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, 1998
------------------------------------------------
[ ] 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
|X| Yes |_| 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 3, 1998.
<PAGE>
CANADA SOUTHERN PETROLEUM LTD.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(Expressed in Canadian dollars)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- -----------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,223,071 $ 2,129,156
Marketable securities - 3,373,334
Accounts and interest receivable 787,663 1,226,086
Other assets 359,247 242,278
----------- -----------
Total current assets 3,369,981 6,970,854
----------- -----------
Oil and gas properties and equipment
(full cost method) 15,148,959 13,984,771
----------- -----------
Total assets $18,518,940 $20,955,625
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 937,262 $ 1,120,521
Accrued liabilities 380,439 277,715
----------- -----------
Total current liabilities 1,317,701 1,398,236
----------- -----------
Future site restoration costs 235,786 210,974
----------- -----------
Shareholders' Equity
Limited Voting Shares, par value $1 per share
Authorized - 100,000,000 shares
Outstanding -14,234,740 shares 14,234,740 14,234,740
Contributed surplus 26,254,139 26,254,139
----------- -----------
Total capital 40,488,879 40,488,879
Deficit (23,523,426) (21,142,464)
----------- -----------
Total shareholders' equity 16,965,453 19,346,415
----------- -----------
Total liabilities and shareholders' equity $18,518,940 $20,955,625
=========== ===========
</TABLE>
<PAGE>
CANADA SOUTHERN PETROLEUM LTD.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations and Deficit
(Expressed in Canadian dollars)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Revenues:
<S> <C> <C> <C> <C>
Oil sales $ 298,819 $ 250,214 $ 724,196 $ 782,826
Gas sales 452,472 89,801 729,821 372,025
Proceeds under carried interest agreements 95,891 74,627 205,888 222,111
Interest and other income 36,076 88,274 168,175 278,633
------------ ------------ ------------ ------------
883,258 502,916 1,828,080 1,655,595
------------ ------------ ------------ ------------
Costs and expenses:
General and administrative 240,557 241,316 1,004,442 854,799
Legal 602,997 327,127 1,659,148 1,113,936
Lease operating costs 359,878 186,195 942,712 618,244
Depletion, depreciation, and amortization 300,900 110,100 702,700 360,200
Foreign exchange loss (gain) (116,918) 5,001 (186,695) (46,422)
Provision for future site restoration costs 11,000 4,000 26,500 13,500
Rent 19,177 11,921 60,235 39,014
------------ ------------ ------------ ------------
1,417,591 885,660 4,209,042 2,953,271
------------ ------------ ------------ ------------
Loss before income taxes (534,333) (382,744) (2,380,962) (1,297,676)
Income taxes
- - - -
Net loss (534,333) (382,744) (2,380,962) (1,297,676)
Deficit - beginning of period (22,989,093) (20,299,732) (21,142,464) (19,384,800)
------------ ------------ ------------ ------------
Deficit - end of period $(23,523,426) $(20,682,476) $(23,523,426) $(20,682,476)
============= ============= ============= =============
Average number of shares outstanding 14,234,740 14,154,340 14,234,740 14,039,160
========== ========== ========== ==========
Net loss per share (basic & diluted) $(.04) $(.03) $(.17) $(.09)
====== ====== ====== ======
</TABLE>
<PAGE>
CANADA SOUTHERN PETROLEUM LTD.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1998 1997
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net loss $(2,380,962) $(1,297,676)
Adjustments to reconcile net loss
to net cash used in operating activity:
Depreciation, depletion and amortization 702,700 360,200
Future site restoration costs 24,812 (44,728)
Change in current assets and liabilities:
Accounts and interest receivable 438,423 41,314
Other (116,969) (25,220)
Accounts payable (183,259) 337,891
Accrued liabilities 102,724 39,584
----------- -----------
Net cash used in operations (1,412,531) (588,635)
----------- -----------
Cash flows from investing activities:
Additions to oil and gas properties (net) (1,866,888) (2,227,733)
Sale (purchase) of marketable securities 3,373,334 1,519,258
----------- -----------
Net cash used in investing activities 1,506,446 (708,475)
----------- -----------
Cash flows from financing activities:
Exercise of stock options - 1,581,075
----------- -----------
Net cash from financing activities - 1,581,075
----------- -----------
Increase (decrease) in cash and cash equivalents 93,915 283,965
Cash and cash equivalents at the
beginning of period 2,129,156 2,709,597
----------- -----------
Cash and cash equivalents at the
end of period $ 2,223,071 $ 2,993,562
=========== ===========
</TABLE>
<PAGE>
CANADA SOUTHERN PETROLEUM LTD.
PART I - FINANCIAL INFORMATION
September 30, 1998
(Expressed in Canadian Dollars)
Item 1. Financial Statements - Notes
The information for the three and nine month periods ended September
30, 1998 and 1997 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, 1998, the Company had approximately $2.2 million of
cash and securities available. Of this amount, approximately $2 million are held
in U.S. Government securities and bank accounts which are subject to exchange
fluctuations. These funds are expected to be used for general corporate
purposes, including exploration and continuation of the Kotaneelee field
litigation.
During November 1998, the Company agreed to sell certain of its
properties in British Columbia for approximately $3.6 million, which
approximates the Company's carrying costs for the properties. These properties
generated net revenues of approximately $630,000 in 1997 and approximately
$410,000 during the nine months ended September 30, 1998. The Company currently
expects that the proceeds of sale will be used in connection with the Kotaneelee
litigation.
The Company is also considering the sale of its Alberta heavy oil
properties in which the Company holds a minority interest. The proceeds from any
sale would be added to the Company's working capital.
<PAGE>
CANADA SOUTHERN PETROLEUM LTD.
PART I - FINANCIAL INFORMATION
September 30, 1998
(Expressed in Canadian Dollars)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Cash flow used in operations during the nine months ended September 30,
1998 increased to $1,413,000 compared to $589,000 during the comparable 1997
period. The difference between the periods was caused primarily by the
following:
Increase in loss from operations $(671,000)
Changes in accounts receivable and other 305,000
Net change in current liabilities (458,000)
----------
Difference in net cash used in operations $ 824,000
=========
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 have been 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 $21 million, of which the
Company's share is $6.3 million, remain to be recovered at July 31, 1998. During
the summer of 1998, remedial work was performed by the operator on one of the
two wells in the Kotaneelee field. Approximately $4 million in costs for this
work are not reflected in the above amounts. Initial indications are that the
remedial work on the well could significantly increase production from the
field.
The Company is currently evaluating and expects to continue to evaluate
oil and gas properties and may make expenditures on such properties depending on
its financial resources. 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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Kotaneelee Litigation - Taxable Costs
Under Canadian law, certain costs (known as "taxable costs") of the
litigation may be assessed against the non-prevailing party. Previously, the
Company had reported that while such costs were not determinable, the Company
estimated that taxable costs, assuming a twelve month trial, could be
approximately $1.5 million and noted that the judge in complex and lengthy
trials has the discretion to increase an award.
Effective September 1, 1998, the Alberta Rules of Court were amended to
provide for a material increase in the costs which may be awarded to the
prevailing party in matters before the Court. In addition, the Company believes
that the trial will extend well beyond its original time estimates and,
therefore, potentially assessable costs would increase accordingly.
The trial has been lengthy, complicated and costly to all parties and
the Company believes that the prevailing party or parties in the litigation will
argue for a substantial assessment of costs against the non-prevailing party or
parties. The Court has very broad discretion as to whether to award costs and
disbursements and as to the calculation of the amount to be awarded.
Accordingly, the Company is unable to determine whether, in the event that it
does not prevail on its claims in the litigation, it will be assessed costs or
in what amount. However, since the costs incurred by the Defendants have been
substantial, and since the Court has broad discretion in the awarding of costs,
an award to the Defendants potentially could be material. A cost award against
the Company could be of sufficient magnitude to necessitate a sale of Company
assets or a debt or equity financing to fund such an award. There are no
assurances that any such sale or financing would be consummated.
Year 2000 Compliance
The Company has determined that the year 2000 change will have no
material impact on the Company's internal operations or financial results. The
Company expects to be year 2000 compliant by December 1998. However, it will be
dependent on its suppliers, partners and customers to make their systems year
2000 compliant.
<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, 1998 vs. September 30, 1997
The net loss for the quarter ended September 30, 1998 was $534,000
($(.04) per share) compared to a net loss of $383,000 ($.03 per share) for the
1997 period. A summary of revenue and expenses during the periods is as follows:
1998 1997 Net Change
---- ---- ----------
Revenues $ 883,258 $ 502,916 $ 380,342
Costs and expenses (1,417,591) (885,660) (531,931)
------------ ---------- ----------
Net loss $ (534,333) $(382,744) $(151,589)
============ ========== ==========
Oil sales increased 19% due to a 25% increase in the number of units
sold and a reduction in royalties paid which was partially offset by a 32%
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:
Three month period ended September 30,
---------------------------------------------------------------
1998 1997
------------------------------ ------------------------------
Average price Average price
bbls per bbl Total bbls per bbl Total
------ ------- --------- ------ ------- ---------
Oil sales 21,304 $14.13 $301,000 17,039 $20.77 $354,000
Royalties paid (2,000) (104,000)
-------- --------
Total $299,000 $250,000
======== ========
Gas sales increased 404%. There was a 44% increase in gas prices
combined with a 331% increase in the number of units sold. 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:
Three month period ended September 30,
---------------------------------------------------------------
1998 1997
------------------------------ ------------------------------
Average price Average price
mmcf per mcf Total mmcf per mcf Total
------ ------- --------- ------ ------- ---------
Gas sales 224 $2.08 $466,000 52 $1.44 $75,000
Royalty income 38,000 25,000
Royalties paid (51,000) (10,000)
--------- --------
Total $453,000 $90,000
======== =======
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Proceeds under carried interest agreements increased 29% to $96,000
during 1998 compared to $75,000 in 1997. During the prior period, the operators
of the Company's carried interest properties were recouping their capital
expenditures on the properties from production revenues.
Interest and other income was 59% lower in 1998. Interest income
decreased 61% from $80,000 in 1997 to $36,000 in the current period due to the
decrease in funds available for investment and lower interest rates during 1998.
In addition, the 1998 period includes proceeds from the sale of seismic data in
the amount of $5,000 compared to $8,000 in 1997.
Legal expenses increased 84% during 1998 to $603,000 compared to
$327,000 during 1997. These expenses are related primarily to the cost of the
Kotaneelee litigation. During 1998, the Company continued the presentation of a
major part of its case against the working interest partners which was completed
on September 16, 1998. The 1998 costs represent both legal fees and the cost of
various Company experts who testified or were being prepared for testimony.
Lease operating costs increased 93% from $186,000 in 1997 to $360,000
in the 1998 period. The increase represents the charges by the operators of the
Company's properties which is related to the increased production. In addition,
the Company's share of production costs in producing Alberta heavy oil
increased.
Depletion, depreciation and amortization expense increased 173% in 1998
to $301,000 from $110,000 in 1997. The increase in depletion in 1998 is the
result of increased production and the amount of additional costs being
depleted.
A foreign exchange gain of $117,000 was recorded in 1998, compared with
a loss of $5,000 in 1997 on the Company's U.S. investments. The value of the
Canadian dollar was U.S. $.6813 at June 30, 1998 compared to U.S.
$.6528 at September 30, 1998.
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, 1998 vs. September 30, 1997
The net loss for the quarter ended September 30, 1998 was $2,381,000
($(.17) per share) compared to a net loss of $1,298,000 ($.09 per share) for the
1997 period. A summary of revenue and expenses during the periods is as follows:
1998 1997 Net Change
---- ---- ----------
Revenues $ 1,828,080 $ 1,655,595 $ 172,485
Costs and expenses (4,209,042) (2,953,271) (1,255,771)
------------ ------------ ------------
Net loss $(2,380,962) $(1,297,676) $(1,083,286)
============ ============ ============
Oil sales decreased 8% due to a 39% decrease in the price of oil sold
which was partially offset by a 35% increase in the number of units sold. Oil
unit sales in barrels ("bbls") (before deducting royalties) and the average
price per barrel sold during the periods indicated were as follows:
Nine month period ended September 30,
---------------------------------------------------------------
1998 1997
------------------------------ ------------------------------
Average price Average price
bbls per bbl Total bbls per bbl Total
------ ------- --------- ------ ------- -----------
Oil sales 60,723 $13.85 $841,000 45,001 $22.66 $1,020,000
Royalties paid (117,000) (237,000)
--------- -----------
Total $724,000 $ 783,000
======== ==========
Gas sales increased 96%. There was a 135% increase in units sold which
was partially offset by an 11% 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:
Nine month period ended September 30,
---------------------------------------------------------------
1998 1997
------------------------------ ------------------------------
Average price Average price
mmcf per mcf Total mmcf per mcf Total
------ ------- --------- ------ ------- ---------
Gas sales 332 $2.13 $707,000 141 $2.38 $336,000
Royalty income 113,000 104,000
Royalties paid (90,000) (68,000)
--------- ---------
Total $730,000 $372,000
======== ========
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Proceeds under carried interest agreements decreased 7% to $206,000
during 1998 compared to $222,000 in 1997. The operators of the Company's carried
interest properties have been making capital expenditures which are being
recouped from production revenues.
Interest and other income was 40% lower in 1998. Interest income
decreased from $261,000 in 1997 to $143,000 in the current year because less
funds were available for investment and interest rates were lower. The 1998
period also includes proceeds from the sale of seismic data in the amount of
$25,000 compared to $18,000 in 1997. 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 $1,004,000 in 1998
from $855,000 in 1997 primarily as a result of increased Company activity in
connection with the Kotaneelee litigation and the Company's exploration program.
In addition, the expenses increased in the United States because of the 7%
increase in the value of the U.S. dollar compared to the Canadian dollar during
1998.
Legal expenses increased 49% during 1998 to $1,659,000 compared to
$1,114,000 during 1997. These expenses are related primarily to the cost of the
Kotaneelee litigation. During 1998, the Company continued the presentation of a
major part of its case against the working interest partners. The Company's case
was completed on September 16, 1998 and defendants' case is now proceeding. The
1998 costs represent both legal fees and the cost of various Company experts who
testified or were being prepared for testimony.
Lease operating costs increased 52% from $618,000 in 1997 to $943,000
in the 1998 period. The increase represents the charges by the operators of the
Company's properties which is related to the increased production. In addition,
the Company's share of production costs in producing Alberta heavy oil
increased.
Depletion, depreciation and amortization expense increased 95% in 1998
to $703,000 from $360,000 in 1997. The increase in depletion in 1998 is the
result of increased production and the amount of additional costs being
depleted.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
A foreign exchange gain of $187,000 was recorded in 1998, compared with
a gain of $46,000 on the Company's U.S. investments in 1997. In 1998, 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. The Canadian dollar was
equivalent to U.S.
$.6992 at December 31, 1997 compared to U.S. $.6528 at September 30, 1998.
Income taxes. No provision for income taxes is required for the current
period.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The information required by this item is not applicable to the Company
because the Company does not own any market risk sensitive instruments. At
September 30, 1998, the value of the Canadian dollar relative to the U.S. dollar
decreased 7% compared to its value on December 31, 1997.
<PAGE>
CANADA SOUTHERN PETROLEUM LTD.
PART II - OTHER INFORMATION
September 30, 1998
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
1. On July 1, 1998, the Company filed a Current Report
on Form 8-K to report that (1) the Kotaneelee trial
had adjourned until September 8, 1998 and (2) the
B-38 well in the Kotaneelee gas field would undergo
remedial work to correct a wellsite problem at an
estimated cost between $1-8 million (Cdn.).
2. On September 18, 1998, the Company filed a Current
Report on Form 8-K to report that the Company had
completed the presentation of its case against Amoco
Canada and several other partners in the Kotaneelee
gas field and presented evidence that the Company
sustained monetary damages of approximately $100
million.
<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 10, 1998 By /s/ Kelly B. Johnson
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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 0.6528
<CASH> 2,223,071
<SECURITIES> 0
<RECEIVABLES> 787,663
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,369,981
<PP&E> 23,815,025
<DEPRECIATION> (8,666,066)
<TOTAL-ASSETS> 18,518,940
<CURRENT-LIABILITIES> 1,317,701
<BONDS> 0
0
0
<COMMON> 14,234,740
<OTHER-SE> 2,730,713
<TOTAL-LIABILITY-AND-EQUITY> 18,518,940
<SALES> 1,659,905
<TOTAL-REVENUES> 1,828,080
<CGS> 0
<TOTAL-COSTS> 4,209,042
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,380,962)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,380,962)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,380,962)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
