Exhibit 99.2
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
SA Oil and Gas Corporation:
We have audited the accompanying balance sheets of SA Oil and Gas Corporation as
of December 31, 2000 and 1999, and the related statements of operations,
stockholders' deficit 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 auditing standards generally accepted
in the United States of America. 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 SA Oil and Gas Corporation as
of December 31, 2000 and 1999, and the results of its operations and its cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
May 10, 2001
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SA OIL AND GAS CORPORATION
Balance Sheets
December 31, 2000 and 1999
2000 1999
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 158,178 132,725
Accounts receivable 91,582 60,911
----------- -----------
Total current assets 249,760 193,636
----------- -----------
Oil and gas properties, at cost, using the successful
efforts method of accounting:
Proved properties 2,858,387 2,860,954
Accumulated depletion, depreciation and amortization (2,815,085) (2,773,447)
----------- -----------
43,302 87,507
----------- -----------
Deferred tax asset 415,556 518,818
----------- -----------
Total assets $ 708,618 799,961
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 33,104 29,341
----------- -----------
Total current liabilities 33,104 29,341
Note payable to shareholder 902,618 902,618
Stockholders' deficit:
Preferred Stock, $.01 par value; 20,000,000 shares authorized; 300,000
and 800,000 shares issued and outstanding in 2000 and 1999, respectively 3,000 8,000
Series A Preferred Stock, $1.00 par value; 5,000,000 shares
authorized; no shares issued and outstanding in 2000 and 1999 -- --
Common Stock, no par value; 25,000,000 shares authorized; 13,468,959
shares issued and outstanding in 2000 and 1999 552,316 552,316
Additional paid-in capital 20,500 265,500
Accumulated deficit (677,295) (832,189)
----------- -----------
(101,479) (6,373)
Less: treasury stock, 130,000 shares at cost (125,625) (125,625)
----------- -----------
Total stockholders' deficit (227,104) (131,998)
----------- -----------
Total liabilities and stockholders' deficit $ 708,618 799,961
=========== ===========
See accompanying notes to financial statements.
2
SA OIL AND GAS CORPORATION
Statements of Operations
For the years ended December 31, 2000 and 1999
2000 1999
-------- --------
Revenues:
Oil and gas $549,347 399,399
Interest and other 11,585 4,389
-------- --------
Total revenues 560,932 403,788
-------- --------
Costs and expenses:
Lease operating 140,509 125,427
General and administrative 28,794 17,803
Geological and geophysical and exploratory costs 37,530 --
Depreciation, depletion and amortization 41,638 47,014
Interest and other 54,305 56,066
-------- --------
Total costs and expenses 302,776 246,310
-------- --------
Net income before income taxes 258,156 157,478
Income tax expense 103,262 62,991
-------- --------
Net income $154,894 94,487
======== ========
See accompanying notes to financial statements.
3
SA OIL AND GAS CORPORATION
Statements of Stockholders' Deficit
For the years ended December 31, 2000 and 1999
COMMON STOCK PREFERRED STOCK ADDITIONAL TOTAL
--------------------- ------------------- PAID-IN ACCUMULATED TREASURY STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK DEFICIT
------ ------ ------ ------ ------- ------- ----- -------
Balances at
December 31, 1998 13,468,959 $552,316 800,000 $ 8,000 $ 265,500 $(926,676) $(125,625) $(226,485)
Net income -- -- -- -- -- 94,487 -- 94,487
---------- -------- -------- ------- --------- --------- --------- ---------
Balances at
December 31, 1999 13,468,959 552,316 800,000 8,000 265,500 (832,189) (125,625) (131,998)
Redemption of preferred
stock -- -- (500,000) (5,000) (245,000) -- -- (250,000)
Net income -- -- -- -- -- 154,894 -- 154,894
---------- -------- -------- ------- --------- --------- --------- ---------
Balances at
December 31, 2000 13,468,959 $552,316 300,000 $ 3,000 $ 20,500 $(677,295) $(125,625) $(227,104)
========== ======== ======== ======= ========= ========= ========= =========
See accompanying notes to financial statements.
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SA OIL AND GAS CORPORATION
Statements of Cash Flows
For the years ended December 31, 2000 and 1999
2000 1999
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 154,894 94,487
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 41,638 47,014
Deferred tax expense 103,262 62,991
Changes in assets and liabilities:
Increase in accounts receivables (30,671) (16,236)
Increase (decrease) in accounts payable and accrued expenses 3,763 (33,697)
--------- ---------
Net cash provided by operating activities 272,886 154,559
--------- ---------
Cash flows from investing activities:
Additions to oil and gas property -- (7,613)
Proceeds from sale of oil and gas properties 2,567 --
--------- ---------
Net cash provided by (used in) investing activities 2,567 (7,613)
--------- ---------
Cash flows from financing activities:
Payments on note payable to shareholder -- (22,382)
Redemption of preferred stock (250,000) --
--------- ---------
Net cash provided by financing activities (250,000) (22,382)
--------- ---------
Net increase (decrease) in cash and cash equivalents 25,453 124,564
Cash and cash equivalents, beginning of year 132,725 8,161
--------- ---------
Cash and cash equivalents, end of year $ 158,178 132,725
========= =========
Supplemental disclosures of noncash financing activities:
Cash paid for interest $ 54,305 56,066
========= =========
See accompanying notes to financial statements.
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SA OIL GAS CORPORATION
Notes to Financial Statements
December 31, 2000 and 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) NATURE OF OPERATIONS
SA Oil and Gas Corporation (the "Company") is an Arizona corporation
formed on November 12, 1991. The Company's principal business is the sale
of oil and gas produced from investments in oil and gas properties in
Texas and Oklahoma. The Company solely owns working interests in various
properties and does not engage in the activities of exploration,
drilling, or production of oil and gas.
(B) CONCENTRATION OF CREDIT RISK
Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of unsecured accounts
receivable from crude oil and natural gas purchasers.
(C) PROPERTY AND EQUIPMENT
OIL AND GAS PROPERTIES: The Company utilizes the successful efforts
method of accounting for its oil and gas properties as promulgated by
Statement of Financial Accounting Standards No. 19, "Financial Accounting
and Reporting by Oil and Gas Producing Companies." Under this method all
costs associated with productive wells and nonproductive development
wells are capitalized while nonproductive exploration costs are expensed.
Capitalized costs relating to proved properties are depleted using the
straight-line method over a period of five years.
Capitalized costs of individual properties abandoned or retired are
charged to accumulated depletion, depreciation and amortization. Proceeds
from sales of individual properties are credited to property costs. No
gain or loss is recognized until the entire amortization base is sold or
abandoned.
(D) IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Financial Accounting Standards Board Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"), the Company reviews
its long-lived assets to be held and used, including oil and gas
properties accounted for under the successful efforts method of
accounting, whenever events or circumstances indicate that the carrying
value of those assets may not be recoverable. An impairment loss is
indicated if the sum of the expected future cash flows is less than the
carrying amount of the assets. The Company has not recorded any
impairment loss related to its oil and gas properties during 2000 or
1999.
(E) INCOME TAXES
INCOME TAXES. The Company accounts for income taxes in accordance with
the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). Under the asset and liability
method of SFAS 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets
and liabilities of a change in tax rate is recognized in income in the
period that includes the enactment date.
6 (Continued)
SA OIL GAS CORPORATION
Notes to Financial Statements
December 31, 2000 and 1999
(F) ENVIRONMENTAL
The Company is subject to extensive Federal, state and local
environmental laws and regulations. These laws, which are constantly
changing, regulate the discharge of materials into the environment.
Environmental changes affecting the oil and gas properties in which the
Company owns interests may have an impact on the Company's future
financial position or results of operations.
(G) REVENUE RECOGNITION
The Company uses the sales method of accounting for crude oil revenues
and for natural gas reserves. Under this method, revenues are recognized
based on actual volumes of oil and gas sold to purchasers.
(H) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
Preparation of the accompanying financial statements in conformity with
accounting principles generally accepted in the United States of America
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.
(2) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (Statement 133) "Accounting for
Derivative Instruments and Hedging Activities" which, as amended,
establishes standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. It establishes conditions under which a
derivative may be designated as a hedge, and establishes standards for
reporting changes in the fair value of a derivative. Statement 133 is
required to be implemented for the first quarter of the fiscal year ended
2001. Early adoption is permitted. The Company's adoption of Statement 133
did not have a material impact on the Company's financial statements.
(3) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE. The
carrying amounts approximate fair value due to the short maturity of these
instruments.
DEBT. The carrying amount of the Company's note payable approximates fair
value as the note payable bears interest at a rate that is comparable to
current market rates.
(4) INCOME TAXES
As discussed in Note 1, the Company accounts for income taxes in accordance
with SFAS 109.
7 (Continued)
SA OIL GAS CORPORATION
Notes to Financial Statements
December 31, 2000 and 1999
The reconciliation between the tax expense computed by multiplying pretax
income (loss) by the U.S. federal statutory rate and the reported amounts
of income tax expense (benefit) is as follows:
YEAR ENDED DECEMBER 31,
-------------------------
2000 1999
-------- --------
Income at statutory rate $ 87,773 53,543
State expense 15,489 9,448
-------- --------
Income tax expense $103,262 62,991
======== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:
YEAR ENDED DECEMBER 31,
-------------------------
2000 1999
-------- --------
Deferred tax assets (liabilities):
Net operating loss carryforwards $ 417,524 526,449
Property, plant and equipment, principally
due to differences in basis upon acquisition,
depletion, and the deduction of intangible
drilling costs for tax purposes (1,968) (7,631)
--------- ---------
Net deferred tax asset $ 415,556 518,818
========= =========
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Based on
expectations for the future and the availability of certain tax planning
strategies that would generate taxable income to realize the net tax
benefits, if implemented, management has determined that taxable income of
the Company will more likely than not be sufficient to fully utilize
available carryforwards prior to their ultimate expiration.
At December 31, 2000, the Company had net operating loss carryforwards
("NOLs") for U.S. federal income tax purposes of approximately $1,162,424,
which are available to offset future regular taxable income, if any. The
carryforwards begin to expire in 2006.
8 (Continued)
SA OIL GAS CORPORATION
Notes to Financial Statements
December 31, 2000 and 1999
(5) STOCKHOLDERS' DEFICIT
The preferred stock of the Company consists of 5,000,000 authorized shares
of Series A preferred stock ("Series A") with a par value of $1.00 per
share, and 20,000,000 authorized shares of Preferred Stock ("Preferred
Stock"). The Series A shares bear a 13% cumulative dividend payable
annually in arrears, and are entitled to dividend, liquidation and
conversion rights in preference to Preferred Stock and Common Stock. At
December 31, 2000 and 1999, no shares of the Series A Preferred Stock were
issued or outstanding. At December 31, 2000 and 1999, 250,000 and 800,000
shares of Preferred Stock were issued and outstanding, respectively.
During the year ended December 31, 2000, payments of $250,000 were made to
fully redeem 500,000 shares of Preferred Stock.
(6) NOTE PAYABLE TO SHAREHOLDER
In November 1991, the Company entered into a note payable agreement with a
shareholder for an aggregate principal amount of $1,500,000. As of December
31, 2000 and 1999, the principal balance of the note payable is $902,618.
The note payable bears interest at the rate of 6% per annum, payable
quarterly. All outstanding principal and any interest accrued is payable on
September 1, 2003.
(7) COSTS INCURRED FOR OIL AND GAS PRODUCING ACTIVITIES
For the years ended December 31, 2000 and 1999, the Company capitalized
successful development costs of $1,049 and $1,090, respectively. No
acquisition or exploration costs were incurred or capitalized.
(8) SUBSEQUENT EVENTS
In January 2001, the Company paid cash of $25,000 to fully redeem 50,000
shares of Preferred Stock.
On March 22, 2001, the Company entered into a stock purchase agreement with
Stratford American Corporation ("Stratford"), a related entity. The Company
and Stratford have common members of management. This agreement closed on
April 19, 2001, at which time Stratford purchased all of the outstanding
shares of SA Oil's Common Stock and Preferred Stock in exchange for shares
of Stratford's common stock. The common shares were exchanged on a 20-for-1
basis, exchanging one share of Stratford's common stock for each 20 shares
of the Company's Common Stock. The preferred shares were exchanged on a
2-for-1 basis, exchanging one share of Stratford's common stock for each
two shares of the Company's Preferred Stock. Two of the Company's common
stockholders opted to receive cash instead of shares of Stratford's common
stock, and therefore the Company redeemed their shares for $162,000 in cash
prior to the closing of the acquisition.
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