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, 2006
[_] 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.
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(Name of Small Business Issuer in its Charter)
Delaware 84-0989164
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(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, Including Area Code: (303) 265-9312
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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 is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. [ ]
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 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]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Issuer's revenue for its most recent fiscal year: $3,124,000
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 9, 2006: $1,672,000
Number of shares outstanding of issuer's Common Stock as of November 9,
2006: 14,346,724
Transitional Small Business Disclosure Format: Yes No X
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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;
movements in interest rates; the market price of oil and natural gas; the risks
associated with exploration and production in the Rocky Mountain region; the
Company's ability, or the ability of its operating subsidiary, Altex Oil
Corporation ("AOC"), 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 and
AOC'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, AOC, the
Company currently owns interests, including working interests, in productive
onshore oil and gas properties, has bought and sold producing oil and gas
properties, and, to a lesser extent, has participated in the drilling of
exploratory and development wells, and in recompletions of existing wells.
AOC operates 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 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.
The operators of producing properties in which AOC has an interest sell produced
oil and gas to refiners, pipeline operators, and processing plants. If a
refinery, pipeline, or processing plant that purchases such production were
taken out of service, the operator could be forced to halt the production that
is purchased by such refinery, pipeline, or plant.
Although many entities produce oil and gas, competitive factors play a material
role in AOC'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 AOC 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. AOC 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. AOC 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.)
During the year ended September 30, 2006, ("FY06") AOC sold: (1) its
non-operated working interests in three producing oil and gas wells for
proceeds, net of selling expenses, of $206,000; (2) substantially all of its
remaining non-operated working interests in producing oil and gas wells in
Wyoming, all of its operated working interests in producing oil and gas wells,
and all of its overriding royalty interests in then producing oil and gas wells
in Wyoming for $2,362,000 cash, net of selling expenses; and (3) its interest in
an application for leases under the Combined Hydrocarbon Leasing Act of 1981 in
the Tar Sands Triangle Area of Utah for $25,000 cash. The Company intends to
invest the proceeds of the sales either in interests in oil and gas properties
or otherwise. There can be no assurance as to if and when any such investment
will be made. AOC retains small working and overriding royalty interests in
producing oil and gas wells in Utah and Wyoming.
2
ITEM 2. DESCRIPTION OF PROPERTY.
WELLS AND ACREAGE: At November 9, 2006, the Company did not own a working
interest in any 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 9, 2006, the Company owned working
interests in 2 gross (0.22 net) productive oil wells (which produce associated
natural gas), no wells producing only natural gas, and 203 gross (13 net)
developed acres. All of the Company's production is located in Utah and Wyoming.
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")
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2006 3,000 19,000 $ 44.67 $ 10.79 $ 19.17
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2005 11,000 83,000 49.00 5.22 11.72
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2004 11,000 89,000 37.00 4.44 11.04
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DRILLING ACTIVITY: The Company did not participate in the drilling of any wells
during fiscal 2004 ("FY04"), fiscal 2005 ("FY05"), or FY06.
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.
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FY06 FY05
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Quarter High Bid Low Bid High Bid Low Bid
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1 $ 0.26 $ 0.14 $ 0.15 $ 0.08
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2 0.26 0.20 0.23 0.10
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3 0.32 0.17 0.25 0.11
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4 0.27 0.22 0.43 0.14
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At November 9, 2006, there were approximately 4,100 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.
3
Small Business Issuer Purchases of Equity Securities
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(a) (b) (c) (d)
Total Number Average Total Number of Shares (or Maximum Number (or
of Shares (or Price Paid Units) Purchased as Part of Approximate Dollar Value) of
Period Units) per Share Publicly Announced Plans or Shares (or Units) that May Yet Be
Purchased (or Unit) Programs Purchased Under the Plans or
Programs
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July 1, 2006
through - - - -
July 31, 2006
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August 1, 2006
through 105,172 $ 0.24 - -
August 31, 2006
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September 1, 2006
through 311,088 $ 0.25 - -
September 30, 2006
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The Company has no publicly announced plan or program for the purchase of
shares. In August 2006 the Company purchased 105,172 shares other than through a
publicly announced plan or program in open-market transactions, and in September
2006 the Company purchased 311,088 shares from two of its Directors other than
through a publicly announced plan or program in two negotiated transactions (See
Item 10).
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FINANCIAL CONDITION
During FY06 AOC sold: (1) its non-operated working interests in three producing
oil and gas wells for proceeds, net of selling expenses, of $206,000; (2)
substantially all of its remaining non-operated working interests in producing
oil and gas wells in Wyoming, all of its operated working interests in producing
oil and gas wells, and all of its overriding royalty interests in then producing
oil and gas wells in Wyoming for $2,362,000 cash, net of selling expenses; and
(3) its interest in an application for leases under the Combined Hydrocarbon
Leasing Act of 1981 in the Tar Sands Triangle Area of Utah for $25,000 cash. The
Company intends to invest the proceeds of the sales either in interests in oil
and gas properties or otherwise. There can be no assurance as to if and when any
such investment will be made. AOC retains small working and overriding royalty
interests in producing oil and gas wells in Utah and Wyoming.
Cash balances increased $2,859,000 during FY06: (1) $42,000 cash was provided by
operating activities, (2) $2,593,000 cash was realized from the sale of assets,
(3) $135,000 cash was used to purchase 530,393 shares of treasury stock, and (4)
$359,000 cash was received from the Company's president and two non-executive
directors to retire notes receivable from them. (See Items 10 and 12). Accounts
receivable declined from $149,000 at September 30, 2005, to $5,000 at September
30, 2006, because the sales by AOC during FY06 of producing oil and gas
properties caused a significant reduction in oil and gas sales during the
quarters ended after December 31, 2005. At September 30, 2005, accrued
production costs were $51,000 and consisted of accrued lease operating expense
("LOE") of $19,000 and accrued production taxes of $32,000. At September 30,
2006, accrued production costs were $17,000 and consisted almost entirely of
accrued production taxes relating to oil and gas sales that occurred during the
first quarter of FY06. Accrued LOE declined from $19,000 to almost nil because
the sales by AOC during FY06 of producing oil and gas properties resulted in
significantly lower LOE. Accrued production taxes declined from $32,000 to
$17,000 because the sales by AOC during FY06 of producing oil and gas properties
resulted in significantly lower oil and gas sales and therefore significantly
lower taxes on oil and gas sales. At September 30, 2006, the Company recognized
a deferred tax asset in the amount of $51,000. Included in other accrued
expenses of $287,000 at September 30, 2006, is an accrued bonus payable to the
Company's president, pursuant to his employment agreement (See Item 10), of
$251,000.
4
The Company is likely to experience negative cash flow from operations unless
and until the Company invests in interests in producing oil and gas wells or in
another venture that produces cash flow from operations. With the exception of
capital expenditures related to production acquisitions or drilling or
recompletion activities or an investment in another venture that produces cash
flow from operations, none of which are currently planned, the cash flows that
could result from such acquisitions, activities, or investments, and the
possibility of a decline from the current level of 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 9,
2006, the Company had no material commitments for capital expenditures.
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.
LIQUIDITY
OPERATING ACTIVITIES. In FY05 net cash provided by operating activities was
$183,000, and in FY06 net cash provided by operating activities was $42,000.
INVESTING ACTIVITIES. In FY05 the Company expended $5,000 on additions to other
property and equipment, and in FY06 the Company received $2,593,000 in proceeds
from the sale of assets.
FINANCING ACTIVITIES. In FY05 the Company expended $11,000 to acquire 110,200
shares of treasury stock. In FY06 the Company expended $135,000 to acquire
530,393 shares of treasury stock and received $359,000 in payments on notes
receivable from stockholders (See Items 10 and 12).
RESULTS OF OPERATIONS
Oil and gas sales decreased from $972,000 in FY05 to $339,000 in FY06 because of
the sales by AOC during FY06 of producing oil and gas properties. $318,000 of
the $339,000 in FY06 oil and gas sales is attributable to the first quarter of
FY06. The Company does not anticipate that oil and gas sales from the interests
retained by AOC in currently producing oil and gas properties will be
significant. Interest income increased from $55,000 in FY05 to $197,000 in FY06
because both cash balances and interest rates increased during FY06. Other
income, which consists of various miscellaneous items, increased from $2,000 in
FY05 to $33,000 in FY06. The bulk of the increase consisted of the unanticipated
receipt of proceeds from oil and gas sales net to the Company's interest that
were attributable to prior fiscal years and that had not previously been
recognized by the Company. The sales by AOC during FY06 of oil and gas
properties resulted in a gain on sale of assets of $2,555,000.
LOE declined from $293,000 during FY05 to $115,000 during FY06 because of the
sales by AOC during FY06 of interests in producing oil and gas properties.
$113,000 of the $115,000 in LOE during FY06 is attributable to the first quarter
of FY06. LOE during the first quarter of FY06 was significantly higher than
normal because of increased repair and maintenance expense: When operators
believe that oil and gas prices will remain significantly higher than
previously, operators tends to increase repair and maintenance expenditures with
the objective of obtaining increased oil and gas production. Production taxes
declined from $118,000 during FY05 to $40,000 during FY06 because of
significantly lower oil and gas sales. $38,000 of the $40,000 in production
taxes is attributable to the first quarter of FY06. General and administrative
expense ("G&A") increased from $453,000 in FY05 to $702,000 in FY06. Included in
G&A in FY06 is accrued bonus payable to the Company's president pursuant to his
employment agreement of $251,000 (See Item 10). Included in G&A in FY05 is
accrued bonus payable to the Company's president pursuant to his employment
agreement of $17,000. Excluding accrued bonus expense, G&A increased from
$436,000 in FY05 to $451,000 in FY06. Net earnings increased from $156,000 in
FY05 to $2,260,000 in FY06 because of gain on sale of assets.
5
The Company's revenue currently consists almost entirely of interest earned on
cash balances. At the current level of cash balances and at current interest
rates, the Company's revenue is unlikely to exceed its expenses. Unless and
until the Company invests a substantial portion of its cash balances into
interests in producing oil and gas wells or into one or more other ventures that
produce revenue and net income, the Company is likely to experience net losses.
With the exception of unanticipated RR&D, unanticipated environmental expense,
and possible changes in 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
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.
As of the end of the period covered by the 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, 55, 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, 55 , 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, 50, 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.
6
The Board of Directors has a separately-designated standing Audit Committee
which is comprised of Messrs. Fante and 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.
ITEM 10. EXECUTIVE COMPENSATION.
Each Director who is not also an officer of the Company receives $1,000 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.
As part of its Director compensation plan, on June 26, 1998, the Company sold
155,544 shares of the Company's Common Stock, an amount equal to 1% of the
then-outstanding Common Stock, to each of its outside directors, Messrs. Jeffrey
S. Chernow and Stephen F. Fante, for $0.17 per share, fair market value on June
26, 1998. Consideration for the shares consisted of the proceeds of non-recourse
loans from the Company, each in the amount of $26,000. The loans were secured by
the shares, bore interest at the Applicable Federal Rate, and were initially due
on September 30, 2002. On September 25, 2001, the Company extended the terms of
the loans until October 1, 2006. Pursuant to the terms of the loans, the Company
reimbursed the Directors for interest expense related to the notes and
indemnified them against additional tax due as a result of such reimbursement
and indemnification. On September 15, 2006, the Company purchased the 155,544
shares of the Company's Common Stock from Mr. Chernow for $0.25 per share, the
closing price on September 15, 2006, for total cash proceeds of $39,000, and
purchased the 155,544 shares of the Company's Common Stock from Mr. Fante for
$0.25 per share, the closing price on September 15, 2006, for total cash
proceeds of $39,000. Messrs. Chernow and Fante each used $26,000 cash from the
transactions to retire the outstanding loans.
Mr. Cardin had an Employment Agreement with the Company that was effective
October 1, 2001, that had an initial term of five years, and that provided that
Mr. Cardin was 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. Effective October 1, 2006, the Company renewed its
Employment Agreement with Mr. Cardin (See Item 12).
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
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Annual Compensation
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Name and Principal Position Year Salary Bonus Other Annual
Compensation*
-------------------------------------------------------------------
Steven H. Cardin, CEO 2006 $233,000 251,000 9,000
-------------------------------------------------------------------
Steven H. Cardin, CEO 2005 $222,000 17,000 9,000
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Steven H. Cardin, CEO 2004 $211,000 4,000 9,000
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*Pursuant to his Employment Agreement, Mr. Cardin paid $9,000 in interest in
FY04, FY05, and FY06, and 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 9, 2006, 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
7
Stock of the Company beneficially owned, as of November 9, 2006, by all
Directors and executive officers and by all Directors and executive officers as
a group.
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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 50.42%
---------------------------------------------------------------------------------------------
All Directors and Executive Officers as a Group (1 Person) 7,233,866 50.42%
---------------------------------------------------------------------------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Effective October 1, 2006, the Company renewed its Employment Agreement with Mr.
Cardin, the prior Employment Agreement having expired effective September 30,
2006. The new Agreement has an initial term of five years and provides that Mr.
Cardin is to receive an annual base salary of $244,000 escalating at no less
than 5% per annum, and an annual bonus of no less than 10% of the Company's
earnings before tax, payable, at Mr. Cardin's election, in either cash or Common
Stock of the Company at then fair market value.
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.
Pursuant to three previous employment agreements with the Company, Mr. Cardin
had purchased 3,759,864 shares of the Company's Common stock from the Company at
fair market value in three separate non-cash transactions for three non-recourse
notes receivable that were secured by the shares and that were subsequently
consolidated into a single $306,000 non-recourse note receivable. The note was
secured by the shares, bore interest at the Applicable Federal Rate, and was due
on September 30, 2006. Pursuant to the terms of the loan, the Company reimbursed
Mr. Cardin for interest expense related to the note and indemnified him against
additional tax due as a result of such reimbursement and indemnification. During
FY06 Mr. Cardin paid off the note with $306,000 cash.
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, 2006
8
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. Billed for FY06: $9,000. Billed for FY05: $10,700.
AUDIT-RELATED FEES. None.
TAX FEES. None.
ALL OTHER FEES. None.
The Company does not engage an accountant to render audit or non-audit services
unless the engagement is explicitly pre-approved by the Company's Audit
Committee. During FY06 and FY05 no Audit-Related Fees, Tax Fees, or Other Fees
were billed by the Company's principal accountant.
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: November 16, 2006
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: November 16, 2006
/s/ STEPHEN F. FANTE
------------------------------------------
By: Stephen F. Fante, Director
Date: November 16, 2006
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, 2006, 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, 2006. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Altex Industries,
Inc. and subsidiary as of September 30, 2006, and the consolidated results of
its operations and its cash flows for each of the years in the two-year period
ended September 30, 2006, in conformity with U.S. generally accepted accounting
principles.
Denver, Colorado
November 13, 2006
/s/ Comiskey & Company
PROFESSIONAL CORPORATION
11
ALTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2006
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 5,140,000
Accounts receivable 5,000
Deferred income tax asset 51,000
Other 15,000
------------
Total current assets 5,211,000
------------
PROPERTY AND EQUIPMENT, AT COST
Proved oil and gas properties (successful efforts method) (Notes 6 and 7) 95,000
Other 63,000
------------
158,000
Less accumulated depreciation, depletion, amortization, and valuation allowance (155,000)
------------
Net property and equipment 3,000
OTHER ASSETS 10,000
------------
$ 5,224,000
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 21,000
Accrued production costs 17,000
Current income taxes payable 51,000
Other accrued expenses 287,000
------------
Total current liabilities 376,000
------------
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,
14,346,724 shares issued and outstanding 144,000
Additional paid-in capital 14,061,000
Accumulated deficit (9,357,000)
------------
4,848,000
------------
$ 5,224,000
------------
See accompanying notes to consolidated financial statements.
12
ALTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2006 AND 2005
2006 2005
-------------------------
REVENUE
Oil and gas sales $ 339,000 $ 972,000
Interest (Note 3) 197,000 55,000
Other income 33,000 2,000
Gain on sale of assets 2,555,000 -
-------------------------
3,124,000 1,029,000
-------------------------
COSTS AND EXPENSES
Lease operating 115,000 293,000
Production taxes 40,000 118,000
General and administrative (Note 3) 702,000 453,000
Depreciation, depletion, and amortization 7,000 9,000
-------------------------
864,000 873,000
-------------------------
NET EARNINGS BEFORE INCOME TAXES 2,260,000 156,000
-------------------------
INCOME TAX (EXPENSE) BENEFIT
Current (51,000) -
Deferred 51,000 -
-------------------------
- -
NET INCOME $ 2,260,000 $ 156,000
-------------------------
EARNINGS PER SHARE OF COMMON STOCK $ 0.15 $ 0.01
-------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING 14,809,857 14,881,949
-------------------------
See accompanying notes to consolidated financial statements.
13
ALTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2006 AND 2005
COMMON STOCK ADDITIONAL ACCUMULATED TREASURY NOTES TOTAL
PAID-IN DEFICIT STOCK RECEIVABLE STOCKHOLDERS'
CAPITAL FROM EQUITY
SHARES AMOUNT SHAREHOLDERS
------------------------------------------------------------------------------------------
BALANCES AT SEPTEMBER 30, 2004 14,987,317 $150,000 14,201,000 (11,773,000) (359,000) $ 2,219,000
Net earnings 156,000 156,000
Acquisition of treasury stock,
110,200 shares at $0.096 per share (11,000) (11,000)
Retirement of treasury stock (110,200) (1,000) (10,000) 11,000
------------------------------------------------------------------------------------------
BALANCES AT SEPTEMBER 30, 2005 14,877,117 149,000 14,191,000 (11,617,000) (359,000) 2,364,000
Net earnings 2,260,000 2,260,000
Acquisition of treasury stock,
530,393 shares at $0.255 per share (135,000) (135,000)
Retirement of treasury stock (530,393) (5,000) (130,000) 135,000
Payments received on notes
receivable from stockholders 359,000 359,000
------------------------------------------------------------------------------------------
BALANCES AT SEPTEMBER 30, 2006 14,346,724 $144,000 14,061,000 (9,357,000) $4,848,000
------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
14
ALTEX INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2006 AND 2005
2006 2005
-------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 2,260,000 $ 156,000
Adjustments to reconcile net earnings to net
cash provided by operating activities
Gain on sale of assets (2,555,000) -
Deferred income taxes (51,000) -
Depreciation, depletion, and amortization 7,000 9,000
(Increase) decrease in accounts receivable 144,000 (9,000)
(Increase) decrease in other current assets 4,000 (9,000)
Decrease in other assets 3,000 4,000
Increase in accounts payable 5,000 11,000
Increase in current income taxes payable 51,000 -
Increase (decrease) in accrued production costs (34,000) 5,000
Increase in other accrued expenses 208,000 16,000
-------------------------
Net cash provided by operating activities 42,000 183,000
-------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Proceeds from sale of assets, net of selling expenses 2,593,000 -
Additions to other property and equipment - (5,000)
-------------------------
2,593,000 (5,000)
-------------------------
CASH FLOWS USED IN FINANCING ACTIVITIES
Acquisition of treasury stock (135,000) (11,000)
Payments received on notes receivable from stockholders 359,000 -
-------------------------
224,000 (11,000)
-------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,859,000 167,000
-------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,281,000 2,114,000
-------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,140,000 $2,281,000
-------------------------
See accompanying notes to consolidated financial statements.
15
ALTEX INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006 AND 2005
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 interest income from cash
deposits, sales of oil and gas production, and sales of oil and gas properties.
The Company's operations are significantly affected by changes in interest rates
and in oil and gas prices.
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 to equip exploratory wells that find proved reserves, and to drill
and to 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 maintains significant amounts of cash
and sometimes permits cash balances in national banking institutions to exceed
FDIC limits.
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.
16
ALTEX INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006 AND 2005
RECENT ACCOUNTING PRONOUNCEMENTS:
In May 2005 the FASB issued SFAS 154, "Accounting Changes and Error
Corrections." SFAS 154 replaces APB 20, "Accounting Changes," and SFAS 3,
"Reporting Accounting Changes in Interim Financial Statements," and establishes
retrospective application as the required method for reporting a change in
accounting principle. SFAS 154 provides guidance for determining whether
retrospective application of a change in accounting principle is impracticable
and for reporting a change when retrospective application is impracticable. The
reporting of a correction of an error by restating previously issued financial
statements is also addressed. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The adoption of this statement is not expected to have a material impact on the
financial statements.
In June 2006 the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes," (FIN 48) effective for fiscal years beginning after December
15, 2006. This interpretation clarifies the accounting for uncertainty in income
taxes in accordance with FASB Statement No. 109 "Accounting for Income Taxes."
FIN 48 provides a recognition threshold and measurement guidance for the
financial statement recognition of a tax position taken or expected to be taken
in a tax return. The Company is currently reviewing FIN 48 and is not certain as
to its impact, if any, on the financial statements.
In September 2006 the FASB issued SFAS No. 157, "Fair Value Measurements," (SFAS
157). The changes to current practice resulting from the application of this
Statement relate to the definition of fair value, the methods used to measure
fair value, and the expanded disclosures about fair value measurements. This
issuance is effective for fiscal years beginning after November 15, 2007. The
adoption of this statement is not expected to have a material impact on the
financial statements.
NOTE 2 - INCOME TAXES. At September 30, 2006, the Company had depletion
carryforwards for income tax purposes of $829,000. 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, 2006, computed in
accordance with SFAS No. 109, is as follows:
DEFERRED TAX ASSETS
Depletion carryforward 301,000
Accrued shareholder bonus 88,000
----------
TOTAL NET DEFERRED TAX ASSETS 389,000
Less valuation allowance (338,000)
----------
NET DEFERRED TAX ASSET $ 51,000
----------
Based on the uncertainty of future realization in excess of its current tax
liability, a valuation allowance has been provided.
Income tax expense is different from amounts computed by applying the statutory
Federal income tax rate for the following reasons:
2006 2005
---------------------
Tax expense at 35% of net earnings
State income tax, net of federal benefit 2,000 -
Change in valuation allowance for net deferred tax assets (805,000) (11,000)
Change in net deferred tax assets, net of utilization 12,000 (44,000)
---------------------
Income tax expense $ - $ -
---------------------
17
ALTEX INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006 AND 2005
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, payable, at his election,
in cash or common stock of the Company at then fair market value. Effective
October 1, 2006, the Company entered into a new five-year employment agreement
with its president on essentially the same terms, except that the base salary is
$244,000 per annum
Pursuant to previous employment agreements with the Company, the Company's
president 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 notes receivable that were consolidated into a
$306,000 note receivable. 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 $26,000.
Each of the three notes was non-recourse, secured by the respective shares, due
on September 30, 2006, and bore interest at the Applicable Federal Rate. The
Company reimbursed the president and the directors for interest expense related
to the notes and indemnified 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
2005 and 2006. In 2006 the Company purchased the 155,544 shares of the Company's
Common Stock from each of the non-executive directors for total cash proceeds to
each of $39,000. The non-executive directors each used $26,000 cash from the
transaction to retire the outstanding loans. Also in 2006 the Company's
president retired the $306,000 note receivable with a cash payment of $306,000.
NOTE 4 - MAJOR CUSTOMERS. In 2006 and 2005 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 86% of oil and gas sales in 2006 and 95% of oil
and gas sales in 2005. In 2006 the two customers individually accounted for 75%
and 11% of oil and gas sales, and in 2005 the two customers individually
accounted for 78% and 17% 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, 2006, required future payments
under the lease are $21,000 for the years ending September 30, 2007, and
September 30, 2008, and $12,000 for the year ending September 30, 2009. In 2006
and 2005 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. The
Company accounts for its remaining RR&D costs in accordance with SFAS 143,
"Accounting for Asset Retirement Obligations". SFAS 143 addresses obligations
associated with the retirement of tangible, long lived assets and the associated
asset retirement costs. This statement requires the Company to recognize a
liability for the fair value of its plugging and abandonment liability
(excluding salvage value) with the associated costs included as part of the
Company's oil and gas properties balance. For the years ended September 30,
2006 and 2005, the plugging and abandonment liability was not material to the
financial statements.
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 depletion carryforwards. The estimation of reserves is complex and
subjective, and reserve estimates tend to fluctuate in light of new production
data.
18
ALTEX INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006 AND 2005
I. CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES
SEPTEMBER 30, 2006
--------------------
Proved properties $ 95,000
Accumulated depreciation, depletion, amortization, and valuation allowance (95,000)
--------------------
Net capitalized cost $ -
--------------------
II. ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
OIL IN BARRELS GAS IN MCFS
-----------------------------
BALANCE AT SEPTEMBER 30, 2004 100,000 749,000
Revisions of previous estimates 34,000 151,000
Production (11,000) (83,000)
-----------------------------
BALANCE AT SEPTEMBER 30, 2005 123,000 817,000
Sales of minerals in place (120,000) (798,000)
Revisions of previous estimates - -
Production (3,000) (19,000)
-----------------------------
BALANCE AT SEPTEMBER 30, 2006 - -
-----------------------------
III. PRESENT VALUE OF ESTIMATED FUTURE NET REVENUE
AT SEPTEMBER 30
2006 2005
------------------------
Estimated future revenue $ - 14,236,000
Estimated future expenditures - (6,119,000)
------------------------
Estimated future net revenue - 8,117,000
10% annual discount of estimated future net revenue - (3,854,000)
------------------------
Present value of estimated future net revenue $ - 4,263,000
------------------------
IV. SUMMARY OF CHANGES IN PRESENT VALUE OF ESTIMATED FUTURE NET REVENUE
YEAR ENDED SEPTEMBER 30
2006 2005
---------------------------
Present value of estimated future net revenue, beginning of year $ 4,263,000 1,975,000
Sales, net of production costs (184,000) (561,000)
Sales of minerals in place (2,568,000) -
Net change in prices and costs of future production - 2,095,000
Revisions of quantity estimates - 974,000
Accretion of discount - 198,000
Change in production rates and other (1,511,000) (418,000)
---------------------------
Present value of estimated future net revenue, end of year $ - 4,263,000
---------------------------
19
EXHIBIT INDEX
10 Summary of Employment Agreement between the Company and Steven H. Cardin,
effective October 1, 2006
31 Rule 13a-14(a)/15d-14(a) Certifications
32 Section 1350 Certifications
20