SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 33-55254-32
CHANCELLOR GROUP, INC.
_________________________________________________________________
(Exact name of small business issuer as specified in its charter)
Nevada 87-0438647
_______________________________ __________________
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
1800 E. Sahara, Suite 107, Las Vegas, Nevada 89104
___________________________________________________________
(Address of principal executive offices, including zip code)
Issuer's Telephone Number: (702) 938-0261
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
___ ___
As of December 31, 2005, 55,844,261 shares of common stock were outstanding,
and the aggregate market value of the common stock of the Registrant held by
nonaffiliates was $0.
Documents incorporated by reference: Exhibits (Item 13)
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State Issuer's revenues for its most recent fiscal year: $0
This Form 10-KSB consists of 32 pages. The Exhibit Index begins on page 12.
TABLE OF CONTENTS
Form 10-KSB Annual Report - 2005
Chancellor Group, Inc.
Page
Facing Page
Index
PART I
Item 1. Business 1
Item 2. Properties 2
Item 3. Legal Proceedings 2
Item 4. Submission of Matters to a Vote of Security Holders 2
PART II
Item 5. Market for Registrant's Common Equity
And Related Shareholder Matters 3
Item 6. Management's Discussion And Analysis Or Plan Of
Operations 3
Item 7. Financial Statements 8
Item 8. Disagreements On Accounting And Financial Disclosures 8
PART III
Item 9. Directors And Executive Officers Of The Registrant 9
Item 10. Executive Compensation 10
Item 11. Security Ownership Of Certain Beneficial Owners And
Management 11
Item 12. Certain Relationships And Related Transactions 11
PART IV
Item 13. Exhibits, Financial Statement Schedules, And
Reports On Form 8-K 12
SIGNATURES 13
CERTIFICATIONS 31
PART I
Item 1. Business
Chancellor Group, Inc. (formerly Nighthawk Capital, Inc.)("Nighthawk",
the "Company", the "Registrant") was organized under the laws of the state
of Utah in 1986 and subsequently reorganized under the laws of Nevada in 1993.
In September, 1997 the Company acquired 100% ownership of Radly
Petroleum, Inc. ("Radly"), a Texas corporation, in
exchange for approximately 80% of the Company's outstanding common stock. In
July, 1998 the Company acquired 100% ownership in Lichfield Petroleum
America, Inc., ("Lichfield") a Texas corporation. In October of 2000,
the Company acquired 100% ownership of Getty Petroleum, Inc. ("Getty") in
exchange for 4,500,000 shares of restricted common stock. Chancellor Group,
Inc., Getty, Radly, and Lichfield remain as separate legal
entities and operate as separate legal entities.
1
Item 2. Properties
The Company maintains its offices in Las Vegas, Nevada, Abilene,
Texas and in Melbourne, Australia. The Company's oil and gas properties
were written off in 2001.
Item 3. Legal Proceedings
A shareholder derivative action brought against the Company because of
its then CEO, Shane Xavier Gabriel Rodgers resulted in the District Court of
Clark County, Nevada placing the Company into receivership in October, 2001.
The receivership was subsequently lifted and on April 5, 2002 Rodgers was
fired from the Board of Directors for breaching his fiduciary duty and a new,
interim Board appointed until a shareholder meeting is held.
Chancellor Group, Inc. shareholders Lichfield Petroleum, Ltd. and Graham
Energy, Inc. also brought a legal action against Rodgers, Chancellor
Group, Inc. and Chancellor Group Inc.'s wholly owned subsidiary Getty
Petroleum, Inc. in Texas, which was subsequently settled without adverse
consequences to the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None
2
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
(a) Principal Market or Markets: The Company's common stock trades
under the symbol CHAGE on the National Quotation Bureau's "Pink Sheets" service.
High and low bids for the Company's common stock for the previous eight
quarters are shown below.
BID
Class Quarter Ended High Low
Common Mar. 31, 2004 0.00 0.00
Common June 30, 2004 0.00 0.00
Common Sept. 30, 2004 0.00 0.00
Common Dec. 31, 2004 0.00 0.00
Common Mar. 31, 2005 0.02 0.01
Common June 30, 2005 0.00 0.00
Common Sept. 30, 2005 0.00 0.00
Common Dec. 31, 2005 0.00 0.00
$0.00 denotes less than $0.01 per share
(b) Common Stock: On December 31, 2005 there were 55,844,261
shares of common stock issued and outstanding, which were held by more than 400
shareholders of record excluding individuals holding securities in street name.
The Company has never paid cash dividends on its common stock and currently
intends to continue its policy of retaining all of its earnings for use in its
business.
(c) Preferred Stock: The Company at December 31, 2005 had -0-
preferred shares issued and outstanding.
Item 6. Management's Discussion and Analysis or Plan of Operations
In May, 2005 Director John C.Y. Lee resigned due to other business
commitments, and was replaced as a Director by Peter A.L. Reid. Mr. Reid
has extensive investment banking experience in the United States, Europe
and Southeast Asia working initially with the Schroder Wagg Group, now part of
Citigroup. He also worked with Indosuez and Societe Generale in both France
and Australia, the Scandinavian Banks in Sweden and Norway, William Glyn's
Bank in London and its associates in Europe (the Inter-Alpha Banks). In
addition, Mr. Reid worked with the Toronto Dominion Bank in Australia.
Mr. Reid's experience, both in the role of executive and director, has
involved large corporate mergers and acquisitions, equity and debt financing,
and the development of new financial instruments used in trade finance and
corporate borrowing. Mr. Reid holds certificates from City University London
and from Harvard University Agribusiness School.
The following discussion should be read in conjunction with the Financial
Statements and notes thereto included herein.
The Company
-----------
Chancellor Group, Inc. is in the business of acquisition,
exploration, and development of natural gas and oil
properties.
3
Comparison of Operating Results
-------------------------------
Effective September 23, 1997 the Company entered into a stock purchase
agreement with Pilares Oil & Gas, Inc., in which the Company issued
12,300,000 shares of common stock representing approximately 80% of its
issued and outstanding shares in exchange for all the common stock of
Radly Petroleum, Inc. The assets of Radly Petroleum, Inc. consisted of
oil, gas and mineral leases and proved gas reserves situated on 3,200 acres
located in Pecos County, Texas. Also as of September 23, 1997, the Company
elected an entirely new board of directors, and new officers and directors
assumed management of the Company. Due to these substantial changes in the
Company's business and management structure as of September 23, 1997, corporate
activities occurring prior to that time are unrelated to activities occurring
after that time and to future corporate activities. As a consequence, a
comparison of corporate financial activity of the Company prior to and
subsequent to September 23, 1997 is not meaningful.
A shareholder derivative action brought against the Company because of
its then CEO, Shane Xavier Gabriel Rodgers resulted in the District Court of
Clark County, Nevada placing the Company into receivership in October, 2001.
The receivership was subsequently lifted and on April 5, 2002 Rodgers was
fired from the Board of Directors for breaching his fiduciary duty and a new,
interim Board appointed until a shareholder meeting is held.
The period of the receivership necessitated due to previous management and the
lack of records provided by same also mean comparisons are not meaningful.
The lack of provision of any meaningful records by previous management also
resulted in the Company failing to meet its filing deadline and being placed in
the Pink Sheets.
But the Company, during 2002, following the appointment of a new Board by the
Court, has applied itself to continuing to clean up the Company and to look for
new business opportunities. Whereas no new cash-flow activities have yet been
found, money provided by several investor-shareholders has enabled the
clean-up to go ahead and the Company's audits to be brought up to date.
4
Liquidity & Capital Resources
-----------------------------
As of December 31, 2005 the Company had a working capital deficit of $93,505.
5
Certain Risks
-------------
Forward Looking Statements. This Report on Form 10-KSB contains forward
looking statements within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward
looking statements include statements regarding: future oil and gas
production and prices, future exploration and development spending, future
drilling and operating plans and expected results, reserve and production
potential of the Company's properties and prospects, and the Company's
strategy. Actual events or results could differ
materially from those discussed in the forward looking statements as a
result of various factors including, without limitation, the factors set
forth below and elsewhere in this 10-KSB.
Dependence on Additional Capital. Successful development of any Company
oil and natural gas reserves will require a substantial amount of additional
funding relative to the Company's current capitalization. There is no
assurance that such development capital will be available to the Company
as it is required. Further, due to the lack of operating cash flow in
amounts sufficient to fund Company operations, there is no assurance that
the Company will be able to continue its efforts to operate and to develop
its oil and gas reserves.
Exploration and Development Risks. The business of exploring for and, to a
lesser extent, of acquiring and developing oil and gas properties is an
inherently speculative activity that involves a high degree of business
and financial risk. Although available geological and geophysical
information can provide information with respect to a potential oil or gas
property, it is impossible to determine accurately the ultimate production
potential, if any, of a particular property or well.
Volatility of Oil and Gas Prices. The Company's future revenues,
profitability and rate of growth are substantially dependent upon prevailing
market prices for natural gas and oil, which can be extremely volatile
and in recent years have been depressed by excess domestic and imported
supplies.
Uncertainty of Estimates of Proved Reserves and Future Net Revenues.
There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond the control of
the producer. Estimating quantities of proved reserves is inherently
imprecise. Such estimates are based upon certain assumptions about future
production levels, future natural gas and crude oil prices and future
operating costs made using currently available geologic engineering and
economic data, some or all of which may prove incorrect over time.
6
Operating and Weather Hazards. The costs and timing of drilling, completing
and operating wells is often uncertain. Drilling operations may be
curtailed, delayed or canceled as a result of a variety of factors,
including regulatory and environmental constraints, unexpected drilling
conditions, equipment failures, accidents, adverse weather conditions,
encountering unexpected formations or pressures in drilling and completion
operations, encountering corrosive or hazardous substances, mechanical
failure of equipment, blowouts, cratering and fires. These conditions could
result in damage or injury to, or destruction of, formations, producing
facilities or other property or could result in personal injuries,
loss of life or pollution of the environment.
Additional factors. Additional factors that could cause actual events to
vary from those discussed above and elsewhere in this report include,
among others: loss of key company personnel; adverse change in governmental
regulation; regulatory and/or environmental constraints; inability to
obtain critical supplies and equipment, personnel and consultants; and
inability to access capital to pursue the Company's plans.
Glossary
--------
When the following terms are used in written material related to the Company,
they have the following meanings:
Bbl - One stock barrel or 42 U.S. gallons liquid volume, usually used in
reference to crude oil or other liquid hydrocarbons.
Bcf - One billion cubic feet; expressed, where gas sales contracts are in
effect, in terms of contractual temperature and pressure basis and, where
contracts are nonexistent, at 60 degrees Fahrenheit at 14.65 pounds per
square inch absolute.
Prospect - An area in which a party owns or intends to acquire one or more
oil and gas interests which is geographically defined on the basis of
geological data and which is reasonably anticipated to contain at least
one reservoir of oil, gas, or other hydrocarbons.
Proved Developed Reserves - Proved Reserves which can be expected to be
recovered through existing wells with existing equipment and operating
methods.
Proved Reserves - The estimated quantities of crude oil, natural gas, and
other hydrocarbons which, based upon geological and engineering data, are
expected to be produced from known oil and gas reserves under existing
economic and operating conditions, and the estimated present value thereof
based upon the prices and costs on the date that the estimate is made and
any price changes provided for by existing conditions.
Proved Undeveloped Reserves - Reserves that are expected to be recovered
from new wells on undrilled acreage or from existing wells where a
relatively major expenditure is required for recompletion.
7
PV10% - The discounted future net cash flows for proved oil and gas
reserves computed using prices and costs, at the dates indicated, before
income taxes and a discount rate of 10%.
Royalty Interest - An interest in an oil and gas property entitling the
owner to a share of oil and gas production free of the costs of production.
Undeveloped Acreage - Oil and gas acreage (including, in applicable
instances, rights in one or more horizons which may be penetrated by
existing well bores, but which have not been tested) to which Proved
Reserves have not been assigned by independent petroleum engineers.
Working Interest - The operating interest under a lease which gives the owner
the right to drill, produce and conduct operating activities on the
property and a share of production, subject to all royalty interests,
and other burdens and to all costs of exploration, development and
operations and all risks in connection therewith.
Item 7. Financial Statements
The Report of the Independent Certified Public Accountant appearing at
page F-1 and the Financial Statements and Notes to Financial Statements
appearing at pages F-2 through F-11 are incorporated herein by reference.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None
8
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
The Directors and Officers of the Registrant as of the date of this report are
as follows:
Served as a
Name Age Position Director since
Robert Gordon 61 Chief Executive Officer, Chief
Financial Officer, Director May 1, 2002
A.L. Reid 65 Director May 6, 2005
Dudley Muth 64 Director April 5, 2002
All Directors of the Company hold office until successors are elected according
to the Company's by-laws.
Officers of the Company are elected by the Board of Directors according to the
Company's by-laws and hold office until their death,
resignation, or removal from office.
9
Mr. Robert Gordon, Chief Executive Officer and Chief Financial
Officer, is a former senior editor with Mr Rupert Murdoch's News
Corporation. He owns his own investor relations firm in Melbourne, Australia,
specializing in the oil and gas industry.
Mr. Peter A.L. Reid has extensive investment banking experience in the United
States,Europe and Southeast Asia working initially with the Schroder Wagg
Group, now part of Citigroup.He also worked with Indosuez and Societe
Generale in both France and Australia, the Scandinavian Banks in Sweden and
Norway, William Glyn's Bank in London and its associates in Europe
(the Inter-Alpha Banks). In addition, Mr. Reid worked with the Toronto
Dominion Bank in Australia. Mr. Reid's experience, both in the role
of executive and director, has involved large corporate mergers and
acquisitions, equity and debt financing, and the development of new
financial instruments used in trade finance and corporate borrowing.
Mr. Reid holds certificates from City University London and from Harvard
University Agribusiness School.
Mr. Dudley Muth is a Los Angeles attorney and a broker-dealer compliance
officer.
Item 10. Executive Compensation
Compensation paid to Officers and Directors is set forth in the Summary
Compensation Table below. The Company may reimburse its Officers and
Directors for any and all out-of-pocket expenses incurred relating to the
business of the Company. During the reporting period of this report, the
Company paid cash compensation to certain officers and directors. The
figures set out below include compensation paid in the form of common stock.
SUMMARY COMPENSATION TABLE
Name and Fiscal Other Annual
Principal Position Year Salary Bonus Compensation
None 2003 $ - - -
Directors - several 2004 $ - - $ 4,500
None 2005 $ - - -
The above table sets forth the rate and amount of compensation due to the
named recipients during the fiscal 2003, 2004 and 2005 periods,
and which amount may materially differ from the actual
amount paid, and which paid amount may additionally be compensation
accumulated but unpaid during prior reporting periods.
10
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of the date of this Report, the stock
ownership of each person known by the Registrant to be the beneficial owner of
five percent or more of any class of the Registrant's capital stock, each
Officer and Director individually and all Directors and Officers of the
Registrant as a group. No shares of any class of capital stock other than
common stock are outstanding.
NO. OF % OF
NAME CLASS SHARES CLASS
Dudley Muth, Director Common 1,320,000 2.36%
Robert Gordon Director Common 2,150,300 3.85%
Peter A.L. Reid Director Common 50,000 0.09%
Koala Pictures Proprietary Ltd. Common 22,021,800 39.45%
Axis Network (affiliate of Koala) Common 8,300 -
Directors & Officers as a Group Common 3,520,300 6.3%
Item 12. Certain Relationships and Related Transactions
Charles M. Childers is the ultimate controlling party in each of the
following entities: Pilares Oil & Gas, Inc., Medallion Holdings Limited,
Forum Energy Limited, Lichfield Petroleum Limited, and Southwin Financial Inc.
Childers' controlling stock position at December 31, 2005 is estimated to be
from 14,000,000 - 16,000,000 common shares.
11
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
-- The following Exhibits are incorporated by reference herein:
3.1 Articles of Incorporation
3.2 By Laws
(b) Reports on Form 8-K
-- None
12
SIGNATURES
Pursuant to the requirements of Section 12(g) 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, on March 14, 2006.
CHANCELLOR GROUP, INC.
By: /s/Robert Gordon
Robert Gordon
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant in
the capacities indicated, on March 14, 2006.
Director:
/s/Robert Gordon
Robert Gordon
Director:
/s/Dudley Muth
Dudley Muth
Director:
/s/Peter A.L. Reid
Peter A.L. Reid
13
CHANCELLOR GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2005
CHANCELLOR GROUP, INC.
Consolidated Financial Statements
TABLE OF CONTENTS
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM F-1
F-2
FINANCIAL STATEMENTS
Consolidated balance sheet F-3
Consolidated statements of operations F-4
Consolidated statements of stockholders' equity F-5
Consolidated statements of cash flows F-6
Notes to consolidated financial statements F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Chancellor Group, Inc.
Las Vegas, Nevada
I have audited the accompanying consolidated balance sheet of Chancellor
Group, Inc. as of December 31, 2004 (not separately presented), and the
related consolidated statements of operations, stockholders' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. My responsibility is to express
an opinion on these financial statements based on my audit.
I conducted my audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that I plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that my audit provides a reasonable
basis for my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Chancellor
Group, Inc. and subsidiaries as of December 31, 2004 and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 5 to the
financial statements the Company has suffered recurring losses from
operations, a court ordered management change, and has a working capital
deficiency that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note 5. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Aurora, Colorado
March 9, 2005 RONALD R. CHADWICK, P.C.
F-1
Larry O'Donnell, CPA, P.C. 2228 South Fraser Street
Telephone (303)745-4545 Unit 1
Aurora, Colorado 80014
Report of Independent Registered Public Accounting Firm
Board of Directors
Chancellor Group, Inc.
Las Vegas, Nevada
I have audited the accompanying consolidated balance sheet of Chancellor
Group, Inc., as of December 31, 2005, and the related consolidated statements
of loss, changes in stockholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these financial
statements based on my audits.
I conducted my audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
I plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. I believe that my
audits provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Chancellor Group, Inc. as of
December 31, 2005, and the results of its operations and cash flows for the
years then ended in conformity with accounting principles generally accepted
in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 5 to the
financial statements the Company has suffered recurring losses from
operations, a court ordered management change, and has a working capital
deficiency that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note 5. The financialstatements do not include any adjustments
that might result from the outcome of this uncertainty.
Larry O'Donnell, CPA, P.C.
Aurora, Colorado
March 2, 2005
F-2
CHANCELLOR GROUP, INC.
CONSOLIDATED BALANCE SHEET
December 31, 2005
ASSETS
Total Assets $ 0
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 88,828
Stock subscription payable 4,677
--------
Total current
liabilities 93,505
--------
Total Liabilities 93,505
--------
Stockholders' equity
Common stock: $.001 par value,
250,000,000 shares authorized,
54,890,461 issued and
outstanding 54,890
Preferred Series B stock:
$1,000 par value;
250,000 shares authorized;
48,000 issued and converted;
none outstanding -
Paid in capital 3,107,886
Accumulated deficit (3,257,235)
-----------
Stockholders'
Equity (93,505)
-----------
Total Liabilities
and Stockholders'
Equity $ 0
===========
The accompanying notes are an integral part of
the consolidated financial statements.
F-3
CHANCELLOR GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Year
Ended Ended
Dec. 31, Dec. 31,
2005 2004
-------- --------
Sales $ $
Operating expenses 11,195 20,375
----------- -----------
Income (loss)
from operations (11,195) (20,375)
Other income
(expense)
Gain on debt reversal
----------- -----------
Income (loss) from
continuing operations (11,195) (20,375)
----------- -----------
Income (loss) before
provision for income
taxes (11,195) (20,375)
Provision for
income tax
----------- -----------
Net income (loss) $ (11,195) $ (20,375)
=========== ===========
Net income (loss) per share
(Basic and fully diluted) $ (*) $ (*)
=========== ===========
Weighted average number of
common shares outstanding 55,446,844 53,363,961
========== ==========
* Less than $.01 per share
The accompanying notes are an integral part of
the consolidated financial statements.
F-4
CHANCELLOR GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK Preferred
Par value $.001 Series B Paid in (Accumulated
Shares Amount Amount Capital Deficit )
Balances at
Dec. 31, 2003 51,837,461 $51,837 $ 0 $ 3,071,825 $(3,225,665)
Compensatory
stock
issuances 550,000 550 4,950
Stock issued
for stock
subscription
payable 2,503,000 2,503 22,527
Net gain (loss)
for the year (20,375)
---------- ------- ----------- ------------ -----------
Balances at
Dec. 31, 2004 54,890,461 $54,890 $ 0 $ 3,099,302 $(3,246,040)
Stock issued
For cash 196,500 197 1,768
Compensatory
stock
issuances 97,500 97 878
Stock issued
for stock
subscription
payable 659,800 660 5,938
Net gain (loss)
for the year (11,195)
---------- ------- ----------- ------------ -----------
Balances at
Dec. 31, 2005 55,844,261 $55,844 $ 0 $ 3,107,886 $(3,257,235)
========== ======= =========== ============ ===========
The accompanying notes are an integral part of
the financial consolidated statements.
F-5
CHANCELLOR GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Year
Ended Ended
Dec. 31, Dec. 31,
2005 2004
------- -------
Cash Flows From
Operating Activities:
Net income (loss) $ (11,195) $ (20,375)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used for) operating
activities:
Compensatory
stock issuances 7,573 30,530
Accounts payable 0 270
Stock sub. payable 1,657 (10,425)
----------- -----------
Net cash
provided by (used
for) operating
activities (1,965) -
----------- -----------
Cash Flows From
Investing Activities:
Net cash
provided by (used
for) investing
activities
----------- -----------
Cash Flows From
Financing Activities:
Stock issuances 1,965
--------- -----------
Net cash provided
by (used
for) financing
activities
--------- -----------
Net Increase
(Decrease) In Cash - -
Cash At The
Beginning
Of The Period - -
--------- -----------
Cash At The End
Of The Period $ - $ -
========= ===========
Schedule of Non-Cash Investing and Financing Activities:
--------------------------------------------------------
None
The accompanying notes are an integral part of
the consolidated financial statements.
F-6
CHANCELLOR GROUP, INC.
Notes to Consolidated Financial Statements
NOTE 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
Chancellor Group, Inc. (the "Company") was
incorporated in the state of Utah on May 2, 1986, then on December 31,
1993 dissolved as a Utah corporation and reincorporated as a Nevada
corporation. The Company's primary business purpose is to engage in the
exploration and production of oil and gas. In 1996 the Company's corporate
name was changed from Nighthawk Capital, Inc. to Chancellor Group, Inc.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
Chancellor Group, Inc., and its wholly owned subsidiaries Radly Petroleum, Inc.
("Radly"), Lichfield Petroleum America, Inc. ("Lichfield"), and Getty
Petroleum, Inc. ("Getty"). These entities are collectively hereinafter
referred to as "the Company". All intercompany accounts and transactions
have been eliminated.
Oil and gas properties
The Company follows the successful efforts method of accounting for its oil
and gas activities. Under this accounting method, costs associated with the
acquisition, drilling and equipping of successful exploratory and development
wells are capitalized. Geological and geophysical costs, delay rentals and
drilling costs of unsuccessful exploratory wells are charged to expense as
incurred. Depletion and depreciation of the capitalized costs for producing
oil and gas properties are provided by the unit-of-production method based
on proved oil and gas reserves. Undeveloped properties are periodically
assessed for possible impairment due to unrecoverability of costs invested.
Cash received for partial conveyances of property interests are treated as
a recovery of cost and no gain or loss is recognized.
Income tax
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating
loss carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion
of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
F-6
CHANCELLOR GROUP, INC.
Notes to Consolidated Financial Statements - Continued
NOTE 1. ORGANIZATION, OPERATIONS, AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued):
Cash and cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less as cash equivalents.
Accounting year
The Company employs a calendar accounting year. The Company recognizes income
and expenses based on the accrual method of accounting.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect 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.
Net income (loss) per share
The net income (loss) per share is computed by dividing the net income (loss)
by the weighted average number of shares of common outstanding. Warrants,
stock options, and common stock issuable upon the conversion of the Company's
preferred stock (if any), are not included in the computation if the effect
would be anti-dilutive and would increase the earnings or decrease loss per
share.
Property and equipment
Property and equipment are recorded at cost and depreciated under the
straight line method over each item's estimated useful life.
Accounts receivable
The Company reviews accounts receivable periodically for collectibility and
establishes an allowance for doubtful accounts and records bad debt expense
when deemed necessary.
Products and services, geographic areas and major customers
The Company plans to acquire and develop domestic oil and gas properties.
Revenue Recognition
The Company recognizes revenue when a product is sold to a customer, either
for cash or as evidenced by an obligation on the part of the customer to pay.
F-7
CHANCELLOR GROUP, INC.
Notes to Consolidated Financial Statements - Continued
NOTE 1. ORGANIZATION, OPERATIONS, AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued):
Financial Instruments
The carrying value of the Company's financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable, and long term debt,
as reported in the accompanying balance sheet, approximates fair value.
Employee Stock-Based Compensation
The Company uses the intrinsic value method of accounting for employee
stock-based compensation.
Recent Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments. The Company has
adopted the provisions of SFAS No. 149 which are effective in general for
contracts entered into or modified after June 30, 2003. The adoption did not
have a material effect on the results of operations of the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. The Company has adopted the
provisions of SFAS No. 150 which are effective in general for financial
instruments entered into or modified after May 31, 2003. The adoption did not
have a material effect on the results of operations of the Company.
NOTE 2. RELATED PARTY TRANSACTIONS
The Company in 2003 issued 3,000,000 shares of common stock valued
at $3,000, to a Director and major shareholders for services related
to litigation efforts in 2001 and 2002 which resulted in changes to
the Company's management and Board. In 2003 the Company agreed to
issued 250,000 common shares valued at $2,500 for business related
phone and travel expenses incurred by a major shareholder.
In August, 2004 the Chancellor Group, Inc. signed an agreement with a
company controlled by a major shareholder to pay the company an overriding
royalty success fee for oil and gas projects brought to
Chancellor Group, Inc. by the company.
In June, 2005 the Company issued 50,000 common shares to a related party
for services valued at $500.
In October, 2005 a related party advanced the Company $1,550 for accounting
expenses, which resulted in a 155,000 stock subscription payable.
F-8
CHANCELLOR GROUP, INC.
Notes to Consolidated Financial Statements - Continued
NOTE 3. INCOME TAXES
Deferred income taxes arise from the temporary differences between financial
statement and income tax recognition of net operating losses. These loss
carryovers are limited under the Internal Revenue Code should a significant
change in ownership occur. The Company accounts for income taxes pursuant to
SFAS 109.
At December 31, 2004 the Company had approximately $3,200,000 in unused
federal net operating loss carryforwards, which begin to expire principally
in the year 2011. A deferred tax asset of approximately $650,000 resulting
from the loss carryforward has been offset by a 100% valuation allowance.
The increase in the valuation allowance from 2003 to 2004 was approximately
$4,000.
At December 31, 2005 the Company had approximately $3,300,000 in
unused federal net operating loss carryforwards, which begin to expire
principally in the year 2011. A deferred tax asset of approximately $650,000
resulting from the loss carryforward has been offset by a 100% valuation
allowance. The increase in the valuation allowance from 2004 to 2005 was
approximately $2,000.
F-9
CHANCELLOR GROUP, INC.
Notes to Consolidated Financial Statements - Continued
NOTE 4. STOCKHOLDERS' EQUITY
Common stock
The Company has 250,000,000 authorized shares of common stock, par value $.001,
with 55,844,261 shares issued and outstanding as of December 31, 2005.
Preferred stock
Preferred Series B Stock - The Company has provided for the issuance of
250,000 shares, par value $1,000 per share, of convertible Preferred
Series B stock ("Series B"). Each Series B share is convertible at
into 166.667 shares of the Company's common stock upon election by the
shareholder, with dates and terms set by the Board. 48,000 Series B shares
have been issued and converted in prior years.
Stock options
Non-employee stock options
The Company accounts for non-employee stock options under SFAS 123 (as amended
by SFAS 148), whereby options costs are recorded based on the fair value of
the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable. During the years ended
December 31, 2004 and 2005, no options were issued, exercised or cancelled.
The Company currently has stock options outstanding to various individuals
in the following amounts:
2,000,000 options exercisable for one share of common stock at an exercise
price of $0.025 per share, currently exercisable, expiring December 12, 2006,
and 4,000,000 options exercisable for one share of common stock at an
exercise price of $0.02 per share, currently exercisable, expiring
December 12, 2006.
Employee stock options
The Company applies APB Opinion 25 and related Interpretations in accounting
for employee stock options. Accordingly, no compensation cost has been
recognized for employee stock options, nor was any compensation cost
charged against income under employee stock options in 2004 or 2005.
The Company issued no employee stock options and had none outstanding at the
end of 2004 or 2005.
F-10
CHANCELLOR GROUP, INC.
Notes to Consolidated Financial Statements - Continued
NOTE 5. GOING CONCERN UNCERTAINTY
These financial statements are presented assuming the Company
will continue as a going concern. The Company has no
established source of revenue, recurring losses from operations,
negative working capital, and stockholders' equity deficiency.
The Company's former Board of Directors has also been replaced by court
order for mismanagement. This raises substantial doubt about its ability to
continue as a going concern. Management's plan in regard to these matters
includes raising working capital to assure the Company's
viability, through private or public equity offerings and/or debt
financing; appointing a qualified and experienced Board; and acquiring and
developing profitable oil and gas properties.
F-11
CHANCELLOR GROUP, INC.
Supplemental Information (Unaudited)
Year Ended December 31, 2005
Capitalized Costs Relating to Oil and Gas
Producing Activities at December 31, 2005
------------------------------------------
Unproved oil and gas properties $ -
Proved oil and gas properties -
Support equipment and facilities -
-----------
-
Less accumulated depreciation,
depletion, amortization, and
impairment ( -)
-----------
Net capitalized costs $ -
===========
Costs Incurred in Oil and Gas Producing
Activities for the Year
Ended December 31, 2005
---------------------------------------
Property acquisition costs
Proved $ -
Unproved -
Exploration costs -
Development costs -
Results of Operations for Oil and Gas Producing
Activities for the Year Ended December 31, 2005
-------------------------------------------------
Oil and gas sales $ -
Gain on sale of oil and gas properties -
Gain on sale of oil and gas leases -
Production costs -
Exploration expenses -
Depreciation, depletion,
and amortization -
-----------
-
Income tax expense -
-----------
Results of operations for oil and gas
producing activities (excluding
corporate overhead and financing
costs) $ -
===========
Reserve Information
The following estimates of proved and proved developed reserve
quantities and related standardized measure of discounted net cash flow
are estimates only, and do not purport to reflect realizable values or
fair market values of the Company's reserves. The Company emphasizes that
reserve estimates are inherently imprecise and that estimates of new
discoveries are more imprecise than those of producing oil and gas
properties. Accordingly, these estimates are expected to change as future
information becomes available. All of the Company's reserves are located
in the United States.
Proved reserves are estimated reserves of crude oil (including
condensate and natural gas liquids) and natural gas that geological and
engineering data demonstrate with reasonable certainty to be recoverable
in future years from known reservoirs under existing economic and operating
conditions. Proved developed reserves are those expected to be recovered
through existing wells, equipment, and operating methods.
The standardized measure of discounted future net cash flows is
computed by applying year end prices of oil and gas (with consideration of
price changes only to the extent provided by contractual arrangements)
to the estimated future production of proved oil and gas reserves, less
estimated future expenditures (based on year end costs) to be incurred in
developing and producing the proved reserves, less estimated future income
tax expenses (based on year end statutory tax rates, with consideration of
future tax rates already legislated) to be incurred on pretax net cash flows
less tax basis of the properties and available credit, and assuming
continuation of existing economic conditions. The estimated future net cash
flows are then discounted using a rate of 10 percent a year to reflect
the estimated timing of the future cash flows.
CHANCELLOR GROUP, INC.
Supplemental Information (Unaudited) - Continued
Year Ended December 31, 2005
Reserve Information
-------------------
Oil Gas
(Bbls) (Bcf)
------ ------
Proved developed and undeveloped reserves
Beginning of year - -
Revisions of previous estimates - -
Improved recovery - -
Purchases of minerals in place - -
Extensions and discoveries - -
Production - -
Sales of minerals in place - -
------- -------
End of year - -
======= =======
Proved developed reserves
Beginning of year - -
End of year - -
Standardized Measure of Discounted Future
Net Cash Flows at December 31, 2004
Future cash inflows $
Future production costs
Future development costs
Future income tax expenses
-------------
Future net cash flows (10% annual discount for
estimated timing of cash flows)
-------------
Standardized measures of discounted future net cash
flows relating to proved oil and gas reserves $
=============
The following reconciles the change in the standardized measure of
discounted future net cash flow during the year
ended December 31, 2005.
Beginning of year $
Sales of oil and gas produced, net of production costs ( xx)
Net changes in prices and production costs ( xx)
Extensions, discoveries, and improved recovery,
less related costs xx
Development costs incurred during the year which
were previously estimated xx
Net change in estimated future development costs xx
Revisions of previous quantity estimates ( xx)
Net change from purchases and sales of minerals in place ( xx)
Accretion of discount xx
Net change in income taxes ( xx)
Other ( xx)
-------------
End of year $
=============
CERTIFICATIONS
I, Robert Gordon, certify that:
1. I have reviewed this annual report on Form 10-KSB of
Chancellor Group, Inc.;
2. Based on my knowledge, this 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 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 report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, 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 and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: March 14, 2006
/s/ Robert Gordon
Robert Gordon
Chief Executive Officer &
Chief Financial Officer
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the Annual Report of Chancellor Group, Inc., a Nevada
corporation (the "Company"), on Form 10-KSB for the year ending
December 31, 2005, as filed with the Securities and Exchange Commission
(the "Report"), Robert Gordon, Chief Executive Officer & Chief Financial
Officer of the Company does hereby certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that to his knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ Robert Gordon
Robert Gordon
Chief Executive Officer
March 14, 2006
[A signed original of this written statement required by Section 906 has been
provided Chancellor Group, Inc. and will be retained by
Chancellor Group, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.]