-----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, RZlLmsBbK9txLrolLu/txtc5QLnUeR3bQRvqV/80fQQFmfmqXnz4iWPR0verQOo+ n9yfDtt7lscB6w6eQN61tw== 0000051072-98-000003.txt : 19980416 0000051072-98-000003.hdr.sgml : 19980416 ACCESSION NUMBER: 0000051072-98-000003 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980415 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FUTURE PETROLEUM CORP/UT/ CENTRAL INDEX KEY: 0000051072 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 870239185 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-08609 FILM NUMBER: 98594641 BUSINESS ADDRESS: STREET 1: 2351 W NW HWY STE 2130 CITY: DALLAS STATE: TX ZIP: 75220 BUSINESS PHONE: 2143507602 MAIL ADDRESS: STREET 1: P O BOX 25253 CITY: DALLAS STATE: TX ZIP: 75225 FORMER COMPANY: FORMER CONFORMED NAME: INTERMOUNTAIN EXPLORATION CO DATE OF NAME CHANGE: 19920703 10KSB 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) [ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ________________ Commission file number 0-8609 Future Petroleum Corporation (Exact name of small business issuer as specified in charter) Utah 87-0239185 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2351 West Northwest Highway, Suite 2130 Dallas, Texas 75220 (Address of principal executive offices) (Zip Code) (Registrants telephone number, including area code (214)350-7602 Securities registered pursuant to section 12(b) of the Act: Title of Class Name of each exchange on which registered None None Securities registered pursuant to section 12(g) of the Act: Common Stock, Par Value $0.01 (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act 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 Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. Registrant's revenues for the most recent fiscal year: $772,000 The aggregate market value of the Company's voting stock held by nonaffiliates computed at the closing bid price in the over-the-counter market as quoted on the National Association of Securities Dealers Electronic Bulletin Board system on April 15, 1998, was approximately $1,067,245. As of April 15, 1998, the Company had outstanding 5,847,015 shares of its common stock, par value $0.01. DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents if incorporated by reference and the part of the form 10-KSB (e.g., part I, part II, etc.) into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to rule 424(b) or (c) under the Securities Act of 1933: Transitional Small Business Disclosure Format Yes X No PREFACE Caution Respecting Forward-Looking Information This annual report contains certain forward-looking statements and information relating to the Company that is based on the beliefs of the Company or management as well as assumptions made by and information currently available to the Company or management. When used in this document, the words "anticipate, " "believe, " "estimate, " "expect," and "intend" and similar expressions, as they relate to the Company or its management, are intended to identify forward-looking statements. Such statements reflect the current view of the Company respecting future events and are subject to certain risks, uncertainties, and assumptions, including the risks and uncertainties noted. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. In each instance, forward-looking information should be considered in light of the accompanying meaningful cautionary statements herein. Certain Definitions All defined terms under rule 4-10(a) of Regulation S-X promulgated by the Securities and Exchange commission shall have their statutorily prescribed meanings when used in this report. In addition, the following terms have the meaning set forth below when used herein. "API" means American Petroleum Institute. "Bpd" means barrels of oil per day. "Bbl" means barrel of oil. "Bcf" means billion cubic feet of natural gas. "Development well" means a well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon know to be productive. "Exploratory well" means a well drilled to find and produce oil or gas in an unproved area, to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir, or to extend a known reservoir. "MBbl" means thousand barrels of oil. "MMBbl" means million barrels of oil. "MMBO" means million barrels of oil. "MCFG" means thousand cubic feet of natural gas. "MMMCFG" means billions cubic feet of natural gas. "COPAS" Council of Petroleum Accountants Societies. "Proved reserves" means the estimated quantities of crude oil, 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, i.e, prices and costs as of the date the estimate is made. "Proved reserves" may be developed or undeveloped. "PV-10 Value" means the estimated future net revenue to be generated from the production of proved reserves discounted to present value using an annual discount rate of 10%. These amounts are calculated net of estimated production costs and future development costs, using prices and costs in effect as of a certain date, without escalation and without giving effect to non-property related expenses such as general and administrative expenses, debt service, future income tax expense or depreciation, depletion and amortization. TABLE OF CONTENTS Item Number and Caption Page PART I 1. Business...................................................... 4 2. Properties..................................................... 10 3. Legal Proceedings.............................................. 14 4. Submission of Matters to Vote of Security Holders.......................................................... 14 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................................................... 15 6. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 16 7. Financial Statements and Supplementary Data................... 17 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................. 17 PART III 9. Directors and Executive Officers of the Registrant............ 18 10. Executive Compensation....................................... 20 11. Security Ownership of Certain Beneficial Owners and Management....................................................... 23 12. Certain Relationships and Related Transactions............... 24 13. Exhibits and Reports on Form 8-K............................. 25 PART I ITEM 1. BUSINESS THE COMPANY Future Petroleum Corporation (the "Company") is engaged through its subsidiaries and subsidiary partnerships in the development of oil and natural gas properties located onshore primarily in Texas and Oklahoma. The Company's principal business strategies include (i) maximizing the value of its existing high-quality, Long-Life reserves through efficient operating and marketing practices, (ii) conducting selective exploratory and development activities, principally in existing areas of operations, and (iii) seeking acquisitions of producing properties, with exploration and development potential in areas where the Company has operating experience and expertise. As of December 31, 1997, the Company owned approximately 3,202,166 barrels of oil equivalent proved reserves. Approximately 59% of the Company's proved reserves are proved developed reserves. Quantities stated as equivalent barrels of oil reserves are based on a factor of six thousand cubic feet ("MCF") of natural gas per barrel of oil. See "Reserves." Strategic Developments On November 25, 1997, the Company acquired from EnCap Equity 1994, Ltd, a Texas limited partnership ("EnCap"), Energy Capital Investment Co., PLC, an English investment company ("ECIC"), and Gecko Booty 1994 I, Ltd, a Texas limited partnership ("Gecko Booty") effective as of November 1, 1997, certain properties and partnerships interests consisting of one (1) field area in west Texas, one (1) field area in southeast New Mexico (the "Permian Basin Properties"), three (3) field areas in the Texas Panhandle and one (1) field area in northern Oklahoma. The acquisition was accomplished by the purchase from Gecko Booty of the southeast New Mexico properties, the purchase from EnCap and ECIC of the general and limited partnership interests in BMC Development No. 1 Limited Partnership, a Texas limited partnership which owns a portion of the Texas Panhandle and northern Oklahoma properties, and the purchase from EnCap and ECIC of the limited partnership interests in Future Acquisition 1995, Ltd., a Texas limited partnership of which the Company's Subsidiary, Future Petroleum Corporation ("Future Texas"), is the general partner and which owns the Texas Panhandle and West Texas properties. The Company formed a new subsidiary created under the laws of the state of Nevada, Future Energy Corporation, to own the limited partnership interests acquired. The general partnership interests and the Gecko Booty properties will be owned by Future Texas. The purchase price for the assets and interests acquired was $6.6 million and 1,575,000 shares of the Company's common stock. The primary producing formations include Grayburg, San Andres and Strawn in the Permian Basin Properties, the Clearfork, Brown Dolomite and Granite Wash in the Texas Panhandle and Red Fork and Meramecian Chet in northern Oklahoma. The properties include 206 producing oil and natural gas wells on approximately 18,740 gross acres (17,749 net acres). The Company financed the acquisition of the properties by issuing the sellers promissory notes aggregating $6.6 million and issuing 1,575,000 shares of restricted common stock. Together with the 225,000 shares of the Company's common stock already held by EnCap and ECIC, EnCap and ECIC now own in the aggregate 1,800,000 shares of common stock, representing approximately 30% of the common stock of the Company. The notes carry a 10% per annum interest rate and mature in five and one half (5 1/2) years. Under the terms of the notes the Company will make payments of interest only until June 30, 1998, at which time payments of principal and interest will begin. The Company may prepay the note at anytime without penalty. All of the properties and interests acquired, as well as the other assets of the Company and Future Texas secure the notes. DEVELOPMENT PROPERTIES Oil and Gas Holdings. The Company's properties are located onshore principally in Texas, New Mexico and Oklahoma. As of April 15, 1998, the Company owns interests in a total of 277 gross (246 net) producing wells, of which 231 wells are operated by the Company. As of that date, the Company had oil and gas rights in leases comprising 21,795 gross (18,762-net) acres. TEXAS PANHANDLE The Company's Texas Panhandle properties offer long lived oil and natural gas reserves and are the core properties of the Company. There are over 30 proved Brown Dolomite, Granite Wash and Moore County Lime development drilling locations. The gas produced is high in Natural Gas Liquids (NGL) which enables the Company to receive premium prices for its gas sold. In addition, the implementation of advanced hydraulic fracturing to new development wells and refracturing existing wells have proven to recover additional reserves. Panhandle Field. The Company has an interest in and operates one hundred sixty one (161) wells in the Panhandle of Texas. These wells are located in Gray, Carson, Hutchinson, Moore and Roberts Counties, Texas. Most of the wells are located in the Panhandle Field. This field is on the Amarillo uplift West of the Anadarko Basin. All of the Company's wells produce from the Wolfcamp Brown Dolomite of Permian age and the Pennsylvanian granite wash. Production is primarily oil, natural gas liquids and gas on the uplift. The Company's wells on the Western edge of the Anadarko Basin flanking the uplift are located on anticlines along a structural ridge. These wells produce gas from the same pay zones found on the uplift in the big Panhandle Field. The Company markets its gas through plants in the Panhandle field. The high liquid content contained in Panhandle gas enables the Company to participate in two separate markets for its gas thereby allowing the Company to enhance the market value of the gas stream. NORTH TEXAS Wichita County Regular Field. The Company owns and operates seventy (70) wells in the Wichita Regular Field in Wichita County, Texas. The field is on the Bend Arch north of the Fort Worth basin. The pay zones are the Gunsight sand, the Thomas sand and an unconsolidated 600' sand. The Gunsight sand is presently under waterflood. All of these sands are Pennsylvanian in age. The trap is a combination of statigraphy and structure. The Company is presently performing remedial recompletions, stimulations and improvements to the waterflood. PERMIAN BASIN Edmission Clearfork. The Company operates and intends to flood its Edmission Clearfork project in Lubbock County, Texas. Two (2) existing floods that have produced more secondary oil from the waterfloods than they produced under the primary phase of production directly offset the property. The Company has a 100% working interest in this field. Azalea Field. The Company has an interest in seventeen (17) producing wells and one (1) commercial Salt Water Disposal well in the Azalea Field, located approximately eight (8) miles Southeast of Midland, Texas in Midland county. It is in the East central portion of the Midland geological Basin. It is near the edge of the Grayburg-San Andres shelf as it swings across the basin from the Central Basin Platform on the west to the eastern shelf on the east. The field is an anticlinal dome caused by drape over of a carbonate bioherm. The leases are on or near the crest of the anticline. The potential pays are in the Grayburg, Permian age sands and carbonates and the San Andres, also Permian, Carbonates (dolomite and limestone). It is the intention of the Company and its partner to drill infill wells to both pay zones and to start a waterflood in order to increase the recovery of oil. Potential increases in production and reserves will increase the Company's reserve base substantially. The Company has completed the drilling of two development wells. The results of these wells indicate that up to 80% of the original oil in place still remains in the reservoir and that a portion of the remaining oil in place can be recovered by a waterflood. Casey Strawn Field. The Company owns a 33% Working Interest in this Field in Lea County, New Mexico which is located on a large Penn Reef Trend. There are 4 existing wells and one 3-D seismically identified PUD location. NORTH CENTRAL OKLAHOMA Red Fork Trend. The Company owns 1340 proven producing acres on the trend containing 8 producing wells. A recent uphole recompletion in the Oread Formation by an offset operator is producing 600 MCF per day. The Company, after reviewing its own logs on its existing wells, believes that 2 and possibly 4 wells have uphole recompletion potential in the Oread Formation. EXPLORATION PROPERTIES Price Ranch Field. The Price Ranch, located in the Texas Panhandle, contains 8390 net acres. Three prospective features have been identified along a producing anticlinal trend using well control and 2-D seismic. A 3-D seismic survey will be utilized to further delineate the three features and to pick drilling locations. Caddo Field. The Pure Oil Company discovered the Caddo Field, located along the north edge of the Ardmore Basin, just south of the Arbuckle Mountains on July 14, 1939. It is located in, Carter County, Oklahoma. Production is from the Goddard sandstone, Sycamore limestone, Woodford shale, Hunton limestone, Viola limestone, and 2nd Bromide sandstone. It has produced 3.99 MMBO and 29.9 MMMCFG. Caddo Field is essentially a gas field with a thin oil ring around it. Structurally, the field is an anticlinal fold on a horst block. The Company has obtained oil and gas leases within the oil ring that surrounds the Caddo Field. One (1) well will initially be drilled to determine if additional wells on 4 more locations are warranted. Cumberland Field. The Cumberland Field is located in Township 5 South Range 7-East in Bryan and Marshall Counties, Oklahoma. The field has a northwest-southeast orientation and is located on a structural high associated with the southwest fault block (horst) of a large northwest- southeast oriented horst and graben fault system. Cumberland field has produced over 73 MMBBLS and over 54 MMMCFG. A substantial amount of remaining BBLS of oil should be producible using present day recovery methods and oil prices. Proven gas reserves remaining to be produced are estimated to be at least 30 MMMCFG. The Arbuckle has never been completely tested. It holds potentially great-untapped reserves. Cumberland field was discovered in 1940 by the Pure (Unocal) #100-1 Quintin Little. Pays range from the Arbuckle Dolomites (Ordovician in age) up through the Simpson Sands, Viola and Hunton Limestones, Woodford Chert and Sycamore Siltstones (Pennsylvanian age). The Simpson Sands are the oil reservoirs. They also hold a large share of the gas as attic gas in their gas caps. The Company has obtained oil and gas leases on the flanks of this field. Major oil companies have conducted an extensive 3-D seismic study of this area with the idea of extending this field and further developing the remaining reserves. The Company is currently participating in a well based on this 3-D seismic survey. The well is utilizing directional drilling techniques. Currently, one (1) directional lateral has been completed and drilling is proceeding on a second lateral. MARKETING Gas Sales. Current marketing arrangements generally provide the Company with the ability to sell its well deliverability from the Company's fields to major processing plants operated by KN Energy, GPM Gas Corporation, Crescendo Resources, Inc., and Western Gas Company. All of the Company's gas is processed thereby allowing the Company to participate in the liquid rich (NGL's) sales from the tailgate of the plants as well as the residue gas which enhances the value of the full gas stream. The Company's gas is sold under contracts with unexpired terms up to five years. The Company has no fixed delivery commitments. Oil Sales. The Company's sales of crude oil and condensate are generally made at posted field prices, plus certain bonuses, which are not subject to regulations. Texaco Trading and Transportation, Total Petroleum Corporation, Phillips Petroleum Corporation Navajo Refining Co., Eott Energy Corp., and Diamond Shamrock are the Company's main crude oil purchasers. COMPETITION The oil and gas industry is highly competitive. Major oil and gas companies, independent concerns, drilling and production purchase programs and individual producers and operators are active bidders for desirable oil and gas properties, as well as the equipment and labor required to operate those properties. Many competitors have financial resources substantially greater than those of the Company. Many competitors also have substantially larger staffs and facilities than those of the Company. The availability of a ready market for the Company's oil and gas production depends in part on the cost and availability of alternative fuels, the level of consumer demand, the extent of other domestic production of oil and gas, the extent of importation of foreign oil and gas, the cost of and proximity to pipelines and other transportation facilities, regulations by state and federal authorities and the cost of complying with applicable environmental regulations. REGULATION General. Domestic development, production and transportation of oil and gas are extensively regulated at both the federal and state levels. Legislation affecting the oil and gas industry is under constant review for amendment, frequently increasing the regulatory burden on the industry. Also, numerous departments and agencies, both federal and state, have issued rules and regulations binding on the oil and gas industry and its individual members, compliance with which is often difficult and costly and some of which carry substantial penalties for noncompliance. The following discussion of oil and gas industry regulation is summary in nature and is not intended to cover all regulatory matters that could affect the Company. State Regulation. State statutes and regulations require permits for drilling operations and construction of gathering lines, as well as drilling bonds and reports concerning operations, often creating delays in drilling, completing new wells and connecting completed wells. Texas and other states in which the Company conducts operations also have statutes and regulations governing conservation matters, including regulation of the size of drilling and spacing or proration units, the density of wells that may be drilled and the unitization or pooling of oil and gas properties. In addition, state conservation laws establish maximum rates of production from oil and gas wells, generally prohibit the venting or flaring of gas and impose certain requirements on the ratability of production. Many states including Texas also have regulatory mechanisms that attempt to match monthly production to the market demand for oil and gas. Certain existing statutes or regulations set limits below the rates at which oil and gas is currently produced from wells in which the Company owns an interest or the prices received for its production. Federal Regulation. Since the lifting of federal price controls in 1981, sales of crude oil, condensate and natural gas liquids can be made at uncontrolled market prices. For many years, the sale and transportation of natural gas in interstate commerce have been subject to regulation under various federal laws, including the Natural Gas Act of 1938 ("NGA") and the Natural Gas Policy Act of 1978 ("NGPA"), both of which are administered by the Federal Energy Regulatory Commission ("FERC"). The provisions of these acts and regulations are complex. Under these acts, producers and marketers have historically been required to obtain from FERC certificates to make so called "first sales" and abandonment authority to discontinue those sales. Additionally, first sales have been subject to price regulations. However, as a result of the enactment of the NGPA and the Natural Gas Wellhead Decontrol Act of 1989, the remaining regulations imposed by the NGA and the NGPA on first sales were terminated on January 1, 1993. Thus, sales of natural gas may currently be made at uncontrolled market prices. FERC jurisdiction over transportation and sales other than first sales has not been affected. Commencing in the mid-1980s, FERC promulgated several orders designed to enhance competition in natural gas markets by requiring that access to the interstate transportation facilities necessary to reach those markets be provided on an open nondiscriminatory basis. FERC has also adopted regulations intended to make intrastate natural gas transportation accessible to gas buyers and sellers on an open nondiscriminatory basis through procedures under which intrastate pipelines may participate in certain interstate activities without becoming subject to FERC's full NGPA jurisdiction. These orders have had a profound influence upon natural gas markets in the United States and, among other things, have fostered the development of a large short term or spot market for gas. The most significant of these orders is Order 636. FERC issued Order 636 in April 1992 to require further restructuring of the sales and transportation services provided by interstate pipelines that perform open access transportation. The changes were intended to improve the competitive structure of the interstate natural gas pipeline industry and to create a regulatory framework that put gas sellers into more direct contractual relations with gas buyers. Order 636 required individual pipeline service restructuring proceedings designed to "unbundle" the services provided by interstate pipelines so that producers and purchasers of natural gas may secure transportation and storage services from the most economical source, whether interstate pipelines or other parties. These initiatives have substantially reduced or eliminated the interstate pipelines' traditional role as wholesalers of natural gas in favor of providing only natural gas storage and transportation services. Although Order 636 does not actually regulate gas producers, FERC has stated that Order 636 is intended to foster increased competition within all phases of the natural gas industry. It is unclear what impact, if any, increased competition within the natural gas industry under Order 636 will have on the Company as a producer. Furthermore, because the requirements of Order 636 were only recently implemented through individual restructuring proceedings on a pipeline-by-pipeline basis, it is impossible to predict what effect, if any, Order 636 will have on the Company's gas marketing operations. The increasing complexity of the energy regulatory environment has prompted many producers, including the Company, to rely on highly specialized experts for the conduct of gas marketing operations. The need for these specialized services is expected to continue. Energy Policy Act. The Energy Policy Act of 1992 (the "Energy Act") was enacted to promote vehicle fuel efficiency and the development of renewable energy sources such as hydroelectric, solar, wind and geothermal energy. Other provisions of the Energy Act include initiatives for reducing restrictions on certain natural gas imports and exports and for expanding and deregulating natural gas markets. While these provisions could have a positive impact on the Company's natural gas sales on a long-term basis, any positive impact could be offset by measures promoting the use of alternative energy sources other than natural gas. The impact of the Energy Act on the Company has not been material. Environmental. The Company's activities are subject to various federal, states and local laws and regulations designed to protect the environment. The Company does not conduct activities offshore. Operations on the Company's onshore properties may generally be liable for clean-up costs to the federal government for up to $50 million for each discharge of oil or hazardous substances under the Federal Clean Water Act, up to $350 million for each oil discharge under the Oil Pollution Act of 1990 and for up to $50 million plus response costs for hazardous substance contamination under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (Superfund). MINERAL HOLDINGS General. The Company has interests in a number of properties, none of which is in production. The Company is seeking arrangements with third parties to sublease, joint venture, or sell properties where warranted. Coarse Gold Claims. Alaska Eldorado Gold Company, a Nevada corporation is a 100% subsidiary of the Company and holds title to 7 placer claims covering approximately 140 acres located northeast of Nome, Alaska, the Coarse Gold claims. The Company plans on drilling and trenching to further delineate gold reserves in the 1998 season. Eldorado Canyon Properties. The Eldorado Canyon Properties consist of 24 1/2 patented, 10 unpatented, and 5 millsites forming two separate sites: (1) the main grouping consists of 171/2 patented, 10 unpatented, and 5 millsites covering approximately 710 acres; (2) 7 patented claims located in the Capital Camp area located 3 miles southeasterly of the main group of claims. All claims are in Clark County, Nevada, within the Nelson or Eldorado Canyon Mining District, approximately 25 miles south of Boulder City. Principal minerals produced by others in the mining district are gold and silver. The properties are crossed by the gravel road from Nelson to Searchlight, Nevada. Single-phase electric power is on the property, and the Company owns a water right to a well in Copper Canyon. During the past 20 years, exploration has been done over most of the property. Significant mineralization was found in two places: (1) Copper Canyon, in which a body of copper mineralization was discovered, and (2) the Blackhawk and Wall Street claims on which a gold/silver mineral deposit was discovered. There is estimated to be blocked out surface accessible gold/silver mineralization estimated at one million tons of a grade 0.06 ounces gold and 0.6 ounces silver per ton. In March 1994, the Company entered into an agreement to sell to Nevada Pacific Mining Company, Incorporated, Las Vegas, Nevada, an unaffiliated entity, the Eldorado Canyon property for a total of $740,000. The final balance of $160,000 was due and payable on July 1, 1997. The unpaid balance is secured by a deed of trust on the property. The note was in default as of December 31, 1997, as all unpaid principal and interest was due and payable on July 1, 1997. White Basin Gypsum Prospect. The White Basin Gypsum Prospect consists of 19 contiguous unpatented claims forming a 380-acre site and covering large, high-quality gypsum outcrops. These beds of the Horse Springs formation are 60 to 120 feet thick estimated to contain over 30 million tons of 85 percent gypsum, including considerable tonnage of 95 percent plus. The gypsum claims are approximately 40 air miles east of Las Vegas, Nevada, 4 miles from the paved North Shore Road between Henderson and Overton, Nevada. Another road gives access to Interstate 15 at a point 30 miles northeast of Las Vegas, which is also on the main line of the Union Pacific Railroad. Great Eastern/Key West Prospects. The Great Eastern Prospect now consists of 8 unpatented claims located approximately 20 road miles south of the town of Bunkerville, Clark County, Nevada. The prospect contains deposits of copper, nickel and platinum on which several diamond drill holes were drilled by the U. S. Bureau of Mines during World War II. These claims adjoin the Key West patented group, which contains a body of copper-nickel-platinum ore and was a producer of platinum at one time. The Company formed an agreement with Nevada Nickel & Copper Company, whose patented Key West group adjoins the Company's claims on the west, to pool the properties and seek to sell or lease the properties, with the two companies splitting the proceeds 50-50. Rights to Unpatented Mining Claims. Various federal and state laws impose requirements designed to reduce the impact of exploration and other field activities on the environment and to require the restoration of the surface following such activities. Such regulations may restrict access to certain areas, preclude significant surface disturbances without first obtaining rights in the property or without first filing a proposed plan of operations with the United States Bureau of Land Management or similar application with the state or other authority if it has jurisdiction of the area, and first obtaining all required consents. There is no assurance that any requisite approvals can be obtained, that the Company's proposed plans might not have to be modified in order to obtain the required approvals, or that delays will not be encountered. Unpatented mining claims, when properly located, staked, and posted according to regulation, give the claimant possessory rights only. Possessory title to an unpatented mining claim, when validly initiated endures unless lost through abandonment due to failure to perform and file proof of annual assessment work or through a forfeiture, which results from an examination of the public record. The continuing validity of these claims is subject to many contingencies, including the availability of land for location at the time the location was made, the making of valid mineral discoveries within the boundary of each claim, compliance with federal and state regulations for locating claims, the performance of annual assessment work, and the making of required annual filings with the Bureau of Land Management and the appropriate state authority in which the claims are located. Failure to perform annual assessment work subjects the claimant to forfeiture of rights through valid subsequent locations by others or through cancellation by the government agency involved. The Company believes that it has valid possessory title to all of the unpatented federal mining claims described herein although it has not completed an in-depth title examination of any of its properties. A 1993 statutory change authorized the promulgation of regulations requiring annual assessment work on unpatented mining claims and established a mandatory annual rental fee of $100 per claim for fiscal years 1994 and 1995 for each mining claim and site in lieu of the current annual assessment work requirement. Failure to pay the required rental fee by the statutory deadline constitutes a statutory abandonment of the mining claim or site. Congress is currently considering various amendments to the 1872 General Mining Law respecting unpatented mining claims that would impose a royalty on production from such claims and contain other limitations or requirements that, if enacted and applicable to the Company's unpatented mining claims, would have a material adverse impact on the Company. The foregoing changes in the laws and regulations affecting mining claims were a major factor in the Company's previous decision to seek diversification through the reorganization with the Company. GENERAL HISTORY Future Petroleum Corporation (the "Company") is engaged through its subsidiaries and subsidiary partnerships in the development of oil and natural gas properties located onshore primarily in Texas, New Mexico and Oklahoma. The Company's strategy has historically been focused on development drilling and exploration activities in or near established production areas. The Company intends to continue its emphasis on development drilling and to augment this strategy with the acquisition of producing oil and gas reserves. Prior to 1994, the Company, formally known as Intermountain Exploration Company, was engaged solely in mineral exploration, holding non-producing mineral properties in the western United States. In view of adverse economic conditions experienced by small exploration firms whose properties consist principally of unpatented mining claims, in 1992 the Company made a strategic decision to reduce its mineral activity and to seek diversification. This decision was driven in large measure by recent legislation that imposed substantial annual cash rental fees on unpatented mining claims, thereby increasing the carrying costs of the Company's properties as it continued with minimal exploration while it sought joint venture, leases, or other arrangements with third parties in which they would provide major exploration funding. As a result of management's decision, in 1993 the Company acquired all of the issued and outstanding common stock of a Texas corporation, in consideration of the issuance of approximately 2,713,000 shares of common stock of the Company, which represented approximately 85% of the number of shares of the Company's issued and outstanding common stock after the transaction. Subsequently, the Company was renamed Future Petroleum Corporation. EMPLOYEES The Company has eight (8) employees, including two (2) executive officers, all of which are associated with the Company's oil and gas activities. Of the eight (8) employees, two are salaried management personnel, and six are field personnel. The Company also contracts with two independent contractors for engineering, land research and fieldwork. ITEM 2. PROPERTIES OIL AND GAS PROPERTIES The Company's significant oil and gas properties are located in Gray, Carson, Hutchinson, Roberts, Lubbock, Midland, Moore and Wichita Counties in Texas, and Grant, Bryan, Logan, Marshall, and Carter Counties in Oklahoma. The Company also holds interest in oil and gas properties in Lea County, New Mexico. Generally, production is from depths of less than 12,000 feet. For additional information about these properties, see financial statements. In the oil and gas industry and as used herein, the word "gross" well or acre is a well or acre 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. A "net" well or acre is deemed to exist when the sum of fractional ownership working interests in gross wells or gross acres equals one. The number of net wells or acres is the sum of the fractional working interests owned in gross wells or gross acres. WELL AND ACREAGE Shown below are tabulations of the productive wells and estimates of the Company's net interest in total proved reserves of crude oil, condensate, natural gas liquids and natural gas as of December 31, 1997, based on information prepared by an independent petroleum engineer. All wells are located in the United States. PRODUCTIVE WELLS Gross Net ___________ ____________ Gas 11 10 Oil 266 236 ___________ ____________ Totals 277 246 RESERVES Petroleum engineering is not an exact science and involves estimates based upon numerous factors, many of which are inherently variable and uncertain. Consequently, reserve estimates are imprecise and are subject to change, as additional information becomes available. Estimates based upon shore periods of production may not be reliable as those based upon longer production histories. Further, estimates of oil and gas reserves, of necessity, are projections based on engineering data. As a result of the uncertainties inherent in the interpretation of such data, there can be no assurance that the Company's estimated oil and gas reserves would ultimately be developed. Estimates of the reserves and future net revenues involve projecting future results under current operating and economic conditions. Actual production, revenues, taxes, development expenditures and operating expenses may not occur as estimated. Product prices vary over time due to market forces, which are beyond the Company's control. PROVED RESERVES Oil & Natural Gas Liquids Gas ---------------- ------------ (BBLS) (MCF) Balance, January 1, 1995 10,000 1,170,000 Purchase of minerals in place 86,000 573,000 Revisions of estimates 31,000 (89,000) Conveyance of minerals in place to limited partnership (11,000) (350,000) Production (3,000) (84,000) ---------------- ------------ Balance, January 1, 1996 113,000 1,220,000 Purchase of minerals in place 5,000 -- Abandonment of minerals (3,000) (181,000) Revisions of previous estimates (56,000) (767,000) Production (7,000) (29,000) ---------------- ------------- Balance, Dec. 31, 1996 52,000 243,000 Purchase of minerals in place 2,071,000 6,176,000 Revisions of previous estimates 89,000 (220,000) Production (33,000) (60,000) --------------- ------------- Balance, December 31, 1997 2,179,000 6,139,000 The following tables summarize the net production owned by the Company and produced to its interest, less production and royalties due others, for all properties in which the Company had an interest during the periods indicated. The net production to the Company increased during 1997, as a result of the transfer of producing properties from the partnerships acquired in November 1997. (See "ITEM 1. BUSINESS.") OPERATIONS ANNUAL PRODUCTION 1997 1996 1995 Barrels of oil equivalents (Boe) 43,000 11,833 17,000 Natural gas (MMcf) 60,000 29,000 84,000 Natural gas liquids (MBbls) 18,000 3,850 1,650 Oil and condensate (MBbls) 15,000 3,150 1,350 DAILY PRODUCTION Year Ended December 31, 1997 1996 1995 Average net daily production Gas (mcf) 164 79 230 Oil (bbls) 41 19 8 NGL (bbls) 49 -- -- Average sales price Gas ($ per mcf) $ 1.91 $ 2.82 $ 1.59 Oil ($ per bbl) $15.92 $21.32 $16.63 NGL ($ per bbl) $13.54 -- -- The average production cost per barrel of oil equivalent, which includes lifting costs (electricity, fuel, water disposal, repairs, maintenance, pumper, transportation, and similar items), and production taxes, were $9.74 for 1997, $15.80 for 1996, and $8.88 for 1995. To facilitate comparisons, units of production are expressed in common units, with gas converted to a common unit of oil production on the basis of six mcf of gas for one bbl of oil. The Company sells gas on a contract basis to one of several purchasers in each of the areas in which it has productive gas wells. The Company sells oil at posted field prices to one of several purchasers in each of the areas in which it has productive oil wells. LEASEHOLD The following table sets forth developed and undeveloped acreage owned by the Company as of December 31, 1997. Developed Acreage Undeveloped Acreage Total Gross Net Gross Net Gross Net ------------------ -------------------- --------------------- New Mexico 320 107 0 0 320 107 Texas 6,832 6,357 10,038 9,791 16,870 16,148 Oklahoma 2,715 2,340 1,890 167 4,605 2,507 ------------------ ------------------- ---------------------- Totals 9,867 8,1804 11,928 9,958 21,795 18,762 DRILLING ACTIVITIES The wells drilled by the Company during the periods indicated are summarized in the following table. Year Ended December 31, 1997 1996 1995 Gross Net Gross Net Gross Net ------------------ ---------------- -------------------- Development Gas (mcf) -- -- 1 .15 -- -- Oil (bbls) 2 2 2 .14 -- -- Non-productive -- -- -- -- -- -- ----------------- ----------------- -------------------- Totals 2 2 3 .29 -- -- ================= ================= ==================== Exploratory Gas -- -- -- -- -- -- Oil 1 .0042 -- -- -- -- Non-productive -- -- -- -- -- -- ----------------- ---------------- --------------------- Totals -- .0042 -- -- -- -- Mineral Properties (See ITEM I of this 10KSB for a description of the Company's properties.) Executive Offices The Company's principal executive offices, consisting of approximately 2,700 square feet of office space located at 2351 West Northwest Highway, Suite 2130, Dallas, Texas 75220, are rented from an unrelated party at a current rate of $2,006.44 per month, under a lease expiring December, 31, 1998. The Company also maintains a field operations office at Pampa, Texas. ITEM 3. LEGAL PROCEEDINGS Neither the Company nor any of its property is subject to any material pending legal proceeding. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the shareholders during the fourth quarter of 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded in the over-the-counter market and is quoted on the OTC Electronic Bulletin Board of the National Association of Securities Dealers, Inc., under the symbol "FUPT". The following table sets forth the high and low bid quotations for the Company's Common Stock as reported on NASDAQ for the periods indicated, based on interdealer bid quotations, without markup, markdown, commissions or adjustments (which may not reflect actual transactions). The Company's Common Stock has traded on a very limited basis during the preceding two years. In March 1994, the issued and outstanding common stock of the Company was reverse split 6 to 1. All quotations have been adjusted retroactive to give effect to this reverse split. Bid Quotation High Low 1997 Quarter ended March 31 $0.875 $0.1875 Quarter ended June 30 $1.00 $0.625 Quarter ended September 30 $0.9687 $0.6562 Quarter ended December 31 $0.625 $0.25 1996 Quarter ended March 31 $0.1875 $0.125 Quarter ended June 30 $0.25 $0.1875 Quarter ended September 30 $0.25 $0.1875 Quarter ended December 31 $0.1875 $0.15625 As of April 14, 1998, immediately prior to the date of this report, the Company's Stock was quoted on the OTC Electronic Bulletin Board at a closing bid of $0.50. On April 15, 1998, the Company had approximately 860 shareholders. Unregistered Sales of Securities During 1997, the year covered by this report, the Company sold securities without registration under the Securities Act of 1933 (the "Securities Act") in the following transactions: In November 1997, the Company acquired certain producing properties and partnership interests for $6.6 million and 1,575,000 shares of restricted Common Stock. See ITEM 1. DESCRIPTION OF BUSINESS. The securities issued in the transactions described above were issued in reliance on the exemption from the registration and prospectus delivery requirements of the Securities Act provided in 4(2) thereof. Each purchaser was provided with business and financial information respecting the Company and was provided with the opportunity to obtain additional information in order to verify the information provided or to further inform themselves respecting the Company. Each of the persons acquiring such securities acknowledged in writing that such person was obtaining "restricted securities" as defined in rule 144 under the Securities Act; that such shares could not be transferred without registration or an available exemption therefrom; that such person must bear the economic risk of the investment for an indefinite period; and that the Company would restrict the transfer of the securities in accordance with such representations. Such persons also agreed that any certificates representing such shares would be stamped with a restrictive legend covering the transfer of such shares. The certificates representing the foregoing shares bear an appropriate restrictive legend conspicuously on their face, and stop transfer instructions are noted on the Company's stock transfer records. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION General In November 1997, the Company completed a recapitalization of its balance sheet by issuing new equity and $6.6 million of debt to acquire total proved reserves with a present value, discounted at 10%, of $14.6 million. The recapitalization enhances the Company's ability to compete in the oil and gas industry by substantially increasing its cash flow available for investment and improving its ability to attract capital. The ability to redirect cash flow to acquisition, exploitation, and exploration activities allows the Company to pursue its aggressive growth strategy. Business Strategy A primary component of the Company's strategy is to expand its oil and gas development and exploration activities. In addition to developing its existing reserves, the Company will attempt to increase its reserve base, production and operating cash flow by engaging in strategic acquisitions of oil and natural gas properties. What the Company needs to complement its developed, long-lived asset base is a portfolio of properties rich with opportunities for reinvestment in both exploitation and exploration projects. We have chosen to focus on domestic producing basins that will establish for us new core areas of operation. We also desire to operate the properties we acquire because as the operator, we believe we can control the timing of projects and receive the highest possible returns. The Company does not have a specific acquisition budget because of the unpredictability of the timing and size of forthcoming acquisition activities. There is no assurance that The Company will be able to identify suitable acquisition candidates in the future, or that the Company will be successful in the acquisition of producing properties. In order to finance any possible future acquisitions, the Company will either use borrowings or the Company may seek to obtain additional debt or equity financing in the public or private capital markets. Further, there can be no assurances that any future acquisitions made by the Company will be integrated successfully into the Company's operations or will achieve desired profitability objectives. Liquidity and Capital Resources The Company incurred a consolidated net loss of $12,000, and had income of $119,000, for the years ended December 31, 1997 and 1996, respectively. At December 31, 1997, the Company had negative working capital of $271,000, which was a $159,000 decrease from the $112,000 working capital deficit that the Company had as of December 31, 1996. This decrease in working capital was due primarily to the current portion of long term debt resulting from the acquisition of proved reserves referred to above. Management believes cash flow from those reserves will be sufficient to eliminate the working capital deficit. Cash Flow to Operating Activities Operating activities of the Company during 1997 provided net cash of $154,000. The Company purchased two (2) partnerships and the assets of a third for $6.6 million and 1,575,000 shares of the Company's common stock. Investing activities in 1997 provided net cash of $16,000, primarily due from cash in the purchased partnerships. Financing activities in 1997 provided net cash of $9,000 primarily due to proceeds from the exercise of stock options. Operating activities of the Company during 1996 provided net cash of $168,000. Such cash was primarily related to oil and gas operations. The Company paid $166,000 for the purchase of property and equipment during 1996, which was offset by proceeds from the sale of mining properties and property and equipment during the year in the amount of $244,000, resulting in net cash provided by investing activities of $105,000. Results of Operations 1997 and 1996 Total revenues in 1997 increased to $772,000 from $378,000 in 1996, primarily due to the acquisition of two (2) partnerships and the assets of a third. Production costs increased due to the purchase of the proved reserves. General and administrative expenses increased to $154,000 from $120,000 in 1996. The Company incurred a net loss in 1997 of $12,000 compared to net income of $119,000 in 1996, primarily due to $102,000 being recognized in 1996 for the sale of mining properties, which did not recur in 1997. 1996 and 1995 Total revenues in 1996 increased to $378,000 from $253,000 in 1995, primarily due to increased prices and new wells drilled in 1996. Production costs increased slightly due to workovers performed. General and administrative expenses declined to $120,000 from $139,000 in 1995. Net income in 1996 increased to $119,000 from $58,000 in 1995, primarily due to an increase in gains on sales of mining properties and to a decrease in expenses referred to above. Inflation The Company's activities have not been, and in the near term are not expected to be, materially affected by inflation or changing prices in general. The Company's oil exploration and production activities are generally affected by prevailing prices for oil, however. (See"ITEM 1. BUSINESS.") YEAR 2000 ISSUE The Company has reviewed its current computer software and hardware systems, and is currently working to resolve the potential problems associated with the Year 2000 and the processing of date sensitive information by such systems. Based on preliminary information, the Company believes that it will be able to implement successfully the systems and programming changes necessary to address the Year 2000 issues, and does not expect the cost of such changes to have a material impact on the Company's financial position, results of operations or cash flows in future periods. ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The table of contents of the financial statements and supplementary data included in this report is contained in "ITEM 14. EXHIBITS REPORTS ON FORM 8-K". ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There are no changes or disagreements with accountants on accounting and financial disclosure. PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth the name, age and position of each executive officer and director of the Company. Director Name Age Position Term Expires B. Carl Price 39 President, Director 1997 and Treasurer Don Wm. Reynolds 72 Chairman of the Board, 1997 Director Robert Price 71 Vice-President, Director 1999 D. William Reynolds, Jr. 36 Director 1999 Christine Sirera 28 Secretary Charles D. Laudeman 34 Director 1998 The articles of incorporation of the Company provide that the board of directors shall be divided into three classes of approximately equal size, with the directors in each class elected for a three-year term. Officers serve at the pleasure of the board of directors. Biographical information for each of the executive officers and directors is presented below: B. Carl Price B. Carl Price is the president, chief executive officer, director and one of the largest shareholders of the Company. He attended Oklahoma State University where he majored in business. Mr. Price has been a landman since the mid 1980's where he gained much experience by initiating, managing, acquiring and operating oil and gas ventures and properties, which he did with much success. The company was established shortly after the oil and gas business had reached its peak in the late 1970's and early 1980's. Since the Company was established, Future has acquired several producing properties, drilled numerous wells, including directional wells, and has consummated many exploratory and development properties. His management skills have enabled him to assemble a team of qualified Board of Directors each with varied business, management, and political experience. Together with teamwork, confidence, and knowledge, Mr. Price is determined to continue the rapid growth of Future Petroleum Corporation. Don Wm. Reynolds Don Wm. Reynolds, Chairman of the Board of Directors, graduated from Ohio State University in 1952 with a degree in Geology. After several short stints with Rowan Drilling Company and Geochemical Engineering Company, he joined Union Oil Company of California in 1953 as a geologist. He retired from Unocal in 1992 after almost 40 years. He served in various staff and management positions in West Texas, New Mexico, Alaska, California and the mid-continent. Mr. Reynolds assembled the second largest block of stock in Future Petroleum Corporation in the fall of 1992. He joined the Board of Directors as Chairman in 1993. Mr. Reynolds has been active in his profession and has served on many local and national committees and held office in geological societies in West Texas and California. He has been recognized for his efforts and can be found listed in various editions of Who's Who in the business world. Robert Price Robert Price is vice-president of Future Petroleum and a member of the Board of Directors. He received a Bachelor's Degree from Oklahoma State University. Mr. Price owns and operates a working farm and cattle ranch in the Texas Panhandle near Pampa, Texas. He, like his son Carl Price, has been active in the oil and gas industry for over ten years. He is a meticulous man who pays close attention to detail when overseeing many field operations. His knowledge of the Texas Panhandle area has been crucial for optimum drilling sights and exploratory developments. Before his success as an oilman and cattle rancher, Mr. Price was a fighter pilot in the Korean War where he flew 27 combat missions. He later went on to serve his country as a United States Congressman and furthered his political career as a Texas State Senator in Austin, Texas. His civic and social status in the Oklahoma/Texas region has proved to be both beneficial and advantageous for Future Petroleum. D. William Reynolds, Jr. D. William Reynolds, Jr. a member of the board of directors, is the founder and president of Intelligent Financial Perspective, Inc. in Austin, Texas. The corporation is a client server software development and technology consulting firm specializing in financial applications. Prior to starting his own business in 1989, Mr. Reynolds was a management consultant for more than six years. He served on two nationwide consulting firms specializing in the financial services industry. Mr. Reynolds earned a Bachelor's Degree in Finance from the University of California at Berkeley. Continuing his education, he went to The University of Texas at Austin where he earned his M.B.A. degree in Information Systems Management, and where he now holds a faculty position in the graduate school of business. Christine Sirera Christine Sirera is the corporate secretary, office administrator and shareholder of the Company. Ms. Sirera joined the Company in 1994 and was appointed corporate secretary in 1996. Ms. Sirera attended Tarrant County Junior College where she majored in business administration. Ms. Sirera has further developed her business skills as an entrepreneur and small business owner. Charles D. Laudeman Charles D. Laudeman, a member of the board of directors, is presently a Gas Marketing Manager for Howell Petroleum Corporation, Houston, Texas. His responsibilities include the direct marketing of Howells' gas and third party gas, as well as identifying natural gas asset opportunities. He graduated from Southern California University with a Bachelor of Arts Degree in International Relations. A key accomplishment that Mr. Laudeman has been able to provide for Future is market support and analysis of producers, endusers and marketers of natural gas. He is an affiliate of the Natural Gas Association of Houston, New Orleans and Oklahoma. B. Carl Price is the son of Robert Price, and D. William Reynolds, Jr. is the son of Don Wm. Reynolds. Compliance with Section 16(a) of the Exchange Act Based solely upon a review of forms 3, 4 and 5 and amendments thereto, furnished to the Company during or respecting its last fiscal year, no person who, at any time during the most recent fiscal year was a director, officer, beneficial owner of more than 10% of any class of equity securities of the Company or any other person known to be subject to Section 16 of the Exchange Act failed to file on a timely basis reports required by Section 16(a) of the Exchange Act, except that Don Wm. Reynolds filed one report less than 5 days late. ITEM 10. EXECUTIVE COMPENSATION Executive Officer Compensation The following table sets forth, for each of the last three fiscal years, cash compensation received by any person serving as chief executive officer of the Company during the last preceding fiscal year and any of the four remaining most highly compensated other executive officers whose salary and bonus for all services in all capacities exceeded $100,000 for the most recent fiscal year. Summary Compensation Table Long Term Compensation Annual Compensation Awards Payouts (a) (b) (c) (d) (e) (f) (g) (h (i) - ------------------------------------------------------------------------------- Other Securities All Other Annual Restricted Underlying Compen- Year Compen- Stock Options/ LTIP sation Name and Ended Salary Bonus sation Award(s) SARs Payouts Position Dec. 31 ($) ($) ($) (#) (#) ($) ($) - ------------------------------------------------------------------------------- B. Carl Price, (CEO) 1997 $12000 -- $50,300(1) 25832(3) 200,000(2) -- -- President, 1996 $12000 -- $21,853(1) -- -- -- -- Director 1995 $12000 -- $35,000(1) -- -- -- -- - ------------------------------------------------------------------------------- (1) During 1997, 1996 and 1995, Price Oil & Gas Co., which is a company, owned by Mr. Price was paid money for consulting services provided to the Company. (2) On January 10, 1997, the Company granted to B. Carl Price five-year options to purchase 200,000 shares, respectively, at $0.44275, based on the approximate market price of the Company's common stock on the date of grant. (3) On November 18, 1997, the Company granted 25,832 shares to Mr. Price. The following table sets forth information respecting the exercise of options and SARs during the fiscal year ended December 31, 1997, by the named executive officer of the Company and the fiscal year end values of unexercised options and SARs. (a) (b) (c) (d) (e) Number of Value of Securities Unexercised Underlying In-the-Money Unexercised Options/SARs Options/SARS at FY End ($) at FY Shares End (#) Acquired Value Exercisable/ Exercisable/ Name on Exercise (#) Realized($) Unexercisable Unexercisable - ----------------------------------------------------------------------- B. Carl Price -- -- 237,720/-- $17,149/-- (1)Options to purchase 150,000 shares of Common Stock at any time through February 25, 1999, at an exercise price of $0.267 per share. On October 17, 1994, Mr. Price exercised options to acquire 112,280 shares for cancellation of a debt owed to a company owned by Mr. Price in the amount of $29,979. Employment Agreements, Deferred Salary and Benefits In November 1997, the Company entered into five-year agreements with the president of the Company and two directors to provide compensation for future services and for rental of certain property used as a storage yard. The minimum annual compensation anticipated by the agreements is $123,600. A portion of the compensation may be paid in stock of the Company, based on the market price of the stock, as specified in the agreements. Stock Option and Award Plan The Company has adopted, and the shareholders have approved, a 1993 Employee Incentive Plan (the "Plan") intended to advance the interests of the Company by attracting competent executive personnel and other employees, ensuring the retention of the services of existing executive personnel and employees, and providing incentives to all of such personnel to devote the utmost effort and skill to the advancement and betterment of the Company by permitting them to participate in the ownership of the Company and thereby permitting them to share in increases in the value of the Company which they will help to produce. The Plan is administered by the board of directors or a committee appointed from time to time by the board of directors. Under the Plan, the board or duly appointed committee may grant stock options, which may be incentive stock options ("ISOs") as defined in the Internal Revenue Code (the "Code"), or options which do not qualify as ISOs, to directors and employees of the Company who, in the opinion of the board or committee, are expected to contribute materially to the Company's success in the future. All employees of the Company are eligible to participate in the Plan. A maximum of 800,000 shares, subject to adjustment for certain events of dilution, are available for grant under the Plan, provided, however, that in no event may the aggregate fair market value of shares of the Company's common stock with respect to which ISO is exercisable for the first time in any calendar year exceed $100,000. The exercise price of options granted under the Plan may not be less than 100% of the fair market value of the Company common stock on the date the option is granted in the case of ISOs (110% of the fair market value in the case of 10% stockholders). All ISOs granted under the Plan shall expire not later than ten years from the date of grant (5 years in the case of ISOs granted to 10% stockholders), and all nonqualified options shall expire at such date as the board or a duly appointed committee shall determine. The option price may be paid by cash or, at the discretion of the board or a duly appointed committee, by delivery of common stock or options already owned by the optionee (valued at their fair market value at the date of exercise), or a combination thereof. The aggregate number of shares of common stock with respect to which options may be granted under the Plan, the number of shares thereof covered by each outstanding option, and the purchase price per share thereof in each such option, shall be adjusted for any increase or decrease in the number of issued shares of common stock of the Company resulting from a recapitalization, reorganization, merger, consolidation, exchange of shares, stock dividend, stock split, reverse stock split, or other subdivision or consolidation of shares or other increase or decrease in such shares effected without receipt by the Company of consideration approved by the board of directors of the Company (an "Event of Dilution"), in amounts to prevent substantial dilution or enlargement of rights granted to or available for eligible employees. In the case of an ISO, the ratio of the option price to the fair market value of the stock subject to the option immediately after the change must not be more favorable to the optionee on a share by share comparison than the ratio of the old option price to the fair market value of the stock subject to the option immediately before such transaction. All such adjustments shall be made by the board or a duly appointed committee, whose good faith determination shall be binding absent manifest error. The board of directors of the Company may from time to time alter, amend, suspend, or discontinue the Plan with respect to any shares of common stock as to which options have not been granted. However, no such alteration or amendment (unless approved by the stockholders) shall (a) increase (except in the case of an Event of Dilution) the maximum number of shares for which options may be granted under the Plan either in the aggregate or to any eligible employee; (b) reduce (except in the case of an Event of Dilution) the minimum option prices which may be established under the Plan; (c) extend the period or periods during which options may be granted or exercised; (d) materially modify the requirements as to eligibility for participation in the Plan; (e) change the provisions of the preceding paragraph relating to Events of Dilution; or (f) materially increase the benefits accruing to the eligible employees under the Plan. On January 10, 1997, the Company granted to B. Carl Price five-year options to purchase 200,000 shares, respectively, at $0.44275, based on the approximate market price of the Company's common stock on the date of grant. On February 25, 1994, the Company granted to B. Carl Price five-year option to purchase 150,000 shares, respectively, at $0.267 per share (110% of the approximate market price of the Company's common stock on the date of grant). ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of April 15, 1998, the outstanding Common Stock of the Company owned of record or beneficially by each person who owned of record, or was known by the Company to own beneficially, more than 5% of the Company's 5,847,015 shares of Common Stock issued and outstanding, and the name and share holdings of each officer and director and all of the officers and directors as a group: Nature of Number of Name of Person or Group Ownership(1) Shares Owned Percent Principal Shareholders B. Carl Price Direct 1,089,149 18.6% 2351 W. Northwest Hwy Options 237,720 3.9% Suite 2130 Total 1,326,869 22.5% Dallas, TX 75220 Don Wm. Reynolds Direct 653,362 11.2% 206 Rock Street Bowie, TX 76230 EnCap Equity 1994 LP Direct 1,800,000 30.8% Energy Capital Investment Co. PLC 1100 Louisiana, Ste 3150 Houston, TX 77002 Officers and Directors B. Carl Price ------------------See Above-------------------------- Don Wm. Reynolds ------------------See Above-------------------------- Robert D. Price Direct(2) 138,456 2.4% Options 50,000 0.8% Total 188,456 3.2% D. William Reynolds, Jr. Direct 733 0.0% Christine Sirera Direct 16,808 0.3% Options 40,000 0.7% Total 56,808 1.0% Charles D. Laudeman Direct 14,017 0.2% Options 20,000 0.3% Total 34,017 0.6% All Executive Officers Direct 1,912,525 32.7% & Directors as a Group Options 347,720 5.9% (5 people) Total 2,260,245 38.6% (1)Shares owned directly are owned beneficially and of record and such record shareholder has sole voting, except as provided herein, investment and dispositive power. (2)15,409 of the shares held by Mr. Price are held jointly with his wife, Martha Ann Price. B. Carl Price is the son of Robert Price, and D. William Reynolds, Jr. is the son of Don Wm. Reynolds. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reverse Stock Split On March 14, 1994, the Company effected a six-to-one reverse stock split of the issued and outstanding shares of the Company's common stock. Immediately prior to the reverse stock split, the Company had 19,146,191 shares of common stock issued and outstanding, which were reduced to 3,191,032 shares after the reverse stock split. All share and per share amounts in this report give effect to such reverse split. Price Lease In November 1990, the Company entered into a lease with Robert D. Price, an officer and director of the Company, and Martha Ann Price, his wife, respecting the Price Ranch prospect, consisting of 8,388 acres on thirteen tracts of land in Gray, Roberts, Hutchinson and Carson Counties, Texas. The term of the lease is for 10 years, subject to an extension for an additional ten years at the option of the Company. A royalty of 1/8 of the oil and gas produced from the wells drilled on the property is reserved to the lessors, as well as a shut-in royalty after the expiration of the primary term of $1.00 per acre subject to the lease if the Company performs no operations on the property or all wells drilled thereon are shut-in for a period of 90 consecutive days. Future Acquisition 1995, Ltd. In November 1997 the Company acquired the limited partners' interest in Future Acquisition 1995, Ltd., in exchange for a note and stock in the Company. (See Note 4.) During 1997, the Company earned $163,000 in well operation fees from operating the wells of the partnership. Price Oil & Gas Co. Additionally, as of December 31, 1997, the Company owes a company owned by the president of the Company approximately $27,000 for accrued consulting fees and operating advances. The operating advances of $6,000 are short-term, non-interest bearing, uncollateralized obligations of the Company. ITEM 13. EXHIBITS REPORTS ON FORM 8-K (a)(1) Financial Statements. The following statements are included in this report: Title of Document Page Independent Auditor's Report F-1 Consolidated Balance Sheet as of December 31, 1997 F-2 Consolidated Statements of Operations for the Years Ended December 31, 1997 and 1996 F-4 Consolidated Statement of Changes in Stockholders' Equity for the Period from January 1, 1996, through December 31, 1997 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997 and 1996 F-6 Notes to Consolidated Financial Statements F-7 (a)(3) Exhibits. The following exhibits are included as part of this report. (See exhibit index in separate exhibit volume): SEC Exhibit Reference Number Number Title of Document Location Item 3. Articles of Incorporation and Bylaws 3.01 3 Articles of Restatement of the Articles of Incorporation Incorporated by Reference(2) 3.02 3 Bylaws Incorporated by Reference(2) Item 10. Material Contracts 10.01 10 Oil, Gas and Mineral Lease dated November 1, 1990 between the Company and Robert D. Price and Martha Ann Price relating to the lease of the Price Ranch Incorporated by Reference(2) 10.02 10 Acquisition Agreement and related Promissory Note and Deed of trust dated March 4, 1994, related to Eldorado Canyon property Incorporated by Reference(2) 10.03 10 Promissory Note dated November 25, 1997, from the Company to Energy Capital Investment Company, PLC Incorporated by Reference(3) 10.04 10 Promissory Note dated November 25, 1997, from the Company to EnCap Equity 1197 Limited Partnership Incorporated by Reference(3) 10.05 10 Promissory Note Dated November 25, 1997, from the Company to Gecko Booty 1994 I Limited Partnership Incorporated by Reference(3) 10.06 10 Registration Rights Agreement dated November 25, 1997, by the Company, Energy Capital Investment Company, PLC, and EnCap Equity 1994 Limited Partnership Incorporated by Reference(3) 10.07 10 Voting Agreement dated November 25, 1997 by B. Carl Price, Don Wm. Reynolds, Energy Capital Investment Company, PLC, and EnCap Equity 1994 Limited Partnership Incorporated by Reference(3) Item 21. Subsidiaries of the Registrant 21.01 21 Schedule of Subsidiaries This Filing Item 27 Financial Data 27.01 27 Financial Data Schedules This Filing (1) Incorporated by reference from the Company's current report on form 8-K dated September 16, 1993. (2) Incorporated by reference from the Company's annual report on form 10-K for the fiscal year ended December 31, 1996. (3) Incorporated by reference from the Company's current report on form 8-K dated November 25, 1997. * Indicated management contract or compensatory plan or arrangement required to be filed as an exhibit. (b) Reports on form 8-K. During the last quarter of the fiscal year ended December 31, 1997, the Company filed reports on Form 8-K as follows: Date of Event Reported Item Reported November 25, 1997 Item 2. Acquisition or Disposition of Assets Item 7. Financial Statements SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, Registrant has duly caused this amendment to its annual report on form 10-KSB to be signed on its behalf by the undersigned; thereunto duly authorized, this 15th day of April, 1998. FUTURE PETROLEUM CORPORATION (Registrant) By /s/ B. Carl Price B. Carl Price, President Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this form 10-KSB was signed by the following persons in the capacities stated on the 15th day of April, 1998. /s/ B. Carl Price B. Carl Price, President and Director (Chief executive and principal financial and accounting officer) /s/ Christine Sirera Christine Sirera, Corporate Secretary /s/ Don Wm. Reynolds Don Wm. Reynolds, Director (Chairman of the Board) /s/ Robert D. Price Robert D. Price, Vice-President, Director /s/ D. William Reynolds, Jr. D. William Reynolds, Jr., Director /s/ Charles D. Laudeman Charles D. Laudeman, Director Date Filed: April 15, 1998 SEC File No. 0-8609 - ------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------------- EXHIBITS TO ANNUAL REPORT ON FORM 10-KSB UNDER THE SECURITIES EXCHANGE ACT OF 1934 ----------------------------- FUTURE PETROLEUM CORPORATION EXHIBIT INDEX SEC Exhibit Reference Number Number Title of Document Location Item 3. Articles of Incorporation and Bylaws 3.01 3 Articles of Restatement of the Articles of Incorporation Incorporated by Reference(2) 3.02 3 Bylaws Incorporated by Reference(2) Item 10. Material Contracts 10.01 10 Oil, Gas and Mineral Lease dated November 1, 1990 between the Company and Robert D. Price and Martha Ann Price relating to the lease of the Price Ranch Incorporated by Reference(2) 10.02 10 Acquisition Agreement and related Promissory Note and Deed of trust dated March 4, 1994, related to Eldorado Canyon property Incorporated by Reference(2) 10.03 10 Promissory Note dated November 25, 1997, from the Company to Energy Capital Investment Company, PLC Incorporated by Reference(3) 10.04 10 Promissory Note dated November 25, 1997, from the Company to EnCap Equity 1197 Limited Partnership Incorporated by Reference(3) 10.05 10 Promissory Note Dated November 25, 1997, from the Company to Gecko Booty 1994 I Limited Partnership Incorporated by Reference(3) 10.06 10 Registration Rights Agreement dated November 25, 1997, by the Company, Energy Capital Investment Company, PLC, and EnCap Equity 1994 Limited Partnership Incorporated by Reference(3) 10.07 10 Voting Agreement dated November 25, 1997 by B. Carl Price, Don Wm. Reynolds, Energy Capital Investment Company, PLC, and EnCap Equity 1994 Limited Partnership Incorporated by Reference(3) Item 21. Subsidiaries of the Registrant 21.01 21 Schedule of Subsidiaries This Filing Item 27 Financial Data 27.01 27 Financial Data Schedules This Filing (4) Incorporated by reference from the Company's current report on form 8-K dated September 16, 1993. (5) Incorporated by reference from the Company's annual report on form 10-K for the fiscal year ended December 31, 1996. (6) Incorporated by reference from the Company's current report on form 8-K dated November 25, 1997. * Indicated management contract or compensatory plan or arrangement required to be filed as an exhibit. (b) Reports on form 8-K. During the last quarter of the fiscal year ended December 31, 1997, the Company filed reports on Form 8-K as follows: Date of Event Reported Item Reported November 25, 1997 Item 2. Acquisition or Disposition of Assets Item 7. Financial Statements EXHIBIT 21 Schedule of Subsidiaries is as follows: Future Petroleum Corporation, a Texas corporation Alaska Eldordo Gold, a Nevada corporation Future Energy Corporation, a Nevada corporation EXHIBIT 27 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Future Petroleum Corporation Dallas, Texas We have audited the accompanying consolidated balance sheet of Future Petroleum Corporation as of December 31, 1997, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years ended December 31, 1997 and 1996. 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 audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Future Petroleum Corporation as of December 31, 1997, and the results of its consolidated operations and cash flows for the years ended December 31, 1997 and 1996, in conformity with generally accepted accounting principles. HEIN + ASSOCIATES LLP March 20, 1998 Dallas, Texas FUTURE PETROLEUM CORPORTION CONSOLIDATED BALANCE SHEET DECEMBER 31, 1997 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 293,000 Trade accounts receivable, no allowance for doubtful accounts considered necessary: Joint interest billings 9,000 Accrued oil and gas sales 269,000 ------------- Total current assets 571,000 PROPERTY AND EQUIPMENT: Proved oil and gas properties, full cost method 12,134,000 Other 44,000 ------------- Total property and equipment 12,178,000 Less accumulated depletion, depreciation, amortization and impairment (330,000) ------------- Net property and equipment 11,848,000 OTHER ASSETS: Note receivable, net of allowance of$53,000 93,000 Lease operating rights, net of accumulated amortization of $32,000 96,000 Mining properties held for sale 40,000 Other 31,000 ------------- Total assets $ 12,679,000 ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $504,000 Trade accounts payable 233,000 Accrued oil and gas proceeds payable 59,000 Advance from related party 6,000 Deferred gain 40,000 ------------ Total current liabilities 842,000 LONG-TERM DEBT, less current portion 6,133,000 DEFERRED TAX LIABILITY 1,298,000 COMMITMENT (Note 10) STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, 200,000 shares authorized, no shares issued -- Common stock, $.01 par value; 30,000,000 shares authorized; 5,678,779 shares issued and outstanding 57,000 Additional paid-in capital 4,413,000 Accumulated deficit (64,000) ------------- Total stockholders' equity 4,406,000 Total liabilities and stockholders' equity $ 12,679,000 ============= See accompanying notes to these financial statements
F-2 FUTURE PETROLEUM CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, ------------------------- 1997 1996 ---------- ---------- REVENUES: Oil and gas sales $ 596,000 $ 224,000 Well operation fees 176,000 154,000 ---------- ---------- Total revenues 772,000 378,000 COSTS AND EXPENSES: Lease operations and production taxes 419,000 187,000 General and administrative 154,000 120,000 Depletion, depreciation and amortization 191,000 99,000 Interest 69,000 6,000 ---------- --------- Total expenses 833,000 412,000 OTHER INCOME: Gain on sales of assets -- 102,000 Interest income 14,000 42,000 Miscellaneous income 28,000 41,000 ---------- --------- Total other income 42,000 185,000 INCOME (LOSS) BEFORE INCOME TAXES (19,000) 151,000 DEFERRED INCOME TAX (EXPENSE) BENEFIT 7,000 (32,000) ---------- --------- NET INCOME (LOSS) $ (12,000) $ 119,000 ========== ========= NET INCOME (LOSS) PER COMMON SHARE (basic and diluted) $ - $ .03 ========== ========= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,280,000 3,472,000 ========== ========= See accompanying notes to these financial statements
F-3 FUTURE PETROLEUM CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE PERIOD FROM JANUARY 1, 1996 THROUGH DECEMBER 31, 1997 Additional Total Common Stock Paid-In Accumulated Stockholders' Shares Amount Capital Deficit Equity -------------------------------------------------------- BALANCES, JANUARY 1, 1996 3,426,903 $35,000 $1,016,000 $(171,000) $ 880,000 Shares issued for options exercised 59,876 -- 15,000 -- 15,000 Net income -- -- -- 119,000 119,000 -------------------------------------------------------- BALANCES, DECEMBER 31, 1996 3,486,779 35,000 1,031,000 (52,000) 1,014,000 Shares issued for options exercised 200,000 2,000 28,000 -- 30,000 Shares issued for oil and gas properties 1,980,000 20,000 3,349,000 -- 3,369,000 Shares issued for services 12,000 -- 5,000 -- 5,000 Net loss -- -- -- (12,000) (12,000) -------------------------------------------------------- BALANCES, DECEMBER 31, 1997 5,678,779 $57,000 $4,413,000 $(64,000) $4,406,000 See accompanying notes to these financial statements.
F-4 FUTURE PETROLEUM CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997 1996 ----------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (12,000) $ 119,000 Adjustments to reconcile to net cash from operations: Depletion, depreciation and amortization 191,000 99,000 Reserve for bad debts 53,000 -- Gain on sale of assets -- (102,000) Stock issued for services 5,000 -- Change in trade accounts receivable (31,000) (122,000) Change in accounts payable and accrued liabilities (28,000) 98,000 Deferred income taxes (7,000) 32,000 Change in related party payable (20,000) 41,000 Other 3,000 3,000 ---------- --------- Net cash provided by operations 154,000 168,000 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (182,000) (166,000) Proceeds from sale of mining properties and collection of associated notes receivable 12,000 244,000 Cash in Partnerships upon acquisition 186,000 -- Other -- 27,000 ---------- --------- Net cash provided by investing activities 16,000 105,000 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable -- 28,000 Repayments of notes payable (21,000) (153,000) Proceeds from exercise of stock options 30,000 -- Change in overdrafts payable -- (34,000) --------- ---------- Net cash provided (used) by financing activities 9,000 (159,000) --------- ---------- NET CHANGE IN CASH AND CASH EQUIVALENTS 179,000 114,000 CASH AND CASH EQUIVALENTS, beginning of year 114,000 -- CASH AND CASH EQUIVALENTS, end of year $ 293,000 $ 114,000 ========= ========== SUPPLEMENTAL INFORMATION - Cash paid during the year for interest $ 69,000 $ 6,000 ========= ========== NON-CASH INVESTING AND FINANCING ACTIVITIES - In 1997, the Company acquired interests in oil and gas partnerships and oil and gas properties for notes payable of $6,600,000 and common stock valued at $3,369,000. In 1996, a related party exercised options for 59,876 shares of common stock in exchange for the payment of a liability in the amount of $15,000. In 1996, the Company's oil and gas properties increased $190,000 based on its share of Partnership property additions funded by the limited partner. See accompanying notes to these financial statements.
F-5 FUTURE PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Company Operations Future Petroleum Corporation (the Company or FPC) is engaged primarily in the acquisition, development and production of oil and gas reserves and operation of oil and gas wells for third parties. The accompanying financial statements include the accounts of the Company and its wholly-owned subsidiaries, Alaska Eldorado Gold Company, Future Energy Corporation and Future Petroleum Corporation of Texas. In addition, the financial statements include the accounts of Future Acquisition 1995, Ltd. and BMC Development No. 1, Ltd. (the Partnerships). As of December 31, 1997, FPC and a subsidiary held 100% of the ownership interests of the Partnerships (see Note 4). Inter-company accounts and transactions are eliminated in consolidation. Oil and Gas Properties The Company uses the full cost method of accounting for its oil and gas properties. The Company's properties are all located in the continental United States, primarily Texas, Oklahoma, and therefore, its costs are capitalized in one cost center. Under the full cost method, all costs related to the acquisition, exploration or development of oil and gas properties are capitalized into the "full cost pool". Such costs include those related to lease acquisitions, drilling and equipping of productive and non-productive wells, delay rentals, geological and geophysical work and certain internal costs directly associated with the acquisition, exploration or development of oil and gas properties. During the years ended December 31, 1997, and 1996, internal costs capitalized into the full cost pool were approximately $82,000 and $81,000, respectively. Upon the sale or disposition of oil and gas properties, no gain or loss is recognized, unless such adjustments of the full cost pool would significantly alter the relationship between capitalized costs and proved reserves. Under the full-cost method of accounting, a "full-cost ceiling test" is required wherein net capitalized costs of oil and gas properties cannot exceed the present value of estimated future net revenues from proved oil and gas reserves, discounted at 10%, less any related income tax effects. Depletion, depreciation, and amortization of oil and gas properties is computed using the unit-of-production method based on estimated proved oil and gas reserves. Depletion, depreciation and amortization per equivalent mcf of natural gas was approximately $.68 and $1.39 for the years ended December 31, 1997 and 1996, respectively. Mining Properties Held for Sale Mining properties held for sale are recorded at the lower of cost or estimated net realizable value. Other Property Other property and equipment consists of office furniture and fixtures which are carried at cost. Depreciation is provided using the straight-line method over estimated useful lives ranging from five to ten years. Gain or loss on retirement or sale or other disposition of assets is included in income in the period of disposition. F-6 FUTURE PETROLEUM COPORATION NOTES TO CONSOLIDATED FINANACIAL STATEMENTS Income Taxes The Company accounts for its income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". SFAS 109 requires that deferred income taxes be recorded for the temporary differences between the tax and financial statement bases of assets and liabilities and adjusted when new tax rates are enacted. Net Income (Loss) Per Common Share Net income or loss per common share is based on the weighted average number of common shares outstanding. The Company's common stock equivalents, which consisted of stock options and warrants, were anti-dilutive in 1997 and 1996. In 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share", which prescribes certain changes in the method of calculating earnings or loss per share. The Company applied SFAS No. 128 to both its 1997 and 1996 financial statements, and it had an immaterial effect on those statements. Statement of Cash Flows For purposes of reporting cash flows, the Company considers cash and unrestricted interest bearing deposits with original maturities of three months or less to be cash equivalents. Use of Estimates and Certain Significant Estimates The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires the Company's management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates. Significant assumptions are required in the valuation of proved oil and gas reserves, which as described above may affect the amounts at which oil and gas properties are recorded. It is at least reasonably possible those estimates could be revised in the near term and those revisions could be material. Stock-Based Compensation In 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock-Based Compensation", which requires recognition of the value of stock options and warrants granted based on an option pricing model. However, as permitted by SFAS No. 123, the Company continues to account for stock options and warrants granted to directors and employees pursuant to APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. 2. NOTE RECEIVABLE The Company has a note receivable at December 31, 1997 with a balance of $93,000, net of an allowance of $53,000. The note bears interest at 8% (15% if the note is in default), and is collateralized by a deed of trust on a mining property. The note was in default as of December 31, 1997 as all unpaid principal and interest was due and payable on July 1, 1997. The note arose from the sale of mining properties during 1994. Due to the terms of the sale, the gain was deferred and recorded as a liability, which is amortized into income as the note is collected. The balance of the deferred gain at December 31, 1997 is $40,000. The gain associated with this note that was amortized into income was $0 and $26,000 in 1997 and 1996, respectively. F-7 FUTURE PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. RELATED PARTY TRANSACTIONS Included in well operation fees in 1997 and 1996 is $163,000 and $134,000, respectively earned from operating the wells of FAQ (see Note 4) prior to the Company's acquisition of the other interests in FAQ. As of December 31, 1997, the Company owes a company owned by the president of the Company approximately $27,000 for accrued consulting fees and operating advances. The operating advances of $6,000 are short-term, non-interest bearing, uncollateralized obligations of the Company. 4. INVESTMENT IN PARTNERSHIP AND ACQUISITIONS In December 1995, the Company contributed a substantial portion of its oil and gas properties to Future Acquisition 1995, Ltd. (FAQ), a limited partnership in which the Company is the general partner. As a result of entering into the partnership, the Company became the operator of a majority of the partnership properties. The Company's investment was recorded at book value and was allocated to oil and gas properties and lease operating rights based on the relative fair values of those assets. The limited partners contributed cash, which was used to acquire and develop oil and gas properties. Through October 1997, revenues and costs and expenses were generally allocated either 15% and 85% or 3% and 97% to the Company and the limited partners, respectively, depending on the property. Certain acquisition and development costs were allocated 100% to the limited partners. The Company accounted for its investment in FAQ as a pro rata consolidation prior to the Company's acquisition of the remaining interest in FAQ, which is described below. The carrying value of the operating rights are amortized over the estimated life of the partnership's oil and gas reserves. The amortization was $10,000 and $22,000 in 1997 and 1996, respectively and is included in "depletion, depreciation and amortization" in the accompanying statements of operations. In November 1997, the Company purchased all the limited partners' interest in FAQ, 100% of the BMC Development No. 1, Ltd. Partnership (BMC) and all the assets of a third partnership for a total of $6,600,000 in notes payable and 1,575,000 shares of the Company's common stock. The limited partners of FAQ were also the principal owners of the interests in BMC and the other partnership. The acquisition was accounted for as a purchase and the operations of the acquired assets are included with those of the Company beginning in November 1997. The stock was recorded at $3,131,000 based on the estimated fair market values of the net assets acquired. The fair market values were estimated primarily by reference to appraisals that were obtained for the oil and gas properties. In connection with the acquisition of FAQ, the Company acquired certain of the property interests to which it had previously assigned value to the associated lease operating rights. The estimated value of the loss of such third party operating rights was considered to be part of the consideration paid for the net assets acquired. The amount of $267,000 was thus transferred from lease operating rights to oil and gas properties in the recording of the acquisition. The following unaudited pro forma information is presented as if the interests in the Partnerships and the oil and gas properties had been acquired at the beginning of the respective periods: 1997 1996 Revenues $ 2,743,000 $ 2,187,000 Net loss $ (64,000) $ (118,000) Net loss per share $ (.01) $ (.02) F-8 FUTURE PETROLEUM CORPORTION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. LONG-TERM DEBT Long-term debt at December 31, 1997 consisted of the following: Note payable to a stockholder, interest at 10%, monthly payments of interest only from November 1997 through May 1998, then monthly principal payments of $34,395 plus interest through May 31, 2003, with a final payment of $1,238,235 on May 31, 2003. Collateralized by deeds of trust on all current and subsequently acquired properties of the Company and the Partnerships. $ 3,302,000 Note payable to a stockholder, interest at 10%, monthly payments of interest only from November 1997 through May 1998, then monthly principal payments of $32,531 plus interest through May 31, 2003, with a final payment of $1,171,141 on May 31, 2003. Collateralized by deeds of trust on all current and subsequently acquired properties of the Company and the Partnerships. 3,123,000 Note payable to a partnership, interest at 10%, monthly payments of interest only from November 1997 through May 1998, then monthly principal payments of $1,823 plus interest through May 31, 2003, with a final payment of $65,620 on May 31, 2003. Collateralized by deeds of trust on certain oil and gas properties. 175,000 Other notes payable, various terms 37,000 ---------- Total 6,637,000 Less current portion (504,000) ---------- Long-term debt $6,133,000 ========== Maturities of long-term debt for the years ending December 31, 1997 are as follows: 1998 $ 504,000 1999 832,000 2000 832,000 2001 825,000 2002 825,000 Thereafter 2,819,000 ---------- $6,637,000 6. STOCKHOLDERS' EQUITY The Company has 200,000 shares of preferred stock authorized with a par value of $.01. No shares were issued or outstanding at December 31, 1997. The preferred shares may be issued in series with the relative rights and preferences designated by the Company's board of directors. In 1997, the Company issued 405,000 shares, valued at $237,500, as part of its contribution for certain properties acquired by FAQ (see Note 4). F-9 FUTURE PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In connection with the purchase of certain oil and gas properties in 1995, the Company issued warrants to purchase 50,000 shares to the seller as part of the transaction. Warrants to purchase 25,000 shares were not exercised prior to expiration in December 1997; warrants to purchase 12,500 shares have an exercise price of $2 per share and are exercisable until December 2000; and warrants to purchase 12,500 shares have an exercise price of $3 per share and are exercisable until December 2000. In 1996 and 1995, the Company issued warrants to the limited partners in FAQ to purchase 287,500 shares of the Company's common stock for $1.00 per share. The warrants were canceled in connection with the acquisition in 1997 (see Note 4). 7. STOCK BASED COMPENSATION Stock Option Plans The Company has a stock option plan, under which key employees may be granted options to purchase the Company's common stock at prices equal to market value at the date of grant (110% of market value for stockholders with more than 10% of the outstanding stock). The options may be exercised anytime within five years of grant. The following is a summary of activity under this stock option plan for the years ended December 31, 1997 and 1996: 1997 1996 -------------------- ------------------ Weighted Weighted Average Average Number Exercise Number Exercise of Shares Price of Shares Price ---------- --------- --------- --------- Outstanding, beginning of year 297,844 $ .20 137,720 $ .25 Canceled or expired -- -- -- -- Granted 290,000 .45 220,000 .18 Exercised (200,000) .15 (59,876) .24 ----------- --------- --------- --------- Outstanding, end of year 387,844 $ .41 297,844 $ .20 All the options outstanding at December 31, 1997, and those exercised during 1997, were granted to officers or stockholders of the Company. For all options granted during 1997 and 1996, the market price of the Company's common stock on the grant date was approximately equal to the exercise price. F-10 FUTURE PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS If not previously exercised, options outstanding at December 31, 1997 will expire as follows: Weighted Average Number Exercise of Shares Price ------------- ----------- 1999 77,844 $ .26 2001 20,000 .44 2001 290,000 .45 ------------- Total 387,844 ============= Warrants and Other Stock Options The Company has also granted warrants and other options which are summarized as follows for the years ended December 31, 1997 and 1996. 1997 1996 -------------------- ------------------ Weighted Weighted Average Average Number Exercise Number Exercise of Shares Price of Shares Price ---------- --------- --------- --------- Outstanding, beginning of year 337,500 $ 1.12 300,000 $ 1.13 Granted to: Limited partners of FAQ -- -- 37,500 1.00 Expired or canceled (312,500) 1.00 -- -- ----------- --------- --------- --------- Outstanding, end of year 25,000 $ 2.50 337,500 $ 1.12 =========== ========= ========= ========= All outstanding warrants and other options were exercisable at December 31, 1997. If not previously exercised, all warrants and other options outstanding at December 31, 1997 will expire in the year 2000. The exercise price exceeded the market price of the Company's common stock on the grant date for the warrants and other stock options granted during 1996. No warrants or other stock options were granted in 1997. Pro Forma Stock-Based Compensation Disclosures As described in Note 1, the Company applies APB Opinion No. 25 and related interpretations in accounting for its stock options. Accordingly, no compensation cost has been recognized for grants of options to employees since the exercise prices were not lower than the market prices of the Company's common stock on the measurement date. Had compensation been determined based on the estimated fair value at the measurement dates for awards under those plans consistent with the method prescribed by SFAS No. 123, the Company's 1997 and 1996 net income (loss) and earnings (loss) per share would have been changed to the pro forma amounts indicated below. F-11 FUTURE PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1997 1996 ------------- ------------- Net income (loss) applicable to common stockholders: As reported $ (12,000) $ 119,000 ============= ============= Pro forma $ (39,000) $ 103,000 ============= ============= Net income (loss) per share of common stock: As reported $ - $ 0.03 ============= ============= Pro forma $ (.01) $ 0.03 ============= ============= The estimated fair value of each employee option and warrant granted in 1997 and 1996 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: Year Ended December 31, 1997 1996 ------------- ------------- Expected volatility 64% to 102% 62% Risk-free interest rate 6.13% to 6.5% 6.13% to 6.63% Expected dividends -- -- Expected terms (in years) 5 5 8. INCOME TAXES A reconciliation of income tax expense at the Federal statutory rate of 34% to income tax expense reported in the accompanying consolidated statements of operations follows: 1997 1996 --------- --------- Income tax expense (benefit) at statutory rate $ (7,000) $ 51,000 Effect of graduated tax brackets -- (19,000) --------- --------- $ (7,000) $ 32,000 The components of the Company's deferred tax liability as of December 31, 1997 and 1996 are as follows: 1997 1996 ----------- --------- Difference in bases of oil and gas properties $(1,518,000) $(215,000) Net operating loss and other 220,000 183,000 ----------- --------- Net deferred tax liability $(1,298,000) $ (32,000) =========== ========= At December 31, 1997, the Company had a net operating loss carryforward for Federal income tax purposes of approximately $580,000, which will expire if unused in 2006 through 2008. The Company has approximately $1,140,000 of additional net operating loss carryforwards that are subject to substantial limitations under Section 382 of the Internal Revenue Code. F-12 FUTURE PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. ENVIRONMENTAL MATTERS Being engaged in oil and gas development, the Company may become subject to certain liabilities as they relate to environmental clean up of well sites or other environmental restoration procedures as they relate to the drilling of oil and gas wells and the operation thereof. In the Company's acquisition of existing or previously drilled well bores, the Company may not be aware of what environmental safeguards were taken at the time such wells were drilled or during the time that such wells were operated. Should it be determined that a liability exists with respect to any environmental clean up or restoration, the liability to cure such a violation would most likely fall upon the Company. No claim has been made nor has a claim been asserted, nor is the Company aware of the existence of any liability which the Company may have, as it relates to any environmental clean up, restoration or the violation of any rules or regulations relating thereto. 10. COMMITMENTS The Company leases its office space subject to a noncancellable operating lease agreement which will expire in December 1998. Future minimum rental payments under the operating lease are approximately $23,000 per year. The Company incurred rent expense of approximately $12,000 for each year ended December 31, 1997 and 1996. In November 1997, the Company entered into five year agreements with the president of the Company and two directors to provide compensation for future services and for rental of certain property used as a storage yard. The minimum annual compensation anticipated by the agreements is a total of $123,600. A portion of the compensation may be paid in stock of the Company, based on the market price of the stock, as specified in the agreements. 11. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK Financial instruments that subject the Company to credit risk consist principally of accounts and notes receivable. The receivables are primarily from companies in extractive industries or from individual oil and gas investors. These parties are primarily located in the Southwestern regions of the United States. No single receivable is considered to be sufficiently material as to constitute a concentration. The Company does not ordinarily require collateral for accounts receivable, but in the case of receivables for joint operations, the Company often has the ability to offset amounts due against the participant's share of production from the related property. The Company occasionally has cash deposits in excess of FDIC insurance limits. The Company had deposits in one bank at December 31, 1997 that were $113,000 in excess of such limits. The Company believes any risk of loss is remote. Management estimates the market values of notes receivable and payable based on expected cash flows and believes those market values approximate carrying values at December 31, 1997. F-13 FUTURE PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. MAJOR CUSTOMERS In 1997, one purchaser accounted for approximately 10% of the Company's revenues. One purchaser accounted for approximately 16% of the Company's revenues in 1996. 13. FINANCIAL DATA FOR OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) The following table sets forth certain information with respect to the oil and gas producing activities of the Company: Year Ended December 31, 1997 1996 ----------- ---------- Costs incurred in oil and gas producing activities: Acquisition of proved properties $11,265,000 $ 56,000 Acquisition of unproved properties -- 44,000 Development costs 41,000 256,000 ----------- ---------- Total $11,306,000 $ 356,000 =========== ========== Net capitalized costs related to oil and gas producing activities: Proved properties $12,134,000 $ 653,000 Less accumulated depletion, depreciation, amortization and impairment (288,000) (111,000) ----------- ---------- Net oil and gas property costs $11,846,000 $ 542,000 =========== ========== 14. OIL AND GAS RESERVE DATA (UNAUDITED) The following table, based on information prepared by independent petroleum engineers, summarizes changes in the estimates of the Company's net interest in total proved reserves of crude oil and condensate, natural gas liquids and natural gas, all of which are domestic reserves: Oil and Natural Natural Gas Liquids Gas --------------- ----------- (BBLS) (MCF) --------------- ----------- Balance January 1, 1996 113,000 1,220,000 Purchase of minerals in place 5,000 -- Abandonment of minerals (3,000) (181,000) Revisions of estimates (56,000) (767,000) Production (7,000) (29,000) ----------- ----------- Balance, December 31, 1996 52,000 243,000 Purchase of minerals in place 2,071,000 6,176,000 Revisions of previous estimates 89,000 (220,000) Production (33,000) (60,000) ----------- ----------- Balance, December 31, 1997 2,179,000 6,139,000 =========== =========== At December 31, 1997 and 1996, respectively, 1,306,000 and 52,000 barrels of oil and natural gas liquids and 4,355,000 and 243,000 mcf of natural gas were classified as proved developed. Proved oil and gas reserves are the estimated quantities of crude oil, condensate, natural gas liquids and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable F-14 FUTURE PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. The above estimated net interests in proved reserves are based upon subjective engineering judgments and may be affected by the limitations inherent in such estimation. The process of estimating reserves is subject to continual revision as additional information becomes available as a result of drilling, testing, reservoir studies and production history. There can be no assurance that such estimates will not be materially revised in subsequent periods. 15. STANDARDIZED MEASURE OF CHANGES IN FUTURE NET REVENUES (UNAUDITED) The standardized measure of discounted future net cash flows at December 31, 1997 and 1996 relating to proved oil and gas reserves is set forth below. The assumptions used to compute the standardized measure are those prescribed by the Financial Accounting Standards Board and as such, do not necessarily reflect the Company's expectations of actual revenues to be derived from those reserves nor their present worth. The limitations inherent in the reserve quantity estimation process are equally applicable to the standardized measure computations since these estimates are the basis for the valuation process. Year Ended December 31, 1997 1996 ----------- ---------- Future cash inflows $50,183,000 $2,038,000 Future production costs (19,139,000) (1,022,000) Future development costs (3,122,000) -- Future income tax expense (7,408,000) (48,000) ----------- ---------- Future net cash flows 20,514,000 968,000 10% annual discount for estimated timing of cash flows (9,231,000) (308,000) ----------- ---------- Standardized measure of discounted future net cash flows $11,283,000 $ 660,000 Future net cash flows were computed using year-end prices and costs, and year-end statutory tax rates (adjusted for permanent differences) that relate to existing proved oil and gas reserves at year-end. The following are the principal sources of change in the standardized measure of discounted future net cash flows: Year Ended December 31, 1997 1996 ----------- ---------- Sale of oil and gas produced, net of production costs $ (177,000) $ (37,000) Purchase of minerals in place 14,525,000 70,000 Abandonment of minerals -- (82,000) Net changes in prices and production costs (230,000) 450,000 Revisions and other 487,000 (1,023,000) Accretion of discount 66,000 99,000 Net change in income taxes (4,048,000) 195,000 ------------ ---------- Net change 10,623,000 (328,000) Balance, beginning of year 660,000 988,000 ------------ ---------- Balance, end of year $11,283,000 $ 660,000 ============ ========== F-15 EX-27 2
5 YEAR DEC-31-1997 DEC-31-1997 293,000 0 278,000 0 0 571,000 12,178,000 (330,000) 12,679,000 842,000 0 0 0 57,000 0 12,679,000 596,000 772,000 833,000 833,000 0 0 0 (19,000) (7,000) 0 0 0 0 (12,000) 0 0 -----END PRIVACY-ENHANCED MESSAGE-----