AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 23, 1999
REGISTRATION NO. 333
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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BENZ ENERGY INC.
(Name of Small Business Issuer in its Charter)
DELAWARE 1311 76-0577348
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
1000 LOUISIANA STREET, 15TH FLOOR
HOUSTON, TEXAS 77002
(713) 739-0351
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE
OF BUSINESS)
PRENTIS B. TOMLINSON, PRESIDENT
1000 LOUISIANA STREET, 15TH FLOOR
HOUSTON, TEXAS 77002
(713) 739-0351
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
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WITH COPY TO:
PORTER & HEDGES, L.L.P.
700 Louisiana, 35th Floor
Houston, Texas 77002
(713) 226-0629
Attn: Samuel N. Allen
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
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If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF AMOUNT PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED TO BE REGISTERED PROPOSED MAXIMUM AGGREGATE REGISTRATION FEE
(3) OFFERING OFFERING PRICE
PRICE PER SHARE
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Class A, Series II Convertible Preferred Stock, 238,201 90.91(1) 21,654,853 6,054.20
$1.00 par value
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Common Stock, $.01 par value,
issuable upon conversion of the
convertible preferred stock 100,772,634 N/A N/A N/A
Common Stock, $.01 par value,
issuable upon exercise of warrants
or otherwise previously issued 8,558,649 .2179(2) 1,864,704 521.37
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Total 6,575.57
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(1) Pursuant to Rule 457(i), the registration fee is calculated based on the
offering price of the convertible preferred stock when originally issued
by the Company.
(2) Pursuant to Rule 457(c), the registration fee is calculated based on the
average of the bid and ask prices for the Common Stock reported on
the Vancouver Stock Exchange July 19, 1999.
(3) Plus an indeterminate number of shares that may be issued upon conversion
of preferred stock due to changes in the exchange rate of Canadian to U.S.
dollars.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATE AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
Subject to completion, dated July 23, 1999
PROSPECTUS
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The information in this prospectus is not complete and may be changed. We may
not offer these securities until the registration statement filed with the SEC
is effective. This prospectus is not an offer to sell these securities and we
are not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
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[LOGO]
BENZ ENERGY INC.
238,201 Shares of Class A, Series II Convertible Preferred Stock
109,331,283 Shares of Common Stock
This prospectus relates to the resale by certain of our selling
securityholders of:
- up to 238,201 shares of our class A, series II convertible preferred
stock;
- up to 100,772,634 shares of our common stock, par value $.01 per
share, issuable upon conversion of the convertible preferred stock;
- 3,974,923 shares of common stock issuable upon the exercise of
outstanding warrants to purchase our common stock;
- 2,984,526 shares of our common stock issued as commission and fees
related to the offering of convertible preferred stock;
- 541,700 shares of our common stock issued in exchange for certain
convertible debentures, series III; and
- 1,057,500 shares of our common stock issued in lieu of interest
payments.
We will not receive any of the proceeds from the resale of the
convertible preferred stock or common stock issuable upon conversion of the
convertible preferred stock or exercise of warrants.
The convertible preferred stock currently is not listed on any
securities exchange, but we expect to post the convertible preferred stock for
trading on the Nasdaq Bulletin Board. Our common stock is traded on the
Vancouver Stock Exchange under the symbol "BZG." In addition, upon completion of
this offering, we expect to post our common stock for trading on the Nasdaq
Bulletin Board and remove our common stock from trading on the Vancouver Stock
Exchange.
THIS INVESTMENT INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4.
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Neither the SEC nor any state securities commission has approved these
securities or determined that this prospectus is accurate or complete.
Any representation to the contrary is illegal.
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The date of this prospectus is August ___, 1999.
TABLE OF CONTENTS
PAGE
Summary ..................................................................... 2
Cautionary Statement Regarding Forward-looking Statements ................... 4
Risk Factors ................................................................ 4
Capitalization .............................................................. 13
Common Stock Price Range and Dividend Policy ................................ 14
Selected Consolidated Financial Information ................................. 15
Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................... 16
Business and Properties ..................................................... 25
Management .................................................................. 39
Certain Transactions ........................................................ 44
Principal and Selling Shareholders .......................................... 47
Plan of Distribution ........................................................ 50
Description of Capital Stock ................................................ 52
Legal Matters ............................................................... 55
Experts ..................................................................... 55
Index to Financial Statements ............................................... F-1
AVAILABLE INFORMATION
As a result of this offering, we will be subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith will file reports and other information with
the Securities and Exchange Commission. The reports and other information filed
by us with the Commission can be inspected and copies can be obtained at the
public reference facilities maintained by the Commission at Judiciary Plaza,
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Regional
Offices of the Commission at 7 World Trade Center, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material also can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. In addition, the Commission maintains a site on the
World Wide Web at HTTP://WWW.SEC.GOV that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
This Prospectus constitutes a part of a registration statement on Form
SB-2 filed by us with the Securities and Exchange Commission under the
Securities Act. This prospectus omits certain of the information contained in
the registration statement, and reference is hereby made to the registration
statement for further information with respect to us and the securities offered
hereby. Any statements contained herein concerning the provisions of any
document filed as an exhibit to the registration statement or otherwise filed
with the Securities and Exchange Commission is not necessarily complete, and in
each instance, reference is made to the copy of such documents so filed. Each
such statement is qualified in its entirety by such reference.
The reports and other information we file with the Vancouver Stock
Exchange can be inspected and copies can be obtained by contacting Warren H.
Funt, Vice President, Corporate Finance Services, at P.O. Box 10999, 600
Cranville Street, Vancouver, BC Canada V7Y 1H1 or by telephone at (888)
547-8873. In addition, the Vancouver Stock Exchange maintains a site on the
World Wide Web at HTTP://WWW.VSE.CA that contains reports, proxy and information
statements and other information regarding registrants that file with the VSE.
We intend to furnish our stockholders with annual reports containing
audited financial statements and an opinion expressed by independent auditors
and with quarterly reports for the first three quarters of each fiscal year
containing unaudited summary financial information.
i
SUMMARY
THIS SUMMARY SHOULD BE READ IN CONJUNCTION WITH THE MORE DETAILED
INFORMATION AND FINANCIAL INFORMATION, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE
INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS." UNLESS OTHERWISE
INDICATED HEREIN, ALL DOLLAR AMOUNTS ARE IN UNITED STATES DOLLARS. UNLESS
OTHERWISE NOTED HEREIN, REFERENCES IN THIS PROSPECTUS TO US INCLUDE OUR WHOLLY
OWNED SUBSIDIARIES.
BENZ ENERGY INC.
We are an independent energy company engaged in the exploration for and
development of oil and natural gas. We have interests in more than 25 oil and
gas prospects and projects primarily in the United States Gulf Coast areas of
Mississippi, Texas and Louisiana. Most of these prospects have been, are being,
or are expected to be, enhanced with 3-D seismic data and CAEX technologies. The
3-D seismic data, including current surveys, will cover more than 820 square
miles. Our 1999 capital budget provides for a total of $11.3 million for
drilling and prospect development. Of such amounts, approximately $7.3 million
is budgeted for development drilling, approximately $1.0 million is budgeted for
exploratory drilling, testing, and subsequent completions, $2.3 million is
budgeted for seismic data acquisitions and the remainder is budgeted primarily
for leasehold purchases.
Our principal executive offices are located at 1000 Louisiana Street,
15th Floor, Houston, Texas 77002, and our telephone number at that address is
(713) 739-0351.
THE OFFERING
SHARES OFFERED:
- 238,201 shares of our class A, series II convertible preferred
stock;
- 100,772,634 shares of our common stock, par value $.01 per
share, issuable upon conversion of the convertible preferred
stock;
- 3,974,923 shares of common stock issuable upon the exercise of
outstanding warrants to purchase our common stock;
- 2,984,526 shares of our common stock issued as commission and
fees related to the offering of convertible preferred stock;
- 541,700 shares of our common stock issued in exchange for
certain convertible debentures, series III; and
- 1,057,500 shares of our common stock issued in lieu of
interest payments.
2
SUMMARY FINANCIAL INFORMATION
The following selected financial data as of and for the ten-month
period ended August 31, 1997, the four-month period ended December 31, 1997, and
the year ended December 31, 1998, have been derived from our audited
consolidated financial statements. The selected consolidated financial data as
of and for the three-month period ended March 31, 1998 and 1999 have been
derived from our unaudited consolidated financial statements. The unaudited
consolidated financial statements include all adjustments consisting of normal
recurring accruals that we consider necessary for a fair presentation of our
financial position as of these dates and the results of operations and cash
flows for these periods. Operating results for the three months ended March 31,
1999 are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 1999.
TEN MONTH
FOUR MONTH PERIOD
FOR THE QUARTER ENDED YEAR ENDED PERIOD ENDED ENDED
MARCH 31, DECEMBER 31, DECEMBER 31, AUGUST 31,
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1999 1998 1998 1997 (1) 1997 (2)
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(unaudited) (unaudited) (audited) (audited) (audited)
INCOME STATEMENT DATA:
Petroleum revenues ...................... $ 1,370,957 $ 1,040,780 $ 4,947,457 $ 707,987 $ 444,203
Earnings (loss) before DD&A, interest,
amortization of issuance costs,
income tax and preferred dividends..... 210,271 (465,790) (2,756,466) (1,479,769) (1,686,624)
Net loss applicable to common
stockholders .......................... (2,665,782) (2,365,163) (11,915,191) (2,739,322) (1,917,141)
AS OF AS OF AS OF
MARCH 31, DECEMBER 31, AUGUST 31,
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1999 1998 1998 1997 (1) 1997 (2)
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BALANCE SHEET DATA: (unaudited) (unaudited) (audited) (audited) (audited)
Working Capital Surplus (Deficit) ....... $(35,135,688) $ 2,538,902 $(27,360,635) $(15,290,406) $ 1,784,075
Properties and Equipment, net ........... 85,463,843 45,109,137 79,412,241 25,319,771 11,916,817
Total Assets ...................... 97,890,925 75,339,380 95,240,247 36,216,129 21,520,880
Long-term Debt, including current
maturities ............................ 61,871,586 41,152,167 59,490,912 12,708,303 781,326
Redeemable Preferred Shares ............. 9,488,140 12,000,000 9,488,140 -- --
Stockholders' Equity .................... 4,394,320 12,547,544 6,990,828 11,806,496 14,089,948
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(1) We changed our fiscal year end to December 31.
(2) Represents the period from inception to original year-end, August 31.
3
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The statements made in this prospectus or in the documents we have
incorporated by reference that are not statements of historical fact are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate" or "believe," or similar terminology.
The forward-looking statements include discussions about business
strategy and expectations concerning market position, future operations,
seismic, drilling or exploration operations, profitability, liquidity and
capital resources, and statements concerning the integration into our business
of the operations we have acquired. Although we believe that the expectations in
such statements are reasonable, we cannot give any assurance that those
expectations will be correct or that the risks to investors in this offering
will not occur.
We caution you not to place undue reliance on these forward-looking
statements, which speak only as of the date of this prospectus.
Uncertainties are inherent in estimating quantities of proved oil and
natural gas reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond our control. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and natural gas that cannot be measured in an exact way, and the accuracy of
any reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. As a result, estimates
made by different engineers often vary from one another. In addition, results of
drilling, testing and production after the date of an estimate may justify
revisions of such estimate and such revisions, if significant, would change the
schedule of any further production and development drilling. Accordingly,
reserve estimates generally are different from quantities of oil and natural gas
that ultimately are recovered. Drilling and exploration plans are subject to
modification based upon seismic analysis, drilling results, production results,
and capital availability. Capital availability may also be affected by many
factors including market conditions and exploration results.
Additional important factors that could cause actual results to differ
materially from our expectations are disclosed elsewhere in this prospectus.
All subsequent written and oral forward-looking statements
attributable to the company or persons acting on its behalf are expressly
qualified in their entirety by such factors.
RISK FACTORS
WE HAVE A LIMITED OPERATING HISTORY, A HISTORY OF FINANCIAL LOSSES AND HAVE
ACCUMULATED SUBSTANTIAL WORKING CAPITAL DEFICITS.
We commenced operations in 1991 and acquired a substantial portion
of our operating assets through the acquisition of Texstar Petroleum, Inc. in
October 1996. Potential purchasers, therefore, have limited historical
financial and operating information upon which to base an evaluation of our
performance and whether to invest in our securities. We have incurred
substantial operating and net losses to date. The following table reflects
total net losses and net losses per share of common stock for the periods
indicated:
PER SHARE
AMOUNT (BASIC)
------------- ---------
Quarter ended March 31, 1999 .................. $ (2,665,782) $(0.08)
Year ended December 31, 1998 .................. $(11,915,191) $(0.37)
Four Month Period ended December 31, 1997 ..... $ (2,739,322) $(0.10)
Ten Month Period ended August 31, 1997 ........ $ (1,917,141) $(0.09)
4
We have also had the following working capital surplus (deficit) as at
the dates indicated:
March 31, 1999 ................... $(35,135,688)
December 31, 1998 ................ $(27,360,635)
December 31, 1997 ................ $(15,290,406)
August 31, 1997 .................. $ 1,784,075
WE WILL CONTINUE TO REQUIRE SUBSTANTIAL EXPENDITURES TO DEVELOP AND EXPAND OUR
BUSINESS.
Our future financial results will depend primarily on the following:
- our ability to economically locate hydrocarbons in commercial
quantities;
- our ability to reduce drilling risks and costs through 3-D
seismic data and CAEX technologies in selecting site and depth
of wells;
- our ability to secure adequate financial resources to fund
activities; and
- externally, on oil and gas prices.
There can be no assurance that we will achieve or sustain profitability
or positive cash flows from operating activities in the future.
SUBSTANTIAL CAPITAL REQUIREMENTS--WE HAVE SUBSTANTIAL CAPITAL REQUIREMENTS THAT
WE MAY BE UNABLE TO MEET.
We have experienced and expect to continue to experience substantial
working capital needs. Our ongoing capital requirements consist primarily of the
following items:
- funding the 1999 capital and exploration budget;
- payment for the recently completed 3-D survey at Old Ocean
Field in remaining installments totaling approximately
$3,338,000;
- payment of EnCap Credit Facility, the BOCP Credit Facility and
the Old Ocean Loan, all due July 31, 1999 in the principal
amounts of $12.0 million, $6.0 million and $2.2 million, plus
accrued interest, respectively;
- payment of certain trade payables of which approximately
$12,160,000 is past due as of June 30, 1999;
- payment of preferred dividends not otherwise payable in common
stock; and
- payment of interest on our outstanding 9% convertible
debentures and bank obligations.
Our 1999 net capital and exploration budget is $11.3 million
(excluding capitalized interest and overhead). Approximately $2.5 million of
the net capital and exploration budget remains to be used in 1999. The net
capital and exploration budget excludes expenditures anticipated to be funded
by related property sales. We plan to finance anticipated ongoing expenses
and our 1999 net capital and exploration budget with funds generated from the
following sources:
- available cash and cash investments;
- cash provided by operating activities;
- capital we believe we can raise through the Aquila Energy
Capital Corporation ("Aquila") Production Payment and sale
of equity;
- non-core asset sales and sales of excess interests in core
assets;
- a $4.0 million capital infusion from an affiliate of EnCap;
and
- capital raised in connection with our recently completed
offering of convertible preferred stock.
No assurance can be given as to the availability or terms of additional
financing that will be required. If adequate capital resources are not
available, we may be required to curtail our drilling, development and other
operations; may not be able to participate in operations proposed by others with
an interest in our properties and be
5
subjected to applicable non-consent penalties; and may not be able to meet
certain of our existing contractual obligations, which as to any of the
foregoing would have a material adverse effect on us and our financial
condition.
IMPENDING MATURITY DATES--A SUBSTANTIAL AMOUNT OF OUR INDEBTEDNESS IS CURRENTLY
DUE OR PAST DUE AND WE MAY BE UNABLE TO REPAY OR REFINANCE THIS INDEBTEDNESS.
Our EnCap, BOCP and Old Ocean Credit Facilities will come due on
July 31, 1999. As to the indebtedness reflected by the Old Ocean Loan, all
lenders, other than affiliates of EnCap that are owed $100,000, elected to
convert their respective indebtedness and the mineral interests obtained in
connection with the Old Ocean Loan into our convertible preferred stock. We
repaid the $100,000 owed to affiliates of EnCap under the Old Ocean Loan and
expect to repay the indebtedness reflected by the EnCap Credit Facility and
the BOCP Credit Facility with funds obtained in connection with our recently
completed offering of convertible preferred stock and new funds anticipated
being received in connection with a new production payment arrangement with
Aquila. We are currently engaged in negotiations, but do not have a binding
agreement with respect to the Aquila facility. There can be no assurance that
this financing option will be consummated. We currently have an extension of
the maturity dates to July 31, 1999 with respect to the EnCap and BOCP Credit
Facilities, and the lenders thereunder have in the past granted maturity date
extensions, and we believe that EnCap Energy and BOCP will continue to extend
the maturity dates to provide us with sufficient time to obtain the new
financings. If the maturity dates under the EnCap and BOCP Credit Facilities
are not extended or we are unable to obtain sufficient new financings to
repay the EnCap Credit Facility and the BOCP Credit Facility, then we will be
in default under the applicable Credit Facility and the applicable lenders
will have the right to seek immediate repayment of the entire indebtedness
due thereunder and enforce their other remedies, which include the right to
foreclose on substantially all of our properties. Such a default will also
cause defaults under other material contracts to which we and our
subsidiaries are parties. Any of the foregoing actions could cause us to
cease operations.
On June 10, 1999, we were obligated to pay one-half of the $6.7
million cost of acquiring certain seismic materials relating to the Old Ocean
Prospect and were obligated to pay the remaining amounts 60 days after
delivery of the processed data. We paid $700,000 of the total amount due on
June 18, 1999, $2.6 million on July 9, 1999 and have reached an oral
agreement to pay the remaining balance by July 31, 1999. Funds for the final
payment are anticipated to come from the sale of approximately 37.5% of our
interest in the Old Ocean Prospect. We currently are in negotiation for the
sale of that interest, and have entered into a letter of intent with a
potential purchaser. Although we believe the sale will be consummated in time
for us to meet our payment obligations, there can be no assurance that the
sale will be consummated by that time or at all. If we are unable to complete
the transaction and are unable to satisfy our payment obligations by some
other means, we will be in default with respect to our obligations to the
company that has completed the seismic survey and with the other owner of an
interest in the Old Ocean Prospect. The defaults would subject us to the
possibility of losing our rights in the seismic materials and in a
substantial portion of our rights in the Old Ocean Prospect. The defaults
also will cause defaults under other material contracts to which we and our
subsidiaries are parties. Any of the foregoing actions would have a material
adverse effect on us and our financial condition.
TRADE PAYABLES--WE HAVE A SUBSTANTIAL AMOUNT OF PAST-DUE TRADE PAYABLES THAT WE
CURRENTLY DO NOT HAVE THE FUNDS TO PAY.
At June 30, 1999, we had outstanding approximately $14,377,000 of
accounts payable to industry partners and trade creditors. Approximately
$12,160,000 of this amount is past due. We have requested the holders of such
accounts payable to accept payment over an extended time. There can be no
assurance that a sufficient number of our creditors will accept the proposed
discounts or other payment terms; however, on July 12, 1999, we conducted a
meeting with our trade creditors, and a substantial number of them have
indicated that they will be willing to participate in our proposed repayment
plan.
We anticipate funding our payment obligations by using the proceeds to
be received from the new production payment that we are attempting to arrange,
sale of assets and production revenue. If a creditor is unwilling to participate
in any of our proposed repayment arrangements and we do not have sufficient
funds to pay that creditor, then the creditor may declare us in default and
pursue their available remedies against us. Those remedies could include, under
certain circumstances, placing us into involuntary bankruptcy.
6
ABILITY TO CONTINUE AS A GOING CONCERN--THE REPORT OF OUR INDEPENDENT
ACCOUNTANTS WITH RESPECT TO OUR FINANCIAL STATEMENTS DISCUSSES OUR ABILITY TO
CONTINUE AS A GOING CONCERN.
The report of our independent public accountants in our financial
statements includes an explanatory paragraph that states that our ability to
continue as a going concern is in question. Note 18 to our audited
consolidated financial statements states that the financial statements were
prepared assuming that we are able to continue as a going concern assuming
certain events, such as refinancing of our indebtedness and the anticipated
success of certain of our oil and gas wells. There can be no assurance that
the events described in the going concern note will occur, and if they do not
occur, we may be unable to continue as a going concern.
VOLATILITY OF OIL AND GAS MARKETS--THE VOLATILITY OF OIL AND GAS MARKETS CAUSES
UNCERTAINTY CONCERNING THE VALUE OF OUR OIL AND GAS RESERVES.
MARKET PRICES ARE VOLATILE. Our profitability and cash flow depend
greatly on the market price of oil and natural gas. Prices for oil and natural
gas are subject to wide fluctuations in response to relatively minor changes in
supply and demand, market uncertainty and a variety of additional factors that
we cannot control.
These factors include:
- the level of consumer product demand;
- weather conditions;
- domestic and foreign governmental regulations;
- the price and availability of alternative fuels;
- political conditions in the Middle East;
- the foreign supply of oil and natural gas;
- the price of oil and gas imports; and
- overall economic conditions.
Our ability to maintain or increase our borrowing capacity and to
obtain additional capital on attractive terms, or not at all, is also
substantially dependent upon oil and gas prices. Compared to 1998, the average
prices for our production have generally declined. Continued low prices could
seriously affect our cash flow, financial condition and access to additional
capital.
HEDGING TRANSACTIONS MAY MITIGATE FLUCTUATION IN PRICES. Substantially
all of our sales of oil and natural gas are made in the spot market or pursuant
to contracts based on spot market prices. To reduce price risk, we sometimes
execute contracts on a portion of our production to hedge against market price
changes. Hedging transactions are intended to limit the negative effect of
future price declines, but could also limit our participation in significant
price increases for the covered period. We cannot be certain that hedging
transactions will reduce the effect of any substantial declines in oil and
natural gas prices. Except as described below, as of June 30, 1999, we were not
a party to any natural gas futures contracts, crude oil swap agreements or other
commodity hedging agreement; however, we have agreed to backstop the limited gas
hedges entered into by Shell Capital covering gas dedicated to our term
production payment if the gas volumes delivered to Shell Capital are less than
the amounts hedged. In March, we entered into a forward sale of ten contracts
for delivery in May 1999, and twelve contracts for delivery in June, July and
August, of our anticipated gas production at an average price of $2.07/MMBTU.
Each contract equates to 10,000 million BTU of gas.
UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES--ESTIMATING OIL AND GAS
RESERVES IS UNCERTAIN AND WE MAY BE UNABLE TO RECOVER ALL OF OUR CURRENTLY
ESTIMATED RESERVES.
There is substantial uncertainty in estimating quantities of proved
reserves and projecting future production rates and the timing of development
expenditures. No one can measure underground accumulations of oil and natural
gas in an exact way. Accordingly, oil and gas reserve engineering requires
subjective estimations of those accumulations. Estimates of other engineers
might differ widely from those of our internal engineers as well as R.A. Lenser
and Associates, Inc., our independent engineers. Accuracy of reserve estimates
depend on the quality of available data and on engineering and geological
interpretation and judgment. Lenser & Associates may make material changes to
reserve estimates based on the results of actual drilling, testing and
production. As a result, our reserve estimates often differ from the quantities
of oil and gas we ultimately recover. Also, we make certain assumptions
7
regarding future oil and gas prices, production levels, and operating and
development costs that may prove incorrect. Any significant variance from these
assumptions could greatly affect our estimates of reserves and future net
revenues.
EXPLORATION RISKS--OUR OPERATIONS ARE SUBJECT TO SIGNIFICANT EXPLORATION RISKS,
INCLUDING THE RISKS THAT OUR 3-D SEISMIC DATA AND CAEX TECHNOLOGY MAY BE
INSUFFICIENT FOR US TO IDENTIFY OIL AND GAS RESERVES.
Our strategy is to enhance the value of our prospects through the use
of 3-D seismic data and CAEX technology with emphasis on direct hydrocarbon
detection technologies. These technologies create computer generated 3-D
displays of subsurface geological formations that can help our explorationists
detect seismic anomalies and structural features that are not apparent in 2-D
seismic surveys. These technologies, however, require greater pre-drilling
expenditures than traditional drilling strategies. Even when fully used and
properly interpreted, 3-D seismic data and CAEX visualization techniques only
assist geoscientists in identifying subsurface structures and hydrocarbon
indicators, and do not conclusively allow the interpreter to know if
hydrocarbons will in fact be present and recoverable.
OPERATING AND UNINSURED RISKS--OUR OPERATIONS ARE SUBJECT TO MANY OPERATING
RISKS INCLUDING MANY FOR WHICH WE ARE NOT INSURED.
We must continually acquire or explore for and develop new oil and
natural gas reserves to replace those produced and sold. Our hydrocarbon
reserves and revenues will decline if we are not successful in our drilling,
acquisition or exploration activities. We cannot be certain that our exploration
and development projects will result in significant additional reserves or that
we will have success drilling productive wells at economically viable costs.
Casualty risk and other operating risks could cause reserves and revenues to
decline.
CASUALTY RISKS. Our operations are subject to the following inherent
casualty risks:
- fires;
- explosions and blowouts;
- abnormally pressured formations;
- uncontrollable flows of oil, natural gas or well fluids;
- pollution and other environmental risks; and
- pipe failure.
We could suffer substantial financial losses due to any of the
following:
- injury or loss of life;
- severe damage to and destruction of property and equipment;
- pollution and other environmental damage;
- regulatory investigations and penalties; and
- suspension of operations.
UNINSURED RISKS. As is customary in the industry, we maintain insurance
against some, but not all, casualty risks incidental to our business.
OTHER OPERATING RISKS. Numerous risks affect our drilling activities,
including the risk of drilling non-productive wells or dry holes. The cost of
drilling, completing and operating wells and of installing production facilities
and pipelines often is uncertain. Also, our drilling operations could diminish
or cease because of any of the following:
- title problems;
- compliance with governmental regulations;
- shortages or delays in the delivery or availability of
drilling rigs and other equipment; and
- weather conditions.
Moreover, effective marketing of our natural gas production depends on
factors such as the following:
- existing market supply of and demand for natural gas;
8
- the proximity of our reserves to pipelines;
- the available capacity of such pipelines; and
- government regulations.
The marketing of oil and gas production similarly depends on the
availability of pipelines and other transportation, processing and refining
facilities, and the existence of adequate markets. As a result, even if
hydrocarbons are discovered in commercial quantities, a substantial period of
time may elapse before commercial production commences. If pipeline facilities
in an area are insufficient, we may have to wait for construction or expansion
of pipeline capacity before we can market production from the area.
GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL RISKS--OUR OPERATIONS ARE SUBJECT TO
SUBSTANTIAL GOVERNMENTAL REGULATION AND ENVIRONMENTAL RISKS THAT COULD HAVE AN
ADVERSE IMPACT ON OUR OPERATIONS.
LEGAL LIMITATIONS. We are subject to various United States federal,
state and local laws and regulations on taxation, exploration and development,
and environmental and safety matters. Many laws and regulations require drilling
permits and govern the spacing of wells, the prevention of waste, rates of
production and other matters. These statutes and regulations, and any others
that are passed by the jurisdictions where we have production, could limit the
total number of wells drilled or the total allowable production from successful
wells, which could limit revenues. Currently, we have not curtailed production
on any of our oil and gas wells.
ENVIRONMENTAL LIABILITIES. We could incur liability to the government
or third parties for any unlawful discharge of oil, gas or other pollutants into
the air, soil or water, including responsibility for remedial costs. We could
potentially discharge oil or natural gas into the environment in any of the
following ways:
- from a well or drilling equipment at a drill site;
- leakage from storage tanks, pipelines or other gathering and
transportation facilities;
- damage to oil or natural gas wells resulting from accidents
during normal operations; or
- blowouts or explosions.
Environmental discharges may move through soil to water supplies or
adjoining properties giving rise to additional liabilities. Some laws and
regulations could impose liability for failure to notify the proper authorities
of a discharge and other failures to comply with those laws. Environmental laws
may also affect the costs of our acquisitions of properties. We do not believe
that our environmental risks are materially different from those of comparable
companies in the oil and gas industry. However, we cannot be certain that
environmental laws will not, in the future, result in decreased production,
substantially increased costs of operations or other adverse effects to our
operations and financial condition. Pollution and similar environmental risks
generally are not fully insurable.
COMPETITION--WE ARE SUBJECT TO INTENSE COMPETITION WITHIN OUR INDUSTRY AND MANY
OF OUR COMPETITORS HAVE GREATER FINANCIAL RESOURCES THAN US.
The oil and gas industry is highly competitive. We compete with major
oil and gas companies, other independent oil and gas concerns, and individual
producers and operators. Many of these competitors have financial and other
resources substantially greater than those available to us. Moreover, the oil
and gas industry competes with other industries in supplying the energy and fuel
needs of industrial, commercial and other consumers. Increased competition
causing over supply and depressed prices could greatly affect our operations
revenues.
DEPENDENCE ON THE K.S. BYRD 31-1 #1 WELL AND HOWELL #1 WELL--WE ARE HIGHLY
DEPENDENT ON A SMALL NUMBER OF PRODUCING OIL AND GAS WELLS THE LOSS OF
PRODUCTION FROM WHICH WOULD HAVE A SERIOUS IMPACT ON OUR ABILITY TO CONTINUE
OPERATIONS.
For the first quarter of 1999, revenue from the K.S. Byrd 31-1#1 well
totaled approximately $640,800, 47% of our total revenue, on net production of
4,290 MCFGED. The K.S. Byrd 31-1#1 well accounted for approximately $2.4 million
of our revenues for the year ended December 31, 1998, 49% of total revenue, on
net production of 3,226 MCFGED. After dedication of certain volumes to the Shell
Production Payment or a replacement production payment, the K.S. Byrd 31-1 #1
will continue to be a major contributor to our net production. Subsequent to
year-end 1998, we
9
put the Howell #1 on production at a high rate of gas flow. The Howell well
is expected to contribute greater net production than the Byrd, and thus,
should become the largest production source for us.
CONFLICTS OF INTEREST WITH RESPECT TO CERTAIN TRANSACTIONS--WE HAVE ENGAGED IN
SUBSTANTIAL TRANSACTIONS WITH CERTAIN OF OUR OFFICERS AND DIRECTORS THAT WERE
NOT NEGOTIATED AT ARMS-LENGTH.
We have engaged in acquisitions, financings, and other transactions
with entities that are owned in part by certain of our officers, directors and
affiliates. We believe that these transactions were fair to us; however, the
transactions did not result from arms length negotiations. There can be no
assurance that better terms would not have been negotiated in these transactions
through arms-length negotiations with unaffiliated third parties.
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS--A SUBSTANTIAL PORTION OF OUR
OUTSTANDING VOTING STOCK IS CONTROLLED BY A FEW SHAREHOLDERS THAT HAVE
SUBSTANTIAL INFLUENCE OVER OUR BUSINESS DECISIONS.
At June 30, 1999, the Chairman and Chief Executive Officer, Prentis B.
Tomlinson, Jr. and his wife Heather Tomlinson, beneficially own approximately
33.8% and 7.9%, respectively, of our outstanding common stock. Mr. and Mrs.
Tomlinson are able to exercise significant influence over our affairs, including
election of the board of directors and other matters submitted to a vote of the
stockholders.
SHARES ELIGIBLE FOR FUTURE SALE--WE HAVE A SUBSTANTIAL NUMBER OF SHARES OF
COMMON STOCK ISSUABLE UPON THE CONVERSION OF OUTSTANDING CONVERTIBLE SECURITIES
AND WARRANTS THAT IF SOLD INTO THE PUBLIC MARKETS COULD HAVE A MATERIAL ADVERSE
EFFECT ON THE TRADING PRICE OF OUR COMMON STOCK.
As of June 30, 1999, we had 34,785,224 shares of common stock
outstanding. Of the outstanding common stock, 15,414,858 shares are owned by
affiliates, as defined in regulations under the Securities Act, and will be
considered "Restricted Stock" within the meaning of Rule 144 under the
Securities Act. Common stock held by affiliates may not be sold in the absence
of registration under the Securities Act, unless an exemption from registration
is available. The remaining outstanding common stock is freely transferable by
persons other than affiliates without restriction or further registration under
the Securities Act. Although we cannot predict the timing or amount of future
sales of common stock, if any, by our selling shareholders or affiliates or the
effect that the availability of such common stock for sale will have on the
market price from time to time, sales of substantial amounts of common stock
could adversely affect the market price of the common stock. In addition to the
common stock described above, 14,493,837 shares of common stock are reserved for
issuance or are issuable upon the exercise of outstanding warrants, options and
other convertible securities.
To the extent that outstanding options and warrants are exercised, the
percentage ownership of common stock of our stockholders will be diluted.
Moreover, the terms upon which we will be able to obtain additional equity
capital may be adversely affected because the holders of outstanding options and
warrants can be expected to exercise them at a time when we would, in all
likelihood, be able to obtain any needed capital on terms more favorable to us
than the exercise terms provided by such outstanding securities. In the event of
the exercise of a substantial number of stock options or warrants or the
conversion of any convertible securities, within a reasonably short period of
time after the right to exercise commences, the resulting increase in the amount
of our common stock in the trading market could substantially affect the market
price of the common stock.
ABSENCE OF UNITED STATES TRADING MARKET--OUR SECURITIES CURRENTLY ARE NOT TRADED
ON ANY UNITED STATES STOCK EXCHANGE AND THERE CAN BE NO ASSURANCE THAT WE WILL
BE SUCCESSFUL IN LISTING OUR COMMON STOCK ON ANY UNITED STATES EXCHANGE.
Our common stock currently is traded on the Vancouver Stock Exchange.
There is no established trading market for our common stock in the United
States. The future value of the common stock and preferred stock will depend on
many factors including:
- prevailing foreign currency exchange rates,
- operating results, and
- the market for similar domestic securities.
10
We cannot assure that the common stock will be listed on a U.S.
exchange, that an active United States public market will develop or that if
convertible preferred stock is converted into common stock, that it will be able
to resell these securities in the United States. See "Summary - The Offering."
CERTAIN ANTI-TAKEOVER PROVISIONS--OUR CERTIFICATE OF INCORPORATION CONTAINS
PROVISIONS THAT COULD ALLOW OUR BOARD OF DIRECTORS TO IMPEDE THE ABILITY OF
OTHERS TO ACQUIRE US.
Our certificate of incorporation authorizes the issuance of preferred
stock at the discretion of our board of directors. The board of directors can,
without shareholder approval, issue preferred stock with dividend, liquidation,
conversion, voting or other rights that could adversely affect the voting power
or other rights of holders of our securities. The preferred stock could be used,
under certain circumstances, as a method of discouraging, delaying or preventing
a change in control of us. This could discourage bids for us and, thereby,
prevent shareholders from receiving the maximum value for their shares.
Notwithstanding our board's ability to issue preferred stock without shareholder
approval, the certificates of designation with respect to our currently
outstanding preferred stock limit the board's ability to issue any new series of
preferred stock under certain circumstances. The board of directors may
institute further protections on behalf of shareholders to assure their fair
consideration in certain circumstances.
SUBORDINATION OF THE CONVERTIBLE PREFERRED STOCK--THE CONVERTIBLE PREFERRED
STOCK SUBJECT TO RESALE UNDER THIS PROSPECTUS IS SUBORDINATE IN CERTAIN RESPECTS
TO OTHER OF OUR ISSUED AND OUTSTANDING SECURITIES.
The convertible preferred stock ranks PARI PASSU with certain other
issued and outstanding preferred stock and any new issue of preferred stock that
stipulates a liquidation preference PARI PASSU with the convertible preferred
stock, and senior to all other present and any of our future equity that does
not stipulate it, will be PARI PASSU with the convertible preferred stock. The
convertible preferred stock is subordinate to claims of creditors, including
holders of our outstanding debt instruments. As of March 31, 1999, we had
$61,871,600 of indebtedness outstanding. In addition, at March 31, 1999, we had
approximately $12,000,000 of trade payables outstanding and $4.8 million in
notes payable to our vendors.
Additional indebtedness will be incurred by us and our subsidiaries
from time to time subject to certain restrictions contained in our credit
arrangements, the trust indenture relating to our outstanding debentures and the
terms of the convertible preferred stock. In the event of our liquidation,
dissolution or winding up, our lenders to and other creditors and our
subsidiaries would be entitled to payment in full before satisfaction of the
liquidation preference on the convertible preferred stock.
EFFECT OF SUBSTANTIAL INDEBTEDNESS--OUR SUBSTANTIAL INDEBTEDNESS PLACES
SIGNIFICANT RESTRICTIONS ON OUR ABILITY TO ACCESS CAPITAL MARKETS.
Our indebtedness has several important consequences, including, but not
limited to, the following:
- the holders of convertible preferred stock will be subordinate
to any such debt;
- our ability to obtain additional financing in the future, as
needed, is limited;
- our leverage position and the covenants contained in our
existing contractual arrangements limit our ability to expand
our business and take advantage of certain business
opportunities; and
- our leverage makes us more vulnerable to economic downturns,
limits our ability to withstand competitive pressures, and
reduces our flexibility in responding to changing business and
economic conditions.
NO DIVIDENDS--WE HAVE NEVER PAID CASH DIVIDENDS AND DO NOT EXPECT TO PAY
DIVIDENDS ON COMMON STOCK IN THE FUTURE.
We may only pay cash dividends out of surplus, as defined in the
Delaware General Corporation Law, or, if no surplus is available, out of our net
profits for the fiscal year which the dividend or distribution is declared and
the preceding fiscal year. No dividends or distributions may be declared or paid
if we are or would be rendered insolvent by virtue of the dividend distribution.
We do not believe that these restrictions will limit our ability to pay
dividends on the convertible preferred stock in the future. We have not paid any
cash dividends on our common stock and do not expect to declare or pay any cash
dividends on our common stock or the convertible preferred stock in the
foreseeable
11
future. We currently intend to pay dividends on the convertible preferred
stock with common stock. The EnCap Credit Facility and the BOCP Credit
Facility currently contain restrictions on the payment of dividends; however,
we intend to repay these credit facilities shortly.
LIMITATION ON MONETARY LIABILITY OF OFFICERS AND DIRECTORS TO STOCKHOLDERS--OUR
CERTIFICATE OF INCORPORATION LIMITS THE LIABILITY OF OUR OFFICERS AND DIRECTORS
FOR CERTAIN ACTIONS, WHICH MAY RESULT IN OUR INABILITY TO COLLECT MONETARY
DAMAGES FROM THEM IN THE CASE OF THEIR MISCONDUCT.
Section 145 of the Delaware General Corporation Law contains provisions
entitling our directors and officers to indemnification from judgments, fines,
amounts paid in settlement and reasonable expenses, including attorneys' fees,
as the result of an action or proceeding in which they may be involved by reason
of being or having been our director or officer provided the officers or
directors acted in good faith. Our certificate of incorporation contains
provisions indemnifying our officers and directors to the fullest extent
permitted by Delaware law. These provisions provide, among other things, that
our director shall not be liable either to us or our stockholders for monetary
damages for breach of fiduciary duty as a director. These provisions may limit
the ability of our stockholders to collect on any monetary liability owed to
them by our officer or director.
12
CAPITALIZATION
The following table sets forth (i) our capitalization at March 31,
1999; (ii) our pro forma capitalization giving effect to the exchange on July 9,
1999, of 158,455 shares of our class A, series II convertible preferred stock
for $15,145,000 principal amount of our 9% convertible debentures, series 1, due
March 31, 2003, the related sale of 45,150 shares of class A, series II
convertible preferred stock and 34,596 shares of our class A, series II
convertible preferred stock for $2,200,000 principal amount due on the Old Ocean
loan plus accrued interest and repurchase of the NPI, and the application of the
net proceeds therefrom.
MARCH 31, 1999
------------------------------
HISTORICAL PRO FORMA
-------------- --------------
Long-term debt, including current maturities, net of unamortized discount of $ 61,871,586 $ 44,526,586
$937,500 ......................................................................
Redeemable Preferred Stock, no par value, unlimited shares authorized; 9,488,140
shares issued and outstanding; redemption value of $9,488,140 ................. 9,488,140 9,488,140
Stockholders' equity:
Preferred Stock, $1.00 par value, 100,000,000 shares authorized; no shares issued
or outstanding; (238,201 shares outstanding as adjusted) .................... -- 23,820,100
Common Stock; $.01 par value, unlimited shares authorized; 33,727,724 shares
issued and outstanding (1) ................................................... 20,424,996 20,424,996
Common Stock reserved for issuance, 1,927,436 shares reserved (1) .............. 2,496,030 2,496,030
Additional paid-in capital ..................................................... 878,067 878,067
Accumulated deficit ............................................................ (19,237,436) (18,432,936)
Unrealized losses on available for sale marketable securities .................. (72,882) (72,882)
Cumulative foreign currency translation adjustment ............................. (94,455) (94,455)
-------------- --------------
Total stockholders' equity .................................................. 4,394,320 29,018,920
-------------- --------------
Total Capitalization .............................................. $ 75,754,046 $ 83,033,646
-------------- --------------
-------------- --------------
- -----------------------------
(1) On May 18, 1999, we migrated from the Yukon Territory, Canada and
became a Delaware Corporation. Authorized capital stock is currently
400,000,000 shares consisting of 300,000,000 shares of common stock,
par value $.01 per share, and 100,000,000 shares of preferred stock,
par value $1.00 per share.
13
COMMON STOCK PRICE RANGE AND DIVIDEND POLICY
Our common stock is listed on the Vancouver Stock Exchange under the
symbol "BZG." At June 30, 1999, there were approximately 289 shareholders of
record of common stock and 811 beneficial owners.
The following table sets forth, for the periods indicated, the high and
low sales prices per share, in Canadian dollars and in U.S. dollar equivalents,
for the common stock as reported on Canada Stockwatch. We commenced operations
on October 31, 1996.
COMMON SHARE PRICE COMMON SHARE PRICE
RANGE (CDN) RANGE (US$) (1)
------------------------ -------------------------
HIGH LOW HIGH LOW
------------ ---------- ------------ -----------
TEN MONTHS ENDED AUGUST 31, 1997:
Month ended November 30, 1996 ............................ $ 2.50 $ 1.90 $ 1.88 $ 1.41
Second Quarter ended February 28, 1997 ................... $ 4.30 $ 2.00 $ 3.15 $ 1.48
Third Quarter ended May 31, 1997 ......................... $ 4.40 $ 3.00 $ 3.23 $ 2.19
Fourth Quarter ended August 31, 1997 ..................... $ 3.35 $ 2.50 $ 2.44 $ 1.82
FOUR MONTHS ENDED DECEMBER 31, 1997 (2): ..................... $ 3.50 $ 1.55 $ 2.53 $ 1.08
1998
First Quarter ended March 31, 1998 ....................... $ 2.10 $ 1.10 $ 1.49 $ 0.77
Second Quarter ended June 30, 1998 ....................... $ 2.04 $ 1.30 $ 1.43 $ 0.89
Third Quarter ended September 30, 1998 ................... $ 1.80 $ 0.45 $ 1.24 $ 0.30
Fourth Quarter ended December 31, 1998 ................... $ 1.15 $ 0.32 $ 0.74 $ 0.21
1999
First Quarter ............................................ $ 0.75 $ 0.28 $ 0.49 $ 0.18
Second Quarter ........................................... $ 0.50 $ 0.28 $ 0.34 $ 0.19
Third Quarter (through July 14, 1999) .................... $ 0.37 $ 0.29 $ 0.25 $ 0.20
- -------------------------------
(1) Share price was converted from Canadian dollars to U.S. dollars using
the average of the high and low exchange rate in effect during the
respective periods.
(2) In 1997, we changed our fiscal year-end from August 31 to December 31.
DIVIDEND POLICY
To date, we have not paid any cash dividends on our common stock. We
intend to retain our earnings, if any, to provide funds for reinvestment in our
exploration, development and production activities, and, therefore, do not
anticipate declaring or paying cash dividends on our common stock in the
foreseeable future. Furthermore, payment of dividends, if any, in the future is
within the discretion of the board of directors and will depend on our earnings,
if any, our capital requirements and financial condition and other relevant
factors. Presently, the payment of dividends in cash by us on our common stock
is restricted under the terms of certain of our credit facilities. We have the
right through December 31, 1999 to pay dividends due on our class A, series I
preferred stock with common stock priced at a trailing average closing price. To
date, we have elected this option with respect to all dividends due on the class
A, series I preferred stock.
14
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected financial data as of and for the ten-month
period ended August 31, 1997, the four-month period ended December 31, 1997, and
the year ended December 31, 1998, have been derived from our audited
consolidated financial statements. The selected consolidated financial data as
of and for the three-month period ended March 31, 1998 and 1999 have been
derived from our unaudited consolidated financial statements. The unaudited
consolidated financial statements include all adjustments consisting of normal
recurring accruals that we consider necessary for a fair presentation of our
financial position as of such dates and the results of operations and cash flows
for such periods. Operating results for the three months ended March 31, 1999
are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 1999.
FOUR MONTH
FOR THE QUARTER ENDED YEAR ENDED PERIOD ENDED TEN MONTH PERIOD
MARCH 31, DECEMBER 31, DECEMBER 31, ENDED AUGUST 31,
----------------------------- ---------------- --------------- ------------------
1999 1998 1998 1997 (1) 1997 (2)
-------------- ------------- ---------------- --------------- ------------------
(unaudited) (unaudited) (audited) (audited) (audited)
INCOME STATEMENT DATA:
Petroleum revenues ....................... $ 1,370,957 $ 1,040,780 $ 4,947,457 $ 707,987 $ 444,203
Earnings (loss) before DD&A, interest,
amortization of issuance costs, income
tax and preferred dividends............... 210,271 (465,790) (2,756,466) (1,479,769) (1,686,624)
Net loss applicable to common
stockholders ............................. (2,665,782) (2,365,163) (11,915,191) (2,739,322) (1,917,141)
AS OF AS OF AS OF AS OF
MARCH 31, DECEMBER 31, DECEMBER 31, AUGUST 31,
----------------------------- ---------------- --------------- ------------------
1999 1998 1998 1997 (1) 1997 (2)
-------------- ------------- ---------------- --------------- ------------------
BALANCE SHEET DATA: (unaudited) (unaudited) (audited) (audited) (audited)
Working Capital Surplus (Deficit) .... $ (35,135,688) $ 2,538,902 $ (27,360,635) $ (15,290,406) $ 1,784,075
Properties and Equipment, net ........ 85,463,843 45,109,137 79,412,241 25,319,771 11,916,817
Total Assets ...................... 97,890,925 75,339,380 95,240,247 36,216,129 21,520,880
Long-term Debt, including current
maturities ........................ 61,871,586 41,152,167 59,490,912 12,708,303 781,326
Redeemable Preferred Shares .......... 9,488,140 12,000,000 9,488,140 -- --
Stockholders' Equity ................. 4,394,320 12,547,544 6,990,828 11,806,496 14,089,948
- ------------------------------
(1) We changed our fiscal year end to December 31.
(2) Represents the period from inception to original year-end, August 31.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following matters had a significant impact on our results of
operations and financial position for the three months ended March 31, 1999:
VOLUME AND PRICE INFORMATION. Revenue for the first quarter of 1999 was
significantly impacted by low average natural gas prices. Natural gas production
accounts for 87% of our total production on an equivalent MCF basis. Our
revenues are, therefore, more sensitive to gas price fluctuations than to oil
price changes. For the first quarter of 1999, natural gas prices we received for
our production averaged $1.70 per MCF compared to $2.27 for the comparable
period in 1998.
The following table summarizes volume and price information with
respect to our oil and gas production for the three months ended March 31, 1999
and 1998:
THREE MONTHS
ENDED
MARCH 31,
------------------------ INCREASE
1999 1998 (DECREASE)
----------- ----------- --------------
Gas Volume - MCFGD ................... 7,913 4,570 3,343
Average Gas Price - per MCF .......... $ 1.70 $ 2.27 $ (0.57)
Oil Volume - BOD ..................... 191 99 92
Average Oil Price - per barrel ....... $ 9.50 $ 12.08 $ (2.58)
OUTSTANDING DEBT. At March 31, 1999, we had outstanding debt of
$61.9 million. Our EnCap, BOCP and Old Ocean Credit Facilities will come due
on July 31, 1999. As to the indebtedness reflected by the Old Ocean Loan, all
lenders, other than affiliates of EnCap that are owed $100,000, elected to
convert their respective indebtedness and the mineral interests obtained in
connection with the Old Ocean Loan into our convertible preferred stock. In
July 1999, we repaid the $100,000 owed to affiliates of EnCap under the Old
Ocean Loan and we anticipate that we will repay the indebtedness reflected by
the EnCap Credit Facility and the BOCP Credit Facility in July, 1999, with
funds obtained in connection with our recent offering of our convertible
preferred stock and new funds received in connection with an increase either
of the Shell Production Payment or through funds received in connection with
a new production payment arrangement with a new lender. We currently are
engaged in negotiations as to both financing options and believe such new
financing will be available in time to meet the current maturity dates. If we
are unable to obtain sufficient new financing to repay the EnCap Credit
Facility and the BOCP Credit Facility, then we will be in default under the
applicable Credit Facility and the applicable lenders will have the right to
seek immediate repayment of the entire indebtedness due thereunder and
enforce other remedies, which include the right to foreclose on substantially
all of our properties. Any of the foregoing actions could cause us to cease
operations.
16
The following had a significant impact on our results of operations and
financial position for the year ended December 31, 1998:
CAPITALIZATION. We completed in March and April of 1998, the private
placement of $37.5 million principal amount of 9% convertible debentures. After
expenses and escrow of $1.056 million for the satisfaction of certain put rights
of holders of the 9% convertible debentures (of which approximately $988,000 has
been put), $32.5 million of the proceeds remained available to us. In April
1999, we agreed to lower the conversion price of the debentures from Cdn. $1.70
per common share to Cdn. $1.40 per common share in exchange for certain changes
to the indentures. Series 3 debentureholders and the Series A special
noteholders have agreed to the same changes by written consent. The 9% notes are
convertible into 29,003,555 shares of common stock, based on a conversion price
of Cdn.$1.40 and an exchange rate of $0.6711 per Cdn.$1.00 (the exchange rate as
of April 15, 1999). The remaining 9% convertible debentures are convertible into
10,551,121 shares of common stock based on a current conversion price of
Cdn.$1.40, adjusted for a 10% penalty on conversion due to delayed registration.
DISCOVERY WELL. The K. S. Byrd Well, which began producing in September
of 1997, contributed an average of 2,402 MCF per day during 1998, before
including 747 MCF per day for acquired interests.
ACQUISITIONS. We acquired certain producing properties from Lasco
Energy Partners in January 1998, Calibre Energy, L.L.C. in April 1998 and
Southern Gas Company in May 1998. The assets acquired in these transactions and
certain other acquisitions contributed an average of 2,982 MCF per day during
1998, of which 747 MCF per day was additional production to us related to the K.
S. Byrd well not included in the discussion above.
VOLUME AND PRICE INFORMATION. Our average realized price for natural
gas decreased $0.56 per MCF from $2.80 per MCF for the year ended December 31,
1997 to $2.24 per MCF for the comparable period in 1998. Income in 1998 from
hedging gains increased gas realizations by $0.18 per MCF. The average realized
oil price decreased $8.25 per barrel from $19.08 per barrel in 1997 to $10.83
per barrel in 1998.
The following table summarizes volume and price information with
respect to our oil and gas production for the years ended December 31, 1998 and
1997, the four-month period ended December 31, 1997 and the ten month period
ended August 31, 1997:
YEAR ENDED DECEMBER 31,
--------------------------- FOUR MONTHS TEN MONTHS
ENDED ENDED
1998 1997(1) INCREASE DECEMBER 31, AUGUST 31,
(DECREASE) 1997 1997
---------- ---------- ------------- -------------- -------------
Gas Volume - MCFGD ................. 5,506 788 4,718 1,834 276
Average Gas Price - per MCF ........ $ 2.24 $ 2.80 $ (0.56) $ 2.79 $ 3.05
Oil Volume - BOD ................... 111 33 78 37 31
Average Oil Price - per barrel ..... $ 10.83 $ 19.08 $ (8.25) $ 18.54 $ 20.28
- ---------------------------------
(1) The amounts for the year ended December 31, 1997 were derived by adding
the audited four month period ended December 31, 1997 and the audited
ten month period ended August 31, 1997 and then subtracting the
unaudited two month period ended December 31, 1996.
OUTSTANDING DEBT. At December 31, 1998, we had outstanding debt of
$59.5 million compared to $12.7 million at December 31, 1997. The increase
reflects the issuance of $37.5 million of 9% convertible debentures, proceeds
from which were used to fund oil and gas prospect drilling, leasing and seismic
data acquisition activities in the onshore Texas and Mississippi Gulf of Mexico
region, repayment of a portion of our outstanding debt and other working capital
uses. In addition, we entered into a financing agreement with Shell Capital
whereby we sold a term production payment to Shell Capital for $7.0 million.
17
THREE MONTHS ENDED MARCH 31, 1999 VS. THREE MONTHS ENDED MARCH 31, 1998
NET LOSS. For the three months ended March 31, 1999, we reported a net
loss applicable to common stockholders of $2.7 million, or $0.08 per share,
compared to a net loss of $2.4 million, or $0.08 per share, in the comparable
1998 period. Weighted average shares outstanding increased from approximately
30.6 million in the first quarter of 1998 to over 33.7 million in the comparable
1999 period as a result of the issuance of Common Stock as dividend payment on
preferred shares as well as the exercise of warrants and options in the second
half of 1998.
REVENUE. For the three months ended March 31, 1999, revenue from crude
oil and natural gas production increased 32% over the same period in 1998.
Natural gas contributed 88% and crude oil contributed 12% of total oil and gas
production revenue.
GAS SALES. Natural gas sales increased 30%, from $932,400 for the three
months ended March 31, 1998 to approximately $1.2 million for the same period in
1999; however, the impact of increased production was significantly reduced by
the decline in natural gas prices. Production for the first quarter of 1999
increased significantly over the comparable prior year period due primarily to
production from the assets purchased in the second quarter of 1998 and
production from new wells drilled and completed. This increase in production
improved revenue from the 1999 period by $681,800. The average realized price
for natural gas sales declined from $2.27 per MCF in the first quarter of 1998
to $1.70 per MCF in the comparable 1999 period decreasing revenues by $406,700.
OIL SALES. For the three months ended March 31, 1999, oil sales
increased 51% to $163,500, compared to $108,400 for the same period in 1998, due
primarily to sales of production from properties acquired in the second quarter
of 1998 and from new wells drilled and completed. This increase in production
improved revenue for the first quarter of 1999 by approximately $99,500. Our
average realized price for sales of crude oil in the first quarter of 1999
decreased by $2.58 per barrel, or 21%, decreasing revenue by $44,400 compared to
the same period in 1998.
DEPRECIATION, DEPLETION AND AMORTIZATION. Our depreciation, depletion
and amortization expense for the first quarter of 1999 totaled $1.2 million
compared to $676,600 in the comparable period for 1998. Full cost DD&A totaled
$1.1 million for the three months ended March 31, 1999 compared to $621,600 for
the same period in 1998. The increase in DD&A is consistent with a higher
amortizable asset base and an increase in production for the 1999 period
compared to the prior year period. On an equivalent MCF basis, full cost DD&A
decreased $0.04 per MCFE, from $1.34 per MCFE for the three months ended March
31, 1998 to $1.30 per MCFE in the comparable 1999 period. DD&A of other assets
for the first quarter of 1999 totaled $102,500, an increase of $47,500 over the
comparable period in 1998, due primarily to an increase in the related asset
base.
OPERATING COSTS. Operating costs, including lease operating expense and
production taxes, increased 30% from $129,200 in the first quarter of 1998 to
$168,200 for the same period in 1999. The increase was due primarily to
increased production from wells drilled or acquired since the prior year period.
For the three months ended March 31, 1999, lease operating expense, excluding
severance taxes, totaled $138,000 compared to $111,100 for the comparable period
in 1998. On an equivalent MCF basis, average lease operating expense for the
first quarter of 1999 decreased from $0.24 per MCFE in 1998 to $0.17 per MCFE in
the same 1999 period.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
for the three months ended March 31, 1999 decreased $552,200, or 37%, compared
to the same period in 1998. On an equivalent MCF basis, general and
administrative expenses declined 64% to $1.15 per MCFE for the three months
ended March 31, 1999 compared to $3.19 per MCFE for the same period in 1998. The
decrease in general and administrative costs was due primarily to lower
compensation expense generated by staff reductions during the fourth quarter of
1998 and the first quarter of 1999. These staff reductions, as well as salary
reductions for certain of the remaining employees, are expected to significantly
reduce general and administrative costs in 1999.
INTEREST EXPENSE. Interest expense for the three months ended March 31,
1999 totaled $1.0 million compared to $1.2 million in the comparable prior year
period. Average debt was approximately $59.8 million for the first quarter of
1999, resulting in gross interest costs of $2.0 million. Other financing costs
include the amortization of a discount of $77,800. Partially offsetting these
costs was capitalized interest of $1.0 million, which is based on the carrying
value of unproved properties. Financing costs also included amortization of debt
issuance costs totaling $582,030 for the first
18
quarter of 1999. For the first quarter of 1998, average debt was
approximately $25.6 million, resulting in gross interest costs of $857,000.
Other financing costs included the amortization of the original issue
discount for the EnCap NPI and warrants of $512,400. Partially offsetting
these costs was capitalized interest of $171,400. Amortization of debt
issuance costs totaled $53,800 for the first quarter of 1998.
OTHER. Other income (expense) for the three months ended March 31, 1999
included interest income of $88,200 partially offset by losses on the sale of
marketable securities totaling $58,600. For the comparable period in 1998 other
income included interest income of $29,000 and gains on the sale of marketable
securities totaling $108,800.
YEAR ENDED DECEMBER 31, 1998 VS. YEAR ENDED DECEMBER 31, 1997
NET LOSS. For the year ended December 31, 1998, we reported a net loss
applicable to common stockholders, of $11.9 million, or $0.37 per share,
compared to a net loss of $4.4 million, or $0.18 per share, in the comparable
1997 period. Weighted average shares outstanding increased from approximately
24.1 million in 1997 to over 32.4 million in 1998 as a result of the conversion
and exercise of warrants in late 1997 and the issuance of Common Stock to
acquire certain properties in 1998 and to pay interest and dividends on the
Lasco Acquisition note and subsequent preferred shares.
REVENUE. For the year ended December 31, 1998, revenue from crude oil
and natural gas production increased 378% over the same period in 1997. Natural
gas contributed 91% and crude oil contributed 9% of total oil and gas production
revenue.
GAS SALES. Natural gas sales increased over 460%, from $804,700 for the
year ended December 31, 1997 to approximately $4.5 million for the same period
in 1998, as the impact of increased production more than offset the impact of
the decline in natural gas prices. Production for 1998 increased significantly
over the comparable prior year period due primarily to production from the
assets purchased in our recent acquisitions and production from the K. S. Byrd
Well. This increase in production improved revenue for 1998 by $4.8 million. The
average realized price for natural gas sales declined from $2.80 per MCF in 1997
to $2.24 per MCF in the comparable 1998 period, decreasing revenues by $1.1
million. Income in 1998 from hedging gains increased gas realizations by $0.18
per Mcf.
OIL SALES. For the year ended December 31, 1998, oil sales increased
91% to $440,500, compared to $231,100 for the same period in 1997, due primarily
to sales of production for properties acquired in our recent acquisitions and
production from our Reedy Creek properties. This increase in production improved
revenue for 1998 by approximately $544,700. Our average realized price for sales
of crude oil in 1998 decreased by $8.25 per barrel, or 43%, decreasing revenue
by $335,300 compared to the same period in 1997.
DEPRECIATION, DEPLETION AND AMORTIZATION. Our depreciation, depletion
and amortization expense for 1998 totaled $3.2 million compared to $854,100 in
the comparable period for 1997. Full cost DD&A totaled $2.8 million for the year
ended December 31, 1998 compared to $709,200 for the same period in 1997. The
increase in DD&A is consistent with the increased production for 1998 compared
to the prior year period. Included in DD&A for the year ended December 31, 1997,
was $221,000 of non-cash charges attributable to a price-related reduction in
the book value of our oil and gas reserves. On an equivalent MCF basis, full
cost DD&A decreased $0.71 per MCFE, from $1.97 per MCFE for the year ended
December 31, 1997 to $1.26 per MCFE in the comparable 1998 period. DD&A of other
assets for 1998 totaled $305,700, an increase of $160,800 over the comparable
period in 1997 due primarily to an increase in the related asset base.
OPERATING COSTS. Operating costs, including lease operating expense and
production taxes, increased 763% from $111,500 in 1997 to $962,700 for the same
period in 1998. The increase was due primarily to increased production from
wells drilled or acquired since the prior year period. For the year ended
December 31, 1998, lease operating expense, excluding severance taxes, totaled
$860,200 compared to $86,500 for the comparable period in 1997. On an equivalent
MCF basis, average lease operating expense for 1998 increased from $0.24 per
MCFE in 1997 to $0.38 per MCFE in 1998. This increase is primarily due to the
Lasco acquisition that comprised older, lower rate wells.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
for the year ended December 31, 1998 increased over $1.9 million, or 52%,
compared to the same period in 1997. On an equivalent MCF basis, general
19
and administrative costs declined 76% to $2.56 per MCFE for the year ended
December 31, 1998 compared to $10.51 per MCFE for the same period in 1997.
The increase in general and administrative costs was due primarily to higher
compensation expense generated by a larger staff. We began 1998 with 26
employees, increasing to 37 employees during the year. Staff reductions
during the fourth quarter of 1998 reduced total employees to 29 at year-end.
Further staff reductions during the first quarter of 1999 reduced total
employees to 21 at March 31, 1999. These staff reductions, as well as salary
reductions for the majority of the remaining employees, are expected to
significantly reduce general and administrative costs in 1999. The overall
high level of general and administrative expenses in 1997 was due to the
initial costs associated with creating and managing our extensive capital
program.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1998
totaled $5.8 million compared to $689,219 in the comparable prior year period.
The increase is due primarily to the financing arrangements under the EnCap
Credit Facility entered into in December 1997 and interest on the $37.5 million
principal amount of 9% convertible debentures issued in March and April of 1998.
Average debt was approximately $44.6 million for 1998, resulting in gross
interest costs of $4.8 million. Other financing costs include the amortization
of the original issue discount for the EnCap NPI of $1.7 million and the
amortization of deferred loan and issuance costs of $1.2 million. Partially
offsetting these costs were capitalized interest of $1.9 million, which is based
on the carrying value of unproved properties.
OTHER. Other income (expense) for the year ended December 31, 1998
included a charge of $1.0 million due to the termination of our key employee
recorded in December 1998 to reflect settlement of his employment contract. Such
settlement will be paid out through January 2001. Offsetting this expense was
interest income of $573,609 and gains on the sales of marketable securities
totaling $24,971. For the comparable period in 1997, interest income of $77,844
was offset by losses on the sales of marketable securities totaling $86,824.
FOUR MONTHS ENDED DECEMBER 31, 1997 AND TEN MONTHS ENDED AUGUST 31, 1997
NET LOSS. We reported a net loss of $2,739,300, or $0.10 per share, for
the four months ended December 31, 1997 and $1,917,100 or $0.09 per share, for
the ten months ended August 31, 1997. Weighted average shares outstanding were
27.9 million for the four months ended December 31, 1997 and 21.9 million for
the ten months ended August 31, 1997.
GAS SALES. Natural gas sales for the four months ended December 31,
1997 and the ten months ended August 31, 1997 totaled $624,400 and $256,000,
respectively. Production averaged 1,833 MCFD for the four-month period ended
December 31, 1997 at an average price of $2.79 per MCF and 276 MCFD for the
ten-month period ended August 31, 1997 at an average price of $3.05 per MCF. The
K.S. Byrd Well began production in September 1997 and averaged 1,605 MCFD for
the four months ended December 31, 1997.
OIL SALES. Our crude oil sales for the four months ended December 31,
1997 and the ten months ended August 31, 1997 totaled $83,500 and $188,200,
respectively. Production averaged 36.9 barrels per day and 30.5 barrels per day,
respectively, for the four-month period ended December 31, 1997 and the
ten-month period ended August 31, 1997. Our average realized price for sales of
crude oil for the four-month period ended December 31, 1997 and the ten-month
period ended August 31, 1997 were $18.54 per barrel and $20.28 per barrel,
respectively.
DEPRECIATION, DEPLETION AND AMORTIZATION. For the four months ended
December 31, 1997, depreciation, depletion and amortization expense totaled
$634,500 and for the ten months ended August 31, 1997, depreciation, depletion
and amortization expense was $240,400. Full cost depreciation, depletion and
amortization averaged $2.32 per MCFE for the four months ended December 31, 1997
and $1.07 per MCFE for the ten months ended August 31, 1997, due primarily to a
ceiling test write-down of $221,000 at December 31, 1997.
OPERATING COSTS. Operating costs totaled $49,800 and $68,500,
respectively, for the four-month period ended December 31, 1997 and the ten
month period ended August 31, 1997. Lease operating expense, excluding severance
taxes, totaled $42,700 and $45,600 for the same periods, respectively. On an
equivalent barrel basis, lease operating expense for the four months ended
December 31, 1997 averaged $0.17 per MCFE and for the ten months ended August
31, 1997 averaged $0.33 per MCFE.
20
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative costs
totaled $2,087,100 for the four months ended December 31, 1997 and $2,026,400
for the ten months ended August 31, 1997. On an equivalent MCF basis, general
and administrative expenses were $8.32 per MCFE for the four months ended
December 31, 1997 and $14.53 per MCFE for the ten months ended August 31, 1997.
General and administrative costs were significant during these periods and
reflected establishment of the infrastructure necessary to sustain the planned
expansion of oil and gas operations and our desired position as operator of many
of our prospects. Costs included signing bonuses paid to professional and senior
management staff as inducements to leave their previous employment and join us,
legal and accounting fees, and the settlement of a lawsuit filed by a former
employee.
NET FINANCING COSTS. Net financing costs for the four months ended
December 31, 1997 were $625,100, and consisted of gross interest expense of
$286,700, the amortization of the original issue discount for the EnCap NPI of
$427,500 and amortization of deferred loan costs of $42,900. Partially
offsetting these costs was capitalized interest of $108,200 and interest income
of $23,800. For the ten months ended August 31, 1997, gross interest expense of
$49,300 was more than offset by interest income of $59,200. The higher financing
costs in the four-month period ended December 31, 1997 reflect our increase in
long-term debt from $759,300 at August 31, 1997 to $14.7 million at December 31,
1997. This increase in debt relates to the EnCap Credit Facility, entered into
in late 1997, that was used to finance the Oakvale Dome Field and Old Ocean
acquisitions and related development.
OTHER. Other revenue for the four-month period ended December 31, 1997
and the ten-month period ended August 31, 1997 represents losses on the sale of
marketable securities of $50,900 and $35,900, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash needs are for exploration, development and acquisition
of oil and gas properties, payment for the acquisition and processing of seismic
data, the repayment of trade payables and repayment of principal and interest on
outstanding debt. We have budgeted $11.3 million to fund planned capital
expenditures on our prospects during 1999. Our sources of financing include net
proceeds from our recently completed offering of convertible preferred stock, a
tentative commitment of equity from an affiliate of EnCap, revenue generated
from operations, ongoing sales of non-core assets and proceeds from production
payment facilities. Based on the foregoing, we will require additional capital
from more than one of the sources identified above to fund our ongoing
activities and capital budget. If we are unable to obtain additional capital, we
will either have to sell interests in our prospects to fund our drilling
program, curtail our exploration activities or curtail ongoing activities. Such
curtailing of activities could include reducing the number of wells drilled,
slowing activities on projects that we operate, selling additional interests in
our prospect inventory or a combination of the foregoing. In the absence of any
new funding, we will have inadequate liquidity to satisfy our existing
contractual obligations and to continue operations in our current form.
Many of the factors that may affect our future operating performance
and long-term liquidity are beyond our control, including, but not limited to,
oil and natural gas prices, governmental actions and taxes, the availability and
attractiveness of financing and our operational results. We continue to examine
alternative sources of long-term capital, including bank borrowings, the
issuance of debt instruments, the sale of common stock or other equity
securities, the issuance of net profits interests, sales of promoted interests
in our prospects, and various forms of joint venture financing. In addition, the
prices we receive for our future oil and natural gas-production and the level of
our production will have a significant impact on future operating cash flows.
LIQUIDITY. At March 31, 1999, we had cash and cash equivalents on hand
of $565,200 and working capital deficit of $35.1 million, as compared to a cash
balance of $2.3 million and a working capital deficit of $27.4 million as at
December 31, 1998 and a cash balance of $3.2 million and a working capital
deficit of $15.3 million at December 31, 1997. Our ratio of current assets to
current liabilities was 0.16:1 at March 31, 1999, 0.25:1 at December 31, 1998
and 0.37:1 at December 31, 1997. The working capital deficit and low current
ratio is primarily due to the EnCap Credit Facility discussed below, repayment
of which is due by July 31, 1999.
21
CASH FLOWS. Cash flows used in operations, totaled $153,600 for the
three months ended March 31, 1999, compared to $4.1 million for the year ended
December 31, 1998. Cash used in investing activities for the quarter ended March
31, 1999 and year ended December 31, 1998 was $4.1 million and $35.4 million,
respectively. During the first quarter of 1999, costs incurred for exploration
and development expenditures totaled $4.2 million and capital expenditures for
furniture and equipment totaled $64,200. Partially offsetting these costs were
proceeds of $128,100 from the sale of marketable securities. Cash outlays for
exploration and development expenditures totaled approximately $36.3 million and
capital expenditures for furniture and equipment totaled $745,400 during the
year ended December 31, 1998. Partially offsetting these costs were $1.1 million
in proceeds from the sale of non-core properties and $1.1 million in proceeds
from the sale of marketable securities.
Cash provided by financing activities totaled $2.4 million for the
first quarter of 1999 and included borrowings under the BOCP Credit Facility of
approximately $2.7 million and repayments under the Shell Production Payment
totaling approximately $352,500. For the year ended December 31, 1998 cash
provided by financing activities totaled approximately $38.7 million and
consisted primarily of proceeds from the issuance of 9% convertible debentures
and 9% notes. We also borrowed $3.0 million under the EnCap Credit Facility and
repaid $5.0 million thereunder during the first quarter of 1998. In December
1998, we entered into a financing agreement with Shell Capital whereby we sold a
term production payment to Shell Capital for $7.0 million. Also in December, we
repaid $2.9 million on Tranche A and Tranche B loans under our BOCP Credit
Facility resulting in net borrowings under that Facility of $2.3 million for the
year ended December 31, 1998. We also borrowed $2.2 million for the acquisition
of property interests from Mobil through a short term, secured advance from
investors introduced by the agent (referred to herein as the Old Ocean Loan).
CREDIT FACILITIES
ENCAP CREDIT FACILITY. In 1997, we entered into a $20 million credit
agreement with EnCap Capital Fund III, L.P. ("EnCap Energy") consisting of an
original promissory note for $12,000,000 and a supplemental promissory note for
$8,000,000. The original note bears interest at 10% per annum through December
31, 1998 and at 18% per annum thereafter. The original note is due, with accrued
interest, by July 31, 1999. The supplemental note was repaid in full and is no
longer outstanding. Under the terms of the 9% convertible debentures, we have
agreed to limit borrowings under the EnCap Credit Facility to $12,000,000, all
of which is outstanding and due July 31, 1999. The proceeds from the facility
were applied to the acquisition of Oakvale Dome ($8,000,000), and Old Ocean
properties and the drilling and completion of certain development wells
($4,000,000). A first lien on certain properties and a second lien on certain
other properties secure the original note. Mr. Tomlinson, Calibre and certain
affiliates of Calibre guarantee the original note.
Under the terms of the original note, we agreed to convey to EnCap
Energy, on January 1, 1999, a 25% net profit interest from the properties
acquired with the proceeds of the borrowing. In connection with the original
granting of the EnCap NPI, we recorded a discount on the original note of
$2,102,180 as of December 31, 1997. The discount has been amortized over the
term of the original note. The carrying amount of the oil and gas interests has
been reduced by the same amount.
Under the terms of the supplemental note, EnCap Energy was issued
warrants to purchase up to 1.5 million shares of our common stock at an exercise
price of $1.28 per share. In connection with the issuance of these warrants, we
recorded a discount on the supplemental note of $367,881 as of December 31,
1997. This discount is being amortized over the term of the supplemental note.
Pursuant to a financing agreement dated November 4, 1998 with EnCap Energy and
as consideration for enabling additional funding through the BOCP Credit
Facility, the warrants were re-priced to $0.46475 per share.
BOCP CREDIT FACILITY. In December 1998, our loan agreement with Bank
One NA was purchased by BOCP Energy Partners, L.P., an affiliate of EnCap.
Pursuant to an assignment of note and liens dated December 29, 1998, Bank One
assigned the original loan agreement, together with all loan documents referred
to therein, to BOCP. In December 1998, the principal amount then outstanding
under Tranche A of $2.9 million plus interest was repaid and, per amendments to
the loan agreement, no further advances will be requested or made under Tranche
A. Interest accrued on Tranche A at prime plus 2.0% and on Tranche B at a rate
of 15% per annum, payable monthly.
22
The amendments also modified the terms of Tranche B of the credit
facility as follows:
- Maximum availability of $6,000,000;
- No advances on Tranche B will be requested or made on or
after April 30, 1999;
- Maturity date of July 31, 1999; and
- Interest rate of prime plus 8% per annum through and
including December 31, 1998, and 15% per annum from and after
January 1, 1999.
The present outstanding balance of the BOCP Credit Facility is $6.0
million. All interest accrued on Tranche B remains unpaid and owing and is
due on July 31, 1999. We have reached a standstill agreement covering certain
covenants of which we are currently in violation and received an extension in
the maturity date to July 31, 1999.
SHELL FINANCING. In December 1998, we entered into a financing
agreement with Shell Capital, Inc. whereby we sold a term production payment
to Shell Capital for $7.0 million. The production payment comprised a
dedication of 42% of the net revenues from the Wausau, Oak Hill and East
Morgantown properties, 23.1% of Oakvale Dome's Howell well, 12.2% of Oakvale
Dome's Fortenberry well and 38.5% of Oakvale Dome's Byrd well. The interests
conveyed are subject to future adjustment. The Shell production payment is
secured solely by the properties and is non-recourse to us. Following full
pay-out ($7.0 million plus a 15% rate of return) of the production payment,
the dedicated revenue interest is returned to us less a permanent royalty
interest equal to 8.75% of our net revenue interest in Wausau, Oak Hill and
East Morgantown; 4.8% of the Howell and Byrd wells; and 2.5% of the
Fortenberry well. We have the right to buy back the production payment at a
stated rate of return of 25% plus a payment of $1.0 million. In connection
with the right to buy back the permanent overriding royalty interest
conveyance, we recorded a discount on the financing of $1.0 million. The
carrying amount of the oil and gas interests has been reduced by the same
amount. Shell Capital further agreed to expand the Shell production payment
up to $25.0 million provided that we sell certain properties, enter into a
payment schedule for amounts owed to an industry partner, raise additional
capital and obtain certain minimum results from current development drilling
activity. We are currently negotiating with Shell Capital and other parties
to complete the expansion of the Shell production payment or the creation of
a new production payment.
This financing has been classified as debt on the balance sheet and
began being reduced in 1999 as production is delivered to Shell under the
terms of the contract. Volumes delivered to Shell are reported as revenue at
prices received by Shell. Interest expense is recorded based on a rate of 15%
per annum.
OLD OCEAN LOAN. On December 31, 1998, we obtained a $2.2 million
loan from a group of lenders led by RP&C International, the agent in our
recently completed offering of convertible preferred stock, the proceeds
being used to acquire additional interests in the Old Ocean Project from
Mobil. The loan is due, through extension, on July 31, 1999, and is secured
by the acquired interests and a junior lien on certain other properties. We
have repaid a majority of the loan through the issuance of our convertible
preferred stock. We also granted the providers of the facility with an
overriding royalty that is to be converted into a participating net profit
interest, which interest can be repurchased by us for $1.1 million in cash or
stock and $1.1 million principal amount of warrants. We repurchased the
overriding interest and participating net profits interest with preferred
stock as well. One lender of $100,000 elected to accept cash for repayment of
their portion of the loan and purchase of the overriding interest.
CONVERTIBLE DEBENTURES
In April 1998, we issued to certain Canadian investors $1,652,000
principal amount of our series A special notes, which are convertible into
the same principal amount of our series 2 debentures, and issued to certain
United States investors $6,960,000 principal amount of our series 3
debentures on substantially similar terms as the series A notes. We intend to
offer holders of the series 3 debentures the ability to exchange their
special notes or debentures into class A, series II preferred stock on terms
no more favorable than the terms on which we recently completed the exchange
of our 9% convertible debentures, series I due March 31, 2003. The holders of
series 2 debentures will not be offered the opportunity to exchange their
series 2 debentures for preferred stock.
23
CHANGES IN ISSUED SHARE CAPITAL
On May 28, 1999, we issued 1,057,500 shares of our common stock to
certain holders of our series 3 debentures in exchange for interest owed and
due on March 31, 1999. We also agreed to issue 541,700 shares of our common
stock to a holder of series 3 debentures to retire a $250,000 principal
amount of the debentures.
YEAR 2000
We operate on an externally designed software package that is
compliant with the year 2000. The year 2000 problem is the result of software
that uses two digits (rather than four) to define the applicable year. Any
software or hardware that uses time-sensitive coding may recognize a day
using "00" as the year 1900 rather than the year 2000, which could result in
miscalculations or system failures. We are attempting to identify other
potential areas of risk and have begun addressing these in our planning,
purchasing and daily operations. Based on preliminary information, costs of
addressing potential problems are not currently expected to have a material
adverse impact on our financial position, results of operations, or cash
flows in future periods. If, however, we, our customers, or vendors are
unable to adequately resolve such processing issues in a timely manner, our
operations and financial results may be adversely affected.
24
BUSINESS AND PROPERTIES
BACKGROUND
We are an independent energy company engaged in the exploration for
and development of oil and natural gas. We have interests in over 25 oil and
gas prospects and projects primarily in the United States Gulf Coast areas of
Mississippi, Texas and Louisiana. Most of these prospects have been, are
being, or are expected to be, enhanced with 3-D seismic data and CAEX
technologies. The 3-D seismic data, including current surveys, will cover
over 820 square miles. Our 1999 capital budget provides for a total of $11.3
million for drilling and prospect development. Of such amounts, approximately
$7.3 million is budgeted for development drilling, approximately $1.0 million
is budgeted for exploratory drilling, testing, and subsequent completions,
$2.3 million is budgeted for net seismic data acquisitions and the remainder
is budgeted primarily for leasehold purchases.
We were originally formed on February 9, 1981, for the purpose of
conducting mineral exploration in Canada. In 1989, we changed our focus and
concentrated on investment and merchant banking activities. At that time, we
wrote off our mineral property costs and ceased all mineral exploration
activities. From 1991 to 1993, we diversified into the acquisition and
development of oil and gas properties. During 1996, we sold substantially all
of our investments outside of oil and gas and refocused operations on oil and
gas exploration and development in the United States. Effective as of October
31, 1996, we acquired Texstar, and as a result, we focused our operations on
oil and gas exploration and development in the United States, specifically
the Gulf Coast areas of Mississippi, Texas and Louisiana. Former shareholders
of Texstar acquired our control, and Texstar became our wholly owned
subsidiary. In July 1997, we changed our name from Benz Equities Ltd. to Benz
Energy Ltd. We have migrated to the state of Delaware and are now a Delaware
Corporation under the name Benz Energy Inc.
A substantial portion of our growth has been through acquisitions,
including the following 1998 acquisitions:
- in January 1998, the acquisition of certain oil and gas
prospects from Lasco Energy Partners, L.P.;
- the acquisition on April 22, 1998 of certain oil and gas
property interests of Calibre (certain closing matters to be
completed);
- the acquisition on May 1, 1998 of certain oil and gas
properties from Southern Gas Corporation;
- the acquisition effective in July 1998 of certain oil and
gas property interests from Starbucks Trust (certain closing
matters to be completed); and
- the acquisition on December 29, 1998 of the Mobil interest
in the Old Ocean project.
RECENT DEVELOPMENTS
On July 9, 1999, we consummated an offering pursuant to which we
offered to exchange up to 354,250 shares of our class A, series II
convertible preferred stock for any and all of our outstanding 9% convertible
debentures, series I, due March 31, 2003, and an offering to sell up to
121,000 shares of class A, series II convertible preferred stock. At the
closing, we exchanged $15,145,000 principal amount of the 9% convertible
debentures and issued an aggregate of 238,201 shares of class A, series II
convertible preferred stock, which included 44,600 shares issued under the
primary offering and the remainder of which were issued pursuant to the
exchange offer. In addition, we issued 34,596 shares of class A, series II
convertible preferred stock and warrants to purchase 3,974,923 shares of
common stock in connection with the retirement of a majority of the Old Ocean
Loan. The proceeds from the exchange offer and offering of convertible
preferred stock were used to retire the Old Ocean Loan, to repurchase EnCap's
portion of the Old Ocean NPI, the payment of a portion of the seismic costs
relating to the Old Ocean Prospect, and for the fees and expenses of the
transactions.
On July 7, 1999, we executed a letter of intent with Prime
Natural Resources, Inc. for the sale of 37.5% of our interest in the Old
Ocean Prospect. The consummation of the transaction is subject to the
negotiation and execution of a definitive purchase and sale agreement. Under
the letter of intent, Prime has agreed to pay us $3,500,000 at closing and
$1,978,098 on or before September 15 in consideration of the interest to be
purchased. We will reserve an
25
overriding royalty interest in all leases and contractual rights to volumes
of production and all similar interests, whether we currently own them or
later acquire them, within the established area of mutual interest for the
project. Prime has an option for a six month period to purchase an additional
12.5% of our interest in the Old Ocean Prospect, subject to the overriding
royalty reservation set forth above, at a purchase price of $1,826,033, plus
$214,276 at the end of the six month period. We have agreed to enter into an
agreement under which Prime or one of its affiliates will have the right to
market the 3-D seismic geophysical data covering the Old Ocean Prospect for a
ten year period following a 120 day exclusivity period that we have retained.
Prime will be entitled to our share of the proceeds from the sale of the
data, which share may be no less than 66 2/3%, subject to applicable sales
commissions. In addition, Prime or its affiliate must grant us a license to
other geophysical data outside the Old Ocean Prospect owned by Prime or its
affiliate. We may select the outside data of our choice covering up to 102
square miles. The letter of intent will expire if the transactions
contemplated thereby are not closed on or before July 31, 1999.
In January 1999, we acquired, on behalf of us and our partner in the
Wausau prospect, a gas pipeline in Mississippi for approximately $425,000 to
provide access for gas sales. Included in the purchase were a 100% and a
93.75% BPO working interest in two producing gas wells. We own a 53.8%
interest in the pipeline and the Fairchild #1 well and a 50.5% interest in
the A. Foote Estate #1 well. Gas reserves net to us are estimated to be in
excess of 150 MMCFG and net production of over 150 MCFGPD.
In May 1999, we closed the sale of our interests in the Lisbon
Field, comprising essentially all of our proven reserves in Louisiana, for
$507,500 in gross proceeds to an unrelated party.
In June 1999, we completed the drilling of our Fortenberry #1 well
to a depth of 16,126 feet at Oakvale Dome Field in Jefferson Davis County,
Mississippi. We elected to not drill deeper to the projected depth of 16,250
feet due to concerns that additional drilling difficulty could be encountered
in the sidetrack hole. Open hole electric and porosity logs which run to a
depth of 16,088 feet indicate a total of 80 net feet of hydrocarbon bearing
sands in the primary objectives in the Hosston Formation at depths between
15,792 feet and 15,992 feet. An additional four feet of net pay was measured
by electric and porosity logs in the lower Booth zone starting at a depth of
16,075 feet based on mud logs from the original sidetrack hole. The remainder
of the zone could not be logged due to existing hole conditions. We own a 70%
working interest in the well and an average 64% working interest in the
field. We are proceeding to complete the well for production.
We plan to co-mingle the 42 net feet in the Harper and the 38 net
feet in the Booth for production. Both of these zones are producing in the
adjacent fault block to the north out of our first two wells in the field,
the K. S. Byrd #1 and the Howell #1.
STRATEGY
Our strategy is to expand our reserves, production and cash flow
through the implementation of an exploration and exploitation program that
focuses on:
- obtaining dominant positions in core areas of exploration
and development in under-exploited areas in or adjacent to
fields and trends that have historically produced
hydrocarbons in significant quantities;
- enhancing the value of our prospects and reducing
exploration risks through the use of 3-D seismic data and
CAEX technologies;
- maintaining an experienced technical staff with the
expertise necessary to take advantage of our proprietary
3-D seismic data and CAEX technologies;
26
- adding reserves and production using modern reservoir
stimulation methods; and
- retaining control over critical exploration decisions.
OBTAIN DOMINANT POSITION IN CORE AREAS. We have identified core
areas for exploration and development in geological trends with demonstrated
histories of prolific natural gas production from high porosity reservoir
rocks with profiles suitable for seismic evaluation. We believe that by
obtaining substantial working interests, related 3-D seismic data and
significant acreage positions within our core areas, we will be able to
achieve a dominant position in focused portions of those areas. With a
dominant leasehold position, we believe we can better control the core areas,
drilling opportunities and future production and can attempt to minimize
costs through economies of scale and other efficiencies inherent in our
focused approach. Such cost savings and efficiencies include the ability to
use our 3-D seismic data to reduce drilling risks and lower our leasehold
acquisition costs by identifying and purchasing leasehold interests only in
those focused areas in which we believe drilling is most likely to be
successful.
USE OF 3-D SEISMIC AND CAEX TECHNOLOGIES. We attempt to enhance the
value of our prospects through the use of 3-D seismic data and CAEX
technologies, with an emphasis on direct hydrocarbon detection technologies.
These technologies create a computer generated 3-dimensional displays of
subsurface geological formations that help our professional staff detect
seismic anomalies in structural features that are not apparent in 2-D seismic
surveys. We believe that 3-D seismic data, if properly used, will reduce
drilling risks and costs by reducing the number of dry holes, optimizing well
locations and reducing the number of wells required to exploit a discovery.
EXPERIENCED TEAM. We maintain an experienced staff, including
engineers, geoscientists, landmen and other technical personnel. Such
professional staff has on average 18 years of experience in the oil and gas
industry.
USE OF MODERN RESERVOIR STIMULATION METHODS AND NEW DRILLING
TECHNOLOGY. In addition to applying the latest in 3-D seismic and CAEX
technology, we use the latest in industry reservoir stimulation and
directional drilling techniques. For example, many of our development and
exploitation opportunities are "tight" reservoirs in which modern stimulation
practices may significantly increase production.
CONTROL OF DRILLING FUNCTIONS. We believe that controlling the most
critical functions in the drilling process will enhance our ability to
successfully develop our prospects. We have acquired a majority interest in
many of our prospects, including interests in most of the 3-D seismic data
relating to those prospects. In many cases where we do not own a majority
interest in a prospect we still own a greater interest than that of any other
working interest owner. As a result, in many of our prospects, we will be
able to influence the areas to explore, manage the land permitting and option
process, determine seismic survey areas, oversee data acquisition and
processing, prepare, integrate and interpret the data and identify each
prospect drillsite. In addition, we will be the operator of many of the wells
drilled on these prospects.
THE PROSPECTS
Our prospects are located primarily in the Gulf Coast areas of
Mississippi, Texas and Louisiana. As of March 31, 1999, we owned interests in 20
producing wells we operated and also owned non-operated interests in one
producing well in Texas. Daily production from both operated and non-operated
wells net to our interest averaged 5,506 MCFGD and 111.4 BOPD for the year ended
December 31, 1998, and 7,913 MCFGD and 191 BOPD for the three months ended March
31, 1999. Daily production as of March 31, 1999, was approximately 9,547 MCFGD
and 219 BOPD. Each of our prospects differs in scope and character and consists
of one or more types of assets, such as 3-D seismic data, working interests in
oil and gas leases, oil and gas lease options, contractual rights to earn a
working interest in oil and gas leases, royalty interests or other mineral
interests. Most of our prospects have been, are being, or are expected to be
enhanced with 3-D seismic data and CAEX technologies. The 3-D seismic data
acquired will, when completed for the existing prospects, cover over 820 square
miles (gross). The table below gives certain information regarding the location,
objectives, and present status of our most significant prospects as of March 31,
1999:
27
LEASED ADDITIONAL GROSS
ACREAGE ACREAGE (4) SQUARE
------------------ --------------------- MILES OF
GROSS NET GROSS 3-D APPROX.
ACRES ACRES ACRES NET SEISMIC FORMATION TOTAL
PROSPECT (1) (2) (1) ACRES (2) DATA (5) OBJECTIVE DEPTH
- ---------------------------------- --------- ------- --------- ---------- -------- ----------- -------
MISSISSIPPI
Oakvale Dome (3,7) ............ 4,853 2,675 N/A N/A 33 Hosston 16,700'
Glancy Re-entry (3,8) ......... 6,135 5,077 N/A N/A N/A Hosston; 21,000'
Cotton
Valley
Wausau (3) .................... 1,240 471 N/A N/A 55 Cotton 19,000'
Valley
Sardis Church Dome (3,8) ...... 3,588 3,104 N/A N/A N/A Hosston 16,500'
TEXAS
LaHinch (3,9) ................. 1,382 1,037 N/A N/A 20 Wilcox 16,000'
Old Ocean (8,10,11, 12, 13) ... 671 243 42,217 9,846 102 Frio 16,000'
Oak Hill Field (3) ............ 793 698 N/A N/A N/A Cotton 9,500'
Valley
Rayburn (3,8) ................. 2,966 1,050 4,585 3,626 30 Yegua; 15,000'
Wilcox
OTHER
Louisiana ..................... 7,362 705 N/A N/A 478
Mississippi ................... 26,618 10,621 N/A N/A 73
New Mexico .................... 160 12 N/A N/A N/A
Texas ......................... 5,566 2,408 N/A N/A 30
--------- ------- --------- ---------- -----------
Total ......................... 61,334 28,101 46,802 13,472 821
--------- ------- --------- ---------- -----------
--------- ------- --------- ---------- -----------
- ---------------------
(1) "Gross Acres" means an acre in which we own a working interest. When
used in conjunction with acreage under options it means an acre in
which we will acquire a working interest if and when the option is
exercised.
(2) "Net Acres" means the sum of the fractional working interest owned
in gross acres expressed as whole numbers and fractions thereof.
(3) Operated by us.
(4) "Additional Acreage" refers to the number of acres in which we own
options for oil and gas leases from mineral owners and, with respect
to part of the acreage reported for the Old Ocean Prospect, also has
contractual rights to earn a working interest in the 21,784 acre Old
Ocean Unit.
(5) Represents 3-D seismic data acquired, being acquired or expected to
be acquired.
(6) Drilling.
28
(7) Completing.
(8) Soliciting industry participant.
(9) Evaluating 3-D seismic data.
(10) Shooting 3-D seismic survey.
(11) Affiliates of EnCap own an overriding royalty interest that is
convertible into a participating net profit interest.
(12) We will earn an additional working interest in deep rights upon
completion and delivery of a 3-D survey over the unit and the
establishment of commercial production.
(13) Clients of the Agent and the Agent own an overriding royalty
interest that is convertible into a participating net profit
interest. We have the right to buy back the participating net
profits interest and are currently negotiating such purchase in
exchange for Preferred Stock.
Below are descriptions, as of March 31, 1999, unless otherwise
indicated, of our most significant prospects.
OAKVALE DOME. The Oakvale Dome Prospect, located in Jefferson Davis
County, Mississippi, is our most significant producing property. We own
approximately 4,853 gross (2,675 net) acres in the Prospect. We are the
operators.
A 2-D seismic survey shot and processed originally in 1979, was
reprocessed in 1996 and confirmed the discovery well, which was the K.S. Byrd
Well. The K.S. Byrd Well was completed in June 1997 in the Harper formation
from 15,964 feet to 15,988 feet, flowing 5.708 MMCFGD. Initial reserve
estimates as of August 1, 1997 conducted by an independent petroleum engineer
gave the well proved producing reserves of 8.7 BCFG and 34,800 barrels of
condensate. Later reserve estimates as of January 1, 1999 conducted by an
independent petroleum engineer revised the well's proved producing reserves
to 12.1 BCFG and 41,500 barrels of condensate. The well began sales of
production in September 1997 and, as of March 31, 1999, was flowing at the
rate of 9.95 MMCFGD and 37 BOPD.
In February of 1999 the Howell #1 well was completed and initial
tests indicate a commercial production rate of 21.1 MMCFGD and 19 barrels of
condensate per day.
The Fortenberry #1 has just been drilled to total depth. The well is
being completed for production.
GLANCY. We own approximately 6,135 gross (5,077 net) acres in the
Glancy Prospect in Copiah County, Mississippi. We are the operators. Glancy
Field has produced gas and condensate from the Lower Cretaceous Rodessa
formation on acreage not owned by us. The Glancy Prospect is characterized as
a simple anticline structure that formed as a result of a deep-seated salt
pillow. The presence of reservoir quality sandstones at both the deeper
Hosston and Cotton Valley levels has been demonstrated by two well
penetrations, both of which have produced gas and had multiple shows of
hydrocarbons. Early attempts (in 1971) to fracture stimulated one of the test
wells, having an initial production of 3.1 MMCFGD on an extended test from
the Cotton Valley, damaged the formation in the near-wellbore area. We intend
to reenter a deep test well and to apply modern fracture stimulation to
establish commercial production.
WAUSAU. We own approximately 1,240 gross (471 net) acres in the
Wausau Prospect in Wayne County, Mississippi (surface to 15,360 feet only).
We are the operators. We have rights in a 3-D survey acquired by Compagnie
Generale de Geophysiqe over this prospect area. This project is located on
two flanks of a large salt ridge trending northwest to southeast. Based upon
3-D seismic data, the Cotton Valley appears to be trapped in both a simple
closure and an updip pinchout along the salt ridge flank. We commenced
drilling a test well in May 1998 and completed the well in November 1998 as a
Cotton Valley discovery. Production commenced in November and was increased
to a rate of over 400 BOPD and 2,000 MCFD with the connection to a gas sales
pipeline in February 1999. The well has three additional shallower Cotton
Valley reservoirs behind pipe.
29
SARDIS CHURCH DOME. We own approximately 3,588 gross (3,104 net)
acres in the Sardis Church Dome Prospect in Copiah County, Mississippi. We
are the operators. Our drilling objectives are the Paluxy, Hosston and Cotton
Valley sands. We anticipate we will sell at least 50% of the working interest
to an industry participant before spudding the test well. This prospect is an
analog to the Oakvale Dome discovery and is located along a trend. A nearby
off structure well has tested significant oil and gas shows in the Hosston
objective section.
LAHINCH. We own deep rights under approximately 1,382 gross (1,037
net) acres in the LaHinch Prospect in Duval County, Texas. We are the
operators. The objectives for the prospect are sands in the Upper Wilcox
formation. The adjoining operator has drilled an Upper Wilcox test on the
same structure that, if successful, will confirm our prospect and reclassify
it as a proven location. This well reached total depth in April 1999 and is
currently being completed. If we complete a successful test well, we will
commence a development program on our acreage.
OLD OCEAN. We own leases, options for oil and gas leases and have
contractual rights to earn working interests in approximately 42,888 gross
(10,089 net) acres in the Old Ocean Prospect in Brazoria and Matagorda
Counties, Texas. We own a 37.02% working interest within the Old Ocean Unit
and a 69.23% working interest outside the unit, but within the 3-D area. A
3-D seismic survey is underway and we are the operator of the seismic survey.
The Old Ocean Prospect is the largest Frio gas field in the Gulf Coast,
having produced more than five TCFGE since our discovery in 1934. In excess
of 200 wells have been drilled in the Old Ocean field. These reserves have
been produced from four normally pressured reservoirs between 9,500 and
11,000 feet. The Old Ocean Prospect actually consists of numerous prospects
and the main objective is in the over pressured Frio. Deep well information
confirms reservoir quality sands and scattered production of 45 BCFG in the
immediate vicinity. Precise structural mapping from the 3-D seismic survey
will allow accurate delineation of prospects. Affiliates of EnCap and the
Agent and certain of our clients own a 50% overriding royalty interest in
certain of our properties that make up the Old Ocean Prospect, which interest
is convertible into a participating net profit's interest. We have the right
to buy back the participating net profits interests and are negotiating such
purchase in exchange for a cash payment to affiliates of EnCap and using
Preferred Stock for the other Old Ocean Lenders.
OAK HILL FIELD. We own approximately 793 gross (698 net) acres in
the Oak Hill Field in Gregg and Rusk Counties, Texas. We are the operator.
This prospect produces from the Lower Cotton Valley sands at depths of
approximately 10,150 to 10,500 feet and from the Upper Cotton Valley sands at
depths of approximately 9,000 to 10,000 feet. We have completed a
recompletion program covering six wells and involving up to eleven distinct
zones. Six recompleted zones have been fracture stimulated and have increased
our net production by over 1,100 MCFD. Additionally, we expect an increase of
approximately 800 MCFD net production when the original producing interval is
reactivated and the pressures across the zones equalize. There are currently
six producing wells in Oak Hill Field owned by us.
RAYBURN. We own approximately 2,966 gross (1,050 net) acres and have
options for oil and gas leases on an additional 4,585 gross (3,626 net) acres
in the Rayburn Prospect in Liberty Co., Texas. We are the operator. This
prospect is within a 30 square mile 3-D survey acquired in 1998 of which we
intend to sell up to 60% to industry partners. The objectives are sands
primarily in the Wilcox, Cockfield and Miocene formations ranging in depth
from 2,000 to 16,000 feet.
OIL AND GAS RESERVES
The following table sets forth information regarding estimated oil
and gas reserve quantities, reserve values and discounted future net revenues
as estimated by our independent engineering consultant, Lenser & Associates,
as of January 1, 1999.
There are numerous uncertainties inherent in estimating quantities of
proven reserves and projecting future rates of production and timing of
development expenditures. The following reserve information represents estimates
only and should not be construed for being exact.
30
PRESENT
VALUE OF
ESTIMATED
FUTURE NET
REVENUES
BEFORE
INCOME TAXES
GAS ESTIMATED (DISCOUNTED
GAS OIL EQUIVALENT FUTURE NET AT 10
(MMCF) (MBO) (MMCFE)(1) REVENUE (2) PERCENT)
---------- ---------- -------------- ------------- --------------
Proved developed reserves: (3) (in thousands)
Louisiana (5) ........................ 87 75 541 $ 349 $ 311
Mississippi .......................... 15,940 279 17,611 30,772 24,373
Texas ................................ 4,182 55 4,516 5,292 3,473
---------- ---------- -------------- ------------- --------------
20,209 409 22,668 $ 36,413 $28,157
---------- ---------- -------------- ------------- --------------
Proved undeveloped reserves: (4)
Louisiana (5) ........................ 1,359 119 2,072 $ 1,093 $ 362
Mississippi .......................... 14,837 56 15,171 25,816 17,154
Texas ................................ -- -- -- -- --
---------- ---------- -------------- ------------- --------------
16,196 175 17,243 $ 26,909 $17,516
---------- ---------- -------------- ------------- --------------
Total proved reserves ................ 36,405 584 39,911 $ 63,322 $45,673
---------- ---------- -------------- ------------- --------------
---------- ---------- -------------- ------------- --------------
- ------------------------
(1) Oil production is converted to MCFE at the rate of six MCF of
natural gas per Bbl of oil, based upon the approximate energy
content of natural gas and oil.
(2) Estimated future net revenue represents estimated future gross
revenue to be generated from the production of proved reserves, net
of estimated production and future development costs, using prices
and costs in effect as of January 1, 1999. The amounts shown do not
give effect to expenses unrelated to property, such as general and
administrative expenses, debt service and future income tax expense
or to depreciation, depletion and amortization. The estimates shown
do not include amounts dedicated to Shell Capital pursuant to the
Shell Production Payment (see description of Shell Production
Payment above), but do include the effect of the EnCap NPI which
vested on January 1, 1999. The EnCap NPI comprises a 6.25% interest
in the producing Byrd #1 and Howell #1.
(3) "Proved Developed Reserves" means those reserves estimated as
recoverable under current technology and projected economic
conditions, from that portion of a reservoir that can reasonably be
evaluated as economically productive on the basis of analysis of
drilling, geological, geophysical and to be obtained by enhanced
recovery processes demonstrated to be economic and technically
successful in the subject reservoir.
(4) "Proved Undeveloped Reserves" mean those reserves estimated as
recoverable under current technology and projected economic
conditions from that portion of a reservoir that can reasonably be
evaluated as technologically productive, but which requires the
drilling and completion of a well to initiate production.
(5) In May 1999, we sold our interest in the Lisbon Field, which
accounted for all of the proved developed and undeveloped reserves
in Louisiana.
ACREAGE
The following table sets forth as of March 31, 1999, the gross and
net acres of developed and undeveloped oil and gas acreage that we hold.
Additionally, the data set forth below is based on our before pay-out working
interests. In certain cases, we have a greater after pay-out working
interest. In certain other cases, we have only an after pay-out working
interest. As such, the amount of gross and net acreage will increase when and
if certain wells pay out.
31
DEVELOPED (1) UNDEVELOPED (2)
-------------------------- ---------------------------
GROSS NET GROSS NET
ACRES (3) ACRES (4) ACRES (3) ACRES (4)
------------ ------------ ------------- ------------
STATE:
Louisiana (5) .................................. 2,086 481 5,276 224
Mississippi .................................... 1,920 1,130 40,514 20,818
New Mexico ..................................... 160 12 -- --
Texas .......................................... 2,573 1,243 8,805 4,193
------------ ------------ ------------- ------------
Total ................................... 6,739 2,866 54,595 25,235
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
- --------------------------
(1) "Developed acreage" is that acreage which is spaced or assignable to
productive wells.
(2) "Undeveloped acreage" is leased acreage on which wells have not been
drilled or completed to a point that would permit the production of
commercial quantities of oil and gas regardless of whether or not
such acreage contains proved reserves.
(3) "Gross acres" means an acre in which we own a working interest. When
used in conjunction with acreage under options, it means an acre in
which we will acquire a working interest if and when the option is
executed.
(4) "Net acres" means the sum of the fractional working interest owned
in gross acres expressed as whole numbers and fractions thereof.
(5) The number of gross and net acres in Louisiana includes the acreage
associated with the Lisbon Field which we sold after December 31,
1998.
PRODUCTIVE OIL AND GAS WELLS
The following table sets forth certain information regarding our
ownership as of March 31, 1999 of productive oil and gas wells, operated and
non-operated, in the areas indicated. Additionally, the data below are based
on our before pay-out working interest. In some cases we have only an after
pay-out working interest. As such, the number of gross and net wells will
increase when and if certain wells pay-out.
GAS OIL
--------------------------- -----------------------
GROSS NET GROSS NET
WELLS WELLS WELLS WELLS
STATE (1) (2) (1) (2)
- -------------------- ----------- -------------- --------- ------------
Louisiana .............................................. 5 0.88801130 -- --
Mississippi ............................................ 6 3.493795 1 0.03730014
New Mexico ............................................. 1 0.07500000 -- --
Texas .................................................. 10 6.09927790 1 0.50000000
----------- -------------- --------- ------------
Total ........................................... 22 10.5560842 2 0.53730014
----------- -------------- --------- ------------
----------- -------------- --------- ------------
- ---------------------------
(1) "Gross wells" means a well in which we own a working interest. The
number of gross wells is the total number of wells in which a
working interest is owned.
32
(2) "Net wells" means the sum of the fractional working interest owned
in gross wells expressed as whole numbers and fractions thereof.
(3) The number of gross and net wells in Louisiana includes wells
located in the Lisbon Field which we sold after December 31, 1998.
DRILLING ACTIVITY
During the first quarter of 1999, we participated in one gross
(.556248 net) productive developmental well and one gross (.1575 net) dry
developmental well. We participated in one gross (0.14 net) dry and three
gross (1.8383 net) productive exploratory wells and three Gross (0.25954 net)
productive development wells during the year ended December 31, 1998. For the
four-month period ended December 31, 1997, we drilled one gross (0.48500 net)
productive exploratory well, two gross (1.3575 net) dry exploratory wells and
three gross (0.342202 net) productive development wells. For the ten months
ended August 31, 1997, we drilled one gross (0.14725 net) productive
exploratory well and one gross (0.20110 net) dry exploratory well. We are
entitled to a working interest in certain additional wells completed during
these time periods when and if those wells pay-out. Furthermore, the number
of net wells was calculated based-on our before pay-out working interest and
in some cases we will have a greater working interest or is entitled to a
working interest in certain wells completed during these time periods when
and if these wells pay-out. In certain cases, we, subsequent to completion,
sold the prospect on which certain of these wells were drilled. As such,
while we did participate in the drilling, it does not currently have an
interest in all of the productive wells mentioned above.
On March 31, 1999, we were drilling 1.0 gross (0.704075 net)
development well. This well is a step out well from the Byrd discovery well
at Oakvale Dome Field in Mississippi.
VOLUMES, PRICES AND PRODUCTION COSTS
The following table sets forth certain information regarding the
production volumes, average prices received and average production costs
associated with our sale of oil and gas for the periods indicated.
THREE MONTHS TWELVE MONTHS FOUR MONTHS TEN MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, DECEMBER 12, DECEMBER 31, AUGUST 31,
1999 1998 1997 1997
-------------- -------------- -------------- ---------------
Net Production:
Oil (BBL) ....................................... 17,213 40,662 4,506 9,281
Gas (MCF) ....................................... 712,171 2,009,550 223,683 83,810
Gas Equivalent (MCFE) ........................... 815,449 2,253,522 250,719 139,493
Average sales price:
Oil ($ per BBL) ................................. $ 9.50 $ 10.83 $ 18.54 $ 20.28
Gas ($ per MCF) ................................. $ 1.70 $ 2.24 $ 2.79 $ 3.05
Gas Equivalent ($ per MCFE) ..................... $ 1.68 $ 2.20 $ 2.82 $ 3.18
Average production expenses ($ per MCFE) (1) .... $ 0.17 $ 0.38 $ 0.17 $ 0.33
- -----------------------------
(1) Average production costs, excluding severance taxes.
CAEX AND 3-D SEISMIC TECHNOLOGY
33
We, either directly or through other prospect participants, uses 3-D
seismic data and CAEX technology to collect and analyze geological,
geophysical, engineering, production and other data obtained about potential
gas or oil prospects. We use this technology to correlate density and sonic
characteristics of subsurface formations obtained from 2-D seismic surveys
with like data from similar properties, and uses computer programs and
modeling techniques to determine the likely geological composition of a
prospect and potential locations of hydrocarbons.
Once all available data have been analyzed to determine the areas
with the highest potential within a prospect area, we may conduct 3-D seismic
surveys to enhance and verify the geological interpretation of the structure,
including our location and potential size. The 3-D seismic process produces a
three-dimensional image based upon seismic data obtained from multiple
horizontal and vertical points within a geological formation. The
calculations needed to process such data are made possible by computer
programs and advanced computer hardware.
While large oil companies have used 3-D seismic data and CAEX
technologies for approximately 20 years, these methods were not affordable by
smaller, independent oil and gas companies until more recently, when improved
data acquisition equipment and techniques and computer technology became
available at reduced costs. We believe that our use of 3-D seismic data and
CAEX technology may provide it with certain advantages in the exploration
process over those companies that do not use this technology. These
advantages include better delineation of the subsurface, which can reduce
exploration risks and help optimize well locations in productive reservoirs.
We believe these advantages can be readily validated based upon general
industry experience. Because computer modeling generally provides clearer and
more accurate projected images of geological formations, we believe it is
better able to identify potential locations of hydrocarbon accumulations and
the desirable locations for wellbores. However, we have not used the
technology extensively enough to arrive at any conclusion regarding our
ability to interpret and use the information developed from the technology.
CUSTOMERS
For the quarter ended March 31, 1999, Coral Energy L.P. and Tejas
Gas Corporation accounted for approximately 60% and 14%, respectively, of our
total oil and gas revenue. During the year ended December 31, 1998, H&N Gas
Ltd. "H&N Gas" and Tejas Gas Marketing Co. accounted for approximately 51%
and 24%, respectively of our total revenue. For the four-month period ended
December 31, 1997, H&N Gas and KCS Resources, Inc. ("KCS") accounted for 75%
and 10%, respectively, of our total revenue. For the ten months ended August
31, 1997, KCS, Samedan Oil Corporation and Energy Operating Limited
Partnership accounted for 50%, 30% and 15%, respectively, of our total
revenue. No other purchasers accounted for more than 10% of our total revenue
in the periods indicated above. We do not believe the loss of any existing
purchaser would have a material adverse effect on us.
MARKETING
We market our natural gas and oil through monthly spot sales.
Because sales made under spot sales contracts result in fluctuating revenues
to us depending upon the market price of oil and gas, we from time to time
enters into various forward contracts covering a portion of our production to
minimize the fluctuations and the effect of price declines. Under the terms
of the term production payment with Shell Capital, we market our natural gas
through Coral Energy Resources, L.P. ("Coral") whereby Coral markets at both
fixed and floating prices.
COMPETITION
The oil and gas industry is highly competitive in all of its phases.
We encounter strong competition from other oil and gas companies in all areas
of our operations, including the acquisition of exploratory and producing
properties, the permitting and conducting of seismic surveys and the
marketing of oil and gas. Many of these competitors possess greater
financial, technical and other resources than us. Competition for the
acquisition of producing properties is affected by the amount of funds
available to us, information about producing properties available to us and
any standards we establish from time to time for the minimum projected return
on investment. Competition also may be presented by alternative fuel sources,
including heating oil and other fossil fuels. There has been increased
competition for lower risk development opportunities and for available
sources of financing. In addition, the marketing and sale of natural gas and
processed gas are competitive. Because the primary markets for natural gas
liquids are refineries,
34
petrochemical plants and fuel distributors, prices generally are set by or in
competition with the prices for refined products in the petrochemical, fuel
and motor gasoline markets.
REGULATION
GENERAL. The oil and gas industry is extensively regulated by
federal, state and local authorities. In particular, oil and gas production
operations and economics is affected by environmental protection statutes,
tax statutes and other laws, rules and regulations relating to the petroleum
industry, as well as changes in such laws, changing rules and regulations and
the interpretations and applications of such laws, rules and regulations. Oil
and gas industry legislation and agency regulation are under constant review
for amendment and expansion for a variety of political, economic and other
reasons. Numerous regulatory authorities, and federal, state and local
governments issue rules and regulations binding on the oil and gas industry,
some of which carry substantial penalties for failure to comply. The
regulatory burden on the oil and gas industry increases our cost of doing
business and, consequently, affects our profitability. We believe it is in
compliance with all federal, state and local laws, regulations and orders
applicable to us and our properties and operations, the violation of which
would have a material adverse effect on us or our financial condition.
SEISMIC PERMITS. Current law in Louisiana requires permits from
owners of at least an undivided 80% interest in each tract over which we
intend to conduct seismic surveys. As a result, we may not be able to conduct
seismic surveys covering our entire area of interest in that state. Moreover,
3-D seismic surveys typically are conducted from various locations both
inside and outside the area of interest to obtain the most detailed data of
the geological features within the area. To the extent that we are unable to
obtain permits to access locations to conduct the seismic surveys, the data
obtained may not be as detailed as might otherwise be available. In addition,
a recent decision of a federal court in Louisiana casts doubt on traditional
seismic permitting practices, which decision, in some instances, could lead
to the surface owner claiming ownership of the data.
EXPLORATION AND PRODUCTION. Our operations are subject to various
regulations at the federal, state and local levels. Such regulations include
(i) requiring permits for the drilling of wells; (ii) maintaining bonding
requirements to drill or operate wells; and (iii) regulating the location of
wells, the method of drilling and casing wells, the surface use and
restoration of properties upon which wells are drilled, the plugging and
abandoning of wells and the disposal of fluids used in connection with well
operations. Our operations also are subject to various conservation
regulations. These include the regulation of the size of drilling and spacing
units, the density of wells that may be drilled, and the unitization or
pooling of oil and gas properties. In addition, state conservation laws
establish maximum rates of production from oil and gas wells, generally
prohibiting the venting or flaring of gas, and impose certain requirements
regarding the ratability of production. The effect of these regulations is to
limit the amount of oil and gas we can produce from our wells and to limit
the number of wells or the locations at which we can drill.
NATURAL GAS MARKETING, GATHERING AND TRANSPORTATION. Federal
legislation and regulatory controls in the United States have historically
affected the price of the natural gas produced by us and the manner in which
such production is marketed. The transportation and resale of natural gas in
interstate commerce are regulated by the Federal Energy Regulatory Commission
(the "FERC") pursuant to the Natural Gas Act and the Natural Gas Policy Act
of 1978 (the "NGPA"). Sales of our natural gas currently are made at market
prices, subject to applicable contract provisions and are not subject to
federal or state price control. The FERC's jurisdiction over natural gas
transportation was unaffected by the Decontrol Act.
The FERC also regulates interstate natural gas transportation rates
and service conditions, which effect the marketing of natural gas produced by
us, as well as the revenues received by us for sales of such natural gas.
Since the latter part of 1985, the FERC has endeavored to make interstate
natural gas transportation more accessible to gas buyers and sellers on an
open and nondiscriminatory basis. The FERC's efforts have significantly
altered the marketing and transportation of natural gas. Commencing in April
1992, the FERC issued Order Nos. 636, 636-A, 636-B and 636-C (collectively,
"Order No. 636"), which, among other things, required interstate pipelines to
"restructure" their services to provide transportation separate or
"unbundled" from the pipelines' sales of gas. Also, Order No. 636 requires
interstate pipelines to provide open-access transportation on a
nondiscriminatory basis that is equal for all natural gas shippers. Order No.
636 has been implemented through decisions and negotiated settlements in
individual pipeline services restructuring proceedings. In many instances,
the result of Order No. 636 and related initiatives has been to substantially
reduce or eliminate the interstate pipelines' traditional role as wholesalers
of natural gas, and has
35
substantially increased competition and volatility in natural gas markets.
The FERC has issued final orders in virtually all Order No. 636 pipeline
restructuring proceedings. In July 1996, the United States Court of Appeals
for the District of Columbia Circuit largely upheld Order No. 636 and
remanded certain issues for further explanation or clarification. Numerous
petitions for review of the individual pipeline restructuring orders are
currently pending in that court. The issues remanded for further action do
not appear to materially affect us. Proceedings on the remanded issues are
currently ongoing before the FERC following its issuance of Order No. 636-C
in February 1997. Although it is difficult to predict when all appeals of
pipeline restructuring orders will be completed or their impact on us, we do
not believe that it will be affected by the restructuring rule and orders any
differently than other natural gas producers and marketers with which it
competes.
Although Order No. 636 does not regulate natural gas production
operations, the FERC has stated that Order No. 636 is intended to foster
increased competition within all phases of the natural gas industry. It is
unclear what impact, if any, increased competition within the natural gas
industry under Order No. 636 will have on us and our natural gas marketing
efforts. Although Order No. 636 could provide us with additional market
access and more fairly applied transportation service rates, terms and
conditions, it could also subject us to more restrictive pipeline imbalance
tolerances and greater penalties for violation of those tolerances. We do not
believe, however, that it will be affected by any action taken with respect
to Order No. 636 materially differently than other natural gas producers and
marketers with which it competes.
The FERC has recently announced its intention to reexamine certain
of its transportation-related policies, including the appropriate manner for
setting rates for new interstate pipeline construction, the manner in which
interstate pipeline shippers may release interstate pipeline capacity under
Order No. 636 for resale in the secondary market, the price that shippers can
charge for their released capacity, and the use of negotiated and
market-based rates and terms and conditions for interstate gas transmission.
Several pipelines have obtained FERC authorization to charge negotiated rates
as an alternative to traditional, cost-of-service rate making methodology. In
February 1997, the FERC announced a broad inquiry into issues facing the
natural gas industry to assist the FERC in establishing regulatory goals and
priorities in the post-Order No. 636 environment. In December 1997, the FERC
requested comments on the financial outlook of the natural gas pipeline
industry, including among other matters, whether the FERC's current rate
making policies are suitable in the current industry environment. In April
1998, the FERC issued a new rule to further standardize pipeline transaction
tariffs that, as the result of newly standardized provisions regarding firm
intra day transportation nominations, could adversely affect the reliability
of scheduled interruptible transportation service on some pipelines. While
any resulting FERC action would affect us only indirectly, any new rules and
policy statements may have the effect of enhancing competition in natural gas
markets.
Additional proposals and proceedings that might affect the natural
gas industry are considered from time to time by Congress, the FERC and state
regulatory bodies. We cannot predict when or if any such proposals might
become effective, or their effect, if any, on our operations. The natural gas
industry historically has been very heavily regulated; therefore, there is no
assurance that the less stringent regulatory approach recently pursued by the
FERC and Congress will continue indefinitely. The regulatory burden on the
oil and natural gas industry increases our cost of doing business and,
consequently, affects our profitability and cash flow. In as much as such
laws and regulations are frequently expanded, amended or reinterpreted, we
are unable to predict the future cost or impact of complying with such
regulations.
LOUISIANA LEGISLATION. The Louisiana legislature passed Act 404 in
1993, which permits a party transferring an oil field site to establish a
site-specific trust account for such oil field. If the site-specific trust
account is established in accordance with the requirements of the statute,
the party transferring the oil field site may not thereafter be held liable
by the state for any site restoration costs or actions associated with the
transferred oil field site. The parties to a transfer may elect not to
establish a site-specific trust account. However, in the absence of such an
account, the transferring party will continue to have liability for the costs
of restoration of the site. If the parties to a transfer elect to establish a
site-specific trust account pursuant to the statute, the Louisiana Department
of Natural Resources (the "DNR") requires an oil field site restoration
assessment to be made at the time of the transfer or within one year
thereafter, to determine the site restoration requirements existing at the
time of transfer. Based upon the site restoration assessment, the parties to
the transfer must propose to the DNR a funding schedule for the site-specific
trust account, providing for some contribution to the account at the time of
transfer and at least quarterly payment thereafter. If the DNR approves the
establishment and funding of the site-specific trust account, the purchaser
will thereafter be the
36
responsible party to the state, except that the failure of a transferring
party to make a good faith disclosure of all oil field site conditions
existing at the time of the transfer will render that party liable for the
costs of restoration of such undisclosed conditions in excess of the balance
of the site-specific trust fund.
OIL SALES AND TRANSPORTATION RATES. The FERC also regulates rates
and service conditions for interstate transportation of crude oil, liquids
and condensate, which can affect the amount we receive from the sale of these
products. Rates for such transportation are generally subject to an indexing
system under which rates may be increased as long as they do not exceed an
index rate that is tied to inflation. Over time, this indexing system could
have the effect of increasing the cost of transporting crude oil, liquids and
condensate by pipeline. Sales of crude oil, condensate and gas liquids by us
are not regulated and are made at market prices. The price we receive from
the sale of these products is affected by the cost of transporting the
products to market.
ENVIRONMENTAL MATTERS. Our oil and natural gas exploration,
development and production operations are subject to stringent federal, state
and local laws governing the discharge of materials into the environment or
otherwise relating to environmental protection. Numerous governmental
agencies, such as the Environmental Protection Agency (the "EPA"), issue
regulations to implement and enforce such laws, which often require difficult
and costly compliance measures that carry substantial civil and criminal
penalties for failure to comply. These laws and regulations may require the
acquisition of a permit before drilling commences, restrict the types,
quantities and concentrations of various substances that can be released into
the environment in connection with drilling and production activities, limit
or prohibit drilling activities on certain lands lying within wilderness,
wetlands, ecologically sensitive and other protected areas, require some form
of remedial action to prevent pollution from former operations, such as
plugging abandoning wells, and impose substantial liabilities for pollution
resulting from our operations. In addition, these laws, rules and regulations
may restrict the rate of oil and natural gas production below the rate that
would otherwise exist. The regulatory burden on the oil and gas industry
increases the cost of doing business and consequently affects our
profitability. Changes in environmental laws and regulations occur
frequently, and any changes that result in more stringent and costly waste
handling, disposal or cleanup requirements could adversely affect our
operations and financial position, as well as those of the oil and gas
industry in general. While management believes that we are in substantial
compliance with current applicable environmental laws and regulations and we
have not experienced any material adverse effect from compliance with these
environmental requirements, there is no assurance that this will continue in
the future.
The primary environmental statutory and regulatory programs that
affect our operations include the following:
The Comprehensive Environmental Response, Compensation and Liability
Act, as amended ("CERCLA") also known as "Superfund," imposes liability
without regard to fault or the legality of the original conduct, on certain
classes of persons who are considered to be responsible for the release of a
"hazardous substance" into the environment. These persons include (i) the
current owner and operator of a facility from which hazardous substances are
released, (ii) owners and operators of the facility at the time the disposal
of hazardous substances took place, (iii) generators of hazardous substances
who arranged for the disposal or treatment at or transportation to such
facility of hazardous substances and (iv) transporters of hazardous
substances to disposal or treatment facilities selected by them.
Under CERCLA, such persons may be subject to joint and several
liability for the costs of cleaning up the hazardous substances that have
been released into the environment, for damages to natural resources and for
the costs of certain health studies, and it is not uncommon for neighboring
landowners and other third parties to file claims for personal injury and
property damage allegedly caused by the release of hazardous substances or
other pollutants into the environment. Furthermore, although petroleum,
including crude oil and natural gas, is exempt from CERCLA, at least two
courts have ruled that certain wastes associated with the production of crude
oil may be classified as "hazardous substances" under CERCLA, and thus such
wastes may become subject to liability and regulation under CERCLA.
Regulatory programs aimed at remediation of environmental releases could have
a similar impact on us.
The Federal Water Pollution Control Act of 1972 ("FWPCA") as
amended, also known as the Clean Water Act (the "CWA"), imposes restrictions
and strict controls regarding the discharge of pollutants, including produced
waters and other oil and gas wastes, into waters of the United States (as
defined in the CWA). The discharge of pollutants into regulated waters is
prohibited, except in accordance with the terms of a permit issued by the EPA
or the state. These proscriptions also prohibit certain activities in
wetlands unless authorized by a permit issued by the U.S. Army Corps
37
of Engineers. Sanctions for unauthorized discharges include administrative,
civil and criminal penalties, as well as injunctive relief.
The Oil Pollution Act of 1990 (the "OPA") amends certain provisions
of the CWA, and other statutes as they pertain to the prevention of and
response to spills or discharges of hazardous substances or oil into
navigable waters. Under the OPA, a person owning or operating a facility or
equipment (including land drilling equipment) from which there is a discharge
or threat of a discharge of oil into or upon navigable waters or adjoining
shorelines is liable, regardless of fault, as a "responsible party" for
removal costs and damages. Federal laws impose strict, joint and several
liability on facility owners for containment and clean up cost and certain
other damages, including natural resource damages, arising from a spill.
The EPA is also authorized to seek preliminary and permanent
injunctive relief and, in certain cases, criminal penalties and fines. State
laws governing the control of water pollution also provide varying civil and
criminal penalties and liabilities in the case of releases of petroleum or
its derivatives into surface waters or into the ground. If a discharge occurs
at a well site at which we are conducting production operations, we may be
exposed to claims that it is liable under the OPA, the CWA or similar state
laws.
The Resource Conservation and Recovery Act ("RCRA"), as amended,
generally does not regulate most wastes generated by the exploration and
production of oil and gas. RCRA specifically excludes from the definition of
hazardous waste "drilling fluids, produced waters, and other wastes
associated with the exploration, development, or production of crude oil,
natural gas or geothermal energy." However, these wastes may be regulated by
the EPA or state agencies as solid waste. Moreover, ordinary industrial
wastes, such as paint wastes, waste solvents, laboratory wastes, and waste
compressor oils, may be regulated as hazardous waste. Pipelines used to
transfer oil and gas may also generate some hazardous wastes. Although the
costs of managing solid and hazardous waste may be significant, we do not
expect to experience more burdensome costs than similarly situated companies
involved in oil and gas exploration and production.
TITLE TO PROPERTIES
Title to properties is subject to royalty, overriding royalty,
carried working, net profits, working and other similar interests and
contractual arrangements customary in the oil and gas industry, liens for
current taxes not yet due and other encumbrances. As is customary in the
industry in the case of undeveloped properties, little investigation of
record title is made at the time of acquisition (other than a preliminary
review of local records). Investigations, including a title opinion covering
the drill site by local counsel, generally are made before commencement of
drilling operations. With respect to acquisitions of producing properties, it
is customary to review title opinions, review engineering reserve reports and
conduct environmental and operational reviews before the closing of the
purchase.
OPERATING HAZARDS AND INSURANCE
The oil and gas business involves a variety of operating risks,
including the risk of fire, explosions, blowouts, pipe failure, abnormally
pressured formations, and environmental hazards such as oil spills, gas
leaks, ruptures or discharges of toxic gases, the occurrence of any of which
could result in substantial losses to us due to injury or loss of life,
severe damage to or destruction of property, natural resources and equipment,
pollution or other environmental damage, cleanup responsibilities, regulatory
investigation and penalties and suspension of operations.
We maintain an oil and gas lease operator insurance policy that
insures us against certain sudden and accidental risks associated with
drilling, completing and operating our wells. In addition, we require certain
parties conducting operations for us to maintain general comprehensive
liability policies with contractual coverage to support the contractors'
obligations to indemnify and defend us in certain circumstances. There can be
no assurance that this insurance will be adequate to cover any losses or
exposure to liability. We also carry comprehensive general liability policies
and an umbrella policy. Although we believe that the amount of coverage it
maintains is customary in the industry, it does not provide complete coverage
against all operating risks. An uninsured or partially insured claim, if
successful and of sufficient magnitude, could have a material adverse effect
on us and our financial condition. If we experience significant claims or
losses, our insurance premiums could be increased, which may adversely affect
us and our financial condition, or limit the ability of us to obtain
coverage. Any difficulty in obtaining coverage may impair our ability to
engage in our business activities.
38
LEGAL PROCEEDINGS
We are involved in routine litigation arising in the ordinary course of
business. Management believes that the results of each proceedings, individually
and in the aggregate, will not have a material adverse effect on our financial
position or results of operations.
FACILITIES
We maintain approximately 25,100 square feet of office space in
Houston, Texas, which is leased at an annual rent of $396,187. The lease expires
January 31, 2003. We believe we will be able to renew the lease on acceptable
terms, and we currently are offering up to half of the space for sublease.
EMPLOYEES
We have 21 full-time employees in our Houston, Texas office as of June
30, 1999. Their functions include management, production, engineering,
geoscientists, land, gas marketing, accounting, financial planning and
administration. Certain operations of our field activities are accomplished
through independent contractors who are supervised by us. We believe our
relations with our employees and contractors are good. None of our employees are
represented by a union.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding our
directors and executive officers. Our officers are elected by the board of
directors and serve at the discretion of the board. All of the current directors
serve until the next annual shareholders' meeting or until their successors have
been duly elected and qualified.
NAME AGE POSITION
- ------------- ------ ---------------
Prentis B. Tomlinson, Jr. (1) .......... 56 Chairman of the Board, President and Chief Executive Officer
Robert S. Herlin (1)(2) ................ 44 Director, Senior Vice President and Chief Financial Officer
Todd E. Grabois ........................ 39 Vice President, Treasurer & Secretary
Robert L. Zorich (1) ................... 49 Director
Yale Fisher (2) ........................ 53 Director
David P. Quint (3) ..................... 48 Director
Gary Petersen (3) ...................... 53 Director
Russell Cleveland (3) .................. 60 Director
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) New directors elected by the Board on June 2, 1999 to fill vacant seats.
Elected to serve until next annual shareholders' meeting.
PRENTIS B. TOMLINSON, JR. has been involved in the oil and gas industry
for the past 30 years and has been involved with us as our Chief Executive
Officer since our inception in October 1996. He was named our President in July
of 1999. Mr. Tomlinson served as Chairman of Texstar North America, Inc. from
1984 to 1995, founded and served as Chairman of TGS Geophysical Company, Inc.
from 1983 to 1993 and served as Chairman and President of
39
Tomlinson Interests, Inc. from 1973 to 1983. Mr. Tomlinson commenced his
career in the oil and gas industry as a geophysicist with Western Geophysical
Inc. in 1969.
ROBERT S. HERLIN has been our Senior Vice President, Chief Financial
Officer and Director since November 1997, when he joined us. Mr. Herlin has 17
years experience in finance, planning and corporate development in the oil and
gas industry with several companies, including his own management consulting
firm. Most recently, he was vice president of Enron Liquids Services, a
subsidiary of Enron Corporation, and Manager of Planning and Investor Relations
for Kelley Oil & Gas Corporation.
TODD E. GRABOIS has been our Vice President, Treasurer and Secretary
since November 1997. Prior, thereto, Mr. Grabois served as our Chief Financial
Officer from September 1997 until November 1997 and Director from inception in
October 1996 until November 1997. He has served in various other positions with
us or our predecessors since 1984.
ROBERT L. ZORICH has been one of our Directors since November 1997. He
is the Managing Director and cofounder of EnCap, a Houston-based venture capital
and mezzanine fund for the energy industry. Before founding EnCap, Mr. Zorich
was a senior officer in the energy group of Republic Bank. EnCap recently
announced its sale to El Paso Field Services.
YALE FISHER has been one of our Directors since January 1997. He is,
and has been, an independent investment banker based in California since July
1994. Before that he was head of trading at Bank of America in Los Angeles and
San Francisco, California and New York, New York.
DAVID P. QUINT was elected by our Board to serve as a director on June
2, 1999. Mr. Quint has been Managing Director of RP&C International, Inc., an
international investment banking firm based in London and Zurich, for over five
years.
GARY PETERSEN, was elected by our Board to serve as a director on June
2, 1999. Mr. Petersen has been Managing Director of EnCap, a Houston-based
venture capital and mezzanine fund for the energy industry for the past five
years.
RUSSELL CLEVELAND was elected by our Board to serve as a director on
June 2, 1999. Mr. Cleveland is the principal founder and the majority
shareholder of Renaissance Capital Group Inc. Renaissance Capital provides
capital to emerging publicly owned companies. Mr. Cleveland currently serves as
President of the Managing General Partner of Renaissance Capital Partners,
Limited., President and Director of Renaissance Capital Growth & Income Fund
III, Inc. (which is traded on NASDAQ), and a Director of Renaissance U.S. Growth
and Income Trust PLC, which is traded on the London Stock Exchange. Mr.
Cleveland also currently serves as a director of Danzer Corp. (formerly Global
Environmental Corp.), Feminique, Inc. (formerly Biopharmaceutics, Inc.), Tutogen
Medical, Inc., Bentley Pharmaceuticals, Inc., and Technology Research, Inc.
AGREEMENT RELATING TO ELECTIONS OF DIRECTORS
Pursuant to an agreement dated December 16, 1998 between us, Mr.
Tomlinson and EnCap, we agreed to make certain changes in our bylaws restricting
the number of directors to seven. In addition, RP&C International, the agent in
our recently completed exchange offer of 9% convertible debentures for class A,
series II convertible preferred stock, currently has the right to designate up
to two directors to serve on the board of directors during a two-year period.
RP&C has exercised the board representation right described above through the
appointment of David P. Quint and Russell Cleveland as directors effective June
2, 1999.
EXECUTIVE COMPENSATION
The following table sets forth the compensation, including bonuses,
paid by us during the years ended December 31, 1998, 1997 and 1996 to the Chief
Executive Officer and to those executive officers whose aggregate cash
compensation exceeded $100,000 during the last fiscal year other than our Chief
Executive Officer (collectively the "Named Executive Officers").
40
ANNUAL
COMPENSATION NUMBER OF ALL
---------------- SECURITIES OTHER
YEAR ENDED UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION DECEMBER 31,(1) SALARY BONUS OPTIONS (2)
- ---------------------------- ----------------- -------- ---------- ---------- ------------
Prentis B. Tomlinson, Jr. (6) ........... 1998 $243,750 -- -- $ 3,400
Chairman & Chief Executive Officer 1997 150,000 210,000 1,621,000 4,750
1996 (3) 25,000 -- -- --
Ernest J. LaFlure (5) ................... 1998 200,000 -- -- 2,500
Former Director, President and Chief 1997 (4) 46,282 100,000 300,000 --
Operating Officer 1996 -- -- -- --
Robert S. Herlin (6) .................... 1998 165,000 -- -- 5,250
Director, Senior Vice President and 1997 (4) 14,884 110,000 300,000 --
Chief Financial Officer 1996 -- -- -- --
Todd E. Grabois (6) ..................... 1998 105,000 -- -- 4,865
Vice President, Treasurer and Secretary 1997 85,000 -- 140,000 4,750
1996 (3) 11,577 -- -- --
- --------------------------------
(1) In 1997, we changed our fiscal year end from August 31 to December 31.
(2) Other compensation includes our contributions made to each person's
respective account under our 401(k) plan.
(3) Total compensation to Messrs. Tomlinson and Grabois for the year ended
December 31, 1996 was $150,000 and $69,462, respectively, including
amounts paid before our inception.
(4) Salary for Messrs. LaFlure and Herlin represent amounts paid from date of
hire to the end of the year.
(5) Mr. LaFlure resigned as our President and Chief Operating Officer
effective February 15, 1999; and as Director in April 1999.
(6) Effective February 1, 1999, the salaries of Messrs. Tomlinson, Herlin and
Grabois were reduced to $184,248, $105,000 and $84,000, respectively.
Effective May 17, 1999, the salary of Mr. Grabois was reinstated.
DIRECTOR COMPENSATION
Certain non-employee directors are individually awarded stock options
and receive cash compensation at the Board's discretion.
EMPLOYMENT AND TERMINATION AGREEMENTS
We entered into a three-year employment agreement with Mr. LaFlure on
September 30, 1997 pursuant to which Mr. LaFlure served as our President and
Chief Operating Officer.
Under the employment agreement, Mr. LaFlure received a monthly salary
of $16,666.67 and an initial bonus of $100,000. Mr. LaFlure was entitled to
participate in all other employee compensation and welfare benefit plans and
programs available to our other employees and executive officers, including, but
not limited to, health, dental and 401(k) plans. If we terminated the employment
agreement other than for cause or for disability or death (as each such term is
defined in the agreement) at any time before the expiration thereof, then we
were obligated to pay Mr. LaFlure $1,500,000 minus (i) the amount of monthly
salary for each month Mr. LaFlure was paid; (ii) all cash bonuses received by
Mr. LaFlure before the termination; and (iii) the value of his stock options,
such value being the difference between the option price and the value of the
option shares as of the date of termination.
We terminated Mr. LaFlure's employment without cause effective January
15, 1999 and requested Mr. LaFlure to resign all of his positions with us except
his position as our director. Mr. LaFlure resigned as a director in April of
1999. Pursuant to a settlement agreement, Mr. LaFlure was entitled to receive
$1,150,000 payable as follows:
- Payments of $10,000 per month for 12 months commencing
February 15, 1999;
41
- Payment of $400,000 on January 15, 2000
- Payment of $200,000 on July 15, 2000; and
- Payment of the balance due under his agreement, as adjusted, (as
described in the immediately following paragraphs,) on
January 15, 2001.
In addition, Mr. LaFlure was granted new stock options in lieu of the
previous options for 300,000 shares of Common Stock granted on December 18,
1997. The new stock option agreement dated February 15, 1999 is for 500,000
shares of Common Stock at an exercise price of Cdn.$0.53 per share. The
remaining amounts due under the settlement agreement payable on January 15,
2001, shall be reduced by the difference between the option price under the new
option agreement for 500,000 shares of Common Stock and the 500,000 option
shares as of the date the payment of the balance of the agreed amounts. All cash
payments payable to Mr. LaFlure shall be reduced by applicable federal, state of
local withholding taxes. We also agreed that at our sole cost and expense to
continue current health insurance coverage for Mr. LaFlure as required by
applicable law until January 15, 2000.
We entered into a two-year employment agreement with Mr. Herlin on
November 15, 1997. Under the employment agreement, Mr. Herlin receives an
initial monthly salary of $11,250 and an initial bonus of $110,000. Mr. Herlin
is entitled to participate in all other employee compensation and welfare
benefit plans and programs available to our other employees and executive
officers, including, but not limited to, health, dental and 401(k) plans. If we
terminate the employment agreement other than for cause, disability or death at
any time before the expiration thereof, then we must pay to Mr. Herlin the
remaining amount of salary accrued or otherwise to be paid throughout the
remainder of the term of the agreement; provided that the remaining amount may
be no less than 12 months of Mr. Herlin's salary. If such termination is due to
a change of control of us, the minimum remaining amount must be equal to 24
months of Mr. Herlin's salary.
In the event of termination of Mr. Herlin for cause, such agreement
terminates immediately and our sole remaining obligation is to pay any amounts
accrued thereunder through the date of termination.
On December 16, 1998, we entered into an agreement with EnCap, our
largest secured creditor, that should Mr. Tomlinson's employment be
terminated, except for cause, following certain events, then EnCap will make a
cash payment to Mr. Tomlinson of $1.0 million within 30 days of severance, enter
into a consulting agreement with a three-year term providing for payments of
$185,000 per annum, and grant Mr. Tomlinson a permanent overriding royalty
interest in certain properties. These payments are our obligations and EnCap has
agreed to provide financing to fund such payment obligation.
OPTION REPRICING
In February 19, 1999, the board re-priced stock options previously
awarded to certain of our employees, including the Named Executive Officers, one
of our directors and one contract employee. Options were re-priced at CDN.
$0.50, which was the previous 10-day average closing price of the Common Stock
as reported on Canada Stockwatch. Such re-pricing of options held by the Named
Executive Officers and the director is subject to shareholder and regulatory
approval.
OPTION GRANTS
No options were granted to the Named Executive Officers in 1998. See
"Management-Executive Compensation."
42
OPTION EXERCISE AND YEAR-END VALUES
The following table provides information with respect to options to
purchase Common Stock exercised by the Named Executive Officers during 1998 and
with respect to the number and value of unexercised options held by the Named
Executive Officers at December 31, 1998.
VALUE OF UNEXERCISED
NUMBER VALUE NUMBER OF SECURITIES IN-THE-MONEY
OF SHARES REALIZED UNDERLYING OPTIONS AT
ACQUIRED UNEXERCISED OPTIONS AT DECEMBER 31, 1998
ON DECEMBER 31, 1998 CDN
---------- ---------- ------------------------------- ----------------------------
EXERCISE CDN EXERCISABLE (1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------- ---------- --------------- -------------- ------------ --------------
Prentis B. Tomlinson, Jr... -- -- 983,700 -- -- --
Ernest J. LaFlure (2) ..... -- -- 300,000 -- -- --
Robert S. Herlin .......... -- -- 300,000 -- -- --
Todd Grabois .............. -- -- 140,000 -- -- --
- ---------------------------------
(1) All options held by our employees as of February 19, 1999, including Named
Executive Officers, were re-priced to Cdn$0.50, subject to shareholder
approval.
(2) Subject to the terms of a settlement agreement of Mr. LaFlure's employment
contract, his original options were replaced with 500,000 options with an
exercise price of Cdn$0.53 and a term through January 15, 2001.
43
CERTAIN TRANSACTIONS
We have entered into several agreements with entities that are owned or
managed by certain of our directors, officers or other affiliates, or in which
certain of our directors, officers or affiliates have an interest. We also have
entered into agreements with certain of our former directors and officers.
Although some of these transactions were approved by our outside directors,
there can be no assurance that these transactions were negotiated at arms-length
or on terms that would have been negotiated with unaffiliated third parties. The
related entities with which we have entered into transactions include:
- EnCap Capital Fund III L.P., a partnership whose general partner is
EnCap Investments, L.C., which is managed by Robert L. Zorich and
Gary Petersen, two of our directors;
- BOCP Energy Partners, L.P. a partnership managed by EnCap
Investments, L.C., which is managed by Robert L. Zorich and
Gary Petersen, two of our directors;
- Slattery Trust, a private trust of which Mr. Tomlinson is the
beneficiary;
- Starbucks Trust, a private trust of which Heather Tomlinson, is the
beneficiary;
- Calibre Energy, LLC, a limited liability company owned by Slattery
Trust, Starbucks Trust, Mr. Grabois and Mr. Novak, and which is
managed by Heather Tomlinson;
- Lasco, an affiliate of EnCap;
- Texstar Holdings, L.L.C., a private limited liability company owned
by certain of our shareholders;
- Stanford Energy, Inc., a company affiliated with Donald W. Busby,
the former chairman of our board of directors; and
- RP&C International of which David Quint is a director and
shareholder.
ENCAP CREDIT FACILITY. In 1997, we entered into a $20.0 million credit
agreement with EnCap consisting of an Original Note for $12.0 million and a
supplemental note for $8.0 million. The original note bears interest at 10.0%
per annum, and was due, with accrued interest, in December 1998. The
supplemental note, which has been repaid in full, bore interest at 10.0% per
annum until July 1, 1998 and at 18.0% per annum thereafter. Under the terms of
the supplemental note, EnCap was issued warrants for the purchase of 1.5 million
shares of our common stock at an exercise price of $1.28 per share. The original
note is secured by a first lien on the properties acquired and a second lien on
certain other properties. The original note has been guaranteed by Mr.
Tomlinson, Calibre and certain of Calibre's affiliates.
Under the original note, we agreed to convey to EnCap a 25.0% net
profit interest from the properties acquired with the proceeds of the borrowing.
EnCap also required Slattery Trust, Texstar Holdings and certain of our
shareholders to enter into a put/call agreement pursuant to which those
shareholders, under certain conditions, have the right to obtain or "call" the
EnCap NPI in exchange for 1.5 million shares of our common stock. The put/call
agreement also gives EnCap the right, under certain conditions, to sell, or put,
portions of the EnCap NPI to the shareholders for $1.5 million or 3.5 million
shares of our common stock as of December 31, 1998 or March 31, 1999,
respectively. The shareholders' rights and obligations under the put/call
agreement have been transferred to us.
STANFORD ENERGY DEBENTURE. In August 1997, Stanford Energy issued us an
unsecured convertible debenture in the principal amount of Cdn.$200,000. The
debenture bore interest at a rate of 8.0% per annum, payable quarterly. The
debenture was repaid on August 6, 1997.
ADVANCES TO CALIBRE EQUADOR. In the Spring of 1997, we and Slattery
Trust, Starbucks Trust, Mr. Grabois, Mr. Novak and James Alexander formed
Calibre Ecuador, Inc. to develop certain oil and gas prospects in Ecuador. We
owned 50% of the outstanding common stock of Calibre Ecuador and the other
parties collectively owned the other 50%. The development of the prospects
required enactment of certain enabling legislation that would permit non-Ecuador
citizens to own oil and gas properties in Ecuador. Pending the enactment of such
legislation, we advanced funds to Calibre Ecuador to generate the prospect. All
rights to were contributed to Calibre Ecuador by the parties other than us. As
of December 31, 1997, we had written off advances totaling $402,192 made to
Calibre Ecuador. Calibre Ecuador had no means with which to repay the advances.
The advances were non-interest bearing and due upon demand. Due to the
write-off, we obtained rights to substantially all of Calibre Equador's common
stock.
44
In November, 1998, we entered into a participation agreement with
Burlington Resources International Inc. to develop the gas fields in Ecuador. We
and Burlington have participation interests of 25% and 75%, respectively.
Burlington has not renewed the agreement; however, we retain a 25% interest in
any project related to the subject area pursued by Burlington for one year.
CALIBRE TRANSACTIONS. In December 1997, we advanced funds to Calibre
Oil & Gas, Inc. Net advances to Calibre Oil & Gas, Inc. totaled $1,768,772 at
December 31, 1997. The advances bore no interest and were due upon demand.
On April 22, 1998, in a single transaction, we acquired all of the
outstanding shares of Calibre Oil & Gas, Inc. from Calibre and certain oil and
gas properties owned by the Slattery Trust, the Starbucks Trust, Todd Grabois,
Robert Novak, Prentis B. Tomlinson, Jr., and Calibre Oil & Gas, Inc. The shares
of Calibre Oil & Gas, Inc. were valued at $3,820,713 and were paid for through
the issuance to Calibre of 1,927,426 shares of our common stock valued at Cdn.
$2.80 per share. The total purchase price for the oil and gas properties
acquired from the other parties was $2,261,000, paid $261,000 in cash and
$2,000,000 in promissory notes issued by Texstar Petroleum Inc. in differing
amounts to each party. These notes were guaranteed by us, paid 10% annual
interest and were to be repaid in two equal installments due on April 1, 1998
and September 1, 1998. The purchase price was to be adjusted by a credit for
proceeds from production attributable to each property through January 31, 1998.
In connection with the acquisition of the oil and gas properties and
shares of Calibre Oil & Gas, Inc., $1.45 million of the advances to Calibre Oil
& Gas, Inc. were reclassified as an assumption of payables and the remaining
$318,772 was written off as a bad debt. Calibre Oil & Gas, Inc. was subsequently
merged into us and ceased to exist on January 7, 1999.
LASCO ACQUISITION. In January 1998, and effective on December 1, 1997,
we acquired proved reserves in Texas and Louisiana from Lasco for 2.57 million
shares of Common Stock and 12.0 million shares of our Series 1 preferred stock.
In December 1998, we reconveyed a portion of those interests to Lasco in
exchange for approximately 2.5 million shares of our Series 1 preferred stock.
STARBUCKS NOTE. On January 1, 1998, we loaned Starbucks Trust $2.5
million pursuant to a promissory note due December 31, 1998 that bears interest
at 9.0% per annum. Starbucks Trust is a grantor trust with the sole beneficiary
and trustee being Heather Tomlinson, Prentis Tomlinson's spouse. Total advances
and accrued interest under the note are $2.9 million as of March 31, 1999. The
loan was intended to (i) give us a greater return on investment than we were
receiving at the time; (ii) acquire common stock that was reconveyed by
Starbucks Trust to the holders of our series 2 debentures in an effort to
deliver to those debenture holders freely tradeable Benz common stock; and (iii)
acquire shares of our common stock in the open market to support the public
trading price. The entire principal interest outstanding under the note remains
due and payable and is carried on our books as an account receivable; however,
Starbucks Trust lost money on the securities transactions it made with the
proceeds of the loan and currently is unable to repay the loan.
Starbucks has claimed and requested credits, for expenses incurred on
behalf of us, against the amounts owed under the note of Cdn. $740,240.
Separately, and pursuant to the terms of the Starbucks Trust Acquisition
Agreement, we owe the Starbucks Trust $1,283,462 inclusive of accrued interest
as of December 31, 1998. Pursuant to the Calibre Acquisition Agreement, as of
December 31, 1998, we further owe the Starbucks Trust $213,918 and Prentis
Tomlinson $1,588,489 inclusive of accrued interest. On December 28, 1998, as
part of the Shell transaction, the above parties and Texstar Holdings, LLC and
Security Oil, LLC signed a standstill agreement wherein all parties mutually
deferred payments and further agreed not to pursue collection of any amounts
until the Termination Date of the Shell transaction and to toll the applicable
statutes of limitations related to claims arising from any such amounts until
the earlier of the Termination Date or December 31, 2003.
STARBUCKS ACQUISITION. In July 1998, we entered into the Starbucks
acquisition, pursuant to which we acquired certain proved non-producing oil and
gas properties in Mississippi, Texas and Louisiana from Starbucks Trust for
$2.33 million and 600,000 shares of our common stock. The purchase is subject to
certain post-closing adjustments relating to purchase value. The purchase value
is guaranteed and secured by 2.1 million shares of our common stock owned by the
Starbucks Trust.
45
OTHER RELATED PARTY TRANSACTIONS. We had an agreement with DWB
Management Ltd. to provide management, professional and office services. DWB
Management is a private company owned by Donald W. Busby, our former chairman of
the board. During the four months ended December 31, 1997, we paid DWB
Cdn.$8,000. Under the agreement, we paid DWB for services rendered a fee of
Cdn.$8,000 per month. The agreement with DWB Management was terminated in
September 1997.
We entered into an agreement with Chase Management Ltd. to provide
management, professional and office services to us, including daily accounting
services as required, and general legal assistance for routine Canadian
securities filings. Chase Management is a private company owned by Nick DeMare,
one of our former officers and directors. The agreement was for one year
commencing on the first day of October 1997 through the last day of September
1998. Thereafter, the agreement continues in effect from year to year unless
terminated by either party upon 60 days' written notice. During our last fiscal
year, we paid Chase Management Cdn.$60,000 and for the remaining term of the
agreement, we will pay Chase Management Cdn.$5,000 per month for services
rendered.
SECURITIES SUBJECT TO POOLING AGREEMENTS. Pursuant to a pooling
agreement dated April 18, 1997, as amended on September 11, 1997, between us,
certain of our shareholders, including Mr. Tomlinson, and our other senior
management, and Montreal Trust, our registrar and transfer agent, as well as the
agent under the pooling agreement, a total of 10,342,497 shares of our common
stock were deposited on a pooled basis. In addition, a total of 2,000,000 shares
of common stock to be issued on exercise of outstanding share purchase warrants
were, once exercised, to be deposited and held by Montreal Trust pursuant to the
terms and conditions of the pooling agreement. All common stock subject to the
pooling agreement will be released over a period of three years ending April 18,
2000, subject to earlier release from the pool in certain circumstances. As of
April 19, 1999, a total of 313,000 shares of our common stock are held by
Montreal Trust pursuant to the terms and conditions of the pooling agreement.
Pursuant to an agreement dated September 15, 1997, between us, certain
of our shareholders, Mr. Tomlinson, Mr. Busby and Montreal Trust, a total of
13,505,780 shares of our common stock were deposited with Montreal Trust to be
held in escrow pursuant to the escrow agreement. All common stock subject to the
escrow agreement will be released in accordance with the policies of the Ontario
Securities Commission. As of April 19, 1999, a total of 10, 804,624 shares of
our common stock are held in escrow by Montreal Trust pursuant to the escrow
agreement.
Pursuant to an option agreement between Boone Petroleum Inc., a
corporation controlled by Mr. Busby, and Texstar Petroleum, L.L.C., a company
controlled by Mr. Tomlinson, Boone Petroleum Inc. granted Texstar Petroleum,
L.L.C. an option to purchase 1,200,000 shares of our common stock from Boone
Petroleum Inc. The option was exercised and 1,100,000 shares of our Common Stock
were transferred within escrow on September, 1998 to Texstar Petroleum, L.L.C.
As of April 19, 1999, the remaining 100,000 shares of Common Stock have not been
transferred within escrow.
Pursuant to an unsigned agreement dated October 9, 1997, between EnCap
Energy, Montreal Trust, us, Texstar Holdings, L.L.C. and the Slattery Trust,
Texstar Holdings, L.L.C. and the Slattery Trust granted to EnCap Energy a
security interest in 535,521 shares of our common stock owned by Texstar
Holdings, L.L.C. and 5,525,000 shares of our common stock owned by the Slattery
Trust subject to the escrow agreement.
46
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information as of July 15,
1999, with respect to the common stock owned, directly or indirectly, by (i)
each director; (ii) each of our named executive officers; (iii) each person
known by management to own beneficially more than 5% of our outstanding
common stock; (iv) the selling shareholders; and (v) all directors and
executive officers as a group. Unless otherwise noted, the persons named
below have sole voting and investment power with respect to such shares. The
beneficial ownership of the convertible preferred stock and the common stock
issuable upon conversion of the convertible preferred stock and exercise of
the warrants by the selling securityholders after this offering will depend
on the number of shares of convertible preferred stock or common stock sold
by each selling securityholder; however, the table assumes that all shares of
convertible preferred stock and common stock issued upon conversion of the
convertible preferred stock and exercise of the warrants by a selling
securityholder are offered and resold pursuant to this prospectus.
Therefore, no information is given with respect to the beneficial ownership
of convertible preferred stock or common stock following this offering.
PREFERRED STOCK COMMON STOCK
---------------------- ------------------------
NAME OF BENEFICIAL OWNER PERCENT OF PERCENT OF
- ------------------------ NUMBER(1) CLASS(2) NUMBER(3) CLASS(4)(5)
--------- ---------- ---------- -----------
Prentis B. Tomlinson, Jr.(6) ......................... -- * 15,881,910 9.2%
Ernest J. LaFlure(7) ................................. -- * 300,000 *
Robert S. Herlin(8) .................................. -- * 365,000 *
Todd E. Grabois(9) ................................... -- * 453,335 *
Yale E. Fisher(10) ................................... -- * 288,313 *
Robert L. Zorich(11) ................................. -- * 1,536,895 *
David P. Quint(12) ................................... 2,046 * 4,103,819 2.4%
Gary Petersen(11)..................................... -- * 1,536,895 *
Russell Cleveland(13) ................................ 16,300 6.8% 6,895,831 4.0%
Donald W. Busby(14) .................................. -- * 1,866,392 1.1%
Lasco Energy Partners ................................ -- * 3,228,269 1.9%
Heather Tomlinson(15) ................................ -- * 2,950,000 1.7%
ABN Amro Bank (Schweiz) .............................. 3,900 1.6% 1,649,923 *
Anarema Stiftung ..................................... 6,000 2.5% 2,538,343 1.5%
Apple Inc. ........................................... 24,000 10.1% 10,153,371 5.9%
Bank Leumi ........................................... 1,350 * 571,127 *
Banca del Gottardo ................................... 13,200 5.5% 5,584,354 3.2%
Bank Austria ......................................... 5,400 2.3% 2,284,509 1.3%
Bank Austria Creditanstalt ........................... 5,500 2.3% 2,326,814 1.3%
Bank Julius Bar ...................................... 2,070 * 875,728 *
Bank Leu ............................................. 8,910 3.7% 3,769,439 2.2%
Bank Von Ernst a/c Dr. Pollak ........................ 450 * 190,376 *
BSI Banca della Svizzera Italiana .................... 675 * 285,564 *
Banque Edouard Constant .............................. 450 * 190,376 *
Clariden Bank ........................................ 540 * 228,451 *
Cook & Co. ........................................... 900 * 380,751 *
Coutts & Co., AG, Zurich ............................. 17,640 7.4% 7,462,728 4.3%
Credit Suisse First Boston Zurich .................... 11,385 4.8% 4,816,506 2.8%
Dalworth ............................................. 853 * 466,582 *
Deutsche Boerse/National Bank ........................ 650 * 274,987 *
Discount Bank and Trust Co., Geneva .................. 90 * 38,075 *
EFG Private Bank ..................................... 7,825 3.3% 3,310,422 1.9%
Egger & Co. .......................................... 900 * 380,751 *
Enerfin SA - Banque Paribas (London) ................. 900 * 380,751 *
Helaba (Schweiz) ..................................... 1,550 * 655,739 *
James Ladner ......................................... 853 * 466,582 *
Jyske Bank ........................................... 2,160 * 913,803 *
La Roche Banquiers AG ................................ 90 * 38,075 *
Lewco Securities ..................................... 225 * 95,188 *
Liechtensteinische Landesbank ........................ 650 * 274,987 *
Liverpool LP ......................................... 17,650 7.4% 7,466,959 4.3%
47
Lombard Odier & Co. .................................. 3,360 1.4% 1,421,472 *
Migros Bank .......................................... 450 * 190,376 *
MM Warburg Bank (Schweiz) AG ......................... 900 * 380,751 *
NCL Investments Ltd. ................................. 650 * 274,987 *
Perry Limited ........................................ 17,050 7.2% 9,327,410 5.4%
Ron Langden .......................................... 650 * 274,987 *
Rothschild Bank AG ................................... 450 * 190,376 *
Royal Bank of Scotland ............................... 900 * 380,751 *
Sreedeswar, Inc. ..................................... 13,794 5.8% 7,231,145 4.2%
UBS .................................................. 9,335 3.9% 3,949,238 2.3%
UBS Merlo ............................................ 5,150 2.2% 2,178,744 1.3%
UBS Lottenbach ....................................... 900 * 380,751 *
Union Bancaire Privee ............................... 5,200 2.2% 2,199,897 1.3%
Westgate LP .......................................... 17,650 7.4% 7,466,959 4.3%
Xanthus Limited ...................................... 6,000 2.5% 2,538,343 1.5%
ZKB Filiale Neumenster ............................... 650 * 274,987 *
Orbitex Natural Resources Fund ....................... -- * 729,200 *
BlockIsland & Co. .................................... -- * 405,000 *
Hammerhead & Co. ..................................... -- * 60,000 *
Pitt & Co. ........................................... -- * 75,000 *
Tarp & Co. ........................................... -- * 45,000 *
Kane & Co. ........................................... -- * 240,000 *
San Juan Investments, Ltd. ........................... -- * 45,000 *
All Directors and executive officers (9 persons) ..... 18,346 7.7% 31,361,999 18.1%
- --------------------
* Less than one percent
(1) Includes all shares of convertible preferred stock owned by each
holder prior to this offering.
(2) Based on 238,201 shares of convertible preferred stock outstanding as
of July 15, 1999.
(3) Includes all shares with respect to which each person, executive
officer or director who, directly or through any contract, arrangement,
understanding, relationship or otherwise, has or shares the power to
vote or direct the voting of such shares, to dispose or direct the
disposition of such shares or that may be purchased upon the exercise
of stock options or warrants exercisable within 60 days. Assumes
conversion of 100% of all convertible preferred stock or warrants held.
(4) Based on 37,254,360 shares of common stock outstanding or reserved for
issuance at July 9, 1999, plus for each executive officer or director
those number of shares underlying exercisable options held by such
executive officer or director or, in the case of holders of convertible
preferred stock or warrants, the number of shares of common stock
underlying their convertible preferred stock or warrants.
(5) Assumes that 100% of all shares of convertible preferred stock have
been converted into common stock and all warrants held by the selling
shareholder have been converted into common stock.
(6) Includes the following: (i) 983,700 shares issuable upon the exercise
of stock options; (ii) 5,525,000 shares in the name of Slattery Trust,
a trust which Mr. Tomlinson is the beneficiary; (iii) 2,043,000
shares of common stock held in trusts, of which Mr. Tomlinson is the
trustee and exercises voting and dispositive power over such shares;
(iv) 2,452,774 shares of common stock in the name of Texstar Holding
LLC, a private company (v) 1,927,426 shares of common stock issued to
Calibre, controlled by Mr. Tomlinson; and (vi) 2,950,000 shares of
common stock beneficially owned by Mr. Tomlinson's wife.
48
(7) Includes 300,000 shares of common stock issuable upon the exercise of
stock options.
(8) Includes 300,000 shares of common stock issuable upon the exercise of
stock options.
(9) Includes 140,000 shares of common stock issuable upon the exercise of
stock options.
(10) Includes 150,000 shares of common stock issuable upon exercise of
stock options.
(11) Includes 1,536,895 shares of common stock issuable upon the exercise
of warrants issued to EnCap, an investment company which is managed
by Messrs. Zorich and Petersen.
(12) Includes 865,575 shares of common stock issuable upon the conversion
of preferred stock, 2,984,526 common shares to be issued and 253,714
shares issuable upon the exercise of warrants all issued to RP&C
International (Guernsey) Limited, an investment company of which
Mr. Quint is a Managing Director.
(13) Includes 6,895,831 shares issuable upon the conversion of preferred
stock held through Renaissance U.S. Capital Growth and Income Trust,
PLC, an investment company of which Mr. Cleveland is a director.
(14) Includes 1,666,392 shares of common stock held through Boone
Petroleum, Inc., a private corporation wholly owned by Mr. Donald
W. Busby. Mr. Busby resigned as chairman of the Company on
October 2, 1997, and as Director of the Company on October 8, 1997.
Also includes 200,000 shares of common stock issuable upon exercise
of stock options.
(15) Includes 2,930,000 shares of common stock held of record by
Starbucks Trust of which Mrs. Tomlinson is the Trustee.
49
PLAN OF DISTRIBUTION
This prospectus relates to the resale of:
- 238,201 shares of our convertible preferred stock;
- 100,772,634 shares of our common stock issuable upon
conversion of the convertible preferred stock;
- 3,974,923 shares of common stock issuable upon the exercise of
outstanding warrants to purchase our common stock;
- 2,984,526 shares of our common stock issued as commission and
fees related to the offering of convertible preferred stock;
- 541,700 shares of our common stock issued in exchange for
certain convertible debentures; and
- 1,057,500 shares of our common stock issued in lieu of
interest payments.
We will bear all costs, expenses and fees in connection with
registration of the securities covered by this prospectus. Brokerage commissions
and similar selling expenses, if any, attributable to the resale of the
convertible preferred stock or common stock issued upon the conversion of
convertible preferred stock or exercise of warrants will be borne by the selling
securityholders.
Sales of convertible preferred stock or common stock issued upon
exercise of the warrants may be effected by selling securityholders from time to
time in one or more types of transactions (which may include block transactions)
in the over-the-counter market, in negotiated transactions, through put or call
options transactions relating to the securityholders, or a combination of such
methods of sale, at market prices prevailing at the time of sale, or at
negotiated prices. Such transactions may or may not involve brokers or dealers.
The selling securityholders have advised us that they have not entered into any
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their warrants or common stock issued upon
exercise of the warrants, nor is there an underwriter or coordinating broker
acting in connection with the proposed sale of warrants or common stock issued
upon exercise of the warrants by the selling securityholders.
The selling securityholders may effect such transactions by selling
convertible preferred stock or common stock issued upon conversion of
convertible preferred stock or exercise of the warrants directly to purchasers
or to or through broker-dealers, which may act as agents or principals. Such
broker-dealers may receive compensation in the form of discounts, concessions,
or commissions from the selling securityholders and/or the purchasers of
warrants for whom such broker-dealers may act as agents or to whom they sell as
principal, or both which compensation as to a particular broker-dealer might be
in excess of customary commissions.
The selling securityholders and any broker-dealers that act in
connection with the sale of convertible preferred stock might be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act, and
any commissions received by such broker-dealers and any profit on the resale of
the warrants or common stock issued upon exercise of the warrants sold by them
while acting as principals might be deemed to be underwriting discounts or
commissions under the Securities Act. The selling securityholders may agree to
indemnify any agent dealer or broker-dealer that participates in transactions
involving sales of the conversion of convertible preferred stock or common stock
issued upon conversion of convertible preferred stock or exercise of the
warrants against certain liabilities, including liabilities arising under the
Securities Act.
Because selling securityholders may be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act, the selling
securityholders may be subject to the prospectus delivery requirements of the
Securities Act.
50
Selling securityholders also may resell all or a portion of the
conversion of convertible preferred stock or common stock issued upon conversion
of convertible preferred stock or exercise of the warrants in open market
transactions in reliance upon Rule 144 under the Securities Act, provided they
meet the criteria and conform to the requirements of such rule.
After we are notified by a selling securityholder that any material
arrangement has been entered into with a broker-dealer for the sale of
convertible preferred stock or common stock issued upon conversion of
convertible preferred stock or the exercise of warrants through a block trade,
special offering, exchange distribution or secondary distribution or a purchase
by a broker or dealer, a supplement to this prospectus will be filed, if
required, pursuant to Rule 424(b) under the Securities Act, disclosing (i) the
name of each such selling securityholder and of the participating
broker-dealer(s), (ii) the type and number of securities involved, (iii) the
price at which such securities were sold, (iv) the commissions paid or discounts
or concessions allowed to such broker-dealer(s), where applicable, (v) that such
broker-dealer(s) did not conduct any investigations to verify the information
set out or incorporated by reference in this prospectus and (vi) other facts
material to the transaction.
51
DESCRIPTION OF CAPITAL STOCK
Our certificate of incorporation provides for authorized capital stock
of 400,000,000 shares, consisting of 300,000,000 shares of common stock, par
value $0.01 per share and 100,000,000 shares of preferred stock, par value $1.00
per share. As of July 15, 1999, 34,785,224 shares of common stock, 9,488,140
Class A, Series I Preferred Stock and 238,201 shares of Class A, Series II
Convertible Preferred Stock were issued and outstanding.
COMMON STOCK
Holders of common stock are entitled to one vote per share in the
election of directors and on all other matters on which stockholders are
entitled or permitted to vote. Holders of common stock are not entitled to
cumulative voting rights. Therefore, holders of a majority of the shares voting
for the election of directors can elect all the directors. Subject to the terms
of any outstanding series of preferred stock, the holders of common stock are
entitled to dividends in such amounts and at such times as may be declared by
our board of directors out of funds legally available therefor. Upon liquidation
or dissolution, holders of common stock are entitled to share ratably in all net
assets available for distribution to stockholders after payment of any
liquidation preferences to holders of preferred stock. Holders of common stock
have no redemption, conversion or preemptive rights.
Our common stock is traded on the Vancouver Stock Exchange under the
symbol "BZG." We plan to post our common stock for trading on the Nasdaq
Bulletin Board. The transfer agent for our common stock is Montreal Trust.
PREFERRED STOCK
The board of directors has the authority to cause us to issue up to the
authorized number of shares of preferred stock in one or more series, to
designate the number of shares constituting any series, and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
voting rights, redemption and conversion rights and liquidation preferences of
such series, without further action by the stockholders. The issuance of
preferred stock with voting and conversion rights may adversely affect the
voting power of the holders of the common stock.
SERIES II PREFERRED STOCK. Set forth below is a summary of the terms of
our outstanding Series II preferred stock.
DIVIDENDS. The shares of Series II preferred stock are
entitled to dividends payable semiannually in arrears on March 31 and
September 30 of each year. The dividend rate from the date of issuance
through March 31, 2003 is 8.0% per annum. After March 31, 2003,
dividends will accrue at the rate of 15.0% per annum. If dividends are
not timely paid, annual dividends will be increased by 3.0% until such
dividends have been paid. Dividends are payable, at our option, in
freely tradeable common stock valued at the average of the market price
thereof for the 20 consecutive trading days ending five trading days
before the dividend payment date. Market price is defined as the
weighted average price of our common stock on the principal stock
exchange on which our common stock is traded.
LIQUIDATION PREFERENCE. In the event of any liquidation,
dissolution or winding up, voluntary or involuntary, the shares of
Series II preferred stock are entitled to a liquidation preference to
the common stock of a cash amount equal to $105 per share.
OPTIONAL CONVERSION. Through March 31, 2000, the Series II
preferred stock will be convertible at the option of the holder thereof
into common stock at an initial conversion rate equal to CDN $0.45. If
on March 31, 2000, the average of the market price during the preceding
20 consecutive trading days is lower than the preferred conversion
price, then the conversion price will be adjusted downward to such
average price. If the Series II preferred stock is not freely tradeable
on October 1, 1999, the preferred conversion price will be reduced
thereafter by 5.0% for each six-month period or portion thereof until
the Series II preferred stock is freely tradeable.
MANDATORY REDEMPTION. We may cause all of the Series II
preferred stock to be converted into common stock at the then preferred
conversion price at any time after March 31, 2000. If the market price
for
52
the 20 consecutive trading days ending not more than five days before
the giving of the notice is equal to or in excess of 140% of the
preferred conversion price then in effect, and the common stock to be
received in connection with the conversion is freely tradeable. Upon
any mandatory conversion of any Series II preferred stock, we will make
payment for dividends accrued during the period from the most recent
dividend payment date to the conversion date.
REDEMPTION. The Series II preferred stock is redeemable in
whole or in part by us at any time on the giving of 30 days' written
notice at 105% of the nominal amount thereof together with any accrued
but unpaid dividends, payable in cash. Beginning April 1, 2003, at our
option, the Series II preferred stock also may be redeemed for freely
tradeable common stock (i) at 115% of the redemption value if our
market capitalization is $300 million or more on such date or (ii) at
120% of the redemption value if our market capitalization is less than
$300 million on such date. The common stock issued will be valued at
the average market price for the 20 trading days ending five trading
days before the payment date.
RANKING. The Series II preferred stock will rank PARI PASSU
with the Series I preferred stock and any new issue of preferred stock
that stipulates a liquidation preference PARI PASSU with the Series II
preferred stock and senior to of our other equity. The Series II
preferred stock will be subordinate to claims of creditors, including
holders of our outstanding debt instruments.
CERTAIN COVENANTS. During the period that any of the Series II
preferred stock is outstanding, we will maintain tangible assets equal
to or greater than 100% (rising to 140% with respect to the years
ending December 31, 2000 and after) of long-term debt (which includes
the Series II preferred stock, the Series I preferred stock, and any
preferred stock ranking PARI PASSU with either such series of preferred
stock).
VOTING RIGHTS. The Series II preferred stock has no voting
rights before conversion except as provided by law.
LISTING. The convertible preferred stock currently is not
listed for trading on any stock exchange. We plan to post the
convertible preferred stock for trading on the Nasdaq Bulletin Board.
The transfer agent for the convertible preferred stock is American
Stock Transfer Company.
PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND DELAWARE LAW
Our Certificate of Incorporation authorizes the board of directors,
without stockholder approval, to establish and to issue shares of one or more
series of preferred stock, each such series having such voting rights, dividend
rates, liquidation, redemption, conversion and other rights as may be fixed by
the board. Our Bylaws direct that special meetings of the stockholders may only
be called by a majority of the members of the board of directors, the chairman
of the board of directors, the president or the holders of not less than 30% of
the total voting power of all shares of our capital stock entitled to vote in
the election of directors. The Bylaws further provide that stockholders'
nominations to the board of directors and other stockholder business proposed to
be transaction at stockholder meetings must be timely received by us in a proper
written form which meets the prescribed content requirements.
The above provisions may have the effect of deterring certain tender
offers or hostile takeovers or may delay or prevent changes in control of our
management.
LIMITATION OF DIRECTOR LIABILITY
Section 102(b)(7) of the Delaware General Corporation Law ("Section
102(b)") authorizes corporations to limit or eliminate the personal liability of
directors to corporations and their stockholders for monetary damages for breach
of directors' fiduciary duty of care. Although Section 102(b) does not change
directors' duty of care, it enables corporations to limit available relief to
equitable remedies such as injunction or rescission. Our Certificate of
Incorporation limits the liability of our directors or our stockholders (in
their capacity as directors but not in their capacity as officers) to the
fullest extent permitted by Section 102(b). Specifically, our directors will not
be personally liable for monetary damages for breach of a director's fiduciary
duty as a director, except for liability: (i) for any breach of the director's
duty of loyalty to us or our stockholders, (ii) for acts or omissions not in
good faith or that involves
53
intentional, misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal benefit.
INDEMNIFICATION
To the maximum extent permitted by law, the Certificate of
Incorporation and Bylaws provide for mandatory indemnification of directors, and
permit indemnification of our officers, employees and agents against all
expense, liability and loss to which they may become subject or which they may
incur as a result of being or having been a director, officer, employee or
agent. In addition, we must advance or reimburse directors, and may advance or
reimburse officers, employees and agents, for expenses incurred by them in
connection with indemnifiable claims.
DELAWARE ANTI-TAKEOVER LAW
Section 203 of the Delaware General Corporation Law ("Section 203")
generally provides that a stockholder acquiring more than 15% of the outstanding
voting stock of a corporation subject to the statute (an "Interested
Stockholder") but less than 85% of such stock may not engage in certain
"Business Combinations" with the corporation for a period of three years after
the date on which the stockholder became an Interested Stockholder unless (i)
before such date, the corporation's board of directors approved either the
Business Combination or the transaction in which the stockholder became an
Interested Stockholder, or (ii) the Business Combination is approved by the
corporation's board of directors and authorized at a stockholders' meeting by a
vote of at least two-thirds of the corporation's outstanding voting stock not
owned by the Interested Stockholder. Under Section 203, these restrictions will
not apply to certain Business Combinations proposed by an Interested Stockholder
following the earlier of the announcement or notification of one of certain
extraordinary transactions involving the corporation and a person who were not
an Interested Stockholder during the previous three years or who became an
Interested Stockholder with the approval of the corporation's board of
directors, if such extraordinary transaction is approved or not opposed by a
majority of the directors who were directors prior to any person becoming an
Interested Stockholder during the previous three years or were recommended for
election or elected to succeed such directors by a majority of such directors.
Section 203 defines the term "Business Combination" to encompass a wide
variety of transactions with or caused by an Interested Stockholder, including
transactions in which the Interested Stockholder receives or could receive a
benefit on other than a pro rata basis with other stockholders, such as mergers,
certain asset sales, certain issuances of additional shares to the Interested
Stockholder, transactions with the corporation which increase the proportionate
interest in the corporation directly or indirectly owned by the Interested
Stockholder, or transactions in which the Interested Stockholder receives
certain other benefits.
The provisions of Section 203, together with the ability of our board
of directors to issue preferred stock without further stockholder action, could
delay or frustrate the removal of incumbent directors or a change in our
control. The provisions also could discourage, impede or prevent a merger,
tender offer or proxy contest, even if such events would be favorable to the
interests of stockholders. Our stockholders, by adopting an amendment to our
Certificate of Incorporation or Bylaws, may elect not to be governed by Section
203 effective 12 months after such adoption. Neither our Certificate of
Incorporation nor Bylaws currently exclude us from the restrictions imposed by
Section 203.
54
LEGAL MATTERS
Certain legal matters in connection with the Common Stock offered
hereby are being passed upon for us by Porter & Hedges, L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements at December 31, 1997, August 31,
1997 and December 31, 1998, included in this registration statement have been
audited by Merdinger, Fruchter, Rosen & Corso, P.C., independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon such reports given upon the authority of that firm as experts in accounting
and auditing.
Certain information set forth herein relating to our estimated proved
oil and gas reserves at January 1, 1999, the related calculations of future net
revenues and the discounted future net income thereof have been derived from
independent petroleum engineering reports prepared by R.A. Lenser and
Associates, Inc., petroleum engineers. Such information has been included herein
in reliance on such firm as an expert in petroleum engineering.
55
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditor's Report .............................................. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 .............. F-3
Audited Consolidated Statements of Operations for the year ended
December 31, 1998, the four months ended December 31, 1997 and
the ten months ended August 31, 1997 .................................... F-5
Audited Consolidated Statements of Income for the year ended December 31,
1998, the four months ended December 31, 1997 and the ten months ended
August 31, 1997 ......................................................... F-6
Audited Consolidated Statements of Stockholders' Equity for the periods
ended December 31, 1998 and December 31, 1997 ........................... F-7
Audited Consolidated Statements of Cash Flows for the year ended
December 31, 1998, the four months ended December 31, 1997 and the
ten months ended August 31, 1997 ........................................ F-10
Notes to Audited Consolidated Financial Statements ........................ F-11
Unaudited Consolidated Balance Sheets as of March 31, 1999 and 1998 ....... F-45
Unaudited Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998 ........................................... F-47
Unaudited Consolidated Statements of Comprehensive Income for the
three months ended March 31, 1999 and 1998 .............................. F-48
Unaudited Consolidated Statements of Stockholders' Equity for the
three months ended March 31, 1999 and 1998 .............................. F-49
Unaudited Consolidated Statement of Cash Flows for the three months
ended March 31, 1999 and 1998 ........................................... F-51
Notes to Unaudited Consolidated Financial Statements ...................... F-52
F-1
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
BENZ ENERGY LTD.
We have audited the accompanying consolidated balance sheets of BENZ ENERGY LTD.
as of December 31, 1998 and 1997 and the related consolidated statements of
operations, comprehensive income, stockholders' equity, and cash flows for the
year ended December 31, 1998 and for the periods from September 1, 1997 to
December 31, 1997 and from October 31, 1996 (inception) to August 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of BENZ
ENERGY LTD. as of December 31, 1998 and 1997 and the consolidated results of its
operations and its consolidated cash flows for the year ended December 31, 1998,
the four month period ended December 31, 1997 and the ten month period ended
August 31, 1997 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 18 to the
financial statements, the Company has experienced significant delays in the
completion of certain wells and its limited capital resources raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 18. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
April 2, 1999, except for Notes 9,
18 and 22 as to which the date is
July 20, 1999
F-2
BENZ ENERGY LTD.
CONSOLIDATED BALANCE SHEET
December 31,
-----------------------------------
1998 1997
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,319,302 $ 3,162,320
Receivables, net of allowance for doubtful accounts
of $197,008 and $-0-, respectively 5,461,565 4,552,053
Advances to related parties 668,647 --
Available for sale marketable securities 195,671 1,289,781
Prepaid expenses 493,459 109,016
------------ ------------
Total Current Assets 9,138,644 9,113,170
------------ ------------
OIL AND GAS PROPERTIES, USING FULL COST ACCOUNTING
Costs being amortized 48,409,232 13,341,497
Costs not being amortized 33,748,769 12,361,515
------------ ------------
82,158,001 25,703,012
Less: Accumulated amortization (3,840,604) (993,778)
------------ ------------
Net Oil and Gas Properties 78,317,397 24,709,234
------------ ------------
PROPERTY AND EQUIPMENT 1,572,342 782,356
Less: Accumulated depreciation (477,498) (171,819)
------------ ------------
Net Property and Equipment 1,094,844 610,537
------------ ------------
Debt issuance costs, net of accumulated amortization of $1,230,991 and
$42,857, respectively 5,287,340 1,607,143
Available for sale marketable securities -- 22,872
Other assets 1,402,022 153,173
------------ ------------
Total Other Assets 6,689,362 1,783,188
------------ ------------
TOTAL ASSETS $ 95,240,247 $ 36,216,129
------------ ------------
------------ ------------
The accompanying notes to consolidated financial statements are an integral part of this statement.
F-3
BENZ ENERGY LTD.
CONSOLIDATED BALANCE SHEET
December 31,
-----------------------------------
1998 1997
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITES
Accounts payable $ 14,320,846 $ 8,440,713
Revenue payable 444,826 399,352
Accrued interest 1,342,664 94,935
Accrued preferred dividends 239,568 --
Accrued loss on termination of employee 1,000,425 --
Other accrued expenses 1,763,331 2,376,982
Drilling advances 20,774 389,348
Notes payable 137,933 --
Current maturities of long-term debt, net of unamortized discount of $-0-
and $2,042,555, respectively 17,228,912 12,702,246
------------ ------------
Total Current Liabilities 36,499,279 24,403,576
------------ ------------
LONG-TERM DEBT, net of unamortized discount of $1,000,000 and $-0-,
respectively 42,262,000 6,057
COMMITMENTS AND CONTINGENCIES -- --
REDEEMABLE PREFERRED STOCK, no par value; unlimited shares authorized;
9,488,140 and no shares issued and outstanding, respectively; redemption value
of $9,488,140 9,488,140 --
STOCKHOLDERS' EQUITY:
Common Stock, no par value; unlimited shares authorized, 33,727,724 shares
and 29,878,985 shares issued and outstanding 20,424,996 16,222,198
Common Stock reserved for issuance; 1,927,436 and no shares reserved,
respectively 2,496,030 --
Additional paid-in capital 878,067 367,881
Accumulated deficit (16,571,654) (4,656,463)
Unrealized losses on available for sale marketable securities (85,630) (90,048)
Cumulative foreign currency translation adjustment (150,981) (37,072)
------------ ------------
Total Stockholders' Equity 6,990,828 11,806,496
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 95,240,247 $ 36,216,129
------------ ------------
------------ ------------
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-4
BENZ ENERGY LTD.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIODS
Four Months Ten Months
Year Ended Ended Ended
December 31, December 31, August 31,
1998 1997 1997
------------ ------------ ------------
REVENUES
Oil and gas sales $ 4,947,457 $ 707,987 $ 444,203
------------ ------------ ------------
EXPENSES
Depreciation, depletion and
amortization 3,152,506 634,493 240,403
Lease operating 860,185 42,698 45,550
Production taxes 102,547 7,064 22,961
General and administrative 5,765,737 2,087,087 2,026,399
Interest expense 5,802,328 648,885 49,314
------------ ------------ ------------
15,683,303 3,420,227 2,384,627
------------ ------------ ------------
LOSS FROM OPERATIONS
BEFORE OTHER INCOME
(EXPENSES) AND PROVISION
FOR INCOME TAXES (10,735,846) (2,712,240) (1,940,424)
------------ ------------ ------------
Loss on termination of employee (1,000,425) -- --
Interest income 573,609 23,825 59,200
Gain (loss) on sale of investments 24,971 (50,907) (35,917)
------------ ------------ ------------
Total Other Income (Expense) (401,845) (27,082) 23,283
------------ ------------ ------------
LOSS BEFORE PROVISION FOR
INCOME TAXES (11,137,691) (2,739,322) (1,917,141)
Provision for income taxes -- -- --
------------ ------------ ------------
NET LOSS (11,137,691) (2,739,322) (1,917,141)
Cumulative preferred stock dividends (777,500) -- --
------------ ------------ ------------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS $(11,915,191) $ (2,739,322) $ (1,917,141)
------------ ------------ ------------
------------ ------------ ------------
BASIC LOSS PER SHARE $ (0.37) $ (0.10) $ (0.09)
------------ ------------ ------------
------------ ------------ ------------
DILUTED LOSS PER SHARE $ (0.37) $ (0.10) $ (0.09)
------------ ------------ ------------
------------ ------------ ------------
WEIGHTED AVERAGE SHARES
USED TO COMPUTE:
Basic Loss per Share 32,491,343 27,926,016 21,921,985
Diluted Loss per Share 32,491,343 27,926,016 21,921,985
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-5
BENZ ENERGY LTD.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE PERIODS
Year Ended Four Months Ended Ten Months Ended
December 31, December 31, August 31,
1998 1997 1997
------------ ------------ ------------
Net loss $(11,915,191) $ (2,739,322) $ (1,917,141)
Other comprehensive income, net of
tax:
Foreign currency translation
adjustment (113,909) 25,359 (62,431)
Unrealized gains on marketable
securities 4,418 (482,231) 392,183
------------ ------------ ------------
Comprehensive loss $(12,024,682) $ (3,196,194) $ (1,587,389)
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-6
BENZ ENERGY LTD.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock
Common Stock Reserved for Issuance
--------------------------- --------------------------
Shares Amount Number Amount
---------- ------------ --------- ----------
Balance,
December 31, 1997 29,878,985 $ 16,222,198 -- $ --
Exercise of warrants 94,900 84,146 -- --
Exercise of stock
options 87,000 16,152 -- --
Issued for properties 2,542,372 3,000,000 -- --
Issued for properties -- -- 1,927,436 2,496,030
Issued in legal
settlement 200,000 70,000 -- --
Issued on conversion
of debentures 238,570 250,000 -- --
Issued for interest
and preferred
dividends 685,897 782,500 -- --
Costs of issuances -- -- -- --
Foreign currency
translation
adjustments -- -- -- --
Unrealized gains -- -- -- --
Net loss -- -- -- --
---------- ------------ --------- ----------
Balance,
December 31, 1998 33,727,724 $ 20,424,996 1,927,436 $2,496,030
---------- ------------ --------- ----------
---------- ------------ --------- ----------
Additional Unrealized Total
Paid-in Accumulated Gain (Loss) Translation Stockholders'
Capital Deficit on Securities Adjustments Equity
------------ ------------ ------------- ----------- ------------
Balance,
December 31, 1997 $ 367,881 $ (4,656,463) $ (90,048) $ (37,072) $ 11,806,496
Exercise of warrants -- -- -- -- 84,146
Exercise of stock
options -- -- -- -- 16,152
Issued for properties -- -- -- -- 3,000,000
Issued for properties -- -- -- -- 2,496,030
Issued in legal
settlement -- -- -- -- 70,000
Issued on conversion
of debentures -- -- -- -- 250,000
Issued for interest
and preferred
dividends -- -- -- -- 782,500
Costs of issuances 510,186 -- -- -- 510,186
Foreign currency
translation
adjustments -- -- -- (113,909) (113,909)
Unrealized gains -- -- 4,418 -- 4,418
Net loss -- (11,915,191) -- -- (11,915,191)
------------ ------------ ----------- ------------ ------------
Balance,
December 31, 1998 $ 878,067 $(16,571,654) $ (85,630) $ (150,981) $ 6,990,828
------------ ------------ ----------- ------------ ------------
------------ ------------ ----------- ------------ ------------
The accompanying notes to consolidated financial statements are an integral
part of this statement.
F-7
BENZ ENERGY LTD.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock Special Warrants
--------------------------- --------------------------
Shares Amount Number Amount
---------- ------------ --------- ----------
Balance,
August 31, 1997 22,714,821 $ 7,924,329 4,935,800 $ 7,753,008
Conversion of warrants 4,935,800 7,753,008 (4,935,800) (7,753,008)
Exercise of warrants 136,500 108,374 -- --
Exercise of warrants 2,000,000 415,205 -- --
Exercise of warrants 91,864 141,396 -- --
Costs of issuances -- (120,114) -- --
Issuance of warrants
in connection with
debt -- -- -- --
Foreign currency
translation
adjustments -- -- -- --
Unrealized losses -- -- -- --
Net loss -- -- -- --
---------- ------------ ---------- ------------
Balance,
December 31, 1997 29,878,985 $ 16,222,198 -- $ --
---------- ------------ ---------- ------------
---------- ------------ ---------- ------------
Additional Unrealized Total
Paid-in Accumulated Gain (Loss) Translation Stockholders'
Capital Deficit on Securities Adjustments Equity
------------ ------------ ------------- ----------- ------------
Balance,
August 31, 1997 $ -- $ (1,917,141) $ 392,183 $ (62,431) $ 14,089,948
Conversion of warrants -- -- -- -- --
Exercise of warrants -- -- -- -- 108,374
Exercise of warrants -- -- -- -- 415,205
Exercise of warrants -- -- -- -- 141,396
Costs of issuances -- -- -- -- (120,114)
Issuance of warrants
in connection with
debt 367,881 -- -- -- 367,881
Foreign currency
translation
adjustments -- -- -- 25,359 25,359
Unrealized losses -- -- (482,231) -- (482,231)
Net loss -- (2,739,322) -- -- (2,739,322)
------------ ------------ ----------- ------------ ------------
Balance,
December 31, 1997 $ 367,881 $ (4,656,463) $ (90,048) $ (37,072) $ 11,806,496
------------ ------------ ----------- ------------ ------------
------------ ------------ ----------- ------------ ------------
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-8
BENZ ENERGY LTD.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock Special Warrants
--------------------------- --------------------------
Shares Amount Number Amount
---------- ------------ -------- ------------
BALANCE,
October 31, 1996,
adjustment to
reflect outstanding
shares of legal
parent at October
31, 1996 and net
assets of parent at
fair values and
Texstar at historical
cost 20,201,858 $ 5,065,277 -- $ --
Issuance pursuant to
private placements 910,800 881,296 -- --
Issued upon exercise
of options 1,004,300 961,241 -- --
Issued for properties 343,000 442,923 -- --
Issued for properties 254,863 573,592 -- --
Sale of stock purchase
warrants -- -- 4,885,800 8,750,447
Issuance of stock
warrants for
services -- -- 50,000 116,571
Costs of issuances -- -- -- (1,114,010)
Foreign currency
translation
adjustments -- -- -- --
Unrealized gains -- -- -- --
Net loss -- -- -- --
---------- ------------ --------- ------------
Balance,
August 31, 1997 22,714,821 $ 7,924,329 4,935,800 $ 7,753,008
---------- ------------ --------- ------------
---------- ------------ --------- ------------
Unrealized Total
Accumulated Gain (Loss) Translation Stockholders'
Subscriptions Deficit on Securities Adjustments Equity
------------- ----------- ------------- ----------- ------------
October 31, 1996,
adjustment to
reflect outstanding
shares of legal
parent at October
31, 1996 and net
assets of parent at
fair values and
Texstar at historical
cost $ 1,043,846 $ -- $ -- $ -- $ 6,109,123
Issuance pursuant to
private placements (296,032) -- -- -- 585,264
Issued upon exercise
of options -- -- -- -- 961,241
Issued for properties -- -- -- -- 442,923
Issued for properties -- -- -- -- 573,592
Sale of stock purchase
warrants (747,814) -- -- -- 8,002,633
Issuance of stock
warrants for
services -- -- -- -- 116,571
Costs of issuances -- -- -- -- (1,114,010)
Foreign currency
translation
adjustments -- -- -- (62,431) (62,431)
Unrealized gains -- -- 392,183 -- 392,183
Net loss -- (1,917,141) -- -- (1,917,141)
------------ ------------ ------------ ------------ ------------
Balance,
August 31, 1997 $ -- $ (1,917,141) $ 392,183 $ (62,431) $ 14,089,948
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-9
BENZ ENERGY LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIODS
Four Months Ten Months
Year Ended Ended Ended
December 31, December 31, August 31,
1998 1997 1997
------------ ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(11,137,691) $ (2,739,322) $ (1,917,141)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation, depletion and amortization 3,152,506 634,493 240,403
Amortization of deferred loan costs 2,926,482 470,363 --
(Gain) loss on sale of stock held for investment (24,971) 50,907 35,917
Reserve for bad debt 197,008 -- --
Write-off of investment in Calibre Ecuador 319,327 -- --
Changes in operating assets and liabilities:
Funds held in trust -- 1,773,364 (1,819,637)
Increase in receivables (1,056,658) (483,011) (3,606,624)
(Increase) decrease in prepaid expenses (384,443) 214,361 10,718
(Increase) decrease in amounts due from related parties (4,627,308) 453,132 (453,132)
Decrease in advances to Stanford -- -- 311,699
Increase in other assets (430,600) (1,647,237) (360,933)
Increase in accounts payable and accrued expenses 7,366,018 5,475,762 5,486,338
Increase (decrease) in drilling advances (368,574) (421,990) 163,188
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (4,068,904) 3,780,822 (1,909,204)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development expenditures (36,312,839) (16,226,706) (7,136,665)
Proceeds from sale of oil and gas properties 1,059,083 408,931 416,060
Proceeds from sale of stock held for investment 1,085,016 9,308 74,224
Other capital expenditures, net (745,419) (103,346) (375,680)
Other, net (487,847) -- --
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (35,402,006) (15,911,813) (7,022,061)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings 10,057,225 14,115,000 375,500
Payments on long-term debt (9,759,225) (145,468) (80,128)
Proceeds from special financing 7,000,000 -- --
Net increase in short-term borrowings (19,946) -- --
Proceeds from issuance of convertible debentures and special
notes 36,512,000 -- --
Proceeds from issuance of common stock and warrants 170,298 664,975 9,665,709
Cost of debt and equity transactions (4,774,260) (120,114) (1,114,010)
Payments on notes (221,200) -- --
Other (286,644) -- --
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 38,678,248 14,514,393 8,847,071
------------ ------------ ------------
Effect of change in translation (50,356) 84,612 28,484
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (843,018) 2,468,014 (55,710)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,162,320 694,306 750,016
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,319,302 $ 3,162,320 $ 694,306
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-10
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - Benz Energy Ltd. ("Benz" or the "Company") is an
independent energy company engaged primarily in the acquisition, development,
production, exploration for and the sale of oil, gas and natural gas liquids.
The Company's exploration and production activities are located primarily in the
Gulf Coast areas of Mississippi, Louisiana and Texas. Benz treats all operations
as one segment of business. The principal executive offices of the Company are
located at 1000 Louisiana, 15th Floor, Houston, Texas 77002. The Company's
registered and records office is located at 3081 Third Avenue, Whitehorse, Yukon
Y1A 4Z7 Canada.
The Company's future financial condition and results of operations will
depend upon prices received for its oil and natural gas and the costs of
finding, acquiring, developing and producing reserves. Prices for oil and
natural gas are subject to fluctuations in response to changes in supply, market
uncertainty and a variety of other factors beyond the Company's control. These
factors include worldwide political instability (especially in the Middle East),
the foreign supply of oil and natural gas, the price of foreign imports, the
level of consumer product demand and the price and availability of alternative
fuels. With natural gas accounting for 89 percent of Benz's 1998 production on
an energy equivalent basis, the Company was affected more by fluctuations in
natural gas prices than in oil prices.
CHANGE IN ACCOUNTING PRINCIPLE - The Company changed its method of
accounting from the successful efforts method to the full cost method of
accounting for oil and gas properties during the period ended December 31, 1997.
The prior period presented has been restated to reflect the change in
accounting.
BASIS OF CONSOLIDATION - The consolidated financial statements include
the accounts of Benz Energy Ltd. and its wholly owned subsidiaries Texstar
Petroleum, Inc. ("Texstar") and Benz Properties Ltd. ("Benz Properties").
Accordingly, all references herein to Benz or the Company include the
consolidated results of its subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
BASIS OF PRESENTATION - Effective October 31, 1996, Benz acquired 100%
of the outstanding capital stock of Texstar (See Note 2). As a result, Texstar's
former shareholders obtained control of Benz. For accounting purposes, this
acquisition has been treated as a recapitalization of Texstar.
The financial statements presented include only the accounts of the
Company since Texstar's inception (October 31, 1996).
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates with regard to these financial statements include the
estimate of proved oil and gas reserve volumes and the related present value of
estimated future net revenues therefrom (see Note 24, "Supplemental Oil and Gas
Disclosures).
F-11
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CASH AND CASH EQUIVALENTS - Cash and Cash Equivalents include cash in
banks and other cash equivalents that mature within three months of the date of
purchase.
OIL AND GAS PROPERTIES - The Company uses the full cost method of
accounting for its investment in oil and gas properties. Under this method, the
Company capitalizes all acquisition, exploration and development costs incurred
for the purpose of finding oil and gas reserves, including salaries, benefits
and other internal costs directly attributable to these activities. Capitalized
internal costs were as follows for the periods indicated:
Year ended December 31, 1998 $829,835
Four months ended December 31, 1997 $335,626
Ten months ended August 31, 1997 $412,752
Interest costs related to unproved properties and properties under development
are also capitalized to oil and gas properties. Unless a significant portion of
the Company's reserve volumes are sold (generally greater than 25 percent),
proceeds from the sale of oil and gas properties are accounted for as reductions
to capitalized costs and gains or losses are not recognized.
Benz computes the provision for depreciation, depletion and
amortization (DD&A) of oil and gas properties on a quarterly basis using the
units-of-production method based upon production and estimates of proved reserve
quantities. Unevaluated costs and related capitalized internal and interest
costs are excluded from the amortization base until the properties associated
with these costs are evaluated. The amortizable base includes estimated
dismantlement, reclamation and abandonment costs net of equipment salvage
values. The engineering department of Benz generally estimates these future
costs.
Benz limits, by country, net capitalized costs of proved oil and gas
properties, less related deferred income taxes, to the sum of (1) future net
revenues (using prices and cost rates as of the balance sheet date) from proved
reserves and discounted at ten percent per annum, plus (2) costs not being
amortized, less (3) related income tax effects. Excess costs, if any, are
charged to proved property impairment expense.
The costs of certain unevaluated leasehold acreage and wells being
drilled are not being amortized. Costs not being amortized are periodically
assessed for impairments. Any impairment is added to the amortization base.
DEPRECIATION AND AMORTIZATION - Property and equipment are stated at
cost and are depreciated using the straight-line method over their estimated
useful lives. The costs of maintenance and repairs are charged to expense when
incurred; costs of renewals and betterments are capitalized. Upon the sales or
retirement of property and equipment, the cost and related accumulated
depreciation are eliminated from the respective accounts and the resulting gain
or loss is included in operations.
F-12
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
REVENUE RECOGNITION - Revenues from the sale of oil and gas production
are recognized when title passes, net of royalties. Natural gas revenues are
generally recognized under the entitlements method of accounting for gas
imbalances, i.e., monthly sales quantities that do not match the Company's
entitled share of joint production. Entitled quantities in excess of sales
quantities are recorded as a receivable from joint venture partners. The
receivable is carried at the lower of current market price or the market price
at the time the imbalance occurred. Sales quantities in excess of entitled
quantities are recorded as deferred revenue carried at the gas market price
received at the time the imbalance occurred.
HEDGING -The Company may enter into derivative contracts to hedge the
risk of future oil and gas price fluctuations. Such contracts may either fix or
support oil or gas prices or limit the impact of price fluctuations with respect
to the Company's sales of oil and gas. Gains and losses on such hedging
activities are recognized in oil and gas revenues when the hedged production is
sold. Hedged oil and gas prices, if any, used in computing the year-end
standardized measure of discounted future net cash flows relating to proved oil
and gas reserves reflect the estimated effects of hedging contracts existing at
year end.
INVESTMENT IN EQUITY SECURITIES - The Company accounts for its
investments in equity securities under the provisions of Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities".
This standard provides that available-for-sale investments in securities that
have readily determinable fair values be measured at fair value in the balance
sheet and that unrealized holding gains and losses for these investments be
reported in a separate component of stockholders' equity until realized.
LONG-LIVED ASSETS - Long-lived assets to be held and used are reviewed
for impairment whenever events or changes in circumstances indicate that the
related carrying amount may not be recoverable. When required, impairment losses
on assets to be held and used are recognized based on the fair value of the
assets and long-lived assets to be disposed of are reported at the lower of
carrying amount or fair value less cost to sell.
INCOME TAXES - Provisions for income taxes are based on taxes payable
or refundable for the current year and deferred taxes on temporary differences
between the amount of taxable income and pretax financial income and between the
tax bases of assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to the period in
which the deferred tax assets and liabilities are expected to be realized or
settled as prescribed SFAS No. 109, "Accounting for Income Taxes". As changes in
tax laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
CONCENTRATION OF CREDIT RISK - The Company places its cash in what it
believes to be credit-worthy financial institutions. However, cash balances may
exceed FDIC insured levels at various times during the year.
F-13
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
STOCK BASED COMPENSATION - The Company uses the intrinsic value method
of accounting for stock-based compensation in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. See Note 14 for pro forma disclosure of
net income and earnings per share under the fair value method of accounting for
stock-based compensation as proscribed by SFAS No. 123, "Accounting for
Stock-Based Compensation".
TRANSLATION OF FOREIGN CURRENCY - The Company translates the foreign
currency financial statements of its foreign parent in accordance with the
requirements of SFAS No. 52, "Foreign Currency Translation". Assets and
liabilities are translated at current exchange rates, and related revenues and
expenses are translated at average exchange rates in effect during the period.
Resulting translation adjustments are recorded as a separate component in
stockholders' equity. Foreign currency transaction gains and losses are included
in determining net income.
PER SHARE OF COMMON STOCK - Per share amounts have been computed based
on the average number of common shares outstanding during the period.
In February 1997, the FASB issued a new statement titled "Earnings Per
Share" (SFAS No. 128). This statement is effective for both interim and annual
periods ending after December 15, 1997 and specifies the computation,
presentation, and disclosure requirements for earnings per share for entities
with publicly held common stock or potential common stock. All prior-period EPS
data presented has been restated to conform to the provisions of SFAS No. 128.
Potential common stock has been excluded from the computation of
earnings per share since the inclusion of options and warrants would be
antidilutive.
NOTE 2. CORPORATE REORGANIZATION
(a) During the period ended August 31, 1997, Benz issued 8,500,000 common
shares to acquire all of the issued and outstanding shares of Texstar (the
"Texstar Acquisition").
As a result of this transaction the former shareholders of Texstar acquired
or exercised control over a majority of shares of Benz. Accordingly, the
transaction has been treated for accounting purposes as a recapitalization
of Texstar and, therefore, these financial statements represent a
continuation of the legal subsidiary, Texstar, not Benz, the legal parent.
In accounting for this transaction:
(i) Texstar is deemed to be the purchaser and parent company for
accounting purposes. Accordingly, its net assets are included in the
consolidated balance sheet at their historical book values;
F-14
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(ii) Control of the net assets and business of Benz was acquired effective
October 31, 1996 (the "Effective Date"). This transaction has been
accounted for as a purchase of the assets and liabilities of Benz by
Texstar at the fair value of $5,342,158. The historical cost of the
net assets acquired was $4,712,162. A summary of the assigned values
of the net assets acquired is as follows:
Net working capital $ 723,924
Advances to Texstar as at Effective date,
eliminated in consolidation 256,123
Long term investments 1,821,596
Petroleum interests 2,540,515
----------------
Net assets acquired $ 5,342,158
----------------
----------------
(iii) The consolidated statements of operations and cash flows include
Texstar's results of operations and cash flows from October 31, 1996
(date of inception) and Benz's results of operations from the
Effective Date.
Prior to Benz acquiring Texstar, Texstar acquired certain assets and assumed
certain liabilities from Texstar Petroleum L.L.C. ("Texstar L.L.C."), a private
company of which certain of Texstar LLC's members, directors and officers are
also shareholders, directors and officers of the Company. As a result of the
Texstar Acquisition, Texstar LLC's members are also shareholders of the Company.
Due to the fact that Texstar and Texstar LLC were under common control, the
assets and liabilities assigned have been recorded at their historical costs.
(a) Prior to the Effective Date, Benz completed a number of agreements with
Texstar LLC whereby Benz acquired:
(i) various working interests in five oil and gas prospects located in
Mississippi and Texas, paid through the issuance of 2,850,000 common
shares of Benz, at a deemed price of $1,935,800;
(ii) an exclusive right of first refusal, at a cost of $300,000, to
purchase 50% interests in new oil and gas properties located in the
United States Gulf Coast areas of Texas, Louisiana and Mississippi;
and
(iii) a 32% working interest in the shallow rights and 40% working interest
in the deep rights in the Lahinch field (the "Lahinch Prospect"),
covering approximately 2,303 acres, located in Duval County, Texas,
at a price of $193,506.
NOTE 3. ACQUISITIONS AND DIVESTITURES
ACQUISITIONS
On December 29, 1998, the Company acquired, for $2.0 million, all of
Mobil's right, title and interest in the deep rights below the existing
production in the Old Ocean Unit.
F-15
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In July 1998, Benz acquired certain proved and unproved non-producing
oil and gas properties in Mississippi, Texas and Louisiana from Starbucks Trust
for $2.33 million and 600,000 shares of the Company's common stock. The purchase
is subject to certain post-closing adjustments relating to purchase value. The
value of the assets is secured through January 1, 2001, by 2.1 million shares of
the Company's common stock owned by Starbucks Trust. See Note 16, "Related Party
Transactions".
In May 1998, the Company entered into a property swap agreement with
Southern Gas Company ("Southern Gas"). The Company conveyed to Southern Gas the
Company's entire interest in White Castle Dome (5.5%) and $1.25 million in cash.
In exchange, Southern Gas conveyed to the Company Southern Gas's entire interest
in the Oakvale, Wausau and Moselle Dome properties and prospects.
In April 1998, the Company agreed to acquire certain petroleum
interests and assume certain liabilities from Calibre Energy, L.L.C.
("Calibre"). The Company paid $261,000 in cash, forgave $1,450,000 in advances,
assumed $450,000 in debt and issued promissory notes totaling $2,000,000. In
addition, the Company will issue approximately 1,927,400 shares of common stock
in 1999 at an ascribed price of Cdn. $2.80 per share in connection with this
transaction.
In January 1998, Benz acquired certain producing properties from Lasco
Energy Partners ("Lasco") for a purchase price of $15.0 million. The Company
issued a note payable which, subsequent to shareholder approval, was converted
to $12.0 million in newly authorized preferred stock (priced at $1.00) and $3.0
million in common stock (priced at $1.185). In December 1998, the Lasco purchase
price was adjusted to $12,488,140. Included in this reduction were adjustments
for the change in interest and dividends resulting from the lower purchase
price. The difference of $2,511,860 reduced the principal amount of preferred
shares to $9,488,140.
DIVESTITURES
In 1998, Benz received $1.1 million from the sale of non-strategic oil
and gas properties related to three separate transactions. During the periods
ended December 31, 1997 and August 31, 1997, the Company sold partial interests
in various unproved prospects for net proceeds of $408,931 and $416,060,
respectively. No gain has been recognized; capitalized oil and gas property
costs have been reduced by the amount of sales proceeds.
NOTE 4. RESTRICTED CASH
Included in cash and cash equivalents at December 31, 1998 and 1997 is
$1,006,807 and $721,304, respectively, which is restricted to expenditures on
certain petroleum interests.
F-16
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31, December 31,
1998 1997
------------ ------------
3-D Workstations $ 313,117 $ 313,117
Furniture and Fixtures 374,861 180,139
Telephone and Computer Equipment 448,732 274,133
Leasehold Improvements 295,111 14,967
Software 71,472 ---
Other 69,049 ---
------------ ------------
1,572,342 782,356
Less: Accumulated Depreciation (477,498) (171,819)
------------ ------------
Net Property and Equipment $ 1,094,844 $ 610,537
------------ ------------
------------ ------------
The Company recorded the following depreciation expense related to
property and equipment in the Consolidated Statement of Operations for the
periods indicated:
Year ended December 31, 1998 $ 305,679
Four months ended December 31, 1997 $ 53,625
Ten months ended August 31, 1997 $ 91,254
NOTE 6. INVESTMENTS IN EQUITY SECURITIES
At December 31, 1998 and 1997, marketable investments classified as
available for sale were comprised of the following:
December 31, December 31,
1998 1997
------------ ------------
Common Stocks:
Market value $ 195,671 $ 1,312,653
Cost 281,301 1,402,701
------------ ------------
Gross Unrealized Holding Losses $ (85,630) $ (90,048)
------------ ------------
------------ ------------
The Company realized the following gross gains (losses) from the sale
of equity securities for the periods indicated:
Year ended December 31, 1998 $ 24,971
Four months ended December 31, 1997 $ (50,907)
Ten months ended August 31, 1997 $ (35,917)
Benz utilizes the average cost method in computing realized gains and
losses which is included in other income (expense) in the accompanying
Consolidated Statement of Operations.
F-17
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 7. PARTICIPATION AGREEMENT
In November 1998, the Company entered into a participation agreement
with Burlington Resources International Inc. ("Burlington") to pursue government
contracts to participate in the redevelopment of oil and gas fields in Ecuador.
The Company and Burlington have participation interests of 25% and 75%,
respectively. At December 31, 1998, the Company had invested $316,470 in the
venture. Subsequent to year-end, Burlington indicated it might not renew the
agreement at this time, and that action could have an impact on the Company's
ability to maintain an interest in this region. However, the Company would
retain a 25% interest in any project related to the subject area pursued by
Burlington for one year.
NOTE 8. DRILLING ADVANCES
As of December 31, 1998 and 1997, the Company has received drilling
advances from joint interest owners in the amounts of $20,774 and $389,348,
respectively. These advances will be applied toward the payment of drilling
costs to be incurred in the future.
NOTE 9. LONG-TERM DEBT
December 31, December 31,
1998 1997
------------ ------------
EnCap Credit Agreement
(Face Value of $12,000,000 and $14,000,000,
respectively) $ 12,000,000 $ 11,957,445
BOCP Credit Facility 3,000,000 702,000
Shell Financing (Face Value of $7,000,000) 6,000,000 ---
Mobil Financing 2,200,000 ---
Cogniseis Development 28,912 48,858
Convertible Debentures 27,250,000 ---
Special Notes 9,012,000 ---
------------ ------------
Total 59,490,912 12,708,303
Current Portion 17,228,912 (1) 12,702,246
------------ ------------
Total Long-Term Debt $ 42,262,000 $ 6,057
------------ ------------
------------ ------------
- ------------------
(1) Excludes $1,946,667 related to the Shell financing which is considered
long-term until the related production is accrued.
F-18
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Maturities of long-term debt are as follows:
December 31,
1998
--------------
1999 $ 19,175,579
2000 2,776,667
2001 1,276,666
2002 ---
2003 36,262,000
--------------
$ 59,490,912
--------------
--------------
ENCAP CREDIT AGREEMENT. The Company entered into a $20 million
credit agreement (the "EnCap Credit Agreement") with EnCap Capital Fund III,
L.P. ("EnCap") consisting of a promissory note for $12,000,000 (the "Original
Note") and a promissory note for $8,000,000 (the "Supplemental Note";
collectively, the "Notes"). The Original Note bears interest at 10% per annum
up to and until December 31, 1998 and at 18% per annum thereafter. This note
is due, with accrued interest, on July 31, 1999. The Supplemental Note was
repaid in full and no advances are currently outstanding. Under the terms of
the Debentures and Special Notes described below, the Company has agreed to
limit borrowings under the EnCap Credit Agreement to $12,000,000, all of
which is outstanding. The proceeds from the facility were applied to the
acquisition of Oakvale Dome ($8,000,000), and Old Ocean properties and the
drilling and completion of certain development wells ($4,000,000). A first
lien on certain properties and a second lien on certain other properties
secure the Original Note. Prentis B. Tomlinson, Chairman and CEO of the
Company, Calibre, certain affiliates of Calibre, Slattery Trust, a private
trust of which Mr. Tomlison is the beneficiary, and Texastar Holdings, L.L.C.
("Texstar Holdings"), a private limited liability company owned by certain
directors and officers of the Company, guarantee the Original Note.
Under the terms of the Original Note, the Company agreed to convey to
EnCap, on January 1, 1999, a 25% net profit interest (the "EnCap NPI") from the
properties acquired with the proceeds of the borrowing. EnCap also required
Slattery Trust and Texstar Holdings (collectively the "Benz Shareholders"), to
enter into a put/call agreement (the "Put/Call Agreement"), pursuant to which
the Benz Shareholders, under certain conditions, have the right to obtain or
"call" the EnCap NPI in exchange for 1.5 million shares of Common Shares. The
Put/Call agreement also gives EnCap the right, under certain conditions, to
sell, or put, portions of the EnCap NPI to the Benz Shareholders for an
aggregate of 1.5 million shares of Common Shares as of December 31, 1998,
increasing to 3.5 million shares after March 31, 1999. The Benz Shareholders
have transferred the rights and obligations of the Put/Call Agreement to the
Company. In connection with the original granting of the EnCap NPI, the Company
recorded a discount on the Original Note of $2,102,180 as of December 31, 1997.
The discount has been amortized over the term of the Original Note. The carrying
amount of the oil and gas interests has been reduced by the same amount.
Subsequent to the end of 1998, the EnCap NPI vested and the put option expired.
Encap thus retained the NPI.
F-19
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Under the terms of the Supplemental Note, EnCap was issued warrants to
purchase up to 1.5 million shares of Common Shares at an exercise price of $1.28
per share. In connection with the issuance of these warrants, the Company
recorded a discount on the Supplemental Note of $367,881 as of December 31,
1997. This discount is being amortized over the term of the Supplemental Note
Facility. Pursuant to a financing agreement dated November 4, 1998 with EnCap
and as consideration for enabling additional funding through the Bank One Credit
Facility, the warrants were repriced to $0.46475 per share. The re-pricing did
not have material effect on the unamortized discount balance.
BOCP CREDIT FACILITY. In December 1998, the Company's loan agreement
with Bank One NA ("Bank One") was purchased by BOCP Energy Partners, L.P.
("BOCP"). Pursuant to an assignment of note and liens dated December 29, 1998,
Bank One assigned the original loan agreement, together with all loan documents
referred to therein, to BOCP. The principal amount then outstanding under
Tranche A of $2.9 million plus interest was repaid and, per amendments to the
loan agreement, no further advances will be requested or made under Tranche A.
Interest accrued on advances under Tranche A at prime plus 2.0%, payable
monthly. The amendments also modified the terms of Tranche B of the credit
facility as follows:
(1) Maximum availability of $6,000,000.
(2) No advances on Tranche B will be requested or made on or after
April 30, 1999.
(3) Maturity date of July 31, 1999.
(4) Interest rate of prime plus eight percent per annum through
and including December 31, 1998 and fifteen percent per annum
from and after January 1, 1999.
In December, the Company paid $1.5 million of the $4.5 million
outstanding principal balance under Tranche B but no interest thereon. The
outstanding balance of Tranche B as of the date of this report is $6.0
million. All interest accrued on Tranche B remains unpaid and owing and is
due on July 31, 1999. The Company has reached a standstill agreement covering
certain covenants of which the Company is currently in violation. See Note
22, "Subsequent Events."
SHELL FINANCING. In December 1998, the Company entered into a financing
agreement with Shell Capital, Inc. ("Shell Capital") whereby the Company sold a
term production payment to Shell Capital for $7 million. The production payment
comprised a dedication of 42% of net revenues from the Wausau, Oak Hill, East
Morgantown properties, 23.1% of Oakvale Dome's Howell well, 12.2% of Oakvale
Dome's Fortenberry well and 38.5% of Oakvale Dome's Byrd well. Such interests
are subject to adjustment. The production payment is secured solely by the
properties. Following full pay-out ($7.0 million plus a 15% rate of return) of
the production payment, the dedicated revenue interest is returned to the
Company less a permanent royalty interest equal to 8.75% of the Company's net
revenue interest in Wausau, Oak Hill and East Morgantown, and 4.8% of the Howell
and Byrd wells and 2.5% of the Fortenberry well. The Company has the right to
buy back the production payment at a stated rate of return of 25% plus a payment
of $1.0 million. In connection with the right to buy back the permanent
overriding royalty interest conveyance, the Company recorded a discount on the
financing of $1.0 million. The carrying amount of the oil and gas interests has
been reduced by the same amount. Shell Capital further agreed to expand its term
production payment to $25 million provided that the Company sell certain
properties, enter into a payment schedule for amounts owed to an industry
partner, raise additional capital and obtain certain minimum results from
current development drilling activity. The Company is currently negotiating with
Shell Capital and other parties to complete the expansion of the term production
payment.
F-20
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
This financing has been classified as debt on the balance sheet and
will be reduced starting in 1999 as production is delivered to Shell under the
terms of the contract. Volumes delivered to Shell are reported as revenue at
prices received by Shell. Interest expense is recorded based on a rate of 15
percent.
MOBIL FINANCING. In December 1998, the Company obtained a short-term
advance of $2.2 million from certain investors for the purchase of Mobil's
deep rights in the Old Ocean Unit. The advances are due July 31, 1999 and
bear interest at a rate of 10% per annum.
In connection with the short-term advance, the Company agreed to pay
RP&C International, Inc. ("RP&C") and EnCap Investments L.C. ("EnCap L.C.")
arrangement fees in the amounts of $125,400 and $6,600 respectively. In
addition, the Company granted RP&C and EnCap L.C. warrants to purchase Benz
Common Stock in an aggregate amount equal to $220,000. Such warrants were
apportioned 95% to RP&C and 5% to EnCap L.C. The exercise price of the warrants
at issuance was Cdn. $0.46 per share with an exercise period of three years. In
lieu of issuing the warrants, the Company agreed to provide RP&C and EnCap L.C.
in substance with substantially the same economic rights or interests they would
have otherwise received had they been issued the warrants. The fair value of
such right at December 31, 1998 was determined to be approximately $171,217.
The Company also conveyed to each lender of the Mobil financing such
lender's percentage share of an overriding royalty interest equal to 50% of
the Mobil interest purchased in and to the Old Ocean Unit leases and the AMI
leases. If the Company pays in full all of the notes on or before the
original maturity date of April 30, 1999, or as extended, the lenders will
re-convey the overriding royalty interest back to the Company. The lenders
have exended such date to July 31, 1999. The Lender will retain the right to
receive such lender's percentage share of 7.75% of the net profits, if any,
realized from the production of oil, gas and other minerals from the subject
interest in connection with such re-conveyance.
CONVERTIBLE DEBENTURES AND SPECIAL NOTES. In March and April of 1998,
the Company completed the private placements of $27.5 million in 9% Convertible
Debentures, Series 1 general obligation notes and $10 million of 9% Special
Notes, Series A and Series B exercisable into $10 million principal amount of 9%
Convertible Debentures, Series 2 and Series 3.
The Series 1 debentures bear interest at a rate of 9% per year payable
in arrears in equal semi-annual installments on March 31st and September 30th of
each year. The debentures have a maturity date of March 31, 2003. The debentures
are convertible at the option of the holder into the Company's Common Stock
prior to March 27, 2003 at a conversion price of Cdn. $1.70 per share, subject
to adjustment in certain circumstances. The debentures are redeemable in whole
or in part by the Company at any time after March 31, 2002 at the principal
amount thereof, together with any accrued but unpaid interest. The Company may,
at any time after September 30, 1999 and prior to the Maturity Date require that
all outstanding convertible debentures be converted subject to achieving a stock
price of Cdn. $2.38 per share.
F-21
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Special Notes, Series A and Series B entitle the holder to acquire
the same principal amount of 9% convertible debentures Series 2 and Series 3, at
no additional cost, at any time on or before the earlier of (i) the fifth
business day after a final prospectus qualifying the convertible debentures to
be issued upon the exercise of the Special Notes and (ii) the date 18 months
after the closing of the Special Notes Series A and 6 months after the closing
of the Special Notes Series B. The trustee of the Special Notes will exercise
any Special Notes not exercised prior to the above date and the convertible
debentures will be issued to the noteholders without any further action on the
part of the holder. See Note 22, "Subsequent Events".
The convertible debentures, Series 2 and Series 3, bear interest at a
rate of 9% per annum payable in arrears in equal semi-annual installments on
March 31st and September 30th of each year. The debentures have a maturity date
of August 31, 2003. The debentures will be convertible at the option of the
holder into common shares at a conversion price of Cdn. $1.70 per common share,
subject to adjustment in certain circumstances. If the holder elects to convert
the debentures prior to the date of the third semi-annual coupon, the holder
will receive a 5% premium on the number of common shares issued upon conversion.
The debentures are redeemable in whole or in part by the Company at any time
after August 31, 2002 at the principal amount thereof, together with any accrued
but unpaid interest. The Company may, at any time after August 31, 2001 and
prior to the Maturity Date require that all outstanding convertible debentures
be converted subject to achieving a stock price of Cdn. $2.13 per share.
The Company did not receive clearance of the Special Notes in certain
Canadian jurisdictions by August 9, 1998 nor in the U.S. by September 21, 1998
and, therefore, holders of Series A Special Notes had the right to elect
retraction of up to $1.056 million in funds held in escrow pending regulatory
approval. Certain holders elected to retract a total of $988,000 plus accrued
interest. The balance was released from escrow. In addition, holders of both
Series A and Series B notes received the right to receive 10% more common shares
issued upon conversion due to not receiving clearance.
In connection with the issuance of the Convertible Debentures, Series 1
the Company granted the agent 2,109,974 compensation options that entitle the
holder to receive cash payment from the Company equal to the difference between
the closing market price of a common share of the Company on the trading day
immediately preceding the exercise date and Cdn $1.70 per share, subject to
adjustment in certain circumstances. The options expire on March 25, 2000.
Pursuant to an agreement dated December 31, 1998, the options were repriced to
Cdn. $0.46 per common share. The fair value of such options was determined to be
approximately $358,577 and is being amortized over the two-year life of the
options. At December 31, 1998, $209,170 remained unamortized.
In connection with the issuance of the Special Notes, Series A and
Series B, the Company granted the agent 737,903 special compensation warrants
that entitle the holder to acquire the same number of compensation options. The
options each entitle the holder to acquire, subject to adjustment, one common
share of the Company for Cdn. $1.70 per share at any time on or prior to April
8, 2000.
F-22
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
COGNISEIS DEVELOPMENT. On May 1, 1996, Texstar LLC purchased equipment
and financed the purchase through the vendor. The amount financed was $110,365.
As of October 31, 1996, $100,395 was assigned to the Company and was
outstanding. The equipment has also been assigned to the Company. The amount
financed is collaterized by the equipment. Under the terms, monthly payments of
principal and interest are due. The interest rate is 15% per annum. At December
31, 1998, $28,912 remained outstanding.
NOTE 10. INCOME TAXES
The components of the provision for income taxes is as follows:
December 31, December 31, August 31,
1998 1997 1997
------------ ------------ -----------
Current Tax Expense
U.S. Federal $ -- $ -- $ --
State and Local -- -- --
------------ ------------ -----------
Total Current -- -- --
------------ ------------ -----------
Deferred Tax Expense
U.S. Federal -- -- --
State and Local -- -- --
------------ ------------ -----------
Total Deferred -- -- --
------------ ------------ -----------
Total Tax Provision from
Continuing Operations $ -- $ -- $ --
------------ ------------ -----------
------------ ------------ -----------
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
December 31, December 31, August 31,
1998 1997 1997
------------ ------------ -----------
Federal Income Tax Rate (34.0)% (34.0)% (34.0)%
Deferred Tax Charge (Credit) -- -- --
Effect of Valuation Allowance 34.0 % 34.0 % 34.0 %
State Income Tax, Net of Federal Benefit -- -- --
------------ ------------ -----------
Effective Income Tax Rate 0.0 % 0.0 % 0.0 %
------------ ------------ -----------
------------ ------------ -----------
At December 31, 1998 and 1997 and August 31, 1997 the Company had net
carryforward losses of approximately $43,029,000, $11,029,000 and $4,535,000,
respectively. A valuation allowance equal to the tax benefit for deferred taxes
has been established due to the uncertainty of realizing the benefit of the tax
carryforward.
F-23
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Deferred tax assets and liabilities reflect the net tax effect of
temporary differences between the carrying amount of assets and liabilities for
financial reporting purposes and amounts used for income tax purposes.
Significant components of the Company's deferred tax assets (liabilities) are as
follows:
December 31, December 31, August 31,
1998 1997 1997
------------ ------------ ------------
Non-Current Deferred Tax Assets
(Liabilities):
Exploration and development costs
capitalized for financial purposes,
expensed for tax purposes $(11,380,539) $ (2,472,913) $ ( 968,546)
Depreciation Expense 495,664 35,949 (43,341)
Loss Carry-forwards 14,629,860 3,749,860 1,541,900
------------ ------------ ------------
3,744,985 1,312,896 530,013
Less: Valuation Allowance (3,744,985) (1,312,896) (530,013)
------------ ------------ ------------
Net Deferred Tax Assets (Liabilities) $ -- $ -- $ --
------------ ------------ ------------
------------ ------------ ------------
Net operating loss carryforwards expire as follows:
2011 $ 4,535,000
2012 $ 6,494,000
2013 $ 32,000,000
NOTE 11. SEGMENTED INFORMATION
The Company's principal activity is the exploration and development of
petroleum properties in the United States. The principal assets in Canada
consist primarily of cash, funds held in trust, amounts receivable, prepaid
expenses and investments. The allocation of the total assets of the Company
between the two segments are as follows:
December 31, December 31, August 31,
1998 1997 1997
------------ ------------ ------------
Canada $ 4,784,298 $ 1,582,629 $ 3,345,347
United States 90,455,949 34,633,500 18,175,533
------------ ------------ ------------
Total identifiable assets $ 95,240,247 $ 36,216,129 $ 21,520,880
------------ ------------ ------------
------------ ------------ ------------
F-24
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 12. REDEEMABLE PREFERRED STOCK
The Company authorized a new issue of Class A Preferred Shares Series
1. Dividends are payable at 10% per annum of the amount paid or deemed to have
been paid for the shares, payable quarterly. Dividends are cumulative. For the
first eight quarterly dividends, the Company may elect to pay the dividends in
common shares, at a price based on the trailing average price of the Company's
common shares as at the end of the applicable quarter. The Company has the
option to redeem the Preferred Shares at any time. If a qualified public
offering of the Company's common stock is not consummated within the three year
period commencing January 23, 1998, the holders of a majority of the Preferred
Shares may elect to cause the Company to redeem all of the Preferred Shares. On
the fifth anniversary of the sale of the Preferred Shares, the Company is
required to redeem all of the Preferred Shares. The Preferred Shares are
redeemable at an amount equal to the purchase price plus any dividends cumulated
but not paid. At December 31, 1998, 9,488,140 Preferred Shares were outstanding
with a redemption value of $9,488,140.
The Class A Preferred Shares Series 1 will rank equally with all other
series of Class A Preferred shares then outstanding. The Class A Preferred
shares are entitled to priority over the common shares of the Company and over
any other shares of the Company ranking junior to the Class A Preferred shares
with respect to priority in the payment of dividends and the distribution of
assets in the event of the liquidation, dissolution or winding-up of the
Company, whether voluntary or involuntary, or any other distribution of the
assets of the Company among its shareholders for the purpose of winding-up its
affairs.
NOTE 13. WARRANTS
During the period ended December 31, 1997, the Company issued 4,885,800
common shares on the exercise of the following special warrants:
(i) CLASS A SPECIAL WARRANTS
556,000 common shares and 139,000 non-transferable share purchase
warrants (the "Class A Warrants") on the exercise of 556,000 Class A
Special Warrants. Each Class A Warrant entitles the holder to purchase
an additional common share at Cdn. $1.80 per share on or before
February 11, 1998 and at Cdn. $2.07 on or before February 11, 1999. The
Class A Warrants remained unexercised at December 31, 1998 and expired
unexercised in the first quarter of 1999.
(ii) CLASS B SPECIAL WARRANTS
1,540,000 common shares and 1,540,000 non-transferable share purchase
warrants (the "Class B Warrants") on the exercise of 1,400,000 Class B
Special Warrants. Two Class B Warrants entitle the holder to purchase
an additional common share at Cdn. $2.15 per share on or before March
17, 1998 and at Cdn. $2.47 per share on or before March 17, 1999. The
Company has also granted the agent special options to acquire, without
additional consideration, 400,000 Class B Warrants. During the period
ended December 31, 1997, an additional 91,864 common shares were issued
for proceeds of $141,396 on the exercise of 183,728 Class B Warrants.
Of the Class B warrants, 1,756,272 warrants remained unexercised at
December 31, 1998 and expired unexercised in the first quarter of 1999.
F-25
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(i) CLASS C SPECIAL WARRANTS
432,300 common shares and 216,000 non-transferable share purchase
warrants (the "Class C Warrants") on the exercise of 393,000 Class C
Special Warrants. Each Class C Warrant entitles the holder to
purchase an additional common share at Cdn. $2.55 per share on or
before April 13, 1998 and at Cdn. $2.95 per share on or before April
12, 1999. The Company has also granted the agent special options to
acquire, without additional consideration, 40,000 Class C Warrants.
As at December 31, 1998, 256,000 Class C Warrants remained
unexercised and expired unexercised in 1999.
(ii) FIRST TRANCHE CLASS D SPECIAL WARRANTS
2,101,000 common shares and 1,050,000 non-transferable share purchase
warrants (the "First Tranche Class D Warrants") on the exercise of
1,910,000 First Tranche Class D Special Warrants. Each First Tranche
Class D Warrant entitles the holder to purchase an additional common
share at a price of Cdn. $3.50 per share on or before April 18, 1998
and at Cdn. $4.25 per share on or before October 18, 1998. The
Company has issued 50,000 common shares, at an ascribed price of
$116,571 to the agents and has also granted the agents 191,000 share
purchase warrants (the "Agents' First Tranche Warrants"). Each
Agents' First Tranche Warrant is exercisable to purchase one common
share at a price of Cdn. $3.25 per share on or before April 18, 1998
and at Cdn. $3.75 per share thereafter until October 18, 1998,
subject to certain exercise restrictions. The First Tranche Class D
Warrants and the Agents' First Tranche Warrants expired unexercised
in 1998; and
(iii) SECOND TRANCHE CLASS D SPECIAL WARRANTS
256,500 common shares and 128,250 non-transferable share purchase
warrants (the "Second Tranche Class D Warrants") on the exercise of
256,500 Second Tranche Class D Special Warrants. Each Second Tranche
Class D Warrant entitles the holder to purchase an additional common
share at a price of Cdn. $3.50 per share on or before June 26, 1998
and at Cdn. $4.25 per share on or before December 28, 1998. The
Company has also granted the agents 25,650 share purchase warrants
(the "Agents' Second Tranche Warrants"). Each Agent's Second Tranche
Warrant is exercisable to purchase one common share at Cdn. $3.25 per
share until June 26, 1998 and at Cdn. $3.75 per share thereafter
until December 28, 1998, subject to certain exercise restrictions.
The Second Tranche Class D Warrants and the Agents' Second Tranche
Warrants expired unexercised in 1998.
Proceeds from the issuance of the special warrants totaling $8,750,447
were received during the period ended August 31, 1997. No additional
consideration was received on the exercise of the special warrants. For the
periods ended December 31, 1997 and August 31, 1997, the Company incurred a
total of $120,114 and $1,114,010, respectively, for commissions and issue and
prospectus costs related to the special warrant offerings.
F-26
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following additional warrants that were outstanding at December 31,
1997 were exercised or expired unexercised in 1998:
(i) of the warrants to purchase common shares at Cdn. $1.30 per share
on or before December 5, 1998: 5,000 were exercised in April for
proceeds of $4,561, 89,900 were exercised in June for proceeds of
$79,585 and the remaining 393,600 expired unexercised in December;
(ii) 142,900 warrants to purchase common shares at Cdn. $2.05 per share
on or before December 15, 1998 expired unexercised.
NOTE 14. STOCK OPTIONS
Stock options activity is summarized as follows:
Outstanding
Outstanding and and
Per Exercisable at Options Exercisable at
Fiscal Year Share December 31, Options Exercised * December 31, Date of
Granted $ CDN 1997 Granted or Cancelled 1998 Expiration
- ----------- ----- --------------- ------- ------------ -------------- ----------
1995 0.21 45,000 -- (45,000) * -- 1/30/98
1996 0.33 42,000 -- (42,000) * -- 7/17/99
1997 2.30 40,000 -- (40,000) -- 11/21/98
1997 2.60 298,700 -- 298,700 1/16/00
1997 3.45 550,000 -- 550,000 4/25/00
1997 1.95 1,738,764 -- (207,225) 1,531,539 12/19/02
1997 2.98 300,000 -- 300,000 10/17/00
1998 1.83 -- 25,000 25,000 5/06/03
1998 1.61 -- 75,000 75,000 1/15/03
1998 1.69 -- 20,000 20,000 3/01/03
1998 1.68 -- 45,000 45,000 3/15/03
1998 1.89 -- 25,000 25,000 4/01/03
1998 1.96 -- 10,000 10,000 4/15/03
1998 1.60 -- 10,000 10,000 6/16/03
--------- ------- -------- ---------
3,014,464 210,000 (334,225) 2,890,239
--------- ------- -------- ---------
--------- ------- -------- ---------
Outstanding
Outstanding and and
Per Exercisable at Options Exercisable at
Fiscal Year Share August 31, Options Exercised December 31, Date of
Granted $ CDN 1997 Granted or Cancelled 1997 Expiration
- ----------- ----- --------------- ------- ------------ -------------- ----------
1995 0.21 45,000 -- -- 45,000 1/30/98
1996 0.33 42,000 -- -- 42,000 7/17/99
1997 2.30 40,000 -- -- 40,000 11/21/98
1997 2.60 298,700 -- -- 298,700 1/16/00
1997 3.45 750,000 -- (200,000) 550,000 4/25/00
1997 1.95 -- 1,738,764 -- 1,738,764 12/19/02
1997 2.98 -- 300,000 -- 300,000 10/17/00
--------- --------- -------- ---------
1,175,700 2,038,764 (200,000) 3,014,464
--------- --------- -------- ---------
--------- --------- -------- ---------
F-27
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Outstanding
Outstanding and and
Per Exercisable at Options Exercisable at
Fiscal Year Share October 31, Options Exercised August 31, Date of
Granted $ CDN 1996 Granted or Cancelled 1997 Expiration
- ----------- ----- --------------- --------- ------------ -------------- ----------
1995 0.21 85,000 -- (40,000) 45,000 1/30/98
1996 0.33 527,000 -- (485,000) 42,000 7/17/99
1996 0.50 42,000 -- (42,000) -- --
1997 2.30 -- 80,000 (40,000) 40,000 11/21/98
1997 2.60 -- 736,000 (437,300) 298,700 1/16/00
1997 3.45 -- 750,000 -- 750,000 4/25/00
------- --------- ---------- ---------
654,000 1,566,000 (1,044,300) 1,175,700
------- --------- ---------- ---------
------- --------- ---------- ---------
STOCK OPTION PLAN - In 1997, the Company instituted a stock option
plan (the "Plan") covering eligible directors and employees, as defined in
the Plan. The Company may issue up to 3,020,988 shares of Common Stock under
the Plan, of which options to acquire 130,749 shares of Common Stock remained
available for grant at December 31, 1998. Such maximum includes options
issued to certain officers, directors and key employees at the discretion of
the Board prior to the adoption of the Plan. Under the Plan, the exercise
price of each option equals the market price of Benz's Common Stock on the
date of grant. Options become exercisable immediately and expire within a
period determined at grant, not to exceed ten years.
At the February 19, 1999 meeting of the Board of Directors,
2,102,319 options held by certain employees, officers and directors of the
Company were cancelled. The Board reissued 2,112,349 options to these certain
employees, officers and directors at an exercise price of Cdn. $0.50 per
share. In addition, 300,000 options held by a former officer of the Company
were cancelled and 500,000 options were reissued at an exercise price of Cdn.
$0.53 per share as per his termination agreement. See Note 19, "Commitments
and Contingencies" for a discussion of the termination agreement.
The repricing of the options is subject to VSE approval. Of the
options above, 2,023,700 options are held by executive officers and
directors of the Company and repricing of such options requires shareholder
approval in addition to VSE approval.
The Company accounts for its stock option transactions under the
provisions of APB No. 25. The following pro forma information is based on
estimating the fair value of grants based upon the provisions of SFAS No.
123. The fair value of each option granted during the periods indicated has
been estimated as of the date of grant using the Black-Scholes option pricing
model with the following assumptions:
Year Ended Four Months Ended Ten Months Ended
December 31, 1998 December 31, 1997 August 31, 1997
----------------- ----------------- ----------------
Risk Free Interest Rate 4.59% 5.57% 5.57%
Life of the Options 2 years 2-3 years 2-3 years
Expected Dividend Yield 0% 0% 0%
Expected Volatility 138% 30% 30%
Weighted Average Fair Value of
Options Granted $0.14 $0.40 $0.60
F-28
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Accordingly, the Company's pro forma net loss and net loss per share
assuming compensation cost was determined under SFAS No. 123 would have been the
following:
Year Ended Four Months Ended Ten Months Ended
December 31, 1998 December 31, 1997 August 31, 1997
----------------- ----------------- ----------------
Net Loss $ (12,550,062) $ (2,864,698) $ (2,059,798)
Net Loss Per Basic Share (0.39) (0.10) (0.09)
December 31, 1998 December 31, 1997 August 31, 1997
----------------- ----------------- ---------------
Weighted Average Option Price Per Share
(Cdn$):
Granted $1.71 $2.10 2.99
Exercised 0.27 -- 1.32
Cancelled 2.01 3.45 2.30
Outstanding at End of Period 2.39 2.35 2.96
Exercisable at End of Period 2.39 2.35 2.96
Weighted Average Remaining Life of
Options Outstanding 36 months 32 months 29 months
NOTE 15. RETIREMENT PLAN
The Company sponsors a 401(k) Profit Sharing Plan (the "401(k)
Plan") under Section 401(k) of the Internal Revenue Code. This plan covers
all eligible employees of the Company. The Company matches $.50 for each
$1.00 of employee deferral, subject to limitations imposed by the Internal
Revenue Service. Company contributions to the 401(k) Plan during the periods
ended December 31, 1998, December 31, 1997 and August 31, 1997 totaled
$75,416, $12,024 and $23,452, respectively.
NOTE 16. RELATED PARTY TRANSACTIONS
The Company executed a secured short-term interest-bearing note with
Starbucks Trust ("Starbucks"), a trust controlled by the wife of the Chairman
& CEO, in the amount of up to $2.5 million. The Chairman & CEO disclaims
beneficial ownership or control of the trust. Starbucks invested the funds
with brokerage accounts that used a portion of the funds to purchase the
Company's stock. Interest accrues at a rate of 9% per annum on outstanding
advances. All outstanding advances and accrued interest were due on December
31, 1998. Due to a standstill agreement described below, at December 31, 1998
advances totaling $2.9 million plus accrued interest remained outstanding.
F-29
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In July 1998, the Company entered into a purchase and sale agreement
with Starbucks to acquire all of Starbucks' interest in certain oil and gas
leases and properties, along with other associated assets. The purchase price
was $2,332,537 in cash and 600,000 common shares of the Company valued at
$696,661, such price subject to post-closing adjustments. Starbucks has
guaranteed that the assets acquired, on January 1, 2000 or such earlier date
as Starbucks may request, will have a value of not less than $3,032,537, such
valuation defined in the agreement. In the event the valuation is less than
the amount guaranteed, Starbucks is required to pay the difference to the
Company. During 1998, the Company paid approximately $1.1 million of the
principal amount due to Starbucks plus accrued interest. At December 31,
1998, $1.2 million remained outstanding and is currently subject to a
standstill agreement described below. The Company is accruing interest on the
unpaid balance due Starbucks at a rate of 9% per annum. The Starbucks
transaction was reviewed and approved by a committee of outside directors and
received approval from the Vancouver Stock Exchange.
During 1998, the Company sold certain shares of Stanford Energy
stock for proceeds of Cdn. $1,183,735 and transferred such proceeds to
Slattery Trust, a trust controlled by Prentis B. Tomlinson. In addition, the
Company transferred certain shares of Stanford Energy stock to the account of
Slattery Trust. Such stock was subsequently sold. Proceeds from the above
transactions were used by Slattery Trust to purchase Benz Energy Ltd. common
stock on the open market on behalf of the Company. The 600,000 shares of Benz
Energy common stock purchased was then transferred to Starbucks Trust in
satisfaction of the terms of the Starbucks acquisition discussed above.
In April 1998, the Company agreed to acquire certain petroleum
interests and assume certain liabilities from Calibre, a private limited
liability company owned by certain directors and officers of the Company, and
to acquire certain petroleum interests owned by certain directors and
officers of the Company. The Company paid $261,000 in cash, forgave
$1,450,000 of Calibre accounts payable to the Company, assumed $450,000 in
debt, issued promissory notes totaling $2,000,000 and will issue 1,927,426
shares of the Company at an ascribed price of Cdn. $2.80 per share in 1999.
The promissory notes bear interest at 10% per annum and were due, with
accrued interest, half on April 1, 1998 and the balance on September 1, 1998.
Payments of $215,000 were made during 1998 and at December 31, 1998,
$1,785,000 principal amount remained outstanding plus accrued interest. Of
this amount, $1,485,000 and $200,000, due respectively to Prentis B.
Tomlinson Jr. and Starbucks Trust, are subject to a standstill agreement
described below. In addition, Mr. Tomlinson has agreed to allow amounts owed
to him under such promissory notes to be offset against the Starbucks note
receivable described above. The Caliber transaction was reviewed and approved
by a committee of outside directors and received approval from the Vancouver
Stock Exchange.
F-30
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In December 1998, as part of certain transactions by and between the
Company and Shell Capital, Inc., the Company was required to deliver an
agreement whereby Starbucks and Mr. Tomlinson each agreed to a deferment of
payments of any amounts owing to them from Benz, Texstar or any affiliate
(the "Benz Entities") until the termination date as defined in the Shell
financing arrangement. The parties agreed further not to pursue collection of
any such amounts from Benz Entities during such deferment period. Mr.
Tomlinson and Starbucks entered into such agreement in consideration of a
mutual deferment by the Benz Entities to collect or risk payments of amounts
owed to them by Tomlinson, Starbucks, Texstar Holdings L.L.C. and Security
Oil, L.L.C. (See Note 9, "Long-term Debt" for a description of the Shell
financing).
Certain debt, as described in Note 9, "Long-term Debt" is guaranteed
by Mr. Tomlinson, Slattery Trust, whose beneficiary is Mr. Tomlinson,
Calibre, certain affiliates of Calibre, and Texstar Holdings.
At August 31, 1997, the Company had advanced funds to Calibre
($453,132) and Calibre Ecuador, Inc. ($213,187). Calibre is owned by Benz'
controlling shareholders and Calibre Ecuador, Inc. is owned 50% by Benz. The
advances to Calibre Ecuador in the amount of $213,187 have been written off
as of August 31, 1997, as Calibre Ecuador has no assets or other means with
which to repay the advances. The Calibre advances bear no interest and are
due upon demand. Included in this amount is an overhead reimbursement charge
to Calibre of $66,276. This amount has been reflected in the financial
statements as a reduction of general and administrative expense.
During the four-month period ended December 31, 1997, the Company
made additional advances to Calibre Ecuador of $189,005. These advances were
written off as of December 31, 1997. During the year ended December 31, 1998,
the Company made advances to Calibre Ecuador of $319,327. These advances were
written off during the year.
Additionally, during the four-month period ended December 31, 1997,
the Company's net advances to Calibre increased to $1,768,772. At December
31, 1997, $1,450,000 of this amount was reclassified as a prepayment relating
to the acquisition of properties from Calibre. The balance of $318,772 was
written off as a bad debt.
The Company participates in various oil and gas activities with
related parties. All transactions related to such activities are in the
normal course of business. As of December 31, 1998 and 1997, balances with
related parties were as follows:
December 31, 1998 December 31, 1997
----------------- -----------------
Joint Interest Billing Receivable $ 898,459 (1) $ 418,679
Other Receivables 145,000 95,000
Drilling Advances Payable --- 214,776
(1) Includes amount currently involved in litigation. See Note 19, "Commitments
and Contingencies".
F-31
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
During the periods ended December 31, 1998, December 31, 1997 and
August 31, 1997, the Company was charged $40,445, $14,250 and $106,113,
respectively for management, professional and office services provided by
companies under significant influence of former directors of the Company.
During the period ended August 31, 1997, the Company acquired Cdn.
$200,000 unsecured convertible debenture (the "Stanford Debenture") issued by
Stanford. The Stanford Debenture bore interest at a rate of 8% per annum,
payable quarterly, maturing in April 2000, and was convertible, at the option
of the Company, into 340,000 common shares of Stanford and 170,000
non-transferable share purchase warrants. Each warrant entitled the Company
to purchase an additional flow-through common share of Stanford at Cdn. $0.60
per share, expiring one year after issue. On August 6, 1997, the Stanford
Debenture was retired and the Company was repaid Cdn. $222,937.
During the period ended August 31, 1997, the Company completed
certain agreements with Calibre whereby the Company:
(i) acquired 20% working interests in each of four oil and gas prospects
located in Mississippi, paid through the issuance of 254,863 common
shares of the Company at a deemed price of $573,592. In addition,
the Company reimbursed Calibre $80,000 for data costs, and
(ii) acquired a 5.5% working interest in and to lease options, seismic
permits and contracts relating to the White Castle field located in
Iberville Parish, Louisiana through the issuance of 343,000 common
shares of the Company, at a deemed price of $442,925, plus $425,000
cash, for a total of $867,925.
NOTE 17. EARNINGS PER SHARE
Securities that could potentially dilute basic earnings per share in
the future that were not included in the computation of diluted earnings per
share because their effect would have been antidilutive are as follows:
December 31, 1998 December 31, 1997 August 31, 1997
----------------- ----------------- ---------------
Warrants 4,389,175 3,407,572 9,896,350
Options 2,890,239 3,014,464 1,175,700
--------- --------- ----------
Total Shares 7,279,414 6,422,036 11,072,050
--------- --------- ----------
--------- --------- ----------
NOTE 18. GOING CONCERN ISSUE
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. The
Company has experienced significant delays in the completion of certain wells
that are a key component of obtaining new financing for the Company. These
delays have created a significant working capital deficit and depleted cash
reserves. As a result, the Company has secured standstill agreements on
certain financial debt covenants of which it is currently in violation. In
addition, the Company was able to extend the maturity dates of currently due
debt to July 31, 1999 in anticipation of completing a major well. In the
event that the well is not completed timely and the Company is not able to
refinance the current debt by the extended due dates, the debt may ultimately
be called. The Company may not be able to meet such demands.
F-32
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company anticipates the completion of the major well that is
necessary to obtain additional financing. The Company also is currently in
negotiations with several institutions to obtain production financing to
repay currently due debt. The Company also anticipates obtaining significant
additional equity in the near term through a private placement. In addition,
the Company has closed the sale of one non-core property for approximately
$507,500 and is negotiating the sale of an interest in another property for
over $4.0 million of proceeds. One additional property is currently the
subject of negotiations for sale with proceeds expected to exceed $1.0
million.
NOTE 19. COMMITMENTS AND CONTINGENCIES
LITIGATION - The Company is involved in litigation and is subject to
governmental and regulatory controls arising in the ordinary course of
business. It is the opinion of the Company's management that all claims and
litigation involving the Company are not likely to have a material adverse
effect on its financial position or results of operations.
The Company has filed suit against STB Energy Inc., Hilton
Petroleum, Inc., Trimark Resources, Inc., Westport Petroleum, Inc. and
Bradley M. Colby alleging breach or participation and operating agreements,
suit on a sworn account, fraudulent inducement to contract, fraud,
constructive fraud, breach of fiduciary duty and conspiracy, and seeks a
declaratory judgement on corporate veil and alter ego theories. The suit is
pending and trial date has been set.
The Company has filed suit against Rainbow Oil and Gas, Inc.
("Rainbow") alleging breaches of participation, operating and letter
agreements covering certain prospects in Texas, Louisiana, and Mississippi.
Rainbow counter-claimed and seeks relief in the form of damages for breach of
contract, fraud and punitive damages plus attorneys' fees and interest. The
lawsuit is presently in the initial stages of discovery. Although the outcome
of this lawsuit can not be predicted with certainty, management will
vigorously defend the counterclaims and believes that such counterclaims will
not have a material adverse effect on the financial position or results of
operations of the Company.
ENVIRONMENTAL - Benz, as owner and operator of oil and gas
properties, is subject to various federal, state, and local laws and
regulations relating to discharge of materials into, and protection of, the
environment. These laws and regulations may, among other things, impose
liability on the lessee under and oil and gas lease for the cost of pollution
clean-up resulting from operations, subject the lessee to liability for
pollution damages and impose restrictions on the injection of liquids into
subsurface strata. Benz maintains insurance coverage that it believes is
customary in the industry, although it is not fully insured against all
environmental risks.
The Company is not aware of any environmental claims existing as of
December 31, 1998, that would have a material impact on its financial
position or results of operations. There can be no assurance, however, that
current regulatory requirements will not change, or past non-compliance with
environmental laws will not be discovered on the Company's properties.
F-33
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
TERMINATION AGREEMENTS - The Company terminated a key officer's
employment without cause and requested such officer to resign all of his
positions with the Company except his position as a Director of the Company.
As defined in his employment contract with the Company, such officer was
entitled to certain liquidated damages, and not as a penalty, in the amount
of $1,150,000 payable as follows:
- Payments of $10,000 per month for 12 months commencing
February 15, 1999;
- Payment of $400,000 on January 15, 2000;
- Payment of $200,000 on July 15, 2000; and
- Payment of the balance due under his agreement, as adjusted,
on January 15, 2001.
In addition, the officer was granted new stock options in lieu of
the 300,000 shares granted December 18, 1997. The new stock option agreement
dated February 15, 1999 is for 500,000 shares of Common Shares $0.01 par
value. The remaining agreed liquidated damages due on January 25, 2001 shall
be reduced by the difference between the option price under the new option
agreement for 500,000 shares of Common Shares and the 500,000 option shares
as of the date the payment of the balance of the agreed liquidated damages.
All cash payments payable to the officer shall be reduced by applicable
federal, state and local withholding taxes. As a Director to the Company, he
will be provided the same Director's Liability Insurance provided to other
Directors. The Company also agreed that at its sole cost and expense to
continue current health insurance coverage as required by applicable law
until January 5, 2000; however, he notified the Company that he would forfeit
such coverage as of April 15, 1999 and resigned as a director of the Company.
On December 16, 1998, the Company entered into an agreement with
EnCap that, should Mr. Tomlinson's employment be terminated, except for
cause, following certain events, then EnCap on behalf of the Company will
make a cash payment to Mr. Tomlinson of $1.0 million within 30 days of
severance, and the Company will enter into a consulting agreement with a
three-year term providing for payments of $185,000 per annum, and grant
Mr. Tomlinson a permanent overriding royalty interest in certain properties.
These payments are obligations of the Company and EnCap has agreed to provide
financing to fund such payment obligations.
LEASE COMMITMENTS - The Company has entered into a certain
noncancelable operating lease agreement for office space in Houston, Texas.
The lease term expires on January 31, 2003. The lease terms are subject to
certain operating expense escalations.
Rent expense recorded in the statement of operations is $381,084,
$49,977 and $105,158 for the periods ended December 31, 1998, December 31,
1997 and August 31, 1997, respectively.
Future minimum lease payments under the lease agreement for each of
the years ended December 31, are as follows:
1999 $ 396,187
2000 396,187
2001 396,187
2002 396,187
2003 33,016
-----------
$ 1,617,764
-----------
-----------
F-34
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 20. SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES
A summary of non-cash investing and financing activities is
presented below:
In December 1998, the Company acquired all of Mobil's right, title
and interest in the deep rights below the existing production in the Old
Ocean Unit with $2.0 million in proceeds from the issuance of promissory
notes to certain investors.
In October 1998, $250,000 principal amount of debentures was
converted into 238,570 common shares.
In July 1998, the Company acquired certain proved and unproved
non-producing oil and gas properties from Starbucks Trust for cash and
600,000 shares of Benz common stock valued at $696,661.
In May 1998, the Company entered into a property swap agreement with
Southern Gas.
In April 1998, the Company acquired certain petroleum interest from
Calibre for cash, the assumption of liabilities, the forgiveness of advances,
the issuance of promissory notes and the issuance of 1,927,400 shares of Benz
common stock valued at approximately $2,296,000.
In January 1998, the Company acquired certain oil and gas interests
from Lasco for a note payable that was subsequently converted to 2,542,372
shares of Benz common stock valued at $3.0 million and 9,488,140 shares of
redeemable preferred stock, as adjusted for reduction in purchase price,
valued at $1 per share. In addition, the Company paid interest on the Lasco
Acquisition note and dividends on the preferred shares into which the note
was converted with common shares of the company valued at $782,500.
At October 31, 1996, the following assets and liabilities were
assigned to Texstar in exchange for the issuance of 100% of Texstar's common
stock.
Cash $ 559,386
Receivables 94,914
Prepaid Expenses 321,542
Oil and Gas Properties, Net 1,225,909
Property and Equipment, Net 276,390
Organization Costs, Net 8,447
Other Assets 6,025
-----------
Total Assets Assigned $ 2,492,613
-----------
-----------
Accounts Payable and Accrued Expenses $ 335,421
Drilling Advances 648,150
Debt 485,954
Due to Related Parties 256,123
-----------
Total Liabilities Assigned $ 1,725,648
-----------
-----------
Net Assets Assigned $ 766,965
-----------
-----------
F-35
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
During the initial period ended August 31, 1997, the Company
acquired properties in exchange for stock valued at $1,016,516 and issued
options to acquire common stock, for no additional consideration, for
services valued at $116,571.
Supplemental Disclosure of Cash Flow Information
For the Year Ended For the Four Months Ended For the Ten Months Ended
December 31, 1998 December 31, 1997 August 31, 1997
------------------ ------------------------- ------------------------
Cash paid during the period for:
Interest, net of amounts
capitalized $ 2,316,257 $ 84,752 $ 41,200
Income and other taxes, net of
refunds -- -- --
NOTE 21. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts
receivable, accounts payable and long-term debt. The carrying amounts of
cash, accounts receivable and accounts payable approximate fair value due to
the highly liquid nature of these short-term instruments. The long-term debt,
excluding the convertible debentures and special notes, approximates fair
value due to the revision of terms at year-end of the bank indebtedness and
the EnCap facility and the closing at year end of the Mobil promissory notes
and the Shell production payment, all at current terms available to the
Company. The convertible debentures and special notes approximate fair value
based on the fact that holders elected to maintain the current terms when
offered the ability to modify such terms.
NOTE 22. SUBSEQUENT EVENTS
The following events took place subsequent to December 31, 1998:
- The Company executed the Sixth through Ninth Amendments to
the BOCP Credit Facility wherein the maturity of such facility
was changed to July 31, 1999. The Company has been advanced
$3,000,000 from this facility under these amendments.
- Certain holders of the convertible debentures ($7,050,000) elected
to be paid for the six-month period ending March 31, 1999 with
1,057,500 shares of common stock in lieu of $315,000 of interest.
The stock price used in the swap was based on the 10 day trailing
closing average through March 26 1999.
- Effective March 31, 1999, a certain debenture holder has agreed to
exchange $250,000 of debentures for 541,700 common shares.
F-36
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
- Pursuant to the terms of the Series B Special Notes, the Company
issued Series 3 Debentures in exchange for similar amounts of the
Series B Special Notes.
- The Company and Series 1 debenture holders have agreed to lower
the conversion price of the debentures from Cdn. $1.70 per common
share to Cdn $1.40 per common share in exchange for certain
changes in the indenture agreement. The Company intends to
approach the Series 3 debenture holders and Series B Special Note
holders for the same changes. The Company has approached the
Series 1 debenture holders to exchange their debentures for
non-redeemable convertible preferred stock in exchange for new
equity to be placed into the Company. The Company intends to
similarly approach the Series 3 Debenture holders. The early
redemption provision of the redeemable preferred stock
decribed in Note 12 relating to a qualified public offering of the
Company's common stock was waived by the holder in May 1999
subject to the completion of the exchange offer.
- The Company is in negotiations with Pioneer Natural Resources to
structure a plan to pay the balance owing Pioneer (approximately
$4 million). Discussions have included one or all of the
following; issuing stock, issuing a promissory note for payment
over an extended period, paying a portion in cash or trading
prospects for some or all of the amounts due.
- The first payment to Western under the Western Geophysical
contract (estimated $3.35 million) in Old Ocean has been deferred
by Western to approximately June 10, 1999. The Company paid
$700,000 on June 18, 1999 and $2.6 million on July 9, 1999. The
Company has reached an oral agreement to pay the remaining balance
of approximately $3.4 million by July 31, 1999.
- The Company sold its Lisbon properties for proceeds of $507,500 in
April 1998.
- On May 18, 1999, the Company migrated from the Yukon Territory,
Canada and became a Delaware corporation, changing its name to
Benz Energy Inc. Authorized capital stock will be 300,000,000
shares of common stock and 100,000,000 shares of preferred stock.
- Certain vendors have initiated suits against the Company for
non-payment of amounts due them. These amounts are reflected in
the Company's accounts payable.
- The Company has executed a letter of intent to sell 37.5% of its
interest in the Old Ocean Prospect for approximately $5.5 million.
The potential purchaser will also have the option to purchase an
additional 12.5% of the Company's interest for approximately
$2 million. Additionally, the letter of intent contains provisions
relating to the overriding royalty interests in the prospect and
the marketing of 3-D seismic geophysical data covering the prospect.
- In July, 1999, the Company issued 34,596 shares of class A, series
II convertible preferred stock and warrants to purchase 3,974,923
shares of common stock in connection with the retirement of 95.45%
of the Mobil financing described in Note 9 and the re-conveyance
of the applicable net profits interest. The balance of the
financing and re-conveyance was settled through a cash payment.
- On July 9, 1999, the Company consummated an offering pursuant to
which it offered to exchange up to 354,250 shares of its class A,
series II preferred stock for any and all of its outstanding 9%
convertible debentures series I, due March 31, 2003 and an
offering to sell up to 121,000 shares of class A, series II
convertible preferred stock. At the closing, the Company exchanged
$15,145,000 principal amount of the 9% convertible debentures and
issued an aggregate of 238,201 shares of class A, series II
preferred stock, which included 44,600 shares issued under the
primary offering and the remainder of which were issued pursuant
to the exchange offer. The proceeds from the exchange offer and
offering of convertible preferred stock were used to retire a
portion of the Mobil financing, to repurchase a portion of the
Old Ocean net profits interest, to pay a portion of the seismic
costs relating to the Old Ocean Prospect and to pay fees and
expenses of the transactions.
NOTE 23. CUSTOMER INFORMATION
MAJOR PURCHASERS - During the year ended December 31, 1998, H&N Gas
Ltd. "H&N Gas" and Tejas Gas Marketing Co. accounted for approximately 51%
and 24%, respectively, of the Company's total oil and gas revenue. For the
four-month period ended December 31, 1997, H&N Gas and KCS Resources ("KCS")
accounted for 75% and 10%, respectively, of the Company's total oil and gas
revenue. For the ten months ended August 31, 1997, KCS, Samaden Oil
Corporation and Energy Operating Limited Partnership accounted for 50%, 30%
and 18%, respectively, of the Company's total oil and gas revenue. No other
purchasers accounted for more than 10% of the Company's total oil and gas
revenue in the periods indicated above. The Company does not believe the loss
of any existing purchaser would have a material adverse effect on the Company.
CONCENTRATION OF CREDIT RISK - The Company's revenues are derived
principally from uncollateralized sales to customers in the oil and gas
industry; therefore, customers may be similarly affected by changes in
economic and other conditions within the industry. Benz has not experienced
significant credit losses on such sales.
NOTE 24. SUPPLEMENTAL OIL AND GAS DISCLOSURES (Unaudited)
The following supplemental unaudited information regarding the
Company's oil and gas activities is presented pursuant to the disclosure
requirements of SFAS No. 69.
F-37
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
AMORTIZATION RATE - All of the Company's oil and gas properties are
located in the United States. The amortization rate per Mcfe was as follows for
the periods indicated:
Year ended December 31, 1998 $1.26
Four months ended December 31, 1997 $2.32
Ten months ended August 31, 1997 $1.07
Amortization per Mcfe reflects depreciation, depletion and amortization
of only capitalized costs of proved oil and gas properties.
COSTS NOT BEING AMORTIZED - The following table sets forth a summary of
oil and gas property costs not being amortized at dates indicated:
December 31, 1998 December 31, 1997 August 31, 1997
----------------- ----------------- ---------------
Property acquisition costs $ 29,239,755 $ 9,389,316 $ 4,514,379
Exploration and development 4,509,014 2,972,199 1,209,092
------------ ------------ -----------
Total $ 33,748,769 $ 12,361,515 $ 5,723,471
------------ ------------ -----------
------------ ------------ -----------
CAPITALIZED COSTS INCURRED - The following table sets forth the
capitalized costs incurred in oil and gas producing activities for the periods
indicated:
Year Ended Four Months Ended Ten Months Ended
December 31, 1998 December 31, 1997 August 31, 1997
----------------- ----------------- ----------------
Acquisition of proved properties $ 18,801,669 $ 3,193,197 $ 1,533,047
Acquisition of unproved properties 20,312,972 4,874,937 3,852,226
Exploration costs 10,875,957 1,680,446 2,311,404
Development costs 5,668,168 4,485,586 2,020,403
Capitalized interest 1,855,306 108,224 --
Property sales (1,059,083) (408,931) (416,060)
------------ ------------ -----------
Total $ 56,454,989 $ 13,933,459 $ 9,301,020
------------ ------------ -----------
------------ ------------ -----------
F-38
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CAPITALIZED COSTS - The following table sets forth the capitalized
costs and associated accumulated depreciation, depletion and amortization,
including impairments, relating to the Company's oil and gas production,
exploration and development activities:
December 31, 1998 December 31, 1997
----------------- -----------------
Proved properties $ 48,409,232 $ 13,341,497
Unproved properties 33,748,769 12,361,515
------------ ------------
82,158,001 25,703,012
Less: Accumulated DD&A (3,840,604) (993,778)
------------ ------------
Total $ 78,317,397 $ 24,709,234
------------ ------------
------------ ------------
Oil and Gas Reserve Information - Proved oil and gas reserve
quantities are based on estimates prepared by the Company's engineers in
accordance with guidelines established by the Securities and Exchange
Commission (SEC). The Company's estimates of proved reserve quantities are
subject to review by R. A. Lenser and Associates, independent petroleum
engineers.
F-39
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
There are numerous uncertainties inherent in estimating quantities
of proved reserves and projection future rates of production and timing of
development expenditures. The following reserve data represents estimates
only and should not be construed as being exact.
Crude Oil,
Condensate and
Natural Gas Liquids Natural Gas
(barrels) (Mcf)
------------------- -----------
Total proved reserves:
Balance October 31, 1996 229,185 10,953,770
Extensions, discoveries and other additions 6,287 1,492,867
Purchases of minerals in place -- --
Revisions of previous estimates 244,749 (9,122,960)
Production (9,281) (83,810)
-------- ----------
Balance August 31, 1997 470,940 3,239,867
Extensions, discoveries and other additions -- --
Purchases of minerals in place 18,500 4,536,528
Revisions of previous estimates (226,887) 60,966
Production (4,506) (223,683)
-------- ----------
Balance December 31, 1997 258,047 7,613,678
Extensions, discoveries and other additions 364,761 26,191,550
Purchases of minerals in place 207,281 6,645,322
Revisions of previous estimates (205,074) (2,036,000)
Production (40,662) (2,009,550)
-------- ----------
Balance December 31, 1998 584,353 36,405,000
-------- ----------
-------- ----------
Proved developed reserves:
October 31, 1996 34,372 857,772
August 31, 1997 157,240 2,462,000
December 31, 1997 141,940 3,922,000
December 31, 1998 409,790 20,209,000
Future Net Cash Flows - Future cash inflows are based on year-end
prices except in those instances where the sale of natural gas or oil is
covered by physical or derivative contract terms providing for higher or
lower amounts. Operating costs, production and ad valorem taxes and future
development costs are based on current costs with no escalation.
F-40
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table sets forth unaudited information concerning
future net cash flows for oil and gas reserves, net of income tax expense.
Income tax expense has been computed using expected future tax rates and
giving effect to tax deductions and credits available, under current laws,
and that relate to oil and gas producing activities. This information does
not purport to present the fair market value of the Company's oil and gas
assets, but does present a standardized disclosure concerning possible future
net cash flows that would result under the assumptions used.
December 31, 1998 December 31, 1997 August 31, 1997
----------------- ----------------- ---------------
Future cash inflows $ 83,053,800 $ 22,670,400 $ 16,197,000
Future production costs (13,885,600) (3,282,800) (2,749,000)
Future development costs (5,846,000) (2,520,100) (2,003,000)
Future income tax expense (21,529,500) (5,735,000) (3,891,300)
------------- ------------ ------------
Future net cash flows 41,792,700 11,132,500 7,553,700
10% annual discount for estimated timing
of cash flows (11,648,800) (3,224,700) (2,393,160)
------------- ------------ ------------
Standardized measure of discounted
future net cash flows relating to
proved oil and gas reserves (1) $ 30,143,900 $ 7,907,800 $ 5,160,540
------------- ------------ ------------
------------- ------------ ------------
(1) Estimated future net cash flows before income tax expense, discounted at 10
percent per annum, totaled approximately $45.6 million, $12.0 million and
$7.8 million as of December 31, 1998, December 31, 1997 and August 31,
1997, respectively.
F-41
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table sets forth the principal sources of change in the
discounted future net cash flows:
Year Ended Four Months Ended Ten Months Ended
December 31, 1998 December 31, 1997 August 31, 1997
----------------- ----------------- ----------------
Beginning of Period $ 7,907,800 $ 5,160,540 $ 9,092,160
------------ ------------ ------------
Increase (decrease) due to:
Sales, net of production costs (3,984,700) (658,000) (376,000)
Net change in prices and production (605,200) (717,000) (36,000)
costs
Extensions, discoveries and improved 34,438,200 -- 1,979,000
recovery, net of related costs
Net change in estimated future 91,000 (680,000) (741,000)
development costs
Revision of previous quantity (4,055,800) (1,523,000) (8,532,000)
estimates
Purchases 5,801,600 6,676,000 --
Accretion of discount 1,198,100 782,000 1,378,000
Change in income taxes (11,455,000) (1,415,250) 2,025,380
Other 807,900 282,510 371,000
------------ ------------ ------------
Net increase (decrease) 22,236,100 2,747,260 (3,931,620)
------------ ------------ ------------
End of Period $ 30,143,900 $ 7,907,800 $ 5,160,540
------------ ------------ ------------
------------ ------------ ------------
IMPACT OF PRICING - The estimates of cash flows and reserve
quantities shown above are based on year-end oil and gas prices, except in
those cases where future gas sales are covered by contracts at specified
prices. Estimates of future liabilities and receivables applicable to oil and
gas commodity hedges are reflected in future cash flows from proved reserves
with such estimates based on prices in effect as of the date of the reserve
report. Fluctuations are largely due to supply and demand perceptions for
natural gas and volatility in oil prices.
Under SEC rules, companies that follow full cost accounting methods
are required to make quarterly "ceiling test" calculations. Under this test,
capitalized costs of oil and gas properties may not exceed the present value
of estimated future net revenues from proved reserves, discounted at 10
percent, plus the lower of cost or market value of unproved properties, as
adjusted for related tax effects and deferred income taxes. Application of
these rules generally requires future production to be priced at the
unescalated oil and gas prices in effect at the end of each fiscal quarter
and requires a write-down if the "ceiling" is exceeded, even if prices
declined for only a short period of time.
F-42
INDEPENDENT ACCOUNTANT'S REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
BENZ ENERGY INC.
We have reviewed the accompanying consolidated balance sheets of Benz Energy
Inc. as of March 31, 1999 and 1998 and the related consolidated statements of
operations, comprehensive income, stockholders' equity and cash flows for the
three-month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 17 to the
financial statements, the Company has experienced significant delays in the
completion of certain wells and its limited capital resources raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 17. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
June 4, 1999 except for Notes 8, 17 and 21, as to which
the date is July 20, 1999
F-43
AUDITORS REVIEW
F-44
BENZ ENERGY INC.
CONSOLIDATED BALANCE SHEET
March 31,
-----------------------------------
1999 1998
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 565,183 $ 15,631,424
Receivables, net of allowance for doubtful accounts of $257,009 and $-0-,
respectively 5,039,201 8,542,734
Advances to related parties 685,955 987,932
Available for sale marketable securities 25,969 369,071
Prepaid expenses 325,533 299,577
------------ ------------
Total Current Assets 6,641,841 25,830,738
------------ ------------
OIL AND GAS PROPERTIES, Using Full Cost Accounting
Costs being amortized 51,161,009 32,566,598
Costs not being amortized 38,148,243 13,286,254
------------ ------------
89,309,252 45,852,852
Less: Accumulated amortization (4,901,920) (1,615,368)
Net Oil and Gas Properties 84,407,332 44,237,484
------------ ------------
PROPERTY AND EQUIPMENT 1,636,538 1,098,454
Less: Accumulated depreciation (580,027) (226,801)
------------ ------------
Net Property and Equipment 1,056,511 871,653
------------ ------------
Debt issuance costs, net of accumulated amortization of $1,815,378 and
$96,634, respectively 4,819,933 3,008,133
Available for sale marketable securities -- 22,989
Other assets 965,308 1,368,383
------------ ------------
Total Other Assets 5,785,241 4,399,505
------------ ------------
TOTAL ASSETS $ 97,890,925 $ 75,339,380
------------ ------------
------------ ------------
See accountant's review report and notes to consolidated financial statements.
F-45
BENZ ENERGY INC.
CONSOLIDATED BALANCE SHEET
March 31,
-----------------------------------
1999 1998
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Cash overdraft $ 304,706 $ --
Accounts payable 16,805,075 5,561,757
Revenue payable 520,687 422,731
Accrued interest 1,630,520 552,544
Accrued preferred dividends 476,339 --
Accrued loss on termination of employee 981,957 --
Other accrued expenses 1,028,492 2,967,735
Drilling advances 20,774 134,902
Notes payable 109,425 --
Current maturities of long-term debt, net of unamortized discount of $-0-
and $1,530,149, respectively 19,899,554 13,652,167
------------ ------------
Total Current Liabilities 41,777,529 23,291,836
------------ ------------
LONG-TERM DEBT, net of unamortized discount of $937,500 and $-0-, respectively 41,972,032 27,500,000
OTHER LONG-TERM LIABILITIES 258,904 --
COMMITMENTS AND CONTINGENCIES -- --
REDEEMABLE PREFERRED STOCK, no par value; unlimited shares authorized; 9,488,140
and 12,000,000 shares issued and outstanding, respectively; redemption value of
$9,488,140 and $12,000,000, respectively
9,488,140 12,000,000
STOCKHOLDERS' EQUITY:
Common Stock, no par value; unlimited shares authorized, 33,727,724 shares
and 32,708,357 shares issued and outstanding
20,424,996 19,308,350
Common Stock reserved for issuance; 1,927,436 and no shares reserved,
respectively 2,496,030 --
Additional paid-in capital 878,067 367,881
Accumulated deficit (19,237,436) (7,021,626)
Unrealized losses on available for sale marketable securities (72,882) (123,921)
Cumulative foreign currency translation adjustment (94,455) 16,860
------------ ------------
Total Stockholders' Equity 4,394,320 12,547,544
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 97,890,925 $ 75,339,380
------------ ------------
------------ ------------
See accountant's review report and notes to consolidated financial statements.
F-46
BENZ ENERGY INC.
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended
March 31,
-----------------------------------
1999 1998
------------ ------------
REVENUES
Oil and gas sales $ 1,370,957 $ 1,040,780
------------ ------------
EXPENSES
Depreciation, depletion and amortization 1,163,845 676,572
Lease operating 137,971 111,135
Production taxes 30,197 18,048
General and administrative 933,965 1,486,157
Interest expense 981,193 1,198,040
Debt issuance costs 582,030 53,777
------------ ------------
3,829,201 3,543,729
------------ ------------
LOSS FROM OPERATIONS BEFORE OTHER INCOME (EXPENSES) AND
PROVISION FOR INCOME TAXES (2,458,244) (2,502,949)
------------ ------------
Interest income 88,219 29,016
Gain (loss) on sale of investments (58,553) 108,770
------------ ------------
Total Other Income (Expense) 29,666 137,786
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (2,428,578) (2,365,163)
Provision for income taxes -- --
------------ ------------
NET LOSS (2,428,578) (2,365,163)
Cumulative preferred stock dividends (237,204) --
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (2,665,782) $ (2,365,163)
------------ ------------
------------ ------------
BASIC LOSS PER SHARE $ (0.08) $ (0.08)
------------ ------------
------------ ------------
DILUTED LOSS PER SHARE $ (0.08) $ (0.08)
------------ ------------
------------ ------------
WEIGHTED AVERAGE SHARES USED TO COMPUTE:
Basic Loss per Share 33,727,724 30,656,598
Diluted Loss per Share 33,727,724 30,656,598
See accountant's review report and notes to consolidated financial statements.
F-47
BENZ ENERGY INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the Three Months Ended
March 31,
---------------------------------
1999 1998
----------- -----------
Net loss applicable to common stockholders $(2,665,782) $(2,365,163)
Other comprehensive income, net of tax:
Foreign currency translation adjustment 56,526 53,932
Unrealized gains on marketable securities 12,748 (33,873)
----------- -----------
Comprehensive loss $(2,596,508) $(2,345,104)
----------- -----------
----------- -----------
See accountant's review report and notes to consolidated financial statements.
F-48
BENZ ENERGY INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock
Common Stock Reserved for Issuance
-------------------------------------------------------------
Shares Amount Number Amount
---------- ------------ --------- ------------
Balance,
December 31, 1998 33,727,724 $ 20,424,996 1,927,436 $ 2,496,030
Foreign currency
translation
adjustments -- -- -- --
Unrealized gains -- -- -- --
Net loss -- -- -- --
---------- ------------ --------- ------------
Balance,
March 31, 1999 33,727,724 $ 20,424,996 1,927,436 $ 2,496,030
---------- ------------ --------- ------------
---------- ------------ --------- ------------
Additional Unrealized Total
Paid-in Accumulated Gain (Loss) Translation Stockholders'
Capital Deficit on Securities Adjustments Equity
------------ ------------ ------------- ----------- -----------
Balance,
December 31, 1998 $ 878,067 $(16,571,654) $ (85,630) $ (150,981) $ 6,990,828
Foreign currency
translation
adjustments -- -- -- 56,526 56,526
Unrealized gains -- -- 12,748 -- 12,748
Net loss -- (2,665,782) -- -- (2,665,782)
------------ ------------ ------------ ------------ -----------
Balance,
March 31, 1999 $ 878,067 $(19,237,436) $ (72,882) $ (94,455) $ 4,394,320
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ -----------
See accountant's review report and notes to consolidated financial statements.
F-49
BENZ ENERGY INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock Additional
--------------------------- Paid in
Shares Amount Capital
---------- ------------ ------------
Balance,
December 31, 1997 29,878,985 $ 16,222,198 $ 367,881
Exercise of stock
options 87,000 16,152 --
Issued for properties 2,542,372 3,000,000 --
Issued in legal
settlement 200,000 70,000 --
Foreign currency
translation
adjustments -- -- --
Unrealized losses -- -- --
Net loss -- -- --
---------- ------------ ------------
Balance,
March 31, 1998 32,708,357 $ 19,308,350 $ 367,881
---------- ------------ ------------
---------- ------------ ------------
Unrealized Total
Accumulated Gain (Loss) Translation Stockholders'
Deficit on Securities Adjustments Equity
------------ ------------- ----------- ------------
Balance,
December 31, 1997 $ (4,656,463) $ (90,048) $ (37,072) $ 11,806,496
Exercise of stock
options -- -- -- 16,152
Issued for properties -- -- -- 3,000,000
Issued in legal
settlement -- -- -- 70,000
Foreign currency
translation
adjustments -- -- 53,932 53,932
Unrealized losses -- (33,873) -- (33,873)
Net loss (2,365,163) -- -- (2,365,163)
------------ ------------ ------------ ------------
Balance,
March 31, 1998 $ (7,021,626) $ (123,921) $ 16,860 $ 12,547,544
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
See accountant's review report and notes to consolidated financial statements.
F-50
BENZ ENERGY INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Months Ended
March 31,
-----------------------------------
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,428,578) $ (2,365,163)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation, depletion and amortization 1,163,845 676,572
Amortization of deferred loan costs 659,858 566,183
(Gain) loss on sale of stock held for investment 58,553 (108,770)
Reserve for bad debt 68,328 --
Changes in operating assets and liabilities:
(Increase) decrease in receivables 353,757 (1,889,715)
(Increase) decrease in prepaid expenses 168,133 (190,561)
Increase in amounts due from related parties (21,363) (3,088,389)
Decrease in other assets 425,000 312,354
Decrease in accounts payable and accrued expenses (601,091) (1,807,262)
Decrease in drilling advances -- (254,446)
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (153,558) (8,149,197)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development expenditures (4,225,656) (5,749,841)
Proceeds from sale of oil and gas properties -- 600,000
Proceeds from sale of stock held for investment 128,091 991,578
Other capital expenditures, net (64,196) (316,098)
Other, net 68,596 --
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (4,093,165) (4,474,361)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings 2,699,554 3,000,000
Payments on long-term debt (381,379) (5,000,000)
Net increase in short-term borrowings -- 2,431,458
Proceeds from issuance of convertible debentures and special notes -- 27,500,000
Proceeds from issuance of common stock and warrants -- 86,152
Cost of debt and equity transactions (129,951) (2,981,896)
Cash overdraft position 304,706 --
Other (55,900) --
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,437,030 25,035,714
------------ ------------
Effect of change in translation 55,574 56,948
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,754,119) 12,469,104
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,319,302 3,162,320
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 565,183 $ 15,631,424
------------ ------------
------------ ------------
See accountant's review report and notes to consolidated financial statements
F-51
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - Benz Energy Inc. ("Benz" or the "Company") is an
independent energy company engaged primarily in the acquisition, development,
production, exploration for and the sale of oil, gas and natural gas liquids.
The Company's exploration and production activities are located primarily in the
Gulf Coast areas of Mississippi, Louisiana and Texas. Benz treats all operations
as one segment of business. The principal executive offices of the Company are
located at 1000 Louisiana, 15th Floor, Houston, Texas 77002. The Company's
registered and records office is located at 3081 Third Avenue, Whitehorse, Yukon
Y1A 4Z7 Canada.
The Company's future financial condition and results of operations will
depend upon prices received for its oil and natural gas and the costs of
finding, acquiring, developing and producing reserves. Prices for oil and
natural gas are subject to fluctuations in response to changes in supply, market
uncertainty and a variety of other factors beyond the Company's control. These
factors include worldwide political instability (especially in the Middle East),
the foreign supply of oil and natural gas, the price of foreign imports, the
level of consumer product demand and the price and availability of alternative
fuels. With natural gas accounting for 87 percent of Benz's 1999 first quarter
production on an energy equivalent basis, the Company was affected more by
fluctuations in natural gas prices than in oil prices.
CHANGE IN ACCOUNTING PRINCIPLE - The Company changed its method of
accounting from the successful efforts method to the full cost method of
accounting for oil and gas properties during the period ended December 31, 1997.
BASIS OF CONSOLIDATION - The consolidated financial statements include
the accounts of Benz Energy Inc. and its wholly owned subsidiaries Texstar
Petroleum, Inc. ("Texstar") and Benz Properties Ltd. ("Benz Properties").
Accordingly, all references herein to Benz or the Company include the
consolidated results of its subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates with regard to these financial statements include the
estimate of proved oil and gas reserve volumes and the related present value of
estimated future net revenues therefrom.
CASH AND CASH EQUIVALENTS - Cash and Cash Equivalents include cash in
banks and other cash equivalents that mature within three months of the date of
purchase.
OIL AND GAS PROPERTIES - The Company uses the full cost method of
accounting for its investment in oil and gas properties. Under this method, the
Company capitalizes all acquisition, exploration and development costs incurred
for the purpose of finding oil and gas reserves, including salaries, benefits
and other internal costs directly attributable to these activities.
F-52
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Capitalized internal costs were as follows for the periods indicated:
Three months ended March 31, 1999 $146,343
Three months ended March 31, 1998 $285,933
Interest costs related to unproved properties and properties under development
are also capitalized to oil and gas properties. Unless a significant portion of
the Company's reserve volumes are sold (generally greater than 25 percent),
proceeds from the sale of oil and gas properties are accounted for as reductions
to capitalized costs and gains or losses are not recognized.
Benz computes the provision for depreciation, depletion and
amortization (DD&A) of oil and gas properties on a quarterly basis using the
units-of-production method based upon production and estimates of proved reserve
quantities. Unevaluated costs and related capitalized internal and interest
costs are excluded from the amortization base until the properties associated
with these costs are evaluated. The amortizable base includes estimated
dismantlement, reclamation and abandonment costs net of equipment salvage
values. The engineering department of Benz generally estimates these future
costs.
Benz limits, by country, net capitalized costs of proved oil and gas
properties, less related deferred income taxes, to the sum of (1) future net
revenues (using prices and cost rates as of the balance sheet date) from proved
reserves and discounted at ten percent per annum, plus (2) costs not being
amortized, less (3) related income tax effects. Excess costs, if any, are
charged to proved property impairment expense.
The costs of certain unevaluated leasehold acreage and wells being
drilled are not being amortized. Costs not being amortized are periodically
assessed for impairments. Any impairment is added to the amortization base.
DEPRECIATION AND AMORTIZATION - Property and equipment are stated at
cost and are depreciated using the straight-line method over their estimated
useful lives. The costs of maintenance and repairs are charged to expense when
incurred; costs of renewals and betterments are capitalized. Upon the sales or
retirement of property and equipment, the cost and related accumulated
depreciation are eliminated from the respective accounts and the resulting gain
or loss is included in operations.
REVENUE RECOGNITION - Revenues from the sale of oil and gas production
are recognized when title passes, net of royalties. Natural gas revenues are
generally recognized under the entitlements method of accounting for gas
imbalances, i.e., monthly sales quantities that do not match the Company's
entitled share of joint production. Entitled quantities in excess of sales
quantities are recorded as a receivable from joint venture partners. The
receivable is carried at the lower of current market price or the market price
at the time the imbalance occurred. Sales quantities in excess of entitled
quantities are recorded as deferred revenue carried at the gas market price
received at the time the imbalance occurred.
F-53
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
HEDGING -The Company may enter into derivative contracts to hedge the
risk of future oil and gas price fluctuations. Such contracts may either fix or
support oil or gas prices or limit the impact of price fluctuations with respect
to the Company's sales of oil and gas. Gains and losses on such hedging
activities are recognized in oil and gas revenues when the hedged production is
sold. Hedged oil and gas prices, if any, used in computing the year-end
standardized measure of discounted future net cash flows relating to proved oil
and gas reserves reflect the estimated effects of hedging contracts existing at
year end.
INVESTMENT IN EQUITY SECURITIES - The Company accounts for its
investments in equity securities under the provisions of Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities".
This standard provides that available-for-sale investments in securities that
have readily determinable fair values be measured at fair value in the balance
sheet and that unrealized holding gains and losses for these investments be
reported in a separate component of stockholders' equity until realized.
LONG-LIVED ASSETS - Long-lived assets to be held and used are reviewed
for impairment whenever events or changes in circumstances indicate that the
related carrying amount may not be recoverable. When required, impairment losses
on assets to be held and used are recognized based on the fair value of the
assets and long-lived assets to be disposed of are reported at the lower of
carrying amount or fair value less cost to sell.
INCOME TAXES - Provisions for income taxes are based on taxes payable
or refundable for the current year and deferred taxes on temporary differences
between the amount of taxable income and pretax financial income and between the
tax bases of assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to the period in
which the deferred tax assets and liabilities are expected to be realized or
settled as prescribed SFAS No. 109, "Accounting for Income Taxes". As changes in
tax laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
CONCENTRATION OF CREDIT RISK - The Company places its cash in what it
believes to be credit-worthy financial institutions. However, cash balances may
exceed FDIC insured levels at various times during the year.
STOCK BASED COMPENSATION - The Company uses the intrinsic value method
of accounting for stock-based compensation in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. See Note 13 for pro forma disclosure of
net income and earnings per share under the fair value method of accounting for
stock-based compensation as proscribed by SFAS No. 123, "Accounting for
Stock-Based Compensation".
TRANSLATION OF FOREIGN CURRENCY - The Company translates the foreign
currency financial statements of its foreign parent in accordance with the
requirements of SFAS No. 52, "Foreign Currency Translation". Assets and
liabilities are translated at current exchange rates, and related revenues and
expenses are translated at average exchange rates in effect during the period.
Resulting translation adjustments are recorded as a separate component in
stockholders' equity. Foreign currency transaction gains and losses are included
in determining net income.
F-54
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
PER SHARE OF COMMON STOCK - Per share amounts have been computed based
on the average number of common shares outstanding during the period.
Potential common stock has been excluded from the computation of
earnings per share since the inclusion of options and warrants would be
antidilutive.
NOTE 2. ACQUISITIONS AND DIVESTITURES
ACQUISITIONS
In January 1999, the Company acquired on behalf of the Company and its
partner in the Wausau prospect, a gas pipeline in Mississippi for approximately
$425,000 to provide access for gas sales. Included in the purchase were a 100%
and a 93.75% BPO working interest in two producing wells. The Company does not
anticipate these wells reaching pay-out. The Company owns a 53.8% interest in
the pipeline and the Fairchild #1 well and a 50.5% interest in the A. Foote
Estate #1 well. Gas reserves net to the Company are estimated to be in excess of
150 MMCFG and net production of over 150 MCFGPD.
On December 29, 1998, the Company acquired, for $2.0 million, all of
Mobil's right, title and interest in the deep rights below the existing
production in the Old Ocean Unit.
In July 1998, Benz acquired certain proved and unproved non-producing
oil and gas properties in Mississippi, Texas and Louisiana from Starbucks Trust
for $2.33 million and 600,000 shares of the Company's common stock. The purchase
is subject to certain post-closing adjustments relating to purchase value. The
value of the assets is secured through January 1, 2001, by 2.1 million shares of
the Company's common stock owned by Starbucks Trust. See Note 15, "Related Party
Transactions".
In May 1998, the Company entered into a property swap agreement with
Southern Gas Company ("Southern Gas"). The Company conveyed to Southern Gas the
Company's entire interest in White Castle Dome (5.5%) and $1.25 million in cash.
In exchange, Southern Gas conveyed to the Company Southern Gas's entire interest
in the Oakvale, Wausau and Moselle Dome properties and prospects.
In April 1998, the Company agreed to acquire certain petroleum
interests and assume certain liabilities from Calibre Energy, L.L.C.
("Calibre"). The Company paid $261,000 in cash, forgave $1,450,000 in advances,
assumed $450,000 in debt and issued promissory notes totaling $2,000,000. In
addition, the Company will issue approximately 1,927,400 shares of common stock
in 1999 at an ascribed price of Cdn. $2.80 per share in connection with this
transaction.
In January 1998, Benz acquired certain producing properties from Lasco
Energy Partners ("Lasco") for a purchase price of $15.0 million. The Company
issued a note payable which, subsequent to shareholder approval, was converted
to $12.0 million in newly authorized preferred stock (priced at $1.00) and $3.0
million in common stock (priced at $1.185). In December 1998, the Lasco purchase
price was adjusted to $12,488,140. Included in this reduction were adjustments
for the change in interest and dividends resulting from the lower purchase
price. The difference of $2,511,860 reduced the principal amount of preferred
shares to $9,488,140.
F-55
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DIVESTITURES
In the first quarter of 1998, Benz received $600,000 from the sale of
non-strategic oil and gas properties related to three separate transactions. No
gain has been recognized; capitalized oil and gas property costs have been
reduced by the amount of sales proceeds.
NOTE 3. RESTRICTED CASH
Included in cash and cash equivalents at March 31, 1999 and 1998
is $110,139 and $129,615, respectively, which is restricted to
expenditures on certain petroleum interests.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
March 31, March 31,
1999 1998
------------ ----------
3-D Workstations $ 313,117 $ 313,117
Furniture and Fixtures 375,397 206,730
Telephone and Computer Equipment 450,097 372,475
Leasehold Improvements 357,406 138,882
Software 71,472 67,250
Other 69,049 ---
------------ ----------
1,636,538 1,098,454
Less: Accumulated Depreciation (580,027) (226,801)
------------ ----------
Net Property and Equipment $ 1,056,511 $ 871,653
------------ ----------
------------ ----------
The Company recorded the following depreciation expense related to
property and equipment in the Consolidated Statement of Operations for the
periods indicated:
Three months ended March 31, 1999 $ 102,529
Three months ended March 31, 1998 $ 54,982
NOTE 5. INVESTMENTS IN EQUITY SECURITIES
At March 31, 1999 and 1998, marketable investments classified as
available for sale were comprised of the following:
March 31, March 31,
1999 1998
----------- ----------
Common Stocks:
Market value $ 25,969 $ 392,060
Cost 98,851 515,981
----------- ----------
Gross Unrealized Holding Losses $ (72,882) $ (123,921)
----------- ----------
----------- ----------
F-56
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company realized the following gross gains (losses) from the sale
of equity securities for the periods indicated:
Three months ended March 31, 1999 $ (58,553)
Three months ended March 31, 1998 $ 108,770
Benz utilizes the average cost method in computing realized gains and
losses which is included in other income (expense) in the accompanying
Consolidated Statement of Operations.
NOTE 6. PARTICIPATION AGREEMENT
In November 1998, the Company entered into a participation agreement
with Burlington Resources International Inc. ("Burlington") to pursue government
contracts to participate in the redevelopment of oil and gas fields in Ecuador.
The Company and Burlington have participation interests of 25% and 75%,
respectively. At March 31, 1999, the Company had invested $316,470 in the
venture. Burlington has indicated it might not renew the agreement at this time,
and that action could have an impact on the Company's ability to maintain an
interest in this region. However, the Company would retain a 25% interest in any
project related to the subject area pursued by Burlington for one year.
NOTE 7. DRILLING ADVANCES
As of March 31, 1999 and 1998, the Company has received drilling
advances from joint interest owners in the amounts of $20,774 and $134,902,
respectively. These advances will be applied toward the payment of drilling
costs to be incurred in the future.
NOTE 8. LONG-TERM DEBT
March 31, March 31,
1999 1998
------------ ------------
EnCap Credit Agreement
(Face Value of $12,000,000, respectively) $ 12,000,000 $ 10,469,850
BOCP Credit Facility 5,699,554 3,143,225
Shell Financing (Face Value of $7,000,000) 5,710,032 ---
Mobil Financing 2,200,000 ---
Cogniseis Development -- 39,092
Convertible Debentures 27,250,000 27,500,000
Special Notes 9,012,000 ---
------------ ------------
Total 61,871,586 41,152,167
Current Portion 19,899,554 (1) 13,652,167
------------ ------------
Total Long-Term Debt $ 41,972,032 $ 27,500,000
------------ ------------
------------ ------------
- ------------------
(1) Excludes $1,656,699 related to the Shell financing which is considered
long-term until the related production is accrued.
F-57
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Maturities of long-term debt are as follows:
March 31,
1999
--------------------
1999 $ 21,556,253
2000 2,776,667
2001 1,276,666
2002 --
2003 36,262,000
--------------------
$ 61,871,586
--------------------
--------------------
ENCAP CREDIT AGREEMENT. The Company entered into a $20 million credit
agreement (the "EnCap Credit Agreement") with EnCap Capital Fund III, L.P.
("EnCap") consisting of a promissory note for $12,000,000 (the "Original Note")
and a promissory note for $8,000,000 (the "Supplemental Note"; collectively, the
"Notes"). The Original Note bears interest at 10% per annum up to and until
December 31, 1998 and at 18% per annum thereafter. This note is due, with
accrued interest, on July 31, 1999. The Supplemental Note was repaid in full and
no advances are currently outstanding. Under the terms of the Debentures and
Special Notes described below, the Company has agreed to limit borrowings under
the EnCap Credit Agreement to $12,000,000, all of which is outstanding. The
proceeds from the facility were applied to the acquisition of Oakvale Dome
($8,000,000), and Old Ocean properties and the drilling and completion of
certain development wells ($4,000,000). A first lien on certain properties and a
second lien on certain other properties secure the Original Note. Prentis B.
Tomlinson, Chairman and CEO of the Company, Calibre, certain affiliates of
Calibre, Slattery Trust, a private trust of which Mr. Tomlison is the
beneficiary, and Texastar Holdings, L.L.C. ("Texstar Holdings"), a private
limited liability company owned by certain directors and officers of the
Company, guarantee the Original Note.
Under the terms of the Original Note, the Company agreed to convey to
EnCap, on January 1, 1999, a 25% net profit interest (the "EnCap NPI") from the
properties acquired with the proceeds of the borrowing. EnCap also required
Slattery Trust and Texstar Holdings (collectively the "Benz Shareholders"), to
enter into a put/call agreement (the "Put/Call Agreement"), pursuant to which
the Benz Shareholders, under certain conditions, have the right to obtain or
"call" the EnCap NPI in exchange for 1.5 million shares of Common Shares. The
Put/Call agreement also gives EnCap the right, under certain conditions, to
sell, or put, portions of the EnCap NPI to the Benz Shareholders for an
aggregate of 1.5 million shares of Common Shares as of December 31, 1998,
increasing to 3.5 million shares after March 31, 1999. The Benz Shareholders
have transferred the rights and obligations of the Put/Call Agreement to the
Company. In connection with the original granting of the EnCap NPI, the Company
recorded a discount on the Original Note of $2,102,180 as of December 31, 1997.
The discount has been amortized over the term of the Original Note. The carrying
amount of the oil and gas interests has been reduced by the same amount.
Subsequent to the end of 1998, the EnCap NPI vested and the put option expired.
Encap thus retained the NPI.
F-58
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Under the terms of the Supplemental Note, EnCap was issued warrants to
purchase up to 1.5 million shares of Common Shares at an exercise price of $1.28
per share. In connection with the issuance of these warrants, the Company
recorded a discount on the Supplemental Note of $367,881 as of December 31,
1997. This discount is being amortized over the term of the Supplemental Note
Facility. Pursuant to a financing agreement dated November 4, 1998 with EnCap
and as consideration for enabling additional funding through the Bank One Credit
Facility, the warrants were repriced to $0.46475 per share. The re-pricing did
not have material effect on the unamortized discount balance.
BOCP CREDIT FACILITY. In December 1998, the Company's loan agreement
with Bank One NA ("Bank One") was purchased by BOCP Energy Partners, L.P.
("BOCP"). Pursuant to an assignment of note and liens dated December 29, 1998,
Bank One assigned the original loan agreement, together with all loan documents
referred to therein, to BOCP. The principal amount then outstanding under
Tranche A of $2.9 million plus interest was repaid and, per amendments to the
loan agreement, no further advances will be requested or made under Tranche A.
Interest accrued on advances under Tranche A at prime plus 2.0%, payable
monthly. The amendments also modified the terms of Tranche B of the credit
facility as follows:
(1) Maximum availability of $6,000,000.
(2) No advances on Tranche B will be requested or made on or after April
30, 1999.
(3) Maturity date of July 31, 1999.
(4) Interest rate of prime plus eight percent per annum through and
including December 31, 1998 and fifteen percent per annum from and
after January 1, 1999.
In December, the Company paid $1.5 million of the $4.5 million
outstanding principal balance under Tranche B but no interest thereon. The
outstanding balance of Tranche B as of the date of this report is $6.0 million.
All interest accrued on Tranche B remains unpaid and owing and is due on July
31, 1999. The Company has reached a standstill agreement covering certain
covenants of which the Company is currently in violation. See Note 21,
"Subsequent Events."
SHELL FINANCING. In December 1998, the Company entered into a financing
agreement with Shell Capital, Inc. ("Shell Capital") whereby the Company sold a
term production payment to Shell Capital for $7 million. The production payment
comprised a dedication of 42% of net revenues from the Wausau, Oak Hill, East
Morgantown properties, 23.1% of Oakvale Dome's Howell well, 12.2% of Oakvale
Dome's Fortenberry well and 38.5% of Oakvale Dome's Byrd well. Such interests
are subject to adjustment. The production payment is secured solely by the
properties. Following full pay-out ($7.0 million plus a 15% rate of return) of
the production payment, the dedicated revenue interest is returned to the
Company less a permanent royalty interest equal to 8.75% of the Company's net
revenue interest in Wausau, Oak Hill and East Morgantown, and 4.8% of the Howell
and Byrd wells and 2.5% of the Fortenberry well. The Company has the right to
buy back the production payment at a stated rate of return of 25% plus a payment
of $1.0 million. In connection with the right to buy back the permanent
overriding royalty interest conveyance, the Company recorded a discount on the
financing of $1.0 million. The carrying amount of the oil and gas interests has
been reduced by the same amount.
F-59
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Shell Capital further agreed to expand its term production payment to
$25 million provided that the Company sell certain properties, enter into a
payment schedule for amounts owed to an industry partner, raise additional
capital and obtain certain minimum results from current development drilling
activity. The Company is currently negotiating with Shell Capital and other
parties to complete the expansion of the term production payment.
This financing has been classified as debt on the balance sheet and
will be reduced starting in 1999 as production is delivered to Shell under the
terms of the contract. Volumes delivered to Shell are reported as revenue at
prices received by Shell. Interest expense is recorded based on a rate of 15
percent.
MOBIL FINANCING. In December 1998, the Company obtained a short-term
advance of $2.2 million from certain investors for the purchase of Mobil's deep
rights in the Old Ocean Unit. The advances are due July 31, 1999 and bear
interest at a rate of 10% per annum.
In connection with the short-term advance, the Company agreed to pay
RP&C International, Inc. ("RP&C") and EnCap Investments L.C. ("EnCap L.C.")
arrangement fees in the amounts of $125,400 and $6,600 respectively. In
addition, the Company granted RP&C and EnCap L.C. warrants to purchase Benz
Common Stock in an aggregate amount equal to $220,000. Such warrants were
apportioned 95% to RP&C and 5% to EnCap L.C. The exercise price of the warrants
at issuance was Cdn. $0.46 per share with an exercise period of three years. In
lieu of issuing the warrants, the Company agreed to provide RP&C and EnCap L.C.
in substance with substantially the same economic rights or interests they would
have otherwise received had they been issued the warrants. The fair value of
such right at December 31, 1998 was determined to be approximately $171,217.
The Company also conveyed to each lender of the Mobil financing such
lender's percentage share of an overriding royalty interest equal to 50% of the
Mobil interest purchased in and to the Old Ocean Unit leases and the AMI leases.
If the Company pays in full all of the notes on or before the original maturity
date of April 30, 1999, or as extended, the lenders will re-convey the
overriding royalty interest back to the Company. The lenders have extended such
date to July 31, 1999. The Lender will retain the right to receive such lender's
percentage share of 7.75% of the net profits, if any, realized from the
production of oil, gas and other minerals from the subject interest in
connection with such re-conveyance.
CONVERTIBLE DEBENTURES AND SPECIAL NOTES. In March and April of 1998,
the Company completed the private placements of $27.5 million in 9% Convertible
Debentures, Series 1 general obligation notes and $10 million of 9% Special
Notes, Series A and Series B exercisable into $10 million principal amount of 9%
Convertible Debentures, Series 2 and Series 3.
F-60
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Series 1 debentures bear interest at a rate of 9% per year payable
in arrears in equal semi-annual installments on March 31st and September 30th of
each year. The debentures have a maturity date of March 31, 2003. The debentures
are convertible at the option of the holder into the Company's Common Stock
prior to March 27, 2003 at a conversion price of Cdn. $1.70 per share, subject
to adjustment in certain circumstances. The debentures are redeemable in whole
or in part by the Company at any time after March 31, 2002 at the principal
amount thereof, together with any accrued but unpaid interest. The Company may,
at any time after September 30, 1999 and prior to the Maturity Date require that
all outstanding convertible debentures be converted subject to achieving a stock
price of Cdn. $2.38 per share.
The Special Notes, Series A and Series B entitle the holder to acquire
the same principal amount of 9% convertible debentures Series 2 and Series 3, at
no additional cost, at any time on or before the earlier of (i) the fifth
business day after a final prospectus qualifying the convertible debentures to
be issued upon the exercise of the Special Notes and (ii) the date 18 months
after the closing of the Special Notes Series A and 6 months after the closing
of the Special Notes Series B. The trustee of the Special Notes will exercise
any Special Notes not exercised prior to the above date and the convertible
debentures will be issued to the noteholders without any further action on the
part of the holder. See Note 21, "Subsequent Events".
The convertible debentures, Series 2 and Series 3, bear interest at a
rate of 9% per annum payable in arrears in equal semi-annual installments on
March 31st and September 30th of each year. The debentures have a maturity date
of August 31, 2003. The debentures will be convertible at the option of the
holder into common shares at a conversion price of Cdn. $1.70 per common share,
subject to adjustment in certain circumstances. If the holder elects to convert
the debentures prior to the date of the third semi-annual coupon, the holder
will receive a 5% premium on the number of common shares issued upon conversion.
The debentures are redeemable in whole or in part by the Company at any time
after August 31, 2002 at the principal amount thereof, together with any accrued
but unpaid interest. The Company may, at any time after August 31, 2001 and
prior to the Maturity Date require that all outstanding convertible debentures
be converted subject to achieving a stock price of Cdn. $2.13 per share.
The Company did not register the Special Notes in certain Canadian
jurisdictions by August 9, 1998 nor in the U.S. by September 21, 1998 and,
therefore, holders of Series A Special Notes had the right to elect retraction
of up to $1.056 million in funds held in escrow pending regulatory approval.
Certain holders elected to retract a total of $988,000 plus accrued interest.
The balance was released from escrow. In addition, holders of both Series A and
Series B notes received the right to receive 10% more common shares issued upon
conversion due to not completing the registration.
In connection with the issuance of the Convertible Debentures, Series 1
the Company granted the agent 2,109,974 compensation options that entitle the
holder to receive cash payment from the Company equal to the difference between
the closing market price of a common share of the Company on the trading day
immediately preceding the exercise date and Cdn $1.70 per share, subject to
adjustment in certain circumstances. The options expire on March 25, 2000.
Pursuant to an agreement dated December 31, 1998, the options were repriced to
Cdn. $0.46 per common share. The fair value of such options was determined to be
approximately $358,577 and is being amortized over the two-year life of the
options. At March 31, 1999, $164,348 remained unamortized.
F-61
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In connection with the issuance of the Special Notes, Series A and
Series B, the Company granted the agent 737,903 special compensation warrants
that entitle the holder to acquire the same number of compensation options. The
options each entitle the holder to acquire, subject to adjustment, one common
share of the Company for Cdn. $1.70 per share at any time on or prior to April
8, 2000.
COGNISEIS DEVELOPMENT. On May 1, 1996, Texstar LLC purchased equipment
and financed the purchase through the vendor. The amount financed was $110,365.
As of October 31, 1996, $100,395 was assigned to the Company and was
outstanding. The equipment has also been assigned to the Company. The amount
financed is collaterized by the equipment. Under the terms, monthly payments of
principal and interest are due. The interest rate is 15% per annum. At March 31,
1999, the obligation was repaid.
NOTE 9. INCOME TAXES
The components of the provision for income taxes is as follows:
March 31, March 31,
1999 1998
----------- ----------
Current Tax Expense
U.S. Federal $ -- $ --
State and Local -- --
----------- ----------
Total Current -- --
----------- ----------
Deferred Tax Expense
U.S. Federal -- --
State and Local -- --
----------- ----------
Total Deferred -- --
----------- ----------
Total Tax Provision from $ -- $ --
Continuing Operations
----------- ----------
----------- ----------
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
March 31, March 31,
1999 1998
----------- ----------
Federal Income Tax Rate (34.0)% (34.0)%
Deferred Tax Charge (Credit) -- --
Effect of Valuation Allowance 34.0 % 34.0 %
State Income Tax, Net of Federal Benefit -- --
----------- ----------
Effective Income Tax Rate 0.0 % 0.0 %
----------- ----------
----------- ----------
F-62
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At March 31, 1999 and 1998 the Company had net carryforward losses of
approximately $49,748,000 and $15,653,000, respectively. A valuation allowance
equal to the tax benefit for deferred taxes has been established due to the
uncertainty of realizing the benefit of the tax carryforward.
Deferred tax assets and liabilities reflect the net tax effect of
temporary differences between the carrying amount of assets and liabilities for
financial reporting purposes and amounts used for income tax purposes.
Significant components of the Company's deferred tax assets (liabilities) are as
follows:
March 31, March 31,
1999 1998
--------------- ----------------
Non-Current Deferred Tax Assets (Liabilities):
Exploration and development costs capitalized
for financial purposes, expensed for tax
purposes $ (13,402,673) $ (3,455,593)
Depreciation Expense 674,966 226,688
Loss Carry-forwards 16,914,218 5,321,850
--------------- ----------------
4,186,511 2,092,945
Less: Valuation Allowance (4,186,511) (2,092,945)
--------------- ----------------
Net Deferred Tax Assets (Liabilities) $ -- $ --
--------------- ----------------
--------------- ----------------
Net operating loss carryforwards expire as follows:
2011 $ 4,535,000
2012 $ 6,494,000
2013 $ 32,000,000
2014 $ 6,719,000
NOTE 10. SEGMENTED INFORMATION
The Company's principal activity is the exploration and development of
petroleum properties in the United States. The principal assets in Canada
consist primarily of cash, funds held in trust, amounts receivable, prepaid
expenses and investments. The allocation of the total assets of the Company
between the two segments are as follows:
March 31, March 31,
1999 1998
-------------- --------------
Canada $ 4,195,203 $ 5,381,199
United States 93,695,722 69,958,181
-------------- --------------
Total identifiable assets $ 97,890,925 $ 75,339,380
-------------- --------------
-------------- --------------
F-63
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 11. REDEEMABLE PREFERRED STOCK
The Company authorized a new issue of Class A Preferred Shares Series
1. Dividends are payable at 10% per annum of the amount paid or deemed to have
been paid for the shares, payable quarterly. Dividends are cumulative. For the
first eight quarterly dividends, the Company may elect to pay the dividends in
common shares, at a price based on the trailing average price of the Company's
common shares as at the end of the applicable quarter. The Company has the
option to redeem the Preferred Shares at any time. If a qualified public
offering of the Company's common stock is not consummated within the three year
period commencing January 23, 1998, the holders of a majority of the Preferred
Shares may elect to cause the Company to redeem all of the Preferred Shares (See
Note 21). On the fifth anniversary of the sale of the Preferred Shares, the
Company is required to redeem all of the Preferred Shares. The Preferred Shares
are redeemable at an amount equal to the purchase price plus any dividends
cumulated but not paid. At March 31, 1999, 9,488,140 Preferred Shares were
outstanding with a redemption value of $9,488,140.
The Class A Preferred Shares Series 1 will rank equally with all other
series of Class A Preferred shares then outstanding. The Class A Preferred
shares are entitled to priority over the common shares of the Company and over
any other shares of the Company ranking junior to the Class A Preferred shares
with respect to priority in the payment of dividends and the distribution of
assets in the event of the liquidation, dissolution or winding-up of the
Company, whether voluntary or involuntary, or any other distribution of the
assets of the Company among its shareholders for the purpose of winding-up its
affairs.
NOTE 12. WARRANTS
During the period ended December 31, 1997, the Company issued 4,885,800
common shares on the exercise of the following special warrants:
(i) CLASS A SPECIAL WARRANTS
556,000 common shares and 139,000 non-transferable share purchase
warrants (the "Class A Warrants") on the exercise of 556,000
Class A Special Warrants. Each Class A Warrant entitles the
holder to purchase an additional common share at Cdn. $1.80 per
share on or before February 11, 1998 and at Cdn. $2.07 on or
before February 11, 1999. The Class A Warrants remained
unexercised at December 31, 1998 and expired unexercised in the
first quarter of 1999.
(ii) CLASS B SPECIAL WARRANTS
1,540,000 common shares and 1,540,000 non-transferable share
purchase warrants (the "Class B Warrants") on the exercise of
1,400,000 Class B Special Warrants. Two Class B Warrants entitle
the holder to purchase an additional common share at Cdn. $2.15
per share on or before March 17, 1998 and at Cdn. $2.47 per share
on or before March 17, 1999. The Company has also granted the
agent special options to acquire, without additional
consideration, 400,000 Class B Warrants. During the period ended
December 31, 1997, an additional 91,864 common shares were issued
for proceeds of $141,396 on the exercise of 183,728 Class B
Warrants. Of the Class B warrants, 1,756,272 warrants remained
unexercised at December 31, 1998 and expired unexercised in the
first quarter of 1999.
F-64
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(iii) CLASS C SPECIAL WARRANTS
432,300 common shares and 216,000 non-transferable share purchase
warrants (the "Class C Warrants") on the exercise of 393,000
Class C Special Warrants. Each Class C Warrant entitles the
holder to purchase an additional common share at Cdn. $2.55 per
share on or before April 13, 1998 and at Cdn. $2.95 per share on
or before April 12, 1999. The Company has also granted the agent
special options to acquire, without additional consideration,
40,000 Class C Warrants. As at December 31, 1998, 256,000 Class C
Warrants remained unexercised and expired unexercised in 1999.
(iv) FIRST TRANCHE CLASS D SPECIAL WARRANTS
2,101,000 common shares and 1,050,000 non-transferable share
purchase warrants (the "First Tranche Class D Warrants") on the
exercise of 1,910,000 First Tranche Class D Special Warrants.
Each First Tranche Class D Warrant entitles the holder to
purchase an additional common share at a price of Cdn. $3.50 per
share on or before April 18, 1998 and at Cdn. $4.25 per share on
or before October 18, 1998. The Company has issued 50,000 common
shares, at an ascribed price of $116,571 to the agents and has
also granted the agents 191,000 share purchase warrants (the
"Agents' First Tranche Warrants"). Each Agents' First Tranche
Warrant is exercisable to purchase one common share at a price of
Cdn. $3.25 per share on or before April 18, 1998 and at Cdn.
$3.75 per share thereafter until October 18, 1998, subject to
certain exercise restrictions. The First Tranche Class D Warrants
and the Agents' First Tranche Warrants expired unexercised in
1998; and
(v) SECOND TRANCHE CLASS D SPECIAL WARRANTS
256,500 common shares and 128,250 non-transferable share purchase
warrants (the "Second Tranche Class D Warrants") on the exercise
of 256,500 Second Tranche Class D Special Warrants. Each Second
Tranche Class D Warrant entitles the holder to purchase an
additional common share at a price of Cdn. $3.50 per share on or
before June 26, 1998 and at Cdn. $4.25 per share on or before
December 28, 1998. The Company has also granted the agents 25,650
share purchase warrants (the "Agents' Second Tranche Warrants").
Each Agent's Second Tranche Warrant is exercisable to purchase
one common share at Cdn. $3.25 per share until June 26, 1998 and
at Cdn. $3.75 per share thereafter until December 28, 1998,
subject to certain exercise restrictions. The Second Tranche
Class D Warrants and the Agents' Second Tranche Warrants expired
unexercised in 1998.
The following additional warrants that were outstanding at December 31,
1997 were exercised or expired unexercised in 1998:
(i) of the warrants to purchase common shares at Cdn. $1.30
per share on or before December 5, 1998: 5,000 were
exercised in April for proceeds of $4,561, 89,900 were
exercised in June for proceeds of $79,585 and the
remaining 393,600 expired unexercised in December;
(ii) 142,900 warrants to purchase common shares at Cdn. $2.05
per share on or before December 15, 1998 expired
unexercised.
F-65
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 13. STOCK OPTIONS
Stock options activity is summarized as follows:
Outstanding and Outstanding
Per Exercisable at Options and
Fiscal Year Share December 31, Options Exercised Exercisable at Date of
Granted $ CDN 1998 Granted or Cancelled March 31, 1999 Expiration
- ------------- ------- --------------- --------- ------------ -------------- ----------
1997 2.60 298,700 -- -- 298,700 1/16/00
1997 3.45 550,000 -- -- 550,000 4/25/00
1997 1.95 1,531,539 -- -- 1,531,539 12/19/02
1997 2.98 300,000 -- -- 300,000 10/17/00
1998 1.83 25,000 -- -- 25,000 5/06/03
1998 1.61 75,000 -- -- 75,000 1/15/03
1998 1.69 20,000 -- -- 20,000 3/01/03
1998 1.68 45,000 -- -- 45,000 3/15/03
1998 1.89 25,000 -- -- 25,000 4/01/03
1998 1.96 10,000 -- -- 10,000 4/15/03
1998 1.60 10,000 -- -- 10,000 6/16/03
--------------- --------- ------------ --------------
2,890,239 -- -- 2,890,239
--------------- --------- ------------ --------------
--------------- --------- ------------ --------------
Outstanding
Outstanding and Options and
Per Exercisable at Exercised Exercisable
Fiscal Year Share December 31, Options or at March 31, Date of
Granted $ CDN 1997 Granted Cancelled 1998 Expiration
- ------------- ------ --------------- --------- ------------ -------------- ----------
1995 0.21 45,000 -- (45,000) -- 1/30/98
1996 0.33 42,000 -- (42,000) -- 7/17/99
1997 2.30 40,000 -- -- 40,000 11/21/98
1997 2.60 298,700 -- -- 298,700 1/16/00
1997 3.45 550,000 -- -- 550,000 4/25/00
1997 1.95 1,738,764 -- -- 1,738,764 12/19/02
1997 2.98 300,000 -- -- 300,000 10/17/00
--------------- --------- ------------ --------------
3,014,464 -- (87,000) 2,927,464
--------------- --------- ------------ --------------
--------------- --------- ------------ --------------
STOCK OPTION PLAN - In 1997, the Company instituted a stock option plan
(the "Plan") covering eligible directors and employees, as defined in the Plan.
The Company may issue up to 3,020,988 shares of Common Stock under the Plan, of
which options to acquire 130,749 shares of Common Stock remained available for
grant at March 31, 1999. Such maximum includes options issued to certain
officers, directors and key employees at the discretion of the Board prior to
the adoption of the Plan. Under the Plan, the exercise price of each option
equals the market price of Benz's Common Stock on the date of grant. Options
become exercisable immediately and expire within a period determined at grant,
not to exceed ten years.
F-66
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At the February 19, 1999 meeting of the Board of Directors, 2,102,319
options held by certain employees, officers and directors of the Company were
cancelled. The Board reissued 2,112,349 options to these certain employees,
officers and directors at an exercise price of Cdn. $0.50 per share. In
addition, 300,000 options held by a former officer of the Company were cancelled
and 500,000 options were reissued at an exercise price of Cdn. $0.53 per share
as per his termination agreement. See Note 18, "Commitments and Contingencies"
for a discussion of the termination agreement. The repricing of the options is
subject to VSE approval. Of the options above, 2,023,700 options are held by
executive officers and directors of the Company and repricing of such options
requires shareholder approval in addition to VSE approval.
The Company accounts for its stock option transactions under the
provisions of APB No. 25. The following pro forma information is based on
estimating the fair value of grants based upon the provisions of SFAS No. 123.
The fair value of each option granted during the periods indicated has been
estimated as of the date of grant using the Black-Scholes option pricing model
with the following assumptions:
Four Months
Year Ended Ended Ten Months
December 31, December 31, Ended August
1998 1997 31, 1997
------------ --------------- ------------
Risk Free Interest Rate 4.59% 5.57% 5.57%
Life of the Options 2 years 2-3 years 2-3 years
Expected Dividend Yield 0% 0% 0%
Expected Volatility 138% 30% 30%
Weighted Average Fair Value of Options
Granted $0.14 $0.40 $0.60
No options were granted in the first quarter of 1999 or 1998. The
Company's pro forma net loss and net loss per share assuming compensation cost
was determined under SFAS No. 123 would have been the following:
F-67
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Three Months Ended
March 31,
------------------------------------------
1999 1998
-------------- ---------------
Net Loss $ (2,801,905) $ (2,508,105)
Net Loss Per Basic Share (0.08) (0.08)
March 31, March 31,
1999 1998
-------------- ---------------
Weighted Average Option Price Per Share
(Cdn$):
Granted $ -- $ --
Exercised -- 0.27
Cancelled -- --
Outstanding at End of Period 2.39 2.41
Exercisable at End of Period 2.39 2.41
Weighted Average Remaining Life of Options
Outstanding 33 months 44 months
NOTE 14. RETIREMENT PLAN
The Company sponsors a 401(k) Profit Sharing Plan (the "401(k) Plan")
under Section 401(k) of the Internal Revenue Code. This plan covers all eligible
employees of the Company. The Company matches $.50 for each $1.00 of employee
deferral, subject to limitations imposed by the Internal Revenue Service.
Company contributions to the 401(k) Plan during the periods ended March 31, 1999
and 1998 totaled $8,042 and $15,676, respectively.
NOTE 15. RELATED PARTY TRANSACTIONS
The Company executed a secured short-term interest-bearing note with
Starbucks Trust "Starbucks"), a trust controlled by the wife of the Chairman &
CEO, in the amount of up to $2.5 million. The Chairman & CEO disclaims
beneficial ownership or control of the trust. Starbucks invested the funds with
brokerage accounts that used a portion of the funds to purchase the Company's
stock. Interest accrues at a rate of 9% per annum on outstanding advances. All
outstanding advances and accrued interest were due on December 31, 1998. Due to
a standstill agreement described below, at March 31, 1999 advances totaling $2.9
million plus accrued interest remained outstanding.
F-68
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In July 1998, the Company entered into a purchase and sale agreement
with Starbucks to acquire all of Starbucks' interest in certain oil and gas
leases and properties, along with other associated assets. The purchase price
was $2,332,537 in cash and 600,000 common shares of the Company valued at
$696,661, such price subject to post-closing adjustments. Starbucks has
guaranteed that the assets acquired, on January 1, 2000 or such earlier date as
Starbucks may request, will have a value of not less than $3,032,537, such
valuation defined in the agreement. In the event the valuation is less than the
amount guaranteed, Starbucks is required to pay the difference to the Company.
During 1998, the Company paid approximately $1.1 million of the principal amount
due to Starbucks plus accrued interest. At March 31, 1999, $1.2 million remained
outstanding and is currently subject to a standstill agreement described below.
The Company is accruing interest on the unpaid balance due Starbucks at a rate
of 9% per annum. The Starbucks transaction was reviewed and approved by a
committee of outside directors and received approval from the Vancouver Stock
Exchange.
During 1998, the Company sold certain shares of Stanford Energy stock
for proceeds of Cdn. $1,183,735 and transferred such proceeds to Slattery Trust,
a trust controlled by Prentis B. Tomlinson. In addition, the Company transferred
certain shares of Stanford Energy stock to the account of Slattery Trust. Such
stock was subsequently sold. Proceeds from the above transactions were used by
Slattery Trust to purchase Benz Energy Ltd. common stock on the open market
on behalf of the Company. The 600,000 shares of Benz Energy common stock
purchased was then transferred to Starbucks Trust in satisfaction of the terms
of the Starbucks acquisition discussed above.
In April 1998, the Company agreed to acquire certain petroleum
interests and assume certain liabilities from Calibre, a private limited
liability company owned by certain directors and officers of the Company, and to
acquire certain petroleum interests owned by certain directors and officers of
the Company. The Company paid $261,000 in cash, forgave $1,450,000 of Calibre
accounts payable to the Company, assumed $450,000 in debt, issued promissory
notes totaling $2,000,000 and will issue 1,927,426 shares of the Company at an
ascribed price of Cdn. $2.80 per share in 1999. The promissory notes bear
interest at 10% per annum and were due, with accrued interest, half on April 1,
1998 and the balance on September 1, 1998. Payments of $215,000 were made during
1998. At March 31, 1999, $1,785,000 principal amount remained outstanding plus
accrued interest. Of this amount, $1,485,000 and $200,000, due respectively to
Prentis B. Tomlinson Jr. and Starbucks Trust, are subject to a standstill
agreement described below. In addition, Mr. Tomlinson has agreed to allow
amounts owed to him under such promissory notes to be offset against the
Starbucks note receivable described above. The Caliber transaction was reviewed
and approved by a committee of outside directors and received approval from the
Vancouver Stock Exchange.
In December 1998, as part of certain transactions by and between the
Company and Shell Capital, Inc., the Company was required to deliver an
agreement whereby Starbucks and Mr. Tomlinson each agreed to a deferment of
payments of any amounts owing to them from Benz, Texstar or any affiliate (the
"Benz Entities") until the termination date as defined in the Shell financing
arrangement. The parties agreed further not to pursue collection of any such
amounts from Benz Entities during such deferment period. Mr. Tomlinson and
Starbucks entered into such agreement in consideration of a mutual deferment by
the Benz Entities to collect or risk payments of amounts owed to them by
Tomlinson, Starbucks, Texstar Holdings L.L.C. and Security Oil, L.L.C. (See Note
8, "Long-term Debt" for a description of the Shell financing).
F-69
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Certain debt, as described in Note 8, "Long-term Debt" is guaranteed by
Mr. Tomlinson, Slattery Trust, whose beneficiary is Mr. Tomlinson, Calibre,
certain affiliates of Calibre, and Texstar Holdings.
During the three months ended March 31, 1998, the Company made advances
to Calibre Ecuador of $136,607 that were written off.
The Company participates in various oil and gas activities with related
parties. All transactions related to such activities are in the normal course of
business. As of March 31, 1999 and 1998, balances with related parties were as
follows:
March 31, March 31,
1999 1998
-------------- -------------
Joint Interest Billing Receivable $ 899,282 (1) $ 965,433
Other Receivables 95,000 95,000
(1) Includes amount currently involved in litigation. See Note 18,
"Commitments and Contingencies".
During the periods ended March 31, 1999 and 1998, the Company was
charged $9,923 and $10,487, respectively for management, professional and office
services provided by companies under significant influence of former directors
of the Company.
NOTE 16. EARNINGS PER SHARE
Securities that could potentially dilute basic earnings per share in
the future that were not included in the computation of diluted earnings per
share because their effect would have been antidilutive are as follows:
March 31, March 31,
1999 1998
--------- ---------
Warrants 2,493,903 4,799,936
Options 2,890,239 2,927,464
--------- ---------
Total Shares 5,384,142 7,727,400
--------- ---------
--------- ---------
F-70
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 17. GOING CONCERN ISSUE
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
experienced significant delays in the completion of certain wells that are a key
component of obtaining new financing for the Company. These delays have created
a significant working capital deficit and depleted cash reserves. As a result,
the Company has secured standstill agreements on certain financial debt
covenants of which it is currently in violation. In addition, the Company was
able to extend the maturity dates of currently due debt to July 31, 1999 in
anticipation of completing a major well. In the event that the well is not
completed timely and the Company is not able to refinance the current debt by
the extended due dates, the debt may ultimately be called. The Company may not
be able to meet such demands.
The Company anticipates the completion of the major well that is
necessary to obtain additional financing. The Company also is currently in
negotiations with several institutions to obtain production financing to repay
currently due debt. The Company also anticipates obtaining significant
additional equity in the near term through a private placement. In addition, the
Company has closed the sale of one non-core property for approximately $507,500
and is negotiating the sale of an interest in another property for over $4.0
million of proceeds. One additional property is currently the subject of
negotiations for sale with proceeds expected to exceed $1.0 million.
NOTE 18. COMMITMENTS AND CONTINGENCIES
LITIGATION - The Company is involved in litigation and is subject to
governmental and regulatory controls arising in the ordinary course of business.
It is the opinion of the Company's management that all claims and litigation
involving the Company are not likely to have a material adverse effect on its
financial position or results of operations.
The Company has filed suit against STB Energy Inc., Hilton Petroleum,
Inc., Trimark Resources, Inc., Westport Petroleum, Inc. and Bradley M. Colby
alleging breach or participation and operating agreements, suit on a sworn
account, fraudulent inducement to contract, fraud, constructive fraud, breach of
fiduciary duty and conspiracy, and seeks a declaratory judgement on corporate
veil and alter ego theories. The suit is pending and trial date has been set.
The Company has filed suit against Rainbow Oil and Gas, Inc.
("Rainbow") alleging breaches of participation, operating and letter agreements
covering certain prospects in Texas, Louisiana, and Mississippi. Rainbow
counter-claimed and seeks relief in the form of damages for breach of contract,
fraud and punitive damages plus attorneys' fees and interest. The lawsuit is
presently in the initial stages of discovery. Although the outcome of this
lawsuit can not be predicted with certainty, management will vigorously defend
the counterclaims and believes that such counterclaims will not have a material
adverse effect on the financial position or results of operations of the
Company.
F-71
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
ENVIRONMENTAL - Benz, as owner and operator of oil and gas properties,
is subject to various federal, state, and local laws and regulations relating to
discharge of materials into, and protection of, the environment. These laws and
regulations may, among other things, impose liability on the lessee under and
oil and gas lease for the cost of pollution clean-up resulting from operations,
subject the lessee to liability for pollution damages and impose restrictions on
the injection of liquids into subsurface strata. Benz maintains insurance
coverage that it believes is customary in the industry, although it is not fully
insured against all environmental risks.
The Company is not aware of any environmental claims existing as of
March 31, 1999, that would have a material impact on its financial position or
results of operations. There can be no assurance, however, that current
regulatory requirements will not change, or past non-compliance with
environmental laws will not be discovered on the Company's properties.
EMPLOYMENT AGREEMENT - On December 16, 1998, the Company entered into
an agreement with EnCap, the largest secured creditor of the Company, that
should Prentis Tomlinson's employment be terminated, except for cause, following
certain events, then EnCap will make a cash payment to Mr. Tomlinson of $1.0
million within 30 days of severance, enter into a consulting agreement with a
three year term providing for payments of $185,000 per annum, and grant Mr.
Tomlinson an overriding royalty interest in certain properties. These payments
are obligations of the Company and EnCap has agreed to provide financing to fund
such payment obligation.
TERMINATION AGREEMENTS - The Company terminated a key officer's
employment without cause and requested such officer to resign all of his
positions with the Company except his position as a Director of the Company. As
defined in his employment contract with the Company, such officer was entitled
to certain liquidated damages, and not as a penalty, in the amount of $1,150,000
payable as follows:
- Payments of $10,000 per month for 12 months commencing
February 15, 1999;
- Payment of $400,000 on January 15, 2000;
- Payment of $200,000 on July 15, 2000; and
- Payment of the balance due under his agreement, as adjusted,
on January 15, 2001.
In addition, the officer was granted new stock options in lieu of the
300,000 shares granted December 18, 1997. The new stock option agreement dated
February 15, 1999 is for 500,000 shares of Common Shares $0.01 par value. The
remaining agreed liquidated damages due on January 25, 2001 shall be reduced by
the difference between the option price under the new option agreement for
500,000 shares of Common Shares and the 500,000 option shares as of the date the
payment of the balance of the agreed liquidated damages. All cash payments
payable to the officer shall be reduced by applicable federal, state and local
withholding taxes. As a Director to the Company, he will be provided the same
Director's Liability Insurance provided to other Directors. The Company also
agreed that at its sole cost and expense to continue current health insurance
coverage as required by applicable law until January 5, 2000; however, he
notified the Company that he would forfeit such coverage as of April 15, 1999
and resigned as a director of the Company.
On December 16, 1998, the Company entered into an agreement with
EnCap that, should Mr. Tomlinson's employment be terminated, except for
cause, following certain events, then EnCap on behalf of the Company will
make a cash payment to Mr. Tomlinson of $1.0 million within 30 days of
severance, and the Company will enter into a consulting agreement with a
three-year term providing for payments of $185,000 per annum, and grant Mr.
Tomlinson a permanent overriding royalty interest in certain properties.
These payments are obligations of the Company and EnCap has agreed to provide
financing to fund such payment obligations.
F-72
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
LEASE COMMITMENTS - The Company has entered into a certain
noncancelable operating lease agreement for office space in Houston, Texas. The
lease term expires on January 31, 2003. The lease terms are subject to certain
operating expense escalations.
Rent expense recorded in the statement of operations is $111,692 and
$62,306 for the periods ended March 31, 1999 and 1998, respectively.
Future minimum lease payments under the lease agreement for each of the
years ended December 31, are as follows:
1999 $ 396,187
2000 396,187
2001 396,187
2002 396,187
2003 33,016
--------------
$ 1,617,764
--------------
--------------
NOTE 19. SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES
A summary of non-cash investing and financing activities for the three
months ended March 31, 1999 and 1998 is presented below:
In January 1998, the Company acquired certain oil and gas interests
from Lasco for a note payable that was subsequently converted to 2,542,372
shares of Benz common stock valued at $3.0 million and 9,488,140 shares of
redeemable preferred stock, as adjusted for reduction in purchase price, valued
at $1 per share. In addition, the Company paid interest on the Lasco Acquisition
note and dividends on the preferred shares into which the note was converted
with common shares of the company valued at $782,500. There were no non-cash
investing and financing activities in the first quarter of 1999.
Supplemental Disclosure of Cash Flow Information
For the Three Months Ended
March 31,
------------------------------------------
1999 1998
----------------- -----------------
Cash paid during the period for:
Interest, net of amounts
capitalized $ 1,197,296 $ 400,385
Income and other taxes, net of
refunds -- --
F-73
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 20. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts
receivable, accounts payable and long-term debt. The carrying amounts of cash,
accounts receivable and accounts payable approximate fair value due to the
highly liquid nature of these short-term instruments. The long-term debt,
excluding the convertible debentures and special notes, approximates fair value
due to the revision of terms at year-end of the bank indebtedness and the EnCap
facility and the closing at year end of the Mobil promissory notes and the Shell
production payment, all at current terms available to the Company. The
convertible debentures and special notes approximate fair value based on the
fact that holders elected to maintain the current terms when offered the ability
to modify such terms.
NOTE 21. SUBSEQUENT EVENTS
The following events took place subsequent to March 31, 1999:
- The Company executed the Seventh through Ninth Amendments to
the BOCP Credit Facility wherein the maturity of such facility was
extended to JuLY 31, 1999. The Company has been advanced
$3,000,000 from this facility during the first four months of 1999.
- Certain holders of the convertible debentures ($7,050,000)
elected to be paid for the six-month period ending March 31,
1999 with 1,057,500 shares of common stock in lieu of $315,000
of interest. The stock price used in the swap was based on the
10 day trailing closing average through March 26 1999.
- Effective March 31, 1999, a certain debenture holder has
agreed to exchange $250,000 of debentures for 541,700 common
shares.
- Pursuant to the terms of the Series B Special Notes, the
Company issued Series 3 Debentures in exchange for similar
amounts of the Series B Special Notes.
- The Company and Series 1 debenture holders have agreed to
lower the conversion price of the debentures from Cdn. $1.70
per common share to Cdn $1.40 per common share in exchange for
certain changes in the indenture agreement. The Company
intends to approach the Series 3 debenture holders and Series
B Special Note holders for the same changes. The Company has
approached the Series 1 debenture holders to exchange their
debentures for non-redeemable convertible preferred stock in
exchange for new equity to be placed into the Company. The
Company intends to similarly approach the Series 3 Debenture
holders. The early redemption provision of the redeemable
preferred stock described in Note 11 relating to a qualified
public offering of the Company's common stock was waived by
the holder in May 1999, subject to the completion of the
exchange offer.
- The Company is in negotiations with Pioneer Natural Resources
to structure a plan to pay the balance owing Pioneer
(approximately $4 million). Discussions have included one or
all of the following; issuing stock, issuing a promissory note
for payment over an extended period, paying a portion in cash
or trading prospects for some or all of the amounts due.
- The first payment to Western under the Western Geophysical
contract (estimated $3.35 million) in Old Ocean has been deferred
by Western to approximately June 10, 1999. The Company paid
$700,000 on June 18, 1999 and $2.6 million on July 9, 1999. The
Company has reached an oral agreement to pay the remaining balance
of approximately $3.4 million by July 31, 1999.
- The Company sold its Lisbon properties for proceeds of
$507,500 in April 1999.
- On May 18, 1999, the Company migrated from the Yukon
Territory, Canada and became a Delaware Corporation.
Authorized capital stock will be 400,000,000 shares consisting
of 300,000,000 shares of common stock and 100,000,000 shares
of preferred stock.
- Certain vendors have initiated suits against the Company for
non-payment of amounts due them. These amounts have been
reflected in the Company's accounts payable.
- The Company has executed a letter of intent to sell 37.5% of its
interest in the Old Ocean Prospect for approximately $5.5 million.
The potential purchaser will also have the option to purchase an
additional 12.5% of the Company's interest for approximately
$2 million. Additionally, the letter of intent contains provisions
relating to the overriding royalty interests in the prospect and
the marketing of 3-D seismic geophysical data covering the prospect.
- In July, 1999, the Company issued 34,596 shares of class A, series
II convertible preferred stock and warrants to purchase 3,974,923
shares of common stock in connection with the retirement of 95.45%
of the Mobil financing described in Note 8 and the re-conveyance
of the applicable net profits interest. The balance of the
financing and re-conveyance was settled through a cash payment.
- On July 9, 1999, the Company consummated an offering pursuant to
which it offered to exchange up to 354,250 shares of its class A,
series II preferred stock for any and all of its outstanding 9%
convertible debentures series I, due March 31, 2003 and an
offering to sell up to 121,000 shares of class A, series II
convertible preferred stock. At the closing, the Company exchanged
$15,145,000 principal amount of the 9% convertible debentures and
issued an aggregate of 238,201 shares of class A, series II
preferred stock, which included 44,600 shares issued under the
primary offering and the remainder of which were issued pursuant
to the exchange offer. The proceeds from the exchange offer and
offering of convertible preferred stock were used to retire a
portion of the Mobil financing, to repurchase a portion of the
Old Ocean net profits interest, to pay a portion of the seismic
costs relating to the Old Ocean Prospect and to pay fees and
expenses of the transactions.
F-74
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 22. CUSTOMER INFORMATION
MAJOR PURCHASERS - During the three months ended March 31, 1999, Coral
Energy LP and Tejas Gas Corporation accounted for approximately 60% and 14 %,
respectively, of the Company's total oil and gas revenue. No other purchasers
accounted for more than 10% of the Company's total oil and gas revenue in the
periods indicated above. The Company does not believe the loss of any existing
purchaser would have a material adverse effect on the Company.
CONCENTRATION OF CREDIT RISK - The Company's revenues are derived
principally from uncollateralized sales to customers in the oil and gas
industry; therefore, customers may be similarly affected by changes in economic
and other conditions within the industry. Benz has not experienced significant
credit losses on such sales.
NOTE 23. SUPPLEMENTAL OIL AND GAS DISCLOSURES
The following includes supplemental information regarding the Company's
oil and gas activities:
AMORTIZATION RATE - All of the Company's oil and gas properties are
located in the United States. The amortization rate per Mcfe was as follows for
the periods indicated:
Three months ended March 31, 1999 $1.30
Three months ended March 31, 1998 $1.34
Amortization per Mcfe reflects depreciation, depletion and amortization
of only capitalized costs of proved oil and gas properties.
COSTS NOT BEING AMORTIZED - The following table sets forth a summary of
oil and gas property costs not being amortized at dates indicated:
March 31, March 31,
1999 1998
------------- --------------
Property acquisition costs $ 32,767,775 $ 12,714,993
Exploration and development 5,380,468 571,261
------------- --------------
Total $ 38,148,243 $ 13,286,254
------------- --------------
------------- --------------
F-75
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CAPITALIZED COSTS INCURRED - The following table sets forth the
capitalized costs incurred in oil and gas producing activities for the periods
indicated:
Three Months Ended
March 31,
1999 1998
----------------- --------------------
Acquisition of proved properties $ 575,046 $ 479,234
Acquisition of unproved properties 2,909,867 18,813,309
Exploration costs 1,478,771 667,647
Development costs 1,147,670 618,252
Capitalized interest 1,039,897 171,398
Property sales -- (600,000)
----------------- --------------------
Total $ 7,151,251 $ 20,149,840
----------------- --------------------
----------------- --------------------
CAPITALIZED COSTS - The following table sets forth the capitalized
costs and associated accumulated depreciation, depletion and amortization,
including impairments, relating to the Company's oil and gas production,
exploration and development activities:
March 31, March 31,
1999 1998
----------------- --------------------
Proved properties $ 51,161,009 $ 32,566,598
Unproved properties 38,148,243 13,286,254
----------------- --------------------
89,309,252 45,852,852
Less: Accumulated DD&A (4,901,920) (1,615,368)
----------------- --------------------
Total $ 84,407,332 $ 44,237,484
----------------- --------------------
----------------- --------------------
F-76
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law (the "DGCL") grants every
corporation the power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, cardinal, administrative, or instigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee, or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise, against expenses (including attorneys'
fees) judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit, or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
The DGCL also grants every corporation the power to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee, or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust, or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interest of the corporation and except that no
indemnification shall be made in respect of any claim, issue, or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnify for such expenses which the court
shall deem proper.
The DGCL provides that to the extent that a present or former director
or officer of a corporation has been successful on the merits or otherwise in
defense of any action, suit, or proceeding referred to in the statute, or in the
defense of any claim, issue, or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonable incurred by him in
connection therewith.
The Registrant's Certificate of Incorporation contains provisions which
indemnify and exculpate the directors and officers of the Registrant from and
against certain liabilities. The Registrant's Certificate of Incorporation
provides that each person who at any time is or was a director or officer of the
Registrant, and is threatened to be or is made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative, arbitrative or investigative, by reason of the fact that such
person is or was a director or officer of the Registrant, or is or was serving
at the request of the Registrant as a director, officer, partner, venturer,
proprietor, member, employee, trustee, agent or similar functionary of another
domestic or foreign corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other for-profit or non-profit
enterprise, whether the basis of the proceeding is an alleged action in such
person's official capacity or in another capacity while holding such office,
shall be indemnified and held harmless by the Registrant to the fullest extent
authorized by the DGCL, except that such person shall not be indemnified if he
is convicted of a crime in a criminal proceeding. The Registrant's Certificate
of Incorporation provides that a director of the Registrant shall have no
personal liability to the Registrant or its shareholders for monetary damages
for breach of fiduciary duty as a director, except for liability (a) for any
breach of the director's duty of loyalty to the Registrant or its shareholders,
(b) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (c) for acts or omissions specified in
Section 174 of the DGCL regarding the unlawful payment of dividends and the
unlawful purchase or redemption of the Registrant's stock, and (d) for any
transaction from which the director derived an improper personal benefit.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND REGISTRATION
The following table sets forth the various expenses in connection with
the sale and distribution of the securities being registered. All expenses of
registration of the Shares will be borne by us. All of the amounts shown are
estimates except the registration fee.
II-1
Securities and Exchange Commission registration fee ........................... $
Legal fees and expenses .......................................................
Accounting fees and expenses ..................................................
Printing expenses .............................................................
Blue sky fees and expenses ....................................................
Miscellaneous .................................................................
Total Expenses .............................................................. $
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
DATE OF TRANSACTION PERSONS TO WHOM TYPE OF SECURITIES AMOUNT OF DESCRIPTION OF THE TRANSACTION
------------------- SECURITIES WERE SOLD ------------------ SECURITIES SOLD ------------------------------
-------------------- ---------------
March 26, 1998 Convertible Debt $10.0 million Private Placement
March 16, 1998 Convertible Debt $27.5 million Private Placement
ITEM 27. EXHIBITS
EXHIBIT DESCRIPTION
NUMBER -----------
-------
+2.1 Share Purchase Agreement Between Slattery Trust, Ruston Trust,
Houston Trust, Starbucks Trust, Todd Grabois, Robert Novak and
Benz Equities Ltd.
+3.1 Certificate of Incorporation.
+3.2 By-Laws.
+5.1 Opinion of Porter & Hedges, L.L.P.
*10.1 The Stock Option Plan
*10.2 Employment Agreement Prentis B. Tomlinson, Jr.
*10.3 Termination Agreement Ernest J. LaFlure
*10.4 Purchase and Sale Agreement between Texstar Petroleum, Inc.
and Shell Capital Inc.
+10.5 Bank One Credit Facility
*10.6 First Amendment to Loan Agreement between Texstar
Petroleum, Inc. and Bank One, Texas, N.A.
*10.7 Second Amendment to Loan Agreement between Texstar
Petroleum, Inc. and Bank One, Texas, N.A.
*10.8 Third Amendment to Loan Agreement between Texstar
Petroleum, Inc. and Bank One, Texas, N.A.
*10.9 Fourth Amendment to Loan Agreement between Texstar
Petroleum, Inc. and Bank One, Texas, N.A.
*10.10 Participation Agreement between BOCP Energy Partners, L.P.
and Bank One, Texas, N.A.
*10.11 Agreement among Texstar Petroleum, Inc., Benz Energy LTD,
Calibre Energy, L.L.C., BOCP Energy Partners, L.P. and EnCap
Energy Capital Fund IV, L.P.
*10.12 First Amendment to the Participation Agreement between BOCP
Energy Partners, L.P. and Bank One, Texas, N.A.
*10.13 Assignment of oil, gas and mineral leases and Bill of Sale
*10.14 Loan Agreement among Texstar Petroleum, Inc., Perry Limited
Sreedeswar, Inc., Dalworth Capital, James Ladner, RP & C
International Limited and Energy Capital Investment Company
*10.15 Assignment of contract rights and term assignment of oil
and gas lease, Old Ocean Area, Brazoria and Matagorda
Counties, Texas
*15.1 Letter re-unaudited interim financial information
*21.1 Schedule of Subsidiaries
+23.1 Consent of Porter & Hedges, L.L.P. (included in Exhibit 5.1)
*23.2 Consent of Merdinger, Fruchter, Rosen & Corso, P.C.
*23.3 Consent of R.A. Lenser and Associates, Inc.
*24.1 Power of Attorney (included herein at page II-4)
*27.1 Financial Data Schedule
- -----------
* Filed herewith
+ To be filed by amendment
II-2
ITEM 28. UNDERTAKINGS
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in this registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this registration
statement or any material change to such information in this
registration statement; provided, however, that subparagraphs
(i) and (ii) do not apply if the information required to be
included in a post-effective amendment by those paragraphs is
contained in the periodic reports filed by the Registrant
pursuant to Section 13 or Section 15(d) of the Securities and
Exchange Act of 1934 that are incorporated by reference in
this registration statement.
(2) That for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the Securities offered herein,
and the offering of such Securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the Securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to officers, directors and controlling persons of
the Registrant pursuant to the provisions described under Item 24 of this
registration statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in such Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a trustee,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such trustee, officer or controlling
person in connection with the Securities being registered, the Registrant will,
unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is public policy as expressed in such Act and will be
governed by the final adjudication of such issue.
II-3
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements of filing on Form SB-2 and has duly caused this registration
statement to be signed on our behalf by the undersigned, thereon duly authorized
in the City of Houston, State of Texas on July 13, 1999.
BENZ ENERGY INC.
By: /s/ Prentis B. Tomlinson, Jr.
--------------------------------------------
Prentis B. Tomlinson, Jr.
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement on Form SB-2 has been signed below by the
following persons in the capacities and on the dates indicated and each of the
undersigned officers and directors of Benz Energy Inc. hereby severally
constitutes and appoints Prentis B. Tomlinson, Jr. and Robert S. Herlin, his
true and lawful attorney-in-fact, and each of them, to sign for him, and in his
name in the capacity indicated below, such Registration Statement on Form SB-2
and for the purpose of registering such securities under the Securities Act of
1933, as amended, and any and all amendments (including post-effective
amendments) thereto, hereby ratifying and confirming our signatures as they may
be signed by our attorneys-in-fact to such Registration Statement and any and
all amendments thereto.
NAME TITLE DATE
---- ----- ----
/s/ Prentis B. Tomlinson, Jr.
- ------------------------------ Chairman of the Board, President and Chief July 13, 1999
Prentis B. Tomlinson, Jr. Executive Officer
/s/ Robert S. Herlin
- ------------------------------ Director, Senior Vice President and Chief July 12, 1999
Robert S. Herlin Financial Officer
/s/ Todd E. Grabois
- ------------------------------
Todd E. Grabois Vice President, Treasurer & Secretary July 12, 1999
/s/ Kirsten A. Hink
- ------------------------------
Kirsten A. Hink Controller (Principal Financial Officer) July 20, 1999
/s/ Robert L. Zorich
- ------------------------------
Robert L. Zorich Director July 13, 1999
- ------------------------------
Yale Fisher Director July __, 1999
/s/ David P. Quint
- ------------------------------
David P. Quint Director July 14, 1999
II-4
/s/ Gary Petersen
- ------------------------------
Gary Petersen Director July 14, 1999
- ------------------------------
Russell Cleveland Director July __, 1999
II-5
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NUMBER -----------
-------
+2.1 Share Purchase Agreement Between Slattery Trust, Ruston Trust,
Houston Trust, Starbucks Trust, Todd Grabois, Robert Novak and
Benz Equities Ltd.
+3.1 Certificate of Incorporation.
+3.2 By-Laws.
+5.1 Opinion of Porter & Hedges, L.L.P.
*10.1 The Stock Option Plan
*10.2 Employment Agreement Prentis B. Tomlinson, Jr.
*10.3 Termination Agreement Ernest J. LaFlure
*10.4 Purchase and Sale Agreement between Texstar Petroleum, Inc.
and Shell Capital Inc.
+10.5 Bank One Credit Facility
*10.6 First Amendment to Loan Agreement between Texstar
Petroleum, Inc. and Bank One, Texas, N.A.
*10.7 Second Amendment to Loan Agreement between Texstar
Petroleum, Inc. and Bank One, Texas, N.A.
*10.8 Third Amendment to Loan Agreement between Texstar
Petroleum, Inc. and Bank One, Texas, N.A.
*10.9 Fourth Amendment to Loan Agreement between Texstar
Petroleum, Inc. and Bank One, Texas, N.A.
*10.10 Participation Agreement between BOCP Energy Partners, L.P.
and Bank One, Texas, N.A.
*10.11 Agreement among Texstar Petroleum, Inc., Benz Energy LTD,
Calibre Energy, L.L.C., BOCP Energy Partners, L.P. and EnCap
Energy Capital Fund IV, L.P.
*10.12 First Amendment to the Participation Agreement between BOCP
Energy Partners, L.P. and Bank One, Texas, N.A.
*10.13 Assignment of oil, gas and mineral leases and Bill of Sale
*10.14 Loan Agreement among Texstar Petroleum, Inc., Perry Limited
Sreedeswar, Inc., Dalworth Capital, James Ladner, RP & C
International Limited and Energy Capital Investment Company
*10.15 Assignment of contract rights and term assignment of oil
and gas lease, Old Ocean Area, Brazoria and Matagorda
Counties, Texas
*15.1 Letter re-unaudited interim financial information
*21.1 Schedule of Subsidiaries
+23.1 Consent of Porter & Hedges, L.L.P. (included in Exhibit 5.1)
*23.2 Consent of Merdinger, Fruchter, Rosen & Corso, P.C.
*23.3 Consent of R.A. Lenser and Associates, Inc.
*24.1 Power of Attorney (included herein at page II-4)
*27.1 Financial Data Schedule
- -----------
* Filed herewith
+ To be filed by amendment