ITEM 1. BUSINESS
(a) General Development of Business
Golden Triangle Industries, Inc. (the "Company" or "GTII") was incorporated under the name Golden Triangle Royalty & Oil, Inc. on July 30, 1975 under the laws of the State of Colorado. The Company was organized primarily to acquire and hold royalties on oil and gas properties. During the past six years the Company has diversified and expanded its business to include salt water disposal and oil field service operations. It has also acquired and holds a variety of other interests, primarily as a passive investor. See Item 2
Item 2 for a description of the Company's properties. During 1996 the Company's name was changed to Golden Triangle Industries, Inc. to reflect the expansion in the Company's core business from oil and gas royalties to its broader base of activities.
In June 1997, the Company acquired a property in Texas (the "Altair Property"), covering 2,738 acres which contained materials and facilities readily convertible to use by the Company. This property is also suitably located to support expansion of oil field services into a new geographic area. During 1998 and 1999, the Company expanded its operations at the Altair with trucking and equipment services, oil reclamation plant, and sand and gravel sales. See Item 2. Properties (b) Altair Property, for additional information.
The following definitions are provided to clarify certain terms used in this report:
Authority to Prospect ("ATP") - a concession granted by the State of Queensland, Australia, which entitles its holder to an exclusive right to explore for oil and natural gas in Queensland in the particular area covered by the ATP. See Item 2(d), "Oil and Gas Properties - Australian Properties" for additional information.
Gross Production - the total production of oil, gas, or natural gas liquids from a property or group of properties for any specified period of time.
Net Royalty Acre - generally, a measurement of royalty or overriding royalty and the equivalent of the full customary one-eighth royalty of the gross production or revenue free and clear of exploration, drilling and production costs from one acre of land. The number of net royalty acres used in this report applies to figures as of December 31, 1999, and the number will change as relinquishments take place on the ATPs, as an ATP expires or is canceled, or any new areas are added.
Overriding Royalty Interest ("ORRI") - an interest carved out of the lessee's leasehold or working interest. The amounts payable from ORRIs are payments calculated as a percentage of either gross production or the gross revenues of the working interest (based on the wellhead price) from a concession or lease, usually free and clear of all exploration, drilling and development, and production costs, except for any applicable taxes and federal levies. In calculating the wellhead price, pipeline and trucking costs have already been deducted from the refinery price. The overriding royalties discussed herein are generally expressed as a percent of the gross production.
Royalty - generally, a share of the production reserved by the grantor of an oil or gas lease or concession. The royalty interest is customarily free of cost or expense incident to exploration, development or production, except for production or gathering taxes. The royalty is part of the consideration for the grant of the lease or Authority to Prospect.
Working Interest ("WI") - all or a fractional part of the ownership rights granted by a concession or lease. The owner(s) of a WI or a part thereof pays the costs of operations and is entitled to the gross production, less royalties retained by the grantor or lessor, and less ORRIs or other non operating interests created and assigned from the working interest. The owner of a WI may incur operating expenses in excess of income.
Carried Working Interest - a WI assigned to a third party (or third parties) who has agreed to pay all of the costs of drilling, equipping, and operating the underlying lease until they have recouped all of their costs or some other contractual amount from the revenues of the lease (referred to as the time of payout). At the time of payout, the interest is reassigned back to the original owner who then shares pro rata in the ongoing costs and revenues as a regular WI owner.
(b) Financial Information About Industry Segments
In the fiscal year ending December 31, 1999, the Company's revenues, operating profits, and identifiable assets were attributable to its salt water disposal and oil field services and rental operations, acquisition and ownership of interests in oil and gas leases, and sales of sand and gravel and reclaimed oil. (See Items 6 and 8, "Selected Financial Data" and Note 13 to Consolidated Financial Statements at Item 8.)
(c) Narrative Description of Business
General - Oil Field Services
GTII is engaged in the oil field service business which includes equipment services, oil reclamation, sand and gravel sales, and salt water disposal. Oil reclamation is designed to accept oil generated from salt water disposal and other off-grade or unwanted oil, run it through a blending process, and sell it to oil refineries. Trucking and equipment services include equipment moving, vacuum services, oil transportation, drilling pad construction, and the rental of heavy equipment. The Company also rents buildings and lay-down areas. GTII also sells sand and gravel from its Altair property. Salt water disposal consists of disposing of salt water that is produced when oil companies are drilling for oil, and GTII charges a fee per barrel or per load for this service.
The continued profitability of the salt water disposal and oil field service business is dependent upon stable or increased oil and gas prices causing additional oil and gas production in the Company's service area. This business is also subject to environmental considerations and must comply with governmental regulations. See "Governmental Regulation" below.
During 1999, approximately 56% of the Company's revenues attributable to this line of business were billed to a single customer, TransTexas Gas Corporation. The Company sold all of its reclaimed oil to a single entity, Superior Crude Gathering. These sales were 44% of total revenues. In addition, all sand and gravel sales were to Mike Arnold Trucking and Material Co., representing 10% of total revenues. The loss of these customers could have a material adverse effect on the Company's business as a whole. A temporary loss of one of these customers occurred during 1999 when TransTexas filed a Voluntary Petition in the State of Delaware for Order and Relief under Chapter 11 of Title 11 of the United States Bankruptcy Code (see details in Item 7: Management's Discussion and Analysis and in the Notes to Financial Statements). During the early stages of the bankruptcy TransTexas was not operating significantly, and therefore the Company's revenues were reduced. TransTexas started up operations again later in 1999 and the Company is continuing to provide services to them on what is effectively a C.O.D. basis. Mechanical problems with a disposal well, surface owners not renewing a lease, or a competitor installing a new disposal facility in the Company's service area are other risk factors associated with salt water disposal operations generally. See Item 2(a) Properties Attributable to Salt Water Disposal and Oil Field Services for more information.
During 1999 and the two prior fiscal years, the Company's oil field service and salt water disposal business has contributed $843,900, $2,139,843, and $2,003,993 or 36%, 68% and 81% of total consolidated revenues. During the same time period, oil and gas revenues have contributed $225,738, $258,725, and $448,359 or 12%, 8%, and 18% of total consolidated revenues. Sales of reclaimed oil and sand and gravel sales contributed 54% of total revenues in 1999 ($1,267,524) and 22% of total revenues in 1998 ($705,624).
General - Oil and Gas
The majority of the Company's oil and gas properties are royalty interests or ORRIs. Working interests account for less than 5% of the Company's revenues from oil and gas properties.
The acquisition, exploration, development, production and sale of oil and gas are subject to many factors that are outside the Company's control. These factors include market prices; national and international economic conditions; import and export quotas; availability of drilling rigs, casing, pipe, and other equipment and supplies; availability of and proximity to pipelines and other transportation facilities; the supply and price of competitive fuels; and the regulation of prices, production, transportation, and marketing by domestic and foreign governmental authorities. Additionally, the Company generally has no control over whether the owner or operator of leases to which its ORRI or working interests are attributable will elect to explore for oil and gas on such properties, or to develop them following discoveries that may occur. Each of these factors may affect the rate at which oil and gas are produced on properties in which the Company has an interest or affect whether wells will be drilled on such properties, and could otherwise materially affect GTII's earnings from this line of business. Australian concessions, discussed below, require that minimum prospecting expenditures be incurred during their four-year term. Some concessions from prior years have not been developed and are not producing revenues.
The Company does not serve as the operator of properties under which it owns working interests. However, it does bear the risk of fire, blowout or other catastrophe to such properties in proportion to the fractional share owned in the properties to the entire working interest of such properties. The operators of these properties may carry insurance against some of these risks but may not be fully insured due to prohibitive premium costs or coverage being unavailable. Such risks are not borne by the Company on oil and gas leases in which the Company owns an ORRI or royalty interest.
The sections which follow describe the impact of competition and governmental regulation on the Company's salt water disposal and oil field service and oil and gas properties lines of business, as well as the impact of foreign currency regulation and foreign taxes on earnings from oil and gas production located outside the United States.
Competition
The oil and gas industry is highly competitive in all of its phases, with competition for favorable producing royalties and overriding royalties being particularly intense. In the salt water disposal business, salt water disposal wells operated by other companies, as well as oil and gas producers adding their own injection wells, provides competition. An awareness of these factors, causes the Company to seek to provide the best possible services at competitive prices. There are no limitations on entry into the business of providing oil field support services. As the Company has moved in this direction, it has recognized this fact by providing its services at competitive rates and constantly monitors the market for adjustments in its pricing structure that might be required. The Company believes that price, geological and geophysical skill, and familiarity with an area of operations are the primary competitive factors in the identification, selection, and acquisition of desirable leases, both for salt water disposal and oil and gas interests. When attempting to purchase interests in such properties, the Company competes with independent operators and occasionally major oil companies, a number of which have substantially greater technical and financial resources than the Company.
Governmental Regulation
Oil and gas operations are subject to federal, state and local laws and regulations governing waste, environmental quality, pollution control, conservation and other measures regarding environmental and ecological matters. The Company's salt water disposal business is operated under permits from the Texas Railroad Commission and the Texas Natural Resource Conservation Commission. Failure to comply with applicable regulations could result in interruption or termination of the operations. Additionally, upon cessation of use, disposal wells must be plugged and the sites cleaned up to applicable standards. It is impossible to predict the impact of environmental legislation and regulations on the Company's operations and earnings in the future. However, compliance could require the Company to make capital expenditures and could adversely affect earnings.
The Company's operations could also be affected from time to time by other federal, state and local laws and regulations and by political developments. The domestic production and sale of oil and gas are subject to federal regulation by the Department of Energy and the Federal Energy Regulation Commission. Rates of production of oil and gas have for many years been subject to federal and state conservation laws and regulations. In addition, oil and gas operations are subject to extensive federal and state regulations concerning exploration, development, production, transportation and pricing, and even to interruption or termination by governmental authorities. Removal of import duties on oil entering the U.S. has had an adverse effect on the domestic oil industry.
In foreign countries, the Company may be subject to governmental restrictions on production, pricing and export controls. Regulations existing or imposed upon the Company or its properties at the time of their acquisition may change to an unpredictable extent. The Company will have little or no control over the change of regulations or imposition of new regulations and restrictions, expropriation or nationalization by foreign governments or the imposition of additional foreign taxes. Management believes that these actions are unlikely to be undertaken by the governments of Australia or Queensland, where the majority of the foreign oil and gas properties from which the Company receives royalty income are located.
Foreign Currency
Due to the nature of the Company's activities in Australia, portions of the Company's operating capital may at times be held in various foreign currencies. The Company does not maintain a bank account in Australia. However, the Company does have receivables from Australian oil production. These receivables are accrued in U.S. dollars based on production. The existence of revenues generated under a foreign currency subjects the Company to a limited risk of currency fluctuation and changes in rates of conversion for different currencies. Any fluctuations in the value of the accrued receivables and actual receipts have been immaterial. The Company does not engage or expect to engage in any hedging or other transactions that are intended to manage risks relating to foreign currency fluctuations. Additionally, revenues generated in foreign countries in which the Company has or may acquire interests may be subject to governmental regulations which restrict the free convertibility of such funds, and all remittances of funds out of these countries might require the approval of the applicable government's exchange control agency. Presently, the Company experiences no difficulties with the free convertibility of funds from Australia. In the Company's opinion, the foreign exchange control laws currently in effect in Australia do not unreasonably delay the remittance of funds generated in Australia to the United States.
Foreign Taxes and United States Tax Credits
As a result of its royalty and working interests attributable to properties outside the United States, the Company is subject to the imposition of taxes by foreign governments upon the Company's income derived from such foreign jurisdictions. These taxes are of various types, with differing tax rates, and are subject to change. Generally, the Company's income from a foreign jurisdiction will be taxed in the same manner as that for other companies operating in the jurisdiction, but discriminatory taxation by a particular jurisdiction may occur. The current corporate income tax rate in Australia is 30% of net profits.
The Company's income is also subject to taxation under the United States Internal Revenue Code of 1986, as amended (the "Code"). The Code provides that a taxpayer may obtain a tax credit for certain taxes paid to a foreign country or may take a deduction for such taxes. A tax credit is generally more favorable than a deduction. However, the particular tax circumstances create differing benefits in varying situations. The tax credit applicable to particular foreign income arises when such income is included in the Company's taxable income under the provisions of the Code. There are, however, substantial restrictions and limitations on the amount of the tax credit that can actually be claimed. See Note 7 of the Notes to Consolidated Financial Statements at Item 8.
Employees
At March 31, 2000, the Company and its subsidiaries employed nine individuals (including the executive officers).
(d) Financial Information About Foreign and Domestic Operations
See Note 13 to Consolidated Financial Statements at Item 8.
ITEM 2. PROPERTIES
(a) Properties Attributable to Salt Water Disposal
GTII currently owns two salt water disposal facilities, one of which is operating. GTII acquired a saltwater disposal facility near El Campo, Texas, during 1997. This facility, named Transcon Spanish Camp, is located near producing gas wells. This facility was placed into service during the first quarter of 1998. Salt water is produced along with oil and gas, and governmental regulations require the salt water to be disposed of in an environmentally safe manner. The Company is in the primary business of injecting the salt water back into the ground into another salt water bearing zone to protect all fresh water zones from being contaminated. The Company is paid a fee on a per barrel or per load basis for this service by the oil and gas producers whose operations produce the salt water that requires disposal.
The Company is planning to add a salt water disposal facility on the Altair Property. See (b) Altair Property.
During October 1999, the Company sold five of its salt water disposal facilities for a $225,000 note. In addition to the $225,000, the agreement with the buyer also calls for the Company to receive a total of $500,000 in the form of a two cent per barrel per month override. The decision to dispose of these assets was based on several items. Other operators developed some of their own salt water disposal facilities in the area which caused a reduction in disposal at the Company's facilities. The manager of the operations resigned and the Company was unsuccessful in locating a suitable replacement. Management determined that the decline in these operations might prove permanent and could not justify the costs and continued management effort of the facilities. Plans were considered to shut down the operations. However, shutting down the operations would have resulted in requirements to plug all wells used in the disposal facilities. Sale of the facilities transfers that responsibility to the buyer. See Item 7. Management's Discussion and Analysis and Note 6 to the financial statements for more information.
(b) Altair Property
During 1997, GTII acquired the Altair, a 2,738 acre property, located approximately 45 minutes from Houston, Texas, for a purchase price of $1,096,100. This property is located in an area of active oil and gas production and sits along a trend line which has seen significant recent exploratory drilling. Existing assets included approximately 90% of mineral rights, fresh water supplies, a substantial quantity of stockpiled sand and gravel, two usable buildings, and areas suitable for lay down yards for drilling companies. The property also contains sand and gravel which are available for excavation/mining and six plugged gas wells. The Company plans to exploit the undeveloped sand and gravel reserves and to re-evaluate the production potential of the gas wells. The prospects of leasing the property for exploration of deeper zones indicated by geological trends across the area is also expected to be examined.
Beginning in the last quarter of 1997, the Company earned revenues from this property from rental of its buildings and lay-down areas, sales of fresh water, and sales of sand and gravel. Because of its location, the Company has also established and received revenues from an oil reclamation plant and oil field service business based on the rental of heavy equipment for oil field use. The oil reclamation plant, established in the last quarter of 1997, is designed to accept oil generated from saltwater disposal and other off-grade or unwanted oil, run it through a blending process, and sell it to oil refineries. This facility is presently the only one of its type in the surrounding area.
GTII increased revenues during 1998 further with its new trucking and equipment services based at the Altair. With the purchases of additional trucks, trailers and bulldozers, the Company is providing the following services to oil and gas operators: equipment moving, vacuum services, oil transportation, drilling pad construction and leasing of equipment. GTII also plans to construct a saltwater disposal facility on the property, but does not have an estimated date of completion at this time. An analysis is being undertaken on several dry wells (drilled previous to GTII owning the property) to determine the best one to use for the salt water disposal facility. The estimated cost of construction could be from $35,000 to $75,000 depending on whether or not the casing will have to be replaced in the existing well selected. During the last quarter of 1998 the Company signed a contract with Mike Arnold Trucking & Material Co. for the sale of sand and gravel from the Altair. The contract will pay royalty payments of $0.80 per ton on sand that is stockpiled and $0.50 per ton for sand that is mined. Every six months the royalty payment will be adjusted if necessary to compensate GTII if the average sales price of sand increases. GTII will be paid $0.70 per ton for any gravel that is mined from the Altair. Management estimates that there are approximately 2 million tons of sand currently stockpiled with an additional 8-12 million tons that can be mined. In addition, there are approximately 5-8 million tons of gravel that can be mined. GTII began receiving revenues from the sand and gravel contract in the first quarter of 1999.
(c) Apache Ranch
GTII owns the 13,500 acre Apache Ranch which adjoins the Mescalero Indian Reservation and ski resort area near Ruidoso, New Mexico. To date, activity related to this ranch property has included land sales (financed by the Company) in 1995 and 1996, revenues from cattle grazing leases in the 1995-1999 period, and hunting permits in 1996. See Note 3 of Notes to Consolidated Financial Statements at Item 8.
(d) Oil and Gas Properties
General
As of December 31, 1999, the Company owned royalty interests, ORRIs and working interests attributable to oil and gas wells located in the United States, Canada, and Australia. In the United States, the Company's interests are located in the states of Arkansas, Colorado, Kansas, New Mexico, Oklahoma, Texas, and Mississippi. The majority of the Company's oil and gas interests are royalties or ORRIs. The Company also holds working interests in the United States and in Australia.
Most of the U.S. leases under which the Company owns interests provide that such leases will continue in existence as long as oil and gas are produced on the related properties. The duration of the Australian concessions in which the Company owns interests is discussed generally in the following section.
Australian Properties
A significant portion of the Company's oil and gas properties consists of ORRI under ATPs granted by the State of Queensland, Australia. The Company currently has ORRI under eleven such ATPs. Each of these ATPs has an initial term of four years. The area covered by an ATP is reduced by relinquishment of approximately one-fourth of the area at the start of the third year of its effectiveness and an additional one-fourth of the original area at the start of the fourth year of its effectiveness. The area to be relinquished is chosen by the holder of the ATP. An ATP does not require that any specific work, such as drilling or geological or geophysical work, be performed by the holder, but does require that the holder continuously prospect and expend a specified minimum sum over the term of the ATP for such prospecting efforts. Applications for renewal may be filed at the time of expiration of an ATP.
The Company has ORRI in 1,388,560 net royalty acres under 13,358,400 gross surface acres in Australia. Unlike working interests, ORRIs do not require that the Company bear any portion of exploration or drilling expenses to develop the property. In addition, the Company holds 58,305 net working interest acres under 938,400 gross working interest acres.
Oil revenues from Australia during 1999 totaled $172,645 from ATP 267, ATP 299 and ATP 543, before transportation costs to market of $55,589. No revenues were generated by the other eight ATPs during 1999.
Reserves
The majority of the Company's reserves are attributable to properties in which the Company owns ORRI and royalty interests. Data necessary for the computation of reserve estimates for such properties is not available to the Company without the incurrence of unreasonable effort and expense. If estimates of proved reserves were available for such properties, the Company believes that reserves attributable to ATP 299 in Australia would account for the majority of the proved oil reserves attributable to these interests. The working interest holders of the properties under which the Company holds royalty interests and ORRIs have not supplied the Company with information deemed necessary for meaningful reserve calculations. Most of the Company's domestic royalty interests are small, and the Company is of the opinion that obtaining information necessary for meaningful reserve calculations for these interests would involve unreasonable effort or expense. Oil production attributable to the Company's royalty and ORRIs provided approximately 99% of the Company's income attributable to oil and gas properties during the year ended December 31, 1999.
Since the Company's working interests provide only a small percentage (1%) of the Company's total income attributable to oil and gas properties, it was determined that unreasonable effort and expense would be required to prepare a reserve report on the properties to which these interests relate. See "Supplementary Data for Reserves of Oil and Gas" under Item 8. Financial Statements and Supplementary Data.
No estimates of total proved oil or gas reserves were filed by the Company with, or included in reports to, any federal authority or agency other than the Securities and Exchange Commission since the beginning of the Company's last fiscal year.
Average Sales Price and Production Costs
The following table sets forth the average sales price per unit of oil and gas production. Sales prices are based on market prices determined at the point of delivery from the producing unit. Production or severance taxes have not been deducted in determining the average sales price, but rather are included as part of production costs. No sales prices of gas are shown for Australia because the Company had no production of gas in Australia during the relevant reporting periods. The average production (lifting) costs per unit of production are not presented because the majority of the Company's oil and gas revenues are attributable to royalties and ORRIs. The nature of these interests does not require that the Company bear any portion of the production or lifting costs. Additionally, the operators of the leases under which the Company's working interests exist have not provided the Company with information concerning production (lifting) costs. The Company's working interests are small, the Company is not an operator of wells or leases, and the Company is of the opinion that obtaining information necessary for disclosure of production (lifting) costs would involve unreasonable effort or expense.
United States Australia Average Sales Price Average Sales Price Fiscal Year Ended Oil Gas Oil Gas ----------------- ------ ------ -------- ------- December 31, 1999 $17.16 $ 1.82 $US18.36 $US1.12 December 31, 1998 $12.22 $ 1.82 $US15.23 - December 31, 1997 $19.21 $ 1.82 $US20.55 -
WORKING INTERESTS - DOMESTIC
Productive Wells and Developed Acreage
The Company's assets and revenues attributable to its domestic working interests are not material. The interests held are quite small and the Company has determined that the costs incurred to obtain and analyze the information normally required to be presented for working interests would be unreasonable. As a result this information has been omitted.
Non-Productive Acreage
GTII holds a 30% interest in approximately 11,787 acres of long-term leases located in the Overthrust Belt in Arizona. The primary prospect in this lease play is the Cochise Overthrust Prospect. Along with other working interest owners, GTII intends to farm out the interest to a third party, who would assume the costs of drilling and developing the properties. Under such arrangements, GTII, et al would attempt to recover out-of-pocket expenses while retaining an overriding royalty interest.
WORKING INTERESTS - AUSTRALIA
The table below sets forth the undeveloped acreage in Australia in which the Company held working interests as of December 31, 1999. Working interests are acquired by the Company with the intention to farm out operations while retaining an ORRI or carried working interest.
GTII's Net Gross Working WI Area Acres Interest Acres ---- ------- -------- ------- 538 478,400 7.5% 35,880 554 460,000 4.875% 22,425
Recent Developments - WI
During 1999 Dyad-Australia, Inc. entered into an agreement with a major U.S. energy concern whereby significant exploratory work will be funded on ATP 554P including new seismic acquisition and the drilling of at least one exploratory well. The specific terms are subject to a confidentiality agreement; however the exclusive right to market all hydrocarbons from ATP 554 was assigned to that major U.S. energy concern. GTII's ultimate economic interest in ATP 554 will depend on the level of expenditures by the parties to the agreement and on the level and timing of partial reimbursement of expenditures by Dyad and GTII. GTII held a 7.5% interest which was subject to an immediate reduction to 4.875% as a result of the funding arrangement. GTII received compensation for its reduction of interest in the form of $7,500, and additionally, in exchange for a geochemical survey acquired on the area. The reduction in interest will not have a material effect on the Company's financial position. GTII does not intend to repurchase an additional interest to regain its 7.5% previous interest in the area.
As a result of the agreement with the energy concern, Dyad acquired, processed and interpreted 169 kilometers of seismic data. Based on the results of the seismic program, Dyad believes drilling an exploratory well on the area is justified. However, the energy concern that funded the seismic program decided not to provide funds to drill. Under the terms of the final agreement entered into between Dyad and the energy concern, the energy concern has taken the position that it can terminate the agreement if, in its sole and absolute discretion, the seismic investigations do not justify the drilling of an exploratory well. As operator, Dyad has contested this position. If the exploratory well is not funded, then ATP 554P will likely expire as a result of failure to meet exploration commitments required by the Australian government. In the event that ATP 554P expires, then GTII's interest will cease to exist, but the loss of this interest will not have a material effect on the Company's financial position.
ROYALTY AND OVERRIDING ROYALTY INTERESTS - DOMESTIC AND CANADA
The Company owns royalty interests and ORRIs in oil and gas wells primarily located in the states of Arkansas, Colorado, Kansas, New Mexico, Oklahoma, Mississippi, and Texas. During 1996, the Company acquired ORRIs in four producing wells in Texas and four producing wells in Mississippi. During 1997, the Company acquired ORRIs under two production units in Canada. These production units consist of the consolidation of numerous leases and, between the units, contain more than 200 wells. The Company had no ORRIs in undeveloped acreage in the United States, as of December 31, 1999.
Also see (d) Oil and Gas Properties - General.
OVERRIDING ROYALTY INTERESTS - AUSTRALIA
The following table sets forth the ATP number of each Australian concession in which the Company had an ORRI as of December 31, 1999 and upon which productive wells had been drilled, the percentage interest of the Company therein, the number of such wells, the gross acreage of each concession, and the net royalty acres held in each concession.
GTII's Net Area & Gross Royalty Royalty No. of Wells Acres Interest Acres ------------------ --------- ---------- ------- 267 - 21 oil wells 552,000 2.6064700% 115,102 299 - 65 oil wells 441,600 1.6364559% 57,813 543 - 1 gas well 1,545,600 0.5000000% 61,824
The following table sets forth the undeveloped acreage in which the Company had ORRIs in Australia as of December 31, 1999.
GTII's Net Gross Royalty Royalty Area Acres Interest Acres ---- --------- -------- ------- 333 92,000 0.200% 1,472 538 478,400 0.623% 23,843 550 386,400 0.500% 15,456 560 846,400 0.800% 54,170 582 6,716,000 1.000% 537,280 636 640,000 5.000% 256,000 661 430,000 2.000% 68,800 CO98-C 1,230,000 2.000% 196,800
The total of the producing and non-producing acreage in Australia under which GTII holds ORRI interests is 1,388,560 net royalty acres under 13,358,400 gross surface acres.
Recent Developments - ORRI
From 1996 through 1999 a total of 35 new oil wells were completed as producers on ATP 299P. There are now 65 wells in twelve different fields on ATP 299 from which GTII receives revenues. GTII acquired additional interests in ATP 299 during 1997, bringing GTII's ORRI in this ATP to 1.6364559291% of gross production, less transportation costs. Each oil field has numerous undrilled locations, indicating upside potential for the further development of ATP 299.
GTII also purchased additional interests in ATP 267 during 1997 bringing GTII's total ORRI in ATP 267 to 2.60647% of gross production, less transportation costs. There are currently 21 producing oil wells on this concession from which GTII receives revenues. GTII also began receiving revenues from the gas well on ATP 543P during 1999.
During 1999 the Company purchased a 5% overriding royalty interest in ATP 636P from Strategic Consulting, Inc. This concession covers approximately 640,000 and is located in Queensland, Australia. As a part of the purchase, Strategic agreed to grant GTII overriding royalty interests in additional concessions that Strategic applied for if they were granted. Strategic was successful in two other applications, so GTII received a 2% overriding royalty interest in ATP 661P covering 430,000 acres in Queensland, and a 2% overriding royalty interest in CO98-C covering 1,230,000 acres in South Australia. All of these concessions are currently non-producing, but exploratory work is being planned.
(e) Office Facilities
The Company's corporate office is located at 6314 Aspen Cove Court, Sugar Land, Texas 77479. The office is leased from Kenneth Owens, Chairman of the Board and President. In addition, the Company has offices on the Altair property. Rent in the amount of $14,800 was paid to Kenneth Owens in 1999 for these facilities. The Company also has an office at 104 Fossil Court, Springtown, Texas 76082, which handles the stock transfer agent duties and other duties for the Company. No rent payments were made in 1999 for these facilities. The Company believes its office facilities are adequate for the next year.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
As of March 31, 2000, there were no material legal proceedings to which the Company or any of its subsidiaries was a party or of which any of their properties was the subject.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Common Stock
The only class of common equity security authorized by the Company's Articles of Incorporation, as amended, is the Company's Common Stock, $.001 par value. The Company's Common Stock trades on the NASDAQ SmallCap Market tier of the NASDAQ Stock Market under the symbol "GTII." The range of high and low sales prices for each quarter during the last two fiscal years, as quoted in the National Association of Securities Dealers' Automatic Quotation ("NASDAQ") System, is set out in the table that follows. These quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions.
Year Ended December 31, 1999 Year Ended December 31, 1998 High Low High Low ------ ------ ------- ------- 1st Quarter $8.625 $7.750 $14.375 $7.2500 2nd Quarter 9.750 5.000 13.125 7.5000 3rd Quarter 5.500 1.781 11.000 5.5000 4th Quarter 4.250 2.000 11.500 5.0625
As of March 31, 2000, there were approximately 10,216 holders of record of the Company's Common Stock, plus an undetermined number of stockholders who hold their stock in street name.
GTII conducted a buy back of shares from shareholders holding 20 or fewer shares from October 15, 1999 through November 30, 1999. The buy back was conducted to reduce the costs associated with servicing the accounts of shareholders having small amounts of shares, and to provide small shareholders with an opportunity to sell these small blocks of stock without the disproportionate expense of brokerage commissions. A total of 1,789 shareholders sold 7,342.7709 shares back to the Company at $4 per share for total proceeds of $29,371.04.
Dividends - Common Stock
The Company has not paid cash dividends on its common stock and does not anticipate the payment of cash dividends in the foreseeable future. Payment of cash dividends is within the discretion of the Company's Board of Directors and will depend, among other factors, on earnings, capital requirements and the operating and financial condition of the Company. The payment of stock dividends is also within the discretion of the Board of Directors.
Dividends - Preferred Stock
Class A - A cash dividend of $0.30 per Class A preferred share was paid on these shares during 1999.
Dividend Reinvestment and Stock Purchase Plan
GTII set up a Dividend Reinvestment and Stock Purchase Plan (the "Plan") during 1996, to provide existing shareholders of the Company's common stock with a convenient and economical method of investing cash dividends and making cash investments in the Company's common stock without payment of brokerage commissions in connection with purchases. Shareholders may choose to invest funds in common stock through optional cash investments, with a minimum purchase of $25.00 per month and a maximum purchase of $5,000 per month. The optional cash payments may be made occasionally or at regular intervals, as the shareholder desires. A $2.50 service fee is charged for each optional cash investment. The Plan provides that the common shares offered by the Company may be either shares newly issued by the Company or shares purchased on the open market at the Company's option. The purchase price for shares purchased on the open market is the average price paid for such shares, and the purchase price for newly issued shares is 98% of the average of the daily closing prices of the common shares reported on the NASDAQ market on the five trading days prior to the purchase date.
IMPORTANT: The above is only a brief outline of the Plan. Complete details of the Plan were mailed to all shareholders during 1996. Before enrolling, shareholders should review the information received, or obtain complete information on the Plan by requesting a copy of the Dividend Reinvestment and Stock Purchase Plan from the corporate office.
The Company registered 1,000,000 shares of common stock under the Securities Act for sale by GTII pursuant to the Plan, which may be used at the Company's discretion. During 1999 shares for the Plan were purchased from the registered Company stock. An average of 36 stockholders per month purchased shares through the Plan during 1999
Preferred Stock
During 1996, shareholders authorized an amendment of the Articles of Incorporation of the Company, under which 1,000,000 preferred shares are authorized for issuance, with directors given the authority to subdivide the stock and assign the various rights to each class. Directors created Class A and Class B preferred shares and authorized a program whereby shareholders could exchange their common stock for preferred stock at a rate of one share of preferred received for each ten shares of common surrendered. The offer expired on August 30, 1996. The program resulted in the exchange of 2,001,710 common shares for 11,856 Class A preferred shares, and 188,585 Class B preferred shares. As a result of the 1-for-3.5 reverse stock split effective May 20, 1997, there were 3,371 preferred A shares and 53,903 preferred B shares issued and outstanding. Neither class of preferred stock was registered. As a result, any transfers carry trading restrictions associated with unregistered shares and there is no established market for such shares.
Class A Convertible Preferred Stock - Class A preferred stock was a convertible stock. The shareholder holding preferred stock had the same voting rights as if all preferred shares held were common shares (1 preferred share equals 10 common shares). These shares were convertible back to common shares October 31, 1999. An annual cash dividend of $0.30 per share was paid on the Class A preferred shares. See Dividends - Preferred Stock.
Class B Non-Convertible Preferred Stock - Class B preferred stock was issued as non-convertible with an annual cash dividend of $0.20 per share and a stock dividend. The cash and stock dividends were paid in 1997. However, during 1998, the Company's directors voted to eliminate the dividend features of its Class B preferred stock primarily due to the impact on earnings per share. In conjunction with this decision, the directors also voted to allow holders of the stock to convert their shares back into common on a one for ten basis, the same basis that common was converted to preferred in 1996. A shareholder still holding Class B preferred stock has the same voting rights as if all preferred shares held were common shares (1 preferred share equals 10 common shares).
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Fiscal Years Ended December 31 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- Operating revenues $2,337,162 $3,104,192 $2,452,352 $2,489,295 $2,676,204
Net income/(loss) $ (556,215) $ 266,482 $ 438,784 $ 351,195 $ 683,169
Net income/(loss) per share (1) - basic $ (.89) $ 0.45 $ 0.46 $ 0.45 $ 0.62 - diluted $ (.89) $ 0.43 $ 0.46 $ 0.45 $ 0.62
Total assets $6,381,766 $7,309,674 $6,796,852 $6,113,063 $5,927,676
Long-term debt $ - $ - $ - $ - $ 19,486
(1) Net income per share has been restated to reflect a 1-for-2.5 reverse split in 1995, and a 1-for-3.5 reverse split in 1997.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The fall of oil prices during the last part of 1998 and the first quarter of 1999 to approximately 50% of previous prices directly effected the Company's oil and gas revenues and rippled down the line through oil and gas producers to the Company's service businesses during the first quarter of 1999. The ripple effect of the decline in oil and gas prices hurt the salt water disposal business, the other oil field services, and the oil reclamation business. During the second quarter, oil and gas prices began to recover, but, as in the delay of the downturn's effects, the oil field service business recovery trails the oil and gas price recovery.
The Company also felt the effects of the bankruptcy of TransTexas Gas Corporation, its largest customer. TransTexas filed a Voluntary Bankruptcy petition under Chapter 11 of the U.S. Bankruptcy Code on April 19, 1999, largely due to the decline in oil and gas prices combined with restrictive covenants in its financing arrangements. As a result of this filing, the Company recognized a valuation adjustment against its receivables from TransTexas in its financial statements. The impact of this situation is discussed further below.
As mentioned above, oil and gas prices began to rebound during April 1999. Management has seen increased activity in the oil field since March and expects to see improvement in its businesses as producers begin to recover from the disastrously low prices for oil and gas. Although TransTexas filed for bankruptcy, the Company has continued to provide services to them on a C.O.D. basis.
During October 1999, the Company agreed to sell its salt water disposal operations based in Zapata, Texas to the brother of the President of the Company for a $225,000 note. In addition, the agreement calls for the Company to potentially receive an additional $500,000 through a two cent per barrel per month override which estimates indicate may take as long as 15 years. The transaction has been completed with an effective date of November 1, 1999. The $225,000 is currently in the form of a receivable to the Company. The decision to sell these operations culminated from a serious review of their present contribution to the profits of the Company and their future potential. This review was brought on by the resignation of the on-site manager in Zapata and difficulty in identifying a potential replacement. Revenues are not expected to recover significantly due to factors outside the Company's control. Management considered the possibility of shutting the facilities down and waiting for better operating conditions, but regulatory requirements would cause the Company to have to incur costs to plug the unused wells within a specified period of time, and, although costs to plug one well is not significant, costs to plug all the wells at the same time would be quite significant. Selling the facilities transferred the responsibility and liability for the wells to the new owners. The accompanying financial statements include a loss of $534,255 from this transaction. No value was recorded for the two cent per barrel per month override because of its contingent nature.
During November, the Company entered into a letter of intent to acquire Whitemark Homes, Inc. of Orlando, Florida in a stock for stock transaction. Whitemark Homes is privately owned and is in the business of constructing mid-range homes and developments. Whitemark is interested in expanding its operations and the Company's management believes that the Company is positioned to assist Whitemark in its proposed expansion. Management believes that this acquisition will enhance the value of the Company to its stockholders. A portion of the tentative agreement calls for a review of the Company's current asset base and a determination of whether or not assets contribute to the future growth and development of the combined enterprise. The Australian properties are one of the specific topics of discussion and it is expected that they will be disposed of by the Company in some manner. One possibility would be a transfer of these assets to the Company's President in exchange for a relinquishment of a portion of his stock holdings in the Company. A Form 8-K filing is anticipated for this transaction as soon as the terms of the agreement have been finalized.
LIQUIDITY AND CAPITAL RESOURCES
Management has reported total assets of $6,381,766 at December 31, 1999, a decrease of $927,908 from the $7,309,674 total at December 31, 1998. The decrease is primarily a net effect of the write-down taken due to TransTexas' bankruptcy, the loss sustained from the sale of the Zapata disposal facilities, and recognition of tax benefits to be realized in the future. Current assets remained essentially the same in spite of the charge recorded against the Company's TransTexas receivable and reduced cash flow due to reduced operating revenues partially due the recognition of the current portion of deferred income tax benefits. Current liabilities were higher when comparing the current balances to the balances at December 31, 1999 because of borrowings under the line of credit. The Company has drawn an additional $95,000 under the Company's lines of credit with the Wells Fargo Bank and the Bank of America during the current year. The borrowings under the existing lines of credit were largely used to fund the acquisition of an overriding royalty interest in a new Australian prospect in the first quarter and to provide a portion of the down payment for the acquisition of the Wright property (discussed further below). It is important to note that all lines of credit were repaid subsequent to the end of the year so the Company is currently free of long-term debt, and its property and equipment are free from any liens.
The Company has a loan outstanding to its president of $65,000. Management believes this loan is valid and collectible. During 1998, the Company advanced $67,750 in two transactions to the President for less than 90 days each. These amounts were repaid during the year. When the Company relocated its corporate office to Sugar Land, Texas, it entered into a ten-year lease agreement with the Company's president for office space. As part of this agreement, The Company advanced $127,428 to the president for acquisition costs. Of this amount, $30,000 was repaid in 1999 and the balance is being amortized over a ten-year lease period.
Historically, the Company's oil field services and rental revenues have been derived largely from TransTexas Gas Corporation. The business with TransTexas declined in 1999 due to the decline in oil and gas prices and the resulting reduction in cash available for development and service work which led to a bankruptcy filing by TransTexas. Additionally, TransTexas did not make any significant reduction in the amount that it owed the Company. Gross receivables from TransTexas totaled $1,114,427. As mentioned above, TransTexas filed a Voluntary Petition in the State of Delaware for Order and Relief under Chapter 11 of Title 11 of the United States Bankruptcy Code. In March 2000, final approval from the court for the reorganization plan was approved. The Company is to collect 20% of its approved claims in cash and the remainder will be paid through issuance by TransTexas of a new class of preferred stock. GTII has recorded an adjustment to its balances at December 31, 1998, of 80% of the outstanding receivable ($921,228) from TransTexas on that date. In addition, $64,608 has been recorded as an allowance for receivables incurred during the first quarter of 1999. The allowances have been established without regard to the value for the preferred shares to be received, because no value has been established for those shares and any value attributed to them would be arbitrary at this time. Stockholders' equity for 1999 includes the prior period adjustment of $560,374 (receivable adjustment of $921,228 less income tax benefit of $340,854) to reflect the write-down of the receivable. The 1998 financial statements were not restated because the Company has not yet been able to obtain its previous auditors' agreement with regard to this adjustment (see Item 9 for discussion).
Subsequent to TransTexas' bankruptcy filing, the Company has continued providing services to TransTexas and increased them over those provided in the first quarter of 1999. This is largely due to improved oil and gas prices and to efforts by TransTexas to restart its drilling operations. These services are being provided on a "pay as you go" basis under which some services are prepaid while others are paid upon completion.
During March 1999, the Company entered into a contract to purchase one-half of a 1,062 acre property near the Altair property, known as the Wright property, in conjunction with the Company's President. This property has an ongoing sand and gravel excavation operation. The Company closed on this purchase in early May. The Company's portion of the purchase of this property called for a $100,000 down payment and the issuance of a note payable to the seller for $300,000. This note was to be repaid over 10 years. Because of cash shortage by the Company, the Company's President paid $45,000 of the Company's portion of the down payment. Unfortunately, because of a shortage of cash due to the major customer bankruptcy discussed previously, the Company was unable to pay for its one-half interest. Therefore, it was decided the Company would back not participate in the purchase and transferred its interest and liability to Kenneth Owens. GTII had paid a total of $96,637 for the property and, through January 2000, had received $95,165 in revenues, so Mr. Owens paid $1,472 to GTII so that the Company could get back its total investment.
RESULTS OF OPERATIONS
The Company's financial statements present total operating revenues of $2,337,162 for 1999 compared to $3,104,192 for 1998 and $2,452,352 for 1997. The decrease from prior years is attributable mostly to the reduced demands for services by TransTexas and other producers. The bright spots in the Company's revenues were its oil reclamation and sand/gravel sales businesses. Combined, these activities have shown marked improvements during 1999 ($1,378,867) compared to 1998 ($705,624). A significant reduction in oil field services and rentals came from TransTexas reduction in activities as mentioned above, and reduced activity in the salt water disposal business. Oil and gas revenues were negatively impacted by lower oil prices during the first quarter. However, they did show good improvement during the second through fourth quarters, ending up only slightly less than 1998 oil and gas revenues.
Costs of revenues increased when comparing the year ended December 31, 1999 to the previous years, and gross profits declined accordingly. This decline is due to the change in the mix of revenues. Oil field service revenues have significantly lower direct and variable costs than those for oil reclamation sales. Depreciation and materials are the major expenses of the service business, while oil purchases are the significant cost of the reclamation activities. Depreciation is accounted for on a straight-line basis and is not necessarily variable with the level of activity.
Selling and Administrative Expenses consists of personnel, advertising, repairs and maintenance, professional fees, taxes, and other corporate overhead expenses. In 1999, these costs also include a valuation allowance of $64,608 recorded against the Company's 1999 receivables from TransTexas. During 1999, personnel costs declined, and advertising and public relations declined. These costs declined as the Company reduced its personnel due to reduced service work and reduced its promotional activities in a cost cutting move. Various other overhead costs have declined when comparing 1999 from those incurred in 1998; the most significant of these being repairs and maintenance which has been cut more than one-half. These reductions are due to a combination of efforts to control costs and a lower level of activities. Rent and state taxes were both up during 1999. Rent is due to the office leasing arrangement with the Company's President which started in the fourth quarter of 1998 with the move of the Company's headquarters to Sugar Land, Texas. Taxes are up mostly due to the way corporate taxes are assessed in Texas (calculated at the greater of an income tax or a tax on stockholders' equity).
The Company served as a consultant to Clearworks.net, Inc. by providing them with information valuable to a new public Company such as information regarding SEC filings, OTC Bulletin Board and NASDAQ listing requirements, how to set up a Dividend Reinvestment and Stock Purchase Plan, and various other information. In addition, the Company provided them with many contacts such as transfer agents, stock certificate printers, newswire service contacts and more. In consideration for its assistance, Clearworks.net issued 75,000 free trading shares to the Company. The agreement called for the Company to pay a finder's fee of 7,500 shares to a director of GTII, Howard Siegel and to issue 48,117 shares to its stockholders. The Company retained the balance of 19,383 shares as an investment. The shares were issued to the shareholders based on one share of Clearworks received for every 18 shares of GTII owned with all fractional shares being rounded up. Clearworks is a turnkey provider of voice, data, and video services for both commercial and residential customers.
The Company showed a $437,161 loss from operations for the year ended December 31, 1999 compared to profits of $392,196 and $638,993 for the comparable periods in 1998 and 1997. Management believes the Company is weathering the storm, so to speak, caused by the fallout from the low oil and gas prices and TransTexas bankruptcy filing.
Cash flows from operations declined significantly when comparing 1999 to the two previous years. This is largely due to decreased revenues and activities. The increase of the oil reclamation activities also negatively impact cash flows as a function of revenues due to the lower profit margins generated in this line of business. Cash has been used for asset purchases, primarily in the first and second quarters. The Company borrowed an additional $95,000 under its existing lines of credit and borrowed from related parties. A large portion of these funds were used in the purchase of an Australian oil interest and as down payment on the Wright property discussed above. All lines of credit were repaid subsequent to the year end, so the Company currently has no long-term debt.
Management does not expect the trend of decreased revenues to continue, since oil prices have recovered and our major customer is back in business. However, GTII is considering other plans, including the acquisition of a private Company discussed previously.
Income Taxes
The Company anticipates that it will generate sufficient taxable income in 2000 to realize substantially all of its deferred tax assets, based on the sale of certain investments during the first quarter of 2000. See Note 7 to Consolidated Financial Statements for disclosure of book vs. tax differences and Note 15 to the Consolidated Financial Statements regarding subsequent events.
Disclosure Regarding Forward-Looking Statements
This Form 10-K includes "forward-looking" statements within the meaning of Section 27A of the Securities Act and the Company desires to take advantage of the "safe harbor" provisions thereof. Therefore, the Company is including this statement for the express purpose of availing itself of the protections of such safe harbor provisions with respect to all of such forward-looking statements. The forward-looking statements in this Form 10-K reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ from those anticipated. In the Form 10-K, the words "anticipates," "believes, "expects," "intends," "future" and similar expressions identify forward-looking statements. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that may arise after the date hereof. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by this section.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The carrying amounts reflected in the consolidated balance sheets for cash, short-term investments, accounts receivable, accounts payable, and bank loans approximate fair value due to the short maturities of these instruments. The Company's receivables result primarily from oil field support services and the Company does not require collateral for these receivables. A significant portion of the service business is billed to a major customer who also represents a significant portion of the outstanding receivables. The Company's line of credit agreement provides for borrowings which bear interest at rates which vary with the prime rate. The Company had borrowings under this credit facility during 1999 and had an outstanding balance at December 31, 1999. The Company believes that the effect, if any, of reasonably possible near-term changes in interest rates on the Company's financial position, results of operations, and cash flows should not be material.
The Company does not enter into derivatives, hedging, or other financial instruments for trading, speculative, or other purposes. Management does not believe that there is any other material market, interest rate, or risk exposure with respect to derivative or other financial instruments that would require additional disclosure under this item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Consolidated Financial Statements on page immediately following the signature page of this Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Subsequent to the year end (January 12, 2000), the Company filed an 8-K to report a change in auditors from BDO Seidman, LLP to Pricher and Company. There were no known disagreements with the former accountant on accounting and financial disclosure at the time of the change. However, subsequent to the change, it was determined that an adjustment of $580,374 should have been recorded in the 1998 financial statements (receivable allowance of $921,228 less income tax benefit of $340,854). The Company was unsuccessful in negotiating with its previous auditor in order to obtain from them either a consent to use their report or an agreement to the change, and therefore their report on the 1998 financial statements is not included in this filing. .
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The Board of Directors of the Company (the "Board") presently consists of five members. Each director is elected at the annual meeting of shareholders to hold office until the next annual meeting of shareholders and until his/her successor has been elected and qualified. Currently serving as directors are: Kenneth Owens, Howard Siegel, Karen Lee, Glenn Gagnon, and David McFarlane. The following table sets forth information concerning the persons currently serving as directors of the Company.
Date First Position With Elected Name Age the Company C as Director ---------------- --- --------------------- ----------- Kenneth Owens 62 Chairman of the Board 1994 and President Howard B. Siegel 57 Director 1980 Karen Lee 40 Director 1989 Glenn Gagnon 35 Director 1997 David McFarlane 37 Director 1998
Executive Officers
Unless otherwise specified by the Board, all executive officers are elected for a term of one year, commencing with the date of the first meeting of the Board following the annual meeting of stockholders, and serve until their successors are elected or appointed and qualified, or until their respective death, resignation, removal or disqualification. All of the Company's officers are executive officers. The following table sets forth certain information with respect to the persons currently serving as executive officers of the Company.
Date First Position With Elected Name Age the Company as Officer -------------- ----- ----------------------- ---------- Kenneth Owens 62 Chairman of the Board 1994 and President Robert Early 44 Chief Financial Officer 1997 Shawna Owens 27 Secretary/Treasurer 1995
Family relationships between the Company's officers and directors include: Kenneth Owens and Shawna Owens are father and daughter.
Kenneth Owens, Chairman of the Board and President, has expertise in various areas of business. Beginning in 1961 he performed in a supervisory capacity for several worldwide companies including Bechtel and Brown & Root. He has been involved in a variety of projects including: (1) Alaskan oil and gas pipeline; (2) ICBM projects; and (3) underground nuclear testing in Nevada. He has also been active in real estate and agriculture, acquiring a major ownership interest in ranch grazing land and cattle operations in Texas, Arizona, and New Mexico covering hundreds of thousands of acres.
At the present time, he is active in both agricultural ventures and oil and gas operations. He is also a consultant for surrounding businesses in south Texas concerning the Railroad Commission of Texas and the Texas Natural Resource Conservation Commission. He incorporated Transcon Energy Corporation in Texas in 1988, and since that time he has incorporated several other companies and holds positions in these companies as President and/or CEO or Director.
Most of these companies have become subsidiaries of GTII. Any non-subsidiary entities of which Mr. Owens is a director are privately held.
Robert Early, Chief Financial Officer, received his Bachelor of Business Administration from Abilene Christian University in 1979, where he majored in Accounting and minored in Agricultural Business. He received his Certified Public Accountant certificate in Texas in 1981 and is a member of the Texas and American Societies of Public Accounting. Mr. Early worked for an independent oil Company for six years, then moved to a position as partner of the firm Ashley, Early & Folwell, P.C. in 1987. In 1991 he became the sole owner of the firm and changed the name to Robert Early & Company, P.C. Mr. Early has been doing tax work since 1983 and auditing since 1987. Mr. Early was previously the auditor for the Company through November 1997.
Shawna Owens, Secretary/Treasurer, attended Texas A&M University and has experience in management, accounting and public relations with different law firms. Ms. Owens worked in Washington, D.C. for Senator Pete Dominici of New Mexico and also worked with the Sergeant of Arms for the U. S. Senate Chambers. She is in charge of the day to day accounting and treasury functions and was instrumental in centralizing GTII's accounting. Ms. Owens also performs public relations duties for the Company. She has been employed by the Company since August 1995.
Howard B. Siegel, Director, received his Bachelor of Business Administration Degree from the University of Oklahoma in 1966. He received a Doctor of Jurisprudence Degree from St. Mary's University School of Law in 1969. Mr. Siegel was formerly an attorney for Superior Oil Company, a major oil and gas Company located in Houston. He previously served as Vice President, General Counsel, and a member of the Board of Directors of Tenneco Inc. Federal Credit Union. From July 1974 to August 1989, Mr. Siegel was employed as an attorney with the law firm of Bracewell & Patterson in Houston, Texas, and from that date until January 1991, he was employed by Hurt, Richardson, Garner, Todd & Cadenhead in Atlanta, Georgia. Mr. Siegel is currently a practicing attorney in Houston, Texas. Mr. Siegel has served in an advisory capacity to the Board of Directors of the Company since March 25, 1980.
Karen Lee, Director, graduated with high honors from Cisco Junior College. She administers the operation of the Company's offices in Springtown, Texas, does much of the research and writing for filing of Securities and Exchange Commission documents, and performs transfer agent duties and stockholder record keeping for the Company. She is a member of the Southwest Securities Transfer Association, Inc. Ms. Lee has been employed by the Company for the past 19 years.
Glenn Gagnon, Director, received a Bachelor of Science degree from Texas A&M University in 1994. From 1990-1994 he was employed by Gold Gyms Inc. and was responsible for marketing, sales and automation of new facilities. He has been employed by GTII since 1994 and is now in charge of public relations for the Company. He established the Dividend Reinvestment and Stock Purchase Plan for the Company and is currently assisting with filing of Securities and Exchange Commission documents.
David McFarlane, Director, received a BS degree in Optical Engineering from the University of Rochester in 1985, a MS degree in Nuclear Engineering from Texas A&M University in 1991, and a Ph.D. in Radiological Health Physics from Texas A&M in 1995. From 1987 to 1995 he was a research assistant and lecturer at Texas A&M. Since 1996 he has been employed by Bandag, Inc. in Muscatine, Iowa as a research engineer. His responsibilities include conducting research, managing research projects, and developing and managing budgets. Mr. McFarlane was appointed director of GTII in August of 1998 to serve until the next annual meeting of shareholders when he will be placed on the ballot to be voted on by the shareholders.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information as to the Company's chief executive officer for the past three fiscal years. There is no compensation to other officers or employees that would require disclosure under this item.
Name and Salary Cash Bonus Cash Principal Position Year Compensation Compensation - ---------------------- ---- ------------ ------------ Kenneth Owens 1997 $ 5,000 $ -0- Chairman and President 1998 $11,000 $19,000 1999 $17,500 $ 6,000
No other officers, directors, or employees received compensation that would require disclosure herein.
Director Compensation
The Board has approved a $1,500 director fee for the past three years. The fee was paid to all directors for 1997 and 1998. As of December 31, 1999, the 1999 fee had not yet been paid.
Compensation Committee Report
The Board of Directors delegates responsibility for executive compensation to the Compensation Committee which is presently comprised of three of the directors on the Board. This committee reviews the salaries of each of the officers of the Company, and recommends the directors' fees for the year. The Committee recommended to the Board that Kenneth Owens, President, received a salary of $17,500 for 1999, and that directors' fees for 1999 be set at $1,500 cash per director.
In September 1998, the Company filed an S-8 registration statement registering 200,000 common shares for a Stock Compensation Plan recommended by the committee and adopted by the Board. The Plan allows the directors to issue common stock as compensation for services provided by employees, officers, directors, agents, consultants, and advisors. The Plan will allow these service providers to acquire proprietary interests in the Company in exchange for their services. These interests would provide incentives for high levels of service. No shares were issued under the Plan during 1998 or 1999.
Performance Graph - Set forth below is a line graph comparing the yearly percentage change in the cumulative total shareholder return on the Corporation's Common Stock against the cumulative total return of the NASDAQ Stock Market and the NASDAQ Non-Financial Stocks. The graph assumes that the value of the investment in the Corporation's Common Stock and each index was $100 at December 31, 1994. GTII's numbers reflect a 1-for-2.5 reverse stock split in 1995, and a 1-for-3.5 reverse stock split in 1997.
Comparison of Five-Year Cumulative Total Return
Fiscal Years Ended December 31 1994 1995 1996 1997 1998 1999 ------ ------ ------ ------ ------ ------ GTII Stock 100.00 125.88 99.75 132.00 88.00 22.18
NASDAQ Stock 100.00 141.33 173.89 213.07 300.18 545.67
Non-Financial Stocks 100.00 139.26 169.16 198.09 290.28 562.31
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the Company's common stock as of March 31, 2000 with respect to (1) each person known by the Company to own beneficially more than 5% of the Company's common stock, (2) each of the Company's directors, and (3) all directors and officers of the Company as a group. The title of class is common stock, $.001 par value.
NOTE: Some of the following shareholders may still be holding preferred stock that has not been converted back to common. In accordance with the Preferred Stock Plans, the preferred shares have the same voting rights as if they were common shares (1 preferred share is equivalent to 10 common shares). Therefore, the shares are listed below as common shares, with a footnote following to explain the breakdown of the number of common and the number of preferred each person holds.
# of Shares Name and Beneficially Percent of Address of Stockholder Owned Class - --------------------------- ------------ ---------- Kenneth Owens 437,822 (1) 37.16% 6314 Aspen Cove Court Sugar Land, Texas 77479
Howard B. Siegel 100 0.01% P. O. Box 940572 Houston, Texas 77094-1572
Karen Lee 504 0.04% 104 Fossil Court Springtown, Texas 76082
Glenn Gagnon 865 0.07% 5311 Palmetto, Apt. A Houston, TX 77081
David McFarlane 8 0.00% 6500 49th St. S. Muscatine, IA 52761
Shawna Owens 1,710 0.15% P. O. Box 17029 Sugar Land, Texas 77496
Robert Early 15 0.00% 2208 Ivanhoe Abilene, Texas 79605
All directors and officers as a 441,024 (2) 37.43% group (7 persons)
(1) Common - 38,662; Preferred B - 39,916 (2) Common - 41,864; Preferred B - 39,916
Note: The stockholders identified in this table have sole voting and investment power with respect to the shares beneficially owned by them.
Changes in Control
No changes in control occurred during 1999. The Company is currently having discussions with Whitemark Homes, Inc. of Orlando, Florida, regarding an acquisition of that Company (see Item 7. Management's Discussion and Analysis for more information). If this transaction is consummated a change in control will occur, and will be reported at that time.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1998, the Company relocated its corporate office to Sugar Land, Texas. The Company had been leasing its offices in Albuquerque, New Mexico from its President, and decided to continue this relationship in Sugar Land. The Company's President agreed to purchase facilities which would serve adequately as the Company's offices. The Company entered into a ten-year lease agreement with the President for office space. As part of this agreement, the Company advanced $127,428 to him for acquisition costs. Of this amount, $30,000 is to be repaid in early 1999 and the balance is to be amortized over the ten-year lease period.
During March of 1999, the Company entered into a contract to purchase a one-half interest in the 1,062 acre Wright property. This property contained ongoing sand and gravel excavation operations, and the Company felt that this would enhance its sand and gravel operations already being conducted on the Altair property. The President of the Company purchased the other one-half interest. The Company's interest cost $400,000, with $300,000 of this consisting of a promissory note. Unfortunately, because of a shortage of cash due to the major customer's bankruptcy discussed previously, the Company was unable to pay for its one-half interest in the Wright property. Therefore, the Company decided to back out of the deal and transfer its interest and liability to Kenneth Owens. GTII had paid a total of $96,637 for the property and had received $95,165 in revenues, so Mr. Owens paid GTII $1,472 to GTII so that the Company could get back its total investment.
During October 1999 the Company agreed to sell its salt water disposal operations based in Zapata, Texas to the brother of the President of the Company for a $225,000 note. In addition, the agreement calls for GTII to received $500,000 in the form of a two cents per barrel per month override. The decision for this sale culminated from a serious review of their present contribution to the profits of the Company and their future potential. The decision was brought on by the resignation of the on-site manager and difficulty in finding a replacement. Revenues were not expected to recover significantly. Management considered the possibility of shutting the facilities down and waiting for better operating conditions, but regulatory requirements would cause the Company to have to incur costs to plug the unused wells within a specified time period. These costs would have been significant. Therefore, the decision was made to sell the facilities, so that any such costs would be transferred to the buyer.
Several of the officers and directors of the Company have invested in the oil and gas business, either directly or through entities in which they have an interest. Certain of these interests could directly compete with the interests of the Company. Although the Company is not aware of any present conflicts of interest, such present or future activities on the part of the officers and directors could directly compete with the interests of the Company. If the Company should enter into future transactions with its officers, directors or other related parties, the terms of any such transaction will be as favorable to the Company as those which could be obtained from an unrelated party in an arm's-length transaction.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report or are incorporated by reference:
Financial Statements - The following information has been included in response to Item 8 above.
- Report of Independent Certified Public Accountants - Consolidated Balance Sheets - Consolidated Statements of Operations - Consolidated Statements of Stockholders' Equity - Consolidated Statements of Cash Flows - Notes to Consolidated Financial Statements
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1999.
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.
GOLDEN TRIANGLE INDUSTRIES, INC.
Date: April 27, 2000 By: /s/ KENNETH OWENS Kenneth Owens President
Pursuant to the requirements 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.
Signatures Title Date
/s/ KENNETH OWENS Chairman of the Board April 27, 2000 Kenneth Owens and President
/s/ ROBERT EARLY Chief Financial April 27, 2000 Robert Early Officer
/s/ HOWARD B. SIEGEL Director April 27, 2000 Howard B. Siegel
/s/ KAREN LEE Director April 27, 2000 Karen Lee
/s/ GLENN GAGNON Director April 27, 2000 Glenn Gagnon
/s/ DAVID MCFARLANE Director April 27, 2000 David McFarlane
GOLDEN TRIANGLE INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants . . . . .
Consolidated Balance Sheets as of December 31, 1998 and 1997 . .
Consolidated Statements of Operations for the fiscal years ended December 31, 1998, 1997 and 1996 . . . . . . . .
Consolidated Statements of Stockholders' Equity for the fiscal years ended December 31, 1998, 1997 and 1996 . . . .
Consolidated Statements of Cash Flows for the fiscal years ended December 31, 1998, 1997 and 1996 . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . .
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Golden Triangle Industries, Inc.
We have audited the accompanying consolidated balance sheet of Golden Triangle Industries, Inc. (a Colorado corporation) and subsidiaries as of December 31, 1999, and we were engaged to audit the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
Except as discussed in the following paragraphs, we conducted our audit 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 audit provides a reasonable basis for our opinion.
The Company's accounting records do not include reserve analyses for all of its oil and gas properties and a formal engineering analysis of its sand and gravel inventories. In addition, sufficient evidential matter does not support estimates of the amount of uncollectible accounts receivable as of December 31, 1998. We have not satisfied ourselves by means of other auditing procedures about the valuation of the Company's oil and gas properties, inventories and accounts receivable as of December 31, 1998. The valuation of oil and gas properties, inventories and accounts receivable at December 31, 1998, materially affect the determination of the results of operations and cash flows for the year ended December 31, 1999. Accordingly, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on the accompanying consolidated statements of operations, stockholders' equity, and cash flows for the year ended December 31, 1999, or on the consistency of application of accounting principles with the preceding year.
Because of the inadequacy of accounting records, we were unable to form an opinion regarding the amounts at which oil and gas properties and inventories are recorded in the accompanying balance sheet at December 31, 1999 (stated at $1,605,666) or the amount of depletion expense for the year then ended (stated at $53,220).
In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary had accounting records concerning oil and gas properties and inventories been adequate, the accompanying consolidated balance sheet referred to in the first paragraph presents fairly, in all material respects, the financial position of Golden Triangle Industries, Inc. and subsidiaries as of December 31, 1999, in conformity with generally accepted accounting principles.
/s/PRICHER AND COMPANY Pricher and Company
Orlando, Florida April 7, 2000
GOLDEN TRIANGLE INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS December 31 1999 1998 ---------- ---------- ASSETS CURRENT ASSETS Cash $ 66,199 $ 160,204 Accounts receivable - trade 380,928 1,307,042 Accounts receivable - related parties 213,636 27,247 Accounts and notes receivable - other 10,060 33,977 Inventories 238,930 199,296 Investments - available for sale 270,587 47,694 Deferred income taxes 557,288 - Prepaid expenses 15,000 13,500 ---------- ---------- Total Current Assets 1,752,628 1,788,960 ---------- ----------
FIXED ASSETS Oil and gas properties (full cost method), net 1,605,666 1,628,496 Property and equipment, net 2,250,695 3,342,789 ---------- ---------- Total Fixed Assets 3,856,361 4,971,285 ---------- ----------
OTHER ASSETS Accounts and notes receivable - non-current 328,024 305,588 Accounts receivable - officers & related parties - non-current 302,295 185,209 Deferred income taxes 126,306 38,000 Other 16,152 20,632 ---------- ---------- Total Other Assets 772,777 549,429 ---------- ----------
TOTAL ASSETS $6,381,766 $7,309,674 ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES Accounts payable $ 67,827 $ 50,535 Accrued expenses 11,050 73,239 Borrowings under lines of credit 266,200 171,200 ---------- ---------- Total Current Liabilities 345,077 294,974 ---------- ----------
STOCKHOLDERS' EQUITY Preferred, $0.10 par (1,000,000 authorized) Class A 106 337 Class B 4,044 5,294 Common, $.001 par (100,000,000 authorized) 761 605 Additional paid-in capital 7,547,562 7,514,575 Accumulated other comprehensive income/(loss): Unrealized gain/(loss) on securities available for sale 55,676 (72,260) Accumulated deficit (1,571,460) (433,851) ---------- ---------- Net Stockholders' Equity 6,036,689 7,014,700 ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,381,766 $7,309,674 ========== ==========
See accompanying notes to consolidated financial statements.
GOLDEN TRIANGLE INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31 1999 1998 1997 ---------- ---------- ---------- REVENUES Oil field services, rentals and disposals $ 732,557 $2,139,843 $2,003,993 Oil and gas production 225,738 258,725 448,359 Oil reclamation, sand and water sales 1,378,867 705,624 - ---------- ---------- ---------- Total Revenues 2,337,162 3,104,192 2,452,352
COSTS OF REVENUES 1,757,934 1,607,921 964,104 ---------- ---------- ----------
GROSS PROFIT 579,228 1,496,271 1,488,248
SELLING AND ADMINISTRATIVE EXPENSES 1,016,389 1,104,075 849,255 ---------- ---------- ----------
INCOME/(LOSS) FROM OPERATIONS (437,161) 392,196 638,993 ---------- ---------- ----------
OTHER INCOME/(EXPENSES) Interest and dividend income 13,702 31,558 43,331 Gain on sale of securities - 62,436 19,764 Other income 46,291 26,613 26,582 Gain/(loss) on sale of assets (522,975) 1,797 2,781 Stock transfer fees 6,900 10,199 7,965 Interest expense (25,781) (13,317) (518) ---------- ---------- ---------- Net Other Income/(Expenses) (481,863) 119,286 99,905 ---------- ---------- ----------
INCOME/(LOSS) BEFORE INCOME TAXES (919,024) 511,482 738,898
INCOME TAX BENEFIT/(EXPENSE) 362,809 (245,000) (300,114) ---------- ---------- ----------
NET INCOME/(LOSS) $(556,215) $ 266,482 $ 438,784 ========== ========== ==========
Earnings/(Loss) per Common Share: Basic $ (0.89) $ 0.45 $ 0.46 ========== ========== ========== Diluted $ (0.89) $ 0.43 $ 0.46 ========== ========== ==========
Weighted Average Shares Outstanding: Basic 627,366 591,392 552,896 Diluted 627,366 625,102 552,896
See accompanying notes to consolidated financial statements.
GOLDEN TRIANGLE INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
GOLDEN TRIANGLE INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Increase/(Decrease) in Cash and Cash Equivalents
Year Ended December 31 1999 1998 1997 ---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES Net income/(loss) $ (556,215) $ 266,482 $ 438,784 Adjustments to reconcile net income/(loss) to net cash from operating activities: Depreciation, depletion and amortization 419,332 486,367 422,898 (Gain)/loss on sales of assets & securities 522,975 (64,233) (22,545) Stock issued for services - 185 2,534 Deferred income taxes (349,146) 146,000 187,000 Accounts receivable 4,887 (542,293) (198,930) Inventories (39,634) 331 373 Prepaid expenses and other (1,500) 11,469 (42,647) Restricted cash - - 100,954 Accounts payable 17,292 (26,051) 29,921 Accrued expenses (62,189) 55,093 (50,241) ---------- ---------- ---------- NET CASH PROVIDED/(USED) BY OPERATING ACTIVITIES (44,198) 333,350 868,101 ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (135,777) (474,005) (1,644,154) Purchase of inventory on Altair property - - (200,000) Purchase of marketable securities (50,551) (106,654) (56,971) Loan payments received 1,480 - 87,389 Investment in affiliates (4,212) - - Proceeds from sale of securities - 164,152 62,753 Proceeds from sale of assets 63,500 14,141 467,534 ---------- ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES (125,560) (402,366) (1,283,449) ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuing common stock 61,031 152,749 303,085 Purchase of common stock (29,371) - (121,989) Dividends on preferred shares (1,020) (1,012) (41,193) Advances to related parties (180,233) (184,675) (101,428) Repayments from related parties 130,346 71,310 98,000 Proceeds from notes payable 95,000 171,200 176,000 Repayment of notes payable - (76,000) (100,000) ---------- ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES 75,753 133,572 212,475 ---------- ---------- ---------- NET INCREASE/(DECREASE) IN CASH (94,005) 64,556 (202,873)
CASH - Beginning of Year 160,204 95,648 298,521 ---------- ---------- ---------- CASH - END OF YEAR $ 66,199 $ 160,204 $ 95,648 ========== ========== ==========
See accompanying notes to consolidated financial statements.
GOLDEN TRIANGLE INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Increase/(Decrease) in Cash and Cash Equivalents (Continued)
Year Ended December 31 1999 1998 1997 ---------- ---------- ----------
Supplemental Disclosures
Cash payments for: Interest $ 25,781 $ 13,317 $ 518 Income taxes (domestic and foreign) 57,444 47,356 92,229
Non-Cash Investing and Financing Stock issued to related party for 50% interest in Zapata office facility - - 30,106 Services provided as proceeds on sale of Amando facility - - 269,000 Dividends paid with common stock - - 143,421 Purchase of trucks with common stock 11,000 11,000 - Preferred stock converted into common stock 96 96 - Sale of subsidiaries and salt water disposal facilities to related party in exchange for a note receivable 225,000 - - Transfer of 50% interest in Zapata office facility to related party for a receivable 28,588 - -
See accompanying notes to consolidated financial statements.
GOLDEN TRIANGLE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
GENERAL INFORMATION
Golden Triangle Industries, Inc. (the Company) was incorporated under the name Golden Triangle Royalty & Oil, Inc. on July 30, 1975 under the laws of the State of Colorado. It is primarily engaged in the business of providing oil field support services, including equipment rentals and disposition of oil field salt water. Oil field services consist of heavy equipment work such as bulldozing, dirt loading, water and waste hauling, and various other services. Salt water is produced along with oil and gas and is required to be re-injected back into underground formations or otherwise disposed of as a regulated waste product. The Company had one disposal facility in operation at the end of 1999 after having sold five facilities as discussed at Note 6. During 1997, the Company acquired land near Houston, Texas and has developed its significant oil field services and rentals business associated with that property.
The Company also owns passive (primarily royalty) interests in oil and gas production. The passive oil and gas interests consist of U.S. and Australian properties. Australia provided approximately 75% of gross oil and gas revenues during 1999. The bulk of the oil and gas asset base is located in Australia.
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of Golden Triangle Industries, Inc. and its subsidiaries. All significant inter-Company balances and transactions have been eliminated. The Company's subsidiaries at December 31, 1999 are Golden Triangle Coal & Mining, Inc., Golden Triangle Oil & Minerals, Inc. of Australia, Houston Oil & Energy, Inc., Jim Wells Salt Water Disposal, Inc., County Line Salt Water Disposal Inc., and Apache Ranch, Inc. Golden Triangle Coal & Mining, Inc., Houston Oil & Energy, Inc., and Golden Triangle Oil & Minerals, Inc. of Australia are inactive. For purposes of these notes, these entities are collectively referred to as "the Company" or "GTII." The activities of OCR Investments, Inc. (OCR) and Transcon Energy Corporation (Transcon) are consolidated through October 31, 1999 because they were sold effective November 1, 1999 as discussed at Note 6.
MARKETABLE EQUITY SECURITIES. The Company's securities are classified as available for sale. As such, they are reported at fair value with unrealized gains and losses, net of related deferred income taxes, included in shareholders' equity as an element of accumulated other comprehensive income/(loss). Realized securities gains or losses are reported in current year earnings. The cost of securities sold is based on the specific identification method.
INVENTORIES. Inventories are stated at the lower of cost determined on a first in/first out (FIFO) basis or market. The Company's inventory at December 31, 1999 and 1998 consisted of stockpiled sand and gravel and an inventory of reclaimed oil in tanks at the reclamation plant. These products are considered raw materials and are carried at cost.
PROPERTY AND EQUIPMENT. The Company follows the full cost method of accounting for oil and gas producing activities and, accordingly, capitalizes all costs incurred in the acquisition of oil and gas properties. The Company's oil and gas properties consist primarily of overriding royalty interests which do not bear any costs of development or exploration. The Company has not participated in the exploration and development of proved oil and gas properties during any period presented in these financial statements. Capitalized costs are subject to a "ceiling test," which basically limits such costs to the aggregate of the "estimated present value," discounted at a 10% interest rate of future net revenues from proved reserves, based on current economic and operating conditions, plus the lower of cost or fair market value of unproved properties. Costs in excess of the ceiling test are adjusted against income. Sales or abandonments of properties are accounted for as adjustments of overall capitalized costs with no gain or loss recognized.
Costs are recorded in cost centers on a country-by-country basis. Amortization of the limited amount of working interests owned is computed on a composite unit-of-production method based on estimated proved reserves attributable to the respective cost center. Amortization of royalty/overriding interests is calculated at an average rate of $3.98 per equivalent barrel during 1999 and at 22% of gross revenue in prior years. All costs associated with oil and gas properties are currently included in the base for computation and amortization. Such costs include only acquisition costs since there are no exploration and development costs.
Depreciation of property and equipment other than oil and gas properties is computed on the straight-line method over the estimated useful lives of the assets. Useful lives are 10 years for tanks and ramps, 7 years for equipment, and 5 years for electronic equipment. Depreciation totaled $366,112, $424,067 and $320,834 for 1999, 1998, and 1997, respectively.
Gains or losses on sales of property and equipment other than oil and gas properties are recognized as part of operations. Expenditures for renewals and improvements are capitalized, while expenditures for maintenance and repairs are charged to operations as incurred.
INTANGIBLE ASSETS AND AMORTIZATION. Intangible assets consist of disposal well leasehold, goodwill, and water rights. Goodwill and water rights are being amortized on a 10-year straight line basis. Well leasehold is being amortized on a 15-year straight line basis. The amortization expense for these items is included with depreciation and depletion for presentation purposes. The bulk of these assets was sold effective November 1, 1999 as discussed at Note 6.
INCOME TAXES. Deferred tax liabilities and assets result from temporary differences between the financial statement and income tax bases of assets and liabilities. The Company records and adjusts any deferred tax asset valuation based on judgments as to future realization of the deferred tax benefits supported by demonstrated trends in the Company's operating results.
EARNINGS PER SHARE. Accounting rules provide for the calculation of "Basic" and "Diluted" earnings per share. Basic earnings per common share excludes dilutive securities and is computed by dividing net income/(loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per common share reflects the potential dilution of securities that could share in the earnings of the entity on an as if converted basis. This is done by dividing net income/(loss) available to common shareholders, as adjusted if necessary, by the weighted average number of common shares outstanding plus potential dilutive securities.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents for purposes of preparing its Statement of Cash Flows. The Company had no cash equivalents at December 31, 1999 or 1998.
CASH BALANCES. The Company maintains multiple bank accounts at several banks through the various consolidated entities. Funds deposited at the banks are insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000 for each unique combination of entity and bank. Cash balances exceeded federally insured limits occasionally throughout the year.
FAIR VALUE OF FINANCIAL INSTRUMENTS. Unless otherwise specified, the Company believes the book value of the financial instruments approximates their fair value due to their short maturities.
CONCENTRATIONS OF CREDIT RISK. The Company provides its services and rentals to the oil and gas industry and does not require collateral on receivable balances which result primarily from oil field support services. Exposure to credit risk is affected by conditions within the oil and gas industry. Reductions in oil and gas prices could significantly reduce the level of activity for both salt water disposal and drilling support service revenues. The Company's salt water disposal services are primarily located in the Laredo/Zapata, Texas area, which is a significant gas producing area. Other services and rentals are based out of the Altair property west of Houston, Texas. The Company provides a large portion of its services to one major customer as discussed at Note 13. Until 1999, the Company had never experienced significant credit losses. See Notes 2 and 3.
ENVIRONMENTAL ISSUES. The Company's salt water disposal business is in a regulated environmental industry and is operated under permits from the Texas Railroad Commission and the Texas Natural Resource Conservation Commission. Failure to comply with regulations could result in interruption or termination of the operations. There are minor cleanup requirements in the normal course of operations which are expensed as incurred. Additionally, upon cessation of use, the disposal wells will require plugging and site cleanup. Costs of voluntary termination and remediation have been estimated to not be material and are expected to be recorded as incurred. There were no cleanup costs accruals necessary at December 31, 1999. In addition, with the sale of the bulk of the facilities effective November 1, 1999 (See Note 6), the potential for future plugging and cleanup costs have been reduced.
LONG-TERM ASSETS. The Company applies SFAS No. 121, "Accounting for Impairment of Long-Lived Assets." Under SFAS 121, long-lived assets and certain intangibles are reported at the lower of cost or estimated recoverable amounts.
REVENUE RECOGNITION. The Company records sales and related profits for its operations as services and rentals are provided to customers. Oil and gas revenue is recorded in the period of production.
COMPREHENSIVE INCOME. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. The Company has reported other comprehensive income/(loss) from unrealized gains/(losses) on marketable securities as follows:
Year ended December 31, 1999 1998 1997 --------- ---------- --------- Net income/(loss) $(556,215) $ 266,482 $ 438,784 Change in comprehensive income/(loss) 127,936 (40,823) 16,781 --------- ---------- --------- Comprehensive income/(loss) $(428,279) $ 225,659 $ 455,565 ========= ========== =========
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). This statement standardized the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, requiring that an entity recognize those items as assets or liabilities in the statement of financial position and measure them at fair value. The statement generally provides for matching the timing of gain or loss recognition on the hedging instrument with the recognition of (a) the changes in fair value of the hedged assets or liabilities that are attributable to the hedged risk or, (b) the earnings effect of the hedged transaction. The statement is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999, with earlier application encouraged, and will be applied retroactively to financial statements of prior periods. Adoption of SFAS 133 is expected to have no effect on the Company's financial statements.
USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, the 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.
RECLASSIFICATIONS. Certain items included in prior years financial statements have been reclassified to conform to current year presentation.
NOTE 2: PRIOR PERIOD ADJUSTMENT
On April 19, 1999, the Company's largest customer, TransTexas Gas Corporation filed for protection under Chapter 11 of the Federal Bankruptcy Act and the court approved the bankruptcy plan in March 2000. Under the terms of the plan, the Company and other unsecured creditors will recover approximately 20% of their claims in cash plus certain equity securities in TransTexas, which currently have no determinable market value. At December 31, 1998 and as of the date of the bankruptcy filing, the Company had outstanding unsecured receivables from TransTexas of approximately $1,030,000 which were subject to compromise plus other receivables of $95,000 for which no recovery is expected. Accordingly, the Company expects to suffer a loss of $921,228 related to these receivables.
As of December 31, 1998, the Company had not established any allowance for doubtful accounts despite the fact that TransTexas' interim financial statements, which were available to the Company, indicated that TransTexas was suffering significant operating losses and negative cash flows from operations and was insolvent. TransTexas had also disclosed that it was forced to sell operating assets to meet the demands of its secured and unsecured creditors. This information indicated that an allowance for a significant portion of the TransTexas receivables was necessary to properly value these receivables at December 31, 1998. The lack of any allowance under these circumstances required a restatement of the Company's financial statements to recognize the loss in 1998.
Accordingly, stockholders' equity as of December 31, 1998, as previously reported, has been decreased by $580,374 to give effect to a prior period adjustment (receivable adjustment of $921,228 less income tax benefit of $340,854) reflecting the write-down of the receivable. The 1998 financial statements presented herein for comparative purposes do not reflect the prior period adjustment.
NOTE 3: ACCOUNTS AND NOTES RECEIVABLE
Accounts Receivable -- At December 31, 1999 and 1998, the Company has receivables from extension of credit to customers for various services, sales, and salt water disposal and accrued receivables for oil and gas production as presented below. Collection of the accrued Australian production generally occurs during the quarter following the quarter of production. Collection of accrued domestic production generally occurs during the month following production. Collection of other receivables is discussed below. The cost basis of the following receivables is believed to approximate their fair values.
1999 1998 ---------- ----------
Oil field services $1,254,659 $1,233,845 Domestic oil and gas production - 4,369 Australian oil production 41,320 34,899 Oil reclamation, sand and gravel sales 70,785 33,929 ---------- ---------- Total trade receivables 1,366,764 1,307,042 Less allowance for bad debts Prior period (921,228) - Current period (64,608) - ---------- ---------- Net trade receivables $ 380,928 $1,307,042 ========== ==========
The salt water disposal and oil field services businesses include one customer that accounted for more than 10% of total revenues during 1999. This customer was TransTexas Gas Corporation. See Note 13 for further discussion. In addition, TransTexas' receivable balances were approximately 34% and 78% of the Company's total accounts receivable balances at December 31, 1999 and 1998. The allowance for bad debts is primarily established against TransTexas receivables as discussed at Note 2.
All of the reclaimed oil and sand and gravel receivables are from Superior Crude Gathering Corporation and Mike Arnold Trucking, Inc., respectively.
Allowance for uncollectible accounts -- In April 1999, TransTexas filed for bankruptcy protection in order to reorganize its debt and equity positions. At March 31, 1999, TransTexas owed the Company $1,114,427. In March 2000, final approval of the reorganization plan was achieved. The Company is to collect 20% of its receivable in cash and the remainder in the form of a new class of TransTexas preferred stock. As discussed at Note 2, the Company has recorded an adjustment to its balances at December 31, 1998 of 80% of the outstanding receivable from TransTexas on that date. In addition, $64,608 has been recorded as an allowance for receivables incurred during the first quarter of 1999. The allowances have been established without regard to any value for the preferred shares to be received because no value has been established for those shares and any value attributed would be arbitrary at this time.
Notes and Other Receivables -- The Company has notes and other receivable as described below.
1999 1998 --------- --------- Current portion: Land sales $ 8,636 $ 8,636 Southwest Tire Processors, Inc. - 6,910 Accrued interest on these notes 1,424 18,431 --------- --------- Total current portion 10,060 33,977 --------- --------- Long-term portion: Land sales 99,997 102,902 Accrued interest 18,431 - Southwest Tire Processors, Inc. 209,596 202,686 --------- --------- Total long-term portion 328,024 305,588 --------- ---------
Total Notes Receivable $ 338,084 $ 339,565 ========= =========
The sale of a 40-acre tract of the ranch land in 1995 and an 80-acre tract in 1996 resulted in notes receivable secured by warranty deeds to the tracts. The 1995 note bears interest at 10% per annum, is payable in monthly installments of $500 including interest, and is due to pay off in July 2009. The 1996 note bears interest at 8.6% per annum, requires quarterly installments of approximately $2,000 including interest, and is due to pay off in July 2017. These land note balances total $108,633 and $110,113 at December 31, 1999 and 1998, respectively.
In October 1996, the Company converted an account receivable from Southwest Tire Processors, Inc. (SWTP) for unpaid rent on the tire shredder to a note. This note bears interest at 1% per month and calls for monthly payments of $3,000 plus interest and is carried on the books at $209,596 at both December 31, 1999 and 1998. It is secured by a lien against the tire shredder and all of the auxiliary support equipment owned by SWTP. SWTP has not made the payments required under this note during 1999 or 1997. The Company has agreed to a reduction in the monthly payment and has, essentially, removed the due date for the maturity of the note.
See Note 9 for a discussion of related party receivables.
NOTE 4: INVESTMENTS
The following table illustrates the current values, costs and unrealized gains and losses for the securities held.
December 31, 1999 December 31, 1998 -------------------------- --------------------------- Market Unrealized Market Unrealized Cost Value Gain Cost Value Loss -------- -------- ------- -------- ------- --------- Marketable equity securities available for sale $182,211 $270,587 $88,376 $131,660 $47,694 $(83,966)
The following is information regarding trading activity in securities. Cost is determined by actual cost on a first-in first-out basis.
Proceeds Gains from Sales and (Losses) ---------- ---------- 1999 $ - $ - 1998 164,152 62,436
NOTE 5: OIL AND GAS PROPERTIES
The following table presents costs of oil and gas properties at December 31, 1999 and 1998.
1999 1998 ------------ ------------ Proven $ 2,017,602 $ 2,017,602 Unproven 448,877 418,487 ------------ ------------ 2,466,479 2,436,089 Accumulated depletion (860,813) (807,593) ------------ ------------ Net Oil and Gas Properties $ 1,605,666 $ 1,628,496 ============ ============
Depletion charged against income on a per unit basis is presented below. Costs of both working and royalty interests are amortized based on equivalent barrels of oil produced during 1999 . During 1998 and prior, costs of royalty interests were amortized using the percentage method of depletion under which depletion was recorded at 22% of gross revenue.
1999 1998 1997 ------ ------ ------ United States Working interests ($/bbl.) $ 4.23 $13.63 $15.53 Royalty interests ($/bbl. and $/$ revenue) 3.50 .22 .22 Canadian ($/bbl. and $/$ revenue) 8.00 .22 .22 Australian royalties ($/bbl. and $/$ revenue) 4.00 .22 .22
The Company has historically acquired overriding royalty interests in producing and non-producing Australian concessions as availability and negotiations provide opportunity. As an overriding royalty owner, the Company does not have standing to control development activities in these areas. No estimate can be made as to when development may begin on the Company's non-producing properties. Some concessions from prior years have not been developed and are not producing revenues. Costs of non-producing properties totaled $448,875 and $418,487 at December 31, 1999 and 1998.
NOTE 6: PROPERTY AND EQUIPMENT
The following table presents costs of property and equipment at December 31, 1999 and 1998.
1999 1998 ----------- ----------- Equipment and vehicles $ 1,281,303 $ 2,990,976 Well leasehold and water rights - 200,000 Buildings 293,954 312,606 Office furniture and equipment 79,023 101,431 Land 1,023,251 1,063,251 Accumulated depreciation and amortization (426,836) (1,325,475) ----------- -----------
Net Property and Equipment $ 2,250,695 $ 3,342,789 =========== ===========
Effective November 1, 1999, the Company sold all of its leased salt water disposal facilities in the Zapata area to the brother of the President (discussed at Note 9). The Company retained one facility which it owned, however, without a manager, the facility is not currently in operations. This sale resulted in the disposition of net assets of $759,255 in exchange for a note receivable of $225,000, resulting in a net loss of $534,255. The decision to sell came after the manager resigned and efforts to find a replacement proved fruitless. Consideration was given to simply shutting the facilities down. However, shutting down would require the incurrence of an estimated $30,000 to $40,000 per facility in well plugging and site cleanup costs.
NOTE 7: INCOME TAXES
The domestic and foreign source components of income/(loss) before taxes are as follows:
1999 1998 1997 ---------- --------- --------- Domestic sources $ (996,918) $ 446,076 $ 639,697 Foreign sources 77,894 65,406 99,201 ---------- --------- --------- $ (919,024) $ 511,482 $ 738,898 ========== ========= =========
The provisions for income tax expense/(benefit) are as follows:
1999 1998 1997 ---------- --------- --------- Current Federal $ - $ 53,000 $ 31,270 State - 13,000 10,948 Australian 35,116 33,000 70,896 ---------- --------- --------- 35,116 99,000 113,114 ---------- --------- --------- Deferred Federal (356,874) 132,000 172,000 State (41,051) 14,000 15,000 ---------- --------- --------- (397,925) 146,000 187,000 ---------- --------- --------- $ (362,809) $ 245,000 $ 300,114 ========== ========= =========
The tax effects of temporary differences that give rise to deferred tax assets and (liabilities) are as follows:
1999 1998 --------- ----------- Fixed assets $ 30,600 $ (79,000) Equity investments 141,300 130,000 Notes receivable (16,400) (17,000) Unrealized gains on marketable securities (44,306) - Allowance for uncollectible accounts 364,800 - Benefit of operating loss carry forward 192,500 - Tax credits 15,100 4,000 --------- ----------- Net Deferred Tax Asset $ 683,594 $ 38,000 ========= ===========
Australian income taxes are based on 30% of distributable income from oil production and 10% of interest earned. These taxes are withheld by the Australian payer. For domestic tax purposes, the Company has the option of deducting these foreign taxes or taking them as a credit, whichever provides the Company with the most benefit.
The following table presents the significant differences between federal income taxes based on book income before taxes and the Company's estimated federal income tax expense.
1999 1998 1997 -------- ----------- ---------- Federal income taxes computed at statutory rate $(340,029) $ 174,000 $ 251,226 Foreign taxes, net of federal benefit 23,200 22,000 46,791 State taxes, net of federal benefit (23,939) 8,000 7,226 Other (22,041) 41,000 (5,129) --------- ----------- ---------- Taxes on income $(362,809) $ 245,000 $ 300,114 ========= =========== ==========
NOTE 8: LEASES
The Company's salt water disposal facilities are located on oil and gas leases in conjunction with surface leases for the unloading facilities. These costs are included in costs of revenues in the statement of operations. There were two noncancellable leases for salt water disposal facilities. These had required payments of $12,000 in 1999. Each of these leases had options for additional terms, which if exercised would expand the amounts reportable as noncancellable commitments.
Lease cost for the Company's offices totaled $29,175, $11,461 and $11,343 for 1999, 1998 and 1997. These lease arrangements, essentially all with related parties, did not require minimum lease payments or have fixed terms through most of 1998. However, in October 1998, when the Company moved its corporate office from Albuquerque to Sugar Land, Texas, the Company entered into a lease agreement with its President for office space over a ten-year term. The following table sets out the minimum requirements for the next five years:
Year Ended Amount ---------- --------- 2000 $ 25,200 2001 25,200 2002 25,200 2003 25,200 2004 25,200 Thereafter 100,800 --------- Total minimum future rentals $ 226,800 =========
NOTE 9: TRANSACTIONS WITH RELATED PARTIES
The Company has a loan outstanding to its President of $65,000. Management believes this loan is valid and collectible.
During 1998, the Company advanced $67,750 in two transactions to its President for less than 90 days each. These amounts were repaid during the year. When the Company relocated its corporate office to Sugar Land, Texas, it entered into a ten-year lease agreement with the Company's President for office space. As part of this agreement, the Company advanced $127,428 to the President for acquisition costs. Of this amount, $30,000 was repaid in 1999 and the balance is being amortized over a ten-year lease period.
As discussed at Note 6, Horace Owens, the brother of the Company's president, purchased five of the Company's seven salt water disposal facilities (all in the Zapata area) for a $225,000 note. Subsidiaries Transcon Energy Corporation and OCR Investments, Inc. were included in the transaction along with the disposal facilities. No other bids were received prior to the sale to Mr. Owens. The note is non interest bearing and calls for 22 monthly payments of $10,000 and a final payment of $5,000. The terms of the agreement also call for the payment of two cents per barrel per month until $500,000 is paid. No value has been recorded for this contingent receivable.
In addition, as a result of the sale of the Zapata area operations, the Company transferred its half of a house in Zapata used as the area's office to the president of the Company (who owned of the other half) who is to reimburse the Company for its depreciated cost in the property.
In May 1999, the Company entered into a transaction to acquire one-half interest in another property in Colorado County Texas in conjunction with its president. The transaction called for the Company to pay $100,000 down and incur a note payable of $300,000 for its half interest. The Company's president loaned the Company $65,000 of the initial down payment. In November 1999, due to the Company's decreased operations and upcoming debt payment on this property, it was decided that the Company would back out of its interest in this property and the Company's president would assume the asset and liability. The Company was reimbursed the final piece of its cash outflow in January 2000.
NOTE 10: STOCK TRANSACTIONS
In August 1996, the Company made an offer to exchange preferred shares for common shares on a one for ten basis. The preferred shares offered consisted of Class A and Class B. Common shares totaling 2,001,710 were exchanged for 11,586 Class A preferred shares and 188,585 Class B preferred shares. (These share amounts have not been adjusted for the effect of the 1 for 3.5 reverse split in 1997.)
Both classes of preferred stock retain the same number of voting rights as the number of common shares given up (10 votes per preferred share). The Class A preferred shares are entitled to a $.30 per share cash dividend to be paid on an annual basis. They are also convertible back into common shares after the earlier of 38 months or the Company's gross revenues being in excess of $5 million. The Class B preferred shares were entitled to a $.20 per share cash dividend to be paid on an annual basis. In addition, a 30% common stock dividend (i.e., 3 common shares per 10 shares of Class B preferred) was to be paid in the first year after issuance and 40% in the second year. Class B preferred shares were not convertible back to common shares. Dividends on both classes of preferred stock are non-cumulative. During 1998, the Board of Directors voted to eliminate the dividends on the Class B preferred stock and to allow conversion of those shares back into common on an annually limited basis. Under these new provisions, 962 Class B preferred shares were exchanged for 9,620 common shares during 1998. During 1999, 12,501 Class B preferred shares were exchanged for 125,010 common shares. After the non-conversion period expired in 1999, 2,317 Class A preferred shares were converted into 23,170 common shares.
During June 1996, the Company adopted a Dividend Reinvestment and Stock Purchase Plan. Under this plan existing stockholders are given the opportunity to use dividends or cash payments to purchase the Company's stock through the transfer agent. The minimum investment is $25 per month and the maximum investment is $5,000 per month. The Company filed a registration statement for 1,000,000 shares and has the option of issuing new shares or acquiring shares in the open market to fill purchases under the plan. During 1999 and 1998, the Company issued 14,795 and 9,509 shares for total proceeds of $61,031 and $95,385. At December 31, 1999 and 1998, 235,510 and 250,305 common shares were reserved for potential issuance under this plan.
During 1998, the Company registered a warrants offering. This offering offered shares to existing shareholders at a price determined based on the registration date of the offering. This offering resulted in the issuance of 4,856 common shares and proceeds to the Company of $57,363.
During 1999, the Company initiated an offer to buy back shares from stockholders holding less than 20 shares. This offer resulted in the Company's being able to retire 7,343 shares at a cost of $29,371 and to reduce its stockholder list by 1,789 names.
NOTE 11: EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per common share (EPS) for the years ended December 31, 1999, 1998, and 1996.
1999 1998 1997 --------- -------- -------- Numerator: Net income/(loss) $(556,215) $266,482 $438,784 Less preferred stock dividends (1,020) (1,012) (184,614) --------- -------- -------- Numerator for basic EPS (557,235) 265,470 254,170
Effect of dilutive preferred stock dividends 1,020 1,012 - --------- -------- -------- Numerator for diluted EPS $(556,215) $266,482 $254,170 ========= ======== ========
Denominator: Basic weighted average shares outstanding 627,366 591,392 552,896 Convertible preferred shares (1) - 33,710 - --------- -------- -------- Denominator for diluted EPS 627,366 625,102 552,896 ========= ======== ========
Basic EPS $ (0.89) $ 0.45 $ 0.46 Diluted EPS (0.89) 0.43 0.46
(1) The equivalent common shares of convertible preferred stock of 33,311 were not included in the computation of the 1999 and 1997 denominators for diluted earnings per share due to their being antidilutive.
NOTE 12: SHORT-TERM BORROWINGS
Short-term borrowings had the following outstanding balances at December 31, 1999 and 1998:
1999 1998 ---------- ---------- Bank line of credit, interest payable monthly at the Bank of New Mexico, Chase Manhattan prime plus 2%, currently 10.5%, secured by accounts receivable. Maturity is December 25, 1999. Maximum amount $250,000 $ 241,200 $ 171,200
Bank line of credit, interest payable monthly at the Bank of America, bank prime plus 2%, currently 10.5%, secured by accounts receivable. Maturity is December 1, 1999. Maximum amount $25,000 25,000 - ---------- ----------
Totals $ 266,200 $ 171,200 ========== ==========
NOTE 13: SEGMENT AND GEOGRAPHICAL DATA AND MAJOR CUSTOMERS
OPERATING SEGMENTS: 1999 1998 1997 ---------- ---------- ---------- Revenues: Oil field rentals and services $ 843,900 $2,139,843 $2,003,993 Oil reclamation and other sales 1,267,524 705,624 - Oil and gas 225,738 258,725 448,359
Operating profit: Oil field rentals and services $ (81,379) $ 332,446 $ 451,669 Oil reclamation and other sales (271,699) 31,331 - Oil and gas (84,083) 28,419 187,324
Long-lived asset: Oil field services $1,755,552 $3,058,178 $3,295,569 Oil reclamation and other sales 434,521 284,610 - Oil and gas 2,466,477 1,628,497 1,685,554
Additions to property: Oil field services $ 59,319 $ 252,343 $1,593,612 Oil reclamation and other sales 45,563 228,803 - Oil and gas 30,389 3,859 50,542
Depreciation, depletion and amortization: Oil field services $ 319,990 $ 378,513 $ 317,187 Oil reclamation and other sales 46,122 46,937 - Oil and gas 53,220 60,917 105,711
INTERNATIONAL: The Company generates revenues in the United States, Australia, and Canada. The following is a summary of information by area.
1999 1998 1997 ---------- ---------- ---------- Revenues: United States $2,159,966 $2,904,189 $2,085,852 Australia 172,645 195,150 366,500 Canada 4,551 4,853 - ---------- ---------- ---------- Totals $2,337,162 $3,104,192 $2,452,352 ========== ========== ==========
Operating profit: United States $ (515,055) $ 324,317 $ 539,792 Australia 77,843 65,407 99,201 Canada 51 2,472 - ---------- ---------- ---------- (437,161) 392,196 638,993 Other income/(expense) (481,863) 119,286 99,905 ---------- ---------- ---------- Income/(loss) before income taxes $ (919,024) $ 511,482 $ 738,898 ========== ========== ========== Identifiable assets: United States $5,144,232 $6,036,982 $5,603,047 Australia 1,216,428 1,248,759 1,168,805 Canada 21,106 23,933 25,000 ---------- ---------- ---------- $6,381,766 $7,309,674 $6,796,852 ========== ========== ==========
MAJOR CUSTOMERS: As shown in Note 3, the Company extends credit to its customers and operates with significant accounts receivable balances. Approximately 34% of the Company's trade receivables are due from TransTexas Gas Corporation at year end. This amount is net of the establishment of an allowance for uncollectible accounts as discussed at Note 2. TransTexas represents approximately 56% of oil field service revenues during 1999. The Company currently sells all of its reclaimed oil to a single entity, Superior Crude Gathering. Sales to this entity amount to 44% of total revenues and 15% of accounts receivable at year end. Mike Arnold Trucking, Inc. is the purchaser of essentially all of the Company's sand and gravel sales. These sales totaled 10% of total revenues during 1999 and Mike Arnold represented 4% of year end accounts receivable. It follows that the Company's results of operations are significantly reliant on these customers' continued ability to operate. Mitigating factors for the sales of reclaimed oil, sand and gravel sales are that other entities similar to Superior and Mike Arnold are available to purchase these products should these entities choose to discontinue their purchases.
NOTE 14: OIL AND GAS INFORMATION (UNAUDITED)
Reserves of oil and gas - Royalty and Working Interests
The Company's domestic working interest properties are not material to the Company's assets nor to its revenues. Domestic working interests generated approximately 1% of the Company's total oil and gas revenues and represent only $23,708 of the Company's capitalized oil and gas properties. Since these properties and their revenues are not material, Management has concluded that the Company would incur unreasonable cost and effort in order to obtain reserve analysis as is required by accounting disclosure rules for material oil and gas working interests. As a result of this conclusion, some of the information normally presented for oil and gas working interests by oil and gas producing entities has been omitted. No reserve information is presented for Australian working interests because the Company's Australian working interests are non-producing. The Company is not the operator on any of the oil and gas properties under which it owns interests.
The quantities of proved reserves of oil and gas relating to royalty and working interests are not presented because the necessary information is not reasonably available to the Company or the Company's interests are not large enough to economically obtain this information. The Company's share of oil and gas produced from these interests is presented in the following schedule:
Working Interests Royalties and ORRIs ------------------ ------------------------------------- United States United States Australia Canada Oil Gas Oil Gas Oil Oil (bbls.) (mcf) (bbls.) (mcf) (bbls.) (bbls.) --------- -------- -------- ------ ---------- --------- For the year ended: December 31, 1999 109 - 2,046 7,733 9,565 353 December 31, 1998 217 804 2,776 10,495 13,599 391 December 31, 1997 566 2,158 2,571 12,616 17,485 -
Results of Operations for Producing Activities for the Year Ended December
1999 1998 1997 ----------------------- ----------------------- ---------------- United United United States Australia Canada States Australia Canada States Australia ------- ------- ------ ------- -------- ------ ------- --------
Sales of oil & gas $48,542 $172,645 $4,551 $58,722 $195,150 $4,853 $81,859 $366,500
Production costs (including taxes) 2,894 56,542 1,673 6,669 86,811 1,313 13,185 94,692 Depletion 12,133 38,261 2,826 16,916 42,933 1,068 25,108 80,630 ------- -------- ------ ------- -------- ------ ------- -------- Total costs 15,027 94,803 4,499 23,585 129,744 2,381 38,293 175,322 ------- -------- ------ ------- -------- ------ ------- --------
Results of operations from producing activities (excluding corporate overhead) $33,515 $ 77,842 $ 52 $35,137 $ 65,406 $2,472 $43,566 $191,178 ======= ======== ====== ======= ======== ====== ======= ========
Capitalized Costs Relating to Oil and Gas Producing Activities
December 31, 1999 --------------------------------------------- United Canada States Australia Total --------- --------- ---------- ---------- Unproved properties (not being amortized) $ - $ 60,671 $ 388,206 $ 448,877 Proved properties (being amortized) 25,000 778,110 1,214,492 2,017,602 --------- --------- ---------- ---------- Total Capitalized Costs 25,000 838,781 1,602,698 2,466,479 Accumulated Depletion (3,894) (374,936) (481,983) (860,813) --------- --------- ---------- ---------- Net Capitalized Costs $ 21,106 $ 463,845 $1,120,715 $1,605,666 ========= ========= ========== ==========
December 31, 1998 --------------------------------------------- United Canada States Australia Total --------- --------- ---------- ---------- Unproved properties (not being amortized) $ - $ 55,283 $ 363,204 $ 418,487 Proved properties (being amortized) 25,000 778,110 1,214,492 2,017,602 --------- --------- ---------- ---------- Total Capitalized Costs 25,000 833,393 1,577,696 2,436,089 Accumulated Depletion (1,068) (362,803) (443,722) (807,593) --------- --------- ---------- ---------- Net Capitalized Costs $ 23,932 $ 470,590 $1,133,974 $1,628,496 ========= ========= ========== ==========
December 31, 1997 --------------------------------------------- United Canada States Australia Total --------- --------- ---------- ---------- Unproved properties (not being amortized) $ - $ 51,424 $ 363,204 $ 414,628 Proved properties (being amortized) 25,000 778,110 1,214,492 2,017,602 --------- --------- ---------- ---------- Total Capitalized Costs 25,000 829,534 1,577,696 2,432,230 Accumulated Depletion - (345,887) (400,789) (746,676) --------- --------- ---------- ---------- Net Capitalized Costs $ 25,000 $ 483,647 $1,176,907 $1,685,554 ========= ========= ========== ==========
Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development
1999 1998 1997 ------------------ ------------------ ------------------ United United United States Australia States Australia States Australia -------- --------- -------- --------- -------- --------- Property acquisition costs Proved $ - $ - $ - $ - $ - $ - Unproved 5,388 25,000 3,859 - 5,985 44,557 Sales of properties - - - - (18,000) - Exploration costs - - - - - - Development costs - - - - - - -------- --------- -------- --------- -------- -------- $ 5,388 $ 25,000 $ 3,859 $ - $(12,015) $ 44,557 ======== ========= ======== ========= ======== ========
In addition to the 1997 acquisition costs presented above, the Company spent $25,000 purchasing royalty interests in two proved properties in Canada. Property acquisition costs are negative in 1997 due to the sale of one lease. The sales price is reported as a reduction in the cost pool in accordance with full cost accounting rules described at Note 1 to the financial statements.
NOTE 15: SUBSEQUENT EVENTS
During November, the Company entered into a letter of intent to acquire Whitemark Homes, Inc. of Orlando, Florida in a stock for stock transaction. Agreements to consummate this transaction have not been completed. However, negotiations to accomplish finalize the terms of the agreements are in progress. Financial information regarding Whitemark Homes will be provided at such time as agreements have been finalized. Whitemark Homes had total assets at December 31, 1999 of approximately $10,000,000, revenues for 1999 of approximately $15,000,000, and net income of approximately $800,000.
During the first quarter of 2000, the Company was selling large portions of its shares in Black Giant Oil Company. These sales have generated cash flow of approximately $1,100,000 to the Company with resulting taxable capital gains of approximate the same amount. The tax benefits from net operating losses carried forward and the actual loss on the write off of the receivable from TransTexas (determined by the final terms of its bankruptcy reorganization plan in March 2000) should offset some of the tax impact of the gains from selling this investment.