SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [X] Filed by a party other than the Registrant [ ] Check
the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
PIONEER OIL AND GAS
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing party:
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(4) Date Filed:
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PIONEER OIL AND GAS
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To the Shareholders:
Notice is hereby given that the Annual Meeting of Shareholders of Pioneer Oil
and Gas (the "Company") will be held on Monday, September 19, 2005, starting at
10:00 A.M., Mountain Daylight Time, at the Company's office, 1206 W. South
Jordan Parkway, Unit B, South Jordan, Utah 84095. The following matters are on
the agenda for the Meeting:
1. To ratify the Board of Directors decision to effect a 1-for-2000
reverse stock split and the repurchase of all resulting fractional
shares, followed immediately by a 2000-for-1 forward stock split of
the Company's common shares (collectively, the "Stock Splits"). As a
result of the Stock Splits, (a) each shareholder owning fewer than
2000 common shares of the Company immediately before the Stock Splits
will receive $1.50 in cash, without interest, for each of the
Company's common shares owned by such shareholder immediately prior to
the Stock Splits and will no longer be a shareholder of the Company;
and (b) each shareholder owning 2000 or more common shares immediately
before the Stock Splits (i) will receive 2000 Common Shares after the
Stock Splits in exchange for each lot of 2000 Common Shares held
before the Stock Splits and (ii) any additional Common Shares held
other than in a 2000 share lot will be cancelled and exchanged for
$1.50 in cash per share. The Stock Splits will allow the Company to
file a Form 15 with the Securities and Exchange Commission (`SEC"),
thereby causing the Company to no longer be subject to the Rules and
Regulations of the Securities Act of 1934 and particularly the
Sarbanes-Oxley Act of 2002. The Stock Splits is further outlined in
the Proxy Statement enclosed with this Notice
2. To Elect the Board of Directors;
3. To ratify the appointment of Jones Simkins LLP ("Jones"), as
independent auditors for the current fiscal year;
4. To transact any other business matters that may properly come
before the meeting or any adjournment or postponement thereof.
The Directors have fixed the close of business on August 4, 2005, as the record
date for the determination of shareholders entitled to notice of and to vote at
the meeting or any adjournment or postponement thereof. A complete list of such
shareholders will be available at the corporate office of the Company during
normal business hours and shall be open to the examination of any such
shareholder for any purpose relevant to the Meeting.
A record of the Company's activities during the year ending September 30, 2004
and financial statements for that year, are in the Company's annual report to
shareholders, which this year is contained within the Proxy Statement that
accompanies this notice.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE STOCK SPLITS, PASSED UPON THE
MERITS OR FAIRNESS OF THE STOCK SPLITS, OR PASSED UPON THE ADEQUACY OR ACCURACY
OF THE DISCLOSURE IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Company's Board of Directors carefully considered the terms of the proposed
Stock Splits and has determined that the Stock Splits are fair to, and in the
best interests of, the Company and its shareholders and encourages the
shareholders to vote in favor of the Stock Splits.
You are cordially invited to attend the Meeting. Any shareholder that does not
expect to attend the Meeting in person is requested to complete, date, and sign
the enclosed form of Proxy and return it promptly to Pioneer Oil and Gas. Thank
you for your cooperation.
BY ORDER OF THE BOARD OF DIRECTORS
DON J. COLTON, Chairman of the Board of Directors, and President
YOUR VOTE IS IMPORTANT TO PIONEER OIL AND GAS. EVEN IF YOU EXPECT TO ATTEND THE
ANNUAL MEETING, WE URGE YOU TO COMPLETE, DATE, AND SIGN THE ENCLOSED PROXY AND
RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED. COMPLETING THE ENCLOSED PROXY WILL
NOT PREVENT YOU FROM VOTING YOUR SHARES IN PERSON IF YOU DO ATTEND THE MEETING.
PIONEER OIL AND GAS
1206 W. South Jordan Parkway
Unit B
South Jordan, Utah 84095-5512
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PROXY STATEMENT
Annual Meeting of Stockholders
To Be Held on July 19, 2005
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GENERAL INFORMATION
This Proxy Statement is being furnished to the stockholders of Pioneer Oil and
Gas (the "Company"), in connection with the solicitation of proxies on behalf of
the Board of Directors of Pioneer Oil and Gas (the "Directors") for use at the
Company's 2005 Annual Meeting of Stockholders and any and all adjournments or
continuations thereof (the "Meeting"), to be held on Monday, September 19th,
2005 for the purposes set forth under the next paragraph. These materials will
be first mailed to stockholders on or about August 4th, 2005. This Proxy
Statement (the "Proxy Statement") provides detailed information about a proposal
to be put forth before the shareholders of Pioneer Oil and Gas, a Utah
corporation, (the "Company") to effect a 1-for-2000 reverse stock split and the
repurchase of all resulting fractional shares at a price of $1.50 per share
before the reverse stock split, followed immediately by a 2000-for-1 forward
stock split (together these are referred to as the "Stock Splits").
PURPOSE OF ANNUAL MEETING
At the Meeting, stockholders will be asked: (i) to ratify the Board of Directors
decision to effect a 1-for-2000 reverse stock split and the repurchase of all
resulting fractional shares, followed immediately by a 2000-for-1 forward stock
split of the Company's common shares. As a result of the Stock Splits, (a) each
shareholder owning fewer than 2000 common shares of the Company immediately
before the Stock Splits will receive $1.50 in cash, without interest, for each
of the Company's common shares owned by such shareholder immediately prior to
the Stock Splits and will no longer be a shareholder of the Company; and (b)
each shareholder owning 2000 or more common shares immediately before the Stock
Splits will receive 2000 Common Shares after the Stock Splits in exchange for
each lot of 2000 Common Shares held before the Stock Splits and any additional
Common Shares held other than in a 2000 share lot will be canceled and exchanged
for $1.50 in cash per share. The effective date of the Stock Splits will be
September 26, 2005. The Stock Splits is further outlined in the Proxy Statement
enclosed with this Notice; (ii) to elect a Board of Directors to serve until the
next annual meeting of the stockholders, or until their successors are duly
elected and qualified; (iii) to ratify the selection by the Directors of Jones
as independent auditors of the Company for the fiscal year ending September
30th, 2005 ("Fiscal 2005"); and (iv) to transact such other business as may
properly come before the Meeting or any adjournment or postponement thereof.
We urge you to read this Proxy Statement carefully in its entirety including the
attached Exhibits. This Proxy Statement is first being mailed to the Company's
shareholders on or about August 4, 2005.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE STOCK SPLITS, PASSED UPON THE
MERITS OR FAIRNESS OF THE STOCK SPLITS, OR PASSED UPON THE ADEQUACY OR ACCURACY
OF THE DISCLOSURE IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS PROXY STATEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY.
SUMMARY TERM SHEET
The following is a summary of the material terms of the Stock Splits. The Board
of Directors believe that Utah law does not require shareholder approval for the
Stock Splits, only a Board of Directors meeting is necessary to effectuate the
Stock Splits, however, the Board of Directors is asking for shareholder approval
to ratify the action of the Board of Directors and the Company plans to effect
the Stock Splits regardless of whether a majority of the outstanding stock of
the Company votes in favor of the Stock Splits as long as a majority of the
shares voting on the proposal vote in favor of the Stock Splits. In addition,
Utah Code Section 16-10a-604(1)(a) allows the Company to pay the shareholders of
the Company in money the value of fractional shares. The Proxy Statement is
being provided to shareholders under Rule 13E-3 of the Securities Exchange Act
of 1934. While this summary describes what we believe are the most material
terms and conditions of the Stock Splits, this Proxy Statement contains a more
detailed description of such terms and conditions. We urge you to carefully
review, in their entirety, this Proxy Statement, the attached Exhibits and the
documents incorporated by reference.
The Company does not plan presently on any material changes to the Company after
the Stock Splits. Other than as described in this Proxy Statement, neither the
Company, nor its management has any current plans or proposals to effect any
extraordinary corporate transaction (such as a merger, reorganization or
liquidation); to sell or transfer any material amount of the Company assets to
change the composition of the management or to change materially the Company's
capitalization; to change the Company's dividend policy; or otherwise to effect
any material change in the Company's corporate structure or business other than
has already been disclosed or in the normal course of business. The Company does
not believe there will be material differences between affiliated and
unaffiliated shareholders regarding the treatment under the Stock Splits except
if a shareholder has less than 2000 common shares, those shares will be
purchased pursuant to the Stock Splits while an affiliated shareholder may have
some shares acquired by the Stock Splits but the majority of the shares owned by
the affiliate will remain.
OTHER MATTERS
Management does not intend to present, and has no information as of the date of
preparation of this Proxy Statement that others will present, any business at
the Meeting other than business pertaining to matters required to be set forth
in the Notice of Annual Meeting and Proxy Statement. However, if other matters
requiring the vote of the stockholders properly come before the Meeting, it is
the intention of the persons named in the enclosed proxy to vote the proxies
held by them in accordance with their best judgment on such matters.
STOCK SPLITS
The Stock Splits will consist of the following steps: On September 26, 2005 (the
"Effective Date") a 1-for-2000 reverse stock split of the Common Shares will
occur, as a result of which:
Each holder of less than 2000 Common Shares immediately before the reverse
stock split will receive from the Company cash in the amount of $1.50,
without interest, for each Common Share held immediately before the reverse
stock split and will no longer be a shareholder of the Company; and
Each holder of 2000 or more Common Shares immediately prior to the reverse
stock split will receive one whole Common Share for each lot of 2000 Common
Shares held by the shareholder immediately before the reverse stock split
and will receive cash from the Company in the amount of $1.50 for each
Common Share held immediately before the reverse stock split and not
converted into one whole share.
After completion of the reverse stock split and the repurchase of all
resulting fractional shares, the Company will effect a 2000-for-1 forward
stock split of the Common Shares remaining outstanding after the reverse
stock split. Each holder of 2000 or more Common Shares immediately before
the reverse stock split will participate in the forward stock split, which
will result in such holder holding a number of Common Shares equal to the
number of whole shares remaining after the reverse stock split multiplied
by 2000.
Please see the sections of this Proxy Statement entitled "Effects of the Stock
Splits" and "Stock Splits Proposal - Summary and Structure" for a more detailed
discussion of the Stock Splits.
PURPOSES AND REASONS FOR THE STOCK SPLITS
The Stock Splits are intended to reduce the number of record holders of the
Common Shares below 300 and enable the Company to terminate the registration of,
or deregister, the Common Shares under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Deregistration would eliminate the Company's duty
to file periodic reports and Proxy Statements with the Securities and Exchange
Commission (the "SEC"), and as a result, the Company would no longer be a public
reporting company. However, the Company will continue to be subject to the
general anti-fraud provisions of federal and applicable state securities laws.
The Company will also continue to trade electronically on the Pink Sheets(R) and
quotes will be able to be obtained at pinksheets.com.
The following are the principal reasons for the Stock Splits:
Anticipated annual cost savings of approximately $250,000 as a result of
the deregistration of the Common Shares and the related elimination of
periodic reporting requirements, including the cost savings resulting from
no longer being subject to the public company provisions of the
Sarbanes-Oxley Act of 2002, as amended (the "Sarbanes-Oxley Act") and the
elimination of other costs related to a Company subject to the Securities
Exchange Act of 1934 (the "Exchange Act");
Additional savings of management's and employees' time that will no longer
be spent preparing the periodic reports required under the Exchange Act and
complying with other provisions of the Exchange Act;
Decreased expenses resulting from no longer being required to service
holders with small positions in the Common Shares;
The Stock Splits constitute the most expeditious, efficient, cost effective
and fair method to convert the Company from a public reporting company to a
privately-held, non- reporting company compared to other alternatives
considered by the Board; and
The fact that the Company has not realized many of the benefits normally
associated with being a public reporting company (such as access to capital
markets, active trading market and use of company stock as currency for
acquisitions).
Please see the sections of this Proxy Statement entitled " Purpose of the Stock
Splits," " Effects of the Stock Splits" and " Reasons for the Stock Splits" for
a more detailed discussion of the principal reasons for the Stock Splits.
FAIRNESS OF THE STOCK SPLITS
The Board has set $1.50 per pre-split Common Share (the "Repurchase Price") as
the cash consideration to be paid by the Company in lieu of issuing fractional
Common Shares (i.e., less than one whole Common Share) in connection with the
Stock Splits. The Board made this determination in good faith and received a
Valuation Opinion (the "Valuation Opinion") prepared by Gate-Way Capital, Inc.
("Gate-Way"), an independent financial advisor. The Board also considered other
factors the Board deemed relevant, as described in greater detail in this Proxy
Statement.
The Valuation Opinion was delivered to the Board to assist the Board in
establishing the terms and conditions of the Stock Splits. The Valuation Opinion
states, that based upon and subject to the factors and assumptions set forth
therein as of April 30, 2005, the fair market value of the Company with 100% of
the Company's operations and assets is $8,468,420. The opinion of Gate-Way was
based on the Company having outstanding and issued 7,910,727 common shares and
on a fully diluted basis with all options taken into account 8,330,727. The
price of the stock based on Gate-Way's opinion before dilution would be $1.07
and after dilution $1.03. Therefore, the Repurchase Price offered by the Company
is a premium of about 40% before dilution and about 45% after dilution. This is
significant premium that the Company is willing to pay primarily because the
Company's common stock has been trading close to a $1.50.
A summary of the Valuation Opinion, dated April 30, 2005, is attached to this
Proxy Statement as Exhibit A and a full text of the Valuation Opinion can be
found on the SEC's edgar site by typing in Pioneer Oil at
http://www.sec.gov/edgar/searchedgar/companysearch.html, and then accessing
Exhibit B filed with the Proxy Statement. We urge you to read the Valuation
Opinion in its entirety. Gate-Way Capital, Inc ("Gate-Way") provided the
Valuation Opinion to assist the Board in connection with its consideration of
the Stock Splits.
The Board believes that the Stock Splits are in the Company's best interests and
are substantively and procedurally fair to both the affiliated and unaffiliated
holders of the Common Shares, including both those holders whose Common Shares
will be completely cashed out pursuant to the Stock Splits ("Unaffiliated Cashed
Out Holders") and those who will continue to hold Common Shares after the Stock
Splits that are not affiliated with the Company("Unaffiliated Continuing
Holders").
The Board has reviewed and considered the analyses and conclusions of Gate-Way
contained in the Valuation Opinion and has unanimously approved the Stock
Splits. No voting is necessary by the shareholders to effectuate the Stock
Splits, however, the Board of Directors are seeking shareholder approval to
ratify the action of the Board of Directors. The Board of Directors intends to
effectuate the Stock Splits even if it does not receive a majority of the
outstanding stock of the Company voting in favor of the Stock Splits as long as
a majority of shares voting on the proposal vote in favor of the Stock Splits.
Please see the sections of this Proxy Statement entitled "Fairness of the Stock
Splits," "Opinion of Gate-Way," "Background of the Stock Splits" and
"Recommendation of the Board" for a more detailed discussion of the foregoing.
CERTAIN FEDERAL TAX ASPECTS
The Company will not recognize any gain, loss or deduction for federal income
tax purposes as a result of the Stock Splits.
The Company's shareholders will generally recognize a gain or loss for federal
income tax purposes equal to the difference between the amount of cash received
and the shareholder's tax basis in the Common Shares that are exchanged for the
Repurchase Price in lieu of issuing fractional shares.
Please see the section of this Proxy Statement entitled "Federal Income Tax
Consequences" for a more detailed discussion of the foregoing.
UNAVAILABILITY OF APPRAISAL AND DISSENTER'S RIGHTS
A holder of Common Shares does not have under Utah law or the Company's Articles
of Incorporation or bylaws the right to assert dissenters' rights if the holder
is against the transactions contemplated by the Stock Splits.
Please see the section of this Proxy Statement entitled "Proposed Stock Splits -
Unavailability of Appraisal or Dissenters' Rights" for a more detailed
discussion of the foregoing.
ESCHEAT
All unclaimed cash amounts payable to shareholders in lieu of issuing fractional
shares will be subject to applicable state laws regarding abandoned property.
Please see the section of this Proxy Statement entitled "Proposed Stock Splits -
Escheat Laws" for a more detailed discussion of the foregoing.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
When used in this Proxy Statement the words or phrases "will likely result,"
"are expected to," "will continue," "anticipate," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements". Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from results presently anticipated or
projected. The Company cautions you not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company
advises readers that the Company's actual results may differ materially from any
opinions or statements expressed with respect to future periods in any current
statements in this Proxy Statement or in our other filings with the SEC.
The Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions, which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
TABLE OF CONTENTS
SUMMARY TERM SHEET
Stock Splits Proposal
Purposes of and Reasons for the Stock Splits
Fairness of the Stock Splits
Certain Federal Tax Aspects
Unavailability of Appraisal or Dissenters' Rights
Escheat
Cautionary Notice Regarding Forward-Looking Statements
SPECIAL FACTORS
Purpose of the Stock Splits
Reasons for the Stock Splits
Effects of the Stock Splits
Alternatives to the Stock Splits
Fairness of the Stock Splits
Advantages of the Stock Splits
Disadvantages of the Stock Splits
Other Factors
Conclusion
OPINION OF GATE-WAY
Public Comparables Analysis
Review of the Company's Market Performance
Conclusion
Engagement of Gate-Way
QUORUM, VOTING RIGHTS AND OTHER MATTERS
Proposal One: Ratification by the Shareholders of the Board's Proposal
to Effect the Stock Splits
Proposal Two: Election of Directors
Board of Directors
Executive Officers
Executive Compensation and Related Information
Security Ownership of Certain Beneficial Owners and Management
Transactions with Related Parties
Proposal Three: Ratification of Appointment of Independent Public Accountants
Proposal Four: Other Business
Stockholder Proposals
PROPOSED STOCK SPLITS
Summary and Structure
Cost of Stock Splits
Background of the Stock Splits
Recommendation of the Board
Potential Disadvantages of the Stock Splits to Shareholders
Share Certificates
Unavailability of Shareholders' Appraisal or Dissenters' Rights
Escheat Laws
Regulatory Approvals
INFORMATION ABOUT THE COMPANY
Description of Business
Recent Developments
Description of Securities
Market Price and Dividend Information
Common Share Repurchase Information
Available Information
Incorporation of Certain Documents by Reference
Legal Proceedings
FINANCIAL AND OTHER INFORMATION
Management's Discussion and Analysis or Plan of Operation
Certain Financial Effects of the Stock Splits
FINANCIAL STATEMENTS
EXHIBIT A - SUMMARY OF VALUATION OPINION
EXHIBIT B - FULL TEXT OF THE VALUATION OPINION
SPECIAL FACTORS
PURPOSE OF THE STOCK SPLITS
The primary purpose of the Stock Splits is to terminate the Company's status as
a public reporting company with the SEC. As a result of the Stock Splits and the
repurchase of the resulting fractional shares from holders of fewer than 2000
shares, the Company expects to have approximately 200 holders of record of the
Common Shares, which would enable the Company to terminate the registration of
the Common Shares under the Exchange Act. If the Stock Splits are completed, the
Company intends to file with the SEC to terminate the registration of the Common
Shares. Upon deregistration, the Common Shares would no longer be quoted on the
Bulletin Board and trades in the Common Shares would only be possible through
privately negotiated transactions or in the Pink Sheets(R) (a centralized
quotation service that collects and publishes market maker quotes for
securities).
REASONS FOR THE STOCK SPLITS
Reduced Public Reporting Expenses. The Company incurs both direct and indirect
costs to comply with the filing and reporting requirements imposed on the
Company as a public reporting company. As described below, these costs include,
among other things, management's time spent preparing and reviewing public
filings and legal and accounting fees associated with the preparation and review
of such filings. Compliance costs have increased significantly with the adoption
and implementation of the Sarbanes-Oxley Act and related SEC and NASDAQ rules,
and it is expected these costs to increase further in the future. For smaller
publicly traded companies, such as the Company, those costs represent a larger
portion of their revenues than for larger public companies.
Not all Reporting Costs will be Eliminated. The Company plans to continue to
provide shareholders with annual audited financial statements and Proxy
Statements by US mail, although not required to do so. If provided, these
documents may not be as detailed, or contain the same level of disclosure, as
those required of a public reporting company.
Reduced Costs of Expenses. The Board believes that by deregistering the Common
Shares and suspending the Company's periodic reporting obligations under the
Exchange Act, the Company will realize recurring annual cost savings of
approximately $250,000 in fees and expenses that that would be incurred to
comply with the Sarbanes-Oxley Act and associated regulations. These estimated
fees and expenses are described in greater detail below.
Estimated Cost Savings:
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Legal and transfer fees $ 5,000
Printing, mailing and filing costs $ 5,000
Audit fees $ 15,000
Internal personnel fees $ 225,000
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Total $250,000
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These estimated historical cost savings reflect, among other things: (i) a
reduction in audit and related fees; (ii) a reduction in legal and transfer fees
related to securities law compliance; (iii) the elimination of filing costs and
expenses associated with electronically filing periodic reports and other
documents (such as Proxy Statements) with the SEC on its Edgar database; (iv)
the lower printing and mailing costs attributable to the reduction in the number
of shareholders and the less complicated and extensive disclosure required by
the private status; (v) a reduction in management time spent on compliance and
disclosure matters attributable to Exchange Act filings; (vi) the lower risk of
liability that is associated with non-reporting company status; (vii) the cost
savings due to the Company not being subject to the public company provisions of
the Sarbanes-Oxley Act, primarily the 404 internal audit controls that would
require the Company to hire additional personnel to handle the responsibilities
that are performed by one person in the Company; (viii) a reduction in direct
miscellaneous clerical and other expenses.
In addition to the foregoing annual estimated cost savings, the consummation of
the Stock Splits and the subsequent deregistration of the Common Shares would
also result in a significant one-time cost savings of approximately $75,000 in
fees and expenses because the Company would not be subject to the new internal
control audit requirements imposed by Section 404 of the Sarbanes-Oxley Act.
Preparing to comply with Section 404 of the Sarbanes-Oxley Act would require
significant expenditures, including fees to third parties for compliance
planning, assessment, documentation and testing. Further, the Company would not
need to hire up to another four personnel in the accounting department to comply
with Section 404. The hiring of additional people is contained in the annual
cost savings set forth above. It would also require a significant investment of
time by the management and employees of the Company. These estimated costs for
compliance with Section 404 are described in more detail below.
Non-Recurring Sarbanes-Oxley Act Compliance Costs:
--------------------------------------------------
Third party planning, testing and documentation $25,000
Audit fees $25,000
Internal personnel expenses $25,000
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Total $75,000
========
The historical and non-recurring cost savings figures set forth above are only
estimates. The actual savings we realize from going private may be higher or
lower than these estimates. The estimates are based upon the (i) actual and
estimated costs to the Company of the services and disbursements in each of the
categories listed above that would be reflected on the financial statements and
(ii) allocation to each category of management's estimates of the portion of the
expenses and disbursements believed to be solely or primarily attributable to
the Company's public reporting company status.
In some instances, these cost savings expectations were based on verifiable
assumptions. For example, the auditing fees will be reduced if the Company
ceases to be a public reporting company due to the elimination of fees for
interim services.
Operational Flexibility. Another reason for the Stock Splits is the operational
flexibility that completion of the Stock Splits and subsequent deregistration
would provide. The Board believes that ceasing to be a public reporting company
would enable management to focus more on the Company's long-term growth without
the distraction of SEC reporting requirements and other aspects of being a
public company, and that the Company will benefit if business decisions can be
made with this added focus on long-term growth.
Benefits Normally Associated with Public Reporting Company Status have not been
Realized. A further reason for the Stock Splits is that the Company does not
realize many of the benefits normally associated with being a public reporting
company. A typical advantage of being a public company comes from the ability to
use company stock, as opposed to cash or other consideration, to effect
acquisitions. Since the Company has been operating in the last few years with a
positive cash flow there has not been an attraction to use stock for
acquisitions. Further, due to the fact the Company is small compared to most
public companies the opportunities for doing a stock acquisition are limited.
The Company has not previously completed an acquisition using stock and, given
the limited opportunities for such acquisitions, it is not likely that it would
be able to do so in the future.
In addition, public companies can obtain financing by issuing securities in
public offerings. The Company has historically had adequate capital or other
means of obtaining necessary capital and has not needed to obtain financing
through public offerings.
Conclusion. In light of the foregoing, the Board believes the benefits the
Company receives from maintaining its status as a public reporting company and
maintaining its small shareholder accounts are substantially outweighed by the
associated costs. The Board believes that it is in the Company's best interests
to eliminate the administrative burden and costs associated with maintaining its
status as a public reporting company and its small shareholder accounts.
Reasons for the Forward Stock Split. The forward stock split will occur
immediately after the reverse stock split and the repurchase of fractional
shares resulting from the reverse split. The forward stock split is intended to
prevent the Common Shares from having an unusually high per share value that
would otherwise result from the reverse stock split, which would tend to further
decrease the liquidity of the Common Shares.
EFFECTS OF THE STOCK SPLITS
The Stock Splits are expected to significantly reduce the number of holders of
record of the Common Shares from approximately 980 to approximately 200. Upon
the completion of the Stock Splits, the Company intends to apply with the SEC to
deregister the Common Shares under the Exchange Act as soon as practicable.
After deregistration, the Common Shares will no longer be quoted on the Bulletin
Board. The completion of the Stock Splits and the termination of the Company's
reporting obligations under the Exchange Act will cause the existing limited
trading market for the Common Shares to be further reduced.
Effects on the Common Shares. There will be no differences with respect to
dividend, voting, liquidation or other rights associated with the Common Shares
before and after the Stock Splits. The Common Shares acquired by the Company for
cash in lieu of issuing fractional shares will be retired.
Effects on All the Company Shareholders. All the Company shareholders:
Will not have the opportunity to liquidate, at a time and for a price of
their choosing, the Common Shares that are exchanged for cash in lieu of
issuing fractional shares;
Will not receive a fractional Common Share as a result of the Stock Splits,
but will instead receive cash, in a taxable transaction, equal to $1.50 for
each Common Share held immediately before the Stock Splits that is
exchanged for cash in accordance with the procedures described in this
Proxy Statement;
Will not have to pay any brokerage commissions or other transaction fees in
connection with the exchange of Common Shares for cash in lieu of issuing
fractional shares; and
Will not receive any interest on cash payments owed as a result of the
Stock Splits.
If you hold Common Shares other than in multiples of 2000, some of your Common
Shares will be exchanged for cash in lieu of issuing fractional shares in
connection with the Stock Splits. You will receive a letter of transmittal as
soon as practicable after the Stock Splits are completed. The letter of
transmittal will contain instructions on how to surrender your existing share
certificate(s) to the Transfer Agent to receive your cash payment and, if
applicable, a new share certificate evidencing the number of Common Shares you
hold after the Stock Splits. You will not receive your cash payment or your new
share certificate until you surrender your outstanding share certificate(s) to
the Transfer Agent, along with a completed and executed copy of the letter of
transmittal. Do not send your share certificate(s) in with your Proxy. Please
wait until you receive your letter of transmittal to surrender your share
certificate(s) to the Transfer Agent.
For a discussion of the federal income tax consequences of the Stock Splits,
please see the section of this Proxy Statement entitled "Federal Income Tax
Consequences."
Effects on Unaffiliated Cashed Out Holders. Unaffiliated Cashed Out Holders
(i.e., holders of less than 2000 Common Shares immediately before the
consummation of the Stock Splits) will have no further ownership interest in the
Company and will not be able to participate in future earnings or growth of the
Company.
If you hold less than 2000 Common Shares, but you would rather continue to hold
Common Shares after the Stock Splits and not be completely cashed out, you may
do so by taking either of the following actions far enough in advance so that it
is complete by the Effective Date:
Purchase a sufficient number of additional Common Shares, to the extent
available, on the open market and have them registered in your name and
consolidated with your current record account, if you are a record holder,
or have them entered in your account with a nominee (such as your broker or
bank) in which you hold your current shares so that you hold at least 2000
Common Shares in your record account immediately before the Effective Date.
Due to the limited market in the Common Shares, there is no assurance that
you will be able to purchase enough Common Shares to remain a shareholder
of the Company; or
If applicable, consolidate your accounts so that you hold at least 2000
Common Shares in one record account immediately before the Effective Date.
Effects on Unaffiliated Continuing Holders. If the Stock Splits are consummated,
Unaffiliated Continuing Holders (i.e., holders of 2000 or more Common Shares
immediately before the Stock Splits):
Will likely hold fewer Common Shares after the Stock Splits than they held
before the Stock Splits;
Will likely experience a change in their ownership percentage of the
Company after completion of the Stock Splits;
Will likely experience a further reduction in liquidity of the Common
Shares; and
Will have less publicly available information about the Company.
Upon the termination of the registration of the Common Shares under the Exchange
Act, the Common Shares will no longer be eligible for trading or quotation on
any securities market or quotation system, except the Pink Sheets(R). In order
for the Common Shares to be quoted on the Pink Sheets(R), one or more
broker-dealers would need to act as market maker and sponsor the Common Shares
on the Pink Sheets(R). There can be no assurance that any broker-dealer will be
willing to act as a market maker in Common Shares after the Stock Splits. There
is also no assurance that you will be able to sell your Common Shares or
purchase additional Common Shares after the Stock Splits.
If you hold 2000 or more Common Shares, but you would rather be completely
cashed out in connection with the Stock Splits and not remain a shareholder of
the Company, you may do so by selling a sufficient number of Common Shares in
the open market so that you hold less than 2000 Common Shares as of the
Effective Date. Any such sales should be made far enough in advance so they are
complete by the Effective Date. Due to the limited market in the Common Shares,
there is no assurance that you will be able to sell enough Common Shares to
reduce your holdings to less than 2000 Common Shares.
Effect on Common Shares Held in Street Name. If you hold Common Shares in
"street name," your nominee (such as your broker or bank) may have required
procedures you must follow and you should contact your nominee to determine how
the Stock Splits will affect you.
Effects on the Company. If the number of shareholders falls below 300, the
Company will apply to the SEC to deregister the Common Shares as soon as
practicable after completion of the Stock Splits. Upon deregistration of the
Common Shares, the Company's duty to file periodic reports with the SEC will be
suspended and the Company will no longer be classified as a public reporting
company. In addition, the Company will be relieved of the obligation to comply
with the requirements of the proxy rules under Section 14 of the Exchange Act.
The Company will continue to be subject to the general anti-fraud provisions of
federal and applicable state securities laws.
Although we will no longer be required to file periodic reports with the SEC,
the Company currently intends to continue to provide annual audited financial
statements and Proxy Statements to the Company's shareholders. Although the
Company intends to continue to provide these documents to the shareholders,
there is no SEC requirement that the Company do so, and there is no requirement
that the level of the Company's disclosure in such financial statements or in
the Proxy Statement remain at the level required by the current status as a
public reporting company. These documents may not be as detailed or extensive as
the information currently being filed with the SEC and the financial statements
may not be accompanied by management's discussion and analysis in the same
detail. It will be more difficult for shareholders to obtain information about
the Company.
The Company estimates that it will save approximately $250,000 in annual costs
associated with not being a public company as well as additional cost savings in
time spent by management and employees associated with the SEC reporting
activities. The Company also anticipates a one time cost savings of $75,000 in
expenses associated with the compliance with the internal controls audit
requirements of Section 404 of the Sarbanes-Oxley Act. These anticipated savings
are discussed under the heading entitled "Reasons for the Stock Splits -Reduced
Costs and Expenses" above.
The termination of the reporting obligations under the Exchange Act will render
the Common Shares ineligible for listing or quotation on any stock exchange or
other automated quotation system, except the Pink Sheets(R). As a result, the
Common Shares will no longer trade on the Bulletin Board and the existing
limited trading market for the Common Shares will likely be further reduced.
This reduction or elimination may result in the Company having less flexibility
in attracting and retaining executives and other employees since equity-based
incentives (such as stock options) tend to be viewed as having less
value in a non-publicly traded company.
The Company has no current plans to issue Common Shares after the Stock Splits
other than pursuant to the Company's Option Plan ("Option Plan"), but the
Company reserves the right to do so at any time and from time to time at such
prices and on such terms as the Board determines to be in the Company's best
interests. If in the future the Board determines that the adoption of a new
option plan would be beneficial to the Company, it may, in its discretion, adopt
such a plan. The exercise of options granted under any newly adopted plan would
reduce the ownership percentage of the Company's shareholders at the time. The
Company will not be required to seek shareholder approval of new option plans or
other equity compensation plans. Holders of Common Shares do not currently have,
and will not have, any preemptive or other preferential rights to purchase any
of the Company's equity securities that may issue in the future, unless such
rights are specifically granted to such holders.
After the Stock Splits have been consummated, the Company may, from
time-to-time, repurchase Common Shares pursuant to privately negotiated sales or
other transactions. Whether or not the Company purchases shares in the future
will depend on a number of factors, including the Company's financial condition,
operating results and available capital at the time. The Company presently has
plans to continue to repurchase up to 2,000,000 common shares of the Company
stock pursuant to the approval of the Board of Directors. If a shareholder
desires to sell their shares in the Company in the future without a broker's
commission they may call the Company and find out if the Company is willing to
purchase the shareholder's shares at the prevailing market value. The Company
makes no promise on whether it will purchase the shares, however, all inquiries
regarding the sale of the Company's stock will be considered based on the
financial condition of the Company and the price of the stock.
The Company expects the business and operations to continue as they are
presently conducted. The executive officers and directors of the Company will
not change due to the Stock Splits. The Company expects to realize time and cost
savings as a result of terminating its public company status, and intends to
invest those savings in other areas of its business operations. Other than as
described in this Proxy Statement, neither the Company, nor its management has
any current plans or proposals to effect any extraordinary corporate transaction
(such as a merger, reorganization or liquidation); to sell or transfer any
material amount of the Company assets to change the composition of the
management or to change materially the Company's capitalization; to change the
Company's dividend policy; or otherwise to effect any material change in the
Company's corporate structure or business other than has already been disclosed
or in the normal course of business.
Effects on the Company's Executive Officers, Directors and Affiliates. The
Company's affiliates, comprised of the executive officers, directors and any
shareholders who own more than ten percent (10%) of the Common Shares, will be
relieved from complying with the stock ownership reporting requirements and
"short swing profit" trading restrictions under Section 16 of the Exchange Act,
as well as many of the provisions of the Sarbanes-Oxley Act.
As is more thoroughly set forth under the heading entitled" Security Ownership
of Certain Beneficial Owners and Management," the Company expects that upon the
completion of the Stock Splits, the Common Shares beneficially owned and
controlled by the Company's executive officers and directors will comprise
approximately 44.0% of the then outstanding Common Shares, as compared to
approximately 42.0% of the Common Shares outstanding immediately prior to the
Stock Splits.
ALTERNATIVES TO STOCK SPLITS
In making the determination to proceed with the Stock Splits, the Board
considered the potential feasibility of the alternative transactions described
below but did not consider any transactions doing away with management or
placing the Company up for sale: :
Issuer Tender Offer. The Board considered the feasibility of an issuer
tender offer to repurchase Common Shares. The primary disadvantage of this
type of transaction is that, due to its voluntary nature, the Company would
have no assurance that a sufficient number of Common Shares would be
tendered to sufficiently reduce the number of the Company's shareholders.
In addition, the rules governing tender offers require equal treatment of
all shareholders, including pro rata acceptance of offers from
shareholders. These requirements make it difficult to ensure that the
Company would be able to reduce the number of the holders of record of the
Common Shares enough to permit the Company to deregister the Common Shares,
and the Company could repurchase numerous Common Shares at a great expense
and still be unable to deregister. A tender offer would likely take longer
to complete than the Stock Splits. As a result of these disadvantages, the
Board determined not to pursue this alternative. For the same reasons the
Board rejected an odd-lot tender offer.
Traditional Stock Repurchase Program. The Board also considered a plan
whereby the Company would periodically repurchase Common Shares on the open
market at then-current market prices. The Board rejected this type of
transaction since repurchasing enough shares in this manner to enable the
Company to deregister the Common Shares would likely take an extended
period of time, have no assurance of success and be of undeterminable cost.
Cash Out Merger. The alternative available to the Board, which was most
similar to the Stock Splits, was coordinating a merger with a shell
corporation and reissuing stock to the shareholders of the newly merged
entity. The share exchange would be such that shareholders owning less than
2000 Common Shares prior to the merger would be cashed out, and
shareholders owning more than 2000 Common Shares would become shareholders
in the newly merged entity. The Board of Directors concluded that the Stock
Splits were a better alternative since they do not require the formation of
a new entity and allow the Company to avoid the regulatory issues and
approvals associated with the merger of the Company into another
corporation.
Maintaining the Status Quo or Selling Company. The Board considered maintaining
the status quo. In that case, the Company would continue to incur the expenses
of being a public reporting company without enjoying the benefits traditionally
associated with public company status. The Board believes that maintaining the
status quo is not in the best interests of the Company and its shareholders and
rejected this alternative. The Company did not consider selling the Company or
changing its management because these alternatives did not apply to the reason
for the Stock Splits namely being released from the burdens of a fully reporting
company, particularly the requirements of the Sarbanes-Oxley Act.
FAIRNESS OF THE STOCK SPLITS
No independent committee of the Board has reviewed the fairness of the Stock
Splits. Although three out of four of the directors own Common Shares, the
1-for-2000 reverse split ratio and the 2000-for-1 forward split ratio were
determined without regard to their share ownership. As this was the sole
potential conflict of interest and the directors will be treated identically to
all other shareholders in the Stock Splits, the Board did not feel that the
additional protections that may be afforded by an independent committee would be
significant.
The Split ratio was determined because after review of the shareholder's list
the Company determined that it was a high probability that the Company would
have less than 300 shareholders. After a 1 for 2000 reverse stock split the
Stock Transfer list showed the Company to have less than 100 shareholders of
record if no shareholders with less than 2000 shares acquired additional shares
to remain a shareholder prior to the split.
No unaffiliated representative acting solely on behalf of the shareholders for
the purpose of negotiating the terms of the transaction proposal or preparing a
report covering the fairness of the Stock Splits was retained by the Company or
by a majority of directors who are not employees of the Company. The Board views
the Valuation Opinion, and the other matters discussed in this Proxy Statement
as affording adequate procedural safeguards to unaffiliated shareholders without
the extraordinary expense of multiple financial or legal advisors.
The Company has not made any provision in connection with the Stock Splits to
grant unaffiliated shareholders access to the Company's corporate files or to
obtain counsel or appraisal services at the Company's expense. With respect to
unaffiliated shareholders' access to the Company's corporate files, the Board
determined that this Proxy Statement, together with the Company's other filings
with the SEC, provide adequate information for unaffiliated shareholders with
respect to the Stock Splits. The Board also considered the fact that under Utah
law, subject to certain conditions, shareholders have the right to review the
Company's relevant books and records.
The Board did not consider the steps discussed above necessary to ensure the
fairness of the Stock Splits. The Board determined that such steps would be
costly and would not provide any meaningful additional benefits. The Board noted
the fact that the financial advisor engaged by the Company considered and
rendered its opinion as to the fairness of the consideration payable in the
Stock Splits, from a financial point of view, to the Company's shareholders.
The Board believes that the transaction is substantively and procedurally fair
to affiliated and unaffiliated shareholders, notwithstanding the absence of an
unaffiliated shareholder approval requirement, independent committee or
unaffiliated representative. After consideration of all aspects of the proposed
transaction as described above, all of the directors, including the director who
is not an employee of the Company, approved the Stock Splits.
The Board also believed the Stock Splits to be fair to unaffiliated shareholders
that are cashed out because they would be paid a price higher than Gate-Way
determined the fair market value of the Company's stock on a per share price.
Unaffiliated shareholders that are not cashed out would be treated the same as
affiliated shareholders and remain shareholders of the Company on an ongoing
basis. Unaffiliated shareholders would also have the ability to sell their stock
if they no longer chose to be a shareholder of the Company prior to the Stock
Splits taking effect. Unaffiliated shareholders that remained with the Company
would benefit from the deregistration process even though their shares would be
less liquid because the Company would not have to incur the significant
compliance costs of the Sarbanes-Oxley Act and therefore, the Company would have
more time and funds to pursue other endeavors.
The Board considered the factors in support of and in opposition to the Stock
Splits discussed below in reaching its conclusion as to the substantive fairness
of the Stock Splits. The Board did not assign specific weight to the following
factors but did place emphasis on the opportunity for unaffiliated holders of
Common Shares who will have fractional shares exchanged for cash to sell such
Common Shares at a premium and without brokerage fees or commissions, as well as
the significant cost and time savings the Company is expected to realize from
deregistration of the Common Shares.
ADVANTAGES OF THE STOCK SPLITS
Opportunity for Shareholders to Sell Repurchased Common Shares at a Premium and
Without Broker Fees or Commissions. The Repurchase Price of $1.50 per Common
Share represents (i) a premium based on Gate-Way's opinion of the share price
before dilution of about 40% and after dilution of 45%. The price offered by the
Company is also a premium of 7.14% over the average closing price of the Common
Shares on June 27, 2005 of a $1.40. The Board reviewed the proposal made by the
Company's management that a $1.50 per share be established as the Repurchase
Price for the Common Shares. The Board, in the exercise of its business
judgment, adopted such recommendation since the Repurchase Price for the Common
Shares represented fair consideration at a premium to the current price of the
Common Shares while also being a significant premium to the valuation analysis
of Gate-Way. The Board believes that the Repurchase Price is fair to the
Company's shareholders. The Board determined that the Stock Splits are fair in
part because they provide Unaffiliated Cashed Out Holders with an opportunity to
liquidate all of their Common Shares, and for Unaffiliated Continuing Holders to
liquidate some Common Shares, without paying brokerage commissions or other
transaction fees.
While performing its analysis for the Valuation Opinion, Gate-Way Capital
selected the valuation analyses it deemed most relevant based on its knowledge
of the Company and the Company's expressed intent to continue as an operating
entity and not liquidate. Please see the section entitled "Opinion of Gate-Way"
for a discussion of these analyses.
The Board did not deem the Company's liquidation value material or relevant in
the context of the Stock Splits. The Board did not calculate the Company's
liquidation value, on a per share basis or otherwise. Although not calculated by
the Board, the liquidation value of the Company would likely reflect an
arbitrarily low valuation, and thus using liquidation value to help set the
Repurchase Price would have supported a price lower than the price the Board
believed would be appropriate in light of its desire to ensure that shareholders
who receive cash in lieu of fractional shares receive a fair price for their
Common Shares that are exchanged for cash in connection with the Stock Splits.
The Board believes that the Company's net book value per share does not properly
reflect the Company's earnings stream and cash flow, two factors it considers
critical for a meaningful valuation of the Common Shares. Net book value is
based upon the historical cost of a company's assets and ignores the value of a
company as a going concern. The value of items such as a positive business
reputation, a trained workforce and established customers are ignored in
computing net book value. The Board believes that the proper valuation of the
Company should be based on the Company's historical and prospective operating
performance and Gate-Way's analysis was based upon this premise. The Company's
book value per Common Share based on its 10QSB filed for the period ending March
31, 2005 was $.53. The Board believes that the valuation of the Common Shares,
as determined by Gate-Way, as well as the market price of the Common Shares on
May 2, 2005 ($1.45 per share), are significantly greater than the book value per
Common Share.
Significant Cost and Time Savings for the Company. By deregistering the Common
Shares and suspending the Company's periodic reporting obligations under the
Exchange Act, the Company expects to realize recurring annual cost savings of
approximately $250,000 that it would have to expend in the future primarily for
Section 404, the internal controls audit of the Sarbanes-Oxley Act. In addition,
the Company expects to realize non-recurring savings of approximately $75,000 in
fees and expenses that would otherwise incur due to compliance with the internal
controls audit requirements of Section 404 of the Sarbanes-Oxley Act. The
termination of the Company's reporting obligations under the Exchange Act will
also eliminate the significant amount of time and effort previously required of
management to prepare and review the reports required to be filed under the
Exchange Act. Please see the section entitled "Reasons for the Stock Splits" for
a more detailed discussion of these cost savings.
Equal Treatment of Affiliated and Unaffiliated Holders of Common Shares. The
Stock Splits will not impact affiliated holders of Common Shares differently
than unaffiliated holders of Common Shares on the basis of affiliate status. The
sole determining factor as to whether a holder of Common Shares will remain a
shareholder of the Company and how many Common Shares will be repurchased by the
Company in lieu of issuing fractional shares as a result of the Stock Splits is
the number of Common Shares held by such holder immediately prior to the Stock
Splits. Please see the section entitled "Stock Splits Proposal - Summary and
Structure" for a more detailed discussion.
Minimum Effect on Voting Power. The Stock Splits will have minimum effect on the
voting power of the Company's shareholders. The Common Shares are the Company's
only voting shares and will continue to be the Company's only voting shares
after the Stock Splits. The voting and other rights currently held by the Common
Shares will not be affected by the Stock Splits. The only effect of the Stock
Splits on the Company's voting power will be a change in the overall percentage
of ownership of the Unaffiliated Continuing Holders.
No Material Change in Percentage Ownership of Executive Officers and Directors.
Since only an estimated 400,000 out of 7,683,727 outstanding Common Shares will
be eliminated as a result of the Stock Splits, the percentage ownership of the
Unaffiliated Continuing Holders will be approximately the same as it was prior
to the Stock Splits. For example, the executive officers and directors of the
Company beneficially own approximately 28.87% of the outstanding Common Shares,
and will beneficially own approximately 30.33% of the outstanding Common Shares
following completion of the Stock Splits. All of the directors and executive
officers that own stock currently have over 2000 shares and will remain
shareholders of the Company after completion of the Stock Splits. Please see the
section entitled "Security Ownership of Certain Beneficial Owners and
Management."
Potential Ability to Control Decision to Remain a Holder of or Liquidate Common
Shares. Another factor considered by the Board in determining the fairness of
the Stock Splits to the holders of the Common Shares is that current holders of
fewer than 2000 Common Shares can seek to remain shareholders of the Company
following the Stock Splits by acquiring additional shares so that they own at
least 2000 Common Shares immediately before the Stock Splits. However, if enough
small shareholders decided to acquire shares to remain shareholders of the
Company, the Company would not be able to file a Form 15 and deregister. The
Company believes the likelihood of this happening is very remote and decided
that the opportunity to deregister the Company far outweighed any remote
possibility that the Company would have more than 300 shareholders after the
Stock Splits. Conversely, stockholders that own 2000 or more Common Shares who
desire to liquidate their shares in connection with the Stock Splits at the
premium price offered can seek to reduce their holdings to less than 2000 Common
Shares by selling shares prior to the Stock Splits. The Board did not place
undue emphasis on this factor due to the limited trading market for the Common
Shares. Please see the section entitled "Effects of the Stock Splits."
DISADVANTAGES OF THE STOCK SPLITS
Substantial or Complete Reduction of the Market for Common Shares. After the
completion of the Stock Splits and deregistration of the Common Shares, the
Company anticipates that the public market for the Common Shares will be
substantially reduced or altogether eliminated. The Board, however, considered
that potential trades in the Common Shares could be facilitated by a market
maker in the Pink Sheets(R) following deregistration. Please see the section
entitled "Effects of the Stock Splits".
Termination of Publicly Available Information About the Company. Upon
termination of the registration of the Common Shares under the Exchange Act, the
Company's duty to file periodic reports with the SEC will be suspended.
Information regarding the Company's operations and financial results that is
currently available to the general public and the investors will not be readily
available after deregistration, and investors seeking information about the
Company will have to contact the Company directly to receive such information.
The Company may or may not provide investors with requested information that the
Company is not required by law to provide. The Stock Splits will not affect the
right of Unaffiliated Continuing Holders to obtain certain information from the
Company under Utah law. Under Utah law, a shareholder has the right to make a
written request to inspect a company's books and records (including, without
limitation, annual financial statements) and receive copies thereof for any
purpose reasonably related to such person's interest as a shareholder.
While the Board realizes and acknowledges that the termination of publicly
available information may be disadvantageous to the Company shareholders, the
Board believes that the overall benefits to the Company of no longer being a
public reporting company substantially outweigh the disadvantages associated
with a lack of publicly available information about the Company. The Company
currently intends to continue to provide annual audited financial statements and
Proxy Statements to the Company's shareholders; however, these documents may not
be as detailed or extensive as the information currently being filed with the
SEC. Although the Company intends to continue to provide these documents, there
is no SEC requirement that the Company does so or that it maintains the present
level of disclosure contained in such documents. Please see the section entitled
"Effects of the Stock Splits."
Possible Decline in Price of the Common Shares. After the completion of the
Stock Splits, the liquidity of the Common Shares will be significantly reduced
or eliminated. In addition, the lack of publicly available financial and other
information about the Company and the diminished opportunity for the Company's
shareholders to monitor the management of the Company due to the lack of such
public information may cause the Unaffiliated Continuing Holders to experience a
decrease in the price at which they may sell their Common Shares. Please see
"Disadvantages of the Stock Splits -Substantial or Complete Reduction of Public
Sale Opportunities" and "Disadvantages of the Stock Splits - Termination of
Publicly Available Information about the Company" above.
Inability to Participate in Future Increases in Value of the Common Shares or
Payments of Dividends. Following the Stock Splits, Unaffiliated Cashed Out
Holders will have no further financial interest in the Company and will not have
the opportunity to participate in the potential appreciation in the value of, or
the payment of dividends on, the Common Shares.
OTHER FACTORS
The Board concluded the factors set forth below to be either inapplicable or not
material to its assessment of the fairness of the Stock Splits.
Firm Offers. The Company is not aware of any firm offers to purchase the
Company that have been made during the past two calendar years or during
the current calendar year.
Prior Public Offerings. The Company has not made any underwritten public
offering of the Common Shares or any other securities since its initial
public offering in 1981.
Merger, Consolidation or Other Extraordinary Transaction. The Company is
not engaged in a merger or consolidation with another company or in any
other extraordinary transaction, such as the sale or other transfer of all,
or a substantial part, of the Company's assets, during the past two
calendar years or during the current calendar year.
Securities Purchases. There have not been any purchases of the Company's
Common Shares that would enable the holder to exercise control of the
Company.
Liquidation Value. The Company's liquidation value was not deemed relevant
because the Company plans to continue to operate as a going concern
following the Stock Splits.
CONCLUSION
The Board believes that all of the factors mentioned above, both favorable and
unfavorable, when viewed together support a conclusion that the Stock Splits are
substantively fair to the Company's shareholders, including the Unaffiliated
Cashed Out Holders and Unaffiliated Continuing Holders.
OPINION OF GATE-WAY
The Board retained Gate-Way to provide an opinion on the value of the Company's
common shares ("Valuation Opinion"). On April 30, 2005, Gate-Way delivered the
Valuation Opinion to the Board. The Valuation Opinion states that, based upon
and subject to the factors and assumptions set forth therein, the Repurchase
Price to be paid to Unaffiliated Cashed Out Holders pursuant to the Stock Splits
is fair from a financial point of view as of April 30, 2005 since it is a
premium of what Gate-Way considers the stock's valuation to be by 40-45%.
Gate-Way also presented to the Board a summary of the analyses described below
which is attached to this Proxy Statement as Exhibit A.
The factors and assumptions that Gate-Way used for performing its analysis
required that it looked at several factors for determining the cost of capital
for the Income Approach these same factors were used to identify 64 comparable
companies that were used in the Market Approach. The material risk factors that
Gate-way reviewed were; Management Depth and Quality, Importance of Key
Personnel, Stability of Industry, Product Line Diversification, Customer Base
Diversification, Supplier Diversification and Stability, Quality and Abundance
of Resources, Geographic Location, Stability of Earnings, Earning Margins, and
Financial Structure. After analyzing these various risk factors, Gate-Way
determined a cost of capital for the Income Approach that was generally in line
with the oil and gas industry. Other factors Gate-Way considered as part of its
report for valuation were as follows:
1. The nature of the business and its history from its inception.
2. The economic outlook in general and the condition and outlook of the
specific industry.
3. The book value of the stock and the financial condition of the business.
4. The earnings capacity of the company.
5. The dividend-paying capacity.
6. Whether or not the enterprise has goodwill or intangible value.
7. Sales of stock and the size of the block of stock to be valued.
8. The market price of stocks of corporations engaged in the same or a
similar line of business having their stocks actively traded in a free and
open market, either on an exchange or over-the-counter. The foremost
valuation factor to be considered for an operating company generally is its
earnings capacity, whereas the value of the underlying assets, or book
value, is more likely the most important financial measure for a holding or
investment company formed for the purpose of owning the stocks of other
companies, real estate or natural resources.
Other considerations to value which are situational dependent include the
following, which were also incorporated into Gate-Way's analysis:
Purpose of the valuation and what specifically, is being valued
Quality and reliability of reported earnings
Potential for synergy, if the firm is being appraised for acquisition
or merger
Imminence of retirement and health of principals and management
Gross revenue, and its relationship to net earnings
Cash flow and liquidity
Condition of the accounting system and other records
Cost of capital, risk, and inflation in the past and into the future
Restrictive agreements
Prior sales or valuations of the company
Recent mergers or acquisitions of comparable companies
The Valuation Opinion was prepared for use by the Board and was from a financial
point of view, Gate-Way's opinion of the value of the Company. By determining
the value of the Company, the Company's common shares could then be extrapolated
based on the number issued and outstanding shares of the Company. Gate-Way was
not involved in structuring the Stock Splits and its opinion does not compare
the relative merits of the Stock Splits with those of any other transaction or
business strategy which were or might have been available to or considered by
the Company or the Board as alternatives to the Stock Splits and does not
address the underlying business decision by the Board to proceed with or effect
the Stock Splits. The Valuation Opinion is solely for the information of the
valuation of the Company and was specifically addressed to the Board for its
determination of a fair price of the Company's common stock for the reverse
stock split. The information used by Gate-Way for making its determination was
in large part provided by the Company and Gate-Way takes no responsibility for
the underlying data presented in its report. The Valuation Opinion does not
constitute a recommendation to the Board as to how it should vote on the Stock
Splits. In furnishing the Valuation Opinion, Gate-Way did not admit that it is
an expert within the meaning of the term "expert" as used in the Securities Act
of 1933 nor did it admit that its opinion serves as a report or valuation within
the meaning of the Securities Act. Gate-Way has valued other natural resource
businesses in the past, but does not purport to be a guarantor of value.
The full text of the Valuation Opinion is attached as Exhibit B to the Proxy
Statement that is filed with the SEC and is incorporated herein by reference.
You may view the full text of the Valuation Opinion by typing in Pioneer Oil in
the search engine after accessing the SEC's edgar site at
http://www.sec.gov/edgar/searchedgar/companysearch.html. Once you have reached
the filings for the Company enter the Proxy Statement and then access Exhibit B
filed with the Proxy Statement. The summary of the Valuation Opinion set forth
in this Proxy Statement and the summary attached to hereto as Exhibit A is
qualified in its entirety by reference to the full text of the Valuation
Opinion. Shareholders are urged to read the Valuation Opinion carefully and in
its entirety for a discussion of the procedures followed, assumptions made,
other matters considered and limits of the review by Gate-Way in connection with
the Valuation Opinion.
The Board selected Gate-Way as its financial advisor because it is a recognized
financial institution consulting firm that has substantial experience in the
financial institutions industry and is knowledgeable and familiar with the
operations of the Company and its business. As part of its business, Gate-Way is
regularly engaged in the valuation of businesses and securities in connection
with mergers, acquisitions, underwritings, sales and distributions of listed and
unlisted securities, private placements and valuation for corporate and other
purposes, particularly those of mineral companies.
In rendering the Valuation Opinion, Gate-Way reviewed the terms of the Stock
Splits and also reviewed financial and other information that was publicly
available, or furnished to Gate-Way by the Company's management. No projections
or forecasts were furnished or provided to Gate-Way. The Company did provide
Gate-Way with information related to its Central Utah acreage prospect. Gate-Way
also reviewed certain publicly available operational, financial and stock market
data relating to selected public companies and conducted other financial
studies, analyses and investigations as Gate-Way deemed necessary or appropriate
for purposes of rendering the Valuation Opinion, as more fully set forth
therein. No limitations were imposed by the Board of the Company upon Gate-Way
with respect to the investigations made or procedures followed by it in
rendering its opinion.
Gate-Way assumed and relied upon, without independent verification, the accuracy
and completeness of all financial and other information that was publicly
available, supplied or otherwise communicated to it by or on behalf of the
Company. Gate-Way further relied upon the assurances of the Company's management
that they are unaware of any facts that would make the information provided to
it incomplete or misleading.
Gate-Way was not requested to make, and did not make, an independent evaluation
or appraisal of the assets, properties, facilities or liabilities (contingent or
otherwise) of the Company, and was not furnished with any such appraisals or
evaluations other than the reserve study furnished in the Company's Form 10KSB
filed for the period ending 9/30/2004. Gate-Way's opinion is necessarily based
upon financial, economic, market and other conditions and circumstances existing
and disclosed to Gate-Way on the date of the Valuation Opinion. Subsequent
developments may affect the conclusions reached in the Valuation Opinion and
Gate-Way has no obligation to update, revise or reaffirm the Valuation Opinion.
All of the factors and assumptions which were used by Gate-Way are disclosed in
their full report. Some of the most important were the three valuation methods
used which were the Asset Based approach, Market approach and Income approach.
These are the valuations methods approved by the IRS and are standard industry
practice and are consistent with Internal Revenue Ruling 59-60.
The fair market value determined by Gate-Way was based primarily on the
historical income of the Company, the historical market for the Company's stock,
the value of the Company as a going concern, and various risk factors such as no
replacement people for key personnel and the wide swings in oil prices over the
last four years. The value of the Company's central Utah project was an
important factor in valuation and the Company made it clear to Gate-Way that the
sale of these properties is an unusual event and it is unlikely that the Company
will find a similarly profitable leasing opportunity in the foreseeable future.
In preparing the Valuation Opinion, Gate-Way conducted the following two
principal analyses: (i) a comparison of the Company with certain publicly traded
companies deemed comparable to the Company, and (ii) a review of the Company's
historical earnings and financial statements and a projection of future earnings
using an appropriate Cost-of -Capital.
No company used in any analysis as a comparison is identical to the Company, and
they all differ in various ways. As a result, Gate-Way applied its experience
and professional judgment in making such analyses. Accordingly, an analysis of
the results is not mathematical; rather it involves complex considerations and
judgments concerning differences in financial characteristics, performance
characteristics and trading value of the comparable companies to which the
Company is being compared. The preparation of a valuation opinion is a complex
process and is not necessarily susceptible to partial analyses or summary
description. In arriving at the Valuation Opinion, Gate-Way considered the
results of all of its analyses as a whole and weighted the market approach 60%
and the income approach 40%. Gate-Way believes that the summary provided and the
analyses described above must be considered as a whole and that selecting
portions of these analyses, without considering all of them, would create an
incomplete view of the process underlying its analyses and opinion.
The following is a summary of the material financial analyses performed by
Gate-Way in connection with the preparation of the Valuation Opinion. These
summaries of financial analyses alone do not constitute a complete description
of the financial analyses Gate-Way employed in reaching its conclusions. The
order of analyses described does not represent relative importance or weight
given to those analyses by Gate-Way. Except as otherwise noted, the following
quantitative information, to the extent that it is based on market data, is
based on market data as it existed on or before April 30, 2005 and is not
necessarily indicative of current market conditions.
PUBLIC COMPARABLES ANALYSIS/MARKET APPROACH
In rendering its opinion, Gate-Way analyzed the pricing ratios of certain
comparable oil and gas companies that had sold at a certain price. The analysis
included a comparison of such key financial ratios as return on assets, return
on investment and P.E. ratio before extraordinary items and such key pricing
ratios as current ratio, and earnings before interest, depreciation and
amortization. Gate-Way reviewed and compared selected financial and stock market
information, ratios and multiples of the Company to corresponding financial and
stock market information, ratios and multiples for a group of nine selected
publicly-traded oil and gas companies as set forth in the full text of the
Valuation Opinion attached as Exhibit B filed with the SEC.
Gate-Way considered the comparable group comparison of the Market Approach and
analysis as the most appropriate basis for determining the price for the
repurchase of the Company's stock and weighted 60% of the price using this
method. Gate-Way stated that the weight given to the Market and Income approach
was based on the professional judgment and experience of its analyst and not
because of some system of prescribed formulas. The reason for giving a greater
allocation toward the Market approach over the Income approach was not disclosed
by the analyst other than the asset approach relies on the selection of truly
comparable companies in the same industry which is challenging since few
companies have the same financial structure, cost structure, organization,
operational processes, product mixes, markets, etc. However, the approach does
provide valuable perspective about the market.
The Market Approach uses comparable companies in the same industry as defined by
a company's SIC or NAICS codes. Comparable data is extracted from public markets
and from various data bases containing historical information for stock shares,
earnings per share, equity price to annual sales, equity price to annual sales,
and equity price to annual sales or assets, etc. The challenge with this method
is locating and selecting appropriate similar or comparable companies. Two
methods have been approved for the Market Approach namely the Guideline Publicly
Traded Company Method and the Comparative Transaction Method. The Guideline
Publicly Traded Company Method ("GTPCM") incorporates a best fit analysis and
encompasses the concept of selecting those companies that are deemed most
comparable or similar to the Company. Publicly held companies were used for the
comparable analysis since closely-held companies have different foundations,
both financially and organizationally, from those of most public companies.
Gate-Way took information from 193 companies identified in SIC 1311 the same
industrial code as Pioneer Oil and Gas and compared the same with Pioneer Oil
and Gas. Several of the 193 companies in the sample were deleted for various
reasons by Gate-Way with the Companies most close to the Company placed in the
following table that was in Gate-Way's report:
-------------------------------------------------------------------------------------------------------------------------------
Table: ADJUSTED COMPARISON SUMMARY WITH OTHER PUBLICLY TRADED COMPANIES
SIC 1311
Pioneer Oil and Gas
April 30, 2005
-------------------------------------------------------------------------------------------------------------------------------
--------------------------- --------- ---------- --------- ---------- ------- --------- -------- ------- ----------- ----------
DESCRIPTION PE LONG
STOCK RATIO TERM
PRICE/ BEFORE STOCK DEBT/
SALES/ XTR PRICE / DIV PAY OUT CUR TOT RTRN ON RTRN ON
BETA SHARE ITEMS CASH FLOW YIELD RATIO RATIO EQTY INVEST ASSETS
--------------------------- --------- ---------- --------- ---------- ------- --------- -------- ------- ----------- ----------
--------------------------- --------- ---------- --------- ---------- ------- --------- -------- ------- ----------- ----------
-1.03 1.53 16.09 9.25 0.00 0.00 5.05 0.00 20.02 12.65
Pioneer Oil and Gas
--------------------------- --------- ---------- --------- ---------- ------- --------- -------- ------- ----------- ----------
--------------------------- --------- ---------- --------- ---------- ------- --------- -------- ------- ----------- ----------
Total SIC 1311 Sample
--------------------------- --------- ---------- --------- ---------- ------- --------- -------- ------- ----------- ----------
--------------------------- --------- ---------- --------- ---------- ------- --------- -------- ------- ----------- ----------
MEAN 0.49 2.51 15.87 6.36 0.61 1.23 1.36 0.58 9.28 7.71
--------------------------- --------- ---------- --------- ---------- ------- --------- -------- ------- ----------- ----------
--------------------------- --------- ---------- --------- ---------- ------- --------- -------- ------- ----------- ----------
MEDIAN 0.565 2.36 13.68 5.875 0.62 0 1 0.51 9.55 7.88
--------------------------- --------- ---------- --------- ---------- ------- --------- -------- ------- ----------- ----------
--------------------------- --------- ---------- --------- ---------- ------- --------- -------- ------- ----------- ----------
MAXIMUM 1.92 5.08 40.00 13.00 1.09 8.12 5.05 2.07 20.02 16.04
--------------------------- --------- ---------- --------- ---------- ------- --------- -------- ------- ----------- ----------
--------------------------- --------- ---------- --------- ---------- ------- --------- -------- ------- ----------- ----------
MINIMUM -1.13 0.03 2.95 0.24 0.14 0.00 0.05 0.00 0.00 0.00
--------------------------- --------- ---------- --------- ---------- ------- --------- -------- ------- ----------- ----------
--------------------------- --------- ---------- --------- ---------- ------- --------- -------- ------- ----------- ----------
RANGE 3.05 5.05 37.05 12.76 0.95 8.12 5 2.07 20.02 16.04
--------------------------- --------- ---------- --------- ---------- ------- --------- -------- ------- ----------- ----------
--------------------------- --------- ---------- --------- ---------- ------- --------- -------- ------- ----------- ----------
STDEV 0.545 1.02 7.58 2.43 0.29 2.45 1.02 0.46 4.67 3.89
--------------------------- --------- ---------- --------- ---------- ------- --------- -------- ------- ----------- ----------
--------------------------- --------- ---------- --------- ---------- ------- --------- -------- ------- ----------- ----------
COEFVAR 1.105 0.41 0.48 0.38 0.48 2.00 0.75 0.79 0.50 0.50
--------------------------- --------- ---------- --------- ---------- ------- --------- -------- ------- ----------- ----------
--------------------------- --------- ---------- --------- ---------- ------- --------- -------- ------- ----------- ----------
COUNTA 64 64 64 64 17 66 66 63 64 67
--------------------------- --------- ---------- --------- ---------- ------- --------- -------- ------- ----------- ----------
-------------------------------------------------------------------------------------------------------------------------------
Source: C-E-I-R 10,000 - Data extracted as of 31 December 2004.
-------------------------------------------------------------------------------------------------------------------------------
The next table below presents Gate-Way's results of Valuations using the Ratios
from the table above:
Table: SUMMARY OF VALUATION RESULTS
C-E-I-R 10,000 Data
Pioneer Oil and Gas
April 30, 2005
-----------------------------------------------------------------------------------------------------------------------
--------------------------- -------- ------------ ------------- ------------- ------------- ----------- ---------------
PER CURRENTSHARES
DESCRIPTION SHARE MEAN MEDIAN HIGH LOW MEANS
--------------------------- -------- ------------ ------------- ------------- ------------- ----------- ---------------
--------------------------- -------- ------------ ------------- ------------- ------------- ----------- ---------------
Stock Price to Sales 0.199 7,911,727 2.51 2.36 5.08 0.03
--------------------------- -------- ------------ ------------- ------------- ------------- ----------- ---------------
--------------------------- -------- ------------ ------------- ------------- ------------- ----------- ---------------
Ratios .499 .47 1.011 .006
--------------------------- -------- ------------ ------------- ------------- ------------- ----------- ---------------
--------------------------- -------- ------------ ------------- ------------- ------------- ----------- ---------------
Valuation 3,947,950 3,715,700 7,998,100 47,200 5,220,600
--------------------------- -------- ------------ ------------- ------------- ------------- ----------- ---------------
--------------------------- -------- ------------ ------------- ------------- ------------- ----------- ---------------
Price/Earnings 0.041 7,911,727 15.87 13.68 40.00 2.95
--------------------------- -------- ------------ ------------- ------------- ------------- ----------- ---------------
--------------------------- -------- ------------ ------------- ------------- ------------- ----------- ---------------
Ratios .646 .557 1.629 0.120
--------------------------- -------- ------------ ------------- ------------- ------------- ----------- ---------------
--------------------------- -------- ------------ ------------- ------------- ------------- ----------- ---------------
Valuation 5,111,000 4,406,800 12,888,200 949,400 7,468,700
--------------------------- -------- ------------ ------------- ------------- ------------- ----------- ---------------
--------------------------- -------- ------------ ------------- ------------- ------------- ----------- ---------------
Price/Cash Flow 0.055 7,911,727 6.36 5.875 13.00 0.24
--------------------------- -------- ------------ ------------- ------------- ------------- ----------- ---------------
--------------------------- -------- ------------ ------------- ------------- ------------- ----------- ---------------
Ratios 0.35 0.323 0.715 0.013
--------------------------- -------- ------------ ------------- ------------- ------------- ----------- ---------------
--------------------------- -------- ------------ ------------- ------------- ------------- ----------- ---------------
Valuation 2,769,100 2,555,500 5,656,900 102,900 3,660,500
--------------------------- -------- ------------ ------------- ------------- ------------- ----------- ---------------
--------------------------- -------- ------------ ------------- ------------- ------------- ----------- ---------------
3,942,700 3,559,300 8,847,700 366,500
MEANS
--------------------------- -------- ------------ ------------- ------------- ------------- ----------- ---------------
Gate-Way gave careful consideration to the results of the analysis presented in
the Table above. Gate-Way stated in its report that "A comparison between the
Company and 'similar' companies in the same industry shows the Company to be
above average performance wise." Therefore, Gate-Way concluded that an
appropriate value should lie somewhere between the Mean/Median and the High. An
average of those three values was used to derive the Grand Means, and by
comparison Gate-Way selected the two highest values, which were then averaged
resulting in the selected value for this method. The derived values range from a
low of $366,500 to a high of $8,847,700. The selected value using this method
was the mean between the three highest valuations or $7,179,000.
The Comparative Transaction Method compares selected ratios from the actual
sales of other companies in the same industry. Data to support this method is
generally found in a variety of databases which contain key information about
similar companies recently sold. That data is adjusted, and selected financial
ratios are derived from which values can be calculated using th subject
Company's financial data. The challenge using this method is the identification
of truly similar companies for the comparison, since it is rare to find two or
more companies that have the exact same management, product, marketing, and
financial structure, etc. Comparative data was extracted from DoneDeals for the
Gate-Way opinion. The table below summarizes the nine transactions involving
companies used for comparing with Pioneer Oil and Gas. Of the nine transactions,
seven were sold by Private Companies and two by Public companies. Seven of the
nine sellers were U.S. companies, and two were Canadian companies. A summary of
the Sellers Description and the Terms of the sale are presented below:
Table: SUMMARY OF COMPARATIVE TRANSACTIONS - SIC 1311
DoneDeals Database
Pioneer Oil and Gas
April 30, 2005
BUYER'S CITY PRIMARY SELLER (STATE) SALE TYPE BUS TYPE CLOSE
Delray Beach, FL Graham Energy (NV) Stock Private 6-Feb-02
Calgary, Alberta, Canada Assure Oil and Gas Corp. (CANADA) Stock Private 1-Apr-02
New Orleans, LA Hail-Houston Oil Company (TX) Stock Private 15-Jan-02
Calgary, Alberta, Canada Westerra 2000 Inc. (ALBERTA) Stock Private 1-Apr-02
Benedict, KS STP Cherokee, Inc. (OK) Stock Private 7-Nov-02
Denver, CO Bravo Natural Reosurces, Inc. (OK) Stock Private 6-Dec-02
Houston, TX EEX Corporation (TX) Stock Public 26-Nov-02
Denver, CO Matador Petroleum Corp (TX) Stock Public 27-Jun-03
Oklahoma City, OK Perkins Oil Enterprises, Inc. (KS) Stock Private 6-Jun-03
The Gate-Way opinion then summarized the sales transactions of the nine
companies and identified valuation ratios for comparative purposes under the
following tables:
Table: SUMMARY OF EQUITY PRICES, REVENUES AND VALUATION RATIOS
DoneDeals Database
Pioneer Oil and Gas
April 30, 2005
EQUITY EQUITY EQUITY
PRICE PRICE PRICE
PRIMARY SELLER EQUITY PRICE REVENUE REVENUE EBITDA EBITDA NET INCOME NET INCOME
Graham Energy 10,800,000 96,000 113 39,990 270 4,000 2,700.00
Assure Oil and Gas 2,100,000 39,000 54 (90,000) -23 (141,000) (14.89)
Hail-Houston Oil 94,600,000 36,000,000 3 (427,000) -222 (17,400,000) (5.44)
Westerra 2000 2,288,700 600,000 4 275,000 8 13,000 176.05
STP Cherokee 6,110,000 1,800,000 3 81,900 75 (208,500) (29.30)
Bravo Natural Resources 119,000,000 17,466,670 7 12,266,670 10 3,333,333 35.70
EEX Corporation 742,900,000 151,733,337 5 25,600,000 29.02
Matador Petroleum 407,700,000 59,900,000 7 40,100,000 10 10,300,000 39.58
Perkins Oil Enterprises 3,040,000 5,520,000 1 506,400 6 168,000 18.10
MEAN 154,282,078 30,350,556 22 6,594,120 17 2,407,648 328
MEDIAN 10,800,000 5,520,000 5 178,450 9 13,000 29
MAXIMUM 742,900,000 151,733,337 113 40,100,000 270 25,600,000 2,700.00
MINIMUM 2,100,000 39,000 1 (427,000) (222) (17,400,000) (29.00)
RANGE 740,800,000 151,694,337 112 40,527,000 492 43,000,000 2,729.00
STDEV 256,704,131 49,944,688 38 14,198,353 134 11,309,520 892.00
COEFVAR 1.66 1.65 1.75 2.15 8.02 4.70 2.72
SAMPSIZE 9 9 9 9 8 9 9
Table: ADJUSTED SUMMARY OF EQUITY PRICES, REVENUES AND VALUATION RATIOS
DoneDeals Database
Pioneer Oil and Gas
April 30, 2005
EQUITY EQUITY EQUITY
PRICE PRICE PRICE
PRIMARY SELLER EQUITY PRICE REVENUE REVENUE EBITDA EBITDA NET INCOME NET INCOME
Hail-Houston Oil 94,600,000 36,000,000 3 (427,000) (222) (17,400,000) (5)
Westerra 2000 2,288,700 600,000 4 275,000 8 13,000 176
STP Cherokee 6,110,000 1,800,000 3 81,900 75 (208,500) (29)
Bravo Natural REsources 119,000,000 17,466,670 7 12,266,670 10 3,333,333 36
EEX Corporation 742,900,000 151,733,337 5 25,600,000 29
Matador Petroleum 407,700,000 59,900,000 7 40,100,000 10 10,300,000 40
Perkins Oil Enterprises 3,040,000 5,520,000 1 506,400 6 168,000 18
MEAN 196,519,814 39,002,858 4 8,800,495 (19) 3,115,119 38
MEDIAN 94,600,000 17,466,670 4 390,700 9 168,000 29
MAXIMUM 742,900,000 151,733,337 7 40,100,000 75 25,600,000 176
MINIMUM 2,288,700 600,000 1 (427,000) (222) (17,400,000) (29)
RANGE 740,611,300 151,133,337 6 40,527,000 296 43,000,000 205
STDEV 280,161,088 54,156,578 2 16,089,189 103 12,958,043 66
COEFVAR 1.43 1.39 0.55 1.83 -5.47 4.16 1.75
SAMPSIZE 7 7 7 6 6 7 7
Table: SUMMARY OF COMPARATIVE TRANSACTIONS VALUATIONS
Pioneer Oil and Gas
April 30, 2005
* REVENUE * EBITDA * NET INCOME
DESCRIPTION $1,590,900.00 $404,300.00 $297,800.00
MEAN 4 $6,363,600.00 22 $8,894,600.00 31 $9,231,800.00
MEDIAN 4 $6,363,600.00 10 $4,043,000.00 32 $9,529,600.00
MAXIMUM 7 $11,136,300.00 75 $30,322,500.00 40 $11,912,000.00
MINIMUM 1 $1,590,900.00 6 $2,425,800.00 18 $5,360,400.00
MEAN $6,363,600.00 $11,421,475.00 $9,008,450.00
GRAND MEAN $8,931,175.00 $8,931,175.00 $8,931,175.00
* = Valuation Ratio used for calculation
Gate-Way's results using the Comparative Transactions Method was $8,931,200. The
Table presented below considers the valuations selected from each Market
Approach Method, and derives a single value for the Market Approach.
Table: OPINION OF VALUE FOR MARKET APPROACH
Pioneer Oil and Gas
April 30, 2005
Publicly Traded Companies $7,179,000
Comparative Transaction Companies $8,931,200
OPINION OF VALUE - MARKET APPROACH $8,055,100
INCOME APPROACH
The Income Approach is a discounted earnings method used to calculate the
present value of a Company's future earnings potential. The earnings are derived
using statistical projection models of the Company's adjusted historical Income
Statements. Gate-Way in its opinion stated that this method is highly regarded
by the Valuation community as an excellent method for deriving the Sales or
Equity Price of an on-going business. It permits the use of various definitions
of earnings including Net Earnings, Earnings Before Taxes, and Net Cash Flow.
The determination of value then is based on the present value of a stream of
benefits, or earnings, into the future, plus a Terminal Value that represents
the Company's residual value into the future at the end of the earnings stream.
The strengths of this method are that it considers the Company's operational
processes and profits based on historical experience. Its major weakness though
is that it relies on the selection of an appropriate Cost of Capital expressed
as Discount and Capitalization rates, on an appropriately selected long-term
growth rate, and on accurate projections of earnings throughout the analysis
period. Hence, variances from those selections and actual rates and earnings
will result in differences between derived and actual values, and those
differences may be material.
Using this method, Gate-Way determined Pioneer Oil and Gas to have a long term
sustainable growth after taxes of 6.0%. With the exception of 2005, Revenues
were derived from five-year historical information (2000-2004). Expenses were
determined using a ration of revenues to expenses over the same period. General
and Administrative expenses for fiscal year 2005 were set as the same as fiscal
year 2004, and then were inflated at 2.0% per year for the next five years. The
resulting Net Income derived by Gate-Way was used in the Discounted Future
Earnings model presented in the Table below.
For their report, Gate-Way considered 2005 as the base year. Financial results
were available for the first half of the year, and an estimate was made for the
second half. Also, unusual income from the sale of acreage from the Central Utah
Overthrust was included into the 2005 results. Projected Revenues and Expenses
for the subsequent five years were made as described above, and the present
value of that earnings stream was calculated using the long term sustainable
growth number of 6.0%.
Table: PROJECTED FUTURE EARNINGS SUMMARY
Pioneer Oil and Gas
April 30, 2005
REVENUES ($s) 2005 2006 2007 2008 2009 2010
Oil and gas sales 0.56 955,000 1,694,280 2,237,424 2,875,824 3,609,480 4,438,459
Royalty revenue 0.30 850,000 907,650 1,198,620 1,540,620 1,933,650 2,377,746
Production Operations (OGRR) 1,805,000 2,601,930 3,436,044 4,416,444 5,543,130 6,816,205
Operational reimbursements 0.00 0 0 0 0 0 0
Project/lease sales income 0.14 5,860,263 423,570 559,356 718,956 902,370 1,109,615
TOTAL REVENUES 1.00 7,665,263 3,025,500 3,995,400 5,135,400 6,445,500 7,925,820
EXPENSES
Cost of Operations f(OGRR) 0.44 794,899 1,145,857 1,513,190 1,944,946 2,441,124 3,001,770
General& Admin * 0.02 346,970 353,909 360,988 368,207 375,571 383,083
Exploration Costs f(OGRR) 0.13 238,525 343,837 454,062 583,619 732,507 900,740
Lease rentals 0.20 55,000 83,154 109,811 141,143 177,150 217,836
Total Expenses 1,435,394 1,926,757 2,438,051 3,037,915 3,726,352 4,503,428
EBITDA 6,229,869 1,098,743 1,557,349 2,097,485 2,719,148 3,422,392
Depre.,Deple,Amort. f(OGRR) 0.08 623,184 245,973 324,825 417,507 524,018 644,368
TOTAL OPERATING EXP 2,058,578 2,172,729 2,762,876 3,455,422 4,250,370 5,147,796
EBIT (OPERATING PROFIT) 5,606,684 852,771 1,232,524 1,679,978 2,195,130 2,778,024
Other Income (Expenses)
Interest Income 0.01 76,653 30,255 39,954 51,354 64,455 79,258
Interest Expenses (0.01) (76,653) (30,255) (39,954) (51,354) (64,455) (79,258)
Other Income (Expenses) 0.01 76,653 30,255 39,954 51,354 64,455 79,258
Total Other Income 76,653 30,255 39,954 51,354 64,455 79,258
Earnings Before Taxes 5,683,337 883,026 1,272,478 1,731,332 2,259,585 2,857,282
Estimated Federal Taxes(1) 1,932,334 300,229 432,643 588,653 768,259 971,476
Estimated Utah Corporate Taxes(2) 187,550 29,140 41,992 57,134 74,566 94,290
NET INCOME 3,563,452 553,657 797,844 1,085,545 1,416,760 1,791,516
(1) 2004 Corporate Income Tax Rates for 'C' Corporations - Does not consider
dividends or other deductions.
34% Tax bracket 0.34 113,900 113,900 113,900 113,900 113,900 113,900
Plus 34% of earnings over 335,000 1,818,434 186,329 318,743 474,753 654,359 857,576
Total estimated Federal Tax 1,932,334 300,229 432,643 588,653 768,259 971,476
(2) 2005 Utah Flat Corporate Tax rate - 5%
5% Flat Corporate Tax Rate 0.05 187,550 29,140 41,992 57,134 74,566 94,290
Total Estimated Taxes 2,119,885 329,369 474,634 645,787 842,825 1,065,766
Table: PRESENT VALUE OF DISCOUNTED FUTURE EARNINGS
Pioneer Oil and Gas
April 30, 2005
DESCRIPTION VALUES Projected Projected Projected Projected Projected Projected Projected
30-Apr-05 2006 2007 2008 2009 2010 Term Val
Net Income ($s) 3,563,452 553,657 797,844 1,085,545 1,416,760 1,791,516 1,791,516
0 1 2 3 4 5 5
Discount Factor 1.000000 0.795482 0.632791 0.503374 0.400425 0.318530 0.318530
PV of Discounted Earnings 6,193,137.00 3,563,452 440,424 504,868 546,435 567,305 570,652
Terminal Value 1,791,516.00 <=The 11th year of operations, or
5th complete years past the
Valuation Date.
Capitalization of 9,089,376.00 <=Result from dividing by the After
Terminal Value -tax Capitalization Rate shown below.
PV of Capitalized 2,895,242.00 <-Result of multiplying times the
Terminal Value After-tax Discount Rate shown below.
Total Present Value 9,088,379.00
AFTER TAX COST OF CAPITAL
Discount Rate 25.71%
Capitalization Rate 19.71%
Long-term Sustainable Growth 6.00%
The Table presented below summarizes the results of the Discounted Earnings
Method presented in the Table shown above. This method resulted in a valuation
of $9,088,379. Inherent in this valuation are all of the assets and expenses
used to produce earnings and profits including lease rights, buildings,
furniture, fixtures, and equipment, management, depreciation, interest, and
taxes, etc.
Table: DISCOUNTED EARNINGS VALUATION
Pioneer Oil and Gas
April 30, 2005
DESCRIPTION VALUATION
Present Value of Earnings Stream $6,193,137
Present Value of Terminal Value $2,895,242
OPINION OF VALUE - Discounted Earnings Method $9,088,379
Gate-Way determined that the Income Approach and the Market Approach were the
best methods to value the Company since both methods look at the value of a
company on an on going basis. Another method such as the Asset method is used
more often if a company is contemplating liquidation. Because Pioneer Oil and
Gas will continue its operations Gate-Way determined the Income and Market
Approach to be the two best methods to use.
The Income Approach was weighted 40% and the Market Approach 60% under
Gate-Way's valuation and the two methods were added together to arrive at the
value of the Company of $8,468,420. Gate-Way did not use any quantifiable method
for using the Market Approach 60% and the Income Approach 40% but gave greater
weight to the Market Approach because it did not rely on future projections and
Gate-Way was able to identify 64 companies to make its comparable analysis and
therefore, believed the Market Approach to be a little more reliable than the
Income Approach. Since the evaluation was based on the Company having issued and
outstanding common stock of 7,910,727 common shares and 8,330,727 on a fully
diluted basis, the value of the Company's stock using Gate-Way's Valuation
Opinion is $1.07 and $1.03 on a fully diluted basis.
The Repurchase Price offered by the Company is a premium of about 45% before
dilution and about 40% on a fully diluted basis. This is significant premium
that the Company is willing to pay primarily because the Company's common stock
has been trading close to a $1.50.
REVIEW OF THE COMPANY PERFORMANCE
Gate-Way reviewed the trading prices of the Company's Common Shares and the
Company has reviewed the prices for the period of April 1, 2004, through March
31, 2005, as quoted by the Bulletin Board in determining the Repurchase Price.
The following table sets forth the high and low closing prices for the Company
Common Shares for each quarter of the period from April 1, 2004 through March
31, 2005.
Quarter Ended High Close Low Close
------------- ---------- ---------
June 30, 2004 $.85 $.61
September 30, 2004 $2.00 $.65
December 31, 2004 $1.05 $.75
March 31, 2005 $1.96 $.82
Period Of High Close Low Close
--------- ---------- ---------
April 1, 2005 to
May 2, 2005 $1.72 $1.45
Latest Price Closing Price
------------ -------------
May 3, 2005 $1.45 $1.45
Gate-Way did not place a lot of weight on the market price of the Company's
stock since it believed the market and income approach to be better methods in
determining the value of the Company's common stock. However, the Company
believed that even though the price of the Company's stock was relatively high
in light of Gate-Way's opinion it did not want to make the Repurchase Price
lower than the market price and therefore, set the price at $1.50.
CONCLUSION
The Board of Directors adopted the analysis of Gate-Way as a valid opinion for
determining the worth of the company since Gate-Way's opinion had taken into
account the value of the Company as a going concern and the price given by
Gate-Way was greater than the Company's net book value. Based upon the foregoing
analyses and the assumptions and limitations set forth in full in the text of
the Valuation Opinion, the Company is of the opinion that, as of the date of the
Valuation Opinion, that the Repurchase Price of $1.50 per Common Share to be
paid by the Company in lieu of issuing fractional shares in connection with the
Stock Splits is fair to the Unaffiliated Cashed Out Holders and Unaffiliated
Continuing Holders from a financial point of view since it is a substantial
premium over the value of what Gate-Way determined the value of the Company's
common stock. The Board decided on the price of a $1.50 per share because that
was the price that the Company's stock has been trading close to during the last
couple of months. The price of a $1.50 is fair to the Unaffiliated Continuing
Holders since it allows the Company to no longer be subject to the compliance
costs of the Sarbanes-Oxley Act and the Company can use the funds saved by
investing in other endeavors.
ENGAGEMENT OF GATE-WAY
The Company has agreed to pay Gate-Way a fee of $8,500 and to reimburse Gate-Way
for its reasonable out-of-pocket expenses related to its engagement, whether or
not the Stock Splits are consummated. No compensation received or to be received
by Gate-Way is based on or is contingent on the results of Gate-Way's
engagement. There are no other current arrangements to compensate Gate-Way, its
affiliates or unaffiliated representatives for any services rendered to the
Company, its executive officers, directors or affiliates. Gate-Way has not
previously provided financial institution consulting services to the Company.
None of Gate-Way's employees who worked on the engagement has any known
financial interest in the assets or equity of the Company or the outcome of the
engagement.
QUORUM, VOTING RIGHTS AND OTHER MATTERS
The Company presently has one class of capital stock, common stock, $.001 par
value, of which 7,683,727 shares were issued and outstanding at the close of
business on August 4th, 2005. Only shareholders of record at the close of
business on August 4th, 2005 will be entitled to notice of and to vote at the
meeting. The presence at the meeting in person or by proxy of a majority of the
shares entitled to a vote shall constitute a quorum for the transaction of
business. All voting is non-cumulative.
The Directors know of no other matters, which are likely to be brought before
the Meeting. If any other matters properly come before the Meeting, however, the
person named in the enclosed proxy, or that person's duly constituted substitute
acting at the Meeting, will be authorized to vote or otherwise act thereon in
accordance with such matters. If the enclosed proxy is properly executed and
returned prior to voting at the Meeting, the shares represented thereby will be
voted in accordance with the instructions marked thereon. In the absence of
instructions, executed proxies will be voted "FOR" the items listed in the
Notice. The Directors recommend a vote "FOR" each of the proposals. Directors
are elected by a plurality of the common stock represented at the meeting.
In accordance with Utah State law, certain corporate actions, generally, may
create shareholder's rights of dissent and entitlement to payment of the fair
market value of shares held. However, none of the proposals at the Annual
Meeting creates such shareholder dissenters' rights.
Any stockholder executing a proxy has the power to revoke such proxy at any time
prior to its exercise. A proxy may be revoked prior to exercise by (i) filing
with the Company a written revocation of the proxy, (ii) appearing at the
Meeting and casting a vote contrary to that indicated on the proxy, or (iii)
submitting a duly executed proxy bearing a latter date.
The cost of preparing, printing, assembling and mailing this Proxy Statement and
other material furnished to stockholders in connection with the solicitation of
proxies will be borne by the Company. In addition to the solicitation of proxies
by use of mails, officers, directors, employees and agents of the Company may
solicit proxies by written communication, telephone or personal call. Such
persons are to receive no special compensation for any solicitation activities.
The Company will reimburse banks, brokers and other persons holding common stock
in their names, or those of their nominees, for their expenses in forwarding
proxy solicitation materials to beneficial owners of common stock.
The Company will appoint one or more inspectors of election to act at the
Meeting and report the results. Prior to the Meeting, each inspector will sign
an oath to perform his duties in an impartial manner and according to the best
of his ability. Inspectors will ascertain the number of shares outstanding and
the voting power of each, determine the shares represented at the Meeting and
the validity of proxies and ballots, count all votes and ballots, and perform
certain other duties as required by law. Inspectors will tabulate the number of
votes cast for or withheld in the election of directors, and the number of votes
cast for or against all other proposals, including abstentions and other
non-votes.
The required quorum necessary to transact business at the Meeting is a majority
of the issued common stock outstanding on the record date. If a quorum is
present, a plurality of the votes cast for directors will determine the
directors elected and the approval of each proposal at the Meeting requires the
affirmative vote of a majority of the common stock actually voted on such
proposal except on the Stock Splits the Board would request a majority of the
total and issued and outstanding shares ratify their action. Abstentions and
broker non-votes will be counted to determine if a quorum is present but will
not otherwise affect the voting on any proposal.
PROPOSAL ONE: RATIFICATION BY THE SHAREHOLDERS OF THE BOARD'S PROPOSAL TO EFFECT
THE STOCK SPLITS
To ratify the Board of Directors decision for a 1-for-2000 reverse stock split
and the repurchase of all resulting fractional shares, followed immediately by a
2000-for-1 forward stock split of the Company's common shares. As a result of
the Stock Splits, (a) each shareholder owning fewer than 2000 common shares of
the Company immediately before the Stock Splits will receive $1.50 in cash,
without interest, for each of the Company's common shares owned by such
shareholder immediately prior to the Stock Splits and will no longer be a
shareholder of the Company; and (b) each shareholder owning 2000 or more common
shares immediately before the Stock Splits (i) will receive 2000 Common Shares
after the Stock Splits in exchange for each lot of 2000 Common Shares held
before the Stock Splits and (ii) any additional Common Shares held other than in
a 2000 share lot will be canceled and exchanged for $1.50 in cash per share. The
effective date for the reverse stock split will be on September 26, 2005, and
the forward split shall follow as soon thereafter the completion of all
transactions necessary for the reverse stock split. The Stock Splits will allow
the Company to file a Form 15 with the Securities and Exchange Commission
(`SEC"), thereby causing the Company to no longer be subject to the Rules and
Regulations of the Securities Act of 1934 and particularly the Sarbanes-Oxley
Act of 2002.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN
FAVOR OF THE STOCK SPLITS.
PROPOSAL TWO: ELECTION OF DIRECTORS
A Board of four directors is to be elected at the Meeting. The nominees are the
present directors, all of whom are standing for re-election. No director nominee
has declined the nomination or is unable or unfit to serve. Under the Bylaws of
the Company, the Company must have a minimum of three and a maximum of seven
directors. Each director serves until the next annual shareholders meeting or
until a successor is duly elected. Don J. Colton and Gregg B. Colton are
brothers and John O. Anderson is their uncle. The following table sets forth
information about the nominees and lists their ages as of the date of the
meeting.
Name Age Position(s) Held Director Since
Don J. Colton 59 Director, CEO, President October 1980
and Treasurer
Gregg B. Colton 52 Director, Vice President October 1980
and Secretary
John O. Anderson 62 Director January 1988
Lynn Woodbury 42 Director July 2505
Don J. Colton serves as the Company's President, Treasurer and Chairman of its
Board of Directors. Since the Company's inception in October 1980, Mr. Colton
has served as the Company's President and has been involved in all aspects of
the business including exploration, acquisition and development of producing
properties. From 1979 to 1981, Mr. Colton was Chief Financial Officer and a
member of the Board of Directors of Drilling Research Laboratory in Salt Lake
City, Utah. The Drilling Research Laboratory is a subsidiary of Terra Tek, Inc.
and prior to his involvement with the Drilling Research Laboratory, Mr. Colton
was Manager of Special Projects for Terra Tek. Mr. Colton received a BS in
Physics from Brigham Young University in 1970 and a Master of Business
Administration from the University of Utah in 1974.
Gregg B. Colton serves as the Company's Vice President, Secretary, General
Counsel and a member of the Board of Directors. Mr. Colton has been employed
with the Company since it actually commenced business in 1981. Mr. Colton is
involved in handling the contracts, sales of oil and gas products and legal
problems of the Company along with the day to day decision making for the
Company with the Company's President. From 1981 to 1984, Mr. Colton was also a
partner in the law firm of Cannon, Hansen & Wilkinson. Mr. Colton is a member of
the Utah State Bar and a real estate broker. He is also a member of the
Corporate Counsel and Business Law sections for the Utah State Bar. Mr. Colton
earned his BA from the University of Utah in 1976 and a Juris Doctor and a
Master of Business Administration from Brigham Young University in 1981.
John O. Anderson serves as the Company's Office Manager along with being a
member of the Board of Directors. Mr. Anderson as Office Manager handles the day
to day accounting for the Company along with handling the procurement of office
supplies. The Company has employed Mr. Anderson since 1981 and prior to joining
the Company he worked in land investments. Mr. Anderson received his BS in
Zoology in 1968 from the University of California.
Lynn Woodbury is the independent director on the audit committee for the
Company. Ms. Woodbury has been employed as the Controller of International
Petroleum LLC, a Salt Lake based exploration company since 1999 and handles all
phases of accounting, tax returns and internal control structure. Prior to her
employment with International Petroleum LLC, Ms. Woodbury was self-employed and
provided tax planning and compliance services for clients from 1996-1999. Ms.
Woodbury was employed by Kevin R. Huntington, JD, CPA, PC from 1986-1996 and
worked in the accounting, tax and management services. Ms. Woodbury has been a
licensed Certified Public Accountant since 1994 and graduated in 1985 from BYU
with a BS in accounting.
The Company does not have a nominating committee but all members of the Board of
Directors are involved in the consideration of any directors. The Company's
Audit Committee has the responsibility of assisting with the selection of the
independent auditors, approving all audit and non-audit services, reviewing with
management and the independent auditors the Company's financial statements,
significant accounting and financial policies and practices, audit scope and
adequacy of internal audit and control systems. The Audit Committee is comprised
of Lynn Woodbury, presently the sole member of the committee. Ms. Woodbury will
meet each quarter to review the financial statements of the Company prior to
submission with the SEC. Ms. Woodbury, a CPA, is considered an independent
director in accordance with the National Association of Securities Dealer's
listing standards and serves as the Chairman and designated financial expert for
the audit committee. All members of the Audit Committee are able to read and
understand fundamental financial statements.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF THE MEMBERS OF
THE BOARD OF DIRECTORS
BOARD OF DIRECTORS
The Board of Directors held a total of four Board of Directors meeting during
the fiscal year ending September 30, 2004. All directors attended all of the
meetings of the Board of Directors. The Board of Directors has an audit
committee comprised of Ms. Woodbury, but does not have a nominating or
compensation committee or a committee that performs similar functions. The
reason for no nominating committee is because all members of the Board weigh in
on any Board recommendations and the Company has only added one Board member
within the last 10 years.
The Company's directors hold office until the end of their respective terms or
until their successors have been duly elected and qualified. Presently, the
Board of Directors does not receive any cash compensation for serving on the
Board who are employees. Lynn Woodbury, the only Board member that is not an
employee is paid $1,000 per quarter for serving on the Board of Directors. The
employees on the Board have received 60,000 options under the Company's
incentive stock option plan to acquire the Company's common stock at a price of
$.20 per share until August 9, 2011. The options were granted to these employees
when the share price of the Company's common stock was $.20 or below.
At the annual shareholders meeting in 1991, the shareholders approved an
amendment to the Company's Articles of Incorporation, limiting the personal
liability of directors to the Company and its shareholders, to the extent
allowed by Utah law. In effect, the shareholders approved the adoption of
statutory provisions, which permit a Utah corporation to eliminate the personal
liability of directors for monetary damages for breach of fiduciary duty.
The Company's executive officers are appointed by the Board of
Directors and serve at the discretion of the Board.
EXECUTIVE OFFICERS AND MANAGEMENT
The following table sets forth (i) the names of the executive officers,
(ii) their ages as of the Record Date and (iii) the capacities in which they
serve the Company:
Name Age Position(s) Officer Since
Don J. Colton 59 President/Treasurer 1980
Gregg B. Colton 52 Vice President/Secretary 1980
Note: Don J. Colton and Gregg B. Colton are brothers.
Section 16(a) of the Securities and Exchange Act of 1934 requires officers,
directors, and persons who own more than ten percent of a registered class of a
company's equity securities to file initial reports of beneficial ownership and
to report changes in ownership of those securities with the Securities and
Exchange Commission. They are also required to furnish the Company with copies
of all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the applicable copies of
the forms required to be filed with the SEC that have been furnished to the
Company, the Company has determined that the pertinent officers, directors and
principal shareholders have complied with all applicable Section 16(a)
requirements since the Company became subject to Securities Exchange Act of
1934. The Company voluntarily became subject to the Securities Exchange Act of
1934 on February 26th, 2000.
EXECUTIVE COMPENSATION AND RELATED INFORMATION
The following Summary Compensation Table sets forth all cash compensation paid,
distributed or accrued for services, including salary and bonus amounts rendered
in all capacities for the Company's CEO during the fiscal years ended, September
30, 2004, 2003, and 2002. All other tables required to be reported have been
omitted as there has been no compensation awarded to, earned by or paid to any
of the executives of the Company that is required to be reported other than what
is stated below:
SUMMARY COMPENSATION TABLE
Name and Amount of Fiscal
Principal Position Compensation Year Ended
Don J. Colton, CEO $94,879(1) 2004
Don J. Colton, CEO $90,504(1) 2003
Don J. Colton, CEO $90,504(1) 2002
(1) The amount of compensation included in the table above for each
fiscal year does not include amounts paid by the Company for the
Company's Employee Stock Ownership Plan. Under the Employee Stock
Ownership Plan 15% of the employees compensation for salary or bonuses
is paid on behalf of the employee for Company stock in the Company's
Employee Stock Ownership Plan for fiscal year 2004. All full-time
employees of the Company participate in the Employee Stock Ownership
Plan on the same terms and conditions as management. For the fiscal
years shown above 15% of the compensation amount was paid towards the
Employee Stock Ownership Plan in the form of Company stock for 2004
and 2003 and 10% in fiscal year 2002.
The Board of Directors reviews and sets compensation levels of the executive
officers of the Company by evaluating their respective performance in light of a
number of factors, including the Board's assessment of the performance of the
Company, as well as the range of compensation paid by the Company in comparison
to the range of compensation paid by similar oil and gas companies in the
western United States. The board weighs other factors, such as the officer's
performance relative to the continued acquisition of favorable properties, and
relative to the Company's financial performance.
The Company's executive compensation policy continues to look at three variable
elements: base salary, stock awards and option grants. The policy factors, which
determine the setting of these compensation elements, are largely aimed at
attracting and retaining executives considered essential to the Company's
long-term success.
The granting of stock and/or options is designed as an incentive to increasingly
focus management's interests in closer alignment with interests of shareholders.
The Company's executive compensation policy seeks to engender committed
leadership and strategic management to favorably posture the Company for
continued growth, stability and strength of shareholder equity. All options
granted currently to directors, officers and employees of the Company are
pursuant to an incentive stock option plan approved by shareholders of the
Company.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock by each person or group that is known by
the Company to be the beneficial owner of more than five percent of its
outstanding Common Stock, each director of the Company, each person named in the
Summary Compensation Table, and all directors and executive officers of the
Company as a group as September 30, 2004. Unless otherwise indicated, the
Company believes that the persons named in the table below, based on information
furnished by such owners, have sole voting and investment power with respect to
the Common Stock beneficially owned by them, where applicable.
Title of Name and Address of Amount and Nature Percent
Class Beneficial Owner of Beneficial Owner of Class
Common Don J. Colton 910,596(1) 10.93%
2172 E Gambel Oak Drive
Sandy, Utah 84092
Common Gregg B. Colton 916,543(1) 11.0%
10026 Ridge Gate Circle
Sandy, Utah 84092
Common John O. Anderson 553,990(1) 6.65%
7462 S Parkridge Circle
Salt Lake City, Utah 84121
Common Lynn Woodbury 0 0%
1206 W. South Jordan Parkway
Unit B
South Jordan, Utah 84095
Common Pioneer Employee Stock 1,145,916(2) 13.76%
Ownership Plan
1206 W. South Jordan Parkway
Unit B
South Jordan, Utah 84095
All Directors and Officers as a Group
(3 Persons) 2,381,129 28.58%
(1) Includes currently exercisable options to purchase common stock in the
Company as long as the person is serving as a director and employee of the
Company. Each of the persons listed under this footnote has options to
purchase 120,000 shares of the Company's Common Stock.
(2) Persons listed above have their vested shares under the Pioneer
Employee Stock Ownership Plan included under their name. Don J. Colton and
Gregg B. Colton as Trustees of the Pioneer Employee Stock Ownership Plan
have the right to vote all the shares of the Plan at any shareholder
meeting of the Company. The shares listed above under the Pioneer Employee
Stock Ownership Plan include shares of employees vested that are not Board
members along with shares that have not vested yet.
The Company currently has no arrangements, which may result in a change of
control.
TRANSACTIONS WITH RELATED PARTIES
The Board of Directors approved several years ago a resolution to allow
employees of the Company to purchase 25% of any oil and gas producing property
acquired by the Company at the same time as the Company acquires the property.
The resolution required that the employees pay for 25% of the cost of the oil
and gas properties at the same time the Company purchased the properties. In the
event, the Company is unable to fund the total cost of any producing properties
the employees of the Company may purchase the amount the Company is unable to
fund even if it exceeds 25%. The employees also have the right to acquire 25% of
any non-producing oil and gas leases acquired by the Company on similar terms as
those for producing properties.
The Company also leases office space that is owned by the Board of Directors.
The office space is leased to the Company on terms reasonable for the same kind
of office space in the area that it is located. The office space is 1,950 square
feet with an unfinished basement of approximately 975 square feet.
PROPOSAL THREE: RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Jones Simkins LLP served as the independent accountants for the Company for the
year ended September 30, 2004. There have been no disagreements during the three
fiscal years ended September 30, 2004, 2003 and 2002, or at any other time with
Company's present or former independent public accountants. Management of the
Company intends to continue with its selection of Jones for the fiscal year
ending September 30, 2005. A representative of Jones is not expected to be
present at the Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE
APPOINTMENT OF JONES SIMKINS LLP AS THE COMPANY'S ACCOUNTANTS.
PROPOSAL FOUR: OTHER BUSINESS
The Company has not received any shareholder proposals for this Annual Meeting.
The Board of Directors knows of no other business, other than stated in this
Proxy Statement, to be presented for the action at the Annual Meeting. If other
business is properly presented at the Meeting, however, which was not known, or
did not become known to the Board a reasonable time before the solicitation,
then the person designated in the enclosed Proxy will vote, or refrain from
voting, in accordance with his best judgment.
STOCKHOLDER PROPOSALS
Stockholders may submit proposals on matters appropriate for stockholder action
at the Company's annual meetings consistent with regulations adopted by the SEC.
For such proposals to be considered for inclusion in the Proxy Statement and
form of proxy relating to the 2005 annual meeting, they must be received by the
Company not later than September 30, 2004 or such later date as the Company may
specify in its SEC filings. Such proposals should be addressed to the Company's
office at 1206 W. South Jordan Parkway, Unit B, South Jordan, Utah 84095-5512
PROPOSED STOCK SPLITS
Summary and Structure
The Board has authorized the Stock Splits that will take place without
shareholder vote since under Utah law shareholder vote is not required for a
reverse stock split or for the repurchase of fractional shares. The Stock Splits
consist of two steps. First, the Company will conduct a 1-for-2000 reverse stock
split of the Common Shares. In the reverse split, (i) each lot of 2000 Common
Shares held by a shareholder of the Company prior to the reverse split will be
converted into one whole Common Share after the reverse split; and (ii) any
Common Shares held by a shareholder other than in a 2000 share lot will not be
converted into a whole share and will be canceled and exchanged for $1.50 in
cash per share. After the reverse split is completed, it will be followed
immediately by a 2000-for-1 forward stock split of the Common Shares, which will
convert each whole Common Share issued in connection with the reverse split into
2000 Common Shares. The Stock Splits are intended to take effect on the
Effective Date.
Generally, the effects of the Stock Splits can be illustrated by the following
examples:
Shareholder A holds 1500 Common Shares in a single record account and holds no
other Common Shares, Shareholder A's 1500 Common Shares will be converted into
the right to receive $2,250 in cash (1500 x $1.50). If Shareholder A wanted to
continue to be a shareholder after the Stock Splits, he could purchase an
additional 500 Common Shares far enough in advance of the Stock Splits so that
the purchase is complete by the Effective Date.
Shareholder B holds 200 shares in a brokerage account and holds no other Common
Shares the Company intends for the Stock Splits to treat shareholders holding
Common Shares through a nominee the same as those holding shares in a record
account. Nominees will be instructed to effect the Stock Splits for their
beneficial owners. If this occurs, Shareholder B will entitled to receive $300
in cash (200 X $1.50). However, nominees may have different procedures and
shareholders holding shares in street name should contact their
nominee to determine how the Stock Splits will affect them.
Shareholder C holds 3000 Common Shares in a single record account and holds no
other shares After the reverse stock split, Shareholder C would have 1.5 Common
Shares (3000/4000 = 1.5). He will receive one whole Common Share and instead of
receiving a fractional share he will be entitled to receive $1,500 (1000 x
$1.50). In the forward stock split his whole Common Share will be converted into
2000 Common Shares (1 x 2000). After completion of the Stock Splits, Shareholder
C will hold 2000 Common Shares and will be entitled to receive $1,500.
Shareholder D holds 3000 shares in each of two separate record accounts for a
total of 6,000 Common Shares. After the reverse stock split, Shareholder D will
hold one whole Common Share in each separate record account (3,000/2000 =1.5)
and will be entitled to receive $1500 (1000X$1.50) in cash in each record
account in lieu of being issued a fractional share. In the forward split his
shares will be converted into 2000 Common Shares (1 x 2000) in each account.
After the completion of the Stock Splits, Shareholder D will hold 4000 Common
Shares and will be entitled to receive $3,000.
Shareholder E holds 5000 Common Shares in a brokerage account and holds no other
shares. The Company intends for shareholders holding shares through nominees to
be treated the same as record holders and expects that Shareholder E would hold
two whole Common Shares after the reverse split (5000/2000 = 2.50) and would be
entitled to receive $1500 in cash (1000 x $1.50). Shareholder E's two whole
Common Shares would be converted into 4000 Common Shares in the forward split.
After the completion of the Stock Splits, Shareholder E would hold 4000 Common
Shares and would be entitled to receive $1,500.
Husband and Wife each hold 1500 Common Shares in separate record accounts and
hold 1500 shares jointly in another record account and own no other shares.
Shares held in joint accounts will not be added to shares held individually in
determining whether a shareholder will receive whole shares after the reverse
split. In this situation, Husband and Wife will each be entitled to receive
$2,250 each for the shares held in their individual record accounts (1500 x
$1.50). Further, they will be entitled to receive $2,250 for the Common Shares
held in their joint account. Husband and Wife will hold no Common Shares after
the Stock Splits. If Husband and Wife wished to continue to be shareholders
after the Stock Splits, they could transfer a sufficient number of shares from
one account into another so that at least 2000 Common Shares (or
a multiple thereof) are held in one account.
The Board has set the Repurchase Price at $1.50 per pre-split Common Share. The
Board made this determination in good faith, based upon the Valuation Opinion
and other factors the Board deemed relevant. Please see the sections entitled
"Reasons for the Stock Splits," "Opinion of Gate-Way" and "Background of the
Stock Splits." The Company currently estimates that shareholders will receive
payment for their Common Shares that are exchanged for cash in lieu of issuing
fractional shares within approximately four weeks after the Effective Date as
long as they timely return their stock certificates to the Transfer Agent
pursuant to the terms of the transmittal letter.
The Stock Splits are considered a "going-private" transaction as defined in Rule
13e-3 promulgated under the Exchange Act because they are intended to terminate
the registration of the Common Shares and suspend the Company's filing and
reporting obligations under the Exchange Act. In connection with the Stock
Splits, the Company has filed, as required by the Exchange Act, a Rule 13e-3
Transaction Statement on Schedule 13E-3 (the "Schedule 13E-3") with the SEC.
Please see the section entitled "Available Information."
The Stock Splits have become effective by the Board action of approving the
Stock Splits. However, the Board of Directors desire that a majority of the
issued and outstanding shares of the Company ratify the Board's decision on the
Stock Splits and therefore, has asked for the shareholder vote regarding the
Stock Splits.
COST OF STOCK SPLITS
The repurchase of fractional Common Shares in connection with the Stock Splits
is estimated to cost approximately $640,000. The Company intends to finance the
Stock Splits and repurchase of fractional shares by using cash on hand. The
following is an estimate of the total costs expected to be incurred by The
Company in connection with the Stock Splits and the solicitation of Proxies for
the Annual Meeting. Final costs may be higher or lower than the estimates shown
below.
Item Approximate Cost
---- ----------------
Repurchase of Fractional Common Shares $600,000
Legal fees $ 3,500
Gate-Way fees $ 8,500
Accounting fees $ 5,000
Filing fees $ 2,500
Printing, mailing new stock certificates
and transfer costs $ 20,500
----------
Total $640,000
==========
BACKGROUND OF THE STOCK SPLITS
During the past several months after the passage of the Sarbanes-Oxley Act, the
members of the Board as a group considered the advantages and disadvantages of
remaining a SEC reporting company or converting to a privately held institution.
There was not a particular Board member that initiated the discussion other than
all Board members that are employees of the Company were frustrated with the
Sarbanes Oxley Act that imposed more of their time as additional sections of the
Act were to be implemented. All of the employees that were Board members, John
O. Anderson, Don J. Colton and Gregg B. Colton decided individually and
collectively that it made no sense for a Company as small as Pioneer Oil and Gas
with only four employees to be subject to the requirements of the Sarbanes Oxley
Act. The Board has considered many factors, which are discussed throughout this
Proxy Statement. Ultimately, the Board concluded that the advantages of
remaining a SEC reporting company no longer outweigh the costs the Company
incurs as a publicly traded corporation, particularly in light of the
requirements that the Sarbanes-Oxley Act imposed upon public companies. As a
result, the Board approved the Stock Splits and prepared this Proxy Statement
disclosing the reasons for the Stock Splits. The Board determined to undertake
the Stock Splits at this time since the Company decided it had enough working
capital to pay for the cost of the Stock Splits.
Costs Associated with SEC Regulations. Because the Company is an SEC reporting
company, it is obligated to prepare and file periodic reports with the SEC,
including annual reports on Form 10-KSB, quarterly reports on Form 10-QSB,
current reports on Form 8-K and Proxy Statements and related materials. In
addition, the Company's officers and directors are required to file reports
under the Exchange Act's transaction and short swing profit reporting
requirements for affiliates of the Company.
The costs associated with these reports and other filing obligations are a
significant corporate overhead expense. The Company realizes that the costs
associated with SEC reporting have been increasing in recent years and believes
that the costs will continue to increase significantly. The principal reason
behind these increases in compliance costs is the enactment of the
Sarbanes-Oxley Act and related rules and regulations adopted by the SEC. In
addition to compliance costs and expenses, compliance with existing and new SEC
reporting requirements, internal control audit requirements and other SEC
regulatory requirements divert the time and resources of the Company.
The Company estimates that it in the future the Company will pay approximately
$250,000 per year as a result of being a public company, which it would not
incur as a private company. These costs do not include the time and resources
that management of the Company spends in preparation of periodic reports and
compliance with reporting obligations. Further, the Company anticipates that in
order to complete the documentation and testing of internal controls required by
Section 404 of the Sarbanes-Oxley Act, it would incur an additional estimated
$75,000 for fiscal year 2005 alone. In addition, legal expenses associated with
SEC compliance and disclosure rules and regulations have increased and will most
likely continue to increase. The time demanded of the Company's management with
respect to these SEC compliance requirements takes away time, which could be
focused on business matters that bear a more direct relationship to the
Company's operations and profitability. Please see the section entitled "Reasons
for the Stock Split" above.
Advantages of a Public Corporation. Considering the significant increase in SEC
compliance costs that the Company has incurred and will incur in the future, the
Board analyzed the advantages of the Company remaining a SEC reporting company
to determine if the advantages outweighed the costs. One advantage to being a
public company is that it may facilitate a more active trading market. However,
trading reports on the Company's Common Shares reflect that the Common Shares
have a limited trading volume. As a result, the Company's limited trading market
has not allowed the Company's shareholders to recognize the primary benefit
which should be available to shareholders of a publicly traded company, which is
the ability to buy and sell stock in a liquid market.
Another potential advantage of being a publicly traded institution is the
ability to access public markets to raise additional capital. Since becoming a
fully reporting public company in 2000, the Company has not needed to access
public markets to raise capital and, accordingly, the Company has not made any
additional public offerings of Common Shares or any other securities. In
addition, the Company has not used its Common Shares to acquire other companies
because the Company has found that its opportunities for acquisitions using
stock are limited or are not attractive. The Company does not anticipate the
need for a large amount of capital for acquisitions or expansions in the future
and the Company estimates that any anticipated expansion can be accomplished
through controlled growth or by using otherwise available capital. As a result,
the Company does not foresee the need to access public markets.
Shareholders of public corporations also have greater access to information
about the entity. As discussed above, the SEC requires that reporting companies
comply with increasing stringent reporting and auditing requirements. There are
several benefits to this type of SEC oversight and mandated disclosure; however,
it is accompanied by substantial expense. Not only does SEC compliance divert
the time and resources of the Company's management and financial staff from
other business, it also results in increased legal, auditing and accounting
costs which the Company anticipates will continue to rise in the future.
Smaller publicly traded institutions, such as the Company, have more difficulty
absorbing these costs and resource allocations than larger publicly traded
institutions since they represent a larger portion of the Company's revenues.
Background of the Board's Recommendation. The idea of reducing the Company's
number of shareholders and deregistering as an Exchange Act reporting company
has been discussed by the Board members informally since the implementation of
the Sarbanes-Oxley Act. At that time, the Board and management held informal
discussions with the Company's independent auditor regarding the expected costs
and procedures involved in compliance with the internal auditing requirements of
Section 404 of the Sarbanes-Oxley Act. The Company's outside auditor then
estimated that the Company would incur approximately three times the amount of
auditing and accounting costs the Company presently incurs along with having to
hire additional employees to separate the responsibilities of what one person
presently is doing for the Company. The Company's auditor informed management
that in order to comply with Section 404, procedures and controls would need to
be implemented at the beginning of the 2005 fiscal year, and additional expenses
would begin to accrue at that time. The Company's auditor advised the Board to
deregister as soon as the Company had available working capital to do so. Gregg
Colton also spoke with an employee of the SEC who asked not to be identified and
stated that it did not make sense for a Company the size of Pioneer Oil and Gas
to be fully reporting because the cost outweighed the benefits.
After these meetings, the Board and management began discussions regarding the
possibility of the Company deregistering as an Exchange Act reporting company
and some of the advantages and disadvantages of engaging in a "going private"
transaction. The Board and management discussed whether the Company was truly
reaping the benefits typically available to a publicly traded company and
discussed whether reducing the number of shareholders and deregistering as an
Exchange Act reporting company might be a good use of its excess capital. At the
Board's request, management began to analyze potential compliance costs and out
of pocket expenses associated with remaining a SEC reporting company.
After these meetings, management investigated other alternatives besides
deregistering, however, deregistering appeared the most favorable direction to
proceed from its review. See "Alternatives to Stock Splits." The Board and
management discussed the price to be paid to the shareholders in lieu of issuing
fractional shares in connection with the reverse stock split and the
desirability of a forward split immediately following a reverse split to avoid
an unusually high per share value for the Common Shares after the reverse split.
The Board determined that a subsequent forward split was desirable. Also at this
meeting the Board authorized management to contact Gate-Way regarding the
possibility of obtaining a Valuation Opinion regarding the price to be paid to
the shareholders who would receive cash in lieu of fractional shares. The
Company did not consult with another valuation company or another attorney other
than Gregg B. Colton. The Company used Gate-Way based on a recommendation by the
Company's auditors to Don J. Colton, the President.
The Board selected Gate-Way as its financial advisor because it is a recognized
financial institution consulting firm that has substantial experience in the
financial institutions industry and is knowledgeable and familiar with the
operations of the Company and its business. As part of its business, Gate-Way is
regularly engaged in the valuation of businesses and securities in connection
with mergers, acquisitions, underwritings, sales and distributions of listed and
unlisted securities, private placements and valuation for corporate and other
purposes, particularly those of mineral companies.
Management and the Board have met to address the question as to whether the
Stock Splits are a fair transaction to affiliated and unaffiliated shareholders.
A separate discussion was conducted with respect to those shareholders who would
receive whole Common Shares in the reverse split and participate in the
subsequent forward split and those shareholders who would receive only cash and
no longer continue to be shareholders of the Company. After weighing the
advantages and disadvantages of the Stock Splits to unaffiliated shareholders,
the Board also considered whether other procedures should be implemented to
assure fairness to unaffiliated shareholders.
The Board determined that the fairness to unaffiliated shareholders depended in
part on the per share price to be paid in lieu of issuing fractional shares. At
this point, Gate-Way discussed its valuation analysis with respect to the Common
Shares. It presented the Board with information regarding (i) trading history,
including volume and prices, of the Common Shares, and (ii) a review of the
market performance and trading history of companies comparable to the Company
and (iii) the value of the Company using an income approach. At the end of its
presentation, Gate-Way presented that a per share purchase price of $1.07 per
Common Share in lieu of issuing fractional shares would be fair to the Company's
shareholders. The information presented to the Board by Gate-Way regarding its
financial analysis is described more fully under the heading "Opinion of
Gate-Way." However, since the price of the stock was trading significantly above
$1.07, the Board of Directors unanimously concluded that a price of a $1.50 was
fair based on Gate-Way's Valuation Opinion that was adopted by the Board of
Directors. The price of a $1.50 was determined to be a fair price because the
stock was trading close to a $1.50 at the time of the Board's determination of
the price to be paid Unaffiliated Cashed Out Holders.
Finally, the Board reviewed analyses prepared by management regarding the
anticipated financial impact of the Stock Splits. Specifically, the Board
considered the total number of Common Shares which would be exchanged for cash
in the Stock Splits and considered its resulting impact on the financial
condition of the Company. The Board determined that a reverse stock split of 1
for 2000 would have the best chance of insuring that the Company would be able
to deregister since Atlas Stock Transfer, the Company's stock transfer agent
showed several split ratios and that less than 100 shareholders would remain of
record if all shareholders holding 2000 or less shares were cashed out.
The Board reviewed the Valuation Opinion and considered whether a premium should
be paid for shares that will be exchanged for cash in lieu of issuing fractional
shares. After considering other factors described in this Proxy Statement, the
Board concluded that the Company's shareholders should receive $1.50 for each
Common Share held immediately prior to the Stock Splits that is not converted
into a whole Common Share in the reverse split. In determining the price to be
paid in lieu of issuing fractional shares, the Board particularly focused on the
fact that the Stock Splits is not a voluntary transaction for shareholders, and
a higher premium was justified when considering that factor along with the other
analyses. The Board concluded that this price is a fair price to all
unaffiliated shareholders since it was close to the market price being traded by
the stock and it was a premium over the price set by Gate-Way. The matters
considered at the May 2, 2005 Board meeting are more fully discussed in this
Proxy Statement at "Fairness of this Stock Splits" and "Opinion of Gate-Way."
On May 2, 2005, the Board held a regular meeting attended by all of the
directors. At this meeting, the Board reviewed the per share price of $1.50 to
be paid to the shareholders in lieu of issuing fractional shares and once again
considered the advantages and disadvantages of the Stock Splits. At this
meeting, the Board unanimously voted to approve the Stock Splits and the price
per share to be paid in lieu of issuing fractional shares and to recommend the
approval of the Stock Splits by the Company's shareholders.
RECOMMENDATION OF THE BOARD
The Board has unanimously determined that the Stock Splits are in the best
interest of the Company and are fair to the Company's shareholders. The Board
unanimously recommends that the shareholders vote "FOR" the approval of the
Stock Splits.
POTENTIAL DISADVANTAGES TO THE SHAREHOLDERS
As is more thoroughly described in the section entitled "Disadvantages of the
Stock Splits" above, potential disadvantages to the Company and Unaffiliated
Continuing Holders include decreased availability of information about the
Company and decreased liquidity of the Common Shares. If the Stock Splits are
completed, the Company intends to terminate the registration of the Common
Shares under the Exchange Act. As a result, the Company will no longer be
subject to the filing and reporting requirements of the Exchange Act. In
addition, the liquidity of the Common Shares will be adversely affected by the
lack of publicly available information about the Company following
deregistration of the Common Shares. Decreased liquidity may have an adverse
effect on the market value of the Common Shares.
SHARE CERTIFICATES
The Company has appointed the Transfer Agent to act as exchange agent to carry
out the exchange of existing share certificates for cash payments in lieu of
issuing fractional shares and, if applicable, new share certificates. On the
Effective Date, all share certificates evidencing ownership of Common Shares
held by shareholders who will have fractional shares repurchased will be deemed
canceled without further action by the shareholders or the Company. Thereafter,
such certificates will represent only the right to receive cash in the amount of
$1.50 per pre-split Common Share for repurchased fractional shares and, if
applicable, the right to receive a new certificate for Common Shares issued in
the forward stock split. The Common Shares acquired by the Company in connection
with the Stock Splits will be retired.
The Transfer Agent will furnish the Company's shareholders with the necessary
materials and instructions to surrender their Common Share certificate(s)
promptly following the Effective Date. The letter of transmittal will explain
how the certificates are to be surrendered. Shareholders must complete and sign
the letter of transmittal and return it with their certificate(s) to the
Transfer Agent as instructed before they can receive any cash payments and/or
new share certificates to which they are entitled. Do not send your certificates
to us, and do not send them to the Transfer Agent until you have received a
transmittal letter and followed the instructions therein.
No service charges will be payable by the Company's shareholders in connection
with the exchange of certificates or the payment of cash in lieu of issuing
fractional shares. The Company will pay all expenses of the Stock Splits.
FEDERAL INCOME TAX CONSEQUENCES
The Company has summarized below the material federal income tax consequences to
the Company and to holders of Common Shares resulting from the Stock Splits.
This summary is based on the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), the Treasury Department Regulations (the "Treasury
Regulations") issued pursuant thereto, and published rulings and court decisions
in effect as of the date hereof, all of which are subject to change. This
summary does not take into account possible changes in such laws or
interpretations, including amendments to the Code, applicable statutes, Treasury
Regulations and proposed Treasury Regulations or changes in judicial or
administrative rulings. Some of those changes may have retroactive effect. No
assurance can be given that any such changes will not adversely affect this
summary. This summary is not binding on the Internal Revenue Service.
This summary does not address all aspects of the possible federal income tax
consequences of the Stock Splits and is not intended as tax advice to any person
or entity. In particular, this summary does not consider the individual
investment circumstances of holders of Common Shares, nor does it consider the
particular rules applicable to Annual categories of holders (such as tax exempt
entities, life insurance companies, regulated investment companies and foreign
taxpayers) or holders who hold, have held, or will hold, Common Shares as part
of a straddle, hedging or conversion transaction. In addition, this summary does
not address any consequences of the Stock Splits under any state, local or
foreign tax laws.
This summary assumes that you are one of the following: (i) a citizen or
resident of the United States, (ii) a domestic corporation, (iii) an estate, the
income of which is subject to United States federal income tax regardless of its
source, or (iv) a trust, if a United States court can exercise primary
supervision over the trust's administration and one or more United States
persons are authorized to control all substantial decisions of the trust. This
summary also assumes that you have held and will continue to hold your Common
Shares as capital assets for federal income tax purposes.
Management believes the Stock Splits will be treated as a tax-free
"recapitalization" for federal income tax purposes. This treatment will result
in no material federal income tax consequences to the Company. However, you may
not qualify for tax free "recapitalization" treatment for federal income tax
purposes, depending on whether you are receiving cash, stock or both cash and
stock pursuant to the Stock Splits.
You should consult your tax advisor as to the particular federal, state, local,
foreign, and other tax consequences applicable to your specific circumstances.
Federal Income Tax Consequences to Unaffiliated Continuing Holders Not Receiving
Cash. If you (i) continue to hold Common Shares directly immediately after the
Stock Splits and (ii) you receive no cash as a result of the Stock Splits, you
will not recognize any gain or loss in the Stock Splits, and you will have the
same adjusted tax basis and holding period in your Common Shares as you had in
such Common Shares immediately prior to the Stock Splits.
Federal Income Tax Consequences to Holders Receiving Cash. If you receive cash
in exchange for Common Shares as a result of the Stock Splits, your tax
consequence will depend on whether, in addition to receiving cash, you retain a
portion of your Common Shares or a person or entity related to you (as
determined by the Code) continues to hold Common Shares immediately
AFTER STOCK SPLITS
If you receive cash, do not continue to hold directly any Common Shares and are
not related to any person or entity who or which continues to hold Common
Shares, you will recognize capital gain or loss. The amount of this capital gain
or loss will equal the difference between the cash you receive for your Common
Shares and your aggregate adjusted tax basis in such Common Shares.
If you receive cash and either (a) retain a portion of your Common Shares or (b)
do not continue to hold directly any Common Shares but are related to a person
or entity who or which continues to hold Common Shares (in which case you may be
treated as owning constructively the Common Shares owned by such related person
or entity), your receipt of cash may be treated (i) first, as ordinary taxable
dividend income to the extent of your ratable share of the Company's
undistributed earnings and profits, (ii) second, as a tax-free return of capital
to the extent of your aggregate adjusted tax basis in your Common Shares, and
(iii) then, the remainder as capital gain.
If you fall into the category described in the immediately preceding paragraph,
your tax treatment will depend upon whether your receipt of cash either (i) is
"not essentially equivalent to a dividend" or (ii) constitutes a "substantially
disproportionate redemption of stock," as described below. If your receipt of
cash meets either of these two tests, your receipt of cash will result solely in
capital gain or loss. If your receipt of cash cannot meet either of these two
tests, your tax consequences will be those described in the immediately
preceding paragraph.
"Not Essentially Equivalent to a Dividend." You will satisfy the "not
essentially equivalent to a dividend" test if the reduction in your
proportionate interest in the Company resulting from the Stock Splits (taking
into account for this purpose the Common Shares owned by persons or entities
related to you) is considered a "meaningful reduction" given your particular
facts and circumstances. The Internal Revenue Service has ruled that a small
reduction by a minority stockholder whose relative stock interest is minimal and
who exercises no control over the affairs of the corporation will satisfy this
test.
"Substantially Disproportionate Redemption of Stock." Your receipt of cash in
the Stock Splits will be a "substantially disproportionate redemption of stock"
for you if the percentage of Common Shares owned by you (and by persons or
entities related to you) immediately after the Stock Splits is (i) less than 50%
of all Common Shares and (b) less than 80% of the percentage of Common Shares
owned by you (and by persons or entities related to you) immediately before the
Stock Splits.
If you or a person or entity related to you will continue to hold Common Shares
after the Stock Splits, you should consult with your own tax advisor to
determine your particular tax consequences.
Capital Gain and Loss. For individuals, net capital gain (defined generally as
your total capital gains in excess of capital losses for the year) recognized
upon the sale of capital assets that have been held for more than 12 months
generally will be subject to tax at a rate not to exceed 15%. Net capital gain
recognized from the sale of capital assets that have been held for 12 months or
less will continue to be subject to tax at ordinary income tax rates. Capital
gain recognized by a corporate taxpayer will continue to be subject to tax at
the ordinary income tax rates applicable to corporations. There are limitations
on the deductibility of capital losses.
Annual Rate for Certain Dividends. In general, dividends are taxed at ordinary
income rates. However, you may qualify for a 15% rate of tax on any cash
received in the Stock Splits that is treated as a dividend as described above,
if (i) you are an individual or other non-corporate stockholder; (ii) you have
held the Common Shares of the Company with respect to which the dividend was
received for more than 60 days during the 120-day period beginning 60 days
before the ex-dividend date, as determined under the Code; and (iii) you were
not obligated during such period (pursuant to a short sale or otherwise) to make
related payments with respect to positions in substantially similar or related
property. You should consult with your tax advisor regarding your eligibility
for such lower tax rates on dividend income.
Backup Withholding. Holders of Common Shares will be required to provide their
social security or other taxpayer identification numbers (or, in some instances,
additional information) to the Transfer Agent in connection with the Stock
Splits to avoid backup withholding requirements that might otherwise apply. The
letter of transmittal will require each holder of Common Shares to deliver such
information when the Common Share certificates are surrendered following the
Effective Date of the Stock Splits. Failure to provide such information may
result in backup withholding.
As explained above, the amounts paid to you as a result of the Stock Splits may
result in dividend income, capital gain income, or some combination of dividend
and capital gain income to you depending on your individual circumstances.
UNAVAILABILITY OF APPRAISAL AND DISSENTER'S RIGHTS
No appraisal or dissenters' rights are available under Utah law or under the
Company's Articles of Incorporation. Other rights or actions may exist under
Utah law or federal and state securities laws for shareholders who can
demonstrate that they have been damaged by the Stock Splits.
ESCHEAT LAWS
The unclaimed property and escheat laws of each state provide that under
circumstances defined in that state's statutes, holders of unclaimed or
abandoned property must surrender that property to the state. Shareholders who
are entitled to receive cash in lieu of fractional shares in connection with the
Stock Splits whose addresses are unknown to the Company or who do not surrender
their share certificates and request payment of the Repurchase Price generally
will have a period of years from the Effective Date in which to claim the cash
payment to which they are entitled. For example, with respect to shareholders
whose last known addresses, as shown by the records of the Company, are in Utah
the period is five years. Following the expiration of that five-year period, the
relevant provisions of the Utah Revised Code would likely cause the cash
payments to escheat to the State of Utah. For shareholders who reside in other
states or whose last known addresses, as shown by the records of the Company,
are in states other than Utah, such states may have abandoned property laws
which call for such state to obtain either (i) custodial possession of property
that has been unclaimed until the owner reclaims it or (ii) escheat of such
property to the state. Under the laws of such other jurisdictions, the "holding
period" or the time period which must elapse before the property is deemed to be
abandoned may be shorter or longer than five years. If the Company does not have
an address for a shareholder, then the unclaimed cash payment would be turned
over to the Company's state of incorporation, the State of Utah, in accordance
with its escheat laws.
REGULATORY REQUIREMENTS
The Company is not aware of any material governmental or regulatory approval
required for completion of the Stock Splits, other than compliance with the
relevant federal and state securities laws and Utah corporate laws.
INFORMATION ABOUT THE COMPANY
DESCRIPTION OF BUSINESS
The Company has focused its efforts over the years in acquiring oil and gas
properties from other companies, selling producing wells and acquiring new oil
and gas leases for the purpose of exploring for oil and gas. Leases have also
been acquired over the years for the purpose of reselling them at a profit to
other oil and gas companies.
Most of the Company's present production from oil and gas properties was
acquired from large oil companies selling properties they considered to be
marginal producers. The Company has found that it can operate these properties
at a profit. Presently, the Company operates 9 producing oil and gas wells in
Utah and Wyoming.
The Company also owns an interest in several non-operated oil and gas wells and
overriding royalty interests in oil and gas wells located in Utah, Colorado and
Wyoming. Primary among these overriding royalty interests is the Hunter Mesa
Unit and Grass Mesa Unit in Garfield County, Colorado. The Company's overriding
royalty interest although less than a half of a percent in both the Hunter Mesa
Unit and the Grass Mesa Unit accounts for the majority of the Company's royalty
income since the Units contain several hundred wells. An overriding royalty
interest is an interest in a well that receives a percentage of the production
from a well without paying any operation expenses.
The Company over the last few years has focused most of its exploration efforts
in the Rocky Mountain area, and in acquiring leasehold positions in trend areas
of existing production. Prior to leasing an area a geological review of the
prospective area is made by the Company's staff to determine the potential for
oil and gas. If an area is determined to have promise the Company will attempt
to acquire oil and gas leases over the prospective area. The Company will then
acquire geophysical data (generally seismic and gravity data) to further
evaluate the area. After the evaluation of the geophysical data, if the area
appears to contain significant accumulations of oil and gas in the Company's
opinion for the area, the Company will market a drilling program to outside
investors covering the Company's leases or sell the leases with the Company
retaining an overriding royalty interest. Significant accumulations cannot be
quantified because it depends on many factors such as how much it costs to drill
and complete wells in a certain area, how close the wells are to pipelines, what
the price of oil or gas is, how accessible the area is, whether the project is a
developmental or wildcat project, what the cost of oil and gas leases are in an
area, the type of return investors are seeking at that time in the different
exploration areas, and many other geological, geophysical and other
considerations.
When the Company markets a drilling program it sells a portion of its oil and
gas leases over the prospect area along with obtaining a drilling commitment
from the parties purchasing the leases to drill a well on the prospect area. A
drilling program will generally allow the Company to recoup its investment in
the area with the Company also retaining an ongoing interest in new wells to be
drilled in the area.
The Company markets its drilling programs to other industry partners. Drilling
programs have been marketed by placing ads in industry journals, attending trade
shows and by traveling to the office of prospective partners. In the past, the
Company has sold drilling programs to major oil companies and large independents
and occasionally to individuals.
The Company was organized on October 16, 1980 under the laws of the State of
Utah. The Company's principal place of business is located at 1206 West South
Jordan Parkway, Unit B, South Jordan, Utah 84095-5512. The Company's telephone
number is (801) 566-3000 and the Company's fax number is (801) 446-5500. The
Company has primarily been engaged in the acquisition and exploration of oil and
gas properties in Utah, Wyoming, Colorado and Nevada.
RECENT DEVELOPMENTS:
During the last year, the Company has been focusing on obtaining prospects for
the exploration of oil and gas and continuing the operations of its current
producing oil and gas properties. During the last fiscal year ended September
30th, 2004, and to the present the Company has been acquiring acreage with its
partner International Petroleum LLC ("International") in the Central Utah trend
near the discovery of Wolverine Gas & Oil Corp. ("Wolverine"). The Covenant
field discovered by Wolverine has been reported to have produced 265,000 barrels
of oil between May 2004 and March 2005. The Company has owned a 37.5% in the
acreage being acquired from the outset with its employees paying for and
acquiring 12.5% of the acreage from the outset ("See Transactions With Related
Parties") and International paying for and acquiring 50% from the outset
(Collectively the group is referred to as the "Trend Partnership"). The total
acreage acquired by the Trend Partnership during the last 12 months exceeds
100,000 acres with approximately 50,000 acres already sold to a major
independent and another 35,000 acres that the major independent has the right to
acquire. The Company has retained a 1.75% overriding royalty interest on all the
acreage sold in the Central Utah Trend
For the fiscal year ending September 30, 2004, the Company has increased the
amount of undeveloped oil and gas leases it holds from 59,018 gross acres on
9/30/03 to 109,933 gross acres on 9/30/04 primarily due to the purchase of
acreage in Central Utah.
The Company has also sold its remaining 13,189.16 acres in the overpressured gas
play within the last 12 months and retained a carried working interest to casing
point of 10% on the first two wells drilled in the 13,189.16 acre block. The
Company is currently marketing a 27,000 acre block that is in the deepest
structural position of the overpressured gas area and approximately 12 miles
North of the 13,189.16 acreage block.
The Company drilled the Yankee Mine West #1 well within the last few months with
the well being deemed a dry hole. The Company and its partner on the well are
looking at the possibility of shooting seismic over the prospect before drilling
another well.
The Company has sold a drilling prospect in the Emigrant Gap Prospect in Natrona
County, Wyoming, and its Able Spring Prospect in Nye County, Nevada. The Company
expects that one of the prospects will be drilled prior to December 31, 2005.
The Company retained an 18.75% working interest and a 15.0% net revenue interest
on the acreage in the Emigrant Gap, Yankee Mine and Able Spring Prospects.
The Company has been involved in a 3D seismic project in Texas that will
continue to cause the Company to expend funds during the current year in
prospective drilling on prospects identified on 3D seismic. The Company owns a
1.65% working interest in the 3D seismic venture in Texas and already has
drilled six wells on the 3D seismic venture. One of the wells is producing
another one appears to be a producer, and the other four wells have been dry
holes.
DESCRIPTION OF SECURITIES.
Qualification. The following statements constitute brief summaries of the
Company's Articles of Incorporation and Bylaws. Such summaries do not purport to
be fully complete and are qualified in their entirety by reference to the full
text of the Articles of Incorporation and Bylaws of the Company.
Common Stock. The Company's Articles of Incorporation authorize it to issue up
to 50,000,000 (fifty million) Shares of its Common Stock, which carry a par
value of $0.001 per Share.
Liquidation Rights. Upon liquidation or dissolution, each outstanding Common
Share will be entitled to share equally in the assets of the Company legally
available for the distribution to shareholders after the payment of all debts
and other liabilities.
Dividend Rights. There are no limitations or restrictions upon the rights of the
Board of Directors to declare dividends out of any funds legally available
therefor. The Company has not paid dividends to date and it is not anticipated
that any dividends will be paid in the foreseeable future. The Board of
Directors initially will follow a policy of retaining earnings, if any, to
finance the future growth of the Company or repurchase Company stock.
Accordingly, future dividends, if any, will depend upon, among other
considerations, the Company's need for working capital and its financial
conditions at the time.
Voting Rights. Holders of Common Shares of the Company are entitled to cast one
vote for each share held at all shareholders meetings for all purposes.
Other Rights. Common Shares are not redeemable, have no conversion rights and
carry no preemptive or other rights to subscribe to or purchase additional
Common Shares in the event of a subsequent offering.
Transfer Agent. The Company's transfer agent is Atlas Stock Transfer whose
address is 5899 South State Street, Murray, Utah 84107. The phone number of
Atlas Stock Transfer is (801) 266-7151.
The Securities and Exchange Commission has adopted Rule 15g-9 which established
the definition of a "penny stock", for the purposes relevant to the Company, as
any equity security that has a market price of less than $5.00 per share, or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require: (i) that broker or dealer approve a person's account for
transactions in penny stocks; and, (ii) the broker or dealer receive from the
investor a written agreement to the transaction, setting forth the identity and
quantity of the penny stock to be purchased. In order to approve a person's
account for transactions in penny stocks, the broker or dealer must (i) obtain
financial information and investment experience objectives of the person; and
(ii) make a reasonable determination that the transaction(s) in penny stocks are
suitable for that person and the person has sufficient knowledge and experience
in financial matters to be capable of evaluating the risks of transactions in
penny stocks. The broker or dealer must also deliver, prior to any transaction
in a penny stock, a disclosure schedule prepared by the Commission relating to
the penny stock market, which, in highlighted form, (i) sets forth the basis on
which the broker or dealer made the suitability determination; and (ii) that the
broker or dealer received a signed, written agreement from the investors prior
to the transaction. Disclosure also has to be made about the risks of investing
in penny stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and registered representative,
current quotations for the securities and the rights and remedies available to
an investor in case of fraud in penny stock transaction. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stocks held in the account and information on the limited market in penny
stocks.
MARKET PRICE AND DIVIDEND INFORMATION.
The Company is listed on the over-the-counter market on the NASDAQ OTC Bulletin
Board and after the Stock Splits if it trades it will trade only on the Pink
Sheets(R). The range of high and low closing bid information for the shares of
the Company's stock for the last two complete fiscal years, as reported by the
OTC Bulletin Board National Quotation Bureau, is set forth below. Such
quotations represent prices between dealers, do not include retail markup,
markdown or commission, and do not represent actual transactions.
Year Ended September 30, 2004 High Low
----------------------------- ---- ----
First Quarter $.85 $.61
Second Quarter $2.00 $.60
Third Quarter $1.05 $.75
Fourth Quarter $1.96 $.82
Year Ended September 30, 2003 High Low
----------------------------- ---- ----
First Quarter $.36 $.27
Second Quarter .45 .21
Third Quarter .43 .25
Fourth Quarter .47 .16
As of September 30, 2004 the Company had issued and outstanding 7,910,727 common
shares held by approximately 980 holders of record.
There have been no cash dividends declared by the Company since its inception.
Further, there are no restrictions that would limit the Company's ability to pay
dividends on its common equity or that would be likely to do so in the future.
The Company has no plans to register any of its securities under the Securities
Act for sale by security holders. There is no public offering of equity and
there is no proposed public offering of equity.
COMMON SHARE REPURCHASE INFORMATION
The following table provides information regarding the Company's Common Share
repurchases during the periods indicated:
Price Range Weighted Average
Quarter Ended Number Repurchased High Low Price Per Share
Fiscal 2003
December 31, 2002 None N/A N/A N/A
March 31, 2003 None N/A N/A N/A
June 30, 2003 None N/A N/A N/A
September 30, 2003 None N/A N/A N/A
Fiscal 2004
December 31, 2003 200 $.37 $.37 $.37
March 31, 2004 46,999 $.45 $.45 $.45
June 30, 2004 1,400 $.45 $.45 $.45
September 30, 2004 200 $.45 $.45 $.45
Fiscal 2005
December 31, 2004 1,092 $.82 $.75 $.80
March 31, 2005 229,505 $1.65 $1.36 $1.49
to present
The Company plans to continue to buy Common Shares in the Company as it deems
feasible from time to time and management is authorized by the Board of
Directors to purchase up to 2,000,000 shares of the Company's Common Shares on
terms and conditions determined by management. Anyone desiring to sell Common
Shares is encouraged to contact the Company to inquire whether the Company would
purchase their shares without a commission. The Company makes no promise of
repurchasing a shareholder's stock, other than as outlined for the Stock Splits,
at a given time since any decision will be based upon the Company's financial
condition and working capital requirements along with the market price of the
stock taken into consideration.
AVAILABLE INFORMATION
The Stock Splits will constitute a "going-private" transaction for purposes of
Rule 13e-3 of the Exchange Act. As a result, the Company has filed the Schedule
13E-3, which contains additional information about the Company. Copies of the
Schedule 13E-3, along with the full text of the Valuation Opinion are available
for inspection and copying at the Company's principal executive offices during
regular business hours by any interested shareholder of the Company, or a
representative who has been so designated in writing, and may be inspected and
copied, or obtained by written request addressed to Pioneer Oil and Gas, 1206 W.
South Jordan Parkway, Unit B, South Jordan, Utah 84095.
The Company is currently subject to the information requirements of the Exchange
Act and files periodic reports, proxy statements and other information with the
SEC relating to its business, financial and other matters. Copies of such
reports, proxy statements and other information, as well as the Schedule 13E-3,
may be copied (at prescribed rates) at the public reference facilities
maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549. For further information concerning the SEC's public
reference rooms, you may call the SEC at 1-800-SEC-0330. Some of this
information may also be accessed on the World Wide Web through the SEC's
internet address at www.sec.gov.
The Company will provide without charge upon the written or oral request of any
person to whom this Proxy Statement is delivered, by first class mail or other
equally prompt means within one business day of receipt of such request, a copy
of any and all information that has been incorporated by reference, without
exhibits unless such exhibits are also incorporated by reference in this Proxy
Statement. You may obtain a copy of these documents and any amendments thereto
by written request addressed to Pioneer Oil and Gas, 1206 W. South Jordan
Parkway, Unit B, South Jordan, Utah 84095.
LEGAL PROCEEDINGS.
The Company may become or is subject to investigations, claims, or lawsuits
ensuing out of the conduct of its business, including those related to
environmental safety and health, commercial transactions etc. The Company is
currently not aware of any such items, which it believes could have a material
adverse affect on its financial position.
FINANCIAL AND OTHER INFORMATION
The audited financial statements regarding the Company for the fiscal
year ended September 30, 2004, are presented in the Appendix following the Proxy
Statement. A summary of selected financial data, and the information contained
in the disclosures entitled " Management's Discussion and Analysis of Financial
Condition and Results of Operations", are presented below.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS -2004 Compared to 2003
Total revenue for fiscal year 2004 was $1,918,272 as compared to total revenue
for fiscal year 2003 of $1,929,279. Total oil and gas sales (including royalty
revenue) increased 33 percent from $1,360,985 to $1,805,077. This increase in
oil and gas revenue was primarily due to higher product prices and increased
production from our Hunter Mesa and Grassy Mesa units. Average gas prices
increased 22% from $4.08 MCF (2003) to $4.97 MCF (2004). Average oil prices
increased 22 percent from $26.43 per barrel in 2003 to $32.31 per barrel in
2004.
Project and lease sales income decreased from $566,365 in 2003 to $113,195 in
2004. The Company sold two-thirds of its overpressured gas project and a 3500
acre coalbed methane lease block in 2003. Sales of leases near Vernal Utah
accounted for most of the project and lease sales in 2004. Total revenue for the
company declined slightly due to lower project and lease sales income even
though oil and gas revenues increased significantly.
Costs of operations increased from $632,264 to $679,132. This item includes all
well operating expenses and any amounts paid to employees and other interest
owners for their interest in producing properties. Increased disbursements to
interest owners due to higher product prices accounted for most of the increase.
General and administrative costs increased from $316,259 in fiscal 2003 to
$346,970 in fiscal 2004 primarily due to higher payroll costs.
In fiscal 2004 loss on assets sold or abandoned decreased from $355,459 to $0.
The write-off of some of the Company's producing assets in Wyoming during fiscal
2003 accounted for the difference.
The Company's total stockholders' equity increased from $1,034,808 to
$1,533,335. Net income increased from $177,413 in 2003 to $492,344 in 2004.
Earnings per share increased from $.02 in fiscal 2003 to $.06 in fiscal 2004.
LIQUIDITY AND CAPITAL RESOURCES
Historically the Company has funded operations primarily from earnings and bank
borrowing. As of September 30, 2004 the Company had working capital of
$1,151,486 and an unused line of credit with Zions Bank for $750,000. This line
of credit is collateralized by all of the companies operated oil and gas
properties. The line of credit bears interest at prime rate plus 1.0%. The line
of credit with Zions Bank matured on December 31, 2003, and was renewed for a
two-year period ending December 31, 2005. As of September 30, 2003 and as of
September 30, 2004, the amount on the credit line was $0 and $0 respectively.
During fiscal 2004 cash provided by operating activities was $274,903 while cash
used for investing activities was for $133,255. There was a net increase in cash
of $119,563, as cash increased from $371,527 to $491,090. The increase in cash
for operating activities was primarily the result of a drilling advance for our
Yankee Mine Well in Nevada.
OIL AND GAS PROPERTIES
The Company, as of the date of this filing, is the owner of several oil and gas
properties located throughout the Rocky Mountain Region. The Company operates
four properties in Utah, three in Wyoming and one in Colorado. The standardized
measure of discounted future net cash flows (before income taxes) of all the
Company's properties as of September 30, 2004 was $5,405,530.
INCOME TAXES
As of September 30, 2004, the Company had net operating loss carry forwards of
approximately $1,164,000. The present net operating loss carry-forward of the
Company will begin to expire in the year 2012. If substantial changes in the
Company's ownership should occur there would be an annual limitation of the
amount of NOL carry forward, which could be utilized. Also, the ultimate
realization of these carry forwards is due, in part, on the tax law in effect at
the time and future events that cannot be determined. The Company anticipates
that it will use its NOL during the current year and then start having to pay
income tax.
CERTAIN FINANCIAL EFFECTS OF STOCK SPLITS
The Company does not expect the Stock Splits or the use of approximately
$640,000 to complete the Stock Splits (which includes payments to be made to
shareholders who have fractional shares repurchased and professional fees and
other expenses related to the transaction) to have any material adverse effect
on the Company's capitalization, liquidity, results of operations or cash flow.
Please refer to the section entitled "Quorum, Voting Rights and Other Matters".
The Company expects to finance the Stock Splits with cash on hand.
If the Stock Splits are completed, shareholders who receive cash in lieu of
fractional shares will receive cash in the amount of $1.50 per Common Share held
immediately prior to the Stock Splits. The repurchase of the fractional Common
Shares resulting from the Stock Splits is estimated to cost approximately
$640,000 and would reduce the number of record holders of Common Shares from
approximately 980 to 200.
The Company expects that as a result of the Reverse/Forward Stock Splits and the
cashing out of fractional Common Shares held by shareholder after the reverse
stock split:
The Company's shareholders' equity will change as of March 31, 2005 from
$3,747,166 to $3,147,166.
The Company is providing the following pro forma information showing the effects
on the Company's balance sheet, statement of operations, statement of
stockholders equity and selected financial data if the Stock Splits are
effective assuming they had occurred on March 31, 2005 the last available
quarterly statement.
PIONEER OIL AND GAS
BALANCE SHEETS
(unaudited)
March 31, 2005
Assets Pro-Forma Actual
After Stock Purchase
Current assets:
Cash $ 402,119 1,002,119
Marketable securities, available for sale 36,039 36,039
Accounts receivable 203,553 203,553
Resale leases, at lower of cost or market 2,540,349 2,540,349
Total current assets 3,182,060 3,782,060
Property and equipment, net 656,873 656,873
Other assets 2,230 2,230
$ 3,841,163 4,441,163
============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 50,492 50,492
Accrued expenses 28,781 28,781
Income taxes payable 176,000 176,000
Total current liabilities 255,273 255,273
Deferred income tax 278,000 278,000
Asset retirement obligation 160,724 160,724
Total liabilities 693,997 693,997
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.001 per share,
50,000,000 shares authorized; 7,510,802
and 7,910,802 shares issued and outstanding,
respectively 7,510 7,910
Additional paid-in capital 1,871,134 2,470,734
Stock subscription receivable (184,570) (184,570)
Accumulated other comprehensive income 36,039 36,039
Retained earnings 1,417,053 1,417,053
Total stockholders' equity 3,147,166 3,747,166
$ 3,841,163 4,441,163
============== ==============
PIONEER OIL AND GAS
STATEMENTS OF OPERATIONS
Six Months Ended Year Ended
March 31, September 30,
2005 2004 2004
Pro-Forma Pro-Forma Pro-Forma
------------ ------------ ------------
Revenue:
Oil and gas sales $ 530,079 409,530 954,970
Royalty revenue 498,743 338,262 850,107
Operational reimbursements 3,000 3,000 -
Project and lease sales income 2,260,528 18,750 113,195
3,292,350 769,542 1,918,272
Costs and expenses:
Cost of operations 381,325 322,247 679,132
General and administrative expenses 198,425 180,911 346,970
Exploration costs 137,328 91,279 208,309
Lease rentals 18,430 33,960 54,083
Depreciation, depletion and amortization 46,186 54,866 87,770
781,694 683,263 1,376,264
Income from operations 2,510,656 86,279 542,008
Other income (expense):
Interest income - - 15,287
Interest expense (1,267) - (3,059)
Other income 105,838 21,506 19,629
104,571 21,506 31,857
Income before provision for income taxes 2,615,227 107,785 573,865
Provision for income taxes 454,000 - -
Net income before cumulative effect of a change in
accounting principle 2,161,227 107,785 573,865
Cumulative effect of a change in accounting principle - asset
retirement obligation - - (81,521)
Net income $ 2,161,227 107,785 492,344
============ =========== ===========
Earnings per share:
Basic
Income before cumulative effect of accounting change $ .29 .01 .08
Loss from cumulative effect of change in accounting principle - - (.01)
$ .29 .01 .07
============ =========== ===========
Diluted
Income before cumulative effect of accounting change $ .28 .01 .08
Loss from cumulative effect of change in accounting principle - - (.01)
$ .28 .01 .07
============ =========== ===========
Weighted average common shares:
Basic 7,512,000 7,450,000 7,531,000
============ =========== ===========
Diluted 7,859,000 7,450,000 7,531,000
============ =========== ===========
PIONEER OIL AND GAS
STATEMENTS OF STOCKHOLDERS' EQUITY
Six Months Ended March 31, 2005 (Pro-Forma)
Accumulated
Additional Stock Other
Common Stock Paid-in Subscription Comprehensive Retained
Shares Amount Capital Receivable Income Earnings Total
================= =========== ============ ============== ======== ===========
Balance at September 30, 2004 (audited) 7,912,819 $ 7,912 $ 2,473,256 $ (203,659) $ - $(744,174) $ 1,533,335
Payments on stock subscription
receivable - - - 19,089 - - 19,089
Unrealized holding gain on marketable
securities - - - - 36,039 - 36,039
Purchase and retirement of common
stock (2,017) (2) (2,522) - - - (2,524)
Purchase and retirement of common
stock (pro-forma) (400,000) (400) (599,600) - - - (600,000)
Net income - - - - - 2,161,227 2,161,227
Balance at March 31, 2005 (pro-forma) 7,510,802 $ 7,510 $ 1,871,134 $ (184,570) $ 36,039 $ 1,417,053 $ 3,147,166
================= =========== ============= ============ ========== ==========
PIONEER OIL AND GAS
SELECTED FINANCIAL DATA
Three Months Ended Six Months Ended Year Ended
March 31, March 31, September 30,
2005 2004 2005 2004 2004
-------------- --------------- --------------- --------------- --------------------
Ratio of earnings to
fixed charges: 3,464 to 1 (a) 2,065 to 1 (a) 189 to 1
============== =============== =============== =============== ====================
============== =============== =============== =============== ====================
NOTE: The pro-forma ratio of earnings to fixed charges would be the same as the actual
presented above.
(a) No ratios are presented for the three and six months ended March 31, 2004 as there were no
fixed charges.
March 31,
2005
--------------
--------------
Pro-Forma Book value per share: $ .42
==============
==============
THE COMPANY UNDERTAKES TO PROMPTLY FURNISH (WITHOUT CHARGE EXCEPT AS TO THE
EXHIBITS IF REQUESTED THAT INCLUDE ARTICLES OF INCORPORATION, BYLAWS, LETTER
FROM PETROLEUM ENGINEER AND FINANCING AGREEMENTS WITH ZIONS BANK) A COPY OF ITS
FORM 10-KSB FILED PREVIOUSLY WITH THE SECURITIES AND EXCHANGE COMMISSION, TO ANY
SHAREHOLDER OF RECORD UPON WRITTEN REQUEST, WHICH SHALL ALSO INCLUDE A GOOD
FAITH REPRESENTATION THAT, AS OF MAY 31, 2005, THE PERSON MAKING THE REQUEST WAS
THE BENEFICIAL OWNER OF COMMON STOCK OF THE COMPANY ENTITLED TO VOTE AT THE
ANNUAL MEETING. The Form 10-KSB filed by the Company with the SEC can be viewed
in its entirety at Securities and Exchange website www.sec.gov by searching the
Edgar Archives with the keywords "Pioneer Oil and Gas".
BY ORDER OF THE BOARD OF DIRECTORS:
By: Don J. Colton
Chairman of the Board of Directors,
and President
PIONEER OIL AND GAS
PIONEER OIL AND GAS
FINANCIAL STATEMENTS
September 30, 2004 and 2003
PIONEER OIL AND GAS
FINANCIAL STATEMENTS
September 30, 2004 and 2003
INDEX
Page
Independent Auditors' Report F-2
Statements of Operations F-3
Balance Sheets F-4
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
Supplementary Schedules on Oil and Gas Operations F-17
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Pioneer Oil and Gas
We have audited the accompanying balance sheets of Pioneer Oil and Gas as of
September 30, 2004 and 2003, and the related statements of operations,
stockholders' equity, and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing standards
as established by the Auditing Standards Board (United States) and in accordance
with the auditing 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. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, 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 financial position of Pioneer Oil and Gas as of
September 30, 2004 and 2003, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
JONES SIMKINS, P.C.
Logan, Utah
November 18, 2004
F-2
PIONEER OIL AND GAS
STATEMENTS OF OPERATIONS
Years Ended September 30, 2004 and 2003
2004 2003
----------------- -----------------
Revenue:
Oil and gas sales $ 954,970 963,244
Royalty revenue 850,107 397,741
Operational reimbursements - 1,929
Project and lease sales income 113,195 566,365
----------------- -----------------
1,918,272 1,929,279
----------------- -----------------
Costs and expenses:
Cost of operations 679,132 632,264
General and administrative expenses 346,970 316,259
Exploration costs 208,309 248,753
Lease rentals 54,083 57,395
Depreciation, depletion and amortization 87,770 141,019
----------------- -----------------
1,376,264 1,395,690
----------------- -----------------
Income from operations 542,008 533,589
----------------- -----------------
Other income (expense):
Loss on assets sold or abandoned - (355,459)
Interest income 15,287 15,518
Interest expense (3,059) (23,476)
Other 19,629 7,241
----------------- -----------------
31,857 (356,176)
----------------- -----------------
Income before provision for income taxes 573,865 177,413
Provision for income taxes - -
----------------- -----------------
Net income before cumulative effect of a change in
accounting principle 573,865 177,413
Cumulative effect of a change in accounting principle - asset
retirement obligation (81,521) -
----------------- -----------------
Net income $ 492,344 177,413
================= =================
Net income per common share - basic and diluted:
Income before cumulative effect of accounting change $ .07 .02
Loss from cumulative effect of change in accounting principle (.01) -
----------------- -----------------
$ .06 .02
================= =================
Weighted average common shares - basic and diluted 7,931,000 7,962,000
================= =================
See accompanying notes to financial statements
F-3
PIONEER OIL AND GAS
BALANCE SHEETS
September 30, 2004 and 2003
2004 2003
------------------- -------------------
Assets
Current assets:
Cash $ 491,090 371,527
Accounts receivable 301,450 149,793
Resale leases, at lower of cost or market 1,052,292 219,677
------------------- -------------------
Total current assets 1,844,832 740,997
Property and equipment, net 537,969 438,881
Other assets 2,230 2,230
------------------- -------------------
$ 2,385,031 1,182,108
=================== ===================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 108,208 122,093
Accrued expenses 28,565 25,207
Advances on drilling costs 556,573 -
------------------- -------------------
Total current liabilities 693,346 147,300
------------------- -------------------
Asset retirement obligation 158,350 -
------------------- -------------------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.001 per share,
50,000,000 shares authorized; 7,912,819 and
7,961,618 shares issued and outstanding, respectively 7,912 7,961
Additional paid-in capital 2,473,256 2,495,292
Stock subscription receivable (203,659) (231,927)
Accumulated deficit (744,174) (1,236,518)
------------------- -------------------
Total stockholders' equity 1,533,335 1,034,808
------------------- -------------------
$ 2,385,031 1,182,108
=================== ===================
See accompanying notes to financial statements
F-4
Common Stock Additional Stock
-------------------- Paid-in Subscription Accumulated
Shares Amount Capital Receivable Deficit Total
--------- ------- ------------ ------------ ------------- ------------
--------- ------- ------------ ------------ ------------- ------------
Balance at October 1, 2002 7,961,618 $ 7,961 $ 2,495,292 $ (258,219) $ (1,413,931) $ 831,103
Payments on stock subscription
receivable - - - 26,292 - 26,292
Net income - - - - 177,413 177,413
--------- ------- ------------ ------------ ------------- ------------
--------- ------- ------------ ------------ ------------- ------------
Balance at September 30, 2003 7,961,618 7,961 2,495,292 (231,927) (1,236,518) 1,034,808
Payments on stock subscription
receivable - - - 28,268 - 28,268
Purchase and retirement of common
stock (48,799) (49) (22,036) - - (22,085)
Net income - - - - 492,344 492,344
--------- ------- ------------ ------------ ------------- ------------
--------- ------- ------------ ------------ ------------- ------------
Balance at September 30, 2004 7,912,819 $ 7,912 $ 2,473,256 $ (203,659) $ (744,174) $ 1,533,335
========= ======= ============ ============ ============= ============
========= ======= ============ ============ ============= ============
See accompanying notes to financial statements
F-5
PIONEER OIL AND GAS
STATEMENTS OF CASH FLOWS
Years Ended September 30, 2004 and 2003
2004 2003
----------------- -----------------
Cash flows from operating activities:
Net income $ 492,344 177,413
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on assets sold, abandoned, and dry hole costs 19,984 355,459
Depreciation, depletion and amortization 87,770 141,019
Accretion expense 4,609
Cumulative effect of change in accounting principle 81,521 -
Employee benefit plan expense 41,772 41,396
Interest income (13,504) (15,104)
(Increase) decrease in:
Accounts receivable (151,657) (28,620)
Resale leases (833,982) 308,131
Other assets - (230)
Increase (decrease) in:
Accounts payable (13,885) (6,334)
Accrued expenses 3,358 (5,745)
Advances on drilling costs 556,573 -
----------------- -----------------
----------------- -----------------
Net cash provided by operating activities 274,903 967,385
----------------- -----------------
----------------- -----------------
Cash flows from investing activities:
Acquisition of property and equipment (133,255) (32,158)
----------------- -----------------
----------------- -----------------
Net cash used in investing activities (133,255) (32,158)
----------------- -----------------
----------------- -----------------
Cash flow from financing activities:
Decrease in note payable - (654,158)
Purchase of common stock (22,085) -
----------------- -----------------
----------------- -----------------
Net cash used in financing activities (22,085) (654,158)
----------------- -----------------
----------------- -----------------
Net increase in cash 119,563 281,069
Cash, beginning of year 371,527 90,458
----------------- -----------------
----------------- -----------------
Cash, end of year $ 491,090 371,527
================= =================
================= =================
See accompanying notes to financial statements
F-6
PIONEER OIL AND GAS
NOTES TO FINANCIAL STATEMENTS
September 30, 2004 and 2003
Note 1 - Organization and Summary of Significant Accounting Policies
Organization
The Company is incorporated under the laws of the state of Utah and is primarily
engaged in the business of acquiring, developing, producing and selling oil and
gas properties to companies located in the continental United States.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with a maturity of three months or less to be cash
equivalents.
Concentration of Credit Risk
The Company maintains its cash in bank deposit accounts, which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts. The Company believes it is not exposed to any significant credit
risk on cash and cash equivalents.
Resale Leases
The Company capitalizes the costs of acquiring oil and gas leaseholds held for
resale, including lease bonuses and any advance rentals required at the time of
assignment of the lease to the Company. Advance rentals paid after assignment
are charged to expense as carrying costs in the period incurred. Costs of oil
and gas leases held for resale are valued at lower of cost or net realizable
value and included in current assets since they could be sold within one year,
although the holding period of individual leases may be in excess of one year.
The cost of oil and gas leases sold is determined on a specific identification
basis.
Oil and Gas Producing Activities
The Company utilizes the successful efforts method of accounting for its oil and
gas producing activities. Under this method, all costs associated with
productive exploratory wells and productive or nonproductive development wells
are capitalized while the costs of nonproductive exploratory wells are expensed.
F-7
PIONEER OIL AND GAS
NOTES TO FINANCIAL STATEMENTS
September 30, 2004 and 2003
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
Oil and Gas Producing Activities (continued)
If an exploratory well finds oil and gas reserves, but a determination that such
reserves can be classified as proved is not made after one year following
completion of drilling, the costs of drilling are charged to operations.
Indirect exploratory expenditures, including geophysical costs and annual lease
rentals are expensed as incurred. Unproved oil and gas properties that are
individually significant are periodically assessed for impairment of value and a
loss is recognized at the time of impairment by providing an impairment
experience of successful drillings and average holding period. Capitalized costs
of producing oil and gas properties after considering estimated dismantlement
and abandonment costs and estimated salvage values, are depreciated and depleted
by the units-of-production method. Support equipment and other property and
equipment are depreciated over their estimated useful lives.
On the sale or retirement of a complete unit of a proved property, the cost and
related accumulated depreciation, depletion and amortization are eliminated from
the property accounts, and the resultant gain or loss is recognized. On the
retirement or sale of a partial unit of proved property, the cost is charged to
accumulated depreciation, depletion and amortization with a resulting gain or
loss recognized in income.
On the sale of an entire interest in an unproved property for cash or cash
equivalent, gain or loss on the sale is recognized, taking into consideration
the amount of any recorded impairment if the property has been assessed
individually. If a partial interest in an unproved property is sold, the amount
received is treated as a reduction of the cost of the interest retained.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. Expenditures for maintenance and repairs are
expensed when incurred and betterments are capitalized. When assets are sold,
retired or otherwise disposed of the applicable costs and accumulated
depreciation, depletion and amortization are removed from the accounts, and the
resulting gain or loss is reflected in operations.
F-8
PIONEER OIL AND GAS
NOTES TO FINANCIAL STATEMENTS
September 30, 2004 and 2003
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
Income Taxes
Deferred income taxes arise from temporary differences resulting from income and
expense items reported for financial accounting and tax purposes in different
periods. Deferred taxes are classified as current or non-current, depending on
the classification of the assets and liabilities to which they relate. Deferred
taxes arising from temporary differences that are not related to an asset or
liability are classified as current or non-current depending on the periods in
which the temporary differences are expected to reverse. Temporary differences
result primarily from net operating loss carryforwards, intangible drilling
costs and depletion.
Earnings Per Share
The computation of basic earnings per common share is based on the weighted
average number of shares outstanding during each year.
The computation of diluted earnings per common share is based on the weighted
average number of shares outstanding during the year plus the common stock
equivalents which would arise from the exercise of stock options and warrants
outstanding using the treasury stock method and the average market price per
share during the year. Common stock equivalents are not included in the diluted
earnings per share calculation when their effect is antidilutive.
Stock-Based Compensation
The Company accounts for stock options granted to employees under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations, and has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized in the financial statements, as all options granted
under those plans had an exercise price equal to or greater than the market
value of the underlying common stock on the date of grant. Had the Company's
options been determined based on the fair value method, the results of
operations would have remained unchanged as all options were vested in prior
years.
Revenue Recognition
Revenue is recognized from oil sales at such time as the oil is delivered to the
buyer. Revenue is recognized from gas sales when the gas passes through the
pipeline at the well head. Revenue from overriding royalty interests is
recognized when earned.
The Company does not have any gas balancing arrangements.
F-9
PIONEER OIL AND GAS
NOTES TO FINANCIAL STATEMENTS
September 30, 2004 and 2003
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
primarily related to oil and gas property reserves and prices, 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.
Note 2 - Property and Equipment
Property and equipment consists of the following:
September 30,
2004 2003
Oil and gas properties (successful efforts method) $ 1,987,099 1,914,635
Capitalized asset retirement cost 116,376 -
Office furniture and equipment 139,360 133,321
2,242,835 2,047,956
Less accumulated depreciation, depletion and
amortization (1,704,866) (1,609,075)
$ 537,969 438,881
F-10
PIONEER OIL AND GAS
NOTES TO FINANCIAL STATEMENTS
September 30, 2004 and 2003
Note 3 - Asset Retirement Obligation
The Company has an obligation to plug and abandon certain oil and gas wells it
owns. Accordingly, a liability has been established equal to the obligation.
Following is a reconciliation of the aggregate retirement liability associated
with the Company's obligation to plug and abandon its oil and gas properties:
2004
Balance at beginning of year $ -
Initial amount recorded for ARO 116,376
Cumulative effect of accounting change 37,365
Additional obligations incurred -
Revisions of estimate -
Accretion expense 4,609
Balance at end of year $ 158,350
Note 4 - Cumulative Effect of Change In Accounting Principle
The Company has adopted the provisions of SFAS 143 "Accounting for Asset
Retirement Obligations" which requires entities to record the fair value of a
legal liability for an asset retirement obligation in the period in which it is
incurred. The Company has recognized a liability based on the present value of
the estimated costs related to its obligation to plug and abandon the oil and
gas wells it owns. The Company has also capitalized the costs of the liability
through increasing the carrying amount of its oil and gas properties. The
liability is accreted to its estimated present value each period, and the
capitalized cost is amortizated over the useful life of the related asset. Upon
settlement of the liability, the Company will settle the obligation for its
recorded amount or incur a gain or loss upon settlement.
The effect of adopting SFAS 143 is recorded as the cumulative effect of a change
in accounting principle as follows:
Amortization $ 44,156
Accretion of asset retirement obligation 37,365
Cumulative effect of change $ 81,521
F-11
PIONEER OIL AND GAS
NOTES TO FINANCIAL STATEMENTS
September 30, 2004 and 2003
Note 5 - Note Payable
The Company has a bank revolving line-of-credit agreement, which allows the
Company to borrow a maximum amount of $750,000. This agreement bears interest at
the bank's prime rate plus 1 percent and is secured by accounts receivable and
producing properties. The line-of-credit matures on December 31, 2005 and had no
outstanding balance at September 30, 2004 and 2003. Also, as of September 30,
2004, $20,000 of the $750,000 was reserved for an outstanding letter of credit.
Note 6 - Stock Subscription Receivable
The stock subscription receivable consists of a six percent receivable due from
the Company's ESOP. The receivable is reduced every six months by the amount of
the obligation owed by the Company to the ESOP, less interest (see Note 12).
During the years ended September 30, 2004 and 2003, the Company recognized
$13,504 and $15,104 of interest income related to this note.
Note 7 - Income Taxes
The provision for income taxes differs from the amount computed at federal
statutory rates as follows:
Years Ended
September 30,
2004 2003
Income tax provision at statutory rate $ 160,000 45,000
Change in valuation allowance (160,000) (45,000)
-------- --------
$ - -
======== ========
F-12
PIONEER OIL AND GAS
NOTES TO FINANCIAL STATEMENTS
September 30, 2004 and 2003
Note 7 - Income Taxes (continued)
Deferred tax assets (liabilities) are comprised of the following:
September 30,
2004 2003
------- ------
Intangible drilling costs and depletion $ 129,000 15,000
Net operating loss carryforwards 396,000 696,000
Asset Retirement Obligation 31,000 -
AMT credit carryforward - 5,000
------- -------
556,000 716,000
------- -------
Valuation allowance (556,000) (716,000)
$ - -
======== ========
A valuation allowance has been recorded for the full amount of the deferred tax
asset because it is more likely than not that the deferred tax asset will not be
realized.
As of September 30, 2004, the Company had net operating loss carryforwards of
approximately $1,164,000. These carryforwards begin to expire in 2012. If
substantial changes in the Company's ownership should occur there would be an
annual limitation of the amount of NOL carryforward which could be utilized.
Also, the ultimate realization of these carryforwards is due, in part, on the
tax law in effect at the time and future events that cannot be determined.
Note 8 - Sales to Major Customers
The Company had sales to major customers during the years ended September 30,
2004 and 2003, which exceeded ten percent of total sales as follows:
September 30,
2004 2003
------- -------
Company A $ 788,000 115,000
Company B 434,000 420,000
Company C 207,000 414,000
Company D - 134,000
F-13
PIONEER OIL AND GAS
NOTES TO FINANCIAL STATEMENTS
September 30, 2004 and 2003
Note 9 - Related Party Transactions
The Company acts as the operator for several oil and gas properties in which
employees, officers and other related and unrelated parties have a working or
royalty interest. At September 30, 2004 and 2003 there was $14,016 and $17,917,
respectively, included in accounts payable due to officers as a result of these
activities. Also at September 30, 2004 and 2003 there was $26,673 and $0,
respectively, included in accounts receivable due from officers as a result of
these activities. The Company also is the general manager in certain limited
partnerships and the operator for certain joint ventures formed for the purpose
of oil and gas exploration and development.
The Company leases its office space from certain officers of the Company. The
lease requires monthly rental payments of $2,500 plus all expenses pertaining to
the office space and expires in September 2005. Future minimum lease payments
for the next year are $30,000. Rent expense for the years ended September 30,
2004 and 2003 was approximately $30,000 each year.
The Company has a stock subscription receivable from the ESOP (see Note 6).
Note 10 - Supplemental Disclosures of Cash Flow Information
During the year ended September 30, 2004:
o The Company recorded an asset retirement obligation and increased oil and gas
properties in the amount of $116,376.
o The Company transferred property from Leases for Resale to Developing
Properties in the amount of $1,367.
Operations reflect actual amounts paid for interest and income taxes
approximately as follows:
September 30,
2004 2003
------ -------
Interest $ 3,000 23,000
Income taxes - -
Note 11 - Fair Value of Financial Instruments
The Company's financial instruments consist of cash, receivables, payables and a
note payable. The carrying amount of cash, receivables and payables approximates
fair value because of the short-term nature of these items. The carrying amount
of the note payable approximates fair value as the note bears interest at
floating market interest rates.
F-14
PIONEER OIL AND GAS
NOTES TO FINANCIAL STATEMENTS
September 30, 2004 and 2003
Note 12 - Stock Options
The Company has granted stock options to the members of the Board of Directors
and the officers and employees of the Company to purchase shares of the
Company's common stock. The exercise price of the options is equal to or in
excess of the fair market value of the stock on the date of grant. All options
were granted and vested prior to 2003.
Information related to these options at September 30, 2004 is as follows:
Outstanding Exercisable
------------------------------------------------- --------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Exercise Number Life Exercise Number Exercise
Price Outstanding (Years) Price Exercisable Price
$.20 420,000 6.9 $.20 420,000 $.20
==== ======= === ==== ======= ====
Employee Stock Ownership Plan
The Company has adopted a noncontributory employee stock ownership plan (ESOP)
covering all full-time employees who have met certain service requirements. It
provides for discretionary contributions by the Company as determined annually
by the Board of Directors, up to the maximum amount permitted under the Internal
Revenue Code. The plan has received IRS approval under Section 401(A) and 501(A)
of the Internal Revenue Code. Pension expense charged to operations for the
years ended September 30, 2004 and 2003 was $41,772 and $41,396 respectively.
All outstanding shares held by the ESOP are included in the calculation of
earnings per share.
Note 13 - Commitments and Contingencies
Limited Partnerships
The Company has an immaterial interest in a limited partnership drilling program
and acts as the general partner. As the general partner, the Company is
contingently liable for any obligations of the partnership and may be
contingently liable for claims generally incidental to the conduct of its
business as general partner. As of September 30, 2004, the Company was unaware
of any such obligations or claims arising from this partnership.
F-15
PIONEER OIL AND GAS
NOTES TO FINANCIAL STATEMENTS
September 30, 2004 and 2003
Note 13 - Commitments and Contingencies (continued)
Employment Agreements
The Company has entered into severance pay agreements with employees and
officers of the Company who also serve as board members. Under the terms of the
agreements, a board member who is terminated shall receive severance pay equal
to the amount such board member received in salary and bonus for the two years
prior to termination.
Litigation
The Company may become or is subject to investigations, claims or lawsuits
ensuing out of the conduct of its business, including those related to
environmental safety and health, commercial transactions, etc. The Company is
currently not aware of any such item, which it believes could have a material
adverse affect on its financial position.
Letter of Credit
The Company has a $20,000 letter-of-credit related to its oil and gas
operations. The letter-of-credit was issued in connection with the Company's
line-of-credit (see Note 5).
F-16
PIONEER OIL AND GAS
SCHEDULE OF SUPPLEMENTARY INFORMATION
ON OIL AND GAS OPERATIONS
September 30, 2004 and 2003
The information on the Company's oil and gas operations as shown in this
schedule is based on the successful efforts method of accounting and is
presented in conformity with the disclosure requirements of the Statement of
Financial Accounting Standards No. 69 "Disclosures about Oil and Gas Producing
Activities."
Capitalized Costs Relating to Oil and Gas Producing Activities
September 30,
2004 2003
Proved oil and gas properties and related equipment $ 1,763,802 1,763,802
Unproved oil and gas properties 223,298 150,833
Subtotal 1,987,099 1,914,635
Accumulated depreciation, depletion and amortization
and valuation allowances (1,553,389) (1,483,991)
$ 433,710 430,644
Costs Incurred in Oil and Gas Acquisition, Exploration and Development
Activities
September 30,
2004 2003
Acquisition of properties:
Proved $ - -
Unproved $ - -
Exploration costs $ - -
Development costs $ 91,081 96,272
F-17
PIONEER OIL AND GAS
SCHEDULE OF SUPPLEMENTARY INFORMATION
ON OIL AND GAS OPERATIONS
September 30, 2004 and 2003
Results of Operations for Producing Activities
Years Ended
September 30,
2004 2003
Oil and gas - sales $ 1,805,077 1,360,985
Production costs net of reimbursements (733,215) (687,730)
Exploration costs (208,309) (248,753)
Depreciation, depletion and amortization
and valuation provisions (69,397) (136,726)
Net income before income taxes 794,156 287,776
Income tax provision (270,000) (98,000)
Results of operations from producing activities
(excluding corporate overhead and interest costs) $ 524,156 189,776
F-18
PIONEER OIL AND GAS
SCHEDULE OF SUPPLEMENTARY INFORMATION
ON OIL AND GAS OPERATIONS
September 30, 2004 and 2003
Reserve Quantity Information (Unaudited)
---------------------------------------
The estimated quantities of proved oil and gas reserves disclosed in the table
below are based upon on appraisal of the proved developed properties by Fall
Line Energy, Inc. Such estimates are inherently imprecise and may be subject to
substantial revisions.
All quantities shown in the table are proved developed reserves and are located
within the United States.
Years Ended September 30,
2004 2003
Oil Gas Oil Gas
(bbls) (mcf) (bbls) (mcf)
Proved developed and undeveloped reserves:
Beginning of year 116,486 879,320 118,572 774,733
Revision in previous estimates (9,212) 682,220 13,841 53,677
Discoveries and extensions - - - 214,708
Purchase in place - - - -
Production (13,618) (180,329) (15,927) (163,798)
Sales in place - - - -
End of year 93,656 1,381,211 116,486 879,320
Proved developed reserves:
Beginning of year 116,486 879,320 118,572 774,733
End of year 93,656 1,381,211 116,486 879,320
F-19
PIONEER OIL AND GAS
SCHEDULE OF SUPPLEMENTARY INFORMATION
ON OIL AND GAS OPERATIONS
September 30, 2004 and 2003
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proved Oil and Gas Reserves (Unaudited)
Years Ended
September 30,
2004 2003
Future cash inflows $ 10,409,000 7,340,000
Future production and development costs (2,586,000) (1,905,000)
Future income tax expenses (2,660,000) (1,848,000)
5,163,000 3,587,000
10% annual discount for estimated timing of cash flows (1,953,000) (1,415,000)
Standardized measure of discounted future net cash flows $ 3,210,000 2,172,000
The preceding table sets forth the estimated future net cash flows and related
present value, discounted at a 10% annual rate, from the Company's proved
reserves of oil, condense and gas. The estimated future net revenue is computed
by applying the year end prices of oil and gas (including price changes that are
fixed and determinable) and current costs of development production to estimated
future production assuming continuation of existing economic conditions. The
values expressed are estimates only, without actual long-term production to base
the production flows, and may not reflect realizable values or fair market
values of the oil and gas ultimately extracted and recovered. The ultimate year
of realization is also subject to accessibility of petroleum reserves and the
ability of the Company to market the products.
F-20
PIONEER OIL AND GAS
SCHEDULE OF SUPPLEMENTARY INFORMATION
ON OIL AND GAS OPERATIONS
September 30, 2004 and 2003
Changes in the Standardized Measure of
Discounted Future Cash Flows (Unaudited)
Years Ended
September 30,
2004 2003
Balance, beginning of year $ 2,172,000 877,000
Sales of oil and gas produced net of production costs (839,000) (539,000)
Net changes in prices and production costs 1,424,000 (1,186,000)
Extensions and discoveries, less related costs - 876,000
Purchase and sales of minerals in place - -
Revisions of estimated development costs - -
Revisions of previous quantity estimate 771,000 351,000
Accretion of discount 217,000 88,000
Net changes in income taxes (535,000) (667,000)
Balance, end of year $ 3,210,000 2,172,000
F-21
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
____
--------------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For the quarterly period ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-30472
PIONEER OIL AND GAS
Incorporated pursuant to the Laws of the State of Utah
Internal Revenue Service - Employer Identification No. 87-0365907
1206 W. South Jordan Parkway, Unit B
South Jordan, Utah 84095-5512
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X__ No ___
The total number of shares of the registrant's Common Stock, $.001 par value,
outstanding on March 31, 2005, was 7,910,802.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS FOR SECOND FISCAL QUARTER 2005
PERIOD ENDING MARCH 31, 2005
PIONEER OIL AND GAS
Balance Sheet
March 31, 2005
(unaudited)
Assets
Current assets:
Cash $ 1,002,119
Marketable securities, available for sale 36,039
Accounts receivable 203,553
Resale leases, at lower of cost or market 2,540,349
-----------
Total current assets 3,782,060
Property and equipment - net (successful efforts method) 656,873
Other assets 2,230
-----------
$ 4,441,163
===========
----------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 50,492
Accrued expenses 28,781
Income taxes payable 176,000
-----------
Total current liabilities 255,273
Deferred income tax 278,000
Asset retirement obligation 160,724
-----------
Total Liabilities 693,997
-----------
Commitments and contingencies -
Stockholders' equity:
Common stock, par value $.001 per share, authorized
50,000,000 shares: 7,910,802 shares issued and
outstanding 7,910
Additional paid-in capital 2,470,734
Stock subscription receivable (184,570)
Unrealized holding gain 36,039
Retained earnings 1,417,053
-----------
Total stockholder's equity 3,747,166
-----------
$ 4,441,163
===========
The accompanying notes are an integral part of these financial statements.
PIONEER OIL AND GAS
Statement of Operations
Six Months Ended March 31,
(unaudited)
2005 2004
----------- -----------
Revenue:
Oil and gas sales $ 530,079 409,530
Royalty Revenue 498,743 338,262
Operational reimbursements 3,000 3,000
Project and lease sales income 2,260,528 18,750
----------- -----------
3,292,350 769,542
----------- -----------
Costs and expenses:
Cost of operations 381,325 322,247
General and administrative expenses 198,425 180,911
Exploration costs 137,328 91,279
Lease rentals 18,430 33,960
Depreciation, depletion and amortization 46,186 54,866
----------- -----------
781,694 683,263
----------- -----------
Income from operations 2,510,656 86,279
----------- -----------
Other income (expense):
Interest expense (1,267) -
Other income 105,838 21,506
----------- -----------
Net other income 104,571 21,506
----------- -----------
Income before provision
for income taxes 2,615,227 107,785
Provision for income taxes 454,000 -
----------- -----------
Net Income $ 2,161,227 107,785
=========== ===========
Earnings per share:
Basic $ .27 .01
=========== ===========
Diluted $ .26 .01
============ ===========
Weighted average common shares:
Basic 7,912,000 7,950,000
=========== ===========
Diluted 8,259,000 7,950,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
PIONEER OIL AND GAS
Statement of Operations
Three Months Ended March 31,
(unaudited)
2005 2004
----------- -----------
Revenue:
Oil and gas sales $ 226,996 205,977
Royalty Revenue 293,380 159,993
Operational reimbursements 1,500 1,500
Project and lease sales income 2,260,528 -
----------- -----------
2,782,404 367,470
----------- -----------
Costs and expenses:
Cost of operations 238,345 140,341
General and administrative expenses 111,341 101,448
Exploration costs 80,096 46,036
Lease rentals 6,013 5,193
Depreciation, depletion and amortization 23,093 37,433
------------ -----------
458,888 330,451
------------ -----------
Income from operations 2,323,516 37,019
--------- -----------
Other income (expense):
Interest expense (677) -
Other income 21,550 8,058
------------ -----------
Net other income 20,873 8,058
------------ -----------
Income before provision
for income taxes 2,344,389 45,077
Provision for income taxes 454,000 -
------------ -----------
Net Income $ 1,890,389 45,077
========= ===========
Earnings per share:
Basic $ .24 .01
============ ===========
Diluted $ .23 .01
============ ===========
Weighted average common shares:
Basic 7,912,000 7,938,000
============ ===========
Diluted 8,281,000 7,938,000
============ ===========
The accompanying notes are an integral part of these financial statements.
PIONEER OIL AND GAS
Statement of Cash Flows
Six Months Ended March 31,
(unaudited)
2005 2004
----------- -----------
Cash flows from operating activities:
Net income $ 2,161,227 107,785
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Loss on assets sold, abandoned, and dry hold costs 112,321 -
Depreciation, depletion and amortization 46,186 54,866
Employee benefit plan expense 25,199 20,698
Interest income (6,110) (6,958)
Deferred income taxes 278,000 -
Accretion expense 2,374 -
(Increase) decrease in:
Accounts receivable 97,897 (7,003)
Resale leases (1,488,057) (130,568)
Other assets - 230
Increase (decrease) in:
Accounts payable (57,716) (83,954)
Accrued expenses 216 2,173
Income taxes payable 176,000 -
Advances on drilling costs (556,573) -
------------ -----------
Net cash provided by (used in)
operating activities 790,964 42,731
------------ -----------
Cash flows from investing activities:
Acquisition of property and equipment (277,411) (25,423)
------------ -----------
Net cash used in investing activities (277,411) (25,423)
------------ -----------
Cash flow from financing activities:
Acquisition and retirement of Common Stock (2,524) (21,314)
------------ -----------
Net cash provided by(used in) financing activities (2,524) (21,314)
------------ -----------
Net increase (decrease) in cash 511,029 (89,468)
Cash, beginning of year 491,090 371,527
------------ -----------
Cash, end of second quarter $ 1,002,119 282,059
============ ===========
The accompanying notes are an integral part of these financial statements.
PIONEER OIL AND GAS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended March 31, 2005
(Unaudited)
NOTE 1 - UNAUDITED INTERIM INFORMATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Regulation
SB. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and six months ended March 31, 2005
are not necessarily indicative of the results that may be expected for the year
ending September 30, 2005. For further information, refer to the financial
statements and footnotes thereto included in the Company's Form 10KSB for the
year ended September 30, 2004.
(1) The unaudited financial statements include the accounts of Pioneer Oil
and Gas and include all adjustments (consisting of normal recurring items)
which are, in the opinion of management, necessary to present fairly the
financial position as of March 31, 2005 and the results of operations for
the three and six months ended March 31, 2005 and 2004 and the cash flows
for the six months ended March 31, 2005 and 2004. The results of operations
for the three and six months ended March 31, 2005 are not necessarily
indicative of the results to be expected for the entire year.
(2) Earnings per common share is based on the weighted average number of
shares outstanding during the period.
(3) During the six months ended March 31, 2005, the Company generated net
income sufficient to utilize all of the NOL carryforwards. In addition, the
Company recorded a provision for income taxes of $454,000, which included a
current liability of $176,000 and a deferred liability of $278,000.
NOTE 2 - MARKETABLE SECURITIES
During the six months ended March 31, 2005, the Company sold marketable
securities with no cost basis for approximately $78,000. The gain on this sale
is included in "other income" in the statement of operations. The Company
continues to hold approximately 144,000 shares of these securities with a market
value at March 31, 2005 of $36,039.
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
During the six months ended March 31, 2005, the Company recorded an unrealized
holding gain on marketable securities of $36,039.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Period Ending March 31, 2005)
Unaudited financial data
The discussion and analysis contained herein should be read in conjunction with
the preceding financial statements and the information contained in the
Company's 10KSB. Except for the historical information contained herein, the
matters discussed in this 10 QSB contain forward looking statements within the
meaning of Section 27a of the Securities Act of 1933, as amended, and Section
21e of the Securities Exchange Act of 1934, as amended, that are based on
management's beliefs and assumptions, current expectations, estimates, and
projections. Statements that are not historical facts, including without
limitation statements which are preceded by, followed by or include the words
"believes," "anticipates," "plans," "expects," "may," "should," or similar
expressions are forward-looking statements. Many of the factors that will
determine the company's future results are beyond the ability of the Company to
control or predict. These statements are subject to risks and uncertainties and,
therefore, actual results may differ materially. All subsequent written and oral
forward-looking statements attributable to the Company, or persons acting on its
behalf, are expressed qualified in their entirety by these cautionary
statements. The Company disclaims any obligation to update any forward-looking
statements whether as a result of new information, future events or otherwise.
Important factors that may include, but are not limited to: the risk of a
significant natural disaster, the inability of the Company to insure against
certain risks, fluctuations in commodity prices, the inherent limitations in the
ability to estimate oil and gas reserves, changing government regulations, as
well as general market conditions, competition and pricing, and other risks
detailed from time to time in the Company's SEC reports, copies of which are
available upon request from the Company.
Results of Operations -
Total Revenue for the second fiscal quarter increased 657 percent from $367,470
in fiscal 2004 to $2,782,404 in fiscal 2005. For the six-month period revenues
increased 328 percent from $769,542 to $3,292,350. The increase in revenues for
both the three-month period and the six-month period were due primarily to
substantial lease sales. The Company sold the remainder of its Uinta Basin
Overpressured Gas prospect and the first phase of its central Utah play. The
company anticipates receiving substantially higher revenues and profits in
fiscal 2005 and early fiscal 2006 than is normal; these are expected to be
unusual and associated with the central Utah play and not to be expected on a
continuing basis.
Project and lease sales income for the six-month period increased from $18,750
for fiscal 2004 to $2,260,528 for 2005, all of the income in fiscal 2005 coming
in the second quarter. As mentioned above this income was from the sales of some
of our Utah properties.
Total oil and gas sales (including royalty revenue) increased from $365,970 to
$520,376 in the second quarter and from $747,792 to $1,028,822 for the six-month
period. These increases were due primarily to increased oil and gas prices.
Average oil prices for the quarter increased from $30.47 bbl to $42.17 bbl while
gas prices increased from $5.06 MCF to $6.16 MCF. For the six-month period,
average oil prices increased from $28.48 bbl to $36.45 bbl while gas prices
increased from $4.58 to $6.03.
Costs of operations increased from $140,341 to $238,345 for the quarter and
increased from $322,247 to $381,325 for the six-month period primarily due to
higher payments to working interest partners due to higher product prices.
General and administrative expenses increased from $101,448 to $111,341 for the
quarter and increased from $180,911 to $198,425 for the six-month period.
The Company's net income for the second quarter (fiscal 2005) was $1,890,389
compared to net income of $45,077 for the second fiscal quarter 2004. For the
six-month period (fiscal 2005) the Company posted net income of $2,161,227
compared to a net income of $107,785 for fiscal 2004.
Liquidity and Capital Resources
During the first six-months of fiscal 2005 cash provided by operating activities
was $790,964 and cash used in investing activities required $277,411. Financing
activities used $2,524 in cash.
Cash used in operating activities was primarily for the purchase of resale
leases of $1,488,057. Cash used in investing activities increased from $25,423
(fiscal 2004) to $277,411 (fiscal 2005).
ITEM 3. CONTROLS AND PROCEDURE
Within the 90 days prior to this report, we carried out an evaluation, under the
supervision and with the participation of management, including our principal
financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the principal executive and principal financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company required to be
included in our periodic SEC filings. There have been no significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation.
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
The Company may become or is subject to investigations, claims, or
lawsuits ensuing out of the conduct of its business, including those
related to environmental safety and health, commercial transactions
etc. The Company is currently not aware of any such items, which it
believes could have a material adverse affect on its financial
position.
Item 2 - Changes in Securities
None.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
The Company has filed forms SC 13E3 and Pre 14A for the intention of
going private in order to reduce compliance costs associated with new
public company rules. The SEC is currently reviewing these filings.
The Company intends to submit some of these matters to a vote of the
security holders as outlined in these filings.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
Exhibit No. Description
31 Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to Rule 13a-14 of the Securities and Exchange Act of
1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
REPORTS ON FORM 8-K
(b) The registrant filed an 8K on February 8, 2005 regarding its central
Utah project and the results of its Yankee well; and an 8K on February 23,
2005 regarding the sale of a portion of the central Utah project and the
remainder of its Uinta Basin Overpressured Gas Prospect. No other 8K
filings were made during the quarter ending March 31, 2005. However, the
registrant also filed an important 8K on May 5, 2005 regarding the
registrant seeking to go private by purchasing the stock of all
shareholders with less than 2000 shares. Details can be found in the
registrant's SC 13E3 and Pre 14A filings.
SIGNATURES
Pursuant to the requirements of the Securities Exchange act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pioneer Oil and Gas
Dated: May 13, 2005 /s/ Don J. Colton
-------------------------------
President and Chief Executive Officer
Exhibit 31
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Don J. Colton, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Pioneer Oil and Gas.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. I have disclosed, based on the most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
DATE: May 13, 2005
/s/ Don J. Colton
-----------------------
Don J. Colton, President
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report of Pioneer Oil and Gas
(the "Company") on Form 10-QSB for the period ended March 31, 2005 (the
"Report"), I, Don J. Colton, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(i) The Report fully complies with the requirements of section 13(a) of the
Securities Exchange Act of 1934; and
(ii) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Don J. Colton
-------------------------
Don J. Colton
Chief Executive Officer
May 13, 2005