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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, 1996 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 of incorporation (IRS Employer or ID #)
or organization)
9319 LBJ, Frwy., #205 Dallas, TX 75243
(Address of principal executive (Zip Code)
offices)
Company's telephone number, including area code: (972) 644-2581
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 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 15, 1997, 7,488,304 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.
1
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, 1996, were
72,091 barrels of oil and condensate and 2,471,174 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 25.7 miles of pipelines located in Texas, which are used for the
gathering of natural gas. The Company's principal executive offices are located
at 9319 LBJ Freeway, Suite #205, Dallas, 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 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
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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, the 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 outstanding 44,922,564 shares of
common stock, 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.
PLAN OF OPERATION
In 1994 and 1995 the Company successfully concentrated its efforts on oil and
gas property acquisitions. With increased competition for oil and gas property
acquisitions and with a corresponding increase in oil and gas prices, the
Company, in 1996, returned its focus to its primary business of oil and gas
exploration and production. The Company's long-term strategy is to build an oil
and gas production company through 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
geological and land 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 all of its existing
pipelines are connected to wells which it operates. In addition, the oilfield
rental equipment business will be expanded as needed, but this segment also
depends upon the success of the exploration and development program.
The Company in 1996 expanded its current pipeline system by 6.7 miles by
acquiring, at no cost, a pipeline system in Hood County, Texas.
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. The Company owns 26.1 miles of pipelines and
currently gathers approximately 592 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 which the Company operates and in which it owns a working interest.
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 which 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 productive. The Company
is continuing to purchase oil and gas leases in areas where it currently has
production, and also in other areas.
4
(iii) Seasonality.
The Company's oil and gas activities generally are conducted on a year round
basis with only minor interruptions caused by weather.
(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 of the oil and natural gas
produced by the Company for the three year period ended December 31, 1996:
December 31, Percent (1)
Purchaser 1996 1995 1994
------ ------ ------
Lone Star Gas Company and affiliates -% - % 29%
Mitchell Marketing Co. 12% - % -%
Tristar Gas Company 10% - % -%
Texas Utilities Fuel Co. 18% 23% 28%
(1) Percent of total oil and gas sales
In the past The Company sold gas under long term contracts to Lone Star Gas
Company and its affiliates. Such contracts are no longer in effect. Gas
previously marketed under those contracts is now sold to other parties under
market sensitive, short term contracts.
Sales of natural gas to Texas Utilities Fuel Company ("TUFCO") are pursuant to
contracts expiring in 1994 through 1999. Gas previouly marketed under those
contracts and from those contracts that will expire is sold to other parties
under market sensitive, short-term contracts.
(vi) Competition.
Numerous entities and individuals, many of whom 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.
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
5
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
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 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.
(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.
6
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 employs a total of 12 people, 7 persons in its offices in Dallas
and 5 in its field operation. All are full-time employees.
(d) Financial information about foreign and domestic operations and export
sales.
All of the Company's business is conducted domestically, with no export sales.
7
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,
1996 1995 1994
---------- ---------- ----------
Gas and Oil Properties (net) (1):
Proved Developed Gas Reserves-MCF (2) 2,181,212 1,758,260 1,528,355
Proved Undeveloped Gas Reserves-
MCF(3) 289,962 266,927 262,710
Total Proved Gas Reserves-MCF 2,471,174 2,025,187 1,791,065
Proved Developed Crude Oil and
Condensate Reserves-Bbls (2) 72,091 70,257 55,446
Proved Undeveloped Crude Oil and
Condensate Reserves-Bbls (3) - 1,811 -
Total Proved Crude Oil and
Condensate Reserves-Bbls 72,091 72,068 55,446
(See footnotes on Page 9 following)
8
Year Ended December 31,
1996 1995 1994
------------ ------------ ------------
Present Value of Estimated
Future Net Revenues
From Proved Reserves (4) (5):
Developed $ 2,228,000 $ 1,464,000 $ 1,401,000
Developed and Undeveloped 2,381,000 1,625,000 1,527,000
Productive Wells (6):
Gas Wells
Gross 247 266 217
Net 33.98 36.03 30.98
Oil Wells
Gross 224 234 322
Net 15.43 15.71 16.66
Acreage:
Developed Acres (Producing)
Gross 83,642 90,539 80,564
Net 8,600 10,007 9,132
Undeveloped Acres
Gross 81,805 81,805 81,805
Net 8,793 8,793 8,793
(See footnotes below and on Page 10 following)
(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.
(4) "Estimated Future Net Revenues" are computed by applying current prices 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.
9
(6) Operated Wells having multiple completions are as follows:
1996 1995 1994
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
Gas 7 1.66 8 2.13 8 2.13
Oil -0- -0- -0- -0- -0- -0-
The Company has interests in numerous wells which are operating by third party
operators. Information as to multiple completions with respect to third party
operated wells is not available to the Company.
The Company's working interests in exploration and development wells completed
during the years indicated were as follows:
Year Ended December 31,
1996 1995 1994
------------ ------------ ------------
Gross Net Gross Net Gross Net
Exploratory wells:
Productive 1 - - - - -
Non-Productive - - - - - -
--- --- --- --- --- ---
Total 1 - - - - -
--- --- --- --- --- ---
Development wells:
Productive - - - - - -
Non-Productive - - - - - -
--- --- --- --- --- ---
Total - - - - - -
--- --- --- --- --- ---
Total Exploratory and
Development wells:
Productive 1 - - - - -
Non-Productive - - - - - -
--- --- --- --- --- ---
Total 1 - - - - -
--- --- --- --- --- ---
10
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:
Year Ended December 31,
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Oil and Gas Production (net):
Gas 371,074 322,465 284,903 252,240 261,636
Crude Oil and Condensate -
Bbls 17,276 17,873 11,584 7,153 1,815
Average Sales Price Per Unit
Produced:
Gas - per Mcf $ 2.48 $ 2.28 $ 2.57 $ 2.30 $ 2.39
Crude Oil and Condensate -
per Bbl. $ 21.16 $ 16.61 $ 15.71 $ 15.30 $ 15.86
Average Production Cost Per
Equivalent Barrel (1) (2) $ 8.90 $ 8.81 $ 7.62 $ 5.33 $ 7.94
(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 the estimated relative energy content of natural gas to
oil.
The Company owns producing royalties and overriding royalties under properties
located in Texas. The revenues from these properties is not significant.
Current Activities - March 15, 1997.
Gross Wells in Process of Drilling -0-
Net Wells in Process of Drilling -0-
Waterfloods 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, 1996.
Office Space.
The Company leases office space as follows:
Location Square Feet Lease Expires
Dallas, Texas 5,393 May 31, 1997
11
Pipelines.
The company owns, through its subsidiary Prairie Pipeline Co., 26.1 miles of
natural gas pipelines in Parker, Hood and Eastland Counties, Texas. These
pipelines are steel and polyethylene and range in size from 2 inches to 6
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 484, 491
and 615 MCF per day for 1996, 1995, and 1994 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 in which
the Company owns a working interest and which are operated by the Company. 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
by dealers in the over the counter market, the terms of which are not available
to the Company. The Company does not believe that listings of bid and asking
prices for its stock in the pink sheets are indicative of the actual trades of
its stock, since trades are made infrequently. There is no amount of common
stock which is subject to outstanding options or warrants to purchase, or
securities convertible into, common stock of the Company. 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.
The approximate number of record holders of the Company's Common Stock on March
15, 1997, was 650.
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.
12
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.
Years Ended December 31,
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
Total Revenue $1,693,000 $1,448,000 $1,396,000 $1,208,000 $1,125,000
Net Income 141,000 7,000 102,000 89,000 46,000
Earnings Per Share(1) (.02) - .01 .01 .01
At End of Periods
Total Assets 2,154,000 1,949,000 2,212,000 2,125,000 2,110,000
Long-Term Debt - - 3,000 17,000 -
(1) After 1 for 6 stock split discussed in Note 2 to 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 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. The
Company has established a $95,000 line of credit with its bank. The line of
credit was established for oil and gas property acquisitions. 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
1996 Compared to 1995
Oil and gas revenues increased due to an increase in production and an increase
in oil and gas prices. Severance taxes also increased due to the same reason.
1995 Compared to 1994
Lease operating expenses increased because of an increase in monies spent
reworking existing wells.
1994 Compared to 1993
Oil and gas revenues increased $209,000 due to further acquisitions of oil and
gas properties. Additionally some of the properties purchased in 1993 were in
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production for a full year in 1994.
Accordingly, lease operating expenses also increased in 1994.
General and administrative increased $73,000 in 1994 which was primarily
due to the addition of one full-time employee.
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, Hunt & Munselle, P.C.
Certified Public Accountants, who have prepared audit reports for the years
ended December 31, 1994, 1995, and 1996.
There have been no disagreements between the Company and Farmer, Fuqua, Hunt &
Munselle, P.C. on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure.
14
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
Paul E. Cash (1) 64 Director and President
K. Paul Cash 40 Director, Vice President
and Secretary
Gary Goodnight 42 Director, Vice President,
and Treasurer
Ralph Butler 44 Director and Vice President
Kyle Wood 41 Director and Vice President
(1) In addition, Paul E. Cash is the controlling shareholder, Vice President,
Secretary and Director of Loch Exploration, Inc., and a Director, Officer and
Shareholder in Double River Oil & Gas Co., both of which are publicly-owned
companies engaged in the oil and gas business.
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
Paul E. Cash is the father of K. Paul Cash.
(e) Business experience
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 25 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.
During the last 15 years, Mr. Cash has also been an officer and part owner of
several private oil and gas companies and partnerships, and is an officer and
director of Double River Oil & Gas Co. and Loch Exploration, Inc. Mr. Cash also
formerly served as Mayor of the City of Sunnyvale, Texas.
15
Gary Goodnight, a Certified Public Accountant, is a Director, Vice President,
Treasurer, Controller and Principal Accounting Officer. Mr. Goodnight joined
the Company in November 1986. Mr. Goodnight was employed by KPMG Peat Marwick
LLP from 1977 to 1979. From 1979 until joining the Company, Mr. Goodnight was
employed by various independent oil and gas exploration companies. He received
a B.B.A. from the University of Texas at Austin in 1977.
Ralph Butler, Director, Vice President/Engineering and Production, joined the
Company in February 1981. Prior to joining the Company, Mr. Butler was employed
by United Gas Pipeline Co. and Lone Star Gas Co. He received a B.S. in
Engineering Technology and a B.S. in Civil Engineering from Texas A & M
University in 1979.
K. Paul Cash, Director, Vice President and Secretary, joined the Company in
1993. Prior to joining the Company he had been a Director and President of
Daltex Oil & Gas Co., a privately held company for more than five years. K.
Paul Cash is a geologist, having received a degree in geology from the
University of Texas at Arlington in 1981.
Kyle D. Wood, has been Vice President, and a Director since December 1994. From
1979 until now, he has been employed by Spindletop Oil & Gas Co. or related
companies. From January 1981, to January 1983 he served as Land Manager and
Office Manager of Spindletop's former Illinois Basin branch office in
Evansville, Indiana. From February, 1983 to April 1987 he served as Land and
Contracts Manager for Heflin Oil Company. He attended the University of Oklahoma
majoring in Petroleum Land Management and is a Certified Professional Landman.
(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, 1996, none of the Company's executive officers
were paid cash compensation at the annual rate in excess of $60,000. During
1996, the Company paid cash compensation of approximately $167,000 to all of its
officers.
(b) Compensation Pursuant to Plan. None
(c) Other Compensation
Key employees of the Company, other than Mr. Cash, are permitted to purchase, at
cost, a small interest (usually a maximum of 1 to 2% each) of the working
interest in prospects to be drilled by the Company. Mr. Cash, or affiliated
companies, usually purchase a working interest of 20 to 50% at cost.
Key employees of the Company, except Paul E. Cash, are sometimes assigned
overriding royalty interests and/or carried working interest in prospects
acquired by or generated by the Company. These interests normally vary from
16
one-half to one percent for each employee. 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 the ownership of
the Registrant's common stock, $.01 par value, the only outstanding voting
securities, as of December 31, 1996 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.
%BASED ON
NATURE OF OUTSTANDING
NAME AND ADDRESS OF NUMBER OF BENEFICIAL PERCENT OF
BENEFICIAL OWNER SHARES OWNERSHIP CLASS
- ---------------- --------- --------- ------------
Paul E. Cash 6,169,357 Direct 82.39%
9319 LBJ Frwy, Suite 205
Dallas, TX 75243
K. Paul Cash 72,667 Direct 0.97%
9319 LBJ Frwy, Suite 205
Dallas, TX 75243
Gary Goodnight 103,334 Direct 1.38%
9319 LBJ Frwy, Suite 205
Dallas, TX 75243
Ralph Butler 103,459 Direct 1.38%
9319 LBJ Frwy, Suite 205
Dallas, TX 75243
Kyle Wood 103,334 Direct 1.38%
9319 LBJ Frwy, Suite 205
Dallas, TX 75243
All officers and directors 6,552,151 87.50%
as a group
(c) Changes in control
The Company is not aware of any arrangements or pledges with respect to its
securities which may result in a change in control of the Company.
17
Item 13. Certain Relationships and Related Transactions (a) Transactions with
management and others.
A portion of the business of the Company is the development of oil and gas
drilling prospects. In some instances, prospects are developed on leases owned
by Paul E. Cash, President, Director and Majority Shareholder of the Registrant.
Prospects have been developed on leases owned by Mr. Cash, and the Company
expects that prospects will be developed on leases owned by Mr. Cash in the
future. In the event that the company develops the prospect on leases owned by
Mr. Cash, the company will acquire all or a portion of such leases, at the
actual cost to Mr. Cash or the fair market value thereof, whichever is less. Mr.
Cash may retain an interest in the leases and participate in the drilling and
development of wells thereon on an actual cost basis.
In addition, Mr. Cash and other employees of the Company may participate in the
drilling of wells on leases owned by the Company. In the event that such
participation occurs, Mr. Cash and the employees of the Company will participate
on an actual cost basis to the Company.
The Company operates approximately 120 oil and gas wells. Mr. Cash owns an
interest in approximately 90 of these wells, with an average working interest in
such wells of 50.6%. Double River owns an interest in approximately 20 of these
wells, with an average working interest of 22.4% in those wells. All of such
wells are operated pursuant to standard industry operating agreements which
provide for the reimbursement to the operator of its actual costs in the
operation of the properties and a reimbursement for the overhead at a fixed
price on a monthly basis, subject to annual increases. The Registrant believes
that all of the overhead rates charged are reasonable, and are at rates which
would not be less than would be charged by third party operators. In addition,
officers and directors of the Company, other than Mr. Cash, own small interests
in approximately 25 of the wells operated by the company.
(b) Certain Business Relationships
Paul E. Cash was the majority shareholder of Double River Oil & Gas Co., (Double
River) a publicly-owned oil and gas company, until March 1994, when he sold
control of Double River to an unrelated person. Mr.
Cash remains an officer and director of Double River.
Double River was the majority shareholder in Loch Exploration, Inc. until
February 1994, when the controlling interest was purchased from Double River by
Paul E. Cash. Mr. Cash is an officer and a director of Loch Exploration, Inc.
In 1995, Double River utilized the offices of the Company and certain employees
of the Company for a fee of $575 per month. This arrangement ended in 1996. Loch
Exploration maintains separate offices and employees. Additionally, Double River
and Loch both participate in various wells operated by the Company.
Key employees of the Company, except Paul E. Cash, are sometimes assigned
overriding royalty interests and/or carried working interests in prospects
acquired by or generated by the Company. These interests normally vary from
one-half to one percent for each employee. There is no set formula or policy
18
for such program, and the frequency and amounts are largely controlled by the
economics of each particular prospect.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
PART IV
(a) The following documents filed as part of this Report
1. Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Income for the years ended December
31, 1996, 1995, and 1994
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994
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 42 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 43.
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this Report.
(c) The Index of Exhibits is included following the Financial Statement
Schedules beginning at page 43 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 March 27, 1997
By__________________________
Paul E. Cash
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/ Paul E. Cash President, Director March 27, 1997
- ----------------------
Paul E. Cash
/s/ K. Paul Cash Secretary, Director March 27, 1997
- ----------------------
K. Paul Cash
/s/ Ralph H. Butler Vice President, March 27, 1997
- ---------------------- Director
Ralph H. Butler
/s/ Gary D. Goodnight Treasurer, Director March 27, 1997
- ----------------------
Gary D. Goodnight
/s/ Kyle D. Wood Vice President, March 27, 1997
- ---------------------- Director
Kyle D. Wood
20
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedules
Page
Independent Auditors' Report...........................................22
Consolidated Balance Sheets - December 31, 1996
and 1995...............................................................23-24
Consolidated Statements of Income for the years
ended December 31, 1996, 1995 and 1994.................................25
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1996,
1995, and 1994.........................................................26
Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995
and 1994...............................................................27
Notes to Consolidated Financial Statements.............................28-42
Schedules for the years ended December 31, 1996,
1995 and 1994
II - Valuation and Qualifying Accounts...........................43
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, 1996 and 1995,
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, 1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
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, HUNT & MUNSELLE, P.C.
Dallas, Texas
March 10, 1997
22
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1996 1995
---------- ----------
Assets
Current Assets
Cash $ 476,000 $ 229,000
Accounts receivable 399,000 349,000
Accounts receivable, related parties 34,000 64,000
Shareholder Loans 34,000 22,000
Inventory 31,000 7,000
---------- ----------
Total Current Assets 974,000 671,000
---------- ----------
Property and Equipment - at cost
Oil and gas properties (full cost method) 2,522,000 2,427,000
Rental equipment 329,000 329,000
Gas gathering systems 145,000 145,000
Other property and equipment 178,000 167,000
---------- -----------
3,174,000 3,068,000
Accumulated depreciation and amortization (2,055,000) (1,852,000)
---------- -----------
1,119,000 1,216,000
---------- -----------
Other Assets, net of accumulated
amortization of $65,000 and $54,000 at
December 31,1996 and 1995 respectively
61,000 62,000
--------- ----------
Total Assets $ 2,154,000 $ 1,949,000
========= ==========
The accompanying notes are an integral part of these statements.
23
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
December 31,
1996 1995
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 638,000 $ 591,000
Notes payable 12,000 3,000
Tax savings benefit payable 94,000 85,000
---------- ----------
Total Current Liabilities 744,000 679,000
---------- ----------
Shareholders' Equity
Common stock, $.01 par value;100,000,000
shares authorized;7,488,304 issued
(53,654,479 at December 31,1995) 75,000 54,000
Additional paid-in capital 727,000 885,000
Retained earnings 608,000 467,000
---------- ----------
1,410,000 1,406,000
Less treasury stock, at cost; 8,725,625
shares at December 31, 1995 - (136,000)
---------- ----------
1,410,000 1,270,000
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,154,000 $ 1,949,000
=========== ===========
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,
1996 1995 1994
---------- --------- ---------
Revenues
Oil and gas revenues $ 1,287,000 $ 1,033,000 $ 913,000
Revenue from lease
operations 215,000 228,000 256,000
Gas gathering fees 19,000 23,000 34,000
Equipment rental 114,000 126,000 128,000
Interest income 4,000 5,000 3,000
Other 54,000 33,000 62,000
---------- --------- ---------
1,693,000 1,448,000 1,396,000
---------- --------- ---------
Expenses
Pipeline and rental
operations 69,000 57,000 60,000
Lease operations 704,000 631,000 450,000
Depreciation and
amortization 237,000 253,000 245,000
General and
administrative 539,000 496,000 528,000
Interest expense 3,000 4,000 11,000
---------- ---------- ----------
1,552,000 1,441,000 1,294,000
---------- ---------- ---------
Net Income $ 141,000 $ 7,000 $ 102,000
========== ========== ===========
Net Income Per Share Of $ 0.02 $ 0.00 $ 0.01
========== ========== ==========
Common Stock
Weighted average shares
outstanding 7,488,304 7,488,271 7,488,191
========== ========== ==========
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, 1996, 1995, and 1994
Additional
Common Stock Paid-in Treasury Retained
Shares Amount Capital Stock Earnings
----------- -------- -------- -------- -------
Balance January 1,1994 53,653,519 $ 54,000 $ 885,000 $(136,000) $358,000
Common stock issued to former
shareholders 560 - - - -
Net income - - - - 102,000
----------- -------- -------- -------- --------
Balance December 31, 1994 53,654,079 54,000 885,000 (136,000) 460,000
Common stock issued to former
shareholders 400 - - - -
Net income - - - - 7,000
----------- -------- -------- -------- --------
Balance December 31, 1995 53,654,479 54,000 885,000 (136,000) 467,000
Other - - (1,000) - -
Effect of 1 for 6
stock split (44,711,903) (45,000) 45,000 - -
Effect of change in
par value - 81,000 (81,000) - -
Retirement of treasury
stock (1,454,272) (15,000) (121,000) 136,000 -
Net income - - - - 141,000
----------- -------- --------- -------- --------
Balance December 31, 1996 7,488,304 $ 75,000 $ 727,000 $ - $ 608,000
=========== ======== ========= ======== ========
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,
1996 1995 1994
--------- --------- ---------
Cash Flows from Operating Activities
Net Income $ 141,000 $ 7,000 $102,000
Reconciliation of net income to net cash
provided by operating activities
Depreciation and amortization 237,000 253,000 245,000
(Increase) decrease in accounts receivable (30,000) (133,000) (23,000)
(Increase) decrease in inventory (24,000) - 4,000
Increase (decrease) in accounts payable 46,000 100,000 72,000
--------- --------- ---------
Net cash provided by operating activities 370,000 227,000 400,000
--------- --------- ---------
Cash Flows from Investing Activities
Capitalized acquisition, exploration and
development (132,000) (322,000) (161,000)
Proceeds from sale of properties 47,000 146,000 -
Purchase of property and equipment (14,000) (18,000) (75,000)
Principal collected on note receivable - 35,000 -
--------- --------- ---------
Net cash used by investing activities (99,000) (159,000) (236,000)
--------- --------- ---------
Cash Flows from Financing Activities
Repayment of notes payable (11,000) (104,000) (68,000)
Proceeds from borrowings - - 48,000
Repayment of shareholder loans - (54,000) (67,000)
Net advances to shareholder (12,000) - -
Other (1,000) - -
Increase in other assets - - (11,000)
--------- --------- ---------
Net cash used by financing activities (24,000) (158,000) (98,000)
--------- --------- ---------
Increase (decrease) in cash 247,000 (90,000) 66,000
Cash at beginning of period 229,000 319,000 253,000
--------- --------- ---------
Cash at end of period $ 476,000 $ 229,000 $ 319,000
========= ======== ========
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. 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, 1996, 1995, and 1994,
122,436, 122,436, and 122,369 shares, respectively, 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 intercompany 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 proved reserves attributable to
the respective cost center. All costs associated with oil and 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.
28
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.
Goodwill
The goodwill resulting from the contingent consideration, as discussed in Note
8, is being amortized over the remaining life of the net operating loss and
investment credit carryforwards existing at the time of the Plan discussed in
Note 1, which expire at various dates through 2000.
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. These temporary differences primarily relate to depreciation,
depletion and intangible drilling costs. The Company has established a full
valuation allowance against these carryforward benefits, due to uncertainty as
to the Company's ability to utilize the loss carry forwards.
Investment Tax Credits
Investment tax credits are accounted for by the "flow-through" method which
recognizes the credits as a reduction of income tax expense in the year the
credit is utilized.
29
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.
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. The effect of the split
is presented retroactively within stockholder's equity at December 31, 1996 by
transferring the par value for the additional shares issued from additional
paid-in capital to the common stock accounts.
Treasury Stock
Effective December 31, 1996 the Company retired all treasury shares. The Company
transferred the appropriate amounts to the common stock and additional paid-in
capital accounts.
3. ACCOUNTS RECEIVABLE
December 31,
1996 1995
---------- ----------
Trade $ 416,000 $ 335,000
Accrued revenues 203,000 208,000
Other 10,000 6,000
---------- ----------
629,000 549,000
Less allowance for losses (230,000) (200,000)
---------- ----------
$ 399,000 $ 349,000
========== ==========
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
December 31,
1996 1995
---------- ----------
Trade payables $ 175,000 $ 189,000
Production proceeds payable 376,000 323,000
Accrued production taxes 7,000 8,000
Other 80,000 71,000
---------- ----------
$ 638,000 $ 591,000
========== ==========
30
5. RECLASSIFICATION
Certain amounts have been reclassified in the 1995 consolidated financial
statements to conform to the 1996 presentation.
6. NOTES PAYABLE
December 31,
1996 1995
---------- ----------
Notes payable to banks, bearing
interest at rates ranging from 8.0%
to 9.75%, collateralized by equipment
with an original cost of $20,000,
payable in monthly installments
totaling $1,600 through December 1997 $ 12,000 $ 2,000
Line of credit with a bank, under
which the Company may borrow up to
$95,000, bearing interest at 9%,
due on demand or, if no demand be
made,in monthly installments of
$4,000 through May 1996, collateralized
by equipment with an original cost
of $164,000 - 1,000
12,000 3,000
Less current portion (12,000) (3,000)
---------- ----------
$ - $ -
========== ==========
Substantially all of the Company's debt is personally guaranteed by Mr.
Paul E. Cash, the majority shareholder.
7. RELATED PARTY TRANSACTIONS
From March 1994 until 1996, the Company has provided various personnel, office
space, supplies and other administrative services to a related company, Double
River Oil & Gas Co. (Double River) for a fee of $575 per month.
At December 31, 1996, and 1995, approximately $3,000 and $3,000 respectively,
are due from Double River. Double River purchased some of the Company's natural
gas for resale to third parties. In July 1992, the Company entered into a Gas
Purchase Agreement with Double River, whereby the Company agreed to sell
natural gas to Double River at a price equal to 99% of Double River's resale
price under certain sales contracts between Double River and three independent
purchasers.The agreement expired in March 1995 and was assigned to Prairie
Pipeline in March 1994 as discussed below. Sales of natural gas to Double
River amounted to $-0- in 1996, $-0- in 1995 and $143,000 in 1994.
31
Mr. Cash was the majority shareholder of Double River until March 1994, when he
sold control of Double River to an unrelated person. Mr. Cash remains an
officer, shareholder and director of Double River. The Gas Purchase Agreement
discussed above was assigned by Double River to Prairie Pipeline Co. at the
time control of Double River was sold.
Included in the accompanying balance sheets are the following amounts
related to Mr.Cash:
December 31,
1996 1995
---------- ----------
Accounts receivable, trade $ 4,000 $ 24,000
Production proceeds payable - (37,000)
Shareholder loans, non-interest bearing 34,000 22,000
Key employees of the Company, except Paul E. Cash, are sometimes assigned
overriding royalty interests and/or carried working interest in prospects
acquired by or generated by the Company. These interests normally vary from
one-half to one percent for each employee. 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.
In January and February 1997, the Company made cash advances to Mr. Cash
totaling $114,000.
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.
For Federal income tax purposes, the Company has net operating loss and
investment credit carryovers of approximately $1,334,000 and $367,000,
respectively, which expire at various dates through 2010. Of these tax
carryovers, $1,106,000 resulted from losses occurring prior to the
reorganization discussed in Note 1.
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 $9,000, $18,000, and $-0- in 1996, 1995 and 1994, respectively, and
have been recorded as goodwill. As of December 31, 1996 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 carryforwards is assured, the Company will
32
not pay to Exploration's unsecured creditors any of the tax savings benefit.
As of December 31, 1996 and 1995, the Company owes $94,000 and $85,000
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:
1996 1995 1994
------------- ------------- ---------
Intangible drilling costs $ (110,000) $ (95,000) $ (20,000)
Differences between book and
tax depreciation, depletion and
amortization 32,000 104,000 103,000
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, 1996 and 1995 consisted of the following:
December 31,
1996 1995
---------- ----------
Deferred tax assets
Net operating loss carryforwards $ 334,000 $ 352,000
Investment tax credit carryforwards 367,000 367,000
Depreciation, depletion and amortization 118,000 110,000
Other, net 7,000 7,000
---------- ----------
Total 826,000 836,000
Deferred tax liabilities
Intangible drilling costs (138,000) (110,000)
----------- -----------
Net deferred tax assets 688,000 726,000
Less valuation allowance (688,000) (726,000)
----------- -----------
Net deferred tax asset $ - $ -
=========== ===========
SFAS 109 requires that a valuation allowance be recorded against tax assets
which are not likely to be realized. The Company's carryforwards expire at
specific future dates and utilization of certain carryforwards is limited to
specific amounts each year. However, due to the uncertain nature of their
ultimate realization based upon past performance and expiration dates, the
Company has established a full valuation allowance against these carryforward
benefits and is recognizing the benefits only as reassessment demonstrates they
are realizable. Realization is entirely dependent upon future earnings in
specific tax jurisdictions. While the need for this valuation allowance is
33
subject to periodic review, if the allowance is reduced, the tax benefits of
the carryforwards arising prior to reorganization will be credited to
additional paid-in capital, because they bear no relationship to current
operations, while the tax benefits of carryforwards arising after
reorganization will be recorded in future operations as a reduction of the
Company's income tax expense.
9. CASH FLOW INFORMATION
The Company does not consider any of its assets to meet the definition of a cash
equivalent.
Net cash provided by operating activities includes cash payments for interest
of $3,000, $4,000 and $11,000 in 1996, 1995, and 1994, respectively.
Excluded from the Consolidated Statements of Cash Flows were the effects of
certain non-cash investing and financing activities, as follows:
1996 1995 1994
---------- ---------- ----------
Purchase of equipment for notes
payable $ 20,000 $ - $ 15,000
Retirement of fully depreciated
assets 23,000 7,000 27,000
Goodwill capitalized as additional
cost of acquired company 9,000 18,000 -
Tax savings benefit payable 9,000 18,000 -
Retirement of treasury stock 136,000 - -
Effect of 1 for 6 reverse stock
split and change in par value 137,000 - -
Acquisition of oil and gas
properties in exchange for
forgiveness of accounts receivable 10,000 - -
10. EARNINGS PER SHARE
Earnings per common share is based on the weighted average number of shares
outstanding during each year, adjusted for the effects of the stock split
discussed in Note 2.
11. CONCENTRATIONS OF CREDIT RISK
As of December 31, 1996, the Company and one of its subsidiaries had
approximately $266,000 and $199,000, respectively, in checking accounts at one
bank.
34
Most of the Company's business activity is in Texas. Accounts receivable as of
December 31, 1996 and 1995 are primarily from a wide variety of individual and
institutional owners of joint interests in oil and gas wells. 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,
1996 and 1995 follow:
1996 1995
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- -------- --------- ---------
Cash $ 476,000 $ 476,000 $ 229,000 $ 229,000
Accounts receivable 399,000 399,000 349,000 349,000
Accounts receivable,
related parties 34,000 34,000 64,000 64,000
Shareholder loans 34,000 34,000 22,000 22,000
Notes payable 12,000 12,000 32,000 32,000
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
The Company's lease for office space expires in May 1997. Rent expense incurred
under this operating lease was approximately $39,000, $38,000 and $43,000 in
1996, 1995 and 1994, respectively.
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. These net operating losses and investment tax credits
expire at various dates through 2000.
In June 1993, Spindletop Drilling Company entered into an agreement with Loch
Exploration, Inc., whereby the parties agreed to combine their talents and
resources to evaluate and acquire producing and non-producing oil and gas
properties at various auctions. Any such properties acquired under the terms
of this agreement are to be acquired by initial assignment to the Company. The
Company has agreed to provide Loch with a recordable assignment of its
interest, such interest to be determined by the proportionate share of monies
expended for the acquisition of said properties. All costs are to be borne by
the Company and Loch in the same proportions as their respective ownership
interests. The Company will serve as administrator for properties acquired in
connection with this agreement, and will be entitled to an overhead
reimbursement for properties for which the Company serves as operator. This
agreement had an initial term of six months, and continues month to month
thereafter, until canceled by either party.
35
In March 1994, the Company entered into an agreement with PGC Gas Company, an
unaffiliated entity, under terms similar to those of the agreement with Loch
Exploration, Inc., described above. This agreement has an initial term of six
months, and will continue month to month thereafter, until canceled by either
party.
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 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.
14. ADDITIONAL OPERATIONS AND BALANCE SHEET INFORMATION
Certain information about the Company's operations for the years ended December
31, 1996, 1995, and 1994 follows.
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 both short-term and long-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, 1996.
Year Ended
December 31,
1996 1995 1994
------ ------ ------
Lone Star Gas Company and Affiliates -% -% 29%
Mitchell Marketing Co. 12 - -
Tristar Gas Company 10 - -
Texas Utilities Fuel Company 18 23 28
There are no other customers of the Company which individually accounted for
more than 10% of the Company's oil and gas revenues during the three years ended
December 31, 1996.
36
Year Ended December 31,
1996 1995 1994
------------- ------------- -------------
Capitalized costs relating to
oil and gas producing
activities:
Unproved properties $ 21,000 $ 41,000 $ 41,000
Proved properties 2,501,000 2,386,000 2,210,000
---------- ----------- -----------
Total Capitalized Costs 2,522,000 2,427,000 2,251,000
Accumulated amortization (1,560,000) (1,386,000) (1,190,000)
----------- ----------- -----------
$ 962,000 $ 1,141,000 $ 1,061,000
=========== =========== ===========
Year ended December 31,
1996 1995 1994
--------- --------- ---------
Costs incurred in oil and gas property
acquisition, exploration and development:
Acquisition of Properties $ 43,000 $ 212,000 $ 141,000
Exploration Costs 31,000 - -
Development Costs 68,000 110,000 20,000
--------- --------- ---------
$ 142,000 $ 322,000 $ 161,000
========= ========= =========
Results of operations from producing Year ended December 31,
activities: 1996 1995 1994
----------- ----------- ----------
Sales of oil and gas $ 1,287,000 $ 1,033,000 $ 913,000
----------- ----------- ----------
Production costs 704,000 631,000 450,000
Amortization of oil and gas properties 174,000 196,000 185,000
----------- ---------- ----------
878,000 827,000 635,000
----------- ---------- ----------
$ 409,000 $ 206,000 $ 278,000
========== ========== ==========
Year ended December 31,
1996 1995 1994
--------- --------- ---------
Sales price per equivalent Mcf $ 2.71 $ 2.40 $ 2.58
========= ========= =========
Production cost per equivalent Mcf $ 1.48 $ 1.47 $ 1.27
========= ========= =========
Amortization per equivalent Mcf $ .37 $ .46 $ .52
========= ========= =========
Costs incurred in gas gathering and
equipment rental
Acquisition of property and equipment $ - $ 8,000 $ 37,000
========= ========= ==========
37
Results of operations from gas
gathering and equipment rental:
Revenues $ 133,000 $ 149,000 $ 162,000
------- ------- --------
Operating Expenses 69,000 57,000 60,000
Depreciation 27,000 28,000 28,000
------- ------- --------
96,000 85,000 88,000
------- ------- --------
$ 37,000 $ 64,000 $ 74,000
======= ======= ========
15. BUSINESS SEGMENTS
The Company's two business segments are (1) oil and gas exploration, production
and operations and (2) transportation of natural gas, including related
equipment rental. The following is a summary of selected information for these
segments for the three-year period ended December 31, 1996:
1996 1995 1994
----------- ----------- -----------
Revenues:
Oil and gas exploration, production
and operations $ 1,502,000 $ 1,261,000 $ 1,169,000
Gas gathering and equipment rental 133,000 149,000 162,000
---------- --------- ---------
$ 1,635,000 $ 1,410,000 $ 1,331,000
========== ========= =========
Income from operations:
Oil and gas exploration, production
and operations 624,000 $ 434,000 $ 534,000
Gas gathering and equipment rental 37,000 64,000 74,000
--------- --------- ---------
661,000 498,000 608,000
Corporate and other (1) (520,000) (491,000) (506,000)
--------- ---------- ----------
Consolidated net income $ 141,000 $ 7,000 $ 102,000
========= ========== ==========
Identifiable assets:
Oil and gas exploration, production
and operations $ 962,000 $ 1,041,000 $ 1,061,000
Gas gathering & rental equipment 98,000 124,000 144,000
--------- --------- ---------
1,060,000 1,165,000 1,205,000
Corporate and other (2) 1,094,000 784,000 1,007,000
--------- --------- ----------
$ 2,154,000 $ 1,949,000 $ 2,212,000
========= ========= =========
(1) Corporate and other includes general and administrative expenses, other
non-operating income and expense and income taxes.
(2) Corporate and other includes cash, accounts and notes receivable, inventory,
other property and equipment and intangible assets.
38
16. SUPPLEMENTARY INCOME STATEMENT INFORMATION
Charged
Directly to Expense
1996 1995 1994
--------- --------- ---------
Maintenance and Repairs $ 70,000 $ 57,000 $ 60,000
Production taxes 74,000 51,000 47,000
Taxes, other than payroll and income taxes 19,000 27,000 28,000
17. SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED)
The Company's net proved oil and gas reserves as of December 31, 1996, 1995 and
1994 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
Oil Gas
Bbls Mcf
-------- ----------
Proved reserves:
Balance December 31, 1993 44,935 1,825,634
Acquired properties 13,070 376,108
Extensions and discoveries - -
Revisions of previous estimates 9,025 (125,774)
Production (11,584) (284,903)
-------- ----------
Balance December 31, 1994 55,446 1,791,065
Acquired properties 21,176 344,739
Sales of reserves in place (4,886) (63,620)
Revisions of previous estimates 18,205 275,468
Production (17,873) (322,465)
-------- ----------
Balance December 31, 1995 72,068 2,025,187
Extensions and discoveries - 118,963
Sales of reserves in place (2,631) (10,329)
Revisions of previous estimates 19,930 708,427
Production (17,276) (371,074)
-------- ----------
Balance December 31, 1996 72,091 2,471,174
======= =========
Proved Developed Reserves:
Balance December 31, 1994 55,446 1,528,355
Balance December 31, 1995 70,257 1,758,260
Balance December 31, 1996 72,091 2,181,212
39
17. 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. Future income tax payable was not computed because of the net
operating loss carryforward (See Note 8). 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
December 31,
Standardized Measures of 1996 1995 1994
------------ -------------- ----------
Discounted Future Net Cash
Flows:
Future production revenue $ 6,429,000 $ 4,859,000 $ 4,393,000
Future development costs (128,000) (87,000) (85,000)
Future production costs (3,171,000) (2,671,000) (2,411,000)
---------- ----------- ----------
Future net cash flows before
Federal income tax 3,130,000 2,101,000 1,897,000
Future Federal income tax - - -
--------- ---------- ----------
Future net cash flows 3,130,000 2,101,000 1,897,000
Effect of discounting 10%
per year (749,000) (476,000) (370,000)
--------- ---------- ----------
$ 2,381,000 $ 1,625,000 $ 1,527,000
========= ========== ==========
40
1996 1995 1994
-------- --------- ---------
Change Relating to the
Standardized Measures of
Discounted Future Net Cash
Flows:
Beginning balance $ 1,625,000 $ 1,527,000 $ 1,742,000
Oil and gas sales, net of
production costs (583,000) (402,000) (463,000)
Net change in prices, net of
production costs 668,000 (18,000) (126,000)
Extensions and discoveries 187,000 - -
Purchase of reserves in place - 250,000 245,000
Sales of reserves in place (9,000) (61,000) -
Revisions of quantity
estimates 999,000 339,000 (69,000)
Accretion of discount 163,000 153,000 174,000
Other (669,000) (163,000) 24,000
----------- ----------- ---------
$ 2,381,000 $ 1,625,000 $ 1,527,000
=========== =========== ==========
18. SUBSEQUENT EVENT
In March 1997, the Company signed a letter of intent with Network Investor
Communications, Inc., R. Deller, F. Schiemann and K. Dickson (collectively
"Network"), whereby the Company has agreed to engage Network to perform market
making assistance, investor relations services and to arrange for a licensed
stock brokerage firm or firms to assist the Company in raising approximately
$1,000,000 in new capital. Fees payable to such stock brokerage firms are not
presently expected to exceed 13% of the total funds actually raised, plus
$40,000 to $50,000 of unspecified costs.
Per terms of the letter of intent the Company will pay Network fees not to
exceed $5,000 per month for a period of three months, plus direct costs. The
Company has the right to approve, in advance, any direct costs in excess of
$500. One-half of the $15,000 in fees for the three month period will be
deferred and payable only when the Company has successfully raised the proposed
$1,000,000 in new capital. At the end of three months, the Company can elect to
continue the services under terms to be negotiated.
Additionally, the Company has agreed to issue a warrant to Network for up to
1,000,000 shares of the Company's $.01 par value common stock and to elect
one-third of its board of directors from representatives of Network, in the
event that the new capital is successfully raised.
There can be no assurance that the new capital will be raised or that the market
making assistance and investor relations services will be successful.
41
SCHEDULE II
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
Charged To
Beginning Costs and Ending
Description Balance Expenses Deductions Balance
- ------------------------ ----------- ---------- ----------- ---------
Allowance for Doubtful Accounts:
December 31, 1994 $ 175,000 $ 25,000 $ - $ 200,000
======== ======== ======= =======
December 31, 1995 $ 200,000 - - $ 200,000
======== ======== ======= =======
December 31, 1996 $ 200,000 30,000 - $ 230,000
======== ======== ======= =======
42
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
Index to Exhibits
PAGE
22. Subsidiaries of the Registrant 44
43
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
Subsidiaries 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.
44