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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, 1998 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 (IRS Employer or ID #)
incorporation or organization)
9319 LBJ, Frwy., #205 Dallas, TX 75243
(Address of principal executive offices) (Zip Code)
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 31, 1999, 7,525,804 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, 1998, were
33,920 barrels of oil and condensate and 1,998,537 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. 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
2
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 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 the majority 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. The Company sold
this pipeline in 1998 for a price of $30,000.
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 518 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, 1998:
Purchaser December 31, Percent (1)
--------- ------------------------------
1998 1997 1996
---- ---- ----
Lone Star Gas Company and affiliates 13% 13% -%
Mitchell Marketing Co. 22% 13% 12%
Tristar Gas Company -% -% 10%
Texas Utilities Fuel Co. -% 10% 18%
(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 previously 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 9 people, 4 persons in its offices in Dallas
and 5 in its field operations. 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,
1998 1997 1996
---------- ---------- ----------
Gas and Oil Properties (net) (1):
Proved Developed Gas Reserves-MCF (2) 1,699,425 2,122,247 2,181,212
Proved Undeveloped Gas Reserves-MCF(3) 299,112 299,112 289,962
---------- ---------- ----------
Total Proved Gas Reserves-MCF 1,998,537 2,421,359 2,471,174
========== ========== ==========
Proved Developed Crude Oil and
Condensate Reserves-Bbls (2) 33,920 61,646 72,091
Proved Undeveloped Crude Oil and
Condensate Reserves-Bbls (3) - - -
---------- ---------- -----------
Total Proved Crude Oil and
Condensate Reserves-Bbls 33,920 61,646 72,091
========== =========== ===========
(See footnotes on Page 9 following)
8
Year Ended December 31,
1998 1997 1996
----------- ----------- ----------
Present Value of Estimated
Future Net Revenues
From Proved Reserves (4) (5):
Developed $ 1,405,000 $ 2,107,000 $ 2,228,000
Developed and Undeveloped 1,599,000 2,283,000 2,381,000
Productive Wells (6):
Gas Wells
Gross 228 236 247
Net 27.59 29.34 33.98
Oil Wells
Gross 212 216 224
Net 14.56 14.83 15.43
Acreage:
Developed Acres (Producing)
Gross 81,073 82,042 83,642
Net 7,685 7,864 8,600
Undeveloped Acres
Gross 86,868 86,868 81,805
Net 13,856 13,856 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:
1998 1997 1996
----------------- ----------------- --------------
Gross Net Gross Net Gross Net
Gas 6 2.55 6 2.55 7 1.66
Oil -0- -0- -0- -0- -0- -0-
The Company has interests in numerous wells which are operated 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,
1998 1997 1996
-------------- ------------ -------------
Gross Net Gross Net Gross Net
----- ---- ----- ---- ----- ----
Exploratory wells:
Productive - - - - 1 -
Non-Productive - - 2 1.6 - -
----- ---- ----- ---- ----- ----
Total - - 2 1.6 1 -
----- ----- ----- ----- ----- -----
Development wells:
Productive - - - - - -
Non-Productive - - - - - -
----- ----- ----- ---- ----- -----
Total - - - - - -
----- ----- ----- ---- ----- -----
Total Exploratory and Development
wells:
Productive - - - - 1 -
Non-Productive - - 2 1.6 - -
----- ----- ----- ----- ----- -----
Total - - 2 1.6 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,
---------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
Oil and Gas Production (net):
Gas- 350,566 357,166 371,074 322,465 284,903
Crude Oil and Condensate - Bbls 13,304 14,998 17,276 17,873 11,584
Average Sales Price Per Unit
Produced: Gas - per Mcf $ 1.97 $ 2.66 $ 2.48 $ 2.28 $ 2.57
Crude Oil and Condensate-per Bbl $ 11.97 $ 20.29 $ 21.16 $ 16.61 $15.71
Average Production Cost Per
EquivalentBarrel (1) (2) $ 7.37 $ 8.90 $ 8.90 $ 8.81 $7.62
(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, 1999.
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, 1998.
Office Space.
The Company leases office space as follows:
Location Square Feet Lease Expires
Dallas, Texas 5,393 Nov. 30, 1999
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 518, 615
and 484 MCF per day for 1998, 1997, and 1996 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. 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
15, 1999, was 638.
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,
1998 1997 1996 1995 1994
----------- ----------- ----------- ---------- ----------
Total Revenue $ 1,239,000 $ 1,685,000 $ 1,693,000 $1,448,000 $1,396,000
Net Incom (229,000) 83,000 141,000 7,000 102,000
Earnings Per
Share(1) (.03) .01 .02 - .01
At End of
Periods
Total Assets 1,793,000 2,225,000 2,154,000 1,949,000 2,212,000
Long-Term Debt - - - - 3,000
(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. 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:
1998 Compared to 1997
Oil and gas revenues decreased primarily because of decreases in oil and gas
prices. There was also a slight decrease in production.
Lease operating expenses decreased because of a sale of some oil and gas
properties and an overall decrease in the amount of repairs and maintencance
required on existing wells in 1998.
Gas pipeline sales and gas pipeline purchases decreased because of the sale the
pipeline in 1998 for $30,000. This pipeline had been obtained at no cost. The
$30,000 gain is reflected in other income
1997 Compared to 1996
Gas pipeline sales of $89,000 and related gas pipeline purchases of $64,000 did
not exist in 1996. The pipeline was purchased in December 1996.
Revenue from lease operations decreased $28,000 in 1997. The Company decreased
its monthly overhead fee on several wells that it operates.
13
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.
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, 1996, 1997, and 1998.
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 66 Director and President
K. Paul Cash 42 Director, Vice President
and Secretary
Gary Goodnight 44 Director, Vice President, and Treasurer
David Goodhart 34 Director and Vice President
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.
David Goodhart is the son-in-law of Paul E. 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.
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.
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.
David I. Goodhart, Director and Vice-President/General Counsel, joined the
Company in June 1998. Prior to joining the Company, Mr. Goodhart was employed as
an attorney for Thompson & Knight, P.C. in Dallas, Texas, and as an attorney
with Sildon & Evans, P.C. in Kansas City, Missouri. He receive a Bachelor of
15
Business Administration degree in accounting from The University of Texas at
Austin in 1987; a Masters of Science degree in Tax Accounting from the
University of Missouri-Kansas City in 1989; and a Juris Doctorate degree from
the University of Missouri-Kansas City in 1994.
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.
(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, 1998, none of the Company's executive officers
were paid cash compensation at the annual rate in excess of $60,000. During
1998, the Company paid cash compensation of approximately $173,000 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 usually purchases 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
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, 1998 with respect to: (i)any person who is known
to the Registrant to be the owner of more than five percent (5%) of the
16
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 81.97%
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
All officers and directors
as a group 6,345,358 84.32%
(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.
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 100 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%. 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 a few of the wells operated
by the company.
17
(b) Certain Business Relationships
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 for
such program, and the frequency and amounts are largely controlled by the
economics of each particular prospect.
18
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, 1998 and 1997
Consolidated Statements of Income (Loss) for the years ended
December 31, 1998, 1997, and 1996
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996
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 April 12, 1999 By /S/ Paul E. Cash
-------------------
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 April 12, 1999
- ----------------
Paul E. Cash
/s/ K. Paul Cash Secretary, Director April 12, 1999
- ----------------
K. Paul Cash
/s/ David Goodhart Vice President, Director April 12, 1999
- ------------------
David Goodhart
/s/ Gary Goodnight Treasurer, Director April 12, 1999
- -----------------
Gary Goodnight
20
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedules
Page
Independent Auditors' Report...........................................22
Consolidated Balance Sheets - December 31, 1998
and 1997............................................................23-24
Consolidated Statements of Income (Loss) for the years
ended December 31, 1998, 1997 and 1996.................................25
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1998,
1997, and 1996.........................................................26
Consolidated Statements of Cash Flows for the
years ended December 31, 1998, 1997
and 1996...............................................................27
Notes to Consolidated Financial Statements..........................28-41
Schedules for the years ended December 31, 1998,
1997 and 1996
II - Valuation and Qualifying Accounts........................42
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, 1998 and 1997,
and the related consolidated statements of income (loss), changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, 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
April 5, 1999
22
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1998 1997
------------ ------------
ASSETS
Current Assets
Cash $ 288,000 $ 448,000
Accounts receivable 284,000 414,000
Accounts receivable, related parties 33,000 40,000
Shareholder Loans 8,000 3,000
Inventory - 8,000
----------- ------------
Total Current Assets 613,000 913,000
----------- ------------
Property and Equipment - at cost
Oil and gas properties (full cost method) 3,008,000 2,881,000
Rental equipment 338,000 329,000
Gas gathering systems 151,000 151,000
Other property and equipment 191,000 199,000
---------- -----------
3,688,000 3,560,000
Accumulated depreciation and amortization (2,548,000) (2,300,000)
----------- ------------
1,140,000 1,260,000
---------- ----------
Other Assets, net of accumulated
amortization of $89,000 and $77,000 at
December 31,1998 and 1997 respectively 40,000 52,000
---------- ----------
Total Assets $ 1,793,000 $ 2,225,000
========== ===========
The accompanying notes are an integral part of these statements.
23
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
December 31,
1998 1997
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 426,000 $ 628,000
Notes payable - 1,000
Tax savings benefit pay 97,000 97,000
---------- ----------
Total Current Liabilities 523,000 726,000
---------- ----------
Shareholders' Equity
Common stock, $.01 par value;100,000,000
shares authorized;7,525,804 shares
issued and outstanding (7,525,804 at
December 31, 1997) 75,000 75,000
Additional paid-in capital 733,000 733,000
Retained earnings 462,000 691,000
----------- ----------
1,270,000 1,499,000
----------- ----------
Total Liabilities And Shareholders'Equity $ 1,793,000 $ 2,225,000
============ ==========
The accompanying notes are an integral part of these statements.
24
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Years ended December 31,
1998 1997 1996
----------- ----------- -----------
Revenues
Oil and gas revenues $ 850,000 $ 1,255,000 $ 1,287,000
Revenue from lease operations 176,000 187,000 215,000
Gas pipeline sales 35,000 89,000 -
Gas gathering fees 17,000 19,000 19,000
Equipment rental 121,000 114,000 114,000
Interest income 5,000 9,000 4,000
Other 35,000 12,000 54,000
---------- ----------- -----------
1,239,000 1,685,000 1,693,000
---------- ----------- -----------
Expenses
Pipeline and rental operations 86,000 70,000 69,000
Gas pipeline purchases 19,000 64,000 -
Lease operations 529,000 663,000 704,000
Depreciation and amortization 260,000 257,000 237,000
General and administrative 574,000 547,000 539,000
Interest expense - 1,000 3,000
---------- ---------- ----------
1,468,000 1,602,000 1,552,000
---------- ---------- ----------
Net Income (Loss) $ (229,000) $ 83,000 $ 141,000
========== ========== ==========
Earnings Loss) Per Share
Of Common Stock $(0.03) $ 0.01 $ 0.02
====== ====== ======
Weighted average shares outstanding 7,525,804 7,492,992 7,488,304
========== ========== ==========
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, 1998, 1997, and 1996
Additional
Common Stock Paid-in Treasury Retained
Shares Amount Capital Stock Earnings
----------- ------- --------- --------- ---------
Balance January 1, 1996 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
Stock issued in exchange
for pipeline 37,500 - 6,000 - -
Net income - - - - 83,000
------------ -------- -------- --------- --------
Balance December 31, 1997 7,525,804 75,000 733,000 - 691,000
Net loss - - - - (229,000)
------------ -------- -------- --------- ---------
Balance December 31, 1998 7,525,8048 $ 75,000 $733,000 $ - $ 462,000
=========== ======== ======== ========= =========
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,
1998 1997 1996
--------- ---------- ----------
Cash Flows from Operating
Activities:
Net Income (Loss) $ (229,000) $ 83,000 $ 141,000
Reconciliation of net income to
net cash provided by (used for)
operating activities:
Depreciation and amortization 260,000 257,000 237,000
(Increase) decrease in accounts
receivable 137,000 (21,000) (30,000)
(Increase) decrease in inventory 8,000 23,000 (24,000)
Increase (decrease) in accounts payable (202,000) (10,000) 46,000
--------- ---------- ----------
Net cash provided by (used for)
operating activities (26,000) 332,000 370,000
--------- ---------- ----------
Cash Flows from Investing Activities
Capitalized acquisition, exploration
and development costs (188,000) (429,000) (132,000)
Proceeds from sale of property
and equipment 69,000 70,000 47,000
Purchase of property and equipment (9,000) (21,000) (14,000)
---------- ---------- ----------
Net cash used by investing activities (128,000) (380,000) (99,000)
---------- --------- --------
Cash Flows from Financing Activities
Repayment of notes payable (1,000) (19,000) (11,000)
Proceeds from borrowings - 8,000 -
Repayment of shareholder loans - 245,000 -
Advances to shareholder (5,000) (214,000) -
Net repayments from shareholder - - (12,000)
Other - - (1,000)
---------- ---------- ---------
Net cash used by financing activities (6,000) 20,000 (24,000)
---------- ---------- ---------
Increase (decrease) in cash (160,000) (28,000) 247,000
Cash at beginning of period 448,000 476,000 229,000
---------- ---------- ---------
Cash at end of period $ 288,000 $ 448,000 $ 476,000
========== ========== ========
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, 1997, 1996, and 1995,
122,436, 122,436, and 122,436 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
7, is being amortized over the remaining life of the net operating loss existing
at the time of the Plan discussed in Note 1, which expires in 1998.
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 carryforwards.
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 stockholders' 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,
1998 1997
--------- ----------
Trade $ 387,000 $ 354,000
Accrued revenues 146,000 289,000
Other 1,000 1,000
--------- ----------
534,000 644,000
Less allowance for losses (250,000) (230,000)
--------- ---------
$ 284,000 $ 414,000
========= =========
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
December 31,
1998 1997
-------- --------
Trade payables $ 62,000 $ 69,000
Production proceeds payable 230,000 451,000
Accrued production taxes 4,000 10,000
Other 130,000 98,000
-------- --------
$ 426,000 $ 628,000
======== =========
30
5. NOTES PAYABLE
December 31,
1998 1997
----------- -----------
Note payable to a bank, bearing
interest at 8%, collaterlized by
equipment with an original cost of
$8,000, payable in monthly installments
of $713. Loan paid off in January 1998 $ - $ 1,000
----------- -----------
- 1,000
Less current portion - (1,000)
----------- -----------
$ - $ -
========= ==========
Substantially all of the Company's debt is personally guaranteed by Mr.Paul E.
Cash, the majority shareholder(Mr. Cash).
6. RELATED PARTY TRANSACTIONS
From March 1994 until 1998, 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, 1998, and 1997, approximately $2,000 and $4,000 respectively,
are due from Double River.
Included in the accompanying balance sheets are the following amounts related
to Mr. Cash:
December 31,
1998 1997
--------- ---------
Shareholder loans, non-interest bearing $ 8,000 $ 3,000
Key employees of the Company, except Mr. 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.
7. SUBSEQUENT EVENTS
On April 5, 1999, the Company acquired for $1,000 a 50% interest in 352 Stone
Canyon, L.P., a Texas limited partnership ("Limited Partnership"), becoming its
sole general partner. The Limited Partnership is a single-asset entity designed
to be the development arm of a 66.57 acre residential tract of land in the Town
of Sunnyvale, Texas. The Limited Partnership plans to develop the tract into a
luxury residential subdivision. the remaining limited partners of the Limited
Partnership are Paul E. Cash, K. Paul Cash, and David Goodhart, all of whom are
officers and directors of the Company. Contributions of capital for the
remaining limited partners, respectively, are $1,000 each. Paul E. Cash also
loaned the Limited Partnership approximately $300,000.
31
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 $579,000 and $1,000, respectively,
which expire at various dates through 2013.
Expires Net Operating Loss Investment Tax
December 31, Carryforward Credit
-------------------- ------------------------ ------------------
2000 $ - $ 1,000
2005 55,000 -
2007 146,000 -
2010 28,000 -
2012 27,000 -
2013 323,000 -
-------------- --------------
$ 579,000 $ 1,000
=========== ===========
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-, $3,000, and $9,000 in 1998, 1997 and 1996, respectively, and have
been recorded as goodwill. As of December 31, 1998 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 not pay to
Exploration's unsecured creditors any of the tax savings benefit. As of December
31, 1998 and 1997, the Company owes $97,000 and $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:
1998 1997 1996
----------- ----------- ----------
Intangible drilling costs $ (175,000) $ (183,000) $(110,000)
Differences between book and tax
depreciation, depletion and amortization 36,000 49,000 32,000
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
32
corresponding valuation allowance at December 31,1998 and 1997 consisted of the
following:
December 31,
1998 1997
---------- ------------
Deferred tax assets
Net operating loss carryforwards $ 145,000 $ 339,000
Investment tax credit carryforwards 1,000 1,000
Depreciation, depletion and amortization 139,000 130,000
Other, net 7,000 7,000
------------ ---------------
Total 292,000 477,000
Deferred tax liabilities
Intangible drilling costs ( 227,000) (184,000)
------------- ----------------
Net deferred tax assets 65,000 293,000
Less valuation allowance ( 65,000) (293,000)
---------------- ----------------
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
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
$ -0-, $1,000 and $3,000 in 1998, 1997, and 1996, respectively.
33
Excluded from the Consolidated Statements of Cash Flows were the effects of
certain non-cash investing and financing activities, as follows:
1998 1997 1996
----------- ----------- ---------
Purchase of equipment for
notes payable $ - $ - $ 20,000
Retirement of fully depreciated
assets - - 23,000
Goodwill capitalized as additional
cost of acquired company - 3,000 9,000
Tax savings benefit payable - 3,000 9,000
Retirement of treasury stock - - 136,000
Effect of 1 for 6 reverse stock split
and change in par value - - 137,000
Issuance of common stock to acquire
gas gathering system - 6,000 -
Acquisition of oil and gas properties
in exchange for forgiveness of accounts
receivable - - 10,000
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. Diluted EPS does not apply to the Company due to
the absence of dilutive potential common shares. 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.
11. CONCENTRATIONS OF CREDIT RISK
As of December 31, 1998, one of the Company's subsidiaries had approximately
$172,000 in checking accounts at one bank.
Most of the Company's business activity is in Texas. Accounts receivable as of
December 31, 1998 and 1997 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.
34
12. FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments at December 31,
1998 and 1997 follow:
1998 1997
---------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- --------- ---------
Cash $ 288,000 $ 288,000 $ 448,000 $ 448,000
Accounts receivable 284,000 284,000 414,000 414,000
Accounts receivable,
related parties 33,000 33,000 40,000 40,000
Shareholder loans 8,000 8,000 3,000 3,000
Notes payable - - 1,000 1,000
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 November 1999. Rent expense
incurred under this operating lease was approximately $39,000, $39,000 and
$39,000 in 1998, 1997 and 1996, respectively.
Future minimum rentals under the non-cancelable operating lease are
approximately as follows:
Year ended December 31, Amount
----------------------- -------
1999 $ 48,000
2000 44,000
2001 -
2002 -
2003 -
Thereafter -
--------
$ 92,000
========
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. These net
operating losses expire in 1998 and the investment tax credits expired in 1997.
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
35
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.
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, 1998, 1997, and 1996 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, 1998.
Year Ended
December 31,
1998 1997 1996
---- ---- ----
Lone Star Gas Company and Affiliates 13% 13% -%
Mitchell Marketing Co. 22 13 12
Tristar Gas Company - - 10
Texas Utilities Fuel Company - 10 18
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, 1998.
36
Year Ended December 31,
1998 1997 1996
------------ ----------- -----------
Capitalized costs relating to
oil and gas producing activities:
Unproved properties $ 89,000 $ 139,000 $ 21,000
Proved properties 2,919,000 2,742,000 2,501,000
----------- ------------ -----------
Total Capitalized Costs 3,008,000 2,881,000 2,522,000
Accumulated amortization (1,965,000) (1,758,000) (1,560,000)
----------- ------------ ----------
$1,043,000 $ 1,123,000 $ 962,000
=========== ============ ==========
Year ended December 31,
1998 1997 1996
------- --------- -----------
Costs incurred in oil and
gas property acquisition,
exploration and development:
Acquisition of Properties $ - $ 81,000 $ 43,000
Exploration Costs 122,000 327,000 31,000
Development Costs 66,000 21,000 68,000
--------- --------- -----------
$ 188,000 $ 429,000 $ 142,000
========= ========== ==========
Year ended December 31,
1998 1997 1996
---- ---- ----
Results of operations from
producing activities:
Sales of oil and gas $ 850,000 $ 1,255,000 $ 1,287,000
-------- --------- -----------
Production costs 529,000 663,000 704,000
Amortization of oil and gas properties 207,000 198,000 174,000
--------- ---------- -----------
736,000 861,000 878,000
--------- ---------- -----------
$ 114,000 $ 394,000 $ 409,000
========== ========= ===========
Year ended December 31,
1998 1997 1996
Sales price per equivalent Mcf $ 1.97 $ 2.81 $ 2.71
======= ======= ========
Production cost per equivalent Mcf $ 1.23 $ 1.48 $ 1.48
======= ======= ========
Amortization per equivalent Mcf $ .48 $ .44 $ .37
======= ======= ========
Costs incurred in gas gathering
and equipment rental
Acquisition of property and equipment $ - $ - $ -
======== ======== ========
Results of operations from gas
gathering and equipment rental:
Revenues $ 173,000 $ 222,000 $ 149,000
-------- --------- --------
Gas pipeline purchases 19,000 64,000 -
Operating Expenses 86,000 70,000 57,000
Depreciation 21,000 20,000 28,000
------- ------- --------
126,000 154,000 85,000
-------- -------- --------
$ 47,000 $ 68,000 $ 64,000
======== ======= ========
37
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. 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, 1998:
1998 1997 1996
-------------- ------------ ------------
Revenues:(3)
Oil and gas exploration,
production and operations $ 1,026,000 $ 1,442,000 $ 1,502,000
Gas gathering and equipment
rental 173,000 222,000 133,000
---------- ----------- ------------
$ 1,199,000 $ 1,664,000 $ 1,635,000
========== =========== ===========
Depreciation, depletion
and amortization expense:
Oil and gas exploration,
production and operations $ 207,000 $ 198,000 $ 174,000
Gas gathering and equipment
rental 21,000 20,000 27,000
---------- ----------- ------------
$ 228,000 $ 218,000 $ 201,000
=========== =========== ===========
Income from operations:
Oil and gas exploration,
production and operations $ 290,000 $ 581,000 $ 624,000
Gas gathering and equipment
rental 47,000 68,000 37,000
--------- ---------- -----------
337,000 649,000 661,000
Corporate and other (1) (566,000) (566,000) (520,000)
--------- ---------- -----------
Consolidated net income $ (229,000) $ 83,000 $ 141,000
========= ========= ==========
Identifiable assets:
Oil and gas exploration,
production and operations $ 1,043,000 $ 1,124,000 $ 962,000
Gas gathering & rental equipment 71,000 83,000 98,000
--------- ----------- ----------
1,114,000 1,207,000 1,060,000
Corporate and other (2) 679,000 1,018,000 1,094,000
--------- ----------- -----------
$ 1,793,000 $ 2,225,000 $ 2,154,000
========= ========== ==========
(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.
(3) All reported revenues are from external customers
38
16. SUPPLEMENTARY INCOME STATEMENT INFORMATION
Charged
Directly to Expense
1998 1997 1996
---- ---- ----
Maintenance and Repairs $ 86,000 $ 49,000 $ 70,000
Production taxes 45,000 68,000 74,000
Taxes, other than payroll and income taxes 23,000 21,000 19,000
17. SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED)
The Company's net proved oil and gas reserves as of December 31, 1997, 1996 and
1995 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, 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
Sales of reserves in place - (4,554)
Acquired properties - 176,266
Revisions of previous estimates 4,553 135,639
Production (14,998) (357,166)
-------- ----------
Balance December 31, 1997 61,646 2,421,359
Sales of reserves in place (50,843)
Revisions of previous estimates (14,422) (21,413)
Production (13,304) (350,566)
-------- ----------
Balance December 31, 1998 33,920 1,998,537
======= =========
Proved Developed Reserves:
Balance December 31, 1996 72,091 2,181,212
Balance December 31, 1997 61,646 2,122,247
Balance December 31, 1997 33,920 1,699,425
39
16. 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 7). 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,
1998 1997 1996
-------------- -------------- -----------
Standardized Measures of Discounted
Future Net Cash Flows:
Future production revenue $ 4,487,000 $ 6,302,000 $6,429,000
Future development costs (110,000) (110,000) (128,000)
Future production costs (2,238,000) (3,167,000) (3,171,000)
------------ ------------- -----------
Future net cash flows before Federal
income tax 2,139,000 3,025,000 3,130,000
Future Federal income tax - - -
----------- ----------- -----------
Future net cash flows 2,139,000 3,025,000 3,130,000
Effect of discounting 10%
per year (540,000) (741,000) (749,000)
----------- ----------- ----------
$ 1,599,000 $ 2,284,000 $ 2,381,000
========== =========== ===========
40
1998 1997 1996
----- ------ -----
Change Relating to the Standardized
Measures of Discounted Future Net Cash
Flows:
Beginning balance $ 2,284,000 $ 2,381,000 $ 1,625,000
Oil and gas sales, net of production
costs (321,000) (592,000) (583,000)
Net change in prices, net of production
costs (211,000) 99,000 668,000
Extensions and discoveries - - 187,000
Purchase of reserves in place - 124,000 -
Sales of reserves in place (73,000) (4,000) (9,000)
Revisions of quantity estimates (124,000) 204,000 999,000
Accretion of discount 228,000 238,000 163,000
Other (184,000) (166,000) (669,000)
--------- ------------ ----------
$ 1,599,000 $ 2,284,000 $ 2,381,000
========== ============ ==========
41
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
Charged To
Beginning Costs and Ending
Description Balance Expenses Deductions Balance
- ------------------------------- --------- ---------- --------- --------
Allowance for Doubtful Accounts
- -------------------------------
December 31, 1996 $ 200,000 30,000 - $ 230,000
======= ======= ======= =======
December 31, 1997 $ 230,000 - - $ 230,000
======= ======= ======= =======
December 31, 1998 $ 230,000 20,000 - $ 250,000
======= ======= ======= =======
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