SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-8490
ALAMCO, INC.
(Exact name of registrant as specified in its charter)
Delaware 55-0615701
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
200 West Main Street, Clarksburg, WV 26301
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (304) 623-6671
- --------------------------------------------------------------------------------
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
The number of shares outstanding of each of the registrant's classes of
common stock as of November 1, 1996, is set forth below:
Class of Stock Number of Shares Outstanding
Common Stock, $.10 par value 4,752,108
PART I. Financial Information Pages
Item 1. Financial Statements
Condensed Consolidated Statement of Income . . . . . . . . . . 3
for the three and nine months ended September 30, 1996 and 1995
Condensed Consolidated Balance Sheet as of . . . . . . . . . 4 - 5
September 30, 1996 and December 31, 1995
Condensed Consolidated Statement of Cash Flows . . . . . . . . 6
for the nine months ended September 30, 1996 and 1995
Condensed Consolidated Statement of Stockholders' . . . . . . 7
Equity for the nine months ended September 30, 1996 and 1995
Notes to the Condensed Consolidated Financial . . . . . . . 8 - 9
Statements
Item 2. Management's Discussion and Analysis of . . . . . . . . . . 10 - 13
Financial Condition and Results of Operations
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 14
Signature Page . . . . . . . . . . . . . . . . . . . . . . . 15
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ----------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Gas and oil sales $ 4,295 $ 2,668 $15,137 $ 8,727
Well tending income 238 275 641 811
Other revenue 212 206 728 601
------ ------ ------ ------
Total revenues 4,745 3,149 16,506 10,139
------ ------ ------ ------
Expenses:
Operating 2,004 1,692 6,087 4,862
Exploration 110 -- 110 --
General & administrative 1,122 754 2,709 2,312
Depreciation, depletion &
amortization 1,195 1,065 3,412 3,110
Interest 99 185 674 816
------ ------ ------ ------
Total expenses 4,530 3,696 12,992 11,100
------ ------ ------ ------
Income (loss)
from operations 215 (547) 3,514 (961)
Other nonoperating income,
net 49 31 200 145
------ ------ ------ ------
Income (loss) before
income taxes 264 (516) 3,714 (816)
Income tax provision
(benefit) 24 (164) 1,233 (287)
------ ------ ------ -------
Net income (loss) $ 240 ($352) $ 2,481 ($529)
====== ====== ====== ======
Net income (loss) per share $0.05 ($0.08) $0.51 ($0.11)
===== ===== ===== =====
Weighted average number of
shares outstanding 4,913,273 4,690,556 4,894,037 4,673,868
========= ========= ========= =========
September 30, December 31,
1996 1995
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $2,005 $3,297
Accounts receivable 3,338 3,116
Due from partnerships and programs 110 72
Inventories and other current assets 229 368
------ ------
Total current assets 5,682 6,853
------ ------
Property and equipment:
Gas and oil producing properties
(Successful Efforts Method) 84,928 78,076
Other property and equipment 7,712 5,740
------ -------
92,640 83,816
Less accumulated depreciation,
depletion and amortization 34,581 32,201
------- -------
58,059 51,615
Other assets 1,004 1,294
------- -------
Total assets $64,745 $59,762
======= =======
(Continued)
September 30, December 31,
1996 1995
---- ----
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and
capital lease obligations $ 38 $ 33
Accounts payable 1,635 1,026
Accrued expenses and other 1,403 1,545
Due working interest and royalty owners 1,070 3,309
Deferred revenue 61 113
Income tax payable 18 --
------- -------
Total current liabilities 4,225 6,026
------- -------
Long-term debt and capital lease obligations,
less current portion 17,268 13,674
Due working interest and royalty owners 322 325
Deferred revenue -- 29
Deferred taxes 9,778 8,936
Other long-term liabilities 401 429
------- -------
Total liabilities 31,994 29,419
------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $1.00 per share;
1,000,000 shares authorized; none issued
Common stock, par value $.10 per share;
15,000,000 shares authorized,
4,846,697 and 4,762,898 shares
issued and outstanding, respectively,
including treasury stock 481 476
Additional paid-in capital 31,647 31,243
Retained earnings (deficit) 1,329 (1,152)
-------- -------
33,457 30,567
Less: Treasury stock, 94,589 and
62,405 shares of common stock,
respectively 706 224
------- -------
Total stockholders' equity 32,751 30,343
------- -------
Total liabilities and stockholders' equity $64,745 $59,762
======= =======
Nine Months Ended
September 30,
-----------------
1996 1995
---- ----
Net income (loss) $ 2,481 ($529)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 3,412 3,110
Change in deferred tax liability 842 (345)
Exploration expense 110 --
Gains on asset sales (73) (22)
Issuance of stock for employee benefits and
compensation expense 140 105
Other factors, net 4 6
Increases (decreases) in cash from changes in:
Accounts receivable (222) 601
Due from partnerships and programs (38) (85)
Due working interest and royalty owners (2,239) (144)
Inventories and other current assets 139 1
Accounts payable & accrued expenses 467 (228)
Deferred revenue (52) (601)
Income tax payable 18 --
-------- -------
Net cash provided by operating activities 4,989 1,869
-------- -------
Cash flows from investing activities:
Proceeds from disposal of fixed assets 98 242
Capital expenditures (9,874) (4,019)
Investment in limited partnership -- (6)
Other assets 173 70
-------- -------
Net cash used in investing activities (9,603) (3,713)
-------- -------
Cash flows from financing activities:
Borrowings under line of credit agreement 4,600 2,400
Payments on line of credit (1,000) (500)
Additions to long-term debt 13 16
Principal payments on long-term debt and
capital lease obligations (18) (78)
Acquisition of treasury stock (516) (46)
Proceeds from exercise of stock options 71 106
Tax benefit from stock option exercise 232 --
Other liabilities (60) (818)
------- -------
Net cash provided by financing activities 3,322 1,080
------- -------
Net decrease in cash and temporary investments (1,292) (764)
Cash and cash equivalents - beginning of period 3,297 2,632
------- -------
Cash and cash equivalents - end of period $ 2,005 $ 1,868
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $1,043 $928
Income taxes 0 57
Common Stock Additional Retained Treasury Stock
------------- Paid-in Earnings --------------
Shares Dollars Capital (Deficit) Shares Dollars
------ ------- -------- -------- ------ -------
Balance
December 31, 1994 4,712,713 $471 $31,039 ($2,847) 63,360 $188
Issuance of treasury
stock -- -- 36 -- (10,370) (34)
Issuance of common stock 4,585 -- 35 -- -- --
Acquisition of
treasury stock -- -- -- --
6,402 46
Exercise of stock
options 32,700 4 102 -- -- --
Net loss -- -- -- (529) -- --
--------- ----- ------- -------- -------- -----
Balance
September 30, 1995 4,749,998 $475 $31,212 ($3,376) 59,392 $200
========= ===== ======= ======== ======== =====
Balance
December 31, 1995 4,762,898 $476 $31,243 ($1,152) 62,405 $224
Issuance of treasury
stock -- -- 77 -- (12,929) (34)
Issuance of common stock 2,541 -- 29 -- -- --
Acquisition of
treasury stock -- -- -- -- 45,113 516
Exercise of stock
options 81,258 5 66 -- -- --
Tax benefit of stock
option exercise -- -- 232 -- -- --
Net income -- -- -- 2,481 -- --
--------- ----- ------- -------- -------- -----
Balance
September 30, 1996 4,846,697 $481 $31,647 $1,329 94,589 $706
========= ===== ======= ======== ========= =====
1. Accounting Policies
Reference is hereby made to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 ("1995 10-K"), which includes additional
information about the Company, its operations and its consolidated financial
statements, and contains a summary of major accounting policies followed by the
Company in preparation of its consolidated financial statements. These policies
were also followed in preparing the quarterly financial statements included
herein. The year-end consolidated balance sheet data contained herein was
derived from audited financial statements, but does not include all disclosures
required by generally accepted accounting principles.
The management of the Company believes that all adjustments necessary to
make a fair statement of the results in these interim periods have been made.
All adjustments reflected in the financial statements are of a normal recurring
nature except as described in the Notes to Condensed Consolidated Financial
Statements. Net results for the nine month period ended September 30, 1996 are
not necessarily indicative of the results to be expected for the full year.
The disclosure provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" will be adopted by the
Company in its 1996 annual financial statements.
2. Cash and Cash Equivalents
Cash and cash equivalents totalled $2,005,000 at September 30, 1996. Of
this amount, approximately $1,589,000 was available for general corporate
purposes and the balance was held for third parties, including $297,000 in gas
and oil sales proceeds held for eventual distribution to outside working
interest and royalty owners, and $119,000 withheld from outside working interest
owners' distributions to be utilized for future ad valorem tax payments (Note
3). The Company's cash balance at September 30, 1996 includes $1,693,000
invested in commercial paper and U.S. Government and Agency Securities with an
annualized 5.0 percent return.
3. Plugging and Ad Valorem Tax Funds
The Company retains a portion of outside investors' monthly gas and oil
production proceeds to be utilized for anticipated future well plugging and
abandonment costs and ad valorem tax payments. The funds, totalling $441,000 at
September 30, 1996, are invested in securities issued or guaranteed by the
United States Treasury at Bank One, Texas, N.A. ("Bank One") in accounts
segregated from those of the Company, of which $322,000 is included in other
assets. Interest earned on the funds accrues to the benefit of the working
interest owners. Amounts corresponding to these assets are recorded in
liabilities.
4. Income Taxes
Income taxes are provided for financial reporting purposes based on
management's best estimate of the effective tax rate expected to be applicable
for the full calendar year. The tax provision for the three months ended
September 30, 1996 includes an adjustment to reflect the estimated effective tax
rate expected for the full year 1996.
5. Common Stock Held In Treasury
The Company contributed 8,750 and 10,370 shares of its common stock held in
treasury to the Company's 401(k) Plan on January 16, 1996 and February 28,
1995.
6. Earnings Per Share
Primary earnings per share is based on the weighted average number of
common and common equivalent shares outstanding. Common equivalent shares are
included in the calculation beginning in 1996. They were not significant in
previous years. Primary and fully diluted earnings per share are the same.
Management's discussion and analysis of changes in the Company's financial
condition, including results of operations and liquidity and capital resources
during the three and nine month periods ended September 30, 1996 and 1995,
respectively, are presented below.
Results of Operations
The Company recorded net income of $2,481,000 for the nine months ended
September 30, 1996, compared to a net loss of $529,000 for the same period of
1995. Income from operations for the first nine months of 1996 totalled
$3,514,000 compared to a loss from operations of $961,000 for the first nine
months of 1995.
Total revenues of $16,506,000 in the first nine months of 1996 were
$6,367,000 or 63 percent higher than total revenues of $10,139,000 in the first
nine months of 1995.
Gas and oil sales totalled $15,137,000 in the first nine months of 1996 and
represented a $6,410,000 increase over the same period last year. Revenues
were increased $4,569,000 by substantially higher gas prices as compared to
the first nine months of 1995. Higher gas sales volumes, higher oil sales
volumes and higher oil prices contributed $1,506,000, $152,000 and
$183,000, respectively, to the increase. Gas and oil sales volumes
totalled 5,039,000 equivalent thousand cubic feet ("EMCF"), a 19 percent
increase over the 4,231,000 EMCF sold during the nine month period ended
September 30, 1995. The Company received on average $3.00 per MCF and
$18.63 per barrel ("BBL") for the nine month period ended September 30,
1996, compared to $2.01 per MCF and $15.97 per BBL in the same period last
year.
Well tending income decreased $170,000 due principally to the reduction in
the number of wells the Company operates for outside investors.
Other operating revenue increased $127,000 due primarily to increased
marketing revenue as a result of higher gas and oil sales.
Total expenses in the first nine months of 1996 were $12,992,000, an
increase of $1,892,000 or 17 percent from expenses in the first nine months of
1995 of $11,100,000.
Operating expenses were higher by $1,225,000 or 25 percent due to an
increase of $629,000 in production taxes as a result of higher sales,
increased operating costs due to higher ownership in wells, increased
employee-related expenses, and the payment of a three year state severance
tax audit settlement of $77,000.
Alamco reported exploration expense of $110,000 for the nine months ended
September 30, 1996, as a result of the abandonment of the Hoffman Prospect
in Kentucky after a thorough evaluation of drilling results.
General and administrative expenses for the first nine months of 1996 were
higher by $397,000 or 17 percent as compared to last year primarily due to
compensation expenses related to stock options exercised in 1996. The
stock option expense was partially offset by income tax benefits realized
as a result of the exercise of the options. The Company reimburses
employees for their tax costs when exercising options up to the tax savings
realized by the Company as a result of the employee exercising the stock
option. Alamco's tax benefit resulting from the difference between the
option price and market price was credited directly to stockholders'
equity.
Depreciation, depletion and amortization expense was higher by $302,000 in
the first nine months of 1996 due to higher production and property and
equipment levels, partially offset by higher oil and gas reserve levels.
Interest expense for the first nine months of 1996 was $674,000, a decrease
of $142,000 over the same period last year due to more interest
capitalization resulting from increased drilling in 1996.
Non-operating income in the first nine months of 1996 totalled $200,000 as
compared to $145,000 in the same period last year due to higher gains on asset
sales.
The Company reported net income of $240,000 for the three months ended
September 30, 1996, compared to a net loss of $352,000 for the three months
ended September 30, 1995. Income from operations totalled $215,000 for the
third quarter of 1996, compared to a loss from operations of $547,000 for the
same period last year.
Third quarter 1996 revenues of $4,745,000 were higher by $1,596,000 or
51 percent compared to total revenues of $3,149,000 for the same period last
year.
Gas and oil sales increased by $1,627,000 to $4,295,000 over third quarter
1995 gas and oil sales of $2,668,000 due primarily to higher average gas
prices and volumes of $897,000 and $564,000, respectively. Higher oil
prices and volumes of $93,000 and $73,000, respectively, also contributed
to the increase. Gas and oil sales volumes totalled 1,678,000 EMCF and
1,356,000 EMCF for the third quarters of 1996 and 1995, respectively. The
Company received an average $2.50 per MCF and $19.48 per BBL for the third
quarter of 1996 compared to $1.92 per MCF and $15.20 per BBL last year.
Expenses in the three months ended September 30, 1996 totalled $4,530,000
and were $834,000 or 22 percent higher than the three months ended September 30,
1995, when expenses totalled $3,696,000.
Operating expenses of $2,004,000 for the quarter were $312,000 or 18
percent higher than the third quarter last year due principally to higher
production taxes of $142,000 as a result of higher gas sales, higher
operating costs due to higher ownership in wells and higher employee-
related expenses.
Alamco reported exploration expense of $110,000 in the third quarter of
1996 as a result of the abandonment of the Hoffman Prospect in Kentucky
after a thorough evaluation of drilling results.
General and administrative expenses were $368,000 or 49 percent higher than
the same period last year for the same reasons stated in the nine months
results.
Depreciation, depletion and amortization expense was higher by $130,000 for
the same reason stated in the nine months results. Interest expense was
lower by $86,000 due to higher interest capitalization.
Non-operating income in the third quarter of 1996 totalled $49,000 or an
increase of $18,000 from the third quarter of 1995 due to higher gains on asset
sales.
The Company recorded an income tax provision of $24,000 for the third
quarter of 1996, as compared to an income tax benefit of $164,000 in the third
quarter of 1995. The tax provision for the three months ended September 30,
1996 includes an adjustment to reflect the estimated effective tax rate expected
for the full year 1996.
Liquidity and Capital Resources
Working Capital. At September 30, 1996, the Company had working capital of
$1,457,000 as compared to $827,000 at December 31, 1995. Because the Bank One
credit facility agreement, as amended, calls for the payment of interest only
until July 1, 1998, current liabilities on the Company's September 30, 1996,
balance sheet do not include any principal amounts for this credit facility.
Cash and cash equivalents totalled $2,005,000 at September 30, 1996. Of
this amount, approximately $1,589,000 was available for general corporate
purposes and the balance was held for other interest owners. Operating
activities provided a net $4,989,000 which was net of $1.9 million paid to
outside owners from the proceeds of the Columbia settlement. Investment
activities used a net $9,603,000. Financing activities provided a net
$3,322,000.
Revolving Credit Facility. The Company has in place a $30.0 million
revolving credit facility with Bank One. Currently $11.3 million is available
for borrowing by the Company. Interest accrues and is paid monthly at a rate of
Bank One's prime rate plus one-fourth of one percent.
Capital Expenditures and Commitments. In the first nine months of 1996,
the Company's capital expenditures totalled $9,874,000 including approximately
$6,977,000 spent on gas and oil exploration, development and acquisition
activities and $1,295,000 to install a pipeline in Tennessee and Kentucky. The
Company acquired its executive offices containing approximately 20,000 square
feet on January 5, and February 7, 1996 for $568,000 using funds borrowed from
the Bank One credit facility. The remaining capital expenditures were invested
in other property and equipment.
Most of the Company's capital spending is discretionary and the ultimate
level of spending will be dependent, among other things, on the Company's
assessment of the gas and oil business environment, the number of gas and oil
prospects available to the Company, and gas and oil business opportunities in
general. For the ten months ended October 31, 1996, the Company drilled 32
wells, 22 of which were successful, 5 dry holes and 5 wells which are still
being evaluated. Alamco currently plans to spend $13,100,000 on 1996 gas and
oil investments and has expanded its original 1996 drilling program from 30
wells to 39 wells. As part of its 1996 capital program, Alamco is installing
a 6-inch, 22 mile pipeline in Tennessee to interconnect a substantial portion of
its Tennessee and Kentucky production and improve its gas marketing
opportunities to transport gas to alternative purchasers. The Company plans to
continue with its acreage acquisition strategy and will attempt to position
itself to increase both exploratory and development drilling. The Company
remains committed to the acquisition of producing properties at favorable
prices.
On July 11, 1996, the Company entered into a contract to sell 6,000 MMBtus
of gas per day on the CNG Transmission Corporation pipeline for the period
October 1, 1996 through March 31, 1997 at a price of $3.22 per MMBtu. The price
was based on the gas futures prices on the New York Mercantile & Exchange, plus
a premium as consideration for Appalachian gas. The sale was made through
Phoenix-Alamco Ventures, a limited liability company, of which Alamco is a 50
percent owner. As a result of this and other contracts, the Company has locked
in approximately 44 percent of its gas for November 1, 1996 through March 31,
1997, at an average price of $3.20 per MCF.
Shut-in of Gas Volumes. Effective August 1, 1996, the Company was required
to shut-in the majority of its gas volumes on the CNG Transmission Corporation
("CNG") pipeline due to maintenance on the system. The shut-in lasted
approximately three (3) weeks, which reduced volumes by approximately 97,000
MCFs and revenue by approximately $227,000 net to the Company. The Company has
experienced similar shut-ins in previous years.
The EPA issued a complaint on May 23, 1994 for alleged violations of the
Clean Water Act resulting from an oil discharge at Alamco's Days Chapel Field in
Claiborne County, Tennessee. The incident occurred in December 1993 when
vandals severed locks securing the valves on the Alamco storage tanks and
discharged approximately 174 barrels of oil into a local creek. In September
1996, the United States Environmental Protection Agency ("EPA") issued a Final
Order which entered a Consent Agreement that the Company reached with the EPA to
settle the administrative complaint. The settlement will not result in any
material expense in the Company's 1996 financial statements.
Forward-Looking Statements. Some of the statements contained in this Form
10-Q, including without limitation projections of capital expenditures and
percentages of locked-in volumes, may be "forward-looking" statements. In order
to comply with the safe harbor provision of the Private Securities Litigation
Reform Act of 1995, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's forward-
looking statements. Reference is hereby made to the Business Item of Part I of
the Company's 1995 10-K for a discussion of factors that may affect forward-
looking statements.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. Description Filing
---------- ----------- ------
27 Financial Data Schedule. Filed herewith
(b) No current reports on Form 8-K were filed during the quarter ended
September 30, 1996.
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 under-
signed thereunto duly authorized.
November 8, 1996 /s/ John L. Schwager
-------------------------------
John L. Schwager, President,
Chief Executive Officer, and
Principal Financial Officer
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