10-K 1 d78-1.txt QUARTERLY REPORT FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001 Commission File Number 0-8881 DYCO OIL AND GAS PROGRAM 1978-1 (A LIMITED PARTNERSHIP) (Exact name of registrant as specified in its charter) Minnesota 41-1343930 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) Samson Plaza Two West Second Street Tulsa, Oklahoma 74103 (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: (918) 583-1791 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Units of limited partnership interest 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 the filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K405 or any amendment to this Form 10-K405. [X] The units of limited partnership are not publicly traded, therefore, registrant cannot compute the aggregate market value of the voting units held by non-affiliates of the registrant. DOCUMENTS INCORPORATED BY REFERENCE: NONE. -1- FORM 10-K405 DYCO 1978-1 OIL AND GAS PROGRAM (A Minnesota limited partnership) TABLE OF CONTENTS PART I.......................................................................3 ITEM 1. BUSINESS...................................................3 ITEM 2. PROPERTIES.................................................7 ITEM 3. LEGAL PROCEEDINGS.........................................11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF LIMITED PARTNERS.......12 PART II.....................................................................12 ITEM 5. MARKET FOR THE REGISTRANT'S LIMITED PARTNERSHIP UNITS AND RELATED LIMITED PARTNER MATTERS.......................12 ITEM 6. SELECTED FINANCIAL DATA...................................13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................15 ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...............21 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.......................36 PART III....................................................................36 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........36 ITEM 11. EXECUTIVE COMPENSATION....................................37 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................40 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............40 PART IV.....................................................................42 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...............................................42 SIGNATURES..................................................................44 -2- PART I ITEM 1. BUSINESS General The Dyco Oil and Gas Program 1978-1 Limited Partnership (the "Program") is a Minnesota limited partnership engaged in the production of oil and gas. The Program commenced operations on April 1, 1978 with the primary financial objective of investing its limited partners' subscriptions in the drilling of oil and gas prospects and then distributing to its limited partners all available cash flow from the Program's on-going production operations. Dyco Petroleum Corporation ("Dyco") serves as the General Partner of the Program. Samson Resources Company, an affiliate of Dyco, currently owns more than one-half of the Program's Units of limited partnership interest, making the Program a 50% subsidiary of Samson Resources Company. See "Item 2. Properties" for a description of the Program's reserves and properties. The limited partnership agreement for the Program (the "Program Agreement") provides that limited partners are allocated 99% of all Program costs and revenues and Dyco, as General Partner, is allocated 1% of all Program costs and revenues. Included in such costs is the Program's reimbursement to Dyco of the Program's proportionate share of Dyco's geological, engineering, and general and administrative expenses. Dyco currently serves as General Partner of 31 limited partnerships, including the Program. Dyco and Samson Resources Company are wholly-owned subsidiaries of Samson Investment Company. Samson Investment Company and its various corporate subsidiaries, including Dyco, (collectively, "Samson") are primarily engaged in the production and development of and exploration for oil and gas reserves and the acquisition and operation of producing properties. At December 31, 2001, Samson owned interests in approximately 14,000 oil and gas wells located in 19 states of the United States and the countries of Canada, Venezuela, and Russia. At December 31, 2001, Samson operated approximately 3,000 oil and gas wells located in 14 states of the United States, as well as Canada, Venezuela, and Russia. As a limited partnership, the Program has no officers, directors, or employees. It relies instead on the personnel of Dyco and Samson. As of February 15, 2002, Samson employed approximately 1,000 persons. No employees are covered by collective bargaining agreements, and management believes that Samson provides a sound employee relations environment. For information regarding the executive officers of Dyco, see "Item 10. Directors and Executive Officers of the Registrant." -3- Dyco's and the Program's principal place of business is located at Samson Plaza, Two West Second Street, Tulsa, Oklahoma 74103, and their telephone number is (918) 583-1791 or (800) 283-1791. Funding Although the Program Agreement permits the Program to incur borrowings, the Program's operations and expenses are currently funded out of the Program's revenues from oil and gas sales. Dyco may, but is not required to, advance funds to the Program for the same purposes for which Program borrowings are authorized. Principal Products Produced and Services Rendered The Program's sole business is the development and production of oil and gas with a concentration on gas. The Program does not hold any patents, trademarks, licenses, or concessions and is not a party to any government contracts. The Program has no backlog of orders and does not participate in research and development activities. The Program is not presently encountering shortages of oilfield tubular goods, compressors, production material, or other equipment. Oil, Gas, and Environmental Control Regulations Regulation of Production Operations -- The production of oil and gas is subject to extensive federal and state laws and regulations governing a wide variety of matters, including the drilling and spacing of wells, allowable rates of production, prevention of waste and pollution, and protection of the environment. In addition to the direct costs borne in complying with such regulations, operations and revenues may be impacted to the extent that certain regulations limit oil and gas production to below economic levels. Regulation of Sales and Transportation of Oil and Gas -- Sales of crude oil and condensate are made by the Program at market prices and are not subject to price controls. The sale of gas may be subject to both federal and state laws and regulations. The provisions of these laws and regulations are complex and affect all who produce, resell, transport, or purchase gas, including the Program. Although virtually all of the Program's gas production is not subject to price regulation, other regulations affect the availability of gas transportation services and the ability of gas consumers to continue to purchase or use gas at current levels. Accordingly, such regulations may have a material effect on the Program's operations and projections of future oil and gas production and revenues. -4- Future Legislation -- Legislation affecting the oil and gas industry is under constant review for amendment or expansion. Because such laws and regulations are frequently amended or reinterpreted, management is unable to predict what additional energy legislation may be proposed or enacted or the future cost and impact of complying with existing or future regulations. Regulation of the Environment -- The Program's operations are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Compliance with such laws and regulations, together with any penalties resulting from noncompliance, may increase the cost of the Program's operations or may affect the Program's ability to timely complete existing or future activities. Management anticipates that various local, state, and federal environmental control agencies will have an increasing impact on oil and gas operations. Significant Customers Purchases of gas by El Paso Energy Marketing Company ("El Paso") accounted for approximately 96.8% of the Program's oil and gas sales during the year ended December 31, 2001. In the event of interruption of purchases by this significant customer or the cessation or material change in availability of open-access transportation by the Program's pipeline transporters, the Program may encounter difficulty in marketing its gas and in maintaining historic sales levels. Alternative purchasers or transporters may not be readily available. The Program's principal customers for crude oil production are refiners and other companies which have pipeline facilities near the producing properties of the Program. In the event pipeline facilities are not conveniently available to production areas, crude oil is usually trucked by purchasers to storage facilities. Competition and Marketing The Program's revenues, net income or loss, cash flows, carrying value of oil and gas properties, and amount of oil and gas which can be economically produced depend substantially upon the prevailing prices for oil and gas. Oil and gas prices (and consequently the Program's profitability) depend on a number of factors which are beyond the control of the Partnerships. These factors include worldwide political instability and terrorist activities (especially in oil-producing regions), United Nations export embargoes, the supply and price of foreign imports of oil and gas, the level of consumer product demand (which can be heavily influenced by weather patterns), the level of domestic oil and gas production, government regulations and taxes, the price and availability of alternative fuels, the overall economic -5- environment, and the availability and capacity of transportation and processing facilities. The effect of these factors on future oil and gas industry trends cannot be accurately predicted or anticipated. In addition, the domestic oil and gas industry is highly competitive, with a large number of companies and individuals engaged in the exploration and development of oil and gas properties. Predicting future prices is not possible. Concerning past trends, oil and gas prices in the United States have been highly volatile for many years. Over the past ten years average yearly wellhead gas prices have generally been in the $1.50 to $2.50 per Mcf range. Due to unusual supply and demand circumstances gas prices in late 2000 and early 2001 rose to a level not seen since the early 1980s. Recent economic trends and the supply/demand ratio have caused natural gas prices to decline significantly. Substantially all of the Program's gas reserves are being sold on the "spot market." Prices on the spot market are subject to wide seasonal and regional pricing fluctuations due to the highly competitive nature of the spot market. In addition, such spot market sales are generally short-term in nature and are dependent upon the obtaining of transportation services provided by pipelines. Spot prices for the Program's gas production decreased from approximately $9.23 per Mcf at December 31, 2000 to approximately $2.65 per Mcf at December 31, 2001. Such prices were on an MMBTU basis and differ from the prices actually received by the Partnerships due to transportation and marketing costs, BTU adjustments, and regional price and quality differences. For the past ten years, average oil prices have generally been in the $16.00 to $24.00 per barrel range, but have been extremely volatile over the past three years. Due to global consumption and supply trends as well as a slowdown in Asian energy demand, oil prices in late 1997 and early 1998 reached historically low levels, dropping to as low as approximately $9.25 per barrel. The current oil price range between the mid teens and low twenties is somewhat dependent on production curtailment agreements among major oil producing nations. Prices for the Program's oil production decreased from approximately $23.75 per barrel at December 31, 2000 to approximately $16.75 per barrel at December 31, 2001. Future prices for both oil and gas will likely be different from the prices in effect on December 31, 2001. Due to the many factors and uncertainties discussed above, it is impossible to accurately predict whether future oil and gas prices will (i) stabilize, (ii) increase, or (iii) decrease. Insurance Coverage The Program is subject to all of the risks inherent in the exploration for and production of oil and gas, including -6- blowouts, pollution, fires, and other casualties. The Program maintains insurance coverage as is customary for entities of a similar size engaged in operations similar to that of the Program, but losses can occur from uninsurable risks or in amounts in excess of existing insurance coverage. In particular, many types of pollution and contamination can exist, undiscovered, for long periods of time and can result in substantial environmental liabilities which are not insured. The occurrence of an event which is not fully covered by insurance could have a material adverse effect on the Program's financial condition and results of operations. ITEM 2. PROPERTIES Well Statistics The following table sets forth the numbers of gross and net productive wells of the Program as of December 31, 2001. Well Statistics(1) As of December 31, 2001 Gross productive wells(2): Oil - Gas 12 -- Total 12 Net productive wells(3): Oil - Gas .37 --- Total .37 ---------- (1) The designation of a well as an oil well or gas well is made by Dyco based on the relative amount of oil and gas reserves for the well. Regardless of a well's oil or gas designation, it may produce oil, gas, or both oil and gas. (2) As used throughout this Annual Report on Form 10-K405 ("Annual Report"), "Gross Well" refers to a well in which a working interest is owned. The number of gross wells is the total number of wells in which a working interest is owned. (3) As used throughout this Annual Report, "Net Well" refers to the sum of the fractional working interests owned in gross wells. For example, a 15% working interest in a well represents one Gross Well, but 0.15 Net Well. -7- Drilling Activities The Program participated in no drilling activities during the year ended December 31, 2001. Oil and Gas Production, Revenue, and Price History The following table sets forth certain historical information concerning the oil (including condensates) and gas production, net of all royalties, overriding royalties, and other third party interests, of the Program, revenues attributable to such production, and certain price and cost information. Net Production Data Year Ended December 31, ------------------------------------- 2001 2000 1999 -------- -------- -------- Production: Oil (Bbls)(1) 102 83 263 Gas (Mcf)(2) 62,590 89,665 52,504 Oil and gas sales: Oil $ 2,447 $ 2,925 $ 4,012 Gas 221,660 233,879 106,205 ------- ------- ------- Total $224,107 $236,804 $110,217 ======= ======= ======= Total direct operating expenses(3) $ 38,413 $ 30,357 $ 28,897 ======= ======= ======= Direct operating expenses as a percentage of oil and gas sales 17.1% 12.8% 26.2% Average sales price: Per barrel of oil $23.99 $35.24 $15.25 Per Mcf of gas 3.54 2.61 2.02 Direct operating expenses per equivalent Mcf of gas(4) $ .61 $ .34 $ .53 ---------- (1) As used throughout this Annual Report, "Bbls" refers to barrels of 42 U.S. gallons and represents the basic unit for measuring the production of crude oil and condensate oil. -8- (2) As used throughout this Annual Report, "Mcf" refers to volume of 1,000 cubic feet under prescribed conditions of pressure and temperature and represents the basic unit for measuring the production of gas. (3) Includes lease operating expenses and production taxes. (4) Oil production is converted to gas equivalents at the rate of six Mcf per barrel, representing the estimated relative energy content of gas and oil, which rate is not necessarily indicative of the relationship of oil and gas prices. The respective prices of oil and gas are affected by market and other factors in addition to relative energy content. Proved Reserves and Net Present Value The following table sets forth the Program's estimated proved oil and gas reserves and net present value therefrom as of December 31, 2001. The schedule of quantities of proved oil and gas reserves was prepared by Dyco in accordance with the rules prescribed by the Securities and Exchange Commission (the "SEC"). Certain reserve information was reviewed by Ryder Scott Company, L.P. ("Ryder Scott"), an independent petroleum engineering firm. As used throughout this Annual Report, "proved reserves" refers to those estimated quantities of crude oil, gas, and gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known oil and gas reservoirs under existing economic and operating conditions. Net present value represents estimated future gross cash flow from the production and sale of proved reserves, net of estimated oil and gas production costs (including production taxes, ad valorem taxes, and operating expenses) and estimated future development costs, discounted at 10% per annum. Net present value attributable to the Program's proved reserves was calculated on the basis of current costs and prices at December 31, 2001. Such prices were not escalated except in certain circumstances where escalations were fixed and readily determinable in accordance with applicable contract provisions. Oil and gas prices at December 31, 2001 were substantially lower than the very high prices in effect on December 31, 2000. This decrease in oil and gas prices has caused the estimates of remaining economically recoverable reserves, as well as the values placed on said reserves, at December 31, 2001 to be significantly lower than what such estimates and values would have been if oil and gas prices remained unchanged from December 31, 2000 to December 31, 2001. The prices used in calculating the net present value attributable to the Program's proved reserves do not necessarily reflect market prices for oil and gas production subsequent to December 31, 2001. There can be no assurance that the prices used in calculating the net present value of the Program's proved reserves at December 31, 2001 will actually be realized for such production. -9- The process of estimating oil and gas reserves is complex, requiring significant subjective decisions in the evaluation of available geological, engineering, and economic data for each reservoir. The data for a given reservoir may change substantially over time as a result of, among other things, additional development activity, production history, and viability of production under varying economic conditions; consequently, it is reasonably possible that material revisions to existing reserve estimates may occur in the near future. Although every reasonable effort has been made to ensure that these reserve estimates represent the most accurate assessment possible, the significance of the subjective decisions required and variances in available data for various reservoirs make these estimates generally less precise than other estimates presented in connection with financial statement disclosures. Proved Reserves and Net Present Value From Proved Reserves As of December 31, 2001 (1) Estimated proved reserves: Gas (Mcf) 363,882 Oil and liquids (Bbls) 849 Net present value (discounted at 10% per annum) $ 363,565 ----------------- (1) Includes certain gas balancing adjustments which cause the gas volumes and net present value to differ from the reserve reports prepared by Dyco and reviewed by Ryder Scott. No estimates of the proved reserves of the Program comparable to those included herein have been included in reports to any federal agency other than the SEC. Additional information relating to the Program's proved reserves is contained in Note 5 to the Program's financial statements, included in Item 8 of this Annual Report. Significant Properties As of December 31, 2001, the Program's properties consist of 12 gross (.37 net) productive wells. The Program also owns a non-working interest in an additional 12 wells. Affiliates of the Program operate 8 (33%) of its total wells. All of the -10- Program's properties are located in the Anadarko Basin of western Oklahoma and the Texas panhandle. Title to Oil and Gas Properties Management believes that the Program has satisfactory title to its oil and gas properties. Record title to substantially all of the Program's properties is held by Dyco as nominee. Title to the Program's properties is subject to customary royalty, overriding royalty, carried, working, and other similar interests and contractual arrangements customary in the oil and gas industry, to liens for current taxes not yet due, and to other encumbrances. Management believes that such burdens do not materially detract from the value of such properties or from the Program's interest therein or materially interfere with their use in the operation of the Program's business. ITEM 3. LEGAL PROCEEDINGS On February 13, 1998, Walter K. Spurlin L.L.C. filed a lawsuit against Dyco alleging that Dyco amended or terminated certain gas purchase contracts and fraudulently concealed the settlement of these contracts. (Walter K. Spurlin L.L.C., et al. vs. Dyco Petroleum Corporation, CJ-98-3, District Court of Roger Mills County, Oklahoma.) The Plaintiff filed the petition as a class action on behalf of all individuals who leased Oklahoma mineral leases to Dyco which were subject to certain gas purchase contracts. The Plaintiff, a lessor of the Spurlin No. 1-23 well, alleged that Dyco's actions resulted in a breach of the express and implied obligations of the leases and reckless indifference and/or actual fraud on behalf of Dyco. The Plaintiff has not specified the amount of alleged damages. Dyco filed its answer in the matter on April 1, 1998 in which it denied all of the Plaintiff's allegations and asserted a number of affirmative defenses, including failure to state a claim and running of the statute of limitations. Dyco's affirmative defenses also alleged that the Plaintiff's claims were contrary to the Oklahoma Supreme Court's decision in Roye Realty and Developing, Inc. v. Watson, 949 P.2d 1208 (Okla. 1996) and that Dyco acted as a prudent operator and in accordance with the lease terms. A class certification order was entered by the district court on February 25, 2000. Dyco filed an interlocutory appeal of this order which is currently pending before the Oklahoma Supreme Court. The Program had an approximate 8.7% working interest in the Spurlin No. 1-23 well during the periods applicable to this lawsuit. Except for the foregoing, to the knowledge of the management of Dyco and the Program, neither Dyco, the Program, nor the Program's properties are subject to any litigation, the results -11- of which would have a material effect on the Program's or Dyco's financial condition or operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF LIMITED PARTNERS There were no matters submitted to a vote of the Program's limited partners during 2001. PART II ITEM 5. MARKET FOR THE REGISTRANT'S LIMITED PARTNERSHIP UNITS AND RELATED LIMITED PARTNER MATTERS The Program does not have an established trading market for its units of limited partnership interest ("Units"). Pursuant to the terms of the Program Agreement, Dyco, as General Partner, is obligated to annually issue a repurchase offer which is based on the estimated future net revenues from the Program's reserves and is calculated pursuant to the terms of the Program Agreement. Such repurchase offer is recalculated monthly in order to reflect cash distributions made to the limited partners and extraordinary events. The following table sets forth, for the periods indicated, Dyco's repurchase offer per Unit and the amount of the Program's cash distributions per Unit for the same period. For purposes of this Annual Report, a Unit represents an initial subscription of $5,000 to the Program. Repurchase Cash Price Distributions ---------- ---------------- 2000: First Quarter $140 $ - Second Quarter 140 - Third Quarter 180 20 Fourth Quarter 160 40 2001: First Quarter $120 $ - Second Quarter 120 40 Third Quarter 149 30 Fourth Quarter 119 - 2002: First Quarter $119 $ - As of March 1, 2002, the Program has 2,400 Units outstanding and approximately 700 Limited Partners of record. -12- ITEM 6. SELECTED FINANCIAL DATA The following table presents selected financial data for the Program. This data should be read in conjunction with the financial statements of the Program, and the respective notes thereto, included elsewhere in this Annual Report. See "Item 8. Financial Statements and Supplementary Data." -13-

-14- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Use of Forward-Looking Statements and Estimates This Annual Report contains certain forward-looking statements. The words "anticipate," "believe," "expect," "plan," "intend," "estimate," "project," "could," "may," and similar expressions are intended to identify forward-looking statements. Such statements reflect management's current views with respect to future events and financial performance. This Annual Report also includes certain information which is, or is based upon, estimates and assumptions. Such estimates and assumptions are management's efforts to accurately reflect the condition and operation of the Program. Use of forward-looking statements and estimates and assumptions involve risks and uncertainties which include, but are not limited to, the volatility of oil and gas prices, the uncertainty of reserve information, the operating risk associated with oil and gas properties (including the risk of personal injury, death, property damage, damage to the well or producing reservoir, environmental contamination, and other operating risks), the prospect of changing tax and regulatory laws, the availability and capacity of processing and transportation facilities, the general economic climate, the supply and price of foreign imports of oil and gas, the level of consumer product demand, and the price and availability of alternative fuels. Should one or more of these risks or uncertainties occur or should estimates or underlying assumptions prove incorrect, actual conditions or results may vary materially and adversely from those stated, anticipated, believed, estimated, or otherwise indicated. General Discussion The following general discussion should be read in conjunction with the analysis of results of operations provided below. The Program's revenues, net income or loss, cash flows, carrying value of oil and gas properties, and amount of oil and gas which can be economically produced depend substantially upon the prevailing prices for oil and gas. Oil and gas prices (and consequently the Program's profitability) depend on a number of factors which are beyond the control of the Partnerships. These factors include worldwide political instability and terrorist activities (especially in oil-producing regions), United Nations export embargoes, the supply and price of foreign imports of oil and gas, the level of consumer product demand (which can be heavily influenced by weather patterns), the level of domestic oil and gas production, government regulations and taxes, the price and availability of alternative fuels, the overall economic environment, and the availability and capacity of transportation and processing facilities. The effect of these factors on future -15- oil and gas industry trends cannot be accurately predicted or anticipated. In addition, the domestic oil and gas industry is highly competitive, with a large number of companies and individuals engaged in the exploration and development of oil and gas properties. Predicting future prices is not possible. Concerning past trends, oil and gas prices in the United States have been highly volatile for many years. Over the past ten years average yearly wellhead gas prices have generally been in the $1.50 to $2.50 per Mcf range. Due to unusual supply and demand circumstances gas prices in late 2000 and early 2001 rose to a level not seen since the early 1980s. Recent economic trends and the supply/demand ratio have caused natural gas prices to decline significantly. Substantially all of the Program's gas reserves are being sold on the "spot market." Prices on the spot market are subject to wide seasonal and regional pricing fluctuations due to the highly competitive nature of the spot market. In addition, such spot market sales are generally short-term in nature and are dependent upon the obtaining of transportation services provided by pipelines. Spot prices for the Program's gas production decreased from approximately $9.23 per Mcf at December 31, 2000 to approximately $2.65 per Mcf at December 31, 2001. Such prices were on an MMBTU basis and differ from the prices actually received by the Partnerships due to transportation and marketing costs, BTU adjustments, and regional price and quality differences. For the past ten years, average oil prices have generally been in the $16.00 to $24.00 per barrel range, but have been extremely volatile over the past three years. Due to global consumption and supply trends as well as a slowdown in Asian energy demand, oil prices in late 1997 and early 1998 reached historically low levels, dropping to as low as approximately $9.25 per barrel. The current oil price range between the mid teens and low twenties is somewhat dependent on production curtailment agreements among major oil producing nations. Prices for the Program's oil production decreased from approximately $23.75 per barrel at December 31, 2000 to approximately $16.75 per barrel at December 31, 2001. Future prices for both oil and gas will likely be different from the prices in effect on December 31, 2001. Due to the many factors and uncertainties discussed above, it is impossible to accurately predict whether future oil and gas prices will (i) stabilize, (ii) increase, or (iii) decrease. -16- Results of Operations Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 ------------------------------------- Total oil and gas sales decreased $12,697 (5.4%) in 2001 as compared to 2000. Of this decrease, approximately $71,000 was related to a decrease in volumes of gas sold, which decrease was partially offset by an increase of approximately $58,000 related to an increase in the average price of gas sold. Volumes of oil sold increased 19 barrels, while volumes of gas sold decreased 27,075 Mcf in 2001 as compared to 2000. The decrease in volumes of gas sold was primarily due to positive prior period volume adjustments made by the operators on two wells during 2000. This decrease was partially offset by a positive prior period volume adjustment made by the purchaser on another well during 2001. Average oil prices decreased to $23.99 per barrel in 2001 from $35.24 per barrel in 2000. Average gas prices increased to $3.54 per Mcf in 2001 from $2.61 per Mcf in 2000. Oil and gas production expenses (including lease operating expenses and production taxes) increased $8,056 (26.5%) in 2001 as compared to 2000. This increase was primarily due to a negative prior period lease operating expense adjustment made by the operator on one well during 2000. As a percentage of oil and gas sales, these expenses increased to 17.1% in 2001 from 12.8% in 2000. This percentage increase was primarily due to the dollar increase in oil and gas production expenses. Depreciation, depletion, and amortization of oil and gas properties increased $13,378 (173.6%) in 2001 as compared to 2000. This increase was primarily due to decreases in the oil and gas prices used in the valuation of reserves at December 31, 2001 as compared to December 31, 2000. As a percentage of oil and gas sales, this expense increased to 9.4% in 2001 from 3.3% in 2000. This percentage increase was primarily due to the dollar increase in depreciation, depletion, and amortization. General and administrative expenses increased $650 (1.6%) in 2001 as compared to 2000. As a percentage of oil and gas sales, these expenses increased to 18.7% in 2001 from 17.4% in 2000. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 ------------------------------------- Total oil and gas sales increased $126,587 (114.9%) in 2000 as compared to 1999. Of this increase, approximately $75,000 was related to an increase in volumes of gas sold and approximately $53,000 was related to an increase in the average price of gas sold. Volumes of oil sold decreased 180 barrels, while volumes -17- of gas sold increased 37,161 Mcf in 2000 as compared to 1999. The increase in volumes of gas sold was primarily due to positive prior period volume adjustments made by the operators on two wells during 2000. Average oil and gas prices increased to $35.24 per barrel and $2.61 per Mcf, respectively, in 2000 from $15.25 per barrel and $2.02 per Mcf, respectively, in 1999. Oil and gas production expenses (including lease operating expenses and production taxes) increased $1,460 (5.1%) in 2000 as compared to 1999. This increase was primarily due to an increase in production taxes associated with the increase in oil and gas sales, which increase was partially offset by a negative prior period lease operating expense adjustment made by the operator on one well during 2000. As a percentage of oil and gas sales, these expenses decreased to 12.8 % in 2000 from 26.2% in 1999. This percentage decrease was primarily due to the increases in the average prices of oil and gas sold. Depreciation, depletion, and amortization of oil and gas properties decreased $6,367 (45.2%) in 2000 as compared to 1999. This decrease was primarily due to increases in the oil and gas prices used in the valuation of reserves at December 31, 2000 as compared to December 31, 1999, which decrease was partially offset by the increase in volumes of gas sold. As a percentage of oil and gas sales, this expense decreased to 3.3% in 2000 from 12.8% in 1999. This percentage decrease was primarily due to the increases in the average prices of oil and gas sold and the dollar decrease in depreciation, depletion, and amortization. General and administrative expenses increased $9,883 (31.6%) in 2000 as compared to 1999. This increase was primarily due to a change in allocation among the Program and other affiliated programs of audit fees and indirect general and administrative expenses reimbursed to the General Partner. As a percentage of oil and gas sales, these expenses decreased to 17.4 % in 2000 from 28.4% in 1999. This percentage decrease was primarily due to the increase in oil and gas sales. Liquidity and Capital Resources Net proceeds from operations less necessary operating capital are distributed to the limited partners on a quarterly basis. See "Item 5. Market for the Registrant's Limited Partnership Units and Related Limited Partner Matters." The net proceeds from production are not reinvested in productive assets, except to the extent that producing wells are improved, where methods are employed to permit more efficient recovery of reserves, or where identified developmental drilling or recompletion opportunities are pursued, thereby resulting in a positive economic impact. Assuming 2001 production levels for future years, the Program's proved reserve quantities at December 31, 2001 would have a remaining life of approximately 5.8 years -18- for gas reserves and 8.3 years for oil reserves. These life of reserves estimates are based on the current estimates of remaining oil and gas reserves. See "Item 2. Properties" for a discussion of these reserve estimates. The Program's available capital from the limited partners' subscriptions has been spent on oil and gas drilling activities and there should be no further material capital resource commitments in the future. Occasional expenditures by the Program for well completions or workovers, however, may reduce or eliminate cash available for a particular quarterly cash distribution. During 1999, the Program invested $24,413 for the purchase of additional gas reserves (20,414 Mcf) in the Pankey Unit No. 1 well, the Walter No. 1-24 well, and the Music No. 3-24 well in which the Program owns working interests of 6.77%, 7.41%, and 1.70%, respectively. These reserves were purchased in order to assist the Program in reducing its gas imbalance liabilities on these wells. The Program has no debt commitments. Cash for operational purposes has generally been provided by current oil and gas production. Management believes that cash for ordinary operational purposes in the future will be provided by current oil and gas production. There can be no assurance as to the amount of the Program's future cash distributions. The Program's ability to make cash distributions depends primarily upon the level of available cash flow generated by the Program's operating activities, which will be affected (either positively or negatively) by many factors beyond the control of the Program, including the price of and demand for oil and gas and other market and economic conditions. Even if prices and costs remain stable, the amount of cash available for distributions will decline over time (as the volume of production from producing properties declines) since the Program is not replacing production through acquisitions of producing properties and drilling. New Accounting Pronouncements Below is a brief description of a Financial Accounting Standard ("FAS") recently issued by the Financial Accounting Standards Board ("FASB") which may have an impact on the Program's future results of operations and financial position. In July 2001, the FASB issued FAS No. 143, "Accounting for Asset Retirement Obligations", which is effective for fiscal years beginning after June 15, 2002 (January 1, 2003 for the Program). FAS No. 143 will require the recording of the fair value of liabilities associated with the retirement of long-lived assets (mainly plugging and abandonment costs for the Program's depleted wells), in the period in which the liabilities are incurred (at the time the wells are drilled). Management has not -19- yet determined the effect of adopting this statement on the Program's financial condition or results of operations. Inflation and Changing Prices Prices obtained for oil and gas production depend upon numerous factors, including the extent of domestic and foreign production, foreign imports of oil, market demand, domestic and foreign economic conditions in general, and governmental regulations and tax laws. The general level of inflation in the economy did not have a material effect on the operations of the Program in 2001. Oil and gas prices have fluctuated during recent years and generally have not followed the same pattern as inflation. See "Item 2. Properties - Oil and Gas Production, Revenue, and Price History." ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Program does not hold any market risk sensitive instruments. -20- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT ACCOUNTANTS TO THE PARTNERS DYCO OIL AND GAS PROGRAM 1978-1 LIMITED PARTNERSHIP In our opinion, the accompanying balance sheets and the related statements of operations, changes in partners' capital and cash flows present fairly, in all material respects, the financial position of the Dyco Oil and Gas Program 1978-1 Limited Partnership, a Minnesota limited partnership, at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Program's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Tulsa, Oklahoma March 11, 2002 -21- DYCO OIL AND GAS PROGRAM 1978-1 LIMITED PARTNERSHIP Balance Sheets December 31, 2001 and 2000 ASSETS ------ 2001 2000 -------- -------- CURRENT ASSETS: Cash and cash equivalents $ 22,219 $ 15,709 Accrued oil and gas sales 12,839 37,936 ------- ------- Total current assets $ 35,058 $ 53,645 NET OIL AND GAS PROPERTIES, utilizing the full cost method 83,125 104,489 DEFERRED CHARGE 3,034 2,739 ------- ------- $121,217 $160,873 ======= ======= LIABILITIES AND PARTNERS' CAPITAL --------------------------------- CURRENT LIABILITIES: Accounts payable $ 1,120 $ 1,928 ------- ------- Total current liabilities $ 1,120 $ 1,928 ACCRUED LIABILITY $ 30,036 $ 23,586 CONTINGENCY (Note 4) PARTNERS' CAPITAL: General Partner, 24 general partner units $ 901 $ 1,354 Limited Partners, issued and outstanding, 2,400 Units 89,160 134,005 ------- ------- Total Partners' capital $ 90,061 $135,359 ------- ------- $121,217 $160,873 ======= ======= The accompanying notes are an integral part of these financial statements. -22- DYCO OIL AND GAS PROGRAM 1978-1 LIMITED PARTNERSHIP Statements of Operations For the Years Ended December 31, 2001, 2000, and 1999 2001 2000 1999 -------- -------- -------- REVENUES: Oil and gas sales $224,107 $236,804 $110,217 Interest 1,573 1,472 948 ------- ------- ------- $225,680 $238,276 $111,165 COSTS AND EXPENSES: Lease operating $ 22,470 $ 13,899 $ 21,137 Production taxes 15,943 16,458 7,760 Depreciation, depletion, and amortization of oil and gas properties 21,084 7,706 14,073 General and administrative 41,801 41,151 31,268 ------- ------- ------- $101,298 $ 79,214 $ 74,238 ------- ------- ------- NET INCOME $124,382 $159,062 $ 36,927 ======= ======= ======= GENERAL PARTNER (1%) - NET INCOME $ 1,244 $ 1,591 $ 369 ======= ======= ======= LIMITED PARTNERS (99%) - NET INCOME $123,138 $157,471 $ 36,558 ======= ======= ======= NET INCOME per Unit $ 51.31 $ 65.62 $ 15.23 ======= ======= ======= UNITS OUTSTANDING 2,424 2,424 2,424 ======= ======= ======= The accompanying notes are an integral part of these financial statements. -23- DYCO OIL AND GAS PROGRAM 1978-1 LIMITED PARTNERSHIP Statements of Changes in Partners' Capital For the Years Ended December 31, 2001, 2000, and 1999 General Limited Partner Partners Total -------- ---------- ---------- Balances at Dec. 31, 1998 $1,333 $131,957 $133,290 Cash distributions ( 485) ( 47,995) ( 48,480) Net income 369 36,558 36,927 ----- ------- ------- Balances at Dec. 31, 1999 $1,217 $120,520 $121,737 Cash distributions ( 1,454) ( 143,986) ( 145,440) Net income 1,591 157,471 159,062 ----- ------- ------- Balances at Dec. 31, 2000 $1,354 $134,005 $135,359 Cash distributions ( 1,697) ( 167,983) ( 169,680) Net income 1,244 123,138 124,382 ----- ------- ------- Balances at Dec. 31, 2001 $ 901 $ 89,160 $ 90,061 ===== ======= ======= The accompanying notes are an integral part of these financial statements. -24- DYCO OIL AND GAS PROGRAM 1978-1 LIMITED PARTNERSHIP Statements of Cash Flows For the Years Ended December 31, 2001, 2000, and 1999 2001 2000 1999 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $124,382 $159,062 $36,927 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion, and amortization of oil and gas properties 21,084 7,706 14,073 (Increase) decrease in accrued oil and gas sales 25,097 ( 17,626) ( 1,373) (Increase) decrease in deferred charge ( 295) 8,962 5,318 Increase (decrease)in accounts payable ( 808) 410 319 Increase (decrease)in payable to General Partner - ( 5,000) 5,000 Increase (decrease) in accrued liability 6,450 ( 3,998) ( 3,778) ------- ------- ------ Net cash provided by operating activities $175,910 $149,516 56,486 ------- ------- ------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from the sale of oil and gas properties $ 280 $ 11,703 $ 1,363 Additions to oil and gas properties - ( 2,529) ( 31,113) ------- ------- ------ Net cash provided (used) by investing activities $ 280 $ 9,174 ($29,750) ------- ------- ------ CASH FLOWS FROM FINANCING ACTIVITIES: Cash distributions ($169,680) ($145,440) ($48,480) ------- ------- ------ Net cash used by financing activities ($169,680) ($145,440) ($48,480) ------- ------- ------ -25- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 6,510 $ 13,250 ($21,744) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 15,709 2,459 24,203 ------- ------- ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 22,219 $ 15,709 $ 2,459 ======= ======= ====== The accompanying notes are an integral part of these financial statements. -26- DYCO OIL AND GAS PROGRAM 1978-1 LIMITED PARTNERSHIP Notes to Financial Statements For the Years Ended December 31, 2001, 2000, and 1999 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations The Dyco Oil and Gas Program 1978-1 Limited Partnership (the "Program"), a Minnesota limited partnership, commenced operations on April 1, 1978. Dyco Petroleum Corporation ("Dyco") is the General Partner of the Program. Affiliates of Dyco owned 1,261 (52.5%) of the Program's Units at December 31, 2001. The Program's sole business is the development and production of oil and gas with a concentration on gas. Substantially all of the Program's gas reserves are being sold regionally in the "spot market." Due to the highly competitive nature of the spot market, prices on the spot market are subject to wide seasonal and regional pricing fluctuations. In addition, such spot market sales are generally short-term in nature and are dependent upon obtaining transportation services provided by pipelines. The prices received for the Program's oil and gas are subject to influences such as global consumption and supply trends. Cash and Cash Equivalents The Program considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents are not insured, which cause the Program to be subject to risk. Credit Risk Accrued oil and gas sales which are due from a variety of oil and gas purchasers subject the Program to a concentration of credit risk. Some of these purchasers are discussed in Note 3 - Major Customers. Oil and Gas Properties Oil and gas operations are accounted for using the full cost method of accounting. All productive and non-productive costs associated with the acquisition, exploration, and development of oil and gas reserves are capitalized. Capitalized costs are depleted on a gross revenue method using estimates of proved reserves. The full cost amortization rates per equivalent Mcf of gas produced -27- during the years ended December 31, 2001, 2000, and 1999, were $0.33, $0.09, and $0.26, respectively. The Program's calculation of depreciation, depletion, and amortization includes estimated future expenditures to be incurred in developing proved reserves and estimated dismantlement and abandonment costs, net of estimated salvage values. In the event the unamortized cost of oil and gas properties being amortized exceeds the full cost ceiling (as defined by the Securities and Exchange Commission ("SEC")) the excess is charged to expense in the year during which such excess occurs. Sales and abandonments of properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved oil and gas reserves. Deferred Charge The Deferred Charge at December 31, 2001 and 2000 represents costs deferred for lease operating expenses incurred in connection with the Program's underproduced gas imbalance positions. The rate used in calculating the deferred charge is the average production costs per Mcf during the period the underproduction occurred. At December 31, 2001, cumulative total gas sales volumes for underproduced wells were less than the Program's pro-rata share of total gas production on these wells by 9,444 Mcf, resulting in prepaid lease operating expenses of $3,034. At December 31, 2000, cumulative total gas sales volumes for underproduced wells were less than the Program's pro-rata share of total gas production on these wells by 8,526 Mcf, resulting in prepaid lease operating expenses of $2,739. Accrued Liability The Accrued Liability at December 31, 2001 and 2000 represents charges accrued for lease operating expenses incurred in connection with the Program's overproduced gas imbalance positions. The rate used in calculating the accrued liability is the average production costs per Mcf during the period the overproduction occurred. At December 31, 2001, cumulative total gas sales volumes for overproduced wells exceeded the Program's pro-rata share of total gas production on these wells by 93,482 Mcf, resulting in accrued lease operating expenses of $30,036. At December 31, 2000, cumulative total gas sales volumes for overproduced wells exceeded the Program's pro-rata share of total gas production on these wells by 73,408 Mcf, resulting in accrued lease operating expenses of $23,586. -28- Oil and Gas Sales and Gas Imbalance Payable The Program's oil and condensate production is sold, title passed, and revenue recognized at or near the Program's wells under short-term purchase contracts at prevailing prices in accordance with arrangements which are customary in the oil industry. Sales of gas applicable to the Program's interest in producing oil and gas leases are recorded as revenue when the gas is metered and title transferred pursuant to the gas sales contracts covering the Program's interest in gas reserves. During such times as the Program's sales of gas exceed its pro rata ownership in a well, such sales are recorded as revenue unless total sales from the well have exceeded the Program's share of estimated total gas reserves underlying the property at which time such excess is recorded as a liability. The rates per Mcf used to calculate this liability are based on the average gas prices received for the volumes at the time the overproduction occurred. No such liability was recorded at December 31, 2001 or December 31, 2000. Use of Estimates in Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Further, the deferred charge, the accrued liability, the gas imbalance payable, and the litigation contingency (see Note 4) all involve estimates which could materially differ from the actual amounts ultimately realized in the near term. Oil and gas reserves (see Note 5) also involve significant estimates which could materially differ from the actual amounts ultimately realized. New Accounting Pronouncements Below is a brief description of a Financial Accounting Standard ("FAS") recently issued by the Financial Accounting Standards Board ("FASB") which may have an impact on the Program's future results of operations and financial position. In July 2001, the FASB issued FAS No. 143, "Accounting for Asset Retirement Obligations", which is effective for fiscal years beginning after June 15, 2002 (January 1, 2003 for the Program). FAS No. 143 will require the recording of -29- the fair value of liabilities associated with the retirement of long-lived assets (mainly plugging and abandonment costs for the Program's depleted wells), in the period in which the liabilities are incurred (at the time the wells are drilled). Management has not yet determined the effect of adopting this statement on the Program's financial condition or results of operations. Income Taxes Income or loss for income tax purposes is includable in the income tax returns of the partners. Accordingly, no recognition has been given to income taxes in the accompanying financial statements. During 1999, upon Samson Resources Company's ownership of Units first exceeding 50% and as required by IRS Regulations, the Program's tax year was changed from January 1/December 31 in order to coincide with Samson's tax year of July 1/June 30. 2. TRANSACTIONS WITH RELATED PARTIES The Program obtained an operating advance from the General Partner during the fourth quarter of 1999 due to the purchase of reserves on one well. Such amount was repaid in January 2000. Under the terms of the Program Agreement, Dyco is entitled to receive a reimbursement for all direct expenses and general and administrative, geological, and engineering expenses it incurs on behalf of the Program. During the years ended December 31, 2001, 2000, and 1999, such expenses totaled $41,801, $41,151, and $31,268, respectively, of which $28,752, $28,752, and $24,876, respectively, were paid each year to Dyco and its affiliates. Affiliates of the Program operate certain of the Program's properties. Their policy is to bill the Program for all customary charges and cost reimbursements associated with these activities, together with any compressor rentals, consulting, or other services provided. Such charges are comparable to third party charges in the area where the wells are located and are the same as charged to other working interest owners in the wells. 3. MAJOR CUSTOMERS The following purchaser individually accounted for 10% or more of the combined oil and gas sales of the Program for the years ended December 31, 2001, 2000, and 1999: -30- Purchaser 2001 2000 1999 --------- ----- ----- ----- El Paso Energy Marketing Company 96.8% 94.9% 92.1% In the event of interruption of purchases by this significant customer or the cessation or material change in availability of open-access transportation by the Program's pipeline transporters, the Program may encounter difficulty in marketing its gas and in maintaining historic sales levels. Alternative purchasers or transporters may not be readily available. 4. CONTINGENCY On February 13, 1998, a royalty owner filed a lawsuit against Dyco alleging that Dyco amended or terminated certain gas purchase contracts and fraudulently concealed the settlement of these contracts. The lawsuit involves the Spurlin No. 1-23 Well. Dyco has filed an Answer asserting various affirmative defenses, and intends to vigorously defend this lawsuit. A class certification order was entered by the district court on February 25, 2000. Dyco has filed an interlocutory appeal of this order which is currently pending before the Oklahoma Supreme Court. As of the date of these financial statements, the Program is not able to determine the ultimate outcome of this lawsuit or the assessment of any damages that may result. 5. SUPPLEMENTAL OIL AND GAS INFORMATION The following supplemental information regarding the oil and gas activities of the Program is presented pursuant to the disclosure requirements promulgated by the SEC. -31- Capitalized Costs The Program's capitalized costs and accumulated depreciation, depletion, amortization, and valuation allowance at December 31, 2001 and 2000 were as follows: December 31, ------------------------------- 2001 2000 ------------- ------------- Proved properties $14,956,646 $14,956,926 Less accumulated depre- ciation, depletion, amortization, and valuation allowance ( 14,873,521) ( 14,852,437) ---------- ---------- Net oil and gas properties $ 83,125 $ 104,489 ========== ========== Costs Incurred The Program incurred no oil and gas property exploration costs during 2001, 2000, and 1999. Costs incurred by the Program in connection with its oil and gas property acquisition (purchase of reserves) and development activities during 2001, 2000, and 1999, were as follows: December 31, ------------------------------ 2001 2000 1999 ------ ------- ------ Acquisition costs $ - $ - $24,413 Development costs - 2,529 6,700 Quantities of Proved Oil and Gas Reserves - Unaudited Set forth below is a summary of the changes in the net quantities of the Program's proved crude oil and gas reserves for the years ended December 31, 2001, 2000, and 1999. Proved reserves were estimated by petroleum engineers employed by affiliates of Dyco. Certain reserve information was reviewed by Ryder Scott Company, L.P., an independent petroleum engineering firm. All of the Program's reserves are located in the United States. The following information includes certain gas balancing adjustments which cause the gas volumes to differ from the reserve information prepared by Dyco and reviewed by Ryder Scott. -32-

-33- The process of estimating oil and gas reserves is complex, requiring significant subjective decisions in the evaluation of available geological, engineering, and economic data for each reservoir. The data for a given reservoir may change substantially over time as a result of, among other things, additional development activity, production history, and viability of production under varying economic conditions; consequently, it is reasonably possible that material revisions to existing reserve estimates may occur in the near future. Although every reasonable effort has been made to ensure that the reserve estimates reported herein represent the most accurate assessment possible, the significance of the subjective decisions required and variances in available data for various reservoirs make these estimates generally less precise than other estimates presented in connection with financial statement disclosures. The Program's estimated remaining reserves as of December 31, 2001 were determined using oil and gas prices of $16.40 per barrel and $2.39 per Mcf, respectively. 6. QUARTERLY FINANCIAL DATA (Unaudited) Summarized unaudited quarterly financial data for 2001 and 2000 are as follows: -34-

-35- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Program is a limited partnership and has no directors or executive officers. The following individuals are directors and executive officers of Dyco, the General Partner. The business address of such directors and executive officers is Two West Second Street, Tulsa, Oklahoma 74103. NAME AGE POSITION WITH DYCO ---------------- --- ------------------------------ Dennis R. Neill 50 President and Director Craig D. Loseke 33 Chief Financial Officer Judy K. Fox 51 Secretary The director will hold office until the next annual meeting of shareholders of Dyco or until his successor has been duly elected and qualified. All executive officers serve at the discretion of the Board of Directors. Dennis R. Neill joined Samson in 1981, was named Senior Vice President and Director of Dyco on June 18, 1991, and was named President of Dyco on June 30, 1996. Prior to joining Samson, he was associated with a Tulsa law firm, Conner and Winters, where his principal practice was in the securities area. He received a Bachelor of Arts degree in political science from Oklahoma State University and a Juris Doctorate degree from the University of Texas. Mr. Neill also serves as Senior Vice President of Samson Investment Company and as President and Director of Samson Properties Incorporated, Samson Hydrocarbons Company, Berry Gas Company, Circle L Drilling Company, Compression, Inc., and Geodyne Resources, Inc. and its subsidiaries. Craig D. Loseke joined Samson in 1990 and was named Chief Financial Officer of Dyco on November 15, 2001. He received a Bachelor of Science in Accounting and a Master of Business Administration from the University of Tulsa. He is a Certified Public Accountant and Certified Management Accountant. Mr. Loseke also serves as Vice President of Financial and Operational Reporting of Samson Investment Company. -36- Judy K. Fox joined Samson in 1990 and was named Secretary of Dyco on June 30, 1996. Prior to joining Samson, she served as Gas Contract Manager for Ely Energy Company. Ms. Fox is also Secretary of Berry Gas Company, Circle L Drilling Company, Compression, Inc., Samson Hydrocarbons Company, Samson Properties Incorporated, and Geodyne Resources, Inc. and its subsidiaries. Section 16(a) Beneficial Ownership Reporting Compliance To the best knowledge of the Program and Dyco, there were no officers, directors, or ten percent owners who were delinquent filers during 2001 of reports required under Section 16(a) of the Securities and Exchange Act of 1934. ITEM 11. EXECUTIVE COMPENSATION The Program is a limited partnership and, therefore, has no officers or directors. The following table summarizes the amounts paid by the Program as compensation and reimbursements to Dyco and its affiliates for the three years ended December 31, 2001: Compensation/Reimbursement to Dyco and its affiliates Three Years Ended December 31, 2001 Type of Compensation/Reimbursement(1) Expense ------------------------------------- ----------------------------- 2001 2000 1999 -------- ------- ------- Compensation: Operations (2) (2) (2) Reimbursements: General and Administrative, Geological, and Engineering Expenses and Direct Expenses(3) $28,752 $28,752 $24,876 ---------- (1) The authority for all of such compensation and reimbursement is the Program Agreement. With respect to the Operations activities noted in the table, management believes that such compensation is equal to or less than that charged by unaffiliated persons in the same geographic areas and under the same conditions. (2) Affiliates of the Program serve as operator of some of the Program's wells. Dyco, as general partner, contracts with such affiliates for services as operator of the wells. As operator, such affiliates are compensated at rates provided in the operating agreements in effect and charged to all parties to such agreement. The dollar amount of such -37- compensation paid by the Program to such affiliates is impossible to quantify as of the date of this Annual Report. (3) The Program reimburses Dyco and its affiliates for reasonable and necessary general and administrative, geological, and engineering expenses and direct expenses incurred in connection with their management and operation of the Program. The directors, officers, and employees of Dyco and its affiliates receive no direct remuneration from the Program for their services to the Program. See "Salary Reimbursement Table" below. The allocable general and administrative, geological, and engineering expenses are apportioned on a reasonable basis between the Program's business and all other oil and gas activities of Dyco and its affiliates, including Dyco's management and operation of affiliated oil and gas limited partnerships. The allocation to the Program of these costs is made by Dyco as General Partner. As noted in the Compensation/Reimbursement Table above, the directors, officers, and employees of Dyco and their affiliates receive no direct remuneration from the Program for their services. However, to the extent such services represent direct involvement with the Program, as opposed to general corporate functions, such persons' salaries are allocated to and reimbursed by the Program. Such allocation to the Program's general and administrative, geological, and engineering expenses of the salaries of directors, officers, and employees of Dyco and its affiliates is based on internal records maintained by Dyco and its affiliates, and represents investor relations, legal, accounting, data processing, management, gas marketing, and other functions directly attributable to the Program's operations. When actual costs incurred benefit other partnerships and affiliates, the allocation of costs is based on the relationship of the Program's reserves to the total reserves owned by all partnerships and reserves. The following table indicates the approximate amount of general and administrative expense reimbursement attributable to the salaries of the directors, officers, and employees of Dyco and its affiliates for the three years ended December 31, 2001: -38-

-39- Samson maintains necessary inventories of new and used field equipment. Samson may have provided some of this equipment for wells in which the Program has an interest. This equipment was provided at prices or rates equal to or less than those normally charged in the same or comparable geographic area by unaffiliated persons or companies dealing at arm's length. The operators of these wells bill the Program for a portion of such costs based upon the Program's interest in the well. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table provides information as to the beneficial ownership of the Program's Units as of March 1, 2002 by each beneficial owner of more than 5% of the issued and outstanding Units and by the directors, officers, and affiliates of Dyco. The address of each of such persons is Samson Plaza, Two West Second Street, Tulsa, Oklahoma 74103. Number of Units Beneficially Owned (Percent Beneficial Owner of Outstanding) ------------------------------- ----------------- Samson Resources Company 1,263 (52.6%) All directors, officers, and affiliates of Dyco as a group and Dyco (5 persons) 1,263 (52.6%) ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain affiliates of Dyco engage in oil and gas activities independently of the Program which result in conflicts of interest that cannot be totally eliminated. The allocation of acquisition and drilling opportunities and the nature of the compensation arrangements between the Program and such affiliates also create potential conflicts of interest. An affiliate of the Program owns a significant amount of the Program's Units and therefore has an identity of interest with other limited partners with respect to the operations of the Program. In order to attempt to assure limited liability for limited partners as well as an orderly conduct of business, management of the Program is exercised solely by Dyco. The Program Agreement grants Dyco broad discretionary authority with respect to the Program's participation in drilling prospects and expenditure and control of funds, including borrowings. These provisions are similar to those contained in prospectuses and partnership agreements for other public oil and gas drilling partnerships. -40- Broad discretion as to general management of the Program involves circumstances where Dyco has conflicts of interest and where it must allocate costs and expenses, or opportunities, among the Program and other competing interests. Dyco does not devote all of its time, efforts, and personnel exclusively to the Program. Furthermore, the Program does not have any employees, but instead relies on the personnel of Samson. The Program thus competes with Samson (including other oil and gas programs) for the time and resources of such personnel. Samson devotes such time and personnel to the management of the Program as are indicated by the circumstances and as are consistent with Dyco's fiduciary duties. Affiliates of the Program are solely responsible for the negotiation, administration, and enforcement of oil and gas sales agreements covering the Program's leasehold interests. Because affiliates of the Program who provide services to the Program have fiduciary or other duties to other members of Samson, contract amendments and negotiating positions taken by them in their effort to enforce contracts with purchasers may not necessarily represent the positions that the Program would take if it were to administer its own contracts without involvement with other members of Samson. On the other hand, management believes that the Program's negotiating strength and contractual positions have been enhanced by virtue of its affiliation with Samson. Samson Resources Company, an affiliate of Dyco, ("Resources") owns approximately 53% of the Program's outstanding Units as of March 1, 2002, making the Program a 50% subsidiary of Resources. The Program Agreement permits Resources to independently vote its Units. Resources' majority Unit ownership will determine the outcome of any matter submitted for a vote of the Limited Partners. -41- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements, Financial Statement Schedules, and Exhibits. (1) Financial Statements: The following financial statements for the Program as of December 31, 2001 and 2000 and for the years ended December 31, 2001, 2000, and 1999 are filed as part of this report: Report of Independent Accountants Balance Sheets Statements of Operations Statements of Changes in Partners' Capital Statements of Cash Flows Notes to Financial Statements (2) Financial Statement Schedules: None. (3) Exhibits: 4.1 Drilling Agreement dated April 1, 1978 for Dyco Drilling Program 1978-1 by and between the Dyco Oil and Gas Program 1978-1, Dyco Petroleum Corporation, and Jaye F. Dyer filed as Exhibit 4.1 to Annual Report on Form 10-K for the year ended December 31, 1991 on April 10, 1992 and is hereby incorporated by reference. 4.2 Program Agreement dated April 1, 1978 for Dyco Oil and Gas Program 1978-1 by and between Dyco Petroleum Corporation and Participants filed as Exhibit 4.2 to Annual Report on Form 10-K for the year ended December 31, 1991 on April 10, 1992 and is hereby incorporated by reference. 4.3 Amendment to Program Agreement for Dyco Oil and Gas Program 1978-1 dated February 9, 1989 filed as Exhibit 4.3 to Annual Report on Form 10K for the year ended December 31, 1991 on April 10, 1992 and is hereby incorporated by reference. -42- 4.4 Certificate of Limited Partnership for Dyco Oil and Gas Program 1978-1 Limited Partnership filed as Exhibit 4.4 to Annual Report on Form 10-K for the year ended December 31, 1991 on April 10, 1992 and is hereby incorporated by reference. *23.1 Consent of Ryder Scott Company, L.P. for Dyco Oil and Gas Program 1978-1 Limited Partnership. All other Exhibits are omitted as inapplicable. ------------------ * Filed herewith. (b) Reports on Form 8-K filed during the fourth quarter of 2001: None. -43- SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) 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 organized. DYCO OIL AND GAS PROGRAM 1978-1 LIMITED PARTNERSHIP By: DYCO PETROLEUM CORPORATION General Partner March 20, 2002 By: //s//Dennis R. Neil ------------------------------ Dennis R. Neill President 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 and in the capacities on the dates indicated. By: //ss//Dennis R. Neil President and March 20, 2002 ------------------- Director (Principal Dennis R. Neill Executive Officer) //ss//Craig D. Loseke Chief Financial March 20, 2002 ------------------- Officer (Principal Craig D. Loseke Financial and Accounting Officer) //ss//Judy K. Fox Secretary March 20, 2002 ------------------- Judy K. Fox -44- INDEX TO EXHIBITS Exhibit Number Description ------- ----------- 4.1 Drilling Agreement dated April 1, 1978 for Dyco Drilling Program 1978-1 by and between the Dyco Oil and Gas Program 1978-1, Dyco Petroleum Corporation, and Jaye F. Dyer filed as Exhibit 4.1 to Annual Report on Form 10-K for the year ended December 31, 1991 on April 10, 1992 and is hereby incorporated by reference. 4.2 Program Agreement dated April 1, 1978 for Dyco Oil and Gas Program 1978-1 by and between Dyco Petroleum Corporation and Participants filed as Exhibit 4.2 to Annual Report on Form 10-K for the year ended December 31, 1991 on April 10, 1992 and is hereby incorporated by reference. 4.3 Amendment to Program Agreement for Dyco Oil and Gas Program 1978-1 dated February 9, 1989 filed as Exhibit 4.3 to Annual Report on Form 10-K for the year ended December 31, 1991 on April 10, 1992 and is hereby incorporated by reference. 4.4 Certificate of Limited Partnership for Dyco Oil and Gas Program 1978-1 Limited Partnership filed as Exhibit 4.4 to Annual Report on Form 10-K for the year ended December 31, 1991 on April 10, 1992 and is hereby incorporated by reference. *23.1 Consent of Ryder Scott Company, L.P. for Dyco Oil and Gas Program 1978-1 Limited Partnership. ------------------ * Filed herewith. -45-

DYCO 1978 OIL & GAS PROGRAMS/OLD/ 10-K