Great American Partners Finds Flaw in Exchange Offer

Great American Partners’ auditor has qualified the oil and gas limited partnership’s 1986 financial statements because the San Diego-based company may have violated federal securities law during a 1986 exchange offer of units in the firm.

The Securities & Exchange Commission has not initiated legal action against GAP but the company plans to make a rescission offer to the unit holders.

GAP issued 3.8 million units of the company valued at $13.2 million in exchange for oil and gas properties, services and cash, according to a Form 10-K that GAP filed last week with the SEC. However, the company lacked an effective registration, according to documents filed with the SEC.

GAP used a “significant portion” of the $1.9 million in cash generated by the offering to help pay $2.5 million in distributions to unit holders during 1986, according to GAP’s 10-K form.

Audit Found Discrepancy

A successful rescission offer would lessen “contingent liabilities” generated by the offering, according to GAP Vice President Frederick Smith, who added that GAP’s accountant discovered the likely securities law violation during a year-end audit.

“This (rescission) is probably exactly what (the SEC) would have required us to do,” Smith said. “We’re in effect slapping our own wrists” by initiating the rescission.

GAP “didn’t know” that its previous registration had expired, Smith said.

It is too early to determine the impact of a rescission offer because the company has “not gotten any inkling that anybody would or would not do a rescission,” Smith said.

GAP intends to fund the proposed rescission by selling Class A units for cash. GAP will register with the SEC during the next few weeks, Smith said.

If that rescission offering fails, GAP would be forced to fund the rescission offer through “any available working capital, asset sales or borrowings,” which could generate “significant losses,” according to documents filed with the SEC.

Auditor Touche Ross & Co.’s report cautioned that, if the rescission offer attracts many participants and the upcoming offering does not raise enough money, “the partnership may be unable to continue in existence.”

During a June 7 board meeting, GAP President and Chief Executive Gary Takessian was replaced by Steve R. Vrable, a GAP director. Takessian remains a director of Great American Resources Partners, GAP’s general partnership.

“Essentially, what the company needed is (a president) who has a little bit more in the way of gas and oil experience,” Smith said.

In last week’s filing, GAP reported a $6.3-million net loss for the year ended Dec. 31, compared to a $9.8-million net loss during 1985. The company reported that revenue remained stable at about $2.5 million.

GAP also amended its financial results for the first three quarters of 1986, to reflect losses of $235,000, $471,000 and $535,000, respectively.

GAP’s original filing with the SEC had reported net income of $48,000 during the first quarter and $6,000 during the second quarter and a net loss of $372,000 in the third quarter.