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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended September 30, 2003
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
------- ------
Commission file number 1-9030
ALTEX INDUSTRIES, INC.
(Name of Small Business Issuer in its Charter)
Delaware 84-0989164
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
POB 1057 Breckenridge, CO 80424-1057
---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(303) 265-9312
----------------------------------------------
Issuer's Telephone Number, Including Area Code
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common stock, par value $0.01 per share
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 in response to Item 405 of
Regulation S-B contained in this form, and if no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this form 10-KSB. [X]
Issuer's revenue for its most recent fiscal year: $777,000
Aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the average bid and asked price of such
common equity as of November 19, 2003: $683,000
Number of shares outstanding of issuer's Common stock as of November 19,
2003: 15,129,250
Transitional Small Business Disclosure Format: Yes No X
--- ---
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Page 1 of 17
SAFE HARBOR STATEMENT UNDER THE UNITED STATES
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements that are not historical facts contained in this Form 10-KSB are
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ from projected results. Factors that could cause actual
results to differ materially include, among others: general economic conditions;
the market price of oil and natural gas; the risks associated with exploration
and production in the Rocky Mountain region; the Company's ability to find,
acquire, market, develop, and produce new properties; operating hazards
attendant to the oil and natural gas business; uncertainties in the estimation
of proved reserves and in the projection of future rates of production and
timing of development expenditures; the strength and financial resources of the
Company's competitors; the Company's ability to find and retain skilled
personnel; climatic conditions; availability and cost of material and equipment;
delays in anticipated start-up dates; environmental risks; the results of
financing efforts; and other uncertainties detailed elsewhere herein.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Altex Industries, Inc. (or the "Registrant" or the "Company," each of which
terms, when used herein, refer to Altex Industries, Inc. and/or its subsidiary)
is a holding company with one full-time employee and one part-time employee that
was incorporated in Delaware in 1985. Through its operating subsidiary, the
Company currently owns interests, including working interests, in productive
onshore oil and gas properties, buys and sells producing oil and gas properties,
and, to a lesser extent, participates in the drilling of exploratory and
development wells, and in recompletions of existing wells.
The Company operates only one producing well and one field currently being
abandoned. All other interests are in properties operated by others. A working
interest owner in a property not operated by that interest owner must
substantially rely on information regarding the property provided by the
operator, even though there can be no assurance that such information is
complete, accurate, or current. In addition, an owner of a working interest in a
property is potentially responsible for 100% of all liabilities associated with
that property, regardless of the size of the working interest actually owned.
Through the operators of the properties in which it has an interest, the Company
sells produced oil and gas to refiners, pipeline operators, and processing
plants. If a refinery, pipeline, or processing plant that purchases the
Company's production were taken out of service, the Company could be forced to
halt production that is purchased by such refinery, pipeline, or plant.
Approximately 74% of the Company's oil and gas sales result from production from
one field for which there is only one available gas pipeline system (See Note 4
of Notes to Consolidated Financial Statements below.). If this pipeline system
were taken out of service, production of both oil and gas from that field would
be halted.
Although many entities produce oil and gas, competitive factors play a material
role in the Company's production operations only to the extent that such factors
affect demand for and prices of oil and gas and demand for, supply of, and
prices of oilfield services. The sale of oil and gas is regulated by Federal,
state, and local agencies, and the Company is also subject to Federal, state,
and local laws and regulations relating to the environment. These laws and
regulations generally provide for control of pollutants released into the
environment and require responsible parties to undertake remediation. The
Company regularly assesses its exposure to environmental liability and to
reclamation, restoration, and dismantlement expense (RR&D), which activities are
covered by Federal, state, and local regulation. The Company does not believe
that it currently has any material exposure to environmental liability or to
RR&D, net of salvage value, although this cannot be assured. (See Management's
Discussion and Analysis below.)
ITEM 2. DESCRIPTION OF PROPERTY.
WELLS AND ACREAGE: At November 19, 2003, the Company owned no undeveloped
acreage, and, to the best knowledge of the Company, none of the wells in which
the Company owns an interest is a multiple completion. However, certain wells in
which the Company owns an interest do produce from multiple zones. At November
19, 2003, the Company owned working interests in 44 gross (14.18 net) productive
oil wells (certain of which produce associated natural gas), no wells producing
only natural gas, and 20,000 gross (6,000 net) developed acres. Substantially
all of the Company's production is located in Utah and Wyoming. One well
accounts for approximately 15% of the Company's oil and gas sales and for
approximately 34% of the Company's estimated proved oil reserves. The Company
has not reported to, or filed with, any other Federal authority or agency any
estimates of total, proved net oil or gas reserves since the beginning of the
last fiscal year. For additional information, see Note 7 of Notes to
Consolidated Financial Statements below.
Page 2 of 17
PRODUCTION
Net Production Average Price
---------------- --------------- Average Production
Oil Gas Oil Gas Cost Per Equivalent
Fiscal Year (Bbls) (Mcf) (Bbls) (Mcf) Barrel ("BOE")
----------- ------- ------- ------- ------ ---------------------
2003 13,000 84,000 $ 26.54 $ 4.57 $ 10.74
----------- ------- ------- ------- ------ ---------------------
2002 12,000 97,000 22.45 2.15 8.66
----------- ------- ------- ------- ------ ---------------------
2001 13,000 86,000 27.62 4.81 11.05
----------- ------- ------- ------- ------ ---------------------
DRILLING ACTIVITY: The Company did not participate in the drilling of any wells
during fiscal 2001 (FY01"), fiscal 2002 (FY02"), or fiscal 2003 (FY03").
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common stock is quoted on the OTC Bulletin Board under the symbol
"ALTX". Inter-dealer prices provided by the OTC Bulletin Board, which do not
include retail mark-up, mark-down, or commission, and may not represent actual
transactions, are listed in the table below.
FY03 FY02
----------------------------------------
QUARTER HIGH BID LOW BID HIGH BID LOW BID
-------------------------------------------------
1 $ 0.07 $ 0.05 $ 0.10 $ 0.06
2 0.07 0.05 0.09 0.06
3 0.10 0.06 0.13 0.06
4 0.07 0.05 0.10 0.05
At November 19, 2003, there were approximately 4,600 holders of record of the
Company's Common stock, excluding entities whose stock is held by clearing
agencies. The Company has not paid a dividend during the last two fiscal years.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FINANCIAL CONDITION
Cash balances decreased $21,000 during FY03 because the Company used $16,000
cash in operating activities, $4,000 cash for additions to other property and
equipment, and $1,000 cash to acquire 14,000 shares of treasury stock. Accounts
receivable increased $58,000 because of increased sales. Accrued production
costs increased from $38,000 at September 30, 2002, to $51,000 at September 30,
2003, because of increased accrued lease operating expense (LOE) and increased
accrued production taxes. Other accrued expenses increased from $37,000 at
September 30, 2002, to $55,000 at September 30, 2003, because of accrued
employee salary expense. Included in other accrued expenses at September 30,
2001, is $75,000 in bonus expense accrued pursuant to the Company's employment
agreement with its president. (See Note 3 of Notes to Consolidated Financial
Statements.) During FY02 the Company issued 936,868 shares of its Common Stock
to its president, in lieu of cash, as payment of his accrued bonus.
The Company is completing the restoration of the area that had contained its
East Tisdale Field in Johnson County, Wyoming. The Company has removed all
equipment from the field and has recontoured and reseeded virtually all
disturbed areas in the field. Barring unforeseen events, the Company does not
believe that the expense associated with any remaining restoration activities
Page 3 of 17
will be material, although this cannot be assured. After its bonds with the
state and the Bureau of Land Management are released, the Company does not
believe it will have any further liability in connection with the field,
although this cannot be assured.
The Company regularly assesses its exposure to both environmental liability and
RR&D. The Company does not believe that it currently has any material exposure
to environmental liability or to RR&D, net of salvage value, although this
cannot be assured.
At current oil and gas price levels and at current interest rates, the Company
is likely to experience negative cash flow from operations. With the exception
of capital expenditures related to production acquisitions or drilling or
recompletion activities, none of which are currently planned, the cash flows
that could result from such acquisitions or activities, and the current level
of prices and interest rates, the Company knows of no trends, events, or
uncertainties that have or are reasonably likely to have a material impact on
the Company's short-term or long-term liquidity. Except for cash generated by
the operation of the Company's producing oil and gas properties, asset sales,
and interest income, the Company has no internal or external sources of
liquidity other than its working capital. At November 19, 2003, the Company had
no material commitments for capital expenditures.
RESULTS OF OPERATIONS
Oil and gas sales increased 53% from $478,000 in FY02 to $729,000 in FY03
because oil sales increased 28% from $269,000 in FY02 to $345,000 in FY03 and
gas sales increased 84% from $209,000 in FY02 to $384,000 in FY03. Oil sales
increased because an 8% increase in barrels sold from 12,000 in FY02 to 13,000
in FY03 was accompanied by an 18% increase in price per barrel from $22.45 in
FY02 to $26.54 in FY03. Gas sales increased because a 13% decrease in thousands
of cubic feet (MCFs) sold from 97,000 in FY02 to 84,000 in FY03 was more than
offset by a 113% increase in price per MCF from $2.15 in FY02 to $4.57 in FY03.
Interest income decreased 33% from $73,000 in FY02 to $49,000 in FY02 because of
decreased interest rates. Other income (expense) consists of various minor
items.
LOE increased 19% from $244,000 in FY02 to $290,000 in FY03 because of increased
repairs and maintenance expense. Production taxes increased 43% from $58,000 in
FY02 to $83,000 in FY03 because of increased sales. Net loss decreased 86% from
$171,000 in FY02 to $24,000 in FY03 because of increased sales.
LIQUIDITY
OPERATING ACTIVITIES. In FY02 net cash used in operating activities was
$134,000, and in FY03 net cash used in operating activities was $16,000.
INVESTING ACTIVITIES. In FY03 the Company expended $4,000 on additions to other
property and equipment.
FINANCING ACTIVITIES. In FY02 the Company expended $138,000 to acquire 1,352,843
shares of treasury stock, and in FY03 the Company expended $1,000 to acquire
14,000 shares of treasury stock.
The Company's revenues and earnings are functions of the prices of oil, gas, and
natural gas liquids and of the level of production expense, all of which are
highly variable and largely beyond the Company's control. In addition, because
the quantity of oil and gas produced from existing wells declines over time, the
Company's sales and net income will decline unless rising prices offset
production declines or the Company increases its net production by investing in
the drilling of new wells, in successful workovers, or in the acquisition of
interests in producing oil or gas properties. At current price and interest rate
levels, the Company is likely to record net losses. With the exception of
unanticipated variations in production levels, unanticipated RR&D, unanticipated
environmental expense, and possible changes in oil and gas price levels and
interest rates, the Company is not aware of any other trends, events, or
uncertainties that have had or that are reasonably expected to have a material
impact on net sales or revenues or income from continuing operations.
ITEM 7. FINANCIAL STATEMENTS.
The consolidated financial statements follow the signature page.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
Page 4 of 17
ITEM 8a. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized, and reported within the time periods
specified in the SECs rules and forms, and that such information is accumulated
and communicated to the Company's management, including its Principal Executive
Officer and Principal Financial Officer as appropriate, to allow timely
decisions regarding required disclosure. Management necessarily applied its
judgment in assessing the costs and benefits of such controls and procedures
which, by their nature, can provide only reasonable assurance regarding
managements control objectives.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Principal Executive Officer and Principal
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon the foregoing, the Company's Principal Executive Officer and
Principal Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiary) required to be
included in the Company's Exchange Act reports. There have been no significant
changes in the Company's internal controls or in other factors which could
significantly affect internal controls subsequent to the date the Company
carried out its evaluation.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Mr. Steven H. Cardin, 53, an economist, formerly with The Conference Board and
the consulting firm, National Economics Research Associates, has been Chairman
and CEO of the Company for over five years, and a Director since 1984. Mr.
Jeffrey S. Chernow, 52, a lawyer, formerly Director of Enforcement in the
Division of Securities, State of Maryland, Office of the Attorney General, has
been in private practice in Maryland for over five years, and a Director since
1989. Mr. Stephen F. Fante, 47, a CPA, formerly Chairman and CEO of IMS, which
provided computerized accounting systems to the oil and gas industry and was a
reseller of microcomputer products to the Fortune 1000, and formerly Chairman
and CEO of Seca Graphics, Inc., which provided design and mapping services and
software to the cable television and telecommunications industries, has been a
private investor for the last five years, and a Director since 1989. Messrs.
Chernow's, Cardin's, and Fante's terms as Directors continue until their
successors are duly elected and qualified. The Company has adopted a code of
ethics that applies to its principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions.
ITEM 10. EXECUTIVE COMPENSATION.
Each Director who is not also an officer of the Company receives $750 per month
for service as a Director. No additional fees are paid for service on Committees
of the Board or for attendance at Board or Committee Meetings. In 1998, the
Company's two non-executive Directors each purchased 155,544 shares of the
Company's Common Stock from the Company at a price of $0.17 per share in
exchange for notes receivable from each of $26,500. The notes are non-recourse,
secured by the respective shares, bear interest at the Applicable Federal Rate,
and due on September 30, 2006. The principal amount of the notes can be paid
with shares of the Company's Common Stock. The Company will reimburse the
Directors for interest expense related to the notes and will indemnify them
against additional tax due as a result of such reimbursement and
indemnification.
Mr. Cardin has an Employment Agreement with the Company that was effective
October 1, 2001, that has an initial term of five years, and that provides that
Mr. Cardin is to receive a base salary of $191,000 per annum, escalating at no
less than 5% per annum, and an annual bonus of no less than 10% of the Company's
earnings before tax. Pursuant to the agreement, Mr. Cardin purchased from the
Company 2,383,615 shares of the Company's Common Stock at a price of $.09375 per
share and 1,376,249 shares at a price of $0.06 per share in exchange for a note
receivable from him of $306,000. The note is non-recourse, is secured by the
shares, bears interest at the Applicable Federal Rate, and is due at the end of
the term of the Employment Agreement. The principal amount of the note can be
paid with shares of the Company's Common Stock. The Company will reimburse Mr.
Cardin for interest expense related to the note and will indemnify him against
additional tax due as a result of such reimbursement and indemnification. In
2002 the Company issued 936,868 shares of Common Stock to Mr. Cardin, valued at
$0.08 per share, in lieu of cash, as payment of his accrued bonus.
Page 5 of 17
The Employment Agreement also provides that, in the event the Company terminates
Mr. Cardin's employment by reason of his permanent disability, the Company shall
(1) pay Mr. Cardin a total sum, payable in 24 equal monthly installments, equal
to 50% of the base salary to which he would have been entitled had he performed
his duties for the Company for a period of two years after his termination, less
the amount of any disability insurance benefits he receives under policies
maintained by the Company for his benefit, and (2) continue to provide Mr.
Cardin with all fringe benefits provided to him at the time of his permanent
disability for a period of two years following such permanent disability.
The Employment Agreement also provides that, in the event the Company terminates
Mr. Cardin's employment in breach of the agreement, or in the event that Mr.
Cardin terminates his employment because his circumstances of employment shall
have changed subsequent to a change in control, then the Company shall pay Mr.
Cardin a lump sum payment equal to the sum of (1) twice Mr. Cardin's base salary
during the 12-month period immediately preceding the termination of his
employment, (2) the greater of (a) twice any annual bonus paid to or accrued
with respect to Mr. Cardin by the Company during the fiscal year immediately
preceding the fiscal year in which his employment shall have been terminated or
(b) three times his base salary during the 12-month period immediately preceding
the termination of his employment, and (3) any other compensation owed to Mr.
Cardin at the time of his termination. The agreement also provides that the
Company will indemnify Mr. Cardin against any special tax that may be imposed on
him as a result of any such termination payment made by the Company pursuant to
the agreement.
Under the Employment Agreement, a change in control is deemed to occur (1) if
there is a change of one-third of the Board of Directors under certain
conditions, (2) if there is a sale of all or substantially all of the Company's
assets, (3) upon certain mergers or consolidations, (4) under certain
circumstances if another person (or persons) acquires 20% or more of the
outstanding voting shares of the Company, or (5) if any person except Mr. Cardin
shall own or control half of such outstanding voting shares.
The following table sets forth the dollar value of compensation earned by the
Company's CEO, its only executive officer, during the last three fiscal years.
SUMMARY COMPENSATION TABLE
Annual Compensation
--------------------------- ---- ------------------------------
Name and Principal Position Year Salary Bonus Other Annual
Compensation
--------------------------- ---- -------- ------ ------------
Steven H. Cardin, CEO 2003 $201,000 - 10,000
--------------------------- ---- -------- ------ ------------
Steven H. Cardin, CEO 2002 $191,000 - 14,000
--------------------------- ---- -------- ------ ------------
Steven H. Cardin, CEO 2001 $182,000 63,000 14,000
--------------------------- ---- -------- ------ ------------
Pursuant to his Employment Agreement (See above), Mr. Cardin paid $14,000 in
interest to the Company in each of the fiscal years 2001 and 2002 and $10,000 in
interest in fiscal 2003, and the Company reimbursed him for those payments.
Page 6 of 17
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The following table sets forth information concerning each person who, as of
November 19, 2003, is known to the Company to be the beneficial owner of more
than five percent of the Company's Common Stock, and information regarding
Common Stock of the Company beneficially owned, as of November 19, 2003, by all
Directors and executive officers and by all Directors and executive officers as
a group.
----------------------------------------------------------- ---------------------- ---------
Name and Address of Beneficial Owner Shares of Common Stock Percent
Beneficially Owned of Class
----------------------------------------------------------- ---------------------- ---------
Steven H. Cardin (Director and Executive Officer)
POB 1057 Breckenridge CO 80424-1057 7,233,866 47.8%
----------------------------------------------------------- ---------------------- ---------
Jeffrey S. Chernow (Director)
POB 1057 Breckenridge CO 80424-1057 155,544 1.0%
----------------------------------------------------------- ---------------------- ---------
Stephen F. Fante (Director)
POB 1057 Breckenridge CO 80424-1057 155,544 1.0%
----------------------------------------------------------- ---------------------- ---------
All Directors and Executive Officers as a Group (3 Persons) 7,544,954 49.8%
----------------------------------------------------------- ---------------------- ---------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Effective October 1, 2001, the Company entered into a five-year employment
agreement with its president which provides for a base salary of $191,000
annually, plus escalations of not less than 5% annually. The agreement contains
provisions providing for payments to the president in the event of his
disability or termination of his employment. The agreement also provides that he
will receive an annual bonus equal to no less than 10% of the Company's earnings
before income tax. At September 30, 2001, the Company had accrued bonus expense
of $75,000. In 2002 the Company issued 936,868 shares of common stock to the
president, valued at $0.08 per share, in lieu of cash, as payment of his accrued
bonus. Pursuant to the employment agreement, the Company's president has
purchased from the Company 2,383,615 shares of the Company's common stock at a
price of $.09375 per share and 1,376,249 shares at a price of $0.06 per share in
exchange for a $306,000 note receivable. The Company's two non-executive
directors have each purchased 155,544 shares of the Company's common stock from
the Company at a price of $0.17 per share in exchange for notes receivable from
each of $26,500. Each of the three notes is non-recourse, secured by the
respective shares, due on September 30, 2006, and bears interest at the
Applicable Federal Rate. The principal amount of the notes can be paid with
shares of the Company's common stock. The Company will reimburse the president
and the directors for interest expense related to the notes, and will indemnify
them against additional tax due as a result of such reimbursement and
indemnification. The Company recognized $11,000 of both interest income and
general and administrative expense related to the notes in 2003 and $17,000 of
both interest income and general and administrative expense related to the notes
in 2002.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
3(i) Articles of Incorporation - Incorporated herein by reference to
Exhibit B to August 20, 1985 Proxy Statement
3(ii) Bylaws - Incorporated herein by reference to Exhibit C to August 20,
1985 Proxy Statement
10 Summary of Employment Agreement between the Company and Steven H.
Cardin, effective October 1, 2001 - Incorporated herein by reference
to Form 10-KSB for fiscal year ended September 30, 2001
14 Code of Ethics
21 List of subsidiaries - Incorporated herein by reference to Form 10-KSB
for fiscal year ended September 30, 1997
31 Rule 13a-14(a)/15d-14(a) Certifications
32 Section 1350 Certifications
(b) REPORTS ON FORM 8-K. None
Page 7 of 17
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ALTEX INDUSTRIES, INC.
By: /s/ STEVEN H. CARDIN November 25, 2003
-------------------------------------- --------------------------
Steven H. Cardin, CEO Date
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ STEVEN H. CARDIN November 25, 2003
-------------------------------------- --------------------------
Steven H. Cardin, Director, Principal Date
Executive Officer, Principal Financial
Officer, and Principal Accounting
Officer
By: /s/ STEPHEN F. FANTE November 25, 2003
-------------------------------------- --------------------------
Director Date
Page 8 of 17
INDEPENDENT AUDITORS' REPORT
THE STOCKHOLDERS AND BOARD OF DIRECTORS
ALTEX INDUSTRIES, INC.:
We have audited the accompanying consolidated balance sheet of Altex Industries,
Inc. and subsidiary as of September 30, 2003, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the two-year period ended September 30, 2003. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Altex Industries,
Inc. and subsidiary as of September 30, 2003, and the results of their
operations and their cash flows for each of the years in the two-year period
ended September 30, 2003, in conformity with accounting principles generally
accepted in the United States of America.
Burdick, Meritt & Associates, P.C.
Denver, Colorado
November 6, 2003
Page 9 of 17
ALTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2003
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 2,097,000
Accounts receivable 125,000
Other receivables 1,000
Other 10,000
-------------
Total current assets 2,233,000
-------------
PROPERTY AND EQUIPMENT, AT COST
Proved oil and gas properties (successful efforts method) (Notes 6 and 7) 1,076,000
Other 51,000
-------------
1,127,000
Less accumulated depreciation, depletion, amortization, and valuation allowance (1,074,000)
-------------
Net property and equipment 53,000
OTHER ASSETS 20,000
-------------
$ 2,306,000
=============
LIABILITIES AND STOCKHOLDERS EQUITY
-----------------------------------
CURRENT LIABILITIES
Accounts payable $ 7,000
Accrued production costs 51,000
Other accrued expenses 55,000
-------------
Total current liabilities 113,000
-------------
COMMITMENTS AND CONTINGENCIES (Notes 3, 5, and 6)
STOCKHOLDERS EQUITY (Note 3)
Preferred stock, $.01 par value. Authorized 5,000,000 shares, none issued --
Common stock, $.01 par value. Authorized 50,000,000 shares, 15,129,250 shares issued and
outstanding 151,000
Additional paid-in capital 14,212,000
Accumulated deficit (11,811,000)
Notes receivable from stockholders (359,000)
-------------
2,193,000
-------------
$ 2,306,000
=============
See accompanying notes to consolidated financial statements.
Page 10 of 17
ALTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2003 AND 2002
2003 2002
------------ ------------
REVENUE
Oil and gas sales $ 729,000 $ 478,000
Interest (Note 3) 49,000 73,000
Other income (expense) (1,000) 11,000
------------ ------------
777,000 562,000
------------ ------------
COSTS AND EXPENSES
Lease operating 290,000 244,000
Production taxes 83,000 58,000
General and administrative (Note 3) 419,000 414,000
Reclamation, restoration, and dismantlement (Note 6) - 4,000
Depreciation, depletion, and amortization 9,000 13,000
------------ ------------
801,000 733,000
------------ ------------
NET LOSS $ (24,000) $ (171,000)
============ ============
LOSS PER SHARE OF COMMON STOCK * $ (0.01)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 15,137,113 15,274,404
============ ============
==========================================
* Less than $(0.01) per share
See accompanying notes to consolidated financial statements.
Page 11 of 17
ALTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
YEARS ENDED SEPTEMBER 30, 2003 AND 2002
COMMON STOCK ADDITIONAL ACCUMULATED TREASURY NOTE TOTAL
PAID-IN DEFICIT STOCK RECEIVABLE STOCKHOLDERS
CAPITAL FROM EQUITY
SHARES AMOUNT SHAREHOLDER
----------- --------- ------------ ------------- ---------- ------------- --------------
BALANCES AT SEPTEMBER 30, 2001 15,559,225 156,000 14,271,000 (11,616,000) - (359,000) 2,452,000
Net loss (171,000) - - (171,000)
Issuance of common stock at $0.08
per share 936,868 9,000 66,000 - - - 75,000
Acquisition of treasury stock,
1,352,843 shares at $0.10 per - - - - (138,000) - (138,000)
share
Retirement of treasury stock (1,352,843) (14,000) (124,000) - 138,000 - -
----------- --------- ------------ ------------- ---------- ------------- --------------
BALANCES AT SEPTEMBER 30, 2002 15,143,250 $151,000 $14,213,000 $(11,787,000) $ - $ (359,000) $ 2,218,000
Net loss (24,000) - - (24,000)
Acquisition of treasury stock,
14,000 shares at $0.09 per share - - - - (1,000) - (1,000)
Retirement of treasury stock (14,000) (1,000) - 1,000 - -
----------- --------- ------------ ------------- ---------- ------------- --------------
BALANCES AT SEPTEMBER 30, 2003 15,129,250 $151,000 $14,212,000 $(11,811,000) $ $ (359,000) $ 2,193,000
=========== ========= ============ ============= ========== ============= ==============
See accompanying notes to consolidated financial statements.
Page 12 of 17
ALTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2003 AND 2002
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (24,000) $ (171,000)
Adjustments to reconcile net loss to net cash
provided used in operating activities
Depreciation, depletion, and amortization 9,000 13,000
Decrease (increase) in accounts receivable (58,000) 12,000
Decrease in other receivables 4,000 10,000
Decrease in other current assets 7,000 -
Decrease in other assets 12,000 18,000
Increase (decrease) in accounts payable 3,000 (6,000)
Increase (decrease) in accrued production costs 13,000 (10,000)
Decrease in accrued restoration, reclamation, and dismantlement - (1,000)
Increase in other accrued expenses 18,000 1,000
----------- -----------
Net cash used in operating activities (16,000) (134,000)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES
Additions to other property and equipment (4,000) -
----------- -----------
CASH FLOWS USED IN FINANCING ACTIVITIES
Acquisition of treasury stock (1,000) (138,000)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (21,000) (272,000)
----------- -----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,118,000 2,390,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $2,097,000 $2,118,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS RECORDED IN THE
ACCOMPANYING FINANCIAL STATEMENTS
Decrease in other accrued expenses resulting from issuance of common
stock to company's president in payment of accrued bonus $ - $ 75,000
=========== ===========
See accompanying notes to consolidated financial statements.
Page 13 of 17
ALTEX INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
NATURE OF OPERATIONS: Altex Industries, Inc., through its wholly-owned
subsidiary, jointly referred to as the Company, owns interests, including
working interests, in productive oil and gas properties located in Utah and
Wyoming. The Company's revenues are generated from sales of oil and gas
production, sales of oil and gas properties, and interest income from cash
deposits. The Company's operations are significantly affected by changes in oil
and gas prices and to changes in interest rates.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of Altex Industries, Inc. and its wholly-owned subsidiary. All
intercompany balances and transactions have been eliminated in consolidation.
ESTIMATES: The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
PROPERTY AND EQUIPMENT: The Company follows the successful efforts method of
accounting for oil and gas operations, under which exploration costs, including
geological and geophysical costs, annual delay rentals, and exploratory dry hole
costs, are charged to expense as incurred. Costs to acquire unproved properties,
to drill and equip exploratory wells that find proved reserves, and to drill and
equip development wells are capitalized. Capitalized costs relating to proved
oil and gas properties are depleted on the units-of-production method based on
estimated quantities of proved reserves and estimated RR&D (Note 6). Upon the
sale or retirement of property and equipment, the cost thereof and the
accumulated depreciation, depletion, and valuation allowance are removed from
the accounts, and the resulting gain or loss is credited or charged to
operations. Actual RR&D expense in excess of estimated RR&D expense is charged
to operations.
IMPAIRMENT OF LONG-LIVED ASSETS: The Company assesses long-lived assets for
impairment when circumstances indicate that the carrying value of such assets
may not be recoverable. This review compares the assets carrying value with
managements best estimate of the assets expected future undiscounted cash flows
without interest costs. If the expected future cash flows exceed the carrying
value, no impairment is recognized. If the carrying value exceeds the expected
future cash flows, an impairment equal to the excess of the carrying value over
the estimated fair value of the asset is recognized. No such impairment may be
restored in the future. The Company's proved oil and gas properties are assessed
for impairment on an individual field basis.
CASH EQUIVALENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS: For purposes of the
statement of cash flows, the Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents. The
carrying amount reported on the balance sheet for cash and cash equivalents
approximates its fair value.
INCOME TAXES: The Company follows the asset and liability method of accounting
for deferred income taxes. The asset and liability method requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between financial accounting and tax bases
of assets and liabilities.
EARNINGS PER SHARE: Earnings per share of common stock is based upon the
weighted average number of shares of common stock outstanding during the year.
CONCENTRATIONS OF CREDIT RISK: The Company sells the majority of its oil and gas
production to two customers (Note 4). Although this concentration could affect
the Company's overall exposure to credit risk, management believes the risk is
minimal since the majority of its sales are ultimately to major companies within
the industry. Although the Company maintains significant amounts of cash,
management does not permit cash deposits to exceed federally insured limits with
any one institution.
REVENUE RECOGNITION: Substantially all of the Company's revenue is from sales of
oil and gas production and from interest income. Revenue from oil and gas
production is recognized based on sales or delivery date. Interest income is
recognized when earned.
Page 14 of 17
ALTEX INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
NOTE 2 - INCOME TAXES. At September 30, 2003, the Company had net operating loss
and depletion carryforwards for income tax purposes of $367,000 and $945,000,
respectively. If not utilized, the net operating losses will expire during the
period from 2004 through 2023. The approximate tax effect of each type of
temporary difference and carryforward that gives rise to a significant portion
of deferred tax assets at September 30, 2003, computed in accordance with SFAS
No. 109, is as follows:
DEFERRED TAX ASSETS
Net operating loss carryforward $ 128,000
Depletion carryforward 331,000
Tax basis of assets written off for financial statement purposes 688,000
------------
1,147,000
DEFERRED TAX LIABILITY
Depletion, depreciation, amortization, and valuation allowance for income tax purposes in
excess of amounts for financial statement purposes (7,000)
------------
TOTAL NET DEFERRED TAX ASSETS 1,140,000
Less valuation allowance (1,140,000)
------------
NET DEFERRED TAX ASSET $ -
============
Based on the uncertainty of future realization, a valuation allowance equal to
the net deferred tax asset has been provided. Accordingly, no tax benefit has
been recorded.
Income tax expense is different from amounts computed by applying the statutory
Federal income tax rate for the following reasons:
2003 2002
----------------------
TAX EXPENSE (BENEFIT) AT 35% OF NET EARNINGS (LOSS) $ (8,000) $ (60,000)
CHANGE IN VALUATION ALLOWANCE FOR NET DEFERRED TAX ASSETS (120,000) (201,000)
EXPIRATION OF TAX CARRYFORWARDS 117,000 279,000
OTHER 11,000 (18,000)
----------------------
INCOME TAX EXPENSE $ - $ -
======================
NOTE 3 - RELATED PARTY TRANSACTIONS. Effective October 1, 2001, the Company
entered into a five-year employment agreement with its president which provides
for a base salary of $191,000 annually, plus escalations of not less than 5%
annually. The agreement contains provisions providing for payments to the
president in the event of his disability or termination of his employment. The
agreement also provides that he will receive an annual bonus equal to no less
than 10% of the Company's earnings before income tax. At September 30, 2001, the
Company had accrued bonus expense of $75,000. In 2002 the Company issued 936,868
shares of common stock to the president, valued at $0.08 per share, in lieu of
cash, as payment of his accrued bonus. Pursuant to the employment agreement, the
Company's president has purchased from the Company 2,383,615 shares of the
Company's common stock at a price of $.09375 per share and 1,376,249 shares at a
price of $0.06 per share in exchange for a $306,000 note receivable. The
Company's two non-executive directors have each purchased 155,544 shares of the
Company's common stock from the Company at a price of $0.17 per share in
exchange for notes receivable from each of $26,500. Each of the three notes is
non-recourse, secured by the respective shares, due on September 30, 2006, and
bears interest at the Applicable Federal Rate. The principal amount of the notes
can be paid with shares of the Company's common stock. The Company will
reimburse the president and the directors for interest expense related to the
notes, and will indemnify them against additional tax due as a result of such
reimbursement and indemnification. The Company recognized $11,000 and $17,000 of
both interest income and general and administrative expense related to the notes
in 2003 and 2002, respectively.
NOTE 4 - MAJOR CUSTOMERS. In 2003 and 2002 the Company had two customers who
individually accounted for 10% or more of the Company's revenue and who, in
aggregate, accounted for 94% of revenue in each of 2003 and 2002. In 2003 the
two customers individually accounted for 79% and 15% of revenue, and in 2002 the
two customers individually accounted for 70% and 24% of revenue.
NOTE 5 - LEASES. The Company rents office space under a noncancellable operating
lease that expires in April 2004. At September 30, 2003, required future
payments under the lease are $12,000 for the year ending September 30, 2004. In
2003 and 2002 the Company incurred rent expense of $21,000.
Page 15 of 17
NOTE 6 - RECLAMATION, RESTORATION, AND DISMANTLEMENT (RR&D). The Company is
completing the restoration of the area that had contained its East Tisdale Field
in Johnson County, Wyoming. The Company has removed all equipment from the field
and has recontoured and reseeded virtually all disturbed areas in the field.
Barring unforeseen events, the Company does not believe that the expense
associated with any remaining restoration activities will be material, although
this cannot be assured. After its bonds with the state and the Bureau of Land
Management are released, the Company does not believe it will have any further
liability in connection with the field, although this cannot be assured.
NOTE 7 - SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED). The Company's operations are confined to the continental United
States, and all of the Company's reserves are proved developed. Prices and costs
in the tables below have been estimated using prices and costs in effect at the
end of the years indicated. Prices are estimated net of estimated quality and
transportation adjustments. Income tax expense is not reflected in the tables
below because of the anticipated utilization of net operating loss carryforwards
and tax credits. The estimation of reserves is complex and subjective, and
reserve estimates tend to fluctuate in light of new production data.
I. CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES
SEPTEMBER 30, 2003
--------------------
Proved properties $ 1,076,000
Accumulated depreciation, depletion, amortization, and valuation allowance (1,027,000)
--------------------
Net capitalized cost $ 49,000
====================
II. ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
OIL IN BARRELS GAS IN MCFS
-----------------------------
BALANCE AT SEPTEMBER 30, 2001 48,000 350,000
Revisions of previous estimates 54,000 326,000
Production (12,000) (97,000)
-----------------------------
BALANCE AT SEPTEMBER 30, 2002 90,000 579,000
Revisions of previous estimates 10,000 223,000
Production (13,000) (84,000)
-----------------------------
BALANCE AT SEPTEMBER 30, 2003 87,000 718,000
=============================
III. PRESENT VALUE OF ESTIMATED FUTURE NET REVENUE
AT SEPTEMBER 30
2003 2002
--------------------------
Estimated future revenue $ 5,345,000 $ 3,601,000
Estimated future expenditures (3,771,000) (2,690,000)
--------------------------
Estimated future net revenue 1,574,000 911,000
10% annual discount of estimated future net revenue (431,000) (239,000)
--------------------------
Present value of estimated future net revenue $ 1,143,000 $ 672,000
==========================
IV. SUMMARY OF CHANGES IN PRESENT VALUE OF ESTIMATED FUTURE NET REVENUE
YEAR ENDED SEPTEMBER 30
2003 2002
-----------------------
Present value of estimated future net revenue, beginning of year $ 672,000 $ 444,000
Sales, net of production costs (356,000) (176,000)
Net change in prices and costs of future production 459,000 (118,000)
Revisions of quantity estimates 260,000 389,000
Accretion of discount 67,000 44,000
Change in production rates and other 41,000 89,000
-----------------------
Present value of estimated future net revenue, end of year $1,143,000 $ 672,000
=======================
Page 16 of 17
EXHIBIT INDEX
14 Code of Ethics
31 Rule 13a-14(a)/15d-14(a) Certifications
32 Section 1350 Certifications