certificate for shares of Canaan common stock you
can sell your shares of Canaan through any brokerage firm. It is
anticipated that certificates for Canaan common stock will be issued
promptly after completion of the combination transactions if you have
previously submitted a properly completed and executed letter of
transmittal.
Q: What do the General Partners of the partnerships recommend?
A: The General Partners and Canaan recommend that limited partners vote for
approval of the combination transactions.
Q: Who can help answer additional questions that I may have?
A: Canaan Energy Corporation - (405) 232-3222. However, Canaan has conflicts
of interests in connection with the transaction as described elsewhere in
this document.
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SUMMARY
The following summary highlights selected information from this
document and may not contain all of the information that is important to you.
For a more complete understanding of this offering, we encourage you to read
this entire document and the documents to which we have referred you. Terms
used in this document are defined under the Section "Definitions".
The Parties
Canaan Energy Corporation
119 N. Robinson, Suite 600
Oklahoma City, OK 73102
Canaan, formerly known as Coral Reserves Group, Ltd., is an
independent oil and gas company headquartered in Oklahoma City, Oklahoma.
Canaan was formed in March, 1987, as an Oklahoma corporation, by Leo E. Woodard
and John K. Penton. Mr. Woodard continues to serve the company as chief
executive officer and Mr. Penton serves as president.
Canaan has been continuously engaged in the acquisition, production,
development and operation of oil and natural gas properties. As of December 31,
1999, Canaan operated 110 wells in which it or the partnerships own an interest.
Operations are located entirely within the state of Oklahoma and are
concentrated in Kingfisher County in north central Oklahoma and Garvin and
McClain counties in south central Oklahoma. As of December 31, 1999, the
estimated present value of Canaan's proved oil and gas reserves was less than
$500,000.
Since 1990, when Coral Reserves, Inc. and Coral Reserves Energy Corp.
began sponsoring partnerships, Canaan has provided management services to them
as the General Partners of the partnerships.
As a result of the combination transactions, Canaan will acquire all
of the other parties to the combination transactions and the equity owners of
the other parties to the combination transactions will become shareholders of
Canaan. Canaan will continue the combined businesses of the entities involved
after the completion of the combination transactions.
Canaan is currently 100% owned by its management, Leo E. Woodard,
47.5%, John K. Penton, 47.5%, and Michael S. Mewbourn, 5%.
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Coral Reserves, Inc. and Coral Reserves Energy Corp.
119 N. Robinson, Suite 600
Oklahoma City, OK 73102
Coral Reserves, Inc., which we refer to as Coral, Inc., serves as
general partner of three of the partnerships and conducts no other business
activities.
Coral Reserves Energy Corp., which we refer to as Coral Corp., serves
as general partner of the remaining five partnerships and conducts no other
business activities.
We occasionally refer to Coral, Inc. and Coral Corp. individually as
"General Partner" and collectively as "General Partners".
Coral Reserves, Inc. and Coral Reserves Energy Corp. are affiliated
with Canaan by common management and ownership. Each of these companies is
owned by management of Canaan in the same ownership percentages that they own of
Canaan which are Leo E. Woodard, 47.5%, John K. Penton, 47.5%, and Michael S.
Mewbourn, 5%.
Indian Oil Company
9400 North Broadway, Suite 800
Oklahoma City, OK 73114
Indian Oil Company is a privately-held Oklahoma corporation which is
engaged in oil and gas exploration, development and production, primarily in
Oklahoma. Indian is not affiliated with Canaan or the General Partners. On
February 15, 1999, Indian, Canaan and the General Partners entered into an
agreement for Canaan to acquire Indian as a part of the combination transactions
and since that date Canaan has been responsible for the day to day management of
Indian subject to control by the Indian board of directors.
Indian is owned by five stockholders who are not currently affiliated
with Canaan, including Anthony Lasuzzo, a proposed executive officer of Canaan.
Canaan Securities, Inc.
21 Locust Avenue, Suite 2A
New Canaan, CT 06840
Canaan Securities, Inc. is not affiliated with Canaan and the General
Partners and is a registered broker/dealer with the SEC and the National
Association of Securities Dealers. Canaan Securities served as a placement agent
in connection with the private placement of the limited partnership interests in
the partnerships. Canaan Securities also engaged other unaffiliated brokers to
assist in the placement, which are referred to as "Placing Brokers". Canaan
Securities and the Placing Brokers receive fees for these services based on the
partnerships' ongoing cash distributions from oil and gas properties. In
addition, Canaan Securities provides ongoing
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reporting services to the limited partners for which it has received and
continues to receive fees based on the partnerships' revenues from oil and gas
properties. Canaan Securities does not engage in any other business activities.
Canaan Securities is 100% owned by Thomas H. Henson, a proposed
executive officer and director of Canaan.
The Partnerships
119 N. Robinson, Suite 600
Oklahoma City, OK 73102
The partnerships consist of Oklahoma limited partnerships previously
sponsored by the General Partners for purposes of acquiring producing oil and
gas properties primarily in Oklahoma and conducting limited additional
development activity relating to the acquired properties. In each of the
partnerships, Leo Woodard and John Penton, officers and shareholders of Canaan,
serve as "Additional General Partners". Each of the partnerships raised capital
in private offerings from limited partners, primarily individuals and
substantially all of whom are considered "accredited investors" under the
federal securities laws. There is no market for the limited partnership
interests and Canaan and the General Partners are not aware of any purchases or
sales of interests within the last five years except for isolated transactions
not involving brokers or other market participants. The following table sets
forth information about the partnerships:
Cumulative Cash
Distributions to
Total Initial Capital Limited Partners
Identity of # of Date Contributions of Through March
General Limited Commenced Limited Partners 31, 2000
Name of Partnership Partner Partners Operations (000 Omitted) (000 Omitted)
- ------------------- ------- -------- ---------- ----------- ----------------
Coral Reserves Natural Gas Income Fund Coral, Inc. 109 04/30/90 $ 3,888 $ 5,550
1990 Limited Partnership ("1990")
Coral Reserves Natural Gas Income Fund Coral Corp. 124 04/30/91 4,480 6,456
1991 Limited Partnership ("1991")
Coral Reserves Natural Gas Income Fund Coral Corp. 191 06/17/92 7,500 7,243
1992 Limited Partnership ("1992")
Coral Reserves Natural Gas Income Fund Coral Corp. 173 07/02/93 6,525 5,933
1993 Limited Partnership ("1993")
Coral Reserves 1993 Institutional Limited Coral, Inc. 21 09/01/93 2,363 2,639
Partnership ("1993-I")
Coral Reserves Energy Income Fund 1995 Coral Corp. 196 12/13/94 6,805 5,199
Limited Partnership ("1995")
Coral Reserves Energy Income Fund 1996 Coral Corp. 226 05/30/96 9,635 3,088
Limited Partnership ("1996")
Coral Reserves 1996 Institutional Limited Coral, Inc. 54 12/21/95 6,520 3,042
Partnership ("1996-I")
---------- ----------- -----------
Totals 1,094 $ 47,715 $39,150
========== =========== ===========
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The cost sharing in each partnership provides for limited partners to
bear all of the costs of acquisition and development of the partnership's oil
and gas properties until capital contributions of limited partners were fully
expended. Thereafter, capital expenditures are shared based on revenue sharing
percentages. As provided by the terms of each partnership, the General Partner
and Additional General Partners did not make any capital contributions for their
interests in the partnership. The sharing of partnership net revenues and cash
distributions for all partnerships except 1993-I and 1996-I vary depending on
whether "payout" has occurred. Payout is calculated on an individual limited
partner basis and is the point when cash distributions to such partner equal the
amount of original investment. As of December 31, 1999, the 1990 and 1991
partnerships have achieved payout for all limited partners and the 1992
partnership has achieved payout as to some of the limited partners. The other
partnerships have not reached payout. The following table sets forth
information about the ongoing net revenue and cash distribution sharing in each
of the partnerships:
Before Payout Net Revenues After Payout Net Revenues
and Cash Distributions and Cash Distributions
-------------------------------------------------- ------------------------------------------------------------
Add'l Add'l
General General Limited Canaan General General Limited Canaan Placing
Partnership Partner Partners Partners Securities Total Partner Partners Partners Securities Brokers Total
----------- ------- --------- -------- ---------- ----- ------- -------- -------- ---------- -------- -----
1990 8.0% 1.0% 90.0% 1.0%/(1)/ 100% 17.0% 1.0% 75.0% 2.0% 5.0% 100%
1991 8.0% 1.0% 90.0% 1.0%/(1)/ 100% 17.0% 1.0% 75.0% 2.0% 5.0% 100%
1992 8.0% 1.0% 90.0% 1.0% 100% 17.0% 1.0% 75.0% 3.0% 4.0% 100%
1993 8.0% 1.0% 90.0% 1.0% 100% 17.0% 1.0% 75.0% 3.0% 4.0% 100%
1993-I 7.2% 0.5% 87.5% 4.8% 100% 7.2% 0.5% 87.5% 2.8% 2.0% 100%
1995 8.0% 1.0% 90.0% 1.0% 100% 17.0% 1.0% 75.0% 3.0% 4.0% 100%
1996 8.0% 1.0% 90.0% 1.0% 100% 17.0% 1.0% 75.0% 3.0% 4.0% 100%
1996-I 7.0% 0.5% 87.5% 5.0% 100% 7.2% 0.5% 87.5% 2.9% 1.9% 100%
(1) Canaan Securities assigned its Before Payout 1% interest in the 1990
partnership to the 1991 partnership and its interest in the 1991
partnership to the 1993-I partnership in exchange for negotiated cash
payments.
Canaan Securities also receives a fee equal to 1.5% of the gross
revenues of the partnerships, except 1993-I and 1996-I, for providing reporting
services to the limited partners. The table above reflects the net revenue and
cash distribution sharing after the payment of such fee. Canaan Securities
assigned its rights to this 1.5% fee in the 1990 partnership to the 1991
partnership in 1992 and its interest in the 1991 partnership to the 1993-I
partnership in 1994 in exchange for negotiated cash payments. Canaan
Securities and Placing Brokers also receive shares of cash otherwise
distributable to General Partners.
-6-
Coral Group
The Coral Group consists of Canaan, the partnerships, Coral, Inc.,
Coral Corp., the Additional General Partners, Canaan Securities and the Placing
Brokers.
The Combination Transactions
The combination transactions consist of:
. The acquisition of all of the limited partners' interests in each
of the partnerships by Canaan by a merger between each
partnership and separate acquisition corporations organized by
Canaan for purposes of the transactions;
. The acquisition of 100% of the stock of the General Partners of
the partnerships by Canaan;
. The acquisition of 100% of the stock of Indian by Canaan.
. The acquisition of 100% of the stock of Canaan Securities by
Canaan; and
. An increase in Canaan's outstanding common stock held by its
current shareholders to result in the appropriate number of
shares outstanding based on Canaan's relative share of the total
Exchange Value.
A total of 5,000,000 shares of Canaan common stock will be issued and
be outstanding after the combination transactions, less the number of shares
otherwise issuable to limited partners who elect to receive cash. The owners of
each of the entities will receive shares of Canaan common stock in proportion to
the "Exchange Value" of such entity relative to the total Exchange Value of all
entities. The Exchange Value has been determined by Canaan and is based on a
valuation of each entity's oil and gas reserves and other assets and
liabilities. Any limited partner in any partnership may elect to receive cash
in lieu of Canaan common stock equal to the appraised value of his interest in a
partnership.
A combined special meeting of the partnerships will be held to
consider and vote upon the proposal to adopt the plan of combination on
__________, 2000 at _____ a.m. at _________________, Oklahoma City, Oklahoma.
Proxies are being solicited by Canaan and the General Partners of the
partnerships. Adoption of the plan of combination by a partnership requires the
consent of the General Partners of the partnership and a majority-in-interest of
limited partners and the plan requires that all partnerships adopt the plan.
Owners of Canaan, the General Partners, and Canaan Securities have already
unanimously approved the plan of combination. The shareholders of Indian owning
a majority of Indian common stock must also vote in favor of the plan of
combination.
-7-
Method of Determining Combination Exchange Values
General
The Exchange Values for each of the entities was determined based on
methods determined by Canaan. The first component of the Exchange Value is the
oil and gas reserve values for each entity's oil and gas properties as estimated
by Netherland, Sewell & Associates, Inc. an independent petroleum engineering
and consulting firm. Netherland Sewell estimated the reserves, future net
revenues therefrom, and the present value of such future net revenues for each
entity involved in the transaction as of September 30, 1999 using the following
assumptions:
. Gas prices were established for each well separately based on a
----------
12 month average of gas prices for the 12 months ending March 31,
2000. This average was constructed using the average of composite
spot wellhead prices as published by Natural Gas Week for the 8
months ending November 30, 1999 and the forward market prices for
the 4 months ending March 31, 2000 based on futures prices quoted
on the New York Mercantile Exchange ("NYMEX") as of October 29,
1999 adjusted for the historical differential between NYMEX and
Natural Gas Week composite spot wellhead prices. The prices for
all wells averaged $2.52 per MMbtu before adjustment by well for
transportation fees, BTU content and regional price differentials
and were held constant for the life of the properties. After
adjustments by well for transportation fees, BTU content and
regional price differentials, the weighted average gas price for
all wells in the report was $2.43/Mcf. The actual weighted
average gas price for all wells for all entities as of September
30, 1999 was $2.49/Mcf.
. Oil prices were established for each well separately based on
----------
an 8 year average of West Texas Intermediate crude oil posted
prices for the 8 year period beginning in 1992 and ending on
December 31, 1999. This average was constructed using average
posted prices for West Texas Intermediate crude oil for 1992
through October 1999 and the forward market prices for November
and December of 1999 as quoted on NYMEX as of October 29, 1999
adjusted for the differential between such forward market prices
and West Texas Intermediate posted prices. The prices for all
wells averaged $18.10 per barrel before adjustment by well for
gravity, transportation fees and regional price differentials and
were held constant for the life of the properties. After
adjustments by well for gravity, transportation fees and regional
price differentials, the weighted average oil price for all wells
in the report was $19.68/Bbl. The actual weighted average oil
price for all wells for all entities as of September 30, 1999 was
$22.81/Bbl.
-8-
. Operating costs and production taxes were based on costs and tax
------------------------------------
rates in effect as of September 30, 1999 and were not escalated.
. A discount rate of 10% was used to discount future net revenues
---------------
to present value at September 30, 1999.
We refer to the evaluation date of September 30, 1999 as the
"Effective Date" and we refer to the present value of the estimated future net
revenues from oil and gas reserves as of the Effective Date as the "Reserve
Value" for each entity involved in the combination transaction. A summary of the
reserve reports prepared by Netherland, Sewell & Associates showing the Reserve
Value for each entity is included in Appendix A.
We refer to the reserves estimated by Netherland Sewell as "Exchange
Reserves". They include estimates of proved undeveloped reserves as well as
proved developed reserves, both producing and nonproducing, as the term proved
reserves is defined by the Society of Petroleum Engineers. However, because the
reserves are estimated using prices different from those required by the
Securities and Exchange Commission, we use the term "Exchange" instead of
"proved" to describe the reserve estimates for the Exchange Value. Properties
with developed reserves have less risk than properties with undeveloped
reserves. However, there was no risk factor assigned to the type of reserves
for purposes of determining the Reserve Values. No attempt was made to assign
value to oil and gas reserves categorized as probable or possible because the
General Partners and Canaan believe such reserves are too speculative to value.
Further, no value has been assigned for purposes of the combination transaction
to any undeveloped acreage or prospects owned by any entity which does not
contain Exchange Reserves.
In addition to the Reserve Value, the Exchange Value will take into
consideration other assets and liabilities for each entity and additional
adjustments will be made to the value of Canaan, Indian and the 1996 and 1996-I
Partnerships for purposes of determining the Exchange Value as described below.
The "Exchange Value" for each entity will be equal to:
. Reserve Value as of the Effective Date.
. Less bank debt at the Effective Date.
. Plus or minus working capital at the Effective Date.
. Minus interest paid or accrued on bank debt from the Effective
Date to the closing date.
-9-
. For limited partners, Additional General Partners, Canaan
Securities and Placing Brokers, minus their share of cash
distributions from production subsequent to the Effective Date
and before the closing date.
. An adjustment for any gas imbalances which are not expected to be
material.
. For Canaan, an upward adjustment for the value of its "operating
rights" as described below.
. For the 1996 and 1996-I Partnerships, upward adjustments, and for
Indian, a downward adjustment, for a production payment
obligation of Indian described below.
Partnership Exchange Values and Allocation to Partners, Canaan Securities and
Placing Brokers
The Exchange Value for each of the partnerships will first be
determined as described above.
As between the limited partners, the General Partner and the
Additional General Partners in each partnership and Canaan Securities and the
Placing Brokers, the Exchange Value will generally be allocated among them in
the ratio in which net revenues and cash distributions are shared. In each of
the partnerships except 1993-I and 1996-I, the General Partners' share of the
net revenues and cash distributions increases when "payout" occurs as to each
individual limited partner. Accordingly, in each of those partnerships in which
payout has not already occurred as to all limited partners as of the Effective
Date, the Reserve Value was allocated first among the parties in their
respective before payout sharing ratios until payout occurred and any remaining
Reserve Value and other components of Exchange Value were allocated in
after-payout sharing ratios.
For the limited partners, the Additional General Partners, Canaan
Securities and the Placing Brokers, an adjustment to their Exchange Values will
be made for cash distributions from production subsequent to the Effective Date
and before the closing date.
If the allocation of Exchange Value within a partnership, plus
historical cash distributions, is not at least 115% of capital contributions of
the limited partners as a group, the Exchange Value shall be first allocated to
limited partners until this amount is achieved and the balance of the Exchange
Value will be allocated based on revenue sharing percentages. Canaan and the
General Partners believe that the 1996 partnership will be the only partnership
in which this priority allocation of Exchange Value may be necessary.
-10-
Canaan Exchange Value
The Exchange Value for Canaan will be determined based on its Reserve
Value, bank debt and working capital in the same manner as other entities as
described above.
Canaan's Exchange Value within the Coral Group will be further
adjusted to take into account its operating rights. As of December 31, 1999,
Canaan served as operator of 110 wells in which the partnerships owned
interests. As such, Canaan receives monthly operating fees which represent a
source of additional income to Canaan. For purposes of calculation of Canaan's
Exchange Value within the Coral Group, the future cash flows attributable to
these operating fees, based on existing reimbursement rights without escalation,
has been determined and the present value thereof as of the Effective Date will
be an additional component of its Exchange Value. The amount of this adjustment
is $5.0 million.
For purposes of determining relative Exchange Values between Indian
and the Coral Group as a whole, the operating rights value allocated to Canaan
is disregarded because the combination of the Coral Group results in the
elimination of a significant portion of Canaan's operating fees. After the
combination transaction, Canaan will no longer receive operating fees from the
partnerships but will continue to receive fees from other unrelated owners.
Further, Canaan and Indian have agreed that neither of them will be allocated
value for operating rights for purposes of determining the Exchange Value. This
agreement is advantageous to the Coral Group because Indian's operating fees are
higher than Canaan's.
Indian Exchange Value
The Exchange Value for Indian will be determined using the Reserve
Value, bank debt and working capital in the same manner as described above.
In connection with the negotiation of the acquisition agreement
between Indian and Canaan, Indian agreed that its Exchange Value would be
reduced by its production payment obligation to the 1996 and 1996-I
partnerships, in consideration of such partnerships advancing to Indian a total
of $6 million in exchange for a "Contingent Production Payment" from Indian to
the partnerships payable at the rate of $56,250 per month until paid in full.
The Contingent Production Payment is $9 million if the combination transactions
are consummated and $6 million if they are not. Accordingly, Indian's Exchange
Value will be adjusted downward by the remaining amount of the Contingent
Production Payment obligation as of the Effective Date, $5,602,250, plus the
additional $3 million as a result of the combination transactions, and the
Exchange Values for the 1996 and 1996-I partnerships will be adjusted upward by
the same amount. As between the 1996 and 1996-I partnerships, the Contingent
Production Payment adjustment will be shared in the same percentages as their
original advances to Indian of 53% for 1996 and 47% for 1996-I.
-11-
Summary of Estimated Exchange Values
The following tables summarize the estimated Exchange Values allocated
to the various parties. All of these tables assume closing of the combination
transactions on July 31, 2000, and use actual cash distributions and interest
expense through March 31, 2000, and estimated revenues and expenses from the
Netherland Sewell reserve reports for purposes of calculating estimated cash
distributions thereafter. Variances in actual cash distributions and interest
expense or a change in the closing date will result in a change in the Exchange
Value for any entity affected.
The "Estimated Exchange Value" as of the closing date for the
partnerships and Canaan set forth in the table is approximately 96.3% of the sum
of their respective components of Exchange Value because the operating rights
adjustment to Canaan's Exchange Value within the Coral Group is excluded for
purposes of computing the relative Exchange Value between the Coral Group and
Indian.
"Closing Date Estimated Exchange Value" and percentages reflect
effects of elimination of the Canaan operating rights adjustment for purposes of
the relative Exchange Values between the Coral Group and Indian. "Total Coral
Group with Operating Fees" calculates Reserve Value including operating fees
paid by partnerships to Canaan. "Total Coral Group without Operating Fees"
excludes operating fees paid to Canaan so that it is calculated on a consistent
basis with the Exchange Value calculation for Indian.
-12-
Estimated Estimated
Effective Date Cash Interest
--------------------------------------
Reserve Bank Working Distributions Expense Other
Entity Value Debt Capital Before Closing Before Closing Adjustments
------ ----- ---- ------- -------------- -------------- -----------
Partnerships
1990
Limited Partners................. $ 1,524,177 $ 491,591 $ 113,069 $ 312,130 $ 37,685 $ -
General Partner.................. 345,481 111,427 25,629 - 8,542 -
Additional General Partners...... 20,322 6,555 1,508 4,162 502 -
Canaan Securities................ 85,908 13,109 3,015 17,002 1,005 (47,196) /(1)/
Placing Brokers.................. 101,612 32,773 7,538 20,809 2,512 -
----------- ------------ ---------- ---------- ---------- ----------
Total...................... $ 2,077,500 $ 655,454 $ 150,759 $ 354,102 $ 50,247 $ (47,196) /(1)/
=========== ============ ========== ========== ========== ==========
Limited Partner
per $1,000 Investment.......... $ 392 $ 126 $ 29 $ 80 $ 10 $ -
=========== ============ ========== ========== ========== ==========
1991
Limited Partners................. $ 1,958,656 $ 557,051 $ 163,470 $ 408,320 $ 40,971 $ 34,809 /(1)/
General Partner.................. 443,963 126,265 37,053 - 9,287 7,890 /(1)/
Additional General Partners...... 26,115 7,427 2,180 5,444 546 464 /(1)/
Canaan Securities................ 110,089 14,855 4,359 22,143 1,093 (61,017) /(1)/
Placing Brokers.................. 130,577 37,137 10,898 27,221 2,731 2,321 /(1)/
----------- ------------ ---------- ---------- ---------- ----------
Total...................... $ 2,669,400 $ 742,734 $ 217,960 $ 463,129 $ 54,628 $ (15,533) /(1)/
=========== ============ ========== ========== ========== ==========
Limited Partner
per $1,000 Investment.......... $ 437 $ 124 $ 36 $ 91 $ 9 $ 8 /(1)/
=========== ============ ========== ========== ========== ==========
1992
Limited Partners................. $ 4,118,669 $ 418,500 $ 200,681 $ 760,942 $ 33,722 $ -
General Partner.................. 859,962 94,860 45,488 - 7,644 -
Additional General Partners...... 53,728 5,580 2,676 8,790 450 -
Canaan Securities................ 274,280 11,160 5,352 30,581 899 -
Placing Brokers.................. 191,162 27,900 13,379 7,962 2,248 -
----------- ------------ ---------- ---------- ---------- ----------
Total...................... $ 5,497,800 $ 558,000 $ 267,575 $ 808,274 $ 44,963 $ -
=========== ============ ========== ========== ========== ==========
Limited Partner
per $1,000 Investment.......... $ 549 $ 56 $ 27 $ 101 $ 4 $ -
=========== ============ ========== ========== ========== ==========
1993
Limited Partners................. $ 3,613,799 $ 359,850 $ 211,544 $ 770,969 $ 27,795 $ -
General Partner.................. 703,595 81,566 47,950 - 6,300 -
Additional General Partners...... 46,321 4,798 2,821 8,588 371 -
Canaan Securities................ 239,673 9,596 5,641 28,201 741 -
Placing Brokers.................. 148,014 23,990 14,103 523 1,853 -
----------- ------------ ---------- ---------- ---------- ----------
Total...................... $ 4,751,400 $ 479,800 $ 282,059 $ 808,281 $ 37,060 $ -
=========== ============ ========== ========== ========== ==========
Limited Partner
per $1,000 Investment.......... $ 554 $ 55 $ 32 $ 118 $ 4 $ -
=========== ============ ========== ========== ========== ==========
---------------------------------
Closing Date
---------------------------------
Estimated
Exchange % of
Entity Value Partnership
------ --------------- -----------
Partnerships
1990
Limited Partners................. $ 766,701 70.98%
General Partner.................. 241,945 22.39%
Additional General Partners...... 10,222 0.95%
Canaan Securities................ 10,222 0.95%
Placing Brokers.................. 51,114 4.73%
--------------- ------
Total...................... $ 1,080,205 100.00%
=============== ======
Limited Partner
per $1,000 Investment.......... $ 197
===============
1991
Limited Partners................. $ 1,108,466 71.41%
General Partner.................. 340,417 21.93%
Additional General Partners...... 14,779 0.95%
Canaan Securities................ 14,779 0.95%
Placing Brokers.................. 73,898 4.76%
--------------- ------
Total...................... $ 1,552,339 100.00%
=============== ======
Limited Partner
per $1,000 Investment.......... $ 247
===============
1992
Limited Partners................. $ 2,992,455 71.34%
General Partner.................. 773,546 18.44%
Additional General Partners...... 40,062 0.96%
Canaan Securities................ 228,314 5.44%
Placing Brokers.................. 160,337 3.82%
--------------- ------
Total...................... $ 4,194,714 100.00%
=============== ======
Limited Partner
per $1,000 Investment.......... $ 399
===============
1993
Limited Partners................. $ 2,569,088 71.91%
General Partner.................. 639,378 17.90%
Additional General Partners...... 34,089 0.95%
Canaan Securities................ 199,204 5.58%
Placing Brokers.................. 130,780 3.66%
--------------- ------
Total...................... $ 3,572,540 100.00%
=============== ======
Limited Partner
per $1,000 Investment.......... $ 394
===============
-13-
Estimated Estimated
Effective Date Cash Interest
-----------------------------------------
Reserve Bank Working Distributions Expense Other
Entity Value Debt Capital Before Closing Before Closing Adjustments
------ ----- ---- ------- -------------- -------------- -----------
1993-I
Limited Partners................ $ 1,836,887 $ 303,188 $ 168,661 $ 417,013 $ 21,416 $ 54,888 /(1)/
General Partner................. 151,151 24,948 13,878 - 4,112 4,516 /(1)/
Additional General Partners..... 10,496 1,733 964 2,383 286 314 /(1)/
Canaan Securities............... 58,780 9,702 5,397 13,344 1,599 1,756 /(1)/
Placing Brokers................. 41,986 6,930 3,855 9,532 1,142 1,255 /(1)/
----------- ------------ ---------- ---------- ---------- ----------
Total..................... $ 2,099,300 $ 346,500 $ 192,755 $ 442,273 $ 28,555 $ 62,729 /(1)/
=========== ============ ========== ========== ========== ==========
Limited Partner
per $1,000 Investment......... $ 778 $ 128 $ 71 $ 177 $ 9 $ 23 /(1)/
=========== ============ ========== ========== ========== ==========
1995
Limited Partners................ $ 4,914,736 $ - $ 526,143 $1,060,357 $ - $ -
General Partner................. 873,600 - 119,259 - - -
Additional General Partners..... 61,652 - 7,015 11,782 - -
Canaan Securities............... 262,578 - 14,030 36,228 - -
Placing Brokers................. 203,434 - 35,076 - - -
----------- ------------ ---------- ---------- ---------- ----------
Total..................... $ 6,316,000 $ - $ 701,524 $1,108,367 $ - $ -
=========== ============ ========== ========== ========== ==========
Limited Partner
per $1,000 Investment......... $ 722 $ - $ 77 $ 156 $ - $ -
=========== ============ ========== ========== ========== ==========
1996
Limited Partners................ $ 6,151,521 $ 1,660,500 $2,933,895 $1,349,859 $ 125,141 $1,440,000 /(2)/
General Partner................. 1,073,125 376,380 258,376 - 28,365 128,000 /(2)/
Additional General Partners..... 76,839 22,140 15,199 14,998 1,669 16,000 /(2)/
Canaan Securities............... 425,145 44,280 30,397 48,680 3,337 16,000 /(2)/
Placing Brokers................. 222,870 110,700 75,993 - 8,343 -
----------- ------------ ---------- ---------- ---------- ----------
Total..................... $ 7,949,500 $ 2,214,000 $3,313,859 $1,413,537 $ 166,855 $1,600,000 /(2)/
=========== ============ ========== ========== ========== ==========
Limited Partner
per $1,000 Investment......... $ 638 $ 172 $ 305 $ 140 $ 13 $ 149 /(2)/
=========== ============ ========== ========== ========== ==========
1996-I
Limited Partners................ $ 5,383,525 $ 1,662,500 $2,650,766 $1,093,850 $ 106,662 $1,225,000 /(2)/
General Partner................. 446,064 137,750 219,635 - 20,621 101,500 /(2)/
Additional General Partners..... 30,763 9,500 15,147 6,251 1,422 7,000 /(2)/
Canaan Securities............... 177,195 54,720 87,248 36,003 8,192 40,320 /(2)/
Placing Brokers................. 115,053 35,530 56,651 23,377 5,319 26,180 /(2)/
----------- ------------ ---------- ---------- ---------- ----------
Total..................... $ 6,152,600 $ 1,900,000 $3,029,447 $1,159,481 $ 142,216 $1,400,000 /(2)/
=========== ============ ========== ========== ========== ==========
Limited Partner
per $1,000 Investment......... $ 826 $ 255 $ 407 $ 168 $ 16 $ 188 /(2)/
=========== ============ ========== ========== ========== ==========
---------------------------------
Closing Date
---------------------------------
Estimated
Exchange % of
Entity Value Partnership
------ --------------- -----------
1993-I
Limited Partners................ $ 1,270,531 85.78%
General Partner................. 135,342 9.13%
Additional General Partners..... 7,103 0.48%
Canaan Securities............... 39,776 2.69%
Placing Brokers................. 28,412 1.92%
--------------- ------
Total..................... $ 1,481,164 100.00%
=============== ======
Limited Partner
per $1,000 Investment......... $ 538
===============
1995
Limited Partners................ $ 4,220,132 74.13%
General Partner................. 956,506 16.80%
Additional General Partners..... 54,803 0.96%
Canaan Securities............... 231,580 4.07%
Placing Brokers................. 229,777 4.04%
--------------- ------
Total..................... $ 5,692,797 100.00%
=============== ======
Limited Partner
per $1,000 Investment......... $ 620
===============
1996
Limited Partners................ 7,526,357 /(3)/ 86.14%
General Partner................. 760,454 /(3)/ 8.71%
Additional General Partners..... 49,914 /(3)/ 0.57%
Canaan Securities............... 270,543 /(3)/ 3.10%
Placing Brokers................. 129,646 /(3)/ 1.48%
--------------- ------
Total..................... $ 8,736,913 100.00%
=============== ======
Limited Partner
per $1,000 Investment......... $ 766
===============
1996-I
Limited Partners................ $ 6,162,084 86.67%
General Partner................. 586,536 8.25%
Additional General Partners..... 34,429 0.48%
Canaan Securities............... 198,311 2.79%
Placing Brokers................. 128,764 1.81%
--------------- ------
Total..................... $ 7,110,123 100.00%
=============== ======
Limited Partner
per $1,000 Investment......... $ 945
===============
-14-
- ------------------------------------------------------------------------------------------------------------------------
Effective Date Estimated Estimated
------------------------------------- Cash Interest
Reserve Bank Working Distributions Expense Other
Entity Value Debt Capital Before Closing Before Closing Adjustments
------ ----- ---- ------- -------------- -------------- -----------
Total Partnerships.................. $ 37,513,500 $6,896,488 $8,155,939 $ 6,557,445 $ 524,524 $ 3,000,000/(2)/
Canaan.............................. 490,900 - 484,891 - - 5,010,676/(4)/
------------ ---------- ---------- ------------ ----------- -----------
Total Coral Group with Operating
Fees................................ $ 38,004,400 $6,896,488 $8,640,830 $ 6,557,445 $ 524,524 $ 8,010,676
============ ========== ========== ============ =========== ===========
Closing Date
Estimated
Exchange
Entity Value
------ -----
Total Partnerships................... $33,420,796
Canaan............................... 5,767,277
-----------
Total Coral Group with Operating
Fees................................. $39,188,073
===========
- ---------------------------------------------------------------------------------------------------------------------
CORAL GROUP/INDIAN RELATIVE EXCHANGE VALUES
Effective Date Estimated
----------------------------------------- Estimated Interest
Estimated Estimated Cash Expense
Reserve Bank Working Distributions Before Other
Entity Value Debt Capital Before Closing Closing Adjustments
------ ----- ---- ------- -------------- -------------- -----------
Total Coral Group without
Operating Fees................. $ 41,525,700 $ 6,896,488 $ 8,640,830 $ 6,557,445 $ 524,524 $ 3,000,000/(2)/
------------ ----------- ----------- ------------ ----------- -----------
Indian......................... 45,467,800 24,536,000 (4,991,609) - 1,754,606 (3,000,000)/(2)/
------------ ----------- ----------- ------------ ----------- -----------
Total.......................... $ 86,993,500 $31,432,488 $ 3,649,221 $ 6,557,445 $ 2,279,130 $ -
============ =========== =========== =========== =========== ===========
Closing Date
Estimated
Exchange
Entity Value
------ -----
Total Coral Group without
Operating Fees................ $39,188,073
Indian........................ 11,185,585
-----------
Total......................... $50,373,658
===========
- ------------------------------------------------------------------------------------------------------------------------------------
______________________
(1) Adjustments to reflect sale of a portion of Canaan Securities' interests
in the 1990 partnership to the 1991 partnership and in the 1991
partnership to the 1993-I partnership.
(2) Reflects $3 million adjustment in Contingent Production Payment due to
the 1996 and 1996-I partnerships from Indian's existing obligation of
$5,606,250 as of Effective Date, included in Working Capital of
partnerships and Working Capital of Indian as of Effective Date.
(3) Estimated Exchange Value for limited partners in 1996 partnership
adjusted to increase Exchange Value to limited partners to 115% of
original investment and to decrease other participants accordingly.
(4) Adjustment for Canaan operating rights.
-15-
The following table sets forth the historical and estimated cash
distributions, estimated Exchange Value, cash distributions plus Exchange Value
as a percent of original investment and estimated ownership of Canaan by each
ownership group and assuming no limited partners elect to receive cash.
Actual and Cash Distributions Canaan Common Stock
Estimated Cash Estimated Plus Exchange -----------------------------------
Distributions Exchange Value as % Number % of Total
Entity or Group thru Closing Date Value of Investment of Shares Outstanding
--------------- ----------------- ------------ ------------- ------------ ---------------
Partnerships
1990
Limited Partners................... $ 5,668,121 $ 766,701 165.53% 77,490 1.55%
General Partner.................... 756,502 241,945 24,470 0.49%
Additional General Partners........ 67,054 10,222 1,020 0.02%
Canaan Securities.................. 68,327 10,222 1,020 0.02%
Placing Brokers.................... 122,258 51,114 3,000/(1)/ 0.06%/(1)/
-------------- ------------ --------- --------
Total............................ $ 6,682,263 $ 1,080,205 107,000 2.14%
============== ============ ========= ========
Limited Partner
per $1,000 Investment........ $ 1,458 $ 197 165.53% 20 0.00%
============== ============
1991
Limited Partners................... $ 6,604,408 $ 1,108,466 172.16% 112,253 2.25%
General Partner.................... 881,024 340,417 34,185 0.68%
Additional General Partners........ 78,125 14,779 1,531 0.03%
Canaan Securities.................. 111,372 14,779 1,531 0.03%
Placing Brokers.................... 142,282 73,898 4,500/(1)/ 0.09%/(1)/
-------------- ------------ --------- --------
Total............................ $ 7,817,211 $ 1,552,339 154,000 3.08%
============== ============ ========= ========
Limited Partner
per $1,000 Investment........ $ 1,474 $ 247 172.16% 25 0.00%
============== ============
1992
Limited Partners................... $ 7,551,877 $ 2,992,455 140.59% 301,746 6.03%
General Partner.................... 655,202 773,546 78,230 1.57%
Additional General Partners........ 79,515 40,062 4,064 0.08%
Canaan Securities.................. 241,068 228,314 22,860 0.46%
Placing Brokers.................... 8,314 160,337 9,600/(1)/ 0.19%/(1)/
-------------- ------------- --------- --------
Total............................ $ 8,535,974 $ 4,194,714 416,500 8.33%
============== ============= ========= ========
Limited Partner
per $1,000 Investment......... $ 1,007 $ 399 140.59% 40 0.00%
============== =============
1993
Limited Partners................... $ 6,240,600 $ 2,569,088 135.01% 258,883 5.18%
General Partner.................... 556,070 639,378 63,959 1.27%
Additional General Partners........ 69,362 34,089 3,553 0.07%
Canaan Securities.................. 224,135 199,204 20,305 0.41%
Placing Brokers.................... 523 130,780 7,800 0.16%
-------------- ------------- --------- --------
Total............................ $ 7,090,690 $ 3,572,540 354,500/(1)/ 7.09%/(1)/
============== ============= ========= ========
Limited Partner
per $1,000 Investment......... $ 956 $ 394 135.01% 40 0.00%
============== =============
1993-I
Limited Partners................... $ 2,777,761 $ 1,270,531 171.36% 127,050 2.54%
General Partner.................... 228,487 135,342 13,613 0.27%
Additional General Partners........ 15,873 7,103 504 0.01%
Canaan Securities.................. 88,764 39,776 4,033 0.08%
Placing Brokers.................... 63,699 28,412 1,800/(1)/ 0.04%/(1)/
-------------- ------------ --------- --------
Total............................ $ 3,174,584 $ 1,481,164 147,000 2.94%
============== ============ ========= ========
Limited Partner
per $1,000 Investment.......... $ 1,176 $ 538 171.36% 54 0.00%
============== ============
-16-
1995
Limited Partners................ $ 5,615,642 $ 4,220,132 144.54% 426,113 8.52%
General Partner................. 499,168 956,506 96,104 1.92%
Additional General Partners..... 62,396 54,803 5,593 0.11%
Canaan Securities............... 192,513 231,580 23,390 0.47%
Placing Brokers................. - 229,777 13,800/(1)/ 0.28%/(1)/
----------- ------------ --------- ------
Total......................... $ 6,369,719 $ 5,692,797 565,000 11.30%
=========== ============ ========= ======
Limited Partner
per $1,000 Investment...... $ 825 $ 620 144.54% 63 0.00%
=========== ============
1996
Limited Partners................ $ 3,561,232 $ 7,526,357/(2)/ 115.08% 751,548/(2)/ 15.03%/(2)/
General Partner................. 316,554 760,454/(2)/ 75,457/(2)/ 1.51%/(2)/
Additional General Partners..... 39,569 49,914/(2)/ 5,031/(2)/ 0.10%/(2)/
Canaan Securities............... 124,541 270,543/(2)/ 27,164/(2)/ 0.54%/(2)/
Placing Brokers................. - 129,646/(2)/ 7,800/(2)/ 0.15%/(2)/
----------- ------------ --------- ------
Total......................... $ 4,041,896 $ 8,736,913 867,000 17.34%
=========== ============ ========= ======
Limited Partner
per $1,000 Investment...... $ 370 $ 781 115.08% 78 0.00%
=========== ============
1996-I
Limited Partners................ $ 3,452,140 $ 6,162,084 147.46% 616,092 12.32%
General Partner................. 286,228 586,536 58,434 1.17%
Additional General Partners..... 19,726 34,429 3,527 0.07%
Canaan Securities............... 113,780 198,311 19,647 0.39%
Placing Brokers................. 73,428 128,764 7,800/(2)/ 0.16%/(2)/
----------- ------------ --------- ------
Total......................... $ 3,945,303 $ 7,110,123 705,500 14.11%
=========== ============ ========= ======
Limited Partner
per $1,000 Investment..... $ 529 $ 945 147.46% 94 0.00%
=========== ============
Total Partnerships
Limited Partners................ $41,471,782 $ 26,615,814 142.70% 2,671,175 53.42%
General Partner................. 4,179,235 4,434,125 444,452 8.88%
Additional General Partners..... 431,620 245,401 24,823 0.49%
Canaan Securities............... 1,164,501 1,192,729 119,950 2.40%
Placing Brokers................. 410,504 932,727 56,100/(2)/ 1.14%/(2)/
----------- ------------ --------- ------
Total......................... $47,657,642 $ 33,420,796 142.70% 3,316,500 66.33%
=========== ============ ========= ======
Indian............................. n/a $ 11,185,585 1,110,500 22.21%
Canaan............................. n/a 5,767,277 573,000 11.46%
----------- ------------ --------- ------
Total......................... $47,657,642 $ 50,373,658 n/a 5,000,000 100.00%
=========== ============ ========= ======
_________________________
*Percent of ownership less than 0.1%
(1) Estimated Number of Shares and % of Total Shares Outstanding for Placing
Brokers is based on 60% of Exchange Value for which Canaan common stock will
be issued. Placing Brokers will receive 40% of Exchange Value in cash
estimated to be: 1990 - $20,445; 1991 - $29,559; 1992 - $ 64,135; 1993 -
$52,312; 1993-I -$11,365; 1995 - $ 91,911; 1996 - $51,858; and, 1996-I -
$51,506;
(2) Estimated Exchange Value, Number of Shares and % of Total Shares Outstanding
for limited partners in the 1996 partnership increased to allocate 115% of
the original investment and decreased for other participants accordingly.
-17-
Determination of Appraised Value
A limited partner may elect to receive cash equal to the "Appraised
Value" of his interest in a partnership. The Appraised Value was determined
based on an appraisal by Madison Energy Advisors of each partnership's oil and
gas properties as of the Effective Date. The oil and gas properties of each
partnership were valued as if sold in an orderly manner and in a reasonable
period of time and in a manner consistent with appropriate industry practice,
taking into consideration costs of sale. An adjustment was made to reduce the
appraised value of the properties for oil and gas net revenues between the
Effective Date and the closing date, so the property value is established on the
same date as the Exchange Value.
Canaan and the General Partners then computed the estimated value of
each limited partner's interest in a partnership based on the assumption that
the partnership's oil and gas properties were sold for the resulting value and
the gain on sale was allocated to the partners in accordance with the provisions
of the applicable partnership agreement and that each partnership was
liquidated, with the proceeds of liquidation, including estimated working
capital at the closing date, and after payment of any partnership debt as of the
closing date being distributed as required by the partnership agreement. A
further adjustment will be made for any gas imbalances which are not expected to
be material. The resulting amount is referred to as the "Appraised Value".
The economic terms of each of the partnerships generally provided for
the limited partners to provide all of the capital of the partnership and to
bear a greater percentage of the share of costs associated with each
partnership's initial acquisition and development of properties. As a result,
the limited partners in each partnership have capital account balances which are
higher, on a relative capital account basis, than their interest in revenues of
the partnership. The partnership agreement for each partnership requires that
the capital accounts be recognized or "balanced" in connection with any
liquidation of a partnership. These balancing provisions result in the limited
partners receiving a priority allocation of the liquidation proceeds as a result
of their relatively higher capital account balances. The effect of this priority
allocation is that the limited partners receive a greater share of liquidation
proceeds than what limited partners would have received from the production of
the oil and gas properties owned by each partnership had the properties been
produced to depletion. Any liquidation of a partnership would therefore result
in a relative higher proportion of value being allocated to the limited partners
than is being done in connection with the combination transactions in which the
allocation between the limited partners and the general partners is being done
based on revenue sharing percentages. However, Canaan and the General Partners
believe that the discounted prices expected to be realized in a sale of
properties in a liquidation offsets any potential incremental liquidation value
allocated to limited partners.
For purposes of determining the appraised value of partnership oil and
gas properties, Madison calculated the estimated present value of future net
revenues from production of oil and gas reserves, but used price assumptions
different from those being used to calculate Exchange Value, applied certain
risk factors to nonproducing or undeveloped reserves and used a discount rate of
20%.
-18-
Madison Energy Advisors provides oil and gas reserve acquisition,
divestment and valuation advisory services to the upstream oil and gas industry,
including fair market value assessments of oil and gas properties. Madison
Energy has offices in Houston, Texas and Denver, Colorado, and has a staff of
professionals with significant experience in advising both buyers and sellers of
oil and gas properties. Madison Energy was selected to perform this appraisal
because it is one of the recognized valuation experts in the industry.
For additional information concerning the methodology used in
calculating the Appraised Value, see "Method of Determining Combination Exchange
Values - Appraised Values" beginning on page 8.
If the Appraised Value of a limited partner's interest plus historical
cash distributions is less than 110% of the amount of the limited partner's
original investment, the Appraised Value for a limited partner electing cash
will be increased to equal such amount. Canaan and the General Partners believe
that the 1996 and 1996-I partnerships will be the only partnerships in which the
Appraised Value plus historical cash distributions may not meet the 110% of
original investment amount.
The Appraised Value for each partnership ranges from 56% to 93% of the
Exchange Values. The following table sets forth for each partnership the
historical and estimated cash distributions, the estimated Appraised Value, and
cash distributions and Appraised Value as a percent of original investment for
the limited partners as a group and for each limited partner per $1,000 of
investment. All of these tables assume closing of the combination transactions
on July 31, 2000, and use actual cash distributions and interest expense through
March 31, 2000, and estimated revenues and expenses from the Netherland Sewell
reserve reports for purposes of calculating estimated cash distributions
thereafter. Variances in actual cash distributions and interest expense or a
change in the closing date will result in a change in the Appraised Value for
any entity affected.
-19-
Cash
Actual and Distributions
Estimated Cash Plus Appraised
Distributions Estimated Value as % of
Partnership thru Closing Date Appraised Value Investment
----------- ----------------- --------------- ----------
1990
Limited Partners.............................. $5,668,121 $ 433,154 156.95%
Limited Partners per $1,000 Investment 1,458 111
1991
Limited Partners.............................. $6,604,408 $ 712,074 163.31%
Limited Partners per $1,000 Investment 1,474 159
1992
Limited Partners.............................. $7,551,877 $2,308,438 131.47%
Limited Partners per $1,000 Investment 1,007 308
1993
Limited Partners.............................. $6,240,600 $2,219,543 129.66%
Limited Partners per $1,000 Investment 956 340
1993-I
Limited Partners.............................. $2,777,761 $ 843,903 153.30%
Limited Partners per $1,000 Investment 1,176 357
1995
Limited Partners.............................. $5,615,642 $3,642,283 136.05%
Limited Partners per $1,000 Investment 825 535
1996
Limited Partners.............................. $3,561,232 $7,037,268(1) 110.00%(1)
Limited Partners per $1,000 Investment 370 730(1)
1996-I
Limited Partners.............................. $3,452,140 $3,969,059(1) 113.82%(1)
Limited Partners per $1,000 Investment 529 609(1)
(1) Estimated Appraised Value in 1996 and 1996-I partnerships adjusted to
increase "Cash Distributions Plus Appraised Value as % of Investment"
to 110% of original investment amount.
Risk Factors
There are numerous risks associated with the combination transactions
which are summarized below. For a more complete description of these risk
factors, please see "Risk Factors".
Risks Related to the Combination Transactions
. Limited partners will own stock in a corporation with perpetual existence
rather than a partnership interest in a limited partnership with a limited
life resulting in material changes in the nature of their investment.
. Limited partners have received cash distributions from the partnerships
but will receive no cash distributions or dividends in the foreseeable
future from Canaan.
-20-
. There has been no prior market for our common stock and there is no
assurance that a market will develop. There is no assurance that the value
of the common stock received by a limited partner will be equal to the
Exchange Value. The Exchange Values are being used solely to determine the
relative ownership of Canaan by each entity involved and do not necessarily
represent the fair value of Canaan or its net assets.
. The consideration to be received by the limited partners and the General
Partners and Canaan and the other terms of the combination transactions
were determined by Canaan and the General Partners, which have inherent
conflicts of interest, and may not reflect the value of the net assets of
the respective partnership if sold to an unaffiliated third party in an
arms length negotiation.
. The Exchange Values were based primarily on estimates of reserves and
future net cash flows which has inherent uncertainties. Exchange Values do
not represent fair market value.
. The price assumptions used to calculate the Reserve Value will not be
modified for changes in prices which could alter the relative values of the
entities involved or the relative share of the limited partners and General
Partners in partnerships which have not achieved payout.
. The alternative of continuing the partnerships or liquidating their assets
could potentially be more beneficial to limited partners than the
combination transactions.
. No independent representative was engaged to represent the limited
partners in negotiating the terms of the combination transactions which may
be inferior to those that could have been negotiated by an independent
representative. No fairness opinion has been obtained regarding the
fairness of the combination transactions to limited partners.
. The cash being offered to limited partners who elect to receive cash is
intended to approximate the fair market value of their interests in a
partnership based on a liquidation of the partnerships, but there is no
assurance such value is in fact fair market value.
. The combination transactions will reduce and dilute a limited partner's
voting rights.
. The combination transactions will result in a limited partner being
exposed to risks of a larger enterprise without restrictions on leverage.
. For the 1996 and 1996-I partnerships, failure to approve the combination
transactions may result in a material adverse effect on returns to limited
partners due to a $3 million downward adjustment in the Indian Contingent
Production Payment.
-21-
. We have not requested a ruling from the IRS on the tax consequences of the
combination transactions and the IRS may disagree with the opinion of our
counsel on the tax consequences.
. If the combination transactions are not approved, limited partners in each
partnership will bear a portion of the transaction expenses.
Risks Related to Canaan
. Our future performance depends upon our ability to find or acquire
additional oil and gas reserves that are economically recoverable.
. We are subject to anti-takeover provisions in our charter that could delay
or prevent an acquisition of our company, even if such an acquisition would
be beneficial to our shareholders.
. If we are unable to retain and hire senior management and key employees,
it will have a material impact on us.
. Investors will be relying on our board and management judgment regarding
the future direction and activities of the Company
. We will need additional financing to grow and our ability to raise further
financing is uncertain.
Risks Related to the Oil and Gas Industry
. A substantial decrease in oil and gas prices would have a material impact
on us.
. Estimating our reserves and future net cash flows is difficult to do with
any certainty.
. We may incur writedowns of the net book value of our oil and gas
properties which would adversely affect our shareholders' equity and
earnings.
. Operational risks in our business are numerous and could materially impact
us.
. Governmental and environmental regulations could adversely affect our
business.
. Competition in the oil and gas industry is strong and can harm our
business.
-22-
Background and Reasons for the Combination Transactions
The partnerships were formed between 1990 and 1996. As contemplated
when the partnerships were organized, the oil and gas production from the
producing properties owned by the older partnerships has steadily declined over
time. These reductions are due to the natural decline occurring in connection
with the depletion of oil and gas properties. These production declines have
contributed to a reduction in cash distributions, particularly in the earlier
partnerships. Similar production declines can be expected from the recently
formed 1996 and 1996-I partnerships in the future. Please see "Information
Concerning the Partnerships - Selected Historical Financial and Operating Data
for Individual Partnerships" on page 121 for cash distribution information.
Each partnership has a specified term of existence of 20 years and can
be terminated earlier upon recommendation of the General Partner with approval
of the majority-in-interest of limited partners. At the time the partnerships
were organized, there were no specific plans to terminate any partnership on the
occurrence of any specific events.
In 1997, Canaan and the General Partners began to consider the
possibility of combining the partnerships into a publicly held oil and gas
company in order to achieve the benefits of a corporate entity with a larger
asset base and greater growth potential than available to any individual
partnership. Actions to implement the plan were not taken at that time pending
the closing of the offering of partnership interests for the 1996 and 1996-I
partnerships and the investment of the capital contributions in oil and gas
properties. In addition, Canaan entered into an agreement in February 1999 to
include Indian in the combination transaction so the new company would have a
larger size.
Canaan and the General Partners recommend that the limited partners in
each of the partnerships vote in favor of the combination transactions. In
considering the combination transactions, Canaan and the General Partners took
into account various advantages and disadvantages of the combination
transactions to each of the partnerships and its respective limited partners.
The advantages they considered included:
. Canaan believes that shares of publicly-held oil and gas
companies generally trade at values greater than their cash
liquidation values affording limited partners potentially greater
value than represented by the cash value of the partnership's oil
and gas properties, either in immediate liquidation or in
continuing the partnership. Canaan believes publicly-held oil and
gas companies generally trade at premiums to their potential cash
liquidation values due to values attributable to going concern
and potential growth and due to the fact that public company
stock valuations do not reflect discounts for nonproducing
reserves typically applied in cash transactions.
. The partnerships may not have the cash nor the ability to borrow
funds necessary to develop their non-producing reserves. This may
result in reduction or temporary suspension of cash distributions
in order to
-23-
participate in proposals to place these non-producing reserves on
production, or the partnerships may be forced to forego
participation in these proposals.
. The continuation of the partnerships will likely result in
declining cash distributions to limited partners as a result of
the natural depletion of each of the partnership's oil and gas
properties and the requirement that partnerships other than the
1995 partnership repay borrowings with cash flow otherwise
distributable to partners.
. The combination transactions permit the limited partners to
participate in an investment in a larger company with a more
diversified property base and a potential for growth and
appreciation in the future. Each partnership owns interests in 52
to 163 gross (3.5 to 27.3 net) wells whereas, on a pro forma
basis as of December 31, 1999, Canaan will have interests in 965
gross (192 net) wells.
. For limited partners whose investment is based on the potential
for increases in oil or gas prices, ownership of stock in a
publicly traded oil and gas company continues to afford an
opportunity to benefit indirectly from these price increases.
. The structure of the transaction gives limited partners the
opportunity to exchange their interest in the partnerships for
common stock without immediate tax consequences or to receive
cash equal to Appraised Value in a taxable transaction if they do
not wish to receive Canaan common stock.
. The ownership of common stock in a publicly traded company will
afford the limited partners the opportunity to liquidate their
investment should they desire to do so.
. The organization of a publicly held oil and gas company will
potentially afford access to capital and other resources that
will provide Canaan opportunities for future growth that are not
available in the partnerships or the other entities.
. The inclusion of Indian in the combination transactions adds
reserves in the same areas as reserves owned by the Coral Group
and further diversifies Canaan's reserve base and property
ownership. Indian and the Coral Group are being valued in a
consistent manner for purposes of the combination transactions.
. For the 1996 and 1996-I partnerships, the terms of the Indian
Contingent Production Payment obligation to them effectively
provide an enhanced return compared to the return such
partnerships could realistically achieve if the combination
transactions are not consummated.
-24-
Canaan and the General Partners also considered disadvantages of the
combination transactions that included:
. Limited partners will own stock in a corporation which is a
different investment objective from investing in a partnership
designed to generate recurring cash distributions. However, the
cash election is intended to provide limited partners the option
to receive cash if they prefer.
. Limited partners will no longer receive cash distributions.
However, most limited partners are high income or high net worth
individuals classified as "accredited investors" under the SEC
rules and are likely to be less dependent on partnership cash
distributions than individuals with lower incomes or net worths.
. Canaan will engage in the acquisition and exploitation of new oil
and gas properties which will expose limited partners to all of
the attendant risks associated with such activities. The
partnerships generally do not conduct significant drilling
activities, but own producing properties. The activities of
Canaan may, therefore, involve greater risks than the activities
of the partnerships, but also offer the potential for additional
benefits if the acquisition and exploitation activities are
successful.
. Increases in prices for oil and gas may have a more direct effect
on limited partners in the partnerships due to the immediate
effect on potential cash distribution. However, Canaan and the
General Partners believe that an increase in oil and gas prices
will also have an indirect beneficial effect on the market price
for Canaan common stock.
. Limited partners will become subject to the volatility of the
market value of Canaan common stock. Market factors that may
affect the common stock price will include factors other than
those that affect the value of a limited partner's interest in a
partnership, such as general market conditions.
Fairness of the Combination Transactions
Canaan and the General Partners believe that the proposed combination
transactions are fair to the limited partners of each of the partnerships
receiving Canaan common stock or cash at Appraised Value, and are fair to the
partnerships as a whole.
The principal structural element affecting the limited partners and
the other parties to the combination transactions receiving Canaan common stock
is the determination of the Exchange Values. As noted elsewhere, the Exchange
Values are based primarily on the Reserve Value based on Netherland Sewell's
independent valuations.
-25-
By using Reserve Values calculated in a consistent manner by a single
engineer based on the same price, cost and discount assumptions, Canaan and the
General Partners believe that the relative value of each of the entities has
been fairly determined for purposes of determining its relative ownership of
Canaan after the combination transactions. Canaan and the General Partners also
considered various other factors in evaluating the fairness of the combination
transactions as described under "Recommendation of the General Partners and
Fairness of the Combination Transaction" beginning on page 74.
The cash amount being offered to limited partners electing to receive
cash is based on an appraisal of the value of each partnership's oil and gas
properties by an independent appraiser and, accordingly, Canaan and the General
Partners believe such cash election amount is fair for limited partners electing
to receive cash.
Alternatives to the Combination Transactions
Canaan and the General Partners have given consideration to the
alternatives of continued operation of the partnerships for a longer period or
the possibility of selling the partnership assets and liquidation of the
partnerships prior to proposing the combination transactions to limited partners
for their approval.
Continuation of the partnerships, while avoiding the risks associated
with the combination transactions and the discontinuance of cash distributions,
would result in declining operating results and distribution rates for each of
the partnerships due to the depletion of reserves, ongoing general and
administrative expense and debt service requirements for all partnerships. A
sale of the partnership assets and liquidation of the partnership would result
in immediate cash distributions to the limited partners and avoid the market
risks associated with the ownership of Canaan common stock. However, Canaan and
the General Partners believe liquidation of the partnerships is less beneficial
to limited partners primarily because the properties owned by many of the
partnerships consist of small non-operated interests which are not likely to be
valued favorably in the property market, resulting in discounted sale
prices.
Canaan and the General Partners conducted an analysis of the going
concern and liquidation values of each partnership compared to the Exchange
Value. Please see "Recommendation of the General Partners and Fairness of the
Combination Transactions -Consideration of Alternatives" beginning on page 78
for a more detailed analysis of the alternatives.
Appraisal Rights; Investor Lists
Under Oklahoma law, limited partners of the partnerships are not
entitled to dissenters' rights. However, pursuant to the rules of the National
Association of Securities Dealers applicable to rollup transactions, limited
partners in each partnership will be entitled to exercise appraisal rights. The
right of a limited partner to receive a cash payment for their interest in a
partnership equal to the Appraised Value provides limited partners with the
required appraisal rights.
26
A limited partner may obtain a list of limited partners in his
partnership by making a written request to the General Partners at 119 North
Robinson, Suite 600, Oklahoma City, Oklahoma 73102.
Accounting Treatment
The combination transactions are expected to be accounted for as:
. A reorganization of entities under common control for the General
Partners and the partnerships. As a result, the value of the
assets and liabilities of the partnerships and the General
Partners will be recorded at their historical cost.
. A purchase of Indian. As a result, the purchase price equal to
the fair value of Indian's assets acquired and liabilities
assumed will be allocated to the assets and liabilities of Indian
as of the date of closing of the combination transactions.
. A purchase of Canaan Securities. As a result, the purchase price
equal to the fair value of Canaan Securities' right to receive
cash distributions and future fees for services based on the
partnerships' ongoing revenues from oil and gas properties will
be allocated to the assets and liabilities of Canaan Securities
based on their estimated values as of the date of closing of the
combination transactions.
Business After the Completion of the Combination Transactions
Canaan will become an independent publicly held oil and gas company
after the completion of the combination transactions.
Canaan will seek growth through an active development drilling
program, identification and development of extension prospects and impact
acquisitions. The company will utilize in-house geological and engineering
expertise to identify and evaluate prospective locations, whether proved or
unproved. Canaan will employ aggressive land strategies to increase ownership
in existing properties with development potential and to obtain acreage in areas
of interest through acquisitions, leases or farm-ins. Canaan will concentrate
its efforts in the Mid-Continent area, with a preference for natural gas
producing properties, and will seek operations whenever possible.
On a pro forma basis as of December 31, 1999, Canaan will have
interests in 754 gross (132 net) gas wells, 211 gross (60 net) oil wells for a
total of 965 gross (192 net) wells, of which 201 or 21% will be operated by
Canaan. Its proved reserves will consist of 103.6 Bcfe with an estimated
Present Value of $75.6 million.
-27-
Canaan intends to finance its growth through various methods including
public and private offerings of equity and debt securities and bank and other
borrowings. Canaan expects to complete a public offering of common stock after
closing of the combination transactions when Canaan determines market conditions
are desirable.
Comparative Rights of Security Holders
For comparison of the rights of Canaan's shareholders under Oklahoma
law and Canaan's certificate of incorporation and bylaws with rights of the
partners of each of the partnerships under Oklahoma law and the respective
partnership agreements, please see "Comparative Rights of Security Holders".
Resales of Canaan Common Stock
The shares of Canaan common stock that will be issued to limited
partners and the shareholders of Indian in connection with the combination
transactions have been registered under the Securities Act. All shares of
common stock received by limited partners will be freely tradeable after
completion of the combination transactions.
The shares of Canaan common stock issued in the combination
transactions to the shareholders of Canaan, the General Partners and Canaan
Securities will not be registered under the Securities Act and may not be sold
unless registered or in transactions exempt from registration. In addition, all
of the shareholders of Canaan, the General Partners and Canaan Securities and
all but two shareholders of Indian have entered into an agreement granting to
each other reciprocal rights of first refusal in connection with any proposed
sales of Canaan common stock by them, except sales of less than a nominal number
of shares. The shareholders who are parties to this agreement will collectively
own 42% -60% of Canaan's common stock, depending on the level of limited partner
cash elections.
Conditions to Combination Transactions
The closing of the combination transactions is conditioned upon, among
other things:
. The approval of the Plan of Combination by a majority in interest
of the limited partners in all of the partnerships.
. The absence of any material adverse change affecting any of the
entities participating in the combination transactions.
. No more than $15 million will be required to be paid in cash to
limited partners electing to receive cash.
-28-
Regulatory Approvals
No federal or state regulatory approvals are required in connection
with the consummation of the combination transactions by the partnerships, the
General Partners, Indian or Canaan Securities.
Pro Forma Financial Data
Unaudited pro forma financial information based on Canaan's historical
financial statements, adjusted to give effect to the combination transactions,
is included in Appendix B. The pro forma data is not necessarily indicative of
results that actually would have occurred if the combination transactions had
been in effect on the dates indicated or which may be obtained in the future.
-29-
RISK FACTORS AND MATERIAL CONSIDERATIONS
In addition to the material contained elsewhere in this document, the
following factors should be considered.
Risks Related to the Combination Transactions
Limited partners will own stock in a corporation with perpetual existence rather
than a partnership interest in a limited partnership with a limited life
resulting in material changes in the nature of their investments.
Limited partners currently own interests in the partnerships which are
subject to a single level of federal and state income taxes at the partner level
and which were organized for the purposes of acquiring producing properties and
making cash distributions to limited partners. The partnerships have a limited
life and a limited purpose. Upon consummation of the transaction, the limited
partners will become shareholders of a corporation subject to income tax at both
the corporate and shareholder levels with perpetual existence and with a broad
business purpose. While the rights of limited partners and shareholders are in
some respects similar, there are material differences to the nature of an
investment in a limited partnership and a corporation.
Limited partners have received cash distributions from the partnerships, but
will receive no cash distributions or dividends in the foreseeable future.
The combination transactions will result in the limited partners
holding shares of our common stock, unless a limited partner elects to receive
cash. We do not anticipate paying dividends on our common stock in the
foreseeable future. Limited partners have historically received cash
distributions as described under "Information Concerning the Partnerships -
Selected Historical and Financial Operating Information".
There has been no public market for our common stock and there is no assurance
that a market will develop. There is no assurance that the value of the Canaan
common stock received by a limited partner will be equal to the Exchange Value.
The Exchange Values are being used solely to determine the relative ownership of
Canaan by the owners of each entity involved and do not represent the fair value
of Canaan or its net assets.
Our common stock will be listed on the NASDAQ National Market System
but there has been no prior market for our common stock. The price at which the
common stock will trade will be established by the market and there is no
assurance such price will bear any relationship to the Exchange Value.
Liquidity for our common stock may be limited because the number of holders will
be relatively small. There may be a large number of shares of our common stock
offered for sale immediately after the closing date for various reasons,
including the liquidity that the combination transactions will afford to limited
partners, who have not had access to a trading market for the partnership
interests and now may wish to liquidate their investment at the
-30-
first opportunity. The inclusion of the cash election for limited partners may
mitigate some of this risk. However, sales by limited partners may tend to lower
the market price for our common stock.
A decline in oil or gas prices or depressed conditions in the oil and
gas industry in general could adversely affect the market price of our common
stock. A downturn in the general economic and stock market conditions or in our
drilling record and production performance or results of our operations that are
lower than expected by the marketplace could also be expected to have a negative
effect on the market price of our common stock.
The consideration limited and general partners receive and the other terms of
the combination transactions were determined by Canaan and the General Partners,
which have inherent conflicts of interest, and may not reflect the value of the
net assets of the respective partnerships if sold to an unaffiliated third party
in an arm's length transaction.
Canaan and the General Partners determined the Exchange Values of the
partnerships based, in part, on the estimated value of each of the partnerships'
oil and gas reserves as of September 30, 1999 as estimated by Netherland Sewell,
its bank debt and net working capital. The determination of the Exchange Values
involves a conflict of interest because the General Partners serve as general
partners of the partnerships, their principal shareholders have been involved in
the organization and promotion of the combination transactions, and Canaan will
be allocated additional Exchange Value for its operating rights. Accordingly,
the determination of the Exchange Values may not reflect the allocation of
relative value between the limited partners and the General Partners if the
combination transactions were negotiated with an unaffiliated third party in an
arm's length transaction.
The Exchange Values are based primarily on estimates of oil and gas reserves and
future net cash flows which have inherent uncertainties. Exchange Values do not
represent fair market value.
The present value of estimated future net cash flows from oil and gas
reserves is the primary factor considered in determining the Exchange Values.
However, reserves cannot be determined with a high degree of certainty. There
are numerous uncertainties inherent in estimating quantities of oil and gas
reserves and in projecting future rates of production, future development,
recompletion and workover expenditures, prices to be received upon the sale, and
costs to be incurred in production. The Reserve Value for each of the entities
involved only represents an estimate and may vary materially from the quantities
of oil and gas actually recovered, and consequently the future net cash flows
received upon the sale thereof. The use of these estimates in determining the
Exchange Values for the entities involved could therefore result in an
undervaluation or overvaluation of the various entities, including the
partnership interests owned by limited partners. For these reasons the Exchange
Values do not represent fair market value.
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The price assumptions used to calculate the Reserve Value will not be modified
for changes in prices which could alter the relative values of the entities
involved in the combination transaction or the relative share of the limited
partners and General Partners which have not achieved payout.
Canaan and the General Partners established the oil and gas prices
used by Netherland Sewell & Associates to calculate the Reserve Value of the
entities involved in the combination transaction. These prices did not take into
consideration existing hedge transactions which the partnerships and Indian have
entered into which expire on or before December 31, 2000 and which are at prices
different from the prices used to calculate Reserve Value. Further, the Reserve
Value will not be adjusted for any changes in oil and gas prices that occur
subsequent to the Effective Date and prior to the closing date. Although the
Reserve Value of all of the entities should be equally affected by changes in
oil and gas prices, different oil and gas prices from those used to calculate
the Reserve Value would have an effect on the timing of payout in the
partnerships which have not yet achieved payout and thereby affect the
allocation of Reserve Value between the limited partners and the General
Partner. In addition, changes in prices would affect the Exchange Value of the
entities differently because of the differences in relative levels of
indebtedness of these entities.
The alternatives to continuing the partnerships or liquidating their assets
potentially could be more beneficial to limited partners than the combination
transactions.
Instead of entering into the combination transactions, a partnership
instead could continue to operate, or with the approval of the limited partners
of the partnership, seek to liquidate the partnership's assets and distribute
the liquidation proceeds in accordance with the provisions of the respective
partnership agreement, enabling limited partners to reinvest proceeds from the
asset sales in the case of a liquidation and avoid the market risks associated
with the ownership of Canaan common stock. Please see "Background and Reasons
For the Combination Transactions - Alternatives to the Combination
Transactions".
No independent representative was engaged to represent the limited partners in
negotiating the terms of the combination transactions, which terms may be
inferior to those that could have been negotiated by an independent
representative. Furthermore, no fairness opinion has been obtained regarding the
fairness of the combination transactions.
We did not engage an independent representative, such as an investment
bank, to negotiate the terms of the combination transactions. As a result, the
Exchange Values and other terms of the combination transactions may not be as
favorable as the terms that an independent representative might have obtained.
In addition, we did not retain an independent third party to render an opinion
with regard to the fairness of the combination transactions to the limited
partners and/or the partnerships.
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The cash being offered to limited partners who elect to receive cash is intended
to approximate the fair market value of their interests in a partnership, but
there is no assurance such value is in fact fair market value.
A limited partner may elect to receive cash equal to the Appraised
Value of his partnership interest, which is based on an appraisal of the
partnership's oil and gas properties by an independent appraiser. This appraisal
represents an opinion and the Appraised Value may or may not represent the fair
market value of the limited partner's interest in the partnership. The cash
election is being offered as a means for limited partners who do not wish to
bear the market risk associated with ownership of Canaan common stock to receive
cash in lieu thereof and to meet a requirement of the National Association of
Securities Dealers that limited partners be offered the right to receive
Appraised Value.
The combination transactions will reduce and dilute a limited partner's voting
rights.
The combination transactions will result in each limited partner
receiving a smaller proportionate ownership interest in Canaan than the interest
such partner owns in the partnership. This will reduce a limited partner's
ability to influence the taking of action in those instances where the
partnership agreements provide for the vote or consent of limited partners.
The combination transactions will result in a limited partner being exposed to
risks of a larger enterprise without restrictions on leverage.
Each of the partnerships acquired specific producing properties and
they have not engaged in material additional development activities. The limited
additional development that has been conducted by the partnerships was financed
using borrowings which under the terms of each of the partnership agreements was
limited to 20-30% of original capital contributions. After the combination
transactions, Canaan will engage in additional oil and gas property acquisitions
and development drilling without any specific limitations on the amount of
leverage that may be incurred to conduct its activities. As of December 31,
1999, the level of indebtedness in partnerships ranged from 9% to 39% of the
present value of estimated future net revenues from proved reserves, whereas
Canaan's pro forma percentage was 42%. While the limited partners in an
individual partnership will reduce the risk of ownership of specific properties
by obtaining an indirect ownership interest in a more diversified group of
properties, they will forsake the economic benefit of any extraordinary increase
in value attributable to the specific oil and gas properties now held by their
individual partnerships. In addition, the additional property acquisition and
development activities will expose limited partners to all of the risks
associated with the conduct of those activities and the absence of any
limitation on the amount of leverage that may be incurred by Canaan exposes its
shareholders to greater risk than exists in the partnerships.
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The 1996 and 1996-I partnerships' failure to approve the combination
transactions may result in a material adverse effect on returns to limited
partners due to the loss of a $3 million upward adjustment in the Indian
Contingent Production Payment.
In connection with the negotiation of the acquisition agreement
between Indian and Canaan, Indian agreed that its Exchange Value would be
reduced by its production payment obligation to the 1996 and 1996-I Partnerships
in consideration of such partnerships advancing to Indian a total of $6 million
in exchange for a "Contingent Production Payment" from Indian to the
partnerships payable at the rate of $56,250 per month until paid in full. The
Contingent Production Payment is $9 million if the combination transactions are
consummated and $6 million if they are not. The 1996 share of the Contingent
Production Payment is 53% and the 1996-I share of the Contingent Production
Payment is 47%. If the combination transactions are not consummated, Indian is
expected to be liquidated and proceeds of liquidation after payment of all
obligations to be shared 50% by the Indian shareholders and 50% by the Coral
Group. Accordingly, if the combination transactions are consummated, the 1996
and 1996-I partnerships may not receive any gain or return on the amount of
their investments in the Contingent Production Payment. The payment of this
obligation is subordinate to Indian's obligations to its bank lenders and
depending upon the amount of liquidation proceeds, the Contingent Production
Payment may not be paid in full. The amount invested in the Contingent
Production Payment represented 33% of the initial capital of the 1996
partnership and 43% of the initial capital of the 1996-I partnership.
We have not requested a ruling from the IRS on the tax consequences of the
combination transactions and the IRS may disagree with the opinion of our
counsel on the tax consequences.
Canaan has received an opinion of counsel relating to material income
tax consequences of the combination transactions. However, counsel has not
expressed an opinion on all consequences. No rulings have been, or will be,
requested from the IRS with respect to the tax consequences resulting from the
proposed combination transactions and, accordingly, we can give no assurance
that the IRS or the courts would agree with the opinion described in "Material
Federal Income Tax Consequences."
The partnerships presently are taxed as limited partnerships and, as
such do not generally pay federal income tax at the partnership level. Rather,
the items of income, gain, loss and deduction flow through to their partners.
The limited partners will receive Canaan common stock in the proposed
combination transactions. Because Canaan is a corporation, its income will be
taxed at the corporate level and, to the extent distributions are made to its
shareholders, such distributions will be taxable to the shareholders to the
extent of Canaan's accumulated and current earnings and profits. As a result of
the proposed combination transactions, the former limited partners who become
Canaan shareholders will no longer receive the pass-through tax treatment
accorded to partners.
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If the combination transactions are not approved, limited partners in each
partnership will bear a portion of the transaction expenses.
The transaction and fees and expenses incurred in connection with the
proposed combination transactions will be allocated to the limited partnerships
in proportion to their relative Exchange Values. The General Partner will bear a
portion of the fees allocated to the partnership equal to its percentage
interest in the partnership operating costs plus a percentage equal to the
percentage of limited partners who abstain or vote against the combination
transactions. The limited partners will bear a percentage of the allocated
expenses in proportion to the percentages of limited partners who voted to
approve the combination transactions. The estimated expenses allocatable to the
limited partnerships range from an estimated $25,500 for the low value
partnerships to $187,000 for the highest value partnership. The maximum expenses
chargeable to the limited partners in any partnership if the combination
transactions are not approved range from approximately $19,000 in the lowest
value partnership to approximately $168,000 in the highest value partnership.
Please see "The Combination Transactions - Expenses and Fees".
Risks Related to Canaan
Our future performance depends upon our ability to find or acquire additional
oil and gas reserves that are economically recoverable.
Unless we successfully replace the reserves that we produce, our
reserves will decline, resulting eventually in a decrease in oil and gas
production and lower revenues and cash flow from operations. While we believe
that we can replace reserves through drilling and acquisitions, we may not be
able to replace such reserves at acceptable costs. The business of exploring
for, developing or acquiring reserves is capital intensive. We may not be able
to make the necessary capital investment to maintain or expand our oil and gas
reserves if cash flow from operations is reduced, due to lower oil and gas
prices or otherwise, or if external sources of capital become limited or
unavailable. In addition, our drilling activities will be subject to numerous
risks, including the risk that no commercially productive oil or gas reserves
will be encountered. Exploratory drilling involves more risk than development
drilling because exploratory drilling is designed to test formations for which
proved reserves have not been discovered.
Although we will continually identify and evaluate acquisition
opportunities, we cannot assure you that we will successfully consummate any
acquisition, that we will be able to acquire producing oil and gas properties
that contain economically recoverable reserves or that any acquisition will be
profitably integrated into our operations.
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We are subject to anti-takeover provisions in our charter that could delay or
prevent an acquisition of our company, even if such an acquisition would be
beneficial to our shareholders.
Our certificate of incorporation, our bylaws, Oklahoma law and
management contracts contain provisions which could make it more difficult for a
third party to acquire us even if doing so might be beneficial to our
shareholders. These provisions include:
. A classified board, the members of which serve staggered three-
year terms and may be removed by shareholders only for cause;
. A prohibition on shareholders calling special meetings and acting
by written consent;
. A requirement for advance notice of shareholder proposals and
director nominations; and,
. Restrictions on business combinations with interested
shareholders and limitations on voting power of control share
acquisitions.
. Contracts providing severance benefits to management of a change
in control.
Please see "Management - Change in Control Agreements" and "Description of
Securities."
If we are unable to retain and hire senior management and key employees, it will
have a material impact on us.
As we continue to grow, we will need to hire additional personnel in
all areas. In order to be successful, we must attract, retain and motivate key
employees and we face significant competition from other oil and gas companies
in doing so. We may be unable to retain our key employees or retain other
qualified employees in the future. Please see "Management" for detailed
information on our senior management.
Investors will be relying on our board and management judgment regarding the
future directions and activities of the company.
Our management and board of directors will have broad discretion with
respect to the future activities of Canaan and limited partners will be relying
on a judgment of our management regarding our activities. The Board and
management will be responsible for making all decisions regarding the
acquisition and development of additional unspecified oil and gas properties and
the general manner in which the Company is operated. Please see "Information
concerning Canaan - Business after the Combination Transactions".
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We will need additional financing to grow and our ability to raise further
financing is uncertain.
After completion of the combination transactions, we anticipate that
our cash flow from operations will be sufficient to meet our anticipated working
capital and debt service requirements, but such cash flow may not be sufficient
to finance significant growth through additional acquisitions or drilling. On a
pro forma basis, Canaan will have 110 undeveloped locations containing proved
reserves with an estimated present value as of December 31, 1999 of $9,178,700.
Costs to develop these reserves are estimated at $13,125,600 over a seven-year
period. Upon the completion of the combination transactions, we anticipate
seeking additional equity financing by an underwritten public offering of common
stock at such time as we believe market conditions are appropriate. There is no
assurance we will complete such an offering. We may pursue alternative sources
of financing through private placements of equity or debt securities or through
asset sales. If financing is not obtained, we may not be able to develop all of
our reserves.
If additional funds are raised through the issuance of equity or
convertible securities, the percentage ownership of our shareholders will be
reduced and these newly issued securities may have rights, preferences or
privileges senior to those of existing shareholders, including those receiving
shares in the combination transactions. We cannot assure you that additional
financing will be available on terms favorable to us or at all. If adequate
funds are not available or not available on acceptable terms, our ability to
fund our operations and take advantage of unanticipated opportunities will be
significantly limited.
Risks Related to the Oil and Gas Industry
A substantial decrease in oil and gas prices would have a material impact on us.
Our future financial condition and results of operations are dependent
upon the prices we receive for our oil and gas production. Oil and gas prices
historically have been volatile and likely will continue to be volatile in the
future. This price volatility also affects our common stock price. We cannot
predict oil and gas prices and such prices may decline in the future. The
following factors have an influence on oil and gas prices:
. relatively minor changes in the supply of and demand for oil and
gas;
. weather conditions;
. market uncertainty;
. domestic and foreign governmental regulations;
. the availability and cost of alternative fuel sources;
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. the domestic and foreign supply of oil and gas;
. the price of foreign oil and gas;
. political conditions in oil and gas producing regions, including
the Middle East; and
. overall economic conditions.
Estimating our reserves and future net cash flows is difficult to do with any
certainty.
There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves and their values, including many factors beyond our
control. The reserve data included in this document represents only estimates.
Reserve engineering 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,
the precision of the engineering and geological interpretation, and judgment. As
a result, estimates of different engineers often vary. The estimates of
reserves, future cash flows and present value are based on various assumptions,
including those prescribed by the SEC, and are inherently imprecise. Actual
future production, cash flows, taxes, development expenditures, operating
expenses and quantities of recoverable oil and gas reserves may vary
substantially from our estimates. Also, the use of a 10% discount factor for
reporting purposes may not necessarily represent the most appropriate discount
factor, given actual interest rates and risks to which our business or the oil
and gas industry in general are subject.
Quantities of proved reserves are estimated based on economic
conditions, including oil and gas prices in existence at the date of assessment.
Our reserves and future cash flows may be subject to revisions, based upon
changes in economic conditions, including oil and gas prices, as well as due to
production results, results of future development, operating and development
costs, and other factors. Downward revisions of our reserves could have an
adverse effect on our financial condition and operating results.
We may incur write-downs of the net book values of our oil and gas properties
which would adversely affect our shareholders equity and earnings.
The full cost method of accounting which we follow requires that we
periodically compare the net book value of our oil and gas properties, less
related deferred taxes, to a calculated "ceiling". The ceiling is the estimated
after-tax present value of the future net revenues from proved reserves using a
10% discount rate and using constant prices and costs. Any excess of net book
value of oil and gas properties is written off as an expense and may not be
reversed in subsequent periods even though higher oil and gas prices may have
increased the ceiling in these periods. A write-off constitutes a charge to
earnings and reduces shareholders equity, but does not
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impact our cash flows from operating activities. Future write-offs may occur
which would have a material adverse effect on our net income in the period
taken, but would not affect our cash flows.
Operational risks in our business are numerous and could materially impact us.
Our operations will involve operational risks and uncertainties
associated with drilling for, and production and transportation of, oil and gas,
all of which can affect our operating results. Our operations may be materially
curtailed, delayed or canceled as a result of numerous factors, including:
. the presence of unanticipated pressure or irregularities in
formations;
. accidents;
. title problems;
. weather conditions;
. compliance with governmental requirements; and
. shortages or delays in the delivery of equipment.
Also, our ability to market oil and gas production depends upon
numerous factors, many of which are beyond our control, including:
. capacity and availability of oil and gas systems and pipelines;
. effect of federal and state production and transportation
regulations; and
. changes in supply and demand for oil and gas.
We do not insure against all potential losses and could be materially impacted
by uninsured losses.
Our operations will be subject to the risks inherent in the oil and
gas industry, including the risks of fire, explosions, blow-outs, pipe failure,
abnormally pressured formations and environmental accidents, such as oil spills,
gas leaks, salt water spills and leaks, ruptures or discharges of toxic gases.
If any of these risks occur in our operations, we could experience substantial
losses due to:
. injury or loss of life;
-39-
. severe damage to or destruction of property, natural resources
and equipment;
. pollution or other environmental damage;
. clean-up responsibilities;
. regulatory investigation and penalties; and
. other losses resulting in suspension of our operations.
In accordance with customary industry practice, we maintain insurance
against some, but not all, of the risks described above. The occurrence of an
uninsured loss could have a material adverse effect on our financial condition
or results of operations.
Governmental and environmental regulations could adversely affect our business.
Our business will be subject to certain foreign, federal, state and
local laws and regulations on taxation, the exploration for and development,
production and marketing of oil and gas, and environmental and safety matters.
Many laws and regulations require drilling permits and govern the spacing of
wells, rates of production, prevention of waste and other matters. Such laws and
regulations have increased the costs of planning, designing, drilling,
installing, operating and abandoning our oil and gas wells and other facilities.
In addition, these laws and regulations, and any others that are passed by the
jurisdictions where we have production, could limit the total number of wells
drilled or the allowable production from successful wells which could limit our
revenues.
Our operations will be subject to complex environmental laws and
regulations adopted by the various jurisdictions where we operate. We could
incur liability to governments or third parties for any unlawful discharge of
oil, gas or other pollutants into the air, soil or water, including
responsibility for remedial costs. We could potentially discharge these
materials into the environment in any of the following ways:
. from a well or drilling equipment at a drill site;
. leakage from gathering systems, pipelines, transportation
facilities and storage tanks;
. damage to oil and gas wells resulting from accidents during
normal operations; and
. blowouts, cratering and explosions.
-40-
Because the requirements imposed by all of the laws and regulations
relating to our business are frequently changed, we cannot assure you that laws
and regulations enacted in the future, including changes to existing laws and
regulations, will not adversely affect our business. In addition, because we may
acquire interests in properties that have been operated in the past by others,
we may be liable for environmental damage caused by such former operators.
Competition in the oil and gas industry is strong and can harm our business.
The oil and gas industry is highly competitive. We will compete in the
areas of proved reserve and undeveloped acreage acquisitions and the
development, production and marketing of oil and gas, as well as contracting for
equipment and recruiting and retaining qualified employees. Our competitors
include major oil and gas companies, other independent oil and gas concerns, gas
marketing companies, and individual producers and operators. Most of our
competitors have financial and other resources which substantially exceed those
which are available to us. Competition in the regions in which we own properties
may result in occasional shortages or unavailability of drilling rigs and other
equipment used in drilling activities, as well as limited availability of and
access to pipelines. Competitive circumstances could result in curtailment of
activities, increased costs, delays or losses in production or revenues, or
cause interests in oil and gas leases to lapse. All of the competitive
influences could have a material adverse impact on our operations and
profitability.
BACKGROUND AND REASONS FOR COMBINATION TRANSACTIONS
Background of Partnerships
Each of the partnerships was organized by the General Partners for the
purpose of acquiring interests in producing oil and gas properties and to engage
in drilling of development and offset wells, for the reworking, recompletion,
deepening or plugging back of existing wells and secondary or tertiary recovery
operations and other production enhancement techniques incident to the operation
of producing properties acquired by the partnerships. The partnerships were not
organized to engage in exploratory drilling activities. The objective of each of
the partnerships is to provide cash distributions generated by the sale of oil
and gas from the properties acquired. Each of the partnerships raised capital in
private offerings from limited partners, primarily individuals and substantially
all of whom are considered "accredited investors" under the federal securities
laws. In each of the partnerships, Leo E. Woodard and John Penton, officers and
shareholders of Canaan, serve as "Additional General Partners". As provided by
the terms of each partnership, the General Partner and Additional General
Partners did not make any capital contributions for their interests in the
partnership.
All of the funds invested by limited partners have been invested in
oil and gas properties as contemplated by the partnership agreements, after
required payments of organization and offering costs. Properties acquired by
each partnership have generated revenues from the sale of oil and gas and cash
distributions have been made to limited partners in accordance with the
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terms of the partnership agreements. Accordingly, the investment objectives of
each of the partnerships have been achieved. The following table sets forth
information about the partnerships:
Total Initial Cumulative Cash
Capital Distributions to
Identity of # of Date Contributions of Limited Partners
General Limited Commenced Limited Partners Through March 31, 2000
Name of Partnership Partner Partners Operations (000 Omitted) (000 Omitted)
- ------------------- ------- -------- ---------- ----------- -----------
Coral Reserves Natural Gas Income Fund Coral, Inc. 109 04/30/90 $ 3,888 $ 5,550
1990 Limited Partnership
Coral Reserves Natural Gas Income Fund Coral Corp. 124 04/30/91 4,480 6,456
1991 Limited Partnership
Coral Reserves Natural Gas Income Fund Coral Corp. 191 06/17/92 7,500 7,243
1992 Limited Partnership
Coral Reserves Natural Gas Income Fund Coral Corp. 173 07/02/93 6,525 5,933
1993 Limited Partnership
Coral Reserves 1993 Institutional Limited Coral, Inc. 21 09/01/93 2,363 2,639
Partnership
Coral Reserves Energy Income Fund 1995 Coral Corp. 196 12/13/94 6,805 5,199
Limited Partnership
Coral Reserves Energy Income Fund 1996 Coral Corp. 226 05/30/96 9,635 3,088
Limited Partnership
Coral Reserves 1996 Institutional Limited Coral, Inc. 54 12/21/95 6,520 3,042
Partnership ----- ------- -------
Totals 1,094 $47,715 $39,150
===== ======= =======
Neither Canaan, the General Partners nor Canaan Securities have
experienced since January 1, 1998, or is likely to experience, any material
adverse financial development. All of the partnerships except the 1995
partnership have incurred significant indebtedness in order to finance limited
development activities. Through March 31, 2000, all of the partnerships have
generally paid interest only on such borrowings and no material principal
payments have been made because the collateral value of each partnership's oil
and gas properties has been substantially more than required by the
partnership's lender. In some of the partnerships, the level of debt in relation
to the collateral value of the partnership's oil and gas properties is
sufficiently high that repayment of principal of the debt will need to be
commenced in 2000 if the combination transactions do not occur. The partnerships
likely to require debt repayment are the 1990 and 1991 partnerships.
Commencement of principal payments on indebtedness of these partnerships will
reduce cash distributions to limited partners in these partnerships, and limited
partners will also be required to report as income their share of partnership
principal repayments. If the combination transactions are consummated, the
partnerships' debt will be paid by Canaan.
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Each partnership has a specified term of existence of 20 years and
could be terminated earlier upon recommendation of the General Partner with
approval of the majority-in-interest of limited partners. At the time the
partnerships were organized, there were no specific plans to terminate any
partnership on the occurrence of any specific events.
Background of Combination Transactions
The partnerships were formed between 1990 and 1996. As contemplated
when the partnerships were organized, the oil and gas production from the
producing properties owned by the older partnerships has steadily declined over
time. These reductions are due to the natural decline occurring in connection
with the depletion of oil and gas properties. These production declines have
contributed to a reduction in cash distributions, particularly in the earlier
partnerships. Similar production declines can be expected from the recently
formed 1996 and 1996-I partnerships in the future. Please see "Information
Concerning the Partnerships - Selected Historical Financial and Operating Data
for Individual Partnerships".
In 1997, Canaan and the General Partners began to consider the
possibility of combining the partnerships in order to achieve the benefits of a
corporate entity with a larger asset base and greater growth potential than
available to the General Partners or any individual partnership. Actions to
implement the Plan were not taken at that time pending the closing of the
offering of partnership interests for the 1996 and 1996-I partnerships and the
investment of the capital contributions in oil and gas properties.
In evaluating the possible combination of the partnerships into a
publicly traded corporation, management of Canaan considered whether the size of
the combined partnerships would be sufficient to attract a market following and
determined it would be desirable to include additional oil and gas properties in
the new entity. Canaan sought another company to join in the transaction and
management became aware that Indian was considering a possible sale or business
combination from information provided to them by employees of Indian. Canaan and
Indian executed an acquisition agreement in February 1999 providing for Indian
to be included in the combination transactions with Indian and the Coral Group
to receive shares of the new entity based on their relative Exchange Values. In
order to induce Indian to make this agreement, the 1996 and 1996-I partnerships
advanced to Indian a combined sum of $6 million. The partnerships received in
exchange a Contingent Production Payment from Indian payable out of production
revenues at the rate of $56,250 per month until paid in full. The Contingent
Production Payment is $9 million if the combination transactions are consummated
and $6 million if they are not, less any payments previously made. At the same
time, Indian and Canaan entered into a management agreement providing for Canaan
to manage the business of Indian subject to the control of Indian's board of
directors.
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After the execution of the Indian acquisition agreement and the full
investment of the 1996 and 1996-I partnerships, Canaan and the General Partners
began the process of evaluating the combination transactions and reviewing the
oil and gas properties of all of the entities involved to prepare them for a
reserve evaluation by Netherland Sewell. Canaan also engaged Crowe & Dunlevy, a
Professional Corporation, Oklahoma City, Oklahoma, as legal counsel and KPMG
LLP, as independent certified public accountants, to audit the financial
statements of Canaan in connection with the transaction. Neither Crowe & Dunlevy
nor KPMG LLP had any prior relationship with Canaan, the General Partners, the
partnerships or Canaan Securities. Crowe & Dunlevy also had no prior
relationship with Indian. KPMG LLP has served as independent auditors of
Indian's financial statements since 1991.
Reasons for the Combination Transactions
Canaan and the General Partners recommend that the limited partners in
each of the partnerships vote in favor of the combination transactions. In
considering the combination transactions, Canaan and the General Partners took
into account various advantages and disadvantages of the combination
transactions to each of the partnerships and its respective limited partners.
The advantages they considered included:
. Canaan believes that shares of publicly held oil and gas
companies generally trade at values greater than their cash
liquidation values, affording limited partners potentially
greater value than represented by the cash value of the
partnership's oil and gas properties, either in immediate
liquidation or in continuing the partnership. Canaan believes
that publicly-held oil and gas companies generally trade at
premiums to their potential cash liquidation values due to value
attributable to going concern and potential growth and due to the
fact that public company stock valuations do not reflect
discounts for nonproducing reserves typically applied in cash
transactions.
. The partnerships may not have the cash nor the ability to borrow
funds necessary to develop their non-producing reserves. This may
result in reduction or temporary suspension of cash distributions
in order to participate in proposals to place these non-producing
reserves on production, or the partnerships may be forced to
forego participation in these proposals.
. The continuation of the partnerships will likely result in
declining cash distributions to limited partners as a result of
the natural depletion of each of the partnership's oil and gas
properties and the requirement that partnerships, other than the
1995 partnership, repay borrowings with cash flow otherwise
distributable to partners.
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. The combination transactions permit the limited partners to
participate in an investment in a larger company with a more
diversified property base and a potential for growth and
appreciation in the future. Each partnership owns interests in 52
to 163 gross wells whereas, on a pro forma basis as of December
31, 1999, Canaan will have interests in 965 gross (192 net)
wells.
. For limited partners whose investment is based on the potential
for increases in oil or gas prices, ownership of stock in a
publicly traded oil and gas company continues to afford an
opportunity to benefit indirectly from these price increases.
. The structure of the transaction gives limited partners the
opportunity to exchange their interest in the partnerships for
Canaan common stock without immediate tax consequences or to
receive cash in a taxable transaction if they do not wish to
receive Canaan common stock.
. The ownership of common stock in a publicly traded company will
afford those limited partners the opportunity to liquidate their
investment should they desire to do so.
. The organization of a publicly held oil and gas company will
potentially afford access to capital and other resources that
will provide Canaan opportunities for future growth that are not
available in the partnerships or the other entities.
. The inclusion of Indian in the combination transactions adds
reserves in the same areas as reserves owned by the Coral Group
and enhances Canaan's reserve base and property ownership. Indian
and the Coral Group are being valued in a consistent manner for
purposes of the combination transactions.
. For the 1996 and 1996-I partnerships, the terms of the Indian
Contingent Production Payment obligations to them effectively
provide an enhanced return compared to the return such
partnerships could realistically achieve if the combination
transactions are not consummated.
Canaan and the General Partners also considered disadvantages of the
combination transactions that included:
. Limited partners will own stock in a corporation which is a
different investment objective from investing in a partnership
designed to generate recurring cash distributions. However, the
cash election is intended to provide limited partners the option
to receive cash if they prefer.
-45-
. Limited partners will no longer receive cash distributions.
However, most limited partners are high income or high net worth
individuals classified as "accredited investors" under the SEC
rules and are likely to be less dependent on partnership cash
distributions than individuals with lower incomes or net worths.
. Canaan will engage in the acquisition and exploitation of new oil
and gas properties which will expose limited partners to all of
the attendant risks associated with such activities. The
partnerships generally do not conduct significant drilling
activities, but own producing properties. The activities of
Canaan may, therefore, involve greater risks than the activities
of the partnerships, but also offer the potential for additional
benefits if the acquisition and exploitation activities are
successful.
. Increases in prices for oil and gas may have a more direct effect
on limited partners in the partnerships due to the immediate
effect on potential cash distributions. However, Canaan and the
General Partners believe that an increase in oil and gas prices
will also have an indirect beneficial effect on the market price
for Canaan common stock.
. Limited partners will become subject to the volatility of the
market value of Canaan common stock. Market factors that may
affect the common stock price will include factors other than
those that affect the value of a limited partner's interest in a
partnership, such as general market conditions.
. Canaan will incur the costs required to maintain its status as a
reporting company under the Exchange Act listed on the NASDAQ
National Market System. These costs will likely exceed the
continuing administrative costs which would be incurred by the
partnerships if they continue in existence.
Canaan and the General Partners also considered the advantages and
disadvantages of the combination transactions for individual partnerships as
described below:
. None of the individual partnerships have a concentrated
investment in a single property or group of properties that
exposes any partnership to the individual risks and potential
benefits of ownership of a property that might be materially
different from the properties owned by any other partnership.
. The 1995 Partnership does not have any significant bank
indebtedness whereas the other partnerships have bank
indebtedness ranging from 9% to 39% of present value of reserves
as of December 31, 1999. If the 1995 Partnership were continued
and it did not borrow funds in the future for development costs,
its partners would continue to receive cash distributions
-46-
without a requirement to amortize bank indebtedness as exists in
the remaining partnerships unless the 1995 partnership incurs
significant debt for development drilling or other purposes.
Therefore, the continuation of the 1995 Partnership might not
result in a reduction in cash distributions to limited partners
for debt service unless additional indebtedness is incurred.
. The terms of the Indian Contingent Production Payment obligation
to the 1996 and 1996-I partnerships effectively provide an
enhanced return compared to the return such partnerships could
realistically achieve if the combination transactions are not
consummated. The terms of such obligation increase the Exchange
Value of the 1996 partnership by 21% and the 1996-I partnership
by 23% over the Exchange Value without the Contingent Production
Payment.
. Except the 1996 partnership, the Exchange Value for all
partnerships plus historical cash distributions is more than 115%
of the limited partners' original investment. Because the 1996
partnership was formed later and its cash distributions to
limited partners have been less, Canaan and the General Partners
agreed to reduce their share of the Exchange Value in the 1996
partnership so that the limited partners receive at least 115% of
their original investment from the Exchange Value plus prior cash
distributions so that the limited partners will receive value in
this form closer to that received by limited partners in the
other partnerships. For the same reason, the Appraised Value plus
prior cash distributions for the 1996 and 1996-I partnerships
will be at least 110% of a limited partner's original investment
for a cash electing partner.
Canaan and the General Partners are proposing the combination
transactions at this time because
. The size of the combined partnerships and Indian are, in their
opinion, sufficient to become an independent oil and gas company
that will gain some market following in the public securities
markets;
. Oil and gas company stocks are trading at relatively favorable
levels primarily due to relatively high commodity prices; and
. Deferring the combination transactions will result in a resulting
entity of smaller size due to depletion of reserves and cash
distributions to partners.
The combination transactions are structured as an exchange of
partnership interests or stock of all of the entities involved for stock in
Canaan because, in the opinion of Canaan and the General Partners:
-47-
. The most common form of organization for a publicly held
independent oil and gas company is a corporation;
Including all of the partnerships in the combination transaction,
rather than only some, treats all partnerships the same and
maximizes the size of the resulting entity;
. Structuring the combination transactions by vote of the limited
partners permits the combination transactions to be consummated
by a majority vote; and
. The structure is designed to be tax-free to the owners of all
entities, except limited partners electing to receive cash.
Canaan and the General Partners have given consideration to
alternatives of continued operation of the partnerships for a longer period or
the possibility of selling the partnership assets and liquidation of the
partnerships prior to proposing the combination transactions to limited partners
for their approval. See "Recommendation of the General Partners and Fairness of
the Combination Transactions" for a complete discussion of these alternatives.
Other Transactions
Since January 1, 1997, there have been no contacts, negotiations or
transactions concerning any of the following matters relating to the
partnerships, except the contacts, negotiations and transactions with respect to
the Indian acquisition described above:
. A merger, consolidation or combination of any of the
partnerships;
. An acquisition of any of the partnerships or of a material amount
of any of their assets;
. A tender offer for or other acquisition of securities of any
class issued by any of the partnerships; or
. A change in control of any of the partnerships.
-48-
THE COMBINATION TRANSACTIONS
Description of the Combination Transactions
The combination transactions consist of:
. The acquisition of all of the limited partners' and additional
general partners' interests in each of the partnerships by Canaan
by a merger between each partnership and acquisition corporations
organized by Canaan for purposes of the transaction;
. The acquisition of 100% of the stock of the General Partners of
the partnerships by Canaan;
. The acquisition of 100% of the stock of Indian by Canaan;
. The acquisition of 100% of the stock of Canaan Securities by
Canaan; and
. An increase in Canaan's outstanding common stock held by its
current shareholders to result in the appropriate number of
shares outstanding based on Canaan's relative share of the total
Exchange Value.
As a result of the combination transactions, the partnerships, the
General Partners, Indian and Canaan Securities will be wholly-owned subsidiaries
of Canaan. We refer to Canaan, the General Partners, Indian, the partnerships
and Canaan Securities as the "Combining Entities".
A total of 5,000,000 shares of Canaan common stock will be issued and
be outstanding after the combination transactions, less the number of shares
otherwise issuable to limited partners who elect to receive cash. The owners of
each of the Combining Entities will receive shares of Canaan common stock in
proportion to the "Exchange Value" of such entity relative to the total Exchange
Value of all Combining Entities. The Exchange Value has been determined by
Canaan and is based on a valuation of each Combining Entity's oil and gas
reserves and other assets and liabilities. The Reserve Values were determined by
Netherland, Sewell & Associates, an independent petroleum engineering and
consulting firm, using the same price, cost, effective date and discount rate
assumptions for each entity. A limited partner in any partnership may also elect
to receive cash equal to the "Appraised Value" of his interest in the
partnership.
The Plan of Combination and Indian Acquisition Agreement
In February 1999, Canaan and the General Partners entered into an
agreement for Canaan to acquire Indian based on their relative Exchange Values
simultaneously with the consummation of the remaining portions of the
combination transactions. We refer to this agreement as the "Indian Acquisition
Agreement". Because the details of the combination
-49-
transactions had not been finalized at the time of execution of the Indian
Acquisition Agreement, the Combining Entities subsequently entered into the
"Plan of Combination" in February 2000, which supplements the Indian Acquisition
Agreement and provides for the details of the combination transactions. The Plan
of Combination was amended in May 2000 to modify certain terms after Canaan
received comments from the Securities and Exchange Commission on a preliminary
filing of this document.
Copies of the Indian Acquisition Agreement and the Plan of
Combination, as amended, have been filed as exhibits to the registration
statement of which this document is a part, are incorporated in this document by
reference and are available to limited partners upon request to Canaan at 119 N.
Robinson, Suite 600, Oklahoma City, Oklahoma 73102, (405) 232-3222.
The Indian Acquisition Agreement obligated the Coral Group to advance
to Indian the sum of $6 million in return for a contingent production payment
("the Contingent Production Payment") payable out of Indian's oil and gas
production proceeds at the rate of $56,250 per month until paid in full. The
1996 partnership provided 53% of the $6 million in funding and the 1996-I
partnership provided 47% of the $6 million in funding. The Indian Acquisition
Agreement provides that for purposes of calculating the Exchange Values, the
Indian Exchange Value will be adjusted downward by the remaining amount of the
Contingent Production Payment obligation as of the Effective Date, plus an
additional $3 million and the Exchange Values for the 1996 and 1996-I
partnerships will be adjusted upward by the same amount.
If the combination transactions do not occur, the Indian Acquisition
Agreement provides that the Contingent Production Payment remains at $6 million,
less any payments previously made, and Indian will be liquidated, with the
proceeds of the liquidation after payment of all liabilities, including the
Contingent Production Payment, to be shared 50% by the shareholders of Indian
and 50% by the Coral Group.
Simultaneously with the execution of the Indian Acquisition Agreement,
Indian entered into a management agreement with Canaan providing for Canaan to
manage the business of Indian pending the consummation of the combination
transactions subject to the control of Indian's board of directors with respect
to specified matters. The management agreement provides for Canaan to be
responsible for the day to day operations of Indian, including the authority to
make employment hiring and termination decisions and to manage the collection of
Indian's revenues and payment of Indian's obligations and expenses. The
management agreement reserved authority to Indian's board of directors to
approve:
. Any sales of Indian's oil and gas properties except as
contemplated by the Indian Acquisition Agreement;
. Actions that would change or substantially expand or enlarge the
business of Indian;
-50-
. The conduct of any exploratory or development drilling;
. Any agreement to create liens on Indian's oil and gas properties
or refinance any of its indebtedness;
. Loans to any person from the funds of Indian;
. The use of insurance proceeds received upon a total or
substantial destruction of Indian's oil and gas properties in any
manner other than may be dictated by any of Indian's loan
agreements;
. Execute or deliver any assignment to the benefit of creditors of
Indian, confess a judgment against Indian or do any act that
would make it impossible to carry on the ordinary business of
Indian;
. Any act that would subject a shareholder or member of the board
of directors of Indian to personal liability; or
. Any changes in the terms of the Indian Acquisition Agreement or
any action which would cause Indian to be in default or in breach
of any of its representations, warranties or obligations under
the Indian Acquisition Agreement.
In order to carry out the management agreement, Leo E. Woodard,
chairman and chief executive officer of Canaan was appointed as president of
Indian and John K. Penton, president of Canaan was appointed as executive vice
president of Indian.
Effective Time of the Combination Transactions
Closing of the combination transactions. Unless the Combining Entities
otherwise agree, the closing of the combination transactions will occur on the
first business day after the date on which all closing conditions have been
satisfied or waived. The closing of the combination transactions is expected to
take place immediately after the approval of the combination transactions by the
partnerships at the special meeting.
Effective time of the combination transactions. At the closing,
certificates of merger for the partnership mergers into separate acquisition
corporations organized by Canaan, and a certificate of acquisition for the share
acquisition of Indian by Canaan will be filed with the Oklahoma Secretary of
State and the mergers and share acquisition will be effective at the time the
certificates are so filed. Simultaneously, Canaan will acquire 100% of the stock
of the General Partners and Canaan Securities, and Canaan's existing common
stock will be reclassified.
-51-
Surviving corporation. Canaan will be the parent company of the other
Combining Entities. Indian, the partnerships, the General Partners and Canaan
Securities will become wholly-owned subsidiaries of Canaan. The certificate of
incorporation and bylaws of Canaan in effect immediately prior to the closing
will be the certificate of incorporation and bylaws of the surviving entity. See
"Comparison of Security Holder Rights".
The initial directors and senior executive officers of Canaan
following the combination transactions will be as described in "Management".
Consideration to be Received in the Combination Transactions.
A total of 5,000,000 shares of Canaan common stock will be issued and
outstanding immediately after the combination transactions, less the number of
shares otherwise issuable to limited partners in the partnerships who elect to
receive cash. The owners of each of the Combining Entities will receive shares
of Canaan common stock in proportion to the Exchange Value of such entity
relative to the total Exchange Value of all Combining Entities. Placing Brokers
will receive cash equal to 40% of their Exchange Value and their share of Canaan
common stock will be determined based on the balance of their Exchange Value.
Issuance of Shares; Fractional Shares
Exchange agent. Prior to consummation of the combination transactions,
Canaan will appoint UMB Bank, N.A., Kansas City, Kansas or another exchange
agent reasonably acceptable to Canaan to effect the issuance of certificates
representing shares of Canaan common stock in the combination transactions.
Issuance of shares. The owners of the Combining Entities other than
limited partners in the partnerships will receive certificates for Canaan common
stock issuable in the combination transactions at the closing in exchange for
the surrender of the certificates of stock in the Combining Entities. Canaan
common stock will be issued to a limited partner in the partnerships by the
exchange agent as soon as the limited partner has submitted a properly completed
and signed proxy and cash election form and letter of transmittal. The proxy and
cash election form and letter of transmittal is being provided to limited
partners with this document and should be submitted prior to the special
meeting. For limited partners who have not previously submitted a proxy and cash
election form and letter of transmittal, after consummation of the combination
transactions, the exchange agent will mail to each of these limited partners a
letter of transmittal and instructions explaining how to complete and submit the
letter. Limited partners will receive a certificate for the number of shares
that he is entitled to receive in accordance with the terms of the combination
transactions rounded to the nearest whole share. No fractional shares of Canaan
common stock will be issued.
-52-
Limited Partner Cash Election
A limited partner in any partnership may elect to receive cash in lieu
of Canaan common stock equal to the Appraised Value of his interest in the
partnership regardless of whether the limited partner has voted in favor of the
combination transactions.
In order to make an election to receive cash, limited partners must
properly complete the cash election portion of the proxy and cash election form
and letter of transmittal accompanying this document and return it to the
General Partner prior to the special meeting. If an election to receive cash is
properly indicated and the combination transactions are approved, the electing
limited partner will receive cash as provided above. If no specific election is
made, and the combination transactions are consummated, the limited partner will
receive Canaan common stock.
Canaan will make payments to cash electing limited partners within
five days after the completion of the combination transactions.
There is a limit on the amount of cash payable to limited partners
electing to receive cash of $15 million. If the amount of cash elections is more
than this limit, the combination transactions will not be consummated.
Revocation of Limited Partner Cash Election
A limited partner may revoke his election at any time before the
special meeting. Any limited partner who attends a special meeting and wishes to
change his election may change his election at that time. Otherwise, a limited
partner must advise the General Partner of any change to his election in
writing, which writing must be received by the General Partner at its offices at
119 N. Robinson, Suite 600, Oklahoma City, Oklahoma 73102, prior to the time the
vote is taken at the special meeting.
Conditions
The obligations of the Combining Entities to effect the combination
transactions are subject to the following conditions:
. All representations and warranties of each of the Combining
Entities contained in the Plan of Combination or Indian
Acquisition Agreement being true and correct in all material
respects;
. Material compliance by all of the Combining Entities with the
agreements and covenants in the Plan of Combination and Indian
Acquisition Agreement;
-53-
. Approval of the Plan of Combination by the shareholders of
Indian;
. The delivery of certificates of existence and good standing by
each of the Combining Entities;
. The approval of the partnership mergers by each of the
partnerships;
. All consents, approvals, permits and authorizations from
governmental authority having been obtained;
. None of the parties being subject to any order or injunction of
the court which prohibits or restricts consummation of the
combination transactions or any pending or threatened actions
seeking such relief or seeking damages;
. The effectiveness of the registration statement of which this
document is a part and the SEC not issuing a stop order
suspending the effectiveness;
. The approval of the shares of Canaan common stock to be issued in
the combination transactions for listing on the NASDAQ National
Market System;
. The absence of any material adverse change in the financial
condition, results of operations or business of Indian or the
Coral Group excluding any change or effect resulting from general
economic conditions, any occurrence or condition affecting the
oil and gas industry generally, and any occurrence or condition
arising out the transactions contemplated by the Indian
Acquisition Agreement;
. No more than $15 million will be required to be paid in cash to
limited partners electing to receive cash.
Representations and Warranties
The Indian Acquisition Agreement and the Plan of Combination contain
representations and warranties by the Combining Entities as to themselves
concerning, among other things:
. Organization, standing and authority;
. Capital structure;
. Absence of defaults caused by execution and delivery of the
agreements;
-54-
. Authorization to enter into the agreements and all related
transactions;
. Accuracy of disclosure of all information;
. Absence of brokers' or finders' fees;
. Compliance with all government permits;
. Title to assets;
. Accuracy of financial statements;
. All material oil and gas leases in full force and effect;
. Absence of material adverse changes since most recent financial
statements;
. Absence of undisclosed liabilities;
. Compliance with laws;
. Compliance with environmental and safety regulations;
. Required board and shareholder approvals;
. Level of bank debt with respect to Indian;
. Accuracy of information provided for registration statement.
Covenants
The Indian Acquisition Agreement and the Plan of Combination provide
various agreements of each the Combining Entities for actions to occur from the
date of the agreements to the closing date, including, among other things,
agreements with respect to:
. Reciprocal access to information and agreements to maintain the
confidentiality of confidential information;
. Conduct of the business only in the ordinary course of business.
Canaan and the General Partners also agreed in the Indian Acquisition
Agreement that they would not:
-55-
. Issue shares of capital stock except pursuant to existing
contractual commitments or in connection with the combination
transactions;
. Amend their certificates of incorporation or bylaws except as
contemplated by the Indian Acquisition Agreement;
. Waive any rights of substantial value;
. Enter into any agreement not in the ordinary course of business
or take any action or meant to take any action which would result
in any of their representations or warranties to become untrue.
Indian agreed in the Indian Acquisition Agreement that it would not:
. Issue, sell or otherwise dispose of share of its capital stock;
. Declare, set aside or pay any dividend or distribution with
respect to its stock;
. Redeem, purchase or otherwise acquire any of its stock;
. Effect a split or reclassification of any capital stock of
Indian;
. Change the charter or bylaws of Indian;
. Permit Indian to grant any increase in compensation payable to
its employees other than regularly scheduled merit increases;
. Borrow any funds except for working capital purposes;
. Waive any rights of substantial value;
. Enter into any material agreements, contracts or commitments or
materially amend or change the terms of any existing material
agreement, contract or commitment or take any action or meant to
take any action which would result in any of its representations
or warranties becoming untrue;
The plan of combination contains additional agreements relating to:
. Public announcements of the transaction;
. Approval by all of the shareholders of Canaan, the General
Partners, and Canaan Securities of the Plan of Combination;
-56-
. The shareholders of Canaan, the General Partners, Indian and
Canaan Securities entering into a shareholders agreement as
described below;
. The elimination of any indebtedness between Canaan Securities and
its principal shareholder;
. The release of personal guaranties of shareholders of Indian and
the General Partners relating to bank debt of Indian and the
partnerships;
. An agreement to use best efforts to cause persons who are
affiliates of Indian to enter into written agreements prior to
the closing of the combination transactions not to sell, pledge,
transfer or otherwise dispose of any shares of Canaan common
stock issued to them except in compliance with Rule 145 under the
Securities Act or unless the shares have been registered under
the Securities Act or there is an available exemption from
registration from the registration requirements;
. The cancellation or contribution to capital of all Indian debt to
its shareholders in the amount of approximately $3.7 million, as
of December 31, 1999;
. Agreements relating to obligations between Indian and an entity
owned by major shareholders of Indian that purchased assets from
Indian and loaned Indian $500,000 in working capital.
Indian Excluded Assets
The Indian Acquisition Agreement provides that specified undeveloped
oil and gas prospects, art, furniture and fixtures, automobiles and Section 29
tax credits will be excluded from the combination transactions. These assets
have been transferred by Indian to a company owned by major shareholders of
Indian in exchange for notes in the amount of $1,088,000. These notes have been
distributed by Indian to such shareholders as a dividend.
Termination or Amendment
Prior to the consummation of the combination transactions, the Indian
Acquisition Agreement and the Plan of Combination may be terminated:
. By mutual consent of Indian, Canaan and the General Partners;
. By either Indian or Canaan and the General Partners, if:
-57-
. The combination transactions are not consummated on or
before September 1, 2000;
. If limited partners of all of the partnerships shall not
have approved the partnership mergers;
. If the shareholders of Indian do not approve the Plan of
Combination;
. There is a legal prohibition to closing the combination
transactions arising from the issuance of an order, decree
or ruling of a governmental body enjoining or prohibiting
the combination transactions by any Combining Entity if
there has been a material breach by any other Combining
Entity of any representations or warranties set forth in the
agreement or any condition to closing in such party's favor
has not been satisfied or waived.
The Indian Acquisition Agreement may not be amended except with the
approval of Indian and Canaan and the General Partners and the Plan of
Combination may not be amended except with the approval of all of the Combining
Entities.
Appraisal Rights
The right of limited partners in any partnership to elect to receive
cash based on the Appraised Value of their interest in a partnership effectively
provides appraisal rights to all limited partners.
Please see "The Combination Transaction - Cash Election" for
additional information.
NASDAQ Listing
Canaan has applied to the NASDAQ National Market System for the
listing on a "when issued" basis of the shares of Canaan common stock to be
issued in the combination transactions under the proposed symbol "KNAN".
Interest of Certain Persons in the Transaction
Leo E. Woodard and John K. Penton, directors and officers of Canaan,
are Additional General Partners of each of the partnerships and have each
personally guaranteed the partnerships' bank borrowings. Major shareholders of
Indian have on a limited basis personally guaranteed Indian bank borrowings. All
of these personal guarantees are expected to be released upon consummation of
the combination transactions. Upon the completion of the combination
transactions, Canaan
-58-
should have sufficient borrowing capacities to obtain credit without the need of
personal guarantees.
Anthony Lasuzzo, a proposed executive officer of Canaan, is a
consultant to Indian and assists Indian in reserve evaluation and property sale
and drilling decisions. Mr. Lasuzzo received a consulting fee of $75,000 paid
on March 1, 2000 for services from the period April 1, 1999 through March 1,
2001. If the combination transactions are consummated, Mr. Lasuzzo is entitled
to a bonus of an additional $75,000 payable on consummation. In addition,
pursuant to an agreement with Richard R. Dunning, a shareholder and director of
Indian, Mr. Lasuzzo has an option to purchase common stock of Indian from Mr.
Dunning immediately preceding consummation of the combination transactions
having a value equal to $150,000 based on Indian's Exchange Value for a price of
$1.00 per share, subject to the right of Mr. Dunning to deliver $150,000 cash in
lieu of shares of Indian common stock.
Resales of Canaan Common Stock
Shares of Canaan common stock to be issued to limited partners in
connection with the combination transactions have been registered under the
Securities Act. All shares of common stock received by them will be freely
tradeable after completion of the combination transactions.
Likewise, all shares of Canaan common stock issued in the combination
transactions to shareholders of Indian will be registered under the Securities
Act. The shareholders of Indian who are affiliates will be subject to
restrictions on sale pursuant to Rule 145 under the Securities Act. The shares
issued to shareholders of the General Partners and Canaan Securities will not be
registered under the Securities Act and will not be freely tradable unless
registered or exempt from registration.
Shareholder's Agreement
Shareholders of Indian owning 81% of Indian's outstanding common stock
and the shareholders of Canaan and Canaan Securities will enter into a
shareholders' agreement among themselves and with Canaan which will go into
effect on closing of the combination transactions. This agreement grants Canaan
a right of first refusal on any sales of Canaan common stock by these
shareholders to the extent the sales by any shareholder would exceed 1% of the
outstanding Canaan common stock in any three month period. In addition, these
shareholders have a pro rata right to participate in any purchases of shares by
any one of the shareholders that exceed 1% of the outstanding Canaan common
stock in any three month period. The shareholders' agreement has a term of five
years. All of the existing directors and executive officers of Canaan are
parties to the shareholders' agreement. The shareholders who are parties to
this agreement will own 42%-60% of Canaan's outstanding common stock, depending
on the level of limited partner cash elections.
59
Accounting Treatment
The combination transactions are expected to be accounted for as:
. A reorganization of entities under common control for the Coral
Companies and the partnerships. As a result, the value of the
assets and liabilities of the partnerships and the General
Partners will be recorded at their historical cost.
. A purchase of Indian. As a result, the purchase price equal to
the fair value of Indian's assets acquired and liabilities
assumed will be allocated to the assets and liabilities of Indian
as of the date of closing of the combination transactions.
. A purchase of Canaan Securities. As a result, the purchase price
equal to the fair value of Canaan Securities' right to receive
cash distributions and future fees for service based on the
partnerships ongoing revenues from oil and gas properties will be
allocated to the assets and liabilities of Canaan Securities
based on their estimated values as of the date of closing of the
combination transactions.
Expenses and Fees
The costs and expenses incurred in connection with the combination
transactions are expected to be approximately $1,000,000, as summarized below:
Estimated Amount
----------------
SEC registration fee............... $ 6,250
NASDAQ listing fees................ 60,000
Legal fees......................... 300,000
Accounting fees.................... 100,000
Reserve report preparation fees.... 300,000
Printing costs..................... 150,000
Solicitation expenses.............. 25,000
Transfer agent fees................ 10,000
Miscellaneous other fees........... 48,750
----------
Total $1,000,000
==========
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All of such fees and expenses will be borne by either Canaan or Indian
and will not be borne by the partnerships, unless the combination transactions
do not occur. Indian has incurred and expensed its share of the combination
expenses totaling $150,000 related to the reserve report preparation fees. If
the combination transactions do not occur, the remaining combination costs will
be borne by the Coral Group. The partnerships will bear a share of the total
transaction costs based on their relative Exchange Values. With respect to each
partnership, its share of the transaction costs will be allocated:
. To the General Partner in proportion to their percentage interest
in the partnership operating costs, plus a percentage equal to the
percentage of limited partners who abstain or vote against the Plan of
Combination; and
. To the limited partners in proportion to the percentages of
limited partners who voted to approve the plan of combination.
The following table sets forth the allocation of the estimated
expenses within the Coral Group, the minimum amount of expenses allocable to the
General Partner and the Additional General Partners and the balance of expenses
to be allocated between the General Partner and the limited partners based on
the percentages of limited partners voting in favor of the combination
transactions.
% of Estimated Minimum
Exchange Exchange Expense General
Value Value Share Partner Share Balance/(1)/
-------- ---------- --------- --------------- -----------
1990 Partnership..... $ 1,080 3.00% $ 25,500 $ 6,375 $ 19,125
1991 Partnership..... 1,552 4.00% 34,000 8,500 25,500
1992 Partnership..... 4,195 11.00% 93,500 9,350 84,150
1993 Partnership..... 3,573 9.00% 76,500 7,650 68,850
1993-I Partnership... 1,481 4.00% 34,000 4,250 29,750
1995 Partnership..... 5,698 15.00% 127,500 12,750 114,750
1996 Partnership..... 8,737 22.00% 187,000 18,700 168,300
1996-I Partnership... 7,110 18.00% 153,000 19,125 133,875
Canaan............... 5,757 15.00% 127,500 127,500 -
------- ------ -------- -------- --------
Totals $39,188 100.00% $850,000 $214,200 $644,300
======= ====== ======== ======== ========
- -----------------------------------------------------------------------------------
/(1)/The balance will be allocated to limited partners in each partnership based
on the percentage held by limited partners approving the combination
transactions and the remaining balance will be allocated to the General Partner.
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Funds for purposes of making cash payments to Placing Brokers and
limited partners electing to receive cash are expected to be borrowed by Canaan
pursuant to a line of credit to be provided by a commercial bank. The terms of
the existing line of credit are described under "Business of Canaan After
Completion of Combination Transactions - Credit Facilities".
METHOD OF DETERMINING COMBINATION EXCHANGE VALUES
AND APPRAISED VALUES
General
Canaan and the General Partners determined the Exchange Value for each
of the Combining Entities. The following discussion describes all of the
factors considered in the determination of the Exchange Value. The Exchange
Value takes into consideration the value of each of the Combining Entity's oil
and gas reserves determined as described below and the other assets and
liabilities of each Combining Entity as adjusted for other items for Canaan,
Indian and the 1996 and 1996-I partnerships. The Exchange Value is used to
allocate the shares of Canaan common stock to each Combining Entity based on
relative Exchange Values. This methodology is used based on the arm's length
negotiated agreement between Indian and Canaan and the General Partners in
connection with the negotiation of the Indian Acquisition Agreement and because
it is a consistent methodology for establishing the relative value of each
Combining Entity.
Canaan engaged Netherland, Sewell & Associates, Inc. to estimate a
value of the oil and gas reserves for each Combining Entity. Netherland Sewell
is a nationally recognized international petroleum consulting firm with
significant experience in petroleum engineering and geology. Netherland Sewell
was selected by Canaan to perform the reserve studies being used for purposes of
the combination transactions based on its reputation in the industry and its
experience in evaluating reserves in the Mid-Continent basin where substantially
all of the reserves owned by the Combining Entities are located. Netherland
Sewell & Associates is an international petroleum consulting firm with offices
in Dallas and Houston. Netherland Sewell's staff includes petroleum engineers
and geological consultants. Services they provide include reserve estimates,
fair value estimates, geological studies, expert witness testimony and
arbitration. Netherland Sewell has previously performed isolated consulting
services for Canaan, for which it has received fees of less than $15,000 since
January 1, 1997. There are no other relationships between Netherland Sewell and
any of the Combining Entities. The fees paid to Netherland Sewell in connection
with the performance of its reserve analysis for the combination transactions
are not contingent in any respect on the approval or completion of the
combination transactions.
Upon written request by a limited partner or his representative who
has been so designated in writing, a copy of the Netherland Sewell reserve
report shall be transmitted promptly, without charge, by the General Partner.
Request for copies of the reserve report should be directed to Canaan Energy
Corporation, 119 N. Robinson, Suite 600, Oklahoma City,
-62-
Oklahoma 73102. A summary of the reserve reports of Netherland Sewell for each
Combining Entity is included in Appendix A.
Neither Canaan nor the General Partner have had any contacts with any
other person concerning the possible preparation of reports by such persons
concerning the estimated reserves of the Combining Entities, evaluation of any
of the partnerships or their assets, the fairness of the combination
transactions or any other report with respect to the combination transactions
other than with Madison Energy Advisors who prepared appraisals of the
partnership oil and gas properties as described elsewhere in this document.
Netherland Sewell estimated the reserves, future net revenues
therefrom and the present value of such future net revenues for each Combining
Entity as of September 30, 1999. We refer to the evaluation date of September
30, 1999 as the "Effective Date" and the present value of the estimated future
net revenues from estimated reserves as of the Effective Date as the "Reserve
Value" for each Combining Entity. Netherland Sewell estimated each Combining
Entity's oil and gas reserves and applied the assumptions described below
regarding prices and costs for purposes of calculating future net revenue.
Future net revenue by year was calculated for each property. The future net
revenue was then discounted at 10% for time using mid-year discounting. The 10%
discount factor, as used by Netherland Sewell, is considered to be an industry
standard for valuing oil and gas properties and it is the standard promulgated
by the SEC for the valuation of oil and gas reserves reported on the balance
sheet. However, this discount factor does not necessarily represent fair market
value.
We refer to the reserves estimated by Netherland Sewell as "Exchange
Reserves". They include estimates of proved undeveloped reserves as well as
proved developed reserves, both producing and nonproducing, as the term "proved"
is defined by the Society of Petroleum Engineers. However, because the reserves
are estimated using prices different from those required by the Securities and
Exchange Commission, we use the term"Exchange" instead of "proved" to describe
the reserve estimates for the Exchange Value. Properties with developed
reserves have less risk than properties with undeveloped reserves. However,
there was no risk factor assigned to the type of reserves for purposes of
determining the Reserve Values. No attempt was made to assign value to oil and
gas reserves categorized as probable or possible, because the General Partners
and Canaan believe such reserves are too speculative to value. Further no value
has been assigned for purposes of the combination transaction to any undeveloped
acreage or prospects owned by any Combining Entity which does not contain
Exchange Reserves. Assigning a risk factor to reserves would cause a Combining
Entity with higher risk reserves to receive a lower Reserve Value. Because none
of the Partnerships have significant reserves classified as undeveloped, or
probable or possible, Canaan does not expect the lack of "risk weighting" would
materially affect the relative Reserve Values of the partnerships. However,
Indian's reserves are approximately 34% undeveloped and assigning a risk factor
to Indian's undeveloped reserves would likely lower Indian's relative Reserve
Value and its relative ownership of Canaan.
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The Reserve Value is an estimate only and does not represent the fair
market value of the underlying properties. The Reserve Values are being used
solely for purposes of determining the relative value of each of the Combining
Entities in the combination transactions. See "Risk Factors and Material
Considerations" for additional information concerning risks associated with the
estimation of oil and gas reserves.
The future net revenues from the properties for purposes of computing
the Reserve Value were based on the following assumptions which were provided to
Netherland Sewell by Canaan and the General Partners:
. Gas prices were established for each well separately based on a
----------
12 month average of gas prices for the 12 months ending March
31, 2000. This average was constructed using the average of
composite spot wellhead prices as published by Natural Gas Week
for the 8 months ending November 30, 1999 and the forward
market prices for the 4 months ending March 31, 2000 based on
future prices quoted on the New York Mercantile Exchange
("NYMEX") as of October 29, 1999 adjusted for the historical
differential between the New York Mercantile Exchange and
Natural Gas Week composite spot wellhead prices. The prices for
all wells averaged $2.52 per MMbtu before adjustment by well
for transportation fees, BTU content and regional price
differentials and were held constant for the life of the
properties. After adjustments by well for transportation fees,
BTU content and regional price differentials, the weighted
average gas price for all wells in the report was $2.43/Mcf.
The actual weighted average gas price for all wells for all
entities as of September 30, 1999 was $2.49/Mcf.
. Oil prices were established for each well separately based on
----------
an 8 year average of West Texas Intermediate crude oil posted
prices for the 8 year period beginning in 1992 and ending on
December 31, 1999. This average was constructed using average
posted prices for West Texas Intermediate crude oil for 1992
through October 1999 and the forward market prices for November
and December of 1999 as quoted on the NYMEX as of October 29,
1999 adjusted for the differential between such forward market
prices and West Texas Intermediate posted prices. The prices
for all wells averaged $18.10 per barrel before adjustment by
well for gravity, transportation fees and regional price
differentials and were held constant for the life of the
properties. After adjustments by well for gravity,
transportation fees and regional price differentials, the
weighted average oil price for all wells in the report was
$19.68/Bbl. The actual weighted average oil price for all wells
for all entities as of September 30, 1999 was $22.81/Bbl.
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. Operating costs and production taxes were based on costs and
------------------------------------
tax effect as of September 30, 1999 and were not escalated.
. A discount rate of 10% was used to discount future net
---------------
revenues to present value at September 30, 1999.
The Reserve Value will not be adjusted to take into account any actual
changes in oil and gas prices or costs subsequent to the Effective Date. The
prices for gas used to compute the Reserve Value were based on average prices
for a one year period ending on March 31, 2000 in order to eliminate seasonal
variances, which included forward market prices quoted on October 29, 1999 for
periods subsequent to October 31, 1999. The prices for oil were based on
average prices for the 8 years ending December 31, 1999. In excess of 70% of
the reserves of each of the Combining Entities is gas and the Reserve Value is
more sensitive to changes in gas prices than oil prices. Further, the Reserve
Value is being used to calculate the relative ownership of Canaan by each
Combining Entity and the Reserve Value of each entity is affected similarly by
changes in prices.
Information concerning the ownership interest owned by each Combining
Entity was provided to Netherland Sewell by the Coral Group or Indian. With
respect to undeveloped properties, the timing of planned development
expenditures was also provided by Canaan.
The Reserve Value for each Combining Entity will be reduced by any
bank debt owed by each entity at the Effective Date. No adjustments for
principal payments subsequent to the Effective Date are made because such
payments would be offset by a reduction in Reserve Value which would otherwise
be used to make such payments.
The Exchange Value for each Combining Entity will also include an
amount attributable to its "working capital" as of the closing date of the
combination transactions. Working capital includes cash, short term investments,
oil and gas sales receivables and other accounts receivable and other current
assets less any current liabilities other than bank debt. All of these assets
and liabilities were valued at book value, which in the opinion of Canaan and
the General Partners represents fair market value.
The Reserve Value of the properties for each Combining Entity has been
established as of the Effective Date. Interest paid or accrued on bank or any
other debt being assumed by Canaan subsequent to the Effective Date up to the
closing date will be a reduction to Exchange Value. The Exchange Value for
limited partners, Additional General Partners, Canaan Securities and the Placing
Brokers will also be adjusted by reducing the Exchange Value for their share of
cash distributions after the Effective Date and before the closing date. No
similar adjustments are being made for the other Combining Entities including
the General Partners because the revenues received by them will not be
distributed to owners or lenders and will be retained and used in their
respective businesses between the Effective Date and the closing date. It
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is currently anticipated that substantially all net revenues of each partnership
received prior to the closing will be distributed to partners consistent with
past practice.
In addition, an adjustment will be made at the closing for any gas
imbalances. If a Combining Entity has produced and sold more than its share of
oil and gas from a property, its Exchange Value will be reduced by the estimated
value of the overproduction and if it has produced and sold less than its share
of oil and gas from a property, its Exchange Value will be increased by the
estimated value of the underproduction. Canaan does not expect the amount of
this adjustment to have a material effect on the relative Exchange Values of all
Combining Entities.
Additional adjustments will be made to the value of Canaan, Indian and
the 1996 and 1996-I partnerships as described below.
The "Exchange Value" for each Combining Entity will be equal to:
. Reserve Value as of the Effective Date.
. Less bank debt at the closing date.
. Minus interest paid or accrued on bank or other debt assumed by
Canaan from the Effective Date to the closing date.
. For limited partners, Additional General Partners, Canaan
Securities and Placing Brokers, minus their share of cash
distributions from production subsequent to the Effective Date
and before the closing date.
. An adjustment for any gas imbalances which are not expected to be
material.
. For Canaan, an upward adjustment of $5.0 million for the value of
its "operating rights" as described below.
. For the 1996 and 1996-I Partnerships, upward adjustments, and for
Indian, a downward adjustment, for the Indian Contingent
Production Payment as described below.
The Exchange Values do not take into consideration any other assets or
liabilities of the Combining Entities. In the case of Canaan, Indian and Canaan
Securities, other assets would include furniture and equipment which Canaan and
Indian consider to be immaterial for purposes of establishing their relative
values. The partnerships do not own any furniture and equipment. In the case of
Indian, additional assets also include approximately $5.7 million of net
operating loss carryforwards as of March 31, 2000 and $1.6 million of statutory
depletion carryforwards, the use of which by Canaan in
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future periods will be subject to limitations under Section 382 of the Internal
Revenue Code because the acquisition of Indian by Canaan will constitute a
change in control.
Partnership Exchange Values and Allocation to Partners, Canaan Securities and
Placing Brokers
The Exchange Value for each of the partnerships will first be
determined as described above.
As between the limited partners and the General Partner and the
Additional General Partners in each partnership, the Exchange Value will
generally be allocated among them in the ratio in which revenues and cash
distributions are shared. This allocation method was selected because it fairly
represents the ongoing economic rights of the partners. In each of the
partnerships except 1993-I and 1996-I, the General Partners' share of the net
revenues and cash distributions increases when "payout" occurs as to each
individual limited partner. Accordingly, in each of those partnerships in which
payout has not already occurred as to all limited partners as of the Effective
Date, the Reserve Value was allocated first among the partners in their
respective before payout sharing ratios until payout occurred and any remaining
Exchange Value was allocated in after payout sharing ratios.
In the partnerships other than 1990, 1991, 1993-I and 1996-I, Canaan
Securities receives a fee for providing reporting services to the partnership
which is equal to 1.5% of partnership gross revenues. In each of these
partnerships, a portion of the Reserve Value, calculated based on gross
revenues, will be allocated to Canaan Securities representing rights to receive
such fee adjusted for any payments for such fee subsequent to the Effective Date
and before the closing date. This allocation will be made prior to the
allocation of the remaining Reserve Value to the limited partners and the
General Partners.
The Exchange Value for the General Partner and Additional General
Partners of the partnerships will be determined based on their share of the
Exchange Value for each of the partnerships as described above.
The marketing arrangements entered into in connection with the sale of
interests in the partnerships provided for specified fees to be paid to Canaan
Securities and Placing Brokers. Such fees are payable out of the cash
distributions otherwise distributable to the General Partner in such
partnerships. Accordingly, the Exchange Value allocated to the General Partner
in these partnerships will be reduced to take into consideration the amount of
the Exchange Value allocable to the rights of Canaan Securities and the Placing
Brokers to receive future distributions of net cash flow out of the General
Partner's share. The Placing Brokers will receive cash equal to 40% of their
Exchange Value and their share of Canaan common stock for the balance.
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As discussed above, for the limited partners, the Additional General
Partners, Canaan Securities and the Placing Brokers, an adjustment to their
Reserve Values will be made for cash distributions from production subsequent to
the Effective Date and before the closing date.
If the allocation of Exchange Value within a partnership does not
produce an "assumed return" of 100% of capital contributions plus 15% for the
limited partners as a group, the Exchange Value shall be first allocated to
limited partners until this assumed return is achieved and the balance of the
Exchange Value will be allocated based on revenue sharing percentages. The
assumed return is based on the sum of historical cash distributions to limited
partners as a group through the closing date plus allocated Exchange Value as a
percentage of the original capital contributions of all limited partners.
Canaan and the General Partners believe that the 1996 partnership will be the
only partnership in which this priority allocation of Exchange Value may be
necessary.
Canaan Securities Exchange Value
The Exchange Value for Canaan Securities will be determined in the
same manner as described above and will include an allocation to it attributable
to its rights to receive cash distributions from the partnerships and the
General Partners, less the Exchange Value allocated to Placing Brokers, as
described above under "Partnership Exchange Values and Allocation to Partners,
Canaan Securities and Placing Brokers".
Canaan Exchange Value
The Exchange Value for Canaan will be determined based on its Reserve
Value, bank debt and working capital in the same manner as other entities as
described above.
Canaan's Exchange Value will be further adjusted to take into account
its operating rights. As of December 31, 1999, Canaan served as operator of 110
wells in which the partnerships own interests. As such, Canaan receives monthly
operating fees which represent a source of additional income to Canaan. For
purposes of calculation of Canaan's Exchange Value within the Coral Group, the
future cash flows attributable to these operating fees, based on existing
reimbursement rights without escalation, will be determined and the present
value thereof as of the Effective Date will be an additional component of its
Exchange Value. The amount of this adjustment is approximately $5.0 million.
Canaan's net working capital adjustment will exclude any receivables
attributable to these fees.
For purposes of determining relative Exchange Values between Indian
and the Coral Group as a whole, the operating rights value allocated to Canaan
is disregarded because the combination of the Coral Group results in the
elimination of a significant portion of Canaan's operating fees. After the
combination transaction, Canaan will no longer receive operating fees from the
partnerships but will continue to receive fees from other unrelated owners.
Further, Canaan and Indian have agreed that neither of them will be allocated
value for operating rights for
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purposes of determining the Exchange Value. This agreement is advantageous to
the Coral Group because Indian's operating fees are higher than Canaan's.
Indian Exchange Value
The Exchange Value for Indian will be determined using the Reserve
Value, bank debt and working capital in the same manner as described above.
In connection with the negotiation of the acquisition agreement
between Indian and the General Partners, Indian agreed that its Exchange Value
would be reduced by its production payment obligation to the 1996 and 1996-I
partnerships, in consideration of such partnerships advancing to Indian a total
of $6 million in exchange for a "Contingent Production Payment" from Indian to
the partnerships payable at the rate of $56,250 per month until paid in full.
The Contingent Production Payment is $9 million if the combination transactions
are consummated and $6 million if they are not. Accordingly, Indian's Exchange
Value will be adjusted downward by the remaining amount of the Contingent
Production Payment obligation as of the Effective Date, $5,606,250, plus the
additional $3 million as a result of the combination transactions, and the
Exchange Values for the 1996 and 1996-I partnerships will be adjusted upward by
the same amount. As between the 1996 and 1996-I partnerships, the Contingent
Production Payment adjustment will be shared in the same percentages as their
original advances to Indian of 53% for the 1996 partnership and 47% for the
1996-I partnership.
Summary of Allocation of Exchange Values
Summaries of the allocation of the estimated Exchange Values for the
partnerships, Canaan, Indian, the limited partners, the General Partners, the
Additional General Partners, Canaan Securities and Placing Brokers are contained
in the tables in the "Summary -Summary of Estimated Exchange Values". More
detailed information concerning the calculation of the Exchange Value for each
individual partnership is contained in the individual partnership supplement for
each partnership.
Method of Determining Appraised Value
A limited partner may elect to receive cash equal to the Appraised
Value of his interest in a partnership. The Appraised Value was determined
based on an appraisal by Madison Energy Advisors of each partnership's oil and
gas properties valuing them as if sold in an orderly manner and in a reasonable
period of time and in a manner consistent with appropriate industry practice.
Other assets and liabilities of each partnership, consisting primarily of bank
debt and working capital were valued at their respective book values. The
Appraised Value also takes into consideration the cost associated with the sale
of the partnership oil and gas properties and assumes the proceeds of sale of
the partnership properties and working capital after payment of liabilities are
distributed in a liquidation of the partnership. The appraisal was obtained in
order to satisfy the
-69-
requirements of the National Association of Securities Dealers that limited
partners be offered the opportunity to receive cash equal to the Appraised Value
of their interest in the partnership.
Madison Energy Advisors provides oil and gas reserve acquisition,
divestment and valuation advisory services to the upstream oil and gas industry,
including fair market value assessments of oil and gas properties. Madison
Energy Advisors has offices in Houston, Texas and Denver, Colorado and has a
staff of professionals with significant experience in advising both buyers and
sellers of oil and gas properties. Madison Energy Advisors was selected to
perform this appraisal because it is one of the recognized valuation experts in
the industry. None of the Combining Entities has had any prior relationship
with Madison Energy Advisors. The fees paid to Madison Energy Advisors are not
contingent in any respect on the approval or completion of the combination
transactions.
A copy of the appraisal report of Madison Energy Advisors is included
as an exhibit to this document. Upon written request by a limited partner or
his representative who has been so designated in writing, a copy of the report
shall be transmitted promptly, without charge, by the General Partner. Request
for copies of the appraisal report should be directed to Canaan Energy
Corporation, 119 N. Robinson, Suite 600, Oklahoma City, Oklahoma, 73102.
Madison Energy Advisors prepared the estimate of the appraised value
of the partnerships' oil and gas properties as of September 30, 1999, the
Effective Date for the calculation of the Exchange Value. For purposes of
determining the value of the oil and gas properties, Madison Energy Advisors
reviewed the reserve estimates made by Netherland Sewell for its estimation of
the Reserve Value and concluded that the Netherland Sewell estimated reserve
quantities were reasonable and prepared in accordance with generally accepted
petroleum engineering and evaluation principles.
For purposes of determining the appraised value of the oil and gas
properties, Madison Energy Advisors used the following criteria:
. Oil and gas prices. For purposes of determining the estimated
------------------
future net revenues from the Exchange Reserves, Madison Energy
Advisors applied more current pricing based on its April 1, 2000
quarterly pricing poll for active middle market buyers. These
prices reflect representative prices used in connection with the
purchase and sale of oil and gas properties. Before adjustment
for transportation fees, BTU content and gravity and regional
price differentials, the prices used by Madison Energy Advisors
were $2.74/Mcf for gas and $25.97/Bbl for crude oil. These
prices were adjusted as follows:
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Year Oil price per BBL Gas price Per MMBtu
-------- -------------------- -----------------------
2001 $22.53 $2.77
2002 21.40 2.71
2003 21.44 2.77
2004 21.54 2.83
Thereafter 1% per year increase 2.44% per year increase
. Operating costs and production taxes were based on costs and tax
rates in effect as of the Effective Date and costs were escalated
at the rate of 1.75% per year.
. A discount rate of 20% was used to discount future net revenues
to present value as of the Effective Date. Madison Energy
Advisors believes the 20% discount rate is appropriate due to the
classification of the partnership properties as "lower tier".
Lower tier properties are those which are small non-operated
interests with no field or basin concentration or control.
. Risk factors were applied to the present value of the estimated
future net revenues from the oil and gas reserves to reduce to
the percentage of estimated present value set forth below:
. Developed non-producing - 65%
. Undeveloped - 35%
. The appraised value of the properties also reflects a 5%
reduction for estimated commissions and transaction expenses
payable in connection with the sale of the properties and
winding-up of the partnership affairs.
Madison Energy Advisors prepared its appraisal of the partnership oil
and gas properties on May 3, 2000, using its prior assumptions for oil and gas
as of April 1, 2000. It is not anticipated that the appraisal of Madison Energy
Advisors will be updated. Canaan and the General Partners are not aware of any
conditions that have changed since the date of the appraisals that would have
caused material change in the value of the appraised value of the partnerships'
oil and gas properties as estimated by Madison Energy Advisors.
The following table sets forth the appraised value of each of the
partnerships' oil and gas properties in comparison to the Reserve Value used for
purposes of calculating the Exchange Value, both as of September 30, 1999. As
noted elsewhere in this document, the
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Reserve Value is used solely for purposes of calculating the Exchange Value and
does not represent the fair market value of the partnerships' oil and gas
properties. The appraised value of the properties represents Madison Energy
Advisor's opinion of the price at which they could be sold. These values are
different primarily due to the differing assumptions with respect to oil and gas
prices, costs, discount rates and risk factors.
Appraised
Value of
Appraised Properties as
Value of % of Reserve
Partnership Reserve Value Properties Value
------------- ------------- ----------- ---------------
1990 $ 2,077,500 $ 1,510,000 73%
1991 2,669,400 1,953,000 73%
1992 5,497,800 3,815,000 69%
1993 4,751,400 3,549,000 75%
1993-I 2,099,300 1,571,000 75%
1995 6,316,000 4,317,000 68%
1996 7,949,500 5,398,000 68%
1996-I 6,152,600 4,205,000 70%
----------- ----------- --
TOTAL $37,513,500 $26,317,000 70%
=========== =========== ==
After the appraised value of the partnerships' oil and gas properties
was established by Madison Energy Advisors for each partnership as of the
Effective Date, such property values were reduced for actual and estimated net
revenues from the properties for the period from the Effective Date to the
closing date to arrive at the estimated appraised value as of such date. This
adjustment is made so that the appraised value of the properties is computed as
of a date consistent with the date of calculation of the Exchange Value.
Canaan and the General Partners then computed the estimated value of
each limited partner's interest in the partnership based on the assumption that
the partnership's oil and gas properties were sold for the resulting value and
the gain on sale was allocated to the partners in accordance with the provisions
of the applicable partnership agreement and that each partnership was
liquidated, with the proceeds of liquidation, including estimated working
capital at the closing date and after payment of any partnership debt as of the
closing date, being distributed as required by the partnership agreement. The
resulting amount is referred to as the "Appraised Value".
The economic terms of each of the partnerships generally provided for
the limited partners to provide all of the capital of the partnership and to
bear a greater percentage of the share of costs associated with each
partnership's initial acquisition and development of properties. As a result,
the limited partners in each partnership have capital account balances which are
higher, on a relative capital account basis, than their interest in revenues of
the partnership. The partnership agreement for each partnership requires that
the capital accounts be recognized or "balanced" in connection with any
liquidation of the partnership. These balancing provisions result in the
limited
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partners receiving a priority allocation of the liquidation proceeds as a result
of their relatively higher capital account balances. The effect of this priority
allocation is that the limited partners receive a greater share of liquidation
proceeds than what limited partners would have received from the production of
the oil and gas properties owned by each partnership had the properties been
produced to depletion. Any liquidation of a partnership would therefore result
in a relative higher proportion of liquidation value being allocated to the
limited partners than is being done in connection with the combination
transactions in which the allocation of Exchange Value between the limited
partners and the general partners is being done based on revenue sharing
percentages. However, Canaan and the General Partners believe that the
discounted prices expected to be realized in a sale of properties in a
liquidation based on the appraisal of Madison Energy Advisors offsets the
potential incremental liquidation value allocated to limited partners.
If the Appraised Value of a limited partner's interest plus historical
cash distributions is less than 110% of the amount of the limited partner's
original investment, the Appraised Value for a limited partner electing cash
will be increased to equal such amount. Canaan and the General Partners believe
that the 1996 and 1996-I partnerships will be the only partnerships in which the
Appraised Value plus historical cash distributions may not meet the 100% of
original investment amounts.
The Appraised Value for each partnership ranges from 54% to 83% of the
Exchange Values. The following table sets forth for each partnership the
historical and estimated cash distributions, the estimated Appraised Value plus
cash distributions and Appraised Value as a percent of original investment for
the limited partners as a group and for each limited partner per $1,000 of
investment. All of these tables assume closing of the combination transactions
on July 31, 2000, and use actual property net revenues through March 31, 2000,
and estimated revenues and expenses from the Netherland Sewell reserve reports
for purposes of calculating estimated property net revenues thereafter.
Variances in net revenues or a change in the closing date will result in a
change in the Appraised Value for any entity affected. See "Recommendation of
the General Partners and Fairness of the Combination Transactions -Comparison of
the Alternatives" for a discussion of the variances between the partnerships in
the measure of Appraised Value in relation to Exchange Value.
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Cash
Actual and Distributions
Estimated Cash Estimated Plus Appraised
Distributions Appraised Value as % of
Partnership thru Closing Date Value Investment
----------- ----------------- ----- ----------
1990
Limited Partners............................ $ 5,668,121 $ 433,154 156.95%
Limited Partners per $1,000 Investment...... 1,458 111
1991
Limited Partners............................ $ 6,604,408 $ 712,074 163.31%
Limited Partners per $1,000 Investment...... 1,474 159
1992
Limited Partners............................ $ 7,551,877 $ 2,308,438 131.47%
Limited Partners per $1,000 Investment...... 1,007 308
1993
Limited Partners............................ $ 6,240,600 $ 2,219,543 129.66%
Limited Partners per $1,000 Investment...... 956 340
1993-I
Limited Partners............................ $ 2,777,761 $ 843,903 153.30%
Limited Partners per $1,000 Investment...... 1,176 357
1995
Limited Partners............................ $ 5,615,642 $ 3,642,283 136.05%
Limited Partners per $1,000 Investment...... 825 535
1996
Limited Partners............................ $ 3,561,232 $ 7,037,268(1) 110.00%(1)
Limited Partners per $1,000 Investment...... 370 730(1)
1996-I
Limited Partners............................ $ 3,452,140 $ 3,969,059(1) 113.82%(1)
Limited Partners per $1,000 Investment...... 529 609(1)
(1) Estimated Appraised Value in 1996 and 1996-I partnership adjusted to
increase "Cash Distributions Plus Appraised Value as % of Investment" to
110% of original investment amount.
See "Background and Reasons For the Combination Transactions -
Alternatives to the Combination Transactions" for a comparison of the Appraised
Value to the Exchange Value and the Continuation Value.
RECOMMENDATION OF THE GENERAL PARTNERS AND
FAIRNESS OF THE COMBINATION TRANSACTIONS
General
Canaan and the General Partners believe that the proposed combination
transactions are fair to the limited partners of each of the partnerships
receiving Canaan common stock or cash at Appraised Value and are fair to the
partnerships as a whole.
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See "Background and Reasons For the Combination Transactions", for
information concerning factors Canaan and the General Partners considered in
recommending the combination transaction in addition to those discussed in this
section.
The principal structural element affecting the limited partners and
the other parties to the combination transactions receiving Canaan common stock
is the determination of the Exchange Values. As noted elsewhere in this
document, the Exchange Values are based primarily on the Reserve Value based on
Netherland Sewell's independent valuations. By using Reserve Values calculated
in a consistent manner by a single engineering firm based on the same price,
cost and discount assumptions, Canaan and the General Partners believe that the
relative value of each of the Combining Entities has been fairly determined for
purposes of determining its relative ownership of Canaan after the combination
transactions. Further, Canaan and the General Partners believe the following
facts support the fairness of the transaction to the limited partners:
. Owners of all of the Combining Entities in the combination
transactions are receiving the same form of consideration,
consisting of common stock of Canaan, except limited partners who
elect to receive cash, and the relative number of shares to be
received by the owners of each entity is being calculated on a
consistent basis for each Combining Entity.
. Canaan believes that shares of publicly held oil and gas
companies generally trade at values greater than their cash
liquidation values, affording limited partners potentially
greater value than represented by the cash value of the
partnership's oil and gas properties, either in immediate
liquidation or in continuing the partnership. Canaan believes
publicly held oil and gas companies generally trade at premiums
to their potential cash liquidation values due to value
attributable to going concern and potential growth and due to the
fact that public company stock valuations do not reflect
discounts for nonproducing reserves typically applied in cash
transactions.
. All of the partnerships had similar investment objectives and all
own similar properties, principally non-operating interests in
proved developed producing gas properties located primarily in
Oklahoma in the Mid-Continent basin. Therefore, Canaan and the
General Partners do not believe that there are material
differences in the assets of the partnerships that would cause
their values to vary based on quality of reserves or differences
in commodity prices for gas or oil.
. The use of Reserve Value to evaluate the Combining Entities is a
commonly used method in valuing oil and gas properties.
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. As between the General Partners and the limited partners, the
allocation of Exchange Value in each partnership is based on the
profit sharing percentages provided in the partnership agreements
and there is no additional consideration being allocated to the
General Partners or Canaan which is not currently being received.
. The actual market value of the Canaan common stock received by
limited partners may be more or less than their Exchange Value,
but the owners of Canaan, the General Partners and Indian will
all be similarly affected by any differences.
. The methodology for determining Exchange Values as between Indian
and the Coral Group was agreed to by the owners of Indian in an
arms length negotiated transaction between Indian and Canaan.
. The combination transactions will not be approved unless the
holders of a majority of the interests in each partnership
approve the combination transactions. Further, all partnerships
are required to be included in the combination transactions for
it to be consummated so it is not possible that any one
partnership will be excluded.
. A limited partner of a partnership may elect to receive cash in
lieu of Canaan common stock in an amount equal to the Appraised
Value of such limited partner's interest. This cash election
provides the opportunity for limited partners who are unwilling
to take market risks with respect to Canaan common stock the
opportunity to receive cash in an amount which Canaan and the
General Partners believe approximates fair value based on an
appraisal of the partnership oil and gas properties performed by
an independent appraiser.
. In each partnership, the General Partner is entitled to receive a
reimbursement for a portion of its overhead expenses, including
office rent and salaries for clerical staff and appropriate
production supervisory personnel and any other overhead expenses
which the General Partner deems reasonable. The amount of the
overhead reimbursement is limited to 5% of the amount of
distributable cash. This overhead reimbursement amount is not
being taken into consideration in the calculation of the General
Partner's share of the Exchange Value. However, if the
partnerships continued to operate, the General Partner would
continue to be entitled to such reimbursement. Thus, the present
value of future cash distributable to limited partners, if the
partnerships were continued, based on the same projections of
future net revenues used to calculate the Exchange Values would
be less than the Exchange Value allocated to limited partners.
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The Exchange Value does not represent the absolute fair market value
of a partnership's oil and gas properties or the interest of a limited partner.
No firm offer has been made by any person during the preceding 18 months
regarding the merger or consolidation of any of the partnerships, the sale or
transfer of all or any substantial part of the assets of any partnership or
securities of any partnership which would enable the holder thereof to exercise
control over a partnership.
For purposes of determining the relative Exchange Value of Canaan
within the Coral Group, Canaan's Exchange Value includes, in addition to the
valuation of its oil and gas properties, a value attributable to its operating
rights. The allocation of value to Canaan for its operating rights recognizes
that Canaan is entitled to receive fees for these activities from the
partnerships and other nonoperating owners which Canaan would be entitled to
continue to receive if the combination transactions did not occur. This
allocation of Exchange Value to Canaan is intended to recognize the economic
benefits that Canaan currently receives in connection with the partnerships and
is not intended to allocate additional new economic benefits to Canaan.
For purposes of determining relative Exchange Values between Indian
and the Coral Group as a whole, the operating rights value allocated to Canaan
is disregarded because the combination of the Coral Group essentially results in
the elimination of a significant portion of Canaan's operating fees. After the
combination transaction, Canaan will no longer receive operating fees from the
partnerships but will continue to receive fees from other unrelated owners.
Further, Canaan and Indian have agreed that neither of them will be allocated
value for operating rights for purposes of determining the Exchange Value. This
agreement is advantageous to the Coral Group because Indian's operating fees are
higher than Canaan's.
The Reserve Value for each of the Combining Entities will not be
adjusted for any changes in oil and gas prices subsequent to the Effective Date.
The gas prices used to calculate the Reserve Value were based on an average of
12 months of prices for a period ending on March 31, 2000 using 8 months of
historical actual prices and 4 months of forward market prices in effect at the
Effective Date. The oil prices were based on an 8 year average price ending
December 31, 1999. The Reserve Value thus takes into effect seasonal
fluctuations in gas prices and historical volatility of oil prices. Further,
more than 69% of the Reserve Value of each Combining Entity is gas and the
Reserve Values are, therefore, more sensitive to gas price changes than oil
price changes. Canaan and the General Partners believe that the Reserve Value
of all of the Combining Entities would be affected similarly by changes in
prices. Canaan and the General Partners have also disregarded short term hedges
of oil and gas production by the partnerships and Indian in the calculation of
Reserve Values because these hedges expire on or before the end of 2000 and are
not expected to have a material effect on production revenues over the life of
the properties. However, because all of the partnerships except the 1995
Partnership and Indian have bank indebtedness, the Exchange Value for such
entities will be more than proportionately benefited by increases in oil and gas
prices and more than proportionately disadvantaged by decreases in oil and gas
prices. Because Indian has more debt relative to Reserve Value than any other
Combining Entity, its
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Exchange Value is more dramatically affected by changes in prices. However,
because of the numerous uncertainties associated with the calculation of the
Reserve Value in addition to the price assumptions, Canaan and the General
Partners do not believe that a recalculation of the Reserve Value based on
temporary changes in product prices is appropriate.
Consideration of Alternatives
In evaluating the fairness of the transaction, Canaan and the General
Partners also considered the possible value of the consideration to be received
in the combination transactions compared to the values that Canaan and the
General Partners estimated would be received by the limited partners if the
partnerships were continued or liquidated.
Continuation. Continuation of the partnerships, while avoiding the
risks associated with the combination transactions and the discontinuance of
cash distributions, would result in declining operating results and distribution
rates for each of the partnership because:
. Reserves will be depleted in the ordinary course from ongoing
production.
. Lease operating costs will remain the same or increase and
potentially become a greater percentage of oil and gas revenues
as production declines regardless of the operating results of the
partnerships assets.
. The partnerships would have to incur the costs of plugging and
abandoning partnership wells when they become uneconomic or any
future sale of the partnerships' wells would be at a price which
would reflect the anticipated costs of such plugging and
abandonment expenses. Canaan will bear these expenses if the
combination transactions are consummated but may be able to
achieve some expense savings by being a larger organization.
. The partnerships do not have additional sources of capital to
support growth or additional development activity. The
partnerships may not have the cash nor the ability to borrow
funds necessary to develop their non-producing reserves. This may
result in reduction or temporary suspension of cash distributions
in order to participate in proposals to place these non-producing
reserves on production, or the partnerships may be forced to
forego participation in these proposals.
. All of the partnerships except the 1995 partnership have incurred
significant debt to engage in additional development. This debt
has not been amortized in any material respect. Principal
payments on partnership debt will adversely affect cash
distributions and require limited partners to report taxable
income on principal repayments.
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. The partnerships will continue to incur general and
administrative reimbursement costs in favor of the General
Partner.
Canaan and the General Partners have prepared an analysis of the
present value of the estimated future net cash flows to the limited partners
assuming that each partnership was continued after the estimated closing date of
July 31, 2000. This value is referred to as the "Continuation Value". Such
continuation analysis is based on the following assumptions:
. The estimated future net revenues from the sale of oil and gas
after July 31, 2000 are based on the same prices and costs that
are used to estimate the Reserve Value for purposes of the
Exchange Value.
. The partnerships will continue to incur general and
administrative expenses in favor of the General Partner as
provided in the applicable partnership agreement in the amount of
5% of the amount of distributable cash.
. Any partnership with bank debt is assumed to amortize such debt
on a 36 month level amortization basis, assuming an interest rate
of 9%, beginning July 31, 2000.
. The estimated future net cash flows were then discounted at a
discount rate of 10% to arrive at the estimated Continuation
Value.
The following table sets forth by partnership the estimated
Continuation Value for all limited partners as a group and per $1,000 of
investment.
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Partnership Estimated Continuation Value
----------- ----------------------------
1990
Limited Partner $ 710,147
Limited Partner per $1,000 Investment 183
1991
Limited Partners 995,442
Limited Partners per $1,000 Investment 222
1992
Limited Partners 2,768,081
Limited Partners per $1,000 Investment 369
1993
Limited Partners 2,311,366
Limited Partners per $1,000 Investment 354
1993-I
Limited Partners 1,084,232
Limited Partners per $1,000 Investment 459
1995
Limited Partners 3,564,073
Limited Partners per $1,000 Investment 524
1996
Limited Partners 4,991,147
Limited Partners per $1,000 Investment 518
1996-I
Limited Partners 4,231,779
Limited Partners per $1,000 Investment 649
The actual amount that limited partners would receive if the
partnerships continue their respective operations will depend on production
levels and future oil and gas prices, which cannot be predicted with certainty.
To the extent that future prices for those commodities are materially higher or
lower than the pricing assumptions made to estimate Continuation Value, those
fluctuations would likely have a similar effect on the operating of wells,
distribution rates and Continuation Value.
Liquidation. A sale of the partnership assets and liquidation of the
partnership would result in immediate cash distributions to the limited partners
and avoid the market risks associated with the ownership of Canaan common stock.
Canaan and the General Partners believe that the material risks relating to a
liquidation of any one or more of the partnerships outweigh the potential
benefits thereof. The principal benefits to limited partners of any partnership
of liquidation as opposed to continuation or participation in the combination
transactions would be the immediate realization of the cash proceeds of the sale
of such properties and the avoidance of the risks and uncertainties associated
with realizing the value of such properties over time or ownership of Canaan
common stock. The material risks of such liquidation would be that the prices
the partnership would receive for its properties upon liquidation from third
party purchasers would be materially less than the value of the future cash
flows from such property discounted
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solely for the time value of money and less than the market value of Canaan
common stock received.
Canaan and the General Partners believe the liquidation of the
partnerships would be less beneficial to limited partners because:
. The prices paid by purchasers of partnership properties in
liquidation would likely include a substantial discount for the
risks and uncertainties of future cash flows which are not
included in the calculation of Reserve Values. Purchasers
typically apply risk discounts to reserve values for reserves
which are not proved developed producing reserves.
. In addition, Canaan and the General Partners believe that
additional discounts would be applied in the valuation of
partnership oil and gas properties related to:
. The relative large number of individual properties owned by
each partnership and the relatively small working and
revenue interests owned by the partnerships in each of its
properties;
. The fact that all partnership's properties are non-operated
and many third party purchasers prefer to operate
properties;
. The additional costs incurred during the extended amount of
time it would take to orderly dispose of a large number of
properties including the costs of brokers and agents
employed to facilitate the sale of properties;
. The complexity involved administratively to transfer a large
number of properties from several entities to a third party
purchaser.
. Liquidation would result in a taxable transaction to all limited
partners, many of whom may not desire such consequences. The
ability of limited partners to receive shares of Canaan common
stock in a tax-free transaction gives them the benefit of an
investment in a larger more diversified property base, together
with the ability to liquidate their investment in whole or in
part in the market by selling their common stock if they desire
to do so and to determine the timing of any tax consequences. In
addition, a cash liquidation would result in a material portion
of the liquidation proceeds being taxed as ordinary income as a
result of the requirement to recapture cumulative tax deductions
for depletion, depreciation and intangible drilling costs. A sale
of Canaan common stock will be potentially taxable at lower long-
term capital gain rates.
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. Canaan and the General Partners believe that shares of publicly
held oil and gas companies are generally traded in the market at
prices in excess of net liquidation value based on estimated oil
and gas property values. As a result, limited partners are
expected to have more value in Canaan common stock than if the
underlying assets were sold.
. Liquidation would deprive limited partners of the ability to
benefit from future increases in prices for oil and gas which
Canaan and the General Partners believe would have an indirect
beneficial effect on the price of Canaan common stock.
. Liquidation would require additional administrative, legal and
accounting costs for winding up of the partnerships.
In order to offer limited partners who do not desire to receive Canaan
common stock an alternative, Canaan and the General Partners have structured the
transaction to permit limited partners to receive cash equal to the Appraised
Value of their partnership interests which they believe, based on the
independent opinion of Madison Energy Advisors, approximates the liquidation
value of their interests.
The economic terms of each of the partnerships generally provided for
the limited partners to provide all of the capital of the partnership and to
bear a greater percentage of the share of costs associated with each
partnership's initial acquisition and development of properties. As a result,
the limited partners in each partnership have capital account balances which are
higher, on a relative capital account basis, than their interest in revenues of
the partnership. The partnership agreements for each partnership require that
the capital accounts be recognized or "balanced" in connection with any
liquidation of a partnership. These balancing provisions result in the limited
partners receiving a priority allocation of the liquidation proceeds as a result
of their relatively higher capital account balances. The effect of this
priority allocation is that the limited partners receive a greater share of
liquidation proceeds than what limited partners would have received from the
production of the oil and gas properties owned by each partnership had the
properties been produced to depletion. Any liquidation of a partnership would
therefore result in a relative higher proportion of value being allocated to the
limited partners than is being done in connection with the combination
transactions in which the allocation between the limited partners and the
general partners is being done based on revenue sharing percentages. However,
Canaan and the General Partners believe that the discounted prices expected to
be realized in a sale of properties in a liquidation offsets any potential
incremental liquidation value allocated to limited partners.
Canaan and the General Partners have computed a liquidation analysis
of each of the partnerships which for each partnership is equal to the Appraised
Value based on the appraisal of the partnership's oil and gas properties
conducted by Madison Energy Advisors. The appraisal by Madison supported the
belief of Canaan and the General Partners that substantial discounts are applied
in calculating the market value of the partnership's properties due to the
nature of the
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properties. A description of the methodology for computing the Appraised Value
is set forth under "Method of Determining Combination Exchange Values -
Determination of Appraised Value".
Comparison of Alternatives
The following table sets forth the comparison of the Continuation
Value, Appraised Value and Exchange Value for each partnership for the limited
partners as a group and for each limited partner per $1,000 of investment.
Partnership Liquidation/Appraised Value Continuation Value Exchange Value
----------- --------------------------- ------------------ --------------
1990
Limited Partners $ 433,154 $ 710,147 $ 766,701
Limited Partners per $1,000 Investment 111 183 197
1991
Limited Partners $ 712,074 $ 995,442 $1,108,466
Limited Partners per $1,000 Investment 159 222 247
1992
Limited Partners $2,308,438 $ 2,768,081 $2,992,455
Limited Partners per $1,000 Investment 308 369 399
1993
Limited Partners $2,219,543 $ 2,311,366 $2,569,088
Limited Partners per $1,000 Investment 340 354 394
1993-I
Limited Partners $ 843,903 $ 1,084,232 $1,270,531
Limited Partners per $1,000 Investment 357 459 538
1995
Limited Partners $3,642,283 $ 3,564,073 $4,220,132
Limited Partners per $1,000 Investment 535 524 620
1996
Limited Partners $7,037,268 $ 4,991,147 $7,526,357
Limited Partners per $1,000 Investment 730 518 781
1996-I
Limited Partners $3,969,059 $ 4,231,779 $6,162,084
Limited Partners per $1,000 Investment 609 649 945
Variances in Appraised Value in relation to Exchange Value for the
limited partners of each of the partnerships as a group result primarily from
the following factors:
. The appraisal value of the oil and gas properties is substantially
less than the Reserve Value used to calculate the Exchange Value.
While the property appraisal values were based on higher future prices
than used for the Reserve Value, the Appraised Value is based on a 20%
discount rate and applies risk factors to non-producing reserve
categories, whereas the Reserve Value is based on a 10% discount rate
and no risk factors.
. The level of debt in each partnership in relation to the appraisal
value of the properties varies. Partnerships with higher debt levels
relative to property values, such as the 1990 and 1991 partnerships,
have relatively lower Appraised Value in relation to reserve value.
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. The Appraised Values of the 1996 and 1996-I partnerships are
adversely affected by the elimination of the $3 million Indian
Contingent Production Payment adjustment, which increases the
Exchange Values of such partnerships, but is not applicable in a
liquidation assumption for the Appraised Value.
. The 1993 and 1995 partnerships have relatively high Appraised
Values in relation to Exchange Values for the limited partners of
each partnership as a group. This is primarily attributable to
the before-payout, priority allocation of liquidation proceeds to
the limited partners, and, in the case of the 1995 partnership,
the absence of significant debt.
. The 1990, 1991 and 1992 partnerships' Appraised Values for
limited partners are relatively lower in each case because, in
these partnerships, payout has already occurred or is near
occurring resulting in a greater percentage of liquidation
proceeds being allocated to the General Partners.
As noted elsewhere, the Exchange Value does not necessarily represent
the fair value of the partnerships or any partnership's net assets, and is being
used solely for purposes of determining the relative ownership of Canaan by each
of the entities involved. Accordingly, there is no assurance that the value of
the common stock received by a limited partner will be equal to the Exchange
Value allocable to such limited partner. Notwithstanding the foregoing, Canaan
and the General Partners believe that the combination transactions are fair
because:
. Canaan and the General Partners believe that shares of publicly
held oil and gas companies generally trade at values greater than
their underlying reserve cash liquidation values, affording
limited partners potentially greater value than represented by a
partnership's liquidation or continuation value; and
. The cash election affords limited partners desiring to receive
liquidation value the opportunity to do so in lieu of accepting
Canaan common stock.
Fiduciary Duties of General Partners
General. The General Partners' fiduciary duties to the limited
partners include legal responsibilities of loyalty, care and good faith. The
General Partners may not profit by any conduct or transaction in contravention
of its fiduciary obligations to limited partners. Rights of action by or on
behalf of the limited partners for any breach of these duties are provided under
Oklahoma partnership law. If a limited partner believes that the proposed Plan
of Combination or the consummation thereof would constitute a breach of his
General Partner's fiduciary duties, the limited partner could institute legal
action against the General Partner to enjoin the consummation transactions or to
recover damages resulting from the consummation of the transactions. In
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appropriate circumstances, a limited partner may institute a class action
against his General Partner on behalf of himself and the other similarly
situated limited partners or a derivative action against his General Partner on
behalf of the partnership to recover damages for a breach of his General
Partner's fiduciary duties. A limited partner who votes to approve the
combination transactions may not be able to assert claims for breaches of
fiduciary duty by the General Partners in the absence of a claim that all facts
necessary for the limited partner to make an informed decision were not properly
disclosed. This is a developing area of the law, and limited partners who have
questions concerning the General Partners' duties should consult with their own
legal counsel.
Operating Rights. As of March 31, 2000, Canaan served as operator of
107 of the wells in which the partnerships own non-operating working interests
and received operating fees for such services from the partnerships. This
arrangement is permitted by the terms of the applicable partnership agreements.
While Canaan is not the General Partner of the partnerships, it is owned by the
same persons who own the General Partners and its principal business activity is
providing services to the General Partners. As a result of this relationship, it
is possible that Canaan could be considered to be a fiduciary to the limited
partners and owe to them the same duties of loyalty, care and good faith as owed
by the General Partners. The limited partners may therefore have the same rights
with respect to Canaan as they have with respect to the General Partners.
Further, the value of the partnership oil and gas properties might be enhanced
if the partnerships had the right to operate the properties rather than Canaan
or if Canaan would relinquish its operating rights in connection with a sale of
properties by a partnership. In such event, the liquidation value of the
partnership properties may be greater than the value of the properties without
the right to operate. However, the partnerships do not have the administrative
and other staff necessary to serve as operator of wells.
Limitations on Limited Partners' Remedies. The partnership agreements
for the partnerships provide that the General Partner and its affiliates are not
liable to the partnership or any partner for any losses arising out of any
action or inaction of the general partners if the general partners, in good
faith, determine that such course of conduct was in the best interest of the
partnership and such course of conduct did not constitute negligence or
misconduct of the general partners. In addition, the partnership agreements
provide that the partnerships will indemnify the general partners for any
losses, judgments and amounts paid in settlement of any claims sustained by them
in connection with the partnership provided that they were not the result of
negligence or misconduct on the part of the general partners. The partnership
agreements further provide for the advancement of legal expenses and other costs
incurred by the general partner in connection with any proceeding arising by
reason of the fact that it is or was a general partner of the partnership, but
such advancement of legal expenses and other costs is not available to a general
partner when an action is initiated by a limited partner.
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Access to Investor List
Under Oklahoma law and the partnership agreement of each partnership,
a limited partner may obtain a list of limited partners in his partnership by
making a written request to the General Partners at 119 N. Robinson, Suite 600,
Oklahoma City, Oklahoma 73102. Limited partners also have the right under the
partnership agreements to inspect the books and records of his partnership at
reasonable times and upon reasonable notice.
Conflicts of Interest
Canaan and the General Partners have conflicts of interest with the
limited partners with respect to the combination transactions arising from,
among other things:
. Canaan and the General Partners determined the structure of the
proposed combination transactions and the Exchange Values without
any independent third party representing the limited partners of
any partnership. As a result, the determination of the Exchange
Values and the relative ownership of Canaan by limited partners
may not reflect the allocation of relative value that would
result if the combination transactions were negotiated with an
unaffiliated third party in an arms length transaction.
. Officers and directors of Canaan and the General Partners will
continue to serve as officers and directors of Canaan. They may
receive compensation and other benefits associated with this
employment as determined by the board of directors and which may
be higher than their current compensation arrangements.
. Legal counsel engaged to assist with the preparation of the
documentation for the combination transactions, including this
document was engaged by Canaan and did not serve, or purport to
serve, as legal counsel for the limited partners.
. For purposes of the allocation of the Exchange Value within the
Coral Group, Canaan is being allocated additional Exchange Value
attributable to its rights to operate partnership properties.
Approximately 62% of Canaan's ongoing operating fees come from
the partnerships. For purposes of determining the relative value
of the Coral Group as a whole and Indian, these operating fees
are disregarded because after giving effect to the combination
transactions, this intercompany item as between Canaan and the
partnerships is eliminated. Canaan and the General Partner
believe this allocation of value is consistent with industry
practices generally, but it has not been established on an arms
length basis and may have the effect of allocating to Canaan a
greater share of the total Exchange Value.
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No Independent Representative
No independent representative of the limited partners was engaged for
purposes of negotiating the terms of the combination transactions, nor was a
fairness opinion obtained from an unaffiliated third party. The absence of these
protections was considered, but was not judged to be significant by Canaan and
the General Partners, in determining the fairness of the proposed combination
transaction to the limited partners. Because the Exchange Values used in
determining the shares of Canaan common stock to be received by the limited
partners in the partnerships in exchange for their interest were primarily based
on the Reserve Values determined by Netherland Sewell with immaterial adjustment
based on such variables as cash, short term investments, liabilities and cash
flow, Canaan and the General Partners determined that the likelihood that such
an unaffiliated representative of the limited partners or a fairness opinion
would add value to the process of structuring the combination transactions was
minimal and outweighed the costs of retaining such a representative or fairness
opinion. As a result, the Exchange Values and other terms of the combination
transactions may not be as favorable as the terms that might have been obtained
had an independent representative been retained or a fairness opinion requested.
FAILURE TO APPROVE THE COMBINATION TRANSACTIONS
If one of the partnerships fails to approve the combination
transactions, the combination transactions will not be consummated for any of
the partnerships. If the combination transactions are not approved, each
partnership will continue in its business as previously conducted. However, it
is possible that a new transaction might be proposed by Canaan or the General
Partners, but no other terms have been discussed or considered by them. In
addition, Canaan and the General Partners may also explore other alternatives,
such as sale of the Coral Group to a third party, but there is no assurance that
Canaan or the General Partners could find a third party interested in purchasing
the assets or that the terms and conditions of any such purchase and sale
agreement would be as favorable as the terms offered pursuant to the combination
transactions.
If the combination transactions are not consummated, costs and
expenses incurred in connection with the combination transaction proposals will
be borne by the Combining Entities, including the partnerships. Limited partners
in each partnership will bear a portion of the costs allocated to each
partnership based on the percentage interests of limited partners voting in
favor of the combination transactions. Please see "The Combination Transactions-
Expenses and Fees" for a discussion of the sharing of transaction costs.
If the combination transactions are not consummated, the amount of the
remaining balance of the Contingent Production Payment owing from Indian to the
1996 and 1996-I partnerships will be reduced by $3 million. This will result in
no gain or return on the amount of these partnerships' investments in the
Contingent Production Payment. The payment of this
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obligation is subordinate to Indian's obligations to its bank lenders and
depending on the amount of the liquidation proceeds, the Contingent Production
Payment may not be paid in full. These partnerships would also be entitled to
share a portion of the 50% of the remaining proceeds of liquidation otherwise
distributable to Indian shareholders, which is uncertain. The amount invested in
the Contingent Production Payment represented 33% of the initial capital of the
1996 partnership and 43% of the initial capital of the 1996-I partnership. Thus,
the failure to approve the combination transactions would adversely affect the
returns to the limited partners in these partnerships unless the Contingent
Production Payment repayment proceeds are successfully reinvested.
SPECIAL MEETING OF THE PARTNERSHIPS
General
A combined special meeting of the partnerships is being called by the
General Partners for limited partners to consider and vote to approve or
disapprove of the Plan of Combination relating to the combination transactions
and to transact such other business as may be properly presented at the special
meeting or any adjournments or postponements thereof.
The combined special meeting will be held on ___________________, at
____________ p.m. at __________________________________________, Oklahoma City,
Oklahoma ________.
Voting Rights
Each limited partner appearing on the records of each of the
partnerships as of _________________, 2000 is entitled to notice of the special
meeting and is entitled to vote his partnership interests at the meeting. Each
partnership is voting separately on the Plan of Combination. Accordingly, not
all of the partnerships may approve the Plan of Combination. Limited partners in
each partnership may vote "FOR" or "AGAINST" their respective partnership
participating in the Plan of Combination.
The General Partners appointed UMB Bank, N.A., Kansas City, Kansas to
receive and tabulate all votes and dissents of limited partners in each
partnership. UMB Bank has no other relationship with the Combining Entities
other than being appointed to serve as exchange agent and transfer agent for
Canaan's common stock. UMB Bank will make the tabulation available to the
General Partners and any limited partner upon request at any time during and
after the voting occurs. Requests should be addressed to UMB Bank, N.A., P. O.
Box 410064, Kansas City, Kansas 64141-0064, Attention: Nancy Hoffman.
-88-
Proxy and Cash Election Form and Letter of Transmittal
A sample of the form of proxy and cash election form and letter of
transmittal is attached to this document. The actual Voting Form to be used to
register your vote on the plan of combination involving your partnership is the
separate green sheet of paper included with this document. Please Use the Green
Proxy and Cash Election Form and Letter of Transmittal to Cast Your Vote on the
Plan of Combination.
Approval/Revocation of Proxy and Cash Election Form
If a Voting Form is properly signed and is not revoked by a limited
partner, the partnership interest it represents will be voted in accordance with
the instructions of the limited partner. If no specific instructions are given,
the partnership interest will be voted FOR the Plan of Combination involving
your partnership. A limited partner may revoke his vote at any time before it is
voted at the special meeting. Any limited partner who attends the special
meeting and wishes to vote in person may revoke his vote at that time.
Otherwise, a limited partner must advise the General Partner of revocation of
his vote in writing, which revocation must be received by the General Partner at
119 N. Robinson, Suite 600, Oklahoma City, Oklahoma 73102 prior to the time the
vote is taken.
The Voting Form also includes methods by which a limited partnership
in each partnership can make an election to receive cash as described under "The
Combination Transactions - Cash Election".
Solicitation
The solicitations of proxies are being made by Canaan, the General
Partners of the partnerships and Canaan Securities. The proxies will be
solicited in person, through the mail and over the telephone. No solicitation
will occur over the Internet and no special compensation will be paid for such
solicitations. The costs of the preparation of this document and of the
solicitation of proxies and such costs for each partnership will be borne as
described under "The Combination Transactions - Expenses and Fees".
Voting Requirements
Approval of the Plan of Combination by each partnership requires the
approval of each General Partner, the Additional General Partners and the
approval of holders of more than fifty percent (50%) of the partnership
interests owned by limited partners calculated based on the limited partners'
share in the profits of the partnership. If any one partnership fails to
receive approval of the Plan of Combination, the combination transactions will
not be consummated.
-89-
For purposes of determining the requisite percentage of partnership
interests, votes will be tabulated based on the percentage interests each
partner, including the General Partner and the Additional General Partner, has
in the profits of the applicable partnership as of the record date. The table
below sets forth information concerning the percentage interest in each
partnership as of the record date:
Voting Percentages
------------------
General and Additional General
Partnership Partners Combined Limited Partners
- ------------- ------------------------------- -----------------
1990 25.00% 75.00%
1991 25.00% 75.00%
1992 14.18% 85.82%
1993 10.34% 89.66%
1993-I 12.50% 87.50%
1995 10.00% 90.00%
1996 10.00% 90.00%
1996-I 12.50% 87.50%
The General Partners and the Additional General Partners intend to
vote in favor of the Plan of Combination.
Rights of Appraisal
Under the rules adopted by the NASD, limited partners in roll-up
transactions such as the combination transactions are entitled to appraisal
rights. The right to make an election to receive cash equal to the Appraised
Value of a limited partner's interest is intended to satisfy this requirement.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
General
This section summarizes the material Federal income tax consequences
of general application that should be considered by holders of interests in the
partnerships and holders of common stock of Indian and the General Partners,
resulting from their participation in the proposed combination transactions.
This section does not, however, comment on all tax matters that may affect the
partnerships, the General Partners, Indian, Canaan Securities or holders of
interests in the partnerships, holders of the General Partners common stock,
holders of Indian common stock and holders of Canaan Securities common stock,
and this section does not consider various facts or limitations applicable to
any particular participant that may modify or alter the results described in
this document. It may not be applicable to various classes of taxpayers,
including, without limitation, insurance companies, tax-exempt organizations,
financial institutions, securities dealers, broker-dealers, and foreign persons.
-90-
Except as otherwise indicated, statements of legal conclusion
regarding tax treatments, tax effects or tax consequences reflect the opinions
of Crowe & Dunlevy, A Professional Corporation, counsel for Canaan and the
General Partners, based on laws, regulations, rulings, practice and judicial
decisions in effect at the date of this document. However, legislative, judicial
or administrative changes or interpretations may be forthcoming that could
repeal, overrule or modify any of these authorities. Any such change could be
retroactive and, accordingly, could alter or modify the statements and
conclusions set forth in this document. No rulings have been requested from the
Internal Revenue Service with respect to any aspect of the proposed combination
transactions. The IRS has announced generally that it will not issue rulings
regarding the tax consequences of transactions similar to the combination
transactions. Furthermore, there can be no assurance that the IRS or the courts
would agree with the conclusions set forth in this discussion below.
A copy of the tax opinion of Crowe & Dunlevy has been filed as an
exhibit to the registration statement of which this document is a part. Crowe &
Dunlevy's tax opinion is based, in part, on various assumptions of fact and
certificates. Upon receipt of a written request by a limited partner or his
representative designated in writing, a copy of the opinion and related
certificates will be provided promptly, without charge, by Canaan. Please make
any written request to Canaan Energy Corporation, 119 North Robinson, Suite 600,
Oklahoma City, Oklahoma, 73102.
All persons affected by proposed combination transactions are urged to
consult their own tax advisor as to the particular federal income and other tax
consequences of the combination transactions.
Limited Partners
In the combination transactions, a Canaan subsidiary acquisition
corporation will merge with and into each separate partnership. The limited
partners of each merging partnership will receive Canaan common stock based on
their share of the partnership's Exchange Value. Because the merging partnership
survives the merger transaction, each merger will be treated for Federal income
tax purposes as if the limited partners transferred their interests in each
respective merging limited partnership to Canaan in exchange for common stock of
Canaan in a transaction described in Section 351(a) of the Code or for cash.
Each merging partnership will not recognize any gain or loss as a result of each
respective partnership merger.
A limited partner who receives Canaan common stock in the combination
transactions will not recognize gain or loss as a result of the receipt of the
stock.
A limited partner who elects to receive cash will recognize gain or
loss equal to the difference between the cash received and his adjusted tax
basis in his partnership interest on the date of the merger.
-91-
Gain, if any, recognized by a limited partner will be treated as gain
from the sale or exchange of his interest in the partnership. Therefore, gain
recognized by a limited partner generally will be capital except to the extent
of the cash received in exchange for his share of the partnership's ordinary
income assets, i.e. unrealized receivables and any inventory items. Unrealized
receivables include some types of recapture items, including depreciation,
depletion and intangible drilling costs with respect to deductions previously
taken by the limited partnership.
A limited partner's basis in Canaan common stock received will be equal
to his aggregate basis in his partnership interest transferred. Such basis will
be prorated among all of the shares of Canaan common stock received.
The holding period required for long-term capital gain treatment is
one year. In tax-free and partially tax-free exchanges where the relinquished
property is a capital or Section 1231 asset, the Code generally provides that
the holding period of the property received in the exchange includes the holding
period of the property relinquished. However, the IRS has published authority
providing that the holding period of common stock received in a tax-free
exchange for a partnership interest does not include the holding period of the
partnership interest to the extent the value of the common stock received is
attributable to unrealized receivables of the partnership that are neither
capital assets nor Section 1231 assets. If the IRS ruling position applies, the
holding period of a portion of the Canaan common stock received by each limited
partner for the value of the partnership's ordinary income assets will begin on
the day following the date of the exchange, and the holding period for the
remaining portion of the Canaan common stock will include each respective
limited partner's holding period for the partnership interest exchanged
therefor. The IRS cites no authority for its ruling position and, accordingly,
it is questionable whether the IRS ruling position is valid. If a limited
partner takes the position that the general tacking principles apply, the IRS
may assert its ruling position on the examination of a limited partner's federal
income tax return.
The Code provides special rules suspending a partner's ability to
deduct his allocable share of partnership losses when the partner lacks tax
basis in his partnership interest, the losses are generated by "passive
activities", or by activities with respect to which the partner is not "at
risk." Following the combination transactions, any prior partnership loss
allocated to a limited partner that was suspended by the at risk rules or by a
lack of basis will continue to be suspended and effectively will be lost.
Losses suspended by the at risk rules, however, should be available to offset
any taxable gain recognized as a result of the combination transactions, as
described above. Any prior partnership loss allocated to a limited partner that
was suspended by the passive activity loss rules should be available to offset
any gain recognized as a result of the combination transactions, because that
income should be passive income, but will not be available to offset nonpassive
income, including dividends receive on Canaan common stock, until such limited
partner has sold all of his Canaan common stock to any unrelated party in a
fully taxable transaction.
-92-
Holders of Common Stock of the General Partners and Indian
The contribution by the holders of all of the outstanding capital
stock of the General Partners and Indian to Canaan in exchange for Canaan common
stock should be treated for Federal income tax purposes as a transaction
described in Section 351(a) of the Code.
No gain or loss should be recognized by the shareholders of the
General Partners and Indian as a result of the proposed combination
transactions.
A shareholder of the General Partners or Indian will have an aggregate
income tax basis in all of the Canaan common stock received in the proposed
combination transactions equal to the Federal income tax basis of the General
Partners and Indian common stock surrendered in exchange therefor.
The holding period of the Canaan common stock received by the
shareholders of the General Partners and Indian will include the period for
which the common stock exchanged therefor was held, provided the exchanged
common stock was held as a capital asset by such shareholder on the date of the
exchange.
Canaan Securities
Crowe & Dunlevy expresses no opinion regarding the Federal income tax
consequences of the proposed combination transaction to Canaan Securities and
its shareholder.
Placing Brokers
The receipt of cash and shares of Canaan common stock by the Placing
Brokers will be treated as ordinary income to the Placing Brokers in the amount
equal to the amount of cash and the fair market value of the Canaan common stock
received.
Canaan
Canaan will not recognize any gain or loss upon the issuance of the
Canaan common stock to the shareholders of the General Partners, the
shareholders of Indian, the shareholder of Canaan Securities or the limited
partners.
Reporting Requirements of Limited Partners and Shareholders of Corporate
Combining Entities
Under the United States Treasury regulations, each limited partner and
each shareholder of the corporate Combining Entities who receives shares of
Canaan common stock must provide a statement concerning the exchange with his
federal income tax return for the year in which the combination transactions
occur. The partnerships and the corporate Combining Entities will provide their
respective limited partners or shareholders with information to assist them in
preparing such statement.
-93-
Entities will provide their respective limited partners or shareholders with
information to assist them in preparing such statement.
INFORMATION CONCERNING CANAAN
General
Canaan, formerly known as Coral Reserves Group, Ltd., is an
independent oil and gas company headquartered in Oklahoma City, Oklahoma. Canaan
was formed in March, 1987, as an Oklahoma corporation, by Leo E. Woodard, who
continues to serve the company as chief executive officer, and John K. Penton,
who continues to serve the company as president.
Canaan has been continuously engaged in the acquisition, production,
development and operation of oil and natural gas properties. As of December 31,
1999, Canaan operated 110 wells in which it or the partnerships own an interest.
Operations are located entirely within the state of Oklahoma and are
concentrated in Kingfisher County in north central Oklahoma and Garvin and
McClain counties in south central Oklahoma. As of December 31, 1999, the
estimated value of Canaan's proved oil and gas reserves was less than $500,000.
Since 1990, when the General Partners began sponsoring partnerships,
Canaan has provided management services to them.
Costs Incurred and Drilling Results
The following table shows information regarding the costs incurred by
Canaan from acquisition and development activities during the periods indicated.
Year ended December 31,
------------------------------------------
1996 1997 1998 1999
-------- -------- ------- --------
Acquisition costs................... $ - $ 16,000 $18,000 $ --
Development costs................... 21,025 139,433 50,816 106,671
-------- -------- ------- --------
Total............................... $ 21,025 $155,433 $68,816 $106,671
======== ======== ======= ========
Canaan has acquired or drilled or participated in the drilling of
wells as set out in the table below for the periods indicated. These acquisition
and drilling activities do not include drilling activities of the partnerships.
-94-
Years Ended December 31,
-----------------------------------------------------
1996 1997 1998 1999
------------ ------------ ------------ -----------
Gross Net Gross Net Gross Net Gross Net
------ ----- ------ ----- ------ ----- ------ ----
Acquired wells:
Gas........................ 1 .001 7 .579 12 .088 - -
Oil........................ 1 .001 11 .836 5 .035 - -
Dry........................ - - - - - - - -
------ ----- ------ ----- ------ ----- ------ ----
Total...................... 2 .002 18 1.415 17 .123 - -
====== ===== ====== ===== ====== ===== ====== ====
Development well drilling:
Gas........................ - - - - - - 2 .063
Oil........................ - - 1 .023 1 .053 - -
Dry........................ - - 1 .050 1 .001 - -
------ ----- ------ ----- ------ ----- ------ ----
Total...................... 2 - 2 .073 2 .054 2 .063
====== ===== ====== ===== ====== ===== ====== ====
As of December 31, 1999, Canaan was involved in the drilling, testing
or completing of 1 gross (.00625 net) development well.
Acreage
The following table shows the developed and undeveloped oil and gas
lease and mineral acreage as of December 31, 1999 owned by Canaan. It does not
include acreage owned by the partnerships. Also excluded is acreage in which an
interest is limited to royalty, overriding royalty and other similar interests.
Developed Undeveloped
-------------------------------------------
Gross Net Gross Net
-------- -------- --------- ----------
Oklahoma....................... 18,086 187 480 270
Other.......................... 362 1 -- --
-------- -------- --------- ----------
Total.......................... 18,448 188 480 270
======== ======== ========= ==========
Productive Well Summary
The following table shows the ownership of Canaan in productive wells
at December 31, 1999. It does not include wells owned by the partnerships. Gross
oil and gas wells include 1 well with multiple completions. Wells with multiple
completions are counted only once for purposes of the following table.
Productive Wells
-----------------------
Gross Net
---------- -----------
Gas................................. 57 0.455
Oil................................. 72 0.729
---------- -----------
Total............................... 129 1.184
========== ===========
-95-
Selected Historical Financial and Operating Data
The following table presents a summary of selected financial
information and operating data for Canaan for the periods indicated. It should
be read in conjunction with the financial statements and related notes and the
section "Information Concerning Canaan - Management's Discussion and Analysis of
Financial Condition and Results of Operations," included elsewhere in this
document. The information contained under the headings Operations Data and Cash
Flow Data for the years ended December 31, 1996, 1997, 1998 and 1999 and Balance
Sheet Data as of December 31, 1996, 1997, 1998 and 1999, were derived from
audited financial statements. All other information is unaudited. The results
for the three months ended March 31, 2000 are not necessarily indicative of the
results to be expected for a full year.
-96-
Three months ended
Years Ended December 31, March 31,
--------------------------------------------------------------- -----------------------
1995 1996 1997 1998 1999 1999 2000
----------- ------------- ----------- ----------- ----------- ----------- ----------
Operations Data:
Revenues:
Oil and natural gas sales............. $ 114,523 $ 95,675 $ 112,412 $ 83,652 $ 140,446 $ 14,455 $ 37,740
Salt water disposal services.......... 43,920 57,000 49,000 51,000 48,000 12,000 16,000
Production engineering services....... 19,808 27,574 16,409 21,883 11,411 4,647 5,016
----------- ------------- ----------- ----------- ----------- ----------- ----------
Total revenues ............... 178,251 180,249 177,821 156,535 199,857 31,102 58,756
----------- ------------- ----------- ----------- ----------- ----------- ----------
Expenses:
Operating costs....................... 26,454 15,845 25,005 33,170 28,531 3,765 6,895
Depreciation and amortization......... 48,434 53,952 59,304 48,350 55,763 8,582 14,338
General and administrative costs...... 848,042 1,188,039 1,281,143 936,720 881,142 149,135 297,634
Less: Partnership management fees..... (777,754) (1,072,000) (1,373,000) (970,500) (856,000) (187,000) (289,000)
Interest.............................. 2,645 - - - - - -
----------- ------------- ----------- ----------- ----------- ----------- ----------
Total expenses................ 147,821 185,836 (7,548) 47,740 109,436 (25,518) 29,867
----------- ------------- ----------- ----------- ----------- ----------- ----------
Other income, principally interest..... 7,454 28,938 38,059 41,544 36,423 10,161 13,379
Earnings before income taxes........... 37,884 23,351 223,428 150,339 126,844 66,781 42,268
Income taxes .......................... (3,000) (2,000) (68,000) (46,000) (39,000) (21,000) (13,000)
----------- ------------- ----------- ----------- ----------- ----------- ----------
Net earnings........................... $ 34,884 $ 21,351 $ 155,428 $ 104,339 $ 87,844 $ 45,781 $ 29,268
=========== ============= =========== =========== =========== =========== ==========
Earnings per average common share
outstanding - basic and diluted....... $ 58.14 $ 35.59 $ 259.05 $ 173.03 $ 138.99 $ 72.44 $ 46.31
=========== ============= =========== =========== =========== =========== ==========
Weighted average common shares
outstanding basic and
diluted........................... 600 600 600 603 632 632 632
=========== ============= =========== =========== =========== =========== ==========
Cash dividends........................ $ - $ - $ - $ - $ - $ - $ -
Cash dividends per share.............. $ - $ - $ - $ - $ - $ - $ -
Ratio of earnings to fixed changes.... 15.3 (1) (1) (1) (1) (1) (1)
Cash Flow Data:
Net cash provided by (used in)
operating activities.................. $ 269,689 $ 10,707 $ 258,000 $ 416,062 $ 32,509 $ (314,495) $ (223,882)
Net cash provided by (used in)
investing activities.................. (22,749) 4,319 (204,490) (26,796) (194,367) (9,752) (80,109)
Net cash provided by (used in)
financing activities.................. (30,000) - - - - - -
Net increase (decrease) in cash and
cash equivalents...................... 216,941 15,026 53,510 389,266 (161,858) (324,247) (303,991)
EBITDA*................................ 86,318 77,303 282,732 198,689 182,607 75,363 56,606
Balance Sheet Data (as of period end):
Cash and cash equivalents.............. $ 291,737 $ 306,762 $ 360,272 $ 749,538 $ 587,680 $ 425,291 $ 283,689
Oil and natural gas properties, net.... 191,751 152,384 278,733 284,934 352,075 295,198 341,561
Total assets........................... 661,800 677,321 939,883 1,312,444 1,558,471 1,082,512 1,710,640
Total liabilities...................... 338,501 332,671 439,805 700,754 851,664 425,222 972,746
Stockholders' equity................... 323,299 344,650 500,078 611,690 706,807 657,290 737,894
Book value per share................... 539 574 833 968 1,118 1,040 1,168
Production:
Oil production (Bbls).................. 1,515 1,036 1,570 1,903 1,585 310 390
Natural gas production (Mcf)........... 63,098 35,102 31,828 29,263 46,506 6,705 12,433
Equivalent production (Mcfe)..... 72,187 41,318 41,248 40,681 56,016 8,565 14,773
Average Sales Price*:
Oil price (per/Bbl) ................... $ 16.87 $ 17.40 $ 22.08 $ 13.52 $ 18.10 $ 11.89 $ 24.07
Natural gas price (per/Mcf)............ 1.41 2.21 2.44 1.98 2.40 1.61 2.28
Average sales price (per Mcfe)... 1.59 2.32 2.73 2.06 2.51 1.69 2.55
Operating Costs (per Mcfe):
Lease operating expense ............... $ 0.26 $ 0.21 $ 0.43 $ 0.67 $ 0.29 $ 0.37 $ 0.29
Production Taxes....................... 0.11 0.18 0.17 0.14 0.22 0.07 0.18
Estimated Net Proved Reserves (as of
period end):
Natural gas (Mcf)...................... 594,000 512,000 515,000 511,000 507,000 NA NA
Oil (Bbls)............................ 9,000 10,000 12,000 11,000 15,000 NA NA
Total (Mcfe)........................... 648,000 572,000 587,000 577,000 597,000 NA NA
Sept. 30, 1999
--------------
Exchange Data:
Total assets for purposes of
Exchange Value....................... $ 6,431,475
Exchange Value per share............... $ 10,176
________________________
*See Definitions
(1) Canaan incurred no fixed charges in respective periods.
-97-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion is intended to assist in an understanding of
Canaan's financial position as of December 31, 1998 and 1999, and March 31,
2000, and its results of operations for each year in the three-year period ended
December 31, 1999, and for the three months ended March 31, 1999 and 2000. The
financial statements and notes thereto included elsewhere in this document
contain additional information and should be referred to in conjunction with
this discussion.
General
Canaan is an Oklahoma corporation formerly known as Coral Reserves
Group, Ltd., organized in March of 1987 for the purpose of originating,
evaluating, engineering, negotiating, closing and managing producing oil and gas
property acquisitions on a contract basis for several limited partnerships
sponsored by others. Since 1990, its primary activities have consisted of
acquiring, developing, producing and operating oil and natural gas properties.
Also, since 1990, when the General Partners began sponsoring partnerships,
Canaan has managed the limited partnerships on behalf of the General Partners.
In February 1999, as a result of the Indian Acquisition Agreement, Canaan has
and will continue to manage Indian's operations until completion of the
combination transactions.
As a result of the combination transactions, Canaan will acquire all
of the other parties to the combination transactions while the equity owners of
the other parties to the combination transactions will become shareholders of
Canaan. Canaan will continue the combined businesses of the partnerships, the
General Partners and Indian after the completion of the combination transactions
in a manner similar to the business activities of such entities prior to such
transactions.
Canaan has been continuously engaged in the acquisition, production,
development and operation of oil and natural gas properties. As of March 31,
2000, Canaan operated 107 of the 129 wells in which it owns an interest.
Operations are located entirely within the state of Oklahoma and are
concentrated in Kingfisher County in north central Oklahoma and Garvin and
McClain counties in south central Oklahoma. Canaan's net production during the
three months ended March 31, 2000 was approximately 164 Mcfe per day, of which
84% was natural gas. Canaan's production is located entirely within Oklahoma,
except for one lease in Texas. As of December 31, 1999, the total value of
Canaan's proved oil and gas reserves approximated $500,000.
Historically, Canaan has utilized cash flows from operations and debt
to fund its capital expenditure programs. Management intends to fund future
capital expenditures through cash flows from operations and other various
capital markets made possible by the combination transactions. Canaan believes
that once the combination transactions are complete, it will be better
98
positioned to pursue many of the prospects resulting from the combination, as
well as projects that are likely to arise as a result of Canaan's ongoing
activities.
The markets for oil and gas have been volatile and are likely to
remain so in the future. Prices for oil and gas are subject to wide fluctuations
in response to relatively minor changes in the supply and demand for oil and
gas, market uncertainty and a variety of additional factors that are beyond the
control of Canaan. In the future, lower oil and gas prices may reduce
the attractiveness or viability of exploration prospects and the amount of oil
and gas reserves that may be produced economically, Canaan's cash flow from
operations, the amount of outstanding borrowings under Canaan's credit
facilities, and Canaan's net income and capital expenditures.
Canaan may from time to time enter into certain oil and gas price swap
agreements in an attempt to manage its exposure to oil and gas price volatility.
To the extent Canaan is unable to effect such transactions, continued
fluctuations in oil and gas prices could have an effect on Canaan's operating
results. Canaan and the combined entities have entered into price swap
contracts to fix the sales price of certain of its oil and gas production for
the remainder of 2000 through May, 2001.
Canaan uses the full cost method of accounting for its investment in
oil and natural gas properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of oil and gas reserves are
capitalized into a "full cost pool" as incurred, and properties in the pool are
amortized and charged to operations using the units-of-production method based
on the ratio of current production to total proved oil and gas reserves. To the
extent that such capitalized costs, net of depreciation, and amortization and
deferred income taxes, exceed the present value of estimated future net
revenues, discounted at 10%, from proved oil and gas reserves, after income tax
effects, such excess costs are charged to operations. Once incurred, a write
down of oil and gas properties is not reversible at a later date, even if oil or
gas prices increase.
During the course of normal operation, Canaan will take more or less
than its respective ownership share of the natural gas volumes produced. These
volumetric imbalances are monitored over the lives of the wells' production
capability. If an imbalance exists at the time the wells' reserves are
depleted, cash settlements are made among the joint interest owners under a
variety of arrangements.
Canaan follows the sales method of accounting for natural gas
imbalances. A liability is recorded only if Canaan's excess takes of natural
gas volumes exceed its estimated remaining recoverable reserves. No receivables
are recorded for those wells where Canaan has taken less that its ownership
share of natural gas production. Canaan's production imbalance position in
terms of volumes and value was not significant as of March 31, 2000. Such
imbalance position is not expected to significantly impact Canaan's future
operating results or financial position.
-99-
Year Ended December 31, 1998 Compared with the Year Ended December 31, 1997
Revenues. Total revenues for the year ended December 31, 1998 were
$156,535, a decrease of $21,286 from revenues of $177,821 for the year ended
1997. Revenues from oil and natural gas sales decreased $28,760 to $83,652 in
1998, from $112,412 in 1997. The primary reason for the decrease in oil and
natural gas sales in 1998 is a result of a significant decrease of $8.56 per
barrel in the average price received for oil in 1998 when compared to 1997, and
a significant decrease of $.46 per Mcf in the average price received for gas in
1998, when compared to 1997. The average price per barrel of oil and Mcf of gas
received in 1998 and 1997 was $13.52 and $1.98, and $22.08 and $2.44,
respectively. Production of oil and natural gas was 1,903 Bbls and 29,263 Mcf,
respectively, in 1998, as compared to 1,570 Bbls and 31,828 Mcf, respectively,
in 1997. On an equivalent basis, there was only a slight decrease in production
in 1998, as compared to 1997, resulting from the late 1997 Boswell Acquisition
of producing properties and development activities adding production, offset by
normal declines in production rates, and the sale of marginal wells in 1998.
Canaan acquired producing properties in December 1998 (the Marathon
Acquisition), which did not significantly impact 1998 production.
Salt water disposal services revenues increased only 4% for the year
ended December 31, 1998, as compared to the same period in 1997, as the salt
water production levels and the number of wells operated by Canaan remained
relatively constant. Production engineering services revenue increased by
approximately 33% or $5,474 for the year ended December 31, 1998, as compared to
the same period in 1997. This is a result of an increase in the number of wells
operated in 1998 compared to 1997 resulting from the late 1997 and 1998
acquisitions. The newly acquired properties required additional operational
field supervision in 1998 due to Canaan's unfamiliarity with the properties.
Operational field supervision is billed by the company to the working interest
owners of its operated wells as production engineering services based on
services provided.
Approximately 55% of salt water disposal services revenue and 60% of
production engineering services revenue was earned from services provided to the
limited partnerships. After completion of the combination transactions, salt
water disposal services revenues and production engineering services revenue
will only be recognized for services provided to non-affiliated third parties
who own working interest in producing oil and natural gas properties operated by
Canaan.
Lease operating expense. Lease operating expense increased $9,801 to
$27,593 in 1998, as compared to $17,792 in 1997, as a result of the continued
operation of marginal wells acquired in the late 1997 Boswell Acquisition which
were plugged in mid-1998. On a Mcfe basis, lease operating expense increased 58%
in 1998 to $0.67 per Mcfe from $0.43 per Mcfe in 1997, due to the reason
discussed above.
Gross Production Taxes. Gross production taxes decreased 23% to $5,577
in 1998, as compared to $7,213 in 1997. This decrease was a result of a 26%
decrease in oil and natural gas revenues in 1998, as compared to 1997.
100
Depreciation and amortization expense. Depreciation and amortization
expense decreased $10,954 to $48,350 in 1998, from $59,304 in 1997. Depreciation
and amortization expense from oil and natural gas properties increased only
slightly to $29,700 in 1998, as compared to $29,084 in 1997. The depreciation
and amortization expense rate increased to $0.73 per Mcfe for 1998, from $0.71
per Mcfe for 1997, as net oil and natural gas properties costs changed only
slightly and production rates compared to proved reserves were consistent with
1997. Depreciation and amortization expense resulting from non-oil and natural
gas properties decreased $11,654 as a result of assets being fully depreciated
in 1996 and 1997.
General and administrative expense. Net general and administrative
expense increased $58,077 to $(33,780) in 1998, as compared to $(91,857) in
1997. Gross general and administrative expense decreased 27% to $936,720 in
1998, from $1,281,169 in 1997. Gross general and administrative expense
decreased primarily as a result of decreased salaries and bonuses of $260,000 in
1998, compared to 1997, due to lower levels of earnings in 1998. Also impacting
the decrease was a $122,000 increase in general and administrative costs
recovered from the other working interest owners in 1998, compared to 1997.
This increase resulted from an increase in the reimbursement rates Canaan was
able to charge to the other interest owners in 1998, compared to 1997 and an
increase in the number of operated properties in 1998, compared to 1997. The
decrease in gross general and administrative expenses were offset by a $402,500,
or 29% decrease in the management fees Canaan earns from the partnerships it
manages in behalf of the General Partners. The management fees are based
primarily on the General Partners' net distributable cash flows from the limited
partnerships. Therefore, the decrease in the 1998 management fees is
attributable to the decrease in the net distributable cash flows from the
limited partnerships.
Income taxes. Income tax expense decreased $22,000 to $46,000 in 1998
from $68,000 in 1997. The change in tax expense was due to a $73,089 decrease
in earnings before income taxes in 1998 compared to 1997. Canaan's effective
tax rate was 31% and 30% in 1998 and 1997, respectively.
Year Ended December 31, 1999 Compared with the Year Ended December 31, 1998
Revenues. Total revenues for the year ended December 31, 1999 were
$199,857, a 28% increase as compared to revenues of $156,535 for the year ended
December 31, 1998. Revenues from oil and natural gas sales increased 68% or
$56,794 to $140,446 in 1999, from $83,652 in 1998. One reason for the increase
in oil and natural gas sales in 1999 is a significant increase of $4.58 per
barrel and $.42 per Mcf in the average price received for oil and gas,
respectively, in 1999, when compared to 1998. The average price per barrel of
oil and Mcf of gas received in 1999 and 1998 was $18.10 and $2.40, and $13.52
and $1.98, respectively. Production of oil and natural gas was 1,585 barrels
and 46,506 Mcf, respectively, in 1999, as compared to 1,903 Bbls and 29,263 Mcf,
respectively, in 1998. On an equivalent basis, there was a 38% increase in
production in 1999, as compared to 1998, as a result of drilling and completing
one
-101-
significant natural gas well in April 1999, and the acquisition of producing
properties from Marathon in December 1998.
Revenues from salt water disposal services decreased $3,000 to $48,000
for the year ended December 31, 1999, from $51,000 for the same period in 1998.
The decrease is a result of small changes in salt water production levels from
period to period. Production engineering services revenue decreased by $10,472
for the year ended December 31, 1999, as compared to the same period in 1998.
In 1998, additional time was required in the field by the company's manager of
operations resulting from the acquisition of operated properties in late 1997
and 1998. In 1999, the amount of time required in the field by the manager of
operations was significantly reduced due to improved operating efficiencies of
the operated properties acquired in late 1997 and 1998.
Approximately 57% of salt water disposal services revenue and 60% of
production engineering services revenue was earned from services provided to the
limited partnerships. After completion of the combination transactions, salt
water disposal services revenues and production engineering services revenue
will only be recognized for services provided to non-affiliated third parties
who own working interest in producing oil and natural gas properties operated by
Canaan.
Lease operating expense. Lease operating expense decreased $11,332 to
$16,261 in 1999, as compared to $27,593 in 1998, as a result of the cessation of
operations of the marginal wells acquired in the 1997 Boswell Acquisition which
were plugged in mid-1998. On a Mcfe basis, lease operating expense decreased
57% in 1999 to $.29 per Mcfe from $0.67 per Mcfe in 1998 due to a significant
increase in production from the drilling and completion of a significant natural
gas well in April 1999, and the December 1998 Marathon Acquisition, and as a
result of the reduction in lease operating expenses as discussed above.
Gross Production Taxes. Gross production taxes increased $6,693 to
$12,270 in 1999 as compared to $5,577 in 1998. This increase was a result of a
68% increase in oil and natural gas revenues in 1999 as compared to 1998.
Depreciation and amortization expense. Depreciation and amortization
expense increased $7,413 to $55,763 in 1999, from $48,350 in 1998. Depreciation
and amortization expense from oil and natural gas properties increased $15,071
to $44,771 in 1999, as compared to $29,700 in 1998. This increase was a result
of increased oil and natural gas property costs and an increase in production
rates compared to proved reserves in 1999 compared to 1998. Depreciation and
amortization expense rate increased to $.80 per Mcfe for 1999 from $0.73 per
Mcfe for 1998 as a result of the above discussion. Depreciation and
amortization expense resulting from non-oil and natural gas properties decreased
$7,658 as a result of additional assets being fully depreciated in 1999 at the
end of 1998.
General and administrative expense. Net general and administrative
expense increased $58,922 to $25,142 in 1999, as compared to $(33,780) in 1998.
Gross general and administrative expense decreased $55,578 to $881,142 in 1999
from $936,720 in 1998. This
102
resulted from an increase of $105,000 in general and administrative costs
recovered from the other working interest owners in 1999 as compared to 1998
resulting from the increase in operated properties acquired in late 1998. Also
increasing the general and administrative costs recovered was a 5.8% increase in
recovery rates charged to other working interest owners in 1999. Offsetting
this increase was an increase in salary and related costs resulting from
increased staffing needs. The increase in net general and administrative
expenses was attributable to a 13% decrease in the management fees Canaan earns
from the partnerships it manages on behalf of the General Partners. The
management fees are based primarily on the General Partners' net distributable
cash flows from the limited partnerships. Therefore, the decrease in the 1999
management fees is attributable to the decrease in the net distributable cash
flows from the limited partnerships.
Income taxes. Income tax expense decreased $7,000 to $39,000 in 1999,
from $46,000 in 1998. The change in tax expense was due to the decrease in
earnings before income taxes in 1999, compared to 1998. Canaan's effective tax
rate was 31% in 1999 and 1998, respectively.
Three Months Ended March 31, 2000 Compared with the Three Months Ended March 31,
1999
Revenues. Total revenues for the three months ended March 31, 2000
were $58,756, a 89% increase as compared to revenues of $31,102 for the three
months ended March 31, 1999. Revenues from oil and natural gas sales increased
161% or $23,285 to $37,740 for the three months ended March 31, 2000, from
$14,455 for the same period in1999. One reason for the increase in oil and
natural gas sales for the three months ended March 31, 2000 was a significant
increase of $12.18 per barrel and $0.67 per Mcf in the average price received
for oil and gas, respectively, for the three months ended March 31, 2000
compared to the same period in 1999. The average price per barrel of oil and Mcf
of gas received for the three months ended March 31, 2000 and 1999 was $24.07
and $2.28 and $11.89 and $1.61, respectively. Production of oil and natural gas
was 390 barrels and 12,433 Mcf, respectively, for the three months ended March
31, 2000, as compared to 310 barrels and 6,705 Mcf, respectively, for the same
period in 1999. On an equivalent basis, there was a 72% increase in production
for the three months ended March 31, 2000, as compared to the same period in
1999, as a result of drilling and completing one significant natural gas well in
April, 1999.
Revenues from salt water disposal services increased $4,000 to $16,000
for the three months ended March 31, 2000, from $12,000 for the same period in
1999. The increase is a result of small changes in salt water production levels
from period to period. Production engineering services revenue increased only
slightly for the three months ended March 31, 2000, as compared to the same
period in 1999.
103
Approximately 58% of salt water disposal services revenue and 42% of
production engineering services revenue was earned from services provided to the
limited partnerships. After completion of the combination transactions, salt
water disposal services revenues and production engineering services revenue
will only be recognized for services provided to non-affiliated third parties
who own working interest in producing oil and natural gas properties operated by
Canaan.
Lease operating expense. Lease operating expense increased $1,085 to
$4,225 for the three months ended March 31, 2000, as compared to $3,140 for the
three months ended March 31, 1999, as a result of costs associated with the
operating costs of a significant natural gas well drilled and completed in
April, 1999. On a Mcfe basis, lease operating expense decreased 22% to $.29 for
the three months ended March 31, 2000, as compared to $.37 per Mcfe during the
same period in 1999 due to a 72% increase in production on an Mcfe basis.
Gross Production Taxes. Gross production taxes increased $2,045 to
$2,670 for the three months ended March 31, 2000, as compared to $625 for the
three months ended March 31, 1999. This increase was a result of a 161%
increase in oil and natural gas revenues for the three months ended March 31,
2000, as compared to the same period in 1999. In addition, during the three
months ended March 31, 1999, the company recognized some gross production tax
credits not available in the same period in 2000.
Depreciation and amortization expense. Depreciation and amortization
expense increased $5,756 to $14,338 for the three months ended March 31, 2000,
from $8,582 for the same period in 1998. Depreciation and amortization expense
from oil and natural gas properties increased $6,166 to $12,010 for the three
months ended March 31, 2000, as compared to $5,834 for the three months ended
March 31, 1999. This increase was a result of an increase in production rates
compared to proved reserves for the three months ended March 31, 2000 compared
to the same period in 1999. The depreciation and amortization rate increased to
$.81 per Mcfe for the three months ended March 31, 2000, as compared to $.68 for
the same period in 1999 as a result of the above discussion.
General and administrative expense. Net general and administrative
expense increased $46,499 to $8,634 for the three months ended March 31, 2000,
as compared to $(37,865) for the three months ended March 31, 1999. Gross
general and administrative expense increased $148,499 to $297,634 for the three
months ended March 31, 2000, from $149,135 for the same period in 1999. $45,000
of the increase is a result of accounting fees incurred during the three months
ended March 31, 2000, which are not directly related to the combination
transactions. The other increases are a result of increases in salary related
costs caused by salary level increases and an increase in personnel for the
three months ended March 31, 2000, compared to the same period in 1999. This
increase in gross general and administrative expense was partially offset by an
increase of $10,000 in general and administrative expenses recovered from the
other working interest owners in the three months ended March 31, 2000, as
compared to the same period in 1999. The increase in gross general and
administrative expense was also offset by a $102,000 or 55% increase in the
management fees Canaan earns from the partnerships it manages on behalf of
-104-
the General Partners. The management fees are based primarily on the General
Partners' net distributable cash flows from the limited partnerships.
Therefore, the increase in the management fee is attributable to an increase in
the limited partnerships' net distributable cash flows for the three months
ended March 31, 2000, compared to the same period in 1999.
Income taxes. Income tax expense decreased $8,000 to $13,000 for the
three months ended March 31, 2000, from $21,000 for the same period in 1999.
The change in tax expense is due to a decrease in earnings before income taxes
for the three months ended March 31, 2000, compared to the same period in 1999
for the reasons discussed above. Canaan's effective tax rate approximated 31%
for the three months ended March 31, 2000 and 1999, respectively.
Capital Expenditures, Capital Resources and Liquidity
As of December 31, 1999 and 1998, Canaan had cash balances of $587,680
and $749,538, respectively. The decrease in working capital to $238,443 as of
December 31, 1999, from $369,930 as of December 1998, relates primarily to an
increase of approximately $107,000 in capital expenditures and $258,000 of costs
incurred related to the combination transactions in 1999, as compared to the
same period in 1998. This decrease was offset by an increase in accounts
receivable at December 31, 1999 compared to December 31, 1998, resulting from
increased levels of acquiring oil and gas assets on behalf of the limited
partnerships. Also offsetting the decrease is an increase of current deferred
tax assets as of December 31, 1999, compared to December 31, 1998. The decrease
in working capital of $262,408 to $(23,965) for the three months ended March 31,
2000, as compared to $238,443 for the period ending 1999 reflects mainly an
increased level of costs incurred in connection with the combination
transactions during the three months ended March 31, 2000.
For 1999, net cash provided by operating activities was $32,509, as
compared to $416,062 in 1998. The decrease in net cash provided by operating
activities in 1999 as compared to 1998, relates primarily to the timing and
disbursements of payments made for accounts payable, accrued expenses and other
liabilities and the changes in operating results in 1999 compared to 1998,
discussed above. For the three months ended March 31, 2000, net cash used in
operating activities was $223,882 as compared to $314,495 for the same period in
1999. This decrease in net cash used in operating activities for the period
ended March 31, 2000, as compared to the same period in 1999, relates primarily
to timing and disbursements of payments made for accounts payable, accrued
expenses and other liabilities and the changes in operating results during the
three months ended March 31, 2000, compared to the same period in 1999,
discussed above.
Net cash used in investing activities in 1999 was $194,367, as
compared to $26,796 for the same period in 1998. This was a result of drilling
and completing a significant natural gas well in April, 1999 and costs
associated with the proposed combination transactions incurred during 1999. Net
cash used in investing activities for the three months ended March 31, 2000, was
$80,109, as compared to $9,752 for the same period in 1999. Again, this was
mainly a result of costs associated with the proposed combination transactions
incurred during 2000.
105
Capital expenditures. Canaan's capital expenditures to date have
focused primarily on the development of oil and natural gas properties in
Oklahoma and to a lesser extent on acquisitions of proved developed producing
oil and natural gas properties located in Oklahoma.
Canaan's capital expenditures to date have been financed with cash
flow provided by operations. After completion of the combination transactions,
Canaan's capital expenditures will increase. The actual level of capital
expenditures and the allocation of such expenditures have not been specifically
determined.
Capital Resources. Canaan's cash requirements have been met primarily
in the past through cash generated from operations. See "Business of Canaan
After Completion of the Combination Transactions" elsewhere in this document for
a discussion of Canaan's anticipated future capital resources.
Liquidity. Canaan intends to meet the remainder of its 2000 capital
requirements primarily from existing cash balances, cash flow from operations,
and subsequent to the combination, with funding under a credit facility.
Canaan's cash flow from operations will be dependent upon its future
performance, which will be subject to prevailing economic conditions and to
financial and business conditions and other factors, many of which are beyond
its control. At some point, Canaan also intends to seek additional capital
through offerings of equity securities. Canaan, as needed will also seek
additional financing through its credit facility available subsequent to the
completion of the combination transactions. There can be no assurance, however,
that the lenders will extend or increase the borrowing limits under the credit
facility or that such offerings can be successfully completed. Should sufficient
financing not be available from these or other sources, implementation of
Canaan's business plan would be delayed and, accordingly, Canaan's growth
strategy could be adversely affected.
Canaan does not intend to pay dividends on its common stock in the
near future. Earnings generated will be redeployed by Canaan as it continues its
growth strategies.
INFORMATION CONCERNING THE GENERAL PARTNERS
General
Coral, Inc. was organized in 1989 and Coral Corp. was organized in 1991 for
the sole purpose of acting as a general partner of the partnerships. Coral,
Inc. serves as managing general partner of the 1990, 1993-I and 1996-I
partnerships. Coral Corp. serves as managing general partner of all of the
remaining partnerships. The sole assets of the General Partners consist of
their respective interests in the partnerships for which they serve as managing
general partner. All of the revenues received by Coral, Inc. and Coral Corp.
from the partnerships are paid either to Canaan to reimburse Canaan for costs
incurred in providing management services relating to the partnerships or to
Canaan Securities for services rendered by Canaan Securities in connection with
the organization of the partnerships.
-106-
Selected Historical Financial and Operating Information
The following tables present summary of selected financial information and
operating data for Coral Inc. and Coral Corp. for the periods indicated. It
should be read in conjunction with the financial statements and related notes
included elsewhere in this document. The information contained under the
headings Statement of Operations Data, Statement of Cash Flows Data, Production,
Average Sales Price and Operating and Overhead Costs (per Mcfe), Cash Operating
Margin and Other for the years ending December 31, 1996, 1997, 1998 and 1999 and
Balance Sheet Data as of December 31, 1997, 1998 and 1999 were derived from
audited financial statements. All other information is unaudited. The results
for the three months ended March 31, 2000 are not necessarily indicative of the
results to be expected for a full year.
-107-
CORAL RESERVES, INC.
Years ended December 31, Three months ended March 31,
------------------------------------------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ---------- ---------
(In thousands, except as otherwise indicated)
Statement of Operations Data:
Oil and natural gas sales........... $ 1,393 $ 2,475 $ 2,736 $ 2,605 $ 2,960 $ 570 $ 818
Other income........................ 34 50 146 105 34 8 4
------- ------- ------- ------- ------- ---------- ---------
Total revenues.................... 1,427 2,525 2,882 2,710 2,994 578 822
------- ------- ------- ------- ------- ---------- ---------
Operating costs..................... 317 479 478 604 673 123 186
General and administrative
costs.............................. 119 323 479 451 443 89 128
Depreciation, depletion and
amortization........................ 541 649 711 927 765 194 188
Interest............................ 21 64 70 74 205 25 66
Reduction of carrying cost
of oil and natural gas
properties....................... - - - 749 - - -
------- ------- ------- ------- ------- ---------- ---------
Total expenses................... 998 1,515 1,738 2,805 2,086 432 568
------- ------- ------- ------- ------- ---------- ---------
Net earnings before minority interest
in operations of consolidated
subsidiaries.................... 429 1,010 1,144 (95) 908 146 254
Minority interest in operations of
consolidated subsidiaries....... 456 980 1,125 (31) 927 150 270
------- ------- ------- ------- ------- ---------- ---------
Net earnings (loss) $ (27) $ 30 $ 19 $ (64) $ (19) $ (4) $ (16)
======= ======= ======= ======= ======= ========== =========
Earnings per average common share
outstanding - basic and
diluted......................... $(26.81) $30.40 $ 18.63 $(63.50) $(17.67) $ (3.59) $(15.39)
======= ======= ======= ======= ======= ========== =========
Weighted average common shares
outstanding - basic and
diluted......................... 1,000 1,000 1,000 1,004 1,053 1,053 1,053
======= ======= ======= ======= ======= ========== =========
Cash dividends...................... - - - - - - -
Cash dividend per share............. NA NA NA NA NA NA NA
Ratio of earnings to fixed
charges............................ NA 1.5:1 1.3:1 0.1:1 0.9:1 0.8:1 0.8:1
Statement of Cash Flows Data:
Net cash provided by
operating activities............ $ 1,028 $1,716 $ 1,830 $ 1,690 $ 1,681 $ 308 $ 407
Net cash provided by (used in)
investing activities............ (2,170) (677) (1,580) (2,987) (2,829) (2,845) 70
Net cash provided by (used in)
financing activities............ (45) 504 1,899 (1,655) 247 1,586 (526)
EBITDA*............................. 529 728 800 1,686 951 215 238
Balance Sheet Data (at end of period):
Cash................................ $ 411 $1,954 $ 4,103 $ 1,153 $ 252 $ 202 $ 203
Oil and natural gas properties,
net............................. 4,230 4,258 5,127 6,438 5,964 6,289 5,784
Total assets........................ 5,102 6,797 9,892 8,115 9,339 9,830 9,046
Total liabilities................... 5,118 6,783 9,859 8,145 9,386 9,866 9,109
Stockholders' equity (deficit)...... (16) 14 33 (30) (47) (36) (63)
Book value per share................ (16.08) 14.33 32.96 (28.24) (44.90) (24.65) (60.04)
Production:
Gas production (MMcf)............... 657 861 841 1,061 1,011 260 250
Oil production (MBbls).............. 22 25 29 36 38 9 9
Equivalent production (MMcfe)....... 789 1,014 1,017 1,280 1,238 314 304
Average Sales Price*:
Gas price (per Mcf)................. $ 1.56 $ 2.25 $ 2.56 $ 2.00 $ 2.26 $ 1.75 $ 2.43
Oil price (per Bbl)................. 16.86 21.01 19.77 13.15 17.89 12.92 23.15
Average sales price (per Mcfe)...... 1.77 2.44 2.69 2.04 2.39 1.82 2.69
Operating and Overhead Costs (per Mcfe):
Lease operating expense............. 0.28 0.29 0.30 0.30 0.36 0.31 0.39
Production taxes.................... 0.12 0.18 0.17 0.18 0.18 0.08 0.22
General and administrative.......... 0.15 0.32 0.47 0.35 0.36 0.39 0.54
------- ------- ------- ------- ------- ---------- ---------
Total $ 0.55 $ 0.79 $ 0.94 $ 0.83 $ 0.90 $ 0.78 $ 1.15
------- ------- ------- ------- ------- ---------- ---------
Cash Operating Margin (per
Mcfe)............................ $ 1.22 $ 1.65 $ 1.75 $ 1.21 $ 1.49 $ 1.04 $ 1.54
======= ======= ======= ======= ======= ========== =========
Other per (Mcfe):
Depreciation, depletion and
amortization - oil and
gas properties................... $ 0.68 $ 0.64 $ 0.70 $ 0.72 $ 0.62 $ 0.62 $ 0.62
Estimated Net Proved Reserves
(as of period end):
Natural gas (MMcf).................. 6,287 6,952 7,255 9,518 9,248 NA NA
Oil (MBbls)......................... 135 167 168 280 304 NA NA
Total (MMcfe)....................... 7,099 7,951 8,265 11,196 11,075 NA NA
Exchange Data: Sept. 30, 1999
Total assets for purposes of --------------
Exchange Value...................... $ 1,451,249
Exchange Value per share............ $ 699
* See "Definitions."
-108-
CORAL RESERVES ENERGY CORP.
Years ended December 31, Three months ended March 31,
------------------------------------------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ---------- ---------
(In thousands, except as otherwise indicated)
Statement of Operations Data:
Oil and natural gas sales........... $ 5,018 $ 8,004 $ 8,163 $ 6,830 $ 7,815 $ 1,414 $ 2,265
Other income........................ 484 257 490 177 60 18 11
------- ------- ------- ------- ------- ---------- ---------
Total revenues................... 5,502 8,261 8,653 7,007 7,875 1,432 2,276
------- ------- ------- ------- ------- ---------- ---------
Operating costs..................... 1,470 1,927 1,965 2,039 2,126 442 629
General and administrative
costs............................ 951 1,056 1,323 1,040 1,024 205 321
Depreciation, depletion and
amortization..................... 1,725 1,988 1,879 2,263 1,793 468 426
Interest............................ 47 104 108 130 292 42 90
Reduction of carrying cost
of oil and natural gas
properties....................... - - - 1,132 - - -
------- ------- ------- ------- ------- ---------- ---------
Total expenses................... 3,193 5,075 5,275 6,603 5,235 1,156 1,466
------- ------- ------- ------- ------- ---------- ---------
Net earnings before minority interest
in operations of consolidated
subsidiaries..................... 2,309 3,186 3,378 404 2,640 276 810
Minority interest in operations of
consolidated subsidiaries........ 2,115 3,346 3,378 511 2,629 295 829
------- ------- ------- ------- ------- ---------- ---------
Net earnings (loss)................. $ 194 $ (160) $ - $ (107) $ 11 $ (19) $ (19)
======= ======= ======= ======= ======= ========== =========
Earnings per average common share
outstanding - basic and
diluted.......................... $193.67 $(160.13) $ (0.30) $(106.84) $ 10.62 $ (18.74) $ (18.93)
======= ======= ======= ======== ======= ========== =========
Weighted average common shares
outstanding -
basic and diluted................ 1,000 1,000 1,000 1,004 1,053 1,053 1,053
======= ======= ======= ======== ======= ========== =========
Cash dividends...................... - - - - - - -
Cash dividend per share............. NA NA NA NA NA NA NA
Ratio of earnings to fixed charges.. 5.1:1 NA 1.0:1 0.2:1 1.0:1 0.5:1 0.8:1
Statement of Cash Flows Data:
Net cash provided by
operating activities............. $ 3,374 $ 5,440 $ 5,206 $ 4,315 $ 4,173 $ 772 $ 1,081
Net cash provided by (used in)
investing activities............. (6,738) (2,012) (3,088) (4,051) (3,895) (3,279) (62)
Net cash provided by (used in)
financing activities............. 1,491 (2,072) 15 (4,293) (1,660) (1,307) (1,156)
EBITDA*............................. 1,966 1,932 1,987 3,418 2,096 491 497
Balance Sheet Data (at end of period):
Cash................................ $ 2,577 $ 3,933 $ 6,066 $ 2,037 $ 655 $ 837 $ 518
Oil and natural gas properties,
net.............................. 13,681 13,704 14,915 15,574 14,778 15,187 14,504
Total assets........................ 17,666 19,303 22,798 18,782 20,014 20,313 19,521
Total liabilities................... 17,688 19,296 22,791 18,879 20,098 20,430 19,624
Stockholders' equity (deficit)...... (153) 7 7 (97) (84) (117) (103)
Book value per share (153.16) 6.97 7.27 (92.48) (79.38) (111.22) (97.69)
Production:
Gas production (MMcf)............... 2,151 2,662 2,336 2,764 2,660 690 625
Oil production (MBbls).............. 116 119 115 115 114 31 28
Equivalent production (MMcfe)....... 2,845 3,378 3,025 3,456 3,345 874 791
Average Sales Price*:
Gas price (per Mcf)................. $ 1.43 $ 2.07 $ 2.53 $ 1.93 $ 2.18 $ 1.51 $ 24.49
Oil price (per Bbl)................. 16.82 20.82 19.72 12.95 17.67 12.13 2.54
Average sales price (per Mcfe)...... 1.76 2.37 2.70 1.98 2.34 1.62 2.86
Operating and Overhead Costs (per Mcfe):
Lease operating expense............. 0.40 0.40 0.45 0.43 0.46 0.40 0.55
Production taxes.................... 0.12 0.17 0.20 0.16 0.18 0.10 0.24
General and administrative.......... 0.62 0.62 0.66 0.69 0.62 0.58 0.65
------- ------- ------- -------- ------- ---------- ---------
Total............................... 1.14 1.19 1.31 1.28 1.26 1.08 1.44
------- ------- ------- -------- ------- ---------- ---------
Cash Operating Margin (per Mcfe).... $ 0.62 $ 1.18 $ 1.39 $ 0.70 $ 1.08 $ 0.54 $ 1.42
======= ======= ======= ======== ======= ========== =========
Other per (Mcfe):
Depreciation, depletion and
amortization - oil and
gas properties.................. $ 0.61 $ 0.59 $ 0.62 $ 0.65 $ 0.54 $ 0.53 $ 0.54
Estimated Net Proved Reserves
(as of period end):
Natural gas (MMcf).................. 22,382 25,141 24,449 26,125 27,792 NA NA
Oil (MBbls)......................... 790 761 778 707 1,126 NA NA
Total (MMcfe)....................... 27,121 29,709 29,116 30,369 34,548 NA NA
Exchange Data: Sept. 30, 1999
--------------
Total assets for purposes of Exchange Value ... $ 4,709,799
Exchange Value per share....................... $ 776
* See "Definitions."
-109-
INFORMATION CONCERNING PARTNERSHIPS
1990 Partnership
General
The 1990 partnership was formed in April, 1990 and raised $3.9 million of
limited partner capital contributions. As of March 31, 2000, the 1990
partnership had returned to limited partners 143% of their original investment.
The 1990 partnership owns an interest in 52 oil and gas wells, with 49
located in Oklahoma and 3 in Texas. Total net production from properties is 95%
gas consisting of 760 Mcf/day of gas and 7 Bbls/day of oil as of March 31, 2000.
Approximately 28% of the 1990 partnership's total Reserve Value is concentrated
in 3 wells. The largest property is the Sewell #1-36, a 15,000 feet deep Atoka
gas well located in western Oklahoma's Custer County, which represents 12.3% of
the total Reserve Value as of December 31, 1999. The Hussey #1-10, a 14,300 feet
deep Sycamore/ Woodford/ Hunton/ Viola gas well located in southern Oklahoma's
Stephens County represents 8.5% of total Reserve Value, and the Cathie Ruth #1-
12, an 8,400 feet deep Sycamore gas well located in southern Oklahoma's Garvin
County, represents 7.5% of total Reserve Value as of December 31, 1999.
Proved developed reserves account for almost 89% of the 1990 partnership's
total proved reserves at December 31, 1999 and 97% of total proved reserves at
such date is gas. The partnership has two well locations with proved undeveloped
reserves, one offsetting the Hussey #1-10 in Stephens County, Oklahoma and one
Redfork development well in Roger Mills County in western Oklahoma.
Acquisition and Drilling Activity
The 1990 partnership has acquired and drilled or participated in the
drilling of wells as set out in the table below for the periods indicated. The
1990 partnership has not participated in the drilling of any exploratory wells.
-110-
Years Ended December 31,
--------------------------------------------------------------
1996 1997 1998 1999
--------------- -------------- -------------- -------------
Gross Net Gross Net Gross Net Gross Net
------- ------ ------- ------ ------- ------ ------ ------
Acquired wells:
Gas.............. 1 0.003 -- -- -- -- -- --
Oil.............. -- -- -- -- -- -- -- --
Dry.............. -- -- -- -- -- -- -- --
------- ------ ------- ------ ------- ------ ----- ------
Total............ 1 0.003 -- -- -- -- -- --
======= ====== ======= ====== ======= ====== ===== ======
Development well
drilling:
Gas.............. 3 0.175 2 1 1 0.027 1 0.010
Oil.............. -- -- -- -- -- -- -- --
Dry.............. -- -- -- -- -- -- -- --
------- ------ ------- ------ ------- ------ ----- ------
Total............ 3 0.175 2 1 1 0.027 1 0.010
======= ====== ======= ====== ======= ====== ===== ======
1991 Partnership
General
The 1991 partnership was formed in April, 1991 and raised $4.5 million of
limited partner capital contributions. As of March 31, 2000, the 1991
partnership had returned to limited partners 144% of their original investment.
The 1991 partnership owns an interest in 57 oil and gas wells, with 50
located in Oklahoma and 7 in Texas. Total net production from properties is 89%
gas, consisting of 928 Mcf/day of gas and 20 Bbls/day of oil as of March 31,
2000. The 1991 partnership's Reserve Value is broadly diversified, with the
largest single well accounting for only 6.9% of total Reserve Value as of
December 31, 1999. The largest well is the Lucky 7 #1, a 9,500 feet deep Davis
Sand well located in Grayson County in North Texas.
Proved developed reserves account for 90% of the 1991 partnership's total
proved reserves at December 31, 1999 and 89% of total proved reserves is gas.
The partnership has three additional development well locations with proved
undeveloped reserves, none of which represent significant reserve value.
Acquisition and Drilling Activity
The 1991 partnership has acquired and drilled or participated in the
drilling of wells as set out in the table below for the periods indicated. The
1991 partnership has not participated in the drilling of any exploratory wells.
-111-
Years Ended December 31,
----------------------------------------------------------------
1996 1997 1998 1999
------------ ---------------- ---------------- -----------------
Gross Net Gross Net Gross Net Gross Net
------ ----- -------- ------ --------- ------ -------- --------
Acquired wells:
Gas............. 1 0.003 1 0.034 -- -- 1 0.007
Oil............. -- -- -- -- -- -- -- --
Dry............. -- -- -- -- -- -- -- --
----- ----- ------- ------ ------- ------ ------- --------
Total........... 1 0.003 1 0.034 -- -- 1 0.007
===== ===== ======= ====== ======= ====== ======= ========
Development well
drilling:
Gas............. 4 0.175 3 0.166 2 0.166 -- --
Oil............. -- -- 1 0.044 1 0.056 -- --
Dry............. -- -- -- -- -- -- -- --
----- ----- ------- ------ ------- ------ ------- --------
Total........... 4 0.175 4 0.210 3 0.222 -- --
===== ===== ======= ====== ======= ====== ======= ========
1992 Partnership
General
The 1992 partnership was formed in June 1992 and raised $7.5 million of
limited partner capital contributions. As of March 31, 2000, the 1992
partnership had returned to limited partners 97% of their original investment.
The 1992 partnership owns an interest in 106 oil and gas wells, with 90
located in Oklahoma, 4 in Nebraska, 3 in Texas and 9 in Wyoming. Total net
production from the properties is 79% gas, consisting of 1,319 Mcf/day of gas
and 58 Bbls/day of oil as of March 31, 2000. The 1992 partnership's Reserve
Value is broadly diversified, with the largest single property accounting for
only 8.3% of total Reserve Value as of December 31, 1999. The largest property
is the Lucky Ditch Unit, a 15,000 feet deep Dakota sand producer located in
southwestern Wyoming.
Proved developed reserves account for almost 84% of the 1992 partnership's
total proved reserves at December 31, 1999 and 83% of total proved reserves is
gas. The partnership has 9 well locations with proved undeveloped reserves, all
located in western Oklahoma. The largest proved undeveloped reserve value is a
Redfork development well location in Custer County, Oklahoma.
Acquisition and Drilling Activity
The 1992 partnership has acquired and drilled or participated in the
drilling of wells as set out in the table below for the periods indicated. The
1992 partnership has not participated in the drilling of any exploratory wells.
-112-
Years Ended December 31,
----------------------------------------------------------------
1996 1997 1998 1999
------------ --------------- ---------------- -----------------
Gross Net Gross Net Gross Net Gross Net
------ ----- -------- ----- --------- ------ -------- --------
Acquired wells:
Gas............. 7 0.071 1 0.047 -- -- -- --
Oil............. -- -- -- -- -- -- -- --
Dry............. -- -- -- -- -- -- -- --
----- ----- ------- ------ ------- ------ ------- --------
Total........... 7 0.071 1 0.047 -- -- -- --
===== ===== ======= ====== ======= ====== ======= ========
Development well
drilling:
Gas............. 4 0.118 3 0.149 1 0.005 1 0.042
Oil............. -- -- 1 0.029 -- -- -- --
Dry............. -- -- -- -- -- -- -- --
----- ----- ------- ------ ------- ------ ------- --------
Total........... 4 0.118 4 0.178 1 0.005 1 0.04
===== ===== ======= ====== ======= ====== ======= ========
1993 Partnership
General
The 1993 partnership was formed in July 1993 and raised $6.5 million of
limited partner capital contributions. As of March 31, 2000, the 1993
partnership had returned to limited partners 91% of their original investment.
The 1993 partnership owns an interest in 163 oil and gas wells, with 134
located in Oklahoma, 4 in Nebraska, 16 in Colorado and 9 in Wyoming. Total net
production from the properties is 71% gas, consisting of 1,207 Mcf/day of gas
and 81 Bbls/day of oil as of March 31, 2000. The 1993 partnership's Reserve
Value is broadly diversified, with the largest single property accounting for
only 6.5% of total Reserve Value as of December 31, 1999. The largest property
is the Lucky Ditch Unit, a 15,000 feet deep Dakota sand producer located in
southwestern Wyoming.
Proved developed reserves account for over 92% of the 1993 partnership's
total proved reserves at December 31, 1999 and 69% of total proved reserves is
gas. The partnership has eight additional development well locations with proved
undeveloped reserves, none of which represent significant reserve value.
Acquisition and Drilling Activity
The 1993 partnership has acquired and drilled or participated in the
drilling of wells as set out in the table below for the periods indicated. The
1993 partnership has not participated in the drilling of any exploratory wells.
-113-
Years Ended December 31,
----------------------------------------------------------------
1996 1997 1998 1999
------------ --------------- ---------------- -----------------
Gross Net Gross Net Gross Net Gross Net
------ ----- -------- ----- --------- ------ -------- --------
Acquired wells:
Gas............. -- -- -- -- -- -- -- --
Oil............. -- -- -- -- -- -- -- --
Dry............. -- -- -- -- -- -- -- --
----- ----- ------- ------ ------- ------ ------- --------
Total........... -- -- -- -- -- -- -- --
===== ===== ======= ====== ======= ====== ======= ========
Development well
drilling:
Gas............. 1 0.041 8 0.456 1 0.050 1 0.034
Oil............. -- -- -- -- -- -- -- --
Dry............. 1 0.059 -- -- -- -- -- --
----- ----- ------- ------ ------- ------ ------- --------
Total........... 2 0.100 8 0.456 1 0.050 1 0.034
===== ===== ======= ====== ======= ====== ======= ========
1993-I Partnership
General
The 1993-I partnership was formed in September 1993 and raised $2.4 million
of limited partner capital contributions. As of March 31, 2000 the 1993-I
partnership had returned to limited partners 112% of their original investment.
The 1993-I partnership owns an interest in 63 oil and gas wells, with 44
located in Oklahoma, 4 in Nebraska, 6 in New Mexico and 9 in Wyoming. Total net
production from the properties is 80% gas, consisting of 564 Mcf/day of gas and
24 Bbls/day of oil as of March 31, 2000. The 1993-I partnership's Reserve Value
is broadly diversified, with the largest two wells accounting for only 7.0% of
total Reserve Value each as of December 31, 1999. The largest wells are the
Lucky Ditch Unit, a 15,000 feet deep Dakota sand producer located in
Southwestern Wyoming and the Harrell C #1-3, an 8,100 feet deep Sycamore
producer located in southern Oklahoma's Stephens County.
Proved developed reserves account for over 93% of the 1993-I partnership's
total proved reserves at December 31, 1999 and 71% of total proved reserves is
gas. The partnership has three additional development well locations with proved
undeveloped reserves, none of which represent significant reserve value.
Acquisition and Drilling Activity
The 1993-I partnership has acquired and drilled or participated in the
drilling of wells as set out in the table below for the periods indicated. The
1993-I partnership has not participated in the drilling of any exploratory
wells.
-114-
Years Ended December 31,
-------------------------------------------------------------------------------------------
1996 1997 1998 1999
-------------------- ------------------- ---------------------- ---------------------
Gross Net Gross Net Gross Net Gross Net
---------- ------- --------- ------- --------- -------- ---------- -------
Acquired wells:
Gas.............. -- -- -- -- 1 0.048 -- --
Oil.............. -- -- -- -- -- -- -- --
Dry.............. -- -- -- -- -- -- -- --
---------- ------- --------- ------- --------- ---------- ---------- -------
Total............ -- -- -- -- 1 0.048 -- --
========== ======= ========= ======= ========= ========== =========== =======
Development well
drilling:
Gas.............. -- -- 4 0.144 2 0.114 1 0.030
Oil.............. -- -- -- -- -- -- -- --
Dry.............. -- -- -- -- -- -- -- --
---------- ------- --------- ------- --------- ---------- ---------- -------
Total............ -- -- 4 0.144 2 0.114 1 0.030
========== ======= ========= ======= ========= ========== ========== =======
1995 Partnership
General
The 1995 partnership was formed in December 1994 and raised $6.8
million of limited partner capital contributions. As of March 31, 2000, the
1995 partnership had returned to limited partners 76% of their original
investment.
The 1995 partnership owns an interest in 127 oil and gas wells, with
95 located in Oklahoma, 23 in Arkansas and 9 in Wyoming. Total net production
from the properties is 82% gas, consisting of 1,810 mcf/day of gas and 64
Bbls/day of oil as of March 31, 2000. The 1995 partnership's Reserve Value is
broadly diversified, with the largest single property accounting for only 5.7%
of total Reserve Value as of December 31, 1999. The largest property is the
Lucky Ditch Unit, a 15,000 feet deep Dakota sand producer located in
southwestern Wyoming.
Proved developed reserves account for 83% of the 1995 partnership's
total proved reserves at December 31, 1999 and 78% of total proved reserves is
gas. The partnership has eight well locations with proved undeveloped reserves
in the Anadarko Basin of western Oklahoma, and one well location in southern
Oklahoma.
Acquisition and Drilling Activity
The 1995 partnership has acquired and drilled or participated in the
drilling of wells as set out in the table below for the periods indicated. The
1995 partnership has not participated in the drilling of any exploratory wells.
-115-
Years Ended December 31,
-------------------------------------------------------------------------------------------
1996 1997 1998 1999
------------------- ------------------- --------------------- ---------------------
Gross Net Gross Net Gross Net Gross Net
---------- ------ --------- ------- --------- -------- ---------- -------
Acquired wells:
Gas.............. 9 0.088 -- -- -- -- -- --
Oil.............. 4 0.127 -- -- -- -- -- --
Dry.............. -- -- -- -- 1 0.094 -- --
---------- ------ --------- ------- --------- -------- ---------- -------
Total............ 13 1.014 -- -- 1 0.094 -- --
========== ====== ========= ======= ========= ======== ========== =======
Development well
drilling:
Gas.............. -- -- 4 0.213 -- -- 2 0.167
Oil.............. -- -- 1 0.022 1 0.043 -- --
Dry.............. -- -- -- -- -- -- 1 0.090
---------- ------ --------- ------- --------- -------- ---------- -------
Total............ -- -- 5 0.235 1 0.043 3 0.257
========== ====== ========= ======= ========= ======== ========== =======
As of December 31, 1999, the 1995 partnership was involved in the
drilling of 2 gross (.12 net) development wells.
1996 Partnership
General
The 1996 partnership was formed in May 1996 and raised $9.6 million of
limited partner capital contributions. As of March 31, 2000, the 1996
partnership had returned to limited partners 32% of their original investment.
The 1996 partnership owns an interest in 127 oil and gas wells, with
125 located in Oklahoma and two in Texas. Total net production from the
properties is 76% gas, consisting of 1,600 Mcf/day of gas and 82 Bbls/day of oil
as of March 31, 2000. The 1996 partnership's Reserve Value is broadly
diversified, with the largest single property accounting for 9.0% of total
Reserve Value as of December 31, 1999. The largest property is the Ehlers #1-
15, a 7,000 feet deep Viola oil well located in Garfield County, Oklahoma.
In addition to oil and gas reserves, the 1996 partnership owns 53% of
a Contingent Production Payment purchased from Indian. This Contingent
Production Payment has a balance of $5,437,500 as of December 31, 1999, of which
the partnership's share is $2,900,000. If the combination transactions are
consummated the Contingent Production Payment will be increased by $3 million of
which $1.6 million would be payable to the 1996 partnership. Please see
"Failure to Approve the Combination Transactions".
Proved developed reserves account for over 91% of the 1996
partnership's total proved reserves at December 31, 1999 and 88% of total proved
reserves is gas. The partnership has eight additional development well
locations with proved undeveloped reserves, none of which represents significant
Reserve Value. Wells with proved undeveloped reserves include five locations in
the Anadarko Basin of Western Oklahoma and three locations in southern Oklahoma.
-116-
Acquisition and Drilling Activity
The 1996 partnership has acquired and drilled or participated in the
drilling of wells as set out in the table below for the periods indicated.
Years Ended December 31,
---------------------------------------------------------------------------------------------
1996 1997 1998 1999
-------------------- ------------------- ----------------------- -----------------------
Gross Net Gross Net Gross Net Gross Net
---------- ------- --------- ------- --------- ---------- ---------- ---------
Acquired wells:
Gas.............. 23 2.73 29 3.44 74 20.320 -- 0.164
Oil.............. 2 0.02 14 2.84 11 2.600 -- --
Dry.............. -- -- -- -- -- -- -- --
---------- ------- --------- --------- --------- ---------- ---------- -------
Total............ 25 2.75 43 6.28 85 22.920 -- 0.164
========== ======= ========= ========= ========= ========== ========== =======
Development well
drilling:
Gas.............. -- -- 3 0.40 -- -- 2 0.183
Oil.............. -- -- 2 0.12 1 0.043 -- --
Dry.............. -- -- -- -- 1 0.094 1 0.073
---------- ------- --------- --------- --------- ---------- ---------- -------
Total............ -- -- 5 0.53 2 0.137 3 0.256
========== ======= ========= ========= ========= ========== ========== =======
Exploratory well
drilling:
Gas.............. -- -- -- -- -- -- -- --
Oil.............. -- -- 1 0.07 -- -- -- --
Dry.............. -- -- -- -- -- -- -- --
---------- ------- --------- --------- --------- ---------- ---------- -------
Total............ -- -- 1 0.07 -- -- -- --
========== ======= ========= ======== ========= ========== ========== =======
As of December 31, 1999, the 1996 partnership was involved in the drilling
of 1 gross (.011 net) development well.
1996-I Partnership
General
The 1996-I partnership was formed in December 1995 and raised $6.5
million of limited partner capital contributions. As of March 31, 2000, the
1996-I partnership had returned to limited partners 47% of their original
investment.
The 1996-I partnership owns an interest in 98 oil and gas wells, all
located in Oklahoma. Total net production from the properties is 77% gas,
consisting of 1,421 Mcf/day of gas and 69 Bbls/day of oil as of March 31, 2000.
The 1996-I partnership Reserve Value is broadly diversified, with the largest
single property accounting for only 13.9% of total Reserve Value as of December
31, 1999. The largest property is the Ehlers #1-15, a 7,000 feet deep Viola oil
well located in Garfield County, Oklahoma.
In addition to oil and gas reserves, the 1996-I partnership owns 47%
of a Contingent Production Payment purchased from Indian. This Contingent
Production Payment has a balance of $5,437,500 as of December 31, 1999, of which
the partnership's share is $2,537,500. If the combination transactions are
consummated, the Contingent Production Payment will be
-117-
increased by $3 million of which $1.4 million would be payable to the 1996-I
partnership. Please see "Failure to Approve the Combination Transactions".
Proved developed reserves account for over 91% of the 1996-I
partnership's total proved reserves and 83% of proved reserves is gas as of
December 31, 1999. The partnership has seven additional development well
locations with proved undeveloped reserves, none of which represents significant
reserve value. Wells with proved undeveloped reserves include five locations to
be drilled in the Anadarko Basin of western Oklahoma and two locations in
southern Oklahoma.
Acquisition and Drilling Activity
The 1996-I partnership has acquired and drilled or participated in the
drilling of wells as set out in the table below for the periods indicated.
Years Ended December 31,
-------------------------------------------------------------------------------------------
1996 1997 1998 1999
-------------------- ---------------------- --------------------- ---------------------
Gross Net Gross Net Gross Net Gross Net
---------- ------- --------- ---------- -------- --------- ---------- -------
Acquired wells:
Gas.............. 9 0.422 18 2.285 30 4.45 1 0.223
Oil.............. 4 0.106 2 0.663 5 1.26 3 0.296
Dry.............. -- -- -- -- -- -- -- --
---------- ------- --------- ---------- -------- --------- ---------- -------
Total............ 13 0.528 20 2.948 35 5.71 4 0.519
========== ======= ========= ========== ======== ========= ========== =======
Development well
drilling:
Gas.............. -- -- 10 1.034 2 0.05 3 0.055
Oil.............. -- -- 1 0.011 1 0.04 -- --
Dry.............. -- -- 1 0.020 1 0.09 -- --
---------- ------- --------- ---------- -------- --------- ---------- -------
Total............ -- -- 12 1.065 4 0.19 3 0.055
========== ======= ========= ========== ======== ========= ========== =======
Exploratory well
drilling:
Gas.............. -- -- -- -- -- -- -- --
Oil.............. 1 0.050 1 0.070 -- -- -- --
Dry.............. -- -- -- -- -- -- -- --
---------- ------- --------- ---------- -------- --------- ---------- -------
Total............ 1 0.050 1 0.070 -- -- -- --
========== ======= ========= ========== ======== ========= ========== =======
As of December 31, 1999, the 1996-I partnership was involved in the
drilling of 1 gross (.02 net) development well.
Acreage and Productive Wells for All Partnerships
The following table shows the developed and undeveloped oil and gas
lease and mineral acreage as of December 31, 1999 owned by each partnership.
The table does not include acreage in which an interest is limited to a royalty,
overriding royalty or other similar interest.
-118-
Developed Undeveloped
--------------------- -------------------
Partnership Gross Net Gross Net
------- ------- ------ --------
1990.................. 15,724 927 - -
1991.................. 15,117 1,451 - -
1992.................. 48,904 3,933 - -
1993.................. 38,343 3,679 - -
1993-I................ 27,132 865 - -
1995.................. 27,087 3,774 320 112
1996.................. 37,086 6,121 - -
1996-I................ 26,246 3,019 - -
------- ------- ------ --------
Total................... 235,639 23,769 320 112
======= ======= ====== ========
The following table shows the ownership of each partnership in
productive wells at December 31, 1999. Gross oil and gas wells include 6 wells
with multiple completions. Wells with multiple completions are counted only once
for purposes of the table.
Productive Wells
-----------------------------------------
Gas Oil
----------------- ---------------------
Partnership Gross Net Gross Net
------ -------- ------- --------
1990.................. 46 2.8913 6 0.5583
1991.................. 42 4.5241 15 1.3173
1992.................. 72 5.3259 34 3.0843
1993.................. 94 10.8681 69 16.4578
1993-I................ 40 2.324 23 1.3156
1995.................. 69 10.1345 58 15.6181
1996.................. 103 18.9048 24 5.1631
1996-I................ 80 9.7998 18 2.4203
----- -------- ----- -------
Total................... 546 64.7725 247 45.9347
===== ======== ===== =======
-119-
Beneficial Owners of Partnerships
Information concerning the percentage ownership of each partnership is
set forth on page 41 under "Background and Reasons for Combination Transactions
- - Background of the Partnerships" and on page 89 under "Special Meeting of the
Partnerships - Voting Requirements". No limited partner in any partnership owns
more than 5% of a partnership based on revenue sharing percentages except as set
forth below:
Name and Address of
Partnership Limited Partner Percent Ownership
- ---------------------------------------------------------------------
1993-I Partnership Ralph T. Corelli 5.26%
154 Cross Ridge Road
New Canaan, CT 06840
John M. Pratt, Jr. 7.37%
P. O. Box 206
Thomaston, CT 06787
Estate of Robert H. Krieble 10.53%
One Gold St., Apt 24H
Hartford, CT 06103
John P. Caval 21.05%
2971 S.E. St Lucie Blvd.
Stuart, FL 34997
1996-I Partnership John P. Caval 7.67%
2971 S.E. St Lucie Blvd.
Stuart, FL 34997
Shanghai Pacific Credit 5.37%
Corporation
13th Floor, Gloucester Tower
The Landmark, 11 Peddler St
Central, Hong Kong
-120-
Selected Historical Financial and Operating Data For Individual Partnerships
The following tables present summary selected financial information
and operating data for each individual partnership for the periods indicated.
It should be read in conjunction with the financial statements and related notes
for the partnerships included elsewhere in this document. The information
contained under the headings Statement of Operations Data, Statement of Cash
Flows Data, Production, Average Sales Price, and Operating and Overhead Costs
(per Mcfe), Cash Operating Margin and Other for the years ending December 31,
1996, 1997, 1998 and 1999 and Balance Sheet Data as of December 31, 1997, 1998
and 1999 were derived from audited financial statements. All other information
is unaudited. The results for the three months ended March 31, 2000 are not
necessarily indicative of the results to be expected for a full year.
-121-
1990 PARTNERSHIP
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
Three months ended
Year ended December 31, March 31,
------------------------------------------------------ -------------------
1995 1996 1997 1998 1999 1999 2000
------- -------- ------- ------- ------- ------- --------
Statement of Operations Data: (in thousands, except where otherwise indicated)
Revenues:
Oil and natural gas sales............. $ 804 $ 1,144 $ 1,014 $ 700 $ 696 $ 123 $ 176
Interest and other.................... 6 5 6 6 3 1 1
------- -------- ------- ------- ------- ------- --------
Total revenues...................... 810 1,149 1,020 706 699 124 177
------- -------- ------- ------- ------- ------- --------
Expenses:
Operating costs....................... 187 204 149 158 144 32 37
General and administrative costs...... 46 51 55 53 46 11 13
Depreciation, depletion, and
amortization..................... 344 301 257 234 194 46 47
Interest.............................. 21 49 50 48 56 16 15
------- -------- ------- ------- ------- ------- --------
Total expenses...................... 598 605 511 493 440 105 112
------- -------- ------- ------- ------- ------- --------
Net income (loss)....................... $ 212 $ 544 $ 509 $ 213 $ 259 $ 19 $ 65
======= ======== ======= ======= ======= ======= ========
Ratio of earnings to fixed charges...... 11.1:1 12.1:1 11.1:1 5.4:1 5.6:1 2.1:1 5.3:1
Statement of Cash Flows Data:
Net cash provided by operating
activities............................ $ 555 $ 704 $ 822 $ 589 $ 443 $ 105 $ 109
Net cash used in investing
activities............................ (319) (46) (198) (48) (75) (2) (3)
Net cash provided by (used in)
financing activities................. (272) (653) (625) (582) (358) (110) (127)
Net increase (decrease) in cash and
cash equivalents........................ (36) 5 0 (40) 10 (7) (21)
EBITDA*................................. 576 894 816 495 509 81 127
Cash distributions/(1)/................. 601 670 762 612 420 110 127
Limited partner's cash distributions
per $1,000 investment/(1)/........... 138 142 147 118 81 21 25
Balance Sheet Data:
Cash and cash equivalents............... $ 109 $ 114 $ 114 $ 74 $ 84 $ 67 $ 63
Oil and gas properties, net at book
value................................ 1,886 1,631 1,572 1,385 1,266 1,341 1,222
Total assets............................ 2,212 2,068 1,970 1,582 1,497 1,492 1,426
Total liabilities....................... 521 503 657 669 745 670 737
Limited partners' equity................ 1,715 1,563 1,312 955 787 876 729
General partners' equity................ (24) 2 1 (42) (35) (54) (40)
Limited partner's book value per
$1,000 investment.................... 441 402 337 246 202 225 187
Production:
Oil production (MBbls).................. 7 7 5 3 3 1 1
Natural gas production (MMcf)........... 441 417 344 313 281 67 69
Equivalent production (MMcfe)......... 486 460 373 333 297 71 73
Average Sales Price*:
Oil price (per/Bbl)..................... $ 16.82 $ 21.27 20.11 $ 13.45 $ 17.58 $ 11.84 $ 24.16
Natural gas price (per/Mcf)............. 1.54 2.38 2.66 2.09 2.31 1.72 2.34
Average sales price (per Mcfe)........ 1.66 2.49 2.72 2.10 2.34 1.73 2.42
Operating and Overhead Costs (per Mcfe):
Lease operating expense................. 0.26 0.27 0.28 0.32 0.32 0.34 0.32
Production taxes........................ 0.12 0.18 0.12 0.16 0.17 0.12 0.19
General and administrative expense...... 0.10 0.11 0.15 0.16 0.16 0.15 0.17
------- -------- ------- ------- ------- ------- --------
Total................................. 0.48 0.56 0.55 0.64 0.65 0.61 0.68
------- -------- ------- ------- ------- ------- --------
Cash Operating Margin (per Mcfe)........... $ 1.18 $ 1.93 $ 2.17 $ 1.46 $ 1.69 $ 1.12 $ 1.74
======== ======== ======= ======= ======= ======= ========
Other:
Depreciation, depletion and
amortization--oil and gas
properties (per Mcfe)................. $ 0.71 $ 0.65 $ 0.69 $ 0.70 $ 0.65 $ 0.65 $ 0.66
Estimated Net Proved Reserves
(as of period end):
Natural gas (MMcf)...................... 2,804 2,724 2,524 2,217 2,173 NA NA
Oil (MBbls)............................. 17 21 17 14 11 NA NA
Total (MMcfe)........................... 2,904 2,853 2,628 2,301 2,240 NA NA
Exchange Data: Sept. 30, 1999
--------------
Total assets for purposes of Exchange
Value................................ $ 1,870,127
Exchange Value per $1,000 investment....... $ 197
- --------------
*See Definitions
(1) Because of depletion (which is usually higher in the early years of
production), a portion of every distribution of revenues from
properties represents a return of a limited partner's original
investment. Until a limited partner receives cash distributions equal
to his original investment, 100% of such distributions may be deemed to
be a return of capital.
-122-
1991 PARTNERSHIP
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
Year ended December 31, Three months ended
March 31,
-------------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1999 2000
--------- ----------- ---------- ----------- ----------- ---------- -----------
Statement of Operations Data: (in thousands, except where otherwise indicated)
Revenues:
Oil and natural gas sales............... $ 1,427 $ 1,454 $ 1,145 $ 1,088 $ 1,016 $ 191 $ 237
Interest and other...................... 6 5 5 10 4 1 2
--------- ----------- ---------- ----------- ----------- ---------- -----------
Total revenues........................ 1,433 1,459 1,150 1,098 1,020 192 239
--------- ----------- ---------- ----------- ----------- ---------- -----------
Expenses:
Operating costs......................... 349 298 234 241 210 45 58
General and administrative costs........ 75 71 61 67 64 16 16
Depreciation, depletion, and
amortization.......................... 466 362 249 304 232 68 54
Interest................................ 47 62 51 48 67 18 16
--------- ----------- ---------- ----------- ----------- ---------- -----------
Total expenses........................ 937 793 595 660 573 147 144
--------- ----------- ---------- ----------- ----------- ---------- -----------
Net income (loss)......................... $ 496 $ 666 $ 555 $ 438 $ 447 $ 45 $ 95
========= =========== ========== =========== =========== ========== ===========
Ratio of earnings to fixed charges........ 11.5:1 11.7:1 11.9:1 10.0:1 7.7:1 3.5:1 6.8:1
Statement of Cash Flows Data:
Net cash provided by operating
activities............................ $ 963 $ 1,013 $ 832 $ 772 $ 674 $ 169 $ 161
Net cash used in investing activities..... (94) (61) 12 (196) (35) 1 (2)
Net cash provided by (used in)
financing activities................... (893) (942) (831) (613) (614) (180) (173)
Net increase (decrease) in cash and
cash equivalents....................... (24) 9 13 (38) 25 (10) (14)
EBITDA*................................... 1,010 1,089 856 791 746 131 165
Cash distributions/(1)/................... 1,004 956 808 788 661 180 173
Limited partner's cash distributions per
$1,000 investment/(1)/.................. $ 202 $ 183 $ 137 $ 132 $ 111 $ 30 $ 29
Balance Sheet Data:
Cash and cash equivalents................. $ 100 $ 109 $ 122 $ 84 $ 109 $ 74 $ 95
Oil and gas properties, net at book
value................................... 2,214 1,914 1,653 1,545 1,348 1,476 1,296
Total assets.............................. 2,535 2,291 1,999 1,822 1,651 1,682 1,581
Total liabilities......................... 582 628 589 762 809 756 813
Limited partners' equity.................. 1,973 1,677 1,427 1,091 871 975 804
General partners' equity.................. (20) (14) (17) (31) (29) (49) (36)
Limited partner's book value per
$1,000 investment..................... 440 374 319 244 194 218 179
Production:
Oil production (MBbls).................... 20 13 9 11 8 2 2
Natural gas production (MMcf)............. 681 489 362 429 360 105 84
Equivalent production (MMcfe)........... 803 569 414 497 407 119 96
Average sales price:
Oil price (per/Bbl)....................... $ 16.91 $ 20.86 $ 19.18 $ 12.42 $ 16.54 $ 10.95 $ 29.18
Natural gas price (per/Mcf)............... 1.59 2.41 2.71 2.21 2.46 1.57 2.17
Average sales price (per Mcfe).......... 1.78 2.56 2.77 2.19 2.50 1.60 2.48
Operating and Overhead Costs (per Mcfe):
Lease operating expense................... 0.31 0.35 0.37 0.31 0.33 0.29 0.42
Production taxes.......................... 0.13 0.18 0.19 0.18 0.19 0.09 0.18
General and administrative expense........ 0.09 0.13 0.15 0.13 0.16 0.13 0.17
--------- ----------- ---------- ----------- ----------- ---------- -----------
Total................................... 0.53 0.66 0.71 0.62 0.68 0.51 0.77
--------- ----------- ---------- ----------- ----------- ---------- -----------
Cash Operating Margin (per Mcfe)............. $ 1.25 $ 1.90 $ 2.06 $ 1.57 $ 1.82 $ 1.09 $ 1.71
========= =========== ========== =========== =========== ========== ===========
Other:
Depreciation, depletion and amortization--
oil and gas properties (per Mcfe)....... $ 0.58 $ 0.64 $ 0.60 $ 0.61 $ 0.57 $ 0.57 $ 0.57
Estimated Net Proved Reserves
(as of period end):
Natural gas (MMcf)........................ 4,354 3,570 2,862 2,673 2,485 NA NA
Oil (MBbls)............................... 93 73 47 42 53 NA NA
Total (MMcfe)............................. 4,915 4,010 3,147 2,925 2,801 NA NA
Exchange Data: Sept. 30, 1999
--------------
Total assets for purposes of Exchange Value.. $ 2,475,403
Exchange Value per $1,000 investment......... $ 247
- --------------
*See Definitions
(1) Because of depletion (which is usually higher in the early years of
production), a portion of every distribution of revenues from
properties represents a return of a limited partner's original
investment. Until a limited partner receives cash distributions equal
to his original investment, 100% of such distributions may be deemed to
be a return of capital.
-123-
1992 PARTNERSHIP
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
Three months ended
Year ended December 31, March 31,
------------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1999 2000
--------- ----------- ---------- ----------- ---------- ---------- -----------
Statement of Operations Data: (in thousands, except where otherwise indicated)
Revenues:
Oil and natural gas sales............... $ 1,366 $ 2,038 $ 1,865 $ 1,383 $ 1,346 $ 188 $ 400
Interest and other...................... 30 7 11 11 5 1 2
--------- ----------- ---------- ----------- ----------- ---------- -----------
Total revenues....................... 1,396 2,045 1,876 1,394 1,351 189 402
--------- ----------- ---------- ----------- ----------- ---------- -----------
Expenses:
Operating costs......................... 397 432 384 382 339 64 102
General and administrative costs........ 75 103 106 95 84 19 27
Depreciation, depletion, and
amortization....................... 518 521 455 456 330 92 87
Interest................................ - 4 25 39 51 13 13
--------- ----------- ---------- ----------- ----------- ---------- -----------
Total expenses....................... 990 1,060 970 972 804 188 229
--------- ----------- ---------- ----------- ----------- ---------- -----------
Net income (loss)......................... $ 406 $ 985 $ 906 $ 422 $ 547 $ 1 $ 173
========= =========== ========== =========== =========== ========== ===========
Ratio of earnings to fixed
charges................................... NA 247.2:1 37.1:1 12.0:1 11.8:1 1.1:1 14.0:1
Statement of Cash Flows Data:
Net cash provided by operating
activities................................ $ 923 $ 1,434 $ 1,389 $ 963 $ 825 $ 158 $ 224
Net cash used in investing
activities................................ (1,297) (107) (226) (118) (103) (8) (6)
Net cash provided by (used in)
financing activities.................... (796) (1,269) (1,237) (903) (669) (166) (214)
Net increase (decrease) in cash
and cash equivalents.................... (1,169) 58 (74) (58) 53 (16) 5
EBITDA*................................... 923 1,511 1,386 916 928 106 273
Cash distributions(1)..................... 1,030 1,371 1,410 1,028 769 166 264
Limited partner's cash
distributions per $1,000
investment(1)........................... $ 124 $ 165 $ 169 $ 123 $ 92 $ 20 $ 31
Balance Sheet Data:
Cash and cash equivalents................. $ 144 $ 202 $ 128 $ 70 $ 123 $ 54 $ 127
Oil and gas properties, net at
book value.............................. 4,318 3,905 3,676 3,338 3,111 3,253 3,029
Total assets.............................. 4,743 4,485 4,149 3,613 3,598 3,440 3,514
Total liabilities......................... 192 319 487 557 764 548 772
Limited partners' equity.................. 4,561 4,169 3,674 3,086 2,857 2,931 2,766
General partners' equity.................. (10) (3) (12) (30) (23) (39) (24)
Limited partner's book value per
$1,000 investment....................... 608 556 490 411 381 391 369
Production:
Oil production (MBbls).................... 3 29 25 25 21 6 5
Natural gas production (MMcf)............. 607 670 564 553 447 128 120
Equivalent production (MMcfe)........... 796 842 714 701 575 162 152
Average sales price:
Oil price (per/Bbl)....................... $ 16.58 $ 20.52 $ 19.13 $ 12.68 $ 17.13 $ 11.27 $ 24.82
Natural gas price (per/Mcf)............... 1.39 2.16 2.46 1.94 2.19 .97 2.24
Average sales price (per Mcfe).......... 1.72 2.42 2.61 1.97 2.34 1.16 2.63
Operating and Overhead Costs (per Mcfe):
Lease operating expense................... 0.37 0.33 0.35 0.39 0.42 0.35 0.46
Production taxes.......................... 0.13 0.18 0.18 0.16 0.17 0.05 0.21
General and administrative
expense................................. 0.09 0.12 0.15 0.14 0.15 0.11 0.18
--------- ----------- ---------- ----------- ----------- ---------- -----------
Total................................... 0.59 0.63 0.68 0.69 0.74 0.51 0.85
--------- ----------- ---------- ----------- ----------- ---------- -----------
Cash Operating Margin (per Mcfe)............ $ 1.13 $ 1.79 $ 1.93 $ 1.28 $ 1.60 $ 0.65 $ 1.78
========= =========== ========== =========== =========== ========== ===========
Other:
Depreciation, depletion and
amortization--oil
and gas properties (per Mcfe)........... $ 0.65 $ 0.62 $ 0.64 $ 0.65 0.57 0.57 0.57
Estimated Net Proved Reserves
(as of period end):
Natural gas (MMcf)........................ 6,508 6,832 6,389 5,850 5,817 NA NA
Oil (MBbls)............................... 210 182 157 132 193 NA NA
Total (MMcfe)............................. 7,768 7,927 7,334 6,647 6,973 NA NA
Exchange Data: Sept. 30, 1999
--------------
Total assets for purposes of Exchange Value........ $ 5,044,590
Exchange Value per $1,000 investment............... $ 399
- --------------
*See Definitions
(1) Because of depletion (which is usually higher in the early years of
production), a portion of every distribution of revenues from properties
represents a return of a limited partner's original investment. Until a
limited partner receives cash distributions equal to his original
investment, 100% of such distributions may be deemed to be a return of
capital.
-124-
1993 PARTNERSHIP
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
Three months ended
Year ended December 31, March 31,
-------------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1999 2000
-------- ---------- --------- ---------- ---------- --------- ----------
Statement of Operations Data: (in thousands, except where otherwise indicated)
Revenues:
Oil and natural gas sales................ $ 1,454 $ 2,471 $ 2,368 $ 1,514 $ 1,497 $ 299 $ 420
Interest and other....................... 45 6 9 9 6 1 2
-------- ---------- --------- ---------- ---------- --------- ----------
Total revenues........................ 1,499 2,477 2,377 1,523 1,503 300 422
-------- ---------- --------- ---------- ---------- --------- ----------
Expenses:
Operating costs.......................... 451 698 689 584 529 118 140
General and administrative costs......... 69 116 119 95 84 18 27
Depreciation, depletion, and
amortization........................... 481 645 540 518 284 78 68
Reduction of carrying value of oil and
gas properties......................... - - - 245 - - -
Interest................................. - 38 32 43 41 12 11
-------- ---------- --------- ---------- ---------- --------- ----------
Total expenses......................... 1,001 1,497 1,380 1,485 938 226 246
-------- ---------- --------- ---------- ---------- --------- ----------
Net income (loss).......................... $ 498 $ 980 $ 997 $ 38 $ 565 $ 74 $ 176
======== ========== ========= ========== ========== ========= ==========
Ratio of earnings to fixed
charges................................ NA 26.8:1 32.6:1 1.9:1 14.9:1 7.3:1 17.0:1
Statement of Cash Flows Data:
Net cash provided by operating
activities............................... $ 979 $ 1,824 $ 1,549 $ 1,003 $ 854 $ 142 $ 218
Net cash used in investing
activities............................... (2,828) (62) (372) 82 (136) (2) 6
Net cash provided by (used in)
financing activities..................... (1,085) (1,709) (1,188) (1,115) (695) (149) (210)
Net increase (decrease) in cash
and cash equivalents..................... (2,933) 53 (12) (29) 23 (8) 13
EBITDA*.................................... 979 1,663 1,569 599 890 164 255
Cash distributions/(1)/.................... 973 1,530 1,545 1,051 734 149 258
Limited partner's cash distributions per
$1,000 investment/(1)/................... $ 134 $ 211 $ 213 $ 145 $ 101 $ 21 $ 36
Balance Sheet Data:
Cash and cash equivalents.................. $ 71 $ 124 $ 112 $ 83 $ 106 $ 74 $ 119
Oil and gas properties, net at book value.. 4,305 3,723 3,556 2,712 2,564 2,635 2,490
Total assets............................... 5,012 4,311 4,114 3,018 2,964 2,926 2,886
Total liabilities.......................... 452 301 651 569 683 552 687
Limited partners' equity................... 4,561 4,009 3,467 2,484 2,308 2,411 2,227
General partners' equity................... (1) 1 (4) (35) (27) (37) (29)
Limited partner's book value per
$1,000 investment........................ 699 614 531 381 354 370 341
Production:
Oil production (MBbls)..................... 4 50 44 33 32 9 7
Natural gas production (MMcf).............. 549 775 573 591 456 126 110
Equivalent production (MMcfe)............ 803 1,075 836 788 647 178 154
Average sales price:
Oil price (per/Bbl)........................ $ 16.97 $ 20.74 $ 19.82 $ 12.86 $ 17.55 $ 12.21 $ 21.56
Natural gas price (per/Mcf)................ 1.34 1.85 2.61 1.85 2.06 1.53 2.37
Average sales price (per Mcfe)........... 1.81 2.30 2.83 1.92 2.31 1.68 2.72
Operating and Overhead Costs (per Mcfe):
Lease operating expense.................... 0.44 0.49 0.60 0.59 0.64 0.53 0.69
Production taxes........................... 0.13 0.16 0.22 0.15 0.18 0.13 0.22
General and administrative expense......... 0.09 0.11 0.14 0.12 0.13 0.10 0.17
-------- ---------- --------- ---------- ---------- --------- ----------
Total.................................... 0.66 0.76 0.96 0.86 0.95 0.76 1.08
-------- ---------- --------- ---------- ---------- --------- ----------
Cash Operating Margin (per Mcfe)............. $ 1.15 $ 1.54 $ 1.87 $ 1.06 $ 1.36 $ 0.92 $ 1.64
======== ========== ========= ========== ========== ========= ==========
Other:
Depreciation, depletion and
amortization--oil and gas properties
(per Mcfe)............................... $ 0.60 $ 0.60 $ 0.64 $ 0.66 $ 0.44 $ 0.44 $ 0.44
Estimated Net Proved Reserves
(as of period end):
Natural gas (MMcf)......................... 6,152 5,249 4,763 4,072 4,684 NA NA
Oil (MBbls)................................ 303 251 210 154 359 NA NA
Total (MMcfe).............................. 7,971 6,759 6,029 5,004 6,838 NA NA
Exchange Data: Sept. 30, 1999
--------------
Total assets for purposes of Exchange Value...... $ 4,315,862
Exchange Value per $1,000 investment............. $ 394
- --------------
*See Definitions
(1) Because of depletion (which is usually higher in the early years of
production), a portion of every distribution of revenues from properties
represents a return of a limited partner's original investment. Until a
limited partner receives cash distributions equal to his original
investment, 100% of such distributions may be deemed to be a return of
capital.
-125-
1993-I PARTNERSHIP
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
Three months ended
Year ended December 31, March 31,
-------------------------------------------------- ------------------
1995 1996 1997 1998 1999 1999 2000
--------- ------- ------- -------- ------- -------- -------
Statement of Operations Data: (in thousands, except where otherwise indicated)
Revenues:
Oil and natural gas sales.......................... $ 589 $ 952 $ 938 $ 691 $ 621 $ 112 $ 181
Interest and other................................. 27 2 3 3 13 1 1
--------- ------- ------- -------- ------- ------- -------
Total revenues................................... 616 954 941 694 634 113 182
--------- ------- ------- -------- ------- ------- -------
Expenses:
Operating costs.................................... 130 213 197 189 162 26 41
General and administrative costs................... 13 24 23 22 24 4 6
Depreciation, depletion, and amortization.......... 198 255 229 249 157 44 39
Reduction of carrying value
of oil and gas properties..................... - - - - - -
Interest........................................... - 15 20 25 31 9 8
--------- ------- ------- -------- ------- ------- -------
Total expenses................................... 341 507 469 585 374 83 94
--------- ------- ------- -------- ------- ------- -------
Net income (loss).................................... $ 275 $ 447 $ 472 $ 109 $ 260 $ 30 $ 88
========= ======= ======= ======== ======= ======= =======
Ratio of earnings to fixed charges................... NA 30.8:1 25.1:1 5.3:1 9.3:1 4.4:1 11.5:1
Statement of Cash Flows Data:
Net cash provided by operating activities............ $ 473 $ 725 $ 684 $ 426 $ 511 $ 67 $ 98
Net cash used in investing activities................ (1,431) (74) (99) (82) (79) (1) 7
Net cash provided by (used in) financing
activities........................................... (464) (617) (604) (363) (412) (71) (108)
Net increase (decrease) in cash and cash
equivalents........................................ (1,422) 34 (19) (19) 20 (4) (4)
EBITDA*.............................................. 473 717 721 384 448 83 135
Cash distributions/(1)/.............................. 445 689 681 474 441 71 120
Limited partner's cash distributions per $1,000
investment(1)....................................... $ 165 $ 255 $ 252 $ 175 $ 163 $ 26 $ 45
Balance Sheet Data:
Cash and cash equivalents............................ $ 29 $ 63 $ 44 $ 25 $ 46 $ 21 $ 42
Oil and gas properties, net at book value............ 1,925 1,743 1,614 1,334 1,268 1,303 1,222
Total assets......................................... 2,148 1,948 1,820 1,550 1,424 1,486 1,383
Total liabilities.................................... 152 193 274 368 424 344 415
Limited partners' equity............................. 1,992 1,752 1,543 1,184 1,007 1,144 974
General partners' equity............................. 4 3 3 (2) (7) (2) (6)
Limited partner's book value per $1,000 investment... 843 741 653 501 426 484 412
Production:
Oil production (MBbls)............................... 15 16 14 11 9 2 2
Natural gas production (MMcf)........................ 216 276 260 278 205 58 51
Equivalent production (MMcfe)...................... 303 372 342 344 260 73 65
Average sales price:
Oil price (per/Bbl).................................. $ 16.88 $ 21.19 $ 19.40 $ 12.05 $ 17.61 $ 11.38 $ 21.79
Natural gas price (per/Mcf).......................... 1.59 2.22 2.59 2.01 2.24 1.45 2.59
Average sales price (per Mcfe)..................... 1.94 2.56 2.74 2.01 2.39 1.54 2.80
Operating and Overhead Costs (per Mcfe):
Lease operating expense.............................. 0.30 0.38 0.36 0.35 0.43 0.29 0.42
Production taxes..................................... 0.13 0.19 0.22 0.20 0.19 0.06 0.22
General and administrative expense................... 0.04 0.06 0.07 0.06 0.09 0.06 0.10
--------- ------- ------- -------- ------- ------- -------
Total.............................................. 0.47 0.63 0.65 0.61 0.71 0.41 0.74
--------- ------- ------- -------- ------- ------- -------
Cash Operating Margin (per Mcfe)........................ $ 1.47 $ 1.93 $ 2.09 $ 1.40 $ 1.68 $ 1.13 $ 2.06
========= ======= ======= ======== ======= ======= =======
Other:
Depreciation, depletion and amortization--oil and
gas properties (per Mcfe)......................... $ 0.65 $ 0.69 $ 0.67 $ 0.72 $ 0.60 $ 0.60 $ 0.60
Estimated Net Proved Reserves (as of period end):
Natural gas (MMcf)................................... 2,462 2,150 2,106 1,789 1,650 NA NA
Oil (MBbls).......................................... 108 90 76 57 113 NA NA
Total (MMcfe)........................................ 3,111 2,690 2,565 2,136 2,327 NA NA
Exchange Data: Sept. 30, 1999
---------------
Total assets for purposes of Exchange Value........... $ 1,933,749
Exchange Value per $1,000 investment.................. $ 538
- --------------
*See Definitions
/(1)/ Because of depletion (which is usually higher in the early years of
production), a portion of every distribution of revenues from properties
represents a return of a limited partner's original investment. Until a
limited partner receives cash distributions equal to his original
investment, 100% of such distributions may be deemed to be a return of
capital.
-126-
1995 PARTNERSHIP
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
Three months ended
Year ended December 31, March 31,
-------------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1999 2000
--------- ----------- ---------- ----------- ----------- ---------- -----------
Statement of Operations Data: (in thousands, except where otherwise indicated)
Revenues:
Oil and natural gas sales................... $ 771 $ 1,919 $ 2,143 $ 1,553 $ 1,803 $ 333 $ 531
Interest and other.......................... 46 51 47 31 23 6 4
-------- ---------- --------- ---------- ---------- --------- ----------
Total revenues............................ 817 1,970 2,190 1,584 1,826 339 535
-------- ---------- --------- ---------- ---------- --------- ----------
Expenses:
Operating costs............................. 273 478 525 454 483 106 129
General and administrative costs............ 36 94 109 101 114 23 34
Depreciation, depletion, and amortization... 260 435 469 474 386 95 99
-------- ---------- --------- ---------- ---------- --------- ----------
Total expenses............................ 569 1,007 1,103 1,029 983 224 262
-------- ---------- --------- ---------- ---------- --------- ----------
Net income (loss)............................. $ 248 $ 963 $ 1,087 $ 555 $ 843 $ 115 $ 273
======== ========== ========= ========== ========== ========= ==========
Ratio of earnings to fixed charges............ NA NA NA NA NA NA NA
Statement of Cash Flows Data:
Net cash provided by operating activities..... $ 508 $ 1,123 $ 1,603 $ 1,186 $ 1,193 $ 217 $ 294
Net cash used in investing activities......... (2,519) (1,075) (534) (135) (427) (1) (107)
Net cash provided by (used in) financing
activities.................................. 4,264 (1,210) (1,502) (1,193) (1,054) (216) (354)
Net increase (decrease) in cash and cash
equivalents............................... 2,253 (1,163) (433) (142) (289) - (167)
EBITDA*....................................... 508 1,398 1,556 1,030 1,229 210 372
Cash distributions(1)......................... 452 1,210 1,502 1,193 1,055 216 364
Limited partner's cash distributions per
$1,000 investment(1)........................ $ 60 $ 160 $ 199 $ 158 $ 139 $ 29 $ 48
Balance Sheet Data:
Cash and cash equivalents..................... $ 2,260 $ 1,098 $ 664 $ 523 $ 234 $ 523 $ 68
Oil and gas properties, net at book value..... 2,844 3,485 3,551 3,212 3,254 3,118 3,262
Total assets.................................. 5,373 5,054 4,659 4,011 3,881 3,906 3,721
Total liabilities............................. 126 54 74 64 146 61 77
Limited partners' equity...................... 5,245 4,985 4,570 3,951 3,727 3,853 3,637
General partners' equity...................... 2 15 15 (4) 8 (8) 7
Limited partner's book value per $1,000
investment.................................. 771 733 672 581 548 566 534
Production:
Oil production (MBbls)........................ 21 26 28 26 25 7 6
Natural gas production (MMcf)................. 314 676 655 654 651 153 165
Equivalent production (MMcfe)............... 443 833 824 810 801 197 200
Average sales price:
Oil price (per/Bbl)........................... $ 16.80 $ 21.17 $ 20.29 $ 13.33 $ 18.03 $ 13.06 $ 24.53
Natural gas price (per/Mcf)................... 1.31 2.02 2.40 1.85 2.08 1.54 2.36
Average sales price (per Mcfe).............. 1.74 2.30 2.60 1.92 2.25 1.69 2.66
Operating and Overhead Costs (per Mcfe):
Lease operating expense....................... 0.52 0.42 0.45 0.42 0.43 0.41 0.42
Production taxes.............................. 0.09 0.16 0.19 0.14 0.17 0.13 0.23
General and administrative expense............ 0.08 0.11 0.13 0.12 0.14 0.11 0.17
-------- ---------- --------- ---------- ---------- --------- ----------
Total....................................... 0.69 0.69 0.77 0.68 0.74 0.65 0.82
-------- ---------- --------- ---------- ---------- --------- ----------
Cash Operating Margin (per Mcfe)................. $ 1.05 $ 1.61 $ 1.83 $ 1.24 $ 1.51 $ 1.04 $ 1.84
======== ========== ========= ========== ========== ========= ==========
Other:
Depreciation, depletion and amortization--oil
and gas properties (per Mcfe)............... $ 0.59 $ 0.52 $ 0.57 $ 0.59 $ 0.48 $ 0.48 $ 0.48
Estimated Net Proved Reserves (as of period end):
Natural gas (MMcf)............................ 5,368 7,079 6,556 5,902 7,052 NA NA
Oil (MBbls)................................... 183 232 222 196 338 NA NA
Total (MMcfe)................................. 6,466 8,471 7,885 7,075 9,079 NA NA
Exchange Data: Sept. 30, 1999
--------------
Total assets for purposes of Exchange
Value...................................... $ 5,968,686
Exchange Value per $1,000 investment............. $ 620
- --------------
*See Definitions
/(1)/ Because of depletion (which is usually higher in the early years of
production), a portion of every distribution of revenues from
properties represents a return of a limited partner's original
investment. Until a limited partner receives cash distributions equal
to his original investment, 100% of such distributions may be deemed to
be a return of capital.
-127-
1996 PARTNERSHIP
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
Three months ended
Year ended December 31, March 31,
------------------------------------------- --------------------
1996 1997 1998 1999 1999 2000
-------- -------- ----------- ---------- --------- ---------
Statement of Operations Data: (in thousands, except where otherwise indicated)
Revenues:
Oil and natural gas sales........................ $ 122 $ 642 $ 1,292 $ 2,153 $ 403 $ 677
Interest and other............................... 32 147 111 19 8 1
------- ------- -------- ------- -------- --------
Total revenues................................. 154 789 1,403 2,172 411 678
------- ------- -------- ------- -------- --------
Expenses:
Operating costs.................................. 21 133 378 564 108 200
General and administrative costs................. 11 33 99 151 21 42
Depreciation, depletion, and amortization........ 26 166 510 561 133 118
Reduction of carrying value
of oil and gas properties................... - - 887 - - -
Interest......................................... - - - 134 - 50
------- ------- -------- ------- -------- --------
Total expenses................................. 58 332 1,874 1,410 262 410
------- ------- -------- ------- -------- --------
Net income (loss).................................. $ 96 $ 457 $ (471) $ 762 $ 149 $ 268
======= ======= ======== ======= ======== ========
Ratio of earnings to fixed charges................. NA NA NA 6.7:1 NA 6.4:1
Statement of Cash Flows Data:
Net cash provided by operating activities.......... $ 46 $ 458 $ 968 $ 1,149 $ 194 $ 356
Net cash used in investing activities.............. (707) (1,967) (3,685) (3,195) (69) 48
Net cash provided by (used in) financing
activities...................................... 3,058 4,149 (1,046) 852 (1,291) (378)
Net increase (decrease) in cash and cash
equivalents...................................... 2,398 2,639 (3,762) (1,194) (1,166) 26
EBITDA*............................................ 122 623 39 1,457 282 436
Cash distributions/(1)/............................ 88 417 1,035 1,420 191 471
Limited partner's cash distributions
per $1,000 investment/(1)/......................... $ 8 $ 39 $ 97 $ 133 $ 17 $ 44
Balance Sheet Data:
Cash and cash equivalents.......................... $ 2,398 $ 5,037 $ 1,275 $ 81 $ 109 $ 107
Oil and gas properties, net at book value.......... 677 2,479 4,767 4,502 4,704 4,426
Total assets....................................... 3,159 7,875 6,316 7,918 8,356 7,817
Total liabilities.................................. 5 115 72 2,332 2,154 2,434
Limited partners' equity........................... 3,151 7,740 6,248 5,604 6,201 5,410
General partners' equity........................... 3 20 (4) (18) 1 (27)
Limited partner's book value per $1,000
investment....................................... 327 803 648 582 644 561
Production:
Oil production (MBbls)............................. 1 9 21 28 6 7
Natural gas production (MMcf)...................... 53 183 537 745 178 146
Equivalent production (MMcfe).................... 59 236 661 915 217 190
Average sales price:
Oil price (per/Bbl)................................ $ 23.22 $ 19.59 $ 13.23 $ 18.19 $ 12.16 $ 25.95
Natural gas price (per/Mcf)........................ 1.86 2.56 1.90 2.20 1.82 3.32
Average sales price (per Mcfe)................... 2.06 2.72 1.95 2.35 1.85 3.56
Operating and Overhead Costs (per Mcfe):
Lease operating expense............................ 0.15 0.36 0.38 0.43 0.40 0.73
Production taxes................................... 0.19 0.21 0.19 0.19 0.10 0.32
General and administrative expense................. 0.19 0.14 0.15 0.17 0.10 0.22
------- ------- -------- ------- -------- --------
Total............................................ 0.53 0.71 0.72 0.79 0.60 1.27
------- ------- -------- ------- -------- --------
Cash Operating Margin (per Mcfe)...................... $ 1.53 $ 2.01 $ 1.23 $ 1.56 $ 1.25 $ 2.29
======= ======= ======== ======= ======== ========
Other:
Depreciation, depletion and amortization--oil
and gas properties (per Mcfe).................... $ 0.43 $ 0.70 $ 0.77 $ 0.61 $ 0.61 $ 0.62
Estimated Net Proved Reserves (as of period end):
Natural gas (MMcf)................................. 2,412 3,879 7,628 7,754 NA NA
Oil (MBbls)........................................ 22 141 182 184 NA NA
Total (MMcfe)...................................... 2,541 4,722 8,719 8,856 NA NA
Exchange Data: Sept. 30, 1999
---------------
Total assets for purposes of Exchange
Value........................... $11,493,818
Exchange Value per $1,000 investment.. $ 781
________________
*See Definitions
/(1)/ Because of depletion (which is usually higher in the early years of
production), a portion of every distribution of revenues from
properties represents a return of a limited partner's original
investment. Until a limited partner receives cash distributions equal
to his original investment, 100% of such distributions may be deemed to
be a return of capital.
-128-
1996-I PARTNERSHIP
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
Three months ended
Year ended December 31, March 31,
------------------------------------------- --------------------
1996 1997 1998 1999 1999 2000
------- ----------- ----------- ---------- --------- ---------
(in thousands, except where otherwise indicated)
Statement of Operations Data:
Revenues:
Oil and natural gas sales........................ $ 379 $ 784 $ 1,214 $ 1,643 $ 335 $ 461
Interest and other............................... 43 84 97 18 6 2
-------- ------- -------- ------- ------- --------
Total revenues................................. 422 868 1,311 1,661 341 463
-------- ------- -------- ------- ------ --------
Expenses:
Operating costs.................................. 61 133 257 367 65 108
General and administrative costs................. 9 19 47 70 17 17
Depreciation, depletion, and amortization........ 94 226 444 414 104 102
Reduction of carrying value of oil and gas
properties................................... - - 649 - - -
Interest......................................... - - - 118 - 43
-------- ------- -------- ------- ------- --------
Total expenses................................. 164 378 1,397 969 186 270
-------- ------- -------- ------- ------- --------
Net income (loss).................................. $ 258 $ 490 $ (86) $ 692 $ 155 $ 193
======== ======= ======== ======= ======= ========
Ratio of earnings to fixed charges................. NA NA NA 6.9:1 NA 5.5:1
Statement of Cash Flows Data:
Net cash provided by operating activities ......... $ 287 $ 652 $ 1,005 $ 1,028 $ 193 $ 292
Net cash used in investing activities.............. (557) (1,284) (2,858) 263 (42) -
Net cash provided by (used in)
financing activities............................ 1,774 2,799 (1,038) 715 (1,091) (382)
Net increase (decrease) in cash and cash
equivalents...................................... 1,504 2,168 (2,891) (931) (940) (24)
EBITDA*............................................ 352 716 1,007 1,224 259 338
Cash distributions/(1)/............................ 270 533 1,038 1,233 191 384
Limited partner's cash distributions per $1,000
investment/(1)/.................................. $ 36 $ 72 $ 139 $ 165 $ 26 $ 52
Balance Sheet Data:
Cash and cash equivalents.......................... $ 1,775 $ 3,943 $ 1,052 $ 121 $ 112 $ 97
Oil and gas properties, net at book value.......... 883 1,942 3,707 3,430 3,645 3,341
Total assets....................................... 2,779 6,100 4,981 6,415 6,851 6,235
Total liabilities.................................. 13 45 50 2,024 1,956 2,035
Limited partners' equity........................... 2,759 6,029 4,919 4,398 4,877 4,219
General partners' equity........................... 7 26 12 (7) 18 (19)
Limited partner's book value per $1,000
investment....................................... 423 924 752 675 748 647
Production:
Oil production (MBbls)............................. 2 11 22 26 6 6
Natural gas production (MMcf)...................... 169 238 471 525 134 129
Equivalent production (MMcfe).................... 183 302 603 681 170 167
Average sales price:
Oil price (per/Bbl)................................ $ 18.96 $ 20.09 $ 13.65 $ 18.02 $ 13.70 $ 23.54
Natural gas price (per/Mcf)........................ 1.98 2.39 1.94 2.24 1.89 2.42
Average sales price (per Mcfe)................... 2.07 2.60 2.01 2.41 1.97 2.76
Operating and Overhead Costs (per Mcfe):
Lease operating expense............................ 0.17 0.24 0.26 0.36 0.31 0.41
Production taxes................................... 0.16 0.19 0.17 0.18 0.08 0.24
General and administrative expense................. 0.05 0.06 0.08 0.10 0.10 0.10
-------- ------- -------- ------- ------- --------
Total............................................ 0.38 0.49 0.51 0.64 0.49 0.75
-------- ------- -------- ------- ------- --------
Cash Operating Margin (per Mcfe)...................... $ 1.69 $ 2.11 $ 1.50 $ 1.77 $ 1.48 $ 2.01
======== ======= ======== ======= ======= ========
Other:
Depreciation, depletion and amortization--oil
and gas properties (per Mcfe)..................... $ 0.51 $ 0.75 $ 0.74 $ 0.61 $ 0.61 $ 0.61
Estimated Net Proved Reserves (as of period end):
Natural gas (MMcf)................................. 2,078 2,624 5,510 5,425 NA NA
Oil (MBbls)........................................ 55 75 208 180 NA NA
Total (MMcfe)...................................... 2,408 3,073 6,759 6,508 NA NA
Exchange Data: Sept. 30, 1999
--------------
Total assets for purposes of Exchange
Value.............................. $ 9,484,925
Exchange Value per $1,000 investment..... $ 945
- --------------
*See Definitions
(1) Because of depletion (which is usually higher in the early years of
production), a portion of every distribution of revenues from
properties represents a return of a limited partner's original
investment. Until a limited partner receives cash distributions equal
to his original investment, 100% of such distributions may be deemed to
be a return of capital.
-129-
INFORMATION CONCERNING INDIAN
General
Indian is an Oklahoma corporation founded in 1981 and engaged in the
exploration, development and production of natural gas, and to a lessor extent,
crude oil. In addition to the above activities, Indian has made significant
acquisitions of producing oil and natural gas properties during the last 19
years. The most significant acquisition was in December 1997. For approximately
$30.2 million, Indian acquired producing Oklahoma and western Arkansas
properties. Indian funded the purchase through borrowings under a line of credit
and term note.
As of March 31, 2000, Indian operated 94 of the 307 wells in which it
owns a working interest. Operations are concentrated in Oklahoma and Arkansas.
Total net production is 10,988 Mcf/day of natural gas and 171 Bbls/day of oil
and condensate as of March 31, 2000. The company's production is located
primarily in Oklahoma and western Arkansas, with minor amounts of production in
Kansas and Texas. As of December 31, 1999, total net proved reserves are 57.4
Bcfe of which 93% was natural gas, with proved developed reserves representing
66% of the total and proved undeveloped reserves accounting for 34% of the
total. The total Present Value of Indian's proved reserves has been estimated at
$37.6 million as of December 31, 1999.
Indian has an inventory of 70 proved undeveloped locations to be
drilled. Of these locations, 64 are located in Oklahoma, primarily in the Strong
City field in the Anadarko Basin of western Oklahoma. The remaining six
locations are in the Massard field of western Arkansas, but they represent 53%
of the total proved undeveloped reserve value.
On March 31, 2000, Indian sold minor properties consisting of
nonoperated interests in approximately 183 gross wells or 18.38 net wells with
an aggregate Reserve Value of approximately $1.5 million. Because Reserve Values
have been established as of September 30, 1999 and these properties were
included, no adjustment to Indian's Exchange Value will be made to reflect this
sale.
Costs Incurred and Drilling Results
The following table shows information regarding the costs incurred by
Indian in acquisition, exploration and development activities during the periods
indicated.
Year ended December 31,
----------------------------------------------------------------
1996 1997 1998 1999
------------ ------------ ----------- --------------
Acquisition costs............... $ 451,500 $30,622,885 $ - $ 123,000
Development costs............... 935,995 1,681,672 1,298,316 1,186,837
------------ ------------ ----------- --------------
Total........................... $ 1,387,495 $32,304,557 $ 1,298,316 $ 1,309,837
============ ============ =========== ==============
-130-
Indian has acquired or drilled or participated in the drilling of
wells as set out in the table below for the periods indicated.
Years Ended December 31,
-----------------------------------------------------------------------------------------------
1996 1997 1998 1999
----------------------- ---------------------- --------------------- --------------------
Gross Net Gross Net Gross Net Gross Net
---------- ---------- -------- ---------- --------- --------- --------- ---------
Acquired wells:
Gas................. 2 0.439 374 64.702 1 0.008 -- 0.004
Oil................. 7 1.988 8 2.379 -- -- -- 0.100
Dry................. -- -- -- -- -- -- -- --
---------- ---------- -------- ---------- --------- --------- --------- ---------
Total............... 9 2.427 382 67.081 1 0.008 -- 0.104
========== ========== ======== ========== ========= ========= ========= =========
Development wells:
Gas................. 5 0.605 3 0.118 12 1.267 6 0.855
Oil................. -- -- -- -- -- -- -- --
Dry................. 1 0.305 -- -- -- -- 1 0.043
---------- ---------- -------- ---------- --------- --------- --------- ---------
Total............... 6 0.910 3 0.118 12 1.267 7 0.898
========== ========== ======== ========== ========= ========= ========= =========
Exploratory wells:
Gas................. 4 0.726 3 0.344 2 0.392 -- --
Oil................. -- -- -- -- 1 0.254 -- --
Dry................. 7 1.043 4 0.847 3 0.475 -- --
---------- ---------- -------- ---------- --------- --------- --------- ---------
Total............... 11 1.769 7 1.190 6 1.121 -- --
========== ========== ======== ========== ========= ========= ========= =========
As of December 31, 1999, Indian was involved in the drilling, testing
or completing of 3 gross (.332 net) development wells and no exploratory wells.
Acreage
The following table shows the developed and undeveloped oil and gas
lease and mineral acreage as of December 31, 1999 owned by Indian. Excluded is
acreage in which an interest is limited to royalty, overriding royalty and other
similar interests.
Developed Undeveloped
-------------------------- ------------------------
Gross Net Gross Net
------------ ---------- ----------- ----------
Oklahoma.................... 149,542 24,855 15,813 2,653
Arkansas.................... 24,960 7,626 - -
Other....................... 4,000 1,838 - -
------------ ---------- ----------- ----------
Total....................... 178,502 34,319 15,813 2,653
============ ========== =========== ==========
Productive Well Summary
The following table shows the ownership of Indian in productive wells
at December 31, 1999. Gross oil and gas wells include 4 wells with multiple
completions. Wells with multiple completions are counted only once for purposes
of the following table.
-131-
Productive Wells
-----------------------------------
Gross Net
--------------- ----------------
Gas..................... 390 68.11
Oil..................... 71 12.27
--------------- ----------------
Total................... 461 80.38
=============== ================
Selected Historical Financial and Operating Information
The following table presents a summary of selected financial
information and operating data for Indian for the periods indicated. It should
be read in conjunction with the financial statements and related notes included
elsewhere in this document. The information contained under the headings
Operations Data and Cash Flow Data and Other for the years ending December 31,
1996, 1997, 1998 and 1999 and Balance Sheet Data as of December 31, 1995, 1996,
1997, 1998 and 1999 were derived from audited financial statements. All other
information is unaudited. The results for the three months ended March 31, 2000
are not necessarily indicative of the results to be expected for a full year.
-132-
Years ended December 31, Three Months ended March 31,
-------------------------------------------------------------- ---------------------------
1995 1996 1997 1998 1999 1999 2000
---------- --------- ---------- ---------- ----------- ---------- --------------
(in thousands, except as otherwise indicated)
Operations Data:
Gas sales............................ $ 1,312 $ 1,984 $ 2,358 $ 9,232 $ 8,054 $ 1,711 $ 2,155
Oil sales............................ 709 1,114 998 783 997 147 355
Other income......................... 154 144 313 235 318 86 36
---------- --------- ---------- ---------- ----------- ---------- --------------
Total revenues................. 2,175 3,243 3,669 10,249 9,369 1,944 2,546
---------- --------- ---------- ---------- ----------- ---------- --------------
Operating costs...................... 875 1,175 1,259 3,476 3,192 744 820
General and administrative costs..... 541 826 1,139 1,659 1,996 822 180
Depreciation and amortization........ 591 533 739 4,029 3,048 919 692
Interest............................. 461 477 509 3,120 2,709 726 599
Reduction of carrying cost
of oil and natural gas
properties..................... - - - 4,000 - - -
---------- --------- ---------- ---------- ----------- ---------- --------------
Total expenses................. 2,468 3,011 3,647 16,284 10,945 3,211 2,291
---------- --------- ---------- ---------- ----------- ---------- --------------
Earnings (loss) before income
taxes.......................... (293) 233 22 (6,035) (1,576) (1,267) 255
Income taxes......................... 125 (50) - 2,195 529 430 (87)
---------- --------- ---------- ---------- ----------- ---------- --------------
Net earnings (loss).................. $ (168) $ 183 $ 22 $ (3,840) $ (1,047) $ (837) $ 168
========== ========= ========== ========== =========== ========== ==============
Cash dividends....................... $ - $ - $ - $ - $ - $ - $ -
Cash dividend per share.............. $ - $ - $ - $ - $ - $ - $ -
Ratio of earnings to fixed charges... (1) 1.49 1.04 (1) 0.42 (1) 1.43
Cash Flow Data:
Net cash provided by (used in)
operating activities........... $ 741 $ 244 $ 1,451 $ 2,395 $ 2,103 $ (32) $ 1,293
Net cash provided by (used in)
investing activities........... (238) (671) (33,492) 59 (404) 177 (282)
Net cash provided by (used in)
financing activities........... 325 498 33,070 (3,199) (2,379) - (600)
EBITDA............................... 759 1,243 1,270 1,114 4,181 378 1,546
Balance Sheet Data (at end of period):
Oil and natural gas properties,
net............................ $ 5,395 $ 5,527 $ 36,938 $ 29,912 $ 26,788 $ 28,911 $ 24,929
Total assets......................... 7,748 9,035 42,818 36,704 32,125 35,423 32,906
Long-term debt, including
current portion................ 4,260 4,765 37,950 35,334 33,436 35,421 29,519
Total liabilities.................... 6,241 7,323 41,083 38,809 37,215 38,364 33,090
Stockholders' equity (deficit)....... 1,507 1,712 1,735 (2,105) (4,090) (2,941) (184)
Book value per share................. 0.06 0.07 0.07 (0.08) (0.14) (0.12) (0.01)
Production:
Gas production (MMcf)................ 875 894 953 4,552 4,305 1,103 1,000
Oil production (MBbls)............... 42 53 51 59 55 13 16
Equivalent production (MMcfe)........ 1,129 1,215 1,258 4,904 4,640 1,181 1,096
Average Sales Price*:
Gas price (per Mcf):................. $ 1.50 $ 2.22 $ 2.48 $ 2.03 $ 1.87 $ 1.55 $ 1.97
Oil price (per Bbl):................. 16.77 20.88 19.65 13.33 18.13 11.31 22.19
Average sales price (per Mcfe)....... 1.79 2.55 2.67 2.04 1.95 1.57 2.29
Operating and Overhead
Costs (per Mcfe):
Lease operating expense.............. $ 0.65 $ 0.80 $ 0.83 $ 0.61 $ 0.58 $ 0.55 $ 0.62
Production taxes..................... 0.12 0.17 0.18 0.10 0.11 0.08 0.13
General and administrative........... 0.48 0.68 0.91 0.34 0.43 0.70 0.16
---------- --------- ---------- ---------- ----------- ---------- --------------
Total................................ $ 1.25 $ 1.65 $ 1.91 $ 1.05 $ 1.12 $ 1.33 $ 0.91
========== ========= ========== ========== =========== ========== ==============
Cash Operating Margin (per
Mcfe).......................... $ 0.54 $ 0.90 $ 0.76 $ 1.00 $ 0.83 $ 0.24 $ 1.38
Other per (Mcfe):
Depreciation, depletion and
amortization - oil and
gas properties................ $ 0.47 $ 0.39 $ 0.52 $ 0.80 $ 0.63 $ 0.75 $ 0.61
Estimated Net Proved
Reserves (as of period end):
Natural gas (MMcf)................... 8,229 8,141 55,994 50,783 53,600 NA NA
Oil (MBbls).......................... 195 264 387 330 639 NA NA
Total (MMcfe)........................ 9,399 9,725 57,316 52,763 57,431 NA NA
Exchange Data: Sept. 30, 1999
--------------
Total assets for purposes of
Exchange Value.............. $ 46,871,419
Exchange Value per share.... $ 714
* See "Definitions."
(1) Earnings were insufficient to cover fixed charges by $293 in 1995, $2,915
in 1998 and $541 for the three months ended March 31, 1999, respectively.
-133-
Security Ownership
The following table sets forth information regarding the record and
beneficial ownership of Indian Common Stock as of May 5, 2000 by each director,
each of the executive officers, all executive officers and directors of Indian
as a group, and all those known by Indian to be beneficial owners of more than
five percent of Indian's Common Stock. The shareholders of Indian are engaged in
negotiations to settle disagreements among themselves and a former employee
relating to their beneficial ownership of Indian common stock. These
disagreements should be resolved before the closing of the combination
transactions.
Beneficial Ownership
------------------------------------------
Number of Percentage
Beneficial Owner Shares of Total
----------------
------------------- -------------------
Dunning Family Limited Partnership............. 23,872 36.37%
Larry D. Hartzog............................... 12,220 18.62%
Michael C. Black, Trustee of the
Michael C. Black Revocable
Trust....................................... 10,467 15.94%
Roger Graham................................... 9,169 13.97%
Anthony Lasuzzo................................ 6,599 10.05%
Frank Harrison................................. 3,316 5.05%
----- -------
All executive officers and directors as a
group (5 persons).............................. 65,643 100.00%
====== =======
INFORMATION CONCERNING CANAAN SECURITIES
General
Canaan Securities was incorporated in 1989 by its sole owner Tom
Henson. Canaan Securities is an SEC registered broker dealer and a member of the
National Association of Securities Dealers. It is also currently licensed as a
broker dealer in Connecticut. Canaan Securities' sole business activity consists
of serving as dealer manager for the private placement of the partnership
offerings sponsored by the General Partners and providing ongoing reporting
services to the partnerships for which it receives fee income from the
partnerships or Canaan. In connection with the original sale of interests in the
partnerships, Canaan Securities entered into
-134-
agreements with Placing Brokers and agreed that these Placing Brokers would
receive a portion of the compensation payable to Canaan Securities. Please see
"Summary - The Parties - The Partnerships" for information concerning the share
of cash distributions from the partnerships that Canaan Securities and the
Placing Brokers are entitled to receive.
Selected Financial Data
The following table presents a summary of selected financial data for
Canaan Securities for the periods indicated. It should be read in conjunction
with financial statements and related notes included elsewhere in this
prospectus. All of the information presented has been derived from the audited
financial statements of Canaan Securities except for the information as of and
for the three months ended March 31, 1999 and 2000, which is unaudited. The
results for the three months ended March 31, 2000 are not necessarily indicative
of the results to be expected for a full year.
Three Months Ended
Years Ended December 31, March 31,
---------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- ---------- -------- -------- ---------- --------
Statement of Operations Data:
Net operating revenues.................... $798,036 $774,661 $1,118,472 $298,809 $276,878 $ 54,604 $ 88,695
Net income................................ 4,720 2,313 3,768 1,008 2,853 18,839 47,835
Cash dividends............................ - - - - - - -
Cash dividends per share.................. - - - - - - -
Balance Sheet Data (at end of period):
Total assets.............................. $ 71,417 $ 73,730 $ 67,748 $ 68,756 $ 71,609 $ 87,920 $119,444
Long-term debt, including 10,000 10,000 - - - - -
current portion..........................
Stockholders' equity...................... 61,417 63,730 67,498 68,506 71,359 87,345 119,194
Book value per share...................... 122.83 127.46 135.00 137.01 142.72 174.69 238.39
Exchange Data Sept. 30, 1999
--------------
Total assets for purposes of Exchange Value........... $ 1,740,386
Exchange Value per share.............................. 343
-135-
BUSINESS OF CANAAN AFTER COMPLETION OF THE
COMBINATION TRANSACTIONS
General
Canaan will become an independent publicly held oil and gas company after
the completion of the combination transactions.
Canaan will seek growth through an active development drilling program,
identification and development of extension prospects and impact acquisitions.
The company will utilize in-house geological and engineering expertise to
identify and evaluate prospective locations, whether proved or unproved.
Aggressive land strategies will be employed to increase ownership in existing
properties with development potential and to obtain acreage in areas of interest
through acquisitions, leases or farm-ins. Canaan will concentrate its efforts in
the Mid-Continent area, with a preference for natural gas producing properties,
and will seek operations whenever possible.
On a pro forma basis as of December 31, 1999, Canaan operates 201 of the
965 wells in which it owns a working interest, and these wells represent 38% of
total net production. Pro forma total net production is 20,734 Mcf/day of
natural gas and 580 Bbls/day of oil and condensate as of March 31, 2000. As
indicated below, total net reserves are 103.6 Bcfe, of which 88% are natural
gas, with proved developed reserves representing 76% of the total and proved
undeveloped reserves accounting for 24% of the total as indicated below:
Pro Forma Reserve Information
All Combining Entities
December 31, 1999
-----------------------------
Proved developed:
Gas (Mmcf)........................... 65,237
Oil (MBbls).......................... 1,703
Total (Mmcfe) 75,455
Proved undeveloped:
Gas (MMcf)........................... 25,909
Oil (MBbls).......................... 379
Total (Mmcfe) 28,183
Total proved:
Gas (MMcf)........................... 91,146
Oil (MBbls).......................... 2,082
Total (Mmcfe) 103,638
Estimated future net cash
flows before income taxes
($000s)................................ $142,438
Present value of estimated net cash
flows before income taxes discounted
at 10% ($000s)......................... $75,620
Netherland, Sewell & Associates, Inc., our independent reserve engineers,
prepared the estimates of the proved reserves and the future net cash flows and
Present Value.
-136-
There are numerous uncertainties inherent in estimating quantities of
proved reserves, including many factors beyond our control or the control of the
reserve engineers. Reserve engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be measured in an exact
manner, and the accuracy of any reserve or cash flow estimate is a function of
the quality of available data and of engineering and geological interpretation
and judgment. Estimates by different engineers often vary, sometimes
significantly. In addition, physical factors, such as the results of drilling,
testing and production subsequent to the date of an estimate, as well as
economic factors, such as an increase or decrease in product prices that renders
production of such reserves more or less economic, may justify revision to such
estimates. Accordingly, reserve estimates are different from the quantities of
oil and gas that are ultimately recovered.
Neither Canaan nor any other Combining Entity has filed any reports with
other federal agencies which contain an estimate of their net proved oil and gas
reserves.
Independent engineering has confirmed an inventory of 110 proved
undeveloped locations. The greatest areas of interest are 80 locations in the
Strong City field, located in the Anadarko Basin of western Oklahoma, and six
high-value locations in the Massard field, located in the Arkoma Basin of
western Arkansas. The Golden Trend in south central Oklahoma will also be an
area of interest.
Canaan has no plans to sell any of the properties acquired in the
combination transactions and has not identified any specific properties to
acquire.
Costs Incurred and Drilling Results
The following table shows the pro forma combined results of the costs
incurred by all of the Combining Entities in acquisition and exploration and
development activities during the periods indicated.
Pro Forma All Combining Entities
----------------------------------------------------------------
As of December 31,
----------------------------------------------------------------
1996 1997 1998 1999
------------- ------------- ------------- -------------
Property acquisition costs:
Proved.............................. $ 2,843,102 $ 319,989,203 $ 6,195,938 $ 129,094
Development costs................... 1,439,513 4,969,291 2,159,133 2,080,865
The following table shows the pro forma combined results of acquisition
and drilling activities by all of the Combining Entities. You should not
consider the results of prior acquisition and drilling activities as necessarily
indicative of future performance, nor should you assume that there is
necessarily any correlation between the number of productive wells drilled and
the oil and gas reserves generated by those wells.
-137-
Pro Forma All Combining Entities
-----------------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------------------------------------------------------------
1996 1997 1998 1999
------------------ --------------------- -------------------- ----------------------
Gross Net Gross Net Gross Net Gross Net
--------- ------- --------- ---------- -------- --------- -------- -----------
Acquired wells:
Gas................................ 52 4.84 399 71.476 75 24.949 2 0.398
Oil................................ 14 2.24 23 6.721 11 3.892 3 0.396
Dry................................ -- -- -- -- -- -- -- --
--------- ------- --------- ---------- -------- --------- -------- -----------
Total.............................. 66 7.09 422 78.197 86 28.842 5 0.794
========= ======= ========= ========== ======== ========= ======== ===========
Development well drilling:
Gas................................ 16 1.00 22 2.709 18 1.733 8 0.958
Oil................................ -- -- 4 0.252 2 0.185 -- --
Dry................................ 1 0.31 -- -- 1 0.094 3 0.206
--------- ------- --------- ---------- -------- --------- -------- -----------
Total.............................. 17 1.30 26 2.960 21 2.012 11 1.164
========= ======= ========= ========== ======== ========= ======== ===========
Exploratory well drilling:
Gas................................ 4 0.73 3 0.344 2 0.392 -- --
Oil................................ 1 0.05 3 0.201 2 0.274 -- --
Dry................................ 7 1.04 4 0.847 3 0.475 -- --
--------- ------- --------- ---------- -------- --------- -------- -----------
Total.............................. 12 1.82 10 1.340 7 1.141 0 0.000
========= ======= ========= ========== ======== ========= ======== ===========
Acreage
The following table shows the pro forma combined developed and undeveloped
oil and gas lease and mineral acreage as of December 31, 1999, owned by Canaan
assuming completion of the combination transactions at that date. Excluded is
acreage in which an interest is limited to royalty, overriding royalty and other
similar interests.
Pro Forma All Combining Entities
------------------------------------------------------
Developed Undeveloped
-------------------------- ------------------------
Gross Net Gross Net
------------ ---------- ----------- ----------
Oklahoma.............................. 291,378 45,843 17,253 3,267
Other................................. 58,585 12,520 - -
------------ ---------- ----------- ----------
Total................................. 349,963 58,363 17,253 3,267
============ ========== =========== ==========
Productive Well Summary
The following table shows the pro forma combined ownership of Canaan in
productive wells at December 31, 1999, assuming the completion of the
combination transactions as of such date. Gross oil and gas wells include 10
wells with multiple completions. Wells with multiple completions are counted
only once for purposes of the following table.
-138-
Pro Forma All Combining
Entities
------------------------------
Productive Wells
------------------------------
Gross Net
-------------- -------------
Gas................ 754 132
Oil................ 211 60
-------------- -------------
Total.............. 965 192
============== =============
Production Summary and Prices
The following table sets forth the pro forma combined production and
prices for all of the Combining Entities for the periods indicated.
Pro Forma All Combining Entities
--------------------------------------------------------------------------
Three Months Ended
Years Ended December 31, March 31,
------------------------------- -----------------
1996 1997 1998 1999 1999 2000
------ ------ ------ ------ ------ ------
(in thousands, except as otherwise indicated)
Production:
Gas production (MMcf)........................... 4,453 4,162 8,406 7,814 2,059 1,895
Oil production (Mbbls).......................... 199 197 213 201 53 54
Equivalent production (Mmcfe)................... 5,648 5,341 9,680 9,025 2,378 2,216
Average Sales Price:
Gas price (per Mcf):............................ $ 2.14 $ 2.63 $ 2.04 $ 2.08 $ 1.56 $ 2.31
Oil price (per Bbl):............................ 20.84 18.87 12.31 18.50 12.07 23.42
Average sales price (per Mcfe).................. 2.42 2.75 2.04 2.21 1.62 2.54
Operating and Overhead Costs (per Mcfe):
Lease operating expenses........................ $ .42 $ .46 $ .47 $ .52 $ .46 $ .56
Production taxes................................ .17 .19 .13 .15 .09 .18
General and administrative...................... .49 .61 .36 .39 .46 .30
------ ------ ------ ------ ------ ------
Total........................................... 1.08 1.26 .96 1.06 1.01 1.04
------ ------ ------ ------ ------ ------
Cash Operating Margin (per Mcfe)................ $ 1.34 $ 1.49 $ 1.08 $ 1.15 $ 0.61 $ 1.50
====== ====== ====== ====== ====== ======
Other:
Depreciation, depletion and amortization - oil
and gas properties (per Mcfe).................. $ .57 $ .63 $ .78 $ .63 $ .67 $ .60
Marketing
The ability of Canaan to market oil and gas often depends on factors
beyond its control. The potential effects of governmental regulation and market
factors, including alternative domestic and imported energy sources, available
pipeline capacity, and general market conditions are not entirely predictable.
Natural Gas. Natural gas is generally sold pursuant to individually
negotiated gas purchase contracts, which vary in length from spot market sales
of a single day to term agreements that may extend several years. Customers who
purchase natural gas include marketing affiliates of the major pipeline
companies, natural gas marketing companies, and a variety of commercial and
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public authorities, industrial, and institutional end-users who ultimately
consume the gas. Gas purchase contracts define the terms and conditions unique
to each of these sales. The price received for natural gas sold on the spot
market may vary daily, reflecting changing market conditions. The deliverability
and price of natural gas are subject to both governmental regulation and supply
and demand forces. During the past several years, regional surpluses and
shortages of natural gas have occurred, resulting in wide fluctuations in prices
achieved. During 1999, the average monthly gas prices received by the Combining
Entities ranged from $1.89 to $2.46 per mcf.
The lengths of the contracts vary widely. Substantially all of Canaan's gas
will be sold under contracts providing for market sensitive terms.
During the past several years, an overabundance of natural gas supplies and
the promulgation of state and federal regulations pertaining to the sale,
transportation, and marketing of natural gas resulted in increasing competition
and declining prices. It is likely that supply and demand factors will continue
to be the driving force in the changing marketplace.
Crude Oil. Oil produced from Canaan's properties will be sold at the
prevailing field price to one or more of a number of unaffiliated purchasers in
the area. Generally, purchase contracts for the sale of oil are cancelable on
30-days notice. The price paid by these purchasers is generally an established,
or "posted," price that is offered to all producers. During 1999, the average
monthly prices received by the Combining Entities ranged from $16.54 to $18.19
per barrel. During the last several years prices paid for crude oil have
fluctuated substantially. Future oil prices are difficult to predict due to the
impact of worldwide economic trends, coupled with supply and demand variables,
and such non-economic factors as the impact of political considerations on OPEC
pricing policies and the possibility of supply interruptions. Oil production
comprised approximately 14% of Canaan's total pro forma oil and gas production
calculated on an equivalent Mcf basis for 1999. Therefore, an increase or
decrease in oil prices has a minimal effect on revenues when compared to the
effect on the price of natural gas.
Competition
The oil and natural gas industry is intensely competitive. Competition is
particularly intense in the acquisition of prospective oil and natural gas
properties and oil and gas reserves. Canaan's competitive position depends on
our geological, geophysical and engineering expertise, our financial resources,
our ability to develop properties and our ability to select, acquire and develop
proved reserves. We compete with a substantial number of other companies having
larger technical staffs and greater financial and operational resources. Many
such companies not only engage in the acquisition, exploration, development and
production of oil and natural gas reserves, but also carry on refining
operations, generate electricity and market refined products. We also compete
with major and independent oil and gas companies in the marketing and sale of
oil and gas to transporters, distributors and end users. The oil and natural gas
industry competes with other industries supplying energy and fuel to industrial,
commercial and individual
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consumers. Canaan also competes with other oil and natural gas companies in
attempting to secure drilling rigs and other equipment necessary for drilling
and completion of wells. Such equipment may be in short supply from time to
time. Finally, companies not previously investing in oil and natural gas may
choose to acquire reserves to establish a firm supply or simply as an
investment. Such companies also provide competition for Canaan.
Canaan's business is affected not only by such competition, but also by
general economic developments, governmental regulations and other facts that
affect out ability to market our oil and natural gas production. The prices of
oil and natural gas realized by Canaan are highly volatile. The price of oil is
generally dependent on world supply and demand, while the price we receive for
our natural gas is tied to the specific market sin which such gas is sold.
Declines in crude oil prices or natural gas prices adversely impact Forest's
activities. Our financial position and resources may also adversely affect our
competitive position. Lack of available funds or financing alternatives will
prevent us from executing our operating strategy and from deriving the expected
benefits therefrom.
Regulation
Exploration and Production. The exploration, production and sale of oil and
gas are subject to various types of local, state and federal laws and
regulations. These laws and regulations govern a wide range of matters,
including the drilling and spacing of wells, allowable rates of production,
restoration of surface areas, plugging and abandonment of wells and requirements
for the operation of wells. These regulations may adversely affect the rate at
which wells produce oil and gas.
Environmental Matters. The discharge of oil, gas or other pollutants into
the air, soil or water may give rise to liabilities to the government and third
parties and may require Canaan to incur costs to remedy discharges. Natural gas,
oil or other pollutants, including salt water brine, may be discharged in many
ways, including from a well or drilling equipment at a drill site, leakage from
pipelines or other gathering and transportation facilities, leakage from storage
tanks and sudden discharges from damage or explosion at natural gas facilities
of oil and gas wells. Discharged hydrocarbons may migrate through soil to water
supplies or adjoining property, giving rise to additional liabilities.
A variety of federal and state laws and regulations govern the
environmental aspects of natural gas and oil production, transportation and
processing and may, in addition to other laws, impose liability in the event of
discharges, whether or not accidental, failure to notify the proper authorities
of a discharge, and other noncompliance with those laws. Compliance with such
laws and regulations may increase the cost of oil and gas exploration,
development and production, although the Company does not currently anticipate
that compliance will have a material adverse effect on capital expenditures or
earnings of Canaan. Failure to comply with the requirements of the applicable
laws and regulations could subject Canaan to substantial civil and/or criminal
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penalties and to the temporary or permanent curtailment or cessation of all or a
portion of our operations.
Canaan does not believe that its environmental risks will be materially
different from those of comparable companies in the oil and gas industry. Canaan
believes the present activities of the Combining Entities substantially comply,
in all material respects, with existing environmental laws and regulations.
Nevertheless, Canaan cannot assure you that environmental laws will not result
in a curtailment of production or material increase in the cost of production,
development or exploration or otherwise adversely affect Canaan's financial
condition and results of operations. Although Canaan maintains liability
insurance coverage for liabilities from pollution, environmental risks generally
are not fully insurable.
Marketing and Transportation. The interstate transportation and sale for
resale of natural gas is regulated by the Federal Energy Regulatory Commission
under the Natural Gas Act of 1938. The sale and transportation of natural gas
also is subject to regulation by various state agencies. The Natural Gas
Wellhead Decontrol Act of 1989 eliminated all gas price regulation effective
January 1, 1993. In addition, FERC recently has proposed several rules and
orders concerning transportation and marketing of natural gas. We cannot predict
the impact of these rules and other regulatory developments on Canaan.
In 1992, FERC finalized Order 636, and also has promulgated regulations
pertaining to the restructuring of the interstate transportation of natural gas.
Pipelines serving this function have since been required to "unbundle" the
various components of their service offerings, which include gathering,
transportation, storage, and balancing services. In their current capacity,
pipeline companies must provide their customers with only the specific service
desired, on a non-discriminatory basis. Although Canaan is not an interstate
pipeline, Canaan believes the changes brought about by Order 636 have increased
competition in the marketplace, resulting in greater market volatility.
Various rules, regulations and orders, as well as statutory provisions may
affect the price of natural gas production and the transportation and marketing
of natural gas.
Operating Hazards and Uninsured Risks
Canaan's oil and gas operations are subject to all operating hazards and
risks normally incident to drilling for and producing oil and gas, such as
encountering unusual formations and pressures, blow-outs, environmental
pollution, and personal injury. Canaan will maintain such insurance coverage as
it believes to be appropriate, taking into account the size of Canaan and its
proposed operations. Canaan currently does not maintain insurance coverage for
physical loss or damage to equipment located on the wells or for selected
properties, such as crude oil stored in tanks. Canaan's insurance policies also
have standard exclusions. Losses can occur from an uninsurable risk or in
amounts more than existing insurance coverage. The occurrence of
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an event which is not insured or not fully insured could have an adverse impact
on Canaan's revenues and earnings.
Employees
At March 31, 2000, on a pro forma basis Canaan had 23 full and part-time
employees in its Oklahoma City headquarters and eight employees in various field
offices. None of these employees is represented by a union and Canaan believes
that it maintains good relations with its employees. After consummation of the
combination transactions, Canaan expects to add nine additional office employees
to manage its greater size.
Facilities
Canaan currently leases 5,867 square feet in downtown Oklahoma City for its
corporate headquarters and expects to add additional space after consummation of
the combination transactions.
Legal Proceedings
Canaan expects to be involved from time to time in various legal and
administrative proceedings and threatened legal and administrative proceedings
incidental to the ordinary course of its business. Neither Canaan nor any of the
Combining Entities is now involved in any litigation, individually or in the
aggregate, which could have a material adverse effect on Canaan's business,
financial condition, results of operations, or cash flows.
Capitalization
The following table sets forth as of March 31, 2000 the pro forma
capitalization of Canaan giving effect to the combination transactions assuming
consummation of the combination transactions as of such date and no limited
partners elect to receive cash or exercise dissenters rights. The table also
reflects the pro forma capitalization assuming that limited partners elect to
receive cash or exercise dissenters rights to the maximum $15.0 million limit.
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March 31, 2000
--------------------------------------
$15 Million in
No Cash Cash
to Limited to Limited
Partners Partners
-------- --------
Long term debt, including current maturities
Senior bank credit facility..................... $ 24,701,489 $ 39,701,489
Subordinated bank debt.......................... 6,876,583 6,876,583
------------- --------------
Total long term debt........................ $ 31,578,072 $ 46,578,072
------------- --------------
Shareholders' Equity
Preferred Stock, $.01 par
value, 1,000,000 shares
authorized, none
outstanding..................................... $ - $ -
Common Stock $.01 par
value, 50,000,000 shares
authorized, 5,000,000
and 3,106,938 shares issued and
outstanding..................................... 50,000 31,069
Additional paid in capital...................... 45,983,654 45,983,654
Stock subscription receivables.................. (8,213) (8,213)
Accumulated deficit............................. (21,258,976) (22,276,601)
------------- --------------
Total 24,766,465 23,729,909
------------- --------------
Total capitalization $ 56,344,537 $ 70,307,981
============= ==============
Credit Facilities
As a result of the combination transactions, Canaan expects to succeed to
the obligations of Indian on its senior bank debt under a secured credit
facility provided by Bank One, Oklahoma, N.A., unless Canaan elects to seek
similar financing from another commercial lender. The Bank One credit facility
provides for a line of credit of up to $50 million, subject to a borrowing base
which is based on a periodic valuation of oil and gas reserves (the "Borrowing
Base"). The amount of credit available to Indian at any time under the credit
facility is the lesser of the Borrowing Base or the amount of commitment. As of
March 31, 2000, Indian's Borrowing Base was $20 million. Canaan expects that
its borrowing base under the Bank One credit facility will be increased
significantly upon consummation of the combination transactions based on its pro
forma reserves to make available sufficient funds for its general corporate
purposes. The credit facility has a maturity date of January 15, 2001, which
Canaan expects to extend upon consummation of the combination transactions.
Indian has, and Canaan expects to have, the option of either borrowing at the
LIBOR rate plus a margin currently ranging from 2.5% to 2.75%
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depending on the amount of advances outstanding in relation to the Borrowing
Base or at a base rate which will approximate the prime rate. Indian is
obligated to make monthly principal payments in amounts determined by Bank One
after taking into consideration the expected reductions in the borrowing base as
a result of production. Indian's most recent determination of the Borrowing Base
was as of January 15, 2000 and Indian is currently making monthly principal
reductions in the amount of $215,000. Canaan expects that the monthly principal
reduction amount will be reset at the completion of the combination transactions
based on Canaan's Borrowing Base which will lead to a material reduction in the
required principal payments.
The Bank One credit facility contains various affirmative and restrictive
covenants. These covenants, among other things, limit additional indebtedness,
sales of assets, mergers and consolidations, dividends and distributions and
require the maintenance of certain financial ratios. Borrowings under the Indian
agreement with Bank One are secured by substantially all of Indian's oil and gas
properties and Canaan expects that such security arrangements will remain in
effect following consummation of the combination transactions with the addition
of Coral Group properties to the security.
Funding for any cash payments to be made to Placing Brokers or to limited
partners electing to receive cash or exercising dissenters rights are expected
to be provided under the Bank One credit facility. In addition, the partnerships
collectively are indebted to Bank One in the amount of $7.327 million as of
March 31, 2000 under separate individual partnership loans. Canaan expects to
repay these obligations at the closing with advances under the Bank One credit
facility.
Indian also has outstanding $6.376 million in debt to Mid-First Bank which
matures on March 1, 2001. On July 1, 2000, Indian is obligated to make an
interim principal payment of $376,000 plus accrued interest. Thereafter,
interest only is payable quarterly commencing September 30, 2000 until maturity.
The Mid-First debt is subordinate and junior to the Bank One debt. The Mid-First
debt bears interest at the rate of the prime rate as published in The Wall
Street Journal which was 8.25% at March 31, 2000 and is secured by the personal
guarantees of certain Indian shareholders, the security for which is limited to
the guarantor's stock and other securities of an affiliated company, and a
corporate guaranty from this same affiliated company that is secured by a pledge
of certain of its investment accounts. The personal guarantees and pledges are
required to be released as a part of the combination transactions. Canaan
expects that it will borrow under the Bank One facility to repay Mid-First upon
consummation of the combination transactions or will negotiate a further
extension of payment of the Mid-First debt.
Pro forma total long term debt outstanding as of March 31, 2000 will be
$31.578 million, assuming no limited partners elect to exercise dissenters'
rights and Canaan's pro forma long term debt as a percentage of its total pro
forma capitalization will be 56%. Canaan believes that the borrowing capacity
that will be available under the Bank One credit facility, combined with the
company's internal cash flows, will be adequate to finance the initial capital
expenditure
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programs of Canaan. Repayment of the Bank One credit facility will be made from
cash flow from operations.
Financing Plans
Canaan intends to finance its growth through various methods,
including bank debt and public and private offerings of equity and debt
securities. Canaan believes that a public offering of its common stock would be
desirable in order to improve the trading market for its common stock and to
raise additional capital for specified purposes. Canaan expects to complete a
public offering of its common stock after closing of a combination transaction
when Canaan determines market conditions are desirable for such purpose and an
appropriate use of proceeds can be determined.
Quantitative and Qualitative Disclosures about Market Risk
The following information provides quantitative and qualitative
information about Canaan's potential exposure to market risks. The term "market
risk" refers to the risk of loss arising from adverse changes in oil and gas
prices and interest rates. The disclosures are not meant to be precise
indicators of expected future losses, but rather indicators of reasonably
possible losses. All of the historical market risk sensitive instruments
entered into by Indian and the partnerships were for purposes other than
trading.
Commodity Price Risk. Canaan's major market risk exposure will be in
the pricing applicable to its oil and gas production. Realized pricing will be
primarily driven by the prevailing worldwide price for crude oil and spot market
prices applicable to its U.S. natural gas production. Pricing for oil and gas
production has been volatile and unpredictable for several years.
Indian and the partnerships have entered into, and Canaan expects to
periodically enter into, financial hedging activities with respect to a portion
of projected oil and gas production through financial price swaps whereby they
receive a fixed price for production and pay a variable market price to the
contract counterparty. These financial hedging activities are intended to
reduce exposure to oil and gas price fluctuations. Realized gains or losses
from the settlement of these financial hedging instruments are recognized in oil
and gas sales when the associated production occurs. The gains and losses
realized as a result of these hedging activities are substantially offset in the
cash market when the hedged commodity is delivered.
During 1999, the partnerships and Indian entered into financial oil
and gas price hedging instruments which represented approximately 3,001,950
MMBtu of gas production during the period from April 1, 1999 to December 31,
1999 at the rate of 333,550 MMBtu per month at a weighted average price of $2.01
per MMBtu. The hedged gas volumes represented approximately 33% of pro forma
combined total production for the year ending December 31, 1999.
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At March 31, 2000 the Coral Group and Indian had financial hedging
arrangements as follows:
Weighted Fair Value at
Monthly Average December 31,
Party Commodity Period Volumes Price 1999
- ----------- ----------- ------------------ ---------- -------- -------------
Indian Gas October 1, 1999 - 50,000 $ 1.86 $ (86,500)
March 31, 2000 MMBtu
Indian Gas October 1, 1999 - 250,000 $ 2.19 $(977,424)
September 30, 2000 MMBtu
Coral Group Gas October 1, 1999 - 100,650 $ 2.60 $(147,253)
September 30, 2000 MMBtu
Indian and Oil January 1, 2000 - 12,000 $22.00 $(370,332)
Coral Group December 31, 2000 Bbls
These arrangements hedged approximately 53% of Canaan's pro forma
combined estimated production on an Mcfe basis for the balance of calendar year
2000 based on the Netherland Sewell reserve reports.
Interest Rate Risk. On a pro forma combined basis, Canaan had long-
term debt outstanding of $31.578 million as of March 31, 2000. All of the debt
outstanding at March 31, 2000 bears interest at floating rates which averaged
8.52% as of March 31, 2000. A 10% increase in short-term interest rates on
the floating-rate debt outstanding at December 31, 1999 would equal
approximately 85 basis points. Such an increase in interest rates would have
increased Canaan's interest expense on a pro forma basis for 1999 and the first
three months by approximately $261,000 and $69,000, respectively.
The above sensitivity analysis for interest rate risk excludes
accounts receivable, accounts payable and accrued liabilities because of the
short-term maturity of such instruments.
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MANAGEMENT
Officers and Directors
The executive officers and directors of Canaan following completion of the
combination transactions will be as follows:
Term as
Director
Name Age Position Expires
- ---- --- -------- --------
Leo E. Woodard 51 Chairman and Chief Executive Officer 2003
John K. Penton 43 President and Director 2002
Michael S. Mewbourn 45 Senior Vice President, Chief Financial 2001
Officer and Director
Thomas H. Henson 53 Senior Vice President-Investor Relations 2001
and Director
Anthony Lasuzzo/1/ 49 Senior Vice President and Chief Operating N/A
Officer
Michael P. Cross 48 Director 2001
Mischa Gorkuscha 53 Director 2002
Randy Harp 44 Director 2003
_______________________
/1/Canaan and Mr. Lasuzzo have not yet reached final agreement on his
employment.
The Board of Directors of Canaan will initially consist of 7 members
and is divided into three classes, with the terms of office of expiring as
described above.
The executive officers of Canaan are elected by the Board of Directors
and serve at its discretion.
The following is a brief description of the business background of
each of the executive officers and directors of Canaan.
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Leo E. Woodard
Mr. Woodard graduated from the University of Oklahoma in May, 1972
with a Bachelor of Science degree in Chemical Engineering. From 1972 to 1977 he
was employed in a variety of engineering positions with Exxon Co., U.S.A. From
1977 to 1979, Mr. Woodard was a petroleum engineer with J. M. Huber Corporation
in Oklahoma City. From 1979 to 1982, he served as Chief Engineer for Post
Petroleum Co., Inc. until he co-founded Wood/Gate Engineering, Inc. in Oklahoma
City where he served as President. In 1987, he formed Canaan with John K.
Penton and served as its President until 1999 when he became Chairman and Chief
Executive Officer. He serves as Chairman of the Board of Canaan, as President
of the Coral Companies and as an additional general partner of each partnership.
He also has served as President of Indian since the February 1999 acquisition
agreement between Canaan and Indian.
John K. Penton
Mr. Penton received a Bachelor of Science degree in Economics from
Oklahoma City University in 1978 and a Masters of Business Administration degree
from Central State University in 1980. Mr. Penton was employed as a petroleum
landman by Hunt Energy Corporation in its Oklahoma City office from 1980 through
1984. From 1984 until 1987, Mr. Penton owned and managed an independent
exploration company based in Oklahoma City called Newport Resources, Inc. In
1987, he co-founded Canaan with Leo Woodard and served as its Vice-President
until 1999 when he became President. He serves as a director of Canaan, as
Vice- President of the General Partners and as an additional general partner of
each partnership. He also has served as Executive Vice President of Indian since
the February 1999 acquisition agreement between Canaan and Indian.
Michael S. Mewbourn
Mr. Mewbourn is a graduate of the University of Oklahoma, and received
Bachelor of Business Administration degrees in Marketing and Accounting in 1977
and 1980, respectively. He has served as Canaan's Vice President -- Finance and
Chief Financial Officer since June 1993, and was named Senior Vice President and
Chief Financial Officer in 1999. From 1989 to 1993, Mr. Mewbourn worked in
private practice as a Certified Public Accountant, which included accounting and
tax work performed for Canaan as well as the Partnerships. From 1983 to 1989,
he was with Devon Energy Corporation, Oklahoma City, Oklahoma, where he served
as Manager of Financial Accounting. From 1983 to 1985, Mr. Mewbourn was
Controller and Treasurer of Sabre Oil and Gas Co., Oklahoma City, Oklahoma, and
from 1980 through 1983 was employed by Arthur Young & Company, Oklahoma City,
Oklahoma, with various duties including senior auditor. Mr. Mewbourn is a
Certified Public Accountant and a member of the Oklahoma Society of Certified
Public Accountants.
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Thomas H. Henson
Mr. Henson received a Bachelor of Arts degree in Economics from the
University of Michigan and a Master of Business Administration degree from
Michigan State University. Since June of 1989, he has served as the owner and
President of Canaan Securities. Mr. Henson will become Senior Vice President -
Investor Relations and a director of Canaan upon completion of the combination
transactions.
Anthony Lasuzzo
Mr. Lasuzzo, has served as a consultant to Indian since April 1, 1999.
He previously served as a Director and Executive Vice President of Indian from
March 1997 to April 1, 1999. Mr. Lasuzzo has been in the oil and gas business
since 1974. He graduated with Bachelor of Science. and Master of Science
degrees in Geology from Northeast Louisiana University in 1972 and 1974,
respectively. Mr. Lasuzzo was employed by several major and independent oil and
gas companies and was an independent geologist prior to joining Indian in March,
1997.
Michael P. Cross
Mr. Cross will become a director of Canaan upon completion of the
combination transactions. He has served as President and Manager of Twister Gas
Services, L.L.C., an oil and gas exploration, production and marketing company
based in Oklahoma City, Oklahoma, since its inception in 1996, and he joined
Twister Transmission Company, a predecessor of the gas marketing division of
Twister Gas Services, L.L.C. in 1988. Mr. Cross has more than 10 years of
experience in the gas marketing industry. He currently serves as Treasurer and
Member of the Executive Committee of the Oklahoma Independent Petroleum
Association and is a Member of the National Gas Association of Oklahoma. Mr.
Cross received a Bachelor of Science degree in Business Administration from
Oklahoma State University in 1973.
Mischa Gorkuscha
Mr. Gorkuscha will become a director of Canaan upon completion of the
combination transactions. Since 1998, Mr. Gorkuscha has been self-employed.
From 1990 until 1998, he served as Chief Financial Officer of Liberty Bancorp,
Inc., a publicly-traded bank holding company headquartered in Oklahoma City,
Oklahoma, which was acquired in 1998 by Bank One, N.A. Mr. Gorkuscha received a
Bachelor of Science degree in Mathematics from the University of Oklahoma in
1968, and a Master of Business Administration from Harvard Business School in
1974. He is a director of several not-for-profit charitable institutions.
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Randy Harp
Mr. Harp will become a director of Canaan upon completion of the
combination transactions. For more than the past five years, Mr. Harp has
served as an officer and director of Pre-Paid Legal Services, Inc., a publicly-
traded pre-paid legal insurance company headquartered in Ada, Oklahoma. From
1990 until May 2000, he served as Chief Financial Officer and since 1996 he has
served as Chief Operating Officer of Pre-Paid Legal Services, Inc. From 1982
until 1988, Mr. Harp was employed by RATEX Resources, Inc., a then publicly-
traded oil and gas exploration company located in Oklahoma City, Oklahoma,
serving as its President, Treasurer, Chief Financial Officer and a director.
From 1978 until 1981, he was employed by KPMG LLP, Oklahoma City, Oklahoma, with
various duties including senior auditor. Mr. Harp received a Bachelor of
Science degree in Accounting in 1978 from East Central University, Ada,
Oklahoma. Mr. Harp is a Certified Public Accountant.
Committees
The Board of Directors of Canaan will establish an Audit Committee
consisting of Mssrs. Cross, Gorkuscha and Harp. The Audit Committee's functions
will include recommending to the Board of Directors the engagement of Canaan's
independent public accountants, reviewing with such accountants the results and
scope of their auditing engagement and certain other matters.
Compensation of Directors
Each director who is not an employee of Canaan or any affiliate of
Canaan will be reimbursed for certain expenses in connection with attendance at
such meetings. Canaan's Certificate of Incorporation provides for the mandatory
indemnification of directors and officers of Canaan and limits the liability of
directors of Canaan to Canaan or its shareholders for breaches of the directors'
fiduciary duty to the fullest extent permitted by Oklahoma law. In addition,
Canaan will enter into indemnification agreements with each non-employee
director of Canaan.
Executive Compensation
The following table sets forth information with respect to
compensation received by the chief executive officer of Canaan and the other
executive officers of Canaan. Such individuals are hereinafter referred to as
the "named executive officers".
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Summary Compensation Table
Annual Compensation
---------------------------------------------
Other Annual All Other
Name and Principal Position Year Salary Bonus/(1)/ Compensation/(2)/ Compensation/(3)/
- ---------------------------- ---- ------ ---------- ----------------- -----------------
Leo E. Woodard 1999 $150,000 $100,000 $29,481 $24,000
Chairman and Chief Executive 1998 150,000 125,000 32,315 24,000
Officer 1997 150,000 260,000 34,829 24,000
John Penton 1999 150,000 100,000 29,481 24,000
President 1998 150,000 125,000 32,315 24,000
1997 150,000 260,000 34,829 24,000
Michael S. Mewbourn 1999 100,800 6,017 ---- 26,963
Senior Vice-President and 1998 98,400 6,017 ---- 26,603
Chief Financial Officer 1997 96,000 20,000 ---- 17,400
___________________________
/(1)/ Bonuses were determined based on the agreement of the parties and
available year end cash resources.
/(2)/ Includes cash distributions to Mr. Woodard and Mr. Penton as Additional
General Partners of the partnerships.
/(3)/ Includes amounts contributed by Canaan for the account of the named
executive officers under Canaan's tax qualified profit sharing plan for
the benefit of all employees and for Mr. Mewbourn, in 1998 and 1999,
$10,939 in each year of debt forgiveness in connection with indebtedness
incurred to purchase stock of Canaan.
Upon completion of the combination transactions, the annual base
salary of Canaan's chief executive officer and each of its four other most
highly compensated executive officers is expected as follows:
Name Salary
Leo E. Woodard................................ $ 300,000
John Penton................................... 300,000
Michael S. Mewbourn........................... 120,000
Anthony Lasuzzo............................... 150,000
Thomas H. Henson.............................. 120,000
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Change in Control Agreements
Canaan has entered into agreements with Messrs. Woodard, Penton,
Mewbourn and Henson providing for the payment of severance benefits upon
involuntary termination of such persons, other than for cause, within two years
after a Change in Control (as defined in these agreements) of Canaan, including
constructive termination as a result of certain changes in duties or reduction
of compensation. Canaan expects to enter into similar agreements with other
officers including Mr. Lasuzzo, if he is employed. The agreements are intended
to promote the retention of these officers by providing them with an extra
measure of financial security in the event of a Change of Control of Canaan. In
the event of involuntary termination within two years after a Change in Control,
the agreements provide that the officers will receive a lump sum severance
payment equal to three times the officers' annual compensation defined as annual
salary immediately prior to the Change in Control plus the highest annual bonus
received by the officer in the three years immediately preceding the Change in
Control or any lesser period the officer has been employed by Canaan. No
amounts are payable by Canaan under these agreements unless a Change in Control
occurs and the Change in Control is followed within two years by the involuntary
termination of the officer. The amounts payable under the agreement are subject
to a limitation that the amounts paid may in no event be greater than the amount
that would be deductible by Canaan under applicable Internal Revenue Code
(golden parachute) payment limitations, after taking into consideration all
payments to the officer covered by such limitation, which would include payments
deemed to have been received due to any acceleration of vesting of stock options
or other benefits.
Compensation Decisions
Canaan does not currently have a compensation committee. Messrs.
Woodard and Penton participated in the decision making process with respect to
each of their compensation and the compensation of Mr. Mewbourn.
Stock Option Plan
In January, 2000, the Board of Directors and Canaan's shareholders
adopted Canaan's 2000 Stock Option Plan (the "Option Plan"). Under the Option
Plan, Canaan may grant both incentive stock options intended to qualify under
Section 422 of the Internal Revenue Code and options which are not qualified as
incentive stock options.
The maximum number of shares of Common Stock issuable under the Option
Plan is 500,000, subject to appropriate equitable adjustment in the event of a
reorganization, stock split, stock dividend, reclassification or other change
affecting Canaan's Common Stock. All executive officers of Canaan and other key
employees who hold positions of significant responsibility are eligible to
receive awards under the Option Plan. The exercise price of options granted
under the Plan is not less than 100% of the fair market value of the shares on
the date of grant. Options granted under the Plan become exercisable at such
time as the Board may determine in connection
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with the grant of each option. In addition, the Board may at any time accelerate
the date that any option granted becomes exercisable. Certain limitations exist
on the duration, exercise price and number of shares that may be subject to or
exercised in connection with incentive stock options. The exercise price of
options may be paid in cash, in shares of Common Stock (valued at fair market
value at the date of exercise), by surrender of a portion of the option, or by a
combination of such means of payment, as may be determined by the Board of
Directors.
In the event of any reorganization, merger, consolidation or sale of
substantially all of the assets of Canaan while options remain outstanding under
the Option Plan, the Option Plan provides for substitute options with an
appropriate number of shares or other securities of the reorganized, merged,
consolidated or acquiring corporation which were distributed to the shareholders
of Canaan. Unless the Board of Directors expressly provides otherwise, in the
event of a Change in Control (as defined in the Option Plan) of Canaan, all
outstanding options will become immediately and fully exercisable and optionees
will be entitled to surrender, within 60 days following the Change in Control,
unexercised options or portions of options in return for cash payment equal to
the difference between the aggregate exercise price of the surrendered options
and the fair market value of the shares of Common Stock underlying the
surrendered options.
The Board of Directors may amend or terminate the Option Plan at any
time, except that no amendment will become effective without the approval of the
shareholders except to the extent such approval may be required by applicable
law or by the rules of any securities exchange upon which the Canaan shares are
admitted to listed trading. The Option Plan will terminate in 2010, except with
respect to awards then outstanding.
Prior to the offering, no options have been granted by Canaan pursuant
to the Option Plan. Upon completion of the Offering, Canaan expects to grant to
executive officers and eligible participants under the Option Plan incentive and
nonqualified stock options in amounts which will be determined at a later date.
Profit Sharing Plan
Canaan has historically maintained a tax qualified profit sharing plan
pursuant to which Canaan makes annual discretionary contributions for the
benefit of all eligible employees based on a percentage of covered compensation.
In 1997, 1998 and 1999, Canaan accrued discretionary contributions to the plan
in the aggregate amount of $132,000, $124,000 and $132,000 respectively,
including $65,400, $63,663 and $64,033 respectively, for the account of Canaan's
named executive officers.
-154-
Certain Transactions
In 1998 Michael S. Mewbourn, Senior Vice President and Chief Financial
Officer of Canaan, purchased 5% of the stock of Canaan and the General Partners
for an aggregate purchase price of $32,819 payable on or before November 30,
2001 with interest at the Federal Reserve discount rate. Canaan and the General
Partners agreed to forgive such indebtedness over a three year period and to pay
an annual bonus equal to 40% of the amount of debt forgiveness, subject to Mr.
Mewbourn continuing his employment. In 1999, $10,939 of the indebtedness was
forgiven by Canaan and the General Partners and Mr. Mewbourn received a bonus of
$6,017 of which $ 4,376 related to this arrangement. At December 31, 1999, the
amount of the remaining indebtedness to Canaan and the General Partners was a
total of $10,939.
Canaan Securities, of which Thomas H. Henson is sole owner and
President, receives fees from the partnerships for services in connection with
providing reports and distribution information to limited partners. Canaan
Securities also receives fees from the general partner of each partnership for
services in connection with the sale of partnership interests in the
partnerships. In 1999, Canaan received $89,810 in fees from the partnerships
and $185,586 in fees from the General Partners.
Twister Gas Services L.L.C., of which Michael P. Cross is President
and a principal owner, has purchased natural gas from certain Coral partnerships
in the ordinary course of Twister's gas marketing business for more than the
past five years. In 1999, the aggregate sales of natural gas by the Coral
partnerships to Twister was $1,529,930. This represented 14.2% of the total
1999 sales by the Coral partnerships, and less than 2% of Twister's total 1999
purchases.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of Canaan's Common Stock as of January 1, 2000 and the pro
forma ownership after completion of the combination transactions based on the
estimated Exchange Values and assuming no limited partners elect to receive cash
or exercise dissenters rights by (i) each director, (ii) each of the named
executive officers, (iii) all executive officers and directors of Canaan as a
group, and (iv) all those known by Canaan to be beneficial owners of more than
five percent of Canaan's Common Stock.
-155-
Pro Forma
Current Estimated
Beneficial Ownership(1) Beneficial Ownership (1)
-------------------------------------------------------------------------------------
Number of Percentage Number of Percentage
Beneficial Owner Shares of Total Shares of Total
- ---------------- ---------- ----------- --------- -----------
Leo E. Woodard................................... 300 47.5% 495,447 9.91%
John Penton...................................... 300 47.5% 495,447 9.91%
Michael S. Mewbourn.............................. 32 5.0% 51,382 1.03%
Thomas H. Henson................................. -- -- 119,950 2.40%
Anthony Lasuzzo.................................. -- -- 111,637 2.23%
Michael P. Cross................................. -- -- -- --
Mischa Gorkuscha................................. -- -- -- --
Randy Harp....................................... -- -- -- --
---------- ----------- --------- -----------
All executive officers and directors as a group
(8 persons)...................................... 632 100.0% 1,273,863 25.48%
========== =========== ========= ===========
__________________________
(1) Based on estimated Exchange Values and assuming no limited partners elect
to receive cash.
COMPARISON OF SECURITYHOLDER RIGHTS
Introduction
The following comparative information is a summary of the material
differences associated with rights of a limited partner in the partnerships
versus a shareholder in Canaan, and the effect such differences likely will have
on shareholders. The rights and duties of the limited partners in the
partnerships summarized below are the same for each of the partnerships, except
as otherwise noted. Capitalized terms used in this section shall have the
meaning ascribed to them in this document or in the partnership agreements.
-156-
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PARTNERSHIPS CANAAN
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Federal Income Taxation
- ------------------------------------------------------------------------------------------------------
None of the partnerships is subject to federal Canaan is subject to federal income tax on
or state income taxes. Each partner is its income after allowable deductions and
allocated his pro rata share of the credits. Shareholders will not be taxed on
partnership's taxable income. Canaan's income, but generally will be
subject to federal and state income taxes on
any dividends received from Canaan.
- ------------------------------------------------------------------------------------------------------
Each of the partnerships is a pass-through entity for tax purposes, in which income is not
taxed at the entity level but instead is allocated, along with losses, directly to the partners.
The partners are taxed on income allocated to them, whether or not actual cash distributions
are made to the partners. On the other hand, to the extent that Canaan has any net income,
such income will be taxed at the corporate level at the standard corporate tax rates.
- ------------------------------------------------------------------------------------------------------
Management and Compensation
- ------------------------------------------------------------------------------------------------------
Coral and Coral Corp. each serve as the The shareholders of Canaan elect directors
General Partner of the partnerships. The of Canaan. The Board of Directors
General Partner makes all decisions appoints officers to serve at the discretion
regarding the business and operations of the of the Board of Directors. Executive
partnerships, including production, officer salaries and incentive compensation
development and other activities, and any are determined by the Board of Directors
sale of properties and the acquisition of and/or the Chief Executive Officer of
additional properties subject to limitations. Canaan.
The General Partner received an organization
and acquisition fee in connection with the
organization of the partnerships equal to 6%
of the total capital contributions. The
General Partner also receives compensation
as a result of the cost and revenue sharing
structure of the partnerships which allocates
a greater portion of revenues to it than its
proportionate capital investments.
Furthermore, the partnerships reimburse the
General Partners for their general and
administrative expenses.
- ------------------------------------------------------------------------------------------------------
Shareholders have greater control over management of Canaan than the limited partners have
over the management of the partnerships because the members of the Board of Directors of
Canaan are elected on an annual basis by the shareholders of Canaan. However, in both cases,
limited partners and shareholders must rely upon management for the prudent administration
of their investments.
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-157-
- ------------------------------------------------------------------------------------------------------
PARTNERSHIPS CANAAN
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Operating Strategy
- ------------------------------------------------------------------------------------------------------
The partnerships were each formed to invest Canaan will be primarily engaged in the
in producing oil and gas properties and to acquisition, development and production of
engage in limited drilling activities oil and gas properties. Canaan's business
associated with such properties. Each of the strategy is to seek new reserves in areas of
partnership agreements restricts the amount low geologic risk and to exploit
of money that could be borrowed to finance underdeveloped existing oil and gas fields.
additional activities. Canaan will not be subject to any
restrictions on the methods of financing its
activities
- ------------------------------------------------------------------------------------------------------
The basic operating strategy of Canaan will be substantially similar to the operating
strategies of the partnerships. However, Canaan's oil and natural gas interests will be
substantially larger and more diversified than any of the individual partnerships or all of the
partnerships taken together. Furthermore, unlike the partnerships, Canaan has substantial
flexibility to raise equity, through the sale of common stock or preferred stock, to finance its
operations.
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Fiduciary Duties
- ------------------------------------------------------------------------------------------------------
The General Partner's fiduciary duties to the The fiduciary duties owed by the directors
limited partners include legal responsibilities of Canaan to its shareholders under the
of loyalty, care and good faith. OGCA include duties of loyalty, care and
good faith.
- ------------------------------------------------------------------------------------------------------
The fiduciary duty owed to shareholders of Canaan is substantially the same as the fiduciary
duty owed to the limited partners in the partnerships. Therefore, the combination
transactions generally will not involve any reduction in the standard of care owed to
investors or any reduction in the remedies available for any breach of those duties.
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-158-
- ------------------------------------------------------------------------------------------------------
PARTNERSHIPS CANAAN
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Voting Rights
- ------------------------------------------------------------------------------------------------------
Limited partners in the partnerships are Shareholders of Canaan are entitled to one
entitled to vote on matters submitted to them vote per share on all matters submitted to
for a vote, including any sale of all or them for a vote, including the election and
substantially all of the assets, the borrowing removal of directors, amendments to the
of funds in excess of specific limits and certificate of incorporation, mergers and
removal of the General Partner. Each of share exchanges, dissolution and the sale of
these matters requires the consent of a all or substantially all of Canaan's assets.
majority in interest of the limited partners, These matters require the approval of the
except removal of a General Partner, either holders of a majority of the outstanding
with or without cause, which requires a vote common stock, and removal of directors
of 75% in interest of the limited partners. may only be for cause. Furthermore,
Canaan has adopted several anti-takeover
provisions which could have the effect of
delaying or impeding an unfriendly
takeover of Canaan. Please see
"Description of Capital Stock."
- ------------------------------------------------------------------------------------------------------
With the exception of the right to participate in annual elections of directors, the voting rights
of shareholders of Canaan will be substantially the same as the voting rights of limited
partners in the partnerships; however, because the former limited partners will own a smaller
percentage interest in Canaan than they did of their respective partnerships, the former
limited partners will experience a corresponding decrease in their relative voting power once
they become shareholders of Canaan.
- ------------------------------------------------------------------------------------------------------
Special Meetings
- ------------------------------------------------------------------------------------------------------
Meetings of the limited partners may be Special meetings of Canaan's shareholders
called upon written request of a majority in may be called by the President, the
interest of the Limited Partners. Chairman of the Board of Directors, or the
Board of Directors. Special meetings may not be
called by shareholders. Actions requiring a
vote may be taken without a meeting only
upon written consent of all the
shareholders.
- ------------------------------------------------------------------------------------------------------
The ability of the shareholders of Canaan to call a special meeting of the shareholders will be
more difficult than the ability of the limited partners to call a meeting of the limited partners.
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-159-
- ------------------------------------------------------------------------------------------------------
PARTNERSHIPS CANAAN
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Amendment to Organizational Documents
- ------------------------------------------------------------------------------------------------------
Each of the partnership agreements may be The certificate of incorporation of Canaan,
modified or amended at any time by a subject to certain limitations, may be
writing signed by all the general partners and amended by affirmative vote of the holders
a majority in interest of the limited partners of at least a majority of the shares of
of each partnership. No modification or Canaan common stock outstanding. The
amendment of the partnership agreements, Eleventh Article of the certificate, relating
however, may change the interest of any to the number and term of the Board of
partner in the capital, profit or cash Directors, provides that an affirmative vote
distributions of the partnership or his, her or of the holders of at least sixty-six and two
its right of contribution or withdrawal with third percent (66 2/3%) of the outstanding
respect thereto, or amend the term of the Canaan shares then entitled to be voted in
partnership, the provisions of the partnership an election of directors is required to alter,
agreement relating to dissolution of the amend or repeal, or to adopt any provision
partnership or the provisions of the inconsistent with, Article Eleventh. The
partnership agreement relating to its bylaws of Canaan may be amended or
amendment, without the express written repealed by the Board of Directors at any
consent of each partner materially affected meeting or by the shareholders at any
thereby. meeting, except that the amendment or
repeal of bylaws relating to written
consents, the number and term of the Board
of Directors or the removal of members of
the Board of Directors or the entire Board
of Directors, is prohibited unless the
certificate of incorporation is amended to
permit the amendment or repeal of such sections
of the bylaws.
- ------------------------------------------------------------------------------------------------------
With the exception of the ability to amend the certificate of incorporation of Canaan relating
to the number and term of the Board of Directors, the ability of the shareholders of Canaan to
amend the organizational documents of Canaan will be substantially similar to the ability of
the limited partners to amend the organizational documents relating to the partnerships.
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-160-
- ------------------------------------------------------------------------------------------------------
PARTNERSHIPS CANAAN
- ------------------------------------------------------------------------------------------------------
Anti-Takeover Provisions
- ------------------------------------------------------------------------------------------------------
There are no anti-takeover provisions in the The certificate and bylaws of Canaan, and
partnership agreements under Oklahoma the OGCA include a number of provisions
partnership law. which may have the effect of encouraging
persons considering unsolicited tender
offers or other unilateral takeover proposals
to negotiate with the Canaan Board of
Directors rather than pursue non-negotiated
takeover attempts. These provisions
include a classified Board of Directors,
advance notice requirements for
shareholder proposals and Director
nominations, restrictions on certain
business combinations and stock
repurchases, prohibition against actions
approved by written consent without the
approval of all the shareholders, and the
adoption of the Oklahoma Control Share
Provisions.
- ------------------------------------------------------------------------------------------------------
The shareholders of Canaan are subject to various anti-takeover provisions in the certificate
of incorporation and bylaws of Canaan which the limited partners did not face in the
partnership. These anti-takeover provisions could work to delay or frustrate the assumption
of control of Canaan by a holder of a large block of common stock or the removal of
incumbent members of the Board of Directors of Canaan, even if such actions would be
beneficial to the shareholders of Canaan.
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-161-
- ------------------------------------------------------------------------------------------------------
PARTNERSHIPS CANAAN
- ------------------------------------------------------------------------------------------------------
Distributions and Dividends
- ------------------------------------------------------------------------------------------------------
Under the terms of the 1990, 1991, 1992, Although holders of common stock are
1993, 1995 and 1996 partnership agreements, entitled to receive any dividends declared
revenues (other than net proceeds from the by Canaan's Board of Directors out of
sale or other disposition of all or part of an legally available funds, no dividends are
oil and gas property) available for expected to be paid on the common stock
distribution after the payment of partnership for the foreseeable future. Under
expenses and the establishment of any Oklahoma law, dividends may be paid out
necessary reserves ("Distributable Cash") of the Company's surplus or out of its net
will be distributed 90% to the limited profits for the fiscal year in which the
partners, and 10% to the General Partners dividend is declared and/or the preceding
(9% to the General Partner and .5% to each fiscal year.
of the Additional General Partners) until such
time as Payout is achieved. "Payout" is
defined as the time at which the amount of
Distributable Cash and any proceeds from
the sale of partnership property distributed to
a limited partner, equals the capital
contributions of such limited partner.
Distributable Cash after Payout will be
distributed 75% to the limited partners, and
25% to the General Partners (24% to the
General Partner and .5% to each of the
Additional General Partners). Net proceeds
from nonliquidating sales and other dispositions
of all or a portion of an oil and gas property
shall be distributed, to the extent available
after paying creditors and setting up reserves,
in the following manner: (i) first, to the
partners in proportion to and to the extent of
their respective share of the tax basis of the
property; (ii) to the extent next, until Payout
is achieved, 90% to the limited partners and 10%
to the General Partners (9% to the General Partner
and .5% to each of the Additional General Partners);
and (iii) thereafter, 75% to the limited partners
and 25% to the General Partners (24% to the
- ------------------------------------------------------------------------------------------------------
-162-
- --------------------------------------------------------------------------------
PARTNERSHIPS CANAAN
- --------------------------------------------------------------------------------
General Partner and .5% to each of the
Additional General Partners). Liquidating
distributions will be made, pro rata, in
accordance with the positive capital account
balances of the partners.
Under the terms of the 1993-I and 1996-I
partnership agreements, revenues (other than
net proceeds from the sale or other
disposition of all or part of an oil and gas
property) available for distribution after the
payment of partnership expenses and the
establishment of any necessary reserves
("Distributable Cash") will be distributed
87.5% to the limited partners, and 12.5% to
the General Partners (12% to the General
Partner and .25% to each of the Additional
General Partners).
Net proceeds from nonliquidating sales and
other dispositions of all or a portion of any
oil and gas property shall be distributed, to
the extent available after paying creditors and
setting up reserves, in the following manner:
(i) first, to the partners in proportion to and to
the extent of their respective share of the
basis of the property; and, (ii) thereafter
87.5% to the limited partners, and 12.5% to
the General Partners (12% to the General
Partner and .25% to each of the Additional
General Partners).
- --------------------------------------------------------------------------------
Both the partnership interests of the partnerships and the common stock of
Canaan represent equity interests entitling the holders thereof to participate
in the growth of the partnership and Canaan, respectively. Distributions and
dividends payable with respect to the partnership interests and the common stock
of Canaan depend upon the performance of the partnerships and the company,
respectively. However, Canaan's Board of Directors does not anticipate paying
any dividends on the common stock for the foreseeable future.
- --------------------------------------------------------------------------------
-163-
- ----------------------------------------------------------------------------------------------------------------------------------
PARTNERSHIPS CANAAN
- ----------------------------------------------------------------------------------------------------------------------------------
Liquidation Rights
- ----------------------------------------------------------------------------------------------------------------------------------
In the event of liquidation, the partners are In the event of liquidation, holders of
entitled to a distribution in proportion to their common stock would be entitled to share
positive capital account balances after the ratably in any assets of Canaan remaining
creditors, including partners who are after satisfaction of obligations to its
creditors (to the extent permitted by law), creditors and liquidation preferences on
have been paid. If the liabilities of the any series of preferred stock of Canaan
partnership exceed the assets upon then outstanding.
liquidation, or otherwise if any General
Partner then has a negative balance in its
capital account, the General Partner must
contribute funds to the partnership in the
ratio of their negative capital accounts until
the negative capital accounts are eliminated.
- ---------------------------------------------------------------------------------------------------------------------------------
The liquidation rights of shareholders of Canaan will be substantially the same as the liquidation rights of limited partners in
the partnerships.
- ---------------------------------------------------------------------------------------------------------------------------------
Limited Liability
- ---------------------------------------------------------------------------------------------------------------------------------
Under the terms of the partnership Canaan's shareholders will not be subject to
agreements, limited partners are not subject assessments or to personal liability for
to additional assessments. The liability of obligations of Canaan.
the limited partners generally is limited to
their capital contributions and, in certain
circumstances, the amount of any capital
distributed or returned to them.
- ---------------------------------------------------------------------------------------------------------------------------------
The limitation on personal liability of shareholders of Canaan will be substantially the same as the limitation on personal
liability of limited partners in the partnerships.
- ---------------------------------------------------------------------------------------------------------------------------------
-164-
- ----------------------------------------------------------------------------------------------------------------------------------
PARTNERSHIPS CANAAN
- ----------------------------------------------------------------------------------------------------------------------------------
Continuity of Existence
- ----------------------------------------------------------------------------------------------------------------------------------
The partnership agreements provide for terms Canaan has a perpetual term.
ending as follows:
1990 -- December 31, 2009
1991 -- January 1, 2011
1992 -- January 1, 2012
1993 -- January 1, 2013
1993-I -- January 1, 2014
1995 -- January 1, 2015
1996 -- January 1, 2016
1996-I -- January 1, 2016
- ----------------------------------------------------------------------------------------------------------------------------------
Because Canaan has a perpetual term of existence, the shareholders of Canaan have more of an opportunity to share in any future
growth of Canaan beyond the dates on which the respective partnerships would have terminated.
- ----------------------------------------------------------------------------------------------------------------------------------
Financial Reporting
- ----------------------------------------------------------------------------------------------------------------------------------
The limited partners in the partnerships are Canaan will be subject to the reporting
entitled to receive audited financial requirements of the Exchange Act and will
statements each fiscal year, until the payout be required to file periodic reports as well
for each particular partnership. After payout, as proxy statements with the SEC, copies
the General Partner will not be required to of which will be provided or made
furnish audited financial statements unless available to shareholders.
requested to do so by a majority in interest of
the limited partners.
- ----------------------------------------------------------------------------------------------------------------------------------
Because Canaan will be subject to the reporting requirements of the Exchange Act and the SEC, shareholders of Canaan will receive
substantially more information in the periodic financial reports than they would have received as limited partners in the
partnerships.
- ----------------------------------------------------------------------------------------------------------------------------------
Redemption and Conversion
- ----------------------------------------------------------------------------------------------------------------------------------
The interests in the partnerships are not Canaan common stock is not redeemable or
redeemable or convertible into other convertible.
securities.
- ----------------------------------------------------------------------------------------------------------------------------------
There is no difference between the redemption and conversion rights of Canaan and the partnerships.
- ----------------------------------------------------------------------------------------------------------------------------------
-165-
- ----------------------------------------------------------------------------------------------------------------------------------
PARTNERSHIPS CANAAN
- ----------------------------------------------------------------------------------------------------------------------------------
Right to Compel Dissolution
- ----------------------------------------------------------------------------------------------------------------------------------
There is no right to compel the dissolution of Under Oklahoma law, Canaan shareholders
any of the partnerships. However, the may not vote to compel dissolution of
withdrawal, bankruptcy, insolvency or Canaan without prior action by its Board of
dissolution of any of the General Partners Directors.
will cause the dissolution of the partnership.
The partnership agreement provides,
however, that (i) in any such event if there is
at least one remaining General Partner, the
business of the partnership may be continued
without dissolution by a remaining General
Partner or (ii) within ninety (90) days of a
General Partner's withdrawal, all the
remaining partners may agree in writing to
continue the business of the partnership and
elect additional General Partners, if
necessary or desired.
- ----------------------------------------------------------------------------------------------------------------------------------
Although the partnerships provide for dissolution upon certain events, there are no unilateral rights of the limited partners to
compel a dissolution of the partnerships. As such, the right of the shareholders to compel dissolution of Canaan will be
substantially the same as the limited partners rights to compel dissolution of the partnerships.
- ----------------------------------------------------------------------------------------------------------------------------------
Liquidity, Marketability and Restriction on Transfer
- ----------------------------------------------------------------------------------------------------------------------------------
There is no trading market for the interests in Canaan's common stock will be traded on
the partnership. The General Partners may the NASDAQ-NMS and the shares issued
not assign or transfer any portion of its pursuant to the combination transactions
interest in the partnership without the consent will be freely tradable by non-affiliates of
of a majority in interest of the limited Canaan.
partners of the partnership. No limited
partners of the partnership may assign or
transfer their Units or any interest therein
without the prior written consent of the
General Partner, which consent may be
withheld for any reason at the sole discretion
of the General Partner.
- ----------------------------------------------------------------------------------------------------------------------------------
Because the common stock of Canaan will be traded on the NASDAQ-NMS, the shareholders of Canaan will have substantially more
liquidity than the limited partners of the partnerships.
- ----------------------------------------------------------------------------------------------------------------------------------
-166-
- ----------------------------------------------------------------------------------------------------------------------------------
PARTNERSHIPS CANAAN
- ----------------------------------------------------------------------------------------------------------------------------------
Limitations on Liability of Management
- ----------------------------------------------------------------------------------------------------------------------------------
The partnership agreement provides that in Canaan's certificate provides for the
any threatened, pending or completed action, elimination of directors' liability for
suit or proceeding to which the General monetary damages arising from the breach
Partners were or are a party or are threatened of certain fiduciary obligations and for the
to be made a party by reason of the fact that indemnification of directors, officers,
they were or are a general partner of the employees or agents of Canaan to the
partnership involving any alleged cause of fullest extent provided by the OGCA and
action for damages, the partnership will any other law of the State of Oklahoma.
indemnify the General Partners against These provisions generally provide for
expenses actually and reasonably incurred by indemnification so long as the indemnitee
them in connection with such action, suit or acted in good faith and in a manner he or
proceeding if they acted in good faith and in she reasonably believed to be in or not
a manner they reasonably believed to be in or opposed to the best interests of Canaan.
not opposed to the best interests of the
partnership, and provided that their conduct
does not constitute negligence, misconduct,
or a breach of their fiduciary obligations to
the limited partners of the partnerships.
Under the partnership agreement the limited
partners of the partnerships are each solely
and individually responsible only for their
initial capital contribution to the partnership.
- ----------------------------------------------------------------------------------------------------------------------------------
The limitation on liability of management of Canaan will be substantially the same as the limitation on liability of management of
the partnerships.
- ----------------------------------------------------------------------------------------------------------------------------------
-167-
- ------------------------------------------------------------------------------------------------------
PARTNERSHIPS CANAAN
- ------------------------------------------------------------------------------------------------------
Right to Investor List; Inspection of Books and Records
- ------------------------------------------------------------------------------------------------------
The partnership agreements provide, in Canaan is required to maintain a list of the
accordance with Oklahoma law, that the names and addresses of all shareholders at
General Partner will maintain or cause to be its principal office and make such
maintained full and accurate books and information available for review to
records of the partnerships, and all partners shareholders of record during normal
will have the right to inspect and examine the business hours for any proper purpose.
same at reasonable times and upon Also, Canaan must make all books and
reasonable notice. The records to be kept at records available for shareholder review
the partnership's office in Oklahoma shall during normal business hours for a proper
include, without limitation, (i) a current list purpose.
of the full name and last known business
address of each partner set forth in
alphabetical order; (ii) a copy of the
certificate of limited partnership and all
certificates of amendment thereto, together
with executed copies of any powers of
attorney pursuant to which any certificate has
been executed, (iii) copies of the
partnership's federal, state and local tax
returns and reports, if any, for the three most
recent years, and (iv) copies of any then
effective written partnership agreement and
any financial statements of the partnership
for the three most recent years.
- ------------------------------------------------------------------------------------------------------
The rights of shareholders of Canaan to inspect the investor list and books and records of
Canaan will be substantially the same as the rights of the limited partners to inspect the
investor list and the books and records of the partnerships.
- ------------------------------------------------------------------------------------------------------
Compensation and Distributions to General Partners
The following table sets forth the amount of compensation and
distributions paid by all partnerships on a combined basis to the General
Partners and their affiliates for the periods indicated:
-168-
Year Ended December 31, Three Months
---------------------------------
Ended
1997 1998 1999 March 31, 2000
--------------------------------- -------------------
Reimbursement of expenses paid to General Partners........... $ 380,199 $327,386 $335,498 $100,637
Operating fees paid to Canaan................................ 253,565 328,294 393,941 99,565
Cash distributions paid to General Partners.................. 954,261 905,016 821,870 263,073
Cash distributions paid to Additional General Partners....... 70,515 64,633 58,963 19,079
---------- -------- -------- --------
Total................................................... $1,024,776 $969,649 $880,833 $282,152
========== ======== ======== ========
After the completion of the combination transactions, any
distributions or compensation paid by the partnerships will be paid to Canaan
for the benefit of all shareholders of Canaan.
DESCRIPTION OF CAPITAL STOCK
General
Canaan's authorized capital stock consists of 50,000,000 shares of
common stock, $.01 par value, and 1,000,000 shares of preferred stock, $.01 par
value.
Common Stock
The holders of common stock are entitled to one vote for each share of
common stock held on all matters voted upon by shareholders, including the
election of directors. Subject to the rights of any then outstanding shares of
preferred stock, the holders of common stock are entitled to dividends as may be
declared in the discretion of the board of directors out of funds legally
available for the payment of dividends. The holders of common stock are
entitled to share ratably in Canaan's net assets upon liquidation after Canaan
pays or provides for all liabilities and for any preferential liquidation rights
of any preferred stock then outstanding. The common shareholders have no
preemptive rights to purchase shares of Canaan stock. Shares of common stock
are not subject to any redemption provisions and are not convertible into any of
our other securities. All of the shares of common stock which we are going to
issue in the combination transactions will be fully paid and nonassessable.
-169-
Preferred Stock
Our board of directors has the authority, without further action by
shareholders, to issue shares of undesignated preferred stock from time to time
in one or more series and to fix the related number of shares and the
designations, voting powers, preferences, optional and other special rights, and
restrictions or qualifications of that preferred stock. The rights,
preferences, privileges and restrictions or qualifications of different series
of preferred stock may differ with respect to dividend rates, amounts payable on
liquidation, voting rights, conversion rights, redemption provisions, sinking
fund provisions and other matters. The issuance of preferred stock could:
. decrease the amount of earnings and assets available for
distribution to holders of common stock;
. adversely affect the rights and powers, including voting rights,
of holders of common stock; and
. have the effect of delaying , deferring or preventing a change in
control.
Oklahoma Law and Certificate and Bylaw Provisions - Anti-Takeover Effects
General. Canaan's certificate and bylaws, and the OGCA include a
number of provisions which may have the effect of encouraging persons
considering unsolicited tender offers or other unilateral takeover proposals to
negotiate with Canaan's board of directors rather than pursue non-negotiated
takeover attempts. These provisions include a classified board of directors,
advance notice requirements for shareholder proposals and director nominations,
restrictions on business combinations and stock repurchases, prohibition against
actions approved by written consent without the approval of all the
shareholders, and the adoption of the Oklahoma control share provisions. These
certificate and bylaws provisions could work to delay or frustrate the
assumption of control of Canaan by the holder of a large block of common stock
or the removal of incumbent directors, even if such actions would be beneficial
to the shareholders as a whole. Furthermore, these provisions may discourage or
prevent a merger, tender offer or proxy contest even if it would be favorable to
the interests of the shareholders as a whole. The following is a more specific
description of each of these certificate and bylaws provisions:
Classified Board of Directors. Canaan's certificate and bylaws
contain provisions for a staggered board of directors with one-third (1/3) of
the Board standing for election each year. The term of each director is three
years, and in each year the terms of the directors in one class will expire.
Directors may be removed only for cause and by the affirmative vote of the
holders of a majority of the shares entitled to vote in an election of
directors. A staggered board of directors makes it more difficult for
shareholders to change the majority of the members of the board of directors and
instead promotes continuity of existing management.
-170-
Advance Notice Requirements for Shareholder Proposals and Director
Nominations. Under the bylaws, a notice of intent of a shareholder to bring any
matter before a meeting of the shareholders must be made in writing and received
by our corporate secretary not more than one hundred fifty (150) days and not
less than ninety (90) days in advance of the annual meeting, or, in the event of
a special meeting of shareholders, such notice must be received by the secretary
not later than the close of the fifteenth (15th) day following the day on which
notice of the special meeting is first mailed to the shareholders. Every notice
by a shareholder must state:
. The name and address of the shareholder who intends to bring up
any matter.
. A representation that the shareholder is a registered holder of
Canaan's voting stock and intends to appear in person or by proxy
at the meeting to bring up the matter specified in the notice.
. With respect to notice of an intent to make a director
nomination, a description of all understandings among the
shareholder and each nominee and any other person, naming such
person or persons, pursuant to which the nomination or
nominations are to be made by the shareholder and such other
information regarding each nominee proposed by the shareholder as
would have been required to be included in a proxy statement
filed pursuant to the proxy rules of the SEC had each nominee
been nominated by the board of directors of Canaan.
. With respect to notice of an intent to bring up any other matter,
a description of the matter, and any material interest of the
shareholder in the matter.
. Notice of intent to make a nomination shall be accompanied by the
written consent of each nominee to serve as a director, if
elected.
Business Combinations with Interested Shareholders. Canaan's
certificate contains a provision expressly electing to be governed by Section
1090.3 of the OGCA which places restrictions on Canaan's ability to enter into
business combinations and effect stock repurchases. Specifically, Section
1090.3 of the OGCA generally prevents an "interested shareholder" from engaging
in a "business combination" with a corporation for three years following the
date such person became an interested shareholder, unless:
. Prior to the time such person became an interested shareholder,
the board of directors of the corporation approved the
transaction in which the interested shareholder became an
interested shareholder or approved the business combination;
-171-
. Upon consummation of the transaction that resulted in the
interested shareholder becoming an interested shareholder, the
interested shareholder owns at least 85% of the voting stock of
the corporation outstanding at the time the transaction
commenced, excluding stock held by directors who are also
officers of the corporation and stock held by some employee stock
plans; or
. On or subsequent to the time of the transaction in which such
person became an interested shareholder, the business combination
is approved by the board of directors of the corporation and
authorized at a meeting of shareholders by the affirmative vote
of the holders of two-thirds (2/3) of the outstanding voting
stock of the corporation not owned by the interested shareholder.
The statute defines a "Business Combination" to include:
. any merger or consolidation involving the corporation and an
interested shareholder;
. any sale, transfer, pledge or other disposition involving an
interested shareholder of ten percent (10%) or more of the assets
of the corporation;
. subject to exceptions, any transaction which results in the
issuance or transfer by the corporation of any stock of the
corporation to an interested shareholder;
. any transaction involving the corporation which has the effect of
increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested
shareholder;
. the receipt by an interested shareholder of any loans,
guarantees, pledges or other financial benefits provided by or
through the corporation; or
. any share acquisition by the interested shareholder pursuant to
Section 1090.1 of the OGCA.
In addition, the statutes define "interested shareholder" as any
entity or person beneficially owning fifteen percent (15%) or more of the
outstanding voting stock of the corporation and any entity or person affiliated
with or controlling or controlled by such entity or person.
-172-
Prohibition Against Actions by Written Consent. Canaan's certificate
provides for any action required by the OGCA to be taken or otherwise permitted
to be taken at any annual or special meeting of shareholders of the corporation
may be taken without a meeting, without prior notice and without a vote, only if
a consent or consents in writing, setting forth the action taken, shall be
signed by the holders of all outstanding stock entitled to vote thereon. This
provision effectively prevents any actions without a meeting, notice and a vote
of our shareholders.
Control Share Provisions. Canaan's certificate specifically provides
that we will be subject to the Oklahoma control share acquisition statute
("Oklahoma Control Share Statute"), codified at Sections 1145-1155 of the OGCA.
Section 1145 of the OGCA defines "control shares" as those issued and
outstanding shares of an "issuing public corporation" that, in the absence of
the Oklahoma Control Share Statute, would have voting power, when added to all
the other shares of the issuing public corporation which are owned, directly or
beneficially, by an acquiring person or over which the acquiring person has the
ability to exercise voting power, that would entitle the acquiring person,
immediately after the acquisition of the shares to exercise, or direct the
exercise of, the voting power of the issuing public corporation in the election
of directors within any of the following ranges of voting power:
. one-fifth (1/5) or more but less than one-third (1/3) of all voting
power;
. one-third (1/3) or more but less than a majority of all voting power;
or
. a majority of all voting power.
A "control share acquisition" means the acquisition by any person of
ownership of, or the power to direct the exercise of voting power with respect
to, "control shares." After a control share acquisition occurs, the acquiring
person is subject to limitations on the ability to vote such control shares.
Specifically, Section 1149 of the OGCA provides in pertinent part that under
most control share acquisition scenarios, "the voting power of control shares
having voting power of one-fifth (1/5) or more of all voting power is reduced to
zero unless the shareholders of the issuing public corporation approve a
resolution . . . according the shares the same voting rights as they had before
they became control shares." Section 1153 of the OGCA provides the procedures
for obtaining shareholder consent of a resolution of an "acquiring person" to
determine the voting rights to be accorded the shares acquired or to be acquired
in the control share acquisition. Accordingly, "to be approved, the resolution
shall receive the affirmative votes of a majority of all voting power, excluding
all interested shares." Therefore, Canaan's adoption of the Oklahoma Control
Share Statute makes it more difficult for a person acquiring "control shares" to
exercise his voting rights as a shareholder.
-173-
General Result of Anti-Takeover Measures. By discouraging takeover
attempts, these provisions may have the incidental effect of inhibiting the
temporary fluctuations of the market price of Canaan's common stock or other
securities which may result from actual or rumored takeover attempts. In
addition, these provisions could limit or reduce the price that investors might
be willing to pay for our shares and may limit the ability of Canaan's
shareholders to receive premium prices for their shares which an acquiring party
might be willing to pay in connection with the acquisition of control of Canaan.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is UMB Bank,
n.a., Kansas City, Kansas.
LEGAL MATTERS
Crowe & Dunlevy, A Professional Corporation, Oklahoma City, Oklahoma,
as our counsel, will issue an opinion for Canaan regarding the validity of the
common stock to be issued in the combination transactions and material federal
income tax matters related to the combination transactions.
EXPERTS
The financial statements of Canaan Energy Corporation and Indian Oil
Company as of December 31, 1998 and 1999, and for each of the years in the
three-year period ended December 31, 1999, have been included in this document
and in the registration statement in reliance upon the reports of KPMG LLP,
independent certified public accountants, appearing elsewhere in this document,
and upon the authority of said firm as experts in accounting and auditing.
The financial statements of Coral Reserves, Inc., Coral Reserves
Energy Corp. and of each of the partnerships as of December 31, 1998 and 1999,
and for each of the years in the three-year period ended December 31, 1999, have
been included in this document and in the registration statement in reliance
upon the reports of William T. Zumwalt, Inc., independent certified public
accountants, appearing elsewhere in this document, and upon the authority of
said firm as experts in accounting and auditing.
The financial statements of Canaan Securities, Inc. as of December 31,
1998 and 1999, and for each of the years in the two year period ended December
31, 1999, have been included in this document and in the registration statement
in reliance upon the reports of Nishball, Carp, Niedermeier, Pacowta & Co.,
P.C., independent certified public accountants, appearing elsewhere in this
document, and upon the authority of said firm as experts in accounting and
auditing.
-174-
The information appearing in this document with respect to proved oil
and gas reserves of Canaan, the partnerships and Indian, as of December 31,
1999, to the extent stated in this document, was estimated by Netherland, Sewell
& Associates, Inc. independent petroleum engineers, and is included in this
document on the authority of such firm as experts in petroleum engineering.
AVAILABLE INFORMATION
Canaan has filed with the SEC a registration statement on Form S-4,
including all amendments and exhibits, under the Securities Act with respect to
the common stock in this offering. As permitted by the rules and regulations of
the SEC, this document omits some of the information contained in the
registration statement. For further information with respect to Canaan and the
common stock offered in this offering, you should refer to the registration
statement and its exhibits and schedules. You may obtain copies of all or any
portion of the registration statement at prescribed rates from the public
reference facilities maintained by the SEC at:
. Room 1024, Judiciary Plaza
450 Fifth Street, N.W.,
Washington, D.C. 20549
. 7 World Trade Center
New York, New York 10007
. CitiCorp Center
500 W. Madison Street, Suite 1400
Chicago, IL 60661
You may also call the SEC at 1-800-SEC-0330. In addition, the SEC
maintains a website that contains reports, proxy statements and information
statements and other information regarding registrants, including Canaan, that
file electronically with the SEC, which can be accessed at http://www.sec.gov.
Canaan intends to furnish to our shareholders annual reports
containing financial statements audited by an independent public accounting firm
and to make available to shareholders quarterly reports for each of the quarters
of each fiscal year containing unaudited financial statements.
-175-
FORWARD LOOKING STATEMENTS
All statements made in this document and accompanying supplements
other than purely historical information are "forward looking statements" within
the meaning of the federal securities laws. These statements reflect
expectations and are based on historical operating trends, proved reserve
positions and other currently available information. Forward looking statements
include statements regarding future plans and objectives, exploration and
development budgets and number and location of planned wells and statements
regarding the quality of our properties and potential reserve and production
levels. This statement may be preceded or followed by or otherwise include the
words "believes", "expects", "anticipates", "intends", "plans", "estimates",
"projects" or similar expressions or statements that events "will" or "may"
occur. These statements assume that no significant changes will occur in the
operating environment for oil and gas properties and that there will be no
material acquisitions or divestitures except as otherwise described.
The forward looking statements are subject to all the risks and
uncertainties incident to the combination transactions and acquisition,
exploration, development, marketing of oil and gas reserves, including the risks
described under "Risk Factors." Canaan may also make material acquisitions or
divestitures or enter into financing transactions. None of these events can be
predicted with certainty or not taken into consideration in the forward looking
statements.
For all of these reasons, actual results may vary materially from the
forward looking statements and there is no assurance that the assumptions used
are necessarily the most likely. Canaan will not update any forward looking
statements to reflect events or circumstances occurring after the date the
statement is made except as may be required by federal securities laws.
DEFINITIONS
When the following words are used in the text of this document, they
have the following meaning:
Appraised Value. "Appraised Value" means the value of a limited
---------------
partner's interest in a partnership determined based on an appraisal of the
partnership's oil and gas properties by Madison Energy Advisors as if the
properties were sold in an orderly manner in a reasonable period time less the
cost of sale and in a manner consistent with appropriate industry practice, plus
or minus the book value of the partnership's other assets and liabilities, and
assuming the proceeds of sale are distributed to partners in accordance with the
liquidation provisions of the applicable partnership agreement.
Average Sales Price. "Average Sales Price" means total revenues from
-------------------
the sale of oil or natural gas or on a per Mcfe basis for the applicable period
divided by the units of production for the applicable period.
-176-
Bbl. "Bbl" means one stock tank barrel, or 42 U.S. gallons liquid
---
volume, used in this document in reference to oil or other liquid hydrocarbons.
Bcf. "Bcf" means billion cubic feet.
---
Bcfe. "Bcfe" means billion cubic feet of natural gas equivalent,
----
determined using the ratio of one Bbl of oil or condensate to six Mcf of natural
gas.
Btu. "Btu" means british thermal unit, which is the heat required to
---
raise the temperature of a one pound mass of water from 58.5 to 59.5 degrees
Fahrenheit.
Bbtu. "Bbtu" means billion Btus.
----
Capital Expenditures. "Capital Expenditures" means costs associated
--------------------
with exploratory and development drilling, including exploratory dry holes;
leasehold acquisitions; seismic data acquisitions; geological, geophysical and
land-related overhead expenditures; delay rentals; producing property
acquisitions; and other miscellaneous capital expenditures.
Combining Entities. "Combining Entities" means Canaan, Indian, the
------------------
General Partners, the Partnerships and Canaan Securities.
Completion Costs. "Completion Costs" means as to any well, all those
----------------
costs incurred after the decision to complete the well as a producing well.
Generally, these costs include all costs, liabilities and expenses, whether
tangible or intangible, necessary to complete a well and bring it into
production, including installation of service equipment, tanks and other
materials necessary to enable the well to deliver production.
Developed Acreage. "Developed Acreage" means the number of acres
-----------------
which are allocated or assignable to producing wells or wells capable of
production.
Development Location. "Development Location" means a location on
--------------------
which a development well can be drilled.
Development Well. "Development Well" means a well drilled within the
----------------
proved area of an oil or gas reservoir to the depth of a stratigraphic horizon
known to be productive in an attempt to recover proved undeveloped reserves.
Drilling Unit. "Drilling Unit" means an area specified by
-------------
governmental regulations or orders or by voluntary agreement for the drilling of
a well to a specified formation or formations which may combine several smaller
tracts or subdivides a large tract, and within which there is usually some right
to share in production or expense by agreement or by operation of law.
-177-
Dry Hole. "Dry Hole" means a well found to be incapable of producing
--------
either oil or gas in sufficient quantities to justify completion as an oil or
gas well.
EBITDA. "EBITDA" is defined as income or loss before interest, income
------
taxes, depreciation, depletion and amortization and impairment. We believe that
EBITDA is a financial measure commonly used in the oil and gas industry as an
indicator of a company's ability to service and incur debt. However, EBITDA
should not be considered in isolation or as a substitute for net income, cash
flows provided by operating activities or other data prepared in accordance with
generally accepted accounting principles, or as a measure of a company's
profitability or liquidity. EBITDA measures as presented may not be comparable
to other similarly titled measures of other companies.
Estimated Future Net Revenues. "Estimated Future Net Revenues" means
-----------------------------
revenues from production of oil and gas, net of all production-related taxes,
lease operating expenses, capital costs and abandonment costs.
Exchange Reserves. "Exchange Reserves" means oil and gas reserves
-----------------
estimated for purposes of the combination transactions as of September 30, 1999.
Exchange Reserves consist of proved reserves as defined by the Society of
Petroleum Engineers based on the oil and gas prices specified by Canaan and the
General Partners for purposes of the calculation of Exchange Reserves. Because
the prices specified by Canaan and the General Partners for the calculation of
Exchange Reserves do not use prices in effect as of September 30, 1999, the
Exchange Reserves do not constitute Proved Reserves as defined by the Securities
and Exchange Commission.
Exchange Value. "Exchange Value" means the value assigned to the
--------------
Combining Entities and the respective owners thereof for purposes of the
combination transactions as described under "Method of Determining Combination
Exchange Values" beginning on page _____.
Exploratory Well. "Exploratory Well" means a well drilled to find and
----------------
produce oil or gas in an unproved area, to find a new reservoir in a field
previously found to be productive of oil or gas in another reservoir, or to
extend a known reservoir.
Future Development Cost. "Future Development Cost" means Future
-----------------------
Development Cost of proved non-producing reserves, expressed in dollars per BOE,
is calculated by dividing the amount of future capital expenditures related to
development properties by the amount of total proved non-producing reserves
associated with such activities.
Gross Acre. "Gross Acre" means an acre in which a working interest is
----------
owned.
Gross Well. "Gross Well" means a well in which a working interest is
----------
owned.
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Infill Drilling. "Infill Drilling" means drilling for the development
---------------
and production of proved undeveloped reserves that lie within an area bounded by
producing wells.
Lease Operating Expense. "Lease Operating Expense" means all direct
-----------------------
costs associated with and necessary to operate a producing property.
Lifting Costs. "Lifting Costs" means the expenses of lifting oil from
-------------
a producing formation to the surface, consisting of the costs incurred to
operate and maintain wells and related equipment and facilities, including labor
costs, repair and maintenance, supplies, insurance, production, severance and
windfall profit taxes.
MBbls. "MBbls" means thousand barrels.
-----
MBtu. "MBtu" means thousand Btus.
----
Mcf. "Mcf" means thousand cubic feet.
---
Mcfe. "Mcfe" means thousand cubic feet of natural gas equivalent,
----
determined using the ratio of one Bbl of oil or condensate to six Mcf of natural
gas.
MMBbls. "MMBbls" means million barrels.
------
MMBtu. "MMBtu" means million Btus.
-----
MMcf. "MMcf" means million cubic feet.
----
MMcfe. "MMcfe" means million cubic feet of natural gas equivalent,
-----
determined using the ratio of one Bbl of oil or condensate to six Mcf of natural
gas.
Natural Gas Liquids. "Natural Gas Liquids" means liquid hydrocarbons
-------------------
which have been extracted from natural gas, e.g., ethane, propane, butane and
natural gasoline.
Net Acres or Net Wells. "Net Acres or Net Wells" means the sum of the
----------------------
fractional working interests owned in gross acres or gross wells.
Oil and Gas Lease. "Oil and Gas Lease" means an agreement whereby the
-----------------
grantee receives for a period of time of the full or partial interest in oil and
gas properties, oil and gas mineral rights, fee rights or other rights of the
grantor granting the grantee the right to drill for, produce and sell oil and
gas upon payment of rentals, bonuses and/or royalties. Oil and Gas Leases are
generally acquired from private landowners and federal and state governments.
-179-
Overriding Royalty Interest. "Overriding Royalty Interest" means an
---------------------------
interest in an oil and gas property entitling the owner to a share of oil and
gas production free of well or production costs.
Present Value. "Present Value," when used with respect to oil and gas
-------------
reserves, means the estimated future gross revenue to be generated from the
production of proved reserves, net of estimated production, future development
costs, future income tax expense and future abandonment costs, using prices and
costs in effect as of the date of the report or estimate, without giving effect
to non-property related expenses such as general and administrative expenses and
debt service or to deprecation, depletion and amortization, discounted using an
annual discount rate of 10%. Present Value is the same as the "Standard Measure
of Discounted Future Net Cash Flows" as prescribed by Statement of Financial
Accounting Standards No. 69 promulgated by the Financial Accounting Standards
Board.
Productive Well. "Productive Well" means a well that is producing oil
---------------
or gas or that is capable of production.
Proved Developed Reserves. "Proved Developed Reserves" means proved
-------------------------
reserves that are expected to be recovered through existing wells with existing
equipment and operating methods. Additional oil and gas expected to be obtained
through the application of fluid injection or other improved recovery techniques
for supplementing the natural forces and mechanisms of primary recovery are
included as proved developed reserves only after testing by pilot project or
after the operation of an installed program as confirmed through production
response that increased recovery will be achieved.
Proved Reserves. "Proved Reserves" means the estimated quantities of
---------------
crude oil, natural gas and natural gas liquids which geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions; i.e.,
prices and costs as of the date the estimate is made. Prices include
consideration of changes in existing prices provided only by contractual
arrangements, but not on escalations based upon future conditions.
Proved Undeveloped Reserves. "Proved Undeveloped Reserves" means
---------------------------
proved reserves that are expected to be recovered from new wells on undrilled
acreage, or from existing wells where a relatively major expenditure is required
for recompletion. Reserves on undrilled acreage are limited to those drilling
units offsetting productive units that are reasonably certain of production when
drilled. Proved reserves for other undrilled units can be claimed only where it
can be demonstrated with certainty that there is continuity of production from
the existing productive formation. Under no circumstances do estimates for
proved undeveloped reserves be attributable to any acreage for which an
application of fluid injection or other improved recovery techniques is
contemplated, unless such techniques have been proved effective by actual tests
in the area and in the same reservoir.
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Recompletion. "Recompletion" means the completion for production of
------------
an existing wellbore in another formation from that in which the well has
previously been completed.
Reserve Value. "Reserve Value" means the estimated future gross
-------------
revenue to be generated from production of Exchange Reserves, net of estimated
production, future development costs and future abandonment costs, using prices
as specified by Canaan and the General Partners. The Reserve Value is
calculated for purposes of the calculation of the Exchange Value and is not the
same as the term present value.
Royalty Interest. "Royalty Interest" mean an interest in an oil and
----------------
gas property entitling the owner to a share of oil and gas production, or the
proceeds of the sale thereof, free of the costs of production.
3-D Seismic. "3-D Seismic" means the method by which a three
-----------
dimensional image of the earth's substance is created through the interpretation
of aerially collected seismic data. 3-D surveys allow for a more detailed
understanding of the subsurface than do conventional surveys and contribute
significantly to field appraisal, development and production.
Undeveloped Acreage. "Undeveloped Acreage" means lease acreage on
-------------------
which wells have not been drilled or completed to a point that would permit the
production of commercial quantities of oil and gas regardless of whether such
acreage contains proved reserves.
Working Interest. "Working Interest" means the operating interest
----------------
which gives the owner the right to drill, produce and conduct operating
activities on the property and a share of production.
-181-
CANAAN ENERGY CORPORATION
INDEX TO FINANCIAL STATEMENTS
Canaan Energy Corporation
Independent Auditors' Report.................................................................. F-4
Balance Sheets, December 31, 1998 and 1999 and March 31, 2000................................. F-5
Statements of Operations, Years ended December 31, 1997, 1998, and 1999
and Three Months ended March 31, 1999 and 2000......................................... F-6
Statements of Cash Flows, Years ended December 31, 1997, 1998,
and 1999 and Three Months ended March 31, 1999 and 2000................................ F-7
Statements of Stockholders' Equity, Years ended December 31, 1997, 1998,
and 1999 and Three Months ended March 31, 2000......................................... F-8
Notes to Financial Statements................................................................. F-9
Indian Oil Company
Independent Auditors' Report.................................................................. F-21
Balance Sheets, December 31, 1998 and 1999 and March 31, 2000................................. F-22
Statements of Operations, Years ended December 31, 1997, 1998, and 1999
and Three Months ended March 31, 1999 and 2000......................................... F-23
Statements of Cash Flows, Years ended December 31, 1997, 1998,
and 1999 and Three Months ended March 31, 1999 and 2000................................ F-24
Statements of Stockholders' Equity (Deficit), Years ended December 31, 1997, 1998,
and 1999 and Three Months ended March 31, 2000......................................... F-26
Notes to Financial Statements................................................................. F-27
Coral Reserves Natural Gas Income Fund 1990 Limited Partnership
Independent Auditor's Report.................................................................. F-43
Balance Sheets, December 31, 1998 and 1999 and March 31, 2000................................. F-44
Statements of Operations, Years ended December 31, 1997, 1998, and 1999
and Three Months ended March 31, 1999 and 2000......................................... F-45
Statements of Cash Flow, Years ended December 31, 1997, 1998,
and 1999 and Three Months ended March 31, 1999 and 2000................................ F-46
Statements of Partners' Equity, Years ended December 31, 1997, 1998,
and 1999 and Three Months ended March 31, 2000......................................... F-47
Notes to Financial Statements................................................................. F-48
Coral Reserves Natural Gas Income Fund 1991 Limited Partnership
Independent Auditor's Report.................................................................. F-57
Balance Sheets, December 31, 1998 and 1999 and March 31, 2000................................. F-58
Statements of Operations, Years ended December 31, 1997, 1998, and 1999
and Three Months ended March 31, 1999 and 2000......................................... F-59
Statements of Cash Flow, Years ended December 31, 1997, 1998,
and 1999 and Three Months ended March 31, 1999 and 2000................................ F-60
Statements of Partners' Equity, Years ended December 31, 1997, 1998,
and 1999 and Three Months ended March 31, 2000......................................... F-61
Notes to Financial Statements................................................................. F-62
Coral Reserves Natural Gas Income Fund 1992 Limited Partnership
Independent Auditor's Report.................................................................. F-71
Balance Sheets, December 31, 1998 and 1999 and March 31, 2000................................. F-72
Statements of Operations, Years ended December 31, 1997, 1998, and 1999
and Three Months ended March 31, 1999 and 2000......................................... F-73
F-1
Statements of Cash Flow, Years ended December 31, 1997, 1998,
and 1999 and Three Months ended March 31, 1999 and 2000.......................... F-74
Statements of Partners' Equity, Years ended December 31, 1997, 1998,
and 1999 and Three Months ended March 31, 2000................................... F-75
Notes to Financial Statements.......................................................... F-76
Coral Reserves Natural Gas Income Fund 1993 Limited Partnership
Independent Auditor's Report........................................................... F-85
Balance Sheets, December 31, 1998 and 1999 and March 31, 2000.......................... F-86
Statements of Operations, Years ended December 31, 1997, 1998, and 1999
and Three Months ended March 31, 1999 and 2000................................. F-87
Statements of Cash Flow, Years ended December 31, 1997, 1998,
and 1999 and Three Months ended March 31, 1999 and 2000........................ F-88
Statements of Partners' Equity, Years ended December 31, 1997, 1998,
and 1999 and Three Months ended March 31, 2000................................. F-89
Notes to Financial Statements.......................................................... F-90
Coral Reserves 1993 Institutional Limited Partnership
Independent Auditor's Report........................................................... F-99
Balance Sheets, December 31, 1998 and 1999 and March 31, 2000.......................... F-100
Statements of Operations, Years ended December 31, 1997, 1998, and 1999
and Three Months ended March 31, 1999 and 2000................................. F-101
Statements of Cash Flow, Years ended December 31, 1997, 1998,
and 1999 and Three Months ended March 31, 1999 and 2000........................ F-102
Statements of Partners' Equity, Years ended December 31, 1997, 1998,
and 1999 and Three Months ended March 31, 2000................................. F-103
Notes to Financial Statements.......................................................... F-104
Coral Reserves Energy Income Fund 1995 Limited Partnership
Independent Auditor's Report........................................................... F-113
Balance Sheets, December 31, 1998 and 1999 and March 31, 2000.......................... F-114
Statements of Operations, Years ended December 31, 1997, 1998, and 1999
and Three Months ended March 31, 1999 and 2000................................. F-115
Statements of Cash Flow, Years ended December 31, 1997, 1998,
and 1999 and Three Months ended March 31, 1999 and 2000........................ F-116
Statements of Partners' Equity, Years ended December 31, 1997, 1998,
and 1999 and Three Months ended March 31, 2000................................. F-117
Notes to Financial Statements.......................................................... F-118
Coral Reserves Energy Income Fund 1996 Limited Partnership
Independent Auditor's Report........................................................... F-127
Balance Sheets, December 31, 1998 and 1999 and March 31, 2000.......................... F-128
Statements of Operations, Years ended December 31, 1997, 1998, and 1999
and Three Months ended March 31, 1999 and 2000................................. F-129
Statements of Cash Flow, Years ended December 31, 1997, 1998,
and 1999 and Three Months ended March 31, 1999 and 2000........................ F-130
Statements of Partners' Equity, Years ended December 31, 1997, 1998,
and 1999 and Three Months ended March 31, 2000................................. F-131
Notes to Financial Statements.......................................................... F-132
F-2
Coral Reserves 1996 Institutional Limited Partnership
Independent Auditor's Report................................................................ F-141
Balance Sheets, December 31, 1998 and 1999 and March 31, 2000............................... F-142
Statements of Operations, Years ended December 31, 1997, 1998, and 1999
and Three Months ended March 31, 1999 and 2000...................................... F-143
Statements of Cash Flow, Years ended December 31, 1997, 1998,
and 1999 and Three Months ended March 31, 1999 and 2000............................. F-144
Statements of Partners' Equity, Years ended December 31, 1997, 1998,
and 1999 and Three Months ended March 31, 2000...................................... F-145
Notes to Financial Statements............................................................... F-146
Canaan Securities, Inc.
Independent Auditor's Report................................................................ F-155
Balance Sheets, December 31, 1998 and 1999 and March 31, 2000............................... F-156
Statements of Income and Retained Earnings, Years ended December 31, 1998, and 1999
and Three Months ended March 31, 1999 and 2000...................................... F-157
Statements of Cash Flow, Years ended December 31, 1998 and
1999 and Three Months ended March 31, 1999 and 2000................................. F-158
Notes to Financial Statements............................................................... F-159
Coral Reserves, Inc.
Independent Auditor's Report................................................................ F-162
Consolidated Balance Sheets, December 31, 1998 and 1999 and March 31, 2000.................. F-163
Consolidated Statements of Operations, Years ended December 31, 1997, 1998, and 1999
and Three Months ended March 31, 1999 and 2000...................................... F-164
Consolidated Statements of Cash Flow, Years ended December 31, 1997, 1998,
and 1999 and Three Months ended March 31, 1999 and 2000............................. F-165
Consolidated Statements of Stockholders' Equity, Years ended December 31, 1997, 1998,
and 1999 and Three Months ended March 31, 2000...................................... F-166
Notes to Financial Statements............................................................... F-167
Coral Reserves Energy Corp.
Independent Auditor's Report................................................................ F-176
Consolidated Balance Sheets, December 31, 1998 and 1999 and March 31, 2000.................. F-177
Consolidated Statements of Operations, Years ended December 31, 1997, 1998, and 1999
and Three Months ended March 31, 1999 and 2000...................................... F-178
Consolidated Statements of Cash Flow, Years ended December 31, 1997, 1998,
and 1999 and Three Months ended March 31, 1999 and 2000............................. F-179
Consolidated Statements of Stockholders' Equity, Years ended December 31, 1997, 1998,
and 1999 and Three Months ended March 31, 2000...................................... F-180
Notes to Financial Statements............................................................... F-181
F-3
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Canaan Energy Corporation:
We have audited the accompanying balance sheets of Canaan Energy Corporation, as
of December 31, 1998 and 1999, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999. 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 Canaan Energy Corporation, as
of December 31, 1998 and 1999, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
KPMG LLP
Oklahoma City, Oklahoma
April 17, 2000
F-4
CANAAN ENERGY CORPORATION
Balance Sheets
December 31,
---------------------------------- March 31,
Assets 1998 1999 2000
------------ ----------- -----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 749,538 $ 587,680 $ 283,689
Accounts receivable (Note 4) 231,745 273,136 427,801
Other assets 1,401 1,291 1,291
Deferred tax asset (Note 6) 4,000 62,000 68,000
------------ ----------- -----------
Total current assets 986,684 924,107 780,781
------------ ----------- -----------
Property and equipment, at cost, based on the
full cost method of accounting for oil and
natural gas properties (Note 5) 897,656 1,004,327 1,026,676
Less accumulated depreciation
and amortization (571,896) (627,659) (641,997)
------------ ----------- -----------
325,760 376,668 384,679
------------ ----------- -----------
Other assets - 257,696 545,180
------------ ----------- -----------
Total assets $ 1,312,444 $ 1,558,471 $ 1,710,640
============ =========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable:
Trade $ 32,728 $ 203,019 $ 456,894
Revenue and royalties due to others 289,553 263,937 291,447
Payroll income tax withholdings 117,381 77,388 -
Accrued profit sharing contributions 124,092 126,320 27,405
Income taxes payable 53,000 15,000 29,000
------------ ----------- -----------
Total current liabilities 616,754 685,664 804,746
------------ ----------- -----------
Deferred income taxes (Note 6) 84,000 166,000 168,000
Stockholders' equity:
Common stock, $1.00 par value; 25,000 shares
authorized, 632 shares outstanding 632 632 632
Additional paid-in capital 545,756 545,756 545,756
Common stock subscriptions receivable (14,547) (7,274) (5,455)
Retained earnings 79,849 167,693 196,961
------------ ----------- -----------
Total stockholders' equity 611,690 706,807 737,894
------------ ----------- -----------
Total liabilities and stockholders' equity $ 1,312,444 $ 1,558,471 $ 1,710,640
============ =========== ===========
See accompanying notes to financial statements.
F-5
CANAAN ENERGY CORPORATION
Statements of Operations
Three months ended
Year ended December 31, March 31,
----------------------------------------- -------------------------
1997 1998 1999 1999 2000
------------- ----------- ----------- ----------- -----------
(Unaudited)
Revenues:
Oil and natural gas sales $ 112,412 $ 83,652 $ 140,446 $ 14,455 $ 37,740
Salt water disposal services 49,000 51,000 48,000 12,000 16,000
Production engineering services 16,409 21,883 11,411 4,647 5,016
------------- ----------- ----------- ----------- -----------
Total revenues 177,821 156,535 199,857 31,102 58,756
------------- ----------- ----------- ----------- -----------
Costs and expenses:
Lease operating 17,792 27,593 16,261 3,140 4,225
Production taxes 7,213 5,577 12,270 625 2,670
Depreciation and amortization (Note 5) 59,304 48,350 55,763 8,582 14,338
General and administrative expenses 1,281,143 936,720 881,142 149,135 297,634
Less partnership management
fees (Note 9) (1,373,000) (970,500) (856,000) (187,000) (289,000)
------------- ----------- ----------- ----------- -----------
Net general and administrative
expenses (91,857) (33,780) 25,142 (37,865) 8,634
------------- ----------- ----------- ----------- -----------
Total costs and expenses (7,548) 47,740 109,436 (25,518) 29,867
------------- ----------- ----------- ----------- -----------
Other income, principally interest 38,059 41,544 36,423 10,161 13,379
------------- ----------- ----------- ----------- -----------
Earnings before income taxes 223,428 150,339 126,844 66,781 42,268
Income taxes (Note 6) 68,000 46,000 39,000 21,000 13,000
------------- ----------- ----------- ----------- -----------
Net earnings $ 155,428 $ 104,339 $ 87,844 $ 45,781 $ 29,268
============= =========== =========== =========== ===========
Net earnings per average common
share outstanding - basic and
diluted $ 259.05 $ 173.03 $ 138.99 $ 72.44 $ 46.31
============= =========== =========== =========== ===========
Weighted average common shares
outstanding - basic and diluted 600 603 632 632 632
============= =========== =========== =========== ===========
See accompanying notes to financial statements.
F-6
CANAAN ENERGY CORPORATION
Statements of Cash Flows
Three months ended
Year ended December 31, March 31,
------------------------------------- ------------------------
1997 1998 1999 1999 2000
---------- --------- ---------- ---------- ----------
(Unaudited)
Cash flows from operating activities:
Net earnings $ 155,428 $ 104,339 $ 87,844 $ 45,781 $ 29,268
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities:
Depreciation and amortization 59,304 48,350 55,763 8,582 14,338
Deferred income tax expense (benefit) 40,000 (14,000) 24,000 1,000 (4,000)
Forgiveness of subscription receivable -- 7,273 7,273 1,819 1,819
Changes in:
Accounts receivable (68,671) 552 (41,391) (95,144) (154,665)
Other assets 4,805 (1,401) 110 -- --
Accounts payable, accrued
expenses and other liabilities 67,134 270,949 (101,090) (276,533) (110,642)
---------- --------- ---------- ---------- ----------
Net cash provided by (used in)
operating activities 258,000 416,062 32,509 (314,495) (223,882)
---------- --------- ---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sales of property
and equipment -- 32,915 -- -- --
Capital expenditures (204,490) (59,711) (106,671) (9,752) (22,349)
Costs related to business combinations -- -- (87,696) -- (57,760)
---------- --------- ---------- ---------- ----------
Net cash used in investing activities (204,490) (26,796) (194,367) (9,752) (80,109)
---------- --------- ---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents 53,510 389,266 (161,858) (324,247) (303,991)
Cash and cash equivalents at beginning
of period 306,762 360,272 749,538 749,538 587,680
---------- --------- ---------- ---------- ----------
Cash and cash equivalents at end of period $ 360,272 $ 749,538 $ 587,680 $ 425,291 $ 283,689
========== ========= ========== ========== ==========
Supplemental cash flow information:
Cash payments for income taxes $ 29,000 $ 4,000 $ 53,000 $ 35,000 $ 3,000
========== ========= ========== ========== ==========
Supplemental schedule of non-cash
investing and financing activities:
Costs related to business combinations
incurred with accounts payable $ -- $ -- $ 170,000 $ -- $ 229,724
========== ========= ========== ========== ==========
Issuance of common stock for
subscription receivable $ -- $ 21,820 $ -- $ -- $ --
========== ========= ========== ========== ==========
See accompanying notes to financial statements.
F-7
CANAAN ENERGY CORPORATION
Statements of Stockholders' Equity
Number of
Shares of Common Retained
Common Additional Stock Earnings Total
Stock Common Paid-in Subscription (Accumulated Stockholders'
Outstanding Stock Capital Receivable Deficit) Equity
----------- --------- ---------- ------------ ------------ -------------
Balance at December 31, 1996 600 $ 600 $ 523,968 $ -- $ (179,918) $ 344,650
Net earnings -- -- -- -- 155,428 155,428
----------- --------- ---------- ------------ ------------ -------------
Balance at December 31, 1997 600 600 523,968 -- (24,490) 500,078
Net earnings -- -- -- -- 104,339 104,339
Common stock issued through
subscription receivable 32 32 21,788 (21,820) -- --
Forgiveness of subscription
receivable -- -- -- 7,273 -- 7,273
----------- --------- ---------- ------------ ------------ -------------
Balance at December 31, 1998 632 632 545,756 (14,547) 79,849 611,690
Net earnings -- -- -- -- 87,844 87,844
Forgiveness of subscription
receivable -- -- -- 7,273 -- 7,273
----------- --------- ---------- ------------ ------------ -------------
Balance at December 31, 1999 632 632 545,756 (7,274) 167,693 706,807
Net earnings (unaudited) -- -- -- -- 29,268 29,268
Forgiveness of subscription
receivable (unaudited) -- -- -- 1,819 -- 1,819
----------- --------- ---------- ------------ ------------ -------------
Balance at March 31, 2000
(unaudited) 632 $ 632 $ 545,756 $ (5,455) $ 196,961 $ 737,894
=========== ========= ========== ============ ============ =============
See accompanying notes to financial statements.
F-8
CANAAN ENERGY CORPORATION
Notes to Financial Statements
December 31, 1997, 1998 and 1999
(Information insofar as it relates to March 31, 2000 and
the three months ended March 31, 1999 and 2000 is unaudited)
1. Organization and Basis of Presentation
Canaan Energy Corporation (Canaan) is engaged primarily in the acquisition,
development and production of oil and natural gas properties. Canaan serves as
operator for approximately 107 producing oil and natural gas wells located in
Oklahoma.
Canaan also manages eight oil and natural gas limited partnerships (the
Coral Limited Partnerships) on behalf of Coral Reserves, Inc. and Coral Reserves
Energy Corporation, the general partners of the Coral Limited Partnerships (the
General Partners). Canaan and the General Partners have the same ownership.
Canaan, the Coral Limited Partnerships, the General Partners and Canaan
Securities, Inc. (CSI), an unaffiliated broker/dealer which has previously
participated in marketing of the limited partnership interests, are in the
process of merging (subject to the approval of all parties), whereby the Coral
Limited Partnerships, the General Partners and CSI will merge with and into
Canaan for shares of Canaan's common stock. The merger with the Coral Limited
Partnerships and the General Partners is expected to be accounted for as a
reorganization of interests in a manner similar to a pooling of interests and
the merger with CSI is expected to be accounted for as a purchase. Additionally,
on February 15, 1999 Canaan entered into an agreement and plan of merger with
Indian Oil Company (Indian), an unaffiliated oil and natural gas company. Under
the agreement, Indian will merge with and into Canaan for shares of Canaan's
common stock in a business combination to be accounted for as a purchase. The
mergers are anticipated to be completed in July 2000.
On January 3, 2000, Coral Reserves Group, Ltd. changed its name to Canaan
Energy Corporation but continues to conduct business as Coral Reserves Group,
Ltd.
Accounting policies employed by Canaan reflect industry practices and
conform to generally accepted accounting principles. The more significant of
such policies are discussed below.
In the opinion of management, the accompanying unaudited financial
statements as of March 31, 2000 and for the three months ended March 31, 1999
and 2000, reflect all adjustments (which were normal and recurring) which, in
the opinion of management, are necessary for a fair statement of the financial
position and results of operations of the interim periods presented.
2. Summary of Significant Accounting Policies
Use of 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 the
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 amounts could differ from those estimates.
F-9
CANAAN ENERGY CORPORATION
Notes to Financial Statements
(Continued)
Cash and Cash Equivalents
Canaan considers all highly liquid investments with a maturity of three
months or less at time of purchase to be cash equivalents. Cash equivalents
consist of overnight investments in money market funds.
Fair Value of Financial Instruments
Canaan's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, accrued expenses, other liabilities and
oil and natural gas price swap contracts. Fair value of nonderivative financial
instruments approximates carrying value due to the short-term nature of the
instruments. See "Hedging Activities" policy note for estimated fair values of
the price swap contracts.
Property and Equipment
Canaan follows the full cost method of accounting for its oil and natural
gas properties. Accordingly, all costs incidental to the acquisition,
exploration, and development of oil and natural gas properties, including costs
of undeveloped leasehold, dry holes and leasehold equipment, are capitalized.
Net capitalized costs (capitalized costs less accumulated amortization and
deferred income taxes) are limited to the estimated after-tax future net
revenues using period-end pricing, discounted at 10% per annum, from proved oil,
natural gas and natural gas liquids reserves plus the lower of cost or estimated
fair value of undeveloped properties subject to amortization. Canaan subjects
all costs of undeveloped properties to amortization as such costs are
insignificant. Capitalized costs less accumulated amortization plus estimated
future development cost of proved undeveloped reserves are amortized by an
equivalent unit-of-production method, converting natural gas to oil at the ratio
approximating their relative energy content of one barrel ("Bbl") of oil to six
thousand cubic feet ("Mcf") of natural gas. No gain or loss is recognized upon
disposal of oil and natural gas properties unless such dispositions
significantly alter the relationship between capitalized costs and proved oil
and natural gas reserves.
Depreciation and amortization of other equipment are provided using the
straight-line method based on estimated useful lives of the related assets,
which range from 3 to 7 years.
Canaan accounts for its non-oil and natural gas long-lived assets in
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and Assets
to be Disposed Of". SFAS No. 121 requires that long-lived assets and
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
cost to sell.
Other Assets
Other assets as of December 31, 1999 and March 31, 2000, represent legal,
accounting and engineering costs incurred in connection with Canaan's proposed
merger with the Coral Limited Partnerships, the General Partners, Indian and
CSI, discussed above. Costs incurred in connection with the proposed merger of
the Coral Limited Partnerships and the General Partners are deferred as incurred
and will be
F-10
CANAAN ENERGY CORPORATION
Notes to Financial Statements
(Continued)
expensed when the merger is completed or terminated since the transactions are
being accounted for as reorganization of interests under common control in a
manner similar to a pooling of interests. Costs incurred and deferred in
connection with the proposed merger of the Coral Limited Partnerships and the
General Partners approximated $258,000 and $526,000 for the year ended December
31, 1999 and the three months ended March 31, 2000, respectively. Costs incurred
in connection with the acquisitions of Indian and CSI are being deferred and
will be included in the purchase price upon completion of the acquisitions or
will be expensed if the transactions are terminated.
Revenue and Royalty Distributions Payable
For certain oil and natural gas properties, Canaan receives production
proceeds, from the purchaser and further distributes such amounts to other
revenue and royalty owners. Production proceeds applicable to other revenue and
royalty owners are reflected as revenue and royalty distributions payable in the
accompanying balance sheets. Canaan accrues revenue for only its net interest in
its oil and natural gas properties.
Hedging Activities
Canaan periodically enters into oil and natural gas price swap agreements
to manage its exposure to oil and natural gas price volatility. These contracts
have no cash requirements at inception and are with counterparties that Canaan
believes have minimal credit risks. The oil and natural gas reference prices
upon which the price hedging instruments are based reflect various market
indices that have a high degree of historical correlation with actual prices
received by Canaan.
Canaan accounts for it's hedging contracts using the deferral method of
accounting. Under this method, realized gains and losses from Canaan's price
risk management activities are recognized in oil and natural gas revenues when
the associated production occurs and the resulting cash flows are reported as
cash flows from operating activities. In the event of a loss of correlation
between changes in oil and natural gas reference prices under a hedging contract
and actual oil and natural gas prices, a gain or loss is recognized currently to
the extent the hedging contract has not offset changes in actual oil and natural
gas prices.
Canaan was not a party to any hedging contracts as of December 31, 1998. On
September 24, 1999, Canaan, as a participating party with the Coral Limited
Partnerships, entered into a natural gas price swap covering 1,500,000 cubic
feet of monthly production, or approximately 30% of its natural gas production
beginning October 1999 through September 2000. The price to be received for this
production is $2.60 per Mcf, while Canaan will pay the counterparty a floating
index price. On November 18, 1999, Canaan as a participating party with the
Coral Limited Partnerships, entered into an oil price swap covering 100 barrels
of monthly oil production or approximately 70% of its oil production beginning
January 2000 through December 2000. The price to be received for this production
is $22.00 per barrel, while Canaan will pay the counterparty a floating index
price.
In April 2000, Canaan, as a participating party with the Coral Limited
Partners, entered into an additional natural gas price swap covering 1,500,000
cubic feet of monthly production or approximately 30% of its natural gas
production beginning June 2000 through May 2001. The price to be received for
this production is $2.97 per Mcf, while Canaan will pay the counterparty a
floating index price.
F-11
CANAAN ENERGY CORPORATION
Notes to Financial Statements
(Continued)
The fair value of Canaan's natural gas and oil price hedging contracts
approximated $4,000 and $(6,000) at December 31, 1999 and March 31, 2000,
respectively. This asset (liability) represents the estimated amount Canaan
would receive (pay) to cancel the contracts or transfer them to other parties.
No deferred hedging gains or losses were recorded as of December 31, 1999 or
March 31, 2000.
Revenue Recognition and Natural Gas Balancing
Oil and natural gas sales are recognized in the month in which the oil and
natural gas reserves are produced and sold by Canaan. Salt water disposal
service revenue and production engineering services revenues are recognized
after the services are provided at daily rates.
During the course of normal operations, Canaan and other joint interest
owners of natural gas reservoirs will take more or less than their respective
ownership share of the natural gas volumes produced. These volumetric imbalances
are monitored over the lives of the wells' production capability. If an
imbalance exists at the time the wells' reserves are depleted, cash settlements
are made among the joint interest owners under a variety of arrangements. Canaan
follows the sales method of accounting for natural gas imbalances. A liability
is recorded only if Canaan's excess takes of natural gas volumes exceed its
estimated remaining recoverable reserves. No receivables are recorded for those
wells where Canaan has taken less than its ownership share of natural gas
production. Canaan's production imbalance position in terms of volumes and value
was not significant as of December 31, 1998 and 1999 and March 31, 2000.
Production Costs
Lease operating costs, including costs incurred to maintain or increase
production levels from an existing completion interval, along with production
related taxes are expensed as incurred.
Major Purchasers
Canaan markets its oil and natural gas production to numerous purchasers
under a variety of contracts. Three purchasers accounted for 58%, four
purchasers accounted for 64% and three purchasers accounted for 66% of Canaan's
1997, 1998 and 1999 oil and natural gas revenues, respectively. Canaan had no
other purchasers that accounted for greater than 10% of its oil and natural gas
revenues. Canaan does not believe that the loss of any single customer would
have a material effect on the results of its operations.
General and Administrative Expenses
General and administrative expenses are reported net of amounts allocated
to working interests of the oil and natural gas properties operated by Canaan,
and net of amounts capitalized pursuant to the full cost method of accounting.
No general and administrative costs were capitalized for the years ended
December 31, 1997, 1998 and 1999 or the three months ended March 31, 1999 and
2000, due to nominal exploration and development activities of Canaan.
General and administrative costs recovered through allocation to other
working interest owners approximated $416,000, $538,000, $643,000, $156,000 and
$166,000 for the years ended December 31, 1997, 1998 and 1999 and the three
months ended March 31, 1999 and 2000, respectively.
F-12
CANAAN ENERGY CORPORATION
Notes to Financial Statements
(Continued)
Income Taxes
Canaan accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized at the enacted tax rates for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and the respective tax bases and tax operating losses and
tax credit carryforwards. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Earnings Per Share
Basic earnings per share data is computed by dividing net earnings
attributable to common shareholders by the weighted average number of common
shares outstanding during the period. Canaan has no other securities that would
dilute its basic earnings per share.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of "comprehensive income" and its components in a set of
financial statements. It requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Canaan had no items of comprehensive income as
defined by SFAS No. 130 not included in the accompanying statements of
operations; therefore, statements of comprehensive income have not been
presented in the accompanying financial statements.
3. Property Acquisitions
In November 1997, Canaan acquired oil and natural gas producing properties
located in Oklahoma from Boswell Energy Corp. (Boswell) for $16,000. Estimated
proved reserves acquired in the Boswell acquisition approximated 31,000 Mcf of
natural gas equivalent (unaudited). As a result of the acquisition, Canaan
assumed operations of 15 of the producing oil and natural gas properties.
In December 1998, Canaan acquired oil and natural gas producing properties
located in Oklahoma from Marathon Oil Co. (Marathon) for $18,000. Estimated
proved reserves acquired in the Marathon acquisition approximated 24,000 Mcf of
natural gas equivalent (unaudited). As a result of the acquisition, Canaan
assumed operations of 16 of the producing oil and natural gas properties.
The acquired properties described above were accounted for by the purchase
method and accordingly, operations have been included in the financial
statements from the date of the respective acquisitions.
F-13
CANAAN ENERGY CORPORATION
Notes to Financial Statements
(Continued)
4. Accounts Receivable
Accounts receivable consisted of the following:
December 31, March 31,
----------------------------
1998 1999 2000
---------- ---------- ----------
(Unaudited)
Oil and natural gas revenue accruals $ 13,424 $ 28,843 $ 28,617
Joint interest billings 197,563 198,889 290,980
Receivables from affiliates 14,542 41,906 106,204
Receivables from officers 1,924 2,209 2,000
Other 4,292 1,289 --
---------- ---------- ----------
Total $ 231,745 $ 273,136 $ 427,801
========== ========== ==========
5. Property and Equipment
Property and equipment consisted of the following:
December 31, March 31,
----------------------------
1998 1999 2000
---------- ---------- ----------
(Unaudited)
Oil and natural gas properties - subject to
amortization $ 718,099 $ 830,011 $ 831,497
Accumulated depreciation and
amortization (433,165) (477,936) (489,936)
---------- ---------- ----------
Net oil and natural gas properties 284,934 352,075 341,561
---------- ---------- ----------
Other equipment 179,557 174,316 195,179
Accumulated depreciation (138,731) (149,723) (152,061)
---------- ---------- ----------
Net other equipment 40,826 24,593 43,118
---------- ---------- ----------
Property and equipment, net of accumulated
depreciation and amortization $ 325,760 $ 376,668 $ 384,679
========== ========== ==========
Depreciation, and amortization expense consisted of the following:
Three months ended
Year ended December 31, March 31,
---------------------------------- ---------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(Unaudited)
Depreciation and amortization of oil
and natural gas properties $ 29,084 $ 29,700 $ 44,771 $ 5,834 $ 12,000
Depreciation of other equipment 30,220 18,650 10,992 2,748 2,338
-------- -------- -------- -------- --------
Total expense $ 59,304 $ 48,350 $ 55,763 $ 8,582 $ 14,338
======== ======== ======== ======== ========
F-14
CANAAN ENERGY CORPORATION
Notes to Financial Statements
(Continued)
6. Income Taxes
The components of income tax expense (benefit) were as follows:
Year ended December 31,
---------------------------------------------
1997 1998 1999
--------- --------- ---------
Current income tax expense:
U.S. Federal $ 22,000 $ 50,000 $ 11,000
State 6,000 10,000 4,000
--------- --------- ---------
Total current tax expense 28,000 60,000 15,000
--------- --------- ---------
Deferred income tax expense (benefit):
U.S. Federal 36,000 (13,000) 21,000
State 4,000 (1,000) 3,000
--------- --------- ---------
Total deferred tax expense (benefit) 40,000 (14,000) 24,000
--------- --------- ---------
Total income tax expense (benefit) $ 68,000 $ 46,000 $ 39,000
========= ========= =========
Total income tax expense for the respective years differed from the
amounts computed by applying the U.S. federal income tax rate to earnings before
income taxes as a result of the following:
Year ended December 31,
---------------------------------------------
1997 1998 1999
--------- --------- ---------
U.S. statutory tax rate 34% 34% 34%
State income taxes 4 4 4
Effect of graduated tax rates (8) (5) (7)
Non conventional fuel source tax credits (2) (2) (2)
Other 2 -- 2
--------- --------- ---------
Effective income tax rate 30% 31% 31%
========= ========= =========
The tax effects of temporary differences that gave rise to the deferred
tax assets and liabilities at December 31, 1997, 1998 and 1999 are presented
below:
1997 1998 1999
---------- ---------- ----------
Deferred tax assets:
Effect of cash-basis tax reporting $ -- $ 4,000 $ 62,000
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation and expensing
of intangible drilling costs for tax purposes (94,000) (84,000) (101,000)
Capitalized business combination costs -- -- (65,000)
---------- ---------- ----------
Total deferred tax liabilities (94,000) (84,000) (166,000)
---------- ---------- ----------
Net deferred tax liability $ (94,000) $ (80,000) $ (104,000)
========== ========== ==========
F-15
CANAAN ENERGY CORPORATION
Notes to Financial Statements
(Continued)
7. Employee Benefit Plan
Canaan maintains a qualified profit sharing plan pursuant to which it may
make annual discretionary contributions subject to Internal Revenue Code limits.
The plan allows employees to make voluntary deferred contributions subject to
Internal Revenue Code limits. Benefits payable under the plan are limited to the
amount of plan assets allocable to the account of each plan participant. Canaan
retains the right to modify, amend or terminate the plan at any time. Canaan
recorded $132,000, $124,000, $126,000, $27,000 and $27,000 of expenses related
to discretionary contributions to the plan for the years ended December 31,
1997, 1998 and 1999 and the three months ended March 31, 1999 and 2000,
respectively. Such costs were accrued by Canaan during the year and funded in
the following year.
8. Commitments and Contingencies
Canaan leases office space and equipment under operating leases expiring
over the next three years. Future minimum lease payments under non-cancelable
operating leases having remaining terms in excess of one year as of December 31,
1999 are as follows:
2000 $ 41,706
2001 37,224
2002 34,131
2003 16,530
2004 3,135
----------
Total $ 132,726
==========
Rent expense for the years ended December 31, 1997, 1998 and 1999
approximated $61,000, $63,000 and $73,000, respectively. Rent expense for the
three months ended March 31, 1999 and 2000 approximated $18,000 and $21,000,
respectively.
9. Related Party Transactions
Canaan manages the Coral Limited Partnerships on behalf of the General
Partners which reimburse Canaan for such services with payments equal to
operating fees received from the Coral Limited Partnerships, as defined in the
partnership agreements plus the General Partners' monthly distributions received
from the Coral Limited Partnerships.
In November 1998, Canaan issued 32 shares or 5% of its common stock to one
of its officers in exchange for a $22,000 promissory note. The principle balance
of the promissory note equaled the fair value of the shares issued. The note
earns interest at the annual rate equal to the discount rate charged by the New
York Federal Reserve Bank, redetermined semi-annually, and is secured by the
common stock. The note matures in November 2001; however, it allows Canaan to
forgive the note as services are provided by the officer over the term of the
note. Canaan forgave approximately $7,000 of the note in 1998 and 1999 and
approximately $2,000 for the three months ended March 31, 2000. The note is
reflected in the accompanying balance sheets and statements of stockholders'
equity as a stock subscription receivable. Compensation
F-16
CANAAN ENERGY CORPORATION
Notes to Financial Statements
(Continued)
expense is recorded pro ratably over the term of the note. The shares issued to
the officer have rights equal to Canaan's other common shares.
10. Oil and Natural Gas Operations
The following table reflects the costs incurred in oil and natural gas
property acquisition and development activities:
Three months ended
Year ended December 31, March 31,
----------------------------------- ---------------------
1997 1998 1999 1999 2000
--------- --------- --------- -------- --------
(Unaudited)
Acquisition costs $ 16,000 $ 18,000 $ -- $ -- $ --
Development costs 139,433 50,816 106,671 4,986 1,486
Results of Operations for Oil and Natural Gas Activities
Below is a summary of results of operations for oil and natural gas
producing activities. The results do not include any allocation of Canaan's
general corporate overhead and, therefore, are not necessarily indicative of the
contribution to net earnings of its oil and natural gas operations. Income tax
expense has been calculated by applying statutory income tax rates to oil and
natural gas sales after deducting costs, including depreciation and amortization
and considering permanent differences, tax credits and allowances related to oil
and gas producing activities.
Three months ended
Year ended December 31, March 31,
------------------------------------- ------------------------
1997 1998 1999 1999 2000
----------- ---------- ---------- ----------- -----------
(Unaudited)
Oil and natural gas sales $ 112,412 $ 83,652 $ 140,446 $ 14,455 $ 37,740
Production and operating expenses (25,005) (33,170) (28,531) (3,765) (6,895)
Depreciation and amortization (29,084) (29,700) (44,771) (5,834) (12,000)
Income tax expense (10,000) (3,000) (12,000) (1,000) (4,000)
----------- ---------- ---------- ----------- -----------
Results of operations from oil and
natural gas producing activities $ 48,323 $ 17,782 $ 55,144 $ 3,856 $ 14,845
=========== ========== ========== =========== ===========
Depreciation and amortization
per equivalent Mcf of production $ 0.76 $ 0.73 $ 0.80 $ 0.68 $ 0.81
=========== ========== ========== =========== ===========
11. Supplemental Information on Oil and Natural Gas Operations (Unaudited)
The following supplemental unaudited information regarding the oil and
natural gas activities of Canaan is presented pursuant to the disclosure
requirements promulgated by the Securities and Exchange Commission (SEC) and
SFAS No. 69, "Disclosures About Oil and Gas Producing Activities".
F-17
CANAAN ENERGY CORPORATION
Notes to Financial Statements
(Continued)
Quantities of Oil and Natural Gas Reserves
Set forth below is a summary of the changes in the net quantities of crude
oil and natural gas and reserves for each of the years in the three year period
ended December 31, 1999. Canaan's proved reserves at December 31, 1998 and 1999
were calculated by the independent petroleum consultants of Netherland, Sewell &
Associates, Inc. Canaan cautions that there are many uncertainties inherent in
estimating reserve quantities, and in projecting future production rates and the
timing of future development cost expenditures. In addition, reserve estimates
of new discoveries are more imprecise than those of properties with a production
history. Accordingly, these estimates are subject to change as additional
information becomes available.
Proved oil and natural gas reserves are the estimated quantities of crude
oil, condensate, natural gas and natural liquids that geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic conditions. Proved developed oil
and natural gas reserves are those reserves expected to be recovered through
existing equipment and operating methods.
Estimates of net quantities of proved reserves and proved developed
reserves of crude oil, including condensate and natural gas liquids, and natural
gas, as well as the changes in proved reserves during the periods indicated, are
set forth in the tables below. All reserves are located in the United States.
Canaan prepared the estimated reserves as of December 31, 1996 and 1997
based on geological and engineering evaluations performed as of December 31,
1998. The reserve estimates as of the prior year-end dates were derived by
analyzing actual historical production amounts and by adjusting the reserves
attributable to wells acquired or disposed of during the relevant periods. In
addition, in deriving the estimates as of December 31, 1996 and 1997, Canaan
used production costs based on actual costs incurred during the years and actual
oil and natural gas prices received on December 31, 1996 and 1997. Canaan has
estimated its reserves as of December 31, 1996 and 1997 in this manner because
the actual information necessary to calculate estimated proved reserves and
related information in accordance with guidelines of the SEC as of each date is
not available. Because the reserve estimates as of December 31, 1998 are based
on additional information gained from the result of drilling, testing and
production subsequent to the dates of the estimated reserves, the reserve
estimates as of December 31, 1996 and 1997 are not necessarily reflective of
quantities that might have been estimated based on information available as of
such dates had estimates in accordance with SEC guidelines been made at such
dates. Management believes that, because of the methodology used, the reserve
information presented is more reflective of actual reserve quantities than
estimates that might have been generated as of such dates.
F-18
CANAAN ENERGY CORPORATION
Notes to Financial Statements
(Continued)
Changes in Proved Reserves
Oil Natural Gas
(Bbls) (Mcf)
-------- -----------
Proved reserves as of December 31, 1996 10,000 513,000
Extensions and discoveries 1,000 18,000
Purchases of reserves 3,000 16,000
Production (1,000) (32,000)
Sale of reserves (1,000) --
-------- --------
Proved reserves as of December 31, 1997 12,000 515,000
Purchases of reserves 1,000 25,000
Production (2,000) (29,000)
-------- --------
Proved reserves as of December 31, 1998 11,000 511,000
Extensions and discoveries 2,000 --
Revisions of previous estimates 3,000 43,000
Production (1,000) (47,000)
-------- --------
Proved reserves as of December 31, 1999 15,000 507,000
======== ========
Oil Natural Gas
(Bbls) (Mcf)
-------- -----------
Proved developed reserves as of:
December 31, 1996 8,000 267,000
December 31, 1997 9,000 249,000
December 31, 1998 9,000 245,000
December 31, 1999 11,000 390,000
Standardized Measure of Discounted Future Net Cash Flows:
The following table reflects the standardized measure of discounted
future net cash flows relating to Canaan's interest in proved reserves:
December 31,
-----------------------------------------------
1997 1998 1999
---------- ----------- -----------
Future cash inflows $ 1,364,000 $ 1,178,000 $ 1,476,000
Future development costs (131,000) (133,000) (95,000)
Future production costs (474,000) (399,000) (420,000)
Future income tax expense (232,000) (188,000) (293,000)
---------- ----------- -----------
Future net cash flows 527,000 458,000 668,000
10% discount to reflect timing of cash flows (278,000) (241,000) (357,000)
---------- ----------- -----------
Standardized measure of discounted future
net cash flows $ 249,000 $ 217,000 $ 311,000
=========== =========== ===========
Future cash inflows are computed by applying prices being received at
December 31 of each year presented (averaging $23.06 per barrel of oil, adjusted
for transportation and other charges, and $2.25 per Mcf of natural gas at
December 31, 1999) to the respective year-end quantities of proved reserves,
except where
F-19
CANAAN ENERGY CORPORATION
Notes to Financial Statements
(Continued)
fixed and determinable price changes are provided by contractual arrangements in
existence at year-end. Future development and production costs are computed by
estimating the expenditures to be incurred in developing and producing proved
oil and gas reserves at the end of each year, based on respective year-end costs
and assuming continuation of existing economic conditions.
Future income tax expenses are computed by applying the appropriate
statutory rates to the future pre-tax net cash flows relating to proved
reserves, net of the tax basis of the properties involved giving effect to
permanent differences, tax credits and allowances relating to proved oil and gas
reserves.
Principal changes in the standardized measure of discounted future net
cash flows attributable to Canaan's proved reserves are as follows:
Year ended December 31,
----------------------------------------------------
1997 1998 1999
---------------- -------------- --------------
Beginning balance $ 496,000 $ 249,000 $ 217,000
Sales of oil and natural gas, net of
production costs (87,000) (50,000) (112,000)
Net changes in year-end sales prices and
production costs (380,000) (51,000) 102,000
Extensions and discoveries, net of future
development costs 20,000 -- 16,000
Revisions of previous estimates, net of future
development costs -- -- 53,000
Development costs incurred during the period
which reduced future development costs -- -- 57,000
Purchase of reserves, net future development costs 26,000 19,000 --
Sales of reserves in place, net of future
development costs (8,000) -- --
Accretion of discount 74,000 36,000 31,000
Net change in income taxes 136,000 20,000 (47,000)
Other, primarily timing (28,000) (6,000) (6,000)
---------------- -------------- --------------
Ending balance $ 249,000 $ 217,000 $ 311,000
================ ============== ==============
Segment Information
Canaan manages its business by country, which results in one operating
segment during the years ended December 31, 1997, 1998 and 1999 and the three
months ended March 31, 2000.
Canaan is engaged primarily in the acquisition, development and
production of oil and natural gas properties located in Oklahoma. Canaan also
operates 107 oil and natural gas producing properties located in Oklahoma, and
manages eight oil and natural gas limited partnerships on behalf of those
partnership's general partners.
F-20
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Indian Oil Company:
We have audited the accompanying balance sheets of Indian Oil Company as of
December 31, 1998 and 1999, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 1999. 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 Indian Oil Company as of
December 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
KPMG LLP
Oklahoma City, Oklahoma
May 8, 2000
F-21
INDIAN OIL COMPANY
Balance Sheets
December 31, March 31,
---------------------------------
Assets 1998 1999 2000
------------- ------------- -------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 1,990,838 $ 1,310,811 $ 1,722,644
Accounts receivable, net (Note 4) 2,744,729 2,715,707 4,157,949
Prepaid expenses and other current assets 95,247 130,524 38,525
------------- ------------- -------------
Total current assets 4,830,814 4,157,042 5,919,118
------------- ------------- -------------
Property and equipment - at cost, based on
the full cost method of accounting for oil
and natural gas properties (Note 5):
Oil and natural gas properties subject
to amortization 37,598,702 38,114,089 36,926,012
Oil and natural gas properties not
subject to amortization 812,929 117,368 117,368
Other equipment and leasehold
improvements 690,604 499,412 507,012
------------- ------------- -------------
39,102,235 38,730,869 37,550,392
Accumulated depreciation and amortization (8,912,392) (11,862,802) (12,555,247)
------------- ------------- -------------
30,189,843 26,868,067 24,995,145
------------- ------------- -------------
Debt issuance costs, net (Note 2) 133,714 20,498 --
Deferred tax asset (Note 7) 1,520,000 2,049,000 1,962,000
Other assets 30,000 30,000 30,000
------------- ------------- -------------
Total assets $ 36,704,371 $ 33,124,607 $ 32,906,263
============= ============= =============
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable:
Trade $ 505,239 $ 462,770 $ 506,847
Revenues and royalties due to others 2,558,373 2,257,864 2,462,338
Accrued expenses 192,195 924,741 488,124
Current portion of long-term debt (Note 6) -- 3,603,000 24,425,583
Other current liabilities 84,778 84,778 84,778
------------- ------------- -------------
Total current liabilities 3,340,585 7,333,153 27,967,670
------------- ------------- -------------
Long-term debt, less current portion (Note 6) 35,333,968 29,832,505 5,093,750
Other non-current liabilities 134,232 49,454 28,259
Stockholders' deficit:
Common stock, $0.005 par value; 2,000,000
shares authorized, 62,360 shares
outstanding (less treasury shares of
37,187) in 1998, and 65,643 shares
outstanding (less treasury shares of
37,187) in 1999 and 2000, respectively 312 312 312
Additional paid-in capital 1,332,603 393,348 4,132,451
Accumulated deficit (3,437,329) (4,484,165) (4,316,179)
------------- ------------- -------------
Total stockholders' deficit (2,104,414) (4,090,505) (183,416)
------------- ------------- -------------
Total liabilities and stockholders' deficit $ 36,704,371 $ 33,124,607 $ 32,906,263
============= ============= =============
See accompanying notes to financial statements.
F-22
INDIAN OIL COMPANY
Statements of Operations
Three months ended
Year ended December 31, March 31,
------------------------------------------- --------------------------
1997 1998 1999 1999 2000
---------- ----------- ----------- ---------- ----------
(Unaudited)
Revenues:
Oil and natural gas sales $ 3,356,616 $ 10,014,808 $ 9,050,664 $ 1,858,291 $ 2,509,655
Other income 312,656 234,599 318,412 85,944 36,380
---------- ----------- ----------- ---------- ----------
Total revenue 3,669,272 10,249,407 9,369,076 1,944,235 2,546,035
---------- ----------- ----------- ---------- ----------
Costs and expenses:
Lease operating 1,038,562 2,971,006 2,684,875 646,676 672,735
Production taxes 220,810 504,833 506,854 96,374 147,506
Depreciation and amortization
(Note 5) 739,397 4,029,243 3,047,718 919,311 692,445
General and administrative 1,138,632 1,659,255 1,995,974 822,247 179,662
Interest expense (Note 6) 509,381 3,119,786 2,709,491 726,459 598,701
Reduction of carrying cost of oil
and natural gas properties (Note 12) -- 4,000,000 -- -- --
---------- ----------- ----------- ---------- ----------
Total costs and expenses 3,646,782 16,284,123 10,944,912 3,211,067 2,291,049
---------- ----------- ----------- ---------- ----------
Earnings (loss) before income taxes 22,490 (6,034,716) (1,575,836) (1,266,832) 254,986
Income tax expense (benefit) (Note 7) -- (2,195,000) (529,000) (430,000) 87,000
---------- ----------- ----------- ---------- ----------
Net earnings (loss) $ 22,490 $ (3,839,716) $ (1,046,836) $ (836,832) $ 167,986
========== =========== =========== ========== ==========
See accompanying notes to financial statements.
F-23
INDIAN OIL COMPANY
Statements of Cash Flows
Three months ended
Year ended December 31, March 31,
--------------------------------------------- ---------------------------
1997 1998 1999 1999 2000
------------- ------------ ------------ ------------ -----------
(Unaudited)
Cash flows from operating activities:
Net earnings (loss) $ 22,490 $ (3,839,716) $ (1,046,836) $ (836,832) $ 167,986
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Depreciation and amortization 739,397 4,029,243 3,047,718 919,311 692,445
Reduction in carrying cost of oil
and natural gas properties -- 4,000,000 -- -- --
Amortization of debt issuance costs 9,000 136,000 233,616 33,949 20,498
Accretion of discount on long-term
debt 35,000 40,200 46,700 10,900 6,300
Deferred income tax expense
(benefit) -- (2,195,000) (529,000) (430,000) 87,000
Gain on sale of equipment (32,858) (35,258) (34,067) (21,195) (21,195)
Accrued interest expense increasing
debt -- 343,769 313,337 75,894 39,258
Compensation expense from
issuance of common stock
purchase options -- -- 149,000 -- --
Changes in operating assets and
liabilities:
Accounts receivable 749,452 (1,490,850) (432,249) 719,504 19,758
Other current assets (132,639) 94,889 (35,277) 7,473 91,999
Accounts payable and accrued
expenses 61,267 1,312,031 389,568 (510,605) 188,934
------------- ------------ ------------ ------------ -----------
Net cash provided by (used in)
operating activities 1,451,109 2,395,308 2,102,510 (31,601) 1,292,983
------------- ------------ ------------ ------------ -----------
Cash flows from investing activities:
Purchases of property and equipment (33,769,226) (1,809,140) (1,346,325) (393,714) (356,523)
Proceeds from sales of property and
equipment 276,776 334,293 570,222 570,222 75,000
Cash received from post closing
adjustments to purchase price of
property and equipment -- 1,533,769 372,066 -- --
------------- ------------ ------------ ------------ -----------
Net cash provided by (used in)
investing activities (33,492,450) 58,922 (404,037) 176,508 (281,523)
------------- ------------ ------------ ------------ -----------
Cash flows from financing activities:
Borrowings on long-term debt 35,068,000 -- 6,500,000 6,000,000 --
Repayments of long-term debt (1,918,000) (3,000,000) (8,758,500) (6,000,000) (599,627)
Payments for debt issuance costs (80,000) (198,713) (120,000) -- --
------------- ------------ ------------ ------------ -----------
Net cash provided by (used in)
financing activities 33,070,000 (3,198,713) (2,378,500) -- (599,627)
------------- ------------ ------------ ------------ -----------
Net increase (decrease) in cash and
cash equivalents 1,028,659 (744,483) (680,027) 144,907 411,833
Cash and cash equivalents at beginning
of period 1,706,662 2,735,321 1,990,838 1,990,838 1,310,811
------------- ------------ ------------ ------------ -----------
Cash and cash equivalents at end of period $ 2,735,321 $ 1,990,838 $ 1,310,811 $ 2,135,745 $ 1,722,644
============= ============ ============ ============ ===========
See accompanying notes to financial statements.
F-24
INDIAN OIL COMPANY
Statements of Cash Flows, Continued
Three months ended
Year ended December 31, March 31,
--------------------------------------------- -------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ----------- ------------
(Unaudited)
Supplemental cash flow information:
Cash payments for interest $ 366,000 $ 2,600,000 $ 1,836,000 $ 605,716 $ 532,645
============ ============ ============ =========== ============
Cash payments for income taxes $ 13,000 $ -- $ -- $ -- $ --
============ ============ ============ =========== ============
Supplemental schedule of non-cash
investing and financing activities:
Debt issuance costs included
in accounts payable $ 198,713 $ -- $ -- $ -- $ --
============ ============ ============ =========== ============
Purchases of property and equipment
included in accounts payable $ 315,101 $ -- $ -- $ -- $ --
============ ============ ============ =========== ============
Post closing adjustments to purchase
price of property and equipment
included in accounts receivable $ 1,533,769 $ 372,066 $ -- $ -- $ --
============ ============ ============ =========== ============
Sale of property and equipment for
notes receivable $ -- $ 30,000 $ -- $ -- $ --
============ ============ ============ =========== ============
Distribution of assets to stockholders $ -- $ -- $ 1,088,253 $ -- $ --
============ ============ ============ =========== ============
Issuance of common stock purchase
option by principal stockholder $ -- $ -- $ 149,000 $ -- $ --
============ ============ ============ =========== ============
Sale of property and equipment
for accounts receivable $ -- $ -- $ -- $ -- $ 1,462,000
============ ============ ============ =========== ============
Contribution of stockholder
debt to equity $ -- $ -- $ -- $ -- $ 3,739,103
============ ============ ============ =========== ============
Accrued interest added to debt $ -- $ -- $ -- $ -- $ 377,000
============ ============ ============ =========== ============
See accompanying notes to financial statements.
F-25
INDIAN OIL COMPANY
Statements of Stockholders' Equity (Deficit)
Number of Shares Retained Total
of Common Stock Additional Earnings Stockholders'
----------------------------- Common Paid-in (Accumulated Equity
Outstanding Treasury Stock Capital Deficit) (Deficit)
------------ ------------- ----------- ----------- ------------ ------------
Balance at December 31, 1996 62,360 37,725 $ 312 $ 1,332,603 $ 379,897 $ 1,712,812
Retirement of treasury stock -- (538) -- -- -- --
Net earnings -- -- -- -- 22,490 22,490
----------- ----------- ----------- ----------- ------------ ------------
Balance at December 31, 1997 62,360 37,187 312 1,332,603 402,387 1,735,302
Net loss -- -- -- -- (3,839,716) (3,839,716)
----------- ----------- ----------- ----------- ------------ ------------
Balance at December 31, 1998 62,360 37,187 312 1,332,603 (3,437,329) (2,104,414)
Net loss -- -- -- -- (1,046,836) (1,046,836)
Issuance of common stock
purchase option by principal
stockholder (Note 8) -- -- -- 149,000 -- 149,000
Issuance of common stock
(Note 8) 3,283 -- -- -- -- --
Distribution to stockholders
(Note 8) -- -- -- (1,088,255) -- (1,088,255)
----------- ----------- ----------- ----------- ------------ ------------
Balance at December 31, 1999 65,643 37,187 312 393,348 (4,484,165) (4,090,505)
Net earnings (unaudited) -- -- -- -- 167,986 167,986
Contribution of stockholder
debt (unaudited) (Note 6) -- -- -- 3,739,103 -- 3,739,103
----------- ----------- ----------- ----------- ------------ ------------
Balance at March 31, 2000
(unaudited) 65,643 37,187 $ 312 $ 4,132,451 $ (4,316,179) $ (183,416)
=========== =========== =========== =========== ============ ============
See accompanying notes to financial statements.
F-26
INDIAN OIL COMPANY
Notes to Financial Statements
December 31, 1997, 1998 and 1999
(Information insofar as it relates to March 31, 2000 and
the three months ended March 31, 1999 and 2000 is unaudited)
1. Organization and Basis of Presentation
Indian Oil Company (Indian) is engaged in the exploration, development and
production of natural gas, and to a lesser extent, crude oil. Indian's oil and
natural gas operations are concentrated in Oklahoma and western Arkansas, and to
a lesser extent in Texas, Kansas and Louisiana.
On February 15, 1999, Indian entered into an Agreement and Plan of Merger
with Canaan Energy Corporation (Canaan) and its affiliates (the Coral Group).
Under the plan, within 18 months, Indian will merge with and into Canaan and all
of its issued and outstanding shares will be converted into shares of Canaan.
During the interim period prior to the merger, Indian authorized Canaan to
manage Indian on a day-to-day basis.
In the opinion of management, the accompanying unaudited financial
statements as of March 31, 2000 and for the three months ended March 31 1999 and
2000, reflect all adjustments (which were normal and recurring) which, in the
opinion of management, are necessary for a fair statement of the financial
position and results of operations of the interim periods presented.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates, judgments
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements and revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents
Indian considers all highly liquid investments with maturity of three
months or less at time of purchase to be cash equivalents. Cash equivalents
consist of overnight investments in money market funds.
Property and Equipment
Indian follows the full cost method of accounting for its oil and natural
gas properties. Accordingly, all costs associated with acquisition, exploration
and development of oil and natural gas properties are capitalized, including
nonproductive costs and overhead costs directly identified with acquisition,
exploration and development activities. Indian capitalized $240,000, $200,000,
$60,000 and $60,000 for the years ended December 31, 1997, 1998 and 1999, and
the three months ended March 31, 2000, respectively, of overhead costs related
to acquisition, exploration and development activities. No costs were
capitalized for the three months ended March 31, 1999 due to nominal
acquisition, exploration and development activities of Indian during the period.
Net capitalized costs (capitalized costs less accumulated amortization and
deferred income
F-27
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
taxes) are limited to the estimated after-tax future net revenues based on
period end pricing, discounted at 10% per year, from proved oil and natural gas
reserves plus the lower of cost or estimated fair value of unproved properties
subject to amortization. Indian compares the carrying value of its oil and
natural gas properties to the calculated limitation at each period end.
Capitalized costs less accumulated amortization plus estimated future
development costs are amortized by an equivalent units-of-production method,
converting barrels to natural gas at the ratio approximating their relative
energy content of one barrel of oil to six Mcf of natural gas. No gain or loss
is recognized upon the disposal of oil and natural gas properties, unless such
dispositions significantly alter the relationship between capitalized costs and
proved oil and natural gas reserves.
Oil and natural gas properties not subject to amortization consist of the
cost of undeveloped leaseholds which have not been assigned proved reserves.
These unproven properties are evaluated, on an individual basis, by management
for impairment, with the impairment provision included in the cost of oil and
natural gas properties subject to amortization. Factors considered by management
in its impairment assessment include drilling results by Indian and other
operators, the terms of oil and natural gas leases not held by production, and
available funds for exploration and development.
Depreciation and amortization of other property and equipment, including
leasehold improvements, are provided using the straight-line method based on
estimated useful lives of the related assets, which range from 3 to 7 years.
Indian accounts for its non-oil and natural gas long-lived assets in
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and Assets
to be Disposed Of." SFAS No. 121 requires that long-lived assets and
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
cost to sell.
Debt Issuance Costs
Indian capitalized $279,000 of costs related to the issuance of debt in
December 1997. Included in the amount capitalized was $125,000 of costs paid to
certain stockholders and an affiliated company for their guaranty of a portion
of the debt and for modifications to the terms of the subordinated 1998 notes
payable to stockholders. Also included in the amount capitalized was $45,000
paid to the president of Indian for his role as legal counsel in the preparation
and review of the related debt agreements. In 1999, Indian capitalized $120,000
of costs related to the modification of its debt agreements. Amortization of
debt issuance costs is recognized as interest expense over the repayment terms
of the related debt using the straight-line method, which does not materially
differ from the use of the effective interest method.
Accumulated amortization of debt issuance costs as of December 31, 1998 and
1999, and March 31, 2000, approximated $145,000, $379,000 and $399,000,
respectively.
F-28
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
Revenue and Royalty Distributions Payable
For certain oil and natural gas properties, Indian receives production
proceeds from the purchaser and further distributes such amounts to other
revenue and royalty owners. Production proceeds applicable to other revenue and
royalty owners are reflected as revenue and royalty distributions payable in the
accompanying balance sheets. Indian accrues revenue for only its net revenue
interest in oil and natural gas properties.
Hedging Activities
Indian periodically enters into oil and natural gas price swap agreements
to manage its exposure to oil and natural gas price volatility. These contracts
have no cash requirements at inception and are with counterparties that Indian
believes have minimal credit risks. The oil and natural gas reference prices
upon which the price hedging contracts are based reflect various market indices
that have a high degree of historical correlation with actual prices received by
Indian.
Indian accounts for its hedging contracts using the deferral method of
accounting. Under this method, realized gains and losses from Indian's price
risk management activities are recognized in oil and natural gas revenues when
the associated production occurs and the resulting cash flows are reported as
cash flows from operating activities. In the event of a loss of correlation
between changes in oil and natural gas reference prices under a hedging contract
and actual oil and natural gas prices, a gain or loss is recognized currently to
the extent the hedging contract has not offset changes in actual oil and natural
gas prices.
Indian was not a party to any hedging contracts as of December 31, 1998. At
December 31, 1999, Indian was a party to two natural gas price-hedging contracts
covering 300 million cubic feet of monthly natural gas production. One price
hedging contract covering 50 million cubic feet of monthly natural gas
production terminates on April 1, 2000. The remaining hedge contract terminates
on October 1, 2000. The weighted average price to be received for the hedged
production is $2.14 per Mcf, while Indian will pay the counterparty a floating
index price.
On November 18, 1999, Indian as a participating party with the Coral Group,
entered into an oil price swap covering 2,000 barrels of its monthly oil
production beginning January 2000 through December 2000. The price to be
received for this production is $22.00 per barrel, while Indian will pay the
counterparty a floating index price.
The fair value of Indian's natural gas and oil price hedging contract
liability approximated $208,000 and $1,348,000 at December 31, 1999 and March
31, 2000, respectively. This liability represents the estimated amount Indian
would have to pay to cancel the contracts or transfer them to other parties. No
deferred hedging gains or losses were recorded as of December 31, 1998, 1999 or
March 31, 2000, respectively.
Natural Gas Balancing
During the course of normal operation, Indian and other joint interest
owners of natural gas reservoirs will take more or less than their respective
ownership share of the natural gas volumes produced. These volumetric imbalances
are monitored over the lives of the wells' production capability. If an
imbalance exists at the time the wells' reserves are depleted, cash settlements
are made among the joint interest owners under a variety of arrangements.
F-29
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
Indian follows the sales method of accounting for natural gas imbalances. A
liability is recorded only if Indian's excess takes of natural gas volumes
exceed its estimated remaining recoverable reserves. No receivables are recorded
for those wells where Indian has taken less that its ownership share of natural
gas production. As of December 31, 1998 and 1999 and March 31, 2000, Indian had
a net underproduced imbalance position of 822 million, 834 million and 366
million cubic feet of natural gas, respectively. The fair value of the net
underproduced imbalance position as of December 31, 1998, 1999 and March 31,
2000, approximated $1,600,000, $1,790,000 and $950,000, respectively, using
natural gas prices at the end of the respective periods.
General and Administrative Expenses
General and administrative expenses are reported net of amounts allocated
to working interest owners of the oil and natural gas properties operated by
Indian and net of amounts capitalized pursuant to the full cost method of
accounting.
Production Costs
Lease operating costs, including costs incurred to maintain or increase
production levels from existing completion intervals, along with production
related taxes are expensed as incurred.
Major Purchasers
Indian markets its oil and gas production to numerous purchasers under a
variety of short-term contracts. During 1997, 1998 and 1999, Indian's two, three
and one largest purchasers accounted for 40%, 38% and 28%, respectively, of its
oil and natural gas revenues. Indian had no other purchasers that accounted for
greater than 10% of its oil and natural gas revenues. Indian does not believe
that the loss of any single customer would have a material effect on the results
of its operations.
Income Taxes
Indian accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized at the enacted tax rates for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and the respective tax bases and tax operating losses and
tax credit carryforwards. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of "comprehensive income" and its components in a set of
financial statements. It requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Indian had no items of comprehensive income as
defined by SFAS No. 130 not included in the accompanying statements of
operations; therefore, statements of comprehensive income have not been
presented in the accompanying financial statements.
F-30
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
3. Property Acquisition
In December 1997, Indian acquired certain producing Oklahoma and western
Arkansas properties from Sonat Exploration Inc. (Sonat) for approximately $30.2
million. Estimated proved reserves of the Sonat properties as of December 31,
1997 were 48.8 billion cubic feet of natural gas equivalent (unaudited). Indian
funded the purchase through borrowings under a line of credit and a term note.
Included in the acquisition were numerous natural gas properties in which
Sonat had taken more or less than its ownership share of natural gas volumes
produced. On the acquisition date and through December 31, 1998, Indian was
unable to estimate the value of the volumetric imbalances which may ultimately
be settled in cash with other working interest owners. Accordingly, the purchase
price of the Sonat properties did not include a value for these acquired
volumetric imbalances. If the volumetric imbalances are settled in cash with
other working interest owners, Indian will record the settlements as other
revenues/expenses. Most of the volumetric imbalances between Indian and other
working interest owners are expected to be eliminated through production;
however, cash receipts or payments may occur as the individual properties
approach depletion.
The acquisition of the Sonat properties described above was accounted for
by the purchase method and accordingly have been included in Indian's financial
statements from the date of the acquisition.
4. Accounts Receivable
Accounts receivable consisted of the following:
December 31, March 31,
------------------------------
1998 1999 2000
----------- ----------- -----------
(Unaudited)
Oil and natural gas revenue accruals $ 1,946,000 $ 2,427,000 $ 2,562,064
Joint interest billings 341,508 328,962 181,790
Receivables from officers 86,885 -- --
Receivables from affiliates 18,270 24,520 22,095
Other 372,066 5,225 1,462,000
Allowance for doubtful accounts (20,000) (70,000) (70,000)
----------- ----------- -----------
Net accounts receivable $ 2,744,729 $ 2,715,707 $ 4,157,949
=========== =========== ===========
Indian requires other joint interest owners to pay drilling costs in
advance. The advances are recorded as liabilities by Indian. Indian does not
require parties to collaterize amounts owing for joint interest billings after
completion of the well. To mitigate this credit risk, Indian has the ability to
offset amounts owed through application of revenues of joint interest owners and
also has the ability to file liens on the related properties.
Accounts receivable - other, at December 31, 1998 represents amounts due
from Sonat for post closing adjustments to the purchase price of oil and natural
gas assets discussed in Note 3. Accounts receivable - other, at March 31, 2000,
represents amounts due from Indian selling numerous low-margin oil and natural
gas assets on March 31, 2000 for $1,462,000. The sales proceeds were received on
April 14, 2000.
F-31
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
5. Property and Equipment
Accumulated amortization of oil and natural gas properties subject to
amortization at December 31, 1998 and 1999 and March 31, 2000, was $8,500,000,
$11,443,000 and $12,114,000, respectively.
Oil and natural gas assets not subject to amortization at December 31,
1999, consisted of undeveloped leaseholds acquired in the following years:
1999 $ --
1998 10,819
1997 66,188
Prior to 1997 40,361
----------
Total $ 117,368
==========
Depreciation and amortization expense consisted of the following:
Three months ended
Year ended December 31, March 31,
------------------------------------------ --------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ ----------- -----------
(Unaudited)
Depreciation and amortization of
oil and natural gas properties $ 650,000 $ 3,900,000 $ 2,943,000 $ 887,000 $ 671,000
Depreciation and amortization of other
equipment and leasehold
improvements 89,397 129,243 104,718 32,311 21,445
----------- ------------ ------------ ----------- -----------
Total expense $ 739,397 $ 4,029,243 $ 3,047,718 $ 919,311 $ 692,445
=========== ============ ============ =========== ===========
6. Long-Term Debt
Long-term debt consisted of the following:
December 31,
------------------------------- March 31,
1998 1999 2000
------------- ------------- -------------
(Unaudited)
Credit facilities:
1997 line of credit $ 20,000,000 $ 17,804,000 $ 17,374,000
1997 term loan 12,000,000 6,000,000 6,376,583
Production payment obligation -- 5,437,500 5,268,750
Subordinated 2003 notes payable 1,999,644 2,249,122 --
Subordinated 1998 notes payable 1,334,324 1,444,883 --
Note payable to affiliate -- 500,000 500,000
------------- ------------- -------------
35,333,968 33,435,505 29,519,333
Current portion -- (3,603,000) (24,425,583)
------------- ------------- -------------
Net long-term debt $ 35,333,968 $ 29,832,505 $ 5,093,750
============= ============= =============
F-32
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
1997 Line of Credit
- -------------------
In conjunction with the Sonat property acquisition in December 1997, Indian
established a line of a credit pursuant to which it can borrow up to an amount
determined by the bank based on evaluation of the assets and cash flow of
Indian. The established borrowing base at December 31, 1999 and March 31, 2000
was $20 million. Amounts borrowed under the line of credit bear interest at
various fixed rate options, which Indian may elect for periods up to 90 days.
Such rates are generally less than the prime rate. Indian may also elect to
borrow at the prime rate. The average interest rate at December 31, 1998 and
1999 and March 31, 2000 was 7.80%, 8.13% and 8.55%, respectively. The line of
credit is secured by essentially all of Indian's oil and natural gas properties.
On March 31, 1999, in conjunction with the merger agreement with the Coral
Group, a monthly borrowing base reduction of $244,000 per month was established
for a period of eighty-two (82) months. On January 1, 2000, the bank renewed the
line of credit extending the maturity to January 15, 2001 and lowering the
borrowing base reduction to $215,000 per month.
1997 Term Loan
- --------------
Also in conjunction with the Sonat property acquisition in December 1997,
Indian established a $12 million term loan with a bank. Amounts borrowed under
the term loan bear interest at a specified prime rate redetermined annually. The
interest rate at December 31, 1998 and 1999 and March 31, 2000 was 8.00%, 8.25%
and 8.25%, respectively. The term loan is secured by certain assets of
affiliates of Indian.
As discussed below, in March 1999, Indian repaid $6 million of the term
loan with proceeds received from its issuance of a $6 million production payment
obligation to the Coral Group.
On February 1, 2000, the bank amended the term loan agreement extending its
maturity to March 1, 2001 and increased the loan's principal balance by
approximately $377,000 for accrued interest on the loan.
As of December 31, 1999, Indian was not in compliance with certain
financial covenants required to be met under the 1997 line of credit and 1997
term loan. The financial institutions waived noncompliance with the debt
covenants.
Production Payment Obligation
- -----------------------------
In March 1999, as a result of the Agreement and Plan of Merger with the
Coral Group, the Coral Group loaned Indian $6 million in return for a monthly
production payment of $56,250 until the obligation is paid in full. The
production payment obligation is unsecured and interest free.
Subordinated 2003 Notes Payable
- -------------------------------
As of December 31, 1998 and 1999, Indian had $2 million of 10% (discounted
using a 13.7% interest rate) subordinated, unsecured notes payable to
stockholders. In conjunction with the December 1997 Sonat property acquisition
and execution of the 1997 line of credit, the terms of the subordinated 2003
notes were modified to defer all payments of interest until maturity of the 1997
line of credit. In connection with the
F-33
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
planned merger with the Coral Group, on February 14, 2000 the stockholders
contributed the notes to Indian's equity.
Subordinated 1998 Notes Payable
- -------------------------------
As of December 31, 1998 and 1999, Indian had two subordinated notes
payable, secured by treasury stock, outstanding. The notes were held by two
former stockholders and in April 1996 the notes were purchased by an affiliate
of Indian. The notes accrued interest at the national prime rate plus one half
percent, redetermined annually. The interest rate at December 31, 1998 and 1999
was 8.0% and 8.25%, respectively. In conjunction with the December 1997 Sonat
property acquisition and execution of the 1997 line of credit, the terms of the
subordinated notes were modified to defer all payments of interest until
maturity of the 1997 line of credit. In connection with the planned merger with
the Coral Group, on February 14, 2000 the affiliate contributed the notes to
Indian's equity.
Note Payable to Affiliate
- -------------------------
In October 1999, INDCO L.L.C. (INDCO), an entity with substantially the
same ownership as Indian loaned Indian $500,000 for an unsecured promissory
note. The note payable accrues interest at an annual rate of 6%. The principal
balance and accrued interest thereon are due December 31, 2001.
Future Maturities
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1999, are as follows:
2000 $ 3,603,000
2001 25,745,000
2002 675,000
2003 675,000
2004 675,000
7. Income Taxes
At December 31, 1999, Indian had the following carryforwards available to
reduce future income taxes:
Types of Years of Carryforward
Carryforwards Expiration Amounts
-------------------------------------------------- ----------------------- -----------------------
Net operating loss - U.S. Federal 2006 - 2019 $ 6,237,000
Net operating loss - various states 2006 - 2019 $ 9,023,000
Statutory depletion -- $ 1,387,000
F-34
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
The components of income tax expense (benefit) for the years ended
December 31, 1997, 1998, and 1999 were as follows:
1997 1998 1999
------------ ------------ ------------
Current income tax expense:
U.S. Federal $ -- $ -- $ --
Various states -- -- --
------------ ------------ ------------
Total current tax expense -- -- --
------------ ------------ ------------
Deferred income tax expense (benefit):
U.S. Federal -- (1,954,000) (473,000)
Various states -- (241,000) (56,000)
------------ ------------ ------------
Total deferred tax expense (benefit) -- (2,195,000) (529,000)
------------ ------------ ------------
Total income tax expense (benefit) $ -- $ (2,195,000) $ (529,000)
============ ============ ============
Total income tax expense (benefit) for the years ended December 31,
1997, 1998 and 1999 differed from the amounts computed by applying the U.S.
federal income tax rate to earnings (loss) before income taxes as a result of
the following:
1997 1998 1999
----------- ----------- -----------
Expected income tax (benefit) rate 34% (34)% (34)%
State income tax (benefit) 4 (4) (4)
Effect of graduated tax rates (19) -- --
Increase in the valuation allowance
for deferred tax assets -- 5 --
Other, net (19) (3) 4
----------- ----------- -----------
Effective income tax benefit rate --% (36)% (34)%
----------- ----------- -----------
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and liabilities at December 31, 1997, 1998
and 1999 are as follows:
1997 1998 1999
----------- ----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 347,000 $ 1,555,000 $ 2,482,000
Statutory depletion carryforwards 378,000 471,000 471,000
----------- ----------- -----------
Total deferred tax assets 725,000 2,026,000 2,953,000
Less valuation allowance -- 283,000 283,000
----------- ----------- -----------
Net deferred tax assets 725,000 1,743,000 2,670,000
----------- ----------- -----------
Deferred tax liabilities:
Property and equipment, principally due
to differences in depreciation, and the
expensing of intangible drilling costs
for tax purposes (1,400,000) (223,000) (621,000)
----------- ----------- -----------
Net deferred tax asset (liability) $ (675,000) $ 1,520,000 $ 2,049,000
=========== =========== ===========
F-35
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
Indian has recognized $2.67 million of net deferred tax assets as of
December 31, 1999, which consist of various carryforwards available to offset
future income taxes. The carryforwards include federal net operating loss
carryforwards, the majority of which do not begin to expire until 2018, and
state net operating loss carryforwards, which expire primarily between 2006 and
2019. The tax benefits of carryforwards are recorded as an asset to the extent
that management assesses the utilization of such carryforwards to be "more
likely than not" realizable. When the future utilization of some portion of the
carryforwards is determined not to be likely, a valuation allowance is provided
to reduce the recorded tax benefits from such assets.
Indian believes that its future taxable income will be sufficient to
utilize a significant amount of its carryforwards prior to their expiration.
Indian expects the tax benefit from the net operating loss and statutory
depletion carryforwards to be utilized between 2000 and 2009. Such expectation
is based upon current estimates of taxable income during this period.
Significant changes in such estimates caused by variables such as future oil and
natural gas prices or capital expenditures could alter the timing and amount of
utilization of such carryforwards. There can be no assurance that Indian will
generate any specific level of continuing taxable earnings.
8. Stockholders' Equity
On April 1, 1999, certain Indian stockholders transferred a total of 6,632
shares of their common stock, equal to 10% of Indian's outstanding shares, to
two individuals as additional compensation for prior services performed. The
individuals were officers of Indian who were terminated in March of 1999, as a
result of the Agreement and Plan of Merger with Canaan. Also on April 1, 1999,
as a result of a consulting arrangement between Indian and one of the
individuals discussed above, Indian issued 3,283 shares of its common stock to
the individual as additional compensation. Indian estimated the common shares
transferred or issued had no value on the date of issuance and transfer.
Accordingly, no compensation expense was recorded. The method used by management
to value Indian's common stock was based on the estimated fair value of proved
oil and natural gas reserves, and working capital at March 31, 1999, less non-
stockholder debt obligations and other noncurrent liabilities.
On September 29, 1999, Indian's Chief Executive Officer and principal
stockholder granted the individual providing consulting services to Indian, an
option to purchase shares of the principal stockholders' common stock for $1.00
per share. The option may only be exercised when the individual's consulting
agreement is terminated as a result of a liquidation, reorganization or the
occurrence of other such transactions (a Transaction Event) by Indian. The
number of shares subject to the option is dependent on Indian's Transaction
Event value. The value of shares subject to the option is limited to $150,000.
As disclosed in Note 1, in February 1999, Indian entered into an Agreement
and Plan of Merger with Canaan. Effective September 30, 1999, Indian and Canaan
agreed to Indian's merger value, thereby establishing the number of shares
subject to the purchase option. Indian recorded compensation expense of $149,000
based on the option's fair value.
On October 10, 1999, Indian transferred certain assets to be excluded from
the merger with Canaan to INDCO, for two notes approximating $1,088,000. The
transferred assets included certain undeveloped leases, office fixtures, other
equipment and receivables due from Indian's officers and stockholders. The
notes'
F-36
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
principal amount equaled the book value of transferred assets on the date of
transfer. Also in October 1999, Indian issued INDCO a $500,000 note for cash
(see Note 6). The $500,000 note payable to INDCO is expected to be repaid;
however, the notes receivable from INDCO are not expected to be collected and
have been accounted for as a distribution to stockholders.
9. Employee Benefit Plan
Employees of Indian, if eligible, may participate in a defined contribution
plan with features under Section 401(k) of the Internal Revenue Code. The plan
allows employees to make voluntary deferral contributions up to a maximum of 15%
of their compensation. Indian matches 50% of each employee's contribution up to
6% of such employee's compensation. Benefits payable under the plan are limited
to the amount of plan assets allocable to the account of each plan participant.
Indian retains the right to modify, amend or terminate the plan at any time. For
the years ended December 31, 1997, 1998 and 1999 and the three months ended
March 31, 1999 and 2000, Indian made matching contributions of $35,000, $44,000,
$31,000, $11,000 and $4,300, respectively.
10. Related Party Transactions
Indian subleased a condominium and leased a boat and an automobile from an
affiliate in 1997 and 1998. Indian reimbursed the affiliate for related expenses
incurred. Lease and reimbursement costs incurred by Indian approximated $77,000
and $71,000 for the years ended December 31, 1997 and 1998, respectively.
Terms of the sublease and lease allowed Indian to cancel upon 30 days
notice. Indian terminated the lease in September 1998.
During 1997, Indian received $100,000 from an affiliate, as a reimbursement
for management services provided. Such services were not provided in either 1998
or 1999.
11. Commitments and Contingencies
Indian leases its corporate offices through several lease obligations
expiring August 1, 2001 and leases field operations equipment expiring in July
2001. Minimum future rental payments under non-cancelable operating leases
having remaining terms in excess of one year as of December 31, 1999 are as
follows:
2000 $ 381,000
2001 231,000
-----------
Total $ 612,000
===========
Rent expense for the years ended December 31, 1997, 1998 and 1999
approximated $118,000, $292,000 and $389,000, respectively. Rent expense for the
three months ended March 31, 1999 and 2000 approximated $101,000 and $94,000,
respectively.
F-37
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
12. Reduction of Carrying Cost of Oil and Natural Gas Properties
Under the full cost method of accounting, the net book value of oil and
natural gas properties, less related deferred income taxes, may not exceed a
calculated "ceiling." The ceiling limitation is the discounted estimated
after-tax future net revenues from proved oil and natural gas properties. In
calculating future net revenues, current prices and costs are generally held
constant indefinitely. The net book value less deferred income taxes is compared
to the ceiling with any excess written off as an expense. An expense recorded in
one period may not be reversed in a subsequent period even though higher oil and
natural gas prices may have increased the ceiling applicable to the subsequent
period.
At December 31, 1998, the carrying value of Indian's oil and natural
gas properties, less related deferred income taxes, exceeded the full cost
ceiling by $4 million. Accordingly, a $4 million pre-tax reduction of the
carrying value of such properties was recorded. This reduction was partially
offset by a $1.5 million deferred income tax benefit, resulting in an after-tax
charge of $2.5 million.
13. Oil and Natural Gas Operations
Below is a summary of results of operations for oil and natural gas
producing activities. The results do not include any allocation of Indian's
interest costs or general corporate overhead. Income tax expense (benefit) has
been calculated by applying statutory income tax rates to oil and gas sales
after deducting costs, including depreciation, depletion and amortization and
after giving effect to permanent differences, tax credits and allowances
relating to proved oil and gas reserves.
Three months ended
Year ended December 31, March 31,
----------------------------------------------- ----------------------------
1997 1998 1999 1999 2000
-------------- -------------- -------------- -------------- ------------
(Unaudited)
Oil and natural gas sales $ 3,356,616 $ 10,014,808 $ 9,050,664 $ 1,858,291 $ 2,509,655
Lease operating expenses and
production taxes (1,259,372) (3,475,839) (3,191,729) (743,050) (820,241)
Depreciation and amortization (650,000) (3,900,000) (2,943,000) (887,000) (671,000)
Reduction of carrying value of oil
and natural gas properties -- (4,000,000) -- -- --
Income tax (expense) benefit (492,000) 462,000 (991,000) (78,000) (346,000)
----------- ------------- ----------- ----------- ----------
Results of operations from oil and
natural gas producing activities $ 955,244 $ (899,031) $ 1,924,935 $ 150,241 $ 672,414
=========== ============= =========== =========== ==========
Depreciation and amortization
per equivalent Mcf of production $ 0.52 $ 0.80 $ 0.63 $ 0.75 $ 0.61
=========== ============= =========== =========== ==========
F-38
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
The following is a summary of costs incurred, all of which were
capitalized, for oil and gas property development and acquisition activities:
Three months ended
Year ended December 31, March 31,
----------------------------------------------- -------------------------------
1997 1998 1999 1999 2000
-------------- -------------- -------------- -------------- ---------------
(Unaudited)
Development costs $ 1,681,672 $ 1,298,316 $ 1,186,837 $ 393,714 $ 356,523
Acquisition costs 30,622,885 -- 123,000 -- --
14. Supplemental Information on Oil and Natural Gas Operations (Unaudited)
The following supplemental unaudited information regarding the oil and
natural gas activities of Indian is presented pursuant to the disclosure
requirements promulgated by the Securities and Exchange Commission (SEC) and
SFAS No. 69 "Disclosures About Oil and Gas Producing Activities."
Oil and Natural Gas Quantities
- ------------------------------
The reserve information for the year ended December 31, 1998 and 1999
presented below was prepared by the independent engineering firm of Netherland,
Sewell & Associates, Inc. Indian cautions that there are many uncertainties
inherent in estimating reserve quantities, and in projecting future production
rates and the timing of future development expenditures. In addition, reserve
estimates of new discoveries are more imprecise than those of properties with a
production history. Accordingly, these estimates are subject to change as
additional information becomes available.
Proved oil and natural gas reserves are the estimated quantities of
crude oil, condensate, natural gas and natural gas liquids that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic conditions. Proved
developed oil and natural gas reserves are those reserves expected to be
recovered through existing equipment and operating methods.
Estimates of net quantities of proved reserves and proved developed
reserves of crude oil, including condensate and natural gas liquids, and natural
gas, as well as the changes in proved reserves during the periods indicated, are
set forth in the tables below. All reserves are located in the United States.
Indian prepared the estimated reserves as of December 31, 1996 and 1997
based on geological and engineering evaluations performed as of December 31,
1998. The reserve estimates as of the prior year-end dates were derived by
analyzing actual historical production amounts and by adjusting the reserves
attributable to wells acquired or disposed of during the relevant periods. In
addition, in deriving the estimates as of December 31, 1996 and 1997, Indian
used production costs based on actual costs incurred during the years and actual
oil and natural gas prices received on December 31, 1996 and 1997. Indian has
estimated its reserves as of December 31, 1996 and 1997 in this manner because
the actual information necessary to calculate estimated proved reserves and
related information in accordance with guidelines of the SEC as of each date is
not available. Because the reserve estimates as of December 31, 1998 are based
on additional information gained from the result of drilling, testing and
production subsequent to the dates of the estimated reserves, the reserve
estimates as of December 31, 1996 and 1997 are not necessarily reflective of
quantities that might have been estimated based on information available as of
such dates had estimates in accordance
F-39
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
with SEC guidelines been made at such dates. Management believes that, because
of the methodology used, the reserve information presented is more reflective of
actual reserve quantities than estimates that might have been generated as of
such dates.
On March 31, 2000, Indian sold 230 non-strategic oil and gas properties
to a third party for $1.46 million. The information as to changes in proved
reserves, standardized measure of discounted future net cash flows and changes
in the standardized measure does not include the effect of the sale.
Changes in Proved Reserves
- --------------------------
Oil Natural Gas
(Bbls) (Mcf)
---------------- -----------------
Proved reserves at December 31, 1996 264,000 8,141,000
Extensions and discoveries 1,000 59,000
Purchase of reserves 174,000 47,772,000
Production (51,000) (953,000)
Sales of reserves in place (1,000) (25,000)
--------------- --------------
Proved reserves at December 31, 1997 387,000 54,994,000
Extensions and discoveries 2,000 467,000
Production (59,000) (4,552,000)
Sales of reserves in place -- (126,000)
--------------- --------------
Proved reserves at December 31, 1998 330,000 50,783,000
Extensions and discoveries 38,000 3,448,000
Revisions of previous estimates 300,000 3,647,000
Purchase of reserves 26,000 36,000
Production (55,000) (4,305,000)
Sales of reserves in place -- (9,000)
--------------- --------------
Proved reserves at December 31, 1999 639,000 53,600,000
=============== ==============
Proved Developed Reserves as of:
- -------------------------------
Oil Natural Gas
(Bbls) (Mcf)
------------------- ------------------
December 31, 1996 241,000 5,575,000
December 31, 1997 292,000 38,162,000
December 31, 1998 236,000 33,952,000
December 31, 1999 519,000 34,956,000
Standardized Measure of Discounted Future Net Cash Flows
- --------------------------------------------------------
The following table sets forth the standardized measure of the
discounted future net cash flows attributable to Indian's proved oil and natural
gas reserves. Future cash inflows were computed by applying prices of oil and
natural gas being received at December 31 of each year presented to the
estimated future production of proved oil and natural gas reserves. All prices
were held constant except where definite price escalation is provided for in the
sales contracts.
F-40
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
Future development and production costs are computed by estimating the
expenditures to be incurred in developing and producing proved oil and gas
reserves at the end of each year, based on respective year-end costs and
assuming continuation of existing economic conditions.
Future income tax expenses are computed by applying appropriate
statutory rates to the future pre-tax net cash flows relating to proved
reserves, net of the tax basis of the properties involved giving effect to
permanent differences and tax credits and allowances relating to proved oil and
gas reserves.
Year ended December 31,
----------------------------------------------------
1997 1998 1999
------------- -------------- --------------
Future cash inflows $ 128,942,000 $ 103,279,000 $ 129,862,000
Future development costs (8,425,000) (8,425,000) (9,760,000)
Future production costs (40,694,000) (40,526,000) (48,088,000)
Future income tax expense (5,926,000) -- (3,191,000)
------------- -------------- --------------
Future net cash flows 73,897,000 54,328,000 68,823,000
10% discount to reflect timing of cash flows (34,306,000) (25,221,000) (32,930,000)
------------- -------------- --------------
Standardized measure of discounted future
net cash flows $ 39,591,000 $ 29,107,000 $ 35,893,000
============= ============== ==============
The weighted average prices at December 31, 1999 used in the
computations in the table above were $23.66 per barrel of oil and $2.14 per Mcf
of natural gas.
F-41
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
Changes Relating to Standardized Measure of Discounted Future Net Cash Flows
- ----------------------------------------------------------------------------
Principle changes in the standardized measure of discounted future net
cash flows attributable to Indian's proved reserves are as follows:
Year ended December 31,
----------------------------------------------------
1997 1998 1999
------------- -------------- --------------
Beginning balance $ 10,318,000 $ 39,591,000 $ 29,107,000
Sales of oil and natural gas, net of
production costs (2,097,000) (6,839,000) (5,935,000)
Net changes in year-end sales prices
and production costs (6,455,000) (10,222,000) 4,764,000
Purchase of reserves, net of future
development costs 35,943,000 -- 276,000
Revisions of previous estimates, net of
future development costs -- -- 5,323,000
Extensions and discoveries net of future
development costs 53,000 307,000 1,649,000
Development costs incurred during the period
which reduced future development costs -- -- 845,000
Sales of reserves in place, net of future
development costs (25,000) (81,000) (8,000)
Accretion of discount 1,437,000 4,277,000 2,911,000
Net change in income taxes 881,000 3,175,000 (1,665,000)
Other, primarily timing (464,000) (1,101,000) (1,374,000)
------------- -------------- --------------
Ending balance $ 39,591,000 $ 29,107,000 $ 35,893,000
============= ============== ==============
15. Liquidity
As of March 31, 2000, Indian had a working capital deficiency of $22
million as a result of inclusion in Indian's current liabilities of $23.8
million of borrowings from the 1997 line of credit which matures in January 2001
and from the 1997 term loan which matures in March 2001.
As disclosed in Note 1, Indian entered into an Agreement and Plan of
Merger with the Coral Group, whereby Indian will be acquired by Canaan for
shares of Canaan. If the merger is completed, Canaan will assume Indian's 1997
line of credit and 1997 term loan obligations and Canaan will seek to extend the
maturity date of the obligations or seek alternative financing from other
commercial lenders.
If the merger with Canaan is not completed, the merger agreement
provides for the liquidation of Indian's assets, with any remaining proceeds
after satisfying Indian's obligations being shared equally between Indian's
stockholders and the Coral Group. If Indian is liquidated, management currently
believes proceeds from the sale of its assets would be sufficient to satisfy its
obligations. However, due to the effect of oil and natural gas prices on the
value of Indian's assets, there can be no assurance actual sales proceeds would
be sufficient to satisfy all of the obligations.
F-42
INDEPENDENT AUDITOR'S REPORT
To the Partners
Coral Reserves Natural Gas Income Fund
1990 Limited Partnership
Oklahoma City, Oklahoma
We have audited the balance sheets of Coral Reserves Natural Gas Income
Fund 1990 Limited Partnership as of December 31, 1998 and 1999 and the related
statements of operations, partners' equity and cash flows for each of the years
in the three year period ended December 31, 1999. These financial statements are
the responsibility of the Partnership's Managing General Partner. 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 from
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 Coral Reserves
Natural Gas Income Fund 1990 Limited Partnership as of December 31, 1998 and
1999, and the results of its operations and its cash flow for each of the years
in the three year period ended December 31, 1999 in conformity with generally
accepted accounting principles.
William T. Zumwalt, CPA, Inc.
Tulsa, Oklahoma
March 10, 2000
F-43
CORAL RESERVES NATURAL GAS INCOME FUND 1990 LIMITED PARTNERSHIP
Balance Sheets
December 31,
----------------------- March 31,
1998 1999 2000
---------- ----------- -----------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 73,681 $ 83,622 $ 62,521
Accounts receivable, net (Note 2) 123,388 146,903 141,947
---------- ----------- -----------
Total current assets 197,069 230,525 204,468
---------- ----------- -----------
Property and equipment, at cost, based on the full
cost method of
accounting for oil and gas properties 3,537,870 3,613,177 3,616,129
Accumulated depreciation, depletion and
amortization (2,152,633) (2,346,870) (2,394,546)
---------- ----------- -----------
1,385,237 1,266,307 1,221,583
---------- ----------- -----------
Total assets $ 1,582,306 $ 1,496,832 $ 1,426,051
========== =========== ===========
Liabilities and Partners' Equity
Current liabilities:
Accounts payable $ 15,937 $ 24,359 $ 14,985
Revenue and royalty distributions payable 24,680 30,311 31,251
---------- ----------- -----------
Total current liabilities 40,617 54,670 46,236
---------- ----------- -----------
Long-term debt (Note 3) 628,455 690,455 690,455
Partners' equity (deficit):
General partners (41,951) (35,719) (39,863)
Limited partners 955,185 787,426 729,223
---------- ----------- -----------
Total partners' equity 913,234 751,707 689,360
---------- ----------- -----------
Total liabilities and partners' equity $ 1,582,306 $ 1,496,832 $ 1,426,051
========== =========== ===========
See accompanying notes to financial statements.
F-44
CORAL RESERVES NATURAL GAS INCOME FUND 1990 LIMITED PARTNERSHIP
Statements of Operations
Three months ended
Year ended December 31, March 31
--------------------------------------- ------------------------
1997 1998 1999 1999 2000
------------ ----------- ----------- ----------- -----------
(Unaudited)
-
Revenues:
Oil and gas sales $ 1,014,006 $ 700,257 $ 695,597 $ 122,935 $ 176,329
Other income 6,317 5,588 3,560 880 1,143
------------ ----------- ----------- ----------- -----------
Total revenues 1,020,323 705,845 699,157 123,815 177,472
------------ ----------- ----------- ----------- -----------
Costs and expenses:
Lease operating 103,886 105,603 93,983 23,801 23,132
Production taxes 45,033 52,015 49,817 8,354 14,155
Depreciation, depletion
and amortization 256,591 234,422 194,237 46,164 47,676
General and administrative 55,483 52,775 46,502 10,870 12,641
Interest 50,364 48,475 56,102 16,183 15,113
------------ ---------- ----------- ----------- -----------
Total costs and expenses 511,357 493,290 440,641 105,372 112,717
------------ ---------- ----------- ----------- -----------
Net earnings $ 508,966 $ 212,555 $ 258,516 $ 18,443 $ 64,755
============ =========== =========== =========== ===========
See accompanying notes to financial statements.
F-45
CORAL RESERVES NATURAL GAS INCOME FUND 1990 LIMITED PARTNERSHIP
Statements of Cash Flow
Three months ended
Year ended December 31, March 31,
----------------------------------------- -----------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ---------- ----------
(Unaudited)
Cash flows from operating activities:
Net earnings $ 508,966 $ 212,555 $ 258,516 $ 18,443 $ 64,755
Adjustments to reconcile net earnings to net
Cash provided by operating activities:
Depreciation, depletion and amortization 256,591 234,422 194,237 46,164 47,676
Changes in operating assets and liabilities:
Accounts receivable 39,285 160,256 (23,515) 39,385 4,956
Increase (decrease) in:
Accounts payable and Revenue and royalties
payable 17,243 (17,810) 14,053 691 (8,434)
--------- --------- --------- --------- ---------
Net cash provided by operating activities 822,085 589,423 443,291 104,683 108,953
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Proceeds from sales of property and equipment 8,072 - - - -
Capital expenditures (205,604) (47,542) (75,307) (2,258) (2,952)
--------- --------- --------- --------- ---------
Net cash (used) provided by investing activities (197,532) (47,542) (75,307) (2,258) (2,952)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Borrowings on long-term debt 276,500 29,500 62,000 - -
Repayments of long-term debt (139,500) - - - -
Distributions to partners (761,700) (611,700) (420,043) (109,578) (127,102)
--------- --------- --------- --------- ---------
Net cash (used) provided by financing activities (624,700) (582,200) (358,043) (109,578) (127,102)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents (147) (40,319) 9,941 (7,153) (21,101)
Cash and cash equivalents at beginning of year 114,147 114,000 73,681 73,681 83,622
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of year $ 114,000 $ 73,681 $ 83,622 $ 66,528 $ 62,521
========= ========= ========= ========= =========
Supplemental cash flow information:
Cash payments for interest $ 50,364 $ 48,475 $ 56,102 $ 16,183 $ 15,113
========= ========= ========= ========= =========
See accompanying notes to financial statements.
F-46
CORAL RESERVES NATURAL GAS INCOME FUND 1990 LIMITED PARTNERSHIP
Statements of Partners' Equity
General Limited Total
Partners' Partners' Partners'
Equity Equity Equity
--------- --------- ---------
Balance at December 31, 1997 $ 1,575 $ 1,310,804 $ 1,312,379
Net Earnings 109,400 103,155 212,555
Distributions to partners (152,926) (458,774) (611,700)
--------- --------- ---------
Balance at December 31, 1998 (41,951) 955,185 913,234
Net Earnings 111,244 147,272 258,516
Distributions to partners (105,012) (315,031) (420,043)
--------- --------- ---------
Balance at December 31, 1999 (35,719) 787,426 751,707
Net Earnings (Unaudited) 27,631 37,124 64,755
Distributions to partners
(Unaudited) (31,775) (95,327) (127,102)
--------- --------- ---------
Balance at March 31, 2000
(Unaudited) $ (39,863) $ 729,223 $ 689,360
========= ========= =========
F-47
CORAL RESERVES NATURAL GAS INCOME FUND 1990 LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1997, 1998 and 1999
(Information insofar as it relates to March 31, 2000
or the three months ended March 31, 1999 and 2000 is unaudited)
1. Summary of Significant Accounting Policies
Organization and Business Activity
Coral Reserves Natural Gas Income Fund 1990 Limited Partnership
("Partnership") is organized as an Oklahoma limited partnership. Coral
Reserves, Inc., an Oklahoma corporation, and its two principal stockholders
serve as Managing General Partner and Additional General Partners,
respectively. The remaining 109 participants are limited partners.
By the terms of the Amended and Restated Agreement of Limited Partnership
("Partnership Agreement"), revenues, costs and expenses are allocated among
the partners as follows:
. The allowance for cost depletion is allocated 99% to the Limited
Partners and 1% to the Managing General Partner.
. Depreciation of lease and well equipment and amortization of
organization costs are allocated 99% to the Limited Partners and
1% to the Managing General Partner.
. All other items of income and expense, with certain limited
exceptions, and cash distributions are allocated 90% to the
Limited Partners and 10% to the General Partners until payout is
achieved. After payout, these items are allocated 75% to the
Limited Partners and 25% to the General Partners. Payout occurs
on an individual partner basis, and is reached at the point in
time when cash distributions to a Limited Partner equal his or
her capital contributions made to the Partnership. A portion of
the Limited Partners reached payout status during 1995, and the
remainder reached payout during 1996.
The terms of the Partnership offering called for a subscription price of
$100,000 per unit. Fractional units could be sold at the discretion of the
Managing General Partner. Subscriptions were received for 38.875 units in
the Partnership.
The General Partners are not required to make any capital contributions to
the Partnership, unless there exists a deficit balance in their capital
accounts at the time of termination or dissolution of the Partnership. In
such case, the General Partners would be required to make a contribution
equal to such deficit.
F-48
CORAL RESERVES NATURAL GAS INCOME FUND 1990 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
The Partnership is engaged primarily in the acquisition and development of
producing oil and gas properties. These activities have occurred in the
states of Oklahoma and Texas.
Accounting policies employed by the Partnership reflect industry practices
and conform to generally accepted accounting principles. The more
significant of such policies are discussed below.
Uses of 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
the 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 amounts could differ from those
estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Partnership considers all
short-term debt securities purchased with a maturity of three months or
less to be cash equivalents.
Property and Equipment
The Partnership follows the full cost method of accounting for its oil and
natural gas properties. Accordingly, all costs incidental to the
acquisition, exploration, and development of oil and gas properties,
including costs of undeveloped leasehold, dry holes and leasehold
equipment, are capitalized. The Partnership does not captialize any
internal costs as part of the full cost pool. Net capital costs
(capitalized costs less accumulated amortization) are limited to the
estimated future net revenues, discounted at 10% per annum, from proved
oil, natural gas and natural gas liquids reserves plus the lower of cost or
estimated fair market value of undeveloped properties subject to
amortization. The Partnership subjects all costs of undeveloped properties
to amortization, as such costs are insignificant. Capitalized costs less
accumulated amortization plus estimated future development cost of proved
undeveloped reserves are amortized by an equivalent unit-of-production
method, converting natural gas to oil at the ratio approximating their
relative energy content of one barrel ("Bbl") of oil to six thousand cubic
feet ("Mcf") of natural gas. No gain or loss is recognized upon disposal of
oil and natural gas properties unless such dispositions significantly alter
the relationship between capitalized costs and proved oil and natural gas
reserves.
F-49
CORAL RESERVE NATURAL GAS INCOME FUND 1990 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
The Partnership accounts for its non-oil and natural gas long-lived assets
in accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and Assets to be Disposed of". SFAS No. 121 requires that long-lived
assets and identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds
the fair market value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less cost to sell.
Revenue and Royalty Distributions Payable
For certain oil and gas properties, the Partnership receives production
proceeds, from the purchaser and further distributes such amounts to other
revenue and royalty owners. Production proceeds applicable to other revenue
and royalty owners are reflected as revenue and royalty distributions
payable in the accompanying balance sheets. The Partnership accrues revenue
for only its net interest in its oil and natural gas properties.
Production Costs
Lease operating costs, including costs incurred to maintain or increase
production levels from an existing completion interval, along with
production related taxes are expensed as incurred.
Gas Balancing
During the course of normal operations, the Partnership and other joint
interest owners of natural gas reservoirs will take more or less than their
respective ownership share of the natural gas volumes produced. These
volumetric imbalances are monitored over the lives of the wells' production
capability. If an imbalance exists at the time the wells' reserves are
depleted, cash settlements are made among the joint interest owners under a
variety of arrangements. The Partnership follows the sales method of
accounting for gas imbalances. A liability is recorded only if the
Partnership's excess takes of natural gas volumes exceeds its estimated
remaining recoverable reserves. No receivables are recorded for those wells
where the Partnership has taken less than its ownership share of gas
production.
F-50
CORAL RESERVE NATURAL GAS INCOME FUND 1990 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Major Purchasers
The Partnership markets its oil and natural gas production to numerous
purchasers under a combination of short-term contracts. During 1997 and
1998, the Partnership's largest two purchasers accounted for approximately
35%, and during 1999 the Partnership's three largest purchasers accounted
for 35%, of its oil and natural gas revenues. The Partnership does not
believe that the loss of any single customer would have a material effect
on the results of its operations.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation or other sources are recorded when it is probable that a
liability has been incurred and the amount can be reasonably estimated.
Concentration of Credit Risks
Financial investments that potentially subject the Partnership to credit
risk consist primarily of cash and cash equivalents and trade receivables.
The Partnership maintains its cash and cash equivalents with one major
financial institution. At times, such amounts may exceed the FDIC insured
limit. The Partnership has not experienced any losses in such accounts, and
believes it is not exposed to any significant credit risk.
Trade receivables subject the Partnership to the potential for credit risk
with customers within the oil and gas industry. To reduce risk, the
Partnership performs ongoing evaluations of its customers' financial
condition, but does not generally require collateral.
2. Accounts Receivable
Accounts receivable consisted of the following:
December 31,
-------------------------- March 31,
1998 1999 2000
---------- ---------- ----------
(Unaudited)
Oil and natural gas revenue accruals......... $ 122,254 $ 144,157 $ 139,525
Other........................................ 1,134 2,746 2,422
-------- -------- --------
Total........................................ $ 123,388 $ 146,903 $ 141,947
======== ======== ========
F-51
CORAL RESERVES NATURAL GAS INCOME FUND 1990 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
3. Long-Term Debt
The balances at December 31, 1999 and 1998 consist of a note payable to a
bank. These borrowings have been made against a revolving line of credit
maturing on April 15, 2001. The established borrowing base available to
the Partnership under this credit facility was $750,000 at December 31,
1999 and 1998, respectively. Borrowings bear interest at 1% above a
specified prime rate and are collateralized by certain oil and gas
properties of the Partnership, as well as guarantees by the Managing and
Additional General Partners. The average interest rate under this credit
facility outstanding at December 31, 1999 was 8.15%. At December 31, 1999
and 1998, the balances of the revolving line of credit facility were
classified as long-term, based on the Partnership's continuing intent and
ability to refinance, as evidenced by the renewal of the credit facility in
May 2000, extending the maturity date to April 15, 2001.
4. Income Taxes
The items of taxable income and expense generated by Partnership operations
are includable in the income tax returns of the partners, therefore, no
provision or liability for federal or state income taxes is reflected in
these financial statements. The Partnership income tax returns, the
qualifications of the Partnership as such for tax purposes, and the amount
of the Partnership's taxable income or loss are subject to examination by
federal and state taxing authorities. If such examinations resulted in
changes with respect to the partnership qualification or in changes to
taxable partnership income or loss, the tax liability of the partners could
change accordingly.
5. Related Party Transactions
During the years ended December 31, 1999, 1998 and 1997, the Partnership
engaged in certain transactions with Coral Reserves, Inc., the Managing
General Partner of the Partnership, and certain affiliated partnerships,
whose Managing General Partner is Coral Reserves, Inc. or Coral Reserves
Energy Corp. Coral Reserves, Inc. and Coral Reserves Energy Corp. have
common shareholders.
The Partnership is required to reimburse the Managing General Partner for
overhead expenses, including office rent and salaries for clerical staff
and appropriate production supervisory personnel, or any other overhead
expenses which the Managing General Partner deems reasonable. The
reimbursement for overhead expenses is limited to a maximum of five percent
(5%) of "Distributable Cash", as defined in the Partnership Agreement. Such
overhead reimbursements amounted to $22,883, $30,676 and $40,086 for 1999,
1998 and 1997, respectively, and are
F-52
CORAL RESERVE NATURAL GAS INCOME FUND 1990 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Under an agreement between the Partnership and the Selling Agent, the
Selling Agent is to receive compensation for services performed in the
amount of 1 1/2% of Partnership gross annual revenues, plus 1% of
Partnership monthly distributable cash before payout and an additional 1%
after payout (paid solely out of the Managing General Partner's share of
monthly distributable cash). Effective January 1, 1992, the Selling Agent
sold the rights to these fees to Coral Reserves Natural Gas Income Fund
1991 Limited Partnership ("Coral 1991"), with the sole exception being that
the Selling Agent retained the additional 1% after payout interest in
Partnership monthly distributable cash. Fees subsequently paid to Coral
1991, in lieu of the Selling Agent, totaled $13,397, $18,603 and $22,191
for the years ended December 31, 1999, 1998 and 1997, respectively. The
Selling Agent must continue to perform the services for the Partnership as
originally contracted.
6. Oil and Gas Operations
Costs Incurred
The following table reflects the costs incurred in oil and gas property
acquisition, exploration, and development activities:
Three months ended
Year ended December 31 March 31,
---------------------- ---------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(Unaudited)
-----------
Development costs.......... $ 93,428 $ 28,620 $ 24,454 $ - $ 10,765
Results of Operations for Oil and Gas Producing Activities
The following table includes revenues and expenses associated directly with
the Partnership's oil and gas producing activities. They do not include any
allocation of the Partnership's interest costs or general corporate
overhead and, therefore are not necessarily indicative of the contribution
to net earnings of the Partnership's oil and gas operations.
Three Months Ended
Year ended December 31, March 31,
-------------------------------------- ----------------------
1997 1998 1999 1999 2000
---------- ------------- ----------- --------- ----------
(Unaudited)
-----------
Oil and natural gas sales............... $ 1,014,006 $ 700,257 $ 695,597 $ 122,935 $ 176,329
Production and operating expenses....... (148,919) (157,618) (143,800) (32,155) (37,287)
Depreciation, depletion and amortization (256,591) (234,422) (194,237) (46,164) (47,676)
--------- ---------- --------- --------- --------
Results of operations for oil and gas
producing activities ................... $ 608,496 $ 308,217 $ 357,560 $ 44,616 $ 91,366
========= ========== ========= ========= ========
Depreciation, depletion and amortization
per equivalent MCF of production....... $ 0.69 $ 0.70 $ 0.65 $ 0.65 $ 0.66
========= ========== ========= ========= ========
F-53
CORAL RESERVE NATURAL GAS INCOME FUND 1990 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
7. Supplemental Information on Oil and Gas Operations (Unaudited)
The following supplemental unaudited information regarding the oil and gas
activities of the Partnership presented pursuant to the disclosure
requirements promulgated by the Securities and Exchange Commission and
Statement of Financial Accounting Standards No. 69, "Disclosures About Oil
and Gas Producing Activities".
Quantities of Oil and Gas Reserves
Set forth below is a summary of the changes in the net quantities of crude
oil and natural gas and reserves for each of the years in the three-year
period ended December 31, 1999. The Partnership's proved reserves were
calculated by the independent petroleum consultants of Netherland, Sewell &
Associates, Inc. The Partnership cautions that there are many uncertainties
inherent in estimating reserve quantities, and in projecting future
production rates and the timing of future development cost expenditures. In
addition, reserve estimates of new discoveries are more imprecise than
those of properties with a production history. Accordingly, these estimates
are subject to change as additional information becomes available.
Proved oil and natural gas reserves are the estimated quantities of crude
oil, condensate, natural gas and natural liquids that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic conditions.
Proved developed oil and natural gas reserves are those reserves expected
to be recovered through existing equipment and operating methods.
Estimates of net quantities of proved reserves and proved developed
reserves of crude oil, including condensate and natural gas liquids, and
natural gas, as well as the changes in proved reserves during the periods
indicated, are set forth in the tables below. All reserves are located in
the United States.
The Partnership prepared the estimated reserves as of December 31, 1996 and
1997 based on geological and engineering evaluations performed as of
December 31, 1998. The reserve estimates as of the prior year-end dates
were derived by analyzing actual historical production amounts and by
adjusting the reserves attributable to wells acquired or disposed of during
the relevant periods. In addition, in deriving the estimates as of December
31, 1996 and 1997, the Partnership used production costs based on actual
costs incurred during the years and actual oil and natural gas prices
received on December 31, 1996 and 1997. The Partnership has estimated its
reserves as of December 31, 1996 and 1997 in this manner because the actual
information necessary to calculate estimated proved reserves and related
information in accordance with guidelines of the SEC as of each date is not
available. Because the reserve estimates as of December 31, 1998 are based
on additional information
F-54
CORAL RESERVE NATURAL GAS INCOME FUND 1990 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
gained from the result of drilling, testing and production subsequent to
the dates of the estimated reserves, the reserve estimates as of December
31, 1996 and 1997 are not necessarily reflective of quantities that might
have been estimated based on information available as of such dates had
estimates in accordance with SEC guidelines been made at such dates.
Management believes that, because of the methodology used, the reserve
information presented is more reflective of actual reserve quantities than
estimates that might have been generated as of such dates.
Changes in Proved Reserves:
Oil Gas
---- ---
(Bbls) (Mcf)
----- -----
Proved Reserves as of December 31, 1996..................... 21,000 2,724,000
Extensions and discoveries............................. 1,000 144,000
Production............................................. (5,000) (344,000)
-------- ----------
Proved Reserves as of December 31, 1997..................... 17,000 2,524,000
Extensions and discoveries............................. - 6,000
Production............................................. (3,000) (313,000)
-------- ----------
Proved Reserves as of December 31, 1998..................... 14,000 2,217,000
Revisions.............................................. - 237,000
Production............................................. (3,000) (281,000)
-------- ----------
Proved Reserves as of December 31, 1999..................... 11,000 2,173,000
======== ==========
Proved developed reserves as of:
December 31, 1996...................................... 20,000 2,600,000
December 31, 1997...................................... 15,000 2,256,000
December 31, 1998...................................... 12,000 1,943,000
December 31, 1999...................................... 9,000 1,802,000
Standardized Measure of Discounted Future Net Cash Flows
The following table reflects the standardized measure of discounted future
net cash flows relating to the Partnership's interest in proved reserves:
Year ended December 31,
---------------------------------------------
1997 1998 1999
------------- ------------- -----------
Future cash inflows.......................... $ 6,344,000 $ 4,415,000 $ 4,903,000
Future production costs...................... (1,244,000) (1,670,000) (1,715,000)
Future development costs..................... (235,000) (235,000) (198,000)
------------ ---------- -----------
Future net cash flows........................ 4,865,000 2,510,000 2,990,000
10% discount to reflect timing of
cash flows................................... (1,794,000) (926,000) (1,211,000)
------------ ---------- -----------
Standardized measure of discounted future
net cash flows.............................. $ 3,071,000 $ 1,584,000 $ 1,779,000
============ ========== ===========
F-55
CORAL RESERVE NATURAL GAS INCOME FUND 1990 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Future cash inflows are computed by applying year-end prices (averaging
$22.75 per barrel of oil, adjusted for transportation and other charges,
and $2.25 per Mcf of gas at December 31, 1999) to the year-end quantities
of proved reserves, except where fixed and determinable price changes are
provided by contractual arrangements in existence at year-end. Future
development and production costs are computed by estimating the
expenditures to be incurred in developing and producing proved oil and gas
reserves at the end of the year, based on year-end costs and assuming
continuation of existing economic conditions.
Principal changes in the standardized measure of discounted future net cash
flows attributable to the Partnership's proved reserves are as follows:
Year ended December 31,
---------------------------------------------
1997 1998 1999
------------- ------------ -------------
Beginning balance.............................. $ 5,943,000 $ 3,071,000 $ 1,584,000
Sales of oil and natural gas, net of
production costs............................ (836,000) (514,000) (544,000)
Net changes in year-end sales prices and
production costs............................. (2,524,000) (1,167,000) 421,000
Extensions, discoveries, and improved
recovery, net of future development costs... 180,000 5,000 37,000
Revisions...................................... - - 191,000
Purchases of reserves, net of future
development costs........................... - - -
Sales of reserves in place..................... - - -
Accretion of discount.......................... 594,000 307,000 158,000
Other, primarily changes in timing............. (286,000) (118,000) (68,000)
------------- ------------ -----------
Ending balance................................. $ 3,071,000 $ 1,584,000 $ 1,779,000
============= ============ ===========
F-56
INDEPENDENT AUDITOR'S REPORT
To the Partners
Coral Reserves Natural Gas Income Fund
1991 Limited Partnership
Oklahoma City, Oklahoma
We have audited the balance sheets of Coral Reserves Natural Gas Income
Fund 1991 Limited Partnership as of December 31, 1998 and 1999 and the related
statements of operations, partners' equity and cash flows for each of the years
in the three year period ended December 31, 1999. These financial statements are
the responsibility of the Partnership's Managing General Partner. 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 from
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 Coral Reserves
Natural Gas Income Fund 1991 Limited Partnership as of December 31, 1998 and
1999, and the results of its operations and its cash flow for each of the years
in the three year period ended December 31, 1999 in conformity with generally
accepted accounting principles.
William T. Zumwalt, CPA, Inc.
Tulsa, Oklahoma
March 10, 2000
F-57
CORAL RESERVES NATURAL GAS INCOME FUND 1991 LIMITED
PARTNERSHIP
Balance Sheets
December 31,
-------------------------- March 31,
1998 1999 2000
------------- ------------ --------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 84,107 $ 109,161 $ 95,224
Accounts receivable, net (Note 2) 193,120 194,274 189,897
--------- --------- ----------
Total current assets 277,227 303,435 285,121
--------- --------- ----------
Property and equipment, at cost, based on the full cost method of
accounting for oil and gas properties 4,056,139 4,090,856 4,093,352
Accumulated depreciation, depletion and amortization (2,511,090) (2,743,199) (2,797,614)
---------- --------- ----------
1,545,049 1,347,657 1,295,738
---------- --------- ----------
Total assets $ 1,822,276 $ 1,651,092 $ 1,580,859
========== ========= ==========
Liabilities and Partners' Equity
Current liabilities:
Accounts payable $ 38,425 $ 22,918 $ 24,349
Revenue and royalty distributions payable 28,186 39,451 45,596
--------- --------- ----------
Total current liabilities 66,611 62,369 69,945
--------- --------- ----------
Long-term debt (Note 3) 695,734 742,734 742,734
Partners' equity (deficit):
General partners (31,644) (29,424) (35,815)
Limited partners 1,091,575 875,413 803,995
---------- --------- ----------
Total partners' equity 1,059,931 845,989 768,180
---------- --------- ----------
Total liabilities and partners' equity $ 1,822,276 $ 1,651,092 $ 1,580,859
========= ========= ==========
See accompanying notes to financial statements.
F-58
CORAL RESERVES NATURAL GAS INCOME FUND 1991 LIMITED PARTNERSHIP
Statements of Operations
Three months ended
Year ended December 31, March 31
--------------------------------------- ---------------------------
1997 1998 1999 1999 2000
------------ ----------- ----------- ----------- --------------
(Unaudited)
Revenues:
Oil and gas sales $ 1,145,085 $ 1,088,300 $ 1,016,200 $ 190,918 $ 237,394
Other income 5,375 10,201 4,251 1,034 1,529
------------ ----------- ----------- ----------- --------------
Total revenues 1,150,460 1,098,501 1,020,451 191,952 238,923
------------ ----------- ----------- ----------- --------------
Costs and expenses:
Lease operating 155,094 154,048 134,644 34,500 39,970
Production taxes 78,715 86,911 75,389 10,188 17,510
Depreciation, depletion
and amortization 249,661 304,149 232,109 68,052 54,415
General and
administrative 61,071 66,824 64,143 15,877 15,857
Interest 51,117 48,463 67,135 17,915 16,258
------------ ----------- ----------- ----------- --------------
Total costs and expenses 595,658 660,395 573,420 146,532 144,010
------------ ----------- ----------- ----------- --------------
Net earnings $ 554,802 $ 438,106 $ 447,031 $ 45,420 $ 94,913
============ =========== =========== =========== ==============
See accompanying notes to financial statements.
F-59
CORAL RESERVES NATURAL GAS INCOME FUND 1991 LIMITED PARTNERSHIP
Statements of Cash Flow
Three months ended
Year ended December 31, March 31,
----------------------------------------- -------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------- ----------- -----------
(Unaudited)
Cash flows from operating activities:
Net earnings $ 554,802 $ 438,106 $ 447,031 $ 45,420 $ 94,913
Adjustments to reconcile net earnings to
net
Cash provided by operating activities:
Depreciation, depletion and amortization 249,661 304,149 232,109 68,052 54,415
Changes in operating assets and liabilities:
Accounts receivable 43,216 31,140 (1,154) 61,878 4,377
Increase (decrease) in:
Accounts payable and Revenue and royalties
payable (15,578) (1,893) (4,242) (6,257) 7,576
----------- ------------ ---------- ----------- ----------
Net cash provided by operating activities 832,101 771,502 673,744 169,093 161,281
----------- ------------ ---------- ----------- ----------
Cash flows from investing activities:
Proceeds from sales of property and equipment 193,246 - - - -
Capital expenditures (181,612) (196,468) (34,717) 492 (2,496)
----------- ------------ ---------- ----------- ----------
Net cash (used) provided by investing activities 11,634 (196,468) (34,717) 492 (2,496)
----------- ------------ ---------- ----------- ----------
Cash flows from financing activities:
Borrowings on long-term debt 415,000 175,500 47,000 - -
Repayments of long-term debt (438,246) - - - -
Distributions to partners (807,827) (788,241) (660,973) (179,766) (172,722)
----------- ------------ ---------- ----------- ----------
Net cash (used) provided by financing activities (831,073) (612,741) (613,973) (179,766) (172,722)
----------- ------------ ---------- ----------- ----------
Net increase (decrease) in cash and cash equivalents 12,662 (37,707) 25,054 (10,181) (13,937)
Cash and cash equivalents at beginning of year 109,152 121,814 84,107 84,107 109,161
----------- ------------ ---------- ----------- ----------
Cash and cash equivalents at end of year $ 121,814 $ 84,107 $ 109,161 $ 73,926 $ 95,224
=========== ============ ========== =========== ==========
Supplemental cash flow information:
Cash payments for interest $ 51,117 $ 48,463 $ 67,135 $ 17,915 $ 16,258
=========== ============ ========== =========== ==========
See accompanying notes to financial statements.
F-60
CORAL RESERVES NATURAL GAS INCOME FUND 1991 LIMITED PARTNERSHIP
Statements of Partners' Equity
General Limited Total
Partners' Partners' Partners'
Equity Equity Equity
------------ ------------ -----------
Balance at December 31, 1997 $ (17,107) $ 1,427,173 $ 1,410,066
Net Earnings 182,522 255,584 438,106
Distributions to partners (197,059) (591,182) (788,241)
----------- ----------- -----------
Balance at December 31, 1998 (31,644) 1,091,575 1,059,931
Net Earnings 167,463 279,568 447,031
Distributions to partners (165,243) (495,730) (660,973)
----------- ----------- -----------
Balance at December 31, 1999 (29,424) 875,413 845,989
Net Earnings (Unaudited) 36,789 58,124 94,913
Distributions to partners (Unaudited) (43,180) (129,542) (172,722)
----------- ----------- -----------
Balance at March 31, 2000 (Unaudited) $ (35,815) $ 803,995 $ 768,180
=========== =========== ===========
See accompanying notes to financial statements.
F-61
CORAL RESERVES NATURAL GAS INCOME FUND 1991 LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1997, 1998 and 1999
(Information insofar as it relates to March 31,
2000 or the three months ended March 31, 1999 and
2000 is unaudited)
1. Summary of Significant Accounting Policies
Organization and Business Activity
Coral Reserves Natural Gas Income Fund 1991 Limited Partnership
("Partnership") is organized as an Oklahoma limited partnership. Coral
Reserves, Inc., an Oklahoma corporation, and its two principal stockholders
serve as Managing General Partner and Additional General Partners,
respectively. The remaining 124 participants are limited partners.
By the terms of the Amended and Restated Agreement of Limited Partnership
("Partnership Agreement"), revenues, costs and expenses are allocated among
the partners as follows:
. The allowance for cost depletion is allocated 99% to the Limited
Partners and 1% to the Managing General Partner.
. Depreciation of lease and well equipment and amortization of
organization costs are allocated 99% to the Limited Partners and 1%
to the Managing General Partner.
. All other items of income and expense, with certain limited
exceptions, and cash distributions are allocated 90% to the Limited
Partners and 10% to the General Partners until payout is achieved.
After payout, these items are allocated 75% to the Limited Partners
and 25% to the General Partners. Payout occurs on an individual
partner basis, and is reached at the point in time when cash
distributions to a Limited Partner equal his or her capital
contributions made to the Partnership. A portion of the Limited
Partners reached payout status during 1996, and the remainder
reached payout during 1997.
The terms of the Partnership offering called for a subscription price of
$100,000 per unit. Fractional units could be sold at the discretion of the
Managing General Partner. Subscriptions were received for 44.80 units in
the Partnership.
The General Partners are not required to make any capital contributions to
the Partnership, unless there exists a deficit balance in their capital
accounts at the time of termination or dissolution of the Partnership. In
such case, the General Partners would be required to make a contribution
equal to such deficit.
F-62
CORAL RESERVES NATURAL GAS INCOME FUND 1991 LIMITED PARTNERSHIP
Notes to Financial Statement
(Continued)
The Partnership is engaged primarily in the acquisition and development of
producing oil and gas properties. These activities have occurred in the
states of Oklahoma and Texas.
Accounting policies employed by the Partnership reflect industry practices
and conform to generally accepted accounting principles. The more
significant of such policies are discussed below.
Uses of 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
the 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 amounts could differ from those
estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Partnership considers all
short-term debt securities purchased with a maturity of three months or
less to be cash equivalents.
Property and Equipment
The Partnership follows the full cost method of accounting for its oil and
natural gas properties. Accordingly, all costs incidental to the
acquisition, exploration, and development of oil and gas properties,
including costs of undeveloped leasehold, dry holes and leasehold
equipment, are capitalized. The Partnership does not captialize any
internal costs as part of the full cost pool. Net capital costs
(capitalized costs less accumulated amortization) are limited to the
estimated future net revenues, discounted at 10% per annum, from proved
oil, natural gas and natural gas liquids reserves plus the lower of cost or
estimated fair market value of undeveloped properties subject to
amortization. The Partnership subjects all costs of undeveloped properties
to amortization, as such costs are insignificant. Capitalized costs less
accumulated amortization plus estimated future development cost of proved
undeveloped reserves are amortized by an equivalent unit-of-production
method, converting natural gas to oil at the ratio approximating their
relative energy content of one barrel ("Bbl") of oil to six thousand cubic
feet ("Mcf") of natural gas. No gain or loss is recognized upon disposal of
oil and natural gas properties unless such dispositions significantly alter
the relationship between capitalized costs and proved oil and natural gas
reserves.
F-63
CORAL RESERVES NATURAL GAS INCOME FUND 1991 LIMITED PARTNERSHIP
Notes to Financial Statement
(Continued)
The Partnership accounts for its non-oil and natural gas long-lived assets
in accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and Assets to be Disposed of". SFAS No. 121 requires that long-lived
assets and identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds
the fair market value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less cost to sell.
Revenue and Royalty Distributions Payable
For certain oil and gas properties, the Partnership receives production
proceeds, from the purchaser and further distributes such amounts to other
revenue and royalty owners. Production proceeds applicable to other revenue
and royalty owners are reflected as revenue and royalty distributions
payable in the accompanying balance sheets. The Partnership accrues revenue
for only its net interest in its oil and natural gas properties.
Production Costs
Lease operating costs, including costs incurred to maintain or increase
production levels from an existing completion interval, along with
production related taxes are expensed as incurred.
Gas Balancing
During the course of normal operations, the Partnership and other joint
interest owners of natural gas reservoirs will take more or less than their
respective ownership share of the natural gas volumes produced. These
volumetric imbalances are monitored over the lives of the wells' production
capability. If an imbalance exists at the time the wells' reserves are
depleted, cash settlements are made among the joint interest owners under a
variety of arrangements. The Partnership follows the sales method of
accounting for gas imbalances. A liability is recorded only if the
Partnership's excess takes of natural gas volumes exceeds its estimated
remaining recoverable reserves. No receivables are recorded for those wells
where the Partnership has taken less than its ownership share of gas
production.
F-64
CORAL RESERVES NATURAL GAS INCOME FUND 1991 LIMITED PARTNERSHIP
Notes to Financial Statement
(Continued)
Major Purchasers
The Partnership markets its oil and natural gas production to numerous
purchasers under a combination of short-term contracts. During 1998 and
1999, the Partnership's single largest purchaser accounted for
approximately 30% and 20%, respectively, of its oil and natural gas
revenues. During 1997, no single purchaser accounted for more than 10% of
oil and natural gas revenues. The Partnership does not believe that the
loss of any single customer would have a material effect on the results of
its operations.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation or other sources are recorded when it is probable that a
liability has been incurred and the amount can be reasonably estimated.
Concentration of Credit Risks
Financial investments that potentially subject the Partnership to credit
risk consist primarily of cash and cash equivalents and trade receivables.
The Partnership maintains its cash and cash equivalents with one major
financial institution. At times, such amounts may exceed the FDIC insured
limit. The Partnership has not experienced any losses in such accounts, and
believes it is not exposed to any significant credit risk.
Trade receivables subject the Partnership to the potential for credit risk
with customers within the oil and gas industry. To reduce risk, the
Partnership performs ongoing evaluations of its customers' financial
condition, but does not generally require collateral.
2. Accounts Receivable
Accounts receivable consisted of the following:
December 31, March 31,
---------------------------
1998 1999 2000
----------- ----------- --------------
(Unaudited)
Oil and natural gas revenue accruals......... $ 193,120 $ 193,100 $ 189,015
Other........................................ - 1,174 882
----------- ----------- ----------
Total........................................ $ 193,120 $ 194,274 $ 189,897
=========== =========== ==========
F-65
CORAL RESERVES NATURAL GAS INCOME FUND 1991 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
3. Long-Term Debt
The balances at December 31, 1998 and 1999 consist of a note payable to a
bank. These borrowings have been made against a revolving line of credit
maturing on October 1, 2000. The established borrowing base available to
the Partnership under this credit facility was $750,000 at December 31,
1999 and 1998. Borrowings bear interest at 1% above a specified prime rate
and are collateralized by certain oil and gas properties of the
Partnership, as well as guarantees by the Managing and Additional General
Partners. The average interest rate under this credit facility outstanding
at December 31, 1999 was 8.15%. At December 31, 1999 and 1998, the balances
of the revolving line of credit facility were classified as long-term,
based on the Partnership's continuing intent and ability to refinance, as
evidenced by the renewal of the credit facility in May 2000, extending the
maturity date to April 15, 2001.
4. Income Taxes
The items of taxable income and expense generated by Partnership operations
are includable in the income tax returns of the partners, therefore, no
provision or liability for federal or state income taxes is reflected in
these financial statements. The Partnership income tax returns, the
qualifications of the Partnership as such for tax purposes, and the amount
of the Partnership's taxable income or loss are subject to examination by
federal and state taxing authorities. If such examinations resulted in
changes with respect to the partnership qualification or in changes to
taxable partnership income or loss, the tax liability of the partners could
change accordingly.
5. Related Party Transactions
During the years ended December 31, 1999, 1998 and 1997, the Partnership
engaged in certain transactions with Coral Reserves Energy Corp., the
Managing General Partner of the Partnership, and certain affiliated
partnerships, whose Managing General Partner is Coral Reserves, Inc. or
Coral Reserves Energy Corp. Coral Reserves, Inc. and Coral Reserves Energy
Corp. have common shareholders.
The Partnership is required to reimburse the Managing General Partner for
overhead expenses, including office rent and salaries for clerical staff
and appropriate production supervisory personnel, or any other overhead
expenses which the Managing General Partner deems reasonable. The
reimbursement for overhead expenses is limited to a maximum of five percent
(5%) of "Distributable Cash", as defined in the Partnership Agreement. Such
overhead reimbursements amounted to $35,154, $39,606, and $42,908 for 1999,
1998 and 1997, respectively, and are included in "General and
administrative" expenses in the accompanying statements of operations.
F-66
CORAL RESERVES NATURAL GAS INCOME FUND 1991 LIMITED PARTNERSHIP
Notes to Financial Statement
(Continued)
During 1997, the Partnership sold interests in various producing oil and
gas properties to Coral Reserves Energy Income Fund 1996 Limited
Partnership and Coral Reserves 1996 Institutional Limited Partnership, two
affiliated partnerships, for aggregate consideration of $193,246. The
proceeds were accounted for as an adjustment to the capitalized oil and gas
properties.
Effective January 1, 1992, the Partnership purchased for $67,500 the rights
to consulting fees paid by Coral Reserves Natural Gas Income Fund 1990
Limited Partnership ("Coral 1990") to the Selling Agent of Coral 1990. The
fees are paid by Coral 1990 for services performed by the Selling Agent,
and consist of 1 1/2% of Coral 1990's gross annual revenues, plus 1% of
monthly distributable cash before payout and an additional 1% after payout.
The sole exception to this fee structure as purchased is that the Selling
Agent will retain the additional 1% after payout interest in Partnership
monthly distributable cash. Revenues received by the Partnership under this
arrangement totaled $13,397, $18,603, and $22,191 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Under an agreement between the Partnership and the Selling Agent, the
Selling Agent is to receive compensation for services performed in the
amount of 1 1/2% of Partnership gross annual revenues, plus 1% of
Partnership monthly distributable cash before payout and an additional 1%
after payout (paid solely out of the Managing General Partner's share of
monthly distributable cash). Effective January 1, 1994, the Selling Agent
sold the rights to these fees to Coral Reserves 1993 Institutional Limited
Partnership ("Coral 1993-I"), with the sole exception being that the
Selling Agent retained the additional 1% after payout interest in
Partnership monthly distributable cash. Fees subsequently paid to Coral
1993-I, in lieu of the Selling Agent, totaled $20,603, $23,936, and
$24,188, for the years ended December 31, 1999, 1998 and 1997,
respectively. The Selling Agent must continue to perform the services for
the Partnership as originally contracted.
6. Oil and Gas Operations
Costs Incurred
The following table reflects the costs incurred in oil and gas property
acquisition, exploration, and development activities:
Year ended December 31 Three months ended
----------------------
March 31,
---------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(Unaudited)
Development costs.......... $ 127,917 $ 178,706 $ 228 $ - $ 7,004
F-67
CORAL RESERVES NATURAL GAS INCOME FUND 1991 LIMITED PARTNERSHIP
Notes to Financial Statement
(Continued)
Results of Operations for Oil and Gas Producing Activities
The following table includes revenues and expenses associated directly with
the Partnership's oil and gas producing activities. They do not include any
allocation of the Partnership's interest costs or general corporate
overhead and, therefore are not necessarily indicative of the contribution
to net earnings of the Partnership's oil and gas operations.
Three months ended
Year ended December 31, March 31,
--------------------------------------- ------------------------
1997 1998 1999 1999 2000
---------- ----------- --------- ----------- -----------
(Unaudited)
Oil and natural gas sales................. $ 1,145,085 $1,088,300 $1,016,200 $ 190,918 $ 237,394
Production and operating expenses......... (233,809) (240,959) (210,033) (44,688) (57,480)
Depreciation, depletion and amortization.. (249,661) (304,149) (232,109) (68,052) 54,415
---------- ---------- ---------- --------- ---------
Results of operations for oil and gas
producing activities.................... $ 661,615 $ 543,192 $ 574,058 $ 78,178 $ 125,499
=========== ========== ========== ========= =========
Depreciation, depletion and amortization
per equivalent MCF of production........ $ 0.60 $ 0.61 $ 0.57 $ 0.57 $ 0.57
=========== ========== ========== ========= =========
7. Supplemental Information on Oil and Gas Operations (Unaudited)
The following supplemental unaudited information regarding the oil and gas
activities of the Partnership presented pursuant to the disclosure
requirements promulgated by the Securities and Exchange Commission and
Statement of Financial Accounting Standards No. 69, "Disclosures About Oil
and Gas Producing Activities".
Quantities of Oil and Gas Reserves
Set forth below is a summary of the changes in the net quantities of crude
oil and natural gas and reserves for each of the years in the three-year
period ended December 31, 1999. The Partnership's proved reserves were
calculated by the independent petroleum consultants of Netherland, Sewell &
Associates, Inc. The Partnership cautions that there are many uncertainties
inherent in estimating reserve quantities, and in projecting future
production rates and the timing of future development cost expenditures. In
addition, reserve estimates of new discoveries are more imprecise than
those of properties with a production history. Accordingly, these estimates
are subject to change as additional information becomes available.
Proved oil and natural gas reserves are the estimated quantities of crude
oil, condensate, natural gas and natural liquids that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic conditions.
Proved developed oil and natural gas reserves are those reserves expected
to be recovered through existing equipment and operating methods.
F-68
CORAL RESERVES NATURAL GAS INCOME FUND 1991 LIMITED PARTNERSHIP
Notes to Financial Statement
(Continued)
Estimates of net quantities of proved reserves of crude oil, including
condensate and natural gas liquids, and natural gas, as well as the changes
in proved reserves during the periods indicated, are set forth in the
tables below. All reserves are located in the United States.
The Partnership prepared the estimated reserves as of December 31, 1996 and
1997 based on geological and engineering evaluations performed as of
December 31, 1998. The reserve estimates as of the prior year-end dates
were derived by analyzing actual historical production amounts and by
adjusting the reserves attributable to wells acquired or disposed of during
the relevant periods. In addition, in deriving the estimates as of December
31, 1996 and 1997, The Partnership used production costs based on actual
costs incurred during the years and actual oil and natural gas prices
received on December 31, 1996 and 1997. The Partnership has estimated its
reserves as of December 31, 1996 and 1997 in this manner because the actual
information necessary to calculate estimated proved reserves and related
information in accordance with guidelines of the SEC as of each date is not
available. Because the reserve estimates as of December 31, 1998 are based
on additional information gained from the result of drilling, testing and
production subsequent to the dates of the estimated reserves, the reserve
estimates as of December 31, 1996 and 1997 are not necessarily reflective
of quantities that might have been estimated based on information available
as of such dates had estimates in accordance with SEC guidelines been made
at such dates. Management believes that, because of the methodology used,
the reserve information presented is more reflective of actual reserve
quantities than estimates that might have been generated as of such dates.
Changes in Proved Reserves:
Oil Gas
----- -----
(Bbls) (Mcf)
------ -----
Proved Reserves as of December 31, 1996..................... 73,000 3,570,000
Extensions and discoveries............................. 1,000 201,000
Production............................................. (9,000) (362,000)
Sale of reserves....................................... (18,000) (547,000
-------- ---------
Proved Reserves as of December 31, 1997..................... 47,000 2,862,000
Extensions and discoveries............................. 6,000 240,000
Production............................................. (11,000) (429,000)
------- ---------
Proved Reserves as of December 31, 1998..................... 42,000 2,673,000
Revisions.............................................. 19,000 172,000
Production............................................. (8,000) (360,000)
------- ---------
Proved Reserves as of December 31, 1999..................... 53,000 2,485,000
======= =========
Proved developed reserves as of:
December 31, 1996...................................... 62,000 3,226,000
December 31, 1997...................................... 52,000 2,824,000
December 31, 1998...................................... 41,000 2,395,000
December 31, 1999...................................... 51,000 2,082,000
F-69
CORAL RESERVES NATURAL GAS INCOME FUND 1991 LIMITED PARTNERSHIP
Notes to Financial Statement
(Continued)
Standardized Measure of Discounted Future Net Cash Flows
The following table reflects the standardized measure of discounted future
net cash flows relating to the Partnership's interest in proved reserves:
Year ended December 31,
-------------------------------------------
1997 1998 1999
----------- ----------- ------------
Future cash inflows........................... $ 7,999,000 $ 5,449,000 $ 6,587,000
Future production costs....................... (1,527,000) (2,057,000) (2,465,000)
Future development costs...................... (246,000) (246,000) (244,000)
----------- ------------- -------------
Future net cash flows......................... 6,226,000 3,146,000 3,878,000
10% discount to reflect timing of cash flows.. (2,242,000) (1,133,000) (1,571,000)
----------- ------------- -------------
Standardized measure of discounted future
net cash flows................................ $ 3,984,000 $ 2,013,000 $ 2,307,000
=========== ============= =============
Future cash inflows are computed by applying year-end prices (averaging
$22.75 per barrel of oil, adjusted for transportation and other charges,
and $2,25 per Mcf of gas at December 31, 1999) to the year-end quantities
of proved reserves, except where fixed and determinable price changes are
provided by contractual arrangements in existence at year-end. Future
development and production costs are computed by estimating the
expenditures to be incurred in developing and producing proved oil and gas
reserves at the end of the year, based on year-end costs and assuming
continuation of existing economic conditions.
Principal changes in the standardized measure of discounted future net cash
flows attributable to the Partnership's proved reserves are as follows:
Year Ended December 31,
-------------------------------------------
1997 1998 1999
-------------------------------------------
Beginning balance................................ $ 8,126,000 $ 3,984,000 $ 2,013,000
Sales of oil and natural gas, net of production
costs......................................... (882,000) (818,000) (778,000)
Net changes in year-end sales prices and
production costs................................. (2,975,000) (1,648,000) 614,000
Extensions, discoveries, and improved recovery,
net of future development costs............... 270,000 201,000 3,000
Revisions........................................ - - 326,000
Sales of reserves in place....................... (873,000) - -
Accretion of discount............................ 813,000 398,000 201,000
Other, primarily changes in timing............... (495,000) (104,000) (72,000)
------------ ------------ -------------
Ending balance................................... $ 3,984,000 $ 2,013,000 $ 2,307,000
============ ============= =============
F-70
INDEPENDENT AUDITOR'S REPORT
To the Partners
Coral Reserves Natural Gas Income Fund
1992 Limited Partnership
Oklahoma City, Oklahoma
We have audited the balance sheets of Coral Reserves Natural Gas Income
Fund 1992 Limited Partnership as of December 31, 1998 and 1999 and the related
statements of operations, partners' equity and cash flows for each of the years
in the three year period ended December 31, 1999. These financial statements are
the responsibility of the Partnership's Managing General Partner. 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 from
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 Coral Reserves
Natural Gas Income Fund 1992 Limited Partnership as of December 31, 1998 and
1999, and the results of its operations and its cash flow for each of the years
in the three year period ended December 31, 1999 in conformity with generally
accepted accounting principles.
William T. Zumwalt, CPA, Inc.
Tulsa, Oklahoma
March 10, 2000
F-71
CORAL RESERVES NATURAL GAS INCOME FUND 1992 LIMITED PARTNERSHIP
Balance Sheets
December 31, March 31,
----------------------------
1998 1999 2000
------------ -------------- -------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 70,000 $ 122,922 $ 127,492
accounts receivable, net (Note 2) 204,706 364,073 357,902
----------- ----------- -----------
Total current assets 274,706 486,995 485,394
----------- ----------- -----------
Property and equipment, at cost, based on the full cost method of
Accounting for oil and gas properties 6,334,587 6,437,143 6,442,794
Accumulated depreciation, depletion and amortization (2,996,451) (3,326,469) (3,413,690)
----------- ----------- -----------
3,338,136 3,110,674 3,029,104
----------- ----------- -----------
Total assets $ 3,612,842 $ 3,597,669 $ 3,514,498
=========== =========== ===========
Liabilities and Partners' Equity
Current liabilities:
Accounts payable $ 58,677 $ 98,674 $ 54,700
Revenue and royalty distributions payable 9,209 76,090 78,792
----------- ----------- -----------
Total current liabilities 67,886 174,764 133,492
----------- ----------- -----------
Long-term debt (Note 3) 489,000 589,000 639,000
Partners' equity (deficit):
General partners (30,242) (22,254) (23,574)
Limited partners 3,086,198 2,856,159 2,765,580
----------- ----------- -----------
Total partners' equity 3,055,956 2,833,905 2,742,006
----------- ----------- -----------
Total liabilities and partners' equity $ 3,612,842 $ 3,597,669 $ 3,514,498
=========== =========== ===========
See accompanying notes to financial statements.
F-72
CORAL RESERVES NATURAL GAS INCOME FUND 1992 LIMITED PARTNERSHIP
Statements of Operations
Three months ended
Year ended December 31, March 31
---------------------------------------- ---------------------------
1997 1998 1999 1999 2000
------------ ----------- ----------- ----------- --------------
(Unaudited)
Revenues:
Oil and gas sales $ 1,865,150 $ 1,382,833 $ 1,346,054 $ 188,376 $ 399,936
Other income 11,233 10,771 5,168 1,110 1,814
------------ ----------- ----------- ----------- -----------
Total revenues 1,876,383 1,393,604 1,351,222 189,486 401,750
------------ ----------- ----------- ----------- -----------
Costs and expenses:
Lease operating 252,570 269,910 243,633 56,636 69,622
Production taxes 131,376 112,372 95,866 7,662 32,401
Depreciation, depletion
and amortization 454,823 456,249 330,018 92,363 87,221
General and administrative 106,147 95,138 83,888 18,582 26,949
Interest 25,136 38,430 50,472 12,592 13,245
------------ ----------- ----------- ----------- -----------
Total costs and expenses 970,052 972,099 803,877 187,835 229,438
------------ ----------- ----------- ----------- -----------
Net earnings $ 906,331 $ 421,505 $ 547,345 $ 1,651 $ 172,312
============ =========== =========== =========== ===========
See accompanying notes to financial statements.
F-73
CORAL RESERVES NATURAL GAS INCOME FUND 1992 LIMITED PARTNERSHIP
Statements of Cash Flow
Three months ended
Year ended December 31, March 31,
----------------------------------------- -------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------- ----------- -----------
(Unaudited)
Cash flows from operating activities:
Net earnings $ 906,331 $ 421,505 $ 547,345 $ 1,651 $ 172,312
Adjustments to reconcile net earnings to net
Cash provided by operating activities:
Depreciation, depletion and amortization 454,823 456,249 330,018 92,363 87,221
Changes in operating assets and liabilities:
Accounts receivable 33,961 139,012 (159,367) 72,160 6,171
Increase (decrease) in:
Accounts payable and Revenue and royalties
payable (5,790) (54,007) 106,878 (8,370) (41,272)
----------- ------------ ----------- ----------- ------------
Net cash provided by operating activities 1,389,325 962,759 824,874 157,804 224,432
----------- ------------ ----------- ----------- ------------
Cash flows from investing activities:
Proceeds from sales of property and equipment 7,500 - 35,419 - -
Capital expenditures (233,562) (117,902) (137,975) (7,691) (5,651)
----------- ------------ ----------- ----------- ------------
Net cash (used) provided by investing activities (226,062) (117,902) (102,556) (7,691) (5,651)
----------- ------------ ----------- ----------- ------------
Cash flows from financing activities:
Borrowings on long-term debt 208,200 164,500 100,000 - 50,000
Repayments of long-term debt (35,000) (40,000) - - -
Distributions to partners (1,410,055) (1,027,753) (769,396) (165,849) (264,211)
----------- ------------ ----------- ----------- ------------
Net cash (used) provided by financing activities (1,236,855) (903,253) (669,396) (165,849) (214,211)
----------- ------------ ----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents (73,592) (58,396) 52,922 (15,736) 4,570
Cash and cash equivalents at beginning of year 201,988 128,396 70,000 70,000 122,922
----------- ------------ ----------- ----------- ------------
Cash and cash equivalents at end of year $ 128,396 $ 70,000 $ 122,922 $ 54,264 $ 127,492
=========== ============ =========== =========== ============
Supplemental cash flow information:
Cash payments for interest $ 25,136 $ 38,430 $ 50,472 $ 12,592 $ 13,245
=========== ============ =========== =========== ============
See accompanying notes to financial statements.
F-74
CORAL RESERVES NATURAL GAS INCOME FUND 1992 LIMITED PARTNERSHIP
Statements of Partners' Equity
General Limited Total
Partners' Partners' Partners'
Equity Equity Equity
----------- ------------ -----------
Balance at December 31, 1997 $ (10,689) $ 3,672,893 $ 3,662,204
Net Earnings 83,222 338,283 421,505
Distributions to partners (102,775) (924,978) (1,027,753)
---------- ------------ -----------
Balance at December 31, 1998 (30,242) 3,086,198 3,055,956
Net Earnings 88,447 458,898 547,345
Distributions to partners (80,459) (688,937) (769,396)
---------- ------------ -----------
Balance at December 31, 1999 (22,254) 2,856,159 2,833,905
Net Earnings (Unaudited) 33,553 138,759 172,312
Distributions to partners (Unaudited) (34,873) (229,338) (264,211)
---------- ------------ -----------
Balance at March 31, 2000 (Unaudited) $ (23,574) $ 2,765,580 $ 2,742,006
========== ============ ===========
See accompanying notes to financial statements.
F-75
CORAL RESERVES NATURAL GAS INCOME FUND 1992 LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1997, 1998 and 1999
(Information insofar as it relates to March 31,
2000 or the three months ended March 31, 1999 and
2000 is unaudited)
1. Summary of Significant Accounting Policies
Organization and Business Activity
Coral Reserves Natural Gas Income Fund 1992 Limited Partnership
("Partnership") is organized as an Oklahoma limited partnership. Coral
Reserves Energy Corp., an Oklahoma corporation, and its two principal
stockholders serve as Managing General Partner and Additional General
Partners, respectively. The remaining 191 participants are limited
partners.
By the terms of the Amended and Restated Agreement of Limited Partnership
("Partnership Agreement"), revenues, costs and expenses are allocated among
the partners as follows:
. The allowance for cost depletion is allocated 99% to the Limited
Partners and 1% to the Managing General Partner.
. Depreciation of lease and well equipment and amortization of
organization costs are allocated 99% to the Limited Partners and
1% to the Managing General Partner.
. All other items of income and expense, with certain limited
exceptions, and cash distributions are allocated 90% to the Limited
Partners and 10% to the General Partners until payout is achieved.
After payout, these items are allocated 75% to the Limited Partners
and 25% to the General Partners. Payout occurs on an individual
partner basis, and is reached at the point in time when cash
distributions to a Limited Partner equal his or her capital
contributions made to the Partnership. A portion of the Limited
Partners reached payout status during 1999.
The terms of the Partnership offering called for a subscription price of
$100,000 per unit. Fractional units could be sold at the discretion of the
Managing General Partner. Subscriptions were received for 75.00 units in
the Partnership.
The General Partners are not required to make any capital contributions to
the Partnership, unless there exists a deficit balance in their capital
accounts at the time of termination or dissolution of the Partnership. In
such case, the General Partners would be required to make a contribution
equal to such deficit.
F-76
CORAL RESERVES NATURAL GAS INCOME FUND 1992 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
The Partnership is engaged primarily in the acquisition and development of
producing oil and gas properties. These activities have occurred in the
states of Oklahoma, Texas, Nebraska and Wyoming.
Accounting policies employed by the Partnership reflect industry practices
and conform to generally accepted accounting principles. The more
significant of such policies are discussed below.
Uses of 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
the 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 amounts could differ from those
estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Partnership considers all
short-term debt securities purchased with a maturity of three months or
less to be cash equivalents.
Property and Equipment
The Partnership follows the full cost method of accounting for its oil and
natural gas properties. Accordingly, all costs incidental to the
acquisition, exploration, and development of oil and gas properties,
including costs of undeveloped leasehold, dry holes and leasehold
equipment, are capitalized. The Partnership does not capitalize any
internal costs as part of the full cost pool. Net capital costs
(capitalized costs less accumulated amortization) are limited to the
estimated future net revenues, discounted at 10% per annum, from proved
oil, natural gas and natural gas liquids reserves plus the lower of cost or
estimated fair market value of undeveloped properties subject to
amortization. The Partnership subjects all costs of undeveloped properties
to amortization, as such costs are insignificant. Capitalized costs less
accumulated amortization plus estimated future development cost of proved
undeveloped reserves are amortized by an equivalent unit-of-production
method, converting natural gas to oil at the ratio approximating their
relative energy content of one barrel ("Bbl") of oil to six thousand cubic
feet ("Mcf") of natural gas. No gain or loss is recognized upon disposal of
oil and natural gas properties unless such dispositions significantly alter
the relationship between capitalized costs and proved oil and natural gas
reserves.
F-77
CORAL RESERVES NATURAL GAS INCOME FUND 1992 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
The Partnership accounts for its non-oil and natural gas long-lived assets
in accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and Assets to be Disposed of". SFAS No. 121 requires that long-lived
assets and identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds
the fair market value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less cost to sell.
Revenue and Royalty Distributions Payable
For certain oil and gas properties, the Partnership receives production
proceeds, from the purchaser and further distributes such amounts to other
revenue and royalty owners. Production proceeds applicable to other revenue
and royalty owners are reflected as revenue and royalty distributions
payable in the accompanying balance sheets. The Partnership accrues revenue
for only its net interest in its oil and natural gas properties.
Production Costs
Lease operating costs, including costs incurred to maintain or increase
production levels from an existing completion interval, along with
production related taxes are expensed as incurred.
Gas Balancing
During the course of normal operations, the Partnership and other joint
interest owners of natural gas reservoirs will take more or less than their
respective ownership share of the natural gas volumes produced. These
volumetric imbalances are monitored over the lives of the wells' production
capability. If an imbalance exists at the time the wells' reserves are
depleted, cash settlements are made among the joint interest owners under a
variety of arrangements. The Partnership follows the sales method of
accounting for gas imbalances. A liability is recorded only if the
Partnership's excess takes of natural gas volumes exceeds its estimated
remaining recoverable reserves. No receivables are recorded for those wells
where the Partnership has taken less than its ownership share of gas
production.
F-78
CORAL RESERVES NATURAL GAS INCOME FUND 1992 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Major Purchasers
The Partnership markets its oil and natural gas production to numerous
purchasers under a combination of short-term contracts. During 1997, 1998
and 1999, the Partnership's largest three purchasers accounted for
approximately 50%, of its oil and natural gas revenues. The Partnership
does not believe that the loss of any single customer would have a material
effect on the results of its operations.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation or other sources are recorded when it is probable that a
liability has been incurred and the amount can be reasonably estimated.
Concentration of Credit Risks
Financial investments that potentially subject the Partnership to credit
risk consist primarily of cash and cash equivalents and trade receivables.
The Partnership maintains its cash and cash equivalents with one major
financial institution. At times, such amounts may exceed the FDIC insured
limit. The Partnership has not experienced any losses in such accounts, and
believes it is not exposed to any significant credit risk.
Trade receivables subject the Partnership to the potential for credit risk
with customers within the oil and gas industry. To reduce risk, the
Partnership performs ongoing evaluations of its customers' financial
condition, but does not generally require collateral.
2. Accounts Receivable
Accounts receivable consisted of the following:
December 31, March 31,
---------------------------
1998 1999 2000
----------- ----------- --------------
(Unaudited)
Oil and natural gas revenue accruals......... $ 198,082 $ 293,349 $ 280,820
Other........................................ 6,624 70,724 77,082
----------- ----------- ----------
Total........................................ $ 204,706 $ 364,073 $ 357,902
=========== =========== ==========
F-79
CORAL RESERVES NATURAL GAS INCOME FUND 1992 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
3. Long-Term Debt
The balances at December 31, 1999 and 1998 consist of a note payable to a
bank. These borrowings have been made against a revolving line of credit
maturing on October 1, 2000. The established borrowing base available to
the Partnership under this credit facility was $725,000 and $600,000 at
December 31, 1999 and 1998, respectively. Borrowings bear interest at 1%
above a specified prime rate and are collateralized by certain oil and gas
properties of the Partnership, as well as guarantees by the Managing and
Additional General Partners. The average interest rate under this credit
facility outstanding at December 31, 1999 was 8.15%. At December 31, 1999
and 1998, the balances of the revolving line of credit facility were
classified as long-term, based on the Partnership's continuing intent and
ability to refinance, as evidenced by the renewal of the credit facility in
May 2000, extending the maturity date to April 15, 2001.
4. Income Taxes
The items of taxable income and expense generated by Partnership operations
are includable in the income tax returns of the partners, therefore, no
provision or liability for federal or state income taxes is reflected in
these financial statements. The Partnership income tax returns, the
qualifications of the Partnership as such for tax purposes, and the amount
of the Partnership's taxable income or loss are subject to examination by
federal and state taxing authorities. If such examinations resulted in
changes with respect to the partnership qualification or in changes to
taxable partnership income or loss, the tax liability of the partners could
change accordingly.
5. Related Party Transactions
During the years ended December 31, 1999, 1998 and 1997, the Partnership
engaged in certain transactions with Coral Reserves Energy Corp., the
Managing General Partner of the Partnership.
The Partnership is required to reimburse the Managing General Partner for
overhead expenses, including office rent and salaries for clerical staff
and appropriate production supervisory personnel, or any other overhead
expenses which the Managing General Partner deems reasonable. The
reimbursement for overhead expenses is limited to a maximum of five percent
(5%) of "Distributable Cash", as defined in the Partnership Agreement. Such
overhead reimbursements amounted to $42,042, $50,165, and $74,405 for 1999,
1998 and 1997, respectively, and are included in "General and
administrative" expenses in the accompanying statements of operations.
F-80
CORAL RESERVES NATURAL GAS INCOME FUND 1992 LIMITED PARTNERSHIP
Notes to Financial Statements
(continued)
6. Oil and Gas Operations
Costs Incurred
The following table reflects the costs incurred in oil and gas property
acquisition, exploration, and development activities:
Three months ended
Year ended December 31 March 31,
---------------------- ---------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(Unaudited)
Development costs.......... $ 163,754 $ 84,983 $ 52,186 $ 266 $ 60,620
Results of Operations for Oil and Gas Producing Activities
The following table includes revenues and expenses associated directly with
the Partnership's oil and gas producing activities. They do not include any
allocation of the Partnership's interest costs or general corporate
overhead and, therefore are not necessarily indicative of the contribution
to net earnings of the Partnership's oil and gas operations.
Three months ended March
Year ended December 31, 31,
--------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ------------ -------------
(Unaudited)
Oil and natural gas sales............... $ 1,865,150 $ 1,382,833 $ 1,346,054 $ 188,376 $ 399,936
Production and operating expenses....... (383,946) (382,282) (339,499) (64,298) (102,023)
Depreciation, depletion and
amortization............................. (454,823) (456,249) (330,018) (92,363) (87,221)
----------- ------------ ----------- ----------- -------------
Results of operations for oil and gas
producing activities..................... $ 1,026,381 $ 544,302 $ 676,537 $ 31,715 $ 210,692
=========== ============ =========== =========== =============
Depreciation, depletion and amortization
per equivalent MCF of production......... $ 0.64 $ 0.65 $ 0.57 $ 0.57 $ 0.57
=========== ============ =========== =========== =============
7. Supplemental Information on Oil and Gas Operations (Unaudited)
The following supplemental unaudited information regarding the oil and gas
activities of the Partnership presented pursuant to the disclosure
requirements promulgated by the Securities and Exchange Commission and
Statement of Financial Accounting Standards No. 69, "Disclosures About Oil
and Gas Producing Activities".
F-81
CORAL RESERVES NATURAL GAS INCOME FUND 1992 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Quantities of Oil and Gas Reserves
Set forth below is a summary of the changes in the net quantities of crude
oil and natural gas and reserves for each of the years in the three-year
period ended December 31, 1999. The Partnership's proved reserves were
calculated by the independent petroleum consultants of Netherland, Sewell &
Associates, Inc. The Partnership cautions that there are many uncertainties
inherent in estimating reserve quantities, and in projecting future
production rates and the timing of future development cost expenditures. In
addition, reserve estimates of new discoveries are more imprecise than
those of properties with a production history. Accordingly, these estimates
are subject to change as additional information becomes available.
Proved oil and natural gas reserves are the estimated quantities of crude
oil, condensate, natural gas and natural liquids that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic conditions.
Proved developed oil and natural gas reserves are those reserves expected
to be recovered through existing equipment and operating methods.
Estimates of net quantities of proved reserves and proved developed
reserves of crude oil, including condensate and natural gas liquids, and
natural gas, as well as the changes in proved reserves during the periods
indicated, are set forth in the tables below. All reserves are located in
the United States.
The Partnership prepared the estimated reserves as of December 31, 1996 and
1997 based on geological and engineering evaluations performed as of
December 31, 1998. The reserve estimates as of the prior year-end dates
were derived by analyzing actual historical production amounts and by
adjusting the reserves attributable to wells acquired or disposed of during
the relevant periods. In addition, in deriving the estimates as of December
31, 1996 and 1997, The Partnership used production costs based on actual
costs incurred during the years and actual oil and natural gas prices
received on December 31, 1996 and 1997. The Partnership has estimated its
reserves as of December 31, 1996 and 1997 in this manner because the actual
information necessary to calculate estimated proved reserves and related
information in accordance with guidelines of the SEC as of each date is not
available. Because the reserve estimates as of December 31, 1998 are based
on additional information gained from the result of drilling, testing and
production subsequent to the dates of the estimated reserves, the reserve
estimates as of December 31, 1996 and 1997 are not necessarily reflective
of quantities that might have been estimated based on information available
as of such dates had estimates in accordance with SEC guidelines been made
at such dates. Management believes that, because of the ethodology used,
the reserve information presented is more reflective of actual reserve
quantities than estimates that might have been generated as of such dates.
F-82
CORAL RESERVES NATURAL GAS INCOME FUND 1992 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Changes in Proved Reserves:
Oil Gas
--- ---
(Bbls) (Mcf)
------ -----
Proved Reserves as of December 31, 1996..................... 182,000 6,832,000
Extensions and discoveries............................. - 121,000
Production............................................. (25,000) (564,000)
---------- -------------
Proved Reserves as of December 31, 1997..................... 157,000 6,389,000
Extensions and discoveries............................. - 14,000
Production............................................. (25,000) (553,000)
---------- -------------
Proved Reserves as of December 31, 1998..................... 132,000 5,850,000
Revisions.............................................. 81,000 415,000
Production............................................. (21,000) (447,000)
---------- -------------
Proved Reserves as of December 31, 1999..................... 192,000 5,818,000
========== =============
Proved developed reserves as of:
December 31, 1996...................................... 176,000 5,753,000
December 31, 1997...................................... 151,000 5,189,000
December 31, 1998...................................... 126,000 4,637,000
December 31, 1999...................................... 184,000 4,291,000
Standardized Measure of Discounted Future Net Cash Flows
The following table reflects the standardized measure of discounted future
net cash flows relating to the Partnership's interest in proved reserves:
Year ended December 31,
-------------------------------------------
1997 1998 1999
------------ ------------- -----------
Future cash inflows.......................... $ 16,988,000 $ 12,269,000 $ 16,823,000
Future production costs...................... (4,000,000) (4,723,000) (5,970,000)
Future development costs..................... (989,000) (989,000) (891,000)
----------- ----------- -----------
Future net cash flows........................ 11,999,000 6,557,000 9,962,000
10% discount to reflect timing of cash
flows........................................ (5,716,000) (3,124,000) (4,776,000)
----------- ----------- ----------
Standardized measure of discounted future
net cash flows................................ $ 6,283,000 $ 3,433,000 $ 5,186,000
=========== =========== ==========
Future cash inflows are computed by applying year-end prices (averaging
$22.75 per barrel of oil, adjusted for transportation and other charges,
and $2.25 per Mcf of gas at December 31, 1999) to the year-end quantities
of proved reserves, except where fixed and determinable price changes are
provided by contractual arrangements in existence at year-end. Future
development and production costs are computed by estimating the
expenditures to be incurred in developing and producing proved oil and gas
reserves at the end of the year, based on year-end costs and assuming
continuation of existing economic conditions.
F-83
CORAL RESERVES NATURAL GAS INCOME FUND 1992 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Principal changes in the standardized measure of discounted future net cash
flows attributable to the Partnership's proved reserves are as follows:
Year ended December 31,
----------------------------------------
1997 1998 1999
---------- ------------ ------------
Beginning balance................................ $ 12,337,000 $ 6,283,000 $ 3,433,000
Sales of oil and natural gas, net of production
costs......................................... (1,455,000) (965,000) (989,000)
Net changes in year-end sales prices and
production costs................................. (5,401,000) (2,353,000) 1,196,000
Extensions, discoveries, and improved recovery,
net of future development costs............... 109,000 8,000 98,000
Revisions........................................ - - 1,047,000
Purchases of reserves, net of future development
costs......................................... - -
Sales of reserves in place....................... - -
Accretion of discount............................ 1,234,000 628,000 343,000
Other, primarily changes in timing............... (541,000) (168,000) 58,000
---------- ---------- ----------
Ending balance................................... $ 6,283,000 $ 3,433,000 $ 5,186,000
========== ========== ==========
F-84
INDEPENDENT AUDITOR'S REPORT
To the Partners
Coral Reserves Natural Gas Income Fund
1993 Limited Partnership
Oklahoma City, Oklahoma
We have audited the balance sheets of Coral Reserves Natural Gas Income
Fund 1993 Limited Partnership as of December 31, 1998 and 1999 and the related
statements of operations, partners' equity and cash flows for each of the years
in the three year period ended December 31, 1999. These financial statements are
the responsibility of the Partnership's Managing General Partner. 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 from
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 Coral Reserves
Natural Gas Income Fund 1993 Limited Partnership as of December 31, 1998 and
1999, and the results of its operations and its cash flow for each of the years
in the three year period ended December 31, 1999 in conformity with generally
accepted accounting principles.
William T. Zumwalt, CPA, Inc.
Tulsa, Oklahoma
March 10, 2000
F-85
CORAL RESERVES NATURAL GAS INCOME FUND 1993 LIMITED PARTNERSHIP
Balance Sheets
December 31, March 31,
-------------------------
1998 1999 2000
----------- ------------ -----------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 82,750 $ 105,993 $ 119,491
Accounts receivable, net (Note 2) 218,626 291,044 272,536
Inventories 4,580 3,142 3,142
----------- ----------- -----------
Total current assets 305,956 400,179 395,169
----------- ----------- -----------
Property and equipment, at cost, based on the full cost method of
accounting for oil and gas properties 5,181,469 5,317,479 5,311,908
Accumulated depreciation, depletion and amortization (2,469,847) (2,753,444) (2,821,403)
----------- ----------- -----------
2,711,622 2,564,035 2,490,505
----------- ----------- -----------
Total assets $ 3,017,578 $ 2,964,214 $ 2,885,674
=========== =========== ===========
Liabilities and Partners' Equity
Current liabilities:
Accounts payable $ 65,559 $ 137,662 $ 93,174
Revenue and royalty distributions payable 46,992 51,295 51,418
----------- ----------- -----------
Total current liabilities 112,551 188,957 144,592
----------- ----------- -----------
Long-term debt (Note 3) 455,800 494,800 542,800
Partners' equity (deficit):
General partners (35,599) (26,923) (29,024)
Limited partners 2,484,826 2,307,380 2,227,306
----------- ----------- -----------
Total partners' equity 2,449,227 2,280,457 2,198,282
----------- ----------- -----------
Total liabilities and partners' equity $ 3,017,578 $ 2,964,214 $ 2,885,674
=========== =========== ===========
See accompanying notes to financial statements.
F-86
CORAL RESERVES NATURAL GAS INCOME FUND 1993 LIMITED PARTNERSHIP
Statements of Operations
Three months ended
Year ended December 31, March 31
--------------------------------------- ------------------------
1997 1998 1999 1999 2000
------------ ----------- ----------- ----------- -----------
(Unaudited)
Revenues:
Oil and gas sales $ 2,368,201 $ 1,513,449 $ 1,496,834 $ 299,030 $ 419,626
Other income 9,310 9,402 5,823 1,273 2,009
------------ ----------- ----------- ----------- -----------
Total revenues 2,377,511 1,522,851 1,502,657 300,303 421,635
------------ ----------- ----------- ----------- -----------
Costs and expenses:
Lease operating 504,583 464,498 410,970 94,886 105,925
Production taxes 184,610 119,430 118,445 23,507 34,337
Depreciation, depletion
and amortization 539,825 517,793 283,597 78,425 67,959
General and administrative 119,377 95,096 83,528 17,878 26,287
Interest 31,582 42,900 40,682 11,737 11,021
Reduction in carrying
value of oil and gas
properties (Note 6) - 245,000 - - -
------------ ----------- ----------- ----------- -----------
Total costs and expenses 1,379,977 1,484,717 937,222 226,433 245,529
------------ ----------- ----------- ----------- -----------
Net earnings $ 997,534 $ 38,134 $ 565,435 $ 73,870 $ 176,106
============ =========== =========== =========== ===========
See accompanying notes to financial statements.
F-87
CORAL RESERVES NATURAL GAS INCOME FUND 1993 LIMITED PARTNERSHIP
Statements of Cash Flow
Three months ended
----------------------
Year ended December 31, March 31,
-----------------------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------- ----------- ----------
(Unaudited)
Cash flows from operating activities:
Net earnings $ 997,534 $ 38,134 $ 565,435 $ 73,870 $ 176,106
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation, depletion and
amortization 539,825 517,793 283,597 78,425 67,959
Reduction in carrying value of oil and
gas properties - 245,000 - - -
Changes in operating assets and
liabilities:
Accounts receivable 9,071 221,947 (72,418) 6,582 18,508
Inventories 9,078 (520) 1,438 - -
Increase (decrease) in:
Accounts payable and Revenue
and royalties payable (6,540) (19,356) 76,406 (16,678) (44,365)
------------ ------------ ----------- ------------- ----------
Net cash provided by operating activities 1,548,968 1,002,998 854,458 142,199 218,208
------------ ------------ ----------- ------------- ----------
Cash flows from investing activities:
Proceeds from sales of property and
equipment - 141,770 - - -
Capital expenditures (372,766) (59,340) (136,010) (1,819) 5,571
Increase in other assets 315 - - - -
------------ ------------ ----------- ------------- ----------
Net cash (used) provided by investing
activities (372,451) 82,430 (136,010) (1,819) 5,571
------------ ------------ ----------- ------------- ----------
Cash flows from financing activities:
Borrowings on long-term debt 437,000 61,100 39,000 - 48,000
Repayments of long-term debt (80,000) (124,500) - - -
Distributions to partners (1,545,358) (1,051,362) (734,205) (148,718) (258,281)
------------ ------------ ----------- ------------- ----------
Net cash (used) provided by financing
activities (1,188,358) (1,114,762) (695,205) (148,718) (210,281)
------------ ------------ ----------- ------------- ----------
Net increase (decrease) in cash and cash
equivalents (11,841) (29,334) 23,243 (8,338) 13,498
Cash and cash equivalents at beginning of year 123,925 112,084 82,750 82,750 105,993
------------ ------------ ----------- ------------- ----------
Cash and cash equivalents at end of year $ 112,084 $ 82,750 $ 105,993 $ 74,412 $ 119,491
============ ============ =========== ============= ==========
Supplemental cash flow information:
Cash payments for interest $ 31,582 $ 42,900 $ 40,682 $ 11,737 $ 11,021
============ ============ =========== ============= ==========
See accompanying notes to financial statements.
F-88
CORAL RESERVES NATURAL GAS INCOME FUND 1993 LIMITED PARTNERSHIP
Statements of Partners' Equity
General Limited Total
Partners' Partners' Partners'
Equity Equity Equity
----------- ------------ -----------
Balance at December 31, 1997 $ (2,935) $ 3,465,390 $ 3,462,455
Net Earnings 72,472 (34,338) 38,134
Distributions to partners (105,136) (946,226) (1,051,362)
---------- ------------ -----------
Balance at December 31, 1998 (35,599) 2,484,826 2,449,227
Net Earnings 82,097 483,338 565,435
Distributions to partners (73,421) (660,784) (734,205)
---------- ------------ -----------
Balance at December 31, 1999 (26,923) 2,307,380 2,280,457
Net Earnings (Unaudited) 23,727 152,379 176,106
Distributions to partners (Unaudited) (25,828) (232,453) (258,281)
---------- ------------ -----------
Balance at March 31, 2000 (Unaudited) $ (29,024) $ 2,227,306 $ 2,198,282
========== ============ ===========
See accompanying notes to financial statements.
F-89
CORAL RESERVES NATURAL GAS INCOME FUND 1993 LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1997, 1998 and 1999
(Information insofar as it relates to March 31, 2000
or the three months ended March 31, 1999 and 2000 is unaudited)
1. Summary of Significant Accounting Policies
Organization and Business Activity
Coral Reserves Natural Gas Income Fund 1993 Limited Partnership
("Partnership") is organized as an Oklahoma limited partnership. Coral
Reserves Energy Corp., an Oklahoma corporation, and its two principal
stockholders serve as Managing General Partner and Additional General
Partners, respectively. The remaining 173 participants are limited
partners.
By the terms of the Amended and Restated Agreement of Limited Partnership
("Partnership Agreement"), revenues, costs and expenses are allocated among
the partners as follows:
. The allowance for cost depletion is allocated 99% to the Limited
Partners and 1% to the Managing General Partner.
. Depreciation of lease and well equipment and amortization of
organization costs are allocated 99% to the Limited Partners and 1% to
the Managing General Partner.
. All other items of income and expense, with certain limited
exceptions, and cash distributions are allocated 90% to the Limited
Partners and 10% to the General Partners until payout is achieved.
After payout, these items are allocated 75% to the Limited Partners
and 25% to the General Partners. Payout occurs on an individual
partner basis, and is reached at the point in time when cash
distributions to a Limited Partner equal his or her capital
contributions made to the Partnership.
The terms of the Partnership offering called for a subscription price of
$100,000 per unit. Fractional units could be sold at the discretion of the
Managing General Partner. Subscriptions were received for 65.250 units in
the Partnership.
The General Partners are not required to make any capital contributions to
the Partnership, unless there exists a deficit balance in their capital
accounts at the time of termination or dissolution of the Partnership. In
such case, the General Partners would be required to make a contribution
equal to such deficit.
F-90
CORAL RESERVES NATURAL GAS INCOME FUND 1993 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
The Partnership is engaged primarily in the acquisition and development of
producing oil and gas properties. These activities have occurred in the
states of Oklahoma, Nebraska, Wyoming and Colorado.
Accounting policies employed by the Partnership reflect industry practices
and conform to generally accepted accounting principles. The more
significant of such policies are discussed below.
Uses of 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
the 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 amounts could differ from those
estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Partnership considers all
short-term debt securities purchased with a maturity of three months or
less to be cash equivalents.
Inventories
Inventories are comprised of salvaged lease and well equipment and are
accounted for at the lower of cost or fair market value. Items are removed
from inventory utilizing the first-in, first-out method.
Property and Equipment
The Partnership follows the full cost method of accounting for its oil and
natural gas properties. Accordingly, all costs incidental to the
acquisition, exploration, and development of oil and gas properties,
including costs of undeveloped leasehold, dry holes and leasehold
equipment, are capitalized. The Partnership does not captialize any
internal costs as part of the full cost pool. Net capital costs
(capitalized costs less accumulated amortization) are limited to the
estimated future net revenues, discounted at 10% per annum, from proved
oil, natural gas and natural gas liquids reserves plus the lower of cost or
estimated fair market value of undeveloped properties subject to
amortization. The Partnership subjects all costs of undeveloped properties
to amortization, as such costs are insignificant. Capitalized costs less
accumulated amortization plus estimated future development cost of proved
undeveloped reserves are amortized by an equivalent unit-of-production
method, converting natural gas to oil at the ratio approximating their
relative energy content of
F-91
CORAL RESERVES NATURAL GAS INCOME FUND 1993 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
one barrel ("Bbl") of oil to six thousand cubic feet ("Mcf") of natural
gas. No gain or loss is recognized upon disposal of oil and natural gas
properties unless such dispositions significantly alter the relationship
between capitalized costs and proved oil and natural gas reserves.
The Partnership accounts for its non-oil and natural gas long-lived assets
in accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and Assets to be Disposed of". SFAS No. 121 requires that long-lived
assets and identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds
the fair market value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less cost to sell.
Revenue and Royalty Distributions Payable
For certain oil and gas properties, the Partnership receives production
proceeds, from the purchaser and further distributes such amounts to other
revenue and royalty owners. Production proceeds applicable to other revenue
and royalty owners are reflected as revenue and royalty distributions
payable in the accompanying balance sheets. The Partnership accrues revenue
for only its net interest in its oil and natural gas properties.
Production Costs
Lease operating costs, including costs incurred to maintain or increase
production levels from an existing completion interval, along with
production related taxes are expensed as incurred.
Gas Balancing
During the course of normal operations, the Partnership and other joint
interest owners of natural gas reservoirs will take more or less than their
respective ownership share of the natural gas volumes produced. These
volumetric imbalances are monitored over the lives of the wells' production
capability. If an imbalance exists at the time the wells' reserves are
depleted, cash settlements are made among the joint interest owners under a
variety of arrangements. The Partnership follows the sales method of
accounting for gas imbalances. A liability is recorded only if the
Partnership's excess takes of natural gas volumes exceeds its estimated
remaining
F-92
CORAL RESERVES NATURAL GAS INCOME FUND 1993 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
recoverable reserves. No receivables are recorded for those wells where the
Partnership has taken less than its ownership share of gas production.
Major Purchasers
The Partnership markets its oil and natural gas production to numerous
purchasers under a combination of short-term contracts. During 1998 and
1999, the Partnership's largest two purchasers accounted for approximately
50% and 55%, respectively, and in 1997 its largest single purchaser
accounted for 35% of its oil and natural gas revenues. The Partnership does
not believe that the loss of any single customer would have a material
effect on the results of its operations.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation or other sources are recorded when it is probable that a
liability has been incurred and the amount can be reasonably estimated.
Concentration of Credit Risks
Financial investments that potentially subject the Partnership to credit
risk consist primarily of cash and cash equivalents and trade receivables.
The Partnership maintains its cash and cash equivalents with one major
financial institution. At times, such amounts may exceed the FDIC insured
limit. The Partnership has not experienced any losses in such accounts, and
believes it is not exposed to any significant credit risk.
Trade receivables subject the Partnership to the potential for credit risk
with customers within the oil and gas industry. To reduce risk, the
Partnership performs ongoing evaluations of its customers' financial
condition, but does not generally require collateral.
2. Accounts Receivable
Accounts receivable consisted of the following:
December 31, March 31,
---------------------------
1998 1999 2000
----------- ----------- ----------
(Unaudited)
Oil and natural gas revenue accruals......... $ 210,151 $ 291,044 $ 272,536
Other........................................ 8,475 - -
----------- ----------- ----------
Total........................................ $ 218,626 $ 291,044 $ 272,536
=========== =========== ==========
F-93
CORAL RESERVES NATURAL GAS INCOME FUND 1993 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
3. Long-Term Debt
The balances at December 31, 1999 and 1998 consist of a note payable to a
bank. These borrowings have been made against a revolving line of credit
maturing on October 1, 2000. The established borrowing base available to
the Partnership under this credit facility was $600,000 at December 31,
1999 and 1998, respectively. Borrowings bear interest at 1% above a
specified prime rate and are collateralized by certain oil and gas
properties of the Partnership, as well as guarantees by the Managing and
Additional General Partners. The average interest rate under this credit
facility outstanding at December 31, 1999 was 8.15%. At December 31, 1999
and 1998, the balances of the revolving line of credit facility were
classified as long-term, based on the Partnership's continuing intent and
ability to refinance, as evidenced by the renewal of the credit facility in
May 2000, extending the maturity date to April 15, 2001.
4. Income Taxes
The items of taxable income and expense generated by Partnership operations
are includable in the income tax returns of the partners, therefore, no
provision or liability for federal or state income taxes is reflected in
these financial statements. The Partnership income tax returns, the
qualifications of the Partnership as such for tax purposes, and the amount
of the Partnership's taxable income or loss are subject to examination by
federal and state taxing authorities. If such examinations resulted in
changes with respect to the partnership qualification or in changes to
taxable partnership income or loss, the tax liability of the partners could
change accordingly.
5. Related Party Transactions
During the years ended December 31, 1999, 1998 and 1997, the Partnership
engaged in certain transactions with Coral Reserves Energy Corp., the
Managing General Partner of the Partnership, and certain affiliated
partnerships, whose Managing General Partner is Coral Reserves, Inc. or
Coral Reserves Energy Corp. Coral Reserves, Inc. and Coral Reserves Energy
Corp. have common shareholders.
The Partnership is required to reimburse the Managing General Partner for
overhead expenses, including office rent and salaries for clerical staff
and appropriate production supervisory personnel, or any other overhead
expenses which the Managing General Partner deems reasonable. The
reimbursement for overhead expenses is limited to a maximum of five percent
(5%) of "Distributable Cash", as defined in the Partnership Agreement. Such
overhead reimbursements amounted to $41,374, $50,869, and $80,000 for 1999,
1998 and 1997, respectively, and are included in "General and
administrative" expenses in the accompanying statements of operations.
F-94
CORAL RESERVES NATURAL GAS INCOME FUND 1993 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
6. Reduction of Carrying Cost of Oil and Natural Gas Properties
Under the full cost method of accounting, the net book value of oil and
natural gas properties may not exceed a calculated "ceiling." The ceiling
limitation is the discounted estimated after-tax future net revenues from
proved oil and natural gas properties. In calculating future net revenues,
current prices and costs are generally held constant indefinitely. The net
book value is compared to the ceiling with any excess written off as an
expense. An expense recorded in one period may not be reversed in a
subsequent period even though higher oil and natural gas prices may have
increased the ceiling applicable to the subsequent period.
At December 31, 1998, the carrying value of the Partnership's oil and
natural gas properties exceeded the full cost ceiling by $244,823.
Accordingly, a $245,000 reduction of the carrying value of such properties
was recorded.
7. Oil and Gas Operations
Costs Incurred
The following table reflects the costs incurred in oil and gas property
acquisition, exploration, and development activities:
Three months ended
Year ended December 31 March 31,
---------------------- ---------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(Unaudited)
Development costs.......... $ 317,038 $ 24,423 $ 43,728 $ - $ 61,079
Results of Operations for Oil and Gas Producing Activities
The following table includes revenues and expenses associated directly with
the Partnership's oil and gas producing activities. They do not include any
allocation of the Partnership's interest costs or general corporate
overhead and, therefore are not necessarily indicative of the contribution
to net earnings of the Partnership's oil and gas operations.
F-95
CORAL RESERVES NATURAL GAS INCOME FUND 1993 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Three months ended
Year ended December 31, March 31,
-------------------------------------- --------------------------
1997 1998 1999 1999 2000
--------- ---------- ---------- ----------- ------------
(Unaudited)
Oil and natural gas sales................. $ 2,368,201 $ 1,513,449 $ 1,496,834 $ 299,030 $ 419,626
Production and operating expenses......... (689,193) 583,928) (529,415) (118,393) (140,262)
Depreciation, depletion and amortization.. (539,825) (517,793) (283,597) (78,425) (67,959)
Reduction of carrying value of oil and
gas assets.............................. - (245,000) - - -
--------- ---------- ---------- ---------- -----------
Results of operations for oil and gas
producing activities.................... $ 1,139,183 $ 166,728 $ 683,822 $ 102,212 $ 211,405
========= ========== ========== ========== ===========
Depreciation, depletion and amortization
per equivalent MCF of production........ $ 0.64 $ 0.66 $ 0.44 $ 0.44 $ 0.44
========= ========== ========== ========== ===========
8. Supplemental Information on Oil and Gas Operations (Unaudited)
The following supplemental unaudited information regarding the oil and gas
activities of the Partnership presented pursuant to the disclosure
requirements promulgated by the Securities and Exchange Commission and
Statement of Financial Accounting Standards No. 69, "Disclosures About Oil
and Gas Producing Activities".
Quantities of Oil and Gas Reserves
Set forth below is a summary of the changes in the net quantities of crude
oil and natural gas and reserves for each of the years in the three-year
period ended December 31, 1999. The Partnership's proved reserves were
calculated by the independent petroleum consultants of Netherland, Sewell &
Associates, Inc. The Partnership cautions that there are many uncertainties
inherent in estimating reserve quantities, and in projecting future
production rates and the timing of future development cost expenditures. In
addition, reserve estimates of new discoveries are more imprecise than
those of properties with a production history. Accordingly, these estimates
are subject to change as additional information becomes available.
Proved oil and natural gas reserves are the estimated quantities of crude
oil, condensate, natural gas and natural liquids that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic conditions.
Proved developed oil and natural gas reserves are those reserves expected
to be recovered through existing equipment and operating methods.
Estimates of net quantities of proved reserves and proved developed
reserves of crude oil, including condensate and natural gas liquids, and
natural gas, as well as the
F-96
CORAL RESERVES NATURAL GAS INCOME FUND 1993 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
changes in proved reserves during the periods indicated, are set forth in
the tables below. All reserves are located in the United States.
The Partnership prepared the estimated reserves as of December 31, 1996 and
1997 based on geological and engineering evaluations performed as of
December 31, 1998. The reserve estimates as of the prior year-end dates
were derived by analyzing actual historical production amounts and by
adjusting the reserves attributable to wells acquired or disposed of during
the relevant periods. In addition, in deriving the estimates as of December
31, 1996 and 1997, the Partnership used production costs based on actual
costs incurred during the years and actual oil and natural gas prices
received on December 31, 1996 and 1997. The Partnership has estimated its
reserves as of December 31, 1996 and 1997 in this manner because the actual
information necessary to calculate estimated proved reserves and related
information in accordance with guidelines of the SEC as of each date is not
available. Because the reserve estimates as of December 31, 1998 are based
on additional information gained from the result of drilling, testing and
production subsequent to the dates of the estimated reserves, the reserve
estimates as of December 31, 1996 and 1997 are not necessarily reflective
of quantities that might have been estimated based on information available
as of such dates had estimates in accordance with SEC guidelines been made
at such dates. Management believes that, because of the methodology used,
the reserve information presented is more reflective of actual reserve
quantities than estimates that might have been generated as of such dates.
Changes in Proved Reserves:
Oil Gas
--- ---
(Bbls) (Mcf)
------ -----
Proved Reserves as of December 31, 1996..................... 251,000 5,249,000
Extensions and discoveries............................. 3,000 87,000
Production............................................. (44,000) (573,000)
---------- ----------
Proved Reserves as of December 31, 1997..................... 210,000 4,763,000
Extensions and discoveries............................. - 40,000
Production............................................. (33,000) (591,000)
Sale of reserves....................................... (23,000) (140,000)
---------- ----------
Proved Reserves as of December 31, 1998..................... 154,000 4,072,000
Revisions.............................................. 193,000 1,051,000
Extensions and discoveries............................. 43,000 17,000
Production............................................. (32,000) (456,000)
---------- ----------
Proved Reserves as of December 31, 1999..................... 358,000 4,684,000
========== ==========
Proved developed reserves as of:
December 31, 1996...................................... 254,000 5,104,000
December 31, 1997...................................... 210,000 4,531,000
December 31, 1998...................................... 154,000 3,800,000
December 31, 1999...................................... 315,000 4,362,000
F-97
CORAL RESERVES NATURAL GAS INCOME FUND 1993 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Standardized Measure of Discounted Future Net Cash Flows
The following table reflects the standardized measure of discounted future
net cash flows relating to the Partnership's interest in proved reserves:
Year ended December 31,
--------------------------------------------
1997 1998 1999
------------ ------------ -----------
Future cash inflows........................... $ 13,837,000 $ 8,884,000 $ 17,987,000
Future production costs....................... (4,469,000) (3,800,000) (6,543,000)
Future development costs...................... (330,000) (330,000) (458,000)
------------ ------------ -----------
Future net cash flows......................... 9,038,000 4,754,000 10,986,000
10% discount to reflect timing of cash flows.. (3,883,000) (2,042,000) (5,360,000)
------------ ------------ -----------
Standardized measure of discounted future
net cash flows............................. $ 5,155,000 $ 2,712,000 $ 5,626,000
============ ============ ===========
Future cash inflows are computed by applying year-end prices (averaging
$22.75 per barrel of oil, adjusted for transportation and other charges,
and $2.25 per Mcf of gas at December 31, 1999) to the year-end quantities
of proved reserves, except where fixed and determinable price changes are
provided by contractual arrangements in existence at year-end. Future
development and production costs are computed by estimating the
expenditures to be incurred in developing and producing proved oil and gas
reserves at the end of the year, based on year-end costs and assuming
continuation of existing economic conditions.
Principal changes in the standardized measure of discounted future net cash
flows attributable to the Partnership's proved reserves are as follows:
Year Ended December 31,
---------------------------------------------
1997 1998 1999
------------- ----------- ------------
Beginning balance.............................. $ 10,182,000 $ 5,155,000 $ 2,712,000
Sales of oil and natural gas, net of
production costs............................ (1,657,000) (900,000) (959,000)
Net changes in year-end sales prices and
production costs............................ (4,176,000) (1,799,000) 1,097,000
Extensions, discoveries, and improved
recovery, net of future development costs... 93,000 25,000 385,000
Revisions...................................... - - 2,359,000
Sales of reserves in place..................... - (155,000) -
Accretion of discount.......................... 1,018,000 515,000 271,000
Other, primarily changes in timing............. (305,000) (129,000) (239,000)
------------- ----------- -----------
Ending balance................................. $ 5,155,000 $ 2,712,000 $ 5,626,000
============= =========== ===========
F-98
INDEPENDENT AUDITOR'S REPORT
To the Partners
Coral Reserves 1993 Institutional Limited Partnership
Oklahoma City, Oklahoma
We have audited the balance sheets of Coral Reserves 1993 Institutional
Limited Partnership as of December 31, 1998 and 1999 and the related statements
of operations, partners' equity and cash flows for each of the years in the
three year period ended December 31, 1999. These financial statements are the
responsibility of the Partnership's Managing General Partner. 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 from
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 Coral Reserves 1993
Institutional Limited Partnership as of December 31, 19978 and 1999, and the
results of its operations and its cash flow for each of the years in the three
year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
William T. Zumwalt, CPA, Inc.
Tulsa, Oklahoma
March 10, 2000
F-99
CORAL RESERVES 1993 INSTITUTIONAL LIMITED PARTNERSHIP
Balance Sheets
December 31, March 31,
----------------------
1998 1999 2000
--------- --------- -----------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 25,260 $ 45,694 $ 41,839
Accounts receivable, net (Note 2) 178,634 111,365 119,200
--------- --------- ---------
Total current assets 203,894 157,059 161,039
--------- --------- ---------
Property and equipment, at cost, based on the full
cost method of accounting for oil and gas properties 2,361,098 2,439,816 2,433,103
Accumulated depreciation, depletion and
amortization (1,015,158) (1,172,253) (1,211,025)
--------- --------- ---------
1,345,940 1,267,563 1,222,078
--------- --------- ---------
Total assets $ 1,549,834 $ 1,424,622 $ 1,383,117
========= ========= ==========
Liabilities and Partners' Equity
Current liabilities:
Accounts payable $ 18,265 $ 47,309 $ 25,325
Revenue and royalty distributions payable 3,224 1,203 2,536
--------- --------- ---------
Total current liabilities 21,489 48,512 27,861
--------- --------- ---------
Long-term debt (Note 3) 346,500 375,500 387,500
Partners' equity (deficit):
General partners (581) (5,170) (4,819)
Limited partners 1,182,426 1,005,780 972,575
--------- --------- ---------
Total partners' equity 1,181,845 1,000,610 967,756
--------- --------- ---------
Total liabilities and partners' equity $ 1,549,834 $ 1,424,622 $ 1,383,117
========= ========= =========
See accompanying notes to financial statements.
F-100
CORAL RESERVES 1993 INSTITUTIONAL LIMITED PARTNERSHIP
Statements of Operations
Three months ended
Year ended December 31, March 31
---------------------------------------- -----------------------
1997 1998 1999 1999 2000
------------ ----------- ----------- ----------- ----------
(Unaudited)
Revenues:
Oil and gas sales $ 938,252 $ 691,149 $ 621,568 $ 112,742 $ 181,073
Other income 3,017 3,090 12,757 437 806
--------- --------- --------- --------- ---------
Total revenues 941,269 694,239 634,325 113,179 181,879
--------- --------- --------- --------- ---------
Costs and expenses:
Lease operating 122,434 119,979 111,371 21,259 26,973
Production taxes 74,213 69,161 50,559 4,632 14,032
Depreciation, depletion
and amortization 228,730 249,343 157,095 43,951 38,772
General and administrative 23,590 21,394 24,465 4,239 6,316
Interest 19,631 25,336 31,145 8,922 8,315
Reduction in carrying
value of oil and gas
properties (Note 6) - 100,000 - - -
--------- --------- --------- --------- ---------
Total costs and expenses 468,598 585,213 374,635 83,003 94,408
--------- --------- --------- --------- ---------
Net earnings $ 472,671 $ 109,026 $ 259,690 $ 30,176 $ 87,471
========= ========= ========= ========= =========
See accompanying notes to financial statements.
F-101
CORAL RESERVES 1993 INSTITUTIONAL LIMITED PARTNERSHIP
Statements of Cash Flow
Three months ended
Year ended December 31, March 31,
----------------------------------------- -------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------- ------------- -----------
(Unaudited)
Cash flows from operating activities:
Net earnings $ 472,671 $ 109,026 $ 259,690 $ 30,176 $ 87,471
Adjustments to reconcile net earnings to
net
Cash provided by operating activities:
Depreciation, depletion and amortization 228,730 249,343 157,095 43,951 38,772
Reduction in carrying value of oil and
gas properties - 100,000 - - -
Changes in operating assets and liabilities:
Accounts receivable (21,358) (16,139) 67,269 16,865 (7,835)
Increase (decrease) in:
Accounts payable and revenue
and royalties payable 3,627 (16,065) 27,023 (23,984) (20,651)
----------- ----------- ----------- ----------- -----------
Net cash provided by operating activities 683,670 426,165 511,077 67,008 97,757
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of property and
equipment - 47,257 - - -
Capital expenditures (99,020) (128,791) (78,718) (733) 6,713
----------- ----------- ----------- ----------- -----------
Net cash (used) provided by investing
activities (99,020) (81,534) (78,718) (733) 6,713
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Borrowings on long-term debt 137,000 151,800 29,000 - 12,000
Repayments of long-term debt (60,000) (41,500) - - -
Distributions to partners (680,657) (473,731) (440,925) (70,531) (120,325)
----------- ----------- ----------- ----------- -----------
Net cash (used) provided by financing
activities (603,657) (363,431) (411,925) (70,531) (108,325)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents (19,007) (18,800) 20,434 (4,256) (3,855)
Cash and cash equivalents at beginning of year 63,067 44,060 25,260 25,260 45,694
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of year $ 44,060 $ 25,260 $ 45,694 $ 21,004 $ 41,839
=========== =========== =========== =========== ===========
Supplemental cash flow information:
Cash payments for interest $ 19,631 $ 25,336 $ 31,145 $ 8,922 $ 8,315
=========== =========== =========== =========== ===========
See accompanying notes to financial statements.
F-102
CORAL RESERVES 1993 INSTITUTIONAL LIMITED PARTNERSHIP
Statements of Partners' Equity
General Limited Total
Partners' Partners' Partners'
Equity Equity Equity
----------- ------------ -----------
Balance at December 31, 1997 $ 4,831 $1,541,719 $1,546,550
Net Earnings 53,805 55,221 109,026
Distributions to partners (59,217) (414,514) (473,731)
----------- ------------ -----------
Balance at December 31, 1998 (581) 1,182,426 1,181,845
Net Earnings 50,527 209,163 259,690
Distributions to partners (55,116) (385,809) (440,925)
----------- ------------ -----------
Balance at December 31, 1999 (5,170) 1,005,780 1,000,610
Net Earnings (Unaudited) 15,392 72,079 87,471
Distributions to partners
(Unaudited) (15,041) (105,284) (120,325)
----------- ------------ -----------
Balance at March 31, 2000
(Unaudited) $ (4,819) $ 972,575 $ 967,756
=========== ============ ===========
See accompanying notes to financial statements.
F-103
CORAL RESERVES 1993 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1997, 1998 and 1999
(Information insofar as it relates to March 31, 2000
or the three months ended March 31, 1999 and 2000 is unaudited)
1. Summary of Significant Accounting Policies
Organization and Business Activity
Coral Reserves Natural Gas Income Fund 1993-I Limited Partnership
("Partnership") is organized as an Oklahoma limited partnership. Coral
Reserves, Inc., an Oklahoma corporation, and its two principal stockholders
serve as Managing General Partner and Additional General Partners,
respectively. The remaining 21 participants are limited partners.
By the terms of the Amended and Restated Agreement of Limited Partnership
("Partnership Agreement"), revenues, costs and expenses are allocated among
the partners as follows:
. The allowance for cost depletion is allocated 99% to the Limited
Partners and 1% to the Managing General Partner.
. Depreciation of lease and well equipment and amortization of
organization costs are allocated 99% to the Limited Partners and
1% to the Managing General Partner.
. All other items of income and expense, with certain limited
exceptions, and cash distributions are allocated 87.50% to the
Limited Partners and 12.50% to the General Partners.
The terms of the Partnership offering called for a subscription price of
$500,000 per unit. Fractional units could be sold at the discretion of the
Managing General Partner. Subscriptions were received for 4.725 units in
the Partnership.
The General Partners are not required to make any capital contributions to
the Partnership, unless there exists a deficit balance in their capital
accounts at the time of termination or dissolution of the Partnership. In
such case, the General Partners would be required to make a contribution
equal to such deficit.
The Partnership is engaged primarily in the acquisition and development of
producing oil and gas properties. These activities have occurred in the
states of Oklahoma, Nebraska, Wyoming and New Mexico.
F-104
CORAL RESERVES 1993 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Accounting policies employed by the Partnership reflect industry practices
and conform to generally accepted accounting principles. The more
significant of such policies are discussed below.
Uses of 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
the 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 amounts could differ from those
estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Partnership considers all
short-term debt securities purchased with a maturity of three months or
less to be cash equivalents.
Property and Equipment
The Partnership follows the full cost method of accounting for its oil and
natural gas properties. Accordingly, all costs incidental to the
acquisition, exploration, and development of oil and gas properties,
including costs of undeveloped leasehold, dry holes and leasehold
equipment, are capitalized. The Partnership does not capitalize any
internal costs as part of the full cost pool. Net capital costs
(capitalized costs less accumulated amortization) are limited to the
estimated future net revenues, discounted at 10% per annum, from proved
oil, natural gas and natural gas liquids reserves plus the lower of cost or
estimated fair market value of undeveloped properties subject to
amortization. The Partnership subjects all costs of undeveloped properties
to amortization, as such costs are insignificant. Capitalized costs less
accumulated amortization plus estimated future development cost of proved
undeveloped reserves are amortized by an equivalent unit-of-production
method, converting natural gas to oil at the ratio approximating their
relative energy content of one barrel ("Bbl") of oil to six thousand cubic
feet ("Mcf") of natural gas. No gain or loss is recognized upon disposal of
oil and natural gas properties unless such dispositions significantly alter
the relationship between capitalized costs and proved oil and natural gas
reserves.
The Partnership accounts for its non-oil and natural gas long-lived assets
in accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and Assets to be Disposed of". SFAS No. 121 requires that long-lived
assets and identifiable
F-105
CORAL RESERVES 1993 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net
cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair
market value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less cost to sell.
Revenue and Royalty Distributions Payable
For certain oil and gas properties, the Partnership receives production
proceeds, from the purchaser and further distributes such amounts to other
revenue and royalty owners. Production proceeds applicable to other revenue
and royalty owners are reflected as revenue and royalty distributions
payable in the accompanying balance sheets. The Partnership accrues revenue
for only its net interest in its oil and natural gas properties.
Production Costs
Lease operating costs, including costs incurred to maintain or increase
production levels from an existing completion interval, along with
production related taxes are expensed as incurred.
Gas Balancing
During the course of normal operations, the Partnership and other joint
interest owners of natural gas reservoirs will take more or less than their
respective ownership share of the natural gas volumes produced. These
volumetric imbalances are monitored over the lives of the wells' production
capability. If an imbalance exists at the time the wells' reserves are
depleted, cash settlements are made among the joint interest owners under a
variety of arrangements. The Partnership follows the sales method of
accounting for gas imbalances. A liability is recorded only if the
Partnership's excess takes of natural gas volumes exceeds its estimated
remaining recoverable reserves. No receivables are recorded for those wells
where the Partnership has taken less than its ownership share of gas
production.
Major Purchasers
The Partnership markets its oil and natural gas production to numerous
purchasers under a combination of short-term contracts. During 1997 the
Partnership's largest single purchaser accounted for approximately 20% and
during 1998 and 1999 the Partnership's largest two purchasers accounted for
30% and 35%, respectively, of its
F-106
CORAL RESERVES 1993 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
oil and natural gas revenues. The Partnership does not believe that the
loss of any single customer would have a material effect on the results of
its operations.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation or other sources are recorded when it is probable that a
liability has been incurred and the amount can be reasonably estimated.
Concentration of Credit Risks
Financial investments that potentially subject the Partnership to credit
risk consist primarily of cash and cash equivalents and trade receivables.
The Partnership maintains its cash and cash equivalents with one major
financial institution. At times, such amounts may exceed the FDIC insured
limit. The Partnership has not experienced any losses in such accounts, and
believes it is not exposed to any significant credit risk.
Trade receivables subject the Partnership to the potential for credit risk
with customers within the oil and gas industry. To reduce risk, the
Partnership performs ongoing evaluations of its customers' financial
condition, but does not generally require collateral.
2. Accounts Receivable
Accounts receivable consisted of the following:
December 31, March 31,
---------------------------
1998 1999 2000
----------- ----------- -------------
(Unaudited)
Oil and natural gas revenue accruals......... $ 160,187 $ 111,365 $ 119,200
Other........................................ 18,447 - -
----------- ------------ -------------
Total........................................ $ 178,634 $ 111,365 $ 119,200
=========== ============ =============
3. Long-Term Debt
The balances at December 31, 1999 and 1998 consist of a note payable to a
bank. These borrowings have been made against a revolving line of credit
maturing on October 1, 2000. The established borrowing base available to
the Partnership under this credit facility was $600,000 and $500,000 at
December 31, 1999 and 1998, respectively. Borrowings bear interest at 1%
above a specified prime rate and are collateralized by certain oil and gas
properties of the Partnership, as well as
F-107
CORAL RESERVES 1993 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
guarantees by the Managing and Additional General Partners. The average
interest rate under this credit facility outstanding at December 31, 1999
was 8.15%. At December 31, 1999 and 1998, the balances of the revolving
line of credit facility were classified as long-term, based on the
Partnership's continuing intent and ability to refinance, as evidenced by
the renewal of the credit facility in May 2000, extending the maturity date
to April 15, 2001.
4. Income Taxes
The items of taxable income and expense generated by Partnership operations
are includable in the income tax returns of the partners, therefore, no
provision or liability for federal or state income taxes is reflected in
these financial statements. The Partnership income tax returns, the
qualifications of the Partnership as such for tax purposes, and the amount
of the Partnership's taxable income or loss are subject to examination by
federal and state taxing authorities. If such examinations resulted in
changes with respect to the partnership qualification or in changes to
taxable partnership income or loss, the tax liability of the partners could
change accordingly.
5. Related Party Transactions
During the years ended December 31, 1999, 1998 and 1997, the Partnership
engaged in certain transactions with Coral Reserves, Inc., the Managing
General Partner of the Partnership, and certain affiliated partnerships,
whose Managing General Partner is Coral Reserves, Inc. or Coral Reserves
Energy Corp. Coral Reserves, Inc. and Coral Reserves Energy Corp. have
common shareholders.
The Partnership is required to reimburse the Managing General Partner for
overhead expenses, including office rent and salaries for clerical staff
and appropriate production supervisory personnel, or any other overhead
expenses which the Managing General Partner deems reasonable. The
reimbursement for overhead expenses is limited to a maximum of three
percent (3%) of "Distributable Cash", as defined in the Partnership
Agreement. Such overhead reimbursements amounted to $14,210, $13,580, and
$20,611 for 1999, 1998 and 1997, respectively, and are included in "General
and administrative" expenses in the accompanying statements of operations.
Effective January 1, 1994, the Partnership purchased for $106,123 the
rights to consulting fees paid by Coral Reserves Natural Gas Income Fund
1991 Limited Partnership ("Coral 1991") to the Selling Agent of Coral 1991.
The fees are paid by Coral 1991 for services performed by the Selling
Agent, and consist of 1 1/2% of Coral 1991's gross annual revenues, plus 1%
of monthly distributable cash before payout and an additional 1% after
payout. The sole exception to this fee structure as purchased is that the
Selling Agent will retain the additional 1% after payout interest
F-108
CORAL RESERVES 1993 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
in Partnership monthly distributable cash. Revenues received by the
Partnership under this arrangement totaled $20,603, $23,937 and $24,645 for
the years ended December 31, 1999, 1998 and 1997, respectively.
6. Reduction of Carrying Cost of Oil and Natural Gas Properties
Under the full cost method of accounting, the net book value of oil and
natural gas properties may not exceed a calculated "ceiling." The ceiling
limitation is the discounted estimated after-tax future net revenues from
proved oil and natural gas properties. In calculating future net revenues,
current prices and costs are generally held constant indefinitely. The net
book value is compared to the ceiling with any excess written off as an
expense. An expense recorded in one period may not be reversed in a
subsequent period even though higher oil and natural gas prices may have
increased the ceiling applicable to the subsequent period.
At December 31, 1998, the carrying value of the Partnership's oil and
natural gas properties exceeded the full cost ceiling by $99,640.
Accordingly, a $100,000 reduction of the carrying value of such properties
was recorded.
7. Oil and Gas Operations
Costs Incurred
The following table reflects the costs incurred in oil and gas property
acquisition, exploration, and development activities:
Three months ended
Year ended December 31 March 31,
---------------------- ------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(Unaudited)
Development costs.......... $ 89,630 $ 117,820 $ 38,105 $ - $ 22,995
Results of Operations for Oil and Gas Producing Activities
The following table includes revenues and expenses associated directly with
the Partnership's oil and gas producing activities. They do not include any
allocation of the Partnership's interest costs or general corporate
overhead and, therefore are not necessarily indicative of the contribution
to net earnings of the Partnership's oil and gas operations.
F-109
CORAL RESERVES 1993 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Three months ended
Year Ended December 31, March 31,
--------------------------------------- ----------------------
1997 1998 1999 1999 2000
--------- ---------- --------- ---------- ----------
(Unaudited)
Oil and natural gas sales................. $ 938,252 $ 691,149 $ 621,568 $ 112,742 $ 181,073
Production and operating expenses......... (196,647) (189,140) (161,930) (258,917) (41,005)
Depreciation, depletion and amortization (228,730) (249,343) (157,095) (43,951) (38,772)
Reduction of carrying value of oil and
gas assets.............................. - (100,000) - - -
--------- ---------- ---------- ---------- ---------
Results of operations for oil and gas
producing activities.................... $ 512,875 $ 152,666 $ 302,543 $ 42,900 $ 101,296
========= ========== ========== ========== =========
Depreciation, depletion and amortization
per equivalent MCF of production........ $ 0.67 $ 0.72 $ 0.60 $ 0.60 $ 0.60
========= ========== ========== ========== =========
8. Supplemental Information on Oil and Gas Operations (Unaudited)
The following supplemental unaudited information regarding the oil and gas
activities of the Partnership presented pursuant to the disclosure
requirements promulgated by the Securities and Exchange Commission and
Statement of Financial Accounting Standards No. 69, "Disclosures About Oil
and Gas Producing Activities".
Quantities of Oil and Gas Reserves
Set forth below is a summary of the changes in the net quantities of crude
oil and natural gas and reserves for each of the years in the three-year
period ended December 31, 1999. The Partnership's proved reserves were
calculated by the independent petroleum consultants of Netherland, Sewell &
Associates, Inc. The Partnership cautions that there are many uncertainties
inherent in estimating reserve quantities, and in projecting future
production rates and the timing of future development cost expenditures. In
addition, reserve estimates of new discoveries are more imprecise than
those of properties with a production history. Accordingly, these estimates
are subject to change as additional information becomes available.
Proved oil and natural gas reserves are the estimated quantities of crude
oil, condensate, natural gas and natural liquids that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic conditions.
Proved developed oil and natural gas reserves are those reserves expected
to be recovered through existing equipment and operating methods.
Estimates of net quantities of proved reserves and proved developed
reserves of crude oil, including condensate and natural gas liquids, and
natural gas, as well as the changes in proved reserves during the periods
indicated, are set forth in the tables below. All reserves are located in
the United States.
F-110
CORAL RESERVES 1993 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
The Partnership prepared the estimated reserves as of December 31, 1996 and
1997 based on geological and engineering evaluations performed as of
December 31, 1998. The reserve estimates as of the prior year-end dates
were derived by analyzing actual historical production amounts and by
adjusting the reserves attributable to wells acquired or disposed of during
the relevant periods. In addition, in deriving the estimates as of December
31, 1996 and 1997, The Partnership used production costs based on actual
costs incurred during the years and actual oil and natural gas prices
received on December 31, 1996 and 1997. The Partnership has estimated its
reserves as of December 31, 1996 and 1997 in this manner because the actual
information necessary to calculate estimated proved reserves and related
information in accordance with guidelines of the SEC as of each date is not
available. Because the reserve estimates as of December 31, 1998 are based
on additional information gained from the result of drilling, testing and
production subsequent to the dates of the estimated reserves, the reserve
estimates as of December 31, 1996 and 1997 are not necessarily reflective
of quantities that might have been estimated based on information available
as of such dates had estimates in accordance with SEC guidelines been made
at such dates. Management believes that, because of the methodology used,
the reserve information presented is more reflective of actual reserve
quantities than estimates that might have been generated as of such dates.
Changes in Proved Reserves:
Oil Gas
--- ---
(Bbls) (Mcf)
------ -----
Proved Reserves as of December 31, 1996..................... 90,000 2,150,000
Extensions and discoveries............................. - 216,000
Production............................................. (14,000) (260,000)
---------- ----------
Proved Reserves as of December 31, 1997..................... 76,000 2,106,000
Extensions and discoveries............................. - 8,000
Production............................................. (11,000) (278,000)
Sale of reserves....................................... (8,000) (47,000)
---------- ----------
Proved Reserves as of December 31, 1998..................... 57,000 1,789,000
Revisions.............................................. 45,000 64,000
Extensions and discoveries............................. 19,000 -
Production............................................. (9,000) (205,000)
---------- ----------
Proved Reserves as of December 31, 1999..................... 112,000 1,648,000
========== ==========
Proved developed reserves as of:
December 31, 1996...................................... 90,000 2,320,000
December 31, 1997...................................... 76,000 2,060,000
December 31, 1998...................................... 57,000 1,735,000
December 31, 1999...................................... 93,000 1,559,000
F-111
CORAL RESERVES 1993 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Standardized Measure of Discounted Future Net Cash Flows
The following table reflects the standardized measure of discounted future
net cash flows relating to the Partnership's interest in proved reserves:
Year ended December 31,
------------------------------------------
1997 1998 1999
----------- ----------- ----------
Future cash inflows.......................... $ 6,113,000 $ 3,862,000 $ 6,136,000
Future production costs...................... (1,409,000) (1,482,000) (2,099,000)
Future development costs..................... (102,000) (102,000) (137,000)
------------ ----------- -----------
Future net cash flows........................ 4,602,000 2,278,000 3,900,000
10% discount to reflect timing of cash
flows....................................... (1,884,000) (932,000) (1,850,000)
------------ ----------- -----------
Standardized measure of discounted future
net cash flows.............................. $ 2,718,000 $ 1,346,000 $ 2,050,000
============ =========== ===========
Future cash inflows are computed by applying year-end prices (averaging
$22.75 per barrel of oil, adjusted for transportation and other charges,
and $2.25 per Mcf of gas at December 31, 1999) to the year-end quantities
of proved reserves, except where fixed and determinable price changes are
provided by contractual arrangements in existence at year-end. Future
development and production costs are computed by estimating the
expenditures to be incurred in developing and producing proved oil and gas
reserves at the end of the year, based on year-end costs and assuming
continuation of existing economic conditions.
Principal changes in the standardized measure of discounted future net cash
flows attributable to the Partnership's proved reserves are as follows:
Year ended December 31,
-----------------------------------------
1997 1998 1999
---------- ----------- ----------
Beginning balance.............................. $ 4,996,000 $ 2,718,000 $ 1,346,000
Sales of oil and natural gas, net of
production costs............................ (731,000) (490,000) (457,000)
Net changes in year-end prices and production
costs....................................... (2,071,000) (1,030,000) 513,000
Extensions, discoveries, and improved
recovery, net of future development costs... 225,000 6,000 191,000
Revisions...................................... - - 471,000
Sales of reserves in place..................... - (58,000) -
Accretion of discount.......................... 500,000 272,000 135,000
Other, primarily changes in timing............. (201,000) (72,000) (149,000)
---------- ----------- ----------
Ending balance................................. $ 2,718,000 $ 1,346,000 $ 2,050,000
========== =========== ==========
F-112
INDEPENDENT AUDITOR'S REPORT
To the Partners
Coral Reserves Energy Income Fund
1995 Limited Partnership
Oklahoma City, Oklahoma
We have audited the balance sheets of Coral Reserves Energy Income Fund
1995 Limited Partnership as of December 31, 1998 and 1999 and the related
statements of operations, partners' equity and cash flows for each of the years
in the three year period ended December 31, 1999. These financial statements are
the responsibility of the Partnership's Managing General Partner. 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 from
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 Coral Reserves
Energy Income Fund 1995 Limited Partnership as of December 31, 1998 and 1999,
and the results of its operations and its cash flow for each of the years in the
three year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
William T. Zumwalt, CPA, Inc.
Tulsa, Oklahoma
March 10, 2000
F-113
CORAL RESERVES ENERGY INCOME FUND 1995 LIMITED PARTNERSHIP
Balance Sheets
December 31, March 31,
-----------------------
1998 1999 2000
---------- ----------- ------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 522,748 $ 234,216 $ 67,547
Accounts receivable, net (Note 2) 271,488 390,001 389,029
Inventories 4,251 2,813 2,813
----------- ----------- ------------
Total current assets 798,487 627,030 459,389
----------- ----------- ------------
Property and equipment, at cost, based on the full cost method of
accounting for oil and gas properties 4,847,201 5,274,378 5,381,519
Accumulated depreciation, depletion and
amortization (1,635,657) (2,020,781) (2,119,448)
----------- ----------- ------------
3,11,544 3,253,597 3,262,071
----------- ----------- ------------
Other assets 800 - -
----------- ----------- ------------
Total assets $ 4,010,831 $ 3,880,627 $ 3,721,460
=========== =========== ============
Liabilities and Partners' Equity
Current liabilities:
Accounts payable $ 40,237 $ 118,904 $ 38,782
Revenue and royalty distributions payable 23,874 26,796 28,458
----------- ----------- ------------
Total current liabilities 64,111 145,700 67,240
----------- ----------- ------------
Long-term debt (Note 3) - - 10,000
Partners' equity (deficit):
General partners (2,775) 10,781 10,589
Limited partners 3,949,495 3,724,146 3,633,631
----------- ----------- ------------
Total partners' equity 3,946,720 3,734,927 3,644,220
----------- ----------- ------------
Total liabilities and partners' equity $ 4,010,831 $ 3,880,627 $ 3,721,460
=========== =========== ============
See accompanying notes to financial statements.
F-114
CORAL RESERVES ENERGY INCOME FUND 1995 LIMITED PARTNERSHIP
Statements of Operations
Three months ended
Year ended December 31, March 31
--------------------------------------- ------------------------
1997 1998 1999 1999 2000
------------ ----------- ----------- ----------- -----------
(Unaudited)
Revenues:
Oil and gas sales $ 2,142,877 $ 1,553,143 $ 1,802,613 $ 332,948 $ 531,354
Other income 46,712 30,940 23,346 5,832 3,859
------------ ----------- ----------- ----------- -----------
Total revenues 2,189,589 1,584,083 1,825,959 338,780 535,213
------------ ----------- ----------- ----------- -----------
Costs and expenses:
Lease operating 371,371 342,852 344,984 80,066 83,107
Production taxes 153,336 110,949 138,216 25,793 46,343
Depreciation, depletion
and amortization 469,181 474,655 385,924 95,514 98,667
General and administrative 108,651 100,674 114,126 22,523 34,234
------------ ----------- ----------- ----------- -----------
Total costs and expenses 1,102,539 1,029,130 983,250 223,896 262,351
------------ ----------- ----------- ----------- -----------
Net earnings $ 1,087,050 $ 554,953 $ 842,709 $ 114,884 $ 272,862
============ =========== =========== =========== ===========
See accompanying notes to financial statements.
F-115
CORAL RESERVES ENERGY INCOME FUND 1995 LIMITED PARTNERSHIP
Statements of Cash Flow
Three months ended
--------------------------
Year ended December 31, March 31,
---------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(Unaudited)
Cash flows from operating activities:
Net earnings $ 1,087,050 $ 554,953 $ 842,709 $ 114,884 $ 272,862
Adjustments to reconcile net earnings to net
Cash provided by operating activities:
Depreciation, depletion and amortization 469,181 474,655 385,924 95,514 98,667
Changes in operating assets and liabilities:
Accounts receivable 17,153 167,573 (118,513) 10,364 972
Inventories 9,078 (520) 1,438 - -
Increase (decrease) in:
Accounts payable and Revenue and royalties
payable 20,937 (10,223) 81,589 (3,291) (78,460)
----------- ----------- ----------- ----------- -----------
Net cash provided by operating activities 1,603,399 1,186,438 1,193,147 217,471 294,041
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of property and equipment 23,540 - - - -
Capital expenditures (557,762) (134,716) (427,177) (1,476) (107,141)
----------- ----------- ----------- ----------- -----------
Net cash (used) provided by investing activities (534,222) (134,716) (427,177) (1,476) (107,141)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Borrowings on long-term debt - - - - 10,000
Distributions to partners (1,502,438) (1,193,395) (1,054,502) (216,146) (363,569)
----------- ----------- ----------- ----------- -----------
Net cash (used) provided by financing activities (1,502,438) (1,193,395) (1,054,502) (216,146) (353,569)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (433,261) (141,673) (288,532) (151) (166,669)
Cash and cash equivalents at beginning of year 1,097,682 664,421 522,748 522,748 234,216
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of year $ 664,421 $ 522,748 $ 234,216 $ 522,597 $ 67,547
=========== =========== =========== =========== ===========
See accompanying notes to financial statements.
F-116
CORAL RESERVES ENERGY INCOME FUND 1995 LIMITED PARTNERSHIP
Statements of Partners' Equity
General Limited Total
Partners' Partners' Partners'
Equity Equity Equity
----------- ------------ ------------
Balance at December 31, 1997 $ 18,334 $ 4,566,828 $ 4,585,162
Net Earnings 98,230 456,723 554,953
Distributions to partners (119,339) (1,074,056) (1,193,395)
----------- ------------ ------------
Balance at December 31, 1998 (2,775) 3,949,495 3,946,720
Net Earnings 119,006 723,703 842,709
Distributions to partners (105,450) (949,052) (1,054,502)
----------- ------------ ------------
Balance at December 31, 1999 10,781 3,724,146 3,734,927
Net Earnings (Unaudited) 36,165 236,697 272,862
Distributions to partners (Unaudited) (36,357) (327,212) (363,569)
----------- ------------ ------------
Balance at March 31, 2000 (Unaudited) $ 10,589 $ 3,633,631 $ 3,644,220
=========== ============ ============
See accompanying notes to financial statements.
F-117
CORAL RESERVES ENERGY INCOME FUND 1995 LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1997, 1998 and 1999
(Information insofar as it relates to March 31, 2000
or the three months ended March 31, 1999 and 2000 is unaudited)
1. Summary of Significant Accounting Policies
Organization and Business Activity
Coral Reserves Energy Income Fund 1995 Limited Partnership ("Partnership")
is organized as an Oklahoma limited partnership. Coral Reserves Energy
Corp., an Oklahoma corporation, and its two principal stockholders serve as
Managing General Partner and Additional General Partners, respectively. The
remaining 196 participants are limited partners.
By the terms of the Amended and Restated Agreement of Limited Partnership
("Partnership Agreement"), revenues, costs and expenses are allocated among
the partners as follows:
. The allowance for cost depletion is allocated 99% to the Limited
Partners and 1% to the Managing General Partner.
. Depreciation of lease and well equipment and amortization of
organization costs are allocated 99% to the Limited Partners and
1% to the Managing General Partner.
. All other items of income and expense, with certain limited
exceptions, and cash distributions are allocated 90% to the
Limited Partners and 10% to the General Partners until payout is
achieved. After payout, these items are allocated 75% to the
Limited Partners and 25% to the General Partners. Payout occurs
on an individual partner basis, and is reached at the point in
time when cash distributions to a Limited Partner equal his or
her capital contributions made to the Partnership.
The terms of the Partnership offering called for a subscription price of
$100,000 per unit. Fractional units could be sold at the discretion of the
Managing General Partner. Subscriptions were received for 68.050 units in
the Partnership.
The General Partners are not required to make any capital contributions to
the Partnership, unless there exists a deficit balance in their capital
accounts at the time of termination or dissolution of the Partnership. In
such case, the General Partners would be required to make a contribution
equal to such deficit.
F-118
CORAL RESERVES ENERGY INCOME FUND 1995 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
The Partnership is engaged primarily in the acquisition and development of
producing oil and gas properties. These activities have occurred in the
states of Oklahoma, Arkansas and Wyoming.
Accounting policies employed by the Partnership reflect industry practices
and conform to generally accepted accounting principles. The more
significant of such policies are discussed below.
Uses of 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
the 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 amounts could differ from those
estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Partnership considers all
short-term debt securities purchased with a maturity of three months or
less to be cash equivalents.
Inventories
Inventories are comprised of salvaged lease and well equipment and are
accounted for at the lower of cost or fair market value. Items are removed
from inventory utilizing the first-in, first-out method.
Property and Equipment
The Partnership follows the full cost method of accounting for its oil and
natural gas properties. Accordingly, all costs incidental to the
acquisition, exploration, and development of oil and gas properties,
including costs of undeveloped leasehold, dry holes and leasehold
equipment, are capitalized. The Partnership does not capitalize any
internal costs as part of the full cost pool. Net capital costs
(capitalized costs less accumulated amortization) are limited to the
estimated future net revenues, discounted at 10% per annum, from proved
oil, natural gas and natural gas liquids reserves plus the lower of cost or
estimated fair market value of undeveloped properties subject to
amortization. The Partnership subjects all costs of undeveloped properties
to amortization, as such costs are insignificant. Capitalized costs less
accumulated amortization plus estimated future development cost of proved
undeveloped reserves are amortized by an equivalent unit-of-production
method, converting natural gas to oil at the ratio approximating their
relative energy content of
F-119
CORAL RESERVES ENERGY INCOME FUND 1995 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
one barrel ("Bbl") of oil to six thousand cubic feet ("Mcf") of natural
gas. No gain or loss is recognized upon disposal of oil and natural gas
properties unless such dispositions significantly alter the relationship
between capitalized costs and proved oil and natural gas reserves.
The Partnership accounts for its non-oil and natural gas long-lived assets
in accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and Assets to be Disposed of". SFAS No. 121 requires that long-lived
assets and identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds
the fair market value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less cost to sell.
Revenue and Royalty Distributions Payable
For certain oil and gas properties, the Partnership receives production
proceeds, from the purchaser and further distributes such amounts to other
revenue and royalty owners. Production proceeds applicable to other revenue
and royalty owners are reflected as revenue and royalty distributions
payable in the accompanying balance sheets. The Partnership accrues revenue
for only its net interest in its oil and natural gas properties.
Production Costs
Lease operating costs, including costs incurred to maintain or increase
production levels from an existing completion interval, along with
production related taxes are expensed as incurred.
Gas Balancing
During the course of normal operations, the Partnership and other joint
interest owners of natural gas reservoirs will take more or less than their
respective ownership share of the natural gas volumes produced. These
volumetric imbalances are monitored over the lives of the wells' production
capability. If an imbalance exists at the time the wells' reserves are
depleted, cash settlements are made among the joint interest owners under a
variety of arrangements. The Partnership follows the sales method of
accounting for gas imbalances. A liability is recorded only if the
Partnership's excess takes of natural gas volumes exceeds its estimated
remaining
F-120
CORAL RESERVES ENERGY INCOME FUND 1995 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
recoverable reserves. No receivables are recorded for those wells where the
Partnership has taken less than its ownership share of gas production.
Major Purchasers
The Partnership markets its oil and natural gas production to numerous
purchasers under a combination of short-term contracts. During 1997, the
Partnership's largest single purchaser accounted for approximately 50% and
during 1998 the Partnership's largest three purchasers accounted for 70% of
its oil and natural gas revenues. During 1999, the Partnership's two
largest purchasers accounted for 65% of its oil and natural gas revenues.
The Partnership does not believe that the loss of any single customer would
have a material effect on the results of its operations.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation or other sources are recorded when it is probable that a
liability has been incurred and the amount can be reasonably estimated.
Concentration of Credit Risks
Financial investments that potentially subject the Partnership to credit
risk consist primarily of cash and cash equivalents and trade receivables.
The Partnership maintains its cash and cash equivalents with one major
financial institution. At times, such amounts may exceed the FDIC insured
limit. The Partnership has not experienced any losses in such accounts, and
believes it is not exposed to any significant credit risk. At December 31,
1999, a significant concentration of credit risk existed with respect to
$234,216 deposited with one financial institution.
Trade receivables subject the Partnership to the potential for credit risk
with customers within the oil and gas industry. To reduce risk, the
Partnership performs ongoing evaluations of its customers' financial
condition, but does not generally require collateral.
2. Accounts Receivable
Accounts receivable consisted of the following:
F-121
CORAL RESERVES ENERGY INCOME FUND 1995 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
December 31,
------------------------------- March 31,
1998 1999 2000
------------- ------------- ---------------
(Unaudited)
Oil and natural gas revenue accruals.............. $ 267,961 $ 390,001 $ 389,029
Other............................................. 3,527 - -
------------- ------------- ---------------
Total............................................. $ 271,488 $ 390,001 $ 389,029
============= ============= ===============
3. Long-Term Debt
A revolving line of credit maturing on October 1, 2000, was established in
September 1999. Borrowings bear interest at 1% above a specified prime rate
and are collateralized by certain oil and gas properties of the
Partnership, as well as guarantees by the Managing and Additional General
Partners. The borrowing base available to the Partnership under this credit
facility is $2,000,000. No borrowings have been made under this line of
credit as of December 31, 1999. An initial draw of $10,000 was made against
the line of credit in March, 2000. The balance of the revolving line of
credit facility was reclassified as long-term, based on the Partnership's
continuing intent and ability to refinance, as evidenced by the renewal of
the credit facility in May 2000, extending the maturity date to April 15,
2001.
4. Income Taxes
The items of taxable income and expense generated by Partnership operations
are includable in the income tax returns of the partners, therefore, no
provision or liability for federal or state income taxes is reflected in
these financial statements. The Partnership income tax returns, the
qualifications of the Partnership as such for tax purposes, and the amount
of the Partnership's taxable income or loss are subject to examination by
federal and state taxing authorities. If such examinations resulted in
changes with respect to the partnership qualification or in changes to
taxable partnership income or loss, the tax liability of the partners could
change accordingly.
5. Related Party Transactions
During the years ended December 31, 1999, 1998 and 1997, the Partnership
engaged in certain transactions with Coral Reserves Energy Corp., the
Managing General Partner of the Partnership
The Partnership is required to reimburse the Managing General Partner for
overhead expenses, including office rent and salaries for clerical staff
and appropriate production supervisory personnel, or any other overhead
expenses which the Managing General Partner deems reasonable. The
reimbursement for overhead expenses is limited to a maximum of five percent
(5%) of "Distributable Cash", as defined in the Partnership Agreement. Such
overhead reimbursements amounted to $59,253, $58,639, and $78,659 for 1999,
1998 and 1997, respectively, and are included in "General and
administrative" expenses in the accompanying statements of operations.
F-122
CORAL RESERVES ENERGY INCOME FUND 1995 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
6. Oil and Gas Operations
Costs Incurred
The following table reflects the costs incurred in oil and gas property
acquisition, exploration, and development activities:
Three months ended
Year ended December 31 March 31,
---------------------- ------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(Unaudited)
Development costs.......... $ 500,780 $ 117,707 $ 305,227 $ - $ 184,934
Results of Operations for Oil and Gas Producing Activities
The following table includes revenues and expenses associated directly with
the Partnership's oil and gas producing activities. They do not include any
allocation of the Partnership's interest costs or general corporate
overhead and, therefore are not necessarily indicative of the contribution
to net earnings of the Partnership's oil and gas operations.
Three months ended
Year ended December 31, March 31,
---------------------------------------- ---------------------------
1997 1998 1999 1999 2000
------------ -------------- ------------ ------------- -------------
(Unaudited)
Oil and natural gas sales.................... $ 2,142,877 $ 1,553,143 $ 1,802,613 $ 332,948 $ 531,354
Production and operating expenses............ (524,707) (453,801) (483,200) (105,859) (129,450)
Depreciation, depletion and amortization..... (469,181) (474,665) (385,924) (95,514) (98,667)
----------- ------------- ----------- ----------- -----------
Results of operations for oil and gas
producing activities....................... $ 1,148,989 $ 624,677 $ 933,489 $ 131,575 $ 303,237
=========== ============= =========== =========== ===========
Depreciation, depletion and amortization
per equivalent MCF of production........... $ 0.57 $ 0.59 $ 0.48 $ .048 $ .049
=========== ============= =========== =========== ===========
7. Supplemental Information on Oil and Gas Operations (Unaudited)
The following supplemental unaudited information regarding the oil and gas
activities of the Partnership presented pursuant to the disclosure
requirements promulgated by the Securities and Exchange Commission and
Statement of Financial Accounting Standards No. 69, "Disclosures About Oil
and Gas Producing Activities".
Quantities of Oil and Gas Reserves
Set forth below is a summary of the changes in the net quantities of crude
oil and natural gas and reserves for each of the years in the three-year
period ended December 31, 1999. The Partnership's proved reserves were
calculated by the independent petroleum consultants of Netherland, Sewell &
Associates, Inc. The
F-123
CORAL RESERVES ENERGY INCOME FUND 1995 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Partnership cautions that there are many uncertainties inherent in
estimating reserve quantities, and in projecting future production rates
and the timing of future development cost expenditures. In addition,
reserve estimates of new discoveries are more imprecise than those of
properties with a production history. Accordingly, these estimates are
subject to change as additional information becomes available.
Proved oil and natural gas reserves are the estimated quantities of crude
oil, condensate, natural gas and natural liquids that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic conditions.
Proved developed oil and natural gas reserves are those reserves expected
to be recovered through existing equipment and operating methods.
Estimates of net quantities of proved reserves and proved developed
reserves of crude oil, including condensate and natural gas liquids, and
natural gas, as well as the changes in proved reserves during the periods
indicated, are set forth in the tables below. All reserves are located in
the United States.
The Partnership prepared the estimated reserves as of December 31, 1996 and
1997 based on geological and engineering evaluations performed as of
December 31, 1998. The reserve estimates as of the prior year-end dates
were derived by analyzing actual historical production amounts and by
adjusting the reserves attributable to wells acquired or disposed of during
the relevant periods. In addition, in deriving the estimates as of December
31, 1996 and 1997, The Partnership used production costs based on actual
costs incurred during the years and actual oil and natural gas prices
received on December 31, 1996 and 1997. The Partnership has estimated its
reserves as of December 31, 1996 and 1997 in this manner because the actual
information necessary to calculate estimated proved reserves and related
information in accordance with guidelines of the SEC as of each date is not
available. Because the reserve estimates as of December 31, 1998 are based
on additional information gained from the result of drilling, testing and
production subsequent to the dates of the estimated reserves, the reserve
estimates as of December 31, 1996 and 1997 are not necessarily reflective
of quantities that might have been estimated based on information available
as of such dates had estimates in accordance with SEC guidelines been made
at such dates. Management believes that, because of the methodology used,
the reserve information presented is more reflective of actual reserve
quantities than estimates that might have been generated as of such dates.
F-124
CORAL RESERVES ENERGY INCOME FUND 1995 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Changes in Proved Reserves:
Oil Gas
----------- -------------
(Bbls) (Mcf)
----------- -------------
Proved Reserves as of December 31, 1996.................... 232,000 7,079,000
Extensions and discoveries............................. 18,000 132,000
Production............................................. (28,000) (655,000)
----------- -------------
Proved Reserves as of December 31, 1997.................... 222,000 6,556,000
Production............................................. (26,000) (654,000)
----------- -------------
Proved Reserves as of December 31, 1998.................... 196,000 5,902,000
Revisions.............................................. 111,000 1,411,000
Purchase of reserves................................... 47,000 164,000
Extensions and discoveries............................. 9,000 227,000
Production............................................. (25,000) (651,000)
----------- -------------
Proved Reserves as of December 31, 1999.................... 338,000 7,053,000
=========== =============
Proved developed reserves as of:
December 31, 1996...................................... 246,000 6,116,000
December 31, 1997...................................... 217,000 5,461,000
December 31, 1998...................................... 191,000 4,806,000
December 31, 1999...................................... 224,000 5,428,000
Standardized Measure of Discounted Future Net Cash Flows
The following table reflects the standardized measure of discounted future
net cash flows relating to the Partnership's interest in proved reserves:
Year ended December 31,
--------------------------------------------
1997 1998 1999
-------------- -------------- -------------
Future cash inflows........................... $ 17,704,000 $ 12,402,000 $ 22,375,000
Future production costs....................... (4,420,000) (5,083,000) (6,925,000)
Future development costs...................... (930,000) (930,000) (1,129,000)
-------------- -------------- -------------
Future net cash flows......................... 12,354,000 6,389,000 14,321,000
10% discount to reflect timing of cash flows.. (5,358,000) (2,771,000) (6,821,000)
-------------- -------------- -------------
Standardized measure of discounted future
net cash flows................................. $ 6,996,000 $ 3,618,000 $ 7,500,000
============== ============== =============
Future cash inflows are computed by applying year-end prices (averaging
$22.75 per barrel of oil, adjusted for transportation and other charges,
and $2.25 per Mcf of gas at December 31, 1999) to the year-end quantities
of proved reserves, except where fixed and determinable price changes are
provided by contractual arrangements in existence at year-end. Future
development and production costs are computed by estimating the
expenditures to be incurred in developing and producing proved oil and gas
reserves at the end of the year, based on year-end costs and assuming
continuation of existing economic conditions.
F-125
CORAL RESERVES ENERGY INCOME FUND 1995 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Principal changes in the standardized measure of discounted future net cash
flows attributable to the Partnership's proved reserves are as follows:
Year ended December 31,
---------------------------------------------
1997 1998 1999
-------------- ------------- -------------
Beginning balance.............................. $ 13,460,000 $ 6,996,000 $ 3,618,000
Sales of oil and natural gas, net of
production costs............................ (1,585,000) (1,046,000) (1,631,000)
Net changes in year-end sales prices and
production costs............................... (5,816,000) (2,786,000) 2,394,000
Extensions, discoveries, and improved
recovery, net of future development costs... 251,000 - 191,000
Revisions...................................... - - 2,067,000
Purchases of reserves, net of future
development costs........................... - - 589,000
Accretion of discount.......................... 1,346,000 700,000 362,000
Other, primarily changes in timing............. (660,000) (246,000) (90,000)
-------------- ------------- -------------
Ending balance................................. $ 6,996,000 $ 3,618,000 $ 7,500,000
============== ============= =============
F-126
INDEPENDENT AUDITOR'S REPORT
To the Partners
Coral Reserves Energy Income Fund
1996 Limited Partnership
Oklahoma City, Oklahoma
We have audited the balance sheets of Coral Reserves Energy Income Fund
1996 Limited Partnership as of December 31, 1998 and 1999 and the related
statements of operations, partners' equity and cash flows for each of the years
in the three year period ended December 31, 1999. These financial statements are
the responsibility of the Partnership's Managing General Partner. 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 from
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 Coral Reserves Energy Income
Fund 1996 Limited Partnership as of December 31, 1998 and 1999, and the results
of its operations and its cash flow for each of the years in the three year
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
William T. Zumwalt, CPA, Inc.
Tulsa, Oklahoma
March 10, 2000
F-127
CORAL RESERVES ENERGY INCOME FUND 1996 LIMITED PARTNERSHIP
Balance Sheets
December 31, March 31,
----------------------
1998 1999 2000
---------- ---------- -----------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 1,274,867 $ 80,529 $ 106,971
Accounts receivable, net (Note 2) 271,512 434,776 473,006
---------- ---------- ----------
Total current assets 1,546,379 515,305 579,977
---------- ---------- ----------
Property and equipment, at cost, based on the full
cost method of accounting for oil and gas properties 5,467,383 5,762,256 5,804,141
Accumulated depreciation, depletion and amortization (699,904) (1,260,382) (1,377,827)
---------- ---------- -----------
4,767,479 4,501,874 4,426,314
---------- ---------- -----------
Notes Receivable (Note 3) - 2,900,000 2,810,000
Other assets 1,933 1,133 933
---------- ---------- -----------
Total assets $ 6,315,791 $ 7,918,312 $ 7,817,224
========== ========== ==========
Liabilities and Partners' Equity
Current liabilities:
Accounts payable $ 59,158 $ 53,757 $ 62,135
Revenue and royalty distributions payable 12,711 6,922 7,557
---------- --------- ----------
Total current liabilities 71,869 60,679 69,692
---------- --------- ----------
Long-term debt (Note 4) - 2,272,000 2,365,000
Partners' equity (deficit):
General partners (2,715) (17,951) (27,675)
Limited partners 6,246,637 5,603,584 5,410,207
--------- --------- ----------
Total partners' equity 6,243,922 5,585,633 5,382,532
--------- --------- ----------
Total liabilities and partners' equity $ 6,315,791 $ 7,918,312 $ 7,817,224
========= ========= ===========
See accompanying notes to financial statements.
F-128
CORAL RESERVES ENERGY INCOME FUND 1996 LIMITED PARTNERSHIP
Statements of Operations
Three months ended
Year ended December 31, March 31
-------------------------------------- ----------------------
1997 1998 1999 1999 2000
---------- --------- --------- --------- ---------
(Unaudited)
Revenues:
Oil and gas sales $ 641,810 $ 1,292,067 $ 2,152,981 $ 402,834 $ 676,552
Other income 146,966 111,286 19,480 8,651 1,641
---------- --------- --------- --------- ---------
Total revenues 788,776 1,403,353 2,172,461 411,485 678,193
---------- --------- --------- --------- ---------
Costs and expenses:
Lease operating 84,617 249,675 391,189 86,436 139,484
Production taxes 48,733 128,663 172,622 21,632 60,537
Depreciation, depletion and amortization 166,094 509,808 561,278 133,332 117,645
General and administrative 32,526 98,635 151,533 21,088 42,641
Interest - - 133,870 - 49,917
Reduction of carrying
value of oil and gas
properties (Note 7) - 887,000 - - -
---------- --------- --------- --------- ---------
Total costs and expenses 331,970 1,873,781 1,410,492 262,488 410,224
---------- --------- --------- --------- ---------
Net earnings (loss) $ 456,806 $ (470,428) $ 761,969 $ 148,997 $ 267,969
========== ========= ========= ========= =========
See accompanying notes to financial statements.
F-129
CORAL RESERVES ENERGY INCOME FUND 1996 LIMITED PARTNERSHIP
Statements of Cash Flow
Three months ended
Year ended December 31, March 31,
---------------------------------------- ------------------------
1997 1998 1999 1999 2000
---------- ---------- ----------- --------- ---------
(Unaudited)
Cash flows from operating activities:
Net earnings (loss) $ 456,806 $ (470,428) $ 761,969 $ 148,997 $ 267,969
Adjustments to reconcile net earnings to net
Cash provided by operating activities:
Depreciation, depletion and amortization 166,094 509,808 561,278 133,332 117,656
Reduction in carrying value of oil and gas
properties - 887,000 - - -
Changes in operating assets and liabilities:
Accounts receivable (275,150) 84,438 (163,264) (70,640) (38,230)
Increase (decrease) in:
Accounts payable and Revenue and royalties
payable 109,921 (42,919) (11,190) (17,814) 9,013
---------- --------- ----------- --------- ---------
Net cash provided by operating activities 457,671 967,899 1,148,793 193,875 356,397
---------- --------- ----------- --------- ---------
Cash flows from investing activities:
Advances on notes receivable - - (3,200,000) (3,200,000) -
Repayments of notes receivable - - 300,000 - 90,000
Proceeds from sales of property and equipment - 25,000 14,527 - -
Capital expenditures (1,967,166) (3,709,533) (309,400) (68,993) (41,885)
---------- ---------- ----------- --------- ---------
Net cash (used) provided by investing activities (1,967,166) (3,684,533) (3,194,873) (3,268,993) 48,115
---------- ---------- ----------- --------- ---------
Cash flows from financing activities:
Borrowings on long-term debt - - 2,272,000 2,100,000 93,000
Contributed capital 5,695,100 - - - -
Distributions to partners (417,286) (1,034,692) (1,420,258) (190,899) (471,070)
Cost of capital raised (1,129,100) (10,862) - - -
---------- ---------- ----------- --------- ---------
Net cash (used) provided by financing activities 4,148,714 (1,045,554) 851,742 1,909,101 (378,070)
---------- ---------- ----------- --------- ---------
Net increase (decrease) in cash and cash equivalents 2,639,219 (3,762,188) (1,194,338) (1,166,017) 26,442
Cash and cash equivalents at beginning of year 2,397,836 5,037,055 1,274,867 1,274,867 80,529
---------- ---------- ----------- --------- ---------
Cash and cash equivalents at end of year $ 5,037,055 $ 1,274,867 $ 80,529 $ 108,850 $ 106,971
========== ========== =========== ========= =========
Supplemental cash flow information:
Cash payments for interest $ - $ - $ 133,870 $ - $ 49,917
========== ========== =========== ========= =========
See accompanying notes to financial statements.
F-130
CORAL RESERVES ENERGY INCOME 1996 LIMITED PARTNERSHIP
Statements of Partners' Equity
General Limited Total
Partners' Partners' Partners'
Equity Equity Equity
---------- ---------- ----------
Balance at December 31, 1997 $ 22,084 $ 7,737,820 $ 7,759,904
Net Earnings 78,670 (549,098) (470,428)
Distributions to partners (103,469) (931,223) (1,034,692)
Cost of capital raised - (10,862) (10,862)
--------- ---------- ----------
Balance at December 31, 1998 (2,715) 6,246,637 6,243,922
Net Earnings 126,790 635,179 761,969
Distributions to partners (142,026) (1,278,232) (1,420,258)
--------- ---------- ----------
Balance at December 31, 1999 (17,951) 5,603,584 5,585,633
Net Earnings (Unaudited) 37,383 230,586 267,969
Distributions to partners (Unaudited) (47,107) (423,963) (471,070)
--------- ---------- ----------
Balance at March 31, 2000 (Unaudited) $ (27,675) $ 5,410,207 $ 5,382,532
========= ========== ==========
See accompanying notes to financial statements.
F-131
CORAL RESERVES ENERGY INCOME FUND 1996 LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1997, 1998 and 1999
(Information insofar as it relates to March 31,
2000 or the three months ended March 31, 1999 and
2000 is unaudited)
1. Summary of Significant Accounting Policies
Organization and Business Activity
Coral Reserves Energy Income Fund 1996 Limited Partnership ("Partnership")
is organized as an Oklahoma limited partnership. Coral Reserves Energy
Corp., an Oklahoma corporation, and its two principal stockholders serve as
Managing General Partner and Additional General Partners, respectively. The
remaining 226 participants are limited partners.
By the terms of the Amended and Restated Agreement of Limited Partnership
("Partnership Agreement"), revenues, costs and expenses are allocated among
the partners as follows:
. The allowance for cost depletion is allocated 99% to the Limited
Partners and 1% to the Managing General Partner.
. Depreciation of lease and well equipment and amortization of
organization costs are allocated 99% to the Limited Partners and 1%
to the Managing General Partner.
. All other items of income and expense, with certain limited
exceptions, and cash distributions are allocated 90% to the Limited
Partners and 10% to the General Partners until payout is achieved.
After payout, these items are allocated 75% to the Limited Partners
and 25% to the General Partners. Payout occurs on an individual
partner basis, and is reached at the point in time when cash
distributions to a Limited Partner equal his or her capital
contributions made to the Partnership.
The terms of the Partnership offering called for a subscription price of
$100,000 per unit. Fractional units could be sold at the discretion of the
Managing General Partner. Subscriptions were received for 96.350 units in
the Partnership.
The General Partners are not required to make any capital contributions to
the Partnership, unless there exists a deficit balance in their capital
accounts at the time of termination or dissolution of the Partnership. In
such case, the General Partners would be required to make a contribution
equal to such deficit.
The Partnership is engaged primarily in the acquisition and development of
producing oil and gas properties. These activities have occurred in the
states of Oklahoma and Texas.
F-132
CORAL RESERVES ENERGY INCOME FUND 1996 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Accounting policies employed by the Partnership reflect industry practices
and conform to generally accepted accounting principles. The more
significant of such policies are discussed below.
Uses of 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
the 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 amounts could differ from those
estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Partnership considers all
short-term debt securities purchased with a maturity of three months or
less to be cash equivalents.
Property and Equipment
The Partnership follows the full cost method of accounting for its oil and
natural gas properties. Accordingly, all costs incidental to the
acquisition, exploration, and development of oil and gas properties,
including costs of undeveloped leasehold, dry holes and leasehold
equipment, are capitalized. The Partnership does not captialize any
internal costs as part of the full cost pool. Net capital costs
(capitalized costs less accumulated amortization) are limited to the
estimated future net revenues, discounted at 10% per annum, from proved
oil, natural gas and natural gas liquids reserves plus the lower of cost or
estimated fair market value of undeveloped properties subject to
amortization. The Partnership subjects all costs of undeveloped properties
to amortization, as such costs are insignificant. Capitalized costs less
accumulated amortization plus estimated future development cost of proved
undeveloped reserves are amortized by an equivalent unit-of-production
method, converting natural gas to oil at the ratio approximating their
relative energy content of one barrel ("Bbl") of oil to six thousand cubic
feet ("Mcf") of natural gas. No gain or loss is recognized upon disposal of
oil and natural gas properties unless such dispositions significantly alter
the relationship between capitalized costs and proved oil and natural gas
reserves.
The Partnership accounts for its non-oil and natural gas long-lived assets
in accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and Assets to be Disposed of". SFAS No. 121 requires that long-lived
assets and identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances
F-133
CORAL RESERVES ENERGY INCOME FUND 1996 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future undiscounted net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair market value of
the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less cost to sell.
Revenue and Royalty Distributions Payable
For certain oil and gas properties, the Partnership receives production
proceeds, from the purchaser and further distributes such amounts to other
revenue and royalty owners. Production proceeds applicable to other revenue
and royalty owners are reflected as revenue and royalty distributions
payable in the accompanying balance sheets. The Partnership accrues revenue
for only its net interest in its oil and natural gas properties.
Production Costs
Lease operating costs, including costs incurred to maintain or increase
production levels from an existing completion interval, along with
production related taxes are expensed as incurred.
Gas Balancing
During the course of normal operations, the Partnership and other joint
interest owners of natural gas reservoirs will take more or less than their
respective ownership share of the natural gas volumes produced. These
volumetric imbalances are monitored over the lives of the wells' production
capability. If an imbalance exists at the time the wells' reserves are
depleted, cash settlements are made among the joint interest owners under a
variety of arrangements. The Partnership follows the sales method of
accounting for gas imbalances. A liability is recorded only if the
Partnership's excess takes of natural gas volumes exceeds its estimated
remaining recoverable reserves. No receivables are recorded for those wells
where the Partnership has taken less than its ownership share of gas
production.
Major Purchasers
The Partnership markets its oil and natural gas production to numerous
purchasers under a combination of short-term contracts. During 1997, the
Partnership's largest five purchasers accounted for approximately 80%, and
during 1998 the largest two purchasers accounted for 50% of its oil and
natural gas revenues. During 1999, the Partnership's three largest
purchasers accounted for 60% of its oil and natural gas
F-134
CORAL RESERVES ENERGY INCOME FUND 1996 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
revenues. The Partnership does not believe that the loss of any single
customer would have a material effect on the results of its operations.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation or other sources are recorded when it is probable that a
liability has been incurred and the amount can be reasonably estimated.
Concentration of Credit Risks
Financial investments that potentially subject the Partnership to credit
risk consist primarily of cash and cash equivalents and trade receivables.
The Partnership maintains its cash and cash equivalents with one major
financial institution. At times, such amounts may exceed the FDIC insured
limit. The Partnership has not experienced any losses in such accounts, and
believes it is not exposed to any significant credit risk.
Trade receivables subject the Partnership to the potential for credit risk
with customers within the oil and gas industry. To reduce risk, the
Partnership performs ongoing evaluations of its customers' financial
condition, but does not generally require collateral.
2. Accounts Receivable
Accounts receivable consisted of the following:
December 31, March 31,
---------------------------
1998 1999 2000
----------- ----------- --------------
(Unaudited)
Oil and natural gas revenue accruals......... $ 267,215 $ 432,205 $ 469,691
Other........................................ 4,297 2,571 3,315
----------- ----------- ----------
Total........................................ $ 271,512 $ 434,776 $ 473,006
=========== =========== ==========
3. Notes Receivable
Effective February 1999, the Partnership made an advance of $3,200,000 to
Indian Oil Company (Indian). In return for the advance, the Partnership
receives a production payment payable from Indian in the amount of $30,000
per month.
F-135
CORAL RESERVES ENERGY INCOME FUND 1996 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
4. Long-Term Debt
The balance at December 31, 1999 consists of a note payable to a bank.
These borrowings have been made against a revolving line of credit maturing
on October 1, 2000. The established borrowing base available to the
Partnership under this credit facility was $2,400,000 at December 31, 1999.
Borrowings bear interest at 1% above a specified prime rate and are
collateralized by certain oil and gas properties of the Partnership, as
well as guarantees by the Managing and Additional General Partners. The
average interest rate under this credit facility outstanding at December
31, 1999 was 8.19%. At December 31, 1999, the balance of the revolving line
of credit facility was reclassified as long-term, based on the
Partnership's continuing intent and ability to refinance, as evidenced by
the renewal of the credit facility in May 2000, extending the maturity date
to April 15, 2001.
5. Income Taxes
The items of taxable income and expense generated by Partnership operations
are includable in the income tax returns of the partners, therefore, no
provision or liability for federal or state income taxes is reflected in
these financial statements. The Partnership income tax returns, the
qualifications of the Partnership as such for tax purposes, and the amount
of the Partnership's taxable income or loss are subject to examination by
federal and state taxing authorities. If such examinations resulted in
changes with respect to the partnership qualification or in changes to
taxable partnership income or loss, the tax liability of the partners could
change accordingly.
6. Related Party Transactions
During the years ended December 31, 1999, 1998 and 1997, the Partnership
engaged in certain transactions with Coral Reserves Energy Corp., the
Managing General Partner of the Partnership, and certain affiliated
partnerships, whose Managing General Partner is Coral Reserves, Inc. or
Coral Reserves Energy Corp. Coral Reserves, Inc. and Coral Reserves Energy
Corp. have common shareholders.
The Partnership is required to reimburse the Managing General Partner for
overhead expenses, including office rent and salaries for clerical staff
and appropriate production supervisory personnel, or any other overhead
expenses which the Managing General Partner deems reasonable. The
reimbursement for overhead expenses is limited to a maximum of five percent
(5%) of "Distributable Cash", as defined in the Partnership Agreement. Such
overhead reimbursements amounted to $80,193, $53,583 and $24,511 for 1999,
1998 and 1997, respectively, and are included in "General and
administrative" expenses in the accompanying statements of operations.
During 1997, the Partnership purchased interests in various producing oil
and gas properties from Coral Reserves Natural Gas Income Fund 1991 Limited
Partnership, for aggregate consideration of $96,623.
F-136
CORAL RESERVES ENERGY INCOME FUND 1996 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
7. Reduction of Carrying Cost of Oil and Natural Gas Properties
Under the full cost method of accounting, the net book value of oil and
natural gas properties may not exceed a calculated "ceiling." The ceiling
limitation is the discounted estimated after-tax future net revenues from
proved oil and natural gas properties. In calculating future net revenues,
current prices and costs are generally held constant indefinitely. The net
book value is compared to the ceiling with any excess written off as an
expense. An expense recorded in one period may not be reversed in a
subsequent period even though higher oil and natural gas prices may have
increased the ceiling applicable to the subsequent period.
At December 31, 1998, the carrying value of the Partnership's oil and
natural gas properties exceeded the full cost ceiling by $886,779.
Accordingly, a $887,000 reduction of the carrying value of such properties
was recorded.
8. Oil and Gas Operations
Costs Incurred
The following table reflects the costs incurred in oil and gas property
acquisition, exploration, and development activities:
Three months ended
Year ended December 31 March 31,
---------------------- ---------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(Unaudited)
Production acquisition costs
(proved)................... $ 936,095 $ 3,522,344 $ 3,047 $ - $ -
Development costs.......... 1,002,947 113,261 232,107 76,234 55,136
Results of Operations for Oil and Gas Producing Activities
The following table includes revenues and expenses associated directly with
the Partnership's oil and gas producing activities. They do not include any
allocation of the Partnership's interest costs or general corporate
overhead and, therefore are not necessarily indicative of the contribution
to net earnings of the Partnership's oil and gas operations.
F-137
CORAL RESERVES ENERGY INCOME FUND 1996 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Three months ended
Year ended December 31, March 31,
--------------------------------------- ----------------------
1997 1998 1999 1999 2000
----------- ----------- --------- ---------- ----------
(Unaudited)
Oil and natural gas sales................. $ 641,810 $ 1,292,067 $ 2,152,981 $ 402,834 $ 676,552
Production and operating expenses......... (133,350) (378,338) (563,811) (108,068) (200,021)
Depreciation, depletion and amortization.. (166,094) (509,808) (561,278) (133,332) (117,645)
Reduction of carrying value of oil and gas
assets.................................. - (887,000) - - -
--------- ---------- --------- -------- ---------
Results of operations for oil and gas
producing activities.................... $ 342,366 $ (483,079) $ 1,027,892 $ 161,434 $ 358,886
========= ========== ========= ======== =========
Depreciation, depletion and amortization
per equivalent MCF of production........ $ 0.70 $ 0.77 $ 0.61 $ 0.61 $ 0.62
========= ========== ========= ======== =========
9. Supplemental Information on Oil and Gas Operations (Unaudited)
The following supplemental unaudited information regarding the oil and gas
activities of the Partnership presented pursuant to the disclosure
requirements promulgated by the Securities and Exchange Commission and
Statement of Financial Accounting Standards No. 69, "Disclosures About Oil
and Gas Producing Activities".
Quantities of Oil and Gas Reserves
Set forth below is a summary of the changes in the net quantities of crude
oil and natural gas and reserves for each of the years in the three-year
period ended December 31, 1999 The Partnership's proved reserves were
calculated by the independent petroleum consultants of Netherland, Sewell &
Associates, Inc. The Partnership cautions that there are many uncertainties
inherent in estimating reserve quantities, and in projecting future
production rates and the timing of future development cost expenditures. In
addition, reserve estimates of new discoveries are more imprecise than
those of properties with a production history. Accordingly, these estimates
are subject to change as additional information becomes available.
Proved oil and natural gas reserves are the estimated quantities of crude
oil, condensate, natural gas and natural liquids that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic conditions.
Proved developed oil and natural gas reserves are those reserves expected
to be recovered through existing equipment and operating methods.
Estimates of net quantities of proved reserves and proved developed
reserves of crude oil, including condensate and natural gas liquids, and
natural gas, as well as the changes in proved reserves during the periods
indicated, are set forth in the tables below. All reserves are located in
the United States.
F-138
CORAL RESERVES ENERGY INCOME FUND 1996 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
The Partnership prepared the estimated reserves as of December 31, 1996 and
1997 based on geological and engineering evaluations performed as of
December 31, 1998. The reserve estimates as of the prior year-end dates
were derived by analyzing actual historical production amounts and by
adjusting the reserves attributable to wells acquired or disposed of during
the relevant periods. In addition, in deriving the estimates as of December
31, 1996 and 1997, The Partnership used production costs based on actual
costs incurred during the years and actual oil and natural gas prices
received on December 31, 1996 and 1997. The Partnership has estimated its
reserves as of December 31, 1996 and 1997 in this manner because the actual
information necessary to calculate estimated proved reserves and related
information in accordance with guidelines of the SEC as of each date is not
available. Because the reserve estimates as of December 31, 1998 are based
on additional information gained from the result of drilling, testing and
production subsequent to the dates of the estimated reserves, the reserve
estimates as of December 31, 1996 and 1997 are not necessarily reflective
of quantities that might have been estimated based on information available
as of such dates had estimates in accordance with SEC guidelines been made
at such dates. Management believes that, because of the methodology used,
the reserve information presented is more reflective of actual reserve
quantities than estimates that might have been generated as of such dates.
Changes in Proved Reserves:
Oil Gas
--- ---
(Bbls) (Mcf)
------ -----
Proved Reserves as of December 31, 1996..................... 22,000 2,412,000
Extensions and discoveries............................. 14,000 182,000
Purchases of reserves.................................. 114,000 1,468,000
Production............................................. (9,000) (183,000)
------------ ------------
Proved Reserves as of December 31, 1997..................... 141,000 3,879,000
Purchases of reserves.................................. 62,000 4,286,000
Production............................................. (21,000) (537,000)
------------ ------------
Proved Reserves as of December 31, 1998..................... 182,000 7,628,000
Revisions.............................................. 21,000 838,000
Purchase of reserves................................... 2,000 1,000
Extensions and discoveries............................. 7,000 32,000
Production............................................. (28,000) (745,000)
------------ ------------
Proved Reserves as of December 31, 1999..................... 184,000 7,754,000
============ ============
Proved developed reserves as of:
December 31, 1996...................................... 24,000 2,232,000
December 31, 1997...................................... 104,000 3,226,000
December 31, 1998...................................... 142,000 6,724,000
December 31, 1999...................................... 162,000 5,873,000
Standardized Measure of Discounted Future Net Cash Flows
The following table reflects the standardized measure of discounted future
net cash flows relating to the Partnership's interest in proved reserves:
F-139
CORAL RESERVES ENERGY INCOME FUND 1996 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Year ended December 31,
-------------------------------------------
1997 1998 1999
----------- ------------ -----------
Future cash inflows........................... $ 11,174,000 $ 15,843,000 $ 20,768,000
Future production costs....................... (2,702,000) (6,489,000) (6,882,000)
Future development costs...................... (830,000) (1,057,000) (923,000)
---------- ----------- ----------
Future net cash flows......................... 7,642,000 8,297,000 12,963,000
10% discount to reflect timing of cash
flows....................................... (3,250,000) (3,529,000) (5,617,000)
---------- ----------- ----------
Standardized measure of discounted future
net cash flows.............................. $ 4,392,000 $ 4,768,000 $ 7,346,000
========== =========== ==========
Future cash inflows are computed by applying year-end prices (averaging
$22.75 per barrel of oil, adjusted for transportation and other charges,
and $2.25 per Mcf of gas at December 31, 1999) to the year-end quantities
of proved reserves, except where fixed and determinable price changes are
provided by contractual arrangements in existence at year-end. Future
development and production costs are computed by estimating the
expenditures to be incurred in developing and producing proved oil and gas
reserves at the end of the year, based on year-end costs and assuming
continuation of existing economic conditions.
Year ended December 31,
-------------------------------------------------
1997 1998 1999
--------------- --------------- --------------
Beginning balance.............................. $ 4,331,000 $ 4,392,000 $ 4,768,000
Sales of oil and natural gas, net of
production costs............................ (504,000) (899,000) (1,571,000)
Net changes in year-end sales prices and
production costs............................ (2,001,000) (1,869,000) 2,507,000
Extensions, discoveries, and improved
recovery, net of future development costs... 284,000 - 325,000
Revisions...................................... - - 865,000
Purchases of reserves, net of future
development costs........................... 2,068,000 2,761,000 20,000
Accretion of discount.......................... 433,000 439,000 477,000
Other, primarily changes in timing............. (219,000) (56,000) (45,000)
------------- ------------- -------------
Ending balance................................. $ 4,392,000 $ 4,768,000 $ 7,346,000
============= ============= =============
F-140
INDEPENDENT AUDITOR'S REPORT
To the Partners
Coral Reserves 1996 Institutional Limited Partnership
Oklahoma City, Oklahoma
We have audited the balance sheets of Coral Reserves 1996 Institutional
Limited Partnership as of December 31, 1998 and 1999 and the related statements
of operations, partners' equity and cash flows for each of the years in the
three year period ended December 31, 1999. These financial statements are the
responsibility of the Partnership's Managing General Partner. 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 from
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 Coral Reserves 1996
Institutional Limited Partnership as of December 31, 1998 and 1999, and the
results of its operations and its cash flow for each of the years in the three
year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
William T. Zumwalt, CPA, Inc.
Tulsa, Oklahoma
March 10, 2000
F-141
CORAL RESERVES 1996 INSTITUTIONAL LIMITED PARTNERSHIP
Balance Sheets
December 31,
------------------------- March 31,
1998 1999 2000
----------- ----------- -----------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 1,052,042 $ 120,626 $ 97,074
Accounts receivable, net (Note 2) 221,194 325,620 337,893
Inventories 779 779 779
----------- ----------- -----------
Total current assets 1,274,015 447,025 435,746
----------- ----------- -----------
Property and equipment, at cost, based on the full cost method of
accounting for oil and gas properties 4,469,952 4,607,371 4,619,556
Accumulated depreciation, depletion and amortization (763,224) (1,177,029) (1,278,783)
----------- ----------- -----------
3,706,728 3,430,342 3,340,773
----------- ----------- -----------
Notes Receivable (Note 3) - 2,537,500 2,458,750
----------- ----------- -----------
Total assets $ 4,980,743 $ 6,414,867 $ 6,235,269
=========== =========== ===========
Liabilities and Partners' Equity
Current liabilities:
Accounts payable $ 26,583 $ 52,560 $ 61,928
Revenue and royalty distributions payable 23,306 23,653 23,298
----------- ----------- -----------
Total current liabilities 49,889 76,213 85,226
----------- ----------- -----------
Long-term debt (Note 4) - 1,948,000 1,950,000
Partners' equity (deficit):
General partners 12,660 (7,276) (19,404)
Limited partners 4,918,194 4,397,930 4,219,447
----------- ----------- -----------
Total partners' equity 4,930,854 4,390,654 4,200,043
----------- ----------- -----------
Total liabilities and partners' equity $ 4,980,743 $ 6,414,867 $ 6,235,269
=========== =========== ===========
See accompanying notes to financial statements.
F-142
CORAL RESERVES 1996 INSTITUTIONAL LIMITED PARTNERSHIP
Statements of Operations
Three months ended
Year ended December 31, March 31
-------------------------------------- ------------------------
1997 1998 1999 1999 2000
---------- ----------- ----------- ----------- -----------
(Unaudited)
Revenues:
Oil and gas sales $ 784,110 $ 1,213,718 $ 1,643,206 $ 334,647 $ 460,712
Other income 83,885 96,543 18,114 6,623 2,403
---------- ----------- ----------- ----------- -----------
Total revenues 867,995 1,310,261 1,661,320 341,270 463,115
---------- ----------- ----------- ----------- -----------
Costs and expenses:
Lease operating 73,996 153,701 245,404 52,725 68,270
Production taxes 58,538 103,393 122,014 12,951 39,898
Depreciation, depletion
and amortization 225,803 443,525 413,805 103,504 101,754
General and administrative 19,162 47,349 69,667 16,996 17,218
Interest - - 117,776 - 41,661
Reduction of carrying
value of oil and gas
properties (Note 7) - 649,000 - - -
---------- ----------- ----------- ----------- -----------
Total costs and expenses 377,499 1,396,968 968,666 186,176 269,801
---------- ----------- ----------- ----------- -----------
Net earnings (loss) $ 490,496 $ (86,707) $ 692,654 $ 155,094 $ 193,314
========== =========== =========== =========== ===========
See accompanying notes to financial statements.
F-143
CORAL RESERVES 1996 INSTITUTIONAL LIMITED PARTNERSHIP
Statements of Cash Flow
Three months ended
Year ended December 31, March 31,
----------------------------------------- ------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ----------- ----------
(Unaudited)
Cash flows from operating activities:
Net earnings (loss) $ 490,496 $ (86,707) $ 692,654 $ 155,094 $ 193,314
Adjustments to reconcile net earnings to net
Cash provided by operating activities:
Depreciation, depletion and amortization 225,803 443,525 413,805 103,504 101,754
Reduction in carrying value of oil and gas
properties - 649,000 - - -
Changes in operating assets and liabilities:
Accounts receivable (95,086) (6,077) (104,426) (71,933) (12,273)
Inventories (727) (52) - - -
Increase (decrease) in:
Accounts payable and Revenue and royalties
Payable 31,737 5,118 26,324 6,463 9,013
------------ ----------- ----------- ----------- ----------
Net cash provided by operating activities 652,223 1,004,807 1,028,357 193,128 291,808
------------ ----------- ----------- ----------- ----------
Cash flows from investing activities:
Advances on notes receivable - - (2,800,000) (2,800,000) -
Repayments of notes receivable - - 262,500 - 78,750
Proceeds from sales of property and equipment - 15,500 - - -
Capital expenditures (1,283,933) (2,873,152) (137,419) (41,678) (12,185)
Increase in other assets - - - - -
------------ ----------- ----------- ----------- ----------
Net cash (used) provided by investing activities (1,283,933) (2,857,652) (2,674,919) (2,841,678) 66,565
------------ ----------- ----------- ----------- ----------
Cash flows from financing activities:
Borrowings on long-term debt - - 1,948,000 1,900,000 2,000
Contributed capital 3,520,100 - - - -
Distributions to partners (533,207) (1,037,824) (1,232,854) (191,363) (383,925)
Cost of capital raised (187,670) - - - -
------------ ----------- ----------- ----------- ----------
Net cash (used) provided by financing activities 2,799,223 (1,037,824) 715,146 1,708,637 (381,925)
------------ ----------- ----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents 2,167,513 (2,890,669) (931,416) (939,913) (23,552)
Cash and cash equivalents at beginning of year 1,775,198 3,942,711 1,052,042 1,052,042 120,626
------------ ----------- ----------- ----------- ----------
Cash and cash equivalents at end of year $ 3,942,711 $ 1,052,042 $ 120,626 $ 112,129 $ 97,074
============ =========== =========== =========== ==========
Supplemental cash flow information:
Cash payments for interest $ - $ - $ 117,776 $ - $ 42,661
============ =========== =========== =========== ==========
See accompanying notes to financial statements.
F-144
CORAL RESERVES 1996 INSTITUTIONAL LIMITED PARTNERSHIP
Statements of Partners' Equity
General Limited Total
Partners' Partners' Partners'
Equity Equity Equity
----------- ----------- ------------
Balance at December 31, 1997 $ 27,586 $ 6,027,799 $ 6,055,385
Net Earnings 114,802 (201,509) (86,707)
Distributions to partners (129,728) (908,096) (1,037,824)
----------- ----------- ------------
Balance at December 31, 1998 12,660 4,918,194 4,930,854
Net Earnings 134,171 558,483 692,654
Distributions to partners (154,107) (1,078,747) (1,232,854)
----------- ----------- ------------
Balance at December 31, 1999 (7,276) 4,397,930 4,390,654
Net Earnings (Unaudited) 35,863 157,451 193,314
Distributions to partners
(Unaudited) (47,991) (335,934) (383,925)
----------- ----------- ------------
Balance at March 31, 2000
(Unaudited) $ (19,404) $ 4,219,447 $ 4,200,043
=========== =========== ============
See accompanying notes to financial statements.
F-145
CORAL RESERVES 1996 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1997, 1998 and 1999
(Information insofar as it relates to March 31, 2000
or the three months ended March 31, 1999 and 2000 is unaudited)
1. Summary of Significant Accounting Policies
Organization and Business Activity
Coral Reserves 1996 Institutional Limited Partnership ("Partnership") is
organized as an Oklahoma limited partnership. Coral Reserves Energy Corp.,
an Oklahoma corporation, and its two principal stockholders serve as
Managing General Partner and Additional General Partners, respectively. The
remaining 54 participants are limited partners.
By the terms of the Amended and Restated Agreement of Limited Partnership
("Partnership Agreement"), revenues, costs and expenses are allocated among
the partners as follows:
. The allowance for cost depletion is allocated 99% to the Limited
Partners and 1% to the Managing General Partner.
. Depreciation of lease and well equipment and amortization of
organization costs are allocated 99% to the Limited Partners and
1% to the Managing General Partner.
. All other items of income and expense, with certain limited
exceptions, and cash distributions are allocated 87.5% to the
Limited Partners and 12.5% to the General Partners.
The terms of the Partnership offering called for a subscription price of
$500,000 per unit. Fractional units could be sold at the discretion of the
Managing General Partner. Subscriptions were received for 13.040 units in
the Partnership.
The General Partners are not required to make any capital contributions to
the Partnership, unless there exists a deficit balance in their capital
accounts at the time of termination or dissolution of the Partnership. In
such case, the General Partners would be required to make a contribution
equal to such deficit.
F-146
CORAL RESERVES 1996 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
The Partnership is engaged primarily in the acquisition and development of
producing oil and gas properties. These activities have occurred in the
states of Oklahoma and Texas.
Accounting policies employed by the Partnership reflect industry practices
and conform to generally accepted accounting principles. The more
significant of such policies are discussed below.
Uses of 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
the 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 amounts could differ from those
estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Partnership considers all
short-term debt securities purchased with a maturity of three months or
less to be cash equivalents.
Property and Equipment
The Partnership follows the full cost method of accounting for its oil and
natural gas properties. Accordingly, all costs incidental to the
acquisition, exploration, and development of oil and gas properties,
including costs of undeveloped leasehold, dry holes and leasehold
equipment, are capitalized. The Partnership does not captialize any
internal costs as part of the full cost pool. Net capital costs
(capitalized costs less accumulated amortization) are limited to the
estimated future net revenues, discounted at 10% per annum, from proved
oil, natural gas and natural gas liquids reserves plus the lower of cost or
estimated fair market value of undeveloped properties subject to
amortization. The Partnership subjects all costs of undeveloped properties
to amortization, as such costs are insignificant. Capitalized costs less
accumulated amortization plus estimated future development cost of proved
undeveloped reserves are amortized by an equivalent unit-of-production
method, converting natural gas to oil at the ratio approximating their
relative energy content of one barrel ("Bbl") of oil to six thousand cubic
feet ("Mcf") of natural gas. No gain or loss is recognized upon disposal of
oil and natural gas properties unless such dispositions significantly alter
the relationship between capitalized costs and proved oil and natural gas
reserves.
F-147
CORAL RESERVES 1996 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
The Partnership accounts for its non-oil and natural gas long-lived assets
in accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and Assets to be Disposed of". SFAS No. 121 requires that long-lived
assets and identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds
the fair market value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less cost to sell.
Revenue and Royalty Distributions Payable
For certain oil and gas properties, the Partnership receives production
proceeds, from the purchaser and further distributes such amounts to other
revenue and royalty owners. Production proceeds applicable to other revenue
and royalty owners are reflected as revenue and royalty distributions
payable in the accompanying balance sheets. The Partnership accrues revenue
for only its net interest in its oil and natural gas properties.
Production Costs
Lease operating costs, including costs incurred to maintain or increase
production levels from an existing completion interval, along with
production related taxes are expensed as incurred.
Gas Balancing
During the course of normal operations, the Partnership and other joint
interest owners of natural gas reservoirs will take more or less than their
respective ownership share of the natural gas volumes produced. These
volumetric imbalances are monitored over the lives of the wells' production
capability. If an imbalance exists at the time the wells' reserves are
depleted, cash settlements are made among the joint interest owners under a
variety of arrangements. The Partnership follows the sales method of
accounting for gas imbalances. A liability is recorded only if the
Partnership's excess takes of natural gas volumes exceeds its estimated
remaining recoverable reserves. No receivables are recorded for those wells
where the Partnership has taken less than its ownership share of gas
production.
F-148
CORAL RESERVES 1996 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Major Purchasers
The Partnership markets its oil and natural gas production to numerous
purchasers under a combination of short-term contracts. During 1997, the
Partnership's largest five purchasers accounted for approximately 80%, and
during 1998 and 1999 the largest two purchasers accounted for 50% and 65%,
respectively, of it's oil and natural gas revenues. The Partnership does
not believe that the loss of any single customer would have a material
effect on the results of its operations.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation or other sources are recorded when it is probable that a
liability has been incurred and the amount can be reasonably estimated.
Concentration of Credit Risks
Financial investments that potentially subject the Partnership to credit
risk consist primarily of cash and cash equivalents and trade receivables.
The Partnership maintains its cash and cash equivalents with one major
financial institution. At times, such amounts may exceed the FDIC insured
limit. The Partnership has not experienced any losses in such accounts, and
believes it is not exposed to any significant credit risk.
Trade receivables subject the Partnership to the potential for credit risk
with customers within the oil and gas industry. To reduce risk, the
Partnership performs ongoing evaluations of its customers' financial
condition, but does not generally require collateral.
2. Accounts Receivable
Accounts receivable consisted of the following:
December 31, March 31,
--------------------------
1998 1999 2000
---------- ---------- --------------
(Unaudited)
Oil and natural gas revenue accruals......... $ 220,259 $ 322,625 $ 336,823
Other........................................ 935 2,995 1,070
---------- ---------- ----------
Total........................................ $ 221,194 $ 325,620 $ 337,893
========== ========== ==========
F-149
CORAL RESERVES 1996 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
3. Notes Receivable
Effective February 1999, the Partnership made an advance of $2,800,000 to
Indian Oil Company (Indian). In return for the advance, the Partnership
receives a production payment payable from Indian in the amount of $26,250
per month.
4. Long-Term Debt
The balance at December 31, 1999 consists of a note payable to a bank.
These borrowings have been made against a revolving line of credit maturing
on October 1, 2000. The established borrowing base available to the
Partnership under this credit facility was $1,950,000 at December 31, 1999.
Borrowings bear interest at 1% above a specified prime rate and are
collateralized by certain oil and gas properties of the Partnership, as
well as guarantees by the Managing and Additional General Partners. The
average interest rate under this credit facility outstanding at December
31, 1999 was 8.19%. At December 31, 1999, the balance of the revolving line
of credit facility was reclassified as long-term, based on the
Partnership's continuing intent and ability to refinance, as evidenced by
the renewal of the credit facility in May 2000, extending the maturity date
to April 15, 2001.
5. Income Taxes
The items of taxable income and expense generated by Partnership operations
are includable in the income tax returns of the partners, therefore, no
provision or liability for federal or state income taxes is reflected in
these financial statements. The Partnership income tax returns, the
qualifications of the Partnership as such for tax purposes, and the amount
of the Partnership's taxable income or loss are subject to examination by
federal and state taxing authorities. If such examinations resulted in
changes with respect to the partnership qualification or in changes to
taxable partnership income or loss, the tax liability of the partners could
change accordingly.
6. Related Party Transactions
During the years ended December 31, 1999, 1998 and 1997, the Partnership
engaged in certain transactions with Coral Reserves Energy Corp., the
Managing General Partner of the Partnership, and certain affiliated
partnerships, whose Managing General Partner is Coral Reserves, Inc. or
Coral Reserves Energy Corp. Coral Reserves, Inc. and Coral Reserves Energy
Corp. have common shareholders.
The Partnership is required to reimburse the Managing General Partner for
overhead expenses, including office rent and salaries for clerical staff
and appropriate production supervisory personnel, or any other overhead
expenses which the Managing General Partner deems reasonable. The
reimbursement for overhead expenses is limited to a maximum of five percent
(5%) of "Distributable Cash", as defined in the Partnership Agreement. Such
overhead reimbursements amounted to $40,390, $53,583, and $24,511 for 1999,
1998 and 1997, respectively, and are
F-150
CORAL RESERVES 1996 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
included in "General and administrative" expenses in the accompanying
statements of operations.
During 1997, the Partnership purchased interests in various producing oil
and gas properties from Coral Reserves Natural Gas Income Fund 1991 Limited
Partnership, for aggregate consideration of $96,623.
7. Reduction of Carrying Cost of Oil and Natural Gas Properties
Under the full cost method of accounting, the net book value of oil and
natural gas properties may not exceed a calculated "ceiling." The ceiling
limitation is the discounted estimated after-tax future net revenues from
proved oil and natural gas properties. In calculating future net revenues,
current prices and costs are generally held constant indefinitely. The net
book value is compared to the ceiling with any excess written off as an
expense. An expense recorded in one period may not be reversed in a
subsequent period even though higher oil and natural gas prices may have
increased the ceiling applicable to the subsequent period.
At December 31, 1998, the carrying value of the Partnership's oil and
natural gas properties exceeded the full cost ceiling by $886,779.
Accordingly, a $887,000 reduction of the carrying value of such properties
was recorded.
8. Oil and Gas Operations
Costs Incurred
The following table reflects the costs incurred in oil and gas property
acquisition, exploration, and development activities:
Three months ended
Year ended December 31 March 31,
---------------------- ------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(Unaudited)
Production acquisition costs
(proved)................. $ 423,943 $ 2,655,594 $ 3,047 $ - $ -
Development costs.......... 852,692 144,481 91,322 2,707 27,746
Results of Operations for Oil and Gas Producing Activities
The following table includes revenues and expenses associated directly with
the Partnership's oil and gas producing activities. They do not include any
allocation of the Partnership's interest costs or general corporate
overhead and, therefore are not
F-151
CORAL RESERVES 1996 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
necessarily indicative of the contribution to net earnings of the
Partnership's oil and gas operations.
Three months ended
Year ended December 31, March 31,
--------------------------------------- ----------------------
1997 1998 1999 1999 2000
--------- ----------- --------- ---------- ----------
(Unaudited)
Oil and natural gas sales................... $ 784,110 $ 1,213,718 $ 1,643,206 $ 334,647 $ 460,712
Production and operating expenses........... (132,534) (257,094) (367,418) (65,676) (108,168)
Depreciation, depletion and amortization.... (225,803) (443,525) (413,805) (103,504) (101,754)
Reduction of carrying value of oil and gas
assets.................................... - (649,000) - - -
--------- ---------- --------- ---------- ---------
Results of operations for oil and gas
producing activities...................... 425,773 (135,901) 861,983 165,467 250,790
========= ========== ========= ========== =========
Depreciation, depletion and amortization
per equivalent MCF of production.......... $ 0.75 $ 0.74 $ 0.61 $ 0.61 $ 0.61
========= ========== ========= ========== =========
9. Supplemental Information on Oil and Gas Operations (Unaudited)
The following supplemental unaudited information regarding the oil and gas
activities of the Partnership presented pursuant to the disclosure
requirements promulgated by the Securities and Exchange Commission and
Statement of Financial Accounting Standards No. 69, "Disclosures About Oil
and Gas Producing Activities".
Quantities of Oil and Gas Reserves
Set forth below is a summary of the changes in the net quantities of crude
oil and natural gas and reserves for each of the years in the three-year
period ended December 31, 1999. The Partnership's proved reserves were
calculated by the independent petroleum consultants of Netherland, Sewell &
Associates, Inc. The Partnership cautions that there are many uncertainties
inherent in estimating reserve quantities, and in projecting future
production rates and the timing of future development cost expenditures. In
addition, reserve estimates of new discoveries are more imprecise than
those of properties with a production history. Accordingly, these estimates
are subject to change as additional information becomes available.
Proved oil and natural gas reserves are the estimated quantities of crude
oil, condensate, natural gas and natural liquids that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic conditions.
Proved developed oil and natural gas reserves are those reserves expected
to be recovered through existing equipment and operating methods.
Estimates of net quantities of proved reserves and proved developed
reserves of crude oil, including condensate and natural gas liquids, and
natural gas, as well as the
F-152
CORAL RESERVES 1996 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
changes in proved reserves during the periods indicated, are set forth in
the tables below. All reserves are located in the United States.
The Partnership prepared the estimated reserves as of December 31, 1996 and
1997 based on geological and engineering evaluations performed as of
December 31, 1998. The reserve estimates as of the prior year-end dates
were derived by analyzing actual historical production amounts and by
adjusting the reserves attributable to wells acquired or disposed of during
the relevant periods. In addition, in deriving the estimates as of December
31, 1996 and 1997, The Partnership used production costs based on actual
costs incurred during the years and actual oil and natural gas prices
received on December 31, 1996 and 1997. The Partnership has estimated its
reserves as of December 31, 1996 and 1997 in this manner because the actual
information necessary to calculate estimated proved reserves and related
information in accordance with guidelines of the SEC as of each date is not
available. Because the reserve estimates as of December 31, 1998 are based
on additional information gained from the result of drilling, testing and
production subsequent to the dates of the estimated reserves, the reserve
estimates as of December 31, 1996 and 1997 are not necessarily reflective
of quantities that might have been estimated based on information available
as of such dates had estimates in accordance with SEC guidelines been made
at such dates. Management believes that, because of the methodology used,
the reserve information presented is more reflective of actual reserve
quantities than estimates that might have been generated as of such dates.
Changes in Proved Reserves:
Oil Gas
--- ---
(Bbls) (Mcf)
------ -----
Proved Reserves as of December 31, 1996.................... 55,000 2,077,000
Extensions and discoveries............................. 13,000 208,000
Purchases of reserves.................................. 17,000 577,000
Production............................................. (11,000) (238,000)
--------- ----------
Proved Reserves as of December 31, 1997.................... 74,000 2,624,000
Extensions and discoveries............................. - 15,000
Purchases of reserves.................................. 155,000 3,342,000
Production............................................. (22,000) (471,000)
--------- ----------
Proved Reserves as of December 31, 1998.................... 207,000 5,510,000
Revisions.............................................. (12,000) 430,000
Extensions and discoveries............................. 9,000 8,000
Purchases of reserves.................................. 2,000 1,000
Production............................................. (26,000) (525,000)
--------- ----------
Proved Reserves as of December 31, 1999.................... 180,000 5,424,000
========= ==========
Proved developed reserves as of:
December 31, 1996..................................... 60,000 1,776,000
December 31, 1997..................................... 72,000 2,225,000
December 31, 1998..................................... 165,000 4,835,000
December 31, 1999..................................... 135,000 4,494,000
CORAL RESERVES 1996 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Standardized Measure of Discounted Future Net Cash Flows
The following table reflects the standardized measure of discounted future
net cash flows relating to the Partnership's interest in proved reserves:
Year ended December 31,
--------------------------------------------
1997 1998 1999
------------ ------------ -----------
Future cash inflows............................ $ 7,223,000 $ 11,927,000 $ 15,637,000
Future production costs........................ (1,311,000) (5,065,000) (4,648,000)
Future development costs....................... (355,000) (619,000) (526,000)
------------ ------------ -----------
Future net cash flows.......................... 5,557,000 6,243,000 10,463,000
10% discount to reflect timing of cash flows... (2,257,000) (2,536,000) (4,642,000)
------------ ------------ -----------
Standardized measure of discounted future
net cash flows............................... $ 3,300,000 $ 3,707,000 $ 5,821,000
============ ============ ===========
Future cash inflows are computed by applying year-end prices (averaging
$22.75 per barrel of oil, adjusted for transportation and other charges,
and $2.25 per Mcf of gas at December 31, 1999) to the year-end quantities
of proved reserves, except where fixed and determinable price changes are
provided by contractual arrangements in existence at year-end. Future
development and production costs are computed by estimating the
expenditures to be incurred in developing and producing proved oil and gas
reserves at the end of the year, based on year-end costs and assuming
continuation of existing economic conditions.
Principal changes in the standardized measure of discounted future net cash
flows attributable to the Partnership's proved reserves are as follows:
Year ended December 31,
-------------------------------------------
1997 1998 1999
----------- ----------- ----------
Beginning balance.............................. $ 4,346,000 $ 3,300,000 $ 3,707,000
Sales of oil and natural gas, net of
production costs............................ (639,000) (929,000) (1,242,000)
Net changes in year-end sales prices and
production costs............................ (1,783,000) (1,459,000) 2,843,000
Extensions, discoveries, and improved
recovery, net of future development costs... 341,000 9,000 227,000
Revisions...................................... - - 200,000
Purchases of reserves, net of future
development costs........................... 775,000 2,409,000 20,000
Accretion of discount.......................... 435,000 330,000 371,000
Other, primarily changes in timing............. (175,000) 47,000 (305,000)
----------- ----------- ----------
Ending balance................................. $ 3,300,000 $ 3,707,000 $ 5,821,000
=========== =========== ==========
F-154
INDEPENDENT AUDITOR'S REPORT
To the Stockholder
Canaan Securities, Inc.
New Canaan, CT 06840
We have audited the accompanying balance sheet of Canaan Securities,
Inc. as of December 31, 1999 and 1998, and the related statements of income and
retained earnings, 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 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 Canaan Securities,
Inc. as of December 31, 1999 and 1998, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
Nishball, Carp, Niedermeier, Pacowta & Co., P.C.
January 26, 2000
F-155
CANAAN SECURITIES, INC.
Balance Sheet
December 31, March 31,
------------------------
1998 1999 2000
---------- ----------- -------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 14,407 $ 10,503 $ 51,206
Officer loan receivable 43,164 47,928 55,928
----------- ----------- -------------
Total current assets 57,571 58,431 107,134
----------- ----------- -------------
Property and equipment:
Office furniture and equipment 41,351 47,101 47,101
Less: accumulated depreciation (30,166) (33,923) (34,791)
----------- ----------- -------------
Net property and equipment 11,185 13,178 12,310
----------- ----------- -------------
Total assets $ 68,756 $ 71,609 $ 119,444
=========== =========== =============
Liabilities and Stockholder's Equity
Current liabilities:
Accrued income taxes and other $ 250 $ 250 $ 250
----------- ----------- -------------
Total current liabilities 250 250 250
----------- ----------- -------------
Stockholder's equity:
Common stock, $.01 par value, 1,000 shares
authorized, 500 shares issued and outstanding 5 5 5
Paid in capital 36,495 36,495 36,495
Retained earnings 32,006 34,859 82,694
----------- ----------- -------------
Total stockholder's equity 68,506 71,359 119,194
----------- ----------- -------------
Total liabilities and stockholder's
equity $ 68,756 $ 71,609 $ 119,444
=========== =========== =============
See accompanying notes.
F-156
CANAAN SECURITIES, INC.
Statement of Income and Retained Earnings
Three months ended
Year ended December 31, March 31,
------------------------- --------------------------
1998 1999 1999 2000
------------ ----------- ------------ ------------
(Unaudited)
Revenues
Sales commissions $ 141,995 $ 134,572 $ 26,937 $ 41,279
Consulting fee income 57,071 51,013 10,110 16,584
Investor services income 91,883 89,810 17,557 30,457
Other income 7,860 1,483 -- 375
------------ ----------- ------------ ------------
Total revenues 298,809 276,878 54,604 88,695
------------ ----------- ------------ ------------
Operating expenses
Commission expense 85,000 75,970 16,777 23,295
Depreciation 3,153 3,757 772 868
General and administrative 103,709 94,115 18,071 16,721
Sales and related expenses 108,000 105,000 -- --
------------ ----------- ------------ ------------
Total operating expenses 299,862 278,842 35,620 40,884
------------ ----------- ------------ ------------
Income (loss) from operations (1,053) (1,964) 18,984 47,811
------------ ----------- ------------ ------------
Other income (expense)
Interest income 5,773 5,043 25 24
Interest expense (3,712) -- -- --
------------ ----------- ------------ ------------
Total other income 2,061 5,043 25 24
------------ ----------- ------------ ------------
Income before income taxes 1,008 3,079 19,009 47,835
Income taxes 0 226 170 --
------------ ----------- ------------ ------------
Net income 1,008 2,853 18,839 47,835
Retained earnings - beginning 30,998 32,006 32,006 34,859
------------ ----------- ------------ ------------
Retained earnings - ending $ 32,006 $ 34,859 $ 50,845 $ 82,694
============ =========== ============ ============
See accompanying notes.
F-157
Statements of Cash Flow
Three Months ended
Year ended December 31, March 31,
------------------------- ------------------------
1998 1999 1999 2000
----------- ----------- --------- ------------
(Unaudited)
Cash flows from operating activities:
Net income $ 1,008 $ 2,853 $ 18,839 $ 47,835
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation expense 3,153 3,757 772 868
Change in accrued income taxes and other - - 325 -
----------- ------------ ----------- -----------
Total adjustments 3,153 3,757 1,097 868
----------- ------------ ----------- -----------
Net cash provided by operating activities 4,161 6,610 19,936 48,703
----------- ------------ ----------- -----------
Cash flows from investing activities:
Advances to officer (106,400) (81,860) (24,860) (8,000)
Payments received from officer 102,350 77,096 10,000 -
Cash payments for the purchase of equipment (2,702) (5,750) - -
----------- ------------ ----------- -----------
Net cash used in investing activities (6,752) (10,514) (14,860) (8,000)
----------- ------------ ----------- -----------
Net increase (decrease) in cash (2,591) (3,904) 5,076 40,703
Cash - beginning 16,998 14,407 14,407 10,503
----------- ------------ ----------- -----------
Cash - ending $ 14,407 $ 10,503 $ 19,483 $ 51,206
=========== ============ =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Taxes $ - $ 169 $ - $ -
Interest 3,712 - - -
See accompanying notes.
F-158
CANAAN SECURITIES, INC.
Notes to Financial Statements
Summary of significant accounting policies
This summary of significant accounting policies of Canaan Securities, Inc.
(the "Company") is presented to assist in understanding the Company's
financial statements. The financial statements and notes are
representations of the Company's management who is responsible for their
integrity and objectivity. These accounting policies conform to generally
accepted accounting principles and have been consistently applied in the
preparation of the financial statements.
Description of business - Canaan Securities, Inc. was incorporated in the
State of Delaware in 1989.
The Company is a registered broker/dealer engaged in selling interests
in oil and gas limited partnerships and is subject to certain
regulations of the Securities and Exchange Commission (SEC) and the
National Association of Securities Dealers, Inc. (NASD).
Accounting period - the Company maintains a calendar year-end for both
fiscal and tax purposes.
Revenue recognition - commission income is recognized by the Company as of
the date of acceptance of the limited partners' investment. All other
income is recognized when earned.
Cash and cash equivalents - the Company considers all short term
investments with an original maturity of 90 days or less to be cash
equivalents.
Office furniture and equipment - office furniture and equipment are
recorded at cost. Depreciation is provided on a straight-line basis
over the estimated useful lives of the assets, generally 5 to 10 years.
Income taxes - income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes
currently due plus deferred taxes related primarily to differences
between financial and income tax reporting. The 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 taxes also are
recognized for operating losses that are available to offset future
taxable income.
Use of 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.
Officer loan receivable
This represents various advances to the Company's officer/sole stockholder
under a note dated January 31, 1994, and extended in 1997. Under the
agreement, the principal balance outstanding is not to exceed $300,000 and
is payable on demand. Interest accrues at the rate of 6% per annum, and is
payable quarterly. In 1997, the maturity date of the note was extended to
June 15, 2002. Interest income recorded on these advances was $4,904 and
$5,621 for the years ended December 31, 1999 and 1998, respectively.
F-159
CANAAN SECURITIES, INC.
Notes to Financial Statements
(Continued)
Operating expenses
The Company has an informal agreement whereby certain operating expenses
are reimbursed by an unrelated third party who is not a broker/dealer.
Reimbursements for operating expenses were approximately $146,848 and
$94,374 for 1999 and 1998, respectively. Operating expenses are shown net
of these reimbursements.
Pension plan
The Company maintains a defined contribution money purchase and
discretionary profit sharing pension plan for its employees. Two years of
service are required to participate. Pension expense for the years ended
December 31, 1999 and 1998 was $26,250 and $26,000, respectively.
Income taxes
Income tax expense consists of the following:
1999 1998
---- ----
State $226 $ -0-
---- -----
Total $226 $ -0-
==== =====
Operating leases
The Company leases office equipment for an aggregate of $838 per month
under noncancelable operating leases expiring at various dates through
September 2001. The Company also leases two offices from its stockholder.
One lease is for $1,900 per month which increased to $1,925 in August 1998
and $1,950 in August 1999 under an agreement which expires in July 2000.
The other office is being leased on a month to month basis for $450 per
month.
The following is a schedule of future minimum lease payments required under
these noncancelable operating leases:
Year ended,
December 31,
------------
2000 $17,098
2001 2,480
------
Total $19,578
======
Rent expense of $11,400 and $8,250 in 1999 and 1998, respectively, is shown
net of third party reimbursements (see Operating expenses).
Economic dependency
The Company derives all of its revenues from one unrelated third party,
which also reimburses the Company for certain operating expenses (see
Operating expenses).
F-160
CANAAN SECURITIES, INC.
Notes to Financial Statements
(Continued)
Customer securities - possession and control requirements
The Company is exempt from certain provisions of Rule 15c3-3 of the
Securities Exchange Act of 1934 since it carries no customer accounts, and
does not otherwise hold funds or securities of customers.
Capital requirements
The Company is subject to the Uniform Net Capital Rule (Rule 15c3-1) under
the Securities Exchange Act of 1934, which requires that aggregate
indebtedness (as defined) shall not exceed fifteen times net capital (as
defined).
The following is a summary of the Company's net capital position at
December 31, 1999:
Net capital $10,253
======
Excess of net capital over the requirement $ 5,253
======
Aggregate indebtedness to net capital .05 to 1.00
===========
Pending transaction
The Company has entered into an agreement to be acquired by Canaan Energy
Corporation ("Canaan Energy"), a privately-owned corporation formerly known
as Coral Reserves Group, Ltd. Canaan Energy would purchase 100% of the
Company's common stock in exchange for shares in Canaan Energy. Completion
of the transaction is subject to several conditions, including the
successful registration of Canaan Energy's common stock on the NASDAQ
National Market System.
F-161
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Coral Reserves, Inc.
Oklahoma City, Oklahoma
We have audited the consolidated balance sheets of Coral Reserves, Inc. as
of December 31, 1998 and 1999 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three year period ended December 31, 1999. 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 from
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 consolidated financial position of Coral Reserves,
Inc. as of December 31, 1998 and 1999, and the consolidated results of its
operations and its cash flow for each of the years in the three year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
William T. Zumwalt, CPA, Inc.
Tulsa, Oklahoma
March 10, 2000
F-162
CORAL RESERVES, INC.
Consolidated Balance Sheets
December 31, March 31,
---------------------
1998 1999 2000
---------- ---------- -----------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 1,153,017 $ 252,301 $ 203,210
Accounts receivable, net (Note 2) 523,216 583,888 599,040
Inventories 779 779 779
--------- ---------- ----------
Total current assets 1,677,012 836,967 803,029
--------- ---------- ----------
Property and equipment, at cost, based on the full
cost method of accounting for oil and gas properties 10,368,920 10,660,364 10,668,788
Accumulated depreciation, depletion and
amortization (3,931,015) (4,696,152) (4,884,354)
--------- ---------- ----------
6,437,905 5,964,212 5,784,434
--------- ---------- ----------
Notes Receivable (Note 3) - 2,537,500 2,458,750
--------- ---------- ----------
Total assets $ 8,114,917 $ 9,338,679 $ 9,046,213
========= ========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 60,785 $ 124,228 $ 102,238
Revenue and royalty distributions payable 51,210 55,167 57,085
--------- ---------- ----------
Total current liabilities 111,995 179,395 159,323
--------- ---------- ----------
Long-term debt (Note 4) 974,955 3,013,955 3,027,955
Minority interest 7,057,706 6,192,609 5,922,157
Stockholders' equity (deficit):
Common Stock, $0.10 par value: 10,000 shares
authorized, 1,053 shares outstanding 105 105 105
Additional paid-in capital 3,187 3,187 3,187
Common Stock subscription receivable (2,128) (1,064) (798)
Retained Earnings (30,903) (49,508) (65,716)
--------- ---------- ----------
Total stockholders' equity (29,739) (47,280) (63,222)
--------- ---------- ----------
Total liabilities and stockholders'
equity $ 8,114,917 $ 9,338,679 $ 9,046,213
========= ========== ==========
See accompanying notes to financial statements.
F-163
CORAL RESERVES, INC.
Consolidated Statements of Operations
Three months Ended
Year ended December 31, March 31
--------------------------------------- -----------------------
1997 1998 1999 1999 2000
------------ ----------- ----------- ---------- ----------
(Unaudited)
Revenues:
Oil and gas sales $ 2,736,368 $ 2,605,124 $ 2,960,371 $ 570,324 $ 818,114
Other income 145,962 105,221 34,431 7,940 4,352
----------- ----------- ----------- ---------- ----------
Total revenues 2,882,330 2,710,345 2,994,802 578,264 822,466
----------- ----------- ----------- ---------- ----------
Costs and expenses:
Lease operating 300,316 379,283 450,758 97,785 118,375
Production taxes 177,784 224,569 222,390 25,937 68,085
Depreciation, depletion
and amortization 711,124 927,290 765,137 193,619 188,202
General and administrative 479,092 451,496 443,039 89,377 128,037
Interest 69,995 73,811 205,023 25,105 66,089
Reduction of carrying value
of oil and gas properties
(Note 7) - 749,000 - - -
----------- ----------- ----------- ---------- ----------
Total costs and expenses 1,738,311 2,805,449 2,086,347 431,823 568,788
----------- ----------- ----------- ---------- ----------
Net earnings (loss) before
minority interest in operations
of consolidated subsidiaries 1,144,019 (95,104) 908,455 146,441 253,678
Minority interest in operations of
consolidated subsidiaries 1,125,390 (31,341) 927,060 150,219 269,886
----------- ----------- ----------- ---------- ----------
Net earnings (loss) $ 18,629 $ (63,763) $ (18,605) $ (3,778) $ (16,208)
=========== =========== =========== ========== ==========
Net earnings (loss) per average
common share outstanding
- basic and diluted $ 18.63 $ (63.50) $ (17.67) $ (3.59) $ (15.39)
=========== =========== =========== ========== ==========
Weighted average common
shares outstanding - basic
and diluted 1,000 1,004 1,053 1,053 1,053
=========== =========== =========== ========== ==========
See accompanying notes to financial statements.
F-164
CORAL RESERVES, INC.
Consolidated Statements of Cash Flow
Three months ended
Year ended December 31, March 31,
----------------------------------------- ------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------- ----------- ---------
(Unaudited)
Cash flows from operating activities:
Net earnings (loss) $ 18,629 $ (63,763) $ (18,605) $ (3,778) $ (16,208)
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Minority interest in consolidated subsidiaries 1,125,390 (31,341) 927,060 150,219 269,886
Forgiveness of subscription receivable - 1,064 1,064 266 266
Depreciation, depletion and amortization 711,124 927,290 765,137 193,619 188,202
Reduction in carrying value of oil and gas
properties - 749,000 - - -
Changes in operating assets and liabilities:
Accounts receivable (77,159) 138,040 (60,671) (15,683) (15,153)
Inventories (727) (52) - - -
Increase (decrease) in:
Accounts payable and revenue and royalties
payable 52,607 (28,757) 67,400 (16,830) (20,072)
----------- ----------- ------------ ---------- ---------
Net cash provided by operating activities 1,829,864 1,691,481 1,681,385 307,813 406,921
----------- ----------- ------------ ---------- ---------
Cash flows from investing activities:
Advances on notes receivable - - (2,800,000) (2,800,000) -
Repayments of notes receivable - - 262,500 - 78,750
Proceeds from sales of property and equipment 8,072 62,757 - - -
Capital expenditures (1,588,557) (3,049,485) (291,444) (44,669) (8,424)
----------- ----------- ------------ ---------- ---------
Net cash (used) provided by investing activities (1,580,485) (2,986,728) (2,828,944) (2,844,669) 70,326
----------- ----------- ------------ ---------- ---------
Cash flows from financing activities:
Borrowings on long-term debt 413,500 181,300 2,039,000 1,900,000 14,000
Repayments of long-term debt (199,500) (41,500) - - -
Contributed capital 3,520,100 - - - -
Distributions to partners (1,647,091) (1,795,061) (1,792,157) (314,012) (540,338)
Cost of capital raised (187,670) - - - -
----------- ----------- ------------ ---------- ---------
Net cash (used) provided by financing activities 1,899,339 (1,655,261) 246,843 1,585,988 (526,338)
----------- ----------- ------------ ---------- ---------
Net increase (decrease) in cash and cash equivalents 2,148,718 (2,950,508) (900,716) (950,868) (49,091)
Cash and cash equivalents at beginning of year 1,954,807 4,103,525 1,153,017 1,153,017 252,301
----------- ----------- ------------ ---------- ---------
Cash and cash equivalents at end of year $ 4,103,525 $ 1,153,017 $ 252,301 $ 202,149 $ 203,210
=========== =========== ============ ========== =========
Supplemental cash flow information:
Cash payments for interest $ 69,995 $ 73,811 $ 205,023 $ 25,105 $ 66,089
=========== =========== ============ ========== =========
See accompanying notes to financial statements.
F-165
CORAL RESERVES, INC.
Statements of Stockholders' Equity
Number of
Shares of Common Retained
Common Additional Stock Earnings Total
Stock Common Paid-In Subscription (Accumulated Stockholders'
Outstanding Stock Capital Receivable Deficit) Equity
------------ --------- ----------- ------------ ------------- -------------
Balance at December 31, 1997 1,000 $ 100 $ - $ - $ 32,860 $ 32,960
Net Loss - - - - (63,763) (63,763)
Common stock issued through subscription
receivable 53 5 3,187 (3,192) - -
Forgiveness of subscription receivable - - - 1,064 - 1,064
--------- ------- ---------- ----------- ------------ -----------
Balance at December 31, 1998 1,053 $ 105 $ 3,187 $ (2,128) $ (30,903) $ (29,739)
========= ======= ========== =========== ============ ===========
Net Loss - $ - $ - $ - $ (18,605) $ (18,605)
Forgiveness of subscription receivable - - - 1,064 - 1,064
--------- ------- ---------- ----------- ------------ -----------
Balance at December 31, 1999 1,053 $ 105 $ 3,187 $ (1,064) $ (49,508) $ (47,280)
========= ======= ========== =========== ============ ===========
Net Loss (unaudited) - $ - $ - $ - $ (16,208) $ (16,208)
Forgiveness of subscription receivable
(unaudited) - - - 266 - 266
--------- ------- ---------- ----------- ------------ -----------
Balance at March 31, 2000 1,053 $ 105 $ 3,187 $ (798) $ (65,716) $ (63,222)
========= ======= ========== =========== ============ ===========
See accompanying notes to financial statements.
F-166
CORAL RESERVES, INC.
Notes to Financial Statements
December 31, 1997, 1998 and 1999
(Information insofar as it relates to March 31,
2000 or the three months ended March 31, 1999 and
2000 is unaudited)
1. Summary of Significant Accounting Policies
Organization and Business Activity
Coral Reserves, Inc. ("CRI") was formed as an Oklahoma corporation in
December, 1989 for the sole purpose of serving as Managing General Partner
for Coral Reserves Natural Gas Income Fund 1990 Limited Partnership ("Coral
1990"). In addition, CRI has subsequently served as Managing General
Partner for Coral Reserves 1993 Institutional Limited Partnership ("Coral
1993-I") and Coral Reserves 1996 Institutional Limited Partnership ("Coral
1996-I"). All of the aforementioned partnerships are also collectively
referred to in these footnotes as "the Partnerships".
By the terms of the respective partnership agreements of the Partnerships
("the Partnership Agreements"), revenues, costs and expenses are allocated
to CRI as follows:
Coral 1990:
----------
Cost Depletion 1%
Lease & well equipment depreciation and amortization of
organization costs 1%
All other items of income and expense (before payout) 9%
All other items of income and expense (after payout) 24%
Coral 1993-I and Coral 1996-I:
-----------------------------
Cost Depletion 1%
Lease & well equipment depreciation and amortization of organization
costs 1%
All other items of income and expense 12%
Payout occurs on an individual limited partner basis, and is reached at the
point in time when cumulative cash distributions made to a limited partner
equal his or her capital contributions made to the Partnership.
CRI is not required to make any capital contributions to the Partnership,
unless there exists a deficit balance in their capital accounts at the time
of termination or dissolution of the Partnership. In such case, the General
Partners would be required to make a contribution equal to such deficit.
F-167
CORAL RESERVES, INC.
Notes to Financial Statements
(Continued)
Accounting policies employed by CRI reflect industry practices and conform
to generally accepted accounting principles. The more significant of such
policies are discussed below.
The accompanying financial statements include the accounts of CRI and the
three limited partnerships that it controls as Managing General Partner.
All significant intercompany balances and transactions have been eliminated
in consolidation.
Uses of 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
the 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 amounts could differ from those
estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, CRI considers all short-term
debt securities purchased with a maturity of three months or less to be
cash equivalents.
Property and Equipment
CRI follows the full cost method of accounting for its oil and gas
properties. Accordingly, all costs incidental to the acquisition,
exploration, and development of oil and gas properties, including costs of
undeveloped leasehold, dry holes and leasehold equipment, are capitalized.
CRI does not capitalize any internal costs as part of the full cost pool.
Net capitalized costs (capitalized costs less accumulated amortization) are
limited to the estimated future net revenues, discounted at 10% per annum,
from proved oil, natural gas and natural gas liquids reserves plus the
lower of cost or estimated fair market value of undeveloped properties
subject to amortization. Capitalized costs less accumulated amortization
plus estimated future development cost of proved undeveloped reserves are
amortized by an equivalent unit-of-production method, converting natural
gas to oil at the ratio approximating their respective energy content of
one barrel ("Bbl") of oil to six thousand cubic feet ("Mcf") of natural
gas. No gain or loss is recognized upon disposal of oil and gas properties
unless such dispositions significantly alter the relationship between
capitalized costs and proved oil and natural gas reserves.
CRI accounts for its non-oil and natural gas long-lived assets in
accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and Assets to be Disposed of". SFAS No. 121 requires that long-lived
assets and identifiable intangibles be reviewed
F-168
CORAL RESERVES, INC.
Notes to Financial Statements
(Continued)
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair market value of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or fair
value less cost to sell.
Revenue and Royalty Distributions Payable
For certain oil and gas properties, CRI receives production proceeds, from
the purchaser and further distributes such amounts to other revenue and
royalty owners. Production proceeds applicable to other revenue and royalty
owners are reflected as revenue and royalty distributions payable in the
accompanying balance sheets. CRI accrues revenue for only its net interest
in its oil and natural gas properties.
Production Costs
Lease operating costs, including costs incurred to maintain or increase
production levels from an existing completion interval, along with
production related taxes are expensed as incurred.
Gas Balancing
During the course of normal operations, CRI and other joint interest owners
of natural gas reservoirs will take more or less than their respective
ownership share of the natural gas volumes produced. These volumetric
imbalances are monitored over the lives of the wells' production
capability. If an imbalance exists at the time the wells' reserves are
depleted, cash settlements are made among the joint interest owners under a
variety of arrangements. CRI follows the sales method of accounting for gas
imbalances. A liability is recorded only if CRI's excess takes of natural
gas volumes exceeds its estimated remaining recoverable reserves. No
receivables are recorded for those wells where CRI has taken less than its
ownership share of gas production.
Major Purchasers
CRI markets its oil and natural gas production to numerous purchasers under
a combination of short-term contracts. During 1997, 1998 and 1999 CRI's
single largest purchaser accounted for approximately 14%, 22% and 36%,
respectively, of its oil and natural gas revenues. CRI does not believe
that the loss of any single customer would have a material effect on the
results of its operations.
F-169
CORAL RESERVES, INC.
Notes to Financial Statements
(Continued)
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation or other sources are recorded when it is probable that a
liability has been incurred and the amount can be reasonably estimated.
Concentration of Credit Risks
Financial investments that potentially subject CRI to credit risk consist
primarily of cash and cash equivalents and trade receivables.
CRI maintains its cash and cash equivalents with one major financial
institution. At times, such amounts may exceed the FDIC insured limit. CRI
has not experienced any losses in such accounts, and believes it is not
exposed to any significant credit risk.
Trade receivables subject CRI to the potential for credit risk with
customers within the oil and gas industry. To reduce risk, CRI performs
ongoing evaluations of its customers' financial condition, but does not
generally require collateral.
2. Accounts Receivable
Accounts receivable consisted of the following:
December 31, March 31,
----------------------------
1998 1999 2000
----------- ------------ -------------
Oil and natural gas revenue accruals......... $ 502,700 $ 578,147 $ 595,548
Other........................................ 20,516 5,741 3,492
----------- ------------ -------------
Total........................................ $ 523,216 $ 583,888 $ 599,040
=========== ============ =============
3. Notes Receivable
Effective February 1999, one of the partnerships that is controlled by CRI
made an advance of $2,800,000 to Indian Oil Company (Indian). In return for
the advance, the Partnership receives a production payment payable from
Indian in the amount of $26,250 per month.
4. Long-Term Debt
The balance at December 31, 1999 consists of notes payable to a bank. These
borrowings have been made against a revolving line of credit maturing on
April 15, 2001. The established borrowing base available to the
Partnerships that CRI controls under these credit facilities was $3,300,000
at December 31, 1999. Borrowings bear interest at 1% above a specified
prime rate and are collateralized by certain oil and
F-170
CORAL RESERVES, INC.
Notes to Financial Statements
(Continued)
gas properties of the Partnerships, as well as guarantees by CRI and the
Additional General Partners. The average interest rate under these credit
facilities outstanding at December 31, 1999 was 8.15%.
5. Income Taxes
CRI is an S Corporation for federal and state income tax purposes. The
items of taxable income and expense generated by its operations are
includable in the income tax returns of the shareholders, therefore, no
provision or liability for federal or state income taxes is reflected in
these financial statements. The CRI income tax returns, the qualifications
of CRI as such for tax purposes, and the amount of CRI's taxable income or
loss are subject to examination by federal and state taxing authorities. If
such examinations resulted in changes with respect to CRI's qualification
as an S Corporation or in changes to taxable income or loss, the tax
liability of the shareholders could change accordingly.
6. Related Party Transactions
During the years ended December 31, 1999, 1998 and 1997, the Partnerships
engaged in certain transactions with Coral Reserves, Inc., the Managing
General Partner of the Partnerships, and certain affiliated partnerships,
whose Managing General Partner is Coral Reserves Energy Corp. Coral
Reserves, Inc. and Coral Reserves Energy Corp. have common shareholders.
The Partnerships are required to reimburse the CRI for overhead expenses,
including office rent and salaries for clerical staff and appropriate
production supervisory personnel, or any other overhead expenses that the
Managing General Partner deems reasonable. The reimbursement for overhead
expenses is limited to a maximum of five percent (5%) of "Distributable
Cash", as defined in the Partnership Agreement. Such overhead
reimbursements amounted to $77,716, $74,524 and $77,482 for 1997, 1998 and
1999, respectively, and are included in "General and administrative"
expenses in the accompanying statements of operations.
During 1997, one of the Partnerships controlled by CRI purchased interests
in various producing oil and natural gas properties from Coral Reserves
Natural Gas Income Fund 1991 Limited Partnership, for aggregate
consideration of $96,623.
7. Reduction of Carrying Cost of Oil and Natural Gas Properties
Under the full cost method of accounting, the net book value of oil and
natural gas properties may not exceed a calculated "ceiling." The ceiling
limitation is the discounted estimated after-tax future net revenues from
proved oil and natural gas properties. In calculating future net revenues,
current prices and costs are generally held constant indefinitely. The net
book value is compared to the ceiling with any
F-171
CORAL RESERVES, INC.
Notes to Financial Statements
(Continued)
excess written off as an expense. An expense recorded in one period may not
be reversed in a subsequent period even though higher oil and natural gas
prices may have increased the ceiling applicable to the subsequent period.
At December 31, 1998, the carrying value of the Coral 1993-I and Coral
1996-I partnerships' oil and natural gas properties exceeded the full cost
ceiling. Accordingly, an aggregate reduction of $749,000 of the carrying
value of such properties was recorded.
8. Oil and Gas Operations
Costs Incurred
The following table reflects the costs incurred in oil and gas property
acquisition, exploration, and development activities:
Three months ended
Year ended December 31, March 31,
----------------------- ---------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
Property acquisition costs (proved)..... $ 936,095 $3,522,344 $ 3,047 $ - $ -
Development costs....................... 1,002,947 113,261 232,107 2,707 61,506
Results of Operations for Oil and Gas Producing Activities
The following table includes revenues and expenses associated directly with
the CRI's oil and gas producing activities. They do not include any
allocation of interest costs or general corporate overhead and, therefore
are not necessarily indicative of the contribution to net earnings of CRI's
oil and gas operations.
Three months ended
Year ended December 31, March 31,
--------------------------------------- ----------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------
Oil and natural gas sales.................. $ 2,736,368 $ 2,605,124 $ 2,960,371 $ 570,324 $ 818,114
Production and operating expenses.......... (478,100) (603,852) (673,148) (123,722) (186,460)
Depreciation, depletion and amortization... (711,124) (927,290) (765,137) (193,619) (188,202)
Reduction of carrying value of oil and
gas assets............................... - (749,000) - - -
--------- --------- ---------- --------- ---------
Results of operations for oil and gas
producing activities..................... $ 1,547,144 $ 324,982 $ 1,522,086 $ 252,983 $ 443,452
========= ========= ========== ========= =========
Depreciation, depletion and amortization
per equivalent MCF of production......... $ 0.70 $ 0.72 $ 0.62 $ 0.62 $ 0.62
========= ========= ========== ========= =========
9. Supplemental Information on Oil and Gas Operations (Unaudited)
The following supplemental unaudited information regarding the oil and gas
activities of CRI is presented pursuant to the disclosure requirements
promulgated by the Securities and Exchange Commission and Statement of
Financial Accounting Standards No. 69, "Disclosures About Oil and Gas
Producing Activities".
F-172
CORAL RESERVES, INC.
Notes to Financial Statements
(Continued)
Quantities of Oil and Gas Reserves
Set forth below is a summary of the changes in the net quantities of crude
oil and natural gas and reserves for each of the years in the three-year
period ended December 31, 1999. CRI's proved reserves were calculated by
the independent petroleum consultants of Netherland, Sewell & Associates,
Inc. CRI cautions that there are many uncertainties inherent in estimating
reserve quantities, and in projecting future production rates and the
timing of future development cost expenditures. In addition, reserve
estimates of new discoveries are more imprecise than those of properties
with a production history. Accordingly, these estimates are subject to
change as additional information becomes available.
Proved oil and natural gas reserves are the estimated quantities of crude
oil, condensate, natural gas and natural liquids that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic conditions.
Proved developed oil and natural gas reserves are those reserves expected
to be recovered through existing equipment and operating methods.
Estimates of net quantities of proved reserves and proved developed
reserves of crude oil, including condensate and natural gas liquids, and
natural gas, as well as the changes in proved reserves during the periods
indicated, are set forth in the tables below. All reserves are located in
the United States.
CRI prepared the estimated reserves as of December 31, 1996 and 1997 based
on geological and engineering evaluations performed as of December 31,
1998. The reserve estimates as of the prior year-end dates were derived by
analyzing actual historical production amounts and by adjusting the
reserves attributable to wells acquired or disposed of during the relevant
periods. In addition, in deriving the estimates as of December 31, 1996 and
1997, CRI used production costs based on actual costs incurred during the
years and actual oil and natural gas prices received on December 31, 1996
and 1997. CRI has estimated its reserves as of December 31, 1996 and 1997
in this manner because the actual information necessary to calculate
estimated proved reserves and related information in accordance with
guidelines of the SEC as of each date is not available. Because the reserve
estimates as of December 31, 1998 are based on additional information
gained from the result of drilling, testing and production subsequent to
the dates of the estimated reserves, the reserve estimates as of December
31, 1996 and 1997 are not necessarily reflective of quantities that might
have been estimated based on information available as of such dates had
estimates in accordance with SEC guidelines been made at such dates.
Management believes that, because of the methodology used, the reserve
information presented is more reflective of actual reserve quantities than
estimates that might have been generated as of such dates.
F-173
CORAL RESERVES, INC.
Notes to Financial Statements
(Continued)
Changes in Proved Reserves:
Oil Gas
(Bbls) (Mcf)
------ -----
Proved Reserves as of December 31, 1996..................... 166,000 6,951,000
Extensions and discoveries............................. 14,000 568,000
Purchases of reserves.................................. 17,000 577,000
Production............................................. (30,000) (842,000)
------------- -------------
Proved Reserves as of December 31, 1997..................... 167,000 7,254,000
Extensions and discoveries............................. - 29,000
Purchases of reserves.................................. 155,000 3,342,000
Production............................................. (36,000) (1,062,000)
Sales of reserves in place............................. (8,000) (47,000)
------------- -------------
Proved Reserves as of December 31, 1998..................... 278,000 9,516,000
Revisions.............................................. 33,000 731,000
Extensions and discoveries............................. 28,000 8,000
Purchases of reserves.................................. 2,000 1,000
Production............................................. (38,000) (1,011,000)
------------- -------------
Proved Reserves as of December 31, 1999..................... 303,000 9,245,000
------------- -------------
Proved developed reserves as of:
December 31, 1996...................................... 170,000 6,696,000
December 31, 1997...................................... 163,000 6,541,000
December 31, 1998...................................... 234,000 8,513,000
December 31, 1999...................................... 237,000 7,855,000
Standardized Measure of Discounted Future Net Cash Flows
The following table reflects the standardized measure of discounted future
net cash flows relating to the CRI's interest in proved reserves:
Year ended December 31,
------------------------------------------
1997 1998 1999
------------ ------------- ----------
Future cash inflows.......................... $ 19,680,000 $ 20,204,000 $ 26,676,000
Future production costs...................... (3,964,000) (8,217,000) (8,462,000)
Future development costs..................... (692,000) (956,000) (861,000)
---------- ----------- ----------
Future net cash flows........................ 15,024,000 11,031,000 17,353,000
10% discount to reflect timing of cash flows. (5,935,000) (4,394,000) (7,703,000)
---------- ----------- ----------
Standardized measure of discounted future
net cash flows............................... $ 9,089,000 $ 6,637,000 $ 9,650,000
========== =========== ==========
Future cash inflows are computed by applying year-end prices (averaging
$22.75 per barrel of oil, adjusted for transportation and other charges,
and $2.25 per Mcf of gas at December 31, 1999) to the year-end quantities
of proved reserves, except where fixed and determinable price changes are
provided by contractual arrangements in existence at year-end. Future
development and production costs are computed by estimating the
expenditures to be incurred in developing and producing proved oil
F-174
CORAL RESERVES, INC.
Notes to Financial Statements
(Continued)
and gas reserves at the end of the year, based on year-end costs and
assuming continuation of existing economic conditions.
Principal changes in the standardized measure of discounted future net cash
flows attributable to the Partnership's proved reserves are as follows:
Year ended December 31,
------------------------------------------
1997 1998 1999
------------ --------------- -----------
Beginning balance.............................. $ 15,285,000 $ 9,089,000 $ 6,637,000
Sales of oil and natural gas, net of
production costs............................ (2,206,000) (1,933,000) (2,243,000)
Net changes in year-end sales prices
and production costs........................ (6,378,000) (3,656,000) 3,777,000
Extensions, discoveries, and improved
recovery, net of future development costs... 746,000 20,000 455,000
Revisions...................................... - - 862,000
Purchases of reserves, net of future
development costs........................... 775,000 2,409,000 20,000
Sales of reserves in place..................... - (58,000) -
Accretion of discount.......................... 1,529,000 909,000 664,000
Other, primarily changes in timing............. (662,000) (143,000) (522,000)
---------- ------------- -----------
Ending balance................................. $ 9,089,000 $ 6,637,000 $ 9,650,000
========== ============= ===========
F-175
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Coral Reserves Energy Corp.
Oklahoma City, Oklahoma
We have audited the consolidated balance sheets of Coral Reserves
Energy Corp. as of December 31, 1998 and 1999 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three year period ended December 31, 1999. 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 from
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 consolidated financial position of Coral
Reserves Energy Corp. as of December 31, 1998 and 1999, and the consolidated
results of its operations and its cash flow for each of the years in the three
year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
William T. Zumwalt, CPA, Inc.
Tulsa, Oklahoma
March 10, 2000
F-176
CORAL RESERVES ENERGY CORP.
Consolidated Balance Sheets
December 31, March 31,
------------------------------
1998 1999 2000
------------- ------------- ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 2,036,923 $ 655,054 $ 518,373
Accounts receivable, net (Note 2) 1,159,452 1,674,168 1,682,370
Inventories 8,831 5,955 5,955
------------ ------------ ------------
Total current assets 3,205,206 2,335,177 2,206,698
------------ ------------ ------------
Property and equipment, at cost, based on the full cost method of
accounting for oil and gas properties 25,886,779 26,882,112 27,033,714
Accumulated depreciation, depletion and amortization
(10,312,949) (12,104,275) (12,529,982)
------------ ------------ ------------
15,573,830 14,777,837 14,503,732
------------ ------------ ------------
Notes Receivable (Note 3) - 2,900,000 2,810,000
Other assets 2,733 1,133 933
------------ ------------ ------------
Total assets $ 18,781,769 $ 20,014,147 $ 19,521,363
============ ============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 262,334 $ 431,915 $ 273,139
Revenue and royalty distributions payable 120,972 200,554 211,821
------------ ------------ ------------
Total current liabilities 383,306 632,469 484,960
------------ ------------ ------------
Long-term debt (Note 4) 1,640,534 4,098,534 4,299,534
Minority interest in consolidated subsidiaries 16,855,313 15,366,730 14,839,734
Partners' equity (deficit):
Common Stock, $0.10 par value: 10,000 shares
authorized, 1,053 shares outstanding 105 105 105
Additional paid-in capital 7,834 7,834 7,834
Common stock subscription receivable (5,226) (2,613) (1,960)
Retained earnings (accumulated deficit) (100,097) (88,912) (108,844)
------------ ------------ ------------
Total stockholders' equity (97,384) (83,586) (102,865)
------------ ------------ ------------
Total liabilities and partners' equity $ 18,781,769 $ 20,014,147 $ 19,521,363
============ ============ ============
See accompanying notes to financial statements.
F-177
CORAL RESERVES ENERGY CORP.
Consolidated Statements of Operations
Three months ended
Year ended December 31, March 31,
---------------------------------------------- -----------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ------------ ------------
(Unaudited)
Revenues:
Oil and gas sales $ 8,163,123 $ 6,829,792 $ 7,814,682 $ 1,414,106 $ 2,264,862
Other income 490,080 177,224 61,041 18,198 11,548
------------ ------------ ------------ ------------ ------------
Total revenues 8,653,203 7,007,016 7,875,723 1,432,304 2,276,410
------------ ------------ ------------ ------------ ------------
Costs and expenses:
Lease operating 1,368,235 1,480,983 1,525,420 352,524 438,108
Production taxes 596,770 558,325 600,538 88,782 191,128
Depreciation, depletion and
amortization 1,879,584 2,262,654 1,792,926 467,686 425,907
General and administrative 1,323,030 1,039,606 1,024,143 205,483 320,406
Interest 107,835 129,793 292,159 42,244 90,441
Reduction of carrying value
of oil and gas properties
(Note 7) - 1,132,000 - - -
------------ ------------ ------------ ------------ ------------
Total costs and expenses 5,275,454 6,603,361 5,235,186 1,156,719 1,465,990
------------ ------------ ------------ ------------ ------------
Net earnings before minority
interest in operations of
consolidated subsidiaries 3,377,749 403,655 2,640,537 275,585 810,420
Minority interest in operations of
consolidated subsidiaries (3,378,048) (510,923) (2,629,352) (295,322) (830,352)
------------ ------------ ------------ ------------ ------------
Net earnings (loss) $ (299) $ (107,268) $ 11,185 $ (19,737) $ (19,932)
============ ============ ============ ============ ============
Net earnings (loss) per
common share outstanding
- basic and diluted $ (0.30) $ (106.84) $ 10.62 $ (18.74) $ (18.93)
============ ============ ============ ============ ============
Weighted average common
shares outstanding
- basic and diluted 1,000 1,004 1,053 1,053 1,053
============ ============ ============ ============ ============
See accompanying notes to financial statements.
F-178
CORAL RESERVES ENERGY CORP.
Consolidated Statements of Cash Flow
Three months ended
Year ended December 31, March 31,
------------------------------------------ ---------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ------------ ------------
(Unaudited)
Cash flows from operating activities:
Net earnings (loss) $ (299) $ (107,268) $ 11,185 $ (19,737) $ (19,932)
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Minority interest in consolidated subsidiaries 3,378,048 510,923 2,629,352 295,322 830,352
Forgiveness of subscription receivable - 2,613 2,613 653 653
Depreciation, depletion and amortization 1,879,584 2,262,654 1,792,926 467,686 425,907
Reduction in carrying value of oil and gas
properties - 1,132,000 - - -
Changes in operating assets and liabilities:
Accounts receivable (171,749) 644,110 (514,716) 80,344 (8,202)
Inventories 18,156 (1,040) 2,876 - -
Increase (decrease) in:
Accounts payable and revenue and royalties
payable 102,950 (128,398) 249,163 (52,410) (147,509)
------------ ------------ ------------ ------------ ------------
Net cash provided by operating activities 5,206,690 4,315,594 4,173,399 771,858 1,081,269
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Advances on notes receivable - - (3,200,000) (3,200,000) -
Repayments of notes receivable - - 300,000 - 90,000
Proceeds from sales of property and equipment 224,286 166,770 49,946 - -
Capital expenditures (3,312,868) (4,217,959) (1,045,279) (79,487) (151,602)
Increase in other assets 315 - - - -
------------ ------------ ------------ ------------ ------------
Net cash (used) provided by investing activities (3,088,267) (4,051,189) (3,895,333) (3,279,487) (61,602)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Borrowings on long-term debt 1,060,200 401,100 2,458,000 2,100,000 201,000
Repayments of long-term debt (553,246) (164,500) - - -
Contributed capital 5,695,100 - - - -
Distributions to partners (5,058,190) (4,519,130) (4,117,935) (793,105) (1,357,348)
Cost of capital raised (1,129,100) (10,862) - - -
------------ ------------ ------------ ------------ ------------
Net cash (used) provided by financing activities 14,764 (4,293,392) (1,659,935) 1,306,895 (1,156,348)
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 2,133,187 (4,028,987) (1,381,869) (1,200,734) (136,681)
Cash and cash equivalents at beginning of year 3,932,723 6,065,910 2,036,923 2,036,923 655,054
============ ============ ============ ============ ============
Cash and cash equivalents at end of year $ 6,065,910 $ 2,036,923 $ 655,054 $ 836,189 $ 518,373
============ ============ ============ ============ ============
Supplemental cash flow information:
Cash payments for interest $ 107,835 $ 129,793 $ 292,159 $ 42,244 $ 90,441
============ ============ ============ ============ ============
See accompanying notes to financial statements.
F-179
CORAL RESERVES ENERGY CORP.
Consolidated Statements of Stockholders' Equity
Number of
Shares of Common Retained
Common Additional Stock Earnings Total
Stock Common Paid-In Subscription (Accumulated Stockholders'
Outstanding Stock Capital Receivable Deficit) Equity
------------ -------- ----------- ------------- ------------ -------------
Balance at December 31, 1997 1,000 $ 100 $ - $ - $ 7,171 $ 7,271
Net Loss - - - - (107,268) (107,268)
Common stock issued through subscription receivable 53 5 7,834 (7,839) - -
Forgiveness of subscription receivable - - - 2,613 - 2,613
------------ -------- ----------- ------------- ------------ -------------
Balance at December 31, 1998 1,053 105 7,834 (5,226) (100,097) (97,384)
Net Earnings - - - - 11,185 11,185
Forgiveness of subscription receivable - - - 2,613 - 2,613
------------ -------- ----------- ------------- ------------ -------------
Balance at December 31, 1999 1,053 105 7,834 (2,613) (88,912) (83,586)
Net Loss (unaudited) - - - - (19,932) (19,932)
Forgiveness of subscription receivable
(unaudited) - - - 653 - 653
------------ -------- ----------- ------------- ------------ -------------
Balance at March 31, 2000 1,053 $ 105 $ 7,834 $ (1,960) $ (108,844) $ (102,865)
============ ======== =========== ============= ============ =============
F-180
CORAL RESERVES ENERGY CORP.
Notes to Financial Statements
December 31, 1997, 1998 and 1999
(Information insofar as it relates to March 31, 2000
or the three months ended March 31, 1999 and 2000 is unaudited)
1. Summary of Significant Accounting Policies
Organization and Business Activity
Coral Reserves Energy Corp. ("CREC") was formed as an Oklahoma corporation
in January, 1991 for the sole purpose of serving as Managing General
Partner for Coral Reserves Natural Gas Income Fund 1991 Limited Partnership
("Coral 1991"). In addition, CREC has subsequently served as Managing
General Partner for Coral Reserves Natural Gas Income Fund 1992 Limited
Partnership ("Coral 1992"), Coral Reserves Natural Gas Income Fund 1993
Limited Partnership ("Coral 1993"), Coral Reserves Energy Income Fund 1995
Limited Partnership ("Coral 1995") and Coral Reserves Energy Income Fund
1996 Limited Partnership ("Coral 1996"). All of the aforementioned
partnerships are also collectively referred to in these footnotes as "The
Partnerships".
By the terms of the Amended and Restated Agreement of Limited Partnership
("Partnership Agreement"), revenues, costs and expenses are allocated to
CREC as follows:
. The allowance for cost depletion is allocated 99% to the Limited
Partners and 1% to the Managing General Partner.
. Depreciation of lease and well equipment and amortization of
organization costs are allocated 99% to the Limited Partners and
1% to the Managing General Partner.
. All other items of income and expense, with certain limited
exceptions, are allocated 90% to the Limited Partners and 10% to
the General Partners until payout is achieved. After payout,
these items are allocated 75% to the Limited Partners and 25% to
the General Partners. Payout occurs on an individual partner
basis, and is reached at the point in time when cash
distributions to a Limited Partner equal his or her capital
contributions made to the Partnership.
The terms of the Partnership offering called for a subscription price of
$100,000 per unit. Fractional units could be sold at the discretion of the
Managing General Partner. Subscriptions were received for 96.350 units in
the Partnership.
F-181
CORAL RESERVES ENERGY CORP.
Notes to Financial Statements
(Continued)
The General Partners are not required to make any capital contributions to
the Partnership, unless there exists a deficit balance in their capital
accounts at the time of termination or dissolution of the Partnership. In
such case, the General Partners would be required to make a contribution
equal to such deficit.
The Partnership is engaged primarily in the acquisition and development of
producing oil and gas properties. These activities have occurred in the
states of Oklahoma and Texas.
Accounting policies employed by the Partnership reflect industry practices
and conform to generally accepted accounting principles. The more
significant of such policies are discussed below.
The accompanying financial statements include the accounts of CREC and the
five limited partnerships that it controls as Managing General Partner. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Uses of 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
the 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 amounts could differ from those
estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Partnership considers all
short-term debt securities purchased with a maturity of three months or
less to be cash equivalents.
Property and Equipment
CREC follows the full cost method of accounting for its oil and gas
properties. Accordingly, all costs incidental to the acquisition,
exploration, and development of oil and gas properties, including costs of
undeveloped leasehold, dry holes and leasehold equipment, are capitalized.
CREC does not capitalize any internal costs as part of the full cost pool.
Net capitalized costs (capitalized costs less accumulated amortization) are
limited to the estimated future net revenues, discounted at 10% per annum,
from proved oil, natural gas and natural gas liquids reserves plus the
lower of cost or estimated fair market value of undeveloped properties
subject to amortization. Capitalized costs less accumulated amortization
plus estimated future development cost of proved undeveloped reserves are
amortized by an equivalent unit-of-
F-182
CORAL RESERVES ENERGY CORP.
Notes to Financial Statements
(Continued)
production method, converting natural gas to oil at the ratio approximating
their respective energy content of one barrel ("Bbl") of oil to six
thousand cubic feet ("Mcf") of natural gas. No gain or loss is recognized
upon disposal of oil and gas properties unless such dispositions
significantly alter the relationship between capitalized costs and proved
oil and natural gas reserves.
CREC accounts for its non-oil and natural gas long-lived assets in
accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and Assets to be Disposed of". SFAS No. 121 requires that long-lived
assets and identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds
the fair market value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less cost to sell.
Revenue and Royalty Distributions Payable
For certain oil and gas properties, the CREC receives production proceeds,
from the purchaser and further distributes such amounts to other revenue
and royalty owners. Production proceeds applicable to other revenue and
royalty owners are reflected as revenue and royalty distributions payable
in the accompanying balance sheets. CREC accrues revenue for only its net
interest in its oil and natural gas properties.
Production Costs
Lease operating costs, including costs incurred to maintain or increase
production levels from an existing completion interval, along with
production related taxes are expensed as incurred.
Gas Balancing
During the course of normal operations, the Partnership and other joint
interest owners of natural gas reservoirs will take more or less than their
respective ownership share of the natural gas volumes produced. These
volumetric imbalances are monitored over the lives of the wells' production
capability. If an imbalance exists at the time the wells' reserves are
depleted, cash settlements are made among the joint interest owners under a
variety of arrangements. The Partnership follows the sales method of
accounting for gas imbalances. A liability is recorded only if the
Partnership's excess takes of natural gas volumes exceeds its estimated
remaining
F-183
CORAL RESERVES ENERGY CORP.
Notes to Financial Statements
(Continued)
recoverable reserves. No receivables are recorded for those wells where the
Partnership has taken less than its ownership share of gas production.
Major Purchasers
CREC markets its oil and natural gas production to numerous purchasers
under a combination of short-term contracts. During 1997, 1998 and 1999
CREC's single largest purchaser accounted for approximately 35%, 34% and
32%, respectively, of its oil and natural gas revenues. CRI does not
believe that the loss of any single customer would have a material effect
on the results of its operations.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation or other sources are recorded when it is probable that a
liability has been incurred and the amount can be reasonably estimated.
Concentration of Credit Risks
Financial investments that potentially subject the Partnership to credit
risk consist primarily of cash and cash equivalents and trade receivables.
The Partnership maintains its cash and cash equivalents with one major
financial institution. At times, such amounts may exceed the FDIC insured
limit. The Partnership has not experienced any losses in such accounts, and
believes it is not exposed to any significant credit risk.
Trade receivables subject the Partnership to the potential for credit risk
with customers within the oil and gas industry. To reduce risk, the
Partnership performs ongoing evaluations of its customers' financial
condition, but does not generally require collateral.
2. Accounts Receivable
Accounts receivable consisted of the following:
December 31, March 31,
------------------------------ -----------
1998 1999 2000
----------- ----------- -----------
Oil and natural gas revenue accruals..... $ 1,136,529 $ 1,599,699 $ 1,601,091
Other.................................... 22,923 74,469 81,279
----------- ----------- -----------
Total.................................... $ 1,159,452 $ 1,674,168 $ 1,682,370
=========== =========== ===========
F-184
CORAL RESERVES ENERGY CORP.
Notes to Financial Statements
(Continued)
3. Notes Receivable
Effective February 1999, one of the Partnerships that is controlled by CREC
made an advance of $3,200,000 to Indian Oil Company (Indian). In return for
the advance, the Partnership receives a production payment payable from
Indian in the amount of $30,000 per month.
4. Long-Term Debt
The balance at December 31, 1999 consists of a notes payable to a bank.
These borrowings have been made against a revolving line of credit maturing
on April 15, 2001. The established borrowing base available to these
Partnerships under this credit facility was $5,375,000 at December 31,
1999. Borrowings bear interest at 1% above a specified prime rate and are
collateralized by certain oil and gas properties of the Partnerships, as
well as guarantees by the Managing and Additional General Partners. The
average interest rate under these credit facilities outstanding at December
31, 1999 was 8.15%.
5. Income Taxes
CREC is an S Corporation for federal and state income tax purposes. The
items of taxable income and expense generated by its operations are
includable in the income tax returns of the shareholders, therefore, no
provision or liability for federal or state income taxes is reflected in
these financial statements. The CREC income tax returns, the qualifications
of the CREC as such for tax purposes, and the amount of CREC's taxable
income or loss are subject to examination by federal and state taxing
authorities. If such examinations resulted in changes with respect to
CREC's qualification as an S Corporation or in changes to taxable income or
loss, the tax liability of the shareholders could change accordingly.
6. Related Party Transactions
During the years ended December 31, 1999, 1998 and 1997, the Partnerships
engaged in certain transactions with Coral Reserves Energy Corp., the
Managing General Partner of the Partnerships, and certain affiliated
partnerships, whose Managing General Partner is Coral Reserves, Inc. Coral
Reserves Energy Corp. and Coral Reserves, Inc. have common shareholders.
The Partnerships are required to reimburse CREC for overhead expenses,
including office rent and salaries for clerical staff and appropriate
production supervisory personnel, or any other overhead expenses that the
Managing General Partner deems reasonable. The reimbursement for overhead
expenses is limited to a maximum of five percent (5%) of "Distributable
Cash", as defined in the Partnership Agreement. Such overhead
reimbursements amounted to $300,483, $252,862 and $258,016 for
F-185
CORAL RESERVES ENERGY CORP.
Notes to Financial Statements
(Continued)
1997, 1998 and 1999, respectively, and are included in "General and
administrative" expenses in the accompanying statements of operations.
During 1997, Coral 1991 sold interests in various producing oil and gas
properties to Coral 1996 and another affiliated partnership, for aggregate
consideration of $193,246.
7. Reduction of Carrying Cost of Oil and Natural Gas Properties
Under the full cost method of accounting, the net book value of oil and
natural gas properties may not exceed a calculated "ceiling." The ceiling
limitation is the discounted estimated after-tax future net revenues from
proved oil and natural gas properties. In calculating future net revenues,
current prices and costs are generally held constant indefinitely. The net
book value is compared to the ceiling with any excess written off as an
expense. An expense recorded in one period may not be reversed in a
subsequent period even though higher oil and natural gas prices may have
increased the ceiling applicable to the subsequent period.
At December 31, 1998, the carrying value of the Coral 1993 and Coral 1996
partnerships' oil and natural gas properties exceeded the full cost
ceiling. Accordingly, an aggregate reduction of $1,132,000 of the carrying
value of such properties was recorded.
8. Oil and Gas Operations
Costs Incurred
The following table reflects the costs incurred in oil and gas property
acquisition, exploration, and development activities:
Three months ended
Year ended December 31, March 31,
----------------------- ---------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
Property acquisition costs (proved)..... $ 936,095 $ 3,522,344 $ 3,047 $ - $ -
Development costs........................ 1,002,947 113,261 232,107 76,500 368,773
Results of Operations for Oil and Gas Producing Activities
The following table includes revenues and expenses associated directly with
the CREC's oil and gas producing activities. They do not include any
allocation of interest costs or general corporate overhead and, therefore
are not necessarily indicative of the contribution to net earnings of
CREC's oil and gas operations.
F-186
CORAL RESERVES ENERGY CORP.
Notes to Financial Statements
(Continued)
Three months ended
Year ended December 31, March 31,
-------------------------------------- -----------------------
1997 1998 1999 1999 2000
---------- ----------- ----------- ---------- ----------
Oil and natural gas sales.................... $ 8,163,123 $ 6,829,792 $ 7,814,682 $ 1,414,106 $ 2,264,862
Production and operating expenses............ (1,965,005) (2,039,308) (2,125,958) (441,306) (629,236)
Depreciation, depletion and amortization..... (1,879,584) (2,262,664) (1,792,926) (467,686) (425,907)
Reduction of carrying value of oil and gas
assets...................................... - (1,132,000) - - -
---------- ----------- ----------- ---------- ----------
Results of operations for oil and gas
producing activities........................ $ 4,318,534 $ 1,395,820 $ 3,895,798 $ 505,114 $ 1,209,719
========== ========== ========== ========== ===========
Depreciation, depletion and amortization
per equivalent MCF of production........... $ 0.62 $ 0.65 $ 0.54 $ 0.53 $ 0.54
========== ========== ========== ========== ===========
9. Supplemental Information on Oil and Gas Operations (Unaudited)
The following supplemental unaudited information regarding the oil and gas
activities of CREC is presented pursuant to the disclosure requirements
promulgated by the Securities and Exchange Commission and Statement of
Financial Accounting Standards No. 69, "Disclosures About Oil and Gas
Producing Activities".
Quantities of Oil and Gas Reserves
Set forth below is a summary of the changes in the net quantities of crude
oil and natural gas and reserves for each of the years in the three-year
period ended December 31, 1999. CREC's proved reserves were calculated by
the independent petroleum consultants of Netherland, Sewell & Associates,
Inc. CREC cautions that there are many uncertainties inherent in estimating
reserve quantities, and in projecting future production rates and the
timing of future development cost expenditures. In addition, reserve
estimates of new discoveries are more imprecise than those of properties
with a production history. Accordingly, these estimates are subject to
change as additional information becomes available.
Proved oil and natural gas reserves are the estimated quantities of crude
oil, condensate, natural gas and natural liquids that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic conditions.
Proved developed oil and natural gas reserves are those reserves expected
to be recovered through existing equipment and operating methods.
Estimates of net quantities of proved reserves and proved developed
reserves of crude oil, including condensate and natural gas liquids, and
natural gas, as well as the changes in proved reserves during the periods
indicated, are set forth in the tables below. All reserves are located in
the United States.
F-187
CORAL RESERVES ENERGY CORP.
Notes to Financial Statements
(Continued)
CREC prepared the estimated reserves as of December 31, 1996 and 1997 based
on geological and engineering evaluations performed as of December 31,
1998. The reserve estimates as of the prior year-end dates were derived by
analyzing actual historical production amounts and by adjusting the
reserves attributable to wells acquired or disposed of during the relevant
periods. In addition, in deriving the estimates as of December 31, 1996 and
1997, CREC used production costs based on actual costs incurred during the
years and actual oil and natural gas prices received on December 31, 1996
and 1997. CREC has estimated its reserves as of December 31, 1996 and 1997
in this manner because the actual information necessary to calculate
estimated proved reserves and related information in accordance with
guidelines of the SEC as of each date is not available. Because the reserve
estimates as of December 31, 1998 are based on additional information
gained from the result of drilling, testing and production subsequent to
the dates of the estimated reserves, the reserve estimates as of December
31, 1996 and 1997 are not necessarily reflective of quantities that might
have been estimated based on information available as of such dates had
estimates in accordance with SEC guidelines been made at such dates.
Management believes that, because of the methodology used, the reserve
information presented is more reflective of actual reserve quantities than
estimates that might have been generated as of such dates.
Changes in Proved Reserves:
Oil Gas
(Bbls) (Mcf)
------ -----
Proved Reserves as of December 31, 1996..................... 760,000 25,142,000
Extensions and discoveries............................. 36,000 723,000
Purchases of reserves.................................. 114,000 1,468,000
Production............................................. (115,000) (2,337,000)
Sale of Reserves....................................... (18,000) (547,000)
---------- ----------
Proved Reserves as of December 31, 1997..................... 777,000 24,449,000
Extensions and discoveries............................. 6,000 294,000
Purchases of reserves.................................. 62,000 4,286,000
Production............................................. (116,000) (2,764,000)
Sales of reserves in place............................. (23,000) (140,000)
---------- ----------
Proved Reserves as of December 31, 1998..................... 706,000 26,125,000
Revisions.............................................. 425,000 3,887,000
Extensions and discoveries............................. 59,000 276,000
Purchases of reserves.................................. 49,000 165,000
Production............................................. (114,000) (2,659,000)
---------- ----------
Proved Reserves as of December 31, 1999..................... 1,125,000 27,794,000
========== ==========
Proved developed reserves as of:
December 31, 1996...................................... 762,000 22,431,000
December 31, 1997...................................... 734,000 21,231,000
December 31, 1998...................................... 654,000 22,362,000
December 31, 1999...................................... 936,000 22,036,000
F-188
CORAL RESERVES ENERGY CORP.
Notes to Financial Statements
(Continued)
Standardized Measure of Discounted Future Net Cash Flows
The following table reflects the standardized measure of discounted future
net cash flows relating to the CREC's interest in proved reserves:
Year ended December 31,
--------------------------------------------
1997 1998 1999
----------- ----------- -----------
Future cash inflows............................ $ 67,702,000 $ 54,847,000 $ 84,540,000
Future production costs........................ (17,118,000) (22,152,000) (28,785,000)
Future development costs....................... (3,325,000) (3,552,000) (3,645,000)
----------- ----------- -----------
Future net cash flows.......................... 47,259,000 29,143,000 52,110,000
10% discount to reflect timing of cash flows... (20,449,000) (12,599,000) (24,145,000)
Standardized measure of discounted future ----------- ----------- -----------
net cash flows............................... $ 26,810,000 $ 16,544,000 $ 27,965,000
=========== =========== ===========
Future cash inflows are computed by applying year-end prices (averaging
$22.75 per barrel of oil, adjusted for transportation and other charges, and
$2.25 per Mcf of gas at December 31, 1999) to the year-end quantities of
proved reserves, except where fixed and determinable price changes are
provided by contractual arrangements in existence at year-end. Future
development and production costs are computed by estimating the expenditures
to be incurred in developing and producing proved oil and gas reserves at
the end of the year, based on year-end costs and assuming continuation of
existing economic conditions.
Principal changes in the standardized measure of discounted future net cash
flows attributable to the Partnership's proved reserves are as follows:
Year ended December 31,
--------------------------------------------
1997 1998 1999
----------- ------------ -----------
Beginning balance.............................. $ 48,436,000 $ 26,810,000 $ 16,544,000
Sales of oil and natural gas, net of
production costs............................ (6,083,000) (4,628,000) (5,928,000)
Net changes in year-end sales prices and
production costs............................ (20,369,000) (10,455,000) 7,808,000
Extensions, discoveries, and improved
recovery, net of future development costs... 1,007,000 234,000 1,002,000
Revisions...................................... - - 6,664,000
Purchases of reserves, net of future
development costs........................... 2,068,000 2,761,000 609,000
Sales of reserves in place..................... (873,000) (155,000) -
Accretion of discount.......................... 4,844,000 2,680,000 1,654,000
Other, primarily changes in timing............. (2,220,000) (703,000) (388,000)
----------- ------------ -----------
Ending balance................................. $ 26,810,000 $ 16,544,000 $ 27,965,000
=========== ============ ===========
F-189
APPENDIX A
Summary of Reserve Reports For
Combining Entities
As estimated by Netherland, Sewell & Associates, Inc.
As of September 30, 1999
The following tables summarize the reports of Netherland, Sewell &
Associates, Inc. for the Exchange Reserves and the Reserve Value for each of the
partnerships for Canaan, for the Coral Group without operating rights, for
Indian and for all Combining Entities. See "Definitions" for definitions of the
terms "Exchange Reserves" and "Reserve Value".
Upon written request by a limited partner or his representative who
has been so designated in writing, a copy of the Netherland Sewell Reserve
Report shall be transmitted promptly, without charge by the General Partner.
Request for copies of the Reserve Report should be directed to Canaan Energy
Corporation, 119 N. Robinson, Suite 600, Oklahoma City, Oklahoma, 73102. The
Netherland Sewell reserve reports are as filed as exhibits to the Registration
Statement of which this document is a part.
Net Reserves Future Net Revenues
------------ -------------------
Entity or Present Worth
---------
Group Category Oil (Barrels) Gas (MCF) Total at 10%
----- -------- --------- ----- ----- ---------------
- ------------------------------------------------------------------------------------------------------------------------
1990 Exchange Developed Reserves
Producing 10,729 1,745,316 $ 2,957,900 $ 1,905,700
Non-Producing 470 124,332 160,200 61,700
Exchange Undeveloped Reserves 2,262 273,792 302,800 110,100
----------- ---------- ----------- -------------
Total Exchange Reserve 13,461 2,143,440 $ 3,420,900 $ 2,077,500
=========== ========== =========== =============
========================================================================================================================
1991 Exchange Developed Reserves
Producing 53,624 2,131,729 $ 3,992,900 $ 2,478,700
Non-Producing 258 138,343 163,400 63,400
Exchange Undeveloped Reserves 942 277,936 338,400 127,300
----------- ---------- ----------- -------------
Total Exchange Reserves 54,824 2,548,008 $ 4,494,700 $ 2,669,400
=========== ========== =========== =============
========================================================================================================================
1992 Exchange Developed Reserves
Producing 184,554 4,254,042 $ 8,387,500 $ 4,851,200
Non-Producing 4,517 414,381 748,700 247,400
Exchange Undeveloped Reserves 5,932 1,102,577 1,398,600 399,200
----------- ---------- ----------- -------------
Total Exchange Reserves 195,003 5,771,000 $10,534,800 $ 5,497,800
=========== ========== =========== =============
- ------------------------------------------------------------------------------------------------------------------------
A-1
Net Reserves Future Net Revenues
------------ -------------------
Entity or Present Worth
---------
Group Category Oil (Barrels) Gas (MCF) Total at 10%
----- -------- --------- ----- ----- ---------------
- ------------------------------------------------------------------------------------------------------------------------
1993 Exchange Developed Reserves
Producing 257,633 4,000,585 $ 7,853,000 $ 4,560,300
Non-Producing 2,873 59,394 217,500 75,000
Exchange Undeveloped Reserves 45,102 343,730 703,100 116,100
----------- ---------- ----------- -------------
Total Exchange Reserves 305,608 4,403,709 $ 8,773,600 $ 4,751,400
=========== ========== =========== =============
========================================================================================================================
1993-I Exchange Developed Reserves
Producing 90,208 1,612,620 $ 3,500,200 $ 2,052,000
Non-Producing 1,134 56,228 97,400 29,600
Exchange Undeveloped Reserves 19,554 56,951 219,500 17,700
----------- ---------- ----------- -------------
Total Exchange Reserves 110,896 1,725,799 $ 3,817,100 $ 2,099,300
=========== ========== =========== =============
========================================================================================================================
1995 Exchange Developed Reserves
Producing 182,812 5,010,743 $ 8,762,500 $ 5,253,800
Non-Producing 55,366 285,426 1,250,500 362,100
Exchange Undeveloped Reserves 13,821 1,218,505 1,585,700 700,100
----------- ---------- ----------- -------------
Total Exchange Reserves 215,999 6,514,674 $11,598,700 $ 6,316,000
=========== ========== =========== =============
========================================================================================================================
1996 Exchange Developed Reserves
Producing 145,940 5,867,587 $10,150,500 $ 6,227,800
Non-Producing 8,131 1,148,505 2,018,200 975,200
Exchange Undeveloped Reserves 45,779 898,715 1,487,800 746,500
----------- ---------- ----------- -------------
Total Exchange Reserves 199,850 7,914,807 $13,656,500 $ 7,949,500
=========== ========== =========== =============
========================================================================================================================
1996-I Exchange Developed Reserves
Producing 132,423 4,424,652 $ 8,138,300 $ 5,004,500
Non-Producing 32,415 413,683 1,046,000 384,600
Exchange Undeveloped Reserves 52,436 780,886 1,424,400 763,500
----------- ---------- ----------- -------------
Total Exchange Reserves 217,274 5,619,221 $10,608,700 $ 6,152,600
=========== ========== =========== =============
========================================================================================================================
Canaan Exchange Developed Reserves
Producing 7,717 372,341 $ 772,900 $ 410,000
Non-Producing 2,267 8,797 36,500 16,400
Exchange Undeveloped Reserves 4,313 118,750 177,900 64,500
----------- ---------- ----------- -------------
Total Exchange Reserves 14,297 499,888 $ 987,300 $ 490,900
=========== ========== =========== =============
- ------------------------------------------------------------------------------------------------------------------------
A-2
Net Reserves Future Net Revenues
------------ -------------------
Entity or Present Worth
---------
Group Category Oil (Barrels) Gas (MCF) Total at 10%
----- -------- --------- ----- ----- ---------------
- ------------------------------------------------------------------------------------------------------------------------
Coral Exchange Developed Reserves
Group
w/o Producing 1,185,229 31,052,012 $ 62,256,800 $ 35,976,100
Operating
Fees Non-Producing 107,597 2,616,494 6,032,400 2,314,800
Exchange Undeveloped Reserves 190,141 5,071,842 8,232,100 3,234,800
----------- ----------- ------------ -------------
Total Exchange Reserves 1,482,967 38,740,348 $ 76,521,300 $ 41,525,700
=========== =========== ============ =============
========================================================================================================================
Indian Exchange Developed Reserves
Producing 517,748 34,642,743 $ 58,301,700 $ 33,993,500
Non-Producing 13,622 1,786,364 2,667,500 1,384,100
Exchange Undeveloped Reserves 129,504 19,669,359 26,658,500 10,090,200
----------- ----------- ------------ -------------
Total Exchange Reserves 660,874 56,098,466 $ 87,627,700 $ 45,467,800
=========== =========== ============ =============
========================================================================================================================
All Exchange Developed Reserves
Combining
Entities Producing 1,702,977 65,694,755 120,558,500 $ 69,969,600
Non-Producing 121,219 4,402,858 8,699,900 3,698,900
Exchange Undeveloped Reserves 319,645 24,741,201 34,890,600 13,325,000
----------- ----------- ------------ -------------
Total Exchange Reserves 2,143,841 94,838,814 $164,149,000 $ 86,993,500
=========== =========== ============ =============
- ------------------------------------------------------------------------------------------------------------------------
A-3
Appendix B
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information has been prepared
to assist in the analysis of the financial effects of the combination
transactions involving Canaan, Indian, the General Partners, the partnerships,
and Canaan Securities. This pro forma information is based on the historical
financial statements of the entities participating in the combination
transactions.
The information was prepared based on the following:
. After completion of the combination transactions, 5,000,000 Canaan common
shares are assumed to be outstanding assuming no limited partners elect to
receive cash in lieu of Canaan common stock. Assuming the full $15 million
is paid to electing limited partners, there will be approximately
3,106,938 shares outstanding after completion of the combination
transactions. The 2,671,175 shares potentially distributable to the
limited partners would be reduced to 778,113 if the limited partners elect
to receive the full $15 million. For information regarding the appraised
value of the limited partners' share of the partnerships, see Method of
Determining Combination Exchange Values and Appraised Values elsewhere in
this document. Canaan will borrow under its credit line the amount, if
any, up to $15 million, to be paid to cash-electing limited partners.
. Canaan utilizes the full cost method of accounting for its oil and gas
activities.
. The combination transactions are completed by July 31, 2000.
. The combination transactions are accounted for as a reorganization of
interests under common control in a manner similar to a pooling of
interests for the partnerships and the General Partners and as purchases
of Indian and Canaan Securities.
. The unaudited pro forma balance sheet has been prepared as if the
combination transactions occurred on March 31, 2000. The unaudited pro
forma statement of operations and cash flows have been prepared as if the
combination transactions occurred on January 1, 1999.
. Targeted annual general and administrative expense savings from the
combination transactions have not been reflected as an adjustment to the
historical data.
. Costs of the combination transactions incurred are estimated to be
$850,000 (excluding $150,000 of transaction costs previously incurred by
Indian) with $50,000 attributable to the acquisition of Indian, $10,000
attributable to the acquisition of Canaan Securities and $790,000
attributable to the combination of Canaan, the partnerships and the
General Partners. Through March 31, 2000, Canaan has incurred and
capitalized $545,000 of the reorganization and acquisition costs. Costs
related to the combination transactions with the partnerships and the
General Partners will be expensed in the period the combination
transactions are completed. Costs related to the acquisitions of Indian
and Canaan Securities will be capitalized as part of the purchase price.
The unaudited pro forma financial statements and related notes are
presented for illustrative purposes only. If the combination transactions had
occurred in the past, Canaan's financial position or operating results might
have been different from those presented in the unaudited pro forma information.
The unaudited pro forma information should not be relied on as an indication of
the financial position or operating results that Canaan would have achieved if
the combination transactions had occurred as of March 31, 2000 or January 1,
1999. The unaudited pro forma information also should not be relied on as an
indication of the future results that Canaan will achieve after the completion
of the combination transactions.
B-1
Unaudited Pro Forma Balance Sheet
March 31, 2000
Canaan Combined Indian Canaan
Energy Combined General Oil Securities
Corporation Partnerships Partners Company Inc.
Historical Historical Historical Historical Historical
------------ ------------- ------------ ------------ ------------
Assets
Current assets $ 780,781 3,006,303 3,009,727 5,919,118 107,134
Property and equipment, net 384,679 20,288,166 20,288,166 24,995,145 12,310
Intangible asset (goodwill) -- -- -- -- --
Notes receivable -- 5,268,750 5,268,750 -- --
Deferred tax asset -- -- -- 1,962,000 --
Other assets 545,180 933 933 30,000 --
------------- ------------ ------------ ------------ ---------
Total assets $ 1,710,640 28,564,152 28,567,576 32,906,263 119,444
============= ============ ============ ============ =========
Liabilities and Equity
Current liabilities $ 804,746 644,284 644,284 27,967,670 250
Long-term debt, less current portion -- 7,327,489 7,327,489 5,093,750 --
Other non-current liabilities -- -- -- 28,259 --
Minority interest in consolidated
partnerships -- -- 20,760,311 -- --
Deferred income taxes 168,000 -- -- -- --
Stockholders' equity:
Common stock 632 -- 210 312 5
Additional paid-in capital 545,756 -- 11,021 393,348 36,495
Stock subscription receivable (5,455) -- (2,758) -- --
Retained earnings (deficit) 196,961 -- (172,981) (577,076) 82,694
Partners' equity (deficit):
General partners -- (167,932) -- -- --
Limited partners -- 20,760,311 -- -- --
------------- ------------ ------------ ------------ ---------
Total equity 737,894 20,592,379 (164,508) (183,416) 119,194
------------- ------------ ------------ ------------ ---------
Total liabilities and equity $ 1,710,640 28,564,152 28,567,576 32,906,263 119,444
============= ============ ============ ============ =========
Book value per share $ 1,168
=============
Common shares outstanding 632
=============
Pro Forma
Adjustments Canaan
to Eliminate Other Energy
Duplicative Pro Forma Corporation
Amounts Adjustments Pro Forma
------------- ------------- -------------
Assets
Current assets (3,006,303) (a) (390,528) (d) 9,080,648
(107,134) (d)
(238,450) (e)
Property and equipment, net (20,288,166) (a) 7,120,855 (b) 54,188,845
1,400,000 (d)
(12,310) (d)
Intangible asset (goodwill) -- 2,700,000 (c) 2,993,000
293,000 (d)
Notes receivable (5,268,750) (a) (5,268,750) (e) --
Deferred tax asset -- (1,962,000) (b) --
Other assets (933) (a) (526,000) (g) 30,933
(19,180) (b)
-------------- ------------- -------------
Total assets (28,564,152) 2,989,503 66,293,426
============== ============= =============
Liabilities and Equity
Current liabilities (644,284) (a) (84,778) (b) 28,493,472
(250) (d)
(238,450) (e)
(675,000) (e)
75,000 (h)
Long-term debt, less current portion (7,327,489) (a) (4,593,750) (e) 7,827,489
Other non-current liabilities -- (28,259) (b) --
Minority interest in consolidated
partnerships (20,760,311) (a) -- --
Deferred income taxes -- 2,700,000 (c) 5,206,000
2,045,000 (f)
293,000 (d)
Stockholders' equity:
Common stock -- (312) (b) 50,000
(5) (d)
49,158 (i)
Additional paid-in capital -- (393,348) (b) 45,983,654
5,069,296 (b)
(36,495) (d)
1,009,472 (d)
39,348,109 (i)
Stock subscription receivable -- -- (8,213)
Retained earnings (deficit) -- 577,076 (b) (21,258,976)
(82,694) (d)
(2,045,000) (f)
(526,000) (g)
(75,000) (h)
(18,636,956) (i)
Partners' equity (deficit):
General partners 167,932 (a) -- --
Limited partners -- (20,760,311) (i) --
-------------- ------------- -------------
Total equity 167,932 3,496,990 24,766,465
-------------- ------------- -------------
Total liabilities and equity (28,564,152) 2,989,503 66,293,426
============== ============= =============
Book value per share $ 4.95
=============
Common shares outstanding 5,000,000
=============
See accompanying notes to unaudited pro forma financial information.
B-2
Unaudited Pro Forma Statement of Operations
Year ended December 31, 1999
Canaan Combined Indian Canaan
Energy Combined General Oil Securities
Corporation Partnerships Partners Company Inc.
Historical Historical Historical Historical Historical
----------- ------------ ---------- ---------- ----------
Revenues:
Oil and natural gas sales $ 140,446 10,775,053 10,775,053 9,050,664 --
Sales commissions -- -- -- -- 134,572
Consulting fee and investor services income -- -- -- -- 140,823
Other income 59,411 92,499 95,472 318,412 1,483
----------- ------------ ---------- ---------- ----------
Total revenues 199,857 10,867,552 10,870,525 9,369,076 276,878
----------- ------------ ---------- ---------- ----------
Costs and expenses:
Lease operating 16,261 1,976,178 1,976,178 2,684,875 --
Production taxes 12,270 822,928 822,928 506,854 --
Commission expense -- -- -- -- 75,970
Depreciation and amortization 55,763 2,558,063 2,558,063 3,047,718 3,757
General and administrative, net 25,142 637,852 1,467,182 1,995,974 199,115
Interest expense -- 497,182 497,182 2,709,491 --
----------- ------------ ---------- ---------- ----------
Total costs and expenses 109,436 6,492,203 7,321,533 10,944,912 278,842
----------- ------------ ---------- ---------- ----------
Other income, principally interest 36,423 -- -- -- 5,043
----------- ------------ ---------- ---------- ----------
Minority interest in operations of consolidated
partnerships -- -- (3,556,412) -- --
----------- ------------ ---------- ---------- ----------
Earnings (loss) before income taxes and
transaction expenses and payments 126,844 4,375,349 (7,420) (1,575,836) 3,079
Income tax expense (benefit) 39,000 -- -- (529,000) 226
----------- ------------ ---------- ---------- ----------
Net earnings (loss) before transaction
expenses and payments 87,844 4,375,349 (7,420) (1,046,836) 2,853
Transaction expenses and payments, net of income taxes -- -- -- -- --
----------- ------------ ---------- ---------- ----------
Net earnings (loss) after transaction
expenses and payments $ 87,844 4,375,349 (7,420) (1,046,836) 2,853
=========== ============ ========== ========== ==========
Net earnings (loss) per average
common share outstanding -
basic and diluted:
Before transaction expenses and payments $ 138.99
===========
After transaction expenses and payments $ 138.99
===========
Weighted average common shares
outstanding - basic and diluted 632
===========
Ratio of earnings to fixed charges:
Before transaction expenses and payments --
===========
After transaction expenses and payments --
===========
Pro Forma
Adjustments Canaan
to Eliminate Other Energy
Duplicative Pro Forma Corporation
Amounts Adjustments Pro Forma
------------ ------------ ------------
Revenues:
Oil and natural gas sales (10,775,053) (j) -- 19,966,163
Sales commissions -- (134,572) (l) --
Consulting fee and investor services income -- (140,823) (l) --
Other income (92,499) (j) (33,852) (k) 439,443
(1,483) (l)
------------ ------------ ------------
Total revenues (10,867,552) (310,730) 20,405,606
------------ ------------ ------------
Costs and expenses:
Lease operating (1,976,178) (j) (427,852) (k) 4,249,462
Production taxes (822,928) (j) -- 1,342,052
Commission expense -- (75,970) (l) --
Depreciation and amortization (2,558,063) (j) 111,000 (n) 6,022,301
246,000 (n)
General and administrative, net (637,852) (j) 394,000 (k) 3,879,535
(276,878) (l)
75,000 (o)
Interest expense (497,182) (j) (360,037) (m) 2,613,020
(233,616) (m)
------------ ------------ ------------
Total costs and expenses (6,492,203) (548,353) 18,106,370
------------ ------------ ------------
Other income, principally interest -- (5,043) (l) 36,423
------------ ------------ ------------
Minority interest in operations of consolidated
partnerships 3,556,412 (j) -- --
------------ ------------ ------------
Earnings (loss) before income taxes and
transaction expenses and payments (818,937) 232,580 2,335,659
Income tax expense (benefit) -- 1,470,774 (p) 981,000
------------ ------------ ------------
Net earnings (loss) before transaction
expenses and payments (818,937) (1,238,194) 1,354,659
Transaction expenses and payments, net of income taxes -- 490,000 (q) 490,000
------------ ------------ ------------
Net earnings (loss) after transaction
expenses and payments (818,937) (1,728,194) 864,659
============ ============ ============
Net earnings (loss) per average
common share outstanding -
basic and diluted:
Before transaction expenses and payments $ 0.27
============
After transaction expenses and payments $ 0.17
============
Weighted average common shares
outstanding - basic and diluted 5,000,000
============
Ratio of earnings to fixed charges:
Before transaction expenses and payments 1.89
============
After transaction expenses and payments 1.59
============
See accompanying notes to unaudited pro forma financial information.
B-3
Unaudited Pro Forma Statement of Operations
Three months ended March 31, 2000
Pro Forma
Adjustments
Canaan Combined Indian Canaan to Canaan
Energy Combined General Oil Securities Eliminate Other Energy
Corporation Partnerships Partners Company Inc. Duplicative Pro Forma Corporation
Historical Historical Historical Historical Historical Amounts Adjustments Pro Forma
----------- ------------ ---------- ---------- ---------- ------------ ----------- -----------
Revenues:
Oil and natural gas sales $ 37,740 3,082,976 3,082,976 2,509,655 -- (3,082,976)(j) -- 5,630,371
Sales commissions -- -- -- -- 26,937 -- (26,937)(l) --
Consulting fee and investor
services income -- -- -- -- 27,667 -- (27,667)(l) --
Other income 21,016 15,204 15,900 36,380 -- (15,204)(j) (11,355)(k) 61,941
-------- --------- --------- --------- ------ --------- ------- ---------
Total revenues 58,756 3,098,180 3,098,876 2,546,035 54,604 (3,098,180) (65,959) 5,692,312
-------- --------- --------- --------- ------ --------- ------- ---------
Costs and expenses:
Lease operating 4,225 556,483 556,483 672,735 -- (556,483)(j) (111,355)(k) 1,122,088
Production taxes 2,670 259,213 259,213 147,506 -- (259,213)(j) -- 409,389
Commission expense -- -- -- -- 16,777 -- (16,777)(l) --
Depreciation and amortization 14,338 614,109 614,109 692,445 772 (614,109)(j) 157,000 (n) 1,542,664
64,000 (n)
General and administrative, net 8,634 182,143 448,443 179,662 18,071 (182,143)(j) 100,000 (k) 700,206
(54,604)(l)
Interest expense -- 156,530 156,530 598,701 -- (156,530)(j) (45,558)(m) 689,175
(20,498)(m)
-------- --------- --------- --------- ------ --------- ------- ---------
Total costs and expenses 29,867 1,768,478 2,034,778 2,291,049 35,620 (1,768,478) 72,208 4,463,522
-------- --------- --------- --------- ------ --------- ------- ---------
Other income, principally interest 13,379 -- -- -- 25 -- (25)(l) 13,379
-------- --------- --------- --------- ------ --------- ------- ---------
Minority interest in operations of
consolidated partnerships -- -- (1,100,238) -- -- 1,100,238 (j) -- --
-------- --------- --------- --------- ------ --------- ------- ---------
Earnings (loss) before income taxes 42,268 1,329,702 (36,140) 254,986 19,009 (229,464) (138,192) 1,242,169
Income tax expense 13,000 -- -- 87,000 170 -- 395,830 (p) 496,000
-------- --------- --------- --------- ------ --------- ------- ---------
Net earnings (loss) $ 29,268 1,329,702 (36,140) 167,986 18,839 (229,464) (534,022) 746,169
========= ========= ========= ========= ====== ========= ======= ========
Net earnings per average common
share outstanding - basic and
diluted $ 46.31 $ 0.15
========= ==========
Weighted average common shares
outstanding-basic and diluted 632 5,000,000
========= ==========
Ratio of earnings to fixed charges -- 2.80
========= ==========
See accompanying notes to unaudited pro forma financial information.
B-4
Unaudited Pro Forma Statement of Cash Flows
Year ended December 31, 1999
Pro Forma
Canaan Combined Indian Canaan Adjustments Canaan
Energy Combined General Oil Securities to Eliminate Other Energy
Corporation Partnerships Partners Company Inc. Duplicative Pro Forma Corporation
Historical Historical Historical Historical Historical Amounts Adjustments Pro Forma
----------- ------------ ---------- ---------- ---------- ------------ ----------- -----------
Cash flows from
operating activities:
Net earnings (loss) $ 87,844 4,375,349 (7,420) (1,046,836) 2,853 (818,937)(r) (1,728,194) (s) 864,659
Adjustments to reconcile
net earnings (loss) to
net cash provided by
operating activities:
Depreciation and
amortization 55,763 2,558,063 2,558,063 3,047,718 3,757 (2,558,063)(r) 357,000 (s) 6,022,301
Amortization of debt
issuance costs -- -- -- 233,616 -- -- (233,616) (s) --
Accretion of discount
on long-term debt -- -- -- 46,700 -- -- (46,700) (s) --
Deferred income tax
expense (benefit) 24,000 -- -- (529,000) -- -- (42,000) (w) (547,000)
Other 7,273 -- 3,677 149,000 -- -- -- 159,950
Gain on sale of
equipment -- -- -- (34,067) -- -- -- (34,067)
Accrued interest expense
increasing debt -- -- -- 313,337 -- -- (313,337) (s) --
Minority interest in
operations of
consolidated
partnerships -- -- 3,556,412 -- -- (3,556,412)(r) -- --
Changes in operating
assets and liabilities:
Accounts receivable (41,391) (575,388) (575,388) (432,249) -- 575,388 (r) -- (1,049,028)
Other current assets 110 2,876 2,876 (35,277) -- (2,876)(r) -- (32,291)
Accounts payable and
accrued expenses (101,090) 316,841 316,563 389,568 -- (316,841)(r) -- 605,041
----------- ------------ ---------- ---------- ---------- ------------ ----------- -----------
Net cash provided by
operating activities 32,509 6,677,741 5,854,783 2,102,510 6,610 (6,677,741) (2,006,847) 5,989,565
----------- ------------ ---------- ---------- ---------- ------------ ----------- -----------
Cash flows from
investing activities:
Capital expenditures (106,671) (1,336,723) (1,336,723) (1,346,325) (5,750) 1,336,723 (r) (390,528) (t) (3,180,247)
5,750 (v)
Proceeds from sales of
property and equipment -- 49,946 49,946 570,222 -- (49,946)(r) -- 620,168
Advances on note
receivable -- (6,000,000) (6,000,000) -- -- 6,000,000 (r) 6,000,000 (u) --
Repayments on notes
receivable -- 562,500 562,500 -- -- (562,500)(r) (562,500) (u) --
Cash received from
adjustment to purchase
price of property and
equipment -- -- -- 372,066 -- -- -- 372,066
Advances to officer -- -- -- -- (81,860) -- 81,860 (v) --
Payments received from
officer -- -- -- -- 77,096 -- (77,096) (v) --
Cash of business acquired -- -- -- -- -- -- 1,990,838 (t) 1,990,838
Costs related to
combination transactions (87,696) -- -- -- -- -- 87,696 (x) --
----------- ------------ ---------- ---------- ---------- ------------ ----------- -----------
Net cash used in investing
activities (194,367) (6,724,277) (6,724,277) (404,037) (10,514) 6,724,277 7,136,020 (197,175)
----------- ------------ ---------- ---------- ---------- ------------ ----------- -----------
Cash flows from financing
activities:
Borrowings on long-term
debt -- 4,497,000 4,497,000 6,500,000 -- (4,497,000)(r) (6,000,000) (u) 4,997,000
Repayments of long-term
debt -- -- -- (8,758,500) -- -- 562,500 (u) (8,196,000)
Distributions to partners -- (6,733,156) (5,910,091) -- -- 6,733,156 (r) -- (5,910,091)
Payments for debt issuance
costs -- -- -- (120,000) -- -- -- (120,000)
----------- ------------ ---------- ---------- ---------- ------------ ----------- -----------
Net cash used in financing
activities -- (2,236,156) (1,413,091) (2,378,500) -- 2,236,156 (5,437,500) (9,229,091)
----------- ------------ ---------- ---------- ---------- ------------ ----------- -----------
Net decrease in cash and
cash equivalents (161,858) (2,282,692) (2,282,585) (680,027) (3,904) 2,282,692 (308,327) (3,436,701)
Cash and cash equivalents
at beginning of year 749,538 3,185,455 3,189,940 1,990,838 14,407 (3,185,455) (1,990,838) (t) 3,939,478
----------- ------------ ---------- ---------- ---------- ------------ ----------- -----------
Cash and cash equivalents
at end of year $ 587,680 902,763 907,355 1,310,811 10,503 (902,763) (2,313,572) 502,777
=========== ============ ========== ========== ========== ============ =========== ===========
See accompanying notes to unaudited pro forma financial information.
B-5
Unaudited Pro Forma Statement of Cash Flows
Three months ended March 31, 2000
Canaan Combined Indian Canaan
Energy Combined General Oil Securities
Corporation Partnerships Partners Company Inc.
Historical Historical Historical Historical Historical
----------- ------------ ---------- ---------- ----------
Cash flows from operating activities:
Net earnings (loss) $ 29,268 1,329,702 (36,140) 167,986 18,839
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 14,338 614,109 614,109 692,445 772
Amortization of debt issuance costs -- -- -- 20,498 --
Accretion of discount on long-term debt -- -- -- 6,300 --
Deferred income tax expense (benefit) (4,000) -- -- 87,000 --
Other 1,819 -- 919 -- --
Gain on sale of equipment -- -- -- (21,195) --
Accrued interest expense increasing debt -- -- -- 39,258 --
Minority interest in operations of
consolidated partnerships -- -- 1,100,238 -- --
Changes in operating assets and
liabilities:
Accounts receivable (154,665) (23,354) (23,354) 19,758 --
Other current assets -- -- -- 91,999 --
Accounts payable and accrued expenses (110,642) (167,580) (167,580) 188,934 325
----------- ------------ ---------- ---------- ----------
Net cash provided by (used in) operating activities (223,882) 1,752,877 1,488,192 1,292,983 19,936
----------- ------------ ---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (22,349) (160,026) (160,026) (356,523) --
Proceeds from sales of property and equipment -- -- -- 75,000 --
Repayments on notes receivable -- 168,750 168,750 -- --
Advances to officer -- -- -- -- (24,860)
Payments received from officer -- -- -- -- 10,000
Costs related to combination transactions (57,760) -- -- -- --
----------- ------------ ---------- ---------- ----------
Net cash provided by (used in) investing activities (80,109) 8,724 8,724 (281,523) (14,860)
----------- ------------ ---------- ---------- ----------
Cash flows from financing activities:
Borrowings on long-term debt -- 215,000 215,000 -- --
Repayments of long-term debt -- -- -- (599,627) --
Distributions to partners -- (2,161,205) (1,897,688) -- --
----------- ------------ ---------- ---------- ----------
Net cash used in financing activities -- (1,946,205) (1,682,688) (599,627) --
----------- ------------ ---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (303,991) (184,604) (185,772) 411,833 5,076
Cash and cash equivalents at beginning of period 587,680 902,763 907,355 1,310,811 14,407
----------- ------------ ---------- ---------- ----------
Cash and cash equivalents at end of period $ 283,689 718,159 721,583 1,722,644 19,483
=========== ============ ========== ========== ==========
Pro Forma
Adjustments Canaan
to Eliminate Other Energy
Duplicative Pro Forma Corporation
Amounts Adjustments Pro Forma
------------ ----------- -----------
Cash flows from operating activities:
Net earnings (loss) (229,464) (r) (534,022) (s) 746,169
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization (614,109) (r) 221,000 (s) 1,542,664
Amortization of debt issuance costs -- (20,498) (s) --
Accretion of discount on long-term debt -- (6,300) (s) --
Deferred income tax expense (benefit) -- (60,000) (w) 23,000
Other -- -- 2,738
Gain on sale of equipment -- -- (21,195)
Accrued interest expense increasing debt -- (39,258) (s) --
Minority interest in operations of
consolidated partnerships (1,100,238) (r) -- --
Changes in operating assets and
liabilities:
Accounts receivable 23,354 (r) -- (158,261)
Other current assets -- -- 91,999
Accounts payable and accrued expenses 167,580 (r) (325) (v) (89,288)
------------ ----------- -----------
Net cash provided by (used in) operating activities (1,752,877) (439,403) 2,137,826
------------ ----------- -----------
Cash flows from investing activities:
Capital expenditures 160,026 (r) -- (538,898)
Proceeds from sales of property and equipment -- -- 75,000
Repayments on notes receivable (168,750) (r) (168,750) (u) --
Advances to officer -- 24,860 (v) --
Payments received from officer -- (10,000) (v) --
Costs related to combination transactions -- 57,760 (x) --
------------ ----------- -----------
Net cash provided by (used in) investing activities (8,724) (96,130) (463,898)
------------ ----------- -----------
Cash flows from financing activities:
Borrowings on long-term debt (215,000) (r) -- 215,000
Repayments of long-term debt -- 168,750 (u) (430,877)
Distributions to partners 2,161,205 (r) -- (1,897,688)
------------ ----------- -----------
Net cash used in financing activities 1,946,205 168,750 (2,113,565)
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents 184,604 (366,783) (439,637)
Cash and cash equivalents at beginning of period (902,763) (14,407) (v) 2,805,846
------------ ----------- -----------
Cash and cash equivalents at end of period (718,159) (381,190) 2,366,209
============ =========== ===========
See accompanying notes to unaudited pro forma financial information.
B-6
Appendix B
Notes to Unaudited Pro Forma Financial Information
December 31, 1999 and March 31, 2000
1. Method of Accounting for the Combination Transactions
In presentation of the accompanying pro forma financial information, Canaan
accounted for the combination transactions as:
. A reorganization of entities under common control for the partnerships
and the General Partners in a manner similar to a pooling of
interests. Canaan does not believe the amount of cash elections
offered in the combination transaction with the limited partners will
be significant. See note 3 to Pro Forma Financial Information. As a
result, the historical recorded amounts for the assets and liabilities
of the partnerships and the General Partners were not adjusted to fair
value and the operating results of the partnerships and the General
Partners have been included since formation.
. A purchase of Indian by Canaan. Accordingly, the assets acquired and
the liabilities assumed by Canaan were revalued and recorded at their
estimated "fair values" and the results of operations of Indian have
been included only since January 1, 1999.
. A purchase of Canaan Securities by Canaan. Accordingly, the assets
acquired by Canaan were revalued and recorded at their estimated "fair
values." The operations of Canaan Securities before the combination
transactions will not continue after the combination transactions and
Canaan Securities assets and liabilities other than its right to
receive cash distributions from the partnerships will be distributed
to the sole owner of Canaan Securities prior to completion of the
combination transactions.
. The purchase price of the acquired net assets of Indian was based on
the risk-adjusted, present value (using a 20% discount rate) of
estimated future net revenues from oil and gas reserves, less the fair
value of liabilities to be assumed by Canaan plus the fair value of
non-oil and gas assets and working capital of Indian as of March 31,
2000.
. The purchase price of the acquired net assets of Canaan Securities was
based on the fair value of the right to receive cash distributions
from production revenues of the partnerships. The fair value was
determined using the same assumptions to value the oil and gas assets
of Indian.
2. Pro Forma Adjustments Related to the Combination Transactions
The unaudited pro forma balance sheet includes the following adjustments:
(a) This adjustment eliminates duplicative balances of the partnerships
which are also included in the combined General Partners' financial
statements. The General Partners manage and control the operations of
the partnerships, and therefore consolidate the partnerships' assets
and liabilities.
(b) This entry adjusts the historical book values of Indian's assets and
liabilities to their estimated fair values as of March 31, 2000 and
eliminates Indian's historical financial equity. The calculation of
the total purchase price and the preliminary allocation to assets and
liabilities are as follows:
B-7
Appendix B
Calculation and allocation of purchase price:
Fair value of assets acquired:
Oil and gas properties $ 32,000,000
Non-oil and gas properties 66,000
Current assets 5,919,118
Other assets 30,000
Less fair value of liabilities assumed:
Current liabilities, excluding current maturities of long-term debt (3,457,309)
Bank debt (24,250,583)
Production payment debt (5,268,750)
----------------
Purchase price before transaction costs 5,038,476
Estimated transaction costs 50,000
----------------
Total purchase price for Indian $ 5,088,476
================
Allocated to:
Property and equipment $ 32,116,000
Current assets 5,919,118
Other assets 30,000
Current liabilities, excluding current maturities of long-term debt (3,457,309)
Current maturities of long-tem debt (24,425,583)
Long-term debt (5,093,750)
----------------
$ 5,088,476
================
The above purchase price and allocation are as of March 31, 2000. The
ultimate actual purchase price will be determined as of the date the
combination transactions are completed and will be allocated to assets
and liabilities as of that date. The fair value of Indian's oil and
gas properties as of the date the acquisition is completed may be
different than as of March 31, 2000 due to changes in oil and gas
reserve quantities and estimated future prices used to value the
reserve quantities.
Current liabilities and other non-current liabilities being assumed by
Canaan are less than corresponding amounts recorded by Indian by
$84,778 and $28,259, respectively. Such amounts represent the deferred
gain from a previous sale-leaseback transaction which does not
obligate Canaan in the future.
As of March 31, 2000, Canaan had incurred and capitalized $19,180 of
Indian-related transaction costs.
Based on relative exchange values, Indian's shareholders will receive
1,110,500 shares of Canaan common stock which represents approximately
22% of Canaan assuming no limited partners elect to receive cash in
lieu of Canaan common stock.
(c) This adjustment records goodwill resulting from the combination
transaction with Indian and increases deferred income taxes by $2.7
million. This adjustment equals the deferred income tax effect of the
difference between the fair value assigned to Indian's assets and
liabilities and their estimated income tax basis for income tax
purposes. Due to the tax-free nature of the combination transactions
to the shareholders of Indian, Canaan's tax basis in those assets and
liabilities will be the same as Indian's tax basis. Future utilization
of Indian's tax operating loss carryforwards will be limited as a
result of the "change of control" of Indian which will occur if the
combination transactions are approved. The $2.7 million net deferred
tax liability consists of tax-effected (using 38% combined federal and
state tax rate) future taxable temporary differences of $3.3 million
reduced by $.6 million tax-effected operating loss carryforwards of
Indian.
B-8
Appendix B
(d) This adjustment increases Canaan's oil and gas properties by $1.4
million for the fair value of the future fees based on the
partnerships' ongoing cash distributions from oil and gas properties
to be received by Canaan Securities and the Placing Brokers. Even
though Canaan is acquiring all the common stock of Canaan Securities
in exchange for Canaan common stock, all recorded assets and
liabilities of Canaan Securities will be distributed to the sole owner
of Canaan Securities prior to completion of the combination
transactions. Accordingly, the only asset being acquired by Canaan is
the right to receive future payments based on the partnerships'
ongoing cash distributions from oil and gas properties. The fair value
of future payments based on cash distributions from the partnerships
was determined in the same manner as the fair value of Indian's oil
and gas properties. See The Combination Transactions - Description of
the Combination Transactions elsewhere in this document. Canaan is
acquiring the rights to receive cash distributions from the
partnerships from the Placing Brokers in exchange for Canaan common
stock and cash. The Placing Brokers will receive 40% of the exchange
value in cash which approximates $390,582. This payment is in addition
to the maximum $15 million cash option to the limited partners of the
partnerships. See Summary - Method of Determining Combination Exchange
Values. The owner of Canaan Securities will receive an estimated
119,950 shares of Canaan and the Placing Brokers will receive an
estimated 56,100 shares of Canaan which shares approximate 2.40% and
1.14% of total Canaan shares, respectively, assuming that no limited
partners elect to receive cash in lieu of Canaan common stock.
This adjustment also records goodwill resulting from the combination
transactions with Canaan Securities and increases deferred income
taxes by $293,000. This adjustment equals the deferred income tax
effect of the difference between the fair value assigned to Canaan
Securities' assets and their estimated tax basis for income tax
purposes. Due to the tax-free nature of the combination transactions
to the shareholder of Canaan Securities, Canaan's tax basis in those
assets will be the same as Canaan Securities' tax basis. The deferred
tax adjustment was based on a combined federal and state tax rate of
38%.
(e) This adjustment eliminates receivables and payables between Canaan,
the General Partners and Indian. The adjustment also eliminates the
monetary production payment receivable and payable between the General
Partners and Indian.
(f) This adjustment increases Canaan's deferred income taxes for the tax
effect of the differences between the financial carrying amounts and
the tax bases of the partnerships' assets and liabilities at March 31,
2000 using a combined federal and state tax rate of 38%. The
partnerships have not recorded deferred income taxes since any tax
liabilities are the responsibility of the individual partners. The
$2.05 million has been excluded from the unaudited pro forma
statements of operations as the amount will not recur and is directly
attributable to the combination transactions. The deferred income
taxes will be recorded as part of operations in the period in which
the combination transactions are completed.
(g) This adjustment reflects expensing the deferred costs incurred by
Canaan related to the combination transactions with the General
Partners and the partnerships. The actual deferred costs related to
the combination transactions with the General Partners and the
partnerships will be expensed in the period the transactions are
completed.
(h) This adjustment reflects additional compensation expense to a
consultant of Indian (who is a proposed executive officer of Canaan)
payable upon completion of the combination transactions.
(i) This adjustment records the par value ($.01) of the 5,000,000 common
shares of Canaan which will be outstanding after completing the
combination transactions and reclassifies the partnerships' equity to
additional paid-in capital and accumulated deficit of Canaan. The
adjustment assumes that no limited partners will elect to receive cash
in lieu of Canaan common stock.
B-9
Appendix B
The unaudited pro forma statement of operations include the following
adjustments:
(j) These adjustments eliminate duplicative operations of the partnerships
which are also included in the combined General Partners' financial
statements. The General Partners manage and control the operations of
the partnerships and therefore consolidate the partnerships' revenues
and expenses.
(k) These adjustments eliminate oil and natural gas well overhead and
various services charged to the partnerships as working interests
owners in wells operated by Canaan. The overhead charges are recorded
by Canaan as a reduction in general and administrative expenses.
(l) These adjustments eliminate sales commissions, consulting fees and
investor services income, and other income of Canaan Securities
derived from the General Partners. Canaan Securities derives all of
its revenues from the General Partners. The adjustments also eliminate
commission expense which will not be incurred after the combination
transactions, and interest income resulting from the loan receivable
from Canaan Securities' officer which is excluded from the combination
transaction.
(m) These adjustments eliminate interest expense applicable to Indian's
shareholder debt, which was contributed to Indian's equity in February
2000.
(n) These adjustments record depreciation and amortization of property and
equipment on a consolidated basis assuming the combination
transactions were completed on January 1, 1999. The adjustments also
record amortization of goodwill resulting from the combination
transactions with Indian and Canaan Securities, assuming the
transactions were completed on January 1, 1999. Goodwill amortization
is based on the estimated life of the acquired oil and gas assets.
(o) This adjustment reflects additional compensation expense to a
consultant of Indian (who is a proposed executive officer of Canaan),
the payment of which is contingent upon the completion of the
combination transactions. The adjustment assumes the combination
transactions were completed on January 1, 1999.
(p) These adjustments record the net tax effect of all pro forma
adjustments at a combined statutory federal and state tax rate of 38%
after consideration of permanent differences. The adjustments include
income taxes for the applicable period for the partnerships for which
no income taxes have been previously recorded.
(q) This adjustment records estimated transaction costs net of income tax
of $300,000 (using a 38% effective tax rate) related to the
combination of the General Partners and the partnerships, assuming the
combination transactions were completed on January 1, 1999. Total
combination transaction costs are expected to be $790,000.
The unaudited pro forma statements of cash flows include the following
adjustments:
(r) These adjustments eliminate the cash flows of the partnerships, which
are also included in the combined general partners' financial
statements. The General Partners manage and control the operations of
the partnerships, and therefore consolidate the partnerships' cash
flows.
(s) These adjustments reflect the net adjustments to the pro forma
statement of operations and reflect pro forma adjustments effecting
the reconciliation of net earnings to net cash provided by operating
activities.
B-10
Appendix B
(t) This adjustment reflects the acquisition of Indian's cash, assuming
the transaction was completed on January 1, 1999. The adjustment also
reflects the $390,528 Canaan will pay in acquiring the Placing
Brokers' rights to receive cash distributions from the partnerships
(see adjustment (d)).
(u) This adjustment eliminates the advances/borrowings and repayments
related to the monetary production payment receivable and payable
between the General Partners and Indian.
(v) These adjustments eliminate Canaan Securities' beginning historical
cash balances, and historical net cash provided (used in) operating
and investing activities. Canaan Securities' assets are excluded from
the acquisition, and its liabilities are not being assumed (see
adjustment (d)).
(w) These adjustments reflect the change in deferred income taxes,
resulting from pro forma adjustments effecting the differences between
financial carrying amounts and the tax bases of the combination
entities.
(x) This adjustment eliminates the historical deferred transaction costs
related to the combination with the General Partners and the limited
partners to reflect the expensing of such costs.
3. Pro Forma Effect of Cash Offer to Limited Partners
A limited partner may elect to receive cash in lieu of Canaan common stock
in an amount equal to the appraisal value of his partnership interest based on
an independent appraisal of the partnership assets. See Summary - Determination
of Appraised Value. There is a limit of $15 million on the amount of cash
payable to electing limited partners.
The pro forma financial information has been prepared based on no limited
partners electing to receive cash. Accordingly, the combination of the
partnerships and Canaan has been accounted for as a reorganization of interests
under common control in a manner similar to a pooling of interests.
If the limited partners elect to receive the full $15 million,
approximately 71% of the limited partners interests in the partnerships will be
purchased for cash. While Canaan does not expect to purchase a significant
portion of the limited partner interests for cash, a payment of $15 million
would likely require the combination of Canaan and the partnerships to be
accounted for as a purchase of the limited partners interests rather than as a
reorganization of interests under common control.
However, the net book of the partnerships' oil and gas properties as
reflected on the accompanying pro forma balance sheet as of March 31, 2000 does
not differ materially from the fair value of such properties. Accordingly, the
differences resulting from different accounting treatment of the combination of
Canaan and the partnerships under reorganization accounting or purchase
accounting would not materially affect the pro forma balance sheet of Canaan as
of March 31, 2000.
Assuming Canaan borrows the entire $15 million (at 8.75%) for the purchase
of electing-limited partners' partnership interests, the effect on the
accompanying pro forma statements of operations would be as follows:
B-11
Appendix B
Year ended Three months ended
December 31, 1999 March 31, 2000
------------------------------------- ----------------------------------
As Presented As Presented
Without With Without With
$15 Million $15 Million $15 Million $15 Million
Purchase Purchase Purchase Purchase
------------ ------------ ------------ ------------
Revenues $ 20,405,606 20,405,606 5,692,312 5,692,312
Costs and expenses 18,106,370 19,418,870 4,463,522 4,791,647
Other income 36,423 36,423 13,379 13,379
------------ ------------ ------------ ------------
Earnings before income taxes and
transaction expenses and payments 2,335,659 1,023,159 1,242,169 914,044
Income tax expense 981,000 482,000 496,000 372,000
------------ ------------ ------------ ------------
Net earnings before transaction
expenses and payments 1,354,659 541,159 746,169 542,044
Transaction expenses and payments,
net of income taxes 490,000 490,000 - -
------------ ------------ ------------ ------------
Net earnings after transaction
expenses and payments $ 864,659 51,159 746,169 542,044
============ ============ ============ ============
Net earnings per average common
share outstanding - basic and
diluted:
Before transaction expenses
and payments $ 0.27 0.17 0.15 .17
------------ ------------ ------------ ------------
After transaction expenses
and payments $ 0.17 0.02 0.15 .17
------------ ------------ ------------ ------------
Weighted average common shares
outstanding 5,000,000 3,106,938 5,000,000 3,106,938
------------ ------------ ------------ ------------
Ratio of earnings to fixed charges:
Before transaction expenses
and payments 1.89 1.26 2.80 1.90
------------ ------------ ------------ ------------
After transaction expenses
and payments 1.59 1.06 2.80 1.90
------------ ------------ ------------ ------------
4. Pro Forma Outstanding Shares of Canaan
A total of 5,000,000 shares of Canaan common stock will be issued and be
outstanding after the combination transactions, less the number of shares
otherwise issuable to the limited partners who elect to receive cash. The owners
of each of the participating entities will receive shares of Canaan common stock
in proportion to the "Exchange Value" of each entity to the total Exchange Value
of all entities. The Exchange Value has been determined by Canaan and is based
on a valuation of each entity's oil and gas reserves and other assets and
liabilities. Any limited partner in any partnership may elect to receive cash in
lieu of Canaan common stock equal to the appraisal value of his interest in a
partnership.
The number of shares to be received by each participating entity, assuming
no limited partner elects to receive cash in lieu of Canaan common stock, is
reflected in the table on page 16 under the heading Canaan Common Stock - Number
of Shares.
Assuming the full $15 million is paid to electing partners, there will be
3,106,938 shares outstanding after completion of the combination transactions.
The 2,671,175 shares potentially distributable to the limited partners would be
reduced to 778,113 if the limited partners elect to receive the full $15
million. For every $100,000 of cash paid to electing limited partners, the
number of shares otherwise distributable to limited
B-12
Appendix B
partners decreases by 12,620 or approximately .5% of the total shares
distributable to the limited partners. To effect a 1% decrease in the total
shares expected to be outstanding after completion of the combination
transactions, limited partners would have to elect to receive an aggregate of
approximately $396,000 which is 1.9% of the total appraised value of all the
partnerships.
5. Pro Forma Oil and Gas Property Acquisition and Development Activities
The pro forma oil and gas property acquisition and development activities
set forth below assumes the combination transactions were completed on January
1, 1999. The pro forma adjustments reflect the estimated fair value of the oil
and gas assets purchased from Indian, and the estimated fair value of Canaan
Securities' and the Placing Brokers' future payments from the partnerships'
ongoing cash distributions from oil and gas properties.
Canaan Combined Indian
Energy General Oil
Corporation Partners Company Pro Forma
Historical Historical Historical Adjustments Pro Forma
------------ ------------ ------------ ------------ ------------
Year ended December 31, 1999:
Development costs $ 106,671 464,214 1,186,837 -- 1,757,722
Acquisition costs -- 6,094 123,000 33,450,000 33,579,094
------------ ------------ ------------ ------------ ------------
Total $ 106,671 470,308 1,309,837 33,450,000 35,336,816
============ ============ ============ ============ ============
Three months ended March 31, 2000:
Development costs $ 1,486 430,279 356,523 -- 788,288
Acquisition costs -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total $ 1,486 430,279 356,523 -- 788,288
============ ============ ============ ============ ============
6. Pro Forma Information on Oil and Gas Operations
The pro forma reserve information set forth below assumes the combination
transactions were completed on January 1, 1999. Since the General Partners
consolidate the assets, liabilities, revenues and expenses of the partnerships
for financial reporting purposes, the partnerships' reserve quantities and the
standardized measure of discounted future net cash flows of the partnerships are
included in the column for the General Partners. There are many uncertainties
inherent in estimating reserve quantities, and in projecting future production
rates and the timing of future development expenditures. In addition, reserve
estimates of new discoveries are more imprecise than those of properties with a
production history. Accordingly, estimates are subject to change as additional
information becomes available.
Proved oil and natural gas reserves are the estimated quantities of crude
oil, condensate, natural gas and natural gas liquids that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic conditions. Proved
developed oil and natural gas reserves are those reserves expected to be
recovered through existing equipment and operating methods.
All reserves are located in the United States.
B-13
Appendix B
Changes in Pro Forma Proved Reserves
Canaan Combined Indian
Energy General Oil
Corporation Partners Company
Historical Historical Historical Pro Forma
----------- ---------- ---------- ----------
Oil (Bbls):
Proved reserves, December 31, 1998 11,000 984,000 330,000 1,325,000
Extensions and discoveries 2,000 87,000 38,000 127,000
Purchases of reserves -- 51,000 26,000 77,000
Production (1,000) (152,000) (55,000) (208,000)
Revisions of previous estimates 3,000 458,000 300,000 761,000
----------- ---------- ---------- ----------
Proved reserves, December 31, 1999 15,000 1,428,000 639,000 2,082,000
=========== ========== ========== ==========
Proved developed reserves,
December 31, 1999 11,000 1,173,000 519,000 1,703,000
=========== ========== ========== ==========
Natural Gas (Mcf):
Proved reserves, December 31, 1998 511,000 35,641,000 50,783,000 86,935,000
Extensions and discoveries -- 284,000 3,448,000 3,732,000
Purchases of reserves -- 166,000 36,000 202,000
Production (47,000) (3,670,000) (4,305,000) (8,022,000)
Revisions of previous estimates 43,000 4,618,000 3,647,000 8,308,000
Sales of reserves -- -- (9,000) (9,000)
----------- ---------- ---------- ----------
Proved reserves, December 31, 1999 507,000 37,039,000 53,600,000 91,146,000
=========== ========== ========== ==========
Proved develop reserves,
December 31, 1999 390,000 29,891,000 34,956,000 65,237,000
=========== ========== ========== ==========
Pro Forma Standardized Measure of Discounted Future Net Cash Flows
Canaan Combined Indian
Energy General Oil
Corporation Partners Company Pro Forma
Historical Historical Historical Adjustments Pro Forma
----------- ----------- ----------- ----------- -----------
Future cash inflows $ 1,476,000 111,216,000 129,862,000 -- 242,554,000
Future development costs (95,000) (4,506,000) (9,760,000) -- (14,361,000)
Future production costs (420,000) (37,247,000) (48,088,000) -- (85,755,000)
Future income tax expense (293,000) -- (3,191,000) (9,800,000) (13,284,000)
----------- ----------- ----------- ----------- -----------
Future net cash flows 668,000 69,463,000 68,823,000 (9,800,000) 129,154,000
10% discount to reflect timing of
cash flows (357,000) (31,848,000) (32,930,000) 4,500,000 (60,635,000)
----------- ----------- ----------- ----------- -----------
Standardized measure of discounted
future net cash flows $ 311,000 37,615,000 35,893,000 (5,300,000) 68,519,000
=========== =========== =========== =========== ==========
B-14
Appendix B
Pro Forma Changes in Standardized Measure of Discounted Future Net Cash Flows
Canaan Combined Indian
Energy General Oil
Corporation Partners Company Pro Forma
Historical Historical Historical Adjustments Pro Forma
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 $ 217,000 23,181,000 29,107,000 -- 52,505,000
Sales of oil and natural gas, net of
production costs (112,000) (8,171,000) (5,935,000) -- (14,218,000)
Net changes in year-end sales prices
and production costs 102,000 11,585,000 4,764,000 -- 16,451,000
Purchase of reserves, net of future
development costs -- 629,000 276,000 -- 905,000
Revisions of previous estimates, net of
future development costs 53,000 7,526,000 5,323,000 -- 12,902,000
Extensions and discoveries, net of
future development costs 16,000 1,457,000 1,649,000 -- 3,122,000
Development costs incurred during
the period which reduced future
development costs 57,000 -- 845,000 -- 902,000
Sales of reserves in place, net of
future development costs -- -- (8,000) -- (8,000)
Accretion of discount 31,000 2,318,000 2,911,000 -- 5,260,000
Net change in income taxes (47,000) -- (1,665,000) (5,300,000) (7,012,000)
Other, primarily timing (6,000) (910,000) (1,374,000) -- (2,290,000)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 $ 311,000 37,615,000 35,893,000 (5,300,000) 68,519,000
=========== =========== =========== =========== ===========
The pro forma adjustment to standardized measure and changes in
standardized measure of discounted future net cash flows reflects the purchase
of Indian's oil and gas reserves, assuming the combination transactions were
completed on January 1, 1999. The adjustment also reflects the future income tax
expense impact on the General Partners' standardized measure and changes in
standardized measure of discounted future net cash flows using a combined
federal and state tax rate of 38%. Future income tax expense has been excluded
from the General Partners' standardized measure and changes in standardized
measure of discounted future net cash flows since any tax liabilities are the
responsibility of the individual partners.
B-15
Appendix C
Coral Reserves Natural Gas Income Funds
Coral Reserves Institutional Limited Partnerships
and Coral Reserves Energy Income Fund
Combining Balance Sheet
March 31, 2000
Combined
1990 1991 1992 1993 1993-I 1995 1996 1996-I Partnerships
---------- --------- --------- --------- --------- --------- --------- --------- -----------
Assets
Current assets $ 204,468 285,121 485,394 395,169 161,039 459,389 579,977 435,746 3,006,303
Property and equipment, net 1,221,583 1,295,738 3,029,104 2,490,505 1,222,078 3,262,071 4,426,314 3,340,773 20,288,166
Notes receivable -- -- -- -- -- -- 2,810,000 2,458,750 5,268,750
Other assets -- -- -- -- -- -- 933 -- 933
---------- --------- --------- --------- --------- --------- --------- --------- ----------
Total assets $1,426,051 1,580,859 3,514,498 2,885,674 1,383,117 3,721,460 7,817,224 6,235,269 28,564,152
========== ========= ========= ========= ========= ========= ========= ========= ==========
Liabilities and Partners' Equity
Current liabilities $ 46,236 69,945 133,492 144,592 27,861 67,240 69,692 85,226 644,284
Long-term debt, less
current portion 690,455 742,734 639,000 542,800 387,500 10,000 2,365,000 1,950,000 7,327,489
Partners' equity (deficit):
General partners (39,863) (35,815) (23,574) (29,024) (4,819) 10,589 (27,675) (17,751) (167,932)
Limited partners 729,223 803,995 2,765,580 2,227,306 972,575 3,633,631 5,410,207 4,217,794 20,760,311
---------- --------- --------- --------- --------- --------- --------- --------- ----------
Total partners' equity 689,360 768,180 2,742,006 2,198,282 967,756 3,644,220 5,382,532 4,200,043 20,592,379
---------- --------- --------- --------- --------- --------- --------- --------- ----------
Total liabilities and
partners' equity $1,426,051 1,580,859 3,514,498 2,885,674 1,383,117 3,721,460 7,817,224 6,235,269 28,564,152
========== ========= ========= ========= ========= ========= ========= ========= ==========
C-1
Appendix C
Coral Reserves Natural Gas Income Funds
Coral Reserves Institutional Limited Partnerships
and Coral Reserves Energy Income Fund
Combining Statement of Operations
Year ended December 31, 1999
Combined
1990 1991 1992 1993 1993-I 1995 1996 1996-I Partnerships
--------- --------- --------- --------- ------- --------- --------- --------- ------------
Revenues:
Oil and natural gas sales $ 695,597 1,016,200 1,346,054 1,496,834 621,568 1,802,613 2,152,981 1,643,206 10,775,053
Other income 3,560 4,251 5,168 5,823 12,757 23,346 19,480 18,114 92,499
--------- --------- --------- --------- ------- --------- --------- --------- ----------
Total revenues 699,157 1,020,451 1,351,222 1,502,657 634,325 1,825,959 2,172,461 1,661,320 10,867,552
--------- --------- --------- --------- ------- --------- --------- --------- ----------
Costs and expenses:
Lease operating 93,983 134,644 243,633 410,970 111,371 344,984 391,189 245,404 1,976,178
Production taxes 49,817 75,389 95,866 118,445 50,559 138,216 172,622 122,014 822,928
Depreciation and amortization 194,237 232,109 330,018 283,597 157,095 385,924 561,278 413,805 2,558,063
General and administrative 46,502 64,143 83,888 83,528 24,465 114,126 151,533 69,667 637,852
Interest 56,102 67,135 50,472 40,682 31,145 - 133,870 117,776 497,182
--------- --------- --------- --------- ------- --------- --------- --------- ----------
Total costs and expenses 440,641 573,420 803,877 937,222 374,635 983,250 1,410,492 968,666 6,492,203
--------- --------- --------- --------- ------- --------- --------- --------- ----------
Net earnings $ 258,516 447,031 547,345 565,435 259,690 842,709 761,969 692,654 4,375,349
========= ========= ========= ========= ======= ========= ========= ========= ==========
C-2
Appendix C
Coral Reserves Natural Gas Income Funds
Coral Reserves Institutional Limited Partnerships
and Coral Reserves Energy Income Fund
Combining Statement of Operations
Three months ended March 31, 2000
Combined
1990 1991 1992 1993 1993-I 1995 1996 1996-I Partnerships
--------- ------- ------- ------- ------- ------- ------- ------- ------------
Revenues:
Oil and natural gas sales $ 176,329 237,394 399,936 419,626 181,073 531,354 676,552 460,712 3,082,976
Other income 1,143 1,529 1,814 2,009 806 3,859 1,641 2,403 15,204
--------- ------- ------- ------- ------- ------- ------- ------- ------------
Total revenues 177,472 238,923 401,750 421,635 181,879 535,213 678,193 463,115 3,098,180
--------- ------- ------- ------- ------- ------- ------- ------- ------------
Costs and expenses:
Lease operating 23,132 39,970 69,622 105,925 26,973 83,107 139,484 68,270 556,483
Production taxes 14,155 17,510 32,401 34,337 14,032 46,343 60,537 39,898 259,213
Depreciation and amortization 47,676 54,415 87,221 67,959 38,772 98,667 117,645 101,754 614,109
General and administrative 12,641 15,857 26,949 26,287 6,316 34,234 42,641 17,218 182,143
Interest 15,113 16,258 13,245 11,021 8,315 - 49,917 42,661 156,530
--------- ------- ------- ------- ------- ------- ------- ------- ------------
Total costs and expenses 112,717 144,010 229,438 245,529 94,408 262,351 410,224 269,801 1,768,478
--------- ------- ------- ------- ------- ------- ------- ------- ------------
Net earnings $ 64,755 94,913 172,312 176,106 87,471 272,862 267,969 193,314 1,329,702
========= ======= ======= ======= ======= ======= ======= ======= ============
C-3
Appendix C
Coral Reserves Natural Gas Income Funds
Coral Reserves Institutional Limited Partnerships
and Coral Reserves Energy Income Fund
Combining Statement of Cash Flows
Year ended December 31, 1999
1990 1991 1992 1993 1993-I
---------- -------- -------- -------- --------
Cash flows from operating activities:
Net earnings $ 258,516 447,031 547,345 565,435 259,690
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 194,237 232,109 330,018 283,597 157,095
Changes in operating assets and liabilities:
Accounts receivable (23,515) (1,154) (159,367) (72,418) 67,269
Other assets - - - 1,438 -
Accounts payable and accrued expenses 14,053 (4,242) 106,878 76,406 27,023
---------- -------- -------- -------- --------
Net cash provided by operating activities 443,291 673,744 824,874 854,458 511,077
---------- -------- -------- -------- --------
Cash flows from investing activities:
Proceeds from sales of property and equipment - - 35,419 - -
Capital expenditures (75,307) (34,717) (137,975) (136,010) (78,718)
Advances on note receivable - - - - -
Repayments of note receivable - - - - -
---------- -------- -------- -------- --------
Net cash used in investing activities (75,307) (34,717) (102,556) (136,010) (78,718)
---------- -------- -------- -------- --------
Cash flows from financing activities:
Borrowings on long-term debt 62,000 47,000 100,000 39,000 29,000
Distributions to partners (420,043) (660,973) (769,396) (734,205) (440,925)
---------- -------- -------- -------- --------
Net cash provided by (used in) financing activities (358,043) (613,973) (669,396) (695,205) (411,925)
---------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents 9,941 25,054 52,922 23,243 20,434
Cash and cash equivalents at beginning of year 73,681 84,107 70,000 82,750 25,260
---------- -------- -------- -------- --------
Cash and cash equivalents at end of year $ 83,622 109,161 122,922 105,993 45,694
========== ======== ======== ======== ========
Combined
1995 1996 1996-I Partnerships
--------- --------- --------- ------------
Cash flows from operating activities:
Net earnings 842,709 761,969 692,654 4,375,349
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 385,924 561,278 413,805 2,558,063
Changes in operating assets and liabilities:
Accounts receivable (118,513) (163,264) (104,426) (575,388)
Other assets 1,438 - - 2,876
Accounts payable and accrued expenses 81,589 (11,190) 26,324 316,841
--------- --------- --------- ----------
Net cash provided by operating activities 1,193,147 1,148,793 1,028,357 6,677,741
--------- --------- --------- ----------
Cash flows from investing activities:
Proceeds from sales of property and equipment - 14,527 - 49,946
Capital expenditures (427,177) (309,400) (137,419) (1,336,723)
Advances on note receivable - (3,200,000) (2,800,000) (6,000,000)
Repayments of note receivable - 300,000 262,500 562,500
--------- --------- --------- ----------
Net cash used in investing activities (427,177) (3,194,873) (2,674,919) (6,724,277)
--------- --------- --------- ----------
Cash flows from financing activities:
Borrowings on long-term debt - 2,272,000 1,948,000 4,497,000
Distributions to partners (1,054,502) (1,420,258) (1,232,854) (6,733,156)
--------- --------- --------- ----------
Net cash provided by (used in) financing activities (1,054,502) 851,742 715,146 (2,236,156)
--------- --------- --------- ----------
Net increase (decrease) in cash and cash equivalents (288,532) (1,194,338) (931,416) (2,282,692)
Cash and cash equivalents at beginning of year 522,748 1,274,867 1,052,042 3,185,455
--------- --------- --------- ----------
Cash and cash equivalents at end of year 234,216 80,529 120,626 902,763
========= ========= ======== ==========
C-4
Appendix C
Coral Reserves Natural Gas Income Funds
Coral Reserves Institutional Limited Partnerships
and Coral Reserves Energy Income Fund
Combining Statement of Cash Flows
Three months ended March 31, 2000
1990 1991 1992 1993 1993-I 1995 1996
--------- --------- --------- --------- --------- --------- ---------
Cash flows from operating activities:
Net earnings $ 64,755 94,913 172,312 176,106 87,471 272,862 267,969
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 47,676 54,415 87,221 67,959 38,772 98,667 117,645
Changes in operating assets and liabilities:
Accounts receivable 4,956 4,377 6,171 18,508 (7,835) 972 (38,230)
Other assets
Accounts payable and accrued expenses (8,434) 7,576 (41,272) (44,365) (20,651) (78,460) 9,013
--------- --------- --------- --------- --------- --------- ---------
Net cash provided by operating activities 108,953 161,281 224,432 218,208 97,757 294,041 356,397
--------- --------- --------- --------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures (2,952) (2,496) (5,651) 5,571 6,713 (107,141) (41,885)
Repayments of note receivable - - - - - - 90,000
--------- --------- --------- --------- --------- --------- ---------
Net cash provided by (used in) investing activities (2,952) (2,496) (5,651) 5,571 6,713 (107,141) 48,115
--------- --------- --------- --------- --------- --------- ---------
Cash flows from financing activities:
Borrowings on long-term debt - - 50,000 48,000 12,000 10,000 93,000
Distributions to partners (127,102) (172,722) (264,211) (258,281) (120,325) (363,569) (471,070)
--------- --------- --------- --------- --------- --------- ---------
Net cash used in financing activities (127,102) (172,722) (214,211) (210,281) (108,325) (353,569) (378,070)
--------- --------- --------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents (21,101) (13,937) 4,570 13,498 (3,855) (166,669) 26,442
Cash and cash equivalents at beginning of year 83,622 109,161 122,922 105,993 45,694 234,216 80,529
--------- --------- --------- --------- --------- --------- ---------
Cash and cash equivalents at end of year $ 62,521 95,224 127,492 119,491 41,839 67,547 106,971
========= ========= ========= ========= ========= ========= =========
Combined
1996-I Partnerships
--------- --------------
Cash flows from operating activities:
Net earnings 193,314 1,329,702
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 101,754 614,109
Changes in operating assets and liabilities:
Accounts receivable (12,273) (23,354)
Other assets
Accounts payable and accrued expenses 9,013 (167,580)
--------- --------------
291,808 1,752,877
--------- --------------
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures (12,185) (160,026)
Repayments of note receivable 78,750 168,750
--------- --------------
Net cash provided by (used in) investing activities 66,565 8,724
--------- --------------
Cash flows from financing activities:
Borrowings on long-term debt 2,000 215,000
Distributions to partners (383,925) (2,161,205)
--------- --------------
Net cash used in financing activities (381,925) (1,946,205)
--------- --------------
Net increase (decrease) in cash and cash equivalents (23,552) (184,604)
Cash and cash equivalents at beginning of year 120,626 902,763
--------- --------------
Cash and cash equivalents at end of year 97,074 718,159
========= ==============
C-5
CORAL RESERVES NATURAL GAS INCOME FUND
1990 LIMITED PARTNERSHIP
(the "1990 Partnership")
SUPPLEMENT TO CANAAN ENERGY CORPORATION
PROSPECTUS/PROXY STATEMENT
Dated ______________, 2000
The date of this Supplement is _______________, 2000
General
This Supplement relates to the proposed "combination transactions"
involving Canaan Energy Corporation. In the proposed combination transactions:
. Canaan will acquire all of the limited partners' and Additional
General Partners' interests in the eight oil and gas limited
partnerships previously sponsored by Coral Reserves, Inc. and
Coral Reserves Energy Corp., affiliates of Canaan and the General
Partners of the partnerships;
. Canaan will acquire 100% of the stock of the General Partners of
the partnerships;
. Canaan will acquire 100% of the stock of Indian Oil Company, an
unaffiliated oil and gas company;
. Canaan will acquire 100% of the stock of Canaan Securities, Inc.,
an unaffiliated broker/dealer which has previously participated
in the marketing of the limited partnership interests and
provides ongoing reporting services to limited partners; and
. Existing owners of Canaan's common stock will receive additional
shares of common stock based on Canaan's relative share of the
total "Exchange Value" as described below.
We refer to Canaan, the partnerships, the General Partners, Indian Oil
Company and Canaan Securities as the "Combining Entities". When we refer to the
Coral Group we mean Canaan, the partnerships, the General Partnerships, the
Additional General Partners, Canaan Securities and the Placing Brokers. A total
of 5,000,000 shares of Canaan common stock will be issued and be outstanding
after the combination transactions, less the number of shares otherwise issuable
to limited partners who elect to receive cash. The owners of each of the
Combining
Entities will receive shares of Canaan common stock in proportion to the
"Exchange Value" of such entity relative to the total Exchange Value of all
Combining Entities. The Exchange Value was determined by Canaan and is based on
a valuation of each Combining Entity's oil and gas Reserve Values and other
assets and liabilities. The Reserves Values were determined by Netherland,
Sewell & Associates, Inc. an independent petroleum engineering and consulting
firm, using the same price, cost, effective date and discount rate assumptions
for each entity. A limited partner in any partnership may also elect to receive
cash in lieu of Canaan common stock equal to the "Appraised Value" of his
interest in the partnership.
The Prospectus/Proxy Statement dated ___________, 2000, which we refer
to as the "Prospectus" describes the combination transactions in detail.
However, the effects of the combination transactions may be different for
limited partners in the various partnerships. Accordingly, a supplement has been
prepared for each of the eight partnerships eligible to participate in the
combination transactions. This Supplement provides information regarding the
effects of the combination transactions on the limited partners of the 1990
Partnership. The General Partner will promptly mail a copy of any supplement
relating to other partnerships, without charge, upon request by any limited
partner or his representative who has been so designated in writing, addressed
to: Canaan Energy Corporation, 119 N. Robinson, Suite 600, Oklahoma City,
Oklahoma 73102.
Before voting on the plan of combination, limited partners should
carefully consider the following factors in addition to the other information
included in the Prospectus.
RISK FACTORS
There are numerous risks associated with the combination transactions.
For a more complete description of these risk factors, please see:
. "Risk Factors and Material Considerations" beginning on page 30
of the Prospectus.
. "Comparison of Securityholder Rights" beginning on page 156 of
the Prospectus.
Risks Related to the 1990 Partnership
There are no risk factors applicable to the 1990 Partnership that are
materially different from the risk factors described in the Prospectus.
-2-
TAX CONSEQUENCES
Crowe & Dunlevy, counsel to Canaan, has rendered an opinion that:
. No gain or loss will be recognized by a limited partner as a
result of the receipt of Canaan common stock in connection with
the combination transactions.
. The basis of the Canaan common stock received by each limited
partner will be equal to the basis of his partnership interest
exchanged for such stock.
. The holding period for the Canaan common stock for purposes of
computing eligibility for long-term capital gain or loss will
include the period of a limited partner's ownership of his
partnership interest exchanged for such stock and, to the extent
the Canaan common stock received is attributable to certain
ordinary income assets of the partnership, may begin on the day
after the closing of the combination transactions.
. A limited partner who receives cash will recognize gain or loss
equal to the difference between the cash received and his
adjusted tax basis of his limited partnership interest on the
date of the closing of the combination transactions. Gain
recognized by a limited partner will be capital except to the
extent of such limited partner's share of ordinary income assets,
including recapture of depletion, depreciation and intangible
drilling cost deductions previously allocated to a limited
partner.
For additional information please see:
. "Material Federal Income Tax Consequences" beginning on page 90
of the Prospectus.
METHOD OF DETERMINING COMBINATION EXCHANGE VALUES AND
APPRAISED VALUES
The following is a summary of the methods of determining the Exchange
Values and Appraised Values. For more detailed information concerning the
subject, please see the following sections of the Prospectus:
. "Summary - Method of Determining Combination Exchange Values" on
page 8.
. "Summary - Summary of Estimated Exchange Values" on page 12.
-3-
. "Summary - Determination of Appraised Value" on page 18.
. "Method of Determining Combination Exchange Values and Appraised
Values" on page 62.
General
Canaan and the General Partners determined the Exchange Value for each
of the Combining Entities. The Exchange Value takes into consideration the
value of each Combining Entities oil and gas reserves determined as described
below and the other assets and liabilities of each Combining Entity as adjusted
for other items for Canaan, Indian and the 1996 and 1996-I partnerships. The
Exchange Value is used to allocate the shares of Canaan common stock to each
Combining Entity based on relative Exchange Values. This methodology is used
based on the arm's length negotiated agreement between Indian and Canaan and the
General Partners in connection with the negotiation of the Indian Acquisition
Agreement and because it is a consistent methodology for establishing the
relative value of each Combining Entity. The Exchange Value may not represent
fair market value.
Canaan engaged Netherland, Sewell & Associates, Inc. to estimate a
value of the oil and gas reserves for each Combining Entity. Netherland Sewell
estimated the reserves, future net revenues therefrom and the present value of
such future net revenues for each Combining Entity as of September 30, 1999. We
refer to the evaluation date of September 30, 1999 as the "Effective Date" and
the present value of the estimated future net revenues from estimated reserves
as of the Effective Date as the "Reserve Value" for each Combining Entity.
We refer to the reserves estimated by Netherland Sewell as "Exchange
Reserves". They include estimates of proved undeveloped reserves as well as
proved developed reserves, both producing and nonproducing, as the term "proved"
is defined by the Society of Petroleum Engineers. However, because the reserves
are estimated using prices different from those required by the Securities and
Exchange Commission, we use the term "Exchange" instead of "proved" to describe
the reserve estimates for the Exchange Value.
The Reserve Value is an estimate only and does not represent the fair
market value of the underlying properties. The Reserve Values are being used
solely for purposes of determining the relative value of each of the Combining
Entities in the combination transactions.
The "Exchange Value" for each Combining Entity will be equal to:
. Reserve Value as of the Effective Date.
. Less bank debt at the closing date.
-4-
. Minus interest paid or accrued on bank or other debt assumed by
Canaan from the Effective Date to the closing date.
. For limited partners, Additional General Partners, Canaan
Securities and Placing Brokers, minus their share of cash
distributions from production subsequent to the Effective Date
and before the closing date.
. An adjustment for any gas imbalances which are not expected to be
material.
. For Canaan, an upward adjustment of $5.0 million for the value of
its "operating rights" as described in the Prospectus.
. For the 1996 and 1996-I Partnerships, upward adjustments, and for
Indian, a downward adjustment, for the Indian Contingent
Production Payment as described in the Prospectus.
Partnership Exchange Values and Allocation to Partners, Canaan Securities and
Placing Brokers
The Exchange Value for each of the partnerships will first be
determined as described above.
As between the limited partners and the General Partner and the
Additional General Partners in each partnership, the Exchange Value will
generally be allocated among them in the ratio in which net revenues and cash
distributions are shared. In each of the partnerships except 1993-I and 1996-I,
the General Partners' share of the net revenues and cash distributions increases
when "payout" occurs as to each individual limited partner. Accordingly, in
each of those partnerships in which payout has not already occurred as to all
limited partners as of the Effective Date, the Reserve Value was allocated first
among the partners in their respective before payout sharing ratios until payout
occurred and any remaining Reserve Value and other components of Exchange Value
was allocated in after payout sharing ratios.
As of March 31, 2000, "payout" had occurred for all limited partners
in the 1990 Partnership.
In the partnerships other than 1990, 1991, 1993-I and 1996-I, Canaan
Securities receives a fee for providing reporting services to the partnership
which is equal to 1.5% of partnership gross revenues. In each of these
partnerships, a portion of the Reserve Value (calculated based on gross
revenues) will be allocated to Canaan Securities representing its rights to
receive such fee adjusted for any payments for such fee subsequent to the
Effective Date and before the closing date. This allocation will be made prior
to the allocation of the remaining Reserve Value and other components of
Exchange Value to the limited partners and the General Partners.
-5-
The marketing arrangements entered into in connection with the sale of
interests in partnerships provided for certain fees to be paid to Canaan
Securities and Placing Brokers. Such fees are payable out of the cash
distributions otherwise distributable to the General Partner in such
partnerships. Accordingly, the Exchange Value allocated to the General Partner
in these partnerships will be reduced to take into consideration the amount of
the Exchange Value allocable to the rights of Canaan Securities and the Placing
Brokers to receive future distributions of net cash flow out of the General
Partner's share. The Placing Brokers will receive cash equal to the 40% of
their Exchange Value and their share of Canaan common stock will be determined
based on the balance of their Exchange Value.
As discussed above, for the limited partners, the Additional General
Partners, Canaan Securities and the Placing Brokers, an adjustment to their
Exchange Values will be made for cash distributions from production subsequent
to the Effective Date and before the closing date.
If the allocation of Exchange Value within a partnership plus
historical cash distributions is not at least 115% of the capital contributions
of the limited partners as a group, the Exchange Value shall be first allocated
to limited partners until this amount is achieved and the balance of the
Exchange Value will be allocated based on revenue sharing percentages. Canaan
and the General Partners believe that the 1996 partnership will be the only
partnership in which this priority allocation of Exchange Value will be
necessary.
Method of Determining Appraised Value
A limited partner may elect to receive cash equal to the Appraised
Value of his interest in a partnership. The Appraised Value was determined
based on an appraisal by Madison Energy Advisors of each partnership's oil and
gas properties valuing them as if sold in an orderly manner and in a reasonable
period of time and in a manner consistent with appropriate industry practice.
Other assets and liabilities of each partnership, consisting primarily of bank
debt and working capital were valued at their respective book values. The
Appraised Value also takes into consideration the cost associated with the sale
of the partnership oil and gas properties and assumes the proceeds of sale of
the partnership properties and working capital after payment of liabilities are
distributed in a liquidation of the partnership. The appraisal was obtained in
order to satisfy the requirements of the National Association of Securities
Dealers that limited partners be offered the opportunity to receive cash equal
to the Appraised Value of their interest in the partnership. The Appraised
Value for each partnership ranges from 56% to 93% of the Exchange Values.
If the Appraised Value of a limited partner's interest plus historical
cash distributions is less than 110% of the amount of the limited partner's
original investment, the Appraised Value for a limited partner electing cash
will be increased to such amount. Canaan and the General Partners believe that
the limited partners of the 1996 and 1996-I partnerships will be the only
limited partners whose Appraised Value will be affected by this adjustment.
-6-
Calculation of Exchange Value and Appraised Value
See Table A in this Supplement for calculation of the Exchange Value
of the 1990 Partnership and Table B for the calculation of the Appraised Value
of the 1990 Partnership.
FAIRNESS OF THE COMBINATION TRANSACTIONS
Canaan and the General Partners believe that the proposed combination
transactions are fair to the limited partners of each of the partnerships
receiving Canaan common stock or cash at Appraised Value and are fair to the
partnerships as a whole.
Please see "Recommendation of the General Partners and Fairness of the
Combination Transactions" on page 74 of the Prospectus for a detailed discussion
of the reasons for the General Partners' opinions. The following summarizes the
principal reasons for the General Partners' opinions.
The principal structural element affecting the limited partners and
the other parties to the combination transactions is the determination of the
Exchange Values. The Exchange Values are based primarily on the Reserve Value
based on Netherland Sewell's independent valuations. By using Reserve Values
calculated in a consistent manner by a single engineer based on the same price,
cost and discount assumptions, Canaan and the General Partners believe that the
relative value of each of the Combining Entities has been fairly determined for
purposes of determining its relative ownership of Canaan after the combination
transactions.
A limited partner of a partnership may elect to receive cash in lieu
of Canaan common stock in an amount equal to the Appraised Value of such limited
partner's interest. This cash election provides the opportunity for limited
partners who are unwilling to take market risks with respect to Canaan common
stock the opportunity to receive cash in an amount which Canaan and the General
Partners believe approximates fair value of their interest based on an appraisal
of the partnership oil and gas properties performed by an independent appraiser.
INFORMATION CONCERNING THE 1990 PARTNERSHIP
General
The 1990 Partnership was formed in April, 1990 and raised $3.9 million
of limited partner capital contributions. As of March 31, 2000, the 1990
Partnership had distributed $5.5 million in cash to limited partners
representing 143% of their original investment. The 1990 Partnership has
achieved payout for all limited partners.
The term of the 1990 Partnership is until December 31, 2009 unless the
partnership is earlier terminated in accordance with the applicable provisions
of the Partnership Agreement.
-7-
See "Information Concerning Partnerships" beginning on page 110 of the
Prospectus for additional information about the 1990 Partnership.
Failure to Approve the Combination Transactions
If the combination transactions are not approved, the 1990 Partnership
will continue in its business as previously conducted. However, it is possible
a new transaction might be provoked by Canaan or the General Partners, but no
other terms have been discussed or considered by them. In addition, Canaan and
the General Partners may also explore other alternatives, such as the sale of
the Coral Group to a third party, but there is no assurance that Canaan and the
General Partners could find a third party interested in purchasing as such. The
terms and conditions of any such purchase and sale agreement would be as
favorable as the terms offered pursuant to the combination transactions.
As of December 31, 1999, the 1990 Partnership had bank indebtedness of
$690,455 which is equal to 39% of the Present Value of its oil and gas reserves.
If the combination transactions are not approved, the General Partners
anticipate that amortization of such bank debt will begin prior to year end 2000
and such amortization will have an adverse affect on limited partner cash
distributions.
If the combination transactions are not consummated, costs and
expenses incurred in connection with the combination transaction proposals will
be borne by the Combining Entities, including the partnerships. Limited
partners in each partnership will bear a portion of the costs allocated to each
partnership based on the percentage interest of limited partners voting in favor
of the combination transactions. The estimated share of expenses allocated to
the 1990 Partnership is $25,500 of which a maximum of $19,125 would be allocated
to limited partners if all limited partners voted in favor of the combination
transactions.
Canaan and the General Partners have prepared an analysis of the
present value of the estimated future net cash flows to the limited partners
assuming that each partnership was continued. This value is referred to as the
"Continuation Value" and is based on the following assumptions:
. The estimated future net revenues from the sale of oil and gas are
based on the same prices and costs that are used to estimate the
Reserve Value for purposes of the Exchange Value.
. The partnerships will continue to incur general administrative
expenses in favor of the General Partners as provided in the
applicable partnership agreement in the amount of 5% of the amount
of distributable cash.
. Any partnership with bank debt is assumed to amortize such debt on
a 36 month level amortization basis, assuming an interest rate of
9%, beginning July 31, 2000.
-8-
. The estimated future net cash flows have been discounted at a
discount rate of 10% to arrive at the estimated Continuation
Value.
Table E in this Supplement provides a comparison of Exchange Value,
Appraised Value and Continuation Value for the 1990 Partnership
COMBINATION VALUES AND COMPENSATION
AND DISTRIBUTION INFORMATION
Set forth below are the following tables:
. Table A - Calculation of estimated Exchange Values and
the allocation of shares of Canaan common stock
assuming a closing of the combination transactions on
July 31, 2000.
. Table B - Calculation of estimated Appraised Values as
of July 31, 2000.
. Table C - The General Partners' and Canaan's
compensation and cash distribution history for the
three most recent fiscal years and the three months
ended March 31, 2000.
. Table D - The amount of the limited partners' cash
distributions for the five most recent fiscal years and
the three months ended March 31, 2000.
. Table E - Comparison of Exchange Value, Appraised Value
and Continuation Value.
For additional information, see the following sections of the
Prospectus:
. "Information Concerning the Partnerships - Selected Historical
Financial and Operating Data of Individual Partnerships"
beginning on page 121; and
. "Unaudited Pro Forma Financial Information" in Appendix B.
-9-
Table A
Coral Reserves Natural Gas Income Fund
1990 Limited Partnership
Calculation of Estimated Exchange Value
The Exchange Value is estimated based on Canaan's estimate of cash
distributions and interest expense from the September 30, 1999 Effective Date to
an assumed closing date of July 31, 2000. Variances in actual cash
distributions and interest expense or a change in the closing date will result
in a change in the Exchange Value for the partnership and will similarly change
Exchange Values for other Combining Entities.
- -----------------------------------------------------------------------------------------------------
Amount
-----------
- -----------------------------------------------------------------------------------------------------
Reserve Value of Oil and Gas
Properties (1)......................... $2,077,500
- -----------------------------------------------------------------------------------------------------
Bank Debt as of Effective Date............ 655,454
- ------------------------------------------
Working Capital as of Effective Date:
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents.............. 75,749
- -----------------------------------------------------------------------------------------------------
Accounts receivable.................... 118,176
- -----------------------------------------------------------------------------------------------------
Accounts payable....................... 43,166
- -----------------------------------------------------------------------------------------------------
Subtotal - Working Capital................ 150,759
- -----------------------------------------------------------------------------------------------------
Estimated Cash Distributions Before
Closing (3)............................ 354,102
- -----------------------------------------------------------------------------------------------------
Estimated Interest Expense Before......... Shares of Percent of
Closing (3)............................ 50,247
- -----------------------------------------------------------------------------------------------------
Other Adjustments(4)...................... (47,196) Canaan Stock
Common Stock (2) Outstanding (2)
---------------- --------------
- -----------------------------------------------------------------------------------------------------
Estimated Exchange Value
at Closing(5).......................... 1,080,205 107,000 2.14%
- -----------------------------------------------------------------------------------------------------
Allocated to:
Limited Partners....................... 766,701 77,490 1.55%
- -----------------------------------------------------------------------------------------------------
General Partner........................ 241,945 24,470 0.49%
- -----------------------------------------------------------------------------------------------------
Additional General Partners............ 10,222 1,020 0.02%
- -----------------------------------------------------------------------------------------------------
Canaan Securities...................... 10,222 1,020 0.02%
- -----------------------------------------------------------------------------------------------------
Placing Brokers........................ 51,114 3,000 0.06%
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Limited Partner per $1000 Investment...... 197 20 (6)
- -----------------------------------------------------------------------------------------------------
_______________________
(1) As determined by Netherland, Sewell & Associates, Inc. See "Method of
Determining Combination Exchange Values and Appraised Values" in the
Prospectus. No partnerships own an individual property representing more
than 10% of the Reserve Value or from which the partnership derived more
than 10% of its cash flow or net income for the year ended December 31,
1999.
(2) Assumes no limited partners elect to receive cash. Placing Brokers' shares
based on 60% of Exchange Value.
(3) Assumes closing on July 31, 2000, and uses Netherland, Sewell reserve
report to estimate property revenues and expenses and estimated interest
rate on bank debt for purposes of calculating interest expense.
(4) Adjustment to reflect sale of a portion of Canaan Securities' interests to
the 1991 partnership.
(5) The "Estimated Exchange Value at Closing" for all of the partnerships and
Canaan set forth in the table is approximately 96.3% of the sum of their
respective components of Exchange Value because the operating rights
adjustment to Canaan's Exchange Value within the Coral Group is excluded
for purposes of computing the relative Exchange Value between the Coral
Group and Indian. See "Method of Determining Combination Exchange Values
and Appraised Values" in the Prospectus for a more detailed explantation.
-10-
(6) Less than 0.01%
Table B
Coral Reserves Natural Gas Income Fund
1990 Limited Partnership
Calculation of Estimated Appraised Value
The Appraised Value is estimated based on Canaan's estimate of
property net revenue from the September 30, 1999 Effective Date to an assumed
closing date of July 31, 2000. Variances in actual net revenue or a change in
the closing date will result in a change in the Appraised Value for the
partnership and will similarly change Appraised Values for other partnerships.
Property net revenues include proceeds from sale of production less production
taxes and operating expense.
- ----------------------------------------------------------------------------------------------
Amount
----------
- ----------------------------------------------------------------------------------------------
Appraised Value of Oil and Gas
Properties at Effective Date (1).................. $1,510,000
- ----------------------------------------------------------------------------------------------
Estimated Property Net Revenues Before Closing(2)...... 485,577
- ----------------------------------------------------------------------------------------------
Appraised Value of Properties at Closing............... 1,024,423
Date
- ----------------------------------------------------------------------------------------------
Bank Debt as of Closing Date........................... 690,454
- -------------------------------------------------------
Working Capital as of Closing Date:
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents......................... 75,749
- ----------------------------------------------------------------------------------------------
Accounts receivable............................... 118,176
- ----------------------------------------------------------------------------------------------
Accounts payable.................................. 43,166
- ----------------------------------------------------------------------------------------------
Subtotal - Working Capital............................. 150,759
- ----------------------------------------------------------------------------------------------
Estimated Appraised Value
at Closing(2)..................................... 484,728
- ----------------------------------------------------------------------------------------------
Allocated to:(3)
Limited Partners.................................. 433,154
- ----------------------------------------------------------------------------------------------
General Partner and Additional General Partners... 51,574
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Limited Partner per $1000 Investment................... 111
- ----------------------------------------------------------------------------------------------
_______________________
(1) As determined based on an appraisal of the partnership's properties by
Madison Energy Advisors. See "Method of Determining Combination Exchange
Values and Appraised Values" in the Prospectus.
(2) Assumes closing on July 31, 2000, and uses actual property net revenues
from September 30, 1999 to March 31, 2000 and estimated property net
revenues based on Netherland, Sewell report thereafter.
(3) Allocated based on liquidation provisions of applicable partnership
agreement.
Table C
Coral Reserves Natural Gas Income Fund 1990 Limited Partnership
Summary of Compensation and Cash Distributions
Paid to the General Partners and Affiliates
- ----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
-11-
- ----------------------------------------------------------------------------------------------
1997 1998 1999 THREE MONTHS
ENDED
MARCH 31, 2000
- ----------------------------------------------------------------------------------------------
Reimbursement of expenses paid
to General Partner............. $ 40,086 $ 30,676 $ 22,883 $ 6,334
- ----------------------------------------------------------------------------------------------
Operating fees paid to Canaan.. 4,831 5,347 5,625 1,447
- --------------------------------
Cash distributions paid to
General Partner............... 182,809 146,809 100,810 30,504
- --------------------------------
Cash distributions paid to
Additional General Partners... 7,616 6,117 4,202 1,271
- --------------------------------
Table D
Coral Reserves Natural Gas Income Fund 1990 Limited Partnership
Summary of Cash Distributions Paid to Limited Partners
- --------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 THREE
MONTHS
ENDED MARCH 31,
2000
- --------------------------------------------------------------------------------------------------
Cash distributions
paid to limited
partners(1)........... $537,136 $551,661 $571,275 $458,774 $315,031 $95,327
- -----------------------
Cash distributions
to limited partners
per $1,000 investment. 138 142 147 118 81 25
- -----------------------
_________________________________________
(1) Because of depletion (which is usually higher in the early years of
production), a portion of every distribution of revenues from properties
represents a return of a limited partner's original investment. Until a
limited partner receives cash distributions equal to his original
investment, 100% of such distributions may be deemed to be a return of
capital.
-12-
Table E
Coral Reserves Natural Gas Income Fund 1990 Limited Partnership
Comparison of Exchange Value,
Appraised Value and Continuation Value
The following table sets forth a comparison of the Exchange Value,
Appraised Value and Continuation Value for the 1990 Partnership for the limited
partners as a group and for each limited partner per $1000 of investment.
- ----------------------------------------------------------------------------------------------------
Liquidation/ Continuation Exchange Value
Appraised Value Value --------------
--------------- -----
- ----------------------------------------------------------------------------------------------------
1990 Partnership
- ----------------
- ----------------------------------------------------------------------------------------------------
Limited Partners $433,154 $710,147 $766,701
- ----------------------------------------------------------------------------------------------------
Limited Partners per $1000 of investment 111 183 197
- ----------------------------------------------------------------------------------------------------
The Exchange Value does not represent the fair value of the
partnership or its net assets and is being used solely for purposes of
determining the relative ownership of Canaan by the 1990 Partnership. There is
no assurance that the value of common stock received by a limited partner will
be equal to Exchange Value. The Appraised Value is the amount a limited partner
may elect to receive in cash and is based on an appraisal of the partnership's
assets and an assumed liquidation of the 1990 Partnership.
-13-
CORAL RESERVES NATURAL GAS INCOME FUND
1991 LIMITED PARTNERSHIP
(the "1991 Partnership")
SUPPLEMENT TO CANAAN ENERGY CORPORATION
PROSPECTUS/PROXY STATEMENT
Dated ________, 2000
The date of this Supplement is _______________, 2000
General
This Supplement relates to the proposed "combination transactions"
involving Canaan Energy Corporation. In the proposed combination transactions:
. Canaan will acquire all of the limited partners' and Additional
General Partners' interests in the eight oil and gas limited
partnerships previously sponsored by Coral Reserves, Inc. and
Coral Reserves Energy Corp., affiliates of Canaan and the General
Partners of the partnerships;
. Canaan will acquire 100% of the stock of the General Partners of
the partnerships;
. Canaan will acquire 100% of the stock of Indian Oil Company, an
unaffiliated oil and gas company;
. Canaan will acquire 100% of the stock of Canaan Securities, Inc.,
an unaffiliated broker/dealer which has previously participated
in the marketing of the limited partnership interests and
provides ongoing reporting services to limited partners; and
. Existing owners of Canaan's common stock will receive additional
shares of common stock based on Canaan's relative share of the
total "Exchange Value" as described below.
We refer to Canaan, the partnerships, the General Partners, Indian Oil
Company and Canaan Securities as the "Combining Entities". When we refer to the
Coral Group we mean Canaan, the partnerships, the General Partnerships, the
Additional General Partners, Canaan Securities and the Placing Brokers. A total
of 5,000,000 shares of Canaan common stock will be issued and be outstanding
after the combination transactions, less the number of shares otherwise issuable
to limited partners who elect to receive cash. The owners of each of the
Combining Entities will receive shares of Canaan common stock in proportion to
the "Exchange Value" of
such entity relative to the total Exchange Value of all Combining Entities. The
Exchange Value was determined by Canaan and is based on a valuation of each
Combining Entity's oil and gas Reserve Value and other assets and liabilities.
The Reserves Values were determined by Netherland, Sewell & Associates, Inc. an
independent petroleum engineering and consulting firm, using the same price,
cost, effective date and discount rate assumptions for each entity. A limited
partner in any partnership may also elect to receive cash in lieu of Canaan
common stock equal to the "Appraised Value" of his interest in the partnership.
The Prospectus/Proxy Statement dated ___________, 2000, which we refer
to as the "Prospectus" describes the combination transactions in detail.
However, the effects of the combination transactions may be different for
limited partners in the various partnerships. Accordingly, a supplement has been
prepared for each of the eight partnerships eligible to participate in the
combination transactions. This Supplement provides information regarding the
effects of the combination transactions on the limited partners of the 1991
Partnership. The General Partner will promptly mail a copy of any supplement
relating to other partnerships, without charge, upon request by any limited
partner or his representative who has been so designated in writing, addressed
to: Canaan Energy Corporation, 119 N. Robinson, Suite 600, Oklahoma City,
Oklahoma 73102.
Before voting on the plan of combination, limited partners should
carefully consider the following factors in addition to the other information
included in the Prospectus.
RISK FACTORS
There are numerous risks associated with the combination transactions.
For a more complete description of these risk factors, please see:
. "Risk Factors and Material Considerations" beginning on page 30 of
the Prospectus.
. "Comparison of Securityholder Rights" beginning on page 156 of the
Prospectus.
Risks Related to the 1991 Partnership
There are no risk factors applicable to the 1991 Partnership that are
materially different from the risk factors described in the Prospectus.
-2-
TAX CONSEQUENCES
Crowe & Dunlevy, counsel to Canaan, has rendered an opinion that:
. No gain or loss will be recognized by a limited partner as a
result of the receipt of Canaan common stock in connection with
the combination transactions.
. The basis of the Canaan common stock received by each limited
partner will be equal to the basis of his partnership interest
exchanged for such stock.
. The holding period for the Canaan common stock for purposes of
computing eligibility for long-term capital gain or loss will
include the period of a limited partner's ownership of his
partnership interest exchanged for such stock and, to the extent
the Canaan common stock received is attributable to certain
ordinary income assets of the partnership, may begin on the day
after the closing of the combination transactions.
. A limited partner who receives cash will recognize gain or loss
equal to the difference between the cash received and his adjusted
tax basis of his limited partnership interest on the date of the
closing of the combination transactions. Gain recognized by a
limited partner will be capital except to the extent of such
limited partner's share of ordinary income assets, including
recapture of depletion, depreciation and intangible drilling cost
deductions previously allocated to a limited partner.
For additional information please see:
. "Material Federal Income Tax Consequences" beginning on page 90 of
the Prospectus.
METHOD OF DETERMINING COMBINATION EXCHANGE VALUES AND APPRAISED VALUES
The following is a summary of the methods of determining the Exchange
Values and Appraised Values. For more detailed information concerning the
subject, please see the following sections of the Prospectus:
. "Summary - Method of Determining Combination Exchange Values"on
page 8.
. "Summary - Summary of Estimated Exchange Values" on page 12.
-3-
. "Summary - Determination of Appraised Value" on page 18.
. "Method of Determining Combination Exchange Values and Appraised
Values" on page 62.
General
Canaan and the General Partners determined the Exchange Value for each
of the Combining Entities. The Exchange Value takes into consideration the value
of each Combining Entities oil and gas reserves determined as described below
and the other assets and liabilities of each Combining Entity as adjusted for
other items for Canaan, Indian and the 1996 and 1996-I partnerships. The
Exchange Value is used to allocate the shares of Canaan common stock to each
Combining Entity based on relative Exchange Values. This methodology is used
based on the arm's length negotiated agreement between Indian and Canaan and the
General Partners in connection with the negotiation of the Indian Acquisition
Agreement and because it is a consistent methodology for establishing the
relative value of each Combining Entity. The Exchange Value may not represent
fair market value.
Canaan engaged Netherland, Sewell & Associates, Inc. to estimate a
value of the oil and gas reserves for each Combining Entity. Netherland Sewell
estimated the reserves, future net revenues therefrom and the present value of
such future net revenues for each Combining Entity as of September 30, 1999. We
refer to the evaluation date of September 30, 1999 as the "Effective Date" and
the present value of the estimated future net revenues from estimated reserves
as of the Effective Date as the "Reserve Value" for each Combining Entity.
We refer to the reserves estimated by Netherland Sewell as "Exchange
Reserves". They include estimates of proved undeveloped reserves as well as
proved developed reserves, both producing and nonproducing, as the term "proved"
is defined by the Society of Petroleum Engineers. However, because the reserves
are estimated using prices different from those required by the Securities and
Exchange Commission, we use the term "Exchange" instead of "proved" to describe
the reserve estimates for the Exchange Value.
The Reserve Value is an estimate only and does not represent the fair
market value of the underlying properties. The Reserve Values are being used
solely for purposes of determining the relative value of each of the Combining
Entities in the combination transactions.
The "Exchange Value" for each Combining Entity will be equal to:
. Reserve Value as of the Effective Date.
. Less bank debt at the closing date.
-4-
. Minus interest paid or accrued on bank or other debt assumed by
Canaan from the Effective Date to the closing date.
. For limited partners, Additional General Partners, Canaan
Securities and Placing Brokers, minus their share of cash
distributions from production subsequent to the Effective Date and
before the closing date.
. An adjustment for any gas imbalances which are not expected to be
material.
. For Canaan, an upward adjustment of $5.0 million for the value of
its "operating rights" as described in the Prospectus.
. For the 1996 and 1996-I Partnerships, upward adjustments, and for
Indian, a downward adjustment, for the Indian Contingent
Production Payment as described in the Prospectus.
Partnership Exchange Values and Allocation to Partners, Canaan Securities and
Placing Brokers
The Exchange Value for each of the partnerships will first be
determined as described above.
As between the limited partners and the General Partner and the
Additional General Partners in each partnership, the Exchange Value will
generally be allocated among them in the ratio in which net revenues and cash
distributions are shared. In each of the partnerships except 1993-I and 1996-I,
the General Partners' share of the net revenues and cash distributions increases
when "payout" occurs as to each individual limited partner. Accordingly, in each
of those partnerships in which payout has not already occurred as to all limited
partners as of the Effective Date, the Reserve Value was allocated first among
the partners in their respective before payout sharing ratios until payout
occurred and any remaining Reserve Value and other components of Exchange Value
was allocated in after payout sharing ratios.
As of March 31, 2000, "payout" had occurred for all limited partners
in the 1991 Partnership.
In the partnerships other than 1990, 1991, 1993-I and 1996-I, Canaan
Securities receives a fee for providing reporting services to the partnership
which is equal to 1.5% of partnership gross revenues. In each of these
partnerships, a portion of the Reserve Value (calculated based on gross
revenues) will be allocated to Canaan Securities representing its rights to
receive such fee adjusted for any payments for such fee subsequent to the
Effective Date and before the closing date. This allocation will be made prior
to the allocation of the remaining Reserve Value and other components of
Exchange Value to the limited partners and the General Partners.
-5-
The marketing arrangements entered into in connection with the sale of
interests in partnerships provided for certain fees to be paid to Canaan
Securities and Placing Brokers. Such fees are payable out of the cash
distributions otherwise distributable to the General Partner in such
partnerships. Accordingly, the Exchange Value allocated to the General Partner
in these partnerships will be reduced to take into consideration the amount of
the Exchange Value allocable to the rights of Canaan Securities and the Placing
Brokers to receive future distributions of net cash flow out of the General
Partner's share. The Placing Brokers will receive cash equal to the 40% of their
Exchange Value and their share of Canaan common stock will be determined based
on the balance of their Exchange Value.
As discussed above, for the limited partners, the Additional General
Partners, Canaan Securities and the Placing Brokers, an adjustment to their
Exchange Values will be made for cash distributions from production subsequent
to the Effective Date and before the closing date.
If the allocation of Exchange Value within a partnership plus
historical cash distributions is not at least 115% of the capital contributions
of the limited partners as a group, the Exchange Value shall be first allocated
to limited partners until this amount is achieved and the balance of the
Exchange Value will be allocated based on revenue sharing percentages. Canaan
and the General Partners believe that the 1996 partnership will be the only
partnership in which this priority allocation of Exchange Value will be
necessary.
Method of Determining Appraised Value
A limited partner may elect to receive cash equal to the Appraised
Value of his interest in a partnership. The Appraised Value was determined based
on an appraisal by Madison Energy Advisors of each partnership's oil and gas
properties valuing them as if sold in an orderly manner and in a reasonable
period of time and in a manner consistent with appropriate industry practice.
Other assets and liabilities of each partnership, consisting primarily of bank
debt and working capital were valued at their respective book values. The
Appraised Value also takes into consideration the cost associated with the sale
of the partnership oil and gas properties and assumes the proceeds of sale of
the partnership properties and working capital after payment of liabilities are
distributed in a liquidation of the partnership. The appraisal was obtained in
order to satisfy the requirements of the National Association of Securities
Dealers that limited partners be offered the opportunity to receive cash equal
to the Appraised Value of their interest in the partnership. The Appraised Value
for each partnership ranges from 56% to 93% of the Exchange Values.
If the Appraised Value of a limited partner's interest plus historical
cash distributions is less than 110% of the amount of the limited partner's
original investment, the Appraised Value for a limited partner electing cash
will be increased to such amount. Canaan and the General Partners believe that
the limited partners of the 1996 and 1996-I partnerships will be the only
limited partners whose Appraised Value will be affected by this adjustment.
-6-
Calculation of Exchange Value and Appraised Value
See Table A in this Supplement for calculation of the Exchange Value
of the 1991 Partnership and Table B for the calculation of the Appraised Value
of the 1991 Partnership.
FAIRNESS OF THE COMBINATION TRANSACTIONS
Canaan and the General Partners believe that the proposed combination
transactions are fair to the limited partners of each of the partnerships
receiving Canaan common stock or cash at Appraised Value and are fair to the
partnerships as a whole.
Please see "Recommendation of the General Partners and Fairness of the
Combination Transactions" on page 74 of the Prospectus for a detailed discussion
of the reasons for the General Partners' opinions. The following summarizes the
principal reasons for the General Partners' opinions.
The principal structural element affecting the limited partners and
the other parties to the combination transactions is the determination of the
Exchange Values. The Exchange Values are based primarily on the Reserve Value
based on Netherland Sewell's independent valuations. By using Reserve Values
calculated in a consistent manner by a single engineer based on the same price,
cost and discount assumptions, Canaan and the General Partners believe that the
relative value of each of the Combining Entities has been fairly determined for
purposes of determining its relative ownership of Canaan after the combination
transactions.
A limited partner of a partnership may elect to receive cash in lieu
of Canaan common stock in an amount equal to the Appraised Value of such limited
partner's interest. This cash election provides the opportunity for limited
partners who are unwilling to take market risks with respect to Canaan common
stock the opportunity to receive cash in an amount which Canaan and the General
Partners believe approximates fair value of their interest based on an appraisal
of the partnership oil and gas properties performed by an independent appraiser.
INFORMATION CONCERNING THE 1991 PARTNERSHIP
General
The 1991 Partnership was formed in April, 1991 and raised $4.5 million
of limited partner capital contributions. As of March 31, 2000, the 1991
Partnership had distributed $6.5 million in cash to limited partners
representing 144% of their original investment. The 1991 Partnership has
achieved payout for all limited partners.
The term of the 1991 Partnership is until December 31, 2010 unless the
partnership is earlier terminated in accordance with the applicable provisions
of the Partnership Agreement.
-7-
See "Information Concerning Partnerships" beginning on page 110 of the
Prospectus for additional information about the 1991 Partnership.
Failure to Approve the Combination Transactions
If the combination transactions are not approved, the 1991 Partnership
will continue in its business as previously conducted. However, it is possible
a new transaction might be provoked by Canaan or the General Partners, but no
other terms have been discussed or considered by them. In addition, Canaan and
the General Partners may also explore other alternatives, such as the sale of
the Coral Group to a third party, but there is no assurance that Canaan and the
General Partners could find a third party interested in purchasing as such. The
terms and conditions of any such purchase and sale agreement would be as
favorable as the terms offered pursuant to the combination transactions.
As of December 31, 1999, the 1991 Partnership had bank indebtedness of
$742,734 which is equal to 32% of the Present Value of its oil and gas reserves.
If the combination transactions are not approved, the General Partners
anticipate that amortization of such bank debt will begin prior to year end 2000
and such amortization will have an adverse affect on limited partner cash
distributions.
If the combination transactions are not consummated, costs and
expenses incurred in connection with the combination transaction proposals will
be borne by the Combining Entities, including the partnerships. Limited
partners in each partnership will bear a portion of the costs allocated to each
partnership based on the percentage interest of limited partners voting in favor
of the combination transactions. The estimated share of expenses allocated to
the 1991 Partnership is $34,000 of which a maximum of $25,500 would be allocated
to limited partners if all limited partners voted in favor of the combination
transactions.
Canaan and the General Partners have prepared an analysis of the
present value of the estimated future net cash flows to the limited partners
assuming that each partnership was continued. This value is referred to as the
"Continuation Value" and is based on the following assumptions:
. The estimated future net revenues from the sale of oil and gas are
based on the same prices and costs that are used to estimate the
Reserve Value for purposes of the Exchange Value.
. The partnerships will continue to incur general administrative
expenses in favor of the General Partners as provided in the
applicable partnership agreement in the amount of 5% of the amount
of distributable cash.
. Any partnership with bank debt is assumed to amortize such debt on
a 36 month level amortization basis, assuming an interest rate of
9%, beginning July 31, 2000.
-8-
. The estimated future net cash flows have been discounted at a
discount rate of 10% to arrive at the estimated Continuation
Value.
Table E in this Supplement provides a comparison of Exchange Value,
Appraised Value and Continuation Value for the 1991 Partnership
COMBINATION VALUES AND COMPENSATION
AND DISTRIBUTION INFORMATION
Set forth below are the following tables:
. Table A - Calculation of estimated Exchange Values and the
allocation of shares of Canaan common stock assuming a closing of
the combination transactions on July 31, 2000.
. Table B - Calculation of estimated Appraised Values as of July 31,
2000.
. Table C - The General Partners' and Canaan's compensation and cash
distribution history for the three most recent fiscal years and
the three months ended March 31, 2000.
. Table D - The amount of the limited partners' cash distributions
for the five most recent fiscal years and the three months ended
March 31, 2000.
. Table E - Comparison of Exchange Value, Appraised Value and
Continuation Value.
For additional information, see the following sections of the
Prospectus:
. "Information Concerning the Partnerships - Selected Historical
Financial and Operating Data of Individual Partnerships" beginning
on page 121; and
. "Unaudited Pro Forma Financial Information" in Appendix B.
-9-
Table A
Coral Reserves Natural Gas Income Fund
1991 Limited Partnership
Calculation of Estimated Exchange Value
The Exchange Value is estimated based on Canaan's estimate of cash
distributions and interest expense from the September 30, 1999 Effective Date to
an assumed closing date of July 31, 2000. Variances in actual cash distributions
and interest expense or a change in the closing date will result in a change in
the Exchange Value for the partnership and will similarly change Exchange Values
for other Combining Entities.
- -----------------------------------------------------------------------------------------------------------------
Amount
------
- -----------------------------------------------------------------------------------------------------------------
Reserve Value of Oil and Gas $2,669,400
Properties (1).................
- -----------------------------------------------------------------------------------------------------------------
Bank Debt as of Effective Date.......... 742,734
- ----------------------------------------
Working Capital as of Effective Date:
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents...... 79,068
- -----------------------------------------------------------------------------------------------------------------
Accounts receivable............ 205,597
- -----------------------------------------------------------------------------------------------------------------
Accounts payable............... 66,705
- -----------------------------------------------------------------------------------------------------------------
Subtotal - Working Capital.............. 217,960
- -----------------------------------------------------------------------------------------------------------------
Estimated Cash Distributions Before
Closing (3)............................. 463,129
- -----------------------------------------------------------------------------------------------------------------
Estimated Interest Expense Before
Closing (3) 54,628 Shares of Percent of
- -----------------------------------------------------------------------------------------------------------------
Canaan Stock
Other Adjustments(4) (15,533) Common Stock (2) Outstanding (2)
---------------- ---------------
- -----------------------------------------------------------------------------------------------------------------
Estimated Exchange Value
at Closing(5).................. 1,552,339 154,000 3.08%
- -----------------------------------------------------------------------------------------------------------------
Allocated to:
Limited Partners............... 1,108,466 112,253 2.25%
- -----------------------------------------------------------------------------------------------------------------
General Partner................ 340,417 34,185 0.68%
- -----------------------------------------------------------------------------------------------------------------
Additional General Partners.... 14,779 1,531 0.03%
- -----------------------------------------------------------------------------------------------------------------
Canaan Securities.............. 14,779 1,531 0.03%
- -----------------------------------------------------------------------------------------------------------------
Placing Brokers................ 73,898 4,500 0.09%
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Limited Partner per $1000 Investment.... 247 25 (6)
- -----------------------------------------------------------------------------------------------------------------
___________________________________
(1) As determined by Netherland, Sewell & Associates, Inc. See "Method of
Determining Combination Exchange Values and Appraised Values" in the
Prospectus. No partnerships own an individual property representing
more than 10% of the Reserve Value or from which the partnership
derived more than 10% of its cash flow or net income for the year ended
December 31, 1999.
(2) Assumes no limited partners elect to receive cash. Placing Brokers'
shares based on 60% of Exchange Value.
(3) Assumes closing on July 31, 2000, and uses Netherland, Sewell reserve
report to estimate property revenues and expenses and estimated
interest rate on bank debt for purposes of calculating interest
expense.
(4) Adjustment to reflect sale of a portion of Canaan Securities' interest
to the 1993-I Partnership and a purchase of a portion of Canaan
Securities interest from the 1990 Partnership.
(5) The "Estimated Exchange Value at Closing" for all of the partnerships
and Canaan set forth in the table is approximately 96.3% of the sum of
their respective components of Exchange Value because the operating
rights adjustment to Canaan's Exchange Value within the Coral Group is
excluded for purposes of computing the relative Exchange Value between
the Coral Group and Indian. See "Method of Determining Combination
Exchange Values and Appraised Values" in the Prospectus for a more
detailed explantation.
(6) Less than 0.01%
-10-
Table B
Coral Reserves Natural Gas Income Fund
1991 Limited Partnership
Calculation of Estimated Appraised Value
The Appraised Value is estimated based on Canaan's estimate of
property net revenue from the September 30, 1999 Effective Date to an assumed
closing date of July 31, 2000. Variances in actual net revenue or a change in
the closing date will result in a change in the Appraised Value for the
partnership and will similarly change Appraised Values for other partnerships.
Property net revenues include proceeds from sale of production less production
taxes and operating expense.
- -----------------------------------------------------------------------------------------------------------------
Amount
------
- -----------------------------------------------------------------------------------------------------------------
Appraised Value of Oil and Gas
Properties at Effective Date(1)......................... $1,953,000
- -----------------------------------------------------------------------------------------------------------------
Estimated Property Net Revenues Before Closing(2)................ 625,149
- -----------------------------------------------------------------------------------------------------------------
Appraised Value of Properties at Closing Date.................... 1,327,851
- -----------------------------------------------------------------------------------------------------------------
Bank Debt as of Closing Date..................................... 742,734
- -----------------------------------------------------------------------------------------------------------------
Working Capital as of Closing Date:
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents............................... 79,068
- -----------------------------------------------------------------------------------------------------------------
Accounts receivable..................................... 205,597
- -----------------------------------------------------------------------------------------------------------------
Accounts payable........................................ 66,705
- -----------------------------------------------------------------------------------------------------------------
Subtotal - Working Capital....................................... 217,960
- -----------------------------------------------------------------------------------------------------------------
Estimated Appraised Value
at Closing(2)........................................... 803,077
- -----------------------------------------------------------------------------------------------------------------
Allocated to:(3)
Limited Partners........................................ 712,074
- -----------------------------------------------------------------------------------------------------------------
General Partner and Additional General Partners......... 91,003
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Limited Partner per $1000 Investment............................. 159
- -----------------------------------------------------------------------------------------------------------------
__________________________________
(1) As determined based on an appraisal of the partnership's properties by
Madison Energy Advisors. See "Method of Determining Combination
Exchange Values and Appraised Values" in the Prospectus.
(2) Assumes closing on July 31, 2000, and uses actual property net revenues
from September 30, 1999 to March 31, 2000 and estimated property net
revenues based on Netherland, Sewell report thereafter.
(3) Allocated based on liquidation provisions of applicable partnership
agreement.
Table C
Coral Reserves Natural Gas Income Fund 1991 Limited Partnership
Summary of Compensation and Cash Distributions
Paid to the General Partners and Affiliates
-11-
Year Ended December 31,
------------------------------------------
Three months ended
1997 1998 1999 March 31, 2000
----------- ----------- ------------ --------------------
Reimbursement of expenses paid
to General Partner............... $42,908 $39,606 $35,154 $ 8,390
Operating fees paid to Canaan.... -- -- -- --
Cash distributions paid to
General Partner.................. 187,026 189,177 158,633 41,453
Cash distributions paid to
Additional General Partners...... 8,078 7,882 6,610 1,727
Table D
Coral Reserves Natural Gas Income Fund 1991 Limited Partnership
Summary of Cash Distributions Paid to Limited Partners
Year Ended December 31,
----------------------------------------------------------------------------------
Three months ended
1995 1996 1997 1998 1999 March 31, 2000
------------ ------------ ------------- ------------ -------------- -------------------
Cash distributions
paid to limited
partners(1)......... $903,162 $820,632 $612,723 $591,182 $495,730 $129,542
Cash distributions
to limited partners 202 183 137 132 111 29
per $1,000
investment..........
___________________________________
(1) Because of depletion (which is usually higher in the early years of
production), a portion of every distribution of revenues from properties
represents a return of a limited partner's original investment. Until a
limited partner receives cash distributions equal to his original
investment, 100% of such distributions may be deemed to be a return of
capital.
-12-
Table E
Coral Reserves Natural Gas Income Fund 1991 Limited Partnership
Comparison of Exchange Value,
Appraised Value and Continuation Value
The following table sets forth a comparison of the Exchange Value,
Appraised Value and Continuation Value for the 1991 Partnership for the limited
partners as a group and for each limited partner per $1000 of investment.
- ----------------------------------------------------------------------------------------------------------------------------
Liquidation/ Continuation
Appraised Value Value Exchange Value
--------------- ----- --------------
- ----------------------------------------------------------------------------------------------------------------------------
1991 Partnership
- ----------------
- ----------------------------------------------------------------------------------------------------------------------------
Limited Partners $712,074 $995,442 $1,108,466
- ----------------------------------------------------------------------------------------------------------------------------
Limited Partner per $1000 of investment 159 222 247
- ----------------------------------------------------------------------------------------------------------------------------
The Exchange Value does not represent the fair value of the
partnership or its net assets and is being used solely for purposes of
determining the relative ownership of Canaan by the 1991 Partnership. There is
no assurance that the value of common stock received by a limited partner will
be equal to Exchange Value. The Appraised Value is the amount a limited partner
may elect to receive in cash and is based on an appraisal of the partnership's
assets and an assumed liquidation of the 1991 Partnership.
-13-
CORAL RESERVES NATURAL GAS INCOME FUND
1992 LIMITED PARTNERSHIP
(the "1992 Partnership")
SUPPLEMENT TO CANAAN ENERGY CORPORATION
PROSPECTUS/PROXY STATEMENT
Dated _________, 2000
The date of this Supplement is _______________, 2000
General
This Supplement relates to the proposed "combination transactions"
involving Canaan Energy Corporation. In the proposed combination transactions:
. Canaan will acquire all of the limited partners' and Additional
General Partners' interests in the eight oil and gas limited
partnerships previously sponsored by Coral Reserves, Inc. and
Coral Reserves Energy Corp., affiliates of Canaan and the General
Partners of the partnerships;
. Canaan will acquire 100% of the stock of the General Partners of
the partnerships;
. Canaan will acquire 100% of the stock of Indian Oil Company, an
unaffiliated oil and gas company;
. Canaan will acquire 100% of the stock of Canaan Securities, Inc.,
an unaffiliated broker/dealer which has previously participated
in the marketing of the limited partnership interests and
provides ongoing reporting services to limited partners; and
. Existing owners of Canaan's common stock will receive additional
shares of common stock based on Canaan's relative share of the
total "Exchange Value" as described below.
We refer to Canaan, the partnerships, the General Partners, Indian Oil
Company and Canaan Securities as the "Combining Entities". When we refer to the
Coral Group we mean Canaan, the partnerships, the General Partnerships, the
Additional General Partners, Canaan Securities and the Placing Brokers. A total
of 5,000,000 shares of Canaan common stock will be issued and be outstanding
after the combination transactions, less the number of shares otherwise issuable
to limited partners who elect to receive cash. The owners of each of the
Combining Entities will receive shares of Canaan common stock in proportion to
the "Exchange Value" of
such entity relative to the total Exchange Value of all Combining Entities. The
Exchange Value was determined by Canaan and is based on a valuation of each
Combining Entity's oil and gas Reserve Values and other assets and liabilities.
The Reserves Values were determined by Netherland, Sewell & Associates, Inc. an
independent petroleum engineering and consulting firm, using the same price,
cost, effective date and discount rate assumptions for each entity. A limited
partner in any partnership may also elect to receive cash in lieu of Canaan
common stock equal to the "Appraised Value" of his interest in the partnership.
The Prospectus/Proxy Statement dated __________, 2000, which we refer
to as the "Prospectus" describes the combination transactions in detail.
However, the effects of the combination transactions may be different for
limited partners in the various partnerships. Accordingly, a supplement has been
prepared for each of the eight partnerships eligible to participate in the
combination transactions. This Supplement provides information regarding the
effects of the combination transactions on the limited partners of the 1992
Partnership. The General Partner will promptly mail a copy of any supplement
relating to other partnerships, without charge, upon request by any limited
partner or his representative who has been so designated in writing, addressed
to: Canaan Energy Corporation, 119 N. Robinson, Suite 600, Oklahoma City,
Oklahoma 73102.
Before voting on the plan of combination, limited partners should
carefully consider the following factors in addition to the other information
included in the Prospectus.
RISK FACTORS
There are numerous risks associated with the combination transactions.
For a more complete description of these risk factors, please see:
. "Risk Factors and Material Considerations" beginning on page 30
of the Prospectus.
. "Comparison of Securityholder Rights" beginning on page 156 of
the Prospectus.
Risks Related to the 1992 Partnership
There are no risk factors applicable to the 1992 Partnership that are
materially different from the risk factors described in the Prospectus.
-2-
TAX CONSEQUENCES
Crowe & Dunlevy, counsel to Canaan, has rendered an opinion that:
. No gain or loss will be recognized by a limited partner as a
result of the receipt of Canaan common stock in connection with
the combination transactions.
. The basis of the Canaan common stock received by each limited
partner will be equal to the basis of his partnership interest
exchanged for such stock.
. The holding period for the Canaan common stock for purposes of
computing eligibility for long-term capital gain or loss will
include the period of a limited partner's ownership of his
partnership interest exchanged for such stock and, to the extent
the Canaan common stock received is attributable to certain
ordinary income assets of the partnership, may begin on the day
after the closing of the combination transactions.
. A limited partner who receives cash will recognize gain or loss
equal to the difference between the cash received and his
adjusted tax basis of his limited partnership interest on the
date of the closing of the combination transactions. Gain
recognized by a limited partner will be capital except to the
extent of such limited partner's share of ordinary income assets,
including recapture of depletion, depreciation and intangible
drilling cost deductions previously allocated to a limited
partner.
For additional information please see:
. "Material Federal Income Tax Consequences" beginning on page 90
of the Prospectus.
METHOD OF DETERMINING COMBINATION EXCHANGE VALUES AND APPRAISED VALUES
The following is a summary of the methods of determining the Exchange
Values and Appraised Values. For more detailed information concerning the
subject, please see the following sections of the Prospectus:
. "Summary - Method of Determining Combination Exchange Values" on
page 8.
. "Summary - Summary of Estimated Exchange Values" on page 12.
-3-
. "Summary - Determination of Appraised Value" on page 18.
. "Method of Determining Combination Exchange Values and Appraised
Values" on page 62.
General
Canaan and the General Partners determined the Exchange Value for each
of the Combining Entities. The Exchange Value takes into consideration the
value of each Combining Entities oil and gas reserves determined as described
below and the other assets and liabilities of each Combining Entity as adjusted
for other items for Canaan, Indian and the 1996 and 1996-I partnerships. The
Exchange Value is used to allocate the shares of Canaan common stock to each
Combining Entity based on relative Exchange Values. This methodology is used
based on the arm's length negotiated agreement between Indian and Canaan and the
General Partners in connection with the negotiation of the Indian Acquisition
Agreement and because it is a consistent methodology for establishing the
relative value of each Combining Entity. The Exchange Value may not represent
fair market value.
Canaan engaged Netherland, Sewell & Associates, Inc. to estimate a
value of the oil and gas reserves for each Combining Entity. Netherland Sewell
estimated the reserves, future net revenues therefrom and the present value of
such future net revenues for each Combining Entity as of September 30, 1999. We
refer to the evaluation date of September 30, 1999 as the "Effective Date" and
the present value of the estimated future net revenues from estimated reserves
as of the Effective Date as the "Reserve Value" for each Combining Entity.
We refer to the reserves estimated by Netherland Sewell as "Exchange
Reserves". They include estimates of proved undeveloped reserves as well as
proved developed reserves, both producing and nonproducing, as the term "proved"
is defined by the Society of Petroleum Engineers. However, because the reserves
are estimated using prices different from those required by the Securities and
Exchange Commission, we use the term "Exchange" instead of "proved" to describe
the reserve estimates for the Exchange Value.
The Reserve Value is an estimate only and does not represent the fair
market value of the underlying properties. The Reserve Values are being used
solely for purposes of determining the relative value of each of the Combining
Entities in the combination transactions.
The "Exchange Value" for each Combining Entity will be equal to:
. Reserve Value as of the Effective Date.
. Less bank debt at the closing date.
-4-
. Minus interest paid or accrued on bank or other debt assumed by
Canaan from the Effective Date to the closing date.
. For limited partners, Additional General Partners, Canaan
Securities and Placing Brokers, minus their share of cash
distributions from production subsequent to the Effective Date
and before the closing date.
. An adjustment for any gas imbalances which are not expected to be
material.
. For Canaan, an upward adjustment of $5.0 million for the value of
its "operating rights" as described in the Prospectus.
. For the 1996 and 1996-I Partnerships, upward adjustments, and for
Indian, a downward adjustment, for the Indian Contingent
Production Payment as described in the Prospectus.
Partnership Exchange Values and Allocation to Partners, Canaan Securities and
Placing Brokers
The Exchange Value for each of the partnerships will first be
determined as described above.
As between the limited partners and the General Partner and the
Additional General Partners in each partnership, the Exchange Value will
generally be allocated among them in the ratio in which net revenues and cash
distributions are shared. In each of the partnerships except 1993-I and 1996-I,
the General Partners' share of the net revenues and cash distributions increases
when "payout" occurs as to each individual limited partner. Accordingly, in each
of those partnerships in which payout has not already occurred as to all limited
partners as of the Effective Date, the Reserve Value was allocated first among
the partners in their respective before payout sharing ratios until payout
occurred and any remaining Reserve Value and other components of Exchange Value
was allocated in after payout sharing ratios.
As of March 31, 2000, "payout" had occurred for some but not all
limited partners in the 1992 Partnership.
In the partnerships other than 1990, 1991, 1993-I and 1996-I, Canaan
Securities receives a fee for providing reporting services to the partnership
which is equal to 1.5% of partnership gross revenues. In each of these
partnerships, a portion of the Reserve Value (calculated based on gross
revenues) will be allocated to Canaan Securities representing its rights to
receive such fee adjusted for any payments for such fee subsequent to the
Effective Date and before the closing date. This allocation will be made prior
to the allocation of the remaining Reserve Value and other components of
Exchange Value to the limited partners and the General Partners.
-5-
The marketing arrangements entered into in connection with the sale of
interests in partnerships provided for certain fees to be paid to Canaan
Securities and Placing Brokers. Such fees are payable out of the cash
distributions otherwise distributable to the General Partner in such
partnerships. Accordingly, the Exchange Value allocated to the General Partner
in these partnerships will be reduced to take into consideration the amount of
the Exchange Value allocable to the rights of Canaan Securities and the Placing
Brokers to receive future distributions of net cash flow out of the General
Partner's share. The Placing Brokers will receive cash equal to the 40% of their
Exchange Value and their share of Canaan common stock will be determined based
on the balance of their Exchange Value.
As discussed above, for the limited partners, the Additional General
Partners, Canaan Securities and the Placing Brokers, an adjustment to their
Exchange Values will be made for cash distributions from production subsequent
to the Effective Date and before the closing date.
If the allocation of Exchange Value within a partnership plus
historical cash distributions is not at least 115% of the capital contributions
of the limited partners as a group, the Exchange Value shall be first allocated
to limited partners until this amount is achieved and the balance of the
Exchange Value will be allocated based on revenue sharing percentages. Canaan
and the General Partners believe that the 1996 partnership will be the only
partnership in which this priority allocation of Exchange Value will be
necessary.
Method of Determining Appraised Value
A limited partner may elect to receive cash equal to the Appraised
Value of his interest in a partnership. The Appraised Value was determined based
on an appraisal by Madison Energy Advisors of each partnership's oil and gas
properties valuing them as if sold in an orderly manner and in a reasonable
period of time and in a manner consistent with appropriate industry practice.
Other assets and liabilities of each partnership, consisting primarily of bank
debt and working capital were valued at their respective book values. The
Appraised Value also takes into consideration the cost associated with the sale
of the partnership oil and gas properties and assumes the proceeds of sale of
the partnership properties and working capital after payment of liabilities are
distributed in a liquidation of the partnership. The appraisal was obtained in
order to satisfy the requirements of the National Association of Securities
Dealers that limited partners be offered the opportunity to receive cash equal
to the Appraised Value of their interest in the partnership. The Appraised Value
for each partnership ranges from 56% to 93% of the Exchange Values.
If the Appraised Value of a limited partner's interest plus historical
cash distributions is less than 110% of the amount of the limited partner's
original investment, the Appraised Value for a limited partner electing cash
will be increased to such amount. Canaan and the General Partners believe that
the limited partners of the 1996 and 1996-I partnerships will be the only
limited partners whose Appraised Value will be affected by this adjustment.
-6-
Calculation of Exchange Value and Appraised Value
See Table A in this Supplement for calculation of the Exchange Value
of the 1992 Partnership and Table B for the calculation of the Appraised Value
of the 1992 Partnership.
FAIRNESS OF THE COMBINATION TRANSACTIONS
Canaan and the General Partners believe that the proposed combination
transactions are fair to the limited partners of each of the partnerships
receiving Canaan common stock or cash at Appraised Value and are fair to the
partnerships as a whole.
Please see "Recommendation of the General Partners and Fairness of the
Combination Transactions" on page 74 of the Prospectus for a detailed discussion
of the reasons for the General Partners' opinions. The following summarizes the
principal reasons for the General Partners' opinions.
The principal structural element affecting the limited partners and
the other parties to the combination transactions is the determination of the
Exchange Values. The Exchange Values are based primarily on the Reserve Value
based on Netherland Sewell's independent valuations. By using Reserve Values
calculated in a consistent manner by a single engineer based on the same price,
cost and discount assumptions, Canaan and the General Partners believe that the
relative value of each of the Combining Entities has been fairly determined for
purposes of determining its relative ownership of Canaan after the combination
transactions.
A limited partner of a partnership may elect to receive cash in lieu
of Canaan common stock in an amount equal to the Appraised Value of such limited
partner's interest. This cash election provides the opportunity for limited
partners who are unwilling to take market risks with respect to Canaan common
stock the opportunity to receive cash in an amount which Canaan and the General
Partners believe approximates fair value of their interest based on an appraisal
of the partnership oil and gas properties performed by an independent appraiser.
INFORMATION CONCERNING THE 1992 PARTNERSHIP
General
The 1992 Partnership was formed in June, 1992 and raised $7.5 million
of limited partner capital contributions. As of March 31, 2000, the 1992
Partnership had distributed $7.2 million in cash to limited partners
representing 97% of their original investment. The 1992 Partnership has
achieved payout for some limited partners but not all.
The term of the 1992 Partnership is until December 31, 2011 unless the
partnership is earlier terminated in accordance with the applicable provisions
of the Partnership Agreement.
-7-
See "Information Concerning Partnerships" beginning on page 110 of the
Prospectus for additional information about the 1992 Partnership.
Failure to Approve the Combination Transactions
If the combination transactions are not approved, the 1992 Partnership
will continue in its business as previously conducted. However, it is possible
a new transaction might be provoked by Canaan or the General Partners, but no
other terms have been discussed or considered by them. In addition, Canaan and
the General Partners may also explore other alternatives, such as the sale of
the Coral Group to a third party, but there is no assurance that Canaan and the
General Partners could find a third party interested in purchasing as such. The
terms and conditions of any such purchase and sale agreement would be as
favorable as the terms offered pursuant to the combination transactions.
As of December 31, 1999, the 1992 Partnership had bank indebtedness of
$589,000 which is equal to 11% of the Present Value of its oil and gas reserves.
If the combination transactions are not approved, the General Partners
anticipate that amortization of such bank debt will begin prior to year end 2000
and such amortization will have an adverse affect on limited partner cash
distributions.
If the combination transactions are not consummated, costs and
expenses incurred in connection with the combination transaction proposals will
be borne by the Combining Entities, including the partnerships. Limited
partners in each partnership will bear a portion of the costs allocated to each
partnership based on the percentage interest of limited partners voting in favor
of the combination transactions. The estimated share of expenses allocated to
the 1992 Partnership is $93,500 of which a maximum of $84,150 would be allocated
to limited partners if all limited partners voted in favor of the combination
transactions.
Canaan and the General Partners have prepared an analysis of the
present value of the estimated future net cash flows to the limited partners
assuming that each partnership was continued. This value is referred to as the
"Continuation Value" and is based on the following assumptions:
. The estimated future net revenues from the sale of oil and gas are
based on the same prices and costs that are used to estimate the
Reserve Value for purposes of the Exchange Value.
. The partnerships will continue to incur general administrative
expenses in favor of the General Partners as provided in the
applicable partnership agreement in the amount of 5% of the amount
of distributable cash.
. Any partnership with bank debt is assumed to amortize such debt on
a 36 month level amortization basis, assuming an interest rate of
9%, beginning July 31, 2000.
-8-
. The estimated future net cash flows have been discounted at a
discount rate of 10% to arrive at the estimated Continuation
Value.
Table E in this Supplement provides a comparison of Exchange Value,
Appraised Value and Continuation Value for the 1992 Partnership
COMBINATION VALUES AND COMPENSATION
AND DISTRIBUTION INFORMATION
Set forth below are the following tables:
. Table A - Calculation of estimated Exchange Values and the
allocation of shares of Canaan common stock assuming a closing of
the combination transactions on July 31, 2000.
. Table B - Calculation of estimated Appraised Values as of July
31, 2000.
. Table C - The General Partners' and Canaan's compensation and
cash distribution history for the three most recent fiscal years
and the three months ended March 31, 2000.
. Table D - The amount of the limited partners' cash distributions
for the five most recent fiscal years and the three months ended
March 31, 2000.
. Table E - Comparison of Exchange Value, Appraised Value and
Continuation Value.
For additional information, see the following sections of the
Prospectus:
. "Information Concerning the Partnerships - Selected Historical
Financial and Operating Data of Individual Partnerships"
beginning on page 121; and
. "Unaudited Pro Forma Financial Information" in Appendix B.
-9-
Table A
Coral Reserves Natural Gas Income Fund
1992 Limited Partnership
Calculation of Estimated Exchange Value
The Exchange Value is estimated based on Canaan's estimate of cash
distributions and interest expense from the September 30, 1999 Effective Date to
an assumed closing date of July 31, 2000. Variances in actual cash
distributions and interest expense or a change in the closing date will result
in a change in the Exchange Value for the partnership and will similarly change
Exchange Values for other Combining Entities.
- -------------------------------------------------------------------------------------------------
Amount
------
- -------------------------------------------------------------------------------------------------
Reserve Value of Oil and Gas
Properties (1).................................. $5,497,800
- -------------------------------------------------------------------------------------------------
Bank Debt as of Effective Date..................... 558,000
- -------------------------------------------------------------------------------------------------
Working Capital as of Effective Date:
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents....................... 106,800
- -------------------------------------------------------------------------------------------------
Accounts receivable............................. 248,264
- -------------------------------------------------------------------------------------------------
Accounts payable................................ 87,489
- -------------------------------------------------------------------------------------------------
Subtotal - Working Capital......................... 267,575
- -------------------------------------------------------------------------------------------------
Estimated Cash Distributions Before Closing (3).... 808,274
Shares of Percent of
- -------------------------------------------------------------------------------------------------
Estimated Interest Expense Before Closing (3)...... 44,963 Canaan Stock
Common Stock (2) Outstanding (2)
----------------- ---------------
- ---------------------------------------------------------------------------------------------------
Estimated Exchange Value
at Closing(4)................................... 4,194,714 416,500 8.33%
- ---------------------------------------------------------------------------------------------------
Allocated to:
Limited Partners................................ 2,992,455 301,746 6.03%
- ---------------------------------------------------------------------------------------------------
General Partner................................. 773,546 78,230 1.57%
- ---------------------------------------------------------------------------------------------------
Additional General Partners..................... 40,062 4,064 0.08%
- ---------------------------------------------------------------------------------------------------
Canaan Securities............................... 228,314 22,860 0.46%
- ---------------------------------------------------------------------------------------------------
Placing Brokers................................. 160,337 9,600 0.19%
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Limited Partner per $1000 Investment............... 399 40 (5)
- ---------------------------------------------------------------------------------------------------
_______________________
(1) As determined by Netherland, Sewell & Associates, Inc. See "Method of
Determining Combination Exchange Values and Appraised Values" in the
Prospectus. No partnerships own an individual property representing more
than 10% of the Reserve Value or from which the partnership derived more
than 10% of its cash flow or net income for the year ended December 31,
1999.
(2) Assumes no limited partners elect to receive cash. Placing Brokers' shares
based on 60% of Exchange Value.
(3) Assumes closing on July 31, 2000, and uses Netherland, Sewell reserve
report to estimate property revenues and expenses and estimated interest
rate on bank debt for purposes of calculating interest expense.
(4) The "Estimated Exchange Value at Closing" for all of the partnerships and
Canaan set forth in the table is approximately 96.3% of the sum of their
respective components of Exchange Value because the operating rights
adjustment to Canaan's Exchange Value within the Coral Group is excluded
for purposes of computing the relative Exchange Value between the Coral
Group and Indian. See "Method of Determining Combination Exchange Values
and Appraised Values" in the Prospectus for a more detailed explantation.
-10-
(5) Less than 0.01%
Table B
Coral Reserves Natural Gas Income Fund
1992 Limited Partnership
Calculation of Estimated Appraised Value
The Appraised Value is estimated based on Canaan's estimate of
property net revenue from the September 30, 1999 Effective Date to an assumed
closing date of July 31, 2000. Variances in actual net revenue or a change in
the closing date will result in a change in the Appraised Value for the
partnership and will similarly change Appraised Values for other partnerships.
Property net revenues include proceeds from sale of production less production
taxes and operating expense.
- ---------------------------------------------------------------------------------------------------
Amount
------
- ---------------------------------------------------------------------------------------------------
Appraised Value of Oil and Gas
Properties at Effective Date(1)......................... $ 3,815,000
- ---------------------------------------------------------------------------------------------------
Estimated Property Net Revenues Before Closing(2)............ 976,068
- ---------------------------------------------------------------------------------------------------
Appraised Value of Properties at Closing Date................ 2,838,932
- ---------------------------------------------------------------------------------------------------
Bank Debt as of Closing Date................................. 639,000
- ---------------------------------------------------------------------------------------------------
Working Capital as of Closing Date:
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents............................... 106,800
- ---------------------------------------------------------------------------------------------------
Accounts receivable..................................... 248,264
- ---------------------------------------------------------------------------------------------------
Accounts payable........................................ 87,489
- ---------------------------------------------------------------------------------------------------
Subtotal - Working Capital................................... 267,575
- ---------------------------------------------------------------------------------------------------
Estimated Appraised Value
at Closing(2)............................................. 2,467,507
- ---------------------------------------------------------------------------------------------------
Allocated to:(3)
Limited Partners.......................................... 2,308,438
- ---------------------------------------------------------------------------------------------------
General Partner and Additional General Partners........... 159,068
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Limited Partners per $1000 Investment........................ 308
- ---------------------------------------------------------------------------------------------------
_______________________
(1) As determined based on an appraisal of the partnership's properties by
Madison Energy Advisors. See "Method of Determining Combination Exchange
Values and Appraised Values" in the Prospectus.
(2) Assumes closing on July 31, 2000, and uses actual property net revenues
from September 30, 1999 to March 31, 2000 and estimated property net
revenues based on Netherland, Sewell report thereafter.
(3) Allocated based on liquidation provisions of applicable partnership
agreement.
-11-
Table C
Coral Reserves Natural Gas Income Fund 1992 Limited Partnership
Summary of Compensation and Cash Distributions
Paid to the General Partners and Affiliates
- -------------------------------------------------------------------------------------------
Year Ended December 31,
- -------------------------------------------------------------------------------------------
THREE MONTHS
ENDED
1997 1998 1999 MARCH 31, 2000
- ----------------------------------------------------------------------------------------------------------------------
Reimbursement of expenses paid
to General Partner................................... $74,405 $50,165 $ 42,042 $14,588
- ----------------------------------------------------------------------------------------------------------------------
Operating fees paid to Canaan........................ 10,658 13,346 14,127 3,614
- ----------------------------------------------------------------------------------------------------------------------
Cash distributions paid to General
Partner.............................................. 126,905 92,497 72,765 32,244
- ------------------------------------------------
Cash distributions paid to
Additional General Partners......................... 14,100 10,278 7,694 2,629
- ------------------------------------------------
Table D
Coral Reserves Natural Gas Income Fund 1992 Limited Partnership
Summary of Cash Distributions Paid to Limited Partners
- ----------------------------------------------------------------------------------------
Year Ended December 31,
- ----------------------------------------------------------------------------------------
THREE MONTHS
ENDED
1995 1996 1997 1998 1999 MARCH 31, 2000
- -----------------------------------------------------------------------------------------------------------
Cash distributions
paid to limited
partners(1)..................... $927,447 $1,234,237 $1,269,050 $924,978 $688,937 $229,338
- ---------------------------------
Cash distributions to
limited partners per
$1,000 investment............... 124 165 169 123 92 31
- ---------------------------------
-12-
_________________________________________
(1) Because of depletion (which is usually higher in the early years of
production), a portion of every distribution of revenues from properties
represents a return of a limited partner's original investment. Until a
limited partner receives cash distributions equal to his original
investment, 100% of such distributions may be deemed to be a return of
capital.
Table E
Coral Reserves Natural Gas Income Fund 1992 Limited Partnership
Comparison of Exchange Value,
Appraised Value and Continuation Value
The following table sets forth a comparison of the Exchange Value,
Appraised Value and Continuation Value for the 1992 Partnership for the limited
partners as a group and for each limited partner per $1000 of investment.
Liquidation/ Continuation Exchange Value
Appraised Value Value --------------
--------------- -----
- --------------------------------------------------------------------------------------------------
1992 Partnership
- ----------------
- --------------------------------------------------------------------------------------------------
Limited Partners $2,308,438 $2,768,081 $2,992,455
- --------------------------------------------------------------------------------------------------
Limited Partners per $1000 of investment 308 369 399
- --------------------------------------------------------------------------------------------------
The Exchange Value does not represent the fair value of the
partnership or its net assets and is being used solely for purposes of
determining the relative ownership of Canaan by the 1992 Partnership. There is
no assurance that the value of common stock received by a limited partner will
be equal to Exchange Value. The Appraised Value is the amount a limited partner
may elect to receive in cash and is based on an appraisal of the partnership's
assets and an assumed liquidation of the 1992 Partnership.
-13-
CORAL RESERVES 1993 INSTITUTIONAL
LIMITED PARTNERSHIP
(the "1993-I Partnership")
SUPPLEMENT TO CANAAN ENERGY CORPORATION
PROSPECTUS/PROXY STATEMENT
Dated _________, 2000
The date of this Supplement is _______________, 2000
General
This Supplement relates to the proposed "combination transactions"
involving Canaan Energy Corporation. In the proposed combination transactions:
. Canaan will acquire all of the limited partners' and Additional
General Partners' interests in the eight oil and gas limited
partnerships previously sponsored by Coral Reserves, Inc. and
Coral Reserves Energy Corp., affiliates of Canaan and the General
Partners of the partnerships;
. Canaan will acquire 100% of the stock of the General Partners of
the partnerships;
. Canaan will acquire 100% of the stock of Indian Oil Company, an
unaffiliated oil and gas company;
. Canaan will acquire 100% of the stock of Canaan Securities, Inc.,
an unaffiliated broker/dealer which has previously participated
in the marketing of the limited partnership interests and
provides ongoing reporting services to limited partners; and
. Existing owners of Canaan's common stock will receive additional
shares of common stock based on Canaan's relative share of the
total "Exchange Value" as described below.
We refer to Canaan, the partnerships, the General Partners, Indian Oil
Company and Canaan Securities as the "Combining Entities". When we refer to the
Coral Group we mean Canaan, the partnerships, the General Partnerships, the
Additional General Partners, Canaan Securities and the Placing Brokers. A total
of 5,000,000 shares of Canaan common stock will be issued and be outstanding
after the combination transactions, less the number of shares otherwise issuable
to limited partners who elect to receive cash. The owners of each of the
Combining Entities will receive shares of Canaan common stock in proportion to
the "Exchange Value" of
such entity relative to the total Exchange Value of all Combining Entities. The
Exchange Value was determined by Canaan and is based on a valuation of each
Combining Entity's oil and gas Reserve Values and other assets and liabilities.
The Reserves Values were determined by Netherland, Sewell & Associates, Inc. an
independent petroleum engineering and consulting firm, using the same price,
cost, effective date and discount rate assumptions for each entity. A limited
partner in any partnership may also elect to receive cash in lieu of Canaan
common stock equal to the "Appraised Value" of his interest in the partnership.
The Prospectus/Proxy Statement dated _________, 2000, which we refer
to as the "Prospectus" describes the combination transactions in detail.
However, the effects of the combination transactions may be different for
limited partners in the various partnerships. Accordingly, a supplement has been
prepared for each of the eight partnerships eligible to participate in the
combination transactions. This Supplement provides information regarding the
effects of the combination transactions on the limited partners of the 1993-I
Partnership. The General Partner will promptly mail a copy of any supplement
relating to other partnerships, without charge, upon request by any limited
partner or his representative who has been so designated in writing, addressed
to: Canaan Energy Corporation, 119 N. Robinson, Suite 600, Oklahoma City,
Oklahoma 73102.
Before voting on the plan of combination, limited partners should
carefully consider the following factors in addition to the other information
included in the Prospectus.
RISK FACTORS
There are numerous risks associated with the combination transactions.
For a more complete description of these risk factors, please see:
. "Risk Factors and Material Considerations" beginning on page 30
of the Prospectus.
. "Comparison of Securityholder Rights" beginning on page 156 of
the Prospectus.
Risks Related to the 1993-I Partnership
There are no risk factors applicable to the 1993-I Partnership that
are materially different from the risk factors described in the Prospectus.
-2-
TAX CONSEQUENCES
Crowe & Dunlevy, counsel to Canaan, has rendered an opinion that:
. No gain or loss will be recognized by a limited partner as a
result of the receipt of Canaan common stock in connection with
the combination transactions.
. The basis of the Canaan common stock received by each limited
partner will be equal to the basis of his partnership interest
exchanged for such stock.
. The holding period for the Canaan common stock for purposes of
computing eligibility for long-term capital gain or loss will
include the period of a limited partner's ownership of his
partnership interest exchanged for such stock and, to the extent
the Canaan common stock received is attributable to certain
ordinary income assets of the partnership, may begin on the day
after the closing of the combination transactions.
. A limited partner who receives cash will recognize gain or loss
equal to the difference between the cash received and his
adjusted tax basis of his limited partnership interest on the
date of the closing of the combination transactions. Gain
recognized by a limited partner will be capital except to the
extent of such limited partner's share of ordinary income assets,
including recapture of depletion, depreciation and intangible
drilling cost deductions previously allocated to a limited
partner.
For additional information please see:
. "Material Federal Income Tax Consequences" beginning on page 90
of the Prospectus.
METHOD OF DETERMINING COMBINATION EXCHANGE VALUES AND APPRAISED VALUES
The following is a summary of the methods of determining the Exchange
Values and Appraised Values. For more detailed information concerning the
subject, please see the following sections of the Prospectus:
. "Summary - Method of Determining Combination Exchange Values" on
page 8.
. "Summary - Summary of Estimated Exchange Values" on page 12.
-3-
. "Summary - Determination of Appraised Value" on page 18.
. "Method of Determining Combination Exchange Values and Appraised
Values" on page 62.
General
Canaan and the General Partners determined the Exchange Value for each
of the Combining Entities. The Exchange Value takes into consideration the value
of each Combining Entities oil and gas reserves determined as described below
and the other assets and liabilities of each Combining Entity as adjusted for
other items for Canaan, Indian and the 1996 and 1996-I partnerships. The
Exchange Value is used to allocate the shares of Canaan common stock to each
Combining Entity based on relative Exchange Values. This methodology is used
based on the arm's length negotiated agreement between Indian and Canaan and the
General Partners in connection with the negotiation of the Indian Acquisition
Agreement and because it is a consistent methodology for establishing the
relative value of each Combining Entity. The Exchange Value may not represent
fair market value.
Canaan engaged Netherland, Sewell & Associates, Inc. to estimate a
value of the oil and gas reserves for each Combining Entity. Netherland Sewell
estimated the reserves, future net revenues therefrom and the present value of
such future net revenues for each Combining Entity as of September 30, 1999. We
refer to the evaluation date of September 30, 1999 as the "Effective Date" and
the present value of the estimated future net revenues from estimated reserves
as of the Effective Date as the "Reserve Value" for each Combining Entity.
We refer to the reserves estimated by Netherland Sewell as "Exchange
Reserves". They include estimates of proved undeveloped reserves as well as
proved developed reserves, both producing and nonproducing, as the term "proved"
is defined by the Society of Petroleum Engineers. However, because the reserves
are estimated using prices different from those required by the Securities and
Exchange Commission, we use the term "Exchange" instead of "proved" to describe
the reserve estimates for the Exchange Value.
The Reserve Value is an estimate only and does not represent the fair
market value of the underlying properties. The Reserve Values are being used
solely for purposes of determining the relative value of each of the Combining
Entities in the combination transactions.
The "Exchange Value" for each Combining Entity will be equal to:
. Reserve Value as of the Effective Date.
. Less bank debt at the closing date.
. Minus interest paid or accrued on bank or other debt assumed by
Canaan from the Effective Date to the closing date.
-4-
. For limited partners, Additional General Partners, Canaan
Securities and Placing Brokers, minus their share of cash
distributions from production subsequent to the Effective Date
and before the closing date.
. An adjustment for any gas imbalances which are not expected to be
material.
. For Canaan, an upward adjustment of $5.0 million for the value of
its "operating rights" as described in the Prospectus.
. For the 1996 and 1996-I Partnerships, upward adjustments, and for
Indian, a downward adjustment, for the Indian Contingent
Production Payment as described in the Prospectus.
Partnership Exchange Values and Allocation to Partners, Canaan Securities and
Placing Brokers
The Exchange Value for each of the partnerships will first be
determined as described above.
As between the limited partners and the General Partner and the
Additional General Partners in each partnership, the Exchange Value will
generally be allocated among them in the ratio in which net revenues and cash
distributions are shared. In each of the partnerships except 1993-I and 1996-I,
the General Partners' share of the net revenues and cash distributions increases
when "payout" occurs as to each individual limited partner. Accordingly, in each
of those partnerships in which payout has not already occurred as to all limited
partners as of the Effective Date, the Reserve Value was allocated first among
the partners in their respective before payout sharing ratios until payout
occurred and any remaining Reserve Value and other components of Exchange Value
was allocated in after payout sharing ratios.
In the partnerships other than 1990, 1991, 1993-I and 1996-I, Canaan
Securities receives a fee for providing reporting services to the partnership
which is equal to 1.5% of partnership gross revenues. In each of these
partnerships, a portion of the Reserve Value (calculated based on gross
revenues) will be allocated to Canaan Securities representing its rights to
receive such fee adjusted for any payments for such fee subsequent to the
Effective Date and before the closing date. This allocation will be made prior
to the allocation of the remaining Reserve Value and other components of
Exchange Value to the limited partners and the General Partners.
The marketing arrangements entered into in connection with the sale of
interests in partnerships provided for certain fees to be paid to Canaan
Securities and Placing Brokers. Such fees are payable out of the cash
distributions otherwise distributable to the General Partner in such
partnerships. Accordingly, the Exchange Value allocated to the General Partner
in these
-5-
partnerships will be reduced to take into consideration the amount of the
Exchange Value allocable to the rights of Canaan Securities and the Placing
Brokers to receive future distributions of net cash flow out of the General
Partner's share. The Placing Brokers will receive cash equal to the 40% of their
Exchange Value and their share of Canaan common stock will be determined based
on the balance of their Exchange Value.
As discussed above, for the limited partners, the Additional General
Partners, Canaan Securities and the Placing Brokers, an adjustment to their
Exchange Values will be made for cash distributions from production subsequent
to the Effective Date and before the closing date.
If the allocation of Exchange Value within a partnership plus
historical cash distributions is not at least 115% of the capital contributions
of the limited partners as a group, the Exchange Value shall be first allocated
to limited partners until this amount is achieved and the balance of the
Exchange Value will be allocated based on revenue sharing percentages. Canaan
and the General Partners believe that the 1996 partnership will be the only
partnership in which this priority allocation of Exchange Value will be
necessary.
Method of Determining Appraised Value
A limited partner may elect to receive cash equal to the Appraised
Value of his interest in a partnership. The Appraised Value was determined based
on an appraisal by Madison Energy Advisors of each partnership's oil and gas
properties valuing them as if sold in an orderly manner and in a reasonable
period of time and in a manner consistent with appropriate industry practice.
Other assets and liabilities of each partnership, consisting primarily of bank
debt and working capital were valued at their respective book values. The
Appraised Value also takes into consideration the cost associated with the sale
of the partnership oil and gas properties and assumes the proceeds of sale of
the partnership properties and working capital after payment of liabilities are
distributed in a liquidation of the partnership. The appraisal was obtained in
order to satisfy the requirements of the National Association of Securities
Dealers that limited partners be offered the opportunity to receive cash equal
to the Appraised Value of their interest in the partnership. The Appraised Value
for each partnership ranges from 56% to 93% of the Exchange Values.
If the Appraised Value of a limited partner's interest plus historical
cash distributions is less than 110% of the amount of the limited partner's
original investment, the Appraised Value for a limited partner electing cash
will be increased to such amount. Canaan and the General Partners believe that
the limited partners of the 1996 and 1996-I partnerships will be the only
limited partners whose Appraised Value will be affected by this adjustment.
-6-
Calculation of Exchange Value and Appraised Value
See Table A in this Supplement for calculation of the Exchange Value
of the 1993-I Partnership and Table B for the calculation of the Appraised Value
of the 1993-I Partnership.
FAIRNESS OF THE COMBINATION TRANSACTIONS
Canaan and the General Partners believe that the proposed combination
transactions are fair to the limited partners of each of the partnerships
receiving Canaan common stock or cash at Appraised Value and are fair to the
partnerships as a whole.
Please see "Recommendation of the General Partners and Fairness of the
Combination Transactions" on page 74 of the Prospectus for a detailed discussion
of the reasons for the General Partners' opinions. The following summarizes the
principal reasons for the General Partners' opinions.
The principal structural element affecting the limited partners and
the other parties to the combination transactions is the determination of the
Exchange Values. The Exchange Values are based primarily on the Reserve Value
based on Netherland Sewell's independent valuations. By using Reserve Values
calculated in a consistent manner by a single engineer based on the same price,
cost and discount assumptions, Canaan and the General Partners believe that the
relative value of each of the Combining Entities has been fairly determined for
purposes of determining its relative ownership of Canaan after the combination
transactions.
A limited partner of a partnership may elect to receive cash in lieu
of Canaan common stock in an amount equal to the Appraised Value of such limited
partner's interest. This cash election provides the opportunity for limited
partners who are unwilling to take market risks with respect to Canaan common
stock the opportunity to receive cash in an amount which Canaan and the General
Partners believe approximates fair value of their interest based on an appraisal
of the partnership oil and gas properties performed by an independent appraiser.
INFORMATION CONCERNING THE 1993-I PARTNERSHIP
General
The 1993-I Partnership was formed in September, 1993 and raised $2.4
million of limited partner capital contributions. As of March 31, 2000, the
1993-I Partnership had distributed $2.6 million in cash to limited partners
representing 112% of their original investment.
The term of the 1993-I Partnership is until December 31, 2012 unless
the partnership is earlier terminated in accordance with the applicable
provisions of the Partnership Agreement.
-7-
See "Information Concerning Partnerships" beginning on page 110 of the
Prospectus for additional information about the 1993 Partnership.
Failure to Approve the Combination Transactions
If the combination transactions are not approved, the 1993 Partnership
will continue in its business as previously conducted. However, it is possible
a new transaction might be provoked by Canaan or the General Partners, but no
other terms have been discussed or considered by them. In addition, Canaan and
the General Partners may also explore other alternatives, such as the sale of
the Coral Group to a third party, but there is no assurance that Canaan and the
General Partners could find a third party interested in purchasing as such. The
terms and conditions of any such purchase and sale agreement would be as
favorable as the terms offered pursuant to the combination transactions.
As of December 31, 1999, the 1993 Partnership had bank indebtedness of
$494,800 which is equal to 9% of the Present Value of its oil and gas reserves.
If the combination transactions are not approved, the General Partners
anticipate that amortization of such bank debt will begin prior to year end 2000
and such amortization will have an adverse affect on limited partner cash
distributions.
If the combination transactions are not consummated, costs and
expenses incurred in connection with the combination transaction proposals will
be borne by the Combining Entities, including the partnerships. Limited
partners in each partnership will bear a portion of the costs allocated to each
partnership based on the percentage interest of limited partners voting in favor
of the combination transactions. The estimated share of expenses allocated to
the 1993 Partnership is $76,500 of which a maximum of $68,850 would be allocated
to limited partners if all limited partners voted in favor of the combination
transactions.
Canaan and the General Partners have prepared an analysis of the
present value of the estimated future net cash flows to the limited partners
assuming that each partnership was continued. This value is referred to as the
"Continuation Value" and is based on the following assumptions:
. The estimated future net revenues from the sale of oil and gas are
based on the same prices and costs that are used to estimate the
Reserve Value for purposes of the Exchange Value.
. The partnerships will continue to incur general administrative
expenses in favor of the General Partners as provided in the
applicable partnership agreement in the amount of 5% of the amount
of distributable cash.
. Any partnership with bank debt is assumed to amortize such debt on
a 36 month level amortization basis, assuming an interest rate of
9%, beginning July 31, 2000.
-8-
. The estimated future net cash flows have been discounted at a
discount rate of 10% to arrive at the estimated Continuation
Value.
Table E in this Supplement provides a comparison of Exchange Value,
Appraised Value and Continuation Value for the 1993-I Partnership
COMBINATION VALUES AND COMPENSATION
AND DISTRIBUTION INFORMATION
Set forth below are the following tables:
. Table A - Calculation of estimated Exchange Values and the
allocation of shares of Canaan common stock assuming a closing
of the combination transactions on July 31, 2000.
. Table B - Calculation of estimated Appraised Values as of
July 31, 2000.
. Table C - The General Partners' and Canaan's compensation
and distribution history for the three most recent fiscal years
and the three months ended March 31, 2000.
. Table D - The amount of the limited months the five most
recent fiscal years and the three ended partners' cash
distributions for March 31, 2000.
. Table E - Comparison of Exchange Value, Appraised Value and
Continuation Value.
For additional information, see the following sections of the
Prospectus:
. "Information Concerning the Partnerships - Selected Historical
Financial and Operating Data of Individual Partnerships"
beginning on page 121; and
. "Unaudited Pro Forma Financial Information" in Appendix B.
-9-
Table A
Coral Reserves Natural Gas Income Fund
1993-I Limited Partnership
Calculation of Estimated Exchange Value
The Exchange Value is estimated based on Canaan's estimate of cash
distributions and interest expense from the September 30, 1999 Effective Date to
an assumed closing date of July 31, 2000. Variances in actual cash distributions
and interest expense or a change in the closing date will result in a change in
the Exchange Value for the partnership and will similarly change Exchange Values
for other Combining Entities.
- -------------------------------------------------------------------------------------------------
Amount
----------
- -------------------------------------------------------------------------------------------------
Reserve Value of Oil and Gas $2,099,300
Properties (1).......................
- -------------------------------------------------------------------------------------------------
Bank Debt as of Effective Date.......... 346,500
- -------------------------------------------------------------------------------------------------
Working Capital as of Effective Date:
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents............ 91,751
- -------------------------------------------------------------------------------------------------
Accounts receivable.................. 122,242
- -------------------------------------------------------------------------------------------------
Accounts payable..................... 21,238
- -------------------------------------------------------------------------------------------------
Subtotal - Working Capital.............. 192,755
- -------------------------------------------------------------------------------------------------
Estimated Cash Distributions Before 442,273
Closing (3)
- -------------------------------------------------------------------------------------------------
Estimated Interest Expense Before 28,555
Closing (3) Shares of Percent of
- -------------------------------------------------------------------------------------------------
Other Adjustments(4) 62,729 Canaan Stock
Common Stock (2) Outstanding (2)
--------------- --------------
- -------------------------------------------------------------------------------------------------
Estimated Exchange Value................ 1,481,164 147,000 2.94%
at Closing(5)
- -------------------------------------------------------------------------------------------------
Allocated to: 1,270,531 127,050 2.54%
Limited Partners.....................
- -------------------------------------------------------------------------------------------------
General Partner...................... 135,342 13,613 0.27%
- -------------------------------------------------------------------------------------------------
Additional General Partners.......... 7,103 504 0.01%
- -------------------------------------------------------------------------------------------------
Canaan Securities.................... 39,776 4,033 0.08%
- -------------------------------------------------------------------------------------------------
Placing Brokers...................... 28,412 1,800 0.04%
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Limited Partner per $1000 Investment.... 538 (6)
- -------------------------------------------------------------------------------------------------
_______________________
(1) As determined by Netherland, Sewell & Associates, Inc. See "Method of
Determining Combination Exchange Values and Appraised Values" in the
Prospectus. No partnerships own an individual property representing more
than 10% of the Reserve Value or from which the partnership derived more
than 10% of its cash flow or net income for the year ended December 31,
1999.
(2) Assumes no limited partners elect to receive cash. Placing Brokers' shares
based on 60% of Exchange Value.
(3) Assumes closing on July 31, 2000, and uses Netherland, Sewell reserve
report to estimate property revenues and expenses and estimated interest
rate on bank debt for purposes of calculating interest expense.
(4) Adjustment to reflect purchase of a portion of Canaan Securities' interest
in the 1991 Partnership.
(5) The "Estimated Exchange Value at Closing" for all of the partnerships and
Canaan set forth in the table is approximately 96.3% of the sum of their
respective components of Exchange Value because the operating rights
adjustment to Canaan's Exchange Value within the Coral Group is excluded
for purposes of computing the relative Exchange Value between the Coral
Group and Indian. See "Method of Determining Combination Exchange Values
and Appraised Values" in the Prospectus for a more detailed explantation.
-10-
(6) Less than 0.01%
Table B
Coral Reserves 1993 Institutional
Limited Partnership
Calculation of Estimated Appraised Value
The Appraised Value is estimated based on Canaan's estimate of
property net revenue from the September 30, 1999 Effective Date to an assumed
closing date of July 31, 2000. Variances in actual net revenue or a change in
the closing date will result in a change in the Appraised Value for the
partnership and will similarly change Appraised Values for other partnerships.
Property net revenues include proceeds from sale of production less production
taxes and operating expense.
- ---------------------------------------------------------------------------------------------------
Amount
----------
- ---------------------------------------------------------------------------------------------------
Appraised Value of Oil and Gas
Properties at Effective Date (1)............... $1,571,000
- ---------------------------------------------------------------------------------------------------
Estimated Property Net Revenues Before Closing(2)... 511,255
- ---------------------------------------------------------------------------------------------------
Appraised Value of Properties at Closing Date....... 1,059,745
- ---------------------------------------------------------------------------------------------------
Bank Debt as of Closing Date........................ 387,500
- ----------------------------------------------------------------
Working Capital as of Closing Date:
- ----------------------------------------------------------------
Cash and cash equivalents...................... 91,751
- ---------------------------------------------------------------------------------------------------
Accounts receivable............................ 122,242
- ---------------------------------------------------------------------------------------------------
Accounts payable............................... 21,238
- ---------------------------------------------------------------------------------------------------
Subtotal - Working Capital.......................... 192,755
- ---------------------------------------------------------------------------------------------------
Estimated Appraised Value
at Closing(2).................................... 865,000
- ---------------------------------------------------------------------------------------------------
Allocated to:(3)
Limited Partners................................. 843,903
- ---------------------------------------------------------------------------------------------------
General Partner and Additional General Partners.. 21,097
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Limited Partners per $1000 Investment............... 357
- ---------------------------------------------------------------------------------------------------
_______________________
(1) As determined based on an appraisal of the partnership's properties by
Madison Energy Advisors. See "Method of Determining Combination Exchange
Values and Appraised Values" in the Prospectus.
(2) Assumes closing on July 31, 2000, and uses actual property net revenues
from September 30, 1999 to March 31, 2000 and estimated property net
revenues based on Netherland, Sewell report thereafter.
(3) Allocated based on liquidation provisions of applicable partnership
agreement.
Table C
Coral Reserves 1993 Institutional Limited Partnership
Summary of Compensation and Cash Distributions
Paid to the General Partners and Affiliates
- ------------------------------------------------------------------
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------
1997 1999
- ----------------------------------------------------------------------------------------------------
-11-
- --------------------------------------------------------------------------------
Reimbursement of expenses paid
to General Partner............. $20,611 $13,580 $14,210 $ 3,955
- --------------------------------
Operating fees paid to Canaan... 3,193 4,175 4,419 1,130
- --------------------------------
Cash distributions paid to
General Partner................ 81,678 56,849 52,912 14,439
- --------------------------------
Cash distributions paid to
Additional General Partners.... 3,404 2,368 2,204 602
- --------------------------------
Table D
Coral Reserves 1993 Institutional Limited Partnership
Summary of Cash Distributions Paid to Limited Partners
Year Ended December 31,
-----------------------
Three Months Ended
1995 1996 1997 1998 1999 March 31, 2000
- ----------------------------------------------------------------------------------------------------
Cash distributions
paid to limited
partners(1).......... $389,575 $602,827 $595,575 $414,514 $385,809 $105,284
- ----------------------
Cash distributions
to limited partners
per $1,000
investment........... 165 255 252 175 163 45
---------------------
_________________________________________
(1) Because of depletion (which is usually higher in the early years of
production), a portion of every distribution of revenues from properties
represents a return of a limited partner's original investment. Until a
limited partner receives cash distributions equal to his original
investment, 100% of such distributions may be deemed to be a return of
capital.
-12-
Table E
Coral Reserves 1993 Institutional Limited Partnership
Comparison of Exchange Value,
Appraised Value and Continuation Value
The following table sets forth a comparison of the Exchange Value,
Appraised Value and Continuation Value for the 1993-I Partnership for the
limited partners as a group and for each limited partner per $1000 of
investment.
- --------------------------------------------------------------------------------------------------
Liquidation/ Continuation
Appraised Value Value Exchange Value
--------------- ------------ --------------
- --------------------------------------------------------------------------------------------------
1993-I Partnership
- ------------------
- --------------------------------------------------------------------------------------------------
Limited Partners $843,903 $1,084,232 $1,270,531
- --------------------------------------------------------------------------------------------------
Limited Partners per $1000 of investment 357 459 538
- --------------------------------------------------------------------------------------------------
The Exchange Value does not represent the fair value of the
partnership or its net assets and is being used solely for purposes of
determining the relative ownership of Canaan by the 1993-I Partnership. There is
no assurance that the value of common stock received by a limited partner will
be equal to Exchange Value. The Appraised Value is the amount a limited partner
may elect to receive in cash and is based on an appraisal of the partnership's
assets and an assumed liquidation of the 1993-I Partnership.
-13-
CORAL RESERVES NATURAL GAS INCOME FUND
1993 LIMITED PARTNERSHIP
(the "1993 Partnership")
SUPPLEMENT TO CANAAN ENERGY CORPORATION
PROSPECTUS/PROXY STATEMENT
Dated ___________, 2000
The date of this Supplement is _______________, 2000
General
This Supplement relates to the proposed "combination transactions"
involving Canaan Energy Corporation. In the proposed combination transactions:
. Canaan will acquire all of the limited partners' and Additional
General Partners' interests in the eight oil and gas limited
partnerships previously sponsored by Coral Reserves, Inc. and
Coral Reserves Energy Corp., affiliates of Canaan and the General
Partners of the partnerships;
. Canaan will acquire 100% of the stock of the General Partners of
the partnerships;
. Canaan will acquire 100% of the stock of Indian Oil Company, an
unaffiliated oil and gas company;
. Canaan will acquire 100% of the stock of Canaan Securities, Inc.,
an unaffiliated broker/dealer which has previously participated
in the marketing of the limited partnership interests and
provides ongoing reporting services to limited partners; and
. Existing owners of Canaan's common stock will receive additional
shares of common stock based on Canaan's relative share of the
total "Exchange Value" as described below.
We refer to Canaan, the partnerships, the General Partners, Indian Oil
Company and Canaan Securities as the "Combining Entities". When we refer to the
Coral Group we mean Canaan, the partnerships, the General Partnerships, the
Additional General Partners, Canaan Securities and the Placing Brokers. A total
of 5,000,000 shares of Canaan common stock will be issued and be outstanding
after the combination transactions, less the number of shares otherwise issuable
to limited partners who elect to receive cash. The owners of each of the
Combining Entities will receive shares of Canaan common stock in proportion to
the "Exchange Value" of
such entity relative to the total Exchange Value of all Combining Entities. The
Exchange Value was determined by Canaan and is based on a valuation of each
Combining Entity's oil and gas Reserve Values and other assets and liabilities.
The Reserves Values were determined by Netherland, Sewell & Associates, Inc. an
independent petroleum engineering and consulting firm, using the same price,
cost, effective date and discount rate assumptions for each entity. A limited
partner in any partnership may also elect to receive cash in lieu of Canaan
common stock equal to the "Appraised Value" of his interest in the partnership.
The Prospectus/Proxy Statement dated ____________, 2000, which we
refer to as the "Prospectus" describes the combination transactions in detail.
However, the effects of the combination transactions may be different for
limited partners in the various partnerships. Accordingly, a supplement has been
prepared for each of the eight partnerships eligible to participate in the
combination transactions. This Supplement provides information regarding the
effects of the combination transactions on the limited partners of the 1993
Partnership. The General Partner will promptly mail a copy of any supplement
relating to other partnerships, without charge, upon request by any limited
partner or his representative who has been so designated in writing, addressed
to: Canaan Energy Corporation, 119 N. Robinson, Suite 600, Oklahoma City,
Oklahoma 73102.
Before voting on the plan of combination, limited partners should
carefully consider the following factors in addition to the other information
included in the Prospectus.
RISK FACTORS
There are numerous risks associated with the combination transactions.
For a more complete description of these risk factors, please see:
. "Risk Factors and Material Considerations" beginning on page 30
of the Prospectus.
. "Comparison of Securityholder Rights" beginning on page 156 of
the Prospectus.
Risks Related to the 1993 Partnership
There are no risk factors applicable to the 1993 Partnership that are
materially different from the risk factors described in the Prospectus.
-2-
TAX CONSEQUENCES
Crowe & Dunlevy, counsel to Canaan, has rendered an opinion that:
. No gain or loss will be recognized by a limited partner as a
result of the receipt of Canaan common stock in connection with
the combination transactions.
. The basis of the Canaan common stock received by each limited
partner will be equal to the basis of his partnership interest
exchanged for such stock.
. The holding period for the Canaan common stock for purposes of
computing eligibility for long-term capital gain or loss will
include the period of a limited partner's ownership of his
partnership interest exchanged for such stock and, to the extent
the Canaan common stock received is attributable to certain
ordinary income assets of the partnership, may begin on the day
after the closing of the combination transactions.
. A limited partner who receives cash will recognize gain or loss
equal to the difference between the cash received and his
adjusted tax basis of his limited partnership interest on the
date of the closing of the combination transactions. Gain
recognized by a limited partner will be capital except to the
extent of such limited partner's share of ordinary income assets,
including recapture of depletion, depreciation and intangible
drilling cost deductions previously allocated to a limited
partner.
For additional information please see:
. "Material Federal Income Tax Consequences" beginning on page 90
of the Prospectus.
METHOD OF DETERMINING COMBINATION EXCHANGE VALUES AND APPRAISED VALUES
The following is a summary of the methods of determining the Exchange
Values and Appraised Values. For more detailed information concerning the
subject, please see the following sections of the Prospectus:
. "Summary - Method of Determining Combination Exchange Values" on
page 8.
. "Summary - Summary of Estimated Exchange Values" on page 12.
-3-
. "Summary - Determination of Appraised Value" on page 18.
. "Method of Determining Combination Exchange Values and Appraised
Values" on page 62.
General
Canaan and the General Partners determined the Exchange Value for each
of the Combining Entities. The Exchange Value takes into consideration the value
of each Combining Entities oil and gas reserves determined as described below
and the other assets and liabilities of each Combining Entity as adjusted for
other items for Canaan, Indian and the 1996 and 1996-I partnerships. The
Exchange Value is used to allocate the shares of Canaan common stock to each
Combining Entity based on relative Exchange Values. This methodology is used
based on the arm's length negotiated agreement between Indian and Canaan and the
General Partners in connection with the negotiation of the Indian Acquisition
Agreement and because it is a consistent methodology for establishing the
relative value of each Combining Entity. The Exchange Value may not represent
fair market value.
Canaan engaged Netherland, Sewell & Associates, Inc. to estimate a
value of the oil and gas reserves for each Combining Entity. Netherland Sewell
estimated the reserves, future net revenues therefrom and the present value of
such future net revenues for each Combining Entity as of September 30, 1999. We
refer to the evaluation date of September 30, 1999 as the "Effective Date" and
the present value of the estimated future net revenues from estimated reserves
as of the Effective Date as the "Reserve Value" for each Combining Entity.
We refer to the reserves estimated by Netherland Sewell as "Exchange
Reserves". They include estimates of proved undeveloped reserves as well as
proved developed reserves, both producing and nonproducing, as the term "proved"
is defined by the Society of Petroleum Engineers. However, because the reserves
are estimated using prices different from those required by the Securities and
Exchange Commission, we use the term "Exchange" instead of "proved" to describe
the reserve estimates for the Exchange Value.
The Reserve Value is an estimate only and does not represent the fair
market value of the underlying properties. The Reserve Values are being used
solely for purposes of determining the relative value of each of the Combining
Entities in the combination transactions.
The "Exchange Value" for each Combining Entity will be equal to:
. Reserve Value as of the Effective Date.
. Less bank debt at the closing date.
-4-
. Minus interest paid or accrued on bank or other debt assumed by
Canaan from the Effective Date to the closing date.
. For limited partners, Additional General Partners, Canaan
Securities and Placing Brokers, minus their share of cash
distributions from production subsequent to the Effective Date
and before the closing date.
. An adjustment for any gas imbalances which are not expected to be
material.
. For Canaan, an upward adjustment of $5.0 million for the value of
its "operating rights" as described in the Prospectus.
. For the 1996 and 1996-I Partnerships, upward adjustments, and for
Indian, a downward adjustment, for the Indian Contingent
Production Payment as described in the Prospectus.
Partnership Exchange Values and Allocation to Partners, Canaan Securities and
Placing Brokers
The Exchange Value for each of the partnerships will first be
determined as described above.
As between the limited partners and the General Partner and the
Additional General Partners in each partnership, the Exchange Value will
generally be allocated among them in the ratio in which net revenues and cash
distributions are shared. In each of the partnerships except 1993-I and 1996-I,
the General Partners' share of the net revenues and cash distributions increases
when "payout" occurs as to each individual limited partner. Accordingly, in each
of those partnerships in which payout has not already occurred as to all limited
partners as of the Effective Date, the Reserve Value was allocated first among
the partners in their respective before payout sharing ratios until payout
occurred and any remaining Reserve Value and other components of Exchange Value
was allocated in after payout sharing ratios.
As of March 31, 2000, "payout" had not occurred for any limited
partners in the 1993 Partnership.
In the partnerships other than 1990, 1991, 1993-I and 1996-I, Canaan
Securities receives a fee for providing reporting services to the partnership
which is equal to 1.5% of partnership gross revenues. In each of these
partnerships, a portion of the Reserve Value (calculated based on gross
revenues) will be allocated to Canaan Securities representing its rights to
receive such fee adjusted for any payments for such fee subsequent to the
Effective Date and before the closing date. This allocation will be made prior
to the allocation of the remaining Reserve Value and other remaining components
of Exchange Value to the limited partners and the General Partners.
-5-
The marketing arrangements entered into in connection with the sale of
interests in partnerships provided for certain fees to be paid to Canaan
Securities and Placing Brokers. Such fees are payable out of the cash
distributions otherwise distributable to the General Partner in such
partnerships. Accordingly, the Exchange Value allocated to the General Partner
in these partnerships will be reduced to take into consideration the amount of
the Exchange Value allocable to the rights of Canaan Securities and the Placing
Brokers to receive future distributions of net cash flow out of the General
Partner's share. The Placing Brokers will receive cash equal to the 40% of their
Exchange Value and their share of Canaan common stock will be determined based
on the balance of their Exchange Value.
As discussed above, for the limited partners, the Additional General
Partners, Canaan Securities and the Placing Brokers, an adjustment to their
Exchange Values will be made for cash distributions from production subsequent
to the Effective Date and before the closing date.
If the allocation of Exchange Value within a partnership plus
historical cash distributions is not at least 115% of the capital contributions
of the limited partners as a group, the Exchange Value shall be first allocated
to limited partners until this amount is achieved and the balance of the
Exchange Value will be allocated based on revenue sharing percentages. Canaan
and the General Partners believe that the 1996 partnership will be the only
partnership in which this priority allocation of Exchange Value will be
necessary.
Method of Determining Appraised Value
A limited partner may elect to receive cash equal to the Appraised
Value of his interest in a partnership. The Appraised Value was determined based
on an appraisal by Madison Energy Advisors of each partnership's oil and gas
properties valuing them as if sold in an orderly manner and in a reasonable
period of time and in a manner consistent with appropriate industry practice.
Other assets and liabilities of each partnership, consisting primarily of bank
debt and working capital were valued at their respective book values. The
Appraised Value also takes into consideration the cost associated with the sale
of the partnership oil and gas properties and assumes the proceeds of sale of
the partnership properties and working capital after payment of liabilities are
distributed in a liquidation of the partnership. The appraisal was obtained in
order to satisfy the requirements of the National Association of Securities
Dealers that limited partners be offered the opportunity to receive cash equal
to the Appraised Value of their interest in the partnership. The Appraised Value
for each partnership ranges from 56% to 93% of the Exchange Values.
If the Appraised Value of a limited partner's interest plus historical
cash distributions is less than 110% of the amount of the limited partner's
original investment, the Appraised Value for a limited partner electing cash
will be increased to such amount. Canaan and the General Partners believe that
the limited partners of the 1996 and 1996-I partnerships will be the only
limited partners whose Appraised Value will be affected by this adjustment.
-6-
Calculation of Exchange Value and Appraised Value
See Table A in this Supplement for calculation of the Exchange Value
of the 1993 Partnership and Table B for the calculation of the Appraised Value
of the 1993 Partnership.
FAIRNESS OF THE COMBINATION TRANSACTIONS
Canaan and the General Partners believe that the proposed combination
transactions are fair to the limited partners of each of the partnerships
receiving Canaan common stock or cash at Appraised Value and are fair to the
partnerships as a whole.
Please see "Recommendation of the General Partners and Fairness of the
Combination Transactions" on page 74 of the Prospectus for a detailed discussion
of the reasons for the General Partners' opinions. The following summarizes the
principal reasons for the General Partners' opinions.
The principal structural element affecting the limited partners and
the other parties to the combination transactions is the determination of the
Exchange Values. The Exchange Values are based primarily on the Reserve Value
based on Netherland Sewell's independent valuations. By using Reserve Values
calculated in a consistent manner by a single engineer based on the same price,
cost and discount assumptions, Canaan and the General Partners believe that the
relative value of each of the Combining Entities has been fairly determined for
purposes of determining its relative ownership of Canaan after the combination
transactions.
A limited partner of a partnership may elect to receive cash in lieu
of Canaan common stock in an amount equal to the Appraised Value of such limited
partner's interest. This cash election provides the opportunity for limited
partners who are unwilling to take market risks with respect to Canaan common
stock the opportunity to receive cash in an amount which Canaan and the General
Partners believe approximates fair value of their interest based on an appraisal
of the partnership oil and gas properties performed by an independent appraiser.
INFORMATION CONCERNING THE 1993 PARTNERSHIP
General
The 1993 Partnership was formed in July, 1993 and raised $6.5
million of limited partner capital contributions. As of March 31, 2000, the 1993
Partnership had distributed $5.9 million in cash to limited partners
representing 91% of their original investment. The 1993 Partnership has not
achieved payout for any limited partners.
The term of the 1993 Partnership is until December 31, 2012 unless the
partnership is earlier terminated in accordance with the applicable provisions
of the Partnership Agreement.
-7-
See "Information Concerning Partnerships" beginning on page 110 of the
Prospectus for additional information about the 1993-I Partnership.
Failure to Approve the Combination Transactions
If the combination transactions are not approved, the 1993-I
Partnership will continue in its business as previously conducted. However, it
is possible a new transaction might be provoked by Canaan or the General
Partners, but no other terms have been discussed or considered by them. In
addition, Canaan and the General Partners may also explore other alternatives,
such as the sale of the Coral Group to a third party, but there is no assurance
that Canaan and the General Partners could find a third party interested in
purchasing as such. The terms and conditions of any such purchase and sale
agreement would be as favorable as the terms offered pursuant to the combination
transactions.
As of December 31, 1999, the 1993-I Partnership had bank indebtedness
of $375,500 which is equal to 18% of the Present Value of its oil and gas
reserves. If the combination transactions are not approved, the General
Partners anticipate that amortization of such bank debt will begin prior to year
end 2000 and such amortization will have an adverse affect on limited partner
cash distributions.
If the combination transactions are not consummated, costs and
expenses incurred in connection with the combination transaction proposals will
be borne by the Combining Entities, including the partnerships. Limited
partners in each partnership will bear a portion of the costs allocated to each
partnership based on the percentage interest of limited partners voting in favor
of the combination transactions. The estimated share of expenses allocated to
the 1993-I Partnership is $34,000 of which a maximum of $29,750 would be
allocated to limited partners if all limited partners voted in favor of the
combination transactions.
Canaan and the General Partners have prepared an analysis of the
present value of the estimated future net cash flows to the limited partners
assuming that each partnership was continued. This value is referred to as the
"Continuation Value" and is based on the following assumptions:
. The estimated future net revenues from the sale of oil and gas are
based on the same prices and costs that are used to estimate the
Reserve Value for purposes of the Exchange Value.
. The partnerships will continue to incur general administrative
expenses in favor of the General Partners as provided in the
applicable partnership agreement in the amount of 5% of the amount
of distributable cash.
. Any partnership with bank debt is assumed to amortize such debt on
a 36 month level amortization basis, assuming an interest rate of
9%, beginning July 31, 2000.
-8-
. The estimated future net cash flows have been discounted at a
discount rate of 10% to arrive at the estimated Continuation
Value.
Table E in this Supplement provides a comparison of Exchange Value,
Appraised Value and Continuation Value for the 1993 Partnership
COMBINATION VALUES AND COMPENSATION
AND DISTRIBUTION INFORMATION
Set forth below are the following tables:
. Table A - Calculation of estimated Exchange Values and
the allocation of shares of Canaan common stock
assuming a closing of the combination transactions on
July 31, 2000.
. Table B - Calculation of estimated Appraised Values as
of July 31, 2000.
. Table C - The General Partners' and Canaan's
compensation and cash distribution history for the
three most recent fiscal years and the three months
ended March 31, 2000.
. Table D - The amount of the limited partners' cash
distributions for the five most recent fiscal years and
the three months ended March 31, 2000.
. Table E - Comparison of Exchange Value, Appraised
Value and Continuation Value.
For additional information, see the following sections of the
Prospectus:
. "Information Concerning the Partnerships - Selected Historical
Financial and Operating Data of Individual Partnerships"
beginning on page 121; and
. "Unaudited Pro Forma Financial Information" in Appendix B.
-9-
Table A
Coral Reserves Natural Gas Income Fund
1993 Limited Partnership
Calculation of Estimated Exchange Value
The Exchange Value is estimated based on Canaan's estimate of cash
distributions and interest expense from the September 30, 1999 Effective Date to
an assumed closing date of July 31, 2000. Variances in actual cash distributions
and interest expense or a change in the closing date will result in a change in
the Exchange Value for the partnership and will similarly change Exchange Values
for other Combining Entities.
- -----------------------------------------------------------------------------------------------------------------------------
Amount
------
- -----------------------------------------------------------------------------------------------------------------------------
Reserve Value of Oil and Gas $4,751,400
Properties (1).................
- ------------------------------------------------------------------------------------------------------------------------------
Bank Debt as of Effective Date.......... 479,800
Working Capital as of Effective Date:
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents...... 103,297
- ------------------------------------------------------------------------------------------------------------------------------
Accounts receivable............ 269,446
- ------------------------------------------------------------------------------------------------------------------------------
Accounts payable............... 90,684
- ------------------------------------------------------------------------------------------------------------------------------
Subtotal - Working Capital.............. 282,059
- ------------------------------------------------------------------------------------------------------------------------------
Estimated Cash Distributions Before
Closing (3)............................. 808,281 Shares of Percent of
- -------------------------------------------------------------------------------------------------------------------------------
Estimated Interest Expense Before Canaan Stock
Closing (3) 37,060 Common Stock (2) Outstanding (2)
---------------- ---------------
- -------------------------------------------------------------------------------------------------------------------------------
Estimated Exchange Value
at Closing(4).................. 3,572,540 354,500 7.09%
- -------------------------------------------------------------------------------------------------------------------------------
Allocated to:
Limited Partners............... 2,569,088 258,883 5.18%
- -------------------------------------------------------------------------------------------------------------------------------
General Partner................ 639,378 63,959 1.27%
- -------------------------------------------------------------------------------------------------------------------------------
Additional General Partners.... 34,089 3,553 0.07%
- --------------------------------------------------------------------------------------------------------------------------------
Canaan Securities.............. 199,205 20,305 0.41%
- --------------------------------------------------------------------------------------------------------------------------------
Placing Brokers................ 130,780 7,800 0.16%
- --------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Limited Partner per $1000 Investment.... 394 40 (5)
- ---------------------------------------------------------------------------------------------------------------------------------
- -----------------------
(1) As determined by Netherland, Sewell & Associates, Inc. See "Method of
Determining Combination Exchange Values and Appraised Values" in the
Prospectus. No partnerships own an individual property representing
more than 10% of the Reserve Value or from which the partnership
derived more than 10% of its cash flow or net income for the year ended
December 31, 1999.
(2) Assumes no limited partners elect to receive cash. Placing Brokers'
shares based on 60% of Exchange Value.
(3) Assumes closing on July 31, 2000, and uses Netherland, Sewell reserve
report to estimate property revenues and expenses and estimated
interest rate on bank debt for purposes of calculating interest
expense.
(4) The "Estimated Exchange Value at Closing" for all of the partnerships
and Canaan set forth in the table is approximately 96.3% of the sum of
their respective components of Exchange Value because the operating
rights adjustment to Canaan's Exchange Value within the Coral Group is
excluded for purposes of computing the relative Exchange Value between
the Coral Group and Indian. See "Method of Determining Combination
Exchange Values and Appraised Values" in the Prospectus for a more
detailed explantation.
-10-
(5) Less than 0.01%
Table B
Coral Reserves Natural Gas Income Fund
1993 Limited Partnership
Calculation of Estimated Appraised Value
The Appraised Value is estimated based on Canaan's estimate of
property net revenue from the September 30, 1999 Effective Date to an assumed
closing date of July 31, 2000. Variances in actual net revenue or a change in
the closing date will result in a change in the Appraised Value for the
partnership and will similarly change Appraised Values for other partnerships.
Property net revenues include proceeds from sale of production less production
taxes and operating expense.
- --------------------------------------------------------------------------------------------------------------------
Amount
------
- --------------------------------------------------------------------------------------------------------------------
Appraised Value of Oil and Gas
Properties (1)............................................... $3,549,000
- --------------------------------------------------------------------------------------------------------------------
Estimated Property Net Revenues Before Closing(2)..................... 948,543
- --------------------------------------------------------------------------------------------------------------------
Appraised Value of Properties at Closing Date......................... 2,600,457
- --------------------------------------------------------------------------------------------------------------------
Bank Debt as of Closing Date.......................................... 583,800
- --------------------------------------------------------------------------------------
Working Capital as of Closing Date:
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents.................................... 103,297
- --------------------------------------------------------------------------------------------------------------------
Accounts receivable.......................................... 269,446
- --------------------------------------------------------------------------------------------------------------------
Accounts payable............................................. 90,684
- --------------------------------------------------------------------------------------------------------------------
Subtotal - Working Capital............................................ 282,059
- --------------------------------------------------------------------------------------------------------------------
Estimated Appraised Value
at Closing(2)................................................ 2,298,716
- --------------------------------------------------------------------------------------------------------------------
Allocated to:(3)
Limited Partners............................................. 2,219,543
- --------------------------------------------------------------------------------------------------------------------
General Partner and Additional General Partners.............. 79,173
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Limited Partners per $1000 Investment................................. 340
- --------------------------------------------------------------------------------------------------------------------
- -----------------------
(1) As determined based on an appraisal of the partnership's properties by
Madison Energy Advisors. See "Method of Determining Combination
Exchange Values and Appraised Values" in the Prospectus.
(2) Assumes closing on July 31, 2000, and uses actual property net revenues
from September 30, 1999 to March 31, 2000 and estimated property net
revenues based on Netherland, Sewell report thereafter.
(3) Allocated based on liquidation provisions of applicable partnership
agreement.
-11-
Table C
Coral Reserves Natural Gas Income Fund 1993 Limited Partnership
Summary of Compensation and Cash Distributions
Paid to the General Partners and Affiliates
- --------------------------------------------------------------------------
Year Ended December 31,
- --------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
1997 1998 Three months ended
March 31, 2000
- -------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Reimbursement of expenses paid
to General Partner............... $80,000 $50,869 $41,374 $13,961
- ------------------------------------------------------------------------------------------------------
Operating fees paid to Canaan.... 78,583 105,624 107,780 27,137
- ---------------------------------
Cash distributions paid to
General Partner.................. 139,082 94,622 66,079 23,245
- ---------------------------------
Cash distributions paid to
Additional General Partners...... 15,454 10,514 7,342 2,583
- ---------------------------------
Table D
Coral Reserves Natural Gas Income Fund 1993 Limited Partnership
Summary of Cash Distributions Paid to Limited Partners
- ----------------
Year Ended December 31,
- --------------------------------------------------------------------------------------------
- ----------------------------------- ---------------------------------------------------------------------------------------------
Three 9 months
ended March 31,
1995 1996 1997 1998 2000
- -------------------- -------- -------- -------- -------- -----------------
Cash distributions
paid to limited
partners(1)......... $875,590 $1,376,677 $1,390,822 $946,226 $660,784 $232,453
- --------------------
Cash distributions
to limited partners
per $1,000
investment.......... 134 211 213 145 101 36
- --------------------
-12-
- -----------------------------------------
(1) Because of depletion (which is usually higher in the early years of
production), a portion of every distribution of revenues from properties
represents a return of a limited partner's original investment. Until a
limited partner receives cash distributions equal to his original
investment, 100% of such distributions may be deemed to be a return of
capital.
Table E
Coral Reserves Natural Gas Income Fund 1993 Limited Partnership
Comparison of Exchange Value,
Appraised Value and Continuation Value
The following table sets forth a comparison of the Exchange Value,
Appraised Value and Continuation Value for the 1993 Partnership for the limited
partners as a group and for each limited partner per $1000 of investment.
- --------------------------------------------------------------------------------------------------------
Liquidation/ Continuation
Appraised Value Value Exchange Value
--------------- ------ --------------
- --------------------------------------------------------------------------------------------------------
1993 Partnership
- ----------------
Limited Partners $2,219,543 $2,311,366 $2,569,088
- --------------------------------------------------------------------------------------------------------
Limited Partners per $1000 of investment 340 354 394
- --------------------------------------------------------------------------------------------------------
The Exchange Value does not represent the fair value of the
partnership or its net assets and is being used solely for purposes of
determining the relative ownership of Canaan by the 1993 Partnership. There is
no assurance that the value of common stock received by a limited partner will
be equal to Exchange Value. The Appraised Value is the amount a limited partner
may elect to receive in cash and is based on an appraisal of the partnership's
assets and an assumed liquidation of the 1993 Partnership.
-13-
CORAL RESERVES ENERGY INCOME FUND
1995 LIMITED PARTNERSHIP
(the "1995 Partnership")
SUPPLEMENT TO CANAAN ENERGY CORPORATION
PROSPECTUS/PROXY STATEMENT
Dated ____________, 2000
The date of this Supplement is _______________, 2000
General
This Supplement relates to the proposed "combination transactions"
involving Canaan Energy Corporation. In the proposed combination transactions:
. Canaan will acquire all of the limited partners' and Additional
General Partners' interests in the eight oil and gas limited
partnerships previously sponsored by Coral Reserves, Inc. and
Coral Reserves Energy Corp., affiliates of Canaan and the General
Partners of the partnerships;
. Canaan will acquire 100% of the stock of the General Partners of
the partnerships;
. Canaan will acquire 100% of the stock of Indian Oil Company, an
unaffiliated oil and gas company;
. Canaan will acquire 100% of the stock of Canaan Securities, Inc.,
an unaffiliated broker/dealer which has previously participated
in the marketing of the limited partnership interests and
provides ongoing reporting services to limited partners; and
. Existing owners of Canaan's common stock will receive additional
shares of common stock based on Canaan's relative share of the
total "Exchange Value" as described below.
We refer to Canaan, the partnerships, the General Partners, Indian Oil
Company and Canaan Securities as the "Combining Entities". When we refer to the
Coral Group we mean Canaan, the partnerships, the General Partnerships, the
Additional General Partners, Canaan Securities and the Placing Brokers. A total
of 5,000,000 shares of Canaan common stock will be issued and be outstanding
after the combination transactions, less the number of shares otherwise issuable
to limited partners who elect to receive cash. The owners of each of the
Combining Entities will receive shares of Canaan common stock in proportion to
the "Exchange Value" of
such entity relative to the total Exchange Value of all Combining Entities. The
Exchange Value was determined by Canaan and is based on a valuation of each
Combining Entity's oil and gas Reserve Values and other assets and liabilities.
The Reserves Values were determined by Netherland, Sewell & Associates, Inc. an
independent petroleum engineering and consulting firm, using the same price,
cost, effective date and discount rate assumptions for each entity. A limited
partner in any partnership may also elect to receive cash in lieu of Canaan
common stock equal to the "Appraised Value" of his interest in the partnership.
The Prospectus/Proxy Statement dated _____________, 2000, which we
refer to as the "Prospectus" describes the combination transactions in detail.
However, the effects of the combination transactions may be different for
limited partners in the various partnerships. Accordingly, a supplement has been
prepared for each of the eight partnerships eligible to participate in the
combination transactions. This Supplement provides information regarding the
effects of the combination transactions on the limited partners of the 1995
Partnership. The General Partner will promptly mail a copy of any supplement
relating to other partnerships, without charge, upon request by any limited
partner or his representative who has been so designated in writing, addressed
to: Canaan Energy Corporation, 119 N. Robinson, Suite 600, Oklahoma City,
Oklahoma 73102.
Before voting on the plan of combination, limited partners should
carefully consider the following factors in addition to the other information
included in the Prospectus.
RISK FACTORS
There are numerous risks associated with the combination transactions.
For a more complete description of these risk factors, please see:
. "Risk Factors and Material Considerations" beginning on page 30
of the Prospectus.
. "Comparison of Securityholder Rights" beginning on page 156 of
the Prospectus.
Risks Related to the 1995 Partnership
There are no risk factors applicable to the 1995 Partnership that are
materially different from the risk factors described in the Prospectus.
-2-
TAX CONSEQUENCES
Crowe & Dunlevy, counsel to Canaan, has rendered an opinion that:
. No gain or loss will be recognized by a limited partner as a
result of the receipt of Canaan common stock in connection with
the combination transactions.
. The basis of the Canaan common stock received by each limited
partner will be equal to the basis of his partnership interest
exchanged for such stock.
. The holding period for the Canaan common stock for purposes of
computing eligibility for long-term capital gain or loss will
include the period of a limited partner's ownership of his
partnership interest exchanged for such stock and, to the extent
the Canaan common stock received is attributable to certain
ordinary income assets of the partnership, may begin on the day
after the closing of the combination transactions.
. A limited partner who receives cash will recognize gain or loss
equal to the difference between the cash received and his
adjusted tax basis of his limited partnership interest on the
date of the closing of the combination transactions. Gain
recognized by a limited partner will be capital except to the
extent of such limited partner's share of ordinary income assets,
including recapture of depletion, depreciation and intangible
drilling cost deductions previously allocated to a limited
partner.
For additional information please see:
. "Material Federal Income Tax Consequences" beginning on page 90
of the Prospectus.
METHOD OF DETERMINING COMBINATION EXCHANGE VALUES AND APPRAISED VALUES
The following is a summary of the methods of determining the Exchange
Values and Appraised Values. For more detailed information concerning the
subject, please see the following sections of the Prospectus:
. "Summary - Method of Determining Combination Exchange Values" on
page 8.
. "Summary - Summary of Estimated Exchange Values" on page 12.
-3-
. "Summary - Determination of Appraised Value" on page 18.
. "Method of Determining Combination Exchange Values and Appraised
Values" on page 62.
General
Canaan and the General Partners determined the Exchange Value for each
of the Combining Entities. The Exchange Value takes into consideration the
value of each Combining Entities oil and gas reserves determined as described
below and the other assets and liabilities of each Combining Entity as adjusted
for other items for Canaan, Indian and the 1996 and 1996-I partnerships. The
Exchange Value is used to allocate the shares of Canaan common stock to each
Combining Entity based on relative Exchange Values. This methodology is used
based on the arm's length negotiated agreement between Indian and Canaan and the
General Partners in connection with the negotiation of the Indian Acquisition
Agreement and because it is a consistent methodology for establishing the
relative value of each Combining Entity. The Exchange Value may not represent
fair market value.
Canaan engaged Netherland, Sewell & Associates, Inc. to estimate a
value of the oil and gas reserves for each Combining Entity. Netherland Sewell
estimated the reserves, future net revenues therefrom and the present value of
such future net revenues for each Combining Entity as of September 30, 1999. We
refer to the evaluation date of September 30, 1999 as the "Effective Date" and
the present value of the estimated future net revenues from estimated reserves
as of the Effective Date as the "Reserve Value" for each Combining Entity.
We refer to the reserves estimated by Netherland Sewell as "Exchange
Reserves". They include estimates of proved undeveloped reserves as well as
proved developed reserves, both producing and nonproducing, as the term "proved"
is defined by the Society of Petroleum Engineers. However, because the reserves
are estimated using prices different from those required by the Securities and
Exchange Commission, we use the term "Exchange" instead of "proved" to describe
the reserve estimates for the Exchange Value.
The Reserve Value is an estimate only and does not represent the fair
market value of the underlying properties. The Reserve Values are being used
solely for purposes of determining the relative value of each of the Combining
Entities in the combination transactions.
The "Exchange Value" for each Combining Entity will be equal to:
. Reserve Value as of the Effective Date.
. Less bank debt at the closing date.
-4-
. Minus interest paid or accrued on bank or other debt assumed by
Canaan from the Effective Date to the closing date.
. For limited partners, Additional General Partners, Canaan
Securities and Placing Brokers, minus their share of cash
distributions from production subsequent to the Effective Date
and before the closing date.
. An adjustment for any gas imbalances which are not expected to be
material.
. For Canaan, an upward adjustment of $5.0 million for the value of
its "operating rights" as described in the Prospectus.
. For the 1996 and 1996-I Partnerships, upward adjustments, and for
Indian, a downward adjustment, for the Indian Contingent
Production Payment as described in the Prospectus.
Partnership Exchange Values and Allocation to Partners, Canaan Securities and
Placing Brokers
The Exchange Value for each of the partnerships will first be
determined as described above.
As between the limited partners and the General Partner and the
Additional General Partners in each partnership, the Exchange Value will
generally be allocated among them in the ratio in which net revenues and cash
distributions are shared. In each of the partnerships except 1993-I and 1996-I,
the General Partners' share of the net revenues and cash distributions increases
when "payout" occurs as to each individual limited partner. Accordingly, in
each of those partnerships in which payout has not already occurred as to all
limited partners as of the Effective Date, the Reserve Value was allocated first
among the partners in their respective before payout sharing ratios until payout
occurred and any remaining Reserve Value and other components of Exchange Value
was allocated in after payout sharing ratios.
As of March 31, 2000, "payout" had not occurred for any limited
partners in the 1995 Partnership.
In the partnerships other than 1990, 1991, 1993-I and 1996-I, Canaan
Securities receives a fee for providing reporting services to the partnership
which is equal to 1.5% of partnership gross revenues. In each of these
partnerships, a portion of the Reserve Value (calculated based on gross
revenues) will be allocated to Canaan Securities representing its rights to
receive such fee adjusted for any payments for such fee subsequent to the
Effective Date and before the closing date. This allocation will be made prior
to the allocation of the remaining Reserve Value and other components of
Exchange Value to the limited partners and the General Partners.
-5-
The marketing arrangements entered into in connection with the sale of
interests in partnerships provided for certain fees to be paid to Canaan
Securities and Placing Brokers. Such fees are payable out of the cash
distributions otherwise distributable to the General Partner in such
partnerships. Accordingly, the Exchange Value allocated to the General Partner
in these partnerships will be reduced to take into consideration the amount of
the Exchange Value allocable to the rights of Canaan Securities and the Placing
Brokers to receive future distributions of net cash flow out of the General
Partner's share. The Placing Brokers will receive cash equal to the 40% of
their Exchange Value and their share of Canaan common stock will be determined
based on the balance of their Exchange Value.
As discussed above, for the limited partners, the Additional General
Partners, Canaan Securities and the Placing Brokers, an adjustment to their
Exchange Values will be made for cash distributions from production subsequent
to the Effective Date and before the closing date.
If the allocation of Exchange Value within a partnership plus
historical cash distributions is not at least 115% of the capital contributions
of the limited partners as a group, the Exchange Value shall be first allocated
to limited partners until this amount is achieved and the balance of the
Exchange Value will be allocated based on revenue sharing percentages. Canaan
and the General Partners believe that the 1996 partnership will be the only
partnership in which this priority allocation of Exchange Value will be
necessary.
Method of Determining Appraised Value
A limited partner may elect to receive cash equal to the Appraised
Value of his interest in a partnership. The Appraised Value was determined
based on an appraisal by Madison Energy Advisors of each partnership's oil and
gas properties valuing them as if sold in an orderly manner and in a reasonable
period of time and in a manner consistent with appropriate industry practice.
Other assets and liabilities of each partnership, consisting primarily of bank
debt and working capital were valued at their respective book values. The
Appraised Value also takes into consideration the cost associated with the sale
of the partnership oil and gas properties and assumes the proceeds of sale of
the partnership properties and working capital after payment of liabilities are
distributed in a liquidation of the partnership. The appraisal was obtained in
order to satisfy the requirements of the National Association of Securities
Dealers that limited partners be offered the opportunity to receive cash equal
to the Appraised Value of their interest in the partnership. The Appraised
Value for each partnership ranges from 56% to 93% of the Exchange Values.
If the Appraised Value of a limited partner's interest plus historical
cash distributions is less than 110% of the amount of the limited partner's
original investment, the Appraised Value for a limited partner electing cash
will be increased to such amount. Canaan and the General Partners believe that
the limited partners of the 1996 and 1996-I partnerships will be the only
limited partners whose Appraised Value will be affected by this adjustment.
-6-
Calculation of Exchange Value and Appraised Value
See Table A in this Supplement for calculation of the Exchange Value
of the 1995 Partnership and Table B for the calculation of the Appraised Value
of the 1995 Partnership.
FAIRNESS OF THE COMBINATION TRANSACTIONS
Canaan and the General Partners believe that the proposed combination
transactions are fair to the limited partners of each of the partnerships
receiving Canaan common stock or cash at Appraised Value and are fair to the
partnerships as a whole.
Please see "Recommendation of the General Partners and Fairness of the
Combination Transactions" on page 74 of the Prospectus for a detailed discussion
of the reasons for the General Partners' opinions. The following summarizes the
principal reasons for the General Partners' opinions.
The principal structural element affecting the limited partners and
the other parties to the combination transactions is the determination of the
Exchange Values. The Exchange Values are based primarily on the Reserve Value
based on Netherland Sewell's independent valuations. By using Reserve Values
calculated in a consistent manner by a single engineer based on the same price,
cost and discount assumptions, Canaan and the General Partners believe that the
relative value of each of the Combining Entities has been fairly determined for
purposes of determining its relative ownership of Canaan after the combination
transactions.
A limited partner of a partnership may elect to receive cash in lieu
of Canaan common stock in an amount equal to the Appraised Value of such limited
partner's interest. This cash election provides the opportunity for limited
partners who are unwilling to take market risks with respect to Canaan common
stock the opportunity to receive cash in an amount which Canaan and the General
Partners believe approximates fair value of their interest based on an appraisal
of the partnership oil and gas properties performed by an independent appraiser.
INFORMATION CONCERNING THE 1995 PARTNERSHIP
General
The 1995 Partnership was formed in April, 1995 and raised $6.8 million
of limited partner capital contributions. As of March 31, 2000, the 1995
Partnership had distributed $5.2 million in cash to limited partners
representing 76% of their original investment. The 1995 Partnership has not
achieved payout for any limited partners.
The term of the 1995 Partnership is until December 31, 2014 unless the
partnership is earlier terminated in accordance with the applicable provisions
of the Partnership Agreement.
-7-
See "Information Concerning Partnerships" beginning on page 110 of the
Prospectus for additional information about the 1995 Partnership.
Failure to Approve the Combination Transactions
If the combination transactions are not approved, the 1995 Partnership
will continue in its business as previously conducted. However, it is possible
a new transaction might be provoked by Canaan or the General Partners, but no
other terms have been discussed or considered by them. In addition, Canaan and
the General Partners may also explore other alternatives, such as the sale of
the Coral Group to a third party, but there is no assurance that Canaan and the
General Partners could find a third party interested in purchasing as such. The
terms and conditions of any such purchase and sale agreement would be as
favorable as the terms offered pursuant to the combination transactions.
The 1995 Partnership does not have any material bank indebtedness. If
the combination transactions are not approved, the General Partners anticipate
that the 1995 Partnership may incur indebtedness to provide funds to finance
additional development costs. If so amortization of any bank debt will have an
adverse affect on limited partner cash distributions.
If the combination transactions are not consummated, costs and
expenses incurred in connection with the combination transaction proposals will
be borne by the Combining Entities, including the partnerships. Limited
partners in each partnership will bear a portion of the costs allocated to each
partnership based on the percentage interest of limited partners voting in favor
of the combination transactions. The estimated share of expenses allocated to
the 1995 Partnership is $127,500 of which a maximum of $114,750 would be
allocated to limited partners if all limited partners voted in favor of the
combination transactions.
Canaan and the General Partners have prepared an analysis of the
present value of the estimated future net cash flows to the limited partners
assuming that each partnership was continued. This value is referred to as the
"Continuation Value" and is based on the following assumptions:
. The estimated future net revenues from the sale of oil and gas
are based on the same prices and costs that are used to estimate
the Reserve Value for purposes of the Exchange Value.
. The partnerships will continue to incur general administrative
expenses in favor of the General Partners as provided in the
applicable partnership agreement in the amount of 5% of the
amount of distributable cash.
. Any partnership with bank debt is assumed to amortize such debt
on a 36 month level amortization basis, assuming an interest rate
of 9%, beginning July 31, 2000.
-8-
. The estimated future net cash flows have been discounted at a
discount rate of 10% to arrive at the estimated Continuation
Value.
Table E in this Supplement provides a comparison of Exchange Value,
Appraised Value and Continuation Value for the 1995 Partnership
COMBINATION VALUES AND COMPENSATION
AND DISTRIBUTION INFORMATION
Set forth below are the following tables:
. Table A - Calculation of estimated Exchange Values and
the allocation of shares of Canaan common stock
assuming a closing of the combination transactions on
July 31, 2000.
. Table B - Calculation of estimated Appraised Values as
of July 31, 2000.
. Table C - The General Partners' and Canaan's
compensation and cash distribution history for the
three most recent fiscal years and the three months
ended March 31, 2000.
. Table D - The amount of the limited partners' cash
distributions for the five most recent fiscal years and
the three months ended March 31, 2000.
. Table E - Comparison of Exchange Value, Appraised Value
and Continuation Value.
For additional information, see the following sections of the
Prospectus:
. "Information Concerning the Partnerships - Selected Historical
Financial and Operating Data of Individual Partnerships"
beginning on page 121; and
. "Unaudited Pro Forma Financial Information" in Appendix B.
-9-
Table A
Coral Reserves Energy Income Fund
1995 Limited Partnership
Calculation of Estimated Exchange Value
The Exchange Value is estimated based on Canaan's estimate of cash
distributions and interest expense from the September 30, 1999 Effective Date to
an assumed closing date of July 31, 2000. Variances in actual cash
distributions and interest expense or a change in the closing date will result
in a change in the Exchange Value for the partnership and will similarly change
Exchange Values for other Combining Entities.
- -------------------------------------------------------------------------------------------------
Amount
----------
- -------------------------------------------------------------------------------------------------
Reserve Value of Oil and Gas
Properties (1).................. $6,316,000
- -------------------------------------------------------------------------------------------------
Bank Debt as of Effective Date........... --
- ------------------------------------------
Working Capital as of Effective Date:
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents....... 388,408
- -------------------------------------------------------------------------------------------------
Accounts receivable............. 372,644
- -------------------------------------------------------------------------------------------------
Accounts payable................ 59,528
- -------------------------------------------------------------------------------------------------
Subtotal - Working Capital............... 701,524
- -------------------------------------------------------------------------------------------------
Estimated Cash Distributions Before
Closing (3)..................... 1,108,367
Shares of Percent of
- -------------------------------------------------------------------------------------------------
Estimated Interest Expense Before -- Canaan Stock
Closing (3)..................... Common Stock (2) Outstanding (2)
--------------- --------------
- -------------------------------------------------------------------------------------------------
Estimated Exchange Value 5,692,797 565,000 11.30%
at Closing(4)...................
- -------------------------------------------------------------------------------------------------
Allocated to:
Limited Partners................ 4,220,132 426,113 8.52%
- -------------------------------------------------------------------------------------------------
General Partner................. 956,506 96,104 1.92%
- -------------------------------------------------------------------------------------------------
Additional General Partners..... 54,803 5,593 0.11%
- -------------------------------------------------------------------------------------------------
Canaan Securities............... 231,580 23,390 0.47%
- -------------------------------------------------------------------------------------------------
Placing Brokers................. 229,777 13,800 0.28%
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Limited Partner per $1000 Investment..... 620 63 (5)
- -------------------------------------------------------------------------------------------------
_______________________
(1) As determined by Netherland, Sewell & Associates, Inc. See "Method of
Determining Combination Exchange Values and Appraised Values" in the
Prospectus. No partnerships own an individual property representing more
than 10% of the Reserve Value or from which the partnership derived more
than 10% of its cash flow or net income for the year ended December 31,
1999.
(2) Assumes no limited partners elect to receive cash. Placing Brokers' shares
based on 60% of Exchange Value.
(3) Assumes closing on July 31, 2000, and uses Netherland, Sewell reserve
report to estimate property revenues and expenses and estimated interest
rate on bank debt for purposes of calculating interest expense.
(4) The "Estimated Exchange Value at Closing" for all of the partnerships and
Canaan set forth in the table is approximately 96.3% of the sum of their
respective components of Exchange Value because the operating rights
adjustment to Canaan's Exchange Value within the Coral Group is excluded
for purposes of computing the relative Exchange Value between the Coral
Group and Indian. See "Method of Determining Combination Exchange Values
and Appraised Values" in the Prospectus for a more detailed explantation.
-10-
(5) Less than 0.01%
Table B
Coral Reserves Energy Income Fund
1995 Limited Partnership
Calculation of Estimated Appraised Value
The Appraised Value is estimated based on Canaan's estimate of
property net revenue from the September 30, 1999 Effective Date to an assumed
closing date of July 31, 2000. Variances in actual net revenue or a change in
the closing date will result in a change in the Appraised Value for the
partnership and will similarly change Appraised Values for other partnerships.
Property net revenues include proceeds from sale of production less production
taxes and operating expense.
- ---------------------------------------------------------------------------
Amount
----------
- ---------------------------------------------------------------------------
Appraised Value of Oil and Gas
Properties at Effective Date(1).......................... $4,317,000
- ---------------------------------------------------------------------------
Estimated Property Net Revenues Before Closing(2)............. 1,282,241
- ---------------------------------------------------------------------------
Appraised Value of Properties at Closing Date................. 3,034,759
- ---------------------------------------------------------------------------
Bank Debt as of Closing Date.................................. 94,000
- ---------------------------------------------------------------------------
Working Capital as of Closing Date:
- ---------------------------------------------------------------------------
Cash and cash equivalents................................ 388,408
- ---------------------------------------------------------------------------
Accounts receivable...................................... 372,644
- ---------------------------------------------------------------------------
Accounts payable......................................... 59,528
- ---------------------------------------------------------------------------
Subtotal - Working Capital.................................... 701,524
- ---------------------------------------------------------------------------
Estimated Appraised Value 3,642,283
at Closing(2)............................................
- ---------------------------------------------------------------------------
Allocated to:(3)
Limited Partners......................................... 3,642,283
- ---------------------------------------------------------------------------
General Partner and Additional General Partners.......... ---
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Limited Partners per $1000 Investment......................... 535
- ---------------------------------------------------------------------------
_______________________
(1) As determined based on an appraisal of the partnership's properties by
Madison Energy Advisors. See "Method of Determining Combination Exchange
Values and Appraised Values" in the Prospectus.
(2) Assumes closing on July 31, 2000, and uses actual property net revenues
from September 30, 1999 to March 31, 2000 and estimated property net
revenues based on Netherland, Sewell report thereafter.
(3) Allocated based on liquidation provisions of applicable partnership
agreement.
-11-
Table C
Coral Reserves Energy Income Fund 1995 Limited Partnership
Summary of Compensation and Cash Distributions
Paid to the General Partners and Affiliates
- -------------------------------------------------------------------
Year Ended December 31,
- -------------------------------------------------------------------
- ------------------------------------------------------------------------------
1997 1998 1999 Three months
ended
March 31, 2000
- ------------------------------------------------------------------------------
Reimbursement of expenses paid
to General Partner............. $ 78,659 $ 58,639 $ 59,253 $18,261
-----------------------------------------------------------------------------
Operating fees paid to Canaan... 87,611 125,383 130,991 33,114
- --------------------------------
Cash distributions paid to
General Partner................ 135,220 107,405 94,904 32,721
- --------------------------------
Cash distributions paid to
Additional General Partners.... 15,024 11,934 10,546 3,636
--------------------------------
Table D
Coral Reserves Energy Income Fund 1995 Limited Partnership
Summary of Cash Distributions Paid to Limited Partners
- --------------------------------------------------------------------
Year Ended December 31,
- --------------------------------------------------------------------
- --------------------------------- -------------------------------------------------------------------
1995 1996 1997 1998 1999 Three months
ended March 31,
2000
- ---------------------- ------- --------- --------- ---------- --------- --------------
Cash distributions
paid to limited
partners(1).......... $406,954 $1,089,050 $1,352,194 $1,074,056 $949,052 $327,212
- ----------------------
Cash distributions
to limited partners
per $1,000
investment........... 60 160 199 158 139 48
- ----------------------
-12-
_________________________________________
(1) Because of depletion (which is usually higher in the early years of
production), a portion of every distribution of revenues from properties
represents a return of a limited partner's original investment. Until a
limited partner receives cash distributions equal to his original
investment, 100% of such distributions may be deemed to be a return of
capital.
Table E
Coral Reserves Energy Income Fund 1995 Limited Partnership
Comparison of Exchange Value,
Appraised Value and Continuation Value
The following table sets forth a comparison of the Exchange Value,
Appraised Value and Continuation Value for the 1995 Partnership for the limited
partners as a group and for each limited partner per $1000 of investment.
- -------------------------------------------------------------------------------------------------
Liquidation/ Continuation
Appraised Value Value Exchange Value
--------------- ----- --------------
- -------------------------------------------------------------------------------------------------
1995 Partnership
- ----------------
- -------------------------------------------------------------------------------------------------
Limited Partners $3,642,283 $3,564,073 $4,220,132
- -------------------------------------------------------------------------------------------------
Limited Partner per $1000 of investment 535 524 620
- -------------------------------------------------------------------------------------------------
The Exchange Value does not represent the fair value of the
partnership or its net assets and is being used solely for purposes of
determining the relative ownership of Canaan by the 1995 Partnership. There is
no assurance that the value of common stock received by a limited partner will
be equal to Exchange Value. The Appraised Value is the amount a limited partner
may elect to receive in cash and is based on an appraisal of the partnership's
assets and an assumed liquidation of the 1995 Partnership.
-13-
CORAL RESERVES 1996 INSTITUTIONAL
LIMITED PARTNERSHIP
(the "1996-I Partnership")
SUPPLEMENT TO CANAAN ENERGY CORPORATION
PROSPECTUS/PROXY STATEMENT
Dated ______________, 2000
The date of this Supplement is _______________, 2000
General
This Supplement relates to the proposed "combination transactions"
involving Canaan Energy Corporation. In the proposed combination transactions:
. Canaan will acquire all of the limited partners' and Additional
General Partners' interests in the eight oil and gas limited
partnerships previously sponsored by Coral Reserves, Inc. and
Coral Reserves Energy Corp., affiliates of Canaan and the General
Partners of the partnerships;
. Canaan will acquire 100% of the stock of the General Partners of
the partnerships;
. Canaan will acquire 100% of the stock of Indian Oil Company, an
unaffiliated oil and gas company;
. Canaan will acquire 100% of the stock of Canaan Securities, Inc.,
an unaffiliated broker/dealer which has previously participated
in the marketing of the limited partnership interests and
provides ongoing reporting services to limited partners; and
. Existing owners of Canaan's common stock will receive additional
shares of common stock based on Canaan's relative share of the
total "Exchange Value" as described below.
We refer to Canaan, the partnerships, the General Partners, Indian Oil
Company and Canaan Securities as the "Combining Entities". When we refer to the
Coral Group we mean Canaan, the partnerships, the General Partnerships, the
Additional General Partners, Canaan Securities and the Placing Brokers. A total
of 5,000,000 shares of Canaan common stock will be issued and be outstanding
after the combination transactions, less the number of shares otherwise issuable
to limited partners who elect to receive cash. The owners of each of the
Combining Entities will receive shares of Canaan common stock in proportion to
the "Exchange Value" of
such entity relative to the total Exchange Value of all Combining Entities. The
Exchange Value was determined by Canaan and is based on a valuation of each
Combining Entity's oil and gas Reserve Values and other assets and liabilities.
The Reserves Values were determined by Netherland, Sewell & Associates, Inc. an
independent petroleum engineering and consulting firm, using the same price,
cost, effective date and discount rate assumptions for each entity. A limited
partner in any partnership may also elect to receive cash in lieu of Canaan
common stock equal to the "Appraised Value" of his interest in the partnership.
The Prospectus/Proxy Statement dated ___________, 2000, which we refer
to as the "Prospectus" describes the combination transactions in detail.
However, the effects of the combination transactions may be different for
limited partners in the various partnerships. Accordingly, a supplement has been
prepared for each of the eight partnerships eligible to participate in the
combination transactions. This Supplement provides information regarding the
effects of the combination transactions on the limited partners of the 1996-I
Partnership. The General Partner will promptly mail a copy of any supplement
relating to other partnerships, without charge, upon request by any limited
partner or his representative who has been so designated in writing, addressed
to: Canaan Energy Corporation, 119 N. Robinson, Suite 600, Oklahoma City,
Oklahoma 73102.
Before voting on the plan of combination, limited partners should
carefully consider the following factors in addition to the other information
included in the Prospectus.
RISK FACTORS
There are numerous risks associated with the combination transactions.
For a more complete description of these risk factors, please see:
. "Risk Factors and Material Considerations" beginning on page 30
of the Prospectus.
. "Comparison of Securityholder Rights" beginning on page 156 of
the Prospectus.
Risks Related to the 1996-I Partnership
For the 1996-I Partnership, failure to approve the combination
transactions may result in a material adverse affect on the current limited
partners due to a $3,000,000 downward adjustment in the Indian Contingent
Production Payment negotiated in connection with the Indian Acquisition
Agreement.
-2-
TAX CONSEQUENCES
Crowe & Dunlevy, counsel to Canaan, has rendered an opinion that:
. No gain or loss will be recognized by a limited partner as a
result of the receipt of Canaan common stock in connection with
the combination transactions.
. The basis of the Canaan common stock received by each limited
partner will be equal to the basis of his partnership interest
exchanged for such stock.
. The holding period for the Canaan common stock for purposes of
computing eligibility for long-term capital gain or loss will
include the period of a limited partner's ownership of his
partnership interest exchanged for such stock and, to the extent
the Canaan common stock received is attributable to certain
ordinary income assets of the partnership, may begin on the day
after the closing of the combination transactions.
. A limited partner who receives cash will recognize gain or loss
equal to the difference between the cash received and his
adjusted tax basis of his limited partnership interest on the
date of the closing of the combination transactions. Gain
recognized by a limited partner will be capital except to the
extent of such limited partner's share of ordinary income assets,
including recapture of depletion, depreciation and intangible
drilling cost deductions previously allocated to a limited
partner.
For additional information please see:
. "Material Federal Income Tax Consequences" beginning on page 90
of the Prospectus.
METHOD OF DETERMINING COMBINATION EXCHANGE VALUES AND APPRAISED VALUES
The following is a summary of the methods of determining the Exchange
Values and Appraised Values. For more detailed information concerning the
subject, please see the following sections of the Prospectus:
. "Summary - Method of Determining Combination Exchange Values" on
page 8.
. "Summary - Summary of Estimated Exchange Values" on page 12.
-3-
. "Summary - Determination of Appraised Value" on page 18.
. "Method of Determining Combination Exchange Values and Appraised
Values" on page 62.
General
Canaan and the General Partners determined the Exchange Value for each
of the Combining Entities. The Exchange Value takes into consideration the
value of each Combining Entities oil and gas reserves determined as described
below and the other assets and liabilities of each Combining Entity as adjusted
for other items for Canaan, Indian and the 1996 and 1996-I partnerships. The
Exchange Value is used to allocate the shares of Canaan common stock to each
Combining Entity based on relative Exchange Values. This methodology is used
based on the arm's length negotiated agreement between Indian and Canaan and the
General Partners in connection with the negotiation of the Indian Acquisition
Agreement and because it is a consistent methodology for establishing the
relative value of each Combining Entity. The Exchange Value may not represent
fair market value.
Canaan engaged Netherland, Sewell & Associates, Inc. to estimate a
value of the oil and gas reserves for each Combining Entity. Netherland Sewell
estimated the reserves, future net revenues therefrom and the present value of
such future net revenues for each Combining Entity as of September 30, 1999. We
refer to the evaluation date of September 30, 1999 as the "Effective Date" and
the present value of the estimated future net revenues from estimated reserves
as of the Effective Date as the "Reserve Value" for each Combining Entity.
We refer to the reserves estimated by Netherland Sewell as "Exchange
Reserves". They include estimates of proved undeveloped reserves as well as
proved developed reserves, both producing and nonproducing, as the term "proved"
is defined by the Society of Petroleum Engineers. However, because the reserves
are estimated using prices different from those required by the Securities and
Exchange Commission, we use the term "Exchange" instead of "proved" to describe
the reserve estimates for the Exchange Value.
The Reserve Value is an estimate only and does not represent the fair
market value of the underlying properties. The Reserve Values are being used
solely for purposes of determining the relative value of each of the Combining
Entities in the combination transactions.
The "Exchange Value" for each Combining Entity will be equal to:
. Reserve Value as of the Effective Date.
. Less bank debt at the closing date.
. Minus interest paid or accrued on bank or other debt assumed by
Canaan from the Effective Date to the closing date.
-4-
. For limited partners, Additional General Partners, Canaan
Securities and Placing Brokers, minus their share of cash
distributions from production subsequent to the Effective Date
and before the closing date.
. An adjustment for any gas imbalances which are not expected to be
material.
. For Canaan, an upward adjustment of $5.0 million for the value of
its "operating rights" as described in the Prospectus.
. For the 1996 and 1996-I Partnerships, upward adjustments, and for
Indian, a downward adjustment, for the Indian Contingent
Production Payment as described in the Prospectus.
Partnership Exchange Values and Allocation to Partners, Canaan Securities and
Placing Brokers
The Exchange Value for each of the partnerships will first be
determined as described above.
As between the limited partners and the General Partner and the
Additional General Partners in each partnership, the Exchange Value will
generally be allocated among them in the ratio in which net revenues and cash
distributions are shared. In each of the partnerships except 1996-I and 1996-I,
the General Partners' share of the net revenues and cash distributions increases
when "payout" occurs as to each individual limited partner. Accordingly, in
each of those partnerships in which payout has not already occurred as to all
limited partners as of the Effective Date, the Reserve Value was allocated first
among the partners in their respective before payout sharing ratios until payout
occurred and any remaining Reserve Value and other components of Exchange Value
was allocated in after payout sharing ratios.
In the partnerships other than 1990, 1991, 1996-I and 1996-I, Canaan
Securities receives a fee for providing reporting services to the partnership
which is equal to 1.5% of partnership gross revenues. In each of these
partnerships, a portion of the Reserve Value (calculated based on gross
revenues) will be allocated to Canaan Securities representing its rights to
receive such fee adjusted for any payments for such fee subsequent to the
Effective Date and before the closing date. This allocation will be made prior
to the allocation of the remaining Reserve Value and other components of
Exchange Value to the limited partners and the General Partners.
The marketing arrangements entered into in connection with the sale of
interests in partnerships provided for certain fees to be paid to Canaan
Securities and Placing Brokers. Such fees are payable out of the cash
distributions otherwise distributable to the General Partner in such
partnerships. Accordingly, the Exchange Value allocated to the General Partner
in these
-5-
partnerships will be reduced to take into consideration the amount of the
Exchange Value allocable to the rights of Canaan Securities and the Placing
Brokers to receive future distributions of net cash flow out of the General
Partner's share. The Placing Brokers will receive cash equal to the 40% of their
Exchange Value and their share of Canaan common stock will be determined based
on the balance of their Exchange Value.
As discussed above, for the limited partners, the Additional General
Partners, Canaan Securities and the Placing Brokers, an adjustment to their
Exchange Values will be made for cash distributions from production subsequent
to the Effective Date and before the closing date.
If the allocation of Exchange Value within a partnership plus
historical cash distributions is not at least 115% of the capital contributions
of the limited partners as a group, the Exchange Value shall be first allocated
to limited partners until this amount is achieved and the balance of the
Exchange Value will be allocated based on revenue sharing percentages. Canaan
and the General Partners believe that the 1996 partnership will be the only
partnership in which this priority allocation of Exchange Value will be
necessary.
Method of Determining Appraised Value
A limited partner may elect to receive cash equal to the Appraised
Value of his interest in a partnership. The Appraised Value was determined
based on an appraisal by Madison Energy Advisors of each partnership's oil and
gas properties valuing them as if sold in an orderly manner and in a reasonable
period of time and in a manner consistent with appropriate industry practice.
Other assets and liabilities of each partnership, consisting primarily of bank
debt and working capital were valued at their respective book values. The
Appraised Value also takes into consideration the cost associated with the sale
of the partnership oil and gas properties and assumes the proceeds of sale of
the partnership properties and working capital after payment of liabilities are
distributed in a liquidation of the partnership. The appraisal was obtained in
order to satisfy the requirements of the National Association of Securities
Dealers that limited partners be offered the opportunity to receive cash equal
to the Appraised Value of their interest in the partnership. The Appraised
Value for each partnership ranges from 56% to 93% of the Exchange Values.
If the Appraised Value of a limited partner's interest plus historical
cash distributions is less than 110% of the amount of the limited partner's
original investment, the Appraised Value for a limited partner electing cash
will be increased to such amount. Canaan and the General Partners believe that
the limited partners of the 1996 and 1996-I partnerships will be the only
limited partners whose Appraised Value will be affected by this adjustment.
-6-
Calculation of Exchange Value and Appraised Value
See Table A in this Supplement for calculation of the Exchange Value
of the 1996-I Partnership and Table B for the calculation of the Appraised Value
of the 1996-I Partnership.
FAIRNESS OF THE COMBINATION TRANSACTIONS
Canaan and the General Partners believe that the proposed combination
transactions are fair to the limited partners of each of the partnerships
receiving Canaan common stock or cash at Appraised Value and are fair to the
partnerships as a whole.
Please see "Recommendation of the General Partners and Fairness of the
Combination Transactions" on page 74 of the Prospectus for a detailed discussion
of the reasons for the General Partners' opinions. The following summarizes the
principal reasons for the General Partners' opinions.
The principal structural element affecting the limited partners and
the other parties to the combination transactions is the determination of the
Exchange Values. The Exchange Values are based primarily on the Reserve Value
based on Netherland Sewell's independent valuations. By using Reserve Values
calculated in a consistent manner by a single engineer based on the same price,
cost and discount assumptions, Canaan and the General Partners believe that the
relative value of each of the Combining Entities has been fairly determined for
purposes of determining its relative ownership of Canaan after the combination
transactions.
A limited partner of a partnership may elect to receive cash in lieu
of Canaan common stock in an amount equal to the Appraised Value of such limited
partner's interest. This cash election provides the opportunity for limited
partners who are unwilling to take market risks with respect to Canaan common
stock the opportunity to receive cash in an amount which Canaan and the General
Partners believe approximates fair value of their interest based on an appraisal
of the partnership oil and gas properties performed by an independent appraiser.
INFORMATION CONCERNING THE 1996-I PARTNERSHIP
General
The 1996-I Partnership was formed in December, 1995 and raised $6.5
million of limited partner capital contributions. As of March 31, 2000, the
1996-I Partnership had distributed $3.0 million in cash to limited partners
representing 47% of their original investment.
The term of the 1996-I Partnership is until December 31, 2014 unless
the partnership is earlier terminated in accordance with the applicable
provisions of the Partnership Agreement.
-7-
See "Information Concerning Partnerships" beginning on page 110 of the
Prospectus for additional information about the 1996 Partnership.
Failure to Approve the Combination Transactions
If the combination transactions are not approved, the 1996 Partnership
will continue in its business as previously conducted. However, it is possible
a new transaction might be provoked by Canaan or the General Partners, but no
other terms have been discussed or considered by them. In addition, Canaan and
the General Partners may also explore other alternatives, such as the sale of
the Coral Group to a third party, but there is no assurance that Canaan and the
General Partners could find a third party interested in purchasing as such. The
terms and conditions of any such purchase and sale agreement would be as
favorable as the terms offered pursuant to the combination transactions.
If the combination transactions are not consummated, the amount of the
remaining balance of the Contingent Production Payment owing from Indian to the
1996 and 1996-I partnerships will be reduced by $3 million. This will result in
no gain or return on the amount of these partnerships' investments in the
Contingent Production Payment. The payment of this obligation is subordinate to
Indian's obligations to its bank lenders and depending on the amount of the
liquidation proceeds, the Contingent Production Payment may not be paid in full.
The Coral Group, including these partnerships, would also be entitled to share a
portion of the 50% of the remaining proceeds of liquidation otherwise
distributable to Indian shareholders, which is uncertain. The amount invested
in the Contingent Production Payment represented 33% of the initial capital of
the 1996 partnership and 43% of the initial capital of the 1996-I partnership.
Thus, the failure to approve the combination transactions would adversely affect
the returns to the limited partners in these partnerships unless the Contingent
Production Payment repayment proceeds are successfully reinvested.
As of December 31, 1999, the 1996 Partnership had bank indebtedness of
$2,272,000 which is equal to 31% of the Present Value of its oil and gas
reserves. If the combination transactions are not approved, the General
Partners anticipate that amortization of such bank debt will begin prior to year
end 2000 and such amortization will have an adverse affect on limited partner
cash distributions.
If the combination transactions are not consummated, costs and
expenses incurred in connection with the combination transaction proposals will
be borne by the Combining Entities, including the partnerships. Limited
partners in each partnership will bear a portion of the costs allocated to each
partnership based on the percentage interest of limited partners voting in favor
of the combination transactions. The estimated share of expenses allocated to
the 1996 Partnership is $187,000 of which a maximum of $168,300 would be
allocated to limited partners if all limited partners voted in favor of the
combination transactions.
Canaan and the General Partners have prepared an analysis of the
present value of the estimated future net cash flows to the limited partners
assuming that each partnership was
-8-
continued. This value is referred to as the "Continuation Value" and is based on
the following assumptions:
. The estimated future net revenues from the sale of oil and gas
are based on the same prices and costs that are used to estimate
the Reserve Value for purposes of the Exchange Value.
. The partnerships will continue to incur general administrative
expenses in favor of the General Partners as provided in the
applicable partnership agreement in the amount of 5% of the
amount of distributable cash.
. Any partnership with bank debt is assumed to amortize such debt
on a 36 month level amortization basis, assuming an interest rate
of 9%, beginning July 31, 2000.
. The estimated future net cash flows have been discounted at a
discount rate of 10% to arrive at the estimated Continuation
Value.
Table E in this Supplement provides a comparison of Exchange Value,
Appraised Value and Continuation Value for the 1996-I Partnership
COMBINATION VALUES AND COMPENSATION
AND DISTRIBUTION INFORMATION
Set forth below are the following tables:
. Table A - Calculation of estimated Exchange Values and the
allocation of shares of Canaan common stock assuming a
closing of the combination transactions on July 31, 2000.
. Table B - Calculation of estimated Appraised Values as of
July 31, 2000.
. Table C - The General Partners' and Canaan's compensation
and cash distribution history for the three most recent
fiscal years and the three months ended March 31, 2000.
. Table D - The amount of the limited partners' cash
distributions for the five most recent fiscal years and the
three months ended March 31, 2000.
. Table E - Comparison of Exchange Value, Appraised Value
and Continuation Value.
-9-
For additional information, see the following sections of the
Prospectus:
. "Information Concerning the Partnerships - Selected Historical
Financial and Operating Data of Individual Partnerships"
beginning on page 121; and
. "Unaudited Pro Forma Financial Information" in Appendix B.
-10-
Table A
Coral Reserves Natural Gas Income Fund
1996-I Limited Partnership
Calculation of Estimated Exchange Value
The Exchange Value is estimated based on Canaan's estimate of cash
distributions and interest expense from the September 30, 1999 Effective Date to
an assumed closing date of July 31, 2000. Variances in actual cash
distributions and interest expense or a change in the closing date will result
in a change in the Exchange Value for the partnership and will similarly change
Exchange Values for other Combining Entities.
- -----------------------------------------------------------------------------------------------------
Amount
----------
- -----------------------------------------------------------------------------------------------------
Reserve Value of Oil and Gas $6,152,600
Properties (1)................................
- -----------------------------------------------------------------------------------------------------
Bank Debt as of Effective Date................... 1,900,000
- --------------------------------------------------
Working Capital as of Effective Date:
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents..................... 96,989
- -----------------------------------------------------------------------------------------------------
Accounts receivable........................... 2,732,318
- -----------------------------------------------------------------------------------------------------
Accounts payable.............................. 62,360
- -----------------------------------------------------------------------------------------------------
Subtotal - Working Capital....................... 2,766,947
- -----------------------------------------------------------------------------------------------------
Estimated Cash Distributions Before Closing (3).. 1,159,841
- -----------------------------------------------------------------------------------------------------
Estimated Interest Expense Before
Closing (3)................................... 142,216 Shares of Percent of
- -----------------------------------------------------------------------------------------------------
Other Adjustment(4).............................. 1,400,000 Canaan Stock
Common Stock (2) Outstanding (2)
---------------- ---------------
- -----------------------------------------------------------------------------------------------------
Estimated Exchange Value
at Closing(5)................................. 7,110,123 705,500 14.11%
- -----------------------------------------------------------------------------------------------------
Allocated to: 6,162,085 616,092 12.32%
Limited Partners..............................
- -----------------------------------------------------------------------------------------------------
General Partner............................... 586,536 58,434 1.17%
- -----------------------------------------------------------------------------------------------------
Additional General Partners................... 34,429 3,527 0.07%
- -----------------------------------------------------------------------------------------------------
Canaan Securities............................. 198,311 19,647 0.39%
- -----------------------------------------------------------------------------------------------------
Placing Brokers............................... 128,764 7,800 0.16%
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Limited Partner per $1000 Investment............. 945 94 (6)
- -----------------------------------------------------------------------------------------------------
_______________________
(1) As determined by Netherland, Sewell & Associates, Inc. See "Method of
Determining Combination Exchange Values and Appraised Values" in the
Prospectus. No partnerships own an individual property representing more
than 10% of the Reserve Value or from which the partnership derived more
than 10% of its cash flow or net income for the year ended December 31,
1999.
(2) Assumes no limited partners elect to receive cash. Placing Brokers' shares
based on 60% of Exchange Value.
(3) Assumes closing on July 31, 2000, and uses Netherland, Sewell reserve
report to estimate property revenues and expenses and estimated interest
rate on bank debt for purposes of calculating interest expense.
(4) Adjustment for Indian Contingent Production Payment. Balance before
adjustment included in Working Capital as of Effective Date.
(5) The "Estimated Exchange Value at Closing" for all of the partnerships and
Canaan set forth in the table is approximately 96.3% of the sum of their
respective components of Exchange Value because the operating rights
adjustment to Canaan's Exchange Value within the Coral Group is excluded
for purposes of computing the relative Exchange Value between the Coral
Group and Indian. See "Method of Determining Combination Exchange Values
and Appraised Values" in the Prospectus for a more detailed explantation.
(6) Less than 0.01%
-11-
Table B
Coral Reserves 1996 Institutional
Limited Partnership
Calculation of Estimated Appraised Value
The Appraised Value is estimated based on Canaan's estimate of
property net revenue from the September 30, 1999 Effective Date to an assumed
closing date of July 31, 2000. Variances in actual net revenue or a change in
the closing date will result in a change in the Appraised Value for the
partnership and will similarly change Appraised Values for other partnerships.
Property net revenues include proceeds from sale of production less production
taxes and operating expense.
- ----------------------------------------------------------------------------------------------
Amount
----------
- ----------------------------------------------------------------------------------------------
Appraised Value of Oil and Gas
Properties at Effective Date(1).................... $4,205,000
- ----------------------------------------------------------------------------------------------
Estimated Property Net Revenues Before Closing(2)....... 1,308,706
- ----------------------------------------------------------------------------------------------
Appraised Value of Properties at Closing Date........... 2,896,294
- ----------------------------------------------------------------------------------------------
Bank Debt as of Closing Date............................ 1,948,000
- ----------------------------------------------------------------------------------------------
Working Capital as of Closing Date:
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents.......................... 96,989
- ----------------------------------------------------------------------------------------------
Accounts receivable................................ 2,732,318
- ----------------------------------------------------------------------------------------------
Accounts payable................................... 62,360
- ----------------------------------------------------------------------------------------------
Subtotal - Working Capital.............................. 2,766,947
- ----------------------------------------------------------------------------------------------
Estimated Appraised Value
at Closing(2)........................................ 3,715,241
- ----------------------------------------------------------------------------------------------
Allocated to:(3)
Limited Partners..................................... 3,969,059(4)
- ----------------------------------------------------------------------------------------------
General Partner and Additional General Partners...... 8,062
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Limited Partners per $1000 Investment................... 609
- ----------------------------------------------------------------------------------------------
_______________________
(1) As determined based on an appraisal of the partnership's properties by
Madison Energy Advisors. See "Method of Determining Combination Exchange
Values and Appraised Values" in the Prospectus.
(2) Assumes closing on July 31, 2000, and uses actual property net revenues
from September 30, 1999 to March 31, 2000 and estimated property net
revenues based on Netherland, Sewell report thereafter.
(3) Allocated based on liquidation provisions of applicable partnership
agreement.
(4) Allocation to limited partners adjusted to increase Appraised Value so
limited partners receive Appraised Value plus historical cash distributions
equal to 110% of original investment.
-12-
Table C
Coral Reserves 1996 Institutional Limited Partnership
Summary of Compensation and Cash Distributions
Paid to the General Partners and Affiliates
- --------------------------------------------------------------------------
Year Ended December 31,
- ----------------------------------------------------------------------------------------
Three months
ended March 31,
1997 1998 1999 2000
- ----------------------------------------------------------------------------------------
Reimbursement of expenses paid
to General Partner................ $19,019 $ 30,268 $ 40,389 $11,452
- -------------------------------------------------------------------------------------
Operating fees paid to Canaan 7,812 30,060 56,667 15,905
- -----------------------------------
Cash distributions paid to
General Partner................... 63,985 124,538 147,943 46,071
- -----------------------------------
Cash distributions paid to
Additional General Partners....... 2,666 5,190 6,164 1,920
- -----------------------------------
Table D
Coral Reserves 1996 Institutional Limited Partnership
Summary of Cash Distributions Paid to Limited Partners
- -----------------------
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
Three months
ended March 31,
1995 1996 1997 1998 1999 2000
- ---------------------------- --------- --------- ---------- ---------- --------- ---------------
Cash distributions
paid to limited partners(1)...... $16,510 $236,346 $466,556 $908,096 $1,078,747 $335,934
- ----------------------------
Cash distributions
to limited partners
per $1,000 investment............ 3 36 72 139 165 52
- ----------------------------
_________________________________________
(1) Because of depletion (which is usually higher in the early years of
production), a portion of every distribution of revenues from properties
represents a return of a limited partner's original investment. Until a
limited partner receives cash distributions equal to his original
investment, 100% of such distributions may be deemed to be a return of
capital.
-13-
Table E
Coral Reserves 1996 Institutional Limited Partnership
Comparison of Exchange Value,
Appraised Value and Continuation Value
The following table sets forth a comparison of the Exchange Value,
Appraised Value and Continuation Value for the 1996-I Partnership for the
limited partners as a group and for each limited partner per $1000 of
investment.
- -------------------------------------------------------------------------------------------------
Liquidation/ Continuation Exchange Value
Appraised Value Value --------------
--------------- -----
- -------------------------------------------------------------------------------------------------
1996-I Partnership
- ------------------
- -------------------------------------------------------------------------------------------------
Limited Partners $3,969,059 $4,231,779 $6,162,084
- -------------------------------------------------------------------------------------------------
Limited Partner per $1000 of investment 609 649 945
- -------------------------------------------------------------------------------------------------
The Exchange Value does not represent the fair value of the
partnership or its net assets and is being used solely for purposes of
determining the relative ownership of Canaan by the 1996-I Partnership. There
is no assurance that the value of common stock received by a limited partner
will be equal to Exchange Value. The Appraised Value is the amount a limited
partner may elect to receive in cash and is based on an appraisal of the
partnership's assets and an assumed liquidation of the 1996-I Partnership.
-14-
CORAL RESERVES ENERGY INCOME FUND
1996 LIMITED PARTNERSHIP
(the "1996 Partnership")
SUPPLEMENT TO CANAAN ENERGY CORPORATION
PROSPECTUS/PROXY STATEMENT
Dated ________________, 2000
The date of this Supplement is _______________, 2000
General
This Supplement relates to the proposed "combination transactions"
involving Canaan Energy Corporation. In the proposed combination transactions:
. Canaan will acquire all of the limited partners' and Additional
General Partners' interests in the eight oil and gas limited
partnerships previously sponsored by Coral Reserves, Inc. and
Coral Reserves Energy Corp., affiliates of Canaan and the General
Partners of the partnerships;
. Canaan will acquire 100% of the stock of the General Partners of
the partnerships;
. Canaan will acquire 100% of the stock of Indian Oil Company, an
unaffiliated oil and gas company;
. Canaan will acquire 100% of the stock of Canaan Securities, Inc.,
an unaffiliated broker/dealer which has previously participated
in the marketing of the limited partnership interests and
provides ongoing reporting services to limited partners; and
. Existing owners of Canaan's common stock will receive additional
shares of common stock based on Canaan's relative share of the
total "Exchange Value" as described below.
We refer to Canaan, the partnerships, the General Partners, Indian Oil
Company and Canaan Securities as the "Combining Entities". When we refer to the
Coral Group we mean Canaan, the partnerships, the General Partnerships, the
Additional General Partners, Canaan Securities and the Placing Brokers. A total
of 5,000,000 shares of Canaan common stock will be issued and be outstanding
after the combination transactions, less the number of shares otherwise issuable
to limited partners who elect to receive cash. The owners of each of the
Combining Entities will receive shares of Canaan common stock in proportion to
the "Exchange Value" of
such entity relative to the total Exchange Value of all Combining Entities. The
Exchange Value was determined by Canaan and is based on a valuation of each
Combining Entity's oil and gas Reserve Values and other assets and liabilities.
The Reserves Values were determined by Netherland, Sewell & Associates, Inc. an
independent petroleum engineering and consulting firm, using the same price,
cost, effective date and discount rate assumptions for each entity. A limited
partner in any partnership may also elect to receive cash in lieu of Canaan
common stock equal to the "Appraised Value" of his interest in the partnership.
The Prospectus/Proxy Statement dated ____________, 2000, which we
refer to as the "Prospectus" describes the combination transactions in detail.
However, the effects of the combination transactions may be different for
limited partners in the various partnerships. Accordingly, a supplement has been
prepared for each of the eight partnerships eligible to participate in the
combination transactions. This Supplement provides information regarding the
effects of the combination transactions on the limited partners of the 1996
Partnership. The General Partner will promptly mail a copy of any supplement
relating to other partnerships, without charge, upon request by any limited
partner or his representative who has been so designated in writing, addressed
to: Canaan Energy Corporation, 119 N. Robinson, Suite 600, Oklahoma City,
Oklahoma 73102.
Before voting on the plan of combination, limited partners should
carefully consider the following factors in addition to the other information
included in the Prospectus.
RISK FACTORS
There are numerous risks associated with the combination transactions.
For a more complete description of these risk factors, please see:
. "Risk Factors and Material Considerations" beginning on page 30
of the Prospectus.
. "Comparison of Securityholder Rights" beginning on page 156 of
the Prospectus.
Risks Related to the 1996 Partnership
For the 1996 Partnership, failure to approve the combination
transactions may result in a material adverse affect on the current limited
partners due to a $3,000,000 downward adjustment in the Indian Contingent
Production Payment negotiated in connection with the Indian Acquisition
Agreement.
-2-
TAX CONSEQUENCES
Crowe & Dunlevy, counsel to Canaan, has rendered an opinion that:
. No gain or loss will be recognized by a limited partner as a
result of the receipt of Canaan common stock in connection with
the combination transactions.
. The basis of the Canaan common stock received by each limited
partner will be equal to the basis of his partnership interest
exchanged for such stock.
. The holding period for the Canaan common stock for purposes of
computing eligibility for long-term capital gain or loss will
include the period of a limited partner's ownership of his
partnership interest exchanged for such stock and, to the extent
the Canaan common stock received is attributable to certain
ordinary income assets of the partnership, may begin on the day
after the closing of the combination transactions.
. A limited partner who receives cash will recognize gain or loss
equal to the difference between the cash received and his
adjusted tax basis of his limited partnership interest on the
date of the closing of the combination transactions. Gain
recognized by a limited partner will be capital except to the
extent of such limited partner's share of ordinary income assets,
including recapture of depletion, depreciation and intangible
drilling cost deductions previously allocated to a limited
partner.
For additional information please see:
. "Material Federal Income Tax Consequences" beginning on page 90
of the Prospectus.
METHOD OF DETERMINING COMBINATION EXCHANGE VALUES AND APPRAISED VALUES
The following is a summary of the methods of determining the Exchange
Values and Appraised Values. For more detailed information concerning the
subject, please see the following sections of the Prospectus:
. "Summary - Method of Determining Combination Exchange Values" on
page 8.
. "Summary - Summary of Estimated Exchange Values" on page 12.
-3-
. "Summary - Determination of Appraised Value" on page 18.
. "Method of Determining Combination Exchange Values and Appraised
Values" on page 62.
General
Canaan and the General Partners determined the Exchange Value for each
of the Combining Entities. The Exchange Value takes into consideration the
value of each Combining Entities oil and gas reserves determined as described
below and the other assets and liabilities of each Combining Entity as adjusted
for other items for Canaan, Indian and the 1996 and 1996-I partnerships. The
Exchange Value is used to allocate the shares of Canaan common stock to each
Combining Entity based on relative Exchange Values. This methodology is used
based on the arm's length negotiated agreement between Indian and Canaan and the
General Partners in connection with the negotiation of the Indian Acquisition
Agreement and because it is a consistent methodology for establishing the
relative value of each Combining Entity. The Exchange Value may not represent
fair market value.
Canaan engaged Netherland, Sewell & Associates, Inc. to estimate a
value of the oil and gas reserves for each Combining Entity. Netherland Sewell
estimated the reserves, future net revenues therefrom and the present value of
such future net revenues for each Combining Entity as of September 30, 1999. We
refer to the evaluation date of September 30, 1999 as the "Effective Date" and
the present value of the estimated future net revenues from estimated reserves
as of the Effective Date as the "Reserve Value" for each Combining Entity.
We refer to the reserves estimated by Netherland Sewell as "Exchange
Reserves". They include estimates of proved undeveloped reserves as well as
proved developed reserves, both producing and nonproducing, as the term "proved"
is defined by the Society of Petroleum Engineers. However, because the reserves
are estimated using prices different from those required by the Securities and
Exchange Commission, we use the term "Exchange" instead of "proved" to describe
the reserve estimates for the Exchange Value.
The Reserve Value is an estimate only and does not represent the fair
market value of the underlying properties. The Reserve Values are being used
solely for purposes of determining the relative value of each of the Combining
Entities in the combination transactions.
The "Exchange Value" for each Combining Entity will be equal to:
. Reserve Value as of the Effective Date.
. Less bank debt at the closing date.
-4-
. Minus interest paid or accrued on bank or other debt assumed by
Canaan from the Effective Date to the closing date.
. For limited partners, Additional General Partners, Canaan
Securities and Placing Brokers, minus their share of cash
distributions from production subsequent to the Effective Date
and before the closing date.
. An adjustment for any gas imbalances which are not expected to be
material.
. For Canaan, an upward adjustment of $5.0 million for the value of
its "operating rights" as described in the Prospectus.
. For the 1996 and 1996-I Partnerships, upward adjustments, and for
Indian, a downward adjustment, for the Indian Contingent
Production Payment as described in the Prospectus.
Partnership Exchange Values and Allocation to Partners, Canaan Securities and
Placing Brokers
The Exchange Value for each of the partnerships will first be
determined as described above.
As between the limited partners and the General Partner and the
Additional General Partners in each partnership, the Exchange Value will
generally be allocated among them in the ratio in which net revenues and cash
distributions are shared. In each of the partnerships except 1993-I and 1996-I,
the General Partners' share of the net revenues and cash distributions increases
when "payout" occurs as to each individual limited partner. Accordingly, in
each of those partnerships in which payout has not already occurred as to all
limited partners as of the Effective Date, the Reserve Value was allocated first
among the partners in their respective before payout sharing ratios until payout
occurred and any remaining Reserve Value and other components of Exchange Value
was allocated in after payout sharing ratios.
As of March 31, 2000, "payout" had not occurred for any limited
partners in the 1996 Partnership.
In the partnerships other than 1990, 1991, 1993-I and 1996-I, Canaan
Securities receives a fee for providing reporting services to the partnership
which is equal to 1.5% of partnership gross revenues. In each of these
partnerships, a portion of the Reserve Value (calculated based on gross
revenues) will be allocated to Canaan Securities representing its rights to
receive such fee adjusted for any payments for such fee subsequent to the
Effective Date and before the closing date. This allocation will be made prior
to the allocation of the remaining Reserve Value and other components of
Exchange Value to the limited partners and the General Partners.
-5-
The marketing arrangements entered into in connection with the sale of
interests in partnerships provided for certain fees to be paid to Canaan
Securities and Placing Brokers. Such fees are payable out of the cash
distributions otherwise distributable to the General Partner in such
partnerships. Accordingly, the Exchange Value allocated to the General Partner
in these partnerships will be reduced to take into consideration the amount of
the Exchange Value allocable to the rights of Canaan Securities and the Placing
Brokers to receive future distributions of net cash flow out of the General
Partner's share. The Placing Brokers will receive cash equal to the 40% of
their Exchange Value and their share of Canaan common stock will be determined
based on the balance of their Exchange Value.
As discussed above, for the limited partners, the Additional General
Partners, Canaan Securities and the Placing Brokers, an adjustment to their
Exchange Values will be made for cash distributions from production subsequent
to the Effective Date and before the closing date.
If the allocation of Exchange Value within a partnership plus
historical cash distributions is not at least 115% of the capital contributions
of the limited partners as a group, the Exchange Value shall be first allocated
to limited partners until this amount is achieved and the balance of the
Exchange Value will be allocated based on revenue sharing percentages. Canaan
and the General Partners believe that the 1996 partnership will be the only
partnership in which this priority allocation of Exchange Value will be
necessary.
Method of Determining Appraised Value
A limited partner may elect to receive cash equal to the Appraised
Value of his interest in a partnership. The Appraised Value was determined
based on an appraisal by Madison Energy Advisors of each partnership's oil and
gas properties valuing them as if sold in an orderly manner and in a reasonable
period of time and in a manner consistent with appropriate industry practice.
Other assets and liabilities of each partnership, consisting primarily of bank
debt and working capital were valued at their respective book values. The
Appraised Value also takes into consideration the cost associated with the sale
of the partnership oil and gas properties and assumes the proceeds of sale of
the partnership properties and working capital after payment of liabilities are
distributed in a liquidation of the partnership. The appraisal was obtained in
order to satisfy the requirements of the National Association of Securities
Dealers that limited partners be offered the opportunity to receive cash equal
to the Appraised Value of their interest in the partnership. The Appraised
Value for each partnership ranges from 56% to 93% of the Exchange Values.
If the Appraised Value of a limited partner's interest plus historical
cash distributions is less than 110% of the amount of the limited partner's
original investment, the Appraised Value for a limited partner electing cash
will be increased to such amount. Canaan and the General Partners believe that
the limited partners of the 1996 and 1996-I partnerships will be the only
limited partners whose Appraised Value will be affected by this adjustment.
-6-
Calculation of Exchange Value and Appraised Value
See Table A in this Supplement for calculation of the Exchange Value
of the 1996 Partnership and Table B for the calculation of the Appraised Value
of the 1996 Partnership.
FAIRNESS OF THE COMBINATION TRANSACTIONS
Canaan and the General Partners believe that the proposed combination
transactions are fair to the limited partners of each of the partnerships
receiving Canaan common stock or cash at Appraised Value and are fair to the
partnerships as a whole.
Please see "Recommendation of the General Partners and Fairness of the
Combination Transactions" on page 74 of the Prospectus for a detailed discussion
of the reasons for the General Partners' opinions. The following summarizes the
principal reasons for the General Partners' opinions.
The principal structural element affecting the limited partners and
the other parties to the combination transactions is the determination of the
Exchange Values. The Exchange Values are based primarily on the Reserve Value
based on Netherland Sewell's independent valuations. By using Reserve Values
calculated in a consistent manner by a single engineer based on the same price,
cost and discount assumptions, Canaan and the General Partners believe that the
relative value of each of the Combining Entities has been fairly determined for
purposes of determining its relative ownership of Canaan after the combination
transactions.
A limited partner of a partnership may elect to receive cash in lieu
of Canaan common stock in an amount equal to the Appraised Value of such limited
partner's interest. This cash election provides the opportunity for limited
partners who are unwilling to take market risks with respect to Canaan common
stock the opportunity to receive cash in an amount which Canaan and the General
Partners believe approximates fair value of their interest based on an appraisal
of the partnership oil and gas properties performed by an independent appraiser.
INFORMATION CONCERNING THE 1996 PARTNERSHIP
General
The 1996 Partnership was formed in May, 1996 and raised $9.6 million
of limited partner capital contributions. As of March 31, 2000, the 1996
Partnership had distributed $3.1 million in cash to limited partners
representing 32% of their original investment. The 1996 Partnership has not
achieved payout for any limited partner.
The term of the 1996 Partnership is until December 31, 2015 unless the
partnership is earlier terminated in accordance with the applicable provisions
of the Partnership Agreement.
-7-
See "Information Concerning Partnerships" beginning on page 110 of the
Prospectus for additional information about the 1996-I Partnership.
Failure to Approve the Combination Transactions
If the combination transactions are not approved, the 1996-I
Partnership will continue in its business as previously conducted. However, it
is possible a new transaction might be provoked by Canaan or the General
Partners, but no other terms have been discussed or considered by them. In
addition, Canaan and the General Partners may also explore other alternatives,
such as the sale of the Coral Group to a third party, but there is no assurance
that Canaan and the General Partners could find a third party interested in
purchasing as such. The terms and conditions of any such purchase and sale
agreement would be as favorable as the terms offered pursuant to the combination
transactions.
If the combination transactions are not consummated, the amount of the
remaining balance of the Contingent Production Payment owing from Indian to the
1996 and 1996-I partnerships will be reduced by $3 million. This will result in
no gain or return on the amount of these partnerships' investments in the
Contingent Production Payment. The payment of this obligation is subordinate to
Indian's obligations to its bank lenders and depending on the amount of the
liquidation proceeds, the Contingent Production Payment may not be paid in full.
The Coral Group, including these partnerships, would also be entitled to share a
portion of the 50% of the remaining proceeds of liquidation otherwise
distributable to Indian shareholders, which is uncertain. The amount invested
in the Contingent Production Payment represented 33% of the initial capital of
the 1996 partnership and 43% of the initial capital of the 1996-I partnership.
Thus, the failure to approve the combination transactions would adversely affect
the returns to the limited partners in these partnerships unless the Contingent
Production Payment repayment proceeds are successfully reinvested.
As of December 31, 1999, the 1996-I Partnership had bank indebtedness
of $1,948,000 which is equal to 33% of the Present Value of its oil and gas
reserves. If the combination transactions are not approved, the General
Partners anticipate that amortization of such bank debt will begin prior to year
end 2000 and such amortization will have an adverse affect on limited partner
cash distributions.
If the combination transactions are not consummated, costs and
expenses incurred in connection with the combination transaction proposals will
be borne by the Combining Entities, including the partnerships. Limited
partners in each partnership will bear a portion of the costs allocated to each
partnership based on the percentage interest of limited partners voting in favor
of the combination transactions. The estimated share of expenses allocated to
the 1996-I Partnership is $153,000 of which a maximum of $133,875 would be
allocated to limited partners if all limited partners voted in favor of the
combination transactions.
Canaan and the General Partners have prepared an analysis of the
present value of the estimated future net cash flows to the limited partners
assuming that each partnership was
-8-
continued. This value is referred to as the "Continuation Value" and is based on
the following assumptions:
. The estimated future net revenues from the sale of oil and gas
are based on the same prices and costs that are used to estimate
the Reserve Value for purposes of the Exchange Value.
. The partnerships will continue to incur general administrative
expenses in favor of the General Partners as provided in the
applicable partnership agreement in the amount of 5% of the
amount of distributable cash.
. Any partnership with bank debt is assumed to amortize such debt
on a 36 month level amortization basis, assuming an interest rate
of 9%, beginning July 31, 2000.
. The estimated future net cash flows have been discounted at a
discount rate of 10% to arrive at the estimated Continuation
Value.
Table E in this Supplement provides a comparison of Exchange Value,
Appraised Value and Continuation Value for the 1996 Partnership
COMBINATION VALUES AND COMPENSATION
AND DISTRIBUTION INFORMATION
Set forth below are the following tables:
. Table A - Calculation of estimated Exchange Values and the
allocation of shares of Canaan common stock assuming a
closing of the combination transactions on July 31, 2000.
. Table B - Calculation of estimated Appraised Values as of
July 31, 2000.
. Table C - The General Partners' and Canaan's compensation
and cash distribution history for the three most recent
fiscal years and the three months ended March 31, 2000.
. Table D - The amount of the limited partners' cash
distributions for the five most recent fiscal years and
the three months ended March 31, 2000.
. Table E - Comparison of Exchange Value, Appraised Value
and Continuation Value.
-9-
For additional information, see the following sections of the
Prospectus:
. "Information Concerning the Partnerships - Selected Historical
Financial and Operating Data of Individual Partnerships"
beginning on page 121; and
. "Unaudited Pro Forma Financial Information" in Appendix B.
-10-
Table A
Coral Reserves Energy Income Fund
1996 Limited Partnership
Calculation of Estimated Exchange Value
The Exchange Value is estimated based on Canaan's estimate of cash
distributions and interest expense from the September 30, 1999 Effective Date to
an assumed closing date of July 31, 2000. Variances in actual cash
distributions and interest expense or a change in the closing date will result
in a change in the Exchange Value for the partnership and will similarly change
Exchange Values for other Combining Entities.
- -------------------------------------------------------------------------------------------------------------
Amount
------
- -------------------------------------------------------------------------------------------------------------
Reserve Value of Oil and Gas $7,949,500
Properties (1).........................
- -------------------------------------------------------------------------------------------------------------
Bank Debt as of Effective Date............ 2,214,000
- --------------------------------------------
Working Capital as of Effective Date:
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents.............. 38,354
- -------------------------------------------------------------------------------------------------------------
Accounts receivable.................... 3,019,500
- -------------------------------------------------------------------------------------------------------------
Accounts payable....................... 43,995
- -------------------------------------------------------------------------------------------------------------
Subtotal - Working Capital................ 3,013,859
- -------------------------------------------------------------------------------------------------------------
Estimated Cash Distributions Before Closing (3) 1,413,537
- -------------------------------------------------------------------------------------------------------------
Estimated Interest Expense Before 166,855
Closing (3) Shares of Percent of
- -------------------------------------------------------------------------------------------------------------
Other Adjustments(4) 1,600,000 Canaan Stock
Common Stock (2) Outstanding (2)
--------------- --------------
- -------------------------------------------------------------------------------------------------------------
Estimated Exchange Value 8,736,913 867,000 17.34%
at Closing(5)..........................
- -------------------------------------------------------------------------------------------------------------
Allocated to: 7,526,357(6) 751,548 15.03%
Limited Partners.......................
- -------------------------------------------------------------------------------------------------------------
General Partner........................ 760,454(6) 75,457 1.51%
- -------------------------------------------------------------------------------------------------------------
Additional General Partners............ 49,914(6) 5,031 0.10%
- -------------------------------------------------------------------------------------------------------------
Canaan Securities...................... 270,543(6) 27,164 0.54%
- -------------------------------------------------------------------------------------------------------------
Placing Brokers........................ 129,646(6) 7,800 0.16%
- -------------------------------------------------------------------------------------------------------------
Limited Partner per $1000 Investment...... 781(6) 78 (7)
- -------------------------------------------------------------------------------------------------------------
_______________________
(1) As determined by Netherland, Sewell & Associates, Inc. See "Method of
Determining Combination Exchange Values and Appraised Values" in the
Prospectus. No partnerships own an individual property representing more
than 10% of the Reserve Value or from which the partnership derived more
than 10% of its cash flow or net income for the year ended December 31,
1999.
(2) Assumes no limited partners elect to receive cash. Placing Brokers' shares
based on 60% of Exchange Value.
(3) Assumes closing on July 31, 2000, and uses Netherland, Sewell reserve
report to estimate property revenues and expenses and estimated interest
rate on bank debt for purposes of calculating interest expense.
(4) Adjustment for Indian Contingent Production Payment. Balance before
adjustment included in Working Capital as of Effective Date.
(5) The "Estimated Exchange Value at Closing" for all of the partnerships and
Canaan set forth in the table is approximately 96.3% of the sum of their
respective components of Exchange Value because the operating rights
adjustment to Canaan's Exchange Value within the Coral Group is excluded
for purposes of computing the relative Exchange Value between the Coral
Group and Indian. See "Method of Determining Combination Exchange Values
and Appraised Values" in the Prospectus for a more detailed explanation.
(6) Estimated Exchange Value for limited partners adjusted to increase Exchange
Value so limited partners receive Exchange Value plus cash distributions
equal to 115% of original investment and other participants reduced
accordingly.
-11-
(7) Less than 0.01%
Table B
Coral Reserves Energy Income Fund
1996 Limited Partnership
Calculation of Estimated Appraised Value
The Appraised Value is estimated based on Canaan's estimate of
property net revenue from the September 30, 1999 Effective Date to an assumed
closing date of July 31, 2000. Variances in actual net revenue or a change in
the closing date will result in a change in the Appraised Value for the
partnership and will similarly change Appraised Values for other partnerships.
Property net revenues include proceeds from sale of production less production
taxes and operating expense.
- ---------------------------------------------------------------------------------------------------------------
Amount
------
- ---------------------------------------------------------------------------------------------------------------
Appraised Value of Oil and Gas $5,398,000
Properties at Effective Date(1)................
- ---------------------------------------------------------------------------------------------------------------
Estimated Property Net Revenues Before Closing(2)... 1,726,264
- ---------------------------------------------------------------------------------------------------------------
Appraised Value of Properties at Closing Date....... 3,671,736
- ---------------------------------------------------------------------------------------------------------------
Bank Debt as of Closing Date........................ 2,365,000
- ---------------------------------------------------------------------------------------------------------------
Working Capital as of Closing Date:
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents...................... 38,354
- ---------------------------------------------------------------------------------------------------------------
Accounts receivable............................ 3,019,500
- ---------------------------------------------------------------------------------------------------------------
Accounts payable............................... 43,995
- ---------------------------------------------------------------------------------------------------------------
Subtotal - Working Capital.......................... 3,013,859
- ---------------------------------------------------------------------------------------------------------------
Estimated Appraised Value 4,320,595
at Closing(2)....................................
- ---------------------------------------------------------------------------------------------------------------
Allocated to:(3) 7,037,268 (4)
Limited Partners.................................
- ---------------------------------------------------------------------------------------------------------------
General Partner and Additional General Partners.. ---
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Limited Partners per $1000 Investment............... 730
- ---------------------------------------------------------------------------------------------------------------
_______________________
(1) As determined based on an appraisal of the partnership's properties by
Madison Energy Advisors. See "Method of Determining Combination Exchange
Values and Appraised Values" in the Prospectus.
(2) Assumes closing on July 31, 2000, and uses actual property net revenues
from September 30, 1999 to March 31, 2000 and estimated property net
revenues based on Netherland, Sewell report thereafter.
(3) Allocated based on liquidation provisions of applicable partnership
agreement.
(4) Allocation to limited partners adjusted to increase Appraised Value so
limited partners receive Appraised Value plus historical cash distributions
equal to 110% of original investment.
-12-
Table C
Coral Reserves Energy Income Fund 1996 Limited Partnership
Summary of Compensation and Cash Distributions
Paid to the General Partners and Affiliates
------------------------------------
Year Ended December 31,
------------------------------------
- ------------------------------------------------------------------------------------------------------------------
1997 1998 1999 Three months
ended
March 31, 2000
- ------------------------------------------------------------------------------------------------------------------
Reimbursement of expenses paid
to General Partner.............................. $24,511 $53,583 $ 80,193 $23,696
- ------------------------------------------------------------------------------------------------------------------
Operating fees paid to Canaan.................... 4,665 41,144 74,332 17,217
- -------------------------------------------------
Cash distributions paid to
General Partner................................. 37,555 93,121 127,824 42,396
- -------------------------------------------------
Cash distributions paid to
Additional General Partners..................... 4,174 10,348 14,202 4,711
- -------------------------------------------------
Table D
Coral Reserves Energy Income Fund 1996 Limited Partnership
Summary of Cash Distributions Paid to Limited Partners
-------------------------
Year Ended December 31,
- -------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 Three months
ended March 31,
2000
- ----------------------------------------------------------------------------------------------------------------------
Cash distributions
paid to limited partners(1)...... $ -- $ 78,845 $375,557 $931,223 $1,278,232 $423,963
- ----------------------
Cash distributions
to limited partners per $1,000
investment....................... -- 8 39 97 133 44
----------------------
-13-
_________________________________________
(1) Because of depletion (which is usually higher in the early years of
production), a portion of every distribution of revenues from properties
represents a return of a limited partner's original investment. Until a
limited partner receives cash distributions equal to his original
investment, 100% of such distributions may be deemed to be a return of
capital.
Table E
Coral Reserves Energy Income Fund 1996 Limited Partnership
Comparison of Exchange Value,
Appraised Value and Continuation Value
The following table sets forth a comparison of the Exchange Value,
Appraised Value and Continuation Value for the 1996 Partnership for the limited
partners as a group and for each limited partner per $1000 of investment.
- --------------------------------------------------------------------------------------------------
Liquidation/ Continuation Exchange Value
Appraised Value Value --------------
--------------- -----
- --------------------------------------------------------------------------------------------------
1996 Partnership
- ----------------
- --------------------------------------------------------------------------------------------------
Limited Partners $7,037,268 $4,991,147 $7,526,357
- --------------------------------------------------------------------------------------------------
Limited Partners per $1000 of investment 730 518 781
- --------------------------------------------------------------------------------------------------
The Exchange Value does not represent the fair value of the
partnership or its net assets and is being used solely for purposes of
determining the relative ownership of Canaan by the 1996 Partnership. There is
no assurance that the value of common stock received by a limited partner will
be equal to Exchange Value. The Appraised Value is the amount a limited partner
may elect to receive in cash and is based on an appraisal of the partnership's
assets and an assumed liquidation of the 1996 Partnership.
-14-
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
The Registrant's Certificate of Incorporation provides that, pursuant to
Oklahoma law, its directors shall not be liable for monetary damages for breach
of the directors' fiduciary duty of care to the Registrant and its stockholders.
The provision in the Certificate of Incorporation does not eliminate the duty of
care and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Oklahoma law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Registrant, as well as for acts or
omissions not in good faith or involving intentional misconduct, for knowing
violations of law, for actions leading to improper personal benefit to the
director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Oklahoma law. The provision also does not
affect a director's responsibilities under any other law, such as the state or
federal securities laws.
Under Section 1031 of the Oklahoma General Corporation Act, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act").
The Registrant's Certificate of Incorporation provides that the Registrant
shall indemnify its directors and officers to the fullest extent permitted by
Oklahoma law. The Certificate of Incorporation requires the Registrant to
indemnify such person against expenses, judgments, fines, settlements and other
amounts incurred in connection with any proceeding, whether actual or
threatened, to which any such person may be made a party by reason of the fact
that such person is or was a director or an officer of the Registrant or any of
its affiliated enterprises, provided such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the Registrant, and, with respect to any criminal proceeding, had
no reasonable cause to believe his conduct was unlawful. However, in the case
of a derivative action, an officer or director will not be entitled to
indemnification in respect of any claim, issue or matter as to which such person
is adjudged to be liable to the Registrant, unless and only to the extent that
the court in which the action was brought determines that such person is fairly
and reasonably entitled to indemnity for expenses.
The Registrant has entered into Indemnification Agreements with each non-
employee director of the Registrant that require the Registrant to indemnify
such persons against certain liabilities and expenses incurred by any such
persons by reason of their status or service as directors of the Registrant.
The Indemnification Agreements also set forth procedures that will apply in the
event of a claim for indemnification under such agreements. In addition, the
Indemnification Agreements require that the Registrant use commercially
reasonable efforts to maintain policies of directors' liability insurance.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
Item 21. Exhibits and Financial Statements Schedules.
Exhibit No. Description
- ----------- -----------
2.1/(4)/ Plan of Combination, dated as of February 11, 2000, by and
between the Registrant, Coral Reserves, Inc., Coral Reserves
Energy Corp., Indian Oil Company, Canaan Securities, Inc. and the
partnerships.
2.1(a)/(5)/ Amendment No. 1 to Plan of Combination dated May 5, 2000.
2.2/(4)/ Agreement and Plan of Merger dated February 15, 1999, between
Registrant, Indian Oil Company, Coral Reserves, Inc. and Coral
Reserves Energy Corp. and First Amendment dated February 15,
1999.
2.3/(4)/ Management Agreement dated February 15, 1999, between Coral
Reserves Group, Ltd. and Indian Oil Company.
3.1(a)/(4)/ Amended and Restated Certificate of Incorporation of Registrant.
3.1(b)/(4)/ Amended and Restated Bylaws of Registrant.
3.2(a)/(4)/ Amended and Restated Certificate of Incorporation of Indian Oil
Company.
3.2(b)/(4)/ Amended and Restated Bylaws of Indian Oil Company.
3.3(a)/(4)/ Certificate of Incorporation of Canaan Securities, Inc.
3.3(b)/(4)/ Bylaws of Canaan Securities, Inc.
3.4(a)/(4)/ Certificate of Incorporation of Coral Reserves, Inc.
3.4(b)/(4)/ Bylaws of Coral Reserves, Inc.
3.5(a)/(4)/ Certificate of Incorporation of Coral Reserves Energy Corp.
3.5(b)/(4)/ Bylaws of Coral Reserves Energy Corp.
3.6(a)/(1)(4)/ Amended and Restated Agreement of Limited Partnership of Coral
Reserves Energy Income Fund 1996 Limited Partnership.
3.6(b)/(2)(4)/ Amended and Restated Agreement of Limited Partnership of Coral
Reserves 1996 Institutional Limited Partnership.
5.1/(5)/ Opinion of Crowe & Dunlevy, A Professional Corporation, regarding
the legality of the securities being registered.
8.1/(5)/ Opinion of Crowe & Dunlevy, A Professional Corporation, with
respect to certain tax matters.
10.1/(4)/ Stock Option Plan of the Registrant.
10.2/(4)/ Form of Indemnification Agreement by and between the Registrant
and non-employee directors.
10.3/(3)(4)/ Form of Change of Control Agreement by and between the
Registrant and executive officers.
10.4/(4)/ Shareholders Agreement between Registrant and shareholders of
Registrant and of Indian Oil Company.
10.5(a)/(4)/ Credit Agreement between Indian Oil Company and Bank One,
Oklahoma, N.A. dated December 22, 1997.
10.5(b)/(4)/ First Amendment to Credit Agreement by and between Indian Oil
Company and Bank One, Oklahoma, N.A. dated August 10, 1998.
10.5(c)/(4)/ Second Amendment to Credit Agreement by and between Indian Oil
Company and Bank One, Oklahoma, N.A. dated February 26, 1999.
10.5(d)/(4)/ Third Amendment to Credit Agreement by and between Indian Oil
Company and Bank One, Oklahoma, N.A. dated March 31, 1999.
10.5(e)/(4)/ Fourth Amendment to Credit Agreement by and between Indian Oil
Company and Bank One, Oklahoma, N.A.
10.5(f)/(4)/ Intercreditor Agreement by and among Bank One, Oklahoma, N.A.,
MidFirst Bank and Indian Oil Company dated March 31, 1999.
10.5(g)/(4)/ Intercreditor Agreement by and among BankOne, Oklahoma, N.A.,
Coral Reserves, Inc., Coral Reserves Energy Corp., Coral Reserves
Group, Ltd., Coral Reserves Energy Income Fund 1996 Limited
Partnership and Indian Oil Company.
10.5(h)/(4)/ Fifth Amendment to Credit Agreement by and Between Indian Oil
Company and Bank One, Oklahoma, N.A.
10.6(a)/(4)/ Credit Agreement among Indian Oil Company, Cibola Corporation and
MidFirst Bank dated March 31, 1999.
10.6(b)/(4)/ First Amendment to Credit Agreement among Indian Oil Company,
Cibola Corporation, Richard R. Dunning, Larry D. Hartzog, Michael
C. Black, Dunning Family Limited Partnership, and Michael C.
Black, Trustee of the Michael C. Black Revocable Trust and
MidFirst Bank dated as of May 1999.
10.6(c)/(4)/ Intercreditor Agreement dated March __, 1999 by and among
MidFirst Bank, Coral Reserves, Inc., Coral Reserves Energy Corp,
Coral Reserves Group, Ltd. and Indian Oil Company.
10.6(d)/(4)/ Second Amendment to Credit Agreement dated February __, 2000, by
Indian Oil Company, Cibola Corporation, Richard R. Dunning, Larry
D. Hartzog, Michael C. Black, Dunning Family Limited Partnership
and Michael C. Black, Trustee of The Michael C. Black Revocable
Trust and MidFirst Bank.
10.6(e)/(4)/ First Amendment to Intercreditor Agreement dated February __,
2000, by and among MidFirst Bank, Coral Reserves, Inc., Coral
Reserves Energy Corp., Canaan Energy Corporation and Indian Oil
Company.
10.7(a)/(4)/ Promissory Note of Indian Oil Company in favor of Larry D.
Hartzog dated January 20, 1993.
10.7(b)/(4)/ Promissory Note of Indian Oil Company in favor of Richard R.
Dunning dated January 20, 1993.
10.7(c)/(4)/ Promissory Note of Indian Oil Company in favor of Michael C.
Black dated January 20, 1993.
10.8 /(4)/ Amended and Restated Promissory Notes of Indian Oil Company in
favor of Cibola Corporation dated January 2000.
10.9/(5)/ Asset Purchase Agreement between Indian Oil Company and Indco,
L.L.C.
10.10 /(4)/ Stock Purchase Agreement among Coral Reserves Group, Ltd., Coral
Reserves, Inc., Coral Reserves Energy Corp. and Michael Mewbourn
dated November 30, 1998.
10.11(a)/(4)/ Consulting Agreement dated April 1, 1999 between Anthony
"Skeeter" Lasuzzo and Indian Oil Company.
10.11(b)/(4)/ Stock Rights Certificate dated April 1, 1999 between Anthony
"Skeeter" Lasuzzo and Indian Oil Company.
10.11(c)/(4)/ Letter agreement dated September 29, 1999 between Anthony
"Skeeter" Lasuzzo and Richard R. Dunning.
10.12/(5)/ Settlement Agreement among stockholders of Indian Oil Company
dated May 3, 2000.
12.1/(5)/ Calculation of Ratio of earnings to Fixed Charges of Canaan
Energy Corporation
12.2/(5)/ Calculation of Ratio of Earnings to Fixed Charges of Indian Oil
Company.
12.3/(5)/ Calculation of Ratio of Earnings to Fixed Charges of Coral
Reserves, Inc.
12.4/(5)/ Calculation of Ratio of Earnings to Fixed Charges of Coral
Reserves Energy Corp.
12.5/(5)/ Calculation of Ratio of Earnings to Fixed Charges of Coral
Reserves Natural Gas Income Fund 1990 Limited Partnership.
12.6/(5)/ Calculation of Ratio of Earnings to Fixed Charges of Coral
Reserves Natural Gas Income Fund 1991 Limited Partnership.
12.7/(5)/ Calculation of Ratio of Earnings to Fixed Charges of Coral
Reserves Natural Gas Income Fund 1992 Limited Partnership.
12.8/(5)/ Calculation of Ratio of Earnings to Fixed Charges of Coral
Reserves Natural Gas Income Fund 1993 Limited Partnership.
12.9/(5)/ Calculation of Ratio of Earnings to Fixed Charges of Coral
Reserves 1993 Institutional Limited Partnership.
12.10/(5)/ Calculation of Ratio of Earnings to Fixed Charges of Coral
Reserves Energy Income Fund 1995 Limited Partnership.
12.11/(5)/ Calculation of Ratio of Earnings to Fixed Charges of Coral
Reserves Energy Income Fund 1996 Limited Partnership.
12.12/(5)/ Calculation of Ratio of Earnings to Fixed Charges of Coral
Reserves 1996 Institutional Limited Partnership.
23.1/(5)/ Consent of Crowe & Dunlevy, A Professional Corporation (included
in Exhibits 5.1 and 8.1).
23.2/(5)/ Consent of KPMG, L.L.P.
23.3/(5)/ Consent of William T. Zumwalt, Inc.
23.4/(5)/ Consent of Netherland, Sewell and Associates, Inc.
23.5/(5)/ Consent of Nishball, Carp, Niedermeier, Pacowta & Co., P.C.
27/(5)/ Financial Data Schedule.
99.1/(5)/ Reserve Reports of Netherland, Sewell & Associates, Inc.
99.2/(5)/ Form of Proxy and Cash Election Form and Letter of Transmittal.
99.3 Intentionally ommitted.
99.4/(4)/ Consent of Thomas H. Henson to be named director.
99.5/(5)/ Appraisal of Madison Energy Advisors.
99.6/(5)/ Consent of Michael P. Cross to be named director.
99.7/(5)/ Consent of Mischa Gorkuscha to be named director.
99.8/(5)/ Consent of Randy Harp to be named director.
____________________
(1) Agreements of limited partnership for the 1990, 1991, 1992, 1993 and 1995
Partnerships are substantially identical to the 1996 Partnership agreement
and are not being filed.
(2) Agreement of limited partnership for the 1993-I Partnership is
substantially identical to the 1996-I Partnership agreement and is not
being filed.
(3) To be entered into with Messrs. Woodard, Penton, Mewbourn, Henson and
Lasuzzo.
(4) Previously filed.
(5) Filed herewith.
Item 22. Undertakings.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
The undersigned Registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Joint Proxy
Statement/Prospectus pursuant to Items 4, 10(b), 11 or 13 herein, within one
business day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
Registration statement through the date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in the
Registration Statement when it became effective.
[SIGNATURES ON FOLLOWING PAGE]
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 1 to the Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Oklahoma City, State of Oklahoma on May 26, 2000.
CANAAN ENERGY CORPORATION
By: /s/ Leo E. Woodard
----------------------------------------------
Leo E. Woodard, Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Leo E. Woodard Chairman and Chief Executive Officer May 26, 2000
- -------------------------
Leo E. Woodard
/s/ John Penton President and Director May 26, 2000
- -------------------------
John Penton
/s/ Michael S. Mewbourn Sr. Vice President, Chief Financial
- -------------------------
Michael S. Mewbourn Officer and Director May 26, 2000