All notes are secured except

(1) Is personally guaranteed by R. E. Morse, H. I. Harriman, J. D. Clark, John P. Chase, and R. G. Stone.

(2) Is personally guaranteed by Jack Frost, R. B. Smith, and H. I. Harriman. (3) Is secured by 25,000 shares of Swiss Oil Co. (one of the participants). Those not recommended for payment by the agency are expected to look to the guarantors, or accept subordinated debentures to defer the indebtedness.

1 Secured by second mortgages on various oil and gas leases and first liens on two leases. Conditions require the creditor to take subordinated debentures.

All mortgages, except the three equipment notes, are secured by assignment of oil and gas leases and are being reduced by oil runs from the respective leases. The two insurance companies, which are carrying indebtedness totaling $8,531,866 against the properties, require 75 percent of proceeds from oil runs from those properties be applied against the indebtedness, thus leaving an amount insufficient to cover cost of maintaining the wells, or for drilling purposes.

Trade accounts payable, including trade creditors, unsecured

Part payment on acquisition of properties in which investors are interested jointly with Texmass_L.

The group interested in some of the properties pledged as collateral agree to accept $1,000,000 in cash, $3,000,000 in 3 percent subordinated debentures and $20,000 in preferred stock for their interests. Agency recommends that the $1,000,000 proposed to be paid out of proceeds of the loan be satisfied by that much in additional subordinated debentures.

National Cooperative Refinery Association

Per applicant.
Agency recommends..

$1, 000, 000 1, 000, 000

This is in payment for working interest in properties of Swiss Oil Co. owned jointly.

Working capital.-This $4,000,000 to be disbursed as needed. $500,000 will probably be needed at the outset for the purpose of cleaning out and reconditioning some oil wells that have sanded or paraffined up due to incapabilities of the former management and also to absence of funds to pay cost of rehabilitation. The remainder will be disbursed as needed, for the purpose of drilling new wells on offsets from producing wells on adjoining properties. If offsets are not drilled or

begun within the time required under the lease after the wells which are to be offset have been brought in, the holder of the lease to be drilled on will forfeit its lease.

A number of offsets must be drilled in the near future to conserve interest. As each new well is brought in, it will, of course, add materially to the value of the collateral pledged on the loan.

1 Recommendation of the agency manager and of the advisory committee is subject to the Board's determination on the question of paying debts totaling $10,925,000, and purchasing the undivided interest of National Cooperative Refinery Association in the properties of Swiss Oil Co.

Appraised by the following consulting engineers and geologists: S. H. Fagadau, Wichita Falls, Tex.; Roy G. Mead, Glendale, Calif.; Moreland T. Hartwell, Midland, Tex.

Estimated future income, based upon the oil reserves determined by the engineer-geologists and their estimated lifting and drilling costs on all properties to be pledged, is scheduled as follows:

Since the buildings, real estate owned in fee, and lease equipment are incidental to the operating of the leases, appraisal and loan values ascribe only to future income from oil and gas reserves.

Conditions require assignment of all proceeds from sale of oil and gas. Following is an outline showing the proposed use of $11,925,000 proceeds of the loan (exclusive of $4,000,000 for working capital) in respect to each of the four entities to be consolidated, and the value of the collateral supplied by each entity: [000 omitted]

Condensed balance sheet as of Jan. 31, 1949, and pro forma giving effect to a loan of $15,925,000 of which $4,000,000 is to be used as working capital and $11,925,000 (75 percent) for debt payment and acquisition of interest

1 Includes land, buildings, leasehold interest, and equipment. Debentures are to be subordinated for the life of the loan, in which light they may be regarded as con

tributed capital thus reflecting a net worth of $5,239.

Authorized capital 10,000 shares, no par. Issued 8,200 shares. Presently outstanding 200 shares. Of the 8,000 shares issued, but not outstanding, 6,120 were purchased from Dudley Clark, H. I. Harriman, and Dudley Millikin for $1,018,533.75. These, together with 1,880 shares contributed to the company, are held as treasury stock.

Mr. Hatcher now informs us that it is planned, after R. F. C. is paid in full, that the common stock of the applicant will be distributed, 30 percent to the investors, 10 percent to Henry I. Harriman and Forrester A. Clarke jointly, and the remaining 60 percent to E. H. Hatcher and Arthur W. Kinkade.

Contingent liabilities.-Page 30 of agency examiner's report set out probable liabilities growing out of sundry claims, lawsuits, penalites on defaulted obligations, commission of financing, etc., which the secretary-treasurer states can be settled for amounts aggregating $50,000 to $100,000.

Condensed earnings statement.-Earnings statements of all four entities are not submitted for various reasons. Not all of the properties of Swiss Oil Co. are being consolidated, while Midway Oils, Inc. (Mr. Hatcher's company), had only been in existence since July 1948 and an audit had not been completed. Earnings of Texmass Petroleum Co. are reported as follows:

Earnings of Petroleum Reserve Corp., for 6 months ended January 31, 1949:

Total sales.

Net profit

Depreciation and depletion.

$230, 809

56, 668R 139, 076

Earnings statements would not reflect results which may be accomplished in the future under more capable management and at reduced cost.

Repayment of the loan requested is to be derived from gross sales of oil and gas which, in the 15 months ended January 31, 1949, amounted to $4,238,514 from 460 wells, or an average of $3,390,000 per annum. The number of wells in production and the amount of oil and gas sold varies from month to month, due to new wells brought in and the diminishing yield of certain wells.

The properties are located in six States. After expenditure of approximately $500,000 in cleaning and reconditioning existing wells, the cost of operating the consolidated properties will be considerably less than under separate managements and duplication of many functions.

Estimated cost of operating the consolidated properties is $104,500 per month, or $1,254,000 per annum, as follows:

The cost of drilling new wells will run in the neighborhood of $35,000 each. There are about 100 locations on proven acreage on which wells can be drilled. About 10 or 12 of these locations are offsets to producing wells which must be drilled in the near future to avoid forfeiting leases now owned by the company. As working-capital funds are disbursed and new wells are completed the new production, in excess of the reduced output in failing wells, will provide added value to the collateral and increase the rate of repayments on the loan.

The projected income statement furnished by the applicant anticipates a gross income of $4,243,500 in the first year after receiving the loan, and gradually increasing to $6,354,586 by the end of the fifth year.

Comments on management.-Management will be in the hands of Mr. Arthur Kinkade, chairman of the board, and Mr. Earl H. Hatcher, president, both of

whom will serve without salary, and will devote their entire time to the affairs of the applicant.

The salary of Morris A. Porter, secretary (C. P. A.), will be limited to $7,200 per annum.

Mr. Kinkade is at present chairman of the board and president of the Fourth National Bank, Wichita, Kans. (capital and surplus $4,000,000), which position he will resign and will look to future earnings of the applicant, after RFC is paid in full, for compensation for his services, as a part of the capital stock of the applicant is allocated to him for the purpose.

Mr. E. H. Hatcher, general counsel for National Cooperative Refinery Association, and also president of Midway Oils, Inc., will serve as president.

Both of these gentlemen have had wide and varied experience in the operation of oil properties. They are well and favorably known in financial and oil circles, and highly regarded as to integrity and managerial ability.

COMMENTS OF WASHINGTON EXAMINER

Aside from being the victim of poor management, some of the properties have suffered for need of proper care due to absence of working capital.

In order to create the collateral and obtain a loan that will provide the necessary working capital, interested parties have elected to pool the assets and combine the liabilities of the four companies and place the over-all operations in the hands of Messrs. Kinkade and Hatcher, under the continuing entity-Texmass Petroleum Co.

Approximately 400 individuals living in and around Boston, Mass., own approximately one-half undivided interest in properties of Texmass. They are referred to as the Investors Group who, under A. W. Smith, as trustee, have paid for undivided interests in certain lands and supplied funds for drilling purposes aggregating $8,600,000. These interests are unencumbered. In consideration of the contribution of their interests to the pool, they agreed to accept $3,000,000 in 3 percent subordinated debentures, $1,000,000 in cash and $20,000 par value ($2,000,000 redeemable value), of stock in Texmass.

Agency declines to recommend payment of $1,000,000 cash, thus necessitating their acceptance of additional debentures.

Another group of about 25 persons, referred to as the Syndicate, with John P. Chase as trustee, contributed $1,025,000 to the company in an effort to conserve the properties of the Investors Group. They offer to accept $500,000 in cash, $475,000 in subordinated debentures and $50,000 in the company's stock.

Agency does not recommend use of $500,000 for this purpose, thereby necessitating their acceptance of additional debentures.

Texmass executed a note of $400,000 at the Second National Bank, Boston, secured only by the endorsements of R. E. Morse, H. I. Harriman, J. D. Clarke, John P. Chase, and R. G. Stone, some of whom are men of substantial means. Applicant requested payment of this indebtedness, but agency manager does not recommend it. Harriman and Clarke received considerable cash for their stock in Texmass when it was purchased by the company with funds derived from the loan of the insurance companies.

Republic Steel Co. holds a second mortgage of $1,545,373 plus interest. Applicant wishes $1,000,000 to be paid in cash and will issue subordinated debentures for the balance, but agency does not recommend the cash payment.

Massachusetts Mutual and John Hancock Mutual Life Insurance Cos. hold first mortgages totaling $6,533,692 secured by first mortgages on the properties of Texmass (exclusive of the interest of the Investors Group, which is clear) payable by applying 75 percent of the oil runs. These notes will have to be paid.

The indebtedness of the other three entities is not so complicated and, as shown in the foregoing, will be offset by properties contributed to the pool which have values in satisfactory proportion to the amount of indebtedness to be satisfied in order to clear them for collateral purposes.

National Cooperative Refinery Association owns one-half undivided interest, with Swiss Oil Co., in leases in Coleman, Harris, Comanche, Eastland, and Wichita Counties, Tex., consisting of 795 acres on which there are 197 producing wells appraised at $5,733,321, assigned a loan value of $2,250,000 by the agency.. This concern has no indebtedness to be satisfied, but in order for Swiss Oil Co. to pledge all of the properties together with machinery and equipment on the leased properties it is contemplated that $1,000,000 of the loan will be used to acquire this property. The agency recommends this be allowed.