SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
Commission File No. 0-18774
SPINDLETOP OIL & GAS CO.
(Exact name of registrant as specified in its charter)
Texas 75-2063001
(State or other jurisdiction (IRS Employer or ID #)
of incorporation or organization)
331 Melrose, Suite 102, Richardson, TX 75080
(Address of principal executive offices) (Zip Code)
(972) 644-2581
(Company's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $0.01 per share
(Title of Class)
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
Indicate by check mark whether the Company (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
YES X NO
As of March 30, 2004, 7,677,471 shares of the Company's common stock were
issued and outstanding, and the aggregate market value of the voting stock
held by non-affiliates of the company as of that date is not determinable
since no significant public trading market has been established for the
Company's common stock
PART I
Item 1. Description of Business
(a) General Business Development
----------------------------
Spindletop Oil & Gas Co. is engaged in the exploration, development and
production of oil and natural gas; the rental of oilfield equipment; and
through one of its subsidiaries, the gathering and marketing of natural gas.
The term "Company" is used herein to refer to Spindletop Oil & Gas Co. and
its wholly owned subsidiaries, Prairie Pipeline Co. ("PPL") and Spindletop
Drilling Company ("SDC").
The net crude oil and gas reserves of the Company as of December 31, 2003,
were 365,000 barrels of oil and condensate and 9,354,000 MCF (thousand cubic
feet) of natural gas. The Company owns rental equipment, including natural
gas compressors, pumping units, natural gas dehydrators and other various
pieces of oilfield production equipment. In addition, the Company, through
PPL, owns approximately 26.1 miles of pipelines located in Texas, which are
used for the gathering of natural gas. Additionally, the Company purchased
approximately 56 miles of pipeline located in Kansas, subsequent to year-end
in January, 2004. The Company's principal executive offices are located at
331 Melrose, Suite 102, Richardson, Texas. The telephone number is (972)
644-2581.
BACKGROUND
The Company is a Texas Corporation. The Company was previously known as
Prairie States Energy Co. ("PSE"). On July 13, 1990, Spindletop Oil & Gas
Co., a Utah Corporation, ("SOG UTAH") merged into PSE, and the name of PSE
was changed to Spindletop Oil & Gas Co., the Company herein.
The Company was originally incorporated in Colorado as Mid-America Drilling &
Exploration, Inc., on August 9, 1978 as a wholly owned subsidiary of Mid-
America Petroleum, Inc.("MAP"). The principal business of the Company at that
time was contract drilling of oil and gas wells. The initial public offering
of the Company occurred by prospectus dated December 13, 1979. In January
1981, the shares of the Company owned by MAP were distributed as a dividend
to the shareholders of MAP. The Company's name was changed to Prairie States
Exploration, Inc. on March 15, 1983. Prairie States Exploration, Inc. became
insolvent in late 1983, and filed for protection under Chapter 11 of the
Bankruptcy Code on December 14, 1983.
Prairie States Exploration, Inc. was successfully reorganized under Chapter
11 of the Bankruptcy Code, and the Bankruptcy Court approved the plan of
reorganization on September 9, 1985. Pursuant to the Plan, the Company merged
into a wholly owned subsidiary, Prairie States Energy Co., a Texas
Corporation. The Plan of Reorganization was proposed and funded by Paul E.
Cash.
Since the reorganization, the Company has engaged in the general oil and gas
business, including exploration, development, and production of oil and gas,
the rental of oilfield production equipment and the ownership and
construction and operation of pipelines for the gathering and marketing of
natural gas. SOG Utah was incorporated on August 15, 1975 as Main Street
- 2 -
Equities, Inc., a Utah corporation. SOG Utah sold 5,000,000 shares of common
stock in a public offering in 1976. Until 1981, the business of the company
consisted of minor real estate operations. In October 1981 the name was
changed to Aledo Oil and Gas Company, and in January 1983 the name was
changed to Spindletop Oil & Gas Co.
The name "Spindletop" has been used by Paul E. Cash since 1975 in conjunction
with several previous oil and gas businesses in which he was engaged.
On July 13, 1990, SOG Utah was merged into PSE, and the name of the surviving
company was changed to Spindletop Oil & Gas Co., a Texas corporation. In the
merger, each shareholder of PSE received one-half share of the common stock
of the surviving company, for each share of PSE owned prior to the merger.
Each shareholder of SOG Utah received one and one-half shares of the common
stock of the surviving company, for each share of SOG Utah owned prior to the
merger. After the merger, the Company had 44,922,564 shares of common stock
outstanding, 32,255,195 of which were owned by the shareholders of PSE and
12,667,369 by shareholders of SOG Utah. Shares issued to the former
shareholders of SOG Utah have not been registered with the Securities and
Exchange Commission but according to Rule 144-K these shares would
automatically become free trading three years from date of issuance. The
Company's management believes that all shares issued to the former
shareholders of SOG Utah are now free trading in accordance with Rule 144-K.
On January 31, 1997, the Company effected a one for six reverse stock split.
The Company reduced the authorized common shares from 150,000,000 to
100,000,000 and increased the par value from $.001 to $.01 per share.
On December 1, 1999, Giant Energy Corp. ("Giant") purchased controlling
interest in Spindletop Oil & Gas Co. Giant purchased 5,860,889 shares of the
Registrant's outstanding Common Stock and as of December 31, 2003 owns 76.9
percent of the Registrant's 7,677,471 shares of outstanding Common Stock.
Chris Mazzini, President and Chairman of the Board of the Registrant, is the
sole owner of Giant.
PLAN OF OPERATION
The Company's long-term strategy is to build an oil and gas production
company through a strategic combination of selected property acquisitions and
an exploration program. Additionally, the Company will continue to rework
existing wells in an attempt to increase production and reserves.
The Company will continue to generate and evaluate prospects using its own
staff. The Company intends to fund operations primarily from cash flow
generated by operations. The Company's primary area of operation has been
and will continue to be in Texas with an emphasis in the geological provinces
known as the Ft. Worth Basin in Texas.
The Company will attempt to expand its pipeline system. Expansion will be
dependent upon success in its exploration programs, since the majority of its
existing pipelines are connected to wells that the Company operates. In
addition, the oilfield rental equipment and compression business will be
expanded as needed, but this segment also depends upon the success of the
exploration and development program.
- 3 -
(b) Financial information relating to Industry Segments
---------------------------------------------------
The Company has two identifiable business segments: exploration, development
and production of oil and natural gas, and gas gathering and oil field
equipment rental. Footnote 15 to the Consolidated Financial Statements filed
herein sets forth the relevant information regarding revenues, income from
operations and identifiable assets for these segments.
(c) Narrative Description of Business
---------------------------------
The Company and SDC are engaged in the exploration, development and
production of oil and natural gas, and the rental of oil and gas production
equipment. PPL is engaged in the gathering and marketing of natural gas.
(i) Principal Products, Distribution and Availability
-------------------------------------------------
The principal products marketed by the Company are crude oil and natural gas
which are sold to major oil and gas companies, brokers, pipelines and
distributors, and oil and gas properties which are acquired and sold to oil
and gas development entities. Reserves of oil and gas are depleted upon
extraction, and the Company is in competition with other entities for the
discovery of new prospects.
The Company is also engaged in the gathering and marketing of natural gas
through its subsidiary PPL, which owns 26.1 miles of pipelines and currently
gathers approximately 713 MCF of gas per day. Gas is gathered for a fee.
Substantially all of the gas gathered by the Company is gas produced from
wells that the Company operates and in which it owns a working interest.
Subsequent to year-end, the Company acquired an approximate 56 mile inactive
gas gathering system in South Central Kansas. The Company plans to reactivate
this pipeline to gather and transport some of it own gas and third party gas.
The Company is also engaged in the business of rental of oilfield production
equipment. The equipment is comprised of pumping units, compressors, gas
dehydrators and related production equipment. Substantially all of such
equipment is located on wells that the Company operates and in which it owns
a working interest.
(ii) Patents, Licenses and Franchises
--------------------------------
Oil and gas leases of the Company are obtained from the owner of the mineral
estate. The leases are generally for a primary term of 1 to 5 years, and in
some instances as long as 10 years, with the provision that such leases shall
be extended into a secondary term and will continue during such secondary
term as long as oil and gas are produced in commercial quantities or other
operations are conducted on such leases as provided by the terms of the
leases. It is generally required that a delay rental be paid on an annual
basis during the primary term of the lease unless the lease is producing.
Delay rentals are normally $1.00 to $5.00 per net mineral acre.
The Company currently holds interests in producing and non-producing oil and
gas leases. The existence of the oil and gas leases and the terms of the oil
and gas leases are important to the business of the Company because future
additions to reserves will come from oil and gas leases currently owned by
the Company, and others that may be acquired, when they are proven to be
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productive. The Company is continuing to purchase oil and gas leases in
areas where it currently has production, and also in other areas.
(iii) Seasonality
-----------
The Company's oil and gas activities generally are conducted on a year round
basis with only minor interruptions caused by weather, equipment and labor
issues.
(iv) Working Capital Items
---------------------
The Company finances the majority of its operations, including the purchase
of oil and gas leases, the development of wells, the construction of
pipelines and acquisition of oil field rental equipment from its internal
working capital as well as some borrowings.
(v) Dependence on Customers
-----------------------
The following is a summary of significant purchasers from oil and natural gas
produced by the Company for the three-year period ended December 31, 2003:
Year Ended December 31, (1)
--------------------------------
Purchaser 2003 2002 2001
- ----------------------------------------- -------- -------- --------
Cantera Resources 17% 22% 32%
Devon Gas Services/Mitchell Marketing Co. 20% 38% 41%
Shell Trading (US) Company 9% - -
LIG Chemical Company 9% - -
Plains Marketing, L.P. 7% - -
(1) Percent of Total Oil & Gas Sales
Oil and Gas is sold to approximately 100 different purchasers (such as Devon
Gas Services, L.P., Enbridge Energy Partners (formerly Cantera Resources,
Inc.), Plains Marketing, L.P., Eastex Crude Company, Shell Trading (US)
Company, Dynegy Midstream Services, Empire Pipeline Corporation, LIG Chemical
Company, and Duke Energy Field Services) under market sensitive, short-term
contracts computed on a month to month basis.
Except as set forth above, there are no other customers of the Company that
individually accounted for more than 5% of the Company's oil and gas revenues
during the three years ended December 31, 2003.
The Company currently has no hedged contracts.
(vi) Competition
-----------
Numerous entities and individuals, many of which have far greater financial
and other resources than the Company, are active in the exploration for and
production of oil and gas. Substantial competition exists for leases,
prospects and equipment, all of which are necessary for successful
operations. Competition is focused primarily on the discovery of new
prospects, which can be developed and made productive.
- 5 -
The market prices received for the Company's products depend on a number of
factors beyond the control of the Company, including consumer demand,
worldwide availability, transportation facilities, and United States and
foreign government regulation of exports, imports, production and prices.
Widely fluctuating prices for oil and gas over recent years have had a
direct effect on the profitability of the Company's operations.
(vii) Development Activities
----------------------
The Company's primary oil and gas prospect acquisition efforts have been in
known producing areas in the United States with emphasis devoted to Texas.
The Company intends to use a portion of its available funds to participate in
drilling activities. Any drilling activity is performed by independent
drilling contractors. The Company does not refine or otherwise process its
oil and gas production.
Exploration for oil and gas is normally conducted with the Company acquiring
undeveloped oil and gas prospects, and carrying out exploratory drilling on
the prospect with the Company retaining a majority interest in the prospect.
Interests in the property are sometimes sold to key employees and associated
companies at cost. Also, interests may be sold to third parties with the
Company retaining an overriding royalty interest, carried working interest,
or a reversionary interest.
A prospect is a geographical area designated by the Company for the purpose
of searching for oil and gas reserves and reasonably expected by it to
contain at least one oil or gas reservoir. The Company utilizes its own
funds along with the issuance of common stock and options to purchase common
stock in some cases, to acquire oil and gas leases covering the lands
comprising the prospects. These leases are selected by the Company and are
obtained directly from the landowners, as well as from landmen, geologists,
other oil companies, some of whom may be affiliated with the Company, and by
direct purchase, farm-in, or option agreements. After an initial test well
is drilled on a property, any subsequent development of such prospect will
normally require the Company's participation for the development of the
discovery.
(viii) Environmental Regulation
------------------------
The Company's oil and gas exploration and production activities are subject
to Federal, State and environmental quality and pollution control laws and
regulations. Such regulations restrict emission and discharge of wastes from
wells, may require permits for the drilling of wells, prescribe the spacing
of wells and rate of production, and require prevention and clean-up of
pollution.
Although the Company has not in the past incurred substantial costs in
complying with such laws and regulations, future environmental restrictions
or requirements may materially increase the Company's capital expenditures,
reduce earnings, and delay or prohibit certain activities. However, such
restrictions and requirements would also apply to the Company's competitors,
and it is unlikely that compliance by the Company would adversely affect the
Company's competitive position.
- 6 -
(ix) Additional Government Regulation
--------------------------------
In addition to environmental regulations, the production and sale of oil and
gas is subject to regulation by Federal, State and local governmental
authorities and agencies. Such regulations encompass matters such as the
location and spacing of wells, the prevention of waste, the rate of
production, the sale price of certain oil and gas, conservation, and safety.
Oil Price Regulation
- --------------------
Historically, regulatory policy affecting crude oil pricing was derived from
the Emergency Petroleum Allocation Act of 1973, as amended, which provided
for mandatory crude oil price controls until June 1, 1979, and discretionary
controls through September 30, 1981. On April 5, 1979, President Carter
directed the Department of Energy to complete administrative procedures
designed to phase out, commencing June 1, 1979, price controls on all
domestically produced crude oil by October 1, 1981. However, on January 28,
1981, President Reagan ordered the elimination of remaining federal controls
on domestic oil production, effective immediately. Consequently, oil may
currently be sold at unregulated prices.
Gas Price Regulation
- --------------------
The Natural Gas Act of 1938 ("NGA") regulates the interstate transportation
and certain sales for resale of natural gas. The Natural Gas Policy Act of
1978 ("NGPA") regulates the maximum selling prices of certain categories of
gas, whether sold in so-called "first sales" in interstate or intrastate
commerce. These statutes are administered by the Federal Energy Regulatory
Commission ("FERC"). The NGPA established various categories of natural gas
and provided for graduated deregulation of price controls for first sales of
several categories of natural gas. With certain exceptions, all price
deregulation contemplated under the NGPA as originally enacted in 1978 has
already taken place. Under current market conditions, deregulated gas prices
under new contracts tend to be substantially lower than most regulated price
ceilings prescribed by the NGPA.
On July 26, 1989, the Natural Gas Wellhead Decontrol Act of 1989 ("Decontrol
Act") was enacted. The Decontrol Act amended the NGPA to remove as of July
27, 1989 both price and non-price controls from natural gas not subject to a
first sale contract in effect on July 26, 1989. The Decontrol Act also
provided for the phasing out of all price regulation under the NGPA by
January 1, 1993.
(x) Special Tax Provisions
----------------------
See footnote 8 to Consolidated Financial Statements
(xi) Employees
---------
The Company, on its own account and through a management contract with its
parent corporation, employs or contracts for the services of a total of 39
people. Eight are full-time employees or contractors. The remainder are
part-time contractors or employees.
- 7 -
(d) Financial information about foreign and domestic operations and export
sales.
All of the Company's business is conducted domestically, with no export
sales.
Item 2. Properties
Oil and Gas Properties
- ----------------------
The following table sets forth pertinent data with respect to the Company-
owned oil and gas properties, all located within the continental United
States, as estimated by the Company:
Year Ended December 31,
-----------------------------------
2003 2002 2001
----------- ----------- -----------
Gas and Oil Properties, net (1):
Proved developed gas reserves-Mcf (2) 4,978,000 4,977,000 5,312,000
Proved undeveloped gas reserves-Mcf (3) 4,375,000 11,298,000 1,098,000
----------- ----------- -----------
Total proved gas reserves-Mcf 9,353,000 16,275,000 6,410,000
=========== =========== ===========
Proved Developed Crude Oil and
Condensate reserves-Bbls (2) 365,000 153,000 43,000
Proved Undeveloped crude oil and
Condensate reserves-Bbls (3) - - -
----------- ----------- -----------
Total proved crude oil and condensate
Reserves-Bbls 365,000 153,000 42,970
=========== =========== ===========
Year Ended December 31,
-----------------------------------
2003 2002 2001
----------- ----------- -----------
Present Value of Estimated Future
Net Reserves from proved reserves (4)(5)
Developed $10,726,000 $ 5,578,000 $ 3,365,000
Developed and Undeveloped 16,832,000 11,815,000 3,729,000
(1) The estimate of the net proved oil and gas reserves, future net revenues,
and the present value of future net revenues.
(2) "Proved Developed Oil and Gas Reserves" are reserves that can be expected
to be recovered through existing wells with existing equipment and operating
methods.
(3) "Proved Undeveloped Reserves" are reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. See Footnote 18
to the Financial Statements, Supplemental Reserve Information (Unaudited),
for further explanation of the changes for 2001 through 2003.
(4) "Estimated Future Net Revenues" are computed by applying current prices
- 8 -
of oil and gas, less the estimated future expenditures (based on current
costs) to be incurred in developing and producing the proved reserves.
(5) "Present Value of Estimated Future Net Revenues" is computed by
discounting the Estimated Future Net Revenues at the rate of ten percent
(10%) per year in accordance with the Securities and Exchange Commission
Rules and Regulations.
The Company's working interests in exploration and development wells
completed during the years indicated were as follows:
Year Ended December 31,
-----------------------------------------
2003 2002 2001
------------- ------------- -------------
Gross Net Gross Net Gross Net
------ ------ ------ ------ ------ ------
Exploratory Wells:
Productive - - - - - -
Non-Productive - - - - - -
------ ------ ------ ------ ------ ------
Total - - - - - -
------ ------ ------ ------ ------ ------
Development Wells:
Productive 2.000 .765 1.000 .125 - -
Non-Productive - - - - - -
------ ------ ------ ------ ------ ------
Total 2.000 .765 1.000 .125 - -
------ ------ ------ ------ ------ ------
Total Exploration & Development
Wells:
Productive 2.000 .765 1.000 .125 - -
Non-Productive - - - - - -
------ ------ ------ ------ ------ ------
2.000 .765 1.000 .125 - -
====== ====== ====== ====== ====== ======
The following tables set forth additional data with respect to production
from Company-owned oil and gas properties, all located within the continental
United States:
For the years ended December 31
------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Oil and Gas Production, net:
Natural Gas (Mcf) 540,799 499,081 472,728 479,769 277,834
Crude Oil & Condensate (Bbl) 28,747 9,553 9,229 10,111 6,986
Average Sales Price per Unit
Produced:
Natural Gas ($/Mcf) $ 4.33 $ 3.02 $ 4.07 $ 3.58 $ 2.20
Crude Oil & Condensate($/Bbl)$25.14 $ 23.27 $ 25.19 $ 27.37 $ 16.70
- 9 -
Average Production Cost per
Equivalent Barrel (1)(2) $ 10.41 $ 8.51 $ 9.15 $ 8.09 $ 9.59
(1) Includes severance taxes and ad valorem taxes.
(2) Gas production is converted to equivalent barrels at the rate of six Mcf
per barrel, representing relative energy content of natural gas to oil.
The Company owns producing royalties and overriding royalties under
properties located in Texas and other states. The revenue from these
properties is not significant.
Current Activities - March 30, 2004:
- ------------------------------------
Gross Wells in Process of Drilling -1-
Net Wells in Process of drilling -0-
Water floods in Process of Installation -0-
Pressure Maintenance Operations -0-
The Company is not aware of any major discovery or other favorable or adverse
event that is believed to have caused a significant change in the estimated
proved reserves since December 31, 2003.
The Company currently has leases covering in excess of 5,000 acres in
Parker, Denton, Wise Jack, Tarrant and Hood Counties, Texas (currently held by
production), that the Company believes may have drilling locations in the
Barnett Shale Formation. The Company has not included any of these potential
locations in its calculation of proven undeveloped oil and gas reserves,
although it believes that the Barnett Shale Formation underlying this lease
acreage may be productive.
Effective August 1, 2003, the Company sold its working interest in a non-
operated property for a sales price of $735,000. On August 18, 2003, the
proceeds of the sale were deposited directly from the purchaser into the
account of a third party intermediary (the "Exchanger") that specializes in
deferred like-kind exchanges under IRC Section 1031. The Exchanger holds the
sales proceeds pending timely identification of and the closing on the
acquisition of potential qualifying like-kind replacement properties.
Subsequent to the initial sale, the Company acquired various mineral
interests from a third party for the sum of $97,270. The acquisition price
was paid out of the funds being held by the Exchanger. After 180 days from
the initial sale, any funds not used to acquire qualifying properties are to
be returned to the Company, and the Company will recognize a taxable gain on
the unused proceeds.
On January 30, 2004, the Company purchased a gas pipeline for a purchase price
of $200,200 including fees, which was paid by the Exchanger out of funds held
on behalf of the Company. Both of the above purchases (the "Replacement
Property") qualify as tax-free exchanges under IRC Section 1031. During
February, 2004, the Exchanger remitted approximately $437,500 to the Company
representing the net proceeds from the sale and two purchases.
- 10 -
Office Space:
- -------------
The Company leases office space as follows:
Location Square Feet Lease Expires
------------------ ----------- -----------------
Richardson, Texas 3,833 February 28, 2006
Pipelines
- ---------
The Company owns, through its subsidiary Prairie Pipeline Co., 26.1 miles of
natural gas pipelines in Parker, Palo Pinto and Eastland Counties, Texas.
Additionally on January 30, 2004, the Company acquired approximately 56 miles
of natural gas pipelines in South Central Kansas. These pipelines are steel
and polyethylene and range in size from 2 inches to 8 inches. These
pipelines primarily gather natural gas from wells operated by the Company and
in which the Company owns a working interest, but also for other parties.
The Company normally does not purchase and resell natural gas, but gathers
gas for a fee. The fees charged in some cases are subject to regulations by
the State of Texas and the Federal Energy Regulatory Commission. Average
daily volumes of gas gathered by the pipelines owned by the Company was 713,
807, and 496 MCF per day for 2003, 2002, and 2001 respectively.
Oil Field Production Equipment
- ------------------------------
The Company owns various natural gas compressors, pumping units, dehydrators
and various other pieces of oil field production equipment.
Substantially all of the equipment is located on oil and gas properties
operated by the Company and in which it owns a working interest. The rental
fees are charged as lease operating fees to each property and each owner.
Item 3. Legal Proceedings
Neither the Registrant nor its subsidiaries nor any officers or directors is
a party to any material pending legal proceedings for or against the Company
or its subsidiary nor are any of their properties subject to any proceedings.
Item 4. Submission of Matters of Security Holders to a Vote
None
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder
Matters.
No significant public trading market has been established for the Company's
common stock. The common stock of the Company is traded on an occasional
basis in the over the counter market. The Company does not believe that
listings of bid and asking prices for its stock are indicative of the actual
trades of its stock, since trades are made infrequently.
- 11 -
There is no amount of common stock that is subject to outstanding warrants to
purchase, or securities convertible into, common stock of the Company. As of
March 30, 2004, there were options outstanding to purchase up to 75,000
shares of common stock at an exercise price of $0.30 per share. These
options expire in July, 2004. None of these options were granted to officers
or employees of the Company.
On January 31, 1997, the Company effected a one for six reverse stock split.
At that time, the Company reduced the authorized common shares from
150,000,000 to 100,000,000 and increased the par value from $.001 to $.01 per
share.
The approximate number of record holders of the Company's Common Stock on
March 30, 2004, was 627.
The Company has not paid any dividends since its reorganization and it is not
contemplated that it will pay any dividends on its Common Stock in the
foreseeable future. There are no financing agreements in place which
restrict payment of dividends.
The Registrant currently serves as its own stock transfer agent and
registrar.
Item 6. Selected Financial Data
The selected financial information presented should be read in conjunction
with the consolidated financial statements and the related notes thereto.
For the years ended December 31
-----------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
Total Revenue $ 3,458,000 $ 2,084,000 $ 2,610,000 $ 2,345,000 $ 1,072,000
Net Income (Loss) 987,000 382,000 776,000 849,000 (271,000)
Earnings per Share (1) $.13 $ .05 $ .10 $ .11 ($ .04)
As of December 31, 2003
-----------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
Total Assets $ 5,395,000 $ 3,764,000 $ 3,486,000 $ 2,909,000 $ 1,843,000
Long-Term Debt - - 55,000 246,000 308,000
(1) After the 1 for 6 stock split discussed in Footnote 2 to the Consolidated
Financial Statements.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
- -------------------------------
The Company's operating capital needs, as well as its capital spending
program are generally funded from cash flow generated by operations. Because
- 12 -
future cash flow is subject to a number of variables, such as the level of
production and the sales price of oil and natural gas, the Company can
provide no assurance that its operations will provide cash sufficient to
maintain current levels of capital spending. Accordingly, the Company may be
required to seek additional financing from third parties in order to fund its
exploration and development programs.
Results of Operations:
- ----------------------
2003 Compared to 2002
- ---------------------
Oil and gas revenues increased for the year 2003. This was due primarily to
an approximate 43% increase in average gas prices from $3.02 per Mcf in 2002
to $4.33 per Mcf in 2003. Average oil prices received by the Company also
increased approximately 8% from $23.27 per bbl in 2002 to $25.14 per bbl in
2003. Production also increased due primarily to the acquisition of
operating interests in 22 producing oil and gas wells during the first half
of 2003. Natural gas production was approximately 541,000 Mcf in 2003
compared to 499,000 Mcf in 2003. Oil production was approximately 28,747
Bbls in 2003 compared to 9,533 in 2002.
The increase in revenue from lease operations this year was due to the
addition of operated properties mentioned above which were acquired during
the year. The Company bills overhead in accordance with the operating
agreements, and records as income the charges made to the non-operating
interests.
Gas gathering and compression fee income decreased during 2003 as a result of
a decrease in production from properties served by Prairie Pipeline Co. The
decrease was a result of natural decline in production. The Company charges
a fee for transportation of gas from the well site to the purchaser's
pipeline, and in some cases provides and charges for compression services.
Interest income is up due to the Company's policy of investing excess cash
funds in higher earning money market accounts as opposed to checking
accounts, as well as the higher level of cash balances earning interest in
2003 as compared to 2002.
Lease operating expenses was higher in 2003 due to the addition of 22
operated producing wells in 2003 and the addition of 19 producing wells in
August and September of 2002. In addition, costs to operate have increased.
As oil and gas prices have escalated, operating cost, costs of oil field
services and equipment have also increased.
Amortization of the full cost pot (depletion) was up in 2003 due to an
increase in the cost of acquisitions added to the full cost pot, the addition
of reserves and the resulting increase in production for the year.
General and administrative expenses increased $179,000. Due to the
acquisition of over 40 producing oil and gas wells during the year, many in
states in which the Company has not previously operated, the headquarters
staff was increased to accommodate the additional workload. In addition,
the management fee charged by the affiliated entity that provides management
- 13 -
services including supervisory personnel, was increased from $10,000 to
$20,000 per month effective January 1, 2003 (See Item 11 Executive
Compensation and Footnote 6 to the Financial Statements).
Interest expense decreased due to payoff of the note payable to a related
party in May, 2003 and related amortization of the note discount.
2002 Compared to 2001
- ---------------------
Oil and gas revenues decreased for the year 2002. This was due primarily to
an approximate 26% decline in average gas prices from $4.07 per Mcf to $3.02
per Mcf. The decline in prices was partially offset by an increase in
production which was due primarily to the acquisition of eight operated oil
and gas properties during the last half of the year. These acquisitions
offset a slight decline in production from properties existing at the
beginning of the year. Natural gas production was approximately 499,000 Mcf
and 472,000 Mcf for 2002 and 2001 respectively. Crude oil and condensate
production was approximately 9,533 and 9,229 for 2002 and 2001 respectively.
The increase in revenue from lease operations for 2000 was due to the
addition of operated properties acquired during the year. The Company bills
overhead in accordance with the operating agreements, and records as income
the charges made to the non-operating interests.
Gas gathering and compression fee income decreased during 2002 as a result of
a decrease in production from properties served by Prairie Pipeline Co. The
decrease was a result of natural decline in production, but the Company also
lost almost one full month of production from these wells due to a compressor
failure. The Company charges a fee for transportation of gas from the well
site to the purchaser's pipeline, and in some cases provides and charges for
compression services.
Interest income is up due to the Company's policy of investing excess cash
funds in higher earning money market accounts as opposed to checking
accounts, as well as the higher level of cash balances earning interest in
2002 as compared to 2001.
Lease operating expenses were lower due to a decrease in work-over activity
during the year as compared with 2001. Even though gas and oil prices
generally rose during 2002, they never reached the average prices attained in
2001. As a result of general inflationary increases in the cost of repairs,
maintenance, materials and supplies for the year, the Company opted to only
work over wells necessary to hold leases, and tightened the belt, looking for
ways to reduce operating expenses wherever possible.
Amortization of the full cost pot (depletion) was up in 2002 due to an
increase in costs added to the full cost pot, the addition of reserves and
the resulting increase in production for the year.
General and administrative expenses stayed essentially the same. The slight
increase is due to an increase of $20,000 between 2002 and 2001 of a
management fee charged by an affiliated entity. All other general and
administrative expenses were held substantially the same as in 2001.
- 14 -
Interest expense decreased due to the accelerated amortization of the Note
Discount in 2001, that was caused by a substantial prepayment of principal on
the note to a related party and related amortization of the note discount.
The current income tax provision decreased as the Company's taxable income
decreased ratably for 2002 as compared to the Company's net income before tax
for 2002 and 2001.
Certain Factors That Could Affect Future Operations
- ---------------------------------------------------
Certain information contained in this report, as well as written and oral
statements made or incorporated by reference from time to time by the Company
and its representatives in other reports, filings with the Securities and
Exchange Commission, press releases, conferences, teleconferences or
otherwise, may be deemed to be 'forward-looking statements' within the
meaning of Section 21E of the Securities Exchange Act of 1934 and are subject
to the 'Safe Harbor' provisions of that section.
Forward-looking statements include statements concerning the Company's and
management's plans, objectives, goals, strategies and future operations and
performance and the assumptions underlying such forward-looking statements.
When used in this document, the words "anticipates", "estimates", "expects",
"believes", "intends", "plans", and similar expressions are intended to
identify such forward-looking statements. Actual results and developments
could differ materially from those expressed in or implied by such statements
due to these and other factors.
Item 8. Consolidated Financial Statements and Schedules Index at page 21.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
The accountants for the Company are Farmer, Fuqua & Huff, P.C., who have
prepared audit reports for the years ended December 31, 2003, 2002, and 2001
There have been no disagreements between the Company and Farmer, Fuqua, &
Huff, P.C. on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure.
Item 9a. - Controls and Procedures
Based on their most recent evaluation, which was completed within 90 days of
the filing of this Form 10-K, our Acting Principal Executive Officer and
Acting Chief Financial Officer, believe our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) are
effective. There were not any significant changes in internal controls or in
other factors that could significantly affect these controls subsequent to
the date of their evaluation, and there has not been any corrective action
with regard to significant deficiencies and material weaknesses.
- 15 -
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) and (b) The Directors and Executive Officers of the Company and certain
information concerning them is set forth below:
Name Age Position
-------------------- --- ---------------------------------------
Chris Mazzini 46 Chairman of the Board, Director and
President
Michelle Mazzini 42 Director, Vice President and Secretary
Paul E. Cash 71 Director
All directors hold office until the next annual meeting of the shareholders
or until their successors are duly elected and qualified. Officers of the
Company serve at the discretion of the board of directors.
(c) Significant employees
---------------------
Not applicable
(d) Family relationships
- --------------------
Michelle Mazzini is the wife of Chris Mazzini
(e) Business experience
- -------------------
Chris Mazzini, President graduated from the University of Texas at Arlington
in 1979 with a Bachelor of Science degree in geology. Mr. Mazzini founded
Giant Energy Corp ("Giant") in 1985 and has served as President of Giant
since then. He has worked in the oil and gas industry since 1978. He joined
the Company in December 1999 when he purchased controlling interest from Mr.
Cash.
Michelle Mazzini, received her Bachelor of Science Degree in Business
Administration (accounting major) from the University of Southwestern
Louisiana where she graduated magna cum laude in 1985. Ms. Mazzini earned
her law degree from Louisiana State University where she graduated Order of
the Coif in 1988. Ms. Mazzini serves as Vice President and General Counsel of
the Company.
Paul E. Cash is a graduate of The University of Texas (B.B.A.-Accounting) and
is a Certified Public Accountant. He has been active in the oil and gas
industry for over 40 years, during which time he has served as financial
officer of two publicly-owned companies, Texas Gas Producing Co. and Landa
Oil Co., and also served as president of publicly-owned Continental American
Royalty Co., Bloomfield Royalty Co., Southern Bankers Investment Co.,
Spindletop Oil & Gas Co. (a Utah Corporation), Double River Oil & Gas Co.,
and Loch Exploration Inc. Mr. Cash has also been an officer and part owner
of several private oil and gas companies and partnerships. Mr. Cash also
formerly served as Mayor of the City of Sunnyvale, Texas.
- 16 -
(f) Involvement in certain legal proceedings
----------------------------------------
None of the directors or executive officers of the Registrant, during the
past five years, has been involved in any civil or criminal legal proceedings,
bankruptcy filings or has been the subject of an order, judgment or decree of
any Federal or State authority involving Federal or State securities laws.
Item 11. Executive Compensation
(a) Cash Compensation
-----------------
For the year ended December 31, 2003, neither Mr. Mazzini or Ms. Mazzini took
any salary from the Company. None of the executive officers were paid cash
compensation by the Company at an annual rate in excess of $100,000. Mr.
Mazzini and Ms. Mazzini are both employed by Giant. Management fees the
Company paid to Giant are used to reimburse a portion of Mr. Mazzini's, Ms.
Mazzini's and other Giant employees' salaries for time spent working on
matters for the Company.
(b) Compensation Pursuant to Plan.
------------------------------
None
(c) Other Compensation
------------------
Key employees and officers of the Company, may sometimes be assigned
overriding royalty interests and/or carried working interest in prospects
acquired by or generated by the Company. These interests normally vary from
less than one percent to ten percent for each employee or officer. There is
no set formula or policy for such program, and the frequency and amounts are
largely controlled by the economics of each particular prospect.
(d) Compensation of Directors
-------------------------
Directors are not currently compensated nor are there plans to compensate
them for their services on the board.
(e) Termination of Employment and Change of Control Arrangement
-----------------------------------------------------------
There are no plans or arrangements for payment to officers or directors upon
resignation or a change in control of the Registrant.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) & (b) Security ownership of certain beneficial owners and managers
------------------------------------------------------------
The table below sets forth the information indicated regarding ownership of
the Registrant's common stock, $.01 par value, the only outstanding voting
securities, as of December 31, 2003 with respect to: (i) any person who is
known to the Registrant to be the owner of more than five percent (5%) of the
Registrant's common stock; (ii) the common stock of the Registrant
beneficially owned by each of the directors of the Registrant and, (iii) by
all officers and directors as a group. Each person has sole investment and
voting power with respect to the shares indicated, except as otherwise set
forth in the footnotes to the table.
- 17 -
Pct Based On
Nature of Outstanding
Name and Address Number Beneficial Percent of
Of Beneficial Owner of Shares Ownership Class
- ---------------------------------- -------------- ----------- ---------------
Chris Mazzini 5,900,543 Direct 77%
331 Melrose, Suite 102
Richardson, Texas 75080
Paul E. Cash 308,468 Direct 4%
331 Melrose, Suite 102
Richardson, Texas 75080
All officers and directors
as a group 6,209,011 81%
(c) Changes in control
------------------
The Company is not aware of any arrangements or pledges with respect to its
securities that may result in a change in control of the Company.
Item 13. Certain Relationships and Related Transactions
(a) Transactions with management and others.
None
(b) Certain Business Relationships
Key employees and officers of the Company, may sometimes be assigned
overriding royalty interests and/or carried working interests in prospects
acquired by or generated by the Company. These interests normally vary from
less than one percent to ten percent for each employee or officer. There is
no set formula or policy for such program, and the frequency and amounts are
largely controlled by the economics of each particular prospect.
PART IV
Item 14. Principal Accounting Fees and Services
The following table sets forth the aggregate fees for professional services
rendered to Spindletop Oil & Gas Co. and Subsidiaries for the years 2003 and
2002 by accounting firm, Farmer, Fuqua, & Huff, P.C.
Type of Fees 2003 2002
---------------------- --------- ---------
Audit Fees $ 11,200 $ 10,500
Audit related fees - -
Tax fees - -
All other fees - -
- 18 -
Members of the Board of Directors (the "Board") fulfill the responsibilities
of an audit committee and have established policies and Procedures for the
approval and pre-approval of audit services and permitted non-audit services.
The Board has the responsibility to engage and terminate Farmer, Fuqua, &
Huff, P.C. independent auditors, to pre-approve their performance of audit
services and permitted non-audit services, to approve all audit and non-audit
fees, and to set guidelines for permitted non-audit services and fees. All
the fees for 2003 and 2002 were pre-approved by the Board or were within the
pre-approved guidelines for permitted non-audit services and fees established
by the Board, and there were no instances of waiver of approved requirements
or guidelines during the same periods.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Report
1. Independent Auditors' Report
Consolidated Balance Sheets at December 31, 2003 and 2002
Consolidated Statements of Income for the years ended
December 31, 2003, 2002, and 2001
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 2003, 2002, and 2001
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002, and 2001
Notes to Consolidated Financial Statements
2. Financial Statement Schedules required to be filed by Item 8 and
Paragraph (d) of this Item 14
Schedule II Valuation and Qualifying Accounts
All other schedules have been omitted because they are not
applicable or required under the rules of Regulation S-X or the
information has been supplied in the consolidated financial
statements or notes thereto. Such schedules and reports are at
page 45 of this Report.
3. The Exhibits are listed in the index of Exhibits Required by Item 601
of Regulation S-K at Item (c) below and included at page 46.
(b) No Form 8-K was filed during the period covered by this Report.
(c) The Index of Exhibits is included following the Financial Statement
Schedules beginning at page 46 of this Report.
(d) The Index to Consolidated Financial Statements and Supplemental Schedules
is included following the signatures, beginning at page 21 of this Report.
- 19 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SPINDLETOP OIL & GAS CO.
Dated April 8, 2004
By /s/ Chris Mazzini
_____________________________
Chris Mazzini
President, Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following on behalf of the Company and in
the capacities and on the dates indicated.
Signatures Capacity Date
Principal Executive Officers:
/s/ Chris Mazzini
__________________________________ President, Director April 8, 2004
Chris Mazzini
/s/ Michelle Mazzini
__________________________________ Secretary, Director April 8, 2004
Michelle Mazzini
/s/ Robert E. Corbin
__________________________________ Controller April 8, 2004
Robert E. Corbin
/s/ Paul E. Cash
__________________________________ Director April 8, 2004
Paul E. Cash
- 20 -
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedules
Page
Independent Auditors' Report 22
Consolidated Balance Sheets - December 31, 2003 and 2002 23-24
Consolidated Statements of Income
for the years ended December 31, 2003, 2002 and 2001 25
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2003, 2002, and 2001 26
Consolidated Statements of Cash Flows
for the years ended December 31, 2003, 2002 and 2001 27
Notes to Consolidated Financial Statements 28
Schedules for the years ended December 31, 2003, 2002 and 2001
II - Valuation and Qualifying Accounts 45
All other schedules have been omitted because they are not applicable, not
required, or the information has been supplied in the consolidated financial
statements or notes thereto.
- 21 -
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Spindletop Oil & Gas Co.
We have audited the accompanying consolidated balance sheets of Spindletop
Oil & Gas Co. (a Texas Corporation) and subsidiaries as of December 31, 2003
and 2002, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2003. 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 U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated 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 Spindletop Oil & Gas Co. and subsidiaries as of December 31, 2003 and
2002, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 2003, in
conformity with U.S. generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules listed in
the index of consolidated financial statements are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not
part of the basic consolidated financial statements. These schedules have
been subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, fairly state, in all
material respects, the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
FARMER, FUQUA, & HUFF, P.C.
Plano, Texas
March 12, 2004
- 22 -
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31
--------------------------
2003 2002
----------- -----------
ASSETS
Current Assets
Cash $ 2,662,000 $ 2,046,000
Accounts receivable, trade 565,000 274,000
Accounts receivable, other 638,000 -
Prepaid income tax - 109,000
----------- -----------
Total current assets 3,865,000 2,429,000
----------- -----------
Property and Equipment, at cost
Oil and gas properties (full cost method) 4,460,000 3,936,000
Rental equipment 399,000 399,000
Gas gathering systems 145,000 145,000
Other property and equipment 85,000 85,000
----------- -----------
5,089,000 4,565,000
Accumulated depreciation and amortization (3,561,000) (3,230,000)
----------- -----------
Total property and equipment, net 1,528,000 1,335,000
----------- -----------
Other Assets 2,000 -
---------- -----------
Total Assets $ 5,395,000 $ 3,764,000
=========== ===========
The accompanying notes are an integral part of these statements.
- 23 -
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
As of December 31
--------------------------
2003 2002
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities $ 962,000 $ 414,000
Notes payable, related party - 42,000
Income tax payable 278,000 -
Tax savings benefit payable 97,000 97,000
----------- -----------
Total current liabilities 1,337,000 553,000
----------- -----------
Deferred income tax payable 18,000 179,000
----------- -----------
Shareholders' Equity
Common stock, $.01 par value; 100,000,000
Shares authorized; 7,677,471 shares
Issued and outstanding at
December 31, 2003, 7,582,471 issued and
Outstanding at December 31, 2002, and
103,334 shares of Treasury Stock at
December 31, 2003 77,000 75,000
Additional paid-in capital 796,000 776,000
Treasury Stock at cost of $0.175 per share (18,000) (18,000)
Retained earnings 3,185,000 2,198,000
----------- -----------
Total shareholders' equity 4,040,000 3,032,000
----------- -----------
Total Liabilities and Shareholders' Equity $ 5,395,000 $ 3,764,000
=========== ===========
The accompanying notes are an integral part of these statements.
- 24 -
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
-----------------------------------
2003 2002 2001
----------- ----------- -----------
Revenues
Oil and gas revenue $ 3,100,000 $ 1,733,000 $ 2,191,000
Revenue from lease operations 92,000 46,000 32,000
Gas gathering, compression and
Equipment rental 152,000 176,000 219,000
Interest income 107,000 90,000 85,000
Other 7,000 39,000 83,000
----------- ----------- -----------
Total revenue 3,458,000 2,084,000 2,610,000
----------- ----------- -----------
Expenses
Lease operations 1,237,000 790,000 930,000
Pipeline and rental operations 30,000 25,000 36,000
Depreciation and amortization 331,000 278,000 133,000
General and administrative 646,000 467,000 438,000
Interest expense 3,000 9,000 111,000
----------- ----------- -----------
Total expenses 2,247,000 1,569,000 1,648,000
----------- ----------- -----------
Income before income tax 1,211,000 515,000 962,000
----------- ----------- -----------
Current tax provision 385,000 75,000 159,000
Deferred tax provision (161,000) 58,000 27,000
----------- ----------- -----------
224,000 133,000 186,000
----------- ----------- -----------
Net income $ 987,000 $ 382,000 $ 776,000
=========== =========== ===========
Earnings per Share of Common Stock
Basic $ 0.13 $ 0.05 $ 0.10
=========== =========== ===========
Diluted $ 0.13 $ 0.05 $ 0.10
=========== =========== ===========
Weighted Average Shares Outstanding 7,640,074 7,582,471 7,525,804
=========== =========== ===========
Diluted Shares Outstanding 7,751,444 7,727,471 7,525,804
=========== =========== ===========
The accompanying notes are an integral part of these statements.
- 25 -
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002, and 2001
Additional Treasury
Common Stock Paid-In Stock Retained
Shares Amount Capital Shares Amount Earnings
--------- -------- ---------- -------- -------- -----------
Balance
December 31, 2000 7,525,804 75,000 733,000 - - 1,040,000
Net Income - - - - - 776,000
--------- -------- ---------- -------- -------- -----------
Balance
December 31, 2001 7,525,804 75,000 733,000 - - 1,816,000
Issuance of 56,667
shares of Common
Stock for the
purchase of a
drilling prospect 56,667 1,000 16,000 - - -
Issuance of options
to purchase Common
Stock - - 27,000 - - -
Purchase of
Treasury Stock - - - 103,334 18,000 -
Net Income - - - - - 382,000
--------- -------- ---------- -------- -------- -----------
Balance
December 31, 2002 7,582,471 $ 76,000 $ 776,000 103,334 $ 18,000 $ 2,198,000
Issuance of 25,000
Shares of Common
Stock for the
Purchase of a
Drilling prospect 25,000 - - - - -
Issuance of 70,000
Shares of Common
Stock upon exercise
of stock option 70,000 1,000 20,000 - - -
Net Income - - - - - 987,000
--------- -------- ---------- -------- -------- -----------
Balance
December 31, 2003 7,677,471 77,000 796,000 103,334 18,000 3,185,000
========= ======== ========== ======== ======== ===========
The accompanying notes are an integral part of these statements.
- 26 -
SPINDLETOP OIL & GAS CO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------
2003 2002 2001
----------- ----------- -----------
Cash Flows from Operating Activities
Net Income $ 987,000 $ 382,000 $ 776,000
Reconciliation of net income
to net cash provided by Operating
Activities
Depreciation and amortization 331,000 278,000 133,000
Amortization of note discount (3,000) (9,000) (27,000)
Decrease in accounts receivable -
related party - - 8,000
Changes in accounts receivable (291,000) (99,000) 165,000
Changes in prepaid income tax 109,000 (20,000) (89,000)
Changes in accounts payable 548,000 56,000 (114,000)
Changes in current taxes payable 278,000 - (60,000)
Changes in deferred taxes payable (161,000) 58,000 27,000
Changes in other assets (2,000) - -
----------- ----------- -----------
Net cash provided by operating activities 1,796,000 646,000 819,000
----------- ----------- -----------
Cash flows from Investing Activities
Capitalized acquisition, exploration
and development costs (1,162,000) (670,000) (23,000)
Proceeds from sale of properties - - -
Purchase of property and equipment - - (33,000)
----------- ----------- -----------
Net cash provided by (used for) investing
activities (1,162,000) (670,000) (56,000)
----------- ----------- -----------
Cash Flows from Financing Activities
Repayment of notes payable to
related party (39,000) (235,000) (25,000)
Purchase of 103,334 shares of
treasury stock - (18,000) -
Issuance of 70,000 shares of
Common stock 21,000 - -
----------- ----------- -----------
Net cash used for financing activities (18,000) (253,000) (25,000)
----------- ----------- -----------
Increase (decrease) in cash 616,000 (277,000) 738,000
Cash at beginning of period 2,046,000 2,323,000 1,585,000
----------- ----------- -----------
Cash at end of period $ 2,662,000 $ 2,046,000 $ 2,323,000
=========== =========== ===========
The accompanying notes are an integral part of these statements.
- 27 -
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND ORGANIZATION
Merger and Basis of Presentation
- --------------------------------
On July 13, 1990, Prairie States Energy Co., a Texas corporation, (the
Company) merged with Spindletop Oil & Gas Co., a Utah corporation (the
Acquired Company). The name of Prairie States Energy Co. was changed to
Spindletop Oil & Gas Co., a Texas corporation at the time of the merger.
Organization and Nature of Operations
- -------------------------------------
The Company was organized as a Texas corporation in September 1985, in
connection with the Plan of Reorganization ("the Plan"), effective September
9, 1985, of Prairie States Exploration, Inc., ("Exploration"), a Colorado
corporation, which had previously filed for Chapter 11 bankruptcy. In
connection with the Plan, Exploration was merged into the Company, with the
Company being the surviving corporation. After giving effect to the stock
split discussed in Note 2, up to a total of 166,667 of the Company's common
shares may be issued to Exploration's former shareholders. As of December
31, 2003, 2002, and 2001, 122,436 shares have been issued to former
shareholders in connection with the Plan.
Spindletop Oil & Gas Co. is engaged in the exploration, development and
production of oil and natural gas; the rental of oilfield equipment; and
through one of its subsidiaries, the gathering and marketing of natural gas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
Consolidation
- -------------
The consolidated financial statements include the accounts of Spindletop Oil
& Gas Co. and its wholly owned subsidiaries, Prairie Pipeline Co. and
Spindletop Drilling Company. All significant inter-company transactions and
accounts have been eliminated.
Oil and Gas Properties
- ----------------------
The Company follows the full cost method of accounting for its oil and gas
properties. Accordingly, all costs associated with acquisition, exploration
and development of oil and gas reserves are capitalized and accounted for in
cost centers, on a country-by-country basis. If unamortized costs within a
cost center exceed the cost center ceiling (as defined), the excess is
charged to expense during the year in which the excess occurs.
Depreciation and amortization for each cost center are computed on a
composite unit-of-production method, based on estimated proven reserves
attributable to the respective cost center. All costs associated with oil and
- 28 -
gas properties are currently included in the base for computation and
amortization. Such costs include all acquisition, exploration and
development costs. All of the Company's oil and gas properties are located
within the continental United States.
Gains and losses on sales of oil and gas properties are treated as
adjustments of capitalized costs. Gains or losses on sales of property and
equipment, other than oil and gas properties, are recognized as part of
operations. Expenditures for renewals and improvements are capitalized,
while expenditures for maintenance and repairs are charged to operations as
incurred.
Property and Equipment
- ----------------------
The Company, as operator, leases equipment to owners of oil and gas wells, on
a month-to-month basis.
The Company, as operator, transports gas through its gas gathering systems,
in exchange for a fee.
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives (5 to 10
years for rental equipment and gas gathering systems, 4 to 5 years for other
property and equipment). The straight-line method of depreciation is used
for financial reporting purposes, while accelerated methods are used for tax
purposes.
Inventory
- ---------
Inventory consists of oil field materials and supplies, stated at the lower
of average cost or market.
Income Taxes
- ------------
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109), which
requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax bases of assets and liabilities,
using enacted tax rates in effect in the years in which the differences are
expected to reverse. The temporary differences primarily relate to
depreciation, depletion and intangible drilling costs.
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.
- 29 -
Stock Split
- -----------
In December 1996 the Board of Directors declared a 1-for-6 reverse stock
split on the Company's common stock. The record date was January 31, 1997.
All share and per share data as appropriate, reflect this split.
3. ACCOUNTS RECEIVABLE
December 31,
---------------------------
2003 2002
------------ ------------
Trade $ 85,000 $ 49,000
Accrued receivable 510,000 255,000
------------ ------------
595,000 304,000
Less: Allowance for losses (30,000) (30,000)
------------ ------------
$ 565,000 $ 274,000
============ ============
4. ACCOUNTS PAYABLE
December 31,
---------------------------
2003 2002
------------ ------------
Trade payables $ 360,000 $ 185,000
Production proceeds payable 433,000 276,000
Other 169,000 4,000
------------ ------------
$ 962,000 $ 358,000
============ ============
5. NOTES PAYABLE-RELATED PARTY
December 31,
---------------------------
2003 2002
------------ ------------
Non-interest bearing note to Paul Cash,
due in minimum monthly installments of
$3,333 beginning January, 2001, with
unpaid principal due November, 2008,
based on an effective interest rate of
8.5%). The note is not collateralized. (1)
$ - $ 42,000
Less current maturities - 42,000
------------ ------------
$ - $ -
============ ============
(1) This note was paid in full in May, 2003.
- 30 -
6. RELATED PARTY TRANSACTIONS
Since 1999 Giant Energy has charged the Company a management fee. Effective
January 1, 2003, the monthly fee was increased from $10,000 to $20,000 per
month. Giant Energy's personnel provide services to the Company and the
management fee is charged to recoup some of the costs associated with work
performed for the Company.
Included in the accompanying balance sheets are the following amounts related
to Mr. Cash:
December 31,
---------------------------
2003 2002
------------ ------------
Notes Payable, non-interest bearing $ - $ 42,000
============ ============
On August 30, 2001, the Company guaranteed a letter of credit issued by a
bank for the benefit of an affiliated company in favor of the Railroad
Commission of Texas. This letter of credit was issued in accordance with the
filing of a P-5 Organization Report as required by the Texas Natural
Resources Code in order to perform operations within the jurisdiction of the
Railroad Commission of Texas. The letter of credit is dated August 30, 2001
and expired on February 1, 2003. This letter of credit has been extended to
expire on February 1, 2004. In addition to the Company's guarantee, this
letter of credit is also secured by a $100,000 certificate of deposit owned
by the Company. Subsequent to year-end, the Company let the above letter of
credit expire, and replaced it with a letter of credit issued by a second
bank, that expires on August 26, 2004. This letter of credit is issued in
favor of the Railroad Commission of Texas and is secured by a restriction of
certain funds of the Company on deposit at the bank issuing the letter of
credit.
7. STOCK OPTIONS
During 2002, the Company entered into two stock option agreements with third-
parties and issued stock options to purchase up to 145,000 shares of
restricted common stock at a value of $0.30 per share and other consideration
to obtain interests in oil and gas properties. On July 9, 2003, options to
purchase 70,000 shares of stock were exercised and 70,000 shares of common
stock were issued. As of December 31, 2003 there were 75,000 shares of
common stock reserved for issuance related to the stock option plans. The
remaining options granted under the stock option plans expire in July 2004
and have an exercise price of $0.30 per share. The Company has elected to
account for the options using FASB Statement 123, "Accounting for Stock-Based
Compensation," (FAS No. 123) which requires the use of option valuation
models. The fair value of these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following assumption
ranges: risk free interest rates of 1 -2%, volatility factor of 170, and an
expected life of 1 year - 1.5 years. Using the Black-Scholes option
evaluation model, the weighted average value of the option granted during
2002 was $0.19, per option respectively. The effect of applying the fair
value method of FAS No. 123 to the stock options granted during 2002 had a
- 31 -
$26,850 effect which was applied to the oil and gas properties and will be
amortized in the full cost method. These options had no dilutive effect on
earnings per share.
8. INCOME TAXES
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS
109 utilizes the liability method of computing deferred income taxes.
In connection with the Plan discussed in Note 1, the Company agreed to pay,
in cash, to Exploration's unsecured creditors, as defined, one-half of the
future reductions of Federal income taxes which were directly related to any
allowed carryovers of Exploration's net operating losses and investment tax
credits. Such payments are to be made on a pro-rata basis. Amounts incurred
under this agreement, which are considered contingent consideration under APB
No. 16, totaled $ -0-, $ -0-, and $ -0- in 2003, 2002 and 2001, respectively.
As of December 31, 2003 the Company has not received a ruling from the
Internal Revenue Service concerning the net operating loss and investment
credit carryovers. Until the tax savings which result from the utilization
of these carry-forwards is assured, the Company will not pay to Exploration's
unsecured creditors any of the tax savings benefit. As of December 31, 2003
and 2002, the Company owes $97,000 respectively to Exploration's unsecured
creditors.
In calculating tax savings benefits described above, consideration was given
to the alternative minimum tax, where applicable, and the tax effects of
temporary differences, as shown below:
Income tax differed from the amounts computed by applying the U.S. federal
income tax rate of 35% to pretax income in 2003, 2002 and 2001 as a result of
the following:
2003 2002 2001
---------- ---------- ----------
Computed expected tax expense $ 424,000 $ 180,000 $ 272,000
Miscellaneous timing differences (39,000) (105,000) (57,000)
Net operating loss carry-forward - - (56,000)
----------- ---------- ----------
$ 385,000 $ 75,000 $ 159,000
=========== ========== ==========
- 32 -
Deferred income taxes reflect the effects of temporary differences between
the tax bases of assets and liabilities and the reported amounts of those
assets and liabilities for financial reporting purposes. Deferred income
taxes also reflect the value of net operating losses, investment tax credits
and an offsetting valuation allowance. The Company's total deferred tax
assets and corresponding valuation allowance at December 31, 2003 and 2002
consisted of the following:
December 31,
---------------------------
2003 2002
------------ ------------
Deferred tax assets
Investment tax credit carry-forwards $ 1,000 $ 1,000
Depreciation, depletion and amortization 393,000 153,000
Other, net 8,000 7,000
------------ ------------
Total 402,000 161,000
Deferred tax liabilities
Expired leasehold (50,000) (41,000)
Intangible drilling costs (370,000) (299,000)
------------ ------------
Net deferred tax liability $ (18,000) $ (179,000)
============ ============
9. CASH FLOW INFORMATION
The Company does not consider any of its assets, other than cash and
certificates of deposit shown as cash on the balance sheet, to meet the
definition of a cash equivalent.
Net cash provided by operating activities includes cash payments for interest
of $ -0-, $ -0- and $ -0- in 2003, 2002 and 2001, respectively. Also
included are cash payments for taxes of $ 122,000 , $ -0-, and $ 95,000 in
2003, 2002 and 2001, respectively.
Excluded from the Consolidated Statements of Cash Flows were the effects of
certain non-cash investing and financing activities, as follows:
2003 2002 2001
----------- ----------- -----------
Purchase of oil and gas properties
for common stock $ - $ 17,000 $ -
Retirement of fixed assets - - -
Accounts Receivable, Other in
Exchange for the sale of interest
In non-operated oil & gas lease 735,000 - -
Acquisition of various mineral
Interests (97,000) - -
----------- ----------- -----------
$ 638,000 $ 17,000 $ -
=========== =========== ===========
- 33 -
10. EARNINGS PER SHARE
Earnings per share ("EPS") are calculated in accordance with Statement of
Financial Accounting Standards No. 128, Earnings per Share (SFAS 128), which
was adopted in 1997 for all years presented. Basic EPS is computed by
dividing income available to common shareholders by the weighted average
number of common shares outstanding during the period. All calculations have
been adjusted for the effects of the stock split discussed in Note 2. The
adoption of SFAS 128 had no effect on previously reported EPS. Diluted EPS
is computed based on the weighted number of shares outstanding, plus the
additional common shares that would have been issued had the options
outstanding been exercised.
11. CONCENTRATIONS OF CREDIT RISK
As of December 31, 2003, the Company had approximately $903,000 in accounts
at one bank, and $1,759,000 in one Credit Union.
Most of the Company's business activity is located in Texas. Accounts
receivable as of December 31, 2003 and 2002 are due from both individual and
institutional owners of joint interests in oil and gas wells as well as
purchasers of oil and gas. A portion of the Company's ability to collect
these receivables is dependent upon revenues generated from sales of oil and
gas produced by the related wells.
12. FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments at December
31, 2003 and 2002 follow:
-------- 2003 ------ -------- 2002 -------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
Cash $ 2,662,000 $ 2,662,000 $ 2,046,000 $ 2,046,000
Accounts receivable 565,000 565,000 241,000 274,000
Accounts receivable, other 638,000 638,000 - -
Notes payable, related party - - 42,000 42,000
The fair value amounts for each of the financial instruments listed above
approximate carrying amounts due to the short maturities of these
instruments.
13. COMMITMENTS AND CONTINGENCIES
In connection with the Plan of Reorganization discussed in Note 1, the
Company agreed to pay, in cash, to Exploration's unsecured creditors, as
defined, one-half of the future reduction of Federal income taxes which were
directly related to any allowed carryovers of Exploration's net operating
losses and investment tax credits existing at the time of the reorganization.
The Company's oil and gas exploration and production activities are subject
to Federal, State and environmental quality and pollution control laws and
regulations. Such regulations restrict emission and discharge of wastes from
wells, may require permits for the drilling of wells, prescribe the spacing
- 34 -
of wells and rate of production, and require prevention and clean-up
pollution.
Although the Company has not in the past incurred substantial costs in
complying with such laws and regulations, future environmental restrictions
or requirements may materially increase the Company's capital expenditures,
reduce earnings, and delay or prohibit certain activities.
At December 31, 2003, the Company has acquired bonds and letters of credit
issued in favor of various state regulatory agencies as mandated by state law
in order to comply with financial assurance regulations required to perform
oil and gas operations within the various state jurisdictions.
The Company has eleven, $5,000 single-well bonds totaling $55,000 with an
insurance company, for wells the Company operates in Alabama. The Company
also has a single-well bond in the amount of $10,000 with the same insurance
company for a well operated in New Mexico. The bonds renew annually.
The Company has 3 Letters of Credit from a bank, secured by certificates of
deposit with the bank, issued for the benefit of various state regulatory
agencies in Texas, Oklahoma and New Mexico in the amount of $25,000, $10,000
and $10,000. These Letters of Credit expire April 30, 2004, April 15, 2004
and August 8, 2004 respectively.
The Company also has 7 Letters of Credit from a second bank issued for the
benefit of various state regulatory agencies in Texas, Oklahoma, Arkansas and
New Mexico ranging in amounts from $25,000 to $50,000 and totaling $250,000.
These letters of credit have expiration dates that range from January 1, 2004
through December 29, 2004, and are secured by funds on deposit with the bank
in business money market accounts.
Subsequent to year end, the Company obtained 2 additional Letters of Credit
from the second bank issued for the benefit of various state regulatory
agencies in Texas ranging in amounts from $10,000 to $50,000 and totaling
$60,000. These letters of credit have expiration dates that range from March
9, 2005 to March 31, 2005. The Company also extended a $25,000 Letter of
Credit until April 30, 2005 that was issued by the second bank during 2003.
The Company also obtained a Letter of Credit in the amount of $25,000 which
expires on April 20, 2005 issued to a state regulatory agency, and which
replaced a Letter of Credit issued by the first bank.
14. OPERATING LEASE OBLIGATIONS
The Company leases office space under a lease agreement that expired February
28, 2004. Subsequent to year-end, the Company extended the lease agreement
through February 28, 2006 at an increase in rent of $140 per month. At
December 31, 2003 the aggregate amount of future minimum payments under
operating lease commitments are as follows:
2004 $ 47,400
2005 47,700
2006 7,900
---------
$ 103,000
=========
- 35 -
15. ADDITIONAL OPERATIONS AND BALANCE SHEET INFORMATION
Certain information about the Company's operations for the years ended
December 31, 2003, 2002, and 2001 follows.
Sale of Oil & Gas Properties
- ----------------------------
Effective August 1, 2003, the Company sold its working interest in a non-
operated property (the "Relinquished Property") for a sales price of
$735,000. On August 18, 2003, the proceeds of the sale were deposited
directly from the purchaser into the account of a third party intermediary
(the "Exchanger") that specializes in deferred like-kind exchanges under IRC
Section 1031. The Exchanger holds the sales proceeds pending timely
identification of and the closing on the acquisition of potential qualifying
like-kind replacement properties. Subsequent to the initial transaction, the
Company acquired various mineral interests from a third party for the sum of
$97,000, and the acquisition price was paid out of the funds being held by
the Exchanger. After 180 days, any funds not used to acquire qualifying
properties are to be returned to the Company, and the Company will recognize
a taxable gain on the unused proceeds.
As of December 31, 2003, the Exchanger held approximately $638,000 for the
account of the Company. The transaction has been reported in the
accompanying financial statements as an Other Account Receivable, with the
net proceeds from the sale being credited to Oil & Gas Properties under the
full cost method of accounting.
Subsequent to year-end, on January 30, 2004, the Company purchased a gas
pipeline for a purchase price of $200,000 plus fees, which was paid by the
Exchanger out of funds held on behalf of the Company. Both of the above
purchases (the "Replacement Property") qualify as tax-free exchanges under IRC
Section 1031. On February 12, 2004, the Exchanger transferred approximately
$437,500 into the Company's bank account, representing the net proceeds after
purchase of the Replacement Properties. This amount less the basis of the
Relinquished Property, of approximately $56,000, is taxable to the Company in
2003, and accordingly a provision for current income taxes of approximately
$130,000 has been recorded in the books of the Company. Under the full cost
method of accounting, the gain on the sale of the Relinquished Property of
approximately $679,000, is not recognized as income from current operations in
the Company's income statement, but the full amount of the sales price of
$735,000 is treated as an adjustment to capital costs. The purchase price of
the $97,270 property is recorded as an addition to Oil and Gas Properties at
year-end. The acquisition cost of $200,200 of the second Replacement Property
acquired subsequent to year-end will be recorded as an Oil and Gas Property
addition in the first quarter of 2004.
- 36 -
Significant Oil and Gas Purchasers
- ----------------------------------
The Company's oil sales are made on a day to day basis at approximately the
current area posted price. The loss of any oil purchaser would not have an
adverse effect upon operations. The Company generally contracts to sell its
natural gas to purchasers pursuant to short-term contracts. Additionally,
some of the Company's natural gas not under contract is sold at the then
current prevailing "spot" price on a month to month basis. Following is a
summary of significant oil and gas purchasers during the three-year period
ended December 31, 2003.
Year Ended December 31, (1)
------------------------------
Purchaser 2003 2002 2001
- ----------------------------------------- -------- -------- --------
Cantera Resources 17% 22% 32%
Devon Gas Services/Mitchell Marketing Co. 20% 38% 41%
Shell Trading (US) Company 9% - -
LIG Chemical Company 9% - -
Plains Marketing, L.P. 7% - -
(1) Percent of Total Oil & Gas Sales
Oil and Gas is sold to approximately 100 different purchasers (such as Devon
Gas Services, L.P., Enbridge Energy Partners (formerly Cantera Resources,
Inc.), Plains Marketing, L.P., Eastex Crude Company, Shell Trading (US)
Company, Dynegy Midstream Services, Empire Pipeline Corporation, LIG Chemical
Company, and Duke Energy Field Services) under market sensitive, short-term
contracts computed on a month to month basis.
Except as set forth above, there are no other customers of the Company that
individually accounted for more than 5% of the Company's oil and gas revenues
during the three years ended December 31, 2003.
The Company currently has no hedged contracts.
Certain revenues, costs and expenses related to the Company's oil and gas
operations are as follows:
Year Ended December 31,
---------------------------------
2003 2002 2001
----------- ----------- -----------
Capitalized costs relating to oil
and gas producing activities:
Unproved properties $ 154,000 $ - $ -
Proved properties 4,306,000 3,910,000 3,224,000
----------- ----------- -----------
Total capitalized costs 4,460,000 3,910,000 3,224,000
Accumulated amortization (2,990,000) (2,683,000) (2,436,000)
----------- ----------- -----------
Total capitalized costs, net $ 1,470,000 $ 1,227,000 $ 788,000
=========== =========== ===========
- 37 -
Year Ended December 31,
---------------------------------
2003 2002 2001
----------- ----------- -----------
Costs incurred in oil and gas property
acquisition, exploration and
development:
Acquisition of properties $ 538,000 $ 373,000 $ 24,000
Development costs 720,000 295,000 -
----------- ----------- -----------
Total costs incurred $ 1,258,000 $ 668,000 $ 24,000
=========== =========== ===========
Year Ended December 31,
---------------------------------
2003 2002 2001
----------- ----------- -----------
Results of Operations from producing
activities:
Sales of oil and gas $ 3,100,000 $ 1,733,000 $ 2,191,000
----------- ----------- -----------
Production costs 1,237,000 790,000 930,000
Amortization of oil and gas
properties 307,000 248,000 102,000
----------- ----------- -----------
Total production costs 1,544,000 1,038,000 1,032,000
----------- ----------- -----------
Total net revenue $ 1,556,000 $ 695,000 $ 1,158,000
=========== =========== ===========
Year Ended December 31,
---------------------------------
2002 2002 2001
----------- ----------- -----------
Sales price per equivalent Mcf $ 4.35 $ 3.11 $ 4.15
=========== =========== ===========
Production costs per equivalent Mcf $ 1.73 $ 1.42 $ 1.76
=========== =========== ===========
Amortization per equivalent Mcf $ .44 $ .45 $ .19
=========== =========== ===========
- 38 -
Year Ended December 31,
---------------------------------
2003 2002 2001
----------- ----------- -----------
Results of Operations from gas
gathering and equipment rental
activities:
Revenue $ 152,000 $ 176,000 $ 219,000
----------- ----------- -----------
Operating expenses 30,000 25,000 36,000
Depreciation 14,000 18,000 19,000
----------- ----------- -----------
Total costs 44,000 43,000 55,000
----------- ----------- -----------
Total net revenue $ 108,000 $ 133,000 $ 164,000
=========== =========== ===========
16. BUSINESS SEGMENTS
The Company's two business segments are (1) oil and gas exploration,
production and operations and (2) transportation and compression of natural
gas, including related equipment rental. Management has chosen to organize
the Company into the two segments based on the products or services provided.
The following is a summary of selected information for these segments for the
three-year period ended December 31, 2003:
Year Ended December 31,
---------------------------------
2003 2002 2001
----------- ----------- -----------
Revenues: (3)
Oil and gas exploration, production
and operations $ 3,192,000 $ 1,779,000 $2,223,000
Gas gathering, compression and
equipment rental 152,000 176,000 219,000
----------- ----------- -----------
$ 3,344,000 $ 1,955,000 $ 2,442,000
=========== =========== ===========
Depreciation, depletion and
Amortization expense:
Oil and gas exploration, production
and operations $ 317,000 $ 260,000 $ 114,000
Gas gathering, compression and
equipment rental 14,000 18,000 19,000
----------- ----------- -----------
$ 331,000 $ 278,000 $ 133,000
=========== =========== ===========
- 39 -
Income from operations:
Oil and gas exploration, production
and operations $ 1,638,000 $ 729,000 $ 1,179,000
Gas gathering, compression and
equipment rental 108,000 133,000 164,000
----------- ----------- -----------
1,746,000 865,000 1,343,000
Corporate and other (1) (759,000) (480,000) (567,000)
----------- ----------- -----------
Consolidated net income (loss) $ 987,000 $ 382,000 $ 776,000
=========== =========== ===========
Identifiable Assets:
Oil and gas exploration, production
and operations $ 1,630,000 $ 1,271,000 $ 820,000
Gas gathering, compression and
equipment rental 49,000 64,000 80,000
----------- ----------- -----------
$ 1,679,000 $ 1,335,000 $ 900,000
Corporate and other (2) 3,716,000 2,320,000 2,586,000
----------- ----------- -----------
Consolidated total assets $ 5,395,000 $ 3,655,000 $ 3,486,000
=========== =========== ===========
Note (1): Corporate and other includes general and administrative expenses,
other non-operating income and expense and income taxes.
Note (2): Corporate and other includes cash, accounts and notes receivable,
inventory, other property and equipment and intangible assets.
Note (3): All reported revenues are from external customers.
17. SUPPLEMENTARY INCOME STATEMENT INFORMATION
The following items were charged directly to expense:
Year Ended December 31,
---------------------------------
2003 2002 2001
----------- ----------- -----------
Maintenance and repairs $ 7,000 $ 4,000 $ 36,000
Production taxes 169,000 101,000 121,000
Taxes, other than payroll and
income taxes 54,000 24,000 40,000
- 40 -
18. SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED)
The Company's net proved oil and gas reserves as of December 31, 2003, 2002
and 2001 have been estimated by Company personnel in accordance with
guidelines established by the Securities and Exchange Commission.
Accordingly, the following reserve estimates were based on existing economic
and operating conditions. Oil and gas prices in effect at December 31 of
each year were used. Operating costs, production and ad valorem taxes and
future development costs were based on current costs with no escalation.
There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting the future rates of production and timing of
development expenditures. The following reserve data represents estimates
only and should not be construed as being exact. Moreover, the present
values should not be construed as the current market value of the Company's
oil and gas reserves or the costs that would be incurred to obtain equivalent
reserves.
Changes in Estimated Quantities of Proved Oil and Gas Reserves (Unaudited):
Crude Oil Natural Gas
Bbls Mcf
------------ ------------
Quantities of Proved Reserves:
- ------------------------------
Balance December 31, 2000 18,971 2,833,123
Sales of reserves in place - (18,825)
Acquired properties - 5,350
Revisions of previous estimates 33,228 4,062,600
Production (9,229) (472,728)
------------ ------------
Balance December 31, 2001 42,970 6,409,520
Sales of reserves in place - -
Acquired properties 116,662 10,439,648
Extensions and discoveries - 51,615
Revisions of previous estimates 2,915 (127,122)
Production (9,553) (499,081)
------------ ------------
Balance December 31, 2002 152,994 16,274,580
Sales of reserves in place (2) (2,815,000)
Acquired properties 101,308 482,926
Revisions of previous estimates 139,677 (4,048,147)
Production (28,747) (540,799)
------------ ------------
Balance December 31, 2003 365,230 9,353,560
============ ============
Proved Developed Reserves:
- --------------------------
Balance December 31, 2001 42,970 5,311,830
Balance December 31, 2002 152,994 4,976,890
Balance December 31, 2003 365,230 4,978,309
- 41 -
18. SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED) - Continued
Standardized Measure of Discounted Future Net Cash Flows and
Changes Therein Relating to Proved Oil and Gas Reserves
(Unaudited)
The Standardized Measure of Discounted Future Net Cash Flows and Changes
Therein Relating to Proved Oil and Gas Reserves ("Standardized Measures")
does not purport to present the fair market value of a company's oil and gas
properties. An estimate of such value should consider, among other factors,
anticipated future prices of oil and gas, the probability of recoveries in
excess of existing proved reserves, the value of probable reserves and
acreage prospects, and perhaps different discount rates. It should be noted
that estimates of reserve quantities, especially from new discoveries, are
inherently imprecise and subject to substantial revision.
Future net cash flows were computed using the contract price, which was not
escalated. Future production includes operating costs and taxes. No
deduction has been made for interest, general corporate overhead,
depreciation or amortization. The annual discount of estimated future net
cash flows is defined, for use herein, as future cash flows discounted at 10%
per year, over the expected period of realization.
During 2002, the Company acquired a 680 acre development block located within
the Newark Barnett Shale Field in North Texas. There are proven and
producing wells operated by companies other than the Company surrounding the
prospect in every direction. The Company's internal engineering estimates
project that gross gas reserves could exceed 1 BCF per well. The Company is
the project operator and intends to drill up to 17 wells on the prospect.
The Company intends to sell portions of the individual wells to outside
investors to help offset the cost of drilling and completing the wells. The
sale of these partial interests will reduce the Company's ultimate portion of
the recoverable reserves from this field.
In the Changes in Estimated Quantities of Proved Oil and Gas Reserves shown
above, the Company has estimated that recoverable reserves attributable to
the Company's current interest in the Newark Barnett Shale prospect is
approximately 5,000 MMcf of natural gas, and has recorded 4,375 MMcf as
proved undeveloped reserves. In 2002, the Company recorded proved
undeveloped reserves of 10,200 MMcf as additions from acquired properties for
all of the 17 well locations in the field. In 2003, the Company drilled the
Olex #1 well and was in the process of drilling the Olex #2 well at year end.
As a result it transferred reserves for the Olex #1 from the proved
undeveloped classification to proved developed reserves. The Company changed
the way it reports proved undeveloped reserves in 2003 so that only wells for
which it has immediate plans to drill in the near-term future, will be
reported as proved undeveloped reserves. As a result, it revised its
previous estimate of proved undeveloped reserves in the Newark Barnett Shale
prospect by approximately 4,000 MMcf to only include the Olex #2 well, 2
additional wells to be drilled in 2004 and 4 additional wells to be drilled
in 2005.
In the table shown below for Standardized measure of discounted future net
cash flows related to proved reserves, the Company has included $33,638,000
- 42 -
as future production revenue and $2,716,000 as estimated future development
and production costs related to the Newark Barnett Shale prospect.
During 2003, the Company reduced its interest in the Olex lease by acquiring
investors to participate in the drilling of the additional wells. The Sales
of Reserves in Place shown in the table below is due to the reduction of
proved undeveloped reserves from the reduction of the Company's interest in
the Olex lease in Denton County, Texas.
Revisions of Previous Estimates from 2002 of 4,048,147 Mcf as shown above is
due in part to only recognizing the drilling of the Olex #2 well, 2
additional wells in 2004 and 4 additional wells in 2005, as opposed to the
recognition of 17 wells as shown in the 2002 reserve report.
As additional wells are proposed to be drilled within the near-term future,
the amount of proved undeveloped reserves will be added to the amount of
reserves reported in the table above.
The Company emphasizes that reserve estimates are inherently imprecise.
Accordingly, the estimates are expected to change as more current information
becomes available. It is reasonably possible that, because of changes in
market conditions or the inherent imprecision of these reserve estimates,
that the estimates of future cash inflows, future gross revenues, the amount
of oil and gas reserves, the remaining estimated lives of the oil and gas
properties, or any combination of the above may be increased or reduced in
the near term. If reduced, the carrying amount of capitalized oil and gas
properties may be reduced materially in the near term.
Standardized measure of discounted future net cash flows related to proved
reserves:
Year Ended December 31,
------------------------------------
2003 2002 2001
------------ ------------ ------------
Future production revenue $ 46,944,000 $ 56,535,000 $ 15,342,000
Future development costs (2,470,000) (14,621,000) (621,000)
Future production costs (11,342,000) (13,688,000) (7,507,000)
------------ ------------ ------------
Future net cash flow before
Federal income tax 33,132,000 28,226,000 7,214,000
Future income taxes (4,970,000) (4,234,000) (2,453,000)
------------ ------------ ------------
Future net cash flows 28,162,000 23,992,000 4,761,000
Effect of 10% annual discounting (16,300,000) (12,177,000) (1,032,000)
------------ ------------ ------------
Standardized measure of
discounted net cash flows $ 11,862,000 $ 1,815,000 $ 3,729,000
============ ============ ============
- 43 -
Changes in the standardized measure of discounted future net cash flows:
Year Ended December 31,
------------------------------------
2003 2002 2001
------------ ------------ ------------
Beginning of the year $ 11,815,000 $ 3,729,000 $ 7,109,000
Oil and gas sales, net of
production costs (1,970,000) (943,000) (1,261,000)
Purchases of reserves in place 1,813,000 6,129,000 10,000
Sales of reserves in place (2,532,000) - (34,000)
Net change in prices, net of
production costs 5,384,000 2,665,000 (2,700,000)
Changes in production rates,
timing and other (360,000) (2,083,000) (868,000)
Revisions of quantity estimate (2,438,000) (419,000) 739,000
Effect of income tax (1,031,000) (802,000) 23,000
Accretion of discount 1,181,000 3,539,000 711,000
------------ ------------ ------------
End of year $ 11,862,000 $ 11,815,000 $ 3,729,000
============ ============ ============
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SCHEDULE II
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
Beginning Costs & Ending
Description Balance Expenses Deductions Balance
- --------------------------- ----------- ----------- ----------- -----------
Allowance for
doubtful Accounts
December 31, 2001 $ 30,000 $ - $ - $ 30,000
=========== =========== =========== ===========
December 31, 2002 $ 30,000 $ - $ - $ 30,000
=========== =========== =========== ===========
December 31, 2003 $ 30,000 $ - $ - $ 30,000
=========== =========== =========== ===========
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SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
Index to Exhibits
PAGE
22. Subsidiaries of the Registrant . . . . . . . . . . . . . . . . . . . .47
Exhibit 14 - Code of Ethics for Senior Financial Officers . . . . . . . . .48
Exhibit 31(a) - Certification of Officer. . . . . . . . . . . . . . . . . .51
Exhibit 32(b) - Certification of Officer. . . . . . . . . . . . . . . . . .53
Exhibit 32(a) - Officer's Section 1350 Certification. . . . . . . . . . . .55
Exhibit 32(b) - Officer's Section 1350 Certification. . . . . . . . . . . .56
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SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
Subsidiaries of the Registrant
Prairie Pipeline Co. incorporated June 22, 1983, under the laws of the State
of Texas, is a wholly owned subsidiary of Registrant.
Spindletop Drilling Company, incorporated September 5, 1975, under the laws
of the State of Texas, is a wholly owned subsidiary of the Registrant.
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Part II - Other Information
Item 6. - Exhibits and Reports on Form 8-K
Exhibit 14
Code of Ethics for Senior Financial Officers
The principal executive officer, president, principal financial officer,
chief financial officer, principal accounting officer and controller (all,
the company's "Senior Financial Officers") hold an important and elevated
role in corporate governance, vested with both the responsibility and
authority to protect, balance, and preserve the interests of all of the
enterprise stakeholders, including shareholders, customers, employees,
suppliers, and citizens of the communities in which business is conducted.
Senior Financial Officers fulfill this responsibility by prescribing and
enforcing the policies and procedures employed in the operation of the
enterprise's financial organization and by acting in good faith and in the
company's best interests in accordance with the company's Code of Business
Conduct and Ethics.
1. Honest and Ethical Conduct
Senior Financial Officers will exhibit and promote honest and
ethical conduct through the establishment and operation of
policies and procedures that:
- Encourage and reward professional integrity in all aspects
of the financial organization, by eliminating inhibitions
and barriers to responsible behavior, such as coercion,
fear of reprisal, or alienation from the financial
organization or the enterprise itself.
- Promote the ethical handling of actual or apparent
conflicts of interest between personal and professional
relationships.
- Provide a mechanism for members of the finance organization
to inform senior Management of deviations in the practice from
policies and procedures governing honest and ethical behavior.
- Respect the confidentiality of information acquired in the course
of work, except when authorized or otherwise legally obligated to
disclose such information, and restrict the use of confidential
information acquired in the course of work for personal advantage.
- Demonstrate their personal support for such policies and procedures
through periodic communication reinforcing these ethical standards
throughout the finance organization.
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2. Financial Records and Periodic Reports
Senior Financial Officers will establish and manage the enterprise
transaction and reporting systems and procedures to provide that:
- Business transactions are properly authorized and accurately and
timely recorded on the company's books and records in accordance with
Generally Accepted Accounting Principles ("GAAP") and established
company financial policy.
- No false or artificial statements or entries for any purpose are made
in the company's books and records, financial statements and related
communications.
- The retention or proper disposal of company records shall be in
accordance with established records retention policies and applicable
legal and regulatory requirements.
- Periodic financial communications and reports will include full, fair,
accurate, timely and understandable disclosure.
3. Compliance with Applicable Laws, Rules and Regulations.
Senior Financial Officers will establish and maintain mechanisms to:
- Educate members of the finance organization about any federal, state
or local statute, regulation or administrative procedure that affects
the operation of the finance organization and the enterprise generally.
- Monitor the compliance of the finance organization with any applicable
federal, state or local statute, regulation or administrative rule.
- Identify, report and correct in a swift and certain manner, any detected
deviations from applicable federal, state or local statute or regulation.
4. Reporting of Non-Compliance
Senior Financial Officers will promptly bring to the attention of
the Board of Directors:
- Material information that affects the disclosures made by the company
in its public filings.
- Information concerning significant deficiencies in the design or
operation of internal controls that could adversely affect the
company's ability to record, process, summarize and report financial
data.
Senior Financial Officers will promptly bring to the attention of the
General Counsel and to the Board of Directors:
- Fraud, whether or not material, that involves management or other
employees who have a significant role in the company's financial
reporting, disclosures or internal controls.
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- Information concerning a violation of this Code or the company's Code
of Business and Ethics Conduct, including any actual or apparent
conflicts of interest between personal and professional relationships,
involving management or other employees who have a significant role
in the company's financial reporting, disclosures or internal controls.
- Evidence of a material violation by the company or its employees or
agents of applicable laws, rules or regulations.
5. Disciplinary Action
In the event of violation by Senior Financial Officers of this Code or the
company's Code of Business Conduct and Ethics, the Board of Directors shall
recommend appropriate disciplinary and remedial actions.
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Exhibit 31(a)
CERTIFICATIONS
I, Chris G. Mazzini, certify that:
1. I have reviewed this annual report on Form 10-K of Spindletop Oil
& Gas Co.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13-15(e) and 15d-15e) and have internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)
for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
(b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principals; and
(c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the controls and procedures as of the end of the period
covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
(e) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
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5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the registrant's board of directors (or
persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
Dated: April 8, 2004.
/s/ Chris G. Mazzini
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Exhibit 31(b)
CERTIFICATIONS
I, Robert E. Corbin, certify that:
1. I have reviewed this annual report on Form 10-K of Spindletop Oil
& Gas Co.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13-15(e) and 15d-15e) and have internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)
for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
(b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principals; and
(c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the controls and procedures as of the end of the period
covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
(e) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
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5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the registrant's board of directors
(or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
Dated: April 8, 2004.
/s/ Robert E. Corbin
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Exhibit 32(a)
Officers' Section 1350 Certifications
The undersigned officer of Spindletop Oil & Gas Co., a Texas corporation
(the "Company"), hereby certifies that (i) the Company's Annual Report on
Form 10-K for the year ended December 31, 2003 fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934, and
(ii) the information contained in the Company's Annual Report on Form 10-K
for the year ended December 31, 2003 fairly presents, in all material
respects, the financial condition and results of operations of the Company,
at and for the periods indicated.
Dated: April 8, 2004.
/s/ Chris G. Mazzini
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Exhibit 32(b)
Officers' Section 1350 Certifications
The undersigned officer of Spindletop Oil & Gas Co., a Texas corporation
(the "Company"), hereby certifies that (i) the Company's Annual Report on
Form 10-K for the year ended December 31, 2003 fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934, and
(ii) the information contained in the Company's Annual Report on Form 10-K
for the year ended December 31, 2003 fairly presents, in all material
respects, the financial condition and results of operations of the Company,
at and for the periods indicated.
Dated: April 8, 2004.
/s/ Robert E. Corbin
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