ITEM 1 - Business
General
The response to this item is submitted as a separate section in Part IV of this report under Notes to Financial Statements, Note 1 - Organization.
Operating Hazards and Uninsured Risks
All of the Partnership's oil and gas activities are subject to the risks normally associated with exploration for and production of oil and gas, including blowouts, cratering and fires, each of which could result in damage to life and property. The General Partner believes that its operations and facilities are in compliance with applicable environmental regulations. Nevertheless, the risks of substantive costs and liabilities are inherent in operations such as the Partnership's, and there can be no assurance that significant costs and liabilities will not be incurred in the future. The General Partner does carry insurance against some, but not all, of these risks. Losses and liabilities arising from such events would reduce revenues and increase costs to the Partnership to the extent not covered by insurance. Notwithstanding the foregoing, the General Partner believes that it has adequate insurance coverage to preclude any material adverse impact from known claims.
Markets
The availability of a ready market for the Partnership's oil and gas production and revenues generated from sales of production depends on numerous factors beyond its control, including the cost and availability of alternative fuels, the level of consumer demand, the extent of other domestic production of oil and gas, the extent of importation of foreign oil and gas, the costs of and proximity of pipelines and other transportation facilities, regulation by state and federal authorities, and the costs of complying with applicable environmental regulations. Prices for oil and gas have proven volatile in recent years. Due to all of the above stated factors, management is unable to predict future prices.
Regulation
Federal Regulation
Various aspects of the Partnership's natural gas operations are affected by regulations of the Federal Energy Regulatory Commission ("FERC") under authority of the Natural Gas Act of 1938 ("NGA") and the Natural Gas Policy Act of 1978 ("NGPA"). The provisions of these acts are complex. However, pursuant to certain FERC rules and recent legislation, most gas was deregulated on January 1, 1993. Additionally, the interstate natural gas pipeline industry is undergoing a substantial restructuring by the FERC. The impact of price decontrol and the FERC restructuring on the Partnership is uncertain, but at present would appear not to cause a material adverse effect on the business of the Partnership.
State Regulation
Most states in which the Partnership owns oil and gas properties have statutes and regulations governing a number of environmental and conservation matters, including the unitization or pooling of oil and gas properties and maximum rates of production from oil and gas wells. Such statutes and regulations may limit the rate at which oil and gas could otherwise be produced from the Partnership properties. State regulatory authorities have also established rules and regulations requiring permits for drilling operations, drilling bonds and reports concerning operations. Some states have enacted statutes prescribing ceiling prices for gas sold within the state.
In 1992, the Texas Railroad Commission ("TRC") adopted a significant revision to the current system of natural gas production in Texas. The previous system required each pipeline system to estimate the demand for gas each month and take from its suppliers on a pro rata basis. The new rule assigns allowable production of natural gas to wells on an annual basis rather than a monthly basis. In addition, the determination of market demand is made by the TRC rather than the pipelines. The impact of these new regulations on the Partnership has been and is expected to be minimal.
Environmental Regulation
The Partnership's oil and gas exploration and production operations are subject to regulation by the United States Environmental Protection Agency (the "EPA") and the regulatory bodies in each state in which it is doing business. The Partnership's oil and gas exploration, development and production operations are subject to numerous environmental programs, some of which include solid and hazardous waste management, water protection, air emission controls, and situs controls affecting wetlands, coastal operations, and antiquities. New programs and changes in existing programs are anticipated, some of which include naturally occurring radioactive materials ("NORM"), oil and gas exploration and production waste management, and underground injection of waste materials. The Partnership is not a party to any enforcement proceedings at this time.
Federal Income Tax Legislation
The Partnership pays no income taxes. Instead, all items of income and loss flow through directly to the partners to be included in their individual returns. Certain limitations on the deductibility of losses attributable to an investment in the Partnership under the passive loss rules will apply to the Limited Partners which are individuals, estates, trusts, closely held corporations and personal service corporations. In general, losses from activities in which an investor does not materially participate (characterized as passive activities), such as a Limited Partner's interest in the Partnership, are only deductible to the extent of income from such passive activities.
The Revenue Act of 1987 classifies certain "publicly traded" partnerships as corporations for federal income tax purposes. The General Partner believes that the Partnership should not be considered a publicly traded partnership under such provisions, although no assurance of this result can be given. In the event the Partnership was classified as a publicly traded partnership under such provisions, it should qualify for an exemption from corporate classification to the extent that 90% of its gross income is derived from the exploration, production and development of oil and natural gas.
Each Limited Partner should consult with his tax advisor as to the effect of the federal income tax laws on his investment in the Partnership.
Additional Legislation
No prediction can be made as to what additional legislation may be proposed, if any, affecting the competitive status of an oil and gas producer, restricting the prices at which a producer may sell its oil and gas, imposing new taxes on revenues attributable to oil and gas production, or affecting the market demand for oil and gas; nor can it be predicted which proposals, including those currently under consideration, if any, might be enacted or become effective.
Employees
The Partnership has no employees. Management of the Partnership, including legal, accounting, technical and operational support, is provided by the General Partner.
ITEM 2
ITEM 2 - Properties
General
The Partnership's interests in its properties are in the form of various ownership interests in oil and gas leases. On certain properties, the size of interest owned by the Partnership will change after the investment in the prospect or well is recovered. The Partnership's properties may be subject to liens, operating agreements, minor encumbrances, easements and restrictions.
Acreage
As of December 31, 1996, the Partnership held oil and natural gas leases as follows:
Production
The following table summarizes for the periods indicated the Partnership's (i) net oil and gas production, (ii) the average sales price received per barrel ("bbl") of crude oil and per thousand cubic feet ("mcf") of natural gas, and (iii) the composite production cost per equivalent bbl of oil and gas ("BOE") produced. Gas has been converted on the basis of 6 mcf equals 1 bbl. Liquid gas plant products (derived from natural gas) have been converted on the basis of 1 bbl of plant products equals 6 mcf.
Estimated Oil and Gas Reserve Quantities (Unaudited)
The response to this item is submitted as a separate section in Part IV of this report under Notes to Financial Statements, Note 8 - Supplemental Data of Oil and Gas Operations.
Productive Properties
As of December 31, 1996, the Partnership had working interests in seven gross (1.63 net) productive wells, located in Louisiana and Texas.
Drilling Activity
In 1996, the Partnership participated in the drilling of the McIlhenny #1-Sidetrack #3 utilizing the existing wellbore of the McIlhenny #1-D well which was abandoned. The cost to the Partnership to drill and complete the well amounted to $943,564 and increased the Partnership reserve base by 13,661 bbls of oil and 15,846 mcf of gas. In 1995, the Partnership did not participate in any drilling activity. During 1994, the Partnership participated in the drilling of the Mestena No. E-18 which cost the Partnership $178,843 and increased the Partnership reserve base by 2,982 bbls of oil and 182,971 mcf of gas and plant products.
ITEM 3
ITEM 3 - Legal Proceedings
There were no material legal proceedings to which the Partnership is a party nor to which any of its properties were subject.
ITEM 4
ITEM 4 - Submission of Matters to a Vote of Security Holders
None.
PART II
ITEM 5
ITEM 5 - Market for the Registrant's Common Equity and Related Stockholder Matters
The number of holders of record of equity securities of the Partnership as of December 31, 1996, was as follows:
Title of Class Number of Record Holders
Limited Partnership Interests 495
The assignment of interest is subject to certain restrictions. Because of these restrictions and the absence of a public market for the interests, a Limited Partner may not readily be able to liquidate his investment in the Partnership. However, Article VII of the Partnership Agreement provides a procedure whereby a Limited Partner may present his Limited Partnership interest to the General Partner for purchase. The purchase price is based on the Limited Partners' proportionate share of the sum of (i) two-thirds of the present worth of estimated future net revenues discounted at the prime rate in effect on the applicable valuation date plus one percent, (ii) the present value of the estimated salvage value of all production facilities and tangible assets, and (iii) the net book value of all other assets and liabilities. (See Part IV of this report under Notes to Financial Statements, Notes 4 and 5).
ITEM 6
ITEM 6 - Selected Financial Data
Selected financial data for each of the five years in the period ended December 31, 1996 are as follows:
ITEM 6 - Selected Financial Data (continued)
ITEM 7
ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
1996 Compared to 1995
The Partnership's net income for the year ended December 31, 1996, was $780,808, representing a 211% increase from net income of $251,210 reported for the same period in 1995. The increase resulted primarily from higher oil, natural gas and plant products sales prices and higher sales volumes for oil and natural gas.
Crude oil and natural gas sales for the year ended December 31, 1996 increased $827,453 or 68% when compared to the same period in 1995. This increase resulted from higher sales prices and volumes. During 1996, crude oil production per day increased to 233 bbls, compared with 1995 daily production of 174 bbls. Natural gas production increased to 204 mcf per day in 1996, compared with 196 mcf per day in 1995. Plant products decreased to 41 equivalent mcf per day in 1996, compared with 1995 daily production of 55 equivalent mcf. Average crude oil, natural gas, and plant product prices in 1996 were $21.20 per bbl, $2.70 per mcf, and $2.08 per equivalent mcf, respectively, compared to $16.74 per bbl, $1.65 per mcf and $1.40 per equivalent mcf, respectively, for the same period in 1995.
Lease operating expense of $262,395 decreased by 11% compared to the same period in 1995. This decrease of $33,461 is the result of additional safety and environmental costs and the plugging of one well in 1995 which did not occur in 1996. Depreciation, depletion and amortization expense increased by 160% or $222,158 due to increased oil and gas sales in 1996 as compared to the same period in 1995. Production tax expense of $243,458 increased by 77% from 1995, due to increased oil and gas sales in 1996 as compared to the same period in 1995. Interest expense of $113,702 increased by 6% due to increased capital expenditures as a result of the drilling of the McIlhenny #1-Sidetrack #3 well. The Partnership reported marketing deductions of $12,150 for 1996, a decrease of $5,916 or 33% as compared to marketing deductions of $18,066 for 1995.
1995 Compared to 1994
The Partnership's net income for the year ended December 31, 1995, was $251,210, representing a 37% decrease from net income of $400,767 reported for the same period in 1994. The decrease resulted primarily from lower oil production and an increase in lease operating expenses in 1995.
Crude oil and natural gas sales for the year ended December 31, 1995 decreased $122,156 or 9% when compared to the same period in 1994. This decrease resulted from declines in oil and gas production of 12,373 bbls and 4,482 mcf, respectively, and a drop of $0.34 in the average gas price per mcf. These declines were partially offset by an increased price per barrel for oil and an increase in plant product sales. During 1995, crude oil production per day decreased to 174 bbls, compared with 1994 daily production of 208 bbls. Natural gas production decreased to 196 mcf per day in 1995, compared with 208 mcf per day in 1994. Plant products increased to 55 equivalent mcf per day in 1995, compared with 1994 daily production of 26 equivalent mcf. During the first half of 1994, gas was sold at the wellhead rather than processed for economic reasons, which resulted in the increase for 1995. Average crude oil, natural gas, and plant product prices in 1995 were $16.74 per bbl, $1.65 per mcf, and $1.40 per equivalent mcf, respectively, compared to $15.40 per bbl, $1.99 per mcf and $1.23 per equivalent mcf, respectively, for the same period in 1994.
Lease operating expense of $295,856 increased by 23% compared to the same period in 1994. This increase of $56,261 is the result of additional operating requirements as the properties mature, including environmental and safety costs, irrespective of production declines. Depreciation, depletion and amortization expense decreased by 18% or $29,865 due to decreased oil and gas sales in 1995 as compared to the same period in 1994. Production tax expense of $137,473 decreased by 1% from 1994, again due to decreased oil and gas sales in 1995. Interest expense of $107,158 increased by 24% due to rising interest rates in 1995. The Partnership reported marketing deductions of $18,066 for 1995, a decrease of $10,486 or 37% as compared to marketing deductions of $28,552 for 1994.
Financial Condition and Liquidity
Cash Flow from Operations
Net cash provided by operating activities was $1,143,232 in 1996, an increase of $752,801 or 193% when compared to 1995. The increase was primarily the result of higher oil and gas revenues. Cash flow provided from operating activities in 1995 decreased 33% or $189,449 when compared to 1994, the result of lower oil and gas revenues.
Capital Resources
There were capital expenditures for property additions of $939,608 in 1996 as compared with capital expenditures of $666 and $178,843 in 1995 and 1994, respectively. The Partnership has made no immediate plans for additional exploratory or developmental capital programs, except those necessary to maintain well productivity.
Financing Activities and Financial Condition
There were no cash proceeds distributed to the Limited Partners during 1996. The General Partner's contribution (allocated share of costs and expenses incurred) and distributions (allocated share of revenues collected) were $346,099 and $891,204, respectively.
As a result of the deficit capital position of the Limited Partners' interests, all net cash flows attributable to the Limited Partners' share of the Partnership's operations are presently applied entirely against its indebtedness for past funds advanced by the General Partner and are not available to fund Partnership needs. Funds required by the Partnership in excess of those generated by operations will be advanced by the General Partner.
The Partnership's financial condition and operating results will be materially affected by any significant fluctuations in sales prices for oil and gas production. The Limited Partners' ability to reimburse funds advanced by the General Partner will be similarly affected. The Partnership cannot predict the prices it will receive in 1997 and future years for its crude oil and natural gas.
ITEM 8
ITEM 8 - Financial Statements and Supplementary Data
The response to this item is submitted as a separate section in Part IV of this report.
ITEM 9
ITEM 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
On June 20, 1995, the General Partner's Board of Directors approved a change in the Registrant's certified independent accountants from Hein + Associates LLP to Ernst & Young LLP as reported on Form 8-K dated June 21, 1995.
PART III
ITEM 10
ITEM 10 - Directors and Executive Officer of the Registrant
The Partnership has no officers or directors. The management of the General Partner is vested in a Board of Directors consisting of four members. The following persons currently serve as members of the Board of Directors and/or principal executive officers:
Charles C. Gates is Chairman of the Board of CODY ENERGY, INC. He also served as Chairman of the Board and Chief Executive Officer of The Gates Corporation, the parent company to CODY ENERGY, INC., until July, 1996. Mr. Gates attended Massachusetts Institute of Technology and Stanford University where he obtained a Bachelor of Science degree in Engineering. He also received an Honorary Doctorate of Engineering from the Colorado School of Mines and Michigan Technological University.
Robert L. Kubik is a Director and President of CODY ENERGY, INC. Mr. Kubik joined the Gates Corporation in 1986 as Assistant General Counsel and Director of Corporate Real Estate. Qualified as a lawyer, he has over 19 years of oil industry experience with Amerada Hess, Energy Management and Mobil Oil. Mr. Kubik received a Bachelor of Science degree from Ball State University and a Juris Doctorate Degree from Indiana University School of Law. He is also a member of IPAMS, Denver and Colorado Bar Associations, and the American Corporate Counsel Association.
Diane Gates Wallach was appointed Director of CODY ENERGY, INC. in May, 1996. She was also a Director of The Gates Corporation from August, 1992 to July, 1996 and is a Trustee of The Gates Foundation and Colorado Outward Bound. Ms. Wallach received a Masters of Business Administration and a Bachelor of Science degree from Stanford University.
Brown W. Cannon, Jr. was appointed Director of CODY ENERGY, INC. in May, 1996 and also served as a Director of The Gates Corporation from August, 1992 until July, 1996. He is also a Trustee of the Denver Museum of Natural History, a director of the National Western Stock Show and a former chairman of Colorado Outward Bound. Mr. Cannon is a graduate of the University of Arizona.
Brad Fisher is Senior Vice President of Operations for CODY ENERGY, INC. in 1994. Prior to his association with CODY ENERGY, INC., he was with Ultramar Oil and Gas, Limited, last holding the position of Vice President of Exploration and Production. Mr. Fisher received a Bachelor of Science degree in Petroleum Engineering from Texas A&M University in 1983.
Dan R. Taylor is Vice President of Finance and Accounting for CODY ENERGY, INC. He is a Certified Public Accountant with over ten years of professional accounting experience, primarily in the oil and gas industry. Mr. Taylor received his Bachelor of Business Administration degree in Accounting and Information Systems from the University of Texas in 1984 and his Bachelor of Science degree in Natural Resource Planning from the University of Southern Mississippi in 1978.
ITEM 11
ITEM 11 - Executive Compensation
The Partnership has no officers or directors.
ITEM 12
ITEM 12 - Security Ownership of Certain Beneficial Owners and Management
At December 31, 1996, the General Partner owned 46.2% of the Limited Partner interests. No Limited Partner owned, of record or beneficially, more than 5% of the Limited Partnership interests.
The General Partner has a 50% interest in all of the Partnership's oil and gas revenues and, upon liquidation, a 50% interest in the Partnership's properties as provided under the terms of the Articles of Limited Partnership.
As of March 1997, officers and directors of the General Partner owned none of the Limited Partnership interests in the Partnership.
ITEM 13
ITEM 13 - Certain Relationships and Related Transactions
In accordance with the provisions of the Articles of Limited Partnership, the Partnership annually reimbursed the General Partner $247,650 in 1996, 1995, and 1994 for indirect administrative and overhead expenses attributable to the operations of the Partnership. Excluding special costs (reserve report preparation, tax reporting-related costs, audit costs and printing costs attendant to Limited Partner reports), which are allocated 99% to the Limited Partners and 1% to the General Partner, general and administrative expenses are allocated 50% to the Limited Partners and 50% to the General Partner.
The General Partner acts as operator for all seven Partnership wells.
PART IV
ITEM 14
ITEM 14 - Financial Statements, Schedules, Exhibits Filed and Reports on Form 8-K
A. Documents Filed
1. Financial Statements
Independent Auditors' Reports
Balance Sheets - December 31, 1996 and 1995
Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994
Statements of Changes in Partners' Capital (Deficit) for the Years Ended December 31, 1996, 1995 and 1994
Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994
Notes to Financial Statements
2. Exhibits Filed
The following documents are included as exhibits to the Annual Report on Form 10-K. Those exhibits listed below which are incorporated by reference herein are indicated as such by the information supplied in the parenthetical reference thereafter.
4.1- Restated Limited Partnership Agreement. (Filed as Exhibit 4.1 to Registration Statement No. 2-70303 and incorporated herein by reference.)
4.2- Restated Certificate of Limited Partnership for C&K 1981 Fund- A, Ltd. filed in Texas. (Filed as Exhibit 4.2 to Registration Statement No. 2-70303 and incorporated herein by reference.)
4.3- Form of Subscription Agreement. (Filed as Exhibit 4.4 to Registration Statement No. 2-70303 and incorporated herein by reference.)
B. Reports on Form 8-K
On June 21, 1995, the Partnership filed a Form 8-K (Commission No. 0-10268 and Internal Revenue Service Identification No. 76- 0307703), which was received by the Securities and Exchange Commission on June 21, 1995 and incorporated herein by reference, in which it reported a change in the Registrant's certified independent accountants.
Report of Independent Auditors
The Partners of C&K 1981 Fund-A, Ltd.:
We have audited the balance sheets of C&K 1981 Fund-A, Ltd. as of December 31, 1996 and 1995, and the related statements of operations, partners' capital (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of C&K 1981 Fund-A, Ltd. at December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that C&K 1981 Fund-A, Ltd. will continue as a going concern. As discussed in Note 7 to the financial statements, the Partnership has a working capital deficiency and funds required by the Partnership in excess of those generated by operations attributable to certain partner interests will be advanced by the General Partner. The General Partner is currently considering either transferring its limited partner and general partner interests in the Partnership, or withdrawing as General Partner of the Partnership or taking other actions to reduce its responsibilities in the Partnership, which could lead to the ultimate dissolution of the Partnership. These conditions raise substantial doubt about the Partnership's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Ernst & Young LLP Ernst & Young LLP Denver, Colorado March 8, 1997
INDEPENDENT AUDITOR'S REPORT
To the Partners of C&K 1981 Fund-A, Ltd.:
We have audited the accompanying balance sheet of C&K 1981 Fund-A, Ltd. (a Texas Limited partnership) as of December 31, 1994 and the related statements of operations, partners' capital (deficit) and cash flows for each of the two years in the period ended December 31, 1994. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of C&K 1981 Fund-A, Ltd., as of December 31, 1994 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1994 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that C&K 1981 Fund-A, Ltd. will continue as a going concern. As discussed in Note 7 to the financial statements, the Partnership has a net capital deficiency and funds required by the Partnership in excess of those generated by operations attributable to certain partner interests will be advanced by the General Partner. The General Partner is currently considering either transferring its limited partner and general partner interests in the Partnership, or withdrawing as general partner of the Partnership or taking other actions to reduce its responsibilities in the Partnership, which could lead to the ultimate dissolution of the Partnership. These conditions raise substantial doubt about the Partnership's ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Hein + Associates LLP Houston, Texas March 13, 1995
C&K 1981 FUND-A, LTD. (A Texas Limited Partnership) BALANCE SHEETS
ASSETS
[FN] The accompanying notes are an integral part of these financial statements.
C&K 1981 FUND-A, LTD. (A Texas Limited Partnership) STATEMENTS OF OPERATIONS
[FN]
The accompanying notes are an integral part of these financial statements.
C&K 1981 FUND-A, LTD. (A Texas Limited Partnership) STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
[FN]
The accompanying notes are an integral part of these financial statements.
C&K 1981 FUND-A, LTD. (A Texas Limited Partnership) STATEMENTS OF CASH FLOWS
[FN]
The accompanying notes are an integral part of these financial statements.
C&K 1981 FUND-A, LTD. (A Texas Limited Partnership) NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The C&K 1981 Fund-A, Ltd. (the "Partnership"), a Texas Limited Partnership, was organized on December 16, 1980, to acquire, explore, develop and operate onshore oil and gas properties in the United States and commenced operations on May 12, 1981. Total initial Limited Partner contributions were $8,255,000 including $100,000 contributed by C&K Petroleum, Inc. ("C&K"), the initial General Partner.
C&K, after several corporate reorganizations beginning in September of 1984 and ending in December of 1991, was acquired by Ultramar Oil and Gas Limited ("UOGL"), an indirect wholly-owned subsidiary of LASMO plc. Effective November 18, 1992, UOGL was sold to Williams-Cody Limited Liability Company, a Wyoming limited liability company ("WCLLC"), owned by Williams Gas Management Company ("WGMan") and Cody Resources, Inc. ("CRI"). On January 1, 1993, UOGL changed its name to Williams-Cody, Inc. ("Williams-Cody").
Effective May 1, 1993, Cody Company, a wholly owned subsidiary of The Gates Corporation, purchased the units of WCLLC owned by WGMan. As a result of this acquisition, the unit holders of WCLLC are Cody Company and its wholly owned subsidiary, CRI. Subsequently, effective May 15, 1993, the name of Williams-Cody, Inc. was changed to CODY ENERGY, INC. ("CODY"), and the name of Williams-Cody Limited Liability Company was changed to Gates-Cody Energy Company ("GCEC"), a Limited Liability Company. CODY is the surviving corporation and, pursuant to the authority provided in the Partnership Agreement, manages and controls the Partnership's affairs and is responsible for the activities of the Partnership.
Basis of Accounting
The accounts of the Partnership are maintained on the accrual basis in accordance with accounting practices permitted for federal income tax reporting purposes. In order to present the accompanying financial statements on the basis of generally accepted accounting principles for financial reporting purposes, adjustments have been made to account for oil and gas properties under the full cost method of accounting.
Oil and Gas Properties
The Partnership uses the full cost method of accounting for oil and gas properties in accordance with rules prescribed by the Securities and Exchange Commission ("SEC"). Under this method, all costs incurred in connection with the exploration for and development of oil and gas reserves are capitalized. Such capitalized costs include lease acquisition, geological and geophysical work, delay rentals, drilling, completing and equipping oil and gas wells and other related costs together with costs applicable to CODY's technical personnel directly engaged in evaluating and maintaining oil and gas prospects and drilling oil and gas wells. Maintenance and repairs are charged against income when incurred. Renewals and betterments which extend the useful life of properties are capitalized.
The capitalized costs of all oil and gas properties are depleted on a composite units-of-revenue method computed on a future gross revenue basis. An additional depletion provision is made if the total capitalized costs of oil and gas properties exceed the "capitalization ceiling" which is calculated as the present value of future net revenues from estimated production of the Partnership's proved oil and gas reserves as furnished by independent petroleum engineers.
Future gross revenues have been estimated using rules prescribed by the SEC. Under these rules, year-end prices are utilized in determining future gross revenues.
New Accounting Standard
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS No. 121), which requires impairment losses to be recorded on long-lived assets used in operations when indications of impairment are present. The Company adopted SFAS No. 121 during 1996, with no impact on its financial statements.
Contributions and Distributions
Contributions by the General Partner, as presented in the Statements of Changes in Partners' Capital (Deficit), represent amounts paid by the General Partner for its allocated share of the Partnership's costs and expenses. Distributions to the General Partner represent amounts collected by the General Partner for its allocated share of the Partnership's revenues.
Net Income per Limited Partnership Unit
Net income per limited partnership unit is computed by obtaining the Limited Partner net income (see Statements of Changes in Partners' Capital (Deficit)) and dividing by the total limited partnership units outstanding.
Payable to the General Partner
The Partnership's payable to the General Partner is the Limited Partners' obligation for their share of costs, arising from Partnership operations, which are funded entirely by the General Partner. The current portion of the liability is the amount estimated to be collectible from the Limited Partners' net operating revenues over the current operating cycle (one year).
Revenue Recognition
The Partnership recognizes oil and gas revenues for only its ownership percentage of total production under the entitlement method. Purchase, sale and transportation of natural gas and crude oil are recognized upon completion of the sale and when transported volumes are delivered.
Concentration of Credit Risk
Financial instruments which subject the Partnership to concentrations of credit risk consist principally of trade receivables. The Partnership's policy is to evaluate, prior to entering agreements, each purchaser's financial condition. The Partnership sells to purchasers with different geographic and economic characteristics.
Use of Estimates
The preparation of the Partnership's financial statements in conformity with generally accepted accounting principles necessarily 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 balance sheet dates and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Reclassifications
Certain amounts from prior years have been reclassified to be consistent with the financial statement presentation for 1996. Such reclassifications had no effect on net income.
NOTE 2 - SALES TO MAJOR CUSTOMERS
Sales to major customers are summarized in the table below:
Since June 1, 1993, Williams Gas Marketing purchased all of the Partnership's natural gas production under an agreement that calls for market responsive prices which are tied to a published index. The Partnership remains responsible for all costs related to production, gathering, processing or severance of the gas prior to Delivery Point. These costs have been recorded as marketing deductions in the financial statements.
NOTE 3 - ALLOCATION OF PARTNERSHIP REVENUES, COSTS AND EXPENSES
The Partnership Agreement provides that revenues, costs and expenses shall be allocated to the partners as follows:
The depreciation, depletion and amortization provision is calculated based on discrete calculations utilizing the Partnership's and the partners' share of the related capital costs and estimated future net revenues. For financial statement purposes, each partner's depreciation, depletion and amortization has been increased by the amount that his share of unamortized costs exceeded the capitalization ceiling. During 1996, 1995 and 1994, the net capitalized costs of the Partnership's oil and gas properties did not exceed the capitalization ceiling.
The combining adjustment included in partners' capital of $45,192 and $60,081 at December 31, 1996 and 1995, respectively, represents the difference resulting from computing the full cost ceiling test on the total partnership basis, which is used for financial reporting purposes, and the limited partners and general partner basis. The adjustment is an allocation of partners' capital and does not affect net income.
NOTE 4 - PURCHASE OF LIMITED PARTNERS' INTERESTS
The Limited Partners may require the General Partner to purchase up to ten percent of their interests annually. In addition to the 40 units purchased by the General Partner for their initial capital contribution, a total of 1,229.50 units have been purchased from Limited Partners as of December 31, 1995. At January 1, 1996, the General Partner calculated a purchase price of $78.11 per limited partner unit. During the Presentment period, ninety-five Limited Partners tendered 296.25 units, for which the General Partner expended $23,140.09 for the purchase of those units. At December 31, 1996, the General Partner owned a total of 1,525.75 units.
NOTE 5 - SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
The General Partner is reimbursed for administrative and overhead costs incurred in conducting the business of the Partnership. Such reimbursements have been the maximum allowed under the terms of the Partnership Agreement and were $247,650 in 1996, 1995, and 1994.
After such time as total contributions from the Limited Partners have been expended, the General Partner may advance funds to the Limited Partners for their share of costs and expenses for continuing operations. Interest was charged to the Limited Partners on such advances at a rate which approximated 9%, 10%, and 8% in 1996, 1995 and 1994, respectively. The General Partner is reimbursed for funds advanced to the Limited Partners from revenues otherwise allocable to the Limited Partners.
NOTE 6 - INCOME TAXES
Income taxes are not levied at the Partnership level, but rather on the individual partners; therefore, no provision or liability for federal and state income taxes has been reflected in the accompanying financial statements. The tax returns, the qualification of the Partnership as a partnership for tax purposes, and the amount of the Partnership's income or loss is subject to examination by federal and state tax authorities. If such examinations result in changes with respect to the Partnership's qualifications or in changes in the Partnership's income or loss, the tax liability of the partners could be changed accordingly.
Set forth below is a reconciliation between net income for financial and federal income tax reporting purposes for the years ended December 31, 1996, 1995 and 1994.
NOTE 7 - CONTINGENCY
The Partnership has a working capital deficiency. As a result of the working capital deficiency of the Limited Partners' interests, all net cash flows attributable to the Limited Partners' share of the Partnership's operations are presently applied entirely against their indebtedness for past funds advanced by the General Partner and are not available to fund Partnership needs. Funds required by the Partnership in excess of those generated by operations will be advanced by the General Partner.
The General Partner is currently considering either transferring its limited partner and general partner interests in the Partnership, withdrawing as general partner of the Partnership, or taking other actions to reduce its responsibilities in the Partnership, which could lead to the ultimate dissolution of the Partnership. These conditions raise substantial doubt about the Partnership's ability to continue as a going concern. As long as CODY remains the General Partner of the Partnership, GCEC intends to continue advancing funds required by the Partnership in excess of those generated by operations, through CODY. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 8 - SUPPLEMENTAL DATA OF OIL AND GAS OPERATIONS
Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities
Results of Operations from Oil and Gas Producing Activities
Capitalized Costs Relating to Oil and Gas Producing Properties
Estimated Oil and Gas Reserve Quantities (Unaudited)
The following is an analysis of the Partnership's interest in net quantities of proved oil and gas reserves which are all located in onshore areas of the United States. Quantities are based on estimates of proved reserves furnished by Netherland, Sewell and Associates, Inc., independent petroleum engineers, pursuant to rules set by the Securities and Exchange Commission. Estimates of proved reserves are inherently imprecise and are even more imprecise for newly discovered reserves than for reserves with long production histories. As a result, subsequent development and production of the Partnership's reserves may result in revisions of such estimates.
Certain information related to the standardized measure of oil and gas reserves has not been included in the supplemental data on oil and gas operations. The General Partner has elected the exclusion available to limited partnerships when such reserve information is provided annually to the Limited Partners. The supplemental reserve information is provided to the Limited Partners on an annual basis.
Total Proved Reserves
The natural gas volumes (mcf) of 451,479 as of December 31, 1996, disclosed above, include 113,190 equivalent mcf related to plant products.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 26, 1997 C&K 1981 Fund-A, Ltd. (Registrant)
By:/s/ Charles C. Gates Charles C. Gates Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, which include the Chief Executive Officer, the Chief Financial Officer, the Chief Accounting Officer and a majority of the Board of Directors, on behalf of the Registrant and in the capacities and on the date above indicated:
/s/ Diane Gates Wallach /s/ Brown W. Cannon, Jr. Diane Gates Wallach Brown W. Cannon, Jr. Director & Secretary Director
/s/ Brad Fisher /s/ Dan R. Taylor Brad Fisher Dan R. Taylor Senior Vice President, Operations Vice President, Accounting & Finance