UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 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 August 10, 1998.
<PAGE>
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CANADA SOUTHERN PETROLEUM LTD.
CONSOLIDATED BALANCE SHEETS
(Expressed in Canadian dollars)
(unaudited)
June 30, December 31,
1998 1997
----------- -----------
Assets
Current assets:
Cash and cash equivalents $ 2,873,324 $ 2,129,156
Marketable securities - 3,373,334
Accounts and interest receivable 742,405 1,226,086
Other assets 237,312 242,278
----------- -----------
Total current assets 3,853,041 6,970,854
----------- -----------
Oil and gas properties and equipment
(full cost method) 15,011,910 13,984,771
----------- -----------
Total assets $18,864,951 $20,955,625
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 861,905 $ 1,120,521
Accrued liabilities 276,786 277,715
----------- -----------
Total current liabilities 1,138,691 1,398,236
----------- -----------
Future site restoration costs 226,474 210,974
----------- -----------
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 (22,989,093) (21,142,464)
----------- -----------
Total shareholders' equity 17,499,786 19,346,415
----------- -----------
Total liabilities and shareholders' equity $18,864,951 $20,955,625
=========== ===========
<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 Six months ended
June 30, June 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Revenues:
<S> <C> <C> <C> <C>
Oil sales $ 198,798 $ 238,215 $ 425,377 $ 532,612
Gas sales 130,951 94,546 277,349 282,224
Proceeds under carried interest agreements 53,909 146,798 109,997 147,484
Interest and other income 58,450 85,222 132,099 190,359
------------ ------------ ------------ ------------
Total revenues 442,108 564,781 944,822 1,152,679
------------ ------------ ------------ ------------
Costs and expenses:
General and administrative 395,653 322,514 763,885 613,483
Legal 552,063 451,037 1,056,151 786,809
Lease operating costs 269,910 197,160 582,834 432,049
Depletion, depreciation, and amortization 218,900 121,900 401,800 250,100
Foreign exchange loss (gain) (106,429) 13,130 (69,777) (51,423)
Provision for future site restoration costs 8,200 4,500 15,500 9,500
Rent 20,771 13,418 41,058 27,093
------------ ------------ ------------ ------------
Total costs and expenses 1,359,068 1,123,659 2,791,451 2,067,611
------------ ------------ ------------ ------------
Loss before income taxes (916,960) (558,878) (1,846,629) (914,932)
Income taxes - - - -
------------ ------------ ------------ ------------
Net loss (916,960) (558,878) (1,846,629) (914,932)
Deficit - beginning of period (22,072,133) (19,740,854) (21,142,464) (19,384,800)
------------ ------------ ------------ ------------
Deficit - end of period $(22,989,093) $(20,299,732) $(22,989,093) $(20,299,732)
============= ============= ============= =============
Average number of shares outstanding 14,234,740 13,992,790 14,234,740 13,977,254
========== ========== ========== ==========
Net loss per share (Basic & Diluted) $(.06) $(.04) $(.13) $(.07)
====== ====== ====== ======
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CANADA SOUTHERN PETROLEUM LTD.
Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)
(unaudited)
Six months ended
June 30,
1998 1997
---------- ----------
Cash flows from operating activities:
Net loss $(1,846,629) $ (914,932)
Adjustments to reconcile net loss
to net cash used in operating activity:
Depreciation, depletion and amortization 401,800 250,100
Future site restoration costs 15,500 (28,094)
Change in current assets and liabilities:
Accounts and interest receivable 483,680 (162,834)
Prepaid insurance and other 4,967 7,066
Accounts payable (258,616) 68,522
Accrued liabilities (929) 53,967
---------- ----------
Net cash used in operations (1,200,227) (726,205)
---------- ----------
Cash flows from investing activities:
Additions to oil and gas properties (net) (1,428,939) (1,323,882)
Sale (purchase) of marketable securities 3,373,334 2,062,109
---------- ----------
Net cash provided by investing activities 1,944,395 738,227
---------- ----------
Cash flows from financing activities:
Exercise of stock options - 693,000
---------- ----------
Net cash from financing activities - 693,000
---------- ----------
Increase in cash and cash equivalents 744,168 705,022
Cash and cash equivalents at the
beginning of period 2,129,156 2,709,597
---------- ----------
Cash and cash equivalents at the
end of period $2,873,324 $3,414,619
========== ==========
<PAGE>
PART I - FINANCIAL INFORMATION
CANADA SOUTHERN PETROLEUM LTD.
June 30, 1998
(Expressed in Canadian Dollars)
Item 1. Financial Statements - Notes
The information for the three and six month periods ended June 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 June 30, 1998, the Company had approximately $2.9 million of cash
and securities available. Of this amount, approximately $2.5 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 to continue the Kotaneelee field litigation.
The Company is considering the sale of some of its oil and gas
properties in which the Company holds a relatively minority interest and the
future exploration prospects for these properties are considered marginal.
Any proceeds from any sale will be added to the Company's working capital.
Cash flow used in operations during the three months ended June 30,
1998 increased to $1,200,000 compared to $726,000 during the comparable 1997
period. The difference between the periods was caused primarily by the
following:
Increase in loss from operations $(736,000)
Changes in accounts receivable and other 644,000
Net change in current liabilities (382,000)
----------
Difference in net cash used in operations $(474,000)
==========
<PAGE>
PART I - FINANCIAL INFORMATION
CANADA SOUTHERN PETROLEUM LTD.
June 30, 1998
(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 $18,227,000, of which the
Company's share is $5,468,000, remain to be recovered at April 30, 1998.
Recently, remedial work was performed by the operator on one of the wells in the
Kotaneelee field at a cost (through July 31, 1998) of approximately $6 million.
This amount is not reflected in the above amounts. Initial indications are that
the remedial work on the well could significantly increase production from the
field. This remedial work is continuing and additional costs may be incurred.
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 1998 will be approximately $750,000. 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 has determined that the year 2000 century change will have
no material impact on the Company's internal operations or financial results.
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 June 30, 1998 vs. June 30, 1997
The net loss for the quarter ended June 30, 1998 was $916,960 ($.06 per
share) compared to a net loss of $558,878 ($(.04 per share) for the 1997 period.
A summary of revenue and expenses during the periods is as follows:
1998 1997 Net Change
---- ---- ------------
Revenues $ 442,108 $ 564,781 $ (122,673)
Costs and expenses (1,359,068) (1,123,659) (235,409)
------------ ------------ ------------
Net loss $ (916,960) $ (558,878) $ (358,082)
============ ============ ============
Oil sales decreased 17% due to a 42% decrease in the price of oil sold
which was partially offset by a 40% 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:
Three month period ended June 30,
1998 1997
----------------------------- ------------------------------
Average price Average price
bbls per bbl Total bbls per bbl Total
Oil sales 19,724 $13.13 $259,000 14,102 $22.82 $322,000
Royalties paid (60,000) (84,000)
--------- ---------
Total $199,000 $238,000
======== ========
Gas sales increased 39%. There was an 8% increase in gas prices
combined with a 27% 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 June 30,
1998 1997
----------------------------- ------------------------------
Average price Average price
mmcf per mcf Total mmcf per mcf Total
Gas sales 57 $2.01 $115,000 45 $1.86 $84,000
Royalty income 31,000 23,000
Royalties paid (15,000) (12,000)
--------- ---------
Total $131,000 $ 95,000
======== ========
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Proceeds under carried interest agreements decreased 63% to $54,000
during 1998 compared to $147,000 in 1997. The operators of the Company's carried
interest properties have been making capital expenditures on the properties
which are being recouped from production revenues.
Interest and other income was 31% lower in 1998. Interest income
decreased 42% from $83,000 in 1997 to $48,000 in the current period due to the
decrease in funds available for investment and lower interest rates during 1998
compared to the prior period. In addition, the 1998 period includes proceeds
from the sale of seismic data in the amount of $10,000 compared to $2,000 in
1997.
General and administrative costs increased 23% in 1998 to $396,000 from
$323,000 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 incurred in the United States also increased because
of the 4% increase in the value of the U.S. dollar compared to the Canadian
dollar during the period.
Legal expenses increased 22% during 1998 to $552,000 compared to
$451,000 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 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 37% from $197,000 in 1997 to $270,000
in the 1998 period. The increase represents the increased charges by the
operators of the Company's properties during the current period. The production
on these properties also increased proportionately during the period.
Depletion, depreciation and amortization expense increased 80% in 1998
to $219,000 from $122,000 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 $106,000 was recorded in 1998, compared with
a loss of $13,000 in 1997 on the Company's U.S. investments. The value of the
Canadian dollar was U.S. $.7045 at March 31, 1998 compared to U.S.
$.6813 at June 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)
Six month period ended June 30, 1998 vs. June 30, 1997
The net loss for the quarter ended June 30, 1998 was $1,846,629 ($(.13)
per share) compared to a net loss of $914,932 ($(.07) per share) for the 1997
period. A summary of revenue and expenses during the periods is as follows:
1998 1997 Net Change
---- ---- ----------
Revenues $ 944,822 $ 1,152,679 $(207,857)
Costs and expenses (2,791,451) (2,067,611) (723,840)
----------- ------------ ---------
Net loss $(1,846,629) $ (914,932) $(931,697)
============ ============ ==========
Oil sales decreased 20% due to a 42% decrease in the price of oil sold
which was partially offset by a 41% 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:
Six month period ended June 30,
1998 1997
----------------------------- ------------------------------
Average price Average price
bbls per bbl Total bbls per bbl Total
Oil sales 39,419 $13.73 $541,000 27,962 $23.81 $666,000
Royalties paid 116,000 (133,000)
-------- ---------
Total $425,000 $533,000
======== ========
Gas sales decreased 2%. There was a 25% decrease in gas prices which
was partially offset by a 22% increase in 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:
Six month period ended June 30,
1998 1997
----------------------------- ------------------------------
Average price Average price
mmcf per mcf Total mmcf per mcf Total
Gas sales 109 $2.19 $239,000 89 $2.92 $260,000
Royalty income 75,000 79,000
Royalties paid (37,000) (57,000)
--------- ---------
Total $277,000 $282,000
======== ========
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Proceeds under carried interest agreements decreased 25% to $110,000
during 1998 compared to $147,000 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 31% lower in 1998. Interest income
decreased from $181,000 in 1997 to $111,000 in the current year due to a
decrease in funds available for investment and lower interest rates during 1998
compared to the prior period. In addition, the 1998 period includes proceeds
from the sale of seismic data in the amount of $21,000 compared to $9,000 in
1997.
General and administrative expenses increased 25% to $764,000 in 1998
from $613,000 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 5%
increase in the value of the U.S. dollar compared to the Canadian dollar during
1998.
Legal expenses increased 34% during 1998 to $1,056,000 compared to
$787,000 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 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 35% from $432,000 in 1997 to $583,000
in the 1998 period. The increase represents the increased charges by the
operators of the Company's properties during the current period. The production
on these properties also increased proportionately during the period.
Depletion, depreciation and amortization expense increased 61% in 1998
to $402,000 from $250,000 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 $70,000 was recorded in 1998, compared with
a gain of $51,000 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.
Income taxes. No provision for income taxes is required for the current
period.
<PAGE>
PART II - OTHER INFORMATION
CANADA SOUTHERN PETROLEUM LTD.
June 30, 1998
Item 4. Submission of Matters to a Vote of Security Holders
(a) On June 11, 1998, the Company held its Annual General
Meeting of Shareholders.
(b) Mr. Benjamin W. Heath was reelected a director of the
Company. The vote was as follows:
For 475,427
Withheld 41,157
(c) The firm of Ernst & Young, Chartered Accountants, was
appointed as the Company's independent auditors for the
year ending December 31, 1998. The vote was as follows:
For 502,816
Against 6,952
Abstain 6,816
(d) The 1998 Stock Option Plan was approved. The vote was as
follows:
For 364,883
Against 105,146
Abstain 46,555
Item 6. Exhibits and Reports on Form 8-K
None.
<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: August 13, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 0.6813
<CASH> 2,873,324
<SECURITIES> 0
<RECEIVABLES> 742,405
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,853,041
<PP&E> 23,377,976
<DEPRECIATION> (8,366,066)
<TOTAL-ASSETS> 18,864,951
<CURRENT-LIABILITIES> 1,138,691
<BONDS> 0
0
0
<COMMON> 14,234,740
<OTHER-SE> 3,265,046
<TOTAL-LIABILITY-AND-EQUITY> 18,864,951
<SALES> 812,723
<TOTAL-REVENUES> 944,822
<CGS> 0
<TOTAL-COSTS> 2,791,451
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,846,629)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,846,629)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,846,629)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
