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, 2004
[_] 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
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(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (303) 265-9312
--------------------
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 no disclosure will be contained, to
the best of registrant's knowledge, in its 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: $853,000
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 26, 2004: $893,000
Number of shares outstanding of issuer's Common stock as of November 26,
2004: 14,877,117
Transitional Small Business Disclosure Format: Yes No X
--- ---
1
"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 two full-time employees 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 78% 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.)
2
ITEM 2. DESCRIPTION OF PROPERTY.
WELLS AND ACREAGE: At November 26, 2004, 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
26, 2004, 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 17% 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.
Production
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Net Production Average Price
--------- --------- Average Production
Oil Gas Oil Gas Cost Per Equivalent
Fiscal Year (Bbls) (Mcf) (Bbls) (Mcf) Barrel ("BOE")
---------------------
2004 11,000 89,000 $ 37.00 $ 4.44 $ 11.04
2003 13,000 84,000 26.54 4.57 10.74
2002 12,000 97,000 22.45 2.15 8.66
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DRILLING ACTIVITY: The Company did not participate in the drilling of any wells
during fiscal 2002 (FY02"), fiscal 2003 (FY03"), or fiscal 2004 (FY04").
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.
-------------------------------------------------
FY04 FY03
-------------------------------------------------
Quarter High Bid Low Bid High Bid Low Bid
-------------------------------------------------
1 $ 0.12 $ 0.06 $ 0.07 $ 0.05
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2 0.14 0.09 0.07 0.05
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3 0.16 0.08 0.10 0.06
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4 0.10 0.09 0.07 0.05
-------------------------------------------------
3
At November 26, 2004, 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.
Small Business Issuer Purchases of Equity Securities
-------------------------------------------------------------------------------------------------------
(a) (b) (c) (d)
Total Average Total Number of Shares Maximum Number (or
Number of Price (or Units) Purchased as Approximate Dollar Value) of
Period Shares (or Paid per Part of Publicly Shares (or Units) that May Yet
Units) Share (or Announced Plans or Be Purchased Under the Plans
Purchased Unit) Programs or Programs
-------------------------------------------------------------------------------------------------------
July 1, 2004
through
July 31, 2004
-------------------------------------------------------------------------------------------------------
August 1, 2004
through
August 31, 2004
-------------------------------------------------------------------------------------------------------
September 1, 2004
through
September 30, 2004 18,700 $ 0.085
Total 18,700 $ 0.085
-------------------------------------------------------------------------------------------------------
The Company has no publicly announced plan or program for the purchase of
shares. In September 2004 the Company purchased 18,700 shares other than through
a publicly announced plan or program in open-market transactions.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FINANCIAL CONDITION
Cash balances increased $17,000 during FY04 because $36,000 cash provided by
operating activities was reduced by $7,000 cash for additions to other property
and equipment and $12,000 cash used to acquire 141,933 shares of treasury stock.
Accounts receivable increased $15,000 because of increased sales.
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.
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.
The Company is currently experiencing modest cash flow from operations in spite
of the extraordinarily high levels of oil and gas prices, which levels are
unlikely to persist into the long term. Should prices decline materially, and
should interest rates on cash balances remain at current levels, then, unless
the Company materially increases production by acquiring producing properties or
by engaging in successful drilling activities or recompletions, the Company is
likely to
4
experience negative cash flows 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, the current level of prices and
interest rates, and declining production levels, 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 26, 2004, the
Company had no material commitments for capital expenditures.
RESULTS OF OPERATIONS
Oil and gas sales increased 10% from $729,000 in FY03 to $802,000 in FY04
because oil sales increased 18% from $345,000 in FY03 to $407,000 in FY04, and
gas sales increased 3% from $384,000 in FY03 to $395,000 in FY04. Oil sales
increased because a 15% decrease in barrels sold from 13,000 in FY03 to 11,000
in FY04 was more than offset by a 39% increase in price per barrel from $26.54
in FY03 to $37.00 in FY04. Gas sales increased because a 6% increase in
thousands of cubic feet ("MCFs") sold from 84,000 in FY03 to 89,000 in FY04 was
offset by a 3% decrease in price per MCF from $4.57 in FY03 to $4.44 in FY04.
Production taxes increased 24% from $83,000 in FY03 to $103,000 in FY04 because
of increased sales. Net loss decreased from $24,000 in FY03 to a net gain of
$38,000 in FY04 because of increased sales.
LIQUIDITY
OPERATING ACTIVITIES. In FY03 net cash used in operating activities was $16,000,
and in FY04 net cash provided by operating activities was $36,000.
INVESTING ACTIVITIES. In FY03 the Company expended $4,000 on additions to other
property and equipment, and in FY04 the Company expended $7,000 on additions to
other property and equipment.
FINANCING ACTIVITIES. In FY03 the Company expended $1,000 to acquire 14,000
shares of treasury stock, and in FY04 the Company expended $12,000 to acquire
141,933 shares of treasury stock. Between October 1, 2004, and November 26,
2004, the Company acquired 110,200 shares of treasury stock for $11,000.
The Company's revenue 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 a modest net gain. 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.
ITEM 8A. CONTROLS AND PROCEDURES
5
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 SEC's 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
management's 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.
ITEM 8B. OTHER INFORMATION
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Mr. Steven H. Cardin, 54, 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, 53, 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, 48, 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.
The Board of Directors has a separately-designated standing Audit Committee
which is comprised of Mr. Fante and Mr. Chernow. The Board of Directors has
determined that the Company has at least one Audit Committee Financial Expert
serving on its Audit Committee: Mr. Fante is an Audit Committee Financial
Expert, and he is independent, as that term is used in Item 7(d)(3)(iv) of
Schedule 14A under the Exchange Act.
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.
6
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.
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.
7
Summary Compensation Table
----------------------------------------------------------
Annual Compensation
----------------------------------------------------------
Name and Principal Year Salary Bonus Other Annual
Position Compensation
----------------------------------------------------------
Steven H. Cardin, CEO 2004 $211,000 4,000 9,000
----------------------------------------------------------
Steven H. Cardin, CEO 2003 $201,000 10,000
----------------------------------------------------------
Steven H. Cardin, CEO 2002 $191,000 14,000
----------------------------------------------------------
Pursuant to his Employment Agreement (See above), Mr. Cardin paid $14,000 in
interest to the Company in FY02, $10,000 in interest in fiscal FY03, and $9,000
in interest in FY04. The Company reimbursed him for those payments.
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 26, 2004, 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 26, 2004, 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 48.62%
----------------------------------------------------------------------------------------------
Jeffrey S. Chernow (Director)
POB 1057 Breckenridge CO 80424-1057 155,544 1.05%
----------------------------------------------------------------------------------------------
Stephen F. Fante (Director)
POB 1057 Breckenridge CO 80424-1057 155,544 1.05%
----------------------------------------------------------------------------------------------
All Directors and Executive Officers as a Group (3 Persons) 7,544,954 50.72%
----------------------------------------------------------------------------------------------
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. 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
8
Company recognized $11,000 of both interest income and general and
administrative expense related to the notes in 2003 and 2004.
ITEM 13. 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 - Incorporated herein by reference to Form 10-KSB for fiscal year ended September 30, 2003
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
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES. Fees billed for annual audits and for reviews of Forms 10-QSB and
Forms 8-K: Billed in FY04: $10,900. Billed in FY03: $10,525.
AUDIT-RELATED FEES. None
TAX FEES. Fees billed for preparation of registrant's federal and state income
tax returns: Billed in FY04: $2,250. Billed in FY03: $2,000. Fees billed for
other tax-related services: None.
ALL OTHER FEES. None.
The registrant does not engage an accountant to render audit or non-audit
services unless the engagement is explicitly pre-approved by the registrant's
Audit Committee. During FY04 and FY03 no Audit-Related or Other Fees were
billed, and all Tax Fees had been pre-approved by the Audit Committee.
9
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.
/s/ STEVEN H. CARDIN
----------------------------------------
By: Steven H. Cardin, CEO
Date: December 1, 2004
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.
/s/ STEVEN H. CARDIN
By: Steven H. Cardin, Director,
Principal Executive Officer,
Principal Financial Officer, and
Principal Accounting Officer
Date: December 1, 2004
/s/ STEPHEN F. FANTE
----------------------------------------
By: Stephen F. Fante, Director
Date: December 1, 2004
10
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
ALTEX INDUSTRIES, INC.
We have audited the accompanying consolidated balance sheet of Altex Industries,
Inc. and subsidiary as of September 30, 2004, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of September 30,
2004, and the results of its operations and its cash flows for the year ended
September 30, 2004, in conformity with U.S. generally accepted accounting
principles.
Denver, Colorado
November 8, 2004
/S/ COMISKEY & COMPANY
PROFESSIONAL CORPORATION
11
INDEPENDENT AUDITORS' REPORT
THE STOCKHOLDERS AND BOARD OF DIRECTORS
ALTEX INDUSTRIES, INC.
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Altex Industries, Inc. and subsidiary
for the year 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
audit.
We conducted our audit 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 our audit provides a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Altex Industries, Inc. and subsidiary for the year 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
12
ALTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2004
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 2,114,000
Accounts receivable 140,000
Other receivables 8,000
Other 2,000
Total current assets 2,264,000
PROPERTY AND EQUIPMENT, AT COST
Proved oil and gas properties (successful efforts method) (Notes 6 and 7) 1,076,000
Other 58,000
1,134,000
Less accumulated depreciation, depletion, amortization, and valuation allowance (1,082,000)
Net property and equipment 52,000
OTHER ASSETS 17,000
$ 2,333,000
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 5,000
Accrued production costs 46,000
Other accrued expenses 63,000
Total current liabilities 114,000
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, 14,987,317 shares issued and 150,000
outstanding
Additional paid-in capital 14,201,000
Accumulated deficit (11,773,000)
Notes receivable from stockholders (359,000)
2,219,000
$ 2,333,000
See accompanying notes to consolidated financial statements.
13
ALTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2004 AND 2003
2004 2003
REVENUE
Oil and gas sales $ 802,000 $ 729,000
Interest (Note 3) 42,000 49,000
Other income (expense) 9,000 (1,000)
853,000 777,000
COSTS AND EXPENSES
Lease operating 287,000 290,000
Production taxes 103,000 83,000
General and administrative (Note 3) 417,000 419,000
Depreciation, depletion, and amortization 8,000 9,000
815,000 801,000
NET EARNINGS (LOSS) $ 38,000 $ (24,000)
EARNINGS (LOSS) PER SHARE OF COMMON STOCK * *
WEIGHTED AVERAGE SHARES OUTSTANDING 15,039,919 15,137,113
______________________________
* Less than $(0.01) per share
See accompanying notes to consolidated financial statements.
14
ALTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2004 AND 2003
COMMON STOCK ADDITIONAL ACCUMULATED TREASURY NOTES TOTAL
PAID-IN DEFICIT STOCK RECEIVABLE STOCKHOLDERS
CAPITAL FROM EQUITY
SHARES AMOUNT SHAREHOLDERS
-------------------------------------------------------------------------------------------
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 $0.085 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
Net earnings 38,000 38,000
Acquisition of treasury stock,
141,933 shares at $0.085 per share (12,000) (12,000)
Retirement of treasury stock (141,933) (1,000) (11,000) 12,000
-------------------------------------------------------------------------------------------
BALANCES AT SEPTEMBER 30, 2004 14,987,317 $150,000 14,201,000 (11,773,000) (359,000) $ 2,219,000
See accompanying notes to consolidated financial statements.
15
ALTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2004 AND 2003
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 38,000 $ (24,000)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities
Depreciation, depletion, and amortization 8,000 9,000
Increase in accounts receivable (15,000) (58,000)
Decrease (increase) in other receivables (7,000) 4,000
Decrease in other current assets 8,000 7,000
Decrease in other assets 3,000 12,000
Increase (decrease) in accounts payable (2,000) 3,000
Increase (decrease) in accrued production costs (5,000) 13,000
Increase in other accrued expenses 8,000 18,000
Net cash provided by (used in) operating activities 36,000 (16,000)
CASH FLOWS USED IN INVESTING ACTIVITIES
Additions to other property and equipment (7,000) (4,000)
CASH FLOWS USED IN FINANCING ACTIVITIES
Acquisition of treasury stock (12,000) (1,000)
------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 17,000 (21,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,097,000 2,118,000
CASH AND CASH EQUIVALENTS AT END OF YEAR $2,114,000 $2,097,000
See accompanying notes to consolidated financial statements.
16
ALTEX INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
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 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 asset's carrying value with
management's best estimate of the asset's 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). Receivables are not collateralized.
Although this concentration could affect the Company's overall exposure to
credit risk, management believes the risk is minimal. Although the Company
maintains significant amounts of cash, management does not permit cash deposits
to exceed federally insured limits with any one institution.
17
ALTEX INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
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.
NOTE 2 - INCOME TAXES. At September 30, 2004, the Company had net operating loss
and depletion carryforwards for income tax purposes of $323,000 and $1,021,000,
respectively. If not utilized, the net operating losses will expire during the
period from 2005 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, 2004, computed in accordance with SFAS
No. 109, is as follows:
DEFERRED TAX ASSETS
Net operating loss carryforward $ 113,000
Depletion carryforward 357,000
Tax basis of assets written off for financial statement purposes 694,000
------------
1,164,000
DEFERRED TAX LIABILITY
Depletion, depreciation, amortization, and valuation allowance for income tax purposes in
excess of amounts for financial statement purposes (10,000)
------------
TOTAL NET DEFERRED TAX ASSETS 1,154,000
Less valuation allowance (1,154,000)
------------
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:
2004 2003
---------------------
Tax expense (benefit) at 35% of net earnings (loss) $ 13,000 $ (8,000)
Change in valuation allowance for net deferred tax assets 14,000 (120,000)
Expiration of tax carryforwards - 117,000
Change in valuation allowance for net deferred tax assets due to an increase in depletion
carryforwards (27,000) -
Other 11,000
---------------------
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
18
ALTEX INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
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 2004.
NOTE 4 - MAJOR CUSTOMERS. In 2004 and 2003 the Company had two customers who
individually accounted for 10% or more of the Company's oil and gas sales and
who, in aggregate, accounted for 95% of oil and gas sales in 2004 and 94% of oil
and gas sales in 2003. In 2004 the two customers individually accounted for 78%
and 17% of oil and gas sales, and in 2003 the two customers individually
accounted for 79% and 15% of oil and gas sales.
NOTE 5 - LEASES. The Company rented office space under a noncancellable
operating lease that expired in April 2004 and that the Company renewed for five
years ending April 30, 2009. At September 30, 2004, required future payments
under the lease are $21,000 for the years ending September 30, 2005, September
30, 2006, September 30, 2007, and September 30, 2008, and $12,000 for the year
ending September 30, 2009. In 2004 and 2003 the Company incurred rent expense of
$21,000.
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, 2004
Proved properties $ 1,076,000
Accumulated depreciation, depletion, amortization, and valuation allowance (1,032,000)
Net capitalized cost $ 44,000
19
ALTEX INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
II. ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
OIL IN BARRELS GAS IN MCFS
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
Revisions of previous estimates 24,000 120,000
Production (11,000) (89,000)
BALANCE AT SEPTEMBER 30, 2004 100,000 749,000
III. PRESENT VALUE OF ESTIMATED FUTURE NET REVENUE
AT SEPTEMBER 30
2004 2003
Estimated future revenue $ 7,870,000 $ 5,345,000
Estimated future expenditures (4,990,000) (3,771,000)
Estimated future net revenue 2,880,000 1,574,000
10% annual discount of estimated future net revenue (905,000) (431,000)
Present value of estimated future net revenue $ 1,975,000 $ 1,143,000
IV. SUMMARY OF CHANGES IN PRESENT VALUE OF ESTIMATED FUTURE NET REVENUE
YEAR ENDED SEPTEMBER 30
2004 2003
Present value of estimated future net revenue, beginning of year $ 1,143,000 $ 672,000
Sales, net of production costs (412,000) (356,000)
Net change in prices and costs of future production 785,000 459,000
Revisions of quantity estimates 383,000 260,000
Accretion of discount 114,000 67,000
Change in production rates and other (38,000) 41,000
Present value of estimated future net revenue, end of year $ 1,975,000 $ 1,143,000
20
EXHIBIT INDEX
31 Rule 13a-14(a)/15d-14(a) Certifications
32 Section 1350 Certifications