-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Iguxutgu/28yXZUrWbqF+WWe/d/RwBaGLCxNVqRXF661XFNOLealgi4kRjt+eeaL zF4oIebMZNoZ0zWrDEF6Dw== 0000948830-98-000239.txt : 19980826 0000948830-98-000239.hdr.sgml : 19980826 ACCESSION NUMBER: 0000948830-98-000239 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980531 FILED AS OF DATE: 19980825 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALFA RESOURCES INC CENTRAL INDEX KEY: 0000354767 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 840846529 STATE OF INCORPORATION: CO FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-10157 FILM NUMBER: 98697160 BUSINESS ADDRESS: STREET 1: 216 16TH ST STE 730 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3035721135 MAIL ADDRESS: STREET 1: 216 16TH ST STE 730 CITY: DENVER STATE: CO ZIP: 80202 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended MAY 31, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ___________ to _____________ Commission File No. 0-10157 ALFA RESOURCES, INC. ----------------------------------------------------------------- (Exact Name of Small Business Issuer as Specified in its Charter) COLORADO 84-0846529 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 216 16th Street, Suite 780, Denver, Colorado 80202 ----------------------------------------------------------- (Address of Principal Executive Office, Including Zip Code) Registrant's telephone number including area code: (303) 572-1136 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,$.001 PAR VALUE ---------------------------- Title of Class Indicate by check mark whether the registrant (1) has filed all reports required to have filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of August 15, 1998, 44,865,212 shares of common stock were outstanding. The aggregate market value of the common stock of the Registrant held by nonaffiliates on that date was approximately $.00 because the stock has not been actively traded in the past few years. State Issuer's revenues for its most recent fiscal year: $27,499. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-KSB is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. X DOCUMENTS INCORPORATED BY REFERENCE: None. PART I ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS. Alfa Resources, Inc. ("Alfa" or the "Company"), with its mailing address at 216 16th Street, Suite 730, Denver, Colorado 80202, telephone number (303) 572-1135, was incorporated as a Colorado corporation on January 6, 1981. Alfa was organized for the purpose of engaging in oil and gas exploration, development and production activities. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS. The Company's activities are confined to oil and gas exploration and development, hence the Company has no industry segment other than the oil and gas business. (c) NARRATIVE DESCRIPTION OF BUSINESS GENERAL Alfa is engaged in the business of producing and selling crude oil and natural gas in the United States. Alfa is no longer involved in acquiring or developing oil and gas reserves. Management's primary objective now is the merger with another company, possibly one seeking a public "shell", which has potential for future growth. PROPERTY ACQUISITION AND SALES In the past, Alfa attempted to acquire developed and undeveloped oil and gas properties through the acquisition of leases and other mineral interests or through the acquisition of financially troubled companies. EQUIPMENT, PRODUCTS AND RAW MATERIALS Alfa owns no drilling rigs and has done no drilling for several years. Alfa's principal products are crude oil and natural gas. Crude oil and natural gas are sold to various purchasers including pipeline companies which service the areas in which Alfa's producing wells are located. Alfa's business is seasonal in nature, to the extent that weather conditions at certain times of the year may affect its access to oil and gas properties and the demand for natural gas. The existence of commercial oil and gas reserves is essential to the ultimate realization of value from properties, and thus may be considered a raw material essential to Alfa's business. The acquisition, exploration, development, production and sale of oil and gas is subject to many factors which are outside Alfa's control. These factors include national and international economic conditions, availability of drilling rigs, casing, pipe and other fuels, and the regulation of prices, production, transportation, and marketing by federal and state governmental authorities. Alfa acquired oil and gas properties from landowners, other owners of interests in such properties, or governmental entities. For information relating to specific properties of Alfa, see Item 2. Alfa currently is not experiencing any difficulty in acquiring necessary supplies or services as long as Alfa can pay for the services and supplies nor is it experiencing any difficulty selling its products. 2 COMPETITION The oil and gas business is highly competitive. Alfa's competitors include major companies, independents and individual producers and operators. Alfa's numerous competitors throughout the country are larger and have substantially greater financial resources than Alfa. Oil and gas, as a source of energy, must compete with other sources of energy such as coal, nuclear power, synthetic fuels and other forms of alternate energy. Domestic oil and gas must also compete with foreign sources of oil and gas, the supply and availability of which have at times depressed domestic prices. Alfa has an insignificant competitive position in the oil and gas industry. The general economic conditions in the United States and the recession in the oil and gas industry during the past several years have intensified the search for capital necessary for participation in the oil and gas business. This shortage of capital has had the effect of curtailing the operations of many smaller independent companies with limited resources, including Alfa. GOVERNMENTAL AND ENVIRONMENTAL LAWS Alfa's activities are subject to extensive federal, state and local laws and regulations controlling not only the exploration for oil and gas, but also the possible effect of such activities upon the environment. Existing as well as future legislation and regulations could cause additional expense, capital expenditures, restrictions and delays in the development of properties, the extent of which cannot be predicted. Since inception, Alfa has not made any material expenditures for environmental control facilities and does not expect to make any material expenditures during the current and following fiscal year. EMPLOYEES As of May 31, 1998, Alfa had no employees, but uses the services of related entities for administrative purposes as needed. ITEM 2. PROPERTIES (a) OFFICE FACILITIES. Alfa's principal offices are located at 216 16th Street, Suite 780, Denver, Colorado 80202. Alfa's monthly allocated rent is $400 per month, expiring in 2000. (b) OIL AND GAS PROPERTIES. Alfa hold interests in producing oil and gas leaseholds as of May 31, 1998, as follows: Producing Properties Non-Producing Properties Gross Net Gross Net State Acres Acres Acres Acres ----- ----- ----- ----- ----- California 40 1 -- -- Montana 320 21 -- -- New Mexico 640 34 -- -- North Dakota 160 1 -- -- Oklahoma 320 44 -- -- Texas 200 4 -- -- ----- --- ---- ---- Total 1,680 105 -- -- Net acres represent the gross acres in a lease or leases multiplied by Alfa's working interest in such lease or leases. 3 (b)(1)(A) PROVED OR PROVED DEVELOPED RESERVES. The following table sets forth the proved developed or proved undeveloped oil or gas reserves accumulated by Alfa, for the fiscal years ended May 31, 1998, May 31, 1997, and May 31, 1996. The reserve estimates and related values were prepared by management. All such reserves are located in the continental United States. 1998 1997 1996 Oil Gas Oil Gas Oil Gas (Bbls) (MCF) (Bbls) (MCF) (Bbls) (MCF) ------ ----- ------ ----- ------ ----- Proved Reserves 4,206 0 7,860 0 9,584 1,360 Proved Devel- oped Reserves 4,206 0 7,860 0 9,584 1,360 No major discovery or other favorable or adverse event has occurred since May 31, 1998, which is believed to have caused a material change in the proved reserves of Alfa. (b)(2) RESERVES REPORTED TO OTHER AGENCIES. There have been no reserve estimates filed with any other United States federal authority or agency. (b)(3)(a) NET OIL AND GAS PRODUCTION. The following table sets forth the net quantities of oil (including condensate and natural gas liquids) and gas produced during the fiscal years ended May 31, 1998, May 31, 1998, and May 31, 1996. 1998 1997 1996 ----- ----- ----- Oil (Bbls) 1,357 1,783 7,616 Gas (MCF) 519 606 1,042 The following table sets forth the average sales price and production cost per unit of production for the fiscal years ended May 31, 1998, May 31, 1997, and May 31, 1996. 1998 1997 1996 ---- ---- ---- Average Sales Price: Per Equivalent Barrel of Oil $16.73 $21.42 $16.78 Average Production (Lifting) Costs: Per Equivalent Barrel of Oil $16.12 $13.22 $13.37 During the periods covered by the foregoing tables, Alfa was not a party to any long-term supply or similar agreements with foreign governments or authorities in which Alfa acted as a producer. (b)(4) PRODUCTION WELLS AND ACREAGE. The following table sets forth Alfa's total gross and net productive oil and gas wells and developed acreage as of May 31, 1998: 4 A. PRODUCTIVE WELLS(1). OIL GAS State Gross(2) Net(3) Gross(2) Net(3) ----- -------- ------ -------- ------ California -- -- 8 .13 Montana 1 .07 -- -- New Mexico 4 .21 -- -- North Dakota 1 .01 -- -- Oklahoma 8 1.09 -- -- Texas 5 .12 -- -- -- ---- ---- ------ Total 19 1.50 8 .13 _________________ (1) Productive wells are producing wells and wells capable of production including wells that are shut in. (2) A gross well is a well in which a working interest is owned. The number of gross wells is the total number of wells in which a working interest is owned. (3) A net well is deemed to exist when the sum of fractional ownership working interests owned in gross wells equals one. The number of net wells is the sum of the fractional ownership working interests owned in gross wells, expressed in whole numbers and fractions thereof. B. DEVELOPED ACREAGE. State Gross Net(1) ----- ----- ------ California 40 1 Montana 320 21 New Mexico 640 34 North Dakota 160 1 Oklahoma 320 44 Texas 200 4 ----- --- Total 1,680 105 ____________ (1) A net acre is deemed to exist when the sum of the fractional ownership working interest owned in gross acres equals one. The number of net acres is the sum of fractional working interests owned in gross acres expressed as whole numbers and fractions thereof. (b)(5) UNDEVELOPED PROPERTIES. Alfa had no interest as of May 31, 1998 in undeveloped properties. Alfa's oil and gas properties are in the form of mineral leases. As is customary in the oil and gas industry, a preliminary investigation of title is made at the time of acquisition of undeveloped properties. Title investigations are generally completed, however, before commencement of drilling operations. Alfa believes that its methods of investigating are consistent with practices customary in the industry and that it has generally satisfactory title to the leases covering its proved reserves. 5 (b)(6) DRILLING ACTIVITY. Alfa drilled no productive or dry exploratory and development wells during the fiscal years ended May 31, 1998 and May 31, 1997. (b)(7) DELIVERY COMMITMENTS. Alfa is not obligated to provide a fixed and determinable quantity of oil and gas in the future pursuant to existing contracts or agreements. ITEM 3. LEGAL PROCEEDINGS. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. During the fiscal year covered by this Annual Report, no matter was submitted to a vote of Alfa's security holders through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR ALFA'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS. PRICE RANGE OF COMMON STOCK The Common Stock of Alfa has been traded over-the-counter since January 4, 1982. The following table sets forth the high and low bid prices of the Common Stock in the over-the-counter market for the periods indicated. The bid prices represent prices between dealers, who do not include retail markups, markdowns or commissions, and may not represent actual transactions. Public trading in the Common Stock of Alfa is minimal. Quarter Ended Bid High Bid Low ------------- --------- -------- August 31, 1996 No Bid No Bid November 30, 1996 No Bid No Bid February 28, 1997 No Bid No Bid May 31, 1997 No Bid No Bid August 31, 1997 No Bid No Bid November 30, 1997 No Bid No Bid February 28, 1998 No Bid No Bid May 31, 1998 No Bid No Bid The number of record holders of Common Stock of Alfa as of August 15, 1998, was approximately 546. Additional holders of Alfa's Common Stock hold such stock in street name with various brokerage firms. Holders of Common Stock are entitled to receive dividends as may be declared by the Board of Directors out of funds legally available therefor. No common stock dividends have been declared to date by Alfa, nor does Alfa anticipate declaring and paying common stock cash dividends in the foreseeable future. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. LIQUIDITY AND CAPITAL RESOURCES The Company continues to have working capital problems because of continued losses in current and prior years, and has sold property to satisfy debts. 6 Several properties were not able to generate sufficient revenue to pay operating costs in prior years and were shut in and subsequently disposed of. At May 31, 1998, the Company had working capital in the amount of $(26,952). Management's intent is to use the Company as a merger candidate. Management intends to use production revenue and other sources, such as property sales proceeds, to meet reduced administrative costs and continue in operation, but this cannot be assured. A further decrease in the price of oil could cause operations to cease within a short period of time. If the Company is not able to sell assets or production to pay its debts, the Company may not be able to continue in business. Cash flows provided by (used in) operations for the fiscal years ended May 31, 1998, and 1997, were $(26,313) and $7,353 respectively. Alfa sells most of its oil production to major oil companies. However, in the event these purchasers discontinued oil purchases, Alfa has made contact with other purchasers who would purchase the oil. Alfa's past strategy has been the merger with or acquisition of other small independent oil and gas production companies and the acquisition of interests in producing oil and gas properties in exchange for cash and shares of Alfa's equity securities. Alfa's current financial position makes it extremely difficult to accomplish this business plan. Alfa's ability to meet long-term needs, if it is able to overcome its current lack of working capital, will depend on Alfa's ability to find a suitable merger candidate. Alfa has no proprietary software and has checked with the manufacturers of its software package and have been informed that new versions addressing the year 2000 problem will be available by the end of 1999. At this time Alfa has no reason to believe that there will be any significant problems or costs associated with the year 2000 problem. RESULTS OF OPERATIONS YEAR ENDED MAY 31, 1998 COMPARED TO MAY 31, 1997 Oil and gas sales decreased 39% to $23,709 in 1998 from $39,026 in 1997. This decrease is mainly due to the elimination of production as producing properties were sold and the decrease in the selling price of oil. Equivalent barrels of oil produced decreased 24% to 1,417 in 1998 from 1,822 in 1997, the price of which decreased 20% to $16.73 in 1998 from $21.42 in 1997. Production expenses decreased 5% to $22,851 in 1998 from $24,084 in 1997, and is due to decreased production. The cost of production per equivalent barrel of oil produced increased to $16.12 in 1998 from $13.22 in 1997 because of significant workover costs on one property. General and Administrative expenses decreased to $37,959 in 1998 from $41,239 in 1997, as a result of the Company's efforts to reduce costs. Depletion, depreciation and amortization has increased to $9,110 in 1998 from $4,000 in 1997; primarily because of a "ceiling" adjustment of $4,310. Alfa had a net loss of $(42,422) in 1998 compared to net loss of $(9,571) in 1997 as a result of the above factors. YEAR ENDED MAY 31, 1997 COMPARED TO MAY 31, 1996 Oil and gas sales decreased 70% to $39,026 in 1997 from $129,598 in 1996. This decrease is mainly due to the elimination of production as producing 7 properties were sold. Equivalent barrels of oil produced decreased 76% to 1,822 in 1997 from 7,732 in 1996, the price of which increased 28% to $21.42 in 1997 from $16.78 in 1996. Gain on sale of property decreased to $0 in 1997 compared to $210,602 in 1996, as no property was sold in 1997. Management fees and related revenues decreased from $13,730 in 1996 to $7,239 in 1997 as Granite Alfa, which has provided these services to a limited partnership was liquidated. Other income increased as a result of settlement of certain old liabilities, which will not recur. These decreases are expected to stabilize in 1998, primarily because the sale of major properties has ended. Production expenses decreased 77% to $24,084 in 1997 from $103,272 in 1996, and is due to selling existing properties. The cost of production per equivalent barrel of oil produced decreased slightly to $13.22 in 1997 from $13.37 in 1997. General and Administrative expenses decreased to $41,239 in 1997 from $93,823 in 1996, as a result of the Company's efforts to reduce costs (e.g. elimination of employees, and natural decreases resulting from elimination of operations of Meteor Developments). Depletion, depreciation and amortization has decreased to $4,000 in 1997 from $16,362 in 1996. This decrease is due to sale of reserves. Interest expense decreased to $-0- in 1997 compared to $25,923 in 1996, as the amortization of debt discount was eliminated when the related notes payable were extinguished upon transfer of the property which financed their repayment, and which resulted in an extraordinary gain on extinguishment of debt of $365,814 in 1996. Alfa had a net loss of $9,571 in 1997 compared to net income of $415,689 in 1996 as a result of the above factors. EFFECT OF CHANGES IN PRICES Changes in prices during the past few years have been a significant factor in the oil and gas industry. The price received for the oil produced by Alfa fluctuated significantly during the last year. Changes in the price that Alfa receives for its oil and gas is set by market forces beyond Alfa's control as well as governmental intervention. The volatility and uncertainty in oil and gas prices have made it more difficult for a company like Alfa to increase its oil and gas asset base and become a significant participant in the oil and gas industry. Continued volatility or downward price pressure could cause the Company to cease operations. ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Included at Pages F-1 through F-12 hereof. ITEM 8. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. No response required. 8 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS. (a) IDENTIFICATION OF DIRECTORS. The following table sets forth the names and ages of all Directors of Alfa as of August 15, 1998, indicating all positions and offices with Alfa held by each such person, and any periods during which he has served as a Director. Period Served Name Position As Director of Alfa ---- -------- -------------------- H. Wayne Hoover Director January, 1984 to Present C.L. Nordstrom Director January, 1981 to Present Dennis R. Staal Director April 1, 1998 to Present Alfa's Directors hold office until the next annual meeting of Alfa's shareholders. There is no arrangement or understanding between any Director of Alfa and any other person or persons pursuant to which such Director was or is to be selected as a Director or a nominee for Director. IDENTIFICATION OF EXECUTIVE OFFICERS. The following table sets forth the names and ages of all Executive Officers of Alfa, indicating all positions and offices with Alfa held by each such person, and the period during which he has served as such. All Offices Period Served Name Age With Company As Officer of Alfa ---- --- ------------ ------------------- C.L. Nordstrom 79 President December, 1995 to Present H. Wayne Hoover 55 Secretary August, 1987 to Present Dennis R. Staal 50 Treasurer September, 1992 to Present Alfa's Executive Officers hold office until the next annual meeting of Directors of Alfa. There is no arrangement or understanding between any Executive Officer and any other person or pursuant to which such Executive Officer was selected as an Officer of Alfa. BUSINESS EXPERIENCE. Following is a brief account of the business experience during the past five years of each Director and Executive Officer of Alfa indicating his principal occupation and employment during that period, and, the name and principal business of any organization in which such occupations and employment were carried on. H. WAYNE HOOVER, 55, a Director since January, 1984, and Secretary since August, 1987, is a certified public accountant and received a Bachelors Degree in Accounting from Colorado State University in 1969. Since 1969, Mr. Hoover has been engaged in a public accounting practice in Greeley, Colorado. Currently, Mr. Hoover is an officer in Hoover, Harris & Co., P.C., CPA's, a Public Accounting Firm. Mr. Hoover's practice involves all aspects of public accounting including auditing, management advisory services, tax planning and tax return preparation. 9 C.L. NORDSTROM, 79, President and a Director, has been a Director of Alfa since its inception in 1981 and President since December, 1995. From June 1979 to March 1994, Mr. Nordstrom was a Director of Winco Petroleum Corporation, a publicly-held Colorado corporation engaged in oil and gas exploration and development. Since 1973, Mr. Nordstrom has been self-employed as a private investor. From 1970 until 1973, Mr. Nordstrom served as Manager of Operations for the Rocky Mountain District for Champlin Petroleum Company, a subsidiary of Union Pacific Railroad Company, including Petroleum Engineer and Division Petroleum Engineer with the Rocky Mountain Division. Mr. Nordstrom received a Bachelor of Science Degree in Geology and Engineering from Montana School of Mines in 1947. DENNIS R. STAAL, 50, Treasurer and Director, is a graduate of the University of Nebraska, where he received a Bachelor of Science degree in Business Administration in 1970. From 1970 through 1973, he was a CPA with Arthur Andersen and Co. From 1973 through 1976, he was Controller for the Health Planning Council of Omaha. From 1977 through 1981, he served as a Director of Wulf Oil Corporation and as President from 1979 to 1981. From 1979 through 1982, he served as a Director of Chadron Energy Corporation, and as Director of the First National Bank of Chadron. From 1982 through 1984 he was Chief Financial Officer of High Plains Genetics, Inc. From 1984 through 1986, Mr. Staal was a Financial Consultant. From 1986 to 1991 Mr. Staal was Director and President of Saba Petroleum Company. Mr. Staal is the owner and president of Mystique Resources Company. Mr. Staal is also Secretary/Treasurer and director of Meteor Industries, Inc., an S.E.C. reporting company. (b) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES. Alfa does not have employees, but uses administrative services furnished by Meteor Industries, Inc. and occasionally by Messrs. Nordstrom and Staal. (c) FAMILY RELATIONSHIPS. There is no family relationship between any Director or Executive Officer of Alfa (there currently are no persons chosen to become Directors or Executive Officers). (2) DIRECTORSHIPS. Except as described above, Alfa has no Director who is also a director of any other company with a class of securities registered pursuant to Section 15(d) of that Act or any company registered as an investment company under the Investment Company Act of 1940. (d) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS. No event has occurred during the past five years which is material to any evaluation of the ability or integrity of any Director. ITEM 10. EXECUTIVE COMPENSATION. The following table sets forth information regarding the executive compensation for the Company's President and chief financial officer. No executive officer received compensation in excess of $100,000 for the fiscal year ended May 31, 1998.
10 Summary Compensation Table Long Term Compensation Annual Compensation Awards Payouts Other ---------- -------------- All Annual Restricted Options/ Other Name & Principal Compen- Stock SARS LTIP Compen- Position Year Salary Bonus sation Award(s) (Number) Payouts sation - ---------------- ---- ------ ----- ------- ---------- -------- ------- ------- C.L. Nordstrom, 1998 $ -- -- $5,971 -- -- -- -- President Dennis R.Staal, 1998 $ -- -- $2,783 -- -- -- -- Treasurer
Compensation Pursuant to Plans. Alfa has two stock option plans in effect as of September 1, 1995, its "Amended Incentive Stock Option Plan" (ISOP) and its "1982 Bargain Stock Option Plan" (BSOP). Under the ISOP, the exercise price of the options granted must be at least equal to the market value of Alfa stock at the time of grant and under the BSOP the exercise price must be at least $.12 per share. A total of 5,000,000 shares of Alfa's Common Stock has been reserved for issuance pursuant to the ISOP and 8,000,000 shares of Alfa's Common Stock has been reserved for issuance under the BSOP. As of August 15, 1998, the only options issued have expired. For additional information, see Footnote 3 to the Company's financial statements. No other compensation was paid or distributed pursuant to a plan during fiscal year ended 1998. Alfa has no other plans in existence other than those described herein. COMPENSATION OF DIRECTORS. The Directors of Alfa who do not receive annual salaries from Alfa, receive fees of $350 per Board Meeting attended in person, and reimbursement for travel expenses. These fees may be increased or decreased from time to time by a majority vote of the Board of Directors. In addition, any Director who presents a prospect to Alfa which is acceptable to a majority of disinterested Board members or if a Director substantially assists in the sale of a Company property the Board may grant such a Director an overriding royalty interest, and/or pay such a Director a commission or finder's fee in varying amounts on a case-by-case basis. Commissions, if paid, are a minimum of two percent of the purchase or sale price of the property. Other than the fees mentioned above, no consulting fees, finder's fees or commissions were paid to Directors of Alfa during the fiscal year ended May 31, 1998. (See also Item 13(a), Transactions With Management and Others.) TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENT. Alfa has no compensation plan or arrangement with any of its current or former Officers or Directors which results or will result from the resignation, retirement or any other termination by such individual of employment with Alfa. Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. (a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth the number and percentages of shares of Alfa's $.001 par value Common Stock (its only class of voting securities) owned beneficially by any person, who as of August 15, 1998, is known to Alfa to be 11 the beneficial owner of 5% or more of the issued and outstanding Common Stock other than the Officers and Directors listed below. Amount & Nature Name & Address of Beneficial Percent Title of Class of Beneficial Owner Ownership of Class - -------------- ------------------- ---------------- -------- $.001 Par Paul Roebling A Trust 10,330,000(1) 23.0% Value Common c/o Bank of New York Stock 530 5th Avenue New York, NY 10021 $.001 Par Edward J. Names 3,658,000 8.1% Value Common 216 16th Street, #730 Stock Denver, CO 80202 _____________ (1) Includes 2,000,000 shares held in the name of the estate of Paul Roebling individually and 8,330,000 shares in the name of Paul Roebling A Trust. (b) Security Ownership of Management. The following table sets forth the number of percentage of shares of Company's $.001 par value Common Stock (its only class of equity securities outstanding) owned beneficially by each Director of Alfa, and by all Directors and Officers of Alfa as a group, as of August 15, 1998: Amount & Nature Name of of Beneficial Percent Beneficial Owner Ownership (1) of Class - ---------------- ---------------- -------- C.L. Nordstrom 891,500 2.0% Dennis R. Staal 2,000,000 4.5% H. Wayne Hoover 550,000 1.2% All Officers and Directors as a Group (3 Persons) 3,441,500 7.7% _______________ (1) Each of the individuals named own all of the shares listed of Alfa's Common Stock directly and of record unless otherwise indicated. (c) Changes in Control. There are no arrangements, known to the Company, including any pledge by any person of securities of Alfa or any of its parents, the operation of which may at a subsequent date result in a change of control of Alfa. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. (a) TRANSACTIONS WITH MANAGEMENT AND OTHERS. No Director or Officer of Alfa, nominee for election as a Director, security holder who is known to Alfa to own of record or beneficially more than 5% of any class of the Company's voting securities, or any relative or spouse of any of the foregoing persons, or any relative of such spouse, who has the same home as such person or who is a director or officer of any parent or subsidiary of Alfa, has had any 12 transaction or series of transactions exceeding $60,000, during Alfa's last two fiscal years, or has any presently proposed transaction, to which Alfa was or is to be a party, in which any of such persons had or is to have any direct or indirect material interest. As a matter of policy, directors who are not employees of the Company may receive finder's fees or commissions if they present a property or prospect to the Company which is considered acceptable to a majority of disinterested board members. Such commissions or finder's fees will be determined on a case by case basis if a transaction is consummated with regard to such prospect or property. In 1994, a Company director (former president) and the chief financial officer organized a corporation ("Industries") which occupies office space with Alfa and now provides accounting and administrative services to Alfa. In 1998 and 1997, Industries charged Alfa $18,392 and $9,606, respectively for accounting and administrative services. Additionally, $2,500 was paid to a director (Chief Financial Officer) for accounting services related to S.E.C. filings. A payment of $2,900 was also made to Industries as prepayment for preparation of the 1998 Form 10KSB. Prior to January, 1996, Alfa had provided administrative services to Industries, and through December, 1996, Meteor was the lessee for this space and sublet it to Industries and other related parties. In January 1997, Industries assumed the lease. Alfa continues to pay $400 per month and Meteor assigned its rent deposit of approximately $1,400 to Industries in consideration for its lease assumption. Rental and overhead charges to Meteor Industries, Inc. ("Industries") amounted to $375 in fiscal 1997. Additionally, Alfa's subsidiary received $0 and $700 from Yellow Queen (a corporation in which the Company's president, chief financial officer and its former president have ownership) for rent in 1998 and in 1997. (b) TRANSACTIONS WITH PROMOTERS. Not applicable. (c) CERTAIN BUSINESS RELATIONSHIPS. H. Wayne Hoover, a member of Alfa's Board of Directors and its Secretary, is a partner of SHF Partnership, which is an investment partnership. SHF Partnership, was a co-working interest owner and SHF Operating Company was the operator of certain of Alfa's oil and gas properties located in Weld County, Colorado. Alfa sold or promoted this working interest several years ago to SHF Partnership on terms which in the judgment of Alfa's Board of Directors were at least as favorable as could be obtained from unaffiliated third parties. As a co-working interest owner, SHF Partnership had participated in the drilling of approximately seven wells in which Alfa has or had an interest. (d) INDEBTEDNESS OF MANAGEMENT. Except as described above, no Director or Executive Officer of Alfa, nominee for election as a Director, any immediate family member of the above, any affiliated corporation, organization, trust or estate was indebted to Alfa in excess of $60,000 at any time since the beginning of Alfa's last fiscal year. (e) TRANSACTIONS WITH PROMOTERS. Not applicable. 13 PART IV ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents filed as part of this Report: (1) The following Financial Statements are filed as part of this Report: Page Independent Auditor's Report. . . . . . . . . . . . F-1 Consolidated Balance Sheet, May 31, 1998. . . . . . . . . . . . . . . . . . . . . . . F-2 Consolidated Statements of Operations for the years ended May 31, 1998 and 1997. . . . . . . . . F-3 Consolidated Statements of Changes in Stockholders' Equity for the years ended May 31, 1998 and 1997 . F-4 Consolidated Statements of Cash Flows for the years ended May 31, 1998 and 1997. . . . . . . . . F-5 Notes to Consolidated Financial Statements. . . . . F-6 All other Financial Statements Schedules are omitted because they are not required, are inapplicable or the information is included in the financial statements or notes thereto. (3) EXHIBITS. Page(1) 3. Articles of Incorporation and Bylaws (incorporated by reference to Exhibits 4 and 5, respectively, to Registration Statement No. 2-73529). . . . . . . . . -- 3.1 Articles of Amendment(3) . . . . . . . . . . . . . . -- 3.2 Articles of Amendment(4) . . . . . . . . . . . . . . -- 4. Instruments Defining the Rights of security Holders, Including Indentures (see Exhibit 3. above). . . . . -- 9. * . . . . . . . . . . . . . . . . . . . . . . . . . -- 10.01 Employment Agreement between the Company and Ilyas Chaudhary (incorporated by reference to Exhibit 14 to Registration Statement No. 2-73526 ). . . . . . . -- 10.02 Stock Option Plan (Incorporated by reference to Exhibit 16 to Registration Statement No. 2-73526). . -- 10.03 Amended Stock Option Plan, dated May 26, 1982(2). . . . . . . . . . . . . . . . . . -- 14 10.04 Bargain Stock Option Plan, dated May 26, 1982(2) . -- 10.05 Employment Agreement between Alfa and William G. Kimball(2) . . . . . . . . . . . . . . . . . . . . -- 10.06 Option Agreements between the Company and William G. Kimball(2). . . . . . . . . . . . . . . -- 10.07 Employment Agreement between the Company and Michael G. Langton(2). . . . . . . . . . . . . . . -- 10.08 Option Agreement between the Company and Michael G. Langton(2). . . . . . . . . . . . . -- 10.09 Employment Agreement between the Company and Edward J. Names(2) . . . . . . . . . . -- 10.10 Option Agreement between the Company and Edward J. Names. . . . . . . . . . . . . . . . -- 10.11 Employment Agreement between the Company and Theodore E. Dann(2). . . . . . . . . . -- 10.12 Stock Purchase Agreement between Alfa and Petro Quest, Inc. (incorporated by referenced to Exhibit B to Schedule 13d filed by Alfa on or about February 12, 1986(5) . . . . . . . . . . . . . . . -- 10.13 Purchase Agreement between Alfa and Bordeaux Petroleum Corporation dated February 28, 1991 (incorporated by reference to Exhibit 1 to Form 8-K filed by Alfa in March, 1991). . . . . . . . . -- 10.14 Stock Purchase Agreement between Alfa and Meteor Developments, Inc. dated February 28, 1991 (incorporated by reference to Exhibit 2 to Form 8-K filed by Alfa in March, 1991). . . . . . . . . -- 11. * . . . . . . . . . . . . . . . . . . . . . . . . 12. * . . . . . . . . . . . . . . . . . . . . . . . . 13. * . . . . . . . . . . . . . . . . . . . . . . . . 18. * . . . . . . . . . . . . . . . . . . . . . . . . 19. * . . . . . . . . . . . . . . . . . . . . . . . . 22. List of Subsidiaries (2) . . . . . . . . . . . . . -- 23. * . . . . . . . . . . . . . . . . . . . . . . . . 24. * . . . . . . . . . . . . . . . . . . . . . . . . 25. * . . . . . . . . . . . . . . . . . . . . . . . . 27 Financial Data Schedule (filed herewith electronically) 15 28(a). Stock Purchase Agreement between Ilyas Chaudhary and Edward J. Names (incorporated by reference to Exhibit 28(a) to Form 8-K filed by Alfa on or about May 31, 1983)(2). . . . . . . . . . . . . . . . . . . -- 28(b). Voting Agreement between Bushra Chaudhary and Edward J. Names (incorporated by referenced to Exhibit 28(b) to Form 8-K filed by Alfa on or about May 31, 1983)(2). . . . . . . . . . . . . . . . . . . -- 28(c). Stock Subscription Agreement between the Company and the Paul Roebling A Trust (incorporated by reference to Form 8-K)(2) . . . . . . . . . . . . . . . . . . . . . -- * Not applicable. (1) Page number in sequential numbering system (required on manually signed copy only). (2) Previously filed as exhibits to Alfa's Form 10-K for the fiscal year ended May 31, 1983. (3) Previously filed as exhibits to Alfa's Form 10-K for the fiscal year ended May 31, 1984. (4) Previously filed as exhibits to Alfa's Form 10-K for the fiscal year ended May 31, 1985. (5) Previously filed as exhibits to Alfa's Form 10-K for the fiscal year ended May 31, 1986. (b) Reports on Form 8-K. None 16 WILLIAM G. LAJOIE, P.C. CERTIFIED PUBLIC ACCOUNTANT 5961 SOUTH MIDDLEFIELD ROAD, SUITE 100 LITTLETON, COLORADO 80123 (303) 798-3991 INDEPENDENT AUDITOR'S REPORT The Board of Directors Alfa Resources, Inc. I have audited the accompanying consolidated balance sheet of Alfa Resources, Inc., as of May 31, 1998, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the years ended May 31, 1998 and 1997. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audits. I conducted my audits in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. I believe that my audits provide a reasonable basis for my opinion. In my opinion the consolidated financial statements referred to above present fairly in all material respects, the financial position of Alfa Resources, Inc., as of May 31, 1998, and the results of its operations and its cash flows for the years ended May 31, 1998 and 1997, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered significant losses in prior years, has sold most of its oil and gas properties and has no working capital, the effects of which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ William G. Lajoie, P.C. William G. Lajoie, P.C. Littleton, Colorado July 30, 1998 F-1 ALFA RESOURCES, INC. CONSOLIDATED BALANCE SHEET ASSETS May 31, 1998 1997 ---------- ----------- CURRENT ASSETS: Cash and cash equivalents $ 10,830 $ 37,143 Accounts receivable-trade 1,054 1,858 Prepaid expense - related party (Note 4) 2,900 -- Total current assets 14,784 39,001 Oil and gas properties, using the full cost method (note 5) 1,430,126 1,430,126 Less - depletion, depreciation, and amortization and valuation allowance (1,422,132) (1,413,022) 7,994 17,104 Other assets 3,000 7,616 TOTAL ASSETS $ 25,778 $ 63,721 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable $ 14,727 $ 2,634 Dividends payable (Note 6) 26,673 26,673 Accrued expenses 336 7,950 Total current liabilities 41,736 37,257 Stockholders' equity (deficit) (Notes 3 and 6): Preferred stock, $1.00 par value; authorized 10,000,000 shares; 292,947 shares issued and outstanding 292,947 292,947 Common stock, $.001 par value; authorized 150,000,000 shares; issued and outstanding 44,865,212 shares 44,865 44,865 Additional paid-in capital 2,421,976 2,421,976 Accumulated deficit (2,775,746) (2,733,324) Total stockholders' equity (deficit) (15,958) 26,464 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,778 $ 63,721 The accompanying notes are an integral part of the financial statements. F-2 ALFA RESOURCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MAY 31, 1998 AND 1997 1998 1997 ----------- --------- REVENUES: Oil and gas sales $ 23,709 $ 39,026 Management fees -- 7,239 Interest and other income 3,790 13,487 27,499 59,752 EXPENSES: Production 22,851 24,084 General and administrative (Note 4) 37,959 41,239 Depletion, depreciation and amortization 9,110 4,000 69,920 69,323 NET INCOME (LOSS) $ (42,422) $ (9,571) Net (loss) per share $ * $ * Weighted average shares outstanding 44,865,212 44,865,212 *less than $(.01) per share The accompanying notes are an integral part of the financial statements F-3 ALFA RESOURCES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED MAY 31, 1998 AND 1997
Additional Preferred Stock Common Stock Paid In Accumulated Shares Amount Shares Amount Capital Deficit --------- -------- ---------- -------- ---------- ------------ Balance May 31, 1996 240,875 $240,875 44,865,212 $44,865 $2,409,636 $(2,723,753) Elimination of minority interest 52,072 $ 52,072 -- -- 12,340 -- (Note 6) Net loss -- -- -- -- -- (9,571) Balance May 31, 1997 292,947 $292,947 44,865,212 $44,865 $2,421,976 $(2,733,324) Net loss -- -- -- -- -- (42,422) Balance May 31, 1998 292,947 $292,947 44,865,212 $44,865 $2,421,976 $(2,775,746)
The accompanying notes are an integral part of the financial statements. F-4 ALFA RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MAY 31, 1998 AND 1997 1998 1997 --------- ---------- Cash provided by (used in) operations Net Income (loss) $(42,422) $ (9,571) Adjustments to reconcile to cash provided by operations: Depletion, depreciation and amortization 9,110 4,000 (Increase) in prepaid expense (2,900) -- (Increase) decrease in other assets 4,616 1,422 (Increase) decrease in receivables 804 41,614 Increase (decrease) in accounts payable 12,093 (28,292) (Decrease) in accrued expenses (7,614) (1,820) Cash provided by (used in) operations (26,313) 7,353 Cash and cash equivalents, beginning of year 37,143 29,790 Cash and cash equivalents, end of year $ 10,830 $ 37,143 Supplemental information: (1) There were no income taxes or interest paid in 1998 or 1997. (2) Non-cash transactions 1997 -- $11,409 of oil and gas properties were assigned for settlement of trade payables. Preferred stock of Alfa which had been owned by a subsidiary was distributed to the subsidiary's shareholders which resulted in an increase in preferred stock of $52,072 and additional paid in capital of $12,340 and a reduction in receivables of $5,207 and elimination of the minority interest of $69,619. The accompanying notes are an integral part of the financial statements. F-5 ALFA RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 AND 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION AND BASIS OF ACCOUNTING The accompanying financial statements have been prepared on the basis of a going concern. However, the Company has depleted its working capital because of past operating losses, and has experienced the loss of production income because most of its oil and gas properties have been sold. At May 31, 1998, the Company had a negative working capital in the amount ($26,952). Certain current production revenue is being withheld by operators to liquidate trade payables, and this situation is expected to continue through fiscal 1999. Management intends to use unencumbered production revenue and possibly other sources to meet reduced administrative costs and continue in operation, but this cannot be assured. The Company is seeking a merger partner and additional equity, but has not yet been successful. Further decreases in the price of oil or other unexpected circumstances could cause operations to cease within a short period of time. OIL AND GAS ACCOUNTING The Company accounts for oil and gas properties using the "full cost" method. Under this method, all costs associated with property acquisition, exploration and development activities are capitalized, including costs of unsuccessful activities. Oil and gas properties are depleted using the units-of-production method based on the ratio of current period production to estimated proved oil and gas reserve quantities. No gain or loss resulting from the disposition of oil and gas properties is recognized unless the relationship between capitalized costs and reserves in the cost center is significantly changed. In addition to normal depletion, net capitalized costs are subject to a ceiling limitation required by the Securities and Exchange Commission (SEC). Such costs are limited to the present value (discounted at 10%) of the future net revenues from proved oil and gas properties, using year end costs and prices, after considering potential future income tax effects. There were no charges related to the ceiling limitation during the year ending May 31, 1997, but $4,310 was recognized in fiscal 1998. Revenue from oil and gas production is recognized upon sale to unaffiliated purchasers. OFFICE FURNITURE AND EQUIPMENT The Company depreciated furniture and equipment over its estimated useful life (generally seven years) using an accelerated method. As of May 31, 1998, all furniture and equipment have been fully depreciated. CASH EQUIVALENTS Cash equivalents include money-market accounts or other highly-liquid debt instruments with an original maturity of three months or less. F-6 ALFA RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 AND 1997 (Continued) MAJOR CUSTOMERS The Company had major purchasers of oil in 1998 and 1997 as follows: PURCHASER 1998 1997 A 42% 40% B 47% 47% MINORITY INTEREST The minority interest in Alfa's subsidiary's common stock (approximately 20%) was reduced to zero in fiscal year 1995 in recognition of its share of Alfa's subsidiary's net loss to that extent, but was not reduced below zero since there was no guarantee of debt or commitment to contribute additional capital by the minority shareholders. In fiscal year 1996, the minority interest increased by $69,619 in recognition of its share of current year income and to record its share of previously unrecognized losses. In fiscal year 1997, Meteor distributed 52,072 shares of preferred stock of Alfa to its minority shareholders, and the rights to a declared dividend of $5,207, as a liquidating dividend, and management dissolved Meteor in fiscal 1998 (operations were discontinued in 1997). Because of this the minority interest has been eliminated, and the excess of its carrying value over assets distributed recorded as additional paid-in capital. USE OF ESTIMATES Preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates, and actual results could differ from these estimates. The unaudited oil and gas reserve estimates prepared by management should be considered as reasonably possible to change, as indicated in Note 7, which can affect depletion and the net carrying value of oil and gas properties. (LOSS) PER SHARE For the years ended May 31, 1998, and 1997, (loss) per share is computed by dividing the net (loss) by the weighted average number of common shares outstanding during the year. Shares issued to insiders are considered to be outstanding from the beginning of the fiscal year issued. Common stock equivalents represented by options are not included as shares outstanding if their effect is antidilutive, or if estimated market value has not exceeded exercise price. F-7 ALFA RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 AND 1997 (Continued) 2. INCOME TAXES The Company and its subsidiaries file a consolidated income tax return. Investment tax credits were accounted for using the flow-through method. These were no significant temporary difference between amounts reported for financial reporting purposes and those reported for income tax purposes in 1997 and 1998. Due to uncertainty as to whether the Company will continue as a going concern and realize its net deferred tax asset, the Company has established a valuation allowance for its entire amount. Deferred income taxes and benefits reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by enacted tax laws. The significant items comprising the Company's deferred tax assets are as follows: 1998 1997 Operating loss carryforwards $718,000 $1,014,000 Any change in majority ownership of the Company will significantly limit the amount of the net operating loss which may be used. As of May 31, 1998, the Company had available estimated tax operating loss carryovers which expire as follows: Originating Year Carryover Expiration 1984 187,600 1999 1985 238,000 2000 1986 86,500 2001 1987 283,400 2002 1988 147,400 2003 1989 108,600 2004 1990 87,500 2005 1991 8,100 2008 1993 513,200 2009 1995 130,200 2010 1997 8,200 2012 1998 42,400 2013 ---------- $1,841,100 3. STOCK OPTIONS On September 30, 1981, the Board of Directors approved the adoption of an Incentive Stock Option Plan (ISOP). The ISOP reserved 5,000,000 shares of the Company's $.001 par value common stock for grants to employees at exercise prices no less than the market value of the common stock on the date of grant. As of May 31, 1998, no options are outstanding. Options granted are exercisable for a period of five years or three months after an employee terminates his employment with the Company, whichever is sooner. F-8 ALFA RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 1998 and 1997 (Continued) On May 18, 1982, the Board of Directors established a Bargain Stock Option Plan (BSOP). The BSOP reserved 8,000,000 shares of the Company's $.001 par value common stock for grants to officers, directors and employees. The exercise price will be determined by the Compensation Committee of the Board of Directors, but in no event will the exercise price be less than $.12 per share. As of May 31, 1998, no options under this plan are outstanding or exercisable. 4. RELATED PARTY TRANSACTIONS In 1994, a Company director (former president) and the chief financial officer organized a corporation ("Industries") which occupies office space with Alfa and provides accounting and administrative services to Alfa (which no longer has employees). In 1998 and 1997, Industries charged Alfa $18,392 and $9,606 respectively, for accounting and administrative services. Additionally, $2,500 was paid to a director (Chief Financial Officer) for accounting services related to S.E.C. filings. Certain expenses are paid for the Company president for services rendered in lieu of salary, and amounted to $5,971 in fiscal 1998. A payment of $2,900 to Industries for preparation of the 1998 Form 10KSB is included in prepaid expenses at May 31, 1998. Through December, 1996, Meteor was the lessee for office space and sublet it to Industries and other related parties. In January 1997, Industries assumed the lease. Alfa continues to pay $400 per month and Meteor assigned its rent deposit of approximately $1,400 to Industries in consideration for its lease assumption. Until January, 1996, Alfa had provided administrative services to Industries, and rental and overhead charges to Industries amounted to $375 in fiscal 1997. Additionally, Alfa's subsidiary received $0 and $700 from Yellow Queen (a corporation in which the Company's president, chief financial officer and its former president have ownership) for rent in 1998 and in 1997. 5. SUPPLEMENTAL OIL AND GAS FINANCIAL AND RESERVE INFORMATION (UNAUDITED) Reserve estimates for 1998 and 1997 were prepared by Company management. Management cautions that there are many inherent uncertainties in estimating proved reserve quantities and related revenues and expense, and in projecting future production rates and the timing and amount of development expenditures. Accordingly, these estimates will change as future information becomes available. Proved oil and gas reserves are the estimated quantities of crude oil, condensate, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those reserves expected to be recovered through existing wells with existing equipment and operating methods. F-9 ALFA RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 1998 and 1997 (Continued) ANALYSIS OF CHANGES IN PROVED RESERVES Estimated quantities of proved reserves and proved developed reserves of crude oil and natural gas (all of which are located within the United States) as well as changes in proved reserves during the past two years are indicated below: Oil (Bbl) Natural Gas (MCF) Reserves at May 31, 1996 9,584 1,360 Extensions and discoveries -- -- Purchase of minerals in place -- -- Sales of minerals in place -- -- Production (1,783) (606) Revisions of previous estimates 59 (754) Reserves at May 31, 1997 7,860 -- Extensions and discoveries -- -- Purchase of minerals in place -- -- Sales of minerals in place -- -- Production (1,357) (519) Revisions of previous estimates (2,297) 519 Reserves at May 31, 1998 4,206 -0- There are no reserves attributable to partnership or minority interests at May 31, 1998, or 1997. All capitalized costs related to oil and gas activities at May 31, 1998 and 1997 are considered related to proved properties. OIL AND GAS OPERATIONS Depletion, depreciation and amortization (including the 1998 ceiling adjustment) per equivalent unit of production for the years ended May 31, 1998 and 1997 was $6.43 and $2.20, respectively. In 1998 and 1997, there were no acquisition, exploration or development costs incurred. STANDARDIZED MEASURE OF DISCOUNTED NET CASH FLOW AND CHANGES THEREIN The following table sets forth a standardized measure of the discounted future net cash flows attributable to the Company's proved oil and gas reserves. Future cash inflows were computed by applying year-end prices of oil and gas (with consideration of price changes only to the extent provided by contractual F-10 ALFA RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 1998 and 1997 (Continued) arrangements) and using the estimated future expenditures to be incurred in developing and producing the proved reserves, assuming continuation of existing economic conditions. Future income tax expenses were computed by applying statutory income tax rates to the difference between pretax net cash flows relating to the Company's proven oil and gas reserves and the tax basis of proved oil and gas properties and available operating loss and excess statutory depletion carryovers reduced by investment tax credits. Discounting the annual net cash flows at 10% illustrates the impact of timing on these future cash flows. 1998 1997 Future cash inflows $ 56,843 $ 158,188 Future cash outflows: Production costs (47,796) (107,269) Future net cash flows before future income taxes 9,047 50,919 Future income taxes -- -- Future net cash flows 9,047 50,919 Adjustment to discount future annual net cash flows at 10% (1,053) (12,684) Standardized measure of discounted future net cash flows $ 7,994 $ 38,235 The following table summarizes the principal factors comprising the changes in the standardized measure of discounted net cash flows for the years ended May 31, 1998 and 1997. 1998 1997 Standardized measure, beginning of period $ 38,235 $ 52,913 Sales of oil and gas, net of production costs (3,273) (14,942) Net change in sales prices, net of production costs (25,559) (4,679) Changes in estimated future development costs -- -- Purchases of minerals in place -- -- Sales of minerals in place -- -- Revisions of quantity estimates (10,886) (296) Accretion of discount 3,823 5,291 Other, including changes in production rates (timing) 5,654 (52) Standardized measure, end of period $ 7,994 $ 38,235 F-11 ALFA RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 1998 and 1997 (Continued) 6. INVESTMENT IN METEOR DEVELOPMENTS, INC. In January and May, 1990, Alfa purchased 61,250 and 19,250 shares, respectively, of common stock of Alfa's subsidiary, a privately held corporation, resulting in ownership of 33.5% at a cost of $8,000. Saba, which is controlled by a former director and shareholder of Alfa, also acquired a 33.5% interest. On February 28, 1991, Alfa acquired from Saba its 80,500 shares of common stock of Alfa's subsidiary and certain oil, gas, and mineral rights ("Saba Properties"). These assets were acquired in exchange for 240,875 shares of Alfa's Series A Preferred Stock. Alfa also acquired from Alfa's subsidiary 207,143 shares of common stock in exchange for (i) 262,500 shares of Alfa's Series A Preferred Stock and (ii) the Saba Properties. As a result of the two purchases of Alfa's subsidiary's stock by Alfa in February 1991 and the prior purchase of a minority interest in Alfa's subsidiary's common stock, Alfa acquired approximately 82.3% of the issued and outstanding common stock of Alfa's subsidiary. In 1993, 12,000 shares of Alfa's subsidiary's common stock were issued for services rendered, diluting Alfa's ownership to approximately 80%. In fiscal 1997, as part of its planned liquidation, Meteor distributed the preferred shares of Alfa which it held to its shareholders (Alfa received 210,428 preferred shares and the minority shareholders received an aggregate 52,072 preferred shares). Shares distributed to Alfa are considered to be retired. The Series A Preferred Stock has a par value and liquidation value of $1.00 per share, a cumulative 5% dividend and is redeemable by Alfa at 110% of par value. $50,337 in dividends were declared at May 31, 1993, of which only $2,261 has been paid (to Saba in 1994). Only dividends payable to outside parties (Saba and the former minority interest shareholders in Meteor) are included in the accompanying balance sheet. Unpaid and undeclared dividends to outside parties amount to $76,898 at May 31, 1998. The president and former president of Alfa and its chief financial officer were officers of Meteor and constituted three of the five Board members. 7. GOVERNMENTAL AND ENVIRONMENTAL LAWS Alfa's activities are subject to extensive federal, state and local laws and regulations controlling not only the exploration for oil and gas, but also the possible effect of such activities upon the environment. Existing as well as future legislation and regulations could cause additional expense, capital expenditures, restrictions and delays in the development of properties, the extent of which cannot be predicted. Since inception, Alfa has not made any material expenditures for environmental control facilities and does not expect to make any material expenditures during the current and following fiscal year. Management knows of no environmental damage for which the Company could be held liable, and believes that any plugging liabilities for existing properties will be adequately covered by salvage upon cessation of production. F-12 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. ALFA RESOURCES INC. Dated: August 24, 1998 By:/s/ C. L. Nordstrom C.L. Nordstrom, 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 dated indicated. Dated: August 24, 1998 By:/s/ C. L. Nordstrom C.L. Nordstrom, President, Chief Executive Officer and, Director Dated: August 24, 1998 By:/s/ Dennis R. Staal Dennis R. Staal, Principal Financial and Accounting Officer and Director Dated: _________, 1998 By:____________________________ H. Wayne Hoover, Secretary and Director EXHIBIT INDEX EXHIBIT METHOD OF FILING 27. Financial Data Schedule Filed herewith electronically EX-27 2
5 This schedule contains summary financial information extracted from the consolidated balance sheets and consolidated statements of operations found on pages 2 and 3 of the Company's Form 10-KSB for fiscal year ended May 31, 1998, and is qualified in its entirety by reference to such financial statements. YEAR MAY-31-1998 MAY-31-1998 10,830 0 1,054 0 0 14,784 1,430,126 1,422,132 25,778 41,736 0 44,865 0 292,947 (353,770) 25,778 27,499 27,499 0 69,920 0 0 0 0 0 (42,422) 0 0 0 (42,422) 0 0
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