SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Rule 13e-3 Transaction Statement, Amendment #1
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(Pursuant to Section 13(e) of the Securities Exchange Act of 1934)
GREAT NORTHERN GAS COMPANY
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(Name of Issuer)
GREAT NORTHERN GAS COMPANY
ST. FRANCIS RESOURCES, INC.
THOMAS L. DI GRAPPA
FRANK S. DI GRAPPA
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(Name(s) of Persons Filing Statement)
COMMON STOCK, $.01 PAR VALUE
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(Title of Class of Securities)
391044 10 4
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(CUSIP Number of Class of Securities)
FRANK S. DI GRAPPA
621 17TH STREET, SUITE 2150
DENVER, COLORADO 80293
(303) 295-0938
with a copy to
NEIL E. AYERVAIS
LOHF SHAIMAN JACOBS & HYMAN PC
950 SOUTH CHERRY, SUITE 900
DENVER, COLORADO 80246
(303) 753-9000
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(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications on Behalf of Person(s) Filing Statement)
This statement is filed in connection with (check the appropriate box):
a. [ ] The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the
Securities Exchange Act of 1934.
b. [ ] The filing of a registration statement under the Securities Act of
1933
c. [ ] A tender offer.
d. [X] None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: [ ]
Check the following box if the filing is a final amendment reporting the results
of the transaction: [ ]
Calculation of Filing Fee
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Transaction Valuation* Amount of filing fee
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$203,475 $40.70
(cash to be paid for shares
purchased by Issuer)
*Set forth the amount on which the filing fee is calculated and state how it was
determined.
[ ] Check box if any part of the fee is offset as provided by ss.240.0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form or
Schedule and the date of its filing.
Amount Previously Paid: ___________ Filing Party: _____________
Form or Registration No.: __________ Date Filed: ______________
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
Item 1. Summary Term Sheet.
The principal features of this Transaction Statement are:
o St. Francis Resources, Inc. owns over 95% of the stock in the Company.
In large part, because of the small public float, there is no market
for the shares of stock held by others and, as such, the other
shareholders have no liquidity. See "Item 7. Purposes, Alternatives,
Reasons and Effects."
o Management has decided that the costs of being a public company,
including legal, accounting, reporting and administrative expenses,
far outweigh any benefit, particularly since there is no liquidity in
the Company's stock and the Company has no plans to use its stock to
acquire properties or other companies. See "Item 7. Purposes,
Alternatives, Reasons and Effects."
o Consequently, management has decided to "go private," i.e., take steps
which will result in the Company not being required to file reports
with the Securities and Exchange Commission and not being a public
company. See "Item 7. Purposes, Alternatives, Reasons and Effects."
o The vehicle management has decided to use to go private is the merger
of the Company into St. Francis Resources, Inc. The result of the
merger will be the purchase of all shares of stock of shareholders
other than St. Francis, including two directors of the Issuer who also
are directors of St. Francis, at a price of $1.50 per share, the
termination of the existence of the Company and the assumption of all
of the Company's liabilities and assets and operation of its business
by St. Francis Resources, Inc. See "Item 4. Terms of the Transaction"
and Item 6. "Purposes of the Transaction and Plans or Proposals."
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o The Company retained Scott Saltzman, C.P.A. and his firm, Saltzman
Hamma Nelson Massaro LLP to perform a valuation of the Company's
common stock and relied on and adopted that valuation in setting the
purchase price at $1.50. See Item 8. "Fairness of the Transaction,"
and Item 9. "Reports, Opinions, Appraisals and Negotiations."
o Under the corporation law of Colorado, no vote of the shareholders of
the Company is required to effect the merger of the Company into St.
Francis Resources, Inc. and both companies already have taken all
actions necessary to complete the merger after this Statement is sent
to all of the Company's shareholders. However, any shareholder can
disagree with the price being paid for his shares and make a demand on
the Company for a different price. If the Company disagrees with the
price demanded by a shareholder, it must dispute the price in court.
See "Item 7. Purposes, Alternatives, Reasons and Effects."
Item 2. Subject Company Information.
(a) The company subject to the transaction described in this Transaction
Statement and is the subject of this Rule 13e-3 transaction is Great Northern
Gas Company, 621 17th Street, Suite 2150, Denver, Colorado 80293 (the "Issuer").
(b) The Issuer's common stock, $.01 par value (the "Common Stock"), is the
subject of this transaction. As at March 1, 2001, 2,801,195 shares of Common
Stock were issued and outstanding, and were owned by approximately 363 holders
of record.
(c) Until September 12, 2000, the Issuer's Common Stock was listed for
trading on the Pacific Stock Exchange (the "Pacific Exchange"). At that time,
the Common Stock was delisted because of the absence of a sufficient number of
shares of the Common Stock held by individuals who are not affiliates of the
Issuer. Subsequently, the Common Stock has been traded only through occasional
broker transactions in which only the Issuer was the purchaser and one, isolated
non-broker transaction. The high and low quarterly bid quotations for the past
two years for the Common Stock are:
1999 2000
High Low High Low
---- --- ---- ---
1st Quarter .75 .75 1.00 1.00
2nd Quarter .75 .75 1.00 1.00
3rd Quarter .75 .75 1.25 1.00
4th Quarter .75 .75 1.25 1.00
High and low bid quotations for periods after September 12, 2000 were calculated
based upon bid quotations reported by the Pacific Stock Exchange prior to
delisting of the Common Stock. In the first quarter of 2001, the Issuer made one
purchase of 1,500 shares of Common Stock at a purchase price of $2.00 per share
in a private transaction initiated by the shareholder and not undertaken through
a trading exchange or in a manner which would generate a quotation.
(d) The Issuer has paid no dividends on the Common Stock in the past two
years. The Issuer is under no legal restriction on its ability to pay dividends
currently or in the future other than the requirements of Section 7-106-401(3)
of the Colorado Business Corporation Law which prohibits payment of dividends
which would prevent a corporation from paying its debts as they generally come
due or which would reduce its assets to an amount less than its liabilities and
preference payments upon a liquidation.
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(e) During the past three years, the Issuer has not made either an
underwritten public offering of the Common Stock for cash which was registered
under the Securities Act of 1933 or exempt from registration under the Act
pursuant to Regulation A.
(f) During the past two full fiscal years, the Issuer has purchased from
its shareholders shares of Common Stock in the following amounts and prices:
Fiscal Year Shares Purchased Price
----------- ---------------- -----
1999 7,000 $.75
2000 28,046 1.125
238,199 1.25
7,000 1.50
2001 1,500 2.00
The average purchase price for such shares during each quarterly period of the
Issuer during its past two fiscal years is:
1999 2000
---- ----
1st Quarter $.875 NA
2nd Quarter NA $1.00
3rd Quarter 1.00 1.18
4th Quarter .92 1.25
Item 3. Identity and Background of Filing Persons.
(a) The persons filing this statement are Great Northern Gas Company, the
issuer of the Common Stock, St. Francis Resources, Inc., Frank S. DiGrappa,
chairman of the board of the Issuer, and Thomas L. DiGrappa, president of the
Issuer. The business address of all filing persons is 621 17th Street, Suite
2150, Denver, Colorado 80293; (303) 295-0938.
(b) The Issuer is a Colorado corporation which has conducted business as an
independent oil and gas company primarily engaged in onshore crude oil and
natural gas exploration, development and production in the continental United
States. The Issuer owns a small, minority interest in a Delaware corporation
which conducts operations in Russia through that company's subsidiaries. St.
Francis Resources, Inc. ("St. Francis") is a Colorado corporation which conducts
business as an independent oil and gas company in the continental United States.
(c) The natural persons who are filers of this Transaction Statement are
Frank S. DiGrappa and Thomas L. DiGrappa, both of whom are United States
citizens. Neither Thomas DiGrappa nor Frank DiGrappa, nor St. Francis has been
convicted in a criminal proceeding during the past five years (excluding traffic
violations and similar misdemeanors). None was a party to any judicial or
administrative proceeding during the past five years (except for matters that
were dismissed without sanction or settlement) that resulted in a judgment,
decree or final order enjoining the person from future violations of, or
prohibiting activities subject to, federal or state securities laws, or a
finding of any violation of federal or state securities laws.
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(1) Frank S. DiGrappa, 74, is Chairman of the Board, Chief Executive
Officer, Treasurer and Director of the Issuer. He has been involved in the oil
and gas business for 44 years. Mr. DiGrappa graduated from the University of
Oklahoma College of Law with a Bachelor of Law Degree in 1951. Upon graduation,
he joined Ashland Oil, Inc. in Ashland, Kentucky. He worked for Ashland for
seven years in various areas and capacities and was manager of the firm's
Billings, Montana District Office when he resigned to become manager of lands
for the Anschutz Drilling Co., Inc. in Denver, Colorado. After two years, he
resigned to become an independent landman and oil operator. In 1971, Mr.
DiGrappa co-founded Teton Energy Co. Inc., a private oil and gas exploration and
production firm based in Denver.
Until its combination with Petrotech in 1987, which created the Issuer, Mr.
DiGrappa was instrumental in developing Teton Energy into a company whose assets
included 150 oil and gas wells and more than 800,000 acres of oil and gas
leases, located primarily in the Piceance Creek Basin in western Colorado.
Following the combination of Teton and Petrotech, Mr. DiGrappa founded St.
Francis Resources, Inc., the parent of the Issuer, and currently is its
president.
(2) Thomas L. DiGrappa, 46, is Chief Operating Officer, President, and
Director of the Issuer. He is the son of Frank DiGrappa. Tom DiGrappa graduated
from the University of Colorado School of Business with a degree in Minerals
Land Management in December, 1976. In February, 1977, he joined Continental
Minerals, Inc., a subsidiary of Continental Oil Company, in Spokane, Washington,
as a landman in uranium exploration. He resigned his position with Continental
Minerals in February, 1979, to join Intercontinental Energy Corp., a
Denver-based independent oil, gas, uranium and geothermal company. He was with
Intercontinental Energy until November, 1980, when he joined Teton Energy.
During the past six and a half years he has served as president of the Issuer.
Prior to 1994, he served as Vice President of the Company. Mr. DiGrappa is a
director and the vice president of St. Francis and owns approximately 57% of the
issued and outstanding shares of common stock in St. Francis; he also is a
director of Teton Petroleum Company, a Delaware corporation, in which the Issuer
owns a minority interest.
Item 4. Terms of the Transaction
(a) At May 1, 2001, St. Francis owns 2,647,255 shares of the 2,782,905
shares of Common Stock issued and outstanding, or 95.13% of the issued and
outstanding shares of Common Stock. Pursuant to Section 7-11-104 of the Colorado
Business Corporations Act (the "Colorado Act"), a corporation (the "parent")
which owns 90% or more of the issued and outstanding stock of another
corporation (the "subsidiary") may effectuate a merger of the subsidiary into
the parent with the parent being the surviving corporation. The transaction (the
"Transaction") prompting this Statement is the merger of the Issuer into its
parent, St. Francis. As provided in the Colorado Act, the directors of the
Issuer, by consent resolution dated March 8, 2001 and the directors and
shareholders of St. Francis, by consent resolutions also dated March 8, 2001,
approved articles of merger which define the terms of the merger of the Issuer
into St. Francis. Both resolutions are effective two days after the Securities
and Exchange Commission has concluded its review of this Statement. Under the
Colorado Act, no vote of the shareholders of the Issuer is required.
The articles of merger provide that, on the effective date of the merger,
all issued shares of the Issuer's Common Stock which are not owned by St.
Francis will be exchanged for cash in the amount of $1.50 per share upon
surrender of certificates representing the shares or a lost certificate bond or
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other documentation appropriate where no certificate can be located. All issued
shares of the Issuer's Common Stock which are owned by St. Francis on the
effective date of the merger and all shares of the Common Stock held in its
treasury on that date will be cancelled without consideration as of the
effective date. The effective date of the merger of the Issuer into St. Francis
will be the earlier of: (i) the date on which all shareholders of the Issuer
waive the mailing requirement of the plan of merger set forth in ss.7-111-104(4)
of the Colorado Act; or (ii) ten days after the date that the Issuer mails a
copy or summary of the plan of merger to each shareholder of the Issuer. The
Issuer contemplates that it will not obtain waivers of the notice requirements
from all of its shareholders, and the effective date of the merger will be 10
days after mailing of the notice. The record date for ownership of Common Stock
entitled to be purchased is the effective date of the merger. By operation of
the Colorado Act, upon effectiveness of the merger, the Issuer will cease to
exist and all of the Issuer's assets and liabilities will be those of St.
Francis.
(b) The Issuer will purchase 182,000 shares of Common Stock from Frank S.
DiGrappa and 50,000 shares from Thomas L. DiGrappa in the Transaction on the
same terms as shares of Common Stock are to be purchased from non-affiliates.
(c) The articles of merger provide disparate treatment for St. Francis and
all other shareholders of the Issuer. St. Francis will continue to own its
shares of Common Stock (which will be cancelled on the effective date of the
merger), while shares of Common Stock owned by other shareholders, including
Frank S. and Thomas L. DiGrappa (the "minority shareholders") will be purchased
for $1.50 per share.
(d) Pursuant to Section 7-113-102(1)(a)(II) of the Colorado Act, appraisal
rights are provided to the minority shareholders. In order to effectuate
dissenter's rights, a minority shareholder must not execute any writing
consenting to the Transaction and must transmit to the Issuer a payment demand
consistent with the terms of the Colorado Act. The Issuer is required to provide
a notice of dissenter's rights no later than ten (10) days after the effective
date of the corporate action approving the Transaction. The notice is required
to state that the Transaction was authorized and its effective date; provide an
address at which the Issuer will receive payment demands and the address of a
place where certificates for certificated shares must be deposited; inform
holders of uncertificated shares the extent to which transfer will be restricted
after the payment demand is received; supply a form for demanding payment; set a
date by which the Issuer must receive the payment demand, no less than thirty
(30) days after the date of the notice; and be accompanied by copy of the
relevant provisions of the Colorado Act. Each minority shareholder who wishes to
assert rights of appraisal must transmit a demand on the form provided by the
Issuer within the time the Issuer has established for that demand and otherwise
comply with the terms of the notice and of the Colorado Act.
Upon the effective date of the Transaction or receipt of a payment demand,
whichever is later, the Issuer shall pay each dissenter who has complied with
the terms of the notice and the Colorado Act the amount the Issuer estimates to
be the fair value of the dissenter's shares plus accrued interest. The Issuer
intends that the purchase price, determined upon the appraisal of Saltzman LLP,
will be the fair value of the dissenter's shares. A payment shall be accompanied
by the Issuer's balance sheet at the end of its most recent fiscal year; a
statement of the Issuer's estimate of the fair value of the shares; an
explanation of how the interest was calculated; a statement of the dissenter's
right to demand payment under a dispute resolution mechanism set forth in the
Colorado Act; and a copy of pertinent provisions of the Colorado Act.
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A dissenter may provide to the Issuer in writing the dissenter's estimate
of the fair value of the dissenter's shares and the amount of interest due and
demand payment of such estimate or reject the Issuer's offer if (a) the
dissenter believes that the amount offered by the Issuer is less that the fair
value of the Common Stock or that interest is improperly calculated; (b) the
Issuer fails to make payment within 60 days after the date (the "demand date")
set by the Issuer for receipt of the payment demand; or (c) the Issuer does not
return the deposited certificates or release transfer restrictions if the
effective date of the merger does not occur within 60 days after the demand
date. The Issuer may commence an action in the District Court for the City and
County of Denver, Colorado, to dispute the dissenter's demand and then sixty
(60) days after receiving that demand, and the Court will determine the
appropriate price for the dissenter's shares of Common Stock.
The requirements of the Colorado Act with respect to dissenter's rights are
fully set forth in Item 17(e), appended to this Statement.
Item 5. Past Contacts, Transactions, Negotiations and Agreements.
(a) The Issuer has been a subsidiary of St. Francis since December 31,
1987, when a controlling interest in Petrotech, Inc., as the Issuer was then
known, was issued to St. Francis which had then just been formed and then was
wholly-owned by Frank S. DiGrappa. That transaction afforded St. Francis with a
controlling ownership interest in the Issuer. Currently, Frank S. DiGrappa, the
Issuer's director and chairman of the board is the president and a director of
St. Francis; Thomas L. DiGrappa, the Issuer's president and a director is vice
president and a director of St. Francis; and Terri Pagliasotti is secretary of
both corporations. Thomas L. DiGrappa owns approximately 57% of the issued and
outstanding shares of common stock of St. Francis, and his brother Michael (who
is a director of the Issuer) and two sisters own the remaining shares. During
fiscal 2000, Thomas L. DiGrappa received from the Issuer compensation consisting
of $120,000 in salary, a $50,000 bonus and $7500 from the Issuer's overriding
royalty pool and Frank S. DiGrappa received $100,000 in salary, a $50,000 bonus
and $7500 from the overriding royalty pool.
(b) The decision to consider undertaking the Transaction was made by the
Issuer's directors, Messrs. Thomas, Frank and Michael DiGrappa in late 2000.
After having consulted legal counsel concerning the legal implications and costs
of going private, compared to the implications and costs of remaining public and
retained Scott Saltzman, C.P.A. and the firm of Saltzman Hamma Nelson Massaro
LLP ("Saltzman LLP") to appraise the Common Stock, the Issuer's directors
determined to proceed with the Transaction in early March 2001 and took the
formal action which initiated the Transaction on March 8, 2001.
The Saltzman LLP appraisal (the "Saltzman Report") was received on March
12, 2001 and subsequently amended to correct errors in Exhibit 1, to reflect
that the highest price paid for Common Stock by the Issuer during 2000 was
$1.50. Management relied on and adopted the Saltzman Report to value each share
of the Common Stock at $1.50 and did not perform any independent examination of
that value other than to compare the valuation to prices paid for Common Stock
in that past five years. During that time period, the highest price paid for the
Common Stock was $1.50 and most high purchase prices were significantly lower
than $1.50. Management determined that the value determined by Saltzman LLP
would provide a price at least as good, and probably better than the best
possible price a selling shareholder could receive if any market for the Common
Stock actually existed. Management disregarded a single private purchase of 1500
shares at $2.00 per share as a price determined by private negotiation,
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unaffected by and unrelated to any market price and immaterial in view of the
number of shares and circumstances of the transaction. Also, management noted
that any minority shareholder could utilize the rights of appraisal afforded by
the Colorado Act if a shareholder disagrees with the purchase price; the
Colorado Act provides any shareholder with the ability to impose on the Issuer
the burden of validating that price.
(c) To any extent that the interests of St. Francis and the Issuer diverge,
a conflict of interest exists for the Issuer's three directors, all of whom are
affiliated with St. Francis. Upon completion of the Transaction, St. Francis
exclusively will own and operate the Issuer's business and the Issuer's
directors no longer will owe a fiduciary duty to unaffiliated shareholders.
Currently, since St. Francis and its affiliates own almost all of the issued and
outstanding Common Stock, the interests of St. Francis and the Issuer converge
in many ways. Management believes that the costs of continuing the Issuer as a
public company no longer outweigh the costs of that status and, in view of the
absence of any trading market, consequent illiquidity of the Common Stock, the
insignificant stake held by unaffiliated shareholders, and the fact that St.
Francis bears most of the risks of ownership of the Common Stock, the interests
of St. Francis and the Issuer are not in conflict. See "Item 6. Purposes of the
Transaction and Plans or Proposals" and "Item 7. Purposes Alternatives, Reasons
and Effects."
Item 6. Purposes of the Transaction and Plans or Proposals.
(a) The sole purpose of the Transaction is to cause the Issuer "go
private," to no longer be subject to the reporting requirements of the
Securities Exchange Act of 1934 (the "Exchange Act"), to pay cash for Common
Stock held by the small number of unaffiliated shareholders for whom there
currently is no market other than the Issuer (and also to two affiliates of the
Issuer) and to eliminate reporting and other obligations owing to that small
number of unaffiliated shareholders, most of whom were shareholders of
Petrotech, Inc. which was a public company with no operating assets and
liabilities significantly exceeding its assets when Frank S. DiGrappa acquired a
controlling interest in 1987 and subsequently contributed that interest to St.
Francis. See "Item 7. Purposes, Alternatives, Reasons and Effects."
(b) Pursuant to the terms of the Colorado Act, all shares of Common Stock
acquired in the Transaction will be retired and, upon completion of the
Transaction, all shares of Common Stock held by St. Francis will cease to exist.
All shares of Common Stock owned by Thomas L. DiGrappa also will be purchased
and retired.
(c) The Transaction will effect the merger of the Issuer into its parent,
St. Francis. On the effective date of the merger, all issued shares of the
Issuer's Common Stock which are not owned by St. Francis will be exchanged for
cash in the amount of $1.50 per share upon surrender of certificates
representing the shares or a lost certificate bond or other documentation
appropriate where no certificate can be located. All issued shares of the
Issuer's Common Stock which are owned by St. Francis on the effective date of
the merger and all shares of the Common Stock held in its treasury on that date
will be cancelled without consideration as of the effective date. Upon
completion of the Transaction, the Common Stock will become eligible for
termination of registration under Section 12(g)(4) of the Exchange Act and the
obligation of the Issuer to file reports under Section 15(d) will be terminated.
Frank S. DiGrappa and Thomas L. DiGrappa will remain officers and directors of
St. Francis, and Thomas L. DiGrappa will remain the majority shareholder of St.
Francis.
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Item 7. Purposes, Alternatives, Reasons and Effects.
(a) The purpose of the Transaction is to cause the Issuer to become
privately owned, with all of the stock owned by St. Francis. In 1987, the Issuer
was a public company, known as Petrotech, Inc., with no operating assets and
liabilities significantly exceeding assets. At that time, Frank S. DiGrappa
purchased a controlling interest in Petrotech, Inc. and subsequently contributed
the Petrotech stock to St Francis. Most of the Issuer's current minority
shareholders were the other shareholders of Petrotech, Inc. in 1987. Petrotech,
Inc. subsequently was reincorporated in Colorado as Great Northern Gas Company.
All of the increase in value of the Issuer and the stock held by the minority
shareholders is due to the actions of St. Francis, Frank and Thomas DiGrappa and
their affiliates.
At the time of the purchase of a controlling interest in Petrotech, Inc.,
management of the Issuer contemplated that having a class of securities
registered under the Exchange Act and trading on an exchange would provide
liquidity to its shareholders, afford the company increased access to capital
markets for business expansion and provide liquid securities for use in
acquiring oil and gas properties and related enterprises.
The attributes which originally prompted management to make the Issuer a
public company no longer are material to its operations and are outweighed by
the expense and administrative inconvenience of complying with laws and rules
required of public companies. The ownership by St. Francis of nearly all of the
issued and outstanding Common Stock has virtually eliminated the liquidity of
the Common Stock and caused its delisting from the Pacific Exchange. The Issuer
has not raised capital for operations or acquisitions in seven years, and the
illiquidity of the Common Stock impairs its ability to do so or to use the
Common Stock for property acquisitions currently.
Reversion to private ownership will reduce the substantial general and
administrative costs arising from and in connection with the Issuer's status as
a public reporting company. In addition to the non-income producing time
expended by management, the legal and accounting expenses involved in the
preparation of annual and other periodic reports filed with the Securities and
Exchange Commission (the "Commission"), and related expenses and costs of
printing and mailing of proxy solicitation materials and annual reports to the
Issuer's few minority shareholders are significant and of limited usefulness in
view of the limited value in remaining a public company. Minority shareholders
have shown little interest in trading their shares and several have asked that
the Issuer purchase their Common Stock. In addition, many of the former
shareholders of Petrotech, Inc. can no longer be located.
Compliance with the Securities Act of 1933, as amended (the "Act"), the
Exchange Act, related rules and regulations and state securities laws requires
significant expenditures for legal fees to assure that certain corporate acts
comply with those laws. The administrative burden on the Issuer and significant
expenses incurred in remaining a public company all will be obviated by
reversion to private ownership.
In addition, administrative control of the Issuer would be improved and
simplified by the elimination of the minority shareholders interests. Planning
and other management decisions could then be made solely on the basis of the
Issuer's long range business interests without the necessary consideration of
the possible adverse short-term effect of such decisions on the price and
liquidity of the Common Stock.
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(b) Management of the Issuer considered the acquisition by the Issuer of
shares of Common Stock owned by the minority shareholders through a tender offer
or a standing purchase offer through a broker. A tender offer would entail
significant expense in complying with provisions of the Exchange Act governing
such transactions and could not guarantee that all of the minority shareholders
would accept the offer, particularly since many of those shareholders cannot be
located. An incomplete tender would have resulted in the continuation of the
costs of maintaining public status for the benefit of even fewer minority
shareholders. Management had provided the only market available for purchase of
the Common Stock by indicating to a broker that it would purchase Common Stock
offered for sale on the Pacific Exchange or otherwise up to a certain price if
no other purchaser were available. However, while a few shareholders offered to
sell, and did sell, their Common Stock by this mechanism, such sales have been
sporadic and incomplete. A spin-off of the Issuer's assets into a private
company was rejected because effectuation of that transaction would leave the
Issuer a public shell with the same reporting responsibilities and issues.
(c) The Transaction is structured as a merger of a subsidiary into a parent
because it requires no vote of the Issuer's shareholders, which would be
academic given the ownership of most of the Common Stock by St. Francis, is most
efficacious in time and cost and does not involve the effort, cost and time
required for proxy materials or a tender offer. The Transaction is being
undertaken at this time because the delisting of the Common Stock has made
infeasible the continuation of the Issuer as a public company and the Issuer's
inability to purchase the shares of Common Stock owned by the unaffiliated
shareholders through accepting offers from shareholders.
(d) The principal effects of the Transaction will be to (1) eliminate the
corporate existence of the Issuer; (2) by operation of law, cause all of the
Issuer's assets and liabilities to be those of St. Francis; (3) make St. Francis
the sole owner of the Issuer's business; (4) make the Common Stock eligible for
termination of registration pursuant to Section 12(g)(4) of the Exchange Act;
and (5) suspend any obligation to file reports pursuant to Section 15(d) of the
Exchange Act. Thomas L. DiGrappa will become the majority shareholder of the
surviving entity. Consummation of the Transaction will deprive unaffiliated
shareholders of an opportunity to continue their common equity interest in the
Issuer and the potential to share in future growth, if any, of the Issuer. St.
Francis will lose the liquidity of its Common Stock and transactions in common
stock of St. Francis by its shareholders will be subject to restrictions imposed
by the Act and Rule 144 thereunder. No further public reports concerning the
business of the Issuer will be filed. Consummation of the Transaction also will
eliminate the requirements of, and costs associated with printing and
distributing annual reports; holding meetings of stockholders (for which proxies
must be solicited pursuant to a proxy statement complying with the rules
promulgated by the Commission); filing periodic reports with the Commission on
Forms 8-K, 10-Q and 10-K; and maintaining a transfer agent for the Common Stock.
Because St. Francis and the other Filing Persons own such a significant portion
of the Common Stock, on a pro forma basis, the impact of the Transaction on the
financial statements of St. Francis will be immaterial, reducing the value of
the Issuer's assets carried on the records of St. Francis by less than 4% of the
current value of the Common Stock which would be reflected on those financials.
Minority shareholders will incur a capital gain or loss upon the purchase
of their Common Stock, depending on the basis of such Stock in the hands of each
shareholder. To the extent that the purchase price of the Common Stock is less
than $1.50, a shareholder will realize a long-term capital gain in the amount of
the difference between the purchase price and $1.50. If the purchase price
exceeds $1.50, a long-term capital loss will be realized in the amount of that
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excess. The impact on any individual shareholder will depend on his or her
financial and tax status, and each shareholder is advised to consult his or her
tax adviser to determine that impact.
Item 8. Fairness of the Transaction
(a) The Issuer, St. Francis and Messrs. Frank and Thomas DiGrappa (the
"Filing Persons") reasonably believe that the Transaction is fair to
unaffiliated shareholders. All Filing Persons concur in and adopt all opinions
of "management" described in this Transaction Statement.
(b) In endeavoring to assure that the Transaction is fair to the
unaffiliated shareholders, the Issuer retained Scott Saltzman, C.P.A. and
Saltzman LLP to provide an independent valuation of the Issuer and the Common
Stock in the hands of the unaffiliated shareholders. Management based the
purchase price to be paid to the minority shareholders for their Common Stock on
the Saltzman Report. The Filing Persons all adopt the Saltzman Report and the
analysis set forth in the Saltzman Report. Neither Mr. Saltzman nor Saltzman LLP
have had any prior relationship with any Filing Person, serve as an accountant
or auditor for the Filing Persons or possess any ownership interest in the
Issuer. Upon reviewing the valuation provided by Saltzman LLP, management
determined that the purchase price and the Transaction are fair to, and in the
best interests of, the Issuer and the unaffiliated shareholders.
In determining to proceed with the Transaction and pay the purchase price,
management considered a number of factors, including those listed below,
management's recommendations are the product of the business judgment of the
respective members thereof, exercised in light of their fiduciary duties to the
Issuer's minority shareholders. The material factors considered by management in
determining that the Transaction is fair to unaffiliated shareholders are
summarized as follows:
(1) Management considered the historical market prices and absence of
recent trading activity of the Common Stock and the fact that the cash
consideration to be paid to the minority shareholders would provide
liquidity currently unavailable to them and the ability to convert an
illiquid investment in the Issuer into a different, possibly more
liquid investment in another entity. In the past five years, excluding
one private, immaterial purchase, the highest price paid for the
Common Stock was $1.50 per share. The average price for each share in
the past two years ranged from a low of $.875 to a high of $1.25, all
less than the purchase price in the transaction. At December 31, 2000,
the net book value of the Issuer is $1.06 per share, again
significantly less than the purchase price. Given the lack of activity
and income experienced by the Issuer, management considers that net
book value may be the most applicable measure of value.
(2) Management considered, in adopting the Saltzman Report, that Mr.
Saltzman and his firm possess the necessary skill, credentials and
experience to perform such a valuation and to provide a fair, accurate
appraisal of the value of the Common Stock.
(3) Substantial consideration was given to the Issuer's posture in the oil
and gas business. Although the Issuer has experienced some success in
purchasing and selling producing properties, it has not made any
significant drilling discoveries and, therefore, has been unable to
generate interest from the investing community and to obtain the
resultant capital. In addition, the current boom in the oil and gas
11
business has made such acquisitions more difficult on terms acceptable
to the Issuer and has caused the entry into the market of competitors
with substantially more assets and a greater ability to compete. As a
result, management does not perceive that the Issuer is positioned for
significant growth or is a candidate for acquisition by another
entity.
(4) The Issuer's historical inability to attract a market maker and the
delisting of the Common Stock constituted another significant factor
in establishing the purchase price and approving the Transaction.
(5) Management also reviewed the alternatives to the Transaction,
including acquisition by the Issuer of shares of Common Stock owned by
the minority shareholders through a tender offer or acceptance,
through the Issuer's broker, of offers to sell by shareholders, and a
spin-off of the Issuer's assets into a private company. The expense
and certainty that, because the location of numerous shareholders is
unknown, the tender would not be accepted by all minority shareholders
caused rejection of that method. For the same reason, management
believed that waiting for shareholders to offer to sell shares or
making an offer to purchase the Common Stock would be ineffective. The
asset spin-off was rejected because effectuation of that transaction
would leave the Issuer a public shell with the same reporting
responsibilities and issues.
In view of the wide variety of factors considered in connection with its
evaluation of the Transaction, management did not find it practicable to, and
did not, quantify or otherwise assign relative weights to the individual factors
considered in reaching its determinations. However, of primary importance to
management were the independent valuation by Saltzman LLP; the fact that the
purchase price exceeds the prices most recently paid for the Common Stock prior
to delisting and historical market prices, net book value and liquidation value
and going concern value, all acceptable measures of value; the illiquidity of
the Common Stock; the absence of alternative mechanisms to terminate the
Issuer's status as a public company.
The net asset or liquidation value does not consider the earnings of the
Issuer or its goodwill and has merit only as one indicator of value but not the
sole indicia; used in isolation, this test was considered unfair to unaffiliated
shareholders. Historical market prices provided a legitimate factor and
benchmark, but could not be considered in isolation inasmuch as those prices
were established several years ago at a time when such a market existed. Going
concern value may be dependent on an income oriented approach, one requiring a
capitalization of earnings or other estimate of the future earning capacity of
the Issuer. This method is limited in these circumstances since the Issuer has
not had a reliable earnings stream and does not anticipate generating
significant earnings in the future without additional purchases of producing
assets. Any assumptions about the income to be produced by properties which have
not been purchased are hypothetical and, therefore, problematic. The Saltzman
Report generally uses a going concern methodology, which is the most appropriate
for the Transaction when used in conjunction with a market analysis. The Filing
Persons considered that the market comparable approach used by the Saltzman
Report takes all of these types of analyses into account and allows the market
to weigh and appropriate evaluate those factors in a manner which is more
objective and fair to unaffiliated shareholders.
Management also considered purchase prices for stock purchased by the
Issuer during the past year when no market existed for the Common Stock. In
these transactions, a shareholder, generally through a broker, would offer to
sell Common Stock, or set an "ask" price. A floor trader on the Pacific
12
Exchange, who accepted offers to sell the Common Stock would transmit the offer
to a broker selected by the Issuer. The Issuer's broker would accept the offer
to sell at any price at or below a price set by the Issuer, generally $1.50 per
share. The purchase price for the Common Stock in the Transaction is the highest
price paid by the Issuer in these transactions. The Issuer purchased an
immaterial block of stock for $2.00 per share in the first quarter of 2001 in a
transaction not conducted through the floor trader or the Issuer's broker after
the shareholder contacted management, which decided to purchase the stock
without engaging in extended negotiations. The insignificant number of shares
and private nature of the transaction made this price immaterial to management
in setting the purchase price for the Transaction.
Because of the independent valuation performed by Saltzman LLP and the
overwhelming ownership interest of St. Francis, management considered it
unnecessary to retain an unaffiliated representative to act solely on behalf of
the minority shareholders of the Issuer for the purpose of negotiating the terms
of the Transaction and the purchase price for their Common Stock, or for
preparing a report concerning the fairness to such shareholders of the
consideration to be received in the Transaction.
(c) The Transaction is structured in a manner which does not require the
approval of the minority shareholders. Management did not consider whether this
procedure was itself fair to unaffiliated shareholders since the procedure is
authorized by the Colorado Act explicitly for circumstances in which virtually
all of the stock in a Colorado corporation are owned by a parent which takes
most of the risk of the venture. Management believes that the fairness of such a
procedure is a matter determined by the Colorado legislature in establishing the
procedure. That determination is particularly appropriate in this Transaction
since most, if not all, of the unaffiliated shareholders were shareholders of
Petrotech, Inc., which was a shell with no assets and no prospects at the time
of its acquisition by the principals of St. Francis; all value created and all
of the risks undertaken since that acquisition have been attributable to St.
Francis and its principals; and, in the absence of the Transaction, unaffiliated
shareholders would have no liquidity.
(d) All directors of the Issuer are employees of the Issuer. There are no
unaffiliated directors of the Issuer, and the Issuer has not retained specially
an unaffiliated representative to act solely on behalf of the minority
shareholders and to negotiate the terms of the Transaction or prepare a report
concerning the fairness of the Transaction. However, as described above, the
Issuer retained Scott Saltzman, C.P.A. and Saltzman LLP to provide an
independent valuation of the Issuer and the Common Stock in the hands of the
minority shareholders and has established the purchase price for that Common
Stock in reliance on that valuation.
Item 9. Reports, Opinions, Appraisals and Certain Negotiations
(a) The Issuer obtained an appraisal of the value of the initial Common
Stock from Scott Saltzman, C.P.A. and Saltzman LLP. The appraisal did not
consider the fairness of the Transaction or the consideration to be paid to
minority shareholders for their Common Stock. Rather, management adopted the
appraisal to determine the purchase price and to consider the fairness of the
Transaction. The Issuer informed Saltzman LLP about the intended Transaction and
asked Saltzman LLP to appraise the Issuer and the value of the Common Stock.
Management did not suggest a value and did not propose any valuation
methodology. Discussions between management and Saltzman LLP were limited to the
provision of information requested and answers to questions by Saltzman LLP in
the course of its review of the Issuer and valuation of the Common Stock,
13
including provision of annual and quarterly reports of the Issuer with the
Commission for 1996 through 2000, tax returns for tax years 1995 through 1999,
corporate documents, minutes, and other filings with the Commission.
(b) (1) Saltzman Hamma Nelson Massaro, LLP is a Denver, Colorado, firm of
certified public accountants and consultants, with its principal
office at 455 Sherman Street, Suite 400, Denver, Colorado 80203.
(2) Saltzman LLP has been in existence since 1996, and, during that time,
has engaged in services relating to the following matters: accounting;
business planning; estate planning; mergers and acquisitions; systems
development; audit, review, and compilation; business evaluation;
forensic accounting; retirement planning; tax planning; business
capital acquisitions; deferred compensation and plan administration;
litigation consulting; trial services and expert testimony; and
succession planning. With respect to business evaluations, Saltzman
LLP has conducted such appraisals with respect to numerous areas
including mergers and acquisitions, owner disputes, dissenter's rights
and rights of appraisal; and litigation. Saltzman LLP has conducted
such appraisals in diverse industries including oil and gas,
manufacturing, real estate, construction, professional services and
restaurants.
(3) Management selected Saltzman LLP after discussing the proposed
Transaction and the Issuer's need for a valuation with several
investment bankers and accountants who might have provided such a
valuation. Management determined to use Saltzman LLP based upon its
experience and estimated cost of the appraisal.
(4) Neither the Issuer, St. Francis, nor any owners of those two entities
have had any material relationship with Saltzman LLP during the last
two years and no such relationship, other than the retention of
Saltzman LLP for the appraisal, has been agreed upon or is
contemplated. Saltzman LLP was paid $15,000 for conducting the
appraisal.
(5) Saltzman LLP, in providing its appraisal, did not recommend the amount
of consideration to be paid to the minority shareholders for their
Common Stock, but only valued Issuer and the Common Stock.
In valuing the Common Stock, Saltzman LLP utilized an approach designed to
determine fair market value which would provide a fair and reasonable return on
a similar investment, based on an estimate of the risks facing the Issuer and
the return on investment, which would be required on alternative investments
with similar levels of risk. Saltzman LLP used a "fair market value" approach,
based upon the Issuer as a going concern and using the definition of fair market
value provided by Treasury Regulation 20.2031-1(b): "the price at which the
property would change hands between a willing buyer and willing seller, neither
being under any compulsion to buy or sell, and both parties having reasonable
knowledge of relevant facts and the ability to buy and sell."
Among factors considered by Saltzman LLP were the nature and history of the
Issuer's business; the general economic outlook and specific industry outlook;
book value of the Common Stock and financial condition of the Issuer; earning
capacity of the Issuer; dividend paying capacity of the Issuer; existence of
14
goodwill and other intangible value; and market price of stock of corporations
similarly situated to the Issuer and having a trading market. The valuation
methods considered by Saltzman LLP were:
Public Comparable (Guideline). This approach is an income oriented
valuation which calculates future estimated income and capitalizes the
estimated income using a factor derived from that adopted by similar public
companies. This method uses public companies in the same industry to
develop appropriate ratios such as price to earnings or price to equity
which are then multiplied by income results to achieve a value for the
company. The public comparable method is limited where no comparable
companies can be identified and may require adjustments to earnings reports
to adjust for differences in comparable companies. The Saltzman Report uses
this method, as modified by other methods which are weighted by Saltzman
LLC.
Adjusted Net Assets. This method, sometimes called the replacement or
liquidation value, is based on the difference between fair market value of
assets less liabilities. A net assets valuation does not take into account
intangible assets, including goodwill, and best serves to value entities
which are not operating. The Saltzman Report used this method as one of the
indicia of value computed in its final determination, using the public
comparable method.
Capitalization of Earnings. This method is based entirely on the
earnings of the entity, multiplied by a factor derived from similar
companies in the same industry. The inconsistency in the Issuer's earnings
and dependency on uncertain property acquisitions made this method less
reliable and not used in the Saltzman Report.
Dividend Paying Capacity. This method is generally applied to larger
companies with a history of paying dividends, neither of which applies to
the Issuer and, as such, this approach was not used by Saltzman LLP.
Excess Earnings - Treasury Method. Adopted from IRS Regulations, this
method is an income and asset approach which is used principally for
closely held businesses and values a business based on the value of net
assets and a factor for income production (capitalized earnings). Because
this approach works best in businesses which are capital intensive and
because it is a hybrid of methods which were used, Saltzman LLP rejected it
in its analysis of the Issuer.
Discounted Earnings. This method adds all future earnings of the
company over a period of time and discounts the total to the present day.
Again, because the Issuer had had inconsistent earnings, this method was
rejected.
Saltzman LLP evaluated the minimal trading activity of the Common
Stock for the previous five years and concluded that, as such, the fair
market value of the Common Stock may not be reflected in its trading value.
The appraisal also applied various asset-based approaches, income-based
approaches and market-based approaches; compared the relevance of each
approach and arrived at a value of $1.50 per share of Common Stock owned by
the minority shareholders.
15
The application of the public comparable and adjusted net assets methods focused
on internal factors such as the Company's financial posture, its results of
operations and the size and marketability of the minority shareholders' interest
and external factors such as the status of the oil and gas industry, economic
factors affecting the industry and certain risk factors. Saltzman LLP selected
six energy companies which it deemed comparable to the Issuer: Credo Petroleum
Corp., Equity Oil Co., Aspen Exploration Corp., Geoservices Inc., Maynard Oil
Co., and Royale Energy Inc.. The Saltzman Report then applied three ratios for
each and for the Issuer: price/book value; price/earnings; and price/sales:
Past Twelve Months
------------------
Price/ Price/ Price/
Book Earnings Sales
---- -------- -----
Credo Petroleum Corp. 1.17 15.56 4.65
Equity Oil Co. 0.95 9.68 2.03
Aspen Exploration Corp. 1.07 5.71 2.84
Geosources Inc. 1.08 5.71 1.60
Maynard Oil Co. 0.82 9.50 1.86
Royale Energy Inc. 1.57 12.50 3.07
Average 1.11 9.78 2.67
Median 1.08 9.59 2.43
Comparable (Guideline) company medians 1.08 9.59 2.43
x x x
Valuation adjustment (15%) 85% 85% 85%
Adjusted valuation multiples 0.92 8.15 2.07
x x x
Great Northern Gas Company
Book / Earnings / Sales $3,231,094 $ 674,560 $2,255,954
Minority ownership interest $2,959,729 $5,499,000 $4,663,431
Saltzman LLP accorded substantial weight to the absence of a trading market for
the Common Stock owned by minority shareholders. Because shareholders had been
forced to rely on the Company as the principal purchaser of Common Stock,
studies which demonstrated the applicability of a minority and restricted share
discount were pertinent to the appraisal. A 15% discount was considered
appropriate and the appraisal noted the lack of technical advancement, staff,
financial sophistication of management and returns on investment as further
limiting the value of the Common Stock.
Saltzman LLP weighted different asset and earnings valuation methods equally.
That analysis arrived at a value of $1.31 per share of Common Stock. The limited
trading history placed a value at between $0.75 and $1.50 per share. Recent
purchases were made at between $1.25 and $1.50 per share. The Saltzman Report
applying and weighted equally four factors: net asset value, price/book value,
price/earnings and price/sales:
16
Value Weighting Total
----- --------- -----
Comparable (Guideline) company - Price / Book $2,959,729 25% = $ 739,932
Comparable (Guideline) company - Price / Earnings $5,499,000 25% = $1,374,750
Comparable (Guideline) company - Price / Sales $4,663,431 25% = $1,165,858
Adjusted Net Assets $3,231,094 25% = $ 807,774
Minority ownership interest value of the total Company $4,088,314
Lack of marketability discount (15%) 85%.
Fair market value of the Company with lack of marketability
and minority interest discounts $3,475,067
Common stock shares issued and outstanding 2,804,720
The resulting analysis determined the value of the Common Stock in the hands of
the minority shareholders at $1.50 per share.
(c) The Saltzman Report shall be made available for inspection and copying
at the principal executive offices of the Issuer during its regular business
hours by any interested shareholder of the Issuer or any representative
designated in writing by such shareholder. A copy of the Saltzman Report will be
transmitted by the Issuer to any interested shareholder of the Issuer or
representative who has been designated in writing by such shareholder upon
written request and at the expense of the requesting shareholder.
Item 10. Source and Amounts of Funds or Other Consideration.
The funds to be used to purchase the shares of Common Stock owned by the
minority shareholders of the Issuer will be obtained from cash deposits of the
Issuer. At a purchase price of $1.50 per share, an aggregate of $203,475 will be
paid to purchase these shares.
Management of the Issuer estimates that it will expend or incur
approximately $29,000 in expenses to effectuate the Transaction for the
following purposes and in the following amounts:
Purpose Amount
------- ------
Legal Fees and Costs $10,000
Accounting Expenses 15,000
Mailing, Filing, Printing and Other Costs 4,000
Item 11. Interest in Securities of the Issuer
(a) St. Francis owns 2,647,255 shares of Common Stock; Frank S. DiGrappa
owns 182,000 shares and Thomas L. DiGrappa owns 50,000 shares.
(b) Not applicable.
Item 12. The Solicitation or Recommendation.
Not applicable.
17
Item 13. Financial Information
(a) (1) The Issuer's audited financial statements for its fiscal years 1998
and 1999 and unaudited financial statements for fiscal year 2000 are attached as
Exhibit 13(a)(1) to this Statement.
(2) Not applicable.
(3) For the two most recent fiscal years, the ratio of the Issuer's
earnings to its fixed charges is as follows: Because the Issuer had no debt or
other fixed charges during the appropriate periods, this item is inapplicable.
(4) The Issuer's book value per share at December 31, 1999 was $0.93, and
its book value per share at December 31, 2000 was $1.06.
Item 14. Persons and Assets Employed, Retainer Utilized
(a) The Issuer's officers, including its president and secretary, in
consultation with the Issuer's counsel, will provide notices, answer inquiries
from minority shareholders and others, process claims asserting dissenter's
rights, and accomplish other matters necessary to the Transaction. Expenses
incident to the transaction will be paid by the Issuer out of its cash reserves.
(b) No third party has been retained by the Issuer to make solicitations or
recommendations in connection with the Transaction.
Item 15. Additional Information
Not applicable.
Item 16. Material to be Filed as Exhibits
(a) Not applicable.
(b) Not applicable.
(c) Appraisal of Saltzman Hamma Nelson Massaro, LLP, dated March 12, 2001.
(d) Not applicable.
(e) Not applicable.
(f) Letter to shareholders, enclosing a copy of Articles of Merger between
the Issuer and St. Francis. Notice of Dissenter's Rights, including demand form
and copy of pertinent provisions of the Colorado Act.
(g) Not applicable.
18
Signature
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this Statement is true, complete and correct.
GREAT NORTHERN GAS COMPANY
May 23, 2001 /s/ Frank S. Di Grappa
----------------------------------------------
By: Frank S. Di Grappa, Chairman of the Board
ST. FRANCIS RESOURCES, INC.
By: /s/ Frank S. DiGrappa
------------------------------------------
Frank S. DiGrappa, President
/s/ Frank S. DiGrappa
------------------------------------------
Frank S. DiGrappa
/s/ Thomas L. DiGrappa
------------------------------------------
Thomas L. DiGrappa
The original statement shall be signed by each person on whose behalf the
statement is filed or his authorized representative. If the statement is signed
on behalf of a person by his authorized representative (other than an executive
officer or general partner of the person filing this statement), evidence of the
representative's authority to sign on behalf of such person shall be filed with
the statement. The name and any title of each person who signs the statement
shall be typed or printed beneath his signature.
19
Exhibit 13(a)(1)
Financial Statements for Fiscal Years 1998 and 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Great Northern Gas Company:
We have audited the balance sheet of Great Northern Gas Company as of December
31, 1998 and the related statements of earnings, stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Great Northern Gas Company as
of December 31, 1998, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
CAUSEY DEMGEN AND MOORE, INC.
Denver, Colorado
March 12, 1999
1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Great Northern Gas Company:
We have audited the accompanying statement or earnings, stockholders' equity and
cash flows of GREAT NORTHERN GAS COMPANY (a Colorado corporation) for the year
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Great
Northern Gas Company for the year then ended December 31, 1997, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Denver, Colorado
February 14, 1999
2
GREAT NORTHERN GAS COMPANY
BALANCE SHEET
AS OF DECEMBER 31, 1998
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 2,075,657
Accounts receivable:
Oil and gas sales 24,469
Joint interest billings 162,349
Other 9,619
------------
Total current assets 2,272,094
------------
PROPERTY AND EQUIPMENT, at cost:
Oil and gas properties, accounted for using
the full cost method 2,054,565
Furniture, fixtures and automobile 60,105
------------
2,114,670
Less accumulated depreciation, depletion
and amortization 899,775
------------
Net property and equipment 1,214,895
------------
$ 3,486,989
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable:
Trade $ 6,485
Oil and gas sales 153,902
Income taxes 10,847
Other 71,704
------------
Total current liabilities 242,938
------------
DEFERRED INCOME TAXES 201,128
------------
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value; authorized
50,000,000 shares, issued and outstanding 3,079,710 30,797
Additional paid-in capital 38,680,024
Accumulated deficit (35,667,898)
------------
Total stockholders' equity 3,042,923
------------
$ 3,486,989
============
The accompanying notes to financial statements
are an integral part of this balance sheet.
3
GREAT NORTHERN GAS COMPANY
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
---------- -------------
REVENUES:
Oil and gas sales $ 806,434 $1,108,371
Gain on sale of properties and equipment 477,332 351,760
Interest and other income 156,081 216,108
---------- -------------
1,439,847 1,676,239
---------- -------------
COSTS AND EXPENSES:
Lease operating 434,897 391,718
Production taxes 40,447 84,075
Depreciation, depletion and
amortization 224,333 274,675
General and administrative 712,714 737,528
---------- -------------
1,412,391 1,487,996
---------- -------------
EARNINGS BEFORE INCOME TAXES 27,456 188,243
---------- -------------
PROVISION FOR INCOME TAX EXPENSE :
Current 10,847 23,360
Deferred 8,967 19,994
---------- -------------
19,814 43,354
---------- -------------
NET EARNINGS $ 7,642 $ 144,889
========== =============
BASIC EARNINGS PER SHARE OF
COMMON STOCK $ * $ .04
========== =============
WEIGHTED AVERAGE SHARES OF
COMMON STOCK OUTSTANDING 3,112,419 3,441,569
========== =============
* Less than $.01 per share
The accompanying notes to financial statements
are an integral part of these statements.
4
GREAT NORTHERN GAS COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit
------ ------ ------- -------
BALANCE AT
DECEMBER 31, 1996 3,603,313 $ 36,033 $ 39,502,517 $(35,820,429)
Shares acquired
for retirement (305,970) (3,058) (498,504) --
Net earnings -- -- -- 144,889
------------ ------------ ------------ ------------
BALANCE AT
DECEMBER 31, 1997 3,297,343 32,975 39,004,013 (35,675,540)
Shares acquired
for retirement (217,633) (2,178) (323,989) --
Net earnings -- -- -- 7,642
------------ ------------ ------------ ------------
BALANCE AT
DECEMBER 31, 1998 3,079,710 $ 30,797 $ 38,680,024 $(35,667,898)
============ ============ ============ ============
The accompanying notes to financial statements
are an integral part of these statements.
5
GREAT NORTHERN GAS COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 7,642 $ 144,889
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Gain on sale of property and equipment (477,332) (351,760)
Depreciation, depletion and amortization 224,333 274,675
Deferred income tax expense 8,967 19,994
Decrease in accounts receivable 43,285 31,276
Increase (decrease) in current liabilities (116,558) 171,380
----------- -----------
Net cash provided by (used in) operating activities (309,663) 290,454
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 1,006,036 1,543,015
Additions to property and equipment (106,935) (1,166,094)
Proceeds from sale of short term investments -- 242,474
----------- -----------
Net cash provided by investing activities 899,101 619,395
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of Common Stock (326,167) (501,562)
----------- -----------
Net cash used in financing activities (326,167) (501,562)
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 263,271 408,287
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 1,812,386 1,404,099
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 2,075,657 $ 1,812,386
=========== ===========
The accompanying notes to financial statements
are an integral part of these statements.
6
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
Great Northern Gas Company, (the "Company") was reincorporated on September 15,
1989 as a Colorado corporation. The Company is an independent oil and gas
company engaged in onshore crude oil and natural gas exploration, development
and production in the continental United States.
Statements of Cash Flows
- ------------------------
Cash in excess of daily requirements is invested in money market accounts and
commercial paper. Such investments with maturities of three months or less are
deemed to be cash equivalents for purposes of the statements of cash flows. No
cash was paid for interest during 1998 and 1997.
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 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. There
are many factors, including global events, that may influence the production,
processing, marketing, and valuation of crude oil and natural gas. A reduction
in the valuation of oil and gas properties resulting from declining prices or
production could adversely impact depletion rates and ceiling test limitations.
Concentration of Credit Risk
- ----------------------------
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash, cash equivalents and trade receivables.
The Company places its cash with high quality financial institutions. At times
during the year, the balance at any one financial institution may exceed FDIC
limits.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts of the Company's financial instruments, namely cash and
cash equivalents and short term investments held to maturity, approximate their
fair values because of the short maturity of these instruments.
Property and Equipment
- ----------------------
The Company uses the full cost method of accounting for oil and gas properties.
Under this method, all costs associated with property acquisition, exploration
and development activities, including costs of unsuccessful exploration, are
capitalized within a cost center; subject to a cost ceiling limitation, which
basically limits such costs to the present value of future net revenues after
7
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
tax from proved reserves discounted at 10%. The Company's oil and gas properties
are located within the continental United States, which constitutes one cost
center. No gain or loss is recognized upon normal sale or abandonment of oil and
gas properties unless the gain or loss significantly alters the relationship
between capitalized costs and proved oil and gas reserves of the cost center.
Maintenance, repairs, renewals and minor replacements are charged to expense as
incurred. Major additions and improvements are capitalized. When assets other
than oil and gas properties are sold, retired or otherwise disposed of, the cost
and related accumulated depreciation are eliminated from the accounts and gains
or losses are included in the statements of earnings.
Depreciation, Depletion and Amortization
- ----------------------------------------
Depreciation, depletion and amortization of oil and gas properties is computed
on a units-of-production method based on proved oil and gas reserves. The
provision for depreciation, depletion and amortization is calculated by applying
the rate to net capitalized property costs plus estimated future development
costs. The Company uses the straight-line method of depreciation for assets
other than oil and gas properties.
Income Taxes
- ------------
The Company accounts for taxes pursuant to Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes". SFAS No. 109 requires
the measurement of deferred income tax assets for deductible temporary
differences and operating loss carry forwards and deferred tax liabilities for
taxable temporary differences. Measurement of current and deferred income tax
liabilities and assets is based on provisions of enacted tax law; the effects of
future changes in tax laws or rates are not anticipated. Deferred tax assets
primarily result from net operating loss carry forwards and from the recognition
of depreciation, depletion and amortization in different periods for financial
reporting and tax purposes.
Earnings Per Share
- ------------------
Effective December 15, 1997, the Company has adopted the provisions of SFAS 128,
"Earnings Per Share". SFAS 128 requires entities to present both Basic Earnings
Per Share ("EPS") and Diluted EPS. Basic EPS excludes dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Potential dilution of securities exercisable into common stock were computed
using the treasury stock method based on the average fair market value of the
stock.
8
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
Years ended December 31,
------------------------------------------------------------------------
1998 1997
-------------------------------- --------------------------------
Earnings Shares Per Share Earnings Shares Per Share
-------- ------ --------- -------- ------ ---------
(in thousands, except per share amounts)
Basic EPS $ 8 3,112 $ * $ 145 3,442 $ .04
Effect of diluted securities:
Stock options outstanding -- 170 -- -- 428 --
-------- ----- -------- ------ ----- -------
Diluted EPS $ 8 3,282 $ * $ 145 3,870 $ .04
======== ===== ======== ====== ===== =======
*Less than $.01 per share
2. SALE OF OIL AND PROPERTIES
During 1998 the Company sold its Haybarn Area properties for $1,136,046. Because
such sales represented approximately 25% of the Company's reserves fair value at
the time, a gain of $477,332 was recorded. The Company also sold its East
Plateau properties for $70,000.
During 1997 the Company sold its properties at South Douglas Creek for $700,000
and its White River Dome and Gasaway properties for $728,000. Because such sales
represented approximately 50% of the Company's reserves at the time of sale, a
gain of $351,760 was recorded. The proceeds from the South Douglas Creek sale
were placed in a tax free exchange account and subsequently used to purchase the
Long Beach Unit in California.
3. OIL AND GAS OPERATIONS
Capitalized costs and related accumulated depreciation, depletion and
amortization pertaining to oil and gas properties at December 31, 1998 are set
forth below:
Capitalized costs:
Evaluated $ 2,009,799
Unevaluated 44,766
Less accumulated depreciation,
depletion and amortization (858,833)
-----------
Net capitalized costs $ 1,195,732
===========
Costs incurred in oil and gas operations are as follows for the years ended
December 31:
1998 1997
---------- ----------
Oil and gas property acquisitions:
Proved $ -- $ 864,384
Unproved 2,831 73,435
Exploration 24,470 62,156
Development 79,634 166,119
---------- ----------
$ 106,935 $1,166,094
========== ==========
Average depletion expense per
MCF of natural gas produced $ .50 $ .58
========== ==========
9
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
3. OIL AND GAS OPERATIONS - (Continued)
The Company received 10 percent or more of its oil and gas revenues from the
following customers for the years indicated.
Customer 1998 1997
-------- ---- ----
A --% 10%
B 53% 29%
C --% 20%
D 31% 19%
4. COMMON STOCK-SALES, RETIREMENTS AND STOCK OPTIONS
On February 24, 1994, in accordance with the terms of the registration statement
filed with the Securities and Exchange Commission on April 9, 1993, the Company
sold and issued 220,467 Units at a price of $4 per Unit for net proceeds of
$786,000. The Units consist of 440,934 shares of Common Stock and 220,467 Class
A Warrants. The Class A Warrants are detachable from the Units and may be
separately transferred in the over-the-counter market immediately following
issuance unless otherwise mutually determined by the Company and the
Underwriter. Each Class A Warrant will entitle the holder thereof to purchase,
at a price of $3.00, at any time within a period of five years from April 9,
1993, one share of Common Stock of the Company. The Class A Warrants shall be
redeemable by the Company for a price of $.001 per Warrant upon ten (10) days
written notice if the bid price of the Common Stock is at least 125% of the
exercise price of the Warrants for at least ten (10) consecutive business days
prior to the notice of redemption. The warrants expired in April, 1998. The
Company also issued 5,000 shares of Common Stock for services associated with
the issuance of the Units.
During 1998 and 1997 the Company repurchased 217,633 and 305,970 shares of
Common Stock, respectively, which were retired.
On September 15, 1989 the Company's shareholders approved a stock option plan
whereby up to 500,000 shares of the Company's Common Stock are reserved for
issuance and may be granted to officers, directors and certain key employees at
the discretion of the Board of Directors. The stock option price must be at
least 100% of the fair market value at the date of grant unless the optionee
owns more than 10% of the Company's Common Stock in which case the price must be
110% of fair market value. Options may be exercised at the date of grant unless
the terms of the grant specify otherwise. Qualified options must be exercised
within ten years unless the grantee owns more than 10% of the Company's Common
Stock, in which case options must be exercised within five years.
10
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
4. COMMON STOCK-SALES, RETIREMENTS AND STOCK OPTIONS - (Continued)
At December 31, 1989, options on 275,000 shares of Common Stock had been granted
at a price of $.10 per share. During 1990, 50,000 of said options were exercised
and an additional 225,000 options were granted to the Company's President and
Vice President at a price of $.50 per share, which was the estimated market
value at the date of grant. Said options could be exercised at any time over the
period ending April 5, 1998. No options were exercised for the years ended
December 31, 1998 and 1997 and they expired in 1998.
On July 11, 1994, the Company's shareholders approved a nonqualified stock
option plan for key officers, employees and directors covering 500,000 shares of
the Company's Common Stock. Options granted under the nonqualified plan to any
one participant shall not exceed 200,000 shares. On October 4, 1994, 180,000
options were granted under this plan. Said options are exercisable at $1.00 per
share, not less than six months nor more than ten years from the date of the
grant. Options granted during 1994 were for restricted shares, which must be
held for a minimum of two years. No options were granted or exercised in 1998 or
1997.
At December 31, 1997 and 1998 there were outstanding 630,000 options with a
weighted average exercise price of $.50 and 180,000 options with a weighted
average exercise price of $1.00, respectively.
5. OVERRIDING ROYALTY PLAN
On September 15, 1989 the Company's shareholders approved an overriding royalty
plan whereby the Company's President can assign overriding royalty interests
from the Company's prospects to an overriding royalty plan for the benefit of
qualified employees. Distributions from the plan are determined on a
year-to-year basis and made only to current employees. During 1998 and 1997,
$47,080 and $77,200 was paid to plan participants.
6. INCOME TAXES
The Company's provision for income taxes at December 31, 1998 and 1997 includes
deferred tax expense of approximately $8,967 and $19,994, respectively.
The difference between the provision for income taxes and the amount which would
be determined by applying the statutory federal income tax rate to earnings
before income taxes is analyzed below for the years ended December 31:
1998 1997
-------- --------
Tax expense (benefit) by applying the statutory federal
income tax rate to pretax accounting income $ 9,610 $ 65,885
Increase (decrease) in tax from:
State taxes 824 5,647
Other 9,380 (28,178)
-------- --------
$ 19,814 $ 43,354
======== ========
11
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
6. INCOME TAXES - (Continued)
The Company's net deferred tax liability at December 31, 1998 and 1997 primarily
relates to book basis being in excess of tax basis. Long-term deferred assets
and liabilities are comprised of the following at December 31:
1998 1997
--------- ---------
Book basis in excess of tax basis $(266,918) $(267,797)
Loss carry forwards 49,640 59,486
Other 16,150 16,150
--------- ---------
Net deferred tax liability $(201,128) $(192,161)
========= =========
The Company has approximately $16,000,000 of net operating loss carry forwards
generated prior to December 31, 1987, that will fully expire in 2002. As the
Company may only use approximately $26,000 annually due to an equity change that
occurred in December, 1987, the carry forward tax asset above does not include
any amounts in excess of this limitation.
7. COMMITMENTS AND CONTINGENCIES
General and administrative expenses include rent expense for office facilities
and equipment of $26,072 and $24,291 for the years ended 1998 and 1997,
respectively.
The Company entered into an office lease during 1994 which expires in August
1999. Minimum payments due in 1999 are $13,776.
12
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
8. SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
Estimated Quantities of Natural Gas Reserves
- --------------------------------------------
All of the Company's natural gas reserves are located in the United States. The
Company's oil reserves at December 31, 1998 and 1997 are included herein
assuming one barrel of oil equals six mcf of gas. The following reserve related
information is based on estimates prepared by independent petroleum engineers.
Reserve estimates are inherently imprecise and are continually subject to
revisions based on production history, results of additional exploration and
development, prices of oil and gas and other factors.
1998 1997
---------- ---------
Proved natural gas reserves (MCF):
Beginning of year 6,663,456 5,817,136
Revisions of previous estimates 1,184,112 (460,735)
Purchases of reserves in place -- 4,655,656
Sale of reserves in place (4,655,656) (2,872,493)
Production (426,797) (476,108)
---------- ----------
End of year 2,765,115 6,663,456
========== ==========
Proved developed natural gas reserves (MCF):
Beginning of year 1,029,799 2,631,000
========== ==========
End of year 2,765,115 1,029,799
========== ==========
The Company believes that current working capital combined with standard
industry joint ventures and future cash flows from operations, should be
adequate to finance the drilling of the offset locations.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Natural Gas Reserves
- --------------------------------------------------------------------------------
The following is the standardized measure of discounted future net cash flows
and changes therein relating to proved natural gas reserves. Future net cash
flows were computed using year-end prices and costs that relate to existing
proved natural gas reserves in which the Company has mineral interests.
13
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
8. SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Natural Gas Reserves - (Continued)
- --------------------------------------------------------------------------------
1998 1997
------------ ------------
Future cash inflows $ 4,159,000 $ 11,760,000
Future production and development costs (1,979,000) (6,316,000)
Future income tax expense (266,000) (577,000)
------------ ------------
Future net cash flows 1,914,000 4,867,000
10% annual discount for estimated
timing of cash flows (517,000) (1,988,000)
------------ ------------
Standardized measure of discounted
future net cash flows $ 1,397,000 $ 2,879,000
============ ============
The following are the principal sources of change in the standardized measure of
discounted future net cash flows for the years ended December 31:
1998 1997
----------- -----------
Changes:
Sales of natural gas produced,
net of production costs $ (331,000) $ (633,000)
Accretion of discount 288,000 592,000
Net changes in prices and
production costs (1,721,000) (3,318,000)
Change in future development
costs including costs incurred
during the year 526,000 78,000
Revisions of previous quantity
estimates 1,316,000 (780,000)
Purchases of reserves in place -- 1,178,000
Sales of reserves in place (1,178,000) (3,076,000)
Net change in income taxes (230,000) 1,293,000
Other (152,000) 1,624,000
----------- -----------
Net changes (1,482,000) (3,042,000)
Balance at beginning of year 2,879,000 5,921,000
----------- -----------
Balance at end of year $ 1,397,000 $ 2,879,000
=========== ===========
The Company has not filed with or included in reports to any Federal authority
or agency, other than the Securities and Exchange Commission, any estimates of
proved natural gas reserves.
14
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Great Northern Gas Company:
We have audited the balance sheet of Great Northern Gas Company as of December
31, 1999 and the related statements of earnings, stockholders' equity and cash
flows for each of the years ended December 31, 1999 and 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Great Northern Gas Company as
of December 31, 1999, and the results of its operations and its cash flows for
each of the years ended December 31, 1999 and 1998, in conformity with generally
accepted accounting principles.
CAUSEY DEMGEN AND MOORE, INC.
Denver, Colorado
March 15, 2000
15
GREAT NORTHERN GAS COMPANY
BALANCE SHEET
AS OF DECEMBER 31, 1999
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 1,516,081
Accounts receivable:
Oil and gas sales 43,836
Joint interest billings 4,336
Affiliate 1,103
Other 9,619
------------
Total current assets 1,574,975
------------
PROPERTY AND EQUIPMENT, at cost:
Oil and gas properties, accounted for using
the full cost method 2,546,038
Furniture, fixtures and automobile 35,433
------------
2,581,471
Less accumulated depreciation, depletion
and amortization 1,013,993
------------
Net property and equipment 1,567,478
------------
$ 3,142,453
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable:
Oil and gas sales $ 124,360
Taxes Payable 64,886
Other 9,667
------------
Total current liabilities 198,913
------------
DEFERRED INCOME TAXES 84,978
------------
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value; authorized
50,000,000 shares, issued and
outstanding 3,072,690 30,727
Additional paid-in capital 38,674,814
Accumulated deficit (35,846,979)
------------
Total stockholders' equity 2,858,562
------------
$ 3,142,453
===========
The accompanying notes to financial statements
are an integral part of this balance sheet.
16
GREAT NORTHERN GAS COMPANY
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
----------- -----------
REVENUES:
Oil and gas sales $ 402,879 $ 806,434
Gain on sale of properties and equipment 2,552 477,332
Interest and other income 91,537 156,081
----------- -----------
496,968 1,439,847
----------- -----------
COSTS AND EXPENSES:
Lease operating 155,970 434,897
Production taxes 19,957 40,447
Depreciation, depletion and
amortization 139,810 224,333
General and administrative 476,462 712,714
----------- -----------
792,199 1,412,391
----------- -----------
EARNINGS/LOSS BEFORE INCOME TAXES (295,231) 27,456
----------- -----------
PROVISION FOR INCOME TAX EXPENSE(BENEFIT):
Current -- 10,847
Deferred (116,150) 8,967
----------- -----------
(116,150) 19,814
----------- -----------
NET EARNINGS(LOSS) $ (179,081) $ 7,642
=========== ===========
BASIC EARNINGS(LOSS) PER SHARE
OF COMMON STOCK $ (.06) $ *
=========== ===========
WEIGHTED AVERAGE SHARES OF
COMMON STOCK OUTSTANDING 3,075,360 3,112,419
=========== ===========
* Less than $.01 per share
The accompanying notes to financial statements
are an integral part of these statements.
17
GREAT NORTHERN GAS COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Additional
Common Stock Paid in Accumulated
Shares Amount Capital Deficit
------ ------ ------- -------
BALANCE AT
DECEMBER 31, 1997 3,297,343 $ 32,975 $ 39,004,013 $(35,675,540)
Shares acquired
for retirement (217,633) (2,178) (323,989) --
Net earnings -- -- -- 7,642
------------ ------------ ------------ ------------
BALANCE AT
DECEMBER 31, 1998 3,079,710 30,797 38,680,024 (35,667,898)
Shares acquired
for retirement (7,020) (70) (5,210) --
Net earnings -- -- -- (179,081)
------------ ------------ ------------ ------------
BALANCE AT
DECEMBER 31, 1999 3,072,690 $ 30,727 $ 38,674,814 $(35,846,979)
============ ============ ============ ============
The accompanying notes to financial statements
are an integral part of these statements.
18
GREAT NORTHERN GAS COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings(loss) $ (179,081) $ 7,642
Adjustments to reconcile net earnings(loss)
to net cash used in operating activities:
Gain on sale of property and equipment (2,552) (477,332)
Depreciation, depletion and amortization 139,810 224,333
Deferred income tax expense (116,150) 8,967
Decrease in accounts receivable (30,071) 43,285
Decrease in current liabilities (44,025) (116,558)
----------- -----------
Net cash used in operating activities (232,069) (309,663)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 143,391 1,006,036
Additions to property and equipment (465,618) (106,935)
----------- -----------
Net cash provided by (used in) investing activities (322,227) 899,101
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of Common Stock (5,280) (326,167)
----------- -----------
INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS (559,576) 263,271
----------- -----------
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 2,075,657 1,812,386
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 1,516,081 $ 2,075,657
=========== ===========
The accompanying notes to financial statements
are an integral part of these statements.
19
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
Great Northern Gas Company, (the "Company") was reincorporated on September 15,
1989 as a Colorado corporation. The Company is an independent oil and gas
company engaged in onshore crude oil and natural gas exploration, development
and production in the continental United States.
Statements of Cash Flows
- ------------------------
Cash in excess of daily requirements is invested in money market accounts and
commercial paper. Such investments with maturities of three months or less are
deemed to be cash equivalents for purposes of the statements of cash flows. No
cash was paid for interest during 1999 and 1998.
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 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. There
are many factors, including global events, that may influence the production,
processing, marketing, and valuation of crude oil and natural gas. A reduction
in the valuation of oil and gas properties resulting from declining prices or
production could adversely impact depletion rates and ceiling test limitations.
Concentration of Credit Risk
- ----------------------------
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash, cash equivalents and trade receivables.
The Company places its cash with high quality financial institutions. At times
during the year, the balance at any one financial institution may exceed FDIC
limits.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts of the Company?s financial instruments, namely cash and
cash equivalents and short term investments held to maturity, approximate their
fair values because of the short maturity of these instruments.
Property and Equipment
- ----------------------
The Company uses the full cost method of accounting for oil and gas properties.
Under this method, all costs associated with property acquisition, exploration
and development activities, including costs of unsuccessful exploration, are
capitalized within a cost center; subject to a cost ceiling limitation, which
20
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
basically limits such costs to the present value of future net revenues after
tax from proved reserves discounted at 10%. The Company's oil and gas properties
are located within the continental United States, which constitutes one cost
center. No gain or loss is recognized upon normal sale or abandonment of oil and
gas properties unless the gain or loss significantly alters the relationship
between capitalized costs and proved oil and gas reserves of the cost center.
Maintenance, repairs, renewals and minor replacements are charged to expense as
incurred. Major additions and improvements are capitalized. When assets other
than oil and gas properties are sold, retired or otherwise disposed of, the cost
and related accumulated depreciation are eliminated from the accounts and gains
or losses are included in the statements of earnings.
Depreciation, Depletion and Amortization
- ----------------------------------------
Depreciation, depletion and amortization of oil and gas properties is computed
on a units-of-production method based on proved oil and gas reserves. The
provision for depreciation, depletion and amortization is calculated by applying
the rate to net capitalized property costs plus estimated future development
costs. The Company uses the straight-line method of depreciation for assets
other than oil and gas properties.
Income Taxes
- ------------
The Company accounts for taxes pursuant to Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes". SFAS No. 109 requires
the measurement of deferred income tax assets for deductible temporary
differences and operating loss carry forwards and deferred tax liabilities for
taxable temporary differences. Measurement of current and deferred income tax
liabilities and assets is based on provisions of enacted tax law; the effects of
future changes in tax laws or rates are not anticipated. Deferred tax assets
primarily result from net operating loss carry forwards and from the recognition
of depreciation, depletion and amortization in different periods for financial
reporting and tax purposes.
Earnings Per Share
- ------------------
The Company has adopted the provisions of SFAS 128, "Earnings Per Share". SFAS
128 requires entities to present both Basic Earnings Per Share ("EPS") and
Diluted EPS. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Potential dilution of
securities exercisable into common stock were computed using the treasury stock
method based on the average fair market value of the stock. In 1999 Diluted EPS
was not presented as the calculation is anti-dilutive. In 1998, the effect on
Basic EPS is immaterial.
21
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
2. SALE OF OIL AND PROPERTIES
During 1998 the Company sold its Haybarn Area properties for $1,136,046. Because
such sales represented approximately 25% of the Company's reserves fair value at
the time, a gain of $477,332 was recorded. The Company also sold its East
Plateau properties for $70,000.
3. OIL AND GAS OPERATIONS
Capitalized costs and related accumulated depreciation, depletion and
amortization pertaining to oil and gas properties at December 31, 1999 are set
forth below:
Capitalized costs:
Evaluated $ 2,320,629
Unevaluated 225,409
Less accumulated depreciation,
depletion and amortization (989,723)
-----------
Net capitalized costs $ 1,556,315
===========
Costs incurred in oil and gas operations are as follows for the years ended
December 31:
1999 1998
---------- -----------
Oil and gas property acquisitions:
Proved $ 205,601 $ --
Unproved 187,157 2,831
Exploration 26,776 24,470
Development 46,084 79,634
---------- -----------
$ 465,618 $ 106,935
========== ===========
Average depletion expense per
MCF of natural gas produced $ .78 $ .50
========== ===========
The Company received 10 percent or more of its oil and gas revenues from the
following customers for the years indicated.
Customer 1999 1998
-------- ---- ----
A 46% 53%
B --% 31%
C 35% N/A
22
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
4. COMMON STOCK-SALES, RETIREMENTS AND STOCK OPTIONS
During 1999 and 1998 the Company repurchased 7,020 and 217,633 shares of Common
Stock, respectively, which were retired.
On September 15, 1989 the Company's shareholders approved a stock option plan
whereby up to 500,000 shares of the Company's Common Stock are reserved for
issuance and may be granted to officers, directors and certain key employees at
the discretion of the Board of Directors. The stock option price must be at
least 100% of the fair market value at the date of grant unless the optionee
owns more than 10% of the Company's Common Stock in which case the price must be
110% of fair market value. Options may be exercised at the date of grant unless
the terms of the grant specify otherwise. Qualified options must be exercised
within ten years unless the grantee owns more than 10% of the Company's Common
Stock, in which case options must be exercised within five years.
On July 11, 1994, the Company's shareholders approved a nonqualified stock
option plan for key officers, employees and directors covering 500,000 shares of
the Company's Common Stock. Options granted under the nonqualified plan to any
one participant shall not exceed 200,000 shares. On October 4, 1994, 180,000
options were granted under this plan. Said options are exercisable at $1.00 per
share, not less than six months nor more than ten years from the date of the
grant. Options granted during 1994 were for restricted shares, which must be
held for a minimum of two years. No options were granted or exercised in 1999 or
1998.
At December 31, 1998 and 1999 there were outstanding 180,000 options with a
weighted average exercise price of $1.00.
5. OVERRIDING ROYALTY PLAN
On September 15, 1989, the Company's shareholders approved an overriding royalty
plan whereby the Company's President can assign overriding royalty interests
from the Company's prospects to an overriding royalty plan for the benefit of
qualified employees. Distributions from the plan are determined on a
year-to-year basis and made only to current employees. During 1999 and 1998,
$11,849 and $47,080 was paid to plan participants (See Note 8).
23
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
6. INCOME TAXES
The Company's provision for income taxes at December 31, 1999 and 1998 includes
deferred tax expense of approximately $116,150 and $8,967, respectively.
The difference between the provision for income taxes and the amount which would
be determined by applying the statutory federal income tax rate to earnings
before income taxes is analyzed below for the years ended December 31:
1999 1998
----------- ------------
Tax expense (benefit) by applying the statutory federal
income tax rate to pretax accounting income $ (100,379) $ 9,610
Increase (decrease) in tax from:
State taxes (11,809) 824
Other (3,962) 9,380
---------- ------------
$ (116,150) $ 19,814
========== ============
The Company's net deferred tax liability at December 31, 1999 and 1998 primarily
relates to book basis being in excess of tax basis. Long-term deferred assets
and liabilities are comprised of the following at December 31:
1999 1998
---------- ----------
Book basis in excess of tax basis $ (256,435) $ (266,918)
Loss carry forwards 155,041 49,640
Other 16,416 16,150
---------- ----------
Net deferred tax liability $ (84,978) $ (201,128)
========== ==========
The Company has approximately $16,000,000 of net operating loss carry forwards
generated prior to December 31, 1987, that will fully expire in 2002. As the
Company may only use approximately $26,000 annually due to an equity change that
occurred in December, 1987, the carry forward tax asset above does not include
any amounts in excess of this limitation.
7. COMMITMENTS
The company leases office space under a lease agreement which expires August 31,
2002. Future minimum lease payments on the office lease amount to the following
at December 13, 1999:
2000 $26,896
2001 $27,880
2002 $19,024
General and administrative expenses include rent expense for office facilities
and equipment of $28,734 and $26,072 for the years ended 1999 and 1998,
respectively.
24
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
8. RELATED PARTY TRANSACTIONS
The Company's interest in the Long Beach Unit had been acquired in 1997 and held
for the benefit of the officers of the Company in the overriding royalty plan.
The Officers had previously transferred their overriding royalty interests in
various other properties to the Company to facilitate the sale of said
properties in exchange for the Long Beach Unit. The Long Beach interest was
assigned to the officers mentioned as of January 1, 1999.
During 1999 the Company loaned an Officer $400,000 which was subsequently repaid
within 1999.
9. SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
Estimated Quantities of Natural Gas Reserves
- --------------------------------------------
All of the Company's natural gas reserves are located in the United States. The
Company's oil reserves at December 31, 1999 and 1998 are included herein
assuming one barrel of oil equals six mcf of gas. The following reserve related
information is based on estimates prepared by independent petroleum engineers,
and excludes certain Kansas proved developed properties purchased in 1999 for
$228,000, for which reserve information was not available. Reserve estimates are
inherently imprecise and are continually subject to revisions based on
production history, results of additional exploration and development, prices of
oil and gas and other factors.
1999 1998
--------- ---------
Proved natural gas reserves (MCF):
Beginning of year 2,765,115 6,663,456
Revisions of previous estimates (93,393) 1,184,112
Sale of reserves in place -- (4,655,656)
Production (167,054) (426,797)
---------- ----------
End of year 2,504,668 2,765,115
========== ===========
Proved developed natural gas reserves (MCF):
Beginning of year 2,765,115 1,029,799
========== ===========
End of year 344,401 2,765,115
========== ===========
The Company believes that current working capital combined with standard
industry joint ventures and future cash flows from operations, should be
adequate to finance the drilling of the offset locations.
25
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
9. SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
(Continued)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Natural Gas Reserves
- --------------------------------------------------------------------------------
The following is the standardized measure of discounted future net cash flows
and changes therein relating to proved natural gas reserves. Future net cash
flows were computed using year-end prices and costs that relate to existing
proved natural gas reserves in which the Company has mineral interests.
1999 1998
----------- -----------
Future cash inflows $ 4,135,000 $ 4,159,000
Future production and development costs (1,938,000) (1,979,000)
Future income tax expense _-- (266,000)
----------- -----------
Future net cash flows 2,197,000 1,914,000
10% annual discount for estimated
timing of cash flows (654,000) (517,000)
----------- -----------
Standardized measure of discounted
future net cash flows $ 1,543,000 $ 1,397,000
============ ===========
The following are the principal sources of change in the standardized measure of
discounted future net cash flows for the years ended December 31:
1999 1998
----------- -----------
Changes:
Sales of natural gas produced,
net of production costs $ (227,000) $ (331,000)
Accretion of discount 140,000 288,000
Net changes in prices and
production costs 189,000 (1,721,000)
Change in future development
costs including costs incurred
during the year -- 526,000
Revisions of previous quantity
Estimates (108,000) 1,316,000
Sales of reserves in place -- (1,178,000)
Net change in income taxes 197,000 (230,000)
Other (45,000) (152,000)
----------- -----------
Net changes 146,000 (1,482,000)
Balance at beginning of year 1,397,000 2,879,000
----------- -----------
Balance at end of year $ 1,543,000 $ 1,397,000
=========== ===========
The Company has not filed with or included in reports to any Federal authority
or agency, other than the Securities and Exchange Commission, any estimates of
proved natural gas reserves.
26
Financial Statements at December 31, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Great Northern Gas Company:
We have compiled the accompanying balance sheet of Great Northern Gas Company as
of December 31, 2000 and the related statements of operations, stockholders'
equity and cash flows for the year then ended in accordance with statements on
standards for accounting and review services issued by the American Institute of
Certified Public Accountants.
An independent petroleum engineer reserve study for the year ended December 31,
2000 has not been prepared. Estimated quantities of natural gas reserves and
standardized measure have been estimated by progressing the independent reserve
study completed for December 31, 1999.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. We have not audited or
reviewed the accompanying financial statements and, accordingly, we do not
express an opinion on them.
The financial statements for the year ended December 31, 1999 were audited by
Causey, Demgen and Moore, Inc. and they expressed an unqualified opinion on them
in their report dated March 15, 2000 but they have not performed any auditing
procedures since that date.
Quinn & Associates, P.C.
May 5, 2001
1
GREAT NORTHERN GAS COMPANY
BALANCE SHEET
AS OF DECEMBER 31, 2000
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 2,494,130
Trading securities 330,121
Accounts receivable:
Oil and gas sales 51,279
Joint interest billings 75,719
Note receivable 223,785
Other 9,619
------------
Total current assets 3,184,653
------------
PROPERTY AND EQUIPMENT, at cost:
Oil and gas properties, accounted for using
the full cost method 380,376
Furniture, fixtures and automobile 35,433
------------
415,809
Less accumulated depreciation, depletion
and amortization 109,112
------------
Net property and equipment 306,697
------------
$ 3,491,350
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable:
Oil and gas sales $ 126,825
Taxes payable 12,070
Other 21,294
------------
Total current liabilities 160,189
------------
DEFERRED INCOME TAXES 362,966
------------
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value; authorized
50,000,000 shares, issued and outstanding 2,801,195 28,012
Additional paid-in capital 38,336,822
Accumulated deficit (35,396,639)
------------
Total stockholders' equity 2,968,195
------------
$ 3,491,350
============
The accompanying notes to financial statements are an integral part of this
balance sheet.
2
GREAT NORTHERN GAS COMPANY
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
----------- -----------
REVENUES:
Oil and gas sales $ 540,822 $ 402,879
Gain on sale of properties and equipment 1,115,378 2,552
Interest and other income 83,611 91,537
----------- -----------
1,739,811 496,968
----------- -----------
COSTS AND EXPENSES:
Lease operating 252,399 155,970
Production taxes 17,025 19,957
Depreciation, depletion and
amortization 97,046 139,810
General and administrative 645,013 476,462
----------- -----------
1,011,483 792,199
----------- -----------
EARNINGS(LOSS) BEFORE INCOME TAXES 728,328 (295,231)
PROVISION FOR INCOME TAX EXPENSE(BENEFIT):
Deferred 277,988 (116,150)
----------- -----------
NET EARNINGS(LOSS) $ 450,340 $ (179,081)
=========== ===========
BASIC EARNINGS(LOSS) PER SHARE
OF COMMON STOCK $ .15 $ (.06)
=========== ===========
WEIGHTED AVERAGE SHARES OF
COMMON STOCK OUTSTANDING 2,994,928 3,075,360
=========== ===========
The accompanying notes to financial statements are an integral part of
these statements.
3
GREAT NORTHERN GAS COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Additional
Common Stock Paid in Accumulated
Shares Amount Capital Deficit
------------ ------------ ------------ ------------
BALANCE AT
DECEMBER 31, 1998 3,079,710 $ 30,797 $ 38,680,024 $(35,667,898)
Shares acquired
for retirement (7,020) (70) (5,210) --
Net earnings -- -- -- (179,081)
------------ ------------ ------------ ------------
BALANCE AT
DECEMBER 31, 1999 3,072,690 30,727 38,674,814 (35,846,979)
Shares acquired
for retirement (271,495) (2,715) (337,992) --
Net earnings -- -- -- 450,340
------------ ------------ ------------ ------------
BALANCE AT
DECEMBER 31, 2000 2,801,195 $ 28,012 $ 38,336,822 $(35,396,639)
============ ============ ============ ============
The accompanying notes to financial statements are an integral part of these statements.
4
GREAT NORTHERN GAS COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings(loss) $ 450,340 $ (179,081)
Adjustments to reconcile net earnings(loss)
to net cash used in operating activities:
Gain on sale of property and equipment (1,115,378) (2,552)
Depreciation, depletion and amortization 97,046 139,810
Changes in operating assets and liabilities:
Purchase of trading securities (330,121) --
Increase in accounts receivable (77,723) (30,071)
Increase(decrease) in current liabilities 26,811 (44,025)
Deferred income tax expense(benefit) 277,988 (116,150)
----------- -----------
Net cash used in operating activities (671,037) (232,069)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 2,081,244 143,391
Additions to property and equipment (91,451) (465,618)
----------- -----------
Net cash provided by (used in) investing activities 1,989,793 (322,227)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of Common Stock (340,707) (5,280)
----------- -----------
Net cash used in financing activities (340,707) (5,280)
----------- -----------
INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 978,049 (559,576)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 1,516,081 2,075,657
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 2,494,130 $ 1,516,081
=========== ===========
SUPPLEMENTAL NON-CASH DISCLOSURE:
As partial consideration for the sale of the Wyoming property the Company received a $223,785 note receivable.
The accompanying notes to financial statements are an integral part of these statements.
5
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
Great Northern Gas Company, (the "Company") was reincorporated on September 15,
1989 as a Colorado corporation. The Company is an independent oil and gas
company engaged in onshore crude oil and natural gas exploration, development
and production in the continental United States.
Statements of Cash Flows
- ------------------------
Cash in excess of daily requirements is invested in money market accounts and
commercial paper. Such investments with maturities of three months or less are
deemed to be cash equivalents for purposes of the statements of cash flows. No
cash was paid for interest during 2000 and 1999.
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 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. There
are many factors, including global events, that may influence the production,
processing, marketing, and valuation of crude oil and natural gas. A reduction
in the valuation of oil and gas properties resulting from declining prices or
production could adversely impact depletion rates and ceiling test limitations.
Concentration of Credit Risk
- ----------------------------
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash, cash equivalents and trade receivables.
The Company places its cash with high quality financial institutions. At times
during the year, the balance at any one financial institution may exceed FDIC
limits.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts of the Company's financial instruments, namely cash and
cash equivalents and short term investments held to maturity, approximate their
fair values because of the short maturity of these instruments.
Property and Equipment
- ----------------------
The Company uses the full cost method of accounting for oil and gas properties.
Under this method, all costs associated with property acquisition, exploration
and development activities, including costs of unsuccessful exploration, are
capitalized within a cost center; subject to a cost ceiling limitation, which
basically limits such costs to the present value of future net revenues after
tax from proved reserves discounted at 10%. The Company's oil and gas properties
are located within the continental United States, which constitutes one cost
center. No gain or loss is recognized upon normal sale or abandonment of oil and
gas properties unless the gain or loss significantly alters the relationship
between capitalized costs and proved oil and gas reserves of the cost center.
6
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Property and Equipment (Continued)
- ----------------------------------
Maintenance, repairs, renewals and minor replacements are charged to expense as
incurred. Major additions and improvements are capitalized. When assets other
than oil and gas properties are sold, retired or otherwise disposed of, the cost
and related accumulated depreciation are eliminated from the accounts and gains
or losses are included in the statements of earnings.
Depreciation, Depletion and Amortization
- ----------------------------------------
Depreciation, depletion and amortization of oil and gas properties is computed
on a units-of-production method based on proved oil and gas reserves. The
provision for depreciation, depletion and amortization is calculated by applying
the rate to net capitalized property costs plus estimated future development
costs. The Company uses the straight-line method of depreciation for assets
other than oil and gas properties.
Income Taxes
- ------------
The Company accounts for taxes pursuant to Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes". SFAS No. 109 requires
the measurement of deferred income tax assets for deductible temporary
differences and operating loss carry forwards and deferred tax liabilities for
taxable temporary differences. Measurement of current and deferred income tax
liabilities and assets is based on provisions of enacted tax law; the effects of
future changes in tax laws or rates are not anticipated. Deferred tax assets
primarily result from net operating loss carry forwards and from the recognition
of depreciation, depletion and amortization in different periods for financial
reporting and tax purposes.
Earnings Per Share
- ------------------
The Company has adopted the provisions of SFAS 128, Earnings Per Share. SFAS 128
requires entities to present both Basic Earnings Per Share ("EPS") and Diluted
EPS. Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Potential dilution of securities exercisable into
common stock were computed using the treasury stock method based on the average
fair market value of the stock. In 1999 Diluted EPS was not presented as the
calculation is anti-dilutive.
7
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
2. SALE OF OIL AND GAS PROPERTIES
During 2000, the Company sold an option to purchase leases in the Fletcher Gulch
prospect for $789,062, producing a net gain of $517,237. The Company also sold
the Prettywater and Whitewater prospects for a total of $1,528,785. Of that
amount, $1,305,000 is being held in IRC Section 1031 escrow account to be used
in a tax deferred asset exchange, and $223,785 is outstanding as a note
receivable. A net gain of $598,141 was recognized on the sale of such
properties.
3. OIL AND GAS OPERATIONS
Capitalized costs and related accumulated depreciation, depletion and
amortization pertaining to oil and gas properties at December 31, 2000 are set
forth below:
Capitalized costs:
Evaluated $ 354,774
Unevaluated 25,602
Less accumulated depreciation,
depletion and amortization (82,754)
-----------
Net capitalized costs $ 297,622
===========
Costs incurred in oil and gas operations are as follows for the years ended
December 31:
2000 1999
----------- -----------
Oil and gas property acquisitions:
Proved $ -- $ 205,601
Unproved 10,443 187,157
Exploration 33,008 26,776
Development 48,000 46,084
----------- -----------
$ 91,451 $ 465,618
=========== ===========
Average depletion expense per
MCF of natural gas produced $ .76 $ .78
=========== ===========
The Company received 10 percent or more of its oil and gas revenues from the
following customers for the years indicated.
Customer 2000 1999
-------- ---- ----
A 38% 46%
C 58% 35%
8
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
4. COMMON STOCK-SALES, RETIREMENTS AND STOCK OPTIONS
During 2000 and 1999, the Company repurchased 271,495 and 7,020 shares of Common
Stock, respectively, which were retired.
On September 15, 1989, the Company's shareholders approved a stock option plan
whereby up to 500,000 shares of the Company's Common Stock are reserved for
issuance and may be granted to officers, directors and certain key employees at
the discretion of the Board of Directors. The stock option price must be at
least 100% of the fair market value at the date of grant unless the optionee
owns more than 10% of the Company's Common Stock in which case the price must be
110% of fair market value. Options may be exercised at the date of grant unless
the terms of the grant specify otherwise. Qualified options must be exercised
within ten years unless the grantee owns more than 10% of the Company's Common
Stock, in which case options must be exercised within five years.
On July 11, 1994, the Company's shareholders approved a nonqualified stock
option plan for key officers, employees and directors covering 500,000 shares of
the Company's Common Stock. Options granted under the nonqualified plan to any
one participant shall not exceed 200,000 shares. On October 4, 1994, 180,000
options were granted under this plan. Said options are exercisable at $1.00 per
share, not less than six months nor more than ten years from the date of the
grant. Options granted during 1994 were for restricted shares, which must be
held for a minimum of two years. No options were granted or exercised in 2000 or
1999.
At December 31, 2000 and 1999 there were outstanding 180,000 options with a
weighted average exercise price of $1.00.
5. OVERRIDING ROYALTY PLAN
On September 15, 1989, the Company's shareholders approved an overriding royalty
plan whereby the Company's President can assign overriding royalty interests
from the Company's prospects to an overriding royalty plan for the benefit of
qualified employees. Distributions from the plan are determined on a
year-to-year basis and made only to current employees. During 2000 and 1999,
$12,618 and $11,849 were paid to plan participants.
9
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
6. INCOME TAXES
The Company's provision for income taxes at December 31, 2000 includes deferred
tax expense of approximately $277,988 and in 1999 a tax benefit of $116,150 .
The difference between the provision for income taxes and the amount which would
be determined by applying the statutory federal income tax rate to earnings
before income taxes is analyzed below for the years ended December 31:
2000 1999
--------- ---------
Tax expense (benefit) by applying
the statutory federal income tax
rate to pretax accounting income $ 247,632 $(100,379)
Increase (decrease) in tax from:
State taxes 29,133 (11,809)
Other 1,223 (3,962)
--------- ---------
$ 277,988 $(116,150)
========= =========
The Company's net deferred tax liability at December 31, 2000 and 1999 primarily
relates to book basis being in excess of tax basis. Long-term deferred assets
and liabilities are comprised of the following at December 31:
2000 1999
--------- ---------
Book basis in excess of tax basis $(499,761) $(256,435)
Loss carry forwards 120,645 155,041
Other 16,150 16,416
--------- ---------
Net deferred tax liability $(362,966) $ (84,978)
========= =========
The Company has approximately $16,000,000 of net operating loss carry forwards
generated prior to December 31, 1987, that will fully expire in 2002. As the
Company may only use approximately $26,000 annually due to an equity change that
occurred in December, 1987, the carry forward tax asset above does not include
any amounts in excess of this limitation.
7. COMMITMENTS
The company leases office space under a lease agreement which expires August 31,
2002. Future minimum lease payments on the office lease amount to the following
at December 31, 2000:
2001 $ 27,880
2002 $ 19,024
General and administrative expenses include rent expense for office facilities
and equipment of $27,680 and $28,734 for the years ended 2000 and 1999,
respectively.
10
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
8. SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
Estimated Quantities of Natural Gas Reserves
- --------------------------------------------
All of the Company's natural gas reserves are located in the United States. The
Company's oil reserves at December 31, 2000 and 1999 are included herein
assuming one barrel of oil equals six mcf of gas. The following reserve related
information is based on estimates prepared by independent petroleum engineers
for December 31, 1999, and excludes certain Kansas proved developed properties
purchased in 1999 for $228,000. Reserve estimates are inherently imprecise and
are continually subject to revisions based on production history, results of
additional exploration and development, prices of oil and gas and other factors.
2000 1999
---------- ---------
Proved natural gas reserves (MCF):
Beginning of year 2,504,668 2,765,115
Revisions of previous estimates -- (93,393)
Sale of reserves in place (2,160,267) --
Production (127,615) (167,054)
---------- ----------
End of year 216,786 2,504,668
========== ==========
Proved developed natural gas reserves (MCF):
Beginning of year 344,401 2,765,115
========== ==========
End of year 216,786 344,401
========== ==========
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Natural Gas Reserves
- --------------------------------------------------------------------------------
The following is the standardized measure of discounted future net cash flows
and changes therein relating to proved natural gas reserves. Future net cash
flows were computed using year-end prices and costs that relate to existing
proved natural gas reserves in which the Company has mineral interests.
2000 1999
----------- -----------
Future cash inflows $ 1,192,000 $ 4,135,000
Future production and development costs (207,000) (1,938,000)
Future income tax expense (114,000) --
----------- -----------
Future net cash flows 871,000 2,197,000
10% annual discount for estimated
timing of cash flows (305,000) (654,000)
----------- -----------
Standardized measure of discounted
future net cash flows $ 566,000 $ 1,543,000
=========== ===========
11
GREAT NORTHERN GAS COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
8. SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)(Continued)
The following are the principal sources of change in the standardized measure of
discounted future net cash flows for the years ended December 31:
2000 1999
----------- -----------
Changes:
Sales of natural gas produced,
net of production costs $ (271,000) $ (227,000)
Accretion of discount 150,000 140,000
Net changes in prices and
production costs 473,000 189,000
Change in future development
costs including costs incurred
during the year -- --
Revisions of previous quantity
Estimates -- (108,000)
Sales of reserves in place (1,121,000) --
Net change in income taxes (114,000) 197,000
Other (94,000) (45,000)
----------- -----------
Net changes (977,000) 146,000
Balance at beginning of year 1,543,000 1,397,000
----------- -----------
Balance at end of year $ 566,000 $ 1,543,000
=========== ===========
12
Item 16(c)
Appraisal of Saltzman Hamma Nelson Massaro, LLP, dated March 12, 2001
[Saltzman Hamma Nelson Massaro, LLP consents to the inclusion of the Appraisal
as an exhibit to this Transaction Statement.]
March 12, 2001
Board of Directors and Shareholders
of Great Northern Gas Company
Denver, Colorado
RE: DETERMINATION OF THE FAIR MARKET VALUE OF ONE NON-CONTROLLING VOTING COMMON
STOCK SHARE IN GREAT NORTHERN GAS COMPANY AS OF DECEMBER 31, 2000
Dear Board of Directors and Shareholders:
At the request of Mr. Thomas L. DiGrappa, President and Chief Operating Officer
of Great Northern Gas Company, we have prepared and enclose herewith, our
valuation report of one non-controlling voting common stock share in Great
Northern Gas Company (the "Company") dated March 12, 2001. The purpose of our
valuation report is to render an opinion as to the fair market value of one
non-controlling voting common stock share in Great Northern Gas Company as of
December 31, 2000.
The standard of value utilized in this report is "fair market value" and is
defined under Treasury Regulation 20.2031-1(b) of the Estate Tax Regulations,
Treasury Regulation 25.25812-1 of the Gift Tax Regulations and Revenue Ruling
59-60, 1959-1 C.B. 237 as follows:
"The price at which the property would change hands between a
willing buyer and willing seller, neither being under any
compulsion to buy or sell, and both parties having reasonable
knowledge of relevant facts and the ability to buy and sell.
Courts decisions frequently state in addition that the
hypothetical buyer and seller are assumed to be able, as well as
willing, to trade and to be well informed about the property and
concerning the market for such property."
Although the Company's common stock shares are traded publicly, the Company's
common stock has experienced minimal trading activity for the five years prior
to the date of this valuation. Therefore, the fair market value of the Company's
stock may not be reflected in its trading value.
Our report is based on historical and prospective financial information provided
to us by management. Had we audited or reviewed the underlying data, matters may
have come to our attention which would have resulted in our using amounts which
differ from those provided; accordingly, we take no responsibility for the
underlying data presented or relied upon in this report. Users of this valuation
report should be aware that valuations are primarily based on future earnings
potential that may or may not materialize. Therefore, the actual results
achieved during the projection period may vary from the projections used in this
valuation, and the variations may be material. Accordingly, this report and the
information herein is for those whom are informed about valuations, the related
industry, the Company and the inherent risks. Additionally, this valuation
report is based on facts, which were considered known and foreseeable as of
December 31, 2000.
Based on the assumptions, limited conditions, and analytical procedures
described in the attached report as well as the facts and circumstances as of
the valuation date, we conclude that the fair market value of one
non-controlling voting common stock share in Great Northern Gas Company as of
December 31, 2000, is $1.50.
In arriving at our conclusion, neither Saltzman Hamma Nelson Massaro LLP nor any
of its partners or employees, has any present or contemplated financial interest
in Great Northern Gas Company or related entities and we are not associated with
any of the principals in any other venture. Our fee, for this valuation, is
based upon our normal hourly billing rates, and are in no way contingent upon
the results of our findings. We have no responsibility to update this report for
events and circumstances occurring subsequent to the date of this report.
This report has been prepared for the specific purpose of valuing one
non-controlling voting common stock share in Great Northern Gas Company as of
December 31, 2000, which value may be utilized by the majority shareholders and
officers of the Company in acquiring the minority shareholders ownership
interest in the Company. This report is not to be copied or made available to
any persons without the express written consent of Saltzman Hamma Nelson Massaro
LLP.
Our valuation and this report have been prepared in conformity with The Code of
Professional Conduct of the American Institute of Certified Public Accountants,
the National Association of Certified Valuation Analysts, and the Uniform
Standards of Professional Appraisal Standards. We have considered various
valuation approaches, including asset-based approaches, income-based approaches,
and market-based approaches. The value estimates that resulted for each approach
have been compared and a final value conclusion has been determined therefrom.
Sincerely,
Saltzman Hamma Nelson Massaro LLP
/s/ Scott R. Saltzman
- ---------------------
Scott R. Saltzman,
CPA, CVA, ASA, DABFA
SRS:st
Enclosure as stated.
TABLE OF CONTENTS
-----------------
Page
INTRODUCTION...................................................................1
VALUATION METHODOLOGY..........................................................5
COMPANY BACKGROUND AND OPERATIONS.............................................12
NATIONAL ECONOMIC REVIEW......................................................17
INDUSTRY REVIEW...............................................................21
METHODS OF VALUATION..........................................................30
VALUATION ADJUSTMENT ANALYSIS.................................................35
VALUATION ANALYSIS............................................................48
CONCLUSION OF VALUE...........................................................53
CERTIFICATION STATEMENT.......................................................54
VALUATION SUMMARY
-----------------
Report Summarized The appraisal report summarized contains
53 pages plus 11 Exhibits and was issued
on March 12, 2001. This report is
subject to the Statement of Assumptions
and Limiting Conditions as reported
herein.
Date of Valuation December 31, 2000
Purpose of Valuation Establish fair market value of one
non-controlling voting common stock
share which may be utilized by the
majority shareholders and officers of
the Company to possibly purchase the
minority shareholders ownership interest
in the Company
Subject Interest Valued One non-controlling voting common stock
share in Great Northern Gas Company
Ownership Characteristics Limited publicly traded non-controlling
interest basis
Standard of Value Fair market value
Premises of Value As a going concern
Lack of Marketability Discount 15%
Fair Market Value of one non- $1.50
controlling voting common
stock share
GREAT NORTHERN GAS COMPANY BUSINESS VALUATION REPORT
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INTRODUCTION
------------
PURPOSE
- -------
Great Northern Gas Company (the "Company") was re-incorporated on September 15,
1989 as a Colorado corporation. The Company is an independent oil and gas
company primary engaged in onshore crude oil and natural gas exploration,
development and production, in the continental United States. The Company's
primary operations are located in Colorado, Oklahoma, Utah, Wyoming, and Kansas.
The Company's stock is listed on the Pacific Stock Exchange under the symbol
"GTG".
The purpose of our valuation report is to establish the fair market value of one
non- controlling voting common stock share in Great Northern Gas Company as of
December 31, 2000, which value is to be utilized the majority shareholders and
officers of the Company in acquiring the minority shareholders ownership
interest in the Company.
VALUATION APPROACH
- ------------------
Our approach in valuing the ownership interest has been to determine an estimate
of fair market value, which would provide a fair and reasonable return on a
similar investment to an investor or owner, in view of the facts available to us
at the valuation date. Our opinion is based on, among other things, our estimate
of the risks facing the Company and the return on investment, which would be
required on alternative investments with similar levels of risk.
STANDARD OF VALUE
- -----------------
The term "fair market value" is defined under Treasury Regulation 20.2031-1(b)
of the Estate Tax Regulations, Treasury Regulation 25.2512-1 of the Gift Tax
Regulations and Revenue Ruling 59-60, 1959-1 C.B. 237 as:
"The price at which the property would change hands between a
willing buyer and a willing seller when the former is not under
any compulsion to buy and the latter is not under any compulsion
to sell, and both parties have reasonable knowledge of relevant
facts and the ability to buy and sell. Court decisions frequently
state in addition that the hypothetical buyer and seller are
assumed to be able, as well as willing, to trade and to be well
informed about the property and concerning the market for such
property."
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There is considerable content in this brief definition, and an examination of
the underlying conditions and assumptions follows to allow the reader to
understand the context in which our report was prepared.
Price at Which Property Would Change Hands
The IRS Valuation Guide for Income, Gift and Estate Taxes, (the "IRS
Guide") requires the valuator to, "make a reasonable estimate of the
hypothetical sale price." This means that it is assumed that the property
is put up for sale in a hypothetical context, whether or not the property
will actually be sold.
In addition, the IRS Guide states the value, "is the amount that the
property would bring in a cash sale." In other words, the opinion expressed
assumes the seller will receive cash or cash equivalency at the valuation
date. This is particularly relevant in the valuation of small, closely-held
businesses because very often the buyer makes a down payment at closing and
finances the balance of the purchase price over time.
Between a Willing Buyer and a Willing Seller
The IRS Guide states, "The willing buyer and willing seller are
hypothetical persons, not actual persons." They are proxies for the
participants in the hypothetical market. The market is the universe of all
potential buyers and sellers for the same or similar property, and the
market is in a state of equilibrium. In equilibrium, the market is not
influenced by special motivations not exhibited by typical buyers and
sellers.
Not Under the Compulsion to Buy or Sell
Neither the buyer nor the seller is compelled to be a party to the
transaction. Thus, each has equal negotiating power, and the price is not
the result of a special impetus of one of the parties. A representative
price would not be considered a fair market value if it were affected by a
buyer's or a seller's unique motivations. However, the hypothetical willing
buyer and the hypothetical willing seller are presumed to be dedicated to
achieving the maximum economic advantage.
Fair market value also assumes that, given the absence of compulsion, the
property is valued as a going concern, not in a liquidation scenario.
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Both Having Reasonable Knowledge of All Relevant Facts
This concepts assumes both parties are operating from the same basic level
of information and relevant facts, including an understanding of prevalent
economic and market conditions at the date of valuation. Identifying the
circumstances that were reasonably foreseeable at the valuation date can be
a source of confusion. The IRS Guide indicates, "The proper standard of
reasonable knowledge is not what is actually known as of the valuation
date; rather, it is proper to consider facts that are discoverable through
reasonable investigation, as long as such facts existed as of the valuation
date, even if they were not actually known at that time."
Able, as Well as Willing to Trade
The first implication is that the hypothetical buyer must have the
financial capacity to engage in the transaction. Therefore, they universe
of such buyers would only include those investors who, in the context of
diversified investment portfolios, would have the ability to purchase an
investment in the subject company in the value range indicated by the
analysis.
The second implication is that the buyer and seller must also be willing to
trade. Thus, the hypothetical investors are rational investors, and they
engage in transactions and approach the issue of price from a rational
economic and financial perspective.
In Pabst Brewing Company v. Commissioner, TC Memo 1996-506, Judge Laro's
decision reinforced the definition of fair market value, stating in part:
1. "The willing buyer and the willing seller are hypothetical persons, rather
than specific individuals or entities and the characteristics of these
hypothetical persons are not necessarily the same as the personal
characteristics of the actual seller or a particular buyer"
2. "Fair market value is determined as of the valuation date, and no knowledge
of unforeseeable future events which may have affected the value is given
to the hypothetical persons."
3. "Fair market value equals the highest and best use to which property could
be put on the valuation date, and fair market value takes into account
special uses that are realistically available due to the property's
adaptability to a particular buyer... Elements affecting value that depend
upon events or a combination of occurrences which, while within the realm
of possibility, are not reasonably probable, are excluded from this
consideration."
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We have analyzed various valuation methods in estimating the fair market value
of the Company as of December 31, 2000, to determine which method generates the
most reasonable estimate of fair market value of the Company as of December 31,
2000, under the facts and circumstances specific to this matter. After
consideration of each method's underlying assumptions and the variables
utilized, we have concluded that appropriate weight should be assigned to the
public comparable (guideline) method and adjusted net assets method, which are
the most appropriate methods of valuation (see the Methods of Valuation section
of this report for additional information regarding valuation methods).
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VALUATION METHODOLOGY
---------------------
OVERVIEW
- --------
Business valuation methodology is based on two principles: "the principle of
substitution" and "the principle of future benefit". The principle of
substitution states that the value of property tends to be determined by the
cost of acquiring an equally desirable substitute. In other words, a person will
not purchase a particular asset if such substitute can be purchased at a lower
price.
The principle of future benefits states that the economic value of an investment
reflects anticipated future benefits, not for past performance. Although the
past may serve as a proxy for the future, a business that has had poor earnings
in the past but bright future prospects will be worth more than a business that
has been successful in the past but is not expected to be as profitable in the
future.
The fair market value of securities trading on an active public market is
determined by actual market quotations on a particular date, unless the market
for a security is affected by some abnormal influence or condition.
Determination of fair market value of securities of closely-held corporations,
however, cannot be precisely determined, thus creating the need for alternative
valuation methodologies. Section 3.01 of Revenue Ruling 59-60 acknowledges the
disparate results that may then occur:
"A determination of fair market value, being a question of fact,
will depend upon the circumstances in each case. No formula can
be devised that will be generally applicable to the multitude of
different valuation issues arising in estate and gift tax cases.
Often, an appraiser will find differences of opinion as to the
fair market value of a particular stock. In resolving such
differences, he should maintain a reasonable attitude in
recognition of the fact that valuation is not an exact science. A
sound valuation will be based upon all the relevant facts, but
the elements of common sense, informed judgement and
reasonableness must enter into the process of weighting those
facts and determining their aggregate significance."
Both internal and external factors which influence the value of the Company were
analyzed and interpreted. Internal factors include the Company's financial
position, results of operations and the size and marketability of the interest
being valued. External factors include, among other things, the status of the
industry, the position of the Company relative to the industry, the economic
factors affecting the industry and the various risk factors involved (both
internal and external).
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Further, since there is no single, generally accepted formula for establishing
the fair market value of a closely-held corporation, Revenue Ruling 59-60 sets
forth a list of factors to consider (listed below). It generally applies to all
valuations of interests in closely-held businesses lacking a public market for
their securities for income, gift, and estate tax purposes. Thus, the scope of
our work considered all the elements of a business valuation listed in Section 4
of that Ruling.
REVENUE RULING 59-60, 1959-1 C.B. 237
- -------------------------------------
The purpose of Revenue Ruling 59-60, 1959-1 C.B. 237 was "...to outline and
review in general the approach, methods, and factors to be considered in valuing
shares of capital stock of closely held corporations for estate tax and gift tax
purposes. The methods discussed herein will apply likewise to the valuation of
corporate stocks on which market quotations are either unavailable or are of
such scarcity that they do not reflect fair market value.".
This Revenue Ruling states that "...a sound valuation will be based upon all the
relevant facts, but the elements of common sense, informed judgment, and
reasonableness must enter into the process of weighing those facts and
determining their aggregate significance.". According to the Revenue Ruling,
factors to be considered in the valuator's analysis include:
o The nature of the business and the history of the enterprise from its
inception.
o The economic outlook in general and the condition and outlook for the
specific industry in particular.
o The book value of the stock and the financial condition of the business.
o The earning capacity of the company.
o The dividend paying capacity of the company.
o Whether or not the enterprise has goodwill or other intangible value.
o Sales of the stock and the size of block to be valued.
o The market price of stocks of corporations engaged in the same or similar
line of business having their stocks traded in a free and open market,
either on an exchange or over-the-counter.
Below, we have excerpted specific detail, related to each of the above noted
factors, directly from Revenue Ruling 59-60, 1959-1 C.B. 237:
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The nature of the business and the history of the enterprise from its inception
The history of a company will show its past stability, its growth or lack
of growth, the diversity or lack of diversity of its operations, and other
facts needed to form an opinion to the degree of risk involved in the
business. For an enterprise which changed its form of organization but
carried on the same or very similar operations of its predecessor, the
history of the former enterprise should be considered. The detail to be
considered should increase with approach to the required date of appraisal,
since recent events are of greatest help in predicting the future; but a
study of gross and net income, and of dividends/distributions covering a
long prior period, is highly desirable. The history to be studied should
include, but need not be limited to, the nature of the business, its
products or services, its operating and investment assets, capital
structure, plant facilities, sales records and management, all of which
should be considered as of the date of the appraisal, with due regard for
recent significant changes. Events of the past that are unlikely to recur
in the future should be discounted, since value has a close relation to
future expectancy.
The economic outlook in general and the condition and outlook of the specific
industry, in particular
A sound appraisal of a closely held ownership must consider current and
prospective economic conditions as of the date of appraisal, both in the
national economy and in the industry or industries with which the
corporation is allied. It is important to know that the company is more or
less successful than its competitors in the same industry, or that it is
maintaining a stable position with respect to competitors. Equal or even
greater significance may attach to the ability of the industry with which
the company is allied to compete with other industries. The public's
appraisal of the future prospects of competitive industries or of
competitors within an industry may be indicated by price trends in the
markets for commodities and for securities.
The book value of the stock and the financial condition of the business
Balance sheets should be obtained, preferably in the form of comparative
annual statements for two or more years immediately preceding the date of
appraisal, together with a balance sheet at the end of the month preceding
that date, if the company's accounting will permit. Any balance sheet
descriptions that are not self- explanatory, and balance sheet items
comprehending diverse assets or liabilities, should be clarified in
essential detail by supporting supplemental schedules. These statements
usually will disclose to the appraiser:
o Liquid position (ratio of current assets to current liabilities)
o Gross and net book value of principal classes of fixed assets
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o Working capital
o Long-term indebtedness
o Capital structure
o Net worth
Consideration should also be given to any assets not essential to the
operation of the business, such as investments in securities, real estate,
etc. In computing the book value, assets of the investment type should be
re-valued on the basis of their market price and the book value adjusted
accordingly.
The earning capacity of the company
Detailed profit-and-loss statements should be obtained and considered for a
representative period immediately prior to the required date of appraisal,
preferably five or more years. Such statements should show i) gross income
by principal items; ii) principal deductions from gross income including
major prior items of operating expenses, interest and other expense on each
item of long term debt, depreciation and depletion if such deductions are
made, officers'/members' salaries, in total if they appear to be
reasonable; iii) cash flow available for dividends/distributions, and; iv)
rates and amounts of dividends paid on each class of stock, if applicable.
The dividend-paying (distribution) capacity of the company
Primary consideration should be given to the dividend-paying capacity of
the company rather than to dividends actually paid in the past. Recognition
must be given to the necessity of retaining a reasonable portion of profits
in a company to meet competition. Dividend-paying capacity is a factor that
must be considered in an appraisal, but dividends actually paid in the past
may not have any relation to dividend-paying capacity. Specifically, the
dividends paid by a closely held family company may be measured by the
income needs of the stockholders or by their desire to avoid taxes on
dividend receipts, instead of by the ability of the company to pay
dividends. Where an actual or effective controlling interest in a
corporationis to be valued, the dividend factor is not a material element,
since the payment of such dividends is discretionary with the controlling
stockholders. The individual or group in control can substitute salaries
and bonuses for dividends, thus reducing net income and understating the
dividend-paying capacity of the company. It follows, therefore, that
dividends are less reliable criteria of fair market value than other
applicable factors.
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Sales of the stock (ownership interest) and the size of the block of stock
(ownership interest) to be valued
Sales of stock of a closely held corporation should be carefully
investigated to determine whether they represent transactions at arm's
length. Forced or distress sales do not ordinarily reflect fair market
value nor do isolated sales in small amounts necessarily control the
measure of value. This is especially true in the valuation of a controlling
interest in a corporation. Since in the case of closely held stocks, no
prevailing market prices are available, there is no basis for making an
adjustment for blockage. It follows, therefore, that such stocks should be
valued upon a consideration of all the evidence affecting the fair market
value. The size of the block of stock itself is a relevant factor to be
considered. Although it is true that a minority interest in an unlisted
corporation's stock is more difficult to sell than a similar block of
listed stock, it is equally true that control of a corporation, either
actual or in effect, representing as it does an added element of value, may
justify a higher value for a specific block of stock.
The market price of stocks of corporations engaged in the same or similar line
of business having their stocks actively traded in a free and open market,
either on an exchange or over-the-counter
Section 2031(b) of the Internal Revenue Code states, in effect, that in
valuing securities the value of stock or securities of corporations engaged
in the same or a similar line of business which are listed on an exchange,
should be taken into consideration along with all other factors. An
important consideration is that the corporations to be used for comparisons
have capital stocks which are actively traded by the public. The essential
factor is that whether the stocks are sold on an exchange or
over-the-counter, there is evidence of an active, free public market for
the stock as of the valuation date. In selecting corporations for
comparative purposes, care should be taken to use only comparable
companies. Although, the only restrictive requirement as to comparable
corporations specified in the statute is that their lines of business be
the same or similar, it is obvious that consideration must be given to
other relevant factors in order that the most valid comparisonpossible is
obtained. A company with a declining business and decreasing markets is not
comparable to one with a record of current progress and market expansion.
While we considered all of the factors noted above, we attributed varying
weights to each factor depending upon the particular circumstances unique to the
company evaluated. In that regard, it was important that all of the relevant
factors be considered in our valuation process.
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Valuation Approaches
- --------------------
The value of a non-publicly traded business, the, is determined with a view
towards the intrinsic value of the assets, the value of the income flow, the
value of the equity in the marketplace, and other facts and circumstances which
a knowledgeable buyer and seller would consider. Thus, the above principles and
factors have evolved to form the basis for three broad approaches used in
valuing a business:
1. Asset-Based Approach
2. Income-Based Approach
3. Market-Based Approach
Within each of these approaches there are different methods for determining a
business value. The applicability of each approach and the subset of methods
contained thereunder must be assessed, given the nature and purpose of the
particular valuation assignment.
LIMITING CONDITIONS
The estimate of fair market value rendered in this report is based on
information provided to us by the management of the Company and other third
parties. Had we audited or reviewed the underlying data, matters may have come
to our attention which would have resulted in our using amounts which differ
from those provided; accordingly, we take no responsibility for the underlying
data presented or relied upon in this report.
We have not attempted to confirm whether or not all assets of the Company are
free and clear of liens and encumbrances, or that the Company has good title to
all assets.
We have relied upon management's estimate regarding the market value of the
Company's assets and liabilities as of December 31, 2000. The Company did not
have a current oil and gas reserve study prepared with relation to our valuation
report.
Saltzman Hamma Nelson Massaro LLP does not purport to be a guarantor of value.
The valuation of companies with minimal stock trading activity, such as the
Company, is an imprecise science, with value being a question of fact, and
reasonable people may differ in their estimate of value. Saltzman Hamma Nelson
Massaro LLP has, however, performed conceptually sound and commonly accepted
methods of valuation in determining the estimate of value included in this
report.
The estimate of value as stated in this report assumes that the existing Company
will maintain the character and integrity of the Company through any
reorganization or reduction of any owner's participation in the existing
activities of the Company and will continue as a going concern. Additionally,
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this valuation is based on those facts which were considered known and
foreseeable as of December 31, 2000.
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COMPANY BACKGROUND AND OPERATIONS
---------------------------------
Great Northern Gas Company (the "Company") was re-incorporated on September 15,
1989 as a Colorado corporation. The Company is an independent oil and gas
company primary engaged in the exploration for the and development and
production of oil and gas, as well as the acquisition of developed and
undeveloped oil and gas properties., in the continental United States. The
Company's primary operations are located in Colorado, Oklahoma, Utah, Wyoming,
and Kansas.
The Company's stock is listed on the Pacific Stock Exchange under the symbol
"GTG". Exhibit 1 of this report summaries the Company's stock price from 1996
through 2000.
As of December 31, 2000, there were 359 shareholders of record of the Company's
common stock.
The Company has traditionally generated or acquired its oil and gas prospects
through acquisition of leases or through farm-ins from other operators. During
1995, the Company began a program of purchasing proved producing reserves.
As of December 31, 2000, the Company had three full time employees and one full
time geologic consultant. The following represent the Company's directors and
officers as of December 31, 2000 and their respective ownership directly and
indirectly:
Common Percent
Common Stock Fully
Name Position Stock Options Diluted
---- -------- ------ ------ ------
Frank S. Chairman of the board of
DiGrappa directors, Executive Vice- 182,000 -0- 6.10%
President and Treasurer
Thomas L. Director, Chief Operating 2,465,255(1) 170,000 82.60%
DiGrappa Officer and President
Michael J. Director -0- 10,000 0.34%
DiGrappa
- ---------------------
1 Represents 50,000 shares held directly and 2,415,255 owned by St.
Francis Resources, Inc., an entity majority owned by Thomas L.
DiGrappa..
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The Company engages the services of independent accountants, geologists,
engineers and land consultants form time to time to assist in its operations.
The Company does not plan to own any significant amount of drilling equipment.
The Company will engage independent drilling contractors for the drilling of any
wells in which it is the operator. The Company currently has no intention of
refining or marketing oil. The Company does not contemplate any material product
research and development or any material acquisition of plants or equipment.
As of December 31, 2000, the Company currently owns less than a 5% interest in
Teton Petroleum, which owns an approximately 70% interest in a Russian Stock
Company. The Russian Stock Company owns a producing license in Western Siberia
currently making 650 barrels of oil a day. The has no basis recorded nor revenue
recorded related to this investment. In addition, the Company's president, chief
operating officer and director, Thomas L. DiGrappa, is also an officer and
director of Teton Petroleum.
The Company also owns a minority interest in a limited liability company that is
developing for sell, commercial land in Colorado Springs, Colorado.
The has issued and outstanding 180,000 common stock options that are held by two
directors and officers of the Company. These options have an exercise price of
$1.00 and expire in 2004. Management has represented that these individuals have
no intent in exercising their options within the next year.
Balance Sheet Analysis
Exhibit 2 of this report presents the Company's balance sheets as of December
31, 1996 through 1999, and as of September 30, 2000. In addition, Exhibit 3 of
this report presents the common size balance sheets (all elements of the balance
sheets as a percentage of total assets) for the same periods. Exhibit 4 of this
report provides a ratio analysis of the Company compared to companies in the
same industry and similar in size. Based on our evaluation, we noted the
following:
1. The Company liquidity is substantially above its peers;
2. Management has informed us that subsequent to the filing of the September
30, 2000 SEC 10-QSB, the Company increased it liquidity by approximately
$850,000 by selling two oil and gas interest (Exhibit 10)
a. For generally accepted accounting purposes, the transaction will
result in a gain on the sale of $600,000 net of income taxes;
b. For income tax reporting purposes, the Company is anticipating
completing an Internal Revenue Codess.1031 tax free exchange;
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3. The Company's current assets (primarily cash and short-term investments)
represent approximately 70% of the total balance sheet as of December 31,
2000 (Exhibit 10);
4. The Company was not leverage with any short-term or long-term debt for the
entire period evaluated;
5. The Company, as compared to its peers, has significantly less oil and gas
properties as a percentage of net worth or equity;
6. As of December 31, 2000, the Company held developed and undeveloped
interest in oil and gas leases which management estimates the market value
to be approximately $850,00 as follows:
Great Northern Gas Company
Oil and Gas Intrest
As of December 31, 2000
-----------------------------------------------------------
Acreage
-----------------------------------------------------------
Producing Non-Producing
-----------------------------------------------------------
Gross(1) Net(2) Gross(1) Net(2)
-------- -------- -------- --------
Colorado 80 60 6,000 6,000
Oklahoma 920 423 -- --
Utah -- -- 1,100 1,100
Wyoming -- -- 5,300 5,300
Kansas 4,900 1,225 8,475 980
-------- -------- -------- --------
Total 5,900 1,708 20,875 13,380
======== ======== ======== ========
------------------------------------------------------------
1. The number of gross acres is the total number of acres in which
working interest are owned.
2. The number of net acres is the sum of the fractional working
interest owned by the Company in the gross acreage.
------------------------------------------------------------
7. The Company had substantial net operating loss carry forwards, although the
Company is limited to only being able to utilize approximately $26,000
annually. As the Company has utilized an Internal Revenue Code ss. 1031 tax
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free exchange which has resulted in the Company's deferred tax liability
(trapped in gain) of approximately $500,000 as of December 31, 2000
(Exhibit 10).
Statements of Operations Analysis
Exhibit 5 of this report presents the Company's statements of operations for the
years ended December 31, 1996 through 1999, and for the nine months ended
September 30, 2000. In addition, Exhibit 6 of this report presents the common
size statements of operation (all elements of the statement as a percentage of
total revenue) for the same periods. Based on our evaluation, we noted the
following:
1. The Company's profitability appears to be dependent on selling oil and gas
ownership interest;
2. As of December 31, 2000, the Company had a working ownership interest in 27
producing and 1 non-producing oil and gas wells;
3. A majority of the Company's producing oil an gas wells are been producing
for 10 years;
4. The Company's operating ratio (sales / total assets) indicates the Company
is not producing the level of sales as it peers;
5. The Company receives approximately 80% of its revenue from two customers;
and,
6. When the Company recognizes a material gain on the sell of oil and gas
ownership interest, the Company provides management with incentive
compensation bonuses. Management has represented that these bonuses were
earned as follows:
a. Management provided the Company financing in the past when required;
b. Bonuses represent compensation not paid in prior years when the
Company was unable to fully compensate management; and,
c. Incentive compensation for increasing the value of the Company's
common stock;
The following is a summary of officer's and director's compensation for the
years ended December 31, 1996 through 2000:
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-------------------------------------------------------------------------
Great Northern Gas Company
Summary of Officers and Directors Compansation
For the Years Ended December 31, 1996 to 2000
-------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Frank DiGrappa
Salary $100,000 $100,000 $100,000 $100,000 $100,000
Bonus $ 50,000 $ 50,000 $150,000 $170,000 $ --
Thomas L. DiGrappa
Salary $120,000 $120,000 $120,408 $100,000 $120,408
Bonus $ 50,000 $ 50,000 $150,000 $170,00 $ --
-------------------------------------------------------------------------
The Company has the been the only party purchasing the Company's stock and then
retiring it. As indicated in Exhibit 7 of this report, the Company has purchased
retired 1,109,005 shares of the Company's stock from January 1, 1996 through
December 31, 2000, at a cost of $1,724,689 or an average of $1.35 a share.
Subsequent to December 31, 2000, the Company has purchased and retired an
additional 21,815 share of the Company stock through February 19, 2001, at a
cost of $31,635 or an average of $1.45 a share.
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NATIONAL ECONOMIC REVIEW
------------------------
GENERAL ECONOMIC OVERVIEW
- -------------------------
According to preliminary estimates released by the Department of Commerce's
Bureau of Economic Analysis, real Gross Domestic Product ("GDP"), the output of
goods and services produced by labor and property located in the United States,
increased at an annualized rate of 2.7% during the third quarter of 2000. This
is somewhat below expectations. Growth in GDP is believed to have slowed due to
successive actions by the Federal Reserve to raise interest rates during the
last several quarters. Growth in GDP for the second quarter of 2000 was revised
to 5.6%, higher than the preliminary estimated annualized growth rate of 5.2%.
The major contributors to the increase in real GDP in the third quarter included
personal consumption expenditures, exports, and nonresidential fixed investment.
The contributions of these components were partly offset by an increase in
imports (which are subtracted in the calculation of GDP), and decreases in
government spending and in residential investment. The economy is expected to
continue its expansion with growth in GDP expected to fall between 3.5% to 4.0%
during the balance of 2000 and into the first half of 2001. Growth in GDP for
1999 was 4.2%.
The Conference Board reported that the Composite Index of Leading Economic
Indicators ("LEI"), the government's primary forecasting gauge, remained steady
in September at 105.7 after consecutive decreases in July (down 0.2%) and August
(down 0.1%). The index attempts to gauge economic activity six to nine months in
advance. Multiple consecutive moves in the same direction are said to be
indicative of the general direction of the economy. In September, five of the
ten leading economic indicators rose. The most significant increases were money
supply, manufacturers' new orders for consumer goods, average weekly initial
claims for unemployment insurance, building permits, and manufacturers' new
orders for nondefense capital goods and materials. The largest negative
contributors to the leading index in September were vendor performance, average
weekly manufacturing hours, stock prices, interest rate spread, and consumer
expectations. Both the coincident and lagging indices increased in September.
According to the Conference Board, the LEI, in tandem with coincidental and
lagging indicators, suggests a continued but more moderate pace of economic
growth during the balance of the year and into the first half of 2001.
The Dow finished the quarter 1.9% higher than its second quarter 2000 close but
remains 7.4% below its 1999 year-end close. The S&P declined 1.2% for the
quarter, down 2.2% for the year. The NASDAQ declined 7.4% during the third
quarter 2000 and is down 9.7% for the year. Treasury bond yields declined during
each month of the third quarter. Yields on high-grade corporate bonds ticked up
in September while the bank prime rate heldsteady at 9.5%. The Federal Reserve
(the "Fed") left the federal funds target rate unchanged (6.5%) at its August
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GREAT NORTHERN GAS COMPANY BUSINESS VALUATION REPORT
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and October meetings. The Fed is closely monitoring economic growth,
productivity measures, and labor data citing numerous indicators that support a
heightened risk of rising inflation.
CONSUMER SPENDING AND INFLATION
- -------------------------------
According to the Bureau of Labor Statistics the Consumer Price Index ("CPI")
increased 0.5% to 173.7 in September (CPI - all urban consumers, 1982-1984 =
100, before seasonal adjustment). Excluding food and energy, the CPI-U increased
a seasonally adjusted 0.3% in September after maintaining a 0.2% rate of
increase during the prior five months. The seasonally adjusted annual rate of
inflation for the third quarter of 2000 was 2.8%, compared to 2.4%, 6.1%, and
2.6%, respectively, for fourth quarter 1999 through second quarter 2000. The
energy index, which increased 13.4% in 1999, has advanced at a seasonally
adjusted annual rate of 18.4% through September of 2000. Petroleum- based energy
costs have risen at a 25.2% seasonally adjusted annual rate through September of
2000. The year-to-date annual rate of inflation is 3.8% where it is expected to
prevail for the balance of the year. The inflation rate for 1999 was 2.7%;
higher than the 1.6% rate of 1998 which was the smallest annual increase since a
1.1% rise in 1986. The Producer Price Index ("PPI"), which is generally
recognized as predictive of near-term consumer inflation pressure, increased
0.9% in September (PPI for finished goods, seasonally adjusted) following a
decline of 0.3% in August and holding steady in July. During the third quarter
of 2000, the PPI increased at a seasonally adjusted annual rate of 2.6%
resulting in a year-to-date rate of 4.1%. Excluding food and energy, the core
PPI rose 2.2% during the third quarter. As with measures from the first and
second quarters, a significant portion of the increases in PPI are related to
energy prices which have risen 11.4% and 21.3%, respectively, for the third
quarter and for the year. Core PPI has risen at a 1.4% seasonally adjusted rate
during 2000.
According to the Census Bureau of the Commerce Department, the percent change in
retail sales for July to August 2000 was revised from +0.2% to +0.1%. The
advance estimate for September retail sales (adjusted for seasonal, holiday and
trading-day differences) reflected an increase of 0.9% from August and a 7.6%
increase over September 1999 sales. Personal consumption spending represents
approximately two-thirds of total economic activity and is generally a primary
component of overall economic growth. Real personal consumption spending
increased 4.5% in the third quarter of 2000, following increases of 7.6% and
3.1%, respectively, in the first and second quarters of 2000. Durable goods
purchases increased 7.5% versus a decrease of 5.0% in the second quarter and an
increase of 23.6% in the first quarter of 2000.
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THE FINANCIAL MARKETS
- ---------------------
The stock markets continued to display volatile performance with prices
generally declining across the spectrum of small and large capitalization
companies, as well as old and new economy issues. The Dow Jones Industrial
Average ("DJIA" or the "Dow") closed at 10651, up 1.9% for the quarter but 7.4%
off the 1999 year-end close. The Standard & Poor's 500 ("S&P 500") index
decreased 1.2% during the quarter to close at 1437, 2.2% below year-end 1999.
The NASDAQ Composite Index fell 7.4% during the quarter to close at 3673. The
NASDAQ Composite Index was down 9.7% for the year. The broad market Wilshire
5000 index closed at 13613, virtually flat for the quarter and reflecting a
year-to- date loss of 1.4%.
The monthly average yields to maturity on the 30-year Treasury bond during the
third quarter of 2000 were 5.85%, 5.72%, and 5.83%, respectively, for July,
August, and September. Bond prices are negatively correlated with their
respective yields, which can shift abruptly on investor reactions to major
variances in reported economic data versus market expectations (i.e., expected
inflation, growth, monetary policy and other Fed action, etc.). Yields declined
modestly throughout the quarter, as the Fed remained idle on short- term rate.
The Fed's recent restraint has resulted in generally higher bond prices.
INTEREST RATES
- --------------
The Federal Reserve's Open Markets Committee remained idle on interest rates at
its late August and early October meetings. The Fed last raised rates at its May
16th meeting. The Committee maintained a target Fed Funds rate of 6.5% and
stated that it believes that the risks are weighted mainly toward conditions
that may generate heightened inflation pressures in the foreseeable future.
Should the economy experience unexpected growth, continuing low unemployment,
and/or other inflationary pressures the Fed is likely to raise interest rates.
Given a recent softening of economic growth and downturns in the financial
markets, many analysts and economists foresee the Fed potentially reversing its
present bias toward that of lowering short-term interest rates in the first
quarter of 2001. Others view recent inflation measures as troubling and
indicative of a potential rate increase.
CONSTRUCTION, HOUSING, AND REAL ESTATE
- --------------------------------------
Home building is generally representative of overall economic activity because
new home construction stimulates a broad range of industrial, commercial, and
consumer spending and investment. According to the U.S. Commerce Department's
Bureau of the Census, new privately owned housing starts were at a seasonally
adjusted annualized rate of 1.530 million units in September, virtually
unchanged from a revised August estimate of1.525 million units and 6.0% below
the September 1999 rate. Single family housing starts in September were 1.233
million, 1.0% below the August level of 1.249 million units. In the first nine
months of 2000, housing starts have decreased 4.0% from 1999 totals.
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The seasonally adjusted annual rate of new housing building permits (considered
the best indicator of future housing starts) was 1.506 million units in
September, 1.0% above the revised August rate, but 3.0% below the September 1999
estimate of 1.553 million.
UNEMPLOYMENT
- ------------
According to the Labor Department's Bureau of Labor Statistics, unemployment
levels during the third quarter of 2000 remained historically low. After rising
from 3.9% in April, the unemployment rate was 4.0%-4.1% through August before
ticking back down to 3.9% in September. September marked the thirty-ninth
consecutive month that the unemployment rate was below 5%. The unemployment rate
for all of 1999 was approximately 4.2%, down from 4.5% in 1998. Tight labor
markets remain a theme of Fed concerns regarding inflation.
SUMMARY AND OUTLOOK
- -------------------
Economic growth, as measured by growth in GDP, decelerated to 2.7% in the third
quarter of 2000, after registering a revised 5.6% annualized rate in the second
quarter of 2000. Annual growth in GDP for 1999 was 4.2%. During the third
quarter 2000, the Dow increased 1.9%, the S&P 500 decreased 1.2%, and the NASDAQ
sank 7.4%. Bond yields moderated during most of the third quarter ending mostly
lower than second quarter levels. Third quarter inflation was a seasonally
adjusted annualized rate of 2.8%, representing a modest increase from the second
quarter 2000 rate of 2.6%. The inflation rate for 1999 was 2.7%, higher than the
1.6% rate of 1998. The inflation rate is expected to continue at approximately
3.5% to 4.0% for the balance of the year. The Federal Reserve's Open Markets
Committee took no action at its August and October meetings. The U.S. economy is
expected to continue expanding with real GDP growth of approximately 4.0% for
the balance of 2000 and moderating somewhat in the first half of 2001.
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INDUSTRY REVIEW
---------------
Buoyed by higher crude oil prices, capital spending for oil and gas Projects in
the US and Canada will jump sharply this year from 1999 levels.
According to Oil & Gas Journal's annual capital expenditure survey, US outlays
this year are expected to approach 1998's level, reversing their plunge of 1999.
Spending in Canada will continue to rise, although by a healthier margin than it
did last year.
Investments outside the US and Canada will dip, especially for upstream
activities. A year ago, spending in 1999 was expected to plummet due to
extremely low oil prices and weak natural gas prices that had prevailed at the
end of 1998 (OGJ, Apr. 5, 1999, p. 44). OGJ's survey shows that expenditures
were indeed much lower in the US and areas outside North America. Although
prices for crude oil and natural gas were on the rebound last year, companies
remained cautious. Spending for Canadian projects in 1999 was mostly unchanged
from the previous year.
It remains to be seen whether companies will continue to be as cautious this
year with regard to spending plans. With many predicting that oil and gas demand
worldwide will continue to rise this year, the consensus price forecasts suggest
that oil prices will remain well above $20/bbl the rest of this year, while
natural gas prices are expected to continue to be robust throughout the year as
well.
SUPPLY, DEMAND, AND PRICES
- --------------------------
According to the International Energy Agency, worldwide demand for oil averaged
75.3 million b/d in 1999, up 1.7% from 74 million b/d in 1998. At the same time
that demand was increasing last year, supply was decreasing--due in large part
to OPEC's quota reductions- -to an estimated 74 million b/d, down 2% from the
prior year. Stocks of crude oil plummeted, down 2.7% in fourth quarter 1999. IEA
projects that crude oil demand in 2000 will increase 2.4% from last year to an
average 77 million bid and that demand growth will continue to shift from Europe
to Asia.
According to the US Energy Information Administration, demand for natural gas in
the US has been steady, with total consumption up just 0.8% to 21.433 tcf in
1999 from 21.262 tcf in 1998. The most recent peak in gas demand was 22.1 tcf in
1972. OGJ estimates that US marketed natural gas production will rise by 1% to
19.867 tcf this year from 1999.
Capital spending plans often change throughout the year depending on cash flows,
but the price of crude did not realize a truly sustained recovery until the end
of 1999.
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The average price of world export crude in 1998 was $11.92/bbl. Last year, the
average jumped to $17.37/bbl. In February 2000, the price of world export crude
averaged $26.94/bbl.
The average price for West Texas Intermediate crude fell to $14.15/bbl in 1998
from $19.73/bbl in 1997, rebounded to $17.71/bbl in 1999, and was $27/bbl this
past February.
Natural gas prices have also been on the rise. Since averaging $2.03/MMbtu in
1998, the US natural gas spot price increased to $2.19/MMbtu in 1999 and
$2.54/MMbtu in February 2000. The New York Mercantile Exchange futures price for
natural gas averaged $2.31/MMbtu in 1999, up 6.5% from 1998. The average price
for February of this year was $2.60/MMbtu, up 32.3% from $1.76/MMbtu in February
1999.
US UPSTREAM SPENDING
- --------------------
This year, companies plan to increase their US upstream spending by nearly 30%
from last year to $26 billion. As expected, unsteady prices led E&P outlays to a
29.7% drop in 1999 vs. 1998.
Capital expenditures for exploration and drilling in the US are planned to reach
$21.4 billion in 2000. A year ago, E&D spending was expected to drop by 23.1%.
The actual decline, however, was 27.2% from 1998 levels, as companies remained
skeptical about the scope of the oil price recovery.
Outer continental shelf (OCS) lease bonus payments collapsed to $249 million
last year, the lowest since 1993, when they totaled $126 million. The US
Minerals Management Service projects that OCS bonus payments will top 1999
levels by 68.3% at $419 million this year. MMS remains cautious with this year's
estimate, however, which is significantly lower than the $1.32 billion in OCS
lease bonus payments in 1998.
Capital spending on US production also fell in 1999, to $3.2 billion from $4.3
billion in 1998. Plans call for a sharp increase in spending for production and
enhanced recovery projects this year, up 28.9% to $4.1 billion. Wellhead
revenues vary along with production levels and prices of crude oil and natural
gas. In 1999, US wellhead revenues moved up 16.4% on the year to $76.2 billion,
and OGJ estimates that they will be up by a further 17.2% this year, to $92
billion.
Another indicator of upstream spending is the Baker Hughes Inc. count of active
rotary rigs. While the US weekly rig count averaged only 625 for last year,
there has been an upward trend since the tally bottomed last April. Late last
month, the US rig countaveraged 775. OGJ has forecast that rig activity will
average 800 for this year. Well completions are also forecast to be up this year
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at 25,600. The number of US well completions reached a modern low in 1999 at an
estimated 20,770 (OGJ, Jan. 31, 2000, p. 44).
NON-E&P SPENDING
- ----------------
US non-E&P spending is projected to be higher than last year's level, up 11.9%
to $16.6 billion. This follows a decline of 11.4% in 1999 to $14.8 billion.
While there will be small fluctuations for spending on refining and
petrochemical projects, larger shifts in spending will occur for pipelines,
mining, and marketing.
Last year, there was a decline in outlays for petrochemicals, marketing, and
mining and a small increase in spending for refining and gas pipelines. Crude
and product pipeline outlays dropped slightly in 1999, and other transportation
spending was lower by 9.2%.
Refinery investments in 1999 were up only 1.1% at $3.5 billion. This year,
spending in this area will hold steady, expected to dip by only 0.8%.
Expenditures for refineries typically increase when a boost in demand for
products is anticipated. In 1998, there was a 12.4% increase in refining capital
spending. Demand for petroleum products in the US has been rising steadily
throughout the past decade. In order to meet this demand growth, US refiners
have been slowly adding capacity to existing refineries and restarting idle
units. US operable refining capacity has increased from an average 15.594
million b/d in 1997 to 15.785 million in 1998 and to 16.3 million b/d in 1999,
estimates the American Petroleum Institute. US refinery utilization has taken a
turn, though. API calculates that capacity utilization dropped last year to a
4-year low of 92.6% after climbing to 95.4% in 1998 from 95.2% in 1997.
Capital spending on petrochemical plants will decrease by 6.9% to nearly $1.9
billion this year. This drop is much less steep than in 1999 when petrochemical
spending fell by 30.1%.
In general, petrochemical investment operates in cycles and is driven by the
state of the overall economy, as many consumer goods require the plastics that
are manufactured with petrochemicals. In order to respond to increased demand,
often there are large capital outlays as plants increase capacity, and the cycle
is completed when demand drops and they are left with excess capacity and flat
earnings.
Spending on natural gas pipelines is expected to surge this year. After posting
a modest gain of 3.7% in 1999, expenditures will be up 84.5% to $3.69 billion
for 2000. Conversely, investments for crude and products pipelines will plummet
by 55.5% to $540 million from $1.2 billion in 1999.
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Plans call for 3,222 miles of natural gas pipeline and 660 miles of crude and
products pipeline to be laid in the US in 2000 (OGJ, Feb. 7, 2000, p. 36). This
is up from total 1999 construction, with 1,734 miles of natural gas pipeline and
1,540 miles of crude and products pipeline laid that year (OGJ, Feb. 8, 1999, p.
36).
Capital spending on transport equipment other than pipelines is expected to
climb 15.3% in 2000 to $785 million vs. a drop of 9.2% to $681 million in 1999.
Spending on marketing facilities will increase 11.4% to $2.9 billion this year.
In recent years, budgets have been cut in this area due to lower cash flows. In
1999, capital expenditures for marketing decreased 13.6%, following a 6.9% drop
in 1998.
Capital spending by petroleum companies on non-petroleum activities in the US is
estimated to increase by 15.5% in 2000 to $3.3 billion, after falling 19.3% in
1999 to $2.8 billion. This type of spending is also greatly influenced by cash
flows.
CAPITAL SPENDING IN CANADA
- --------------------------
An increase in capital expenditures in Canada is also expected this year,
although it will be smaller than the boost in US spending. Plans call for total
spending in Canada to move up 14.4% to $17 billion from $14.9 billion in 1999.
Investments in Canada are heavily weighted on the upstream side of the industry.
Last year, total Canadian spending was nearly unchanged from 1998, up only 1.4%.
While upstream spending was down slightly in 1999, non-E&P spending increased by
12.4%.
Canadian E&P spending has increased significantly since the early 1990s, when it
averaged only $5.5 billion/year. Since then, Canadian gas production has
increased to meet rising demand in US markets.
Drilling and exploration expenditures are expected to jump this year to $9.6
billion, up 20% from $8 billion in 1999. Production expenditures will increase
to $4.3 billion, putting total Canadian E&P spending at $13.9 billion. The
closest it ever has come to this record high was when it hit $11.9 billion in
1997.
The Canadian weekly rig count has fallen in the past 2 years, averaging 261 in
1998 and 246 last year, down from an average of 375 in 1997. For February 2000,
the average weekly tally of active rigs in Canada recovered to 544. Well
completions in Canada are projected to rebound this year as well. OGJ estimates
a 12.3% increase in Canadian well completions, up to 13,771 this year vs. 12,076
in 1999 (OGJ, Jan. 31, 2000, p. 64).
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Total Canadian non-E&P spending will be off slightly from last year, with
dramatic changes in the types of pipeline expenditures offsetting each other. In
1999, non-E&P spending increased by 12.4%, buoyed by a 29.1% rise in crude and
products pipeline outlays. This year, expenditures for crude and products
pipelines in Canada are expected to sink by 84.9% to $234 million. Spending in
this category peaked in 1999 at $1.6 billion; its recent low was a mere $7
million in 1992.
Spending for natural gas pipelines, on the other hand, will more than triple
from last year. Up 227.3% to $1.4 billion, spending on natural gas pipelines
will dominate non-E&P spending in Canada in 2000. The increase to $428 million
in 1999 natural gas pipeline spending was a modest 8% gain from 1998.
A total of 1,420 miles of new pipeline construction is planned for Canada in
2000. Natural gas pipelines account for 1,047 miles of this total (OGJ, Feb. 7,
2000, p. 36). In 1999, construction was planned for a total of 1,835 miles of
new pipe (OGJ, Feb. 8, 1999, p. 36). Expenditures for transportation activities
other than pipelines are expected to dip 2% to $96 million this year.
Canadian refining spending is projected to inch up 1.1% to $359 million. Last
year, refining expenditures were up 2% at $355 million. Petrochemical spending
will show a small gain this year as well, moving up 3.4% to $122 million after
increasing 4.4% to $118 million in 1999.
Marketing outlays are planned to move back up after their 1999 decline of 6.3%,
rising by 5.2% this year to $344 million.
Spending in Canada for mining and other energy projects, including oilsands
development, is expected to jump by 46.1% to $453 million vs. $310 million last
year. Oil and gas industry capital spending for non-petroleum activities in
Canada is planned to be lower by 0.9% this year, to $107 million.
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SPENDING OUTSIDE US AND CANADA
- ------------------------------
Although US and Canadian companies are planning to spend more money in their two
countries this year, they are planning to spend less for projects outside the US
and Canada.
The OGJ survey collected data from 22 companies based in the US and Canada that
are planning capital and exploration expenditures for projects outside the US
and Canada this year. These companies plan to spend $15.9 billion on such
projects, a 7.2% decrease from the $17.2 billion they spent in 1999. In 1998,
these same companies spent $19.8 billion on projects outside the US and Canada.
In this geographical category, E&P budgets have been decreased, but non-E&P
spending is expected to increase in 2000.
Breaking down the companies' plans, expenditures for drilling and exploration
will diminish by 13.2% to $4.8 billion this year. In 1999, these investments
were 23.9% lower than in the previous year. Production outlays are expected to
be 11.2% lower, settling at $6.9 billion. In total, US and Canadian companies
will spend 12% less on upstream expenditures outside the US and Canada compared
with last year.
Non-E&P spending outside the US and Canada is expected to be up 9.2% at $4.2
billion. In 1999, outlays in this area were $3.9 billion, down 14.5% from $4.5
billion in 1998.
The strongest gain in non-E&P spending will be for pipelines. Plans call for
these 22 companies to spend $398 million in 2000 for pipeline construction,
128.7% more than last year.
Spending will fall slightly for petrochemical projects, down 2.1% to $1.7
billion. Refining spending, however, will increase 15.9% from 1999 to $735
million. Marketing expenditures will also move up this year to $1.2 billion, a
4.5% jump.
All other non-E&P outlays by these companies will be up 7.7% to $208 million
from $192 million in 1999.
- ----------------------------------------
Author: Marilyn Radler
Issue: Oil and Gas Journal. April 10, 2000
2000 PennWell Publishing Co.
2000 Gale Group
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DOCUMENTS REVIEWED AND RESEARCH
-------------------------------
DOCUMENTS REVIEWED AND INTERVIEWS PERFORMED
- -------------------------------------------
Our review included, but was not limited to the following documents:
1. Great Northern Gas Company Securities and Exchange 10-KSB filings for the
years ended December 31, 1996 through 1999;
2. Great Northern Gas Company Securities and Exchange 10-QSB filings for the
three months ended March 31, 2000, six months ended June 30, 2000, and nine
months ended September 30, 2000;
3. Great Northern Gas Company U.S. Corporate Income Tax Returns for the years
ended December 31, 1995 through 1999;
4. Articles of incorporation and bylaws;
5. Board of director minutes for the years ended December 31, 1996 through
2000;
6. Various Security and Exchange filings and/or report for various publicly
traded companies with a focus in the oil and gas industry;
7. Various research in the oil and gas industry;
8. Independent auditors' report (unqualified) and financial statements of
Teton Petroleum Company as of June 30, 2000;
9. Interview of Thomas DiGrappa, director, chief operating officer and
president of Great Northern Gas Company;
10. Interview of Patrick Quinn, CPA, Great Northern Gas Company external
certified public accountant;
11. Other documents made available or obtained by us during our engagement
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RESEARCH
- --------
We reviewed the following sources relative to our valuation:
1. Shannon P. Pratt. Valuing a Business - The Analysis and Appraisal of
Closely Held Companies Third Edition. Irwin McGraw-Hill, 2000.
2. Shannon P. Pratt. Valuing a Businesses, The Analysis and Professional
Practices Third Edition. McGraw-Hill, 1998.
3. Shannon P. Pratt. Guide to Business Valuations. Practitioners Publishing
Company. 2000.
4. Robert F. Reily and Robert P. Schweihs. The Handbook of Advanced Business
Valuations. Irwin Professional Publishing. 1998.
5. John a. Bogdanski. Federal Tax Valuation. Warren, Gorham & Lamont. 1996.
6. Idelle a. Howitt. Federal Tax Valuation Digest 1995/1996 Cumulative
Edition. Warren, Gorham & Lamont. 1995.
7. "Discounts Involved in Purchases of Common Stock" in U.S. 92nd Congress,
1st Sessions, House Institutional Investor Study Report of the Securities
and Exchange Commission (Washington, D.C.: Government Printing Office,
March 10, 1971, 5- 2444-2456, Document No. 92-64, Part 5)
8. Milton Gelman "An Economists-Financial Analyst's Approach to Valuing Stock
of a Closely Held Company" Journal of Taxation, June 1972, pp. 353-54
9. Robert R. Trout, "Estimation of the Discount Associated with the Transfer
of Restricted Securities" Taxes, June 1977, pp. 381-85
10. Robert E. Moroney, "Most Courts Overvalue Closely Held Stocks" Taxes, March
1973, pp. 144-54
11. Michael Maher, "Discounts for Lack of Marketability for Closely-Held
Business Interests" Taxes, September 1976, pp. 562-71
12. John D. Emory, "The Value of Marketability as Illustrated in Initial Public
Offers of Common Stock" February 1992 through July 1993 and various updated
publications.
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13. Z. Christopher Mercer, ASA, CFA. Quantifying Marketability Discounts.
Peadbody Publishing, LP, 1997.
14. Stocks Bonds Bills and Inflation, 2000 Yearbook. Ibbotson Associates, Inc.
2000.
15. Various course materials from the National Association of Certified
Valuation Analyst, American Institute of Certified Public Accountants, and
American Society of Appraisers.
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METHODS OF VALUATION
--------------------
The following are several of the most commonly used methods of valuation. As
will be discussed, each method may at times appear more theoretically justified
in its implementation than other methods. The soundness of a particular method
however, is entirely based on the relative facts and circumstances involved in
each individual valuation case.
The various valuation methods are as follows:
o Adjusted Net Assets Method
o Capitalization of Earnings Method
o Public Comparable (Guideline) Method
o Dividend Paying Capacity Method
o Excess Earnings - Treasury Method
o Discounted Earnings Method
Adjusted Net Assets Method
The adjusted net assets method is an "asset" oriented approach. This method
is used to value a business based on the difference between the fair market
value of the business's assets, less its liabilities. Depending on the
particular purpose or circumstances behind the valuation, this method
sometimes uses the "replacement" or "liquidation" value of the company's
assets less the liabilities. Under this method the book value of the assets
are adjusted to either their fair market, replacement, or liquidation
value, and then reduced by any booked or unrecorded liabilities. This
method is used to derive a total value for the business, or values for
individual parts of the business.
The adjusted net assets method is a sound method for estimating the value
of a business of a non-operating nature (i.e., holding or investment
companies). It is also an acceptable method for estimating the value of a
business, which is continuing to generate losses, or which is to be
liquidated. This method does not consider the earnings of the business and
therefore can not effectively be used to estimate the value of intangible
assets, if any.
Capitalization of Earnings Method
The capitalization of earnings method is an "income oriented" approach.
This method is used to value a business based on the future estimated
earnings to be generated by the company. The estimated future earnings are
capitalized by an appropriate capitalization rate.
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This method assumes that all of the assets, tangible or intangible, are
indistinguishable parts of the business, and does not attempt to separate
the values of the two. In other words, the critical component to the
business' value is its earnings.
This method is more theoretically sound in valuing a profitable business
where the investor's intent is to provide for a return on investment, over
and above a reasonable amount of compensation.
Public Comparable (Guideline) Method
The public comparable (guideline) method is also an "income oriented"
approach, and is similar to the capitalization of earnings method. The
difference between the two lies in the differences between the "type" of
earnings used, and the source of the capitalization rate used in the
valuation calculation.
This method is used to value a business by first calculating the future
estimated net income (after-tax) to be produced by the business, and
capitalizing these earnings using a weighted average comparable P/E ratio
of publicly traded companies.
This method utilizes public companies in the same or similar industry to
develop value multiples, such as price-to-earnings and/or price-to-equity
ratios, which are then multiplied by the operating results or equity value
of the subject company being valued to arrive at an estimate of the subject
company's equity value.
The value of an asset is often defined in terms of what it
can be sold for in a cash transaction. This same value
should apply not just to the asset being sold, but also to
all similar assets. Therefore, an asset's value can
sometimes be determined based on what similar or comparable
assets have recently been sold for in cash transactions.2
This method is particularly useful for estimating the value of businesses that
are relatively large and diversified, and that can be compared to publicly
tradedcompanies. This method is also highly regarded because it utilizes market
comparisons.
- ---------------------
2 Jay E. Fishman and Shannon P. Pratt. Guide to Business Valuations.
Practitioner Publishing Company. 2000. Page 6-1.
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The P/E ratio method would not be appropriate for valuing smaller companies
that do not have publicly traded comparable. Another problem is that the
"type" of earnings base of the subject company may not be consistent with
the earnings base of the comparable companies. Furthermore, adjustments to
earnings in order to maintain consistency are not easily determined.
Dividend Paying Capacity Method
The dividend paying capacity method sometimes referred to as the "dividend
payout method", is also an "income oriented" approach, and is similar to
the capitalization of earnings method. Again, the difference between this
method and the capitalization of earnings method lies in the difference in
the "type" of earnings used in the calculations, and the source of the
capitalization rate.
This method of valuation is based on the future estimated dividends to be
paid out, or the capacity to pay out (on a pre-tax basis). It then
capitalizes these dividends with preferably a five year weighted average of
dividend yields of publicly traded comparable companies, also on a pre-tax
basis.
This method is particularly useful for estimating the value of businesses
that are relatively large, and that have had a history of paying dividends
to its shareholders. It is highly regarded due to the fact that it utilizes
market comparisons.
Similar to the price/earnings ratio method, this method would not be
appropriate for valuing most small businesses because of the lack of
comparable publicly traded companies. Another problem with this method is
that most closely held businesses avoid paying dividends. For tax purposes,
compensation is usually the preferred method of distributing profits.
Excess Earnings - Treasury Method
The excess earnings - treasury method is one of the derivative methods
stemming from what is often called the excess earnings-return on assets
method. This method acquired its name from the IRS in ARM 34 and Revenue
Ruling 68-609. Unlike all of the other methods discussed thus far, this
method is an "income and asset" oriented approach to arrive at a value for
closely held businesses. It is based on the premise that the total
estimated value of a business is the sum of thevalues of the adjusted net
assets (as determined by the adjusted net asset method) and the value of
its intangible assets. The determination of the value of the intangible
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assets of the business is determined by capitalizing the earnings of the
business that exceeds a "reasonable" return on the historical (industry)
net assets of the business.
This method is usually best used for businesses which are considered
capital intensive.
Discounted Earnings Method
The discounted earnings method is often referred to as the "discounted cash
flow" method, which suggests that the only "type" of earnings that should
be applied with this method would be some definition of cash flow (i.e.,
operating cash flow, after- tax cash flow, or discretionary cash flow). The
discounted earnings method however, is more limited in its definition as to
the "type" of earnings that can be applied.
The discounted earnings method is an "income oriented" approach, and is
based on the theory that the total value of a business is the present value
of its projected future earnings, plus the present value of the business
terminal value. This method requires that a terminal value assumption be
made. The amounts of projected earnings and terminal value are "discounted"
to the present using an appropriate "discount rate".
This method is most often used by buyers and sellers of businesses, and it
is least often used in litigation or tax situations. The reason for this is
the heavy reliance on "projected" earnings, the use of which is often
frowned upon by the courts and the IRS.
VALUATION APPROACH SUMMARY
- --------------------------
The determination of the valuation approach to be utilized is based upon a
variety of factors. In that regard, the discounted future earnings approach
was not utilized, due to the fact that it requires projecting earnings into
the future, based upon assumptions as to the occurrence of future events.
The capitalization of earnings method was not utilized as the Company has
not had sufficient and/or consistent historical earnings to reflect fair
market value. The capitalization of excess earnings method was not utilized
as it is a hybrid of the valuation methods that we did select.
Accordingly, the methods of valuation we have selected to estimate the fair
market value of the Company is the comparable (guideline) company method
and the adjusted net asset method based on the following facts:
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1. We were able to locate sufficient comparable companies;
2. The Company has not reported sufficient and/or consistent historical
earnings that provide a return to the investor based on the adjusted net
assets of the Company;
Therefore, we have utilized the two most appropriate valuation methods and have
weighted them accordingly to estimate the fair market value of the Company.
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VALUATION ADJUSTMENT ANALYSIS
-----------------------------
VALUATION ADJUSTMENT STUDIES - DISCOUNT FOR LACK OF MARKETABILITY
- -----------------------------------------------------------------
The fact that there is not a readily accessible market for closely-held stock
substantially increase the risks of ownership due to an inability to achieve
liquidity within a short period of time. A framework for qualitatively assessing
conditions believed to lead to gradations in value impairment was provided by
David Simpson in his article "Minority Interest and Marketability Discounts: A
Perspective, Part II", Business Valuation Review, March 1991. The model of the
following page is presented as a way to view various elements that affect
marketability and positions the Company's equity interest within this framework.
In its truest sense, a discount for lack of marketability is a means of
equalizing a minority interest in a closely-held stock with a minority interest
in a publicly-traded stock, which can be sold easily without a material
concession in price merely because of the necessity of sale. This principle was
explained in Central Trust v. United States, 305 F. 2d 292 (Ct. Cl., 1962), 62-2
U.S.T.C. 12, 092 by the Court of Claims: "It seems clear ... that an unlisted
closely-held stock of a corporation in which trading is infrequent and which
therefore lacks marketability, is less attractive than a similar stock which is
listed on an exchange and has ready access to the investing public."
General factors identified in empirical studies that affect marketability
include:
1. Put rights - Can guarantee a market under certain conditions.
2. Dividend history - If none, a shareholder is dependent entirely upon
the ability to sell the stock in the future to realize any investment
return.
3. Potential buyers - The existence of a reasonable number of potential
buyers or even one potential strong buyer may indicate evidence of a
market.
4. Size of minority block - Larger blocks require more funds to finance
their purchase than smaller blocks.
5. Prospect of public offering - A company committed to remaining private
has no prospect of public offering.
6. Restrictive agreements - Provisions that limit the ability/right of a
shareholder to transfer stock restrict the universe of potential
buyers.
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The following schedule illustrates the concepts of marketability:
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If Securirites Are Publicaly Held-
Able to sell without restriction
Registered:
Active market Maximum Liquidity
Thin market
Unresistered:
Active market
Thin market Great Northern Gas
Restricted stock assures of an eventual market: Gas Company
Registered:
Active market
Thin market
Unredistered:
Active market
Thin market
If Securities Are Closely Held-
No restrictioin on sale:
Evidence of a market:
Meaningful history of dividends
No history of dividends
No evidence of a market:
Meaningful history of dividends
No history of dividends
Restrictions on sale:
Evidence of a market:
Meaningful history of dividends
No history of dividends
No evidence of a market:
Meaningful history of dividends
No history of dividends Most Impaired Value
---------------------------------------------------------------------
The benchmarks for establishing discounts for lack of marketability come
primarily form two sets of ad hoc studies: restricted stock studies and initial
public offering (IPO) studies.
Restricted Stock Studies
Restricted stocks are similar to freely traded stocks except that for a certain
period of time, which varies from case to case, they are restricted from trading
on the open market. According to Revenue Ruling 77-287, restricted stocks are
defined in Securities andExchange Commission ("SEC") Rule 144 as "securities
acquired directly or indirectly from the issuer thereof, or from an affiliate of
such issuer, in a transaction or chain of transactions not involving any public
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offering." Letter stocks, a form of restricted stock, are frequently used as a
viable option by corporations seeking to raise capital or make acquisitions
without the time and expense spent on registering the stock with the SEC.
Founders or other insiders may own portions of the publicly traded company's
stock that have never been registered for public trading. Letter stock is also
restricted from being sold in the open market.
Under certain circumstances, restricted or letter stock may be sold in private
transactions. These SEC-reported transaction are compared to prices of the same,
but unrestricted stock traded on the exchange on the same day. Since the
restricted stock participates in dividends, voting, and other rights enjoyed by
the holders of the unrestricted shares, the price discounts on restricted stock
appear to be due solely to their lack of marketability.
SEC Accounting Release No. 113 acknowledges that restricted stock lack
marketability and therefore, provides insight that relates to the lack of
marketability studies:
"Restricted stocks are often purchased at discount, frequently
substantial, from the market price of outstanding unrestricted
securities of the same class. This reflects the fact that
securities which cannot be readily sold in the public market
place are less valuable than securities which can be sold, and
the fact that by the direct sale of restricted securities,
sellers avoid the expense, time and public disclosure which
registration entails."
Within approximately 24 months restriction on letter stock often expired.
(Effective April 29, 1997, trading restrictions have been reduced to a 12-month
period.) The stock can be sold in the market subject to any remaining
restrictions, volume or otherwise, of SEC Rule 144. Justifiably, the mere fact
that, eventually, the restricted stock can be traded on the open market gives
rise to a lower discount than for closely-held stock that is never expected to
be freely traded. Investors will recognize the difference between the restricted
stock and the closely-held stock and be willing to pay more for restricted
stock. This difference is addressed later in our discussion of the initial
public offering studies.
Restricted stock studies have offered valuable information giving credence to
the existence of a lack of marketability discount for minority interest in
stocks that are not traded on the open market. A capsule summary of the
published studies follows:
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SEC Institutional Investor Study
This study, performed by the SEC and published in 1971, compared prices on
restricted common stock purchased from January 1, 1966 through June 30, 1969, to
prices of identical stock traded freely on the open market. The study divided
purchases into four categories based upon where the unrestricted stock traded:
New York Stock Exchange; American Stock Exchange; over-the-counter ("OTC")
reporting companies; and OTC nonreporting companies. A reporting company is a
publicly traded company that must file Forms 10-K, 10-Q, and other information
with the SEC. A nonreporting company is a publicly traded company that is not
required to file the above forms either because its total asset are less than $1
million or the number of stockholders is fewer than 500. A nonreporting OTC
company is representative of the closely-held company with its lack of public
information and smaller size.
The study found discounts were the highest for OTC nonreporting companies,
followed by OTC reporting companies, American Stock Exchange listed stocks, and
lastly, the New York Stock Exchange listed stocks. For the time period studied,
the overall average mean discount was 25.8%, which also closely approximated the
median. OTC nonreporting companies show a mean and median discount of 32.6% when
compared to their freely traded counterparts.
The study also found that discounts were greatest for those companies with the
smallest sales volume while the companies with the largest sales volume showed
smaller discounts. However, this observation may not attributed to sales volume
alone since most of the companies with the largest sales volume traded on the
New York Exchange, which represents significantly more liquid market than the
other exchanges at the time of the study. The discount today between the OTC
restricted and unrestricted stock is expected to be somewhat narrowed due to
technological advances in electronic communications and the advent of NASDAQ.
The Internal Revenue Service issued Ruling 77-287, "Valuation of Securities
Restricted from Immediate Resale", in 1977 to establish guidelines for the
valuation of restricted securities that incorporate the general findings of this
study.
Gelman Study
Milton Gelman published a study in 1972 detailing his analysis of prices paid
for restricted securities by four closed-end investment companies whose
specialties were in restricted securities investments. The study was based on 89
transactions occurring between 1968and 1970. Gelman found that the average and
median discounts were 33% while almost 60% of the transactions were at discounts
of 30% and higher.
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Trout Study
Robert Trout studied 60 purchases of letter stocks by mutual funds from 1968 to
1972. He sought to provide a financial model to arrive at an estimated discount
for privately-traded stock. Trout used regression analysis and arrived at an
average discount of 33.45% for restricted stock as compared to publicly-traded
stock.
Moroney Study
Robert Moroney researched the prices paid for restricted securities by 10
registered investment companies on 146 purchases. He found that the average
discount was 35.6% while the median discount was 33.0%.
Moroney further showed the discrepancy between actual cash transactions of
restricted stock purchases with lower-than-average discounts for lack of
marketability than had been ruled in most previous court decisions on gift and
estate taxes. Prior to this study, empirical data was generally not available to
benchmark lack of marketability discounts. Moroney suggested in his report that
higher discount rates for lack of marketability be allowed:
"Some appraisers have for years had a strong gut feeling that
they should use far greater discounts for nonmarketability than
the courts had allowed. From now on those appraisers need not
stop at 35% merely because it's perhaps the largest discount
clearly approved in a court decision. Appraisers can now cit a
number of known arm's-length transactions in which the discount
ranged up to 90%."
Maher Study
In a study similar to Moroney's, J. Michael Maher analyzed mutual fund
restricted stock purchases for 1969 - 1973 period. The study found that the mean
discount was 35.43%. When the top and bottom ten percent of purchases were
eliminated in order to eliminate high - low risk situations, the mean discount
moved slightly lower to 34.73%. Maher concluded that a discount of approximately
35% would be appropriate for lack of marketability since investors would not
have the opportunity to take advantage of other investments and would have their
investment at risk until shares could be offered publicly or another purchaser
is found.
Standard Research Consultants Study
Private placements were studied in 1983 by the Standard Research Consultants to
verify the continued validity of the SEC Instititutional Investor study.
Twenty-eight private placements of restricted common stock were selected from
October 1978 through June 1982; the discount ranged from 7% to 91% with a median
of 45%.
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Willamette Management Associates Study
From the period January 1, 1981 through May 31, 1984, purchases of private
placement restricted stocks were studied. Willamette used 33 arm's-length
transactions in which restricted share prices could be compared directly with
the price of purchases of identical unrestricted shares within the same company
at the same time. It found that restricted share prices were 31.2% below the
unrestricted share prices.
Silber Study
William Silber examined 310 restricted stock transactions between 1981 and 1989.
He selected 69 transactions without warrants and other special provisions, as
reported by Securities Data Corporation. The discount ranged from a premium of
12.7% to a discount of 84%, with an average of approximately 34%.
FMV Opinion, Inc. Study
FMV Opinion, Inc. followed up on the SEC Study by examining over 100 restricted
stock transactions from 1979 through April 1992. The average discount rate
indicated by the thirteen years in the study was 23%. The study affirmed the SEC
Study in that the size of the discount often correlated with the amount of
earnings, sales and trading market.
The study also added three additional factors that impacted the size of the
marketability discount: the dollar value of the block, the percentage size of
the block being sold, and the market value of the corporation. Blocks of stock
valued at less than $10 million had the highest marketability discount at 20% to
30%. As the size of the block increased pat $10 million, the discounts for
marketability decreased to 10% to 20%. For blocks of stock representing in
excess of ten percent ownership, discounts were higher (20% to 30%) than for
blocks with less than ten percent ownership. Corporations with market
capitalization in excess of $100 million showed discounts of 10% to 20% as
compared to corporations with capitalization below $50 million (30% to 40%).
Summary of Restricted Stock Studies
The table below shows the restricted stock studies performed, the period of time
covered, and resulting discount determined. Spanning 26 years, the level of
discounts reported by the studies have been fairly consistent, however, there
has been a trend toward lower discounts. The reason may be that, since the early
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1990s, more transactions now occur under SEC Rule 144(a), allowing restrictive
securities to be more marketable.
Study Years Covered Average Discount
------------------------------------- --------- ----------------
SEC, Overall Average (1) 1966-1969 25.80%
SEC, Non-Reporting OTC Companies (1) 1966-1969 32.60%
Gelman (2) 1968-1970 33.00%
Trout (3) 1968-1972 33.50%(median)
Moroney (4) (10) 35.60%
Maher (5) 1969 35.40%
Standard Research Consultants (6) 1978-1982 45.00%(median)
Willamette Management Assoc, Inc. (7) 1981-1984 31.20%(median)
Siber (8) 1981-1988 33.80%
FMV Opinions, Inc. (9) 1979-1992 23.00%
-----------------------------------------------------------------------
(1) Discounts Involved in Purchases of Common Stock [1966-1969],
Institutional Investors Study Report of the Securities and Exchange
Commission, H.R. Doc. No. 64, Part 5, 92d Cong., 1st sess. 1971
pp. 2444-2456.
(2) Milton Gelman, An Economist-Financial Analyst's Approach to Valuing
Stock of a Closely-Held Company, Journal of Taxation, June 1972, pp.
353-354.
(3) Robert R. Trout, Estimation of the Discount Associated with the
Transfer of Restricted Securities, Taxes, June 1977, pp. 381-385.
(4) Robert E. Moroney, Most Courts Overvalue Closely-Held Stocks, Taxes,
March 1973, pp. 144-154.
(5) J. Michael Maher, Discounts for Lack of Marketability for Closely-Held
Business Interest, Taxes, September 1976, pp. 562-571.
(6) Revenue Ruling 77-287 Revisited, SRC Quarterly Reports, Spring 1983,
pp.1-3.
(7) Willamette Management Asscoiates study (unpublished).
(8) William L. Silber, Discounts on Restricted Stock: The Impact of
illiquidity on Stock Prices, Financial Analysts Journal, July-August
1991, pp. 60-64.
(9) Lance S. Hall and Timothy C. Polacek, Strategies for Obtaining the
Largest Valuation Discounts, Estate Planning, January/February 1994,
(10) Although the years covered in this study are likely to be 1969-1972,
no specific years were given in the unpublished account. pp. 38-44.
-----------------------------------------------------------------------
IPO Studies
The focus of lack of marketability studies before the 1980s was the comparison
of restricted stock prices to unrestricted stock prices. Analysts and
researchers acknowledged that a difference still remained in the discount
between a purchase of restricted stock that would eventually sell on the open
market and the discount for a closely-held stock that may never be publicly
traded. To identify this discount, prices of private transactions were compared
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to the prices after the initial public offering by using data in the
registration statements when the companies filed with the SEC to sell to the
public. Two firms have performed this type of study: Robert W. Baird & Company
and Willamette Management Associates.
Emory Studies
John D. Emory, First Vice President in Appraisal Services at Robert W. Baird &
Company, has performed a series of studies on IPOs to determine marketability
discount rates. Baird is a large, regional investment banking firm based in
Milwaukee, Wisconsin. Emory has performed a total of eight studies on public
offerings in eighteen month segments encompassing 12 years. The time periods are
as follows: 1980-1981, 1985-1986, 1987- 1989, 1989-1990, 1990-1992, 1992-1993,
1994-1995, and 1995-1997.
The source documents for the studies were IPO prospectuses which required
disclosure of security transactions between principles and insiders that took
place since the beginning of the registrant's last fiscal year prior to the
offering. The prospectuses were analyzed to determine the relationship between
the price at the time of the offering versus the price of the latest private
transaction within five months prior to the offering. Emory limited the
prospectuses analyzed to companies that were financial sound, so any company
with history of operating losses was eliminated, and to companies that had
offering either by granting options to purchase commons stock or through the
direct sale of stock. Elimination from selection were development stage
companies and companies whose IPO price was less than $5.00.
After the criteria were applied, a total of 310 transactions out of 2,241
prospectuses analyzed were left for analysis in the eight studies. Taking into
account the ensuring public offering and the need to withstand SEC, IRS, or
judicial review gave more assurance that the pre-IPO private transactions
occurred at fair market value. Emory note that the eight studies were performed
in a myriad of economic conditions, but the results did not change
significantly. The following table summarizes Emory's eight studies:
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--------------------------------------------------------------
# of IPO # of Discount
Period Prospectuses Qualifying ----------------
Covered Reviewed Transactions Mean Median
------- -------- ------------ ---- ------
1997-2000 92 53 54% 54%
1995-1997 732 91 43% 42%
1994-1995 318 46 45% 45%
1992-1993 443 54 45% 44%
1990-1992 266 35 42% 40%
1989-1990 157 23 45% 40%
1987-1989 98 27 45% 45%
1985-1986 130 21 43% 43%
1980-1981 97 13 60% 66%
--------- --------- --------- --------
All 9 Studies 2,241 310 47% 47%
========= ========= ========= ========
---------------------------------------------------------------
Most of the qualifying transactions reflected options granted at fair market
value while other transactions were actual stock transactions. Emory found that,
on average, sale transactions have higher discounts than option transactions.
The mean discount for the 67 sales transactions in the eight studies was 50%,
and the median was 51%. Emory also concluded that the size of the transaction
did not seem to be much of an influence on the size of the discount.
Willamette Management Associates Study
Willamette conducted twelve studies that concentrated on SEC registration
statements, primarily Forms S-1 and S-18. These two forms require disclosure of
all private transactions of a company's stock within three years before its
public offering. The periods covered in the studies are as follows: 1975-1978,
1979, 1980-1982, 1984, 1985, 1986, 1987, 1989, 1990, 1991, and 1992. Willamette
sought to include only arm's-length transactions in the study. Private
placements and repurchases of treasury stock were included; however, any stock
option transaction or insider sales were eliminated from the study unless there
was reason to believe it occurred at full value. Also, eliminated were any
financial institutions, natural resource companies, offerings priced at or below
$1.00 per share, and any offerings that included units or warrants. These
offerings were deemed to have special or distinguishing characteristics that set
them apart from the other transactions in the studies.
The Willamette studies then made comparisons of the price per share on private
transactions ranging from 1 to 36 months before the public offering to the price
per shareat the time of the offering. Since market conditions could change over
the 36-month period allowed in the comparison, discounts were made in the
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studies by using the industry stock price index at the time the private
transaction and of the public offering. A total of 879 transactions were
evaluated from 428 companies (if more than one transaction met the criteria, all
were included). The Willamette results showed that median discount for private
transaction prices compared to public offering prices for the time periods
studied ranged from 39.1% to 80.5%.
The Willamette studies also made the same comparisons using the price/earnings
ratios of the private transactions and the public offerings. Again, if market
conditions had changed over this time span, a discount was made by using the
industry average price/earnings ratios at the time of the private transaction
and at the time of the offering. For this comparison, the Willamette studies
analyzed 503 transactions from 296 companies. The discounts for private
transaction price/earnings ratios as compared to public offering price/earnings
ratios ranged from 31.8% to 74.4%.
Summary of IPO Studies
Both the Emory and Willamette studies showed higher average marketability
discounts as compared to the restrictive stock studies. The IPO studies support
a discount of approximately 45% while the restrictive stock studies support a
discount of approximately 35%. Due to the more recent time periods for these
studies, the IPO-implied discount for lack of marketability is generally thought
to be truer measure for closely-held securities than the restricted stock
studies.
Summary of Discount for Lack of Marketability Studies
The lack of marketability studies reinforce the belief that privately-held
minority interests should be significantly adjusted as compared to publicly-held
minority interests. Reflecting on his work, Emory stated:
"The final question to be answered is that if these kinds of
discounts are appropriate for promising situations where
marketability is probable, but not a certainty, how much greater
should discounts be for the more typical company's stock that has
no marketability, little if any chance of ever becoming
marketable, and is in a neutral to unpromising situation?
"In summary, the size of the discount for lack of marketability
depends on the individual situation. While there is not one
discount for lack of marketability applicable at all times to all
situations, it is apparent that the lack of marketability is one
of the most important components of value, and the public
marketplace emphasizes this point."
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Mandelbaum Decision
In Bernard Mandelbaum et al v. Commission (T.C. Memo 1995-255) the Court
recognized and accepted the 35% and 45% discount results of the restricted stock
and IPO studies, respectively, and applied its own qualitative assessment of
nine factors that would increase, decrease, or have no effect on these
benchmarks for lack of marketability. The factors considered were:
1. Financial statement analysis.
2. Company's dividend policy.
3. Nature of the company, its history, its position in the industry, and
its economic outlook.
4. Company's management.
5. Amount of control in transferred shares.
6. Restrictions on transferability of stock.
7. Expected holding period of stock.
8. Company's redemption policy.
9. Costs associated with making a public offering.
Many of these factors overlap those implicitly or explicitly considered in the
discount studies and in Revenue Ruling 59-60.
LACK OF MARKETABILITY VALUATION ADJUSTMENT SUMMARY
- --------------------------------------------------
Based on the above studies, the following similarities and/or differences should
be noted in comparing the Company to those of the studies. The following are
specific attributes of the Company:
o The shareholders have basically relied upon one primary buyer (the
Company) to make the market for the Company's shares for at least five
years prior to the date of this valuation report;
o The Company, as compared to many other publicly traded companies, is
not as technically advanced;
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GREAT NORTHERN GAS COMPANY BUSINESS VALUATION REPORT
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o The Company, as compared to many other publicly traded companies, is
operated by only 3 employees and one contract employee;
o The Company, as compared to many other publicly traded companies, does
not have the same level of financial sophistication and ability to
access the market for additional capital or debt;
o The shareholders of the Company are subject to receiving a return on
their investment solely through either distributions of earnings which
has not occurred in the five years prior to the date of this valuation
or through the liquidation of the underlying assets of the Company
which has not been considered by management of the Company.
o Management of the Company is not as sophisticated as the executives
that manage the companies in the studies.
In summary, an investor in the Company is subject to low market liquidity, and
greater risks (perceived and actual) than the companies in the studies. However,
the Company is well capitalized. As a result, a willing buyer - willing seller
would adjust the value accordingly. In that regard, we have adjusted the net
asset value by 15% to represent the lack of marketability discount.
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VALUATION ANALYSIS
------------------
PUBLIC COMPARABLE (GUIDELINE) APPROACH
- --------------------------------------
The primary basis for the Market Approach - Guideline Public Company data comes
from financial institutions that have publicly traded stock on either the New
York Stock Exchange (NYSE), American Stock Exchange (AMEX), or National
Association of Securities Dealers (Nasdaq). In selecting the appropriate
guideline companies to be utilized in the market approach valuation analysis,
various factors and attributes were considered and evaluated. Various factors
that were considered include, but are not limited to the following:
1. Capital structure 7. Products
2. Credit status 8. Markets
3. Depth of management 9. Earnings
4. Personnel experience 10. Dividend-paying capacity
5. Nature of competition 11. Book value
6. Maturity of the business 12. Position of company in industry
Based on our research, we have selected 6 publicly held companies that are in
the same industry with similar operations. A summary of these companies are as
follows:
Credo Petroleum Corp.
Credo Petroleum Corp. ("Credo") and its wholly owned subsidiaries, SECO Energy
Corp. and United Oil Corp., are independent oil an gas companies which engage in
oil and gas acquisition, exploration, development and production activities
mainly in the Mid-Continent and Rocky Mountain regions of the United States.
Credo's primary business activities are oil and gas production, operation of oil
and gas properties for the Credo's interest and for the interest of third
parties, purchasing producing oil and gas properties, and exploration for and
development of oil and gas properties.
Credo's staff oversee the operations of existing properties, evaluate property
acquisition opportunities and drilling prospects, and oversee drilling and
completion of new wells. Operations are concentrated on shallow to medium depth
properties generally ranging from 7,000 to 10,000 feet.
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Equity Oil Co.
Equity Oil Co. ("Equity") is an independent oil and gas exploration and
production company, currently conducting its business in eight states and two
Canadian provinces. Equity is also a 50% shareholder in Symskaya Exploration,
Inc. which is licensed to operate in Russia. Headquartered in Salt Lake City,
Equity also maintains an exploration office in Denver, Colorado and field office
in Cody, Wyoming and Vernal, Utah.
During the last five years, revenues from the sale of oil and gas have accounted
for more than 90% of the total revenue, while remaining revenue have come from
other sources, including interest income and invested funds.
The majority of Equity's oil production occurs in Colorado and other Rocky
Mountain states, and the Canadian provinces of Alberta and British Columbia. Its
crude oil production is sold under short-term contracts at current posted prices
for each geographic area, less applicable quality or transportation tariffs,
plus negotiated bonuses. The bulk of its natural gas production occurs in
Wyoming and the Canadian province of Alberta.
Aspen Exploration Corp.
Aspen Exploration Corp. ("Aspen") is primarily engage in the development of its
oil and gas reserves in California. Its major emphasis has been on its
participation in the oil and gas segment, acquiring interests in producing oil
or gas properties, and participating in drilling operations. While Aspen sold
its interest in producing properties in Montana, North Dakota, Oklahoma and
Texas, it has acquired a number of interests in oil and gas properties in
California.
Georesources Inc.
Georesouces Inc. ("GI") operates in two business segments:
1. Oil and gas exploration, development and production; and,
2. Mining of leonardite and manufacturing of leonardite based products which
are sold primarily as oil and gas drilling mud additives.
GI's oil and gas exploration and production efforts are concentrated on oil
properties in the North Dakota and Montana portions of the Williston Basis. In
addition, GI operates a leonardite mine and processing plant in Williston, North
Dakota. Leonardite is mined from leased reserves and processed t make a basic
product that can be sold as is, or blended with other substances to make several
different dry, free flowing powders primarily for the oil well drilling mud
industry.
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GREAT NORTHERN GAS COMPANY BUSINESS VALUATION REPORT
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Maynard Oil Co.
Maynard Oil Co. ("Maynard") operates an independent oil and gas concern, engaged
primarily in the production and exploration phases of oil and gas business.
Maynard's oil and gas operations are conducted exclusively in the United States,
primarily in Texas, Oklahoma, and New Mexico.
Royale Energy Inc.
Royale Energy Inc. ("Royale") conducts the majority of its operations in major
geological basins in Northern California. Royale mainly acquires its oil and gas
interest through private joint ventures, and offers fractional working interest
in undeveloped wells to finance drilling costs.
Guideline Company Financial Data
A summary of the selected guideline company's financial condition, operations,
performance and valuation ratios is included on Exhibit 8.
Valuation Analysis
The price-to-earnings, price-to-sales, and price-to-book value represents the
price (value) as a multiple of the earnings, sales, and book value. For example,
if a company's earnings per share was $1 and the price-to-earnings ratio was 20,
the value of the share of stock would be $20. In addition, if the equity value
(assets less liabilities) of a share was $10 and the price-to-equity value was
2, the value of the share of stock would be $20.
The stock price (value) of a public traded company represents a marketable
security that has a minority interest element or discount; the security can be
bought or sold relatively easy and fast with the owner of the stock not being
able to have significant influence on the company's operations. When a public
company is purchased by an other public company or taken private, the purchase
price of the stock usually includes a premium or a value that is in excess of
the previously reported value since the purchaser now controls the company's
operations, assets, and future destiny.
Exhibit 9 illustrates the valuation multiples (price/earnings; price/sales;
price/book) for the latest twelve months for each of the above noted guideline
companies. Based on the uideline company multiple adjustment discussed in the
Valuation Adjustment Studies section of this report, we have applied a fifteen
percent (15%) discount to these valuation multiples. We recognize the Company's
historical earnings have not been sufficient and/or consistent to rely upon to
determine a reasonable conclusion of the fair market value of the Company as the
single approach. We have utilize the price/earnings valuation ratio which will
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be weighted with other indications of value to give to derive the Company's fair
market value. The results of this analysis indicates that the marketable,
minority interest value of 100% ownership of the Company to be as follows:
Price / Earnings $5,499,000
Price / Sales $4,663,431
Price / Book $2,959,729
The above three valuation results are reconciled in the Valuation Conclusion
section of this report.
ADJUSTED NET ASSETS
- -------------------
The Company has not reported sufficient earnings to reflect the fair market
value of the Company. Therefore, the Company's adjusted net assets may represent
the fair market value of the Company. Exhibit 10 of this reports provides our
analysis of the value of the Company's common stock utilizing the net asset
value as follows:
1. We adjusted the Company's assets and liabilities to reflect their fair
value as follows:
a. We adjusted the oil and gas properties to their current value based on
management's representation. The Company did not have a reserve study
completed as of the date of the valuation or the date of this
valuation report date;
b. We increased the short-term investment position of the Company to
reflect the sell of oil and gas properties subsequent to September 30,
2000 and prior to December 31, 2000;
c. We increased the deferred tax liability related to the tax free
exchange of the sale of oil and gas ownership;
d. We adjusted stockholders' equity to reflect the Company's repurchase
and retire of the Company's common stock subsequent to September 30,
2000 and prior to December 31, 2000 and for the fourth quarter
estimated net income
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The results of this analysis indicates that the marketable, minority interest
value of 100% ownership of the Company as of December 31, 2000 is:
$3,231,094
The above valuation result is reconciled in the Valuation Conclusion section of
this report.
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CONCLUSION OF VALUE
-------------------
Each of the valuation methods utilized have been based on the ownership level of
value of a marketable security with a minority interest discount. We weighted
the valuation methods equally (25%) as they all appear to be reasonable based on
the facts and circumstances as of the date of the valuation. This is illustrated
on Exhibit 11. Our analysis indicates the fair market value of an ownership
interest in one non-controlling voting common stock as of December 31, 2000 is
$1.24. The limited trading activity of the Company's stock during 2000,
indicates a trading value of the Company's stock is between $0.75 to $2.003.
Based on review of all the stock transactions for the year ended December 31,
2000, nearly all shares of the Company stock were indicated a trading value
between $1.25 and $1.50.
Based on the assumptions, limited conditions, and analytical procedures as
described in the attached report as well as the facts and circumstances as of
the valuation date, we are of the opinion that the total fair market value of
one non-controlling voting common stock share in Great Northern Gas Company as
of December 31, 2000, is as:
$1.50
In arriving at our conclusion, neither Saltzman Hamma Nelson Massaro LLP nor any
of its partners or employees, has any present or contemplated financial interest
in Great Northern Gas Company or related entities and we are not associated with
any of the principals in any other venture. Our fees, for this valuation, are
based upon our normal hourly billing rates, and are in no way contingent upon
the results of our findings. We have no responsibility to update this report for
events and circumstances occurring subsequent to the date of this report.
- -------------------------
3 We noted only one transaction for $2.00 a share which involved 1,500
shares of common stock repurchased by, and retired by the Company.
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CERTIFICATION STATEMENT
-----------------------
I hereby certify the following statements regarding this valuation report:
1. The statements of fact contained in this report are true and correct.
2. The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are our personal,
unbiased professional analyses, opinions, and conclusions.
3. I have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved.
4. Our compensation is not contingent on an action or event resulting from the
analyses, opinions, and conclusions in, or the use, this report.
5. Our analyses, opinions and conclusions were developed, and this report has
been prepared, in conformity with the Uniform Standards of the Professional
Appraisal Practice.
6. No one provided significant professional assistance to the individual
signing this report.
/s/ Scott R. Saltzman
- ---------------------
Scott R. Saltzman,
CPA, CVA, ASA, DABFA
* * * * *
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SALTZMAN HAMMA NELSON MASSARO LLP PAGE 53
Exhibit 1
Great Northern Gas Company
Common Stock Price
Year Quarter High Low
- ---------------- --------------- -------------- --------------
1996 1 1st $ 1.00 $ 1.00
1996 1 2nd $ 1.00 $ 1.00
1996 1 3rd $ 1.12 $ 1.12
1996 1 4th $ 1.38 $ 1.38
1997 1 1st $ 1.25 $ 1.25
1997 1 2nd $ 1.25 $ 1.25
1997 1 3rd $ 1.50 $ 1.50
1997 1 4th $ 1.50 $ 1.50
1998 1 1st $ 1.50 $ 1.25
1998 1 2nd $ 1.50 $ 1.25
1998 1 3rd $ 1.25 $ 1.00
1998 1 4th $ 1.00 $ 0.875
1999 1 1st $ 0.75 $ 0.75
1999 1 2nd $ 0.75 $ 0.75
1999 1 3rd $ 0.75 $ 0.75
1999 1 4th $ 0.75 $ 0.75
2000 2 1st $ 0.75 $ 0.75 3
2000 2 2nd $ 0.75 $ 0.75 3
2000 2 3rd $ 1.25 $ 1.15
2000 2 4th $ 1.50 $ 1.25
1 Agreed to the Company's SEC 10-KSB, audited financial statements.
2 Agreed to the Company's internally prepared records as the Company acts the
transfer agent.
3 There were not stock transaction during the first and second quarters of
the year.
Note: SHNM noted one transaction subsequent to December 31, 2000 (January 22,
- ---- 2001) for which the Company purchased its stock for $2.00 a share and
then retired the stock.
Exhibit 2
Great Northern Gas Company
Balance Sheets
December 31,
September ------------------------------------------------------------
30, 2000 1 1999 2 1998 2 1997 2 1996 2
------------ ------------ ------------ ------------ ------------
Current assets
Cash $ 1,456,883 $ 1,516,081 $ 2,075,657 $ 1,812,386 $ 1,404,099
Accounts receivable
Oil and gas sales 52,682 43,836 24,469 90,902 132,054
Joint interest billings 85,636 4,336 162,349 139,201 116,005
Affiliate 1,103 1,103 -- -- --
Short-term investments 372,396 -- -- -- 242,474
Other 9,619 9,619 9,619 9,619 22,939
------------ ------------ ------------ ------------ ------------
Total current assets 1,978,319 1,574,975 2,272,094 2,052,108 1,917,571
------------ ------------ ------------ ------------ ------------
Property and equipment
Oil and gas properties (full cost method) 2,237,521 2,546,038 2,054,565 2,682,627 3,327,289
Furniture, fixtures, and automobiles 35,433 35,433 60,105 60,105 57,660
------------ ------------ ------------ ------------ ------------
2,272,954 2,581,471 2,114,670 2,742,732 3,384,949
Less accumulated depreciation (1,098,437) (1,013,993) (899,775) (881,735) (1,224,116)
------------ ------------ ------------ ------------ ------------
Net property and equipment 1,174,517 1,567,478 1,214,895 1,860,997 2,160,833
------------ ------------ ------------ ------------ ------------
Total assets $ 3,152,836 $ 3,142,453 $ 3,486,989 $ 3,913,105 $ 4,078,404
============ ============ ============ ============ ============
Current liabilities
Accounts payable
Oil and gas sales $ 164,018 $ 124,360 $ 153,902 $ 229,707 $ 115,866
Taxes payable 44,103 64,886 10,847 17,286 51,840
Other 5,979 9,667 78,189 112,503 20,410
------------ ------------ ------------ ------------ ------------
Total current liabilities 214,100 198,913 242,938 359,496 188,116
------------ ------------ ------------ ------------ ------------
Deferred income taxes 185,753 84,978 201,128 192,161 172,167
------------ ------------ ------------ ------------ ------------
Stockholders' equity
Common stock 28,102 30,727 30,797 32,975 36,033
Additional paid-in capital 38,351,964 38,674,814 38,680,024 39,004,013 39,502,517
Accumulated deficit (35,627,083) (35,846,979) (35,667,898) (35,675,540) (35,820,429)
------------ ------------ ------------ ------------ ------------
Total stockholders' equity 2,752,983 2,858,562 3,042,923 3,361,448 3,718,121
------------ ------------ ------------ ------------ ------------
Total liabilities and stockholders' equity $ 3,152,836 $ 3,142,453 $ 3,486,989 $ 3,913,105 $ 4,078,404
============ ============ ============ ============ ============
1 Agreed to the Company's SEC 10-QSB.
2 Agreed to the Company's SEC 10-KSB, audited financial statements.
Exhibit 3
Great Northern Gas Company
Balance Sheets - Common Size
December 31,
September ------------------------------------------------------
30, 2000 1 1999 2 1998 2 1997 2 1996 2
----------- ----------- ---------- ---------- ----------
Current assets
Cash 46.21% 48.25% 59.53% 46.32% 34.43%
Accounts receivable
Oil and gas sales 1.67% 1.39% 0.70% 2.32% 3.24%
Joint interest billings 2.72% 0.14% 4.66% 3.56% 2.84%
Affiliate 0.03% 0.04% 0.00% 0.00% 0.00%
Short-term investments 11.81% 0.00% 0.00% 0.00% 5.95%
Other 0.31% 0.31% 0.28% 0.25% 0.56%
------- ------- ------ ------ ------
Total current assets 62.75% 50.12% 65.16% 52.44% 47.02%
------- ------- ------ ------ ------
Property and equipment
Oil and gas properties (full cost method) 70.97% 81.02% 58.92% 68.55% 81.58%
Furniture, fixtures, and automobiles 1.12% 1.13% 1.72% 1.54% 1.41%
------- ------- ------ ------ ------
72.09% 82.15% 60.64% 70.09% 83.00%
Less accumulated depreciation (34.84%) (32.27%) (25.80%) (22.53%) (30.01%)
------- ------- ------ ------ ------
Net property and equipment 37.25% 49.88% 34.84% 47.56% 52.98%
------- ------- ------ ------ ------
Total assets 100.00% 100.00% 100.00% 100.00% 100.00%
======= ======= ======= ======= =======
Current liabilities
Accounts payable
Oil and gas sales 5.20% 3.96% 4.41% 5.87% 2.84%
Taxes payable 1.40% 2.06% 0.31% 0.44% 1.27%
Other 0.19% 0.31% 2.24% 2.88% 0.50%
------- ------- ------ ------ ------
Total current liabilities 6.79% 6.33% 6.97% 9.19% 4.61%
------- ------- ------ ------ ------
Deferred income taxes 5.89% 2.70% 5.77% 4.91% 4.22%
------- ------- ------ ------ ------
Stockholders' equity
Common stock 0.89% 0.98% 0.88% 0.84% 0.88%
Additional paid-in capital 1216.43% 1230.72% 1109.27% 996.75% 968.58%
Accumulated deficit (1130.00%) (1140.73%) (1022.89%) (911.69%) (878.30%)
------- ------- ------- ------ ------
Total stockholders' equity 87.32% 90.97% 87.27% 85.90% 91.17%
------- ------- ------ ------ ------
Total liabilities and stockholders' equity 100.00% 100.00% 100.00% 100.00% 100.00%
======= ======= ======= ======= =======
1 Agreed to the Company's SEC 10-QSB.
2 Agreed to the Company's SEC 10-KSB, audited financial statements.
Exhibit 4
Great Northern Gas Company
Ratio Analysis Summary
December 31,
September --------------------------------------------------------
RMA 1 30, 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------
Liquidity ratios
Current ratio 0.80 9.24 7.92 9.35 5.71 10.19
Quick ratio 0.40 9.20 7.87 9.31 5.68 10.07
Sales/ Receivables 198.70 6.91 10.32 7.71 7.28 3.52
Days' Receivable N/A 52.81 35.38 47.36 50.10 103.84
Sales / Working capital (8.30) 0.54 0.36 0.71 0.99 0.50
Leverage ratios
Net fixed assets / Net worth 1.40 0.43 0.55 0.40 0.55 0.58
Total liabilities / Net worth 1.70 0.15 0.10 0.15 0.16 0.10
Operating ratios
% Profits before taxes /
Net worth N/A 12.88 (10.33) 0.90 5.60 (1.01)
% Profits before taxes /
Total assets 3.60 11.25 (9.39) 0.79 4.81 (0.92)
Sales / Total assets 0.50 0.30 0.16 0.41 0.43 0.21
1 RMA Annual Statement Studies 2000/2001, SIC 1311, NAICS 211111, Total sales $0 to $1 million.
Exhibit 5
Great Northern Gas Company
Statement of Operations
Nine Months Year Ended December 31,
Ended Sept. -----------------------------------------------------------------------
30, 2000 1 1999 2 1998 2 1997 2 1996 2
--------------- --------------- -------------- -------------- --------------
Revenues
Oil and gas sales $ 406,637 $ 402,879 $ 806,434 $ 1,108,371 $ 740,889
Gain on sale of properties
and equipment 396,567 2,552 477,332 351,760 --
Interest and other income 152,750 91,537 156,081 216,108 131,066
--------------- --------------- -------------- -------------- --------------
Total revenue 955,954 496,968 1,439,847 1,676,239 871,955
--------------- --------------- -------------- -------------- --------------
Costs and expenses
Lease operating 200,846 155,970 434,897 391,718 279,231
Production taxes 13,012 19,957 40,447 84,075 46,544
Depreciation, depletion and
amortization 84,445 139,810 224,333 274,675 230,338
General and administrative 302,979 476,462 712,714 737,528 353,355
--------------- --------------- -------------- -------------- --------------
Total costs and expenses 601,282 792,199 1,412,391 1,487,996 909,468
--------------- --------------- -------------- -------------- --------------
Earnings/Loss before income taxes 354,672 (295,231) 27,456 188,243 (37,513)
--------------- --------------- -------------- -------------- --------------
Provision for income tax expense
(benefit)
Current 34,000 -- 10,847 23,360 (6,074)
Deferred 100,775 (116,150) 8,967 19,994 (9,858)
Total provision for income tax --------------- --------------- -------------- -------------- --------------
expense (benefit) 134,775 (116,150) 19,814 43,354 (15,932)
--------------- --------------- -------------- -------------- --------------
Net earnings (loss) $ 219,897 $ (179,081) $ 7,642 $ 144,889 $ (21,581)
=============== =============== ============== ============== ==============
1 Agreed to the Company's SEC 10-QSB.
2 Agreed to the Company's SEC 10-KSB, audited financial statements.
Exhibit 6
Great Northern Gas Company
Statement of Operations
Nine Months Year Ended December 31,
Ended Sept. --------------------------------------------------------------------------
30, 20001 1999 2 1998 2 1997 2 1996 2
--------------- --------------- --------------- --------------- ---------------
Revenues
Oil and gas sales 42.54% 81.07% 56.01% 66.12% 84.97%
Gain on sale of properties 0.00% 0.00% 0.00% 0.00% 0.00%
and equipment 41.48% 0.51% 33.15% 20.99% 0.00%
Interest and other income 15.98% 18.42% 10.84% 12.89% 15.03%
--------------- --------------- --------------- --------------- ---------------
Total revenue 100.00% 100.00% 100.00% 100.00% 100.00%
--------------- --------------- --------------- --------------- ---------------
Costs and expenses
Lease operating 21.01% 31.38% 30.20% 23.37% 32.02%
Production taxes 1.36% 4.02% 2.81% 5.02% 5.34%
Depreciation, depletion and
amortization 8.83% 28.13% 15.58% 16.39% 26.42%
General and administrative 31.69% 95.87% 49.50% 44.00% 40.52%
--------------- --------------- --------------- --------------- ---------------
Total costs and expenses 62.90% 159.41% 98.09% 88.77% 104.30%
--------------- --------------- --------------- --------------- ---------------
Earnings/Loss before income taxes 37.10% -59.41% 1.91% 11.23% -4.30%
--------------- --------------- --------------- --------------- ---------------
Provision for income tax expense
(benefit)
Current 3.56% 0.00% 0.75% 1.39% -0.70%
Deferred 10.54% -23.37% 0.62% 1.19% -1.13%
Total provision for income tax
--------------- --------------- --------------- --------------- ---------------
expense (benefit) 14.10% -23.37% 1.38% 2.59% -1.83%
--------------- --------------- --------------- --------------- ---------------
Net earnings (loss) 23.00% -36.03% 0.53% 8.64% -2.48%
=============== =============== =============== =============== ===============
1 Agreed to the Company's SEC 10-QSB.
2 Agreed to the Company's SEC 10-KSB, audited financial statements.
Exhibit 7
Great Northern Gas Company
Statements of Stockholders' Equity
Common Stock Additional
------------------------------ Paid-In Accumulated
Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ --------------
Balance, January 1, 1996 3,913,725 $ 39,137 $ 39,824,284 $(35,798,848) $ 4,064,573
Shares acquired for retirement (310,412) (3,104) (321,767) -- (324,871)
Net earnings -- -- -- (21,581) (21,581)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 3,603,313 36,033 39,502,517 (35,820,429) 3,718,121
Shares acquired for retirement (305,970) (3,058) (498,504) -- (501,562)
Net earnings -- -- -- 144,889 144,889
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1997 3,297,343 32,975 39,004,013 (35,675,540) 3,361,448
Shares acquired for retirement (217,633) (2,178) (323,989) -- (326,167)
Net earnings -- -- -- 7,642 7,642
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 3,079,710 30,797 38,680,024 (35,667,898) 3,042,923
Shares acquired for retirement (7,020) (70) (5,210) -- (5,280)
Net earnings -- -- -- (179,081) (179,081)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 3,072,690 30,727 38,674,814 (35,846,979) 2,858,562
Shares acquired for retirement (262,455) (2,625) (322,850) -- (325,475)
Net earnings -- -- -- 219,897 219,897
------------ ------------ ------------ ------------ ------------
Balance, September 30, 2000 2,810,235 28,102 38,351,964 (35,627,082) 2,752,984
Shares acquired for retirement (5,515) (552) (7,721) -- (8,273)
Net earnings (estimated) -- -- -- 600,000 600,000
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2000 2,804,720 $ 27,551 $ 38,344,243 $(35,027,082) $ 3,344,712
============ ============ ============ ============ ============
Exhibit 8
Great Northern Gas Company
Comparable (Guideline) Data - Balance Sheets
Long-
Current Property & Total Current Long-tern Sales/ term
Assets Equipment Assets Liabilities Liabilities Equity Current Working Sales/ Equity/ debt/
($Mil) ($Mil) ($Mil) ($Mil) ($Mil) ($Mil) Ratio Capital Assets Assets Equity
---------------------------------------------------------------------------------------------------------
Credo Petroleum Corp. 5.917 6.735 13.506 1.211 -- 10.387 4.886 0.720 0.251 0.769 --
Equity Oil Co. 6.420 39.585 46.394 2.319 9.500 30.987 2.768 5.323 0.251 0.668 0.307
Aspen Exploration Corp. 2.866 1.560 4.665 2.516 -- 2.149 1.139 5.046 0.251 0.461 --
Geosources Inc. 1.730 5.522 7.398 0.893 0.731 5.523 1.937 5.976 0.251 0.747 0.132
Maynard Oil Co. 31.177 72.690 103.867 17.021 26.776 59.686 1.832 3.247 0.251 0.575 0.449
Royale Energy Inc. 4.074 12.983 17.443 5.746 4.150 7.547 0.709 (5.331) 0.251 0.433 0.550
Average 2.212 2.497 0.251 0.609 0.240
Median 1.884 4.146 0.251 0.621 0.219
Great Northern Gas Co. 1.978 0.900 3.152 0.214 -- 2.753 9.2433 0.680 0.251 0.873 --
Great Northern Gas Company
Comparable (Guideline) Data - General and Statements of Operations
Net
Fiscal Number of Sales EBITDA EBIT Income Gross EBITDA EBIT
Ticker Exchange Year End Employees ($Mil) ($Mil) ($Mil) ($Mil) Margin Margin Margin
- - ---------------------------------------------------------------------------------------------------------
Credo Petroleum Corp. CRED NASDAQ Oct-2000 9 3.388 1.562 1.081 1.347 72.4% 46.1% 31.9%
Equity Oil Co. EQTY NASDAQ Sep-2000 21 21.831 10.210 6.199 4.018 67.8% 46.8% 28.4%
Aspen Exploration Corp. 3ASPN NASDAQ Sep-2000 3 1.766 1.076 0.816 0.771 89.3% 60.9% 46.2%
Geosources Inc. GEOI NASDAQ Sep-2000 13 5.002 2.317 1.632 1.406 54.4% 46.3% 32.6%
Maynard Oil Co. MOIL NASDAQ Sep-2000 41 45.958 29.620 20.416 11.822 74.3% 64.5% 44.4%
Royale Energy Inc. ROYL NASDAQ Sep-2000 182 8.913 3.086 1.668 1.233 65.2% 34.6% 18.7%
Average 70.6% 49.9% 33.7%
Median 70.1% 46.6% 32.3%
Great Northern Gas Co. GTG Pacific Dec-2000 4 1.200 0.439 0.354 0.400 33.3% 36.6% 29.5%
Exhibit 9
Great Northern Gas Company
Comparable (Guideline) Company
Valuation Multiple Analysis
Valuation Summary
Trailing Twelve Months
-------------------------------------------------
Price / Price / Price /
Book Earnings Sales
---------- ----------- ----------
Credo Petroleum Corp. 1.17 15.56 4.65
Equity Oil Co. 0.95 9.68 2.03
Aspen Exploration Corp. 1.07 5.71 2.84
Geosources Inc. 1.08 5.71 1.60
Maynard Oil Co. 0.82 9.50 1.86
Royale Energy Inc. 1.57 12.50 3.07
Average 1.11 9.78 2.67
Median 1.08 9.59 2.43
Comparable (Guideline) company medians 1.08 9.59 2.43
x x x
Valuation adjustment (15%) 85% 85% 85%
--------------- --------------- ---------------
Adjusted valuation multiples 0.92 8.15 2.07
x x x
Great Northern Gas Company
Book / Earnings / Sales $ 3,231,094 $ 674,560 $ 2,255,954
--------------- --------------- ---------------
Minority ownership interest $ 2,959,729 $ 5,499,000 $ 4,663,431
=============== =============== ===============
Exhibit 10
Great Northern Gas Company
Adjusted Net Assets
September Adjusted
30, 2000 1 Adjustments Net Assets 2
------------ ------------ ------------
Current assets
Cash $ 1,456,883 $ (39,912) $ 1,416,971
Accounts receivable
Oil and gas sales 52,682 (19,259) 33,423
Joint interest billings 85,636 85,636
Affiliate 1,103 1,103
Note receivable -- 223,647 223,647
Short-term investments 372,396 934,884 1,307,280
Other 9,619 9,619
------------ ------------ ------------
Total current assets 1,978,319 1,099,360 3,077,679
------------ ------------ ------------
Property and equipment
Oil and gas properties (full cost method) 2,237,521 (315,442) 1,922,079
Furniture, fixtures, and automobiles 35,433 35,433
------------ ------------ ------------
2,272,954 (315,442) 1,957,512
Less accumulated depreciation (1,098,437) (1,098,437)
------------ ------------ ------------
Net property and equipment 1,174,517 (315,442) 859,075
------------ ------------ ------------
Total assets $ 3,152,836 $ 783,918 $ 3,936,754
============ ============ ============
Current liabilities
Accounts payable
Oil and gas sales $ 164,018 $ (6,638) $ 157,380
Taxes payable 44,103 44,103
Other 5,979 5,979
------------ ------------ ------------
Total current liabilities 214,100 (6,638) 207,462
------------ ------------ ------------
Deferred income taxes 185,753 312,445 498,198
------------ ------------ ------------
Stockholders' equity
Common stock 28,102 (552) 27,551
Additional paid-in capital 38,351,964 (7,721) 38,344,243
Accumulated deficit (35,627,083) 486,384 (35,140,700)
------------ ------------ ------------
Total stockholders' equity 2,752,983 478,111 3,231,094
------------ ------------ ------------
Total liabilities and stockholders' equity $ 3,152,836 $ 783,918 $ 3,936,754
============ ============ ============
1 Agreed to the Company's SEC 10-QSB.
2 Based on management's representation - December 31, 2000.
Exhibit 11
Great Northern Gas Company
Valuation Conclusion
December 31, 2000
Value Weighting Total
-------------- ------------- ------------
Comparable (Guideline) company - Price / Book $ 2,959,729 x 25% = $ 739,932
Comparable (Guideline) company - Price / Earnings $ 5,499,000 x 25% = $ 1,374,750
Comparable (Guideline) company - Price / Sales $ 4,663,431 x 25% = $ 1,165,858
Adjusted Net Assets $ 3,231,094 x 25% = $ 807,774
------------
Minority ownership interest value of the total Company $ 4,088,314
x
Lack of marketability discount (15%) 85%
-----------
Fair market value of the Company with lack of marketability
and minority interest discounts $ 3,475,067
Common stock shares issued and outstanding 2,804,720
------------
Fair market value of minority interest common stock $ 1.24
============
Price range of the Company's common stock in 2000 $ 1.25 to $ 2.00
========== ============
Price range of the Company's common stock as of
December 31, 2000 $ 1.50
============
Price range of the Company's common stock subsequent
December 31, 2000 and through February 19, 2001 $ 1.00 to $ 1.50
========== ============
Conclusion regarding the fair market value of a
common stock share of Great Northern Gas
Company as of December 31, 2000 $ 1.50
============
Items 17(d) and (e)
Letter to shareholders, enclosing a copy of Articles of Merger
between the Issuer and St. Francis and Notice of Dissenter's Rights
To the Shareholders of Great Northern Gas Company:
By a consent resolution dated March 8, 2001, the directors of Great
Northern Gas Company (the "Company") voted to merge (the "Merger") the Company
into St. Francis Resources Inc. ("St. Francis"), the owner of 95.13% of the
issued and outstanding shares of common stock of the Company. Pursuant to the
Articles of Merger approved by the Company's directors, upon effectuation of the
Merger, the Company will cease to exist, all of the shares of the Company's
stock which are not owned by St. Francis will be exchanged for cash in the
amount of $1.50 per share upon surrender of certificates representing the shares
or a lost certificate bond or other documentation appropriate where no
certificate can be located, and all issued and outstanding shares of the
Company's common stock which are owned by St. Francis on the effective date of
the merger and all shares of the Common Stock held in its treasury on that date
will be cancelled without consideration. The record date for ownership of the
stock is the effective date of the Merger. Section 7-11-104 of the Colorado
Business Corporations Act (the "Colorado Act") permits the Merger to be effected
without a vote of the shareholders of the Company. A copy of the Articles of
Merger is appended to this letter.
The effective date of the merger of the Company into St. Francis will be
the earlier of: (i) the date on which all shareholders of the Company waive the
mailing requirement of the plan of merger set forth in ss.7-111-104(4) of the
Colorado Act; or (ii) ten days after the date that the Company mails a copy or
summary of the plan of merger to each shareholder of the Company. The Company
contemplates that it will not obtain waivers of the notice requirements from all
of its shareholders, and the effective date of the merger will be 10 days after
date of this notice.
Since the Merger is to be effectuated without a vote of the shareholders,
the Company is required to send all shareholders notice of their right to
dissent and demand payment for their stock. A copy of Article 113 of the
Colorado Business Corporation Act, which describes your rights to dissent and be
paid for your stock, is also attached. Pursuant to the Colorado Business
Corporation Act, you have a right to demand and receive payment of the fair
value of your stock, determined immediately before the effectuation of the
Merger, excluding any appreciation or depreciation in anticipation of the
Merger, unless such exclusion would be inequitable. As a dissenting shareholder,
you may demand payment for all shares of the Company's common stock which you
own as of the date of this letter by sending the attached form for demanding
payment to the offices of the Company, whose address is 621 17TH Street Suite
2150, Denver, Colorado 80293, (303) 295-0938 not less than 30 days from the date
of this letter. At the time of filing your demand for payment, you must deposit
all certificates for your shares of stock with the Company at the above address.
If you fail to make a written demand for payment or deliver the certificates for
your stock, you will be bound by the terms of the Merger.
Sincerely,
Teri Pagliasotti, Secretary
1
ARTICLES OF MERGER
MERGING
GREAT NORTHERN GAS COMPANY
INTO
ST. FRANCIS RESOURCES, INC.
ARTICLES OF MERGER entered into this ____ day of March, 2001, by and
between Great Northern Gas Company, a Colorado corporation, and St. Francis
Resources, Inc., a Colorado corporation.
THIS IS TO CERTIFY:
FIRST: St. Francis Resources, Inc., a corporation organized and existing
under the laws of Colorado (hereinafter sometimes referred to as the "Parent
Corporation"), and Great Northern Gas Company, a corporation organized and
existing under the laws of the State of Colorado (hereinafter sometimes referred
to as the "Subsidiary Corporation"), agree that the Subsidiary Corporation shall
be merged into the Parent Corporation. The terms and conditions of the merger
and the mode of carrying the same into effect are set forth in these Articles of
Merger.
SECOND: The Parent Corporation shall survive the merger and shall continue
under the name of St. Francis Resources, Inc.
THIRD: The parties to the Articles of Merger are St. Francis Resources,
Inc. and Great Northern Gas Company, both corporations organized and existing
under the laws of the State of Colorado.
FOURTH: No amendment is made to the Articles of Incorporation of the
surviving corporation as part of the merger.
FIFTH: The total number of shares of stock of all classes which the Parent
Corporation has authority to issue is Five Million (5,000,000) shares of Common
Stock (hereinafter referred to as the "Common Stock").
The total number of shares of stock of all classes which the Subsidiary
Corporation has authority to issue is Fifty Million (50,000,000) shares of
Common Stock, $0.01 par value (hereinafter referred to as the "Subsidiary Common
Stock").
SIXTH: The number of outstanding shares of the Subsidiary Corporation
owned by the Parent Corporation, being more than ninety percent (90%) of the
issued shares, is as follows:
Total Shares Shares Owned by
Outstanding Parent Corporation
----------- ------------------
Common Stock 2,782,905 2,647,255
--------- ---------
2
SEVENTH: All issued shares of the Subsidiary Common Stock which are not
owned on the effective date of the merger by the Parent Corporation shall be
exchanged for money upon presentation of the certificates representing shares of
subsidiary common stock for cancellation. The basis of the exchange shall be One
Dollar and Fifty Cents ($1.50) for each such share of the Subsidiary Common
Stock so surrendered.
All issued shares of the Subsidiary Common Stock which are owned by the
Parent Corporation, and all shares of the Subsidiary Common Stock held in its
treasury on the date of the merger shall be cancelled without consideration as
of the effective date of the merger.
EIGHTH: The principal office of the Subsidiary Corporation, organized under
the laws of the State of Colorado, is located in Denver, Colorado.
NINTH: The location of the principal office of the Surviving Corporation,
organized under the laws of the State of Colorado, is at 621 17th Street, #2150,
Denver, Colorado 80293.
TENTH: The Articles of Merger were duly approved by resolution adopted by a
majority vote of the entire board of directors of the Subsidiary Corporation on
March 8, 2001, in the manner and by the vote required by the laws of the State
of Colorado and by the Articles of Incorporation and Bylaws of said Corporation.
ELEVENTH: The merger to be effected by these Articles of Merger was duly
advised, authorized and approved by the Parent Corporation in the manner and by
the vote required by the laws of the State of Colorado and by the Articles of
Incorporation and Bylaws of the Parent Corporation.
TWELFTH: The effective date of this merger shall be the earlier of: (i) the
date on which all Shareholders of the Subsidiary Corporation waive the mailing
requirement of the plan of merger set forth inss.7-111-104(4), C.R.S.; or (ii)
ten days after the date that St. Francis Resources, Inc. mailed a copy or
summary of the plan of merger to each shareholder of Great Northern Gas Company.
IN WITNESS WHEREOF, Great Northern Gas Company and St. Francis Resources,
Inc., the corporations party to the merger, have caused these Articles of Merger
to be signed in their respective corporate names and on their behalf by the
respective presidents and witnessed or attested by their respective secretaries
as of the ____ day of ____________, 2001.
ATTEST: GREAT NORTHERN GAS COMPANY
By:
- --------------------------- -----------------------------------
Secretary President
ATTEST: ST. FRANCIS RESOURCES, INC.
By:
- --------------------------- -----------------------------------
Secretary President
3
NOTICE OF DEMAND FOR PAYMENT AND
DEPOSIT OF CERTIFICATES
Great Northern Gas Company
621 17TH Street, Suite 2150
Denver, Colorado 80293
Certified Mail
Return Receipt Requested
Notice is hereby given that the undersigned is the owner of shares of the
common stock without par value of Great Northern Gas Company (the "Common
Stock") and is hereby making a written demand for payment of the fair value of
the aforesaid shares of common stock.
The date upon which the undersigned, or the person on whose behalf the
undersigned dissents, acquired beneficial ownership of the stock is __________ ,
19__. The undersigned hereby tenders and deposits the certificates for the
Common Stock with Great Northern Gas Company, for purposes of processing the
same in accordance with Section 7-113-205 of the Colorado Business Corporation
Act.
Yours very truly,
Name of Dissenting Stockholder
4
PART I
RIGHT OF DISSENT -
PAYMENT FOR SHARES
7-113-101. Definitions. For purposes of this article:
(1) "Beneficial shareholder" means the beneficial owner of shares held in a
voting trust or by a nominee as the record shareholder.
(2) "Corporation" means the issuer of the shares held by a dissenter before the
corporate action, or the surviving or acquiring domestic or foreign corporation,
by merger or share exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from corporate
action under section 7-113-102 and who exercises that right at the time and in
the manner required by part 2 of this article.
(4) "Fair value", with respect to a dissenter's shares, means the value of the
shares immediately before the effective date of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action except to the extent that exclusion would
be inequitable.
(5) "Interest" means interest from the effective date of the corporate action
until the date of payment, at the average rate currently paid by the corporation
on its principal bank loans or, if none, at the legal rate as specified in
section 5-12-101, C.R.S.
(6) "Record shareholder" means the person in whose name shares are registered in
the records of a corporation or the beneficial owner of shares that are
registered in the name of a nominee to the extent such owner is recognized by
the corporation as the shareholder as provided in section 7-107-204.
(7) "Shareholder" means either a record shareholder or a beneficial shareholder.
7-113-102. Right to dissent. (1) A shareholder, whether or not entitled to vote,
is entitled to dissent and obtain payment of the fair value of the shareholder's
shares in the event of any of the following corporate actions:
(a) Consummation of a plan of merger to which the corporation is a party if:
(I) Approval by the shareholders of that corporation is required for the merger
by section 7-111-103 or 7-111-104 or by the articles of incorporation; or
(II) The corporation is a subsidiary that is merged with its parent corporation
under section 7-111-104;
(b) Consummation of a plan of share exchange to which the corporation is a party
as the corporation whose shares will be acquired;
(c) Consummation of a sale, lease, exchange, or other disposition of all, or
substantially all, of the property of the corporation for which a shareholder
vote is required under section 7-112-102 (1); and
5
(d) Consummation of a sale, lease, exchange, or other disposition of all, or
substantially all of the property of an entity controlled by the corporation if
the shareholders of the corporation were entitled to vote upon the consent of
the corporation to the disposition pursuant to section 7-112-102 (2).
(1.3) A shareholder is not entitled to dissent and obtain payment, under
subsection (1) of this section, of the fair value of the shares of any class or
series of shares which either were listed on a national securities exchange
registered under the federal "Securities Exchange Act of 1934", as amended, or
on the national market system of the national association of securities dealers
automated quotation system, or were held of record by more than two thousand
shareholders, at the time of:
(a) The record date fixed under section 7-107-107 to determine the shareholders
entitled to receive notice of the shareholders' meeting at which the corporate
action is submitted to a vote;
(b) The record date fixed under section 7-107-104 to determine shareholders
entitled to sign writings consenting to the corporate action; or
(c) The effective date of the corporate action if the corporate action is
authorized other than by a vote of shareholders.
(1.8) The limitation set forth in subsection (1.3) of this section shall not
apply if the shareholder will receive for the shareholder's shares, pursuant to
the corporate action, anything except:
(a) Shares of the corporation surviving the consummation of the plan of merger
or share exchange;
(b) Shares of any other corporation which at the effective date of the plan of
merger or share exchange either will be listed on a national securities exchange
registered under the federal "Securities Exchange Act of 1934", as amended, or
on the national market system of the national association of securities dealers
automated quotation system, or will be held of record by more than two thousand
shareholders;
(c) Cash in lieu of fractional shares; or
(d) Any combination of the foregoing described shares or cash in lieu of
fractional shares.
(2) (Deleted by amendment, L. 96, p. 1321, ss. 30, effective June 1, 1996.)
(2.5) A shareholder, whether or not entitled to vote, is entitled to dissent and
obtain payment of the fair value of the shareholder's shares in the event of a
reverse split that reduces the number of shares owned by the shareholder to a
fraction of a share or to scrip if the fractional share or scrip so created is
to be acquired for cash or the scrip is to be voided under section 7-106-104.
(3) A shareholder is entitled to dissent and obtain payment of the fair value of
the shareholder's shares in the event of any corporate action to the extent
provided by the bylaws or a resolution of the board of directors.
(4) A shareholder entitled to dissent and obtain payment for the shareholder's
shares under this article may not challenge the corporate action creating such
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
7-113-103. Dissent by nominees and beneficial owners. (1) A record shareholder
may assert dissenters' rights as to fewer than all the shares registered in the
record shareholder's name only if the record shareholder dissents with respect
to all shares beneficially owned by any one person and causes the corporation to
receive written notice which states such dissent and the name, address, and
federal taxpayer identification number, if any, of each person on whose behalf
the record shareholder asserts dissenters' rights. The rights of a record
shareholder under this subsection (1) are determined as if the shares as to
which the record shareholder dissents and the other shares of the record
shareholder were registered in the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to the shares held
on the beneficial shareholder's behalf only if:
6
(a) The beneficial shareholder causes the corporation to receive the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder dissents with respect to all shares beneficially
owned by the beneficial shareholder.
(3) The corporation may require that, when a record shareholder dissents with
respect to the shares held by any one or more beneficial shareholders, each such
beneficial shareholder must certify to the corporation that the beneficial
shareholder and the record shareholder or record shareholders of all shares
owned beneficially by the beneficial shareholder have asserted, or will timely
assert, dissenters' rights as to all such shares as to which there is no
limitation on the ability to exercise dissenters' rights. Any such requirement
shall be stated in the dissenters' notice given pursuant to section 7-113-203.
PROCEDURE FOR EXERCISE
OF DISSENTERS'RIGHTS
7-113-201. Notice of dissenters' rights. (1) If a proposed corporate action
creating dissenters' rights under section 7-113-102 is submitted to a vote at a
shareholders' meeting, the notice of the meeting shall be given to all
shareholders, whether or not entitled to vote. The notice shall state that
shareholders are or may be entitled to assert dissenters' rights under this
article and shall be accompanied by a copy of this article and the materials, if
any, that, under articles 101 to 117 of this title, are required to be given to
shareholders entitled to vote on the proposed action at the meeting. Failure to
give notice as provided by this subsection (1) shall not affect any action taken
at the shareholders' meeting for which the notice was to have been given, but
any shareholder who was entitled to dissent but who was not given such notice
shall not be precluded from demanding payment for the shareholder's shares under
this article by reason of the shareholder's failure to comply with the
provisions of section 7-113-202 (1).
(2) If a proposed corporate action creating dissenters' rights under section
7-113-102 is authorized without a meeting of shareholders pursuant to section
7-107-104, any written or oral solicitation of a shareholder to execute a
writing consenting to such action contemplated in section 7-107-104 shall be
accompanied or preceded by a written notice stating that shareholders are or may
be entitled to assert dissenters' rights under this article, by a copy of this
article, and by the materials, if any, that, under articles 101 to 117 of this
title, would have been required to be given to shareholders entitled to vote on
the proposed action if the proposed action were submitted to a vote at a
shareholders' meeting. Failure to give notice as provided by this subsection (2)
shall not affect any action taken pursuant to section 7-107-104 for which the
notice was to have been given, but any shareholder who was entitled to dissent
but who was not given such notice shall not be precluded from demanding payment
for the shareholder's shares under this article by reason of the shareholder's
failure to comply with the provisions of section 7-113-202 (2).
7-113-202. Notice of intent to demand payment. (1) If a proposed corporate
action creating dissenters' rights under section 7-113-102 is submitted to a
vote at a shareholders' meeting and if notice of dissenters' rights has been
given to such shareholder in connection with the action pursuant to section
7-113-201 (1), a shareholder who wishes to assert dissenters' rights shall:
(a) Cause the corporation to receive, before the vote is taken, written notice
of the shareholder's intention to demand payment for the shareholder's shares if
the proposed corporate action is effectuated; and
(b) Not vote the shares in favor of the proposed corporate action.
(2) If a proposed corporate action creating dissenters' rights under section
7-113-102 is authorized without a meeting of shareholders pursuant to section
7-107-104 and if notice of dissenters' rights has been given to such shareholder
7
in connection with the action pursuant to section 7-113-201 (2), a shareholder
who wishes to assert dissenters' rights shall not execute a writing consenting
to the proposed corporate action. (3) A shareholder who does not satisfy the
requirements of subsection (1) or (2) of this section is not entitled to demand
payment for the shareholder's shares under this article.
7-113-203. Dissenters' notice. (1) If a proposed corporate action creating
dissenters' rights under section 7-113-102 is authorized, the corporation shall
give a written dissenters' notice to all shareholders who are entitled to demand
payment for their shares under this article.
(2) The dissenters' notice required by subsection (1) of this section shall be
given no later than ten days after the effective date of the corporate action
creating dissenters' rights under section 7-113-102 and shall:
(a) State that the corporate action was authorized and state the effective date
or proposed effective date of the corporate action;
(b) State an address at which the corporation will receive payment demands and
the address of a place where certificates for certificated shares must be
deposited;
(c) Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
(d) Supply a form for demanding payment, which form shall request a dissenter to
state an address to which payment is to be made;
(e) Set the date by which the corporation must receive the payment demand and
certificates for certificated shares, which date shall not be less than thirty
days after the date the notice required by subsection (1) of this section is
given; (f) State the requirement contemplated in section 7-113-103 (3), if such
requirement is imposed; and (g) Be accompanied by a copy of this article.
7-113-204. Procedure to demand payment. (1) A shareholder who is given a
dissenters' notice pursuant to section 7-113-203 and who wishes to assert
dissenters' rights shall, in accordance with the terms of the dissenters'
notice:
(a) Cause the corporation to receive a payment demand, which may be the payment
demand form contemplated in section 7-113-203 (2) (d), duly completed, or may be
stated in another writing; and (b) Deposit the shareholder's certificates for
certificated shares.
(2) A shareholder who demands payment in accordance with subsection (1) of this
section retains all rights of a shareholder, except the right to transfer the
shares, until the effective date of the proposed corporate action giving rise to
the shareholder's exercise of dissenters' rights and has only the right to
receive payment for the shares after the effective date of such corporate
action.
(3) Except as provided in section 7-113-207 or 7-113-209 (1) (b), the demand for
payment and deposit of certificates are irrevocable.
(4) A shareholder who does not demand payment and deposit the shareholder's
share certificates as required by the date or dates set in the dissenters'
notice is not entitled to payment for the shares under this article.
7-113-205. Uncertificated shares. (1) Upon receipt of a demand for payment under
section 7-113-204 from a shareholder holding uncertificated shares, and in lieu
of the deposit of certificates representing the shares, the corporation may
restrict the transfer thereof.
(2) In all other respects, the provisions of section 7-113-204 shall be
applicable to shareholders who own uncertificated shares.
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7-113-206. Payment. (1) Except as provided in section 7-113-208, upon the
effective date of the corporate action creating dissenters' rights under section
7-113-102 or upon receipt of a payment demand pursuant to section 7-113-204,
whichever is later, the corporation shall pay each dissenter who complied with
section 7-113-204, at the address stated in the payment demand, or if no such
address is stated in the payment demand, at the address shown on the
corporation's current record of shareholders for the record shareholder holding
the dissenter's shares, the amount the corporation estimates to be the fair
value of the dissenter's shares, plus accrued interest.
(2) The payment made pursuant to subsection (1) of this section shall be
accompanied by:
(a) The corporation's balance sheet as of the end of its most recent fiscal year
or, if that is not available, the corporation's balance sheet as of the end of a
fiscal year ending not more than sixteen months before the date of payment, an
income statement for that year, and, if the corporation customarily provides
such statements to shareholders, a statement of changes in shareholders' equity
for that year and a statement of cash flow for that year, which balance sheet
and statements shall have been audited if the corporation customarily provides
audited financial statements to shareholders, as well as the latest available
financial statements, if any, for the interim or full-year period, which
financial statements need not be audited;
(b) A statement of the corporation's estimate of the fair value of the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment under section
7-113-209; and (e) A copy of this article.
7-113-207. Failure to take action. (1) If the effective date of the corporate
action creating dissenters' rights under section 7-113-102 does not occur within
sixty days after the date set by the corporation by which the corporation must
receive the payment demand as provided in section 7-113-203, the corporation
shall return the deposited certificates and release the transfer restrictions
imposed on uncertificated shares.
(2) If the effective date of the corporate action creating dissenters' rights
under section 7-113-102 occurs more than sixty days after the date set by the
corporation by which the corporation must receive the payment demand as provided
in section 7-113-203, then the corporation shall send a new dissenters' notice,
as provided in section 7-113-203, and the provisions of sections 7-113-204 to
7-113-209 shall again be applicable.
7-113-208. Special provisions relating to shares acquired after announcement of
proposed corporate action. (1) The corporation may, in or with the dissenters'
notice given pursuant to section 7-113-203, state the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action creating dissenters' rights under section 7-113-102 and state
that the dissenter shall certify in writing, in or with the dissenter's payment
demand under section 7-113-204, whether or not the dissenter (or the person on
whose behalf dissenters' rights are asserted) acquired beneficial ownership of
the shares before that date. With respect to any dissenter who does not so
certify in writing, in or with the payment demand, that the dissenter or the
person on whose behalf the dissenter asserts dissenters' rights acquired
beneficial ownership of the shares before such date, the corporation may, in
lieu of making the payment provided in section 7-113-206, offer to make such
payment if the dissenter agrees to accept it in full satisfaction of the demand.
(2) An offer to make payment under subsection (1) of this section shall include
or be accompanied by the information required by section 7-113-206 (2).
7-113-209. Procedure if dissenter is dissatisfied with payment or offer. (1) A
dissenter may give notice to the corporation in writing of the dissenter's
estimate of the fair value of the dissenter's shares and of the amount of
interest due and may demand payment of such estimate, less any payment made
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under section 7-113-206, or reject the corporation's offer under section
7-113-208 and demand payment of the fair value of the shares and interest due,
if:
(a) The dissenter believes that the amount paid under section 7-113-206 or
offered under section 7-113-208 is less than the fair value of the shares or
that the interest due was incorrectly calculated;
(b) The corporation fails to make payment under section 7-113-206 within sixty
days after the date set by the corporation by which the corporation must receive
the payment demand; or
(c) The corporation does not return the deposited certificates or release the
transfer restrictions imposed on uncertificated shares as required by section
7-113-207 (1).
(2) A dissenter waives the right to demand payment under this section unless the
dissenter causes the corporation to receive the notice required by subsection
(1) of this section within thirty days after the corporation made or offered
payment for the dissenter's shares.
7-113-301. Court action. (1) If a demand for payment under section 7-113-209
remains unresolved, the corporation may, within sixty days after receiving the
payment demand, commence a proceeding and petition the court to determine the
fair value of the shares and accrued interest. If the corporation does not
commence the proceeding within the sixty-day period, it shall pay to each
dissenter whose demand remains unresolved the amount demanded.
(2) The corporation shall commence the proceeding described in subsection (1) of
this section in the district court of the county in this state where the
corporation's principal office is located or, if the corporation has no
principal office in this state, in the district court of the county in which its
registered office is located. If the corporation is a foreign corporation
without a registered office, it shall commence the proceeding in the county
where the registered office of the domestic corporation merged into, or whose
shares were acquired by, the foreign corporation was located.
(3) The corporation shall make all dissenters, whether or not residents of this
state, whose demands remain unresolved parties to the proceeding commenced under
subsection (2) of this section as in an action against their shares, and all
parties shall be served with a copy of the petition. Service on each dissenter
shall be by registered or certified mail, to the address stated in such
dissenter's payment demand, or if no such address is stated in the payment
demand, at the address shown on the corporation's current record of shareholders
for the record shareholder holding the dissenter's shares, or as provided by
law.
(4) The jurisdiction of the court in which the proceeding is commenced under
subsection (2) of this section is plenary and exclusive. The court may appoint
one or more persons as appraisers to receive evidence and recommend a decision
on the question of fair value. The appraisers have the powers described in the
order appointing them, or in any amendment to such order. The parties to the
proceeding are entitled to the same discovery rights as parties in other civil
proceedings.
(5) Each dissenter made a party to the proceeding commenced under subsection (2)
of this section is entitled to judgment for the amount, if any, by which the
court finds the fair value of the dissenter's shares, plus interest, exceeds the
amount paid by the corporation, or for the fair value, plus interest, of the
dissenter's shares for which the corporation elected to withhold payment under
section 7-113-208.
7-113-302. Court costs and counsel fees. (1) The court in an appraisal
proceeding commenced under section 7-113-301 shall determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation; except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters acted arbitrarily, vexatiously, or not in good faith in demanding
payment under section 7-113-209.
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(2) The court may also assess the fees and expenses of counsel and experts for
the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any dissenters if the court finds
the corporation did notsubstantially comply with the requirements of part 2 of
this article; or
(b) Against either the corporation or one or more dissenters, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by this article.
(3) If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to said counsel reasonable fees to be paid out of the amounts awarded to
the dissenters who were benefited.
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