FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
------------------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ____________________
Commission file number 1-3793
CANADA SOUTHERN PETROLEUM LTD.
................................................................................
(Exact name of registrant as specified in its charter)
NOVA SCOTIA, CANADA 98-0085412
................................................................................
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 1410, One Palliser Square,
125 Ninth Avenue, S.E., Calgary, Alberta, Canada T2G OP6
................................................................................
(Address of principal executive offices) (Zip Code)
403-269-7741
................................................................................
(Registrant's telephone number, including area code)
................................................................................
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
l934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of the issuer's classes of
common stock as of the latest practicable date:
Limited Voting Shares, par value $1.00 (Canadian) per share 14,234,740
shares outstanding as of November 1, 1997.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CANADA SOUTHERN PETROLEUM LTD.
CONSOLIDATED BALANCE SHEETS
(Expressed in Canadian dollars)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,993,562 $ 2,709,597
Marketable securities 3,933,528 3,404,213
Accounts and interest receivable 593,909 635,223
Prepaid insurance and other 252,588 227,368
----------- -----------
Total current assets 7,773,587 6,976,401
----------- -----------
Marketable securities - 2,048,573
----------- -----------
Oil and gas properties and equipment
(full cost method) 13,217,481 11,349,945
----------- -----------
$20,991,068 $20,374,919
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 777,731 $ 439,837
Accrued liabilities 221,688 182,104
----------- -----------
Total current liabilities 999,419 621,941
----------- -----------
Future site restoration costs 205,546 250,274
----------- -----------
Shareholders' Equity
Limited Voting Shares, par value $1 per share
Authorized - 100,000,000 shares
Outstanding -14,229,740 and 13,956,540 shares 14,229,740 13,956,540
Contributed surplus 26,238,839 24,930,964
----------- -----------
40,468,579 38,887,504
Deficit (20,682,476) (19,384,800)
----------- -----------
Total shareholders' equity 19,786,103 19,502,704
----------- -----------
$20,991,068 $20,374,919
=========== ===========
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CANADA SOUTHERN PETROLEUM LTD.
Consolidated Statements of Operations and Deficit
(Expressed in Canadian dollars)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
Revenues:
<S> <C> <C> <C> <C>
Oil sales $ 250,214 $ 168,983 $ 782,826 $ 497,897
Gas sales 89,801 101,858 372,025 283,790
Proceeds under carried interest agreements 74,627 121,452 222,111 607,436
Interest and other income 88,274 161,562 278,633 235,369
------------- ------------- ------------- -------------
502,916 553,855 1,655,595 1,624,492
------------- ------------- ------------- -------------
Costs and expenses:
General and administrative 241,316 177,820 854,799 721,774
Legal 327,127 426,357 1,113,936 1,229,088
Lease operating costs 186,195 69,743 618,244 312,070
Depletion, depreciation, and amortization 110,100 127,182 360,200 402,982
Foreign exchange loss (gain) 5,001 12,705 (46,422) 18,380
Provision for future site restoration costs 4,000 4,800 13,500 14,200
Rent 11,921 13,419 39,014 39,564
------------- ------------- ------------- -------------
885,660 832,026 2,953,271 2,738,058
------------- ------------- ------------- -------------
Loss before income taxes (382,744) (278,171) (1,297,676) (1,113,566)
Income taxes
- - - -
Net loss (382,744) (278,171) (1,297,676) (1,113,566)
Deficit - beginning of period (20,299,732) (18,758,912) (19,384,800) (17,923,517)
------------- ------------- ------------- -------------
Deficit - end of period $(20,682,476) $(19,037,083) $(20,682,476) $(19,037,083)
============= ============= ============= =============
Average number of shares outstanding 14,154,340 13,955,290 14,039,160 13,184,171
========== ========== ========== ==========
Net loss per share $(.03) $(.02) $(.09) $(.08)
====== ====== ====== ======
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CANADA SOUTHERN PETROLEUM LTD.
Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------------------
1997 1996
---------- ----------
Cash flows from operating activities:
<S> <C> <C>
Net loss $(1,297,676) $(1,113,566)
Adjustments to reconcile net loss to net cash used in operating activity:
Depreciation, depletion and amortization 360,200 402,982
Future site restoration costs (44,728) (4,060)
Change in current assets and liabilities:
Accounts and interest receivable 41,314 (453,631)
Prepaid insurance and other (25,220) 97,921
Accounts payable 337,891 195,735
Accrued liabilities 39,584 (66,008)
----------- -----------
Net cash used in operations (588,635) (940,627)
----------- -----------
Cash flows from investing activities:
Additions to oil and gas properties (net) (2,227,733) (477,978)
Sale (purchase) of marketable securities 1,519,258 (5,419,365)
----------- -----------
Net cash used in investing activities (708,475) (5,897,343)
----------- -----------
Cash flows from financing activities:
Sale of Limited Voting Shares less expenses - 9,019,609
Exercise of stock options 1,581,075 232,707
----------- -----------
Net cash from financing activities 1,581,075 9,252,316
----------- -----------
Increase (decrease) in cash and cash equivalents 283,965 2,414,346
Cash and cash equivalents at the
beginning of period 2,709,597 1,181,581
----------- -----------
Cash and cash equivalents at the
end of period $2,993,562 $3,595,927
========== ==========
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
CANADA SOUTHERN PETROLEUM LTD.
September 30, 1997
(Expressed in Canadian Dollars)
Item 1. Financial Statements - Notes
The information for the three and nine month periods ended September
30, 1997 and 1996 is unaudited but includes all adjustments which the Company
considers necessary for a fair statement of the results for those periods. All
adjustments are of a normal recurring nature.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical in
nature, are intended to be, and are hereby identified as, "forward looking
statements" for purposes of the "Safe Harbor" Statement under the Private
Securities Litigation Reform Act of 1995. The Company cautions readers that
forward looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those indicated in the
forward looking statements.
Liquidity and Capital Resources
At September 30, 1997, the Company had approximately $6.9 million of
cash and securities available. Of this amount, approximately $4.6 million are
held in U.S. Government securities which are subject to exchange fluctuations.
These funds are expected to be used for general corporate purposes, including
exploration and to continue the Kotaneelee field litigation.
Cash flow used in operations during the nine months ended September 30,
1997 decreased to $589,000 compared to $941,000 during the comparable 1996
period. The difference between the periods was caused primarily by the
following:
Increase in loss from operations $(268,000)
Changes in accounts receivable and other 372,000
Net change in current liabilities 248,000
---------
Difference in net cash used in operations $ 352,000
=========
<PAGE>
PART I - FINANCIAL INFORMATION
CANADA SOUTHERN PETROLEUM LTD.
September 30, 1997
(Expressed in Canadian Dollars)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
A significant proportion of the Company's property interests are
covered by carried interest agreements, which provide that expenditures made by
the operator are recouped solely out of revenues from production. Major capital
expenditures made by the operators have an impact on the Company's cash flow
from operations as no revenues are reported or received until the capital costs
have been recovered by the operator. Properties in the Fort Nelson, British
Columbia area in which the Company has carried interests have reached payout
status. Proceeds from these carried interests plus oil and gas sales from
working interest properties are the Company's major sources of working capital.
The operator of the Kotaneelee gas field has reported to the Company
that development costs totaling approximately $17,048,000, of which the
Company's share is $5,114,000, remains to be recovered at July 31, 1997.
The Company is currently evaluating and expects to continue to evaluate
oil and gas properties and may make investments in such properties utilizing
cash on hand. The Company anticipates that its capital expenditures for land
acquisitions and drilling for 1997 will be approximately $2.7 million, of which
approximately $2.2 million has been spent through September 30, 1997. In
addition, substantial continuing expenses are expected to be incurred in
connection with the Kotaneelee Litigation. The expense of the Kotaneelee
Litigation has been the principal cause of the Company's losses since 1991. The
Company estimates that it will complete the presentation of its case before the
Christmas recess in December 1997, which may result in a decrease in litigation
related expenses in subsequent periods. The Company is unable to estimate the
time required for the defendants to present their evidence.
During the second half of 1996, the Company participated in 8
productive oil and gas wells. In addition, during the first nine months of the
current year, 18 additional wells were drilled with 14 being completed as oil
wells, 3 as gas wells and one as a water disposal well. This successful drilling
program is being reflected in the increase in the amount of oil and gas sales.
The Company's share (12-15%) of revenues should continue to increase when the
installation of production facilities is completed.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Results of Operations
Three month period ended September 30, 1997 vs. September 30, 1996
The net loss for the quarter ended September 30, 1997 was $383,000
($(.03) per share) compared to a net loss of $278,000 ($.02 per share) for the
1996 period. A summary of revenue and expenses during the periods is as follows:
1997 1996 Net Change
---- ---- ----------
Revenues $ 502,916 $ 553,855 $ (50,939)
Costs and expenses (885,660) (832,026) (53,634)
---------- ---------- ----------
Net loss $(382,744) $(278,171) $(104,573)
========== ========== ==========
Oil sales increased 48% due to a 125% increase in the number of units
sold which was partially offset by a 20% decrease in the price of oil sold. Oil
unit sales in barrels ("bbls") (before deducting royalties) and the average
price per barrel sold during the periods indicated were as follows:
<TABLE>
<CAPTION>
Three month period ended September 30,
1997 1996
------------------------------------------ ---------------------------------------------
Average price Average price
bbls per bbl Total bbls per bbl Total
<S> <C> <C> <C> <C> <C> <C>
Oil sales 17,039 $20.77 $354,000 7,569 $25.83 $196,000
Royalties paid (104,000) (27,000)
--------- ---------
Total $250,000 $169,000
======== ========
</TABLE>
Gas sales decreased 12%. There was a 2% increase in the number of units
sold but a 10% decrease in gas prices. The volumes in million cubic feet
("mmcf") and the average price of gas per thousand cubic feet ("mcf") sold
during the periods indicated were as follows:
<TABLE>
<CAPTION>
Three month period ended September 30,
1997 1996
-------------------------------------------- --------------------------------------------
Average price Average price
mmcf per mcf Total mmcf per mcf Total
<S> <C> <C> <C> <C> <C> <C>
Gas sales 52 $1.44 $75,000 51 $1.60 $ 82,000
Royalty income 25,000 24,000
Royalties paid (10,000) (4,000)
-------- ---------
Total $90,000 $102,000
======= ========
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Proceeds under carried interest agreements decreased 39% to $75,000
during 1997 compared to $121,000 in 1996. Proceeds should increase when the
balance of capital costs to be recovered on one of the properties is completed.
In addition, the operator of one of the properties changed during the current
quarter and there has been a delay in reporting information.
Interest and other income was 45% lower in 1997. Interest income
decreased 19% from $121,000 in 1996 to $98,000 in the current period due to the
decrease in funds available for investment during 1997 compared to the prior
period. In addition, the 1997 period includes proceeds from the sale of seismic
data in the amount of $8,000 compared to $41,000 in 1996.
General and administrative expenses increased 36% in 1997 to $241,000
from $178,000 in 1996. Business taxes, which are based on the Company's net
worth, increased in 1997. Directors' fees also increased in 1997 because
four nonemployee directors are being paid fees in 1997 compared to 1996 when
only two directors were paid fees.
Legal expenses decreased 23% during 1997 to $327,000 compared to
$426,000 during 1996. The court in Calgary was closed during July and August
1997, whereas, in 1996, the Company was preparing for the commencement of trial
in September 1996 during the comparable period.
Lease operating costs increased 167% from $70,000 in 1996 to $186,000
in the 1997 period. The increase represents the increased charges by the
operators of the Company's properties during the current period. Although the
revenue on these properties also increased during the period, the costs are not
yet proportional to revenue because some of the new wells are awaiting
installation of production facilities.
Depletion, depreciation and amortization expense decreased 13% in 1997
to $110,000 from $127,000 in 1996. The decrease in depletion is the result of
the 1997 reduction in the carried interest production compared to the 1996
period.
A foreign exchange loss of $5,000 was recorded in 1997, compared with a
loss of $13,000 in 1996 on the Company's U.S. investments.
Income taxes. No provision for income taxes is required for the current
period.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Nine month period ended September 30, 1997 vs. September 30, 1996
The net loss for the quarter ended September 30, 1997 was $1,298,000
($(.09) per share) compared to a net loss of $1,114,000 ($.08 per share) for the
1996 period. A summary of revenue and expenses during the periods is as follows:
1997 1996 Net Change
---- ---- ----------
Revenues $ 1,655,595 $ 1,624,492 $ 31,103
Costs and expenses (2,953,271) (2,738,060) (215,211)
------------ ------------ ----------
Net loss $(1,297,676) $(1,113,568) $(184,108)
============ ============ ==========
Oil sales increased 57% due to a 92% increase in the number of units
sold which was partially offset by a 7% decrease in oil prices. Oil unit sales
in barrels ("bbls") (before deducting royalties) and the average price per
barrel sold during the periods indicated were as follows:
<TABLE>
<CAPTION>
Nine month period ended September 30,
1997 1996
--------------------------------------------- --------------------------------------------
Average price Average price
bbls per bbl Total bbls per bbl Total
<S> <C> <C> <C> <C> <C> <C>
Oil sales 45,001 $22.66 $1,020,000 23,467 $24.37 $575,000
Royalties paid (237,000) (77,000)
----------- ---------
Total $ 783,000 $498,000
========== ========
</TABLE>
Gas sales increased 31%. There was a 7% decrease in units sold which
was offset by a 55% increase in gas prices. The volumes in million cubic feet
("mmcf") and the average price of gas per thousand cubic feet ("mcf") sold
during the periods indicated were as follows:
<TABLE>
<CAPTION>
Nine month period ended September 30,
1997 1996
-------------------------------------------- -------------------------------------------
Average price Average price
mmcf per mcf Total mmcf per mcf Total
<S> <C> <C> <C> <C> <C> <C>
Gas sales 141 $2.38 $336,000 152 $1.54 $237,000
Royalty income 104,000 73,000
Royalties paid (68,000) (26,000)
----------- -----------
Total $372,000 $284,000
======== ========
</TABLE>
Proceeds under carried interest agreements decreased 63% to $222,000
during 1997 compared to $607,000 in 1996. The Company had been involved in a
dispute with an operator of one of the Company's properties. During the quarter
ended September 30, 1997, the dispute was resolved in substantial part against
the Company which resulted in a decrease of approximately $276,000 in proceeds
under carried interest agreements during the current nine month period.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Interest and other income was 18% higher in 1997. Interest income
increased from $142,000 in 1996 to $261,000 in the current year because funds
were not available for investment until after the June 1996 rights offering. In
addition, the 1997 period includes proceeds from the sale of seismic data in the
amount of $18,000 compared to $94,000 in 1996. It is not possible for the
Company to estimate the amount of future seismic data sales which are dependent
on a purchaser's evaluation of a prospective oil and gas prospect for the
related seismic data.
General and administrative expenses increased 18% to $855,000 in 1997
from $722,000 in 1996. In 1996, the Company saved the cost of printing and
mailing a separate annual report by utilizing the June 1996 rights offering
prospectus in lieu of an annual report. In addition, business taxes which are
based on the Company's net worth increased in 1997. Directors' fees also
increased in 1997 because four nonemployee directors are being paid fees in 1997
compared to 1996 when only two directors were paid fees.
Legal expenses decreased 9% during 1997 to $1,114,000 compared to
$1,229,000 during 1996. The court in Calgary was closed during July and August
1997, whereas, in 1996, the Company was preparing for the commencement of trial
in September 1996 during the comparable period.
Lease operating costs increased 98% from $312,000 in 1996 to $618,000
in the 1997 period. The increase represents the increased charges by the
operators of the Company's properties during the current period. Although the
revenue on these properties also increased during the period, the costs are not
yet proportional to revenue because some of the new wells are awaiting
installation of production facilities.
Depletion, depreciation and amortization expense decreased 11% in 1997
to $360,000 from $403,000 in 1996. The decrease in depletion is the result of
the 1997 reduction in the carried interest production compared to the 1996
period.
A foreign exchange gain of $46,000 was recorded in 1997, compared with
a loss of $18,000 on the Company's U.S. investments in 1996. In 1997, the gain
was attributable to a strengthening of the U.S. dollar as compared to the
Canadian dollar on the Company's U.S. investments.
Income taxes. No provision for income taxes is required for the current
period.
<PAGE>
PART II - OTHER INFORMATION
CANADA SOUTHERN PETROLEUM LTD.
September 30, 1997
Item 6. Exhibits and Reports on Form 8-K
On October 1, 1997, the Company filed a Current Report on Form 8-K
reporting that effective September 30, 1997, Mr. Charles J. Horne resigned as a
director of the Company primarily for health related reasons. On October 1,
1997, Mr. Timothy L. Largay was elected to fill the vacancy created by Mr.
Horne's resignation.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANADA SOUTHERN PETROLEUM LTD.
Registrant
Date: November 11, 1997 By /s/ Beverley A. Scobie
Treasurer and Chief Financial and
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> Canadian Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 0.7241
<CASH> 2,993,562
<SECURITIES> 3,933,528
<RECEIVABLES> 593,909
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,773,587
<PP&E> 13,217,478
<DEPRECIATION> 0
<TOTAL-ASSETS> 20,991,065
<CURRENT-LIABILITIES> 999,416
<BONDS> 0
0
0
<COMMON> 14,229,740
<OTHER-SE> 5,556,363
<TOTAL-LIABILITY-AND-EQUITY> 20,991,065
<SALES> 1,376,962
<TOTAL-REVENUES> 1,655,595
<CGS> 0
<TOTAL-COSTS> 2,953,271
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,297,676)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,297,676)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,297,676)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
