Item 1. BUSINESS
General
The Registrant was incorporated in the State of Texas on August 4, 1978. On August 31, 1978, the Registrant purchased from Energy Oil and Gas Corporation ("Energy"), a Louisiana corporation which may be deemed to be the Registrant's predecessor, certain producing oil properties and related assets. Subsequent transactions have resulted in the Registrant's acquisition and disposal of additional producing oil and gas properties and related assets. The Registrant operates in two industry segments, the production of oil and gas and rental real estate, in one geographic area, the continental United States. For financial information concerning these industry segments, see "Financial Statements and Supplementary Data."
Oil and Gas Producing Activities
Reserves - The Registrant's proved oil and gas reserves were estimated as of August 31, 1996 by Gary R. Christopher, Registered Professional Engineer.
Estimates of oil and gas reserves are, of necessity, projections based on engineering data. There are uncertainties inherent in the interpretation of such data, and there can be no assurance that the reserves set forth herein will ultimately be realized. No estimates have been filed with or included in reports to any Federal Authority or agency other than the Securities and Exchange Commission ("SEC") since August 31, 1995. The Registrant has no reserves outside the United States.
Proved Reserves - The following table was prepared in accordance with the rules and regulations of the SEC and is based on the report of Gary R. Christopher, Registered Professional Engineer.
Proved Reserves As of August 31, 1996
Oil (bbls): Proved developed 38,582 Proved undeveloped 35,688
TOTAL 74,270
Natural Gas (mcf): Proved developed 5,301 Proved undeveloped -
TOTAL 5,301
Acreage - The following table shows the developed and undeveloped leasehold acreage held by the Registrant as of August 31, 1996:
Developed Acreage Undeveloped Acreage
(1) Gross (2) Net (1) Gross (2) Net
Oklahoma 1,020.0 797.0 960.0 802.9
Total 1,020.0 797.0 960.0 802.9
Productive Wells - The following table summarizes the productive oil and gas wells in which the Registrant had an interest at August 31, 1996:
Oil Wells Gas Wells Total
(1) Gross (2) Net (1) Gross (2) Net (1) Gross (2) Net
Oklahoma 16.0 12.6 - - 16.0 12.6
Total 16.0 12.6 - - 16.0 12.6
(1) A "gross acre" or a "gross well" is an acre or well in which a working interest is owned by the Registrant and the number of gross acres or gross wells is the total number of acres or wells in which a working interest is owned by the Registrant.
(2) A "net acre" or a "net well" exists when the sum of the Registrant's fractional ownership interests in gross acres or gross wells equals one. The number of net acres or net wells is the sum of the fractional interests owned in gross acres or gross wells, and does not include any royalty, overriding royalty or reversionary interests.
Production, Price and Cost Data - The following table summarizes certain information relating to the production, price and cost data for the Registrant for the fiscal years ended, August 31, 1996, 1995 and 1994.
1996 1995 1994
Oil Production (bbls) 2,770 2,424 2,060 Revenue $51,261 $41,738 $27,636 Average barrels per day 7.59 6.64 5.64 Average sales price per barrel $18.51 $17.22 $13.42
Natural gas: Production (mcf) 724 642 197 Revenue $ 624 $ 472 $ 189 Average mcf per day 1.98 1.76 .54 Average sales price per mcf $ .86 $ .74 $ .96
Production costs $ 60,111 $ 54,341 $ 39,036 Equivalent (bbls) (1) 2,891 2,531 2,093 Production costs per equivalent bbl $ 20.79 $ 21.47 $ 18.65
Total oil and gas revenues $ 51,885 $ 42,210 $ 27,825
(1) Gas production is converted to barrel equivalents at the rate of six mcf per barrel representing the estimated relative energy content of natural gas to oil.
Office Building Rental Activities
The Registrant owns a commercial office building located in Tulsa, Oklahoma in which its offices are located. Surplus office space is leased to other professionals.
Loan Agreements
Since 1987, cash advances have been made to the Registrant by National Oil & Gas, Inc., an affiliated entity, in order to finance working capital deficits. The terms of the notes representing such cash advances are 6% to 9% interest with all principal and accrued interest due on demand. Outstand- ing principal and accrued interest of $1,465,807 at August 31, 1996 are classi- fied on the balance sheet as a current liability as these notes are payable on demand. National Oil & Gas, Inc. is an affiliated company controlled by Mr. William G. Moser, Chairman of the Board of the Registrant. (See Item 13 - Certain Relationships and Related Transactions.)
The Registrant's office building in Tulsa, Oklahoma is subject to a mortgage in the principal amount of $159,561 as of August 31, 1996 at 10.5% interest, and will be fully amortized in March, 2005.
In view of the current economic conditions within the oil and gas industry, and the limited amount of its oil and gas production, the Registrant anticipates that cash flow from operations will not be sufficient to provide for the payment of its indebtedness, necessitating the renewal or refinancing of such indebtedness at maturity. (See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.)
Patents, Trademarks, Licenses, Etc.
The Registrant does not hold any patents, trademarks, licenses, etc., with respect to, nor are patents significant in regard to, the Registrant's oil production activities (for a discussion of the sources and availability of the Registrant's oil and gas reserves, see "Properties"). The Registrant's oil production activities are not subject to significant seasonal fluctuations.
Governmental Regulation
General - The Registrant's oil production activities are, and any drilling operations of the Registrant would be, subject to extensive regulation by numerous federal, state and local governmental authorities, including state conservation agencies, the Department of Energy and the Department of the Interior (including the Bureau of Indian Affairs and Bureau of Land Management). Regulation of the Registrant's production, transportation and sale of oil or gas have a significant effect on the Registrant and its operating results.
State Regulation - The current production operations of the Registrant are, and any drilling operations of the Registrant would be, subject to regula- tion by state conservation commissions which have authority to issue permits prior to the commencement of drilling activities, establish allowable rates of production, control spacing of wells, prevent waste and protect correlative rights, and aid in the conservation of natural gas and oil. Typical state regulations require permits to drill and produce oil or gas, protection of fresh water horizons, and confirmation that wells have been properly plugged and abandoned.
Environmental Matters - Various federal and state authorities have authority to regulate the exploration and development of oil and gas and mineral properties with respect to environmental matters. Such laws and regulations, presently in effect or as hereafter promulgated, may significantly affect the cost of its current oil production and any exploration and development activities undertaken by the Registrant and could result in loss or liability to the Registrant in the event that any such operations are subsequently deemed inadequate for purposes of any such law or regulation.
Uncertainties Related to the Oil and Gas Business in General
The Registrant's operations are subject to all of the risks normally incident to the exploration for and production of oil and gas, including blow- outs, cratering, pollution, fires, and theft of equipment. Each of these incidents could result in damage to or destruction of oil and gas wells or formations of production facilities or injury to persons, or damage to or loss of property. As is common in the oil and gas industry, the Registrant is not fully insured against these risks either because insurance is not available or because the Registrant has elected not to insure due to prohibitive premium costs.
The Registrant's oil and gas activities have in the past involved exploratory drilling, which carries a significant risk that no commercial oil or gas production will be found. The cost of drilling, completing and operating wells is often uncertain. Further, drilling may be curtailed or delayed as a result of many factors, including title problems, weather conditions, delivery delays, shortages of pipe and equipment, and the availability of drilling rigs.
The oil and gas business is further subject to many other contingen- cies which are beyond the control of the Registrant. Wells may have to be shut- in because they have become uneconomical to operate due to changes in the price of oil, depletion of reserves, or deterioration of equipment. Changes in the price of imported oil, the discovery of new oil and gas fields and the develop- ment of alternative energy sources have had and will continue to have a dramatic effect on the Registrant's business.
Competition and Markets
There are many companies and individuals engaged in the oil and gas business. Some are very large and well established with substantial capabili- ties and long earnings records. The Registrant is at a competitive disadvantage with some other firms and individuals in acquiring and disposing of oil and gas properties since they have greater financial resources and larger technical staffs than the Registrant. In addition, in recent years a number of small companies have been formed which have objectives similar to those of the Registrant and which present substantial competition to the Registrant.
A number of factors, beyond the Registrant's control and the effect of which cannot be accurately predicted, affect the production and marketing of oil and gas. These factors include crude oil imports, actions by foreign oil producing nations, the availability of adequate pipeline and other transporta- tion facilities, the marketing of competitive fuels and other matters affecting the availability of a ready market, such as fluctuating supply and demand.
The Registrant currently sells a substantial portion of its oil pro- duction to two purchasers, Koch Oil Company and Sun Oil Company. The Registrant has no written contracts with purchasers. The Registrant does not believe that the loss of either of these purchasers would significantly impair its operations.
Employees
The Registrant currently coordinates all oil field maintenance and supervision activities using contract labor. The Registrant retains consultants with respect to current and proposed properties and operations. The Registrant from time to time retains independent engineering and geological consultants and the services of lease brokers and geophysicists in connection with its operations.
Item 2.
Item 2. PROPERTIES
Oil and Gas Reserves
(See Item 1, - General Business - Oil and Gas Production Activities, Proved Reserves, Acreage, Productive Wells).
Title to Properties
As is customary in the oil and gas industry, the Registrant conducts only a perfunctory title examination prior to acquisition of properties believed to be suitable for drilling operations. Prior to the commencement of actual drilling operations, a thorough title examination is usually conducted and sig- nificant defects remedied before proceeding with operations. A thorough title examination has been performed by the Registrant or its predecessor in interests with respect to substantially all of the Registrant's producing properties and the Registrant believes that the title to its properties is generally acceptable to third parties. The Registrant's properties are subject to royalty, over- riding royalty and other interests customary in the industry, liens incident to operating agreements, current taxes and other burdens, minor encumbrances, and easement restrictions. The Registrant does not believe that any of these burdens materially detract from the value of the properties or will materially interfere with their use. Oil and gas leases generally provide that properties are subject to reversion for nonproduction.
Other Properties
In the opinion of management of the Registrant, the Registrant owns or has adequate sources of supply of oil field service equipment to maintain its properties.
The Registrant also owns an office building in Tulsa, Oklahoma consisting of approximately 8,400 square feet of office space. The Registrant deems its properties to be adequate for its operations.
Item 3.
Item 3. LEGAL PROCEEDINGS
There are presently no material pending legal proceedings which would result in any uninsured liability, other than routine litigation incidental to the business, to which the Registrant is a party.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
(a) The Registrant's common stock is traded in the over-the- counter market under the symbol OLCP through the "pink sheets" of the National Quotations Bureau. The table below sets forth the high and low bid prices of the Registrant's common stock for the periods indicated. Such prices are inter- dealer prices, without mark-up, mark-down or commissions and do not necessarily represent actual sales.
High Bid Low Bid
1995: 1st quarter 1/16 1/32 2nd quarter 1/16 1/32 3rd quarter 1/16 1/32 4th quarter 1/16 1/32
1996: 1st quarter 1/16 1/32 2nd quarter 1/16 1/32 3rd quarter 1/16 1/32 4th quarter 1/16 1/32
(b) The high and low bid prices for the Registrant's common stock on November 29, 1996 were 1/16 and 1/32, respectively. As of November 29, 1996, there were 423 holders of record of the Registrant's common stock.
(c) The Registrant has neither declared nor paid any cash dividends on its common stock, and it is not anticipated that any such dividends will be declared or paid in the foreseeable future.
Item 6.
Item 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data for the Registrant for the five fiscal years ended August 31, 1996 (see "Business - Oil and Gas Producing Activities, Production, Price and Cost Data").
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Registrant was unable to satisfy all of its general working capital requirements with cash flow generated from operations during the current fiscal year. As in past years, this deficit in working capital was financed by direct cash advances made by National Oil and Gas Incorporated ("National"), an affiliated company. Aggregate indebtedness on such cash advances, including principal and accrued interest of $1,465,807 at August 31, 1996, is represented by notes providing for rates of interest at 6% to 9% per annum and payable on demand. (See Item 13 - Certain Relationships and Related Transactions.)
In view of the current economic conditions within the industry in which the Registrant participates, the Registrant anticipates that cash flow from operations for fiscal 1996 will be insufficient to satisfy all of its general working capital requirements, necessitating additional capital infusions either from affiliates or from sales of assets, borrowed funds, equity partici- pations or Farmout Agreements.
The Registrant will continue a deficit working capital position in the future if sustaining and growth capital are not generated. In recent years, the Registrant has been seeking a buyer or a merger partner in order to infuse substantial operating assets into the Registrant and reverse the trend of operating losses. Until such time as a sale or merger may be consummated, of which there can be no assurance, management's plan is to continue in business with the existing producing assets through financing anticipated to be provided by its Chairman, William G. Moser, and/or National. Any such financing is expected to be in the form of demand loans, which, in effect, provide both long and short-term financing required to continue in business, as no demands for repayment of principal or interest are anticipated until such time as the Registrant achieves profitable operations.
Because of the resources possessed by William G. Moser and National Oil and Gas, Inc., management's plan has the ability to allow the Registrant to continue in operations through fiscal 1997.
Fiscal Year 1996 Compared with Fiscal Year 1995
The 1996 net loss of $222,095 was $30,850 less than the 1995 loss of $252,945. Gross income from oil and gas operations was $51,885, a 23% increase over the prior year, due mostly to equipment upgrades and well workovers from the prior year. Additionally, five wells were acidized in fiscal 1996 to further stimulate production. Oil and gas production and operating expenses were $60,111, an 11% increase over prior year due to the aforementioned well stimulation, and due to a bitterly cold and dry winter followed by widespread grass fires. These events required extra effort and expense to keep the wells flowing. Net income from rental operations was up $4,668 over the prior year due to a higher occupancy rate from the improving market for commercial real estate in the Tulsa, Oklahoma area. Depreciation, depletion and amortization expense decreased slightly by $949. Administrative and general expense remained steady, with a slight drop of $772. Interest expense to affiliates increased $8,676 due to the fact that the Registrant's debt to an affiliate has increased $135,736 since August 31, 1995.
Fiscal Year 1995 Compared with Fiscal year 1994
The 1995 net loss of $252,945 was $55,977 more than the 1994 loss of $196,968. Gross income from oil and gas operations was $42,210, up over 50% over the prior year, mostly due to equipment upgrades and well workovers performed in the current and previous years. Income was adversely affected by a lightning strike which set fire to a tank battery, shutting down over half of the Registrant's wells for two months. After deducting fire repairs, equipment upgrades and well workovers, the 1995 net loss from oil and gas operations was $920 greater than 1994. Depreciation, depletion and amortization expense decreased $3,128, mostly due to an increase in estimated oil and gas reserves. Rental income decreased $7,060 due to the loss of a tenant formerly occupying 1,200 square feet of office space. The tenant was replaced effective April 1, 1995. The loss of rental income was partially offset by a $4,923 decrease in rental expenses, mostly due to fewer repairs being necessary in Fiscal 1995. Administrative and general expenses increased by $17,829 due to higher fees from contracted labor. Interest expense to affiliates increased $9,136 due to the fact that the Registrant's debt to affiliates increased $151,775 since August 31, 1994. In addition to the above, one oil and gas property was sold for a book loss of $30,661.
Fiscal Year 1994 Compared with Fiscal Year 1993
The 1994 net loss of $196,968 was $4,659 more than the 1993 loss of $192,309. Net income from oil and gas operations improved significantly in the first half of fiscal 1994, but a prairie fire in May shut down half of the Registrant's wells for four months, negating the improvement and leaving 1994 net income from oil and gas operations $1,612 lower than 1993. Depreciation, depletion and amortization expense decreased $6,469 due to an increase in estimated reserves combined with the fact that some leases became nearly fully depleted in fiscal 1993. Rental income increased $7,389 due to the leasing of an additional 950 square feet of previously vacant office space, but was partially offset by an increase of $4,362 in rental expenses due to improvements in the newly occupied suites. Administrative and general expenses increased $2,334 primarily due to increased fees from contracted labor. Interest expense increased $11,179 due to the fact that the Registrant's debt to affiliates has increased $131,403 since August 31, 1993.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is included as a separate section (Item 14) of this report.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The names of the directors and information about them, as furnished by the directors themselves, are set forth below:
Director Name Principal Occupation Since Age
William G. Moser President of National Oil & Gas, Inc. 1983 63
Herman E. Nichols, Jr. Vice President of CN Electronics, Inc. 1985 75
Jay D. Kipfer Controller and Secretary of National 1990 62 Oil & Gas, Inc.
William G. Moser has served as Vice President of the Registrant since September, 1982, and as a Director of the Registrant since January, 1983. Mr. Moser was elected as Chairman and Chief Executive Officer of the Registrant in December of 1990. For the past six years, he has served as President of National Oil & Gas, Inc.
Herman E. Nichols, Jr. has served as President of the Registrant since August, 1985. From 1983 to the present, he has been involved with numerous firms as a consulting geologist. Prior to this, he served as Senior Geologist for Coastal Oil & Gas Corporation.
Jay D. Kipfer has served as a Director and as Secretary of the Registrant since September, 1982. For more than the past thirteen years, he has served as Controller and Secretary of National Oil & Gas, Inc.
Each of the above named members of the present Board of Directors was elected to such office at the Annual Meeting of Stockholders held February 24, 1993. There are no family relationships among any of the Directors and any Officer.
(b) The following table sets forth the names and ages of all executive officers of the Registrant, their positions and offices with the Registrant, and the period during which each person has served as such.
Positions & Offices Currently Held with Served as Executive Name Age the Registrant Officer Since
William G. Moser 63 Chairman, Chief 1982 Executive Officer and Vice President
Herman E. Nichols, Jr. 75 President 1985
Jay D. Kipfer 62 Secretary/Treasurer 1982
The Executive Officers of the Registrant are elected annually for terms terminating at such time as their respective successors are elected and qualified.
There are no family relationships between any Director or Executive Officer and any other Director or Executive officer.
Item 11.
Item 11. EXECUTIVE COMPENSATION
Set forth in the following table is information as to the compensation paid by the Registrant during the previous three fiscal years to the Chief Executive Officer, and each other executive officer, if any, where compensation exceeded $100,000 for any of such periods. The Company has no option plans or other forms of compensation.
SUMMARY COMPENSATION TABLE
Fiscal Year Other Annual Name and Principal Ended Salary Bonus Compensation Position August 31 ($) ($) ($) (1)
William G. Moser, 1996 - - - Chairman and Chief 1995 - - - Executive Officer 1994 - - -
(1) The Registrant cannot precisely ascertain the specific amount of personal benefits furnished by the Registrant to any specified persons in the above table, or the extent to which such benefits are personal rather than business, but after reasonable inquiry, the Registrant has concluded that the aggregate amounts of such benefits and any other compensation not otherwise disclosed above do not in any event exceed the lesser of $50,000 or 10 percent of the compensation, if any, reported in the above table as to any person specified.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) The following table sets forth, as of November 29, 1996, the name and address of each person known to the Registrant to be the beneficial owner of more than 5 percent of the Registrant's Common Stock and the number of shares owned by each such person together with the percent of outstanding amount of such class which such ownership represents. Unless otherwise indicated, such persons have sole voting and investment power with respect to such shares.
Amount and Nature Percent Name and Address of of Beneficial of Beneficial Owner Ownership Class
Silver Petroleum Corporation (1) 7,526,915 50.47% 503 Orchard Drive Bluffton, Indiana 46714
Moco Resources, Inc. (1) 2,219,077 14.88% 503 Orchard Drive Bluffton, Indiana 46714
William G. Moser (1) 3,138,000 21.04% 503 Orchard Drive Bluffton, Indiana 46714
(1) A member of a group (as defined in Rule 13d-5 of the Securi- ties Exchange Act of 1934, as amended) which, according to Amendment No. 5 to its Schedule 13D report, at September 7, 1987, owned beneficially an aggregate of 13,495,192 shares (approximately 90.5%) of outstanding Common Stock (see Item 13
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
William G. Moser, who is a Director and Chief Executive Officer of the Registrant, is a Director and Executive Officer (and a controlling stockholder, directly or indirectly) of Moco Resources, Inc. ("Moco") and Silver Petroleum Corporation ("Silver"). Jay D. Kipfer, who is Secretary/Treasurer of the Registrant, is a Director and Executive Officer of Moco and Silver. Moco and Silver are members of a group which, according to Amendment No. 5 to its Schedule 13D report, at September 7, 1987, owned beneficially an aggregate of 13,495,192 shares, constituting approximately 90.5% of the outstanding shares of Common Stock (see Item 12 - Security Ownership of Certain Beneficial Owners and Management).
As in prior years, the Registrant was unable to satisfy all of its general working capital requirements including debt service with cash flow generated from operations during its 1996 fiscal year. This deficit in working capital was financed by direct cash advances made by National Oil and Gas, Inc. ("National"), of which Mr. Moser and Mr. Kipfer are Directors and Executive Officers and of which Mr. Moser, directly and indirectly, is a controlling stockholder. Advances totaling $131,403, $151,775, and $135,736 were received by the Registrant from National in 1994, 1995, and 1996, respectively. Notes for such advances, representing outstanding principal and accrued interest of $1,465,807 at August 31, 1996, provide for rates of interest at 6% to 9% per annum and are payable on demand. The Registrant believes that these notes provide terms and conditions at least as favorable to the Registrant as terms and conditions obtainable from nonaffiliated parties.
It is anticipated that additional financing will be provided by Mr. Moser or affiliated entities if the Registrant is not able to generate adequate cash flow from operations, or from sales of assets, mergers, or other transactions, through August 31, 1997. (See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.)
In 1989, the Registrant's office building was contributed to it by C N Operating Company, an affiliate of William G. Moser, subject to an existing mortgage in the principal amount of $189,292 which is still in the name of the contributing entity, but which the Registrant is currently servicing.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules. The following financial statements and schedules for Oil City Petroleum, Inc. as of August 31, 1996 and 1995 and for the years ended August 31, 1996, 1995 and 1994 are filed as part of this report.
Page
(1) Financial statements of Oil City Petroleum, Inc.:
Reports of Independent Accountants 21 Balance Sheets 23 Statements of Operations 24 Statements of Shareholders' Equity 25 Statements of Cash Flows 26 Notes to Financial Statements 27
(2) Financial Statement Schedules:
Schedule V - Property, Plant and Equipment 41 Schedule VI - Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment 42
(b) Reports on Form 8-K:
There were no reports on Form 8-K for the three months ended August 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DATE OIL CITY PETROLEUM, INC.
November 29, 1996 By: /s/ Herman E. Nichols, Jr. Herman E. Nichols, Jr. President
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Date
/s/ William G. Moser November 29, 1996 William G. Moser, Chairman of the Board and Chief Executive Officer
/s/ Herman E. Nichols, Jr. November 29, 1996 Herman E. Nichols, Jr. President and Director
/s/ Jay D. Kipfer November 29, 1996 Jay D. Kipfer Treasurer and Director
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) and (2) and (d)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED AUGUST 31, 1996
OIL CITY PETROLEUM, INC.
William T. Zumwalt, Inc. 1429 South Baltimore Tulsa, OK 74119 918-583-1040
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders Oil City Petroleum, Inc.
We have audited the balance sheets of Oil City Petroleum, Inc. (the "Company") as of August 31, 1996 and 1995, and the related statements of operations, shareholders' equity and cash flows, and the financial statement schedules for each of the years in the three-year period ended August 31, 1996, as listed in Item 14(a) of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules 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 Oil City Petroleum, Inc. as of August 31, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended August 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
The accompanying financial statements have been prepared assuming that Oil City Petroleum, Inc. will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations, current liabilities exceed current assets by $1,443,629 and it has an accumulated deficit of $8,207,255. Additionally, the Company may not be able to obtain funds needed to develop its proved undeveloped oil and gas properties, which constitute approximately $229,000 of the Company's total standardized measure of discounted future net cash flows of $395,000 at August 31, 1996. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments relating to the recoverability and classification of reported asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
/s/ William T. Zumwalt, Inc. Certified Public Accountants
Tulsa, Oklahoma November 1, 1996
OIL CITY PETROLEUM, INC. NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1996, 1995 AND 1994
1 - Nature of Business and Significant Accounting Policies
(a) Business
Oil City Petroleum, Inc. (the "Company") was incorporated in the State of Texas on August 4, 1978. The Company is principally engaged in the production of oil and gas. The Company owns working interests and overriding royalty interests in producing oil and gas properties, all located in the State of Oklahoma, and acts as operator of the oil wells on two leases which consti- tute the bulk of its working interests. The Company also owns a commercial office building in Tulsa, Oklahoma, consisting of 8,400 square feet of office space. The Company deems its oil and gas producing activities to be the most important segment of its business based on current and potential future revenues derived therefrom.
(b) Basis of presentation
The accompanying financial statements of the Company have been prepared on a going concern basis which contemplates the realization of assets and the liquidation of liabilities in the normal course of business.
Substantial operating losses have been incurred in each of the past several years. During the last eight years, the Company had significant cash flow deficiencies that required the Company's Chairman of the Board and affiliated companies to fund the Company's operations.
Through December, 1987, the Chairman committed to provide funding for any operating cash flow deficiencies and to provide funds for the timely settlement of liabilities. Since December, 1987, cash flow deficiencies continued, and affiliated companies funded company operations. Management's plan is to continue in business with the existing producing assets through financing anticipated to be provided by its Chairman or an affiliated company until such time as a suitable buyer or merger partner can be found. Because of the resources possessed by the Registrant's Chairman and its affiliated companies, management's plan should have the ability to allow the Company to continue in operations for at least one year.
OIL CITY PETROLEUM, INC. NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1996, 1995 AND 1994
1 - Nature of Business and Significant Accounting Policies (continued)
(b) Basis of presentation (continued)
The continuation of the Company as a going concern is dependent upon continuing to receive financial support from affiliated companies and/or the Chairman or obtaining additional capital in order to meet its obligations. The Company's financial statements do not include any adjustments relating to the realization of assets and liquidation of liabilities that might be necessary should the Company be unable to continue as a going concern.
(c) Cash equivalents and short-term investments
For purposes of the statement of cash flows, the Company considers all certificates of deposit and other securities or debt instruments with maturities of three months or less, when purchased, to be cash equivalents. Securities with maturities of more than three months, when purchased, are classified as "short-term investments" in the balance sheet.
(d) Inventories
Crude oil inventory is stated at market value.
(e) Property and equipment
The Company follows the successful efforts method of accounting for its oil and gas producing activities. Under the successful efforts method, the Company capitalizes all oil and gas leasehold acquisition costs. For unproved properties, leasehold impairment is recognized based upon an individual property assessment and exploration experience. Upon discovery of commercial reserves, such leasehold costs are transferred to proved properties.
Geological and geophysical expenses, production costs and overhead are charged against income as incurred. Exploratory drilling costs are capitalized when incurred. If exploratory wells are determined to be unsuccessful (dry holes), applicable costs are expensed. Costs incurred to drill and equip developmental wells, including unsuccessful development wells, are capitalized.
OIL CITY PETROLEUM, INC. NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1996, 1995 AND 1994
1 - Nature of Business and Significant Accounting Policies (continued)
(e) Property and equipment (continued)
Expenditures related to extensive well workover projects are capitalized upon determining that the workover resulted in significantly increased proved reserves. All other workover costs are expensed as incurred. These costs include those for deepening existing producing wells within the same producing formation when such operations are conducted for the purpose of restoring efficient operating conditions as well as other repairs, reconditioning or reworking costs of wells already drilled and operating.
Depreciation, depletion and amortization of the cost of proved producing oil and gas properties, including wells and related equipment and facilities, are determined by the units-of-production method based on quantities produced as a percent of estimated proved recoverable reserves. Depreciation of the office building, office and field equipment is provided for by the straight-line method over estimated useful lives of 31-1/2 years for the office building, 5 years for office equipment and 10 years for field equipment.
When complete units of depreciable property are retired or sold, the asset cost and related accumulated depreciation and depletion are eliminated with any gain or loss reflected in income. When less than complete units of depreciable property are retired or sold, the difference between asset cost and sales price or salvage value is charged or credited to accumulated depreciation and depletion.
(f) Income taxes
Effective September 1, 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". The adoption of SFAS No. 109 changed the Company's method of accounting for income taxes from the deferred method under Accounting Principles Board ("APB") Opinion No. 11 to an asset and liability method. SFAS No. 109 requires the recognition of deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, SFAS No. 109 requires the recognition of future tax benefits, such as net operating loss carryforwards, to the extent that realization of such benefits is more likely than not.
OIL CITY PETROLEUM, INC. NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1996, 1995 AND 1994
1 - Nature of Business and Significant Accounting Policies (continued)
(f) Income taxes (continued)
General business credits are accounted for in the years the credits arise by the flow-through method.
(g) Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount 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.
(h) Fair value
The carrying amounts of accounts receivable and accounts payable approximate their fair value. Based on the estimated borrowing rates currently available to the Company for long-term loans with similar terms and average maturities, the aggregate fair value at August 31, 1996 of the Company's long- term debt approximates the aggregate carrying amount.
(I) Loss per common share
Loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding.
2 - Short-Term Investment
At August 31, 1996 and 1995, the short-term investment represents a one-year renewable certificate of deposit stated at cost which approximates its market value. The certificate of deposit is maintained as collateral in support of a $25,000 letter of credit issued by the Company's bank in favor of the Oklahoma Corporation Commission to meet certain licensing requirements.
OIL CITY PETROLEUM, INC. NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1996, 1995 AND 1994
3 - Related Party Transactions
The balance in "notes and accrued interest payable to affiliate" consists of the following unsecured notes and accrued interest payable to National Oil and Gas, Inc., an entity controlled by the Company's chairman and major stockholder:
August 31, 1996 1995
Notes payable $1,101,936 $ 966,200 Accrued interest payable 363,871 279,361
$1,465,807 $1,245,561
The notes bear interest at rates from 6% to 9%. Interest expense incurred on these notes amounted to $84,510, $75,834 and $66,698 for the years ended August 31, 1996, 1995 and 1994, respectively.
Although the notes and related accrued interest have no scheduled maturity date and are not likely to be repaid within the foreseeable future, by their terms, the notes are due upon demand, and, along with related accrued interest, are classified as current liabilities in these financial statements.
In October, 1993, the Company received nominal overriding royalty interests in sixteen producing oil and gas properties from Silver Petroleum Corporation ("Silver"), an entity controlled by the Company's chairman and major stockholder. The overriding interests were received in exchange for the use of the Company's production bond in Osage County, Oklahoma by Silver and an unrelated joint venture partner in drilling developmental oil and gas wells in that area. Oil and gas sales, net of production taxes, on these properties amounted to $3,146, $3,178 and $2,418 for the years ended August 31, 1996, 1995 and 1994, respectively.
4 - Long-Term Debt
Long-term debt at August 31, 1996 and 1995 consisted of an installment mortgage obligation collateralized by the Company's commercial office building contributed to the Company in fiscal 1990. The mortgage debt bears interest at 10.5% and is payable in monthly installments of $2,362 through maturity in March, 2005.
OIL CITY PETROLEUM, INC. NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1996, 1995 AND 1994
4 - Long-Term Debt (continued)
Estimated installments due on long-term debt during each of the five fiscal years subsequent to August 31, 1996 are as follows:
1997 $12,171 1998 13,512 1999 15,001 2000 16,654 2001 18,490
5 - Income Taxes
No provision (benefit) for income taxes was provided for the years ended August 31, 1996, 1995 and 1994 due to the Company's pretax operating losses sustained for both income tax and financial reporting purposes.
At August 31, 1996, the Company had an operating loss carryforward of approximately $6,638,000 for income tax purposes, expiring as follows: 1997, $1,750,000; 1998, $505,000; 1999, $444,000; 2000, $625,000; 2001, $1002,000; 2002, $487,000; 2003, $278,000; 2004, $216,000; 2005, $138,000; 2006, $216,000; 2007, $144,000; 2008, $193,000; 2009, $183,000; 2010, $242,000; and 2001, $215,000. The tax benefit of these losses has been offset by a valuation allowance due to the uncertainty of their realization.
6 - Major Customers
The Company had oil and gas sales of 10% or more of total oil and gas sales to two major customers in 1996, 1995 and 1994. Such sales accounted for 55% and 44% of oil and gas sales in 1996, 51% and 48% of oil and gas sales in 1995, and 44% and 55% of oil and gas sales in 1994.
7 - Business Segment Information
The Company operates in two business segments, oil and gas development and production ("oil and gas") and rental of commercial real estate ("real estate"). The Company's operations are conducted entirely within the continental United States.
OIL CITY PETROLEUM, INC. NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1996, 1995 AND 1994
7 - Business Segment Information (continued)
Corporate revenues consist principally of interest income.
Operating profit is net revenues less applicable operating expenses. Corporate administrative and general expenses are allocated to each of the industry segments and to general corporate expenses based on management's estimates of time devoted to each segment and general corporate matters.
Identifiable assets by segment are those assets that are used in the operations of each segment. Corporate assets consist primarily of cash, short- term investments and corporate office equipment.
8 - Supplemental Information on Oil and Gas Exploration and Production Activities (Unaudited)
The following supplemental historical and reserve information is presented in accordance with Financial Accounting Standards Board ("FASB") Statement No. 69, "Disclosures about Oil and Gas Producing Activities".
Capitalized Costs
The aggregate amounts of capitalized costs relating to oil and gas producing activities and the aggregate amounts of the related accumulated depreciation, depletion and amortization at August 31, 1996 and 1995, were as follows:
OIL CITY PETROLEUM, INC. NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1996, 1995 AND 1994
8 - Supplemental Information on Oil and Gas Exploration and Production Activities (Unaudited) (continued)
Capitalized Costs (continued)
1996 1995 (In Thousands)
Capitalized costs: Proved properties $ 1,102 $ 1,096 Unproved properties - -
Total capitalized costs 1,102 1,096
Less accumulated depreciation depletion and amortization 651 638
$ 451 $ 458
Costs incurred
Costs (capitalized and expensed) incurred in oil and gas property acquisition, exploration and development activities for the years ended August 31, 1996, 1995 and 1994 were as follows:
1996 1995 1994 (In Thousands)
Property acquisition costs: Proved properties $ - $ - $ - Unproved properties - - - Exploration - - - Development 6 3 7
$ 6 $ 3 $ 7
Results of operations
The results of operations from oil and gas producing activities for the years ended August 31, 1996, 1995 and 1994 were as follows:
OIL CITY PETROLEUM, INC. NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1996, 1995 AND 1994
8 - Supplemental Information on Oil and Gas Exploration and Production Activities (Unaudited) (continued)
Results of operations (continued)
Estimated quantities of proved oil and gas reserves
The following estimates of changes in the Company's net proved developed and undeveloped oil and natural gas reserves during the years ended August 31, 1996, 1995 and 1994 were made by an independent reservoir engineer. Reserve estimates are based on a complex and highly interpretative process which is subject to continuous revisions as additional production and development drilling information becomes available. The quantities reported below are only those amounts which the Company can reasonably expect to recover from known reservoirs under existing economic and operating conditions using current prices and operating costs. All oil and gas reserves reported are located in the United States, in the State of Oklahoma in 1996 and in the States of Oklahoma and Louisiana in 1995 and 1994. The Company does not have any long-term supply contracts with foreign governments or reserves of equity investees.
Based on the information available as of the date of issuance of these financial statements, there has been no major discovery or other event that is believed to have caused a significant change in the estimated proved reserves of the Company. There have been no reports filed with any federal agency of authority since the beginning of the last fiscal year giving estimates of total proved oil and gas reserves other than reports filed with the Securities and Exchange Commission.
Standardized measure of discounted future net cash flows and changes therein relating to proved oil and gas reserves
Estimated future cash inflows are computed by applying year-end prices of oil and gas to year-end quantities of proved reserves. Future price changes are considered only to the extent provided by contractual arrangements. Estimated future development and production costs are determined by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves at the end of the year, based on year-end costs and assuming continuation of existing economic conditions. Estimated future income
OIL CITY PETROLEUM, INC. NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1996, 1995 AND 1994
8 - Supplemental Information on Oil and Gas Exploration and Production Activities (Unaudited) (continued)
Standardized measure of discounted future net cash flows and changes therein relating to proved oil and gas reserves (continued)
tax expense, if any, is calculated by applying year-end statutory tax rates (adjusted for permanent differences and tax credits) to estimated future pretax net cash flows related to proved oil and gas reserves, less the tax basis of the properties involved. The resulting future net cash flows are then discounted using a rate of 10% per annum.
The arbitrary valuation prescribed under FASB Statement No. 69 requires assumptions as to the timing of future production from proved reserves and the timing and amount of future development and production costs. The changes in present values between years not only reflect changes in estimated proved reserve quantities, but also reflect changes in assumptions used in determining future production volumes and expenditures.
It should be recognized that applying current costs and prices and a 10% standard discount rate allows for comparability but does not convey absolute value. The discounted amounts arrived at are only one measure of the value of proved reserves.
The Company does not use discounted estimated future net cash flows from proved reserves for its planning or investment decisions. The following information does not represent management's estimate of the Company's expected future cash flows or value of proved oil and gas reserves. Estimates of proved reserve quantities are imprecise and change over time as new information becomes available. Although calculated in accordance with FASB Statement No. 69, the Company cautions statement users to not place unwarranted reliance on the information.
OIL CITY PETROLEUM, INC. NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1996, 1995 AND 1994
8 - Supplemental Information on Oil and Gas Exploration and Production Activities (Unaudited) (continued)
Standardized measure of discounted future net cash flows and changes therein relating to proved oil and gas reserves (continued)
The standardized measures of discounted future net cash flows as of August 31, 1996, 1995 and 1994 were as follows:
1996 1995 1994 (In Thousands)
Future cash inflows $1,527 $1,082 $946 Future production costs ( 705) ( 509) ( 372) Future development costs ( 130) ( 100) ( 104)
Future net cash flows * 692 473 470
10% annual discount for estimated timing of cash flows 297 202 190
Standardized measure of discounted future net cash flows $ 395 $ 271 $ 280
* Future net cash flows do not include estimated future net salvage value of lease and well equipment of $120,000 at August 31, 1996, 1995, and 1994. The estimated net future salvage value of lease and well equipment pertains primarily to tank batteries, flow lines, pumping units and motors and other surface equipment.
Following is an analysis of changes in the estimated standardized measure of discounted future net cash flows during the years ended August 31, 1996, 1995 and 1994:
OIL CITY PETROLEUM, INC. NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1996, 1995 AND 1994
8 - Supplemental Information on Oil and Gas Exploration and Production Activities (Unaudited) (continued)
Standardized measure of discounted future net cash flows and changes therein relating to proved oil and gas reserves (continued)
1996 1995 1994 (In Thousands)
Standardized measure, beginning of year $271 $280 $266 Sales and transfers of oil and gas produced, net of production costs 8 12 11 Net changes in prices and production costs ( 25) ( 158) ( 45) Extensions, discoveries and other additions - - 21 Sales of minerals-in-place - ( 23) - Revisions of previous quantity estimates 118 170 31 Accretion of discount 27 27 26 Other, primarily changes in the timing of production and development ( 4) ( 37) ( 30)
Standardized measure, end of year $ 395 $ 271 $ 280