<PAGE> 1
================================================================================
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 MARCH 31, 1994
( ) 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 1-8717
--------------------
AMERICAN OIL AND GAS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-1967662
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
333 CLAY STREET
SUITE 2000
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 739-2900
--------------------
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 and
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
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. As of the close of
business on May 13, 1994, the Company had 25,969,395 shares of common stock,
par value $0.04 per share, outstanding.
================================================================================
<PAGE> 2
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF AMERICAN OIL AND GAS CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Page
----
Consolidated Balance Sheets
As of March 31, 1994 and December 31, 1993 3
Consolidated Statements of Operations
For the three months ended March 31, 1994 and 1993 4
Consolidated Statements of Cash Flows
For the three months ended March 31, 1994 and 1993 5
Notes to Unaudited Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10
2
<PAGE> 3
AMERICAN OIL AND GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1994 (UNAUDITED) AND DECEMBER 31, 1993
<TABLE>
<CAPTION>
ASSETS 1994 1993
-------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 10,789 $ 9,207
Accounts receivable 82,911 90,850
Inventories 8,539 17,779
Amounts due from Cabot Corporation 5,512 5,724
Deferred income tax benefits and other 5,641 4,935
-------------- ----------------
Total current assets 113,392 128,495
-------------- ----------------
Property and Equipment, at cost:
Gas gathering, processing and transmission 342,537 332,037
Other 12,635 12,090
-------------- ----------------
355,172 344,127
Less--Accumulated depreciation and amortization (57,117) (52,367)
-------------- ----------------
298,055 291,760
-------------- ----------------
Other 1,714 1,773
-------------- ----------------
Total Assets $ 413,161 $ 422,028
============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 23,542 $ 22,568
Accounts payable 62,162 73,506
Other 4,736 2,679
-------------- ----------------
Total current liabilities 90,440 98,753
-------------- ----------------
Long-term Debt, Net of Current Maturities 96,084 100,232
-------------- ----------------
Deferred Income Taxes and Other 33,585 33,137
-------------- ----------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $10 par value, 2,000,000
shares authorized, none issued and outstanding -- --
Common stock, $.04 par value, 50,000,000 shares authorized,
25,969,395 and 25,884,395 issued and outstanding, respectively 1,039 1,035
Capital in excess of par value 195,858 195,313
Accumulated deficit (3,011) (5,285)
Deferred compensation (834) (1,157)
-------------- ----------------
Total stockholders' equity 193,052 189,906
-------------- ----------------
Total Liabilities and Stockholders' Equity $ 413,161 $ 422,028
============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
AMERICAN OIL AND GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1994 1993
--------------- ----------------
<S> <C> <C>
Revenues:
Natural gas sales $ 139,747 $ 114,491
Natural gas liquids sales 13,595 16,565
Transportation 2,977 2,795
Other 401 296
--------------- ---------------
156,720 134,147
--------------- ---------------
Operating Costs and Expenses:
Cost of sales 134,594 112,419
Operation and maintenance 5,439 5,192
General and administrative 5,572 4,622
Depreciation and amortization 4,805 4,253
Taxes--other than income taxes 872 821
--------------- ---------------
151,282 127,307
--------------- ---------------
Operating Income 5,438 6,840
--------------- ---------------
Other Income (Expense):
Interest income 124 152
Interest expense (1,969) (2,317)
Other, net (68) 45
--------------- ---------------
(1,913) (2,120)
--------------- ---------------
Income Before Income Taxes 3,525 4,720
Provision for Income Taxes 1,251 1,361
Net Income 2,274 3,359
--------------- ---------------
Preferred Stock Dividends -- 43
--------------- ---------------
Net Income Applicable to Common Stock $ 2,274 $ 3,316
=============== ===============
Earnings Per Common Share $ 0.09 $ 0.13
=============== ===============
Number of Shares Used in Computing
Earnings Per Common Share 26,649 26,257
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
AMERICAN OIL AND GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993
------------- ------------
<S> <C> <C>
Cash and Cash Equivalents at Beginning of Period $ 9,207 $ 14,165
------------- ------------
Cash Flows From Operating Activities:
Net income 2,274 3,359
Adjustments to reconcile net income to net
cash provided by operating activities--
Depreciation and amortization 4,805 4,253
Deferred income taxes 511 1,362
Resolution of contractual obligations (514) (1,252)
Executive stock compensation 323 --
Provision for doubtful accounts -- 150
Change in assets and liabilities net of effects from
acquisitions--
Decrease in accounts receivable 8,775 12,923
Decrease in inventories 9,240 5,339
(Increase) decrease in prepaid expenses and other (701) 103
Decrease in accounts payable (11,344) (6,225)
Increase in other current liabilities 2,057 895
Other assets and liabilities 216 40
------------- ------------
Net Cash Provided by Operating Activities 15,642 20,947
------------- ------------
Cash Flows From Investing Activities:
Payments for acquisitions, net of cash acquired -- (1,947)
Capital expenditures (11,050) (4,687)
(Payments) collections under Basket Agreement (322) 1,225
Other -- (468)
------------- ------------
Net Cash Used in Investing Activities (11,372) (5,877)
------------- ------------
Cash Flows From Financing Activities:
Principal payments on long-term debt (4,274) (17,293)
Proceeds from issuance of long-term debt 1,100 12,000
Preferred stock dividends paid -- (407)
Proceeds from issuance of common stock 486 35
------------- ------------
Net Cash Used in Financing Activities (2,688) (5,665)
------------- ------------
Net Increase in Cash and Cash Equivalents 1,582 9,405
------------- ------------
Cash and Cash Equivalents at End of Period $ 10,789 $ 23,570
============= ============
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 2,206 $ 2,518
Income taxes $ 750 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
AMERICAN OIL AND GAS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL
The unaudited interim consolidated financial statements of
American Oil and Gas Corporation and subsidiaries (the "Company"), have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and note disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. In the opinion
of management, the interim consolidated financial statements reflect all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the Company's financial position, results of operations and cash flows
for the interim periods presented. The results of operations for the interim
periods are not necessarily indicative of the results of operations to be
expected for the full year. These interim consolidated financial statements
should be read in conjunction with the consolidated financial statements of the
Company included in its 1993 Annual Report on Form 10-K.
(2) PROPOSED MERGER
On March 24, 1994, the Company and K N Energy, Inc. ("KNE")
entered into an agreement of merger whereby KNE would exchange 0.47 share of
its common stock for each outstanding share of the Company's common stock. The
merger is subject to, among other things, the approval of the stockholders of
each company at special meetings of stockholders expected to be held in July
1994. A preliminary Joint Proxy/Prospectus was filed with the Securities and
Exchange Commission on April 25, 1994.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The following table includes certain financial and operating data
for the three months ended March 31, 1994 and 1993 (in thousands, except per
unit data):
<TABLE>
<CAPTION>
1994 1993
------------- -------------
<S> <C> <C>
FINANCIAL DATA:
Revenues $ 156,720 $ 134,147
Operating Income $ 5,438 $ 6,840
Net Income Applicable to Common Stock $ 2,274 $ 3,316
Earnings Per Share $ 0.09 $ 0.13
Average Sales Prices--
Natural gas, per MMBtu $ 2.41 $ 2.19
Natural gas liquids (NGL), per gallon $ 0.28 $ 0.34
Condensate, per barrel $ 15.42 $ 15.20
Average Cost of Sales--
Gas Sales, per MMBtu $ 2.17 $ 1.96
NGL, per gallon $ 0.20 $ 0.21
OPERATING DATA:
Gas Sales (in MMBtu) 57,925 52,260
NGL Sales (in gallons) 40,974 42,042
Condensate Sales (in barrels) 139 154
Transportation Volumes (in MMBtu) 25,544 29,612
Average Daily Throughput (in MMBtu) 1,003 980
Average Daily Gas Volumes Processed
Through Company-owned Plants (in MMBtu) 194 205
</TABLE>
Note: 1.025 MMBtu of natural gas approximates 1.0 Mcf.
QUARTER ENDED MARCH 31, 1994 COMPARED WITH 1993. Net income for
the current quarter was approximately 31 percent lower than the first quarter of
1993 primarily due to:
(i) a $2.1 million (39 percent) decrease in
gross margin on NGL sales related to lower
sales prices during the current quarter;
(ii) $0.6 million of expenses in the current
quarter related to the proposed merger with
K N Energy, Inc. ("KNE") and the
reorganization of the Company's marketing
and supply departments;
(iii) a lower gross margin contribution from
settlements of certain contractual matters
($0.5 million in the current quarter
compared with $1.3 million for the first
quarter of 1993); and
(iv) a $0.3 million benefit in the first quarter
of 1993 related to utilization of a capital
loss carryforward.
These factors were partially offset by a $2.3 million (20 percent) increase in
gross margin on natural gas sales during the current quarter.
7
<PAGE> 8
NATURAL GAS SALES. Natural gas sales volumes for the current
quarter were approximately 58 Bcf or 11 percent higher than the first quarter
of 1993 due to increased sales to on-system markets, particularly agricultural
customers. The Company's winter-heating sales during the current quarter were
approximately 10 percent lower than the first quarter of 1993. The increase in
sales to agricultural customers reflects an earlier start of the irrigation
season as compared with the prior year.
Gross margin on natural gas sales for the current quarter was
approximately $2.3 million higher than 1993. This increase, which consisted of
an 11 percent increase in sales volumes and 8 percent increase in unit margin,
reflected (i) higher sales to irrigation and other on-system markets, (ii) more
effective use of natural gas financial instruments in managing natural gas
price risks, (iii) reformation of certain contracts and (iv) more effective use
of the Company's natural gas storage facilities.
NATURAL GAS LIQUIDS SALES. NGL sales volumes for the current
quarter were modestly below the first quarter of 1993, due to lower plant
throughput. The lower throughput primarily reflected the highly competitive
market for the gas supply behind the Company's plants.
Gross margin on NGL sales decreased approximately $2.1 million
primarily as a result of the 18 percent drop in NGL prices. The effects of the
lower prices were partially offset by a 5 percent decrease in the unit cost of
sales from the effective hedging of plant fuel and shrinkage.
Operation and maintenance expenses increased slightly in the current
quarter compared with the first quarter of 1993 due to higher operating costs
of the natural gas processing plants. The $1.0 million increase in general and
administrative expenses in the current quarter included (i) $0.6 million in
expenses related to the proposed merger with KNE and the reorganization of the
Company's marketing and supply departments and (ii) $0.3 million of
amortization of deferred compensation related to executive stock awards granted
in late 1993.
Interest expense for the current quarter was approximately $0.3
million lower than the first quarter of 1993. The decrease related to the
expiration of an interest rate collar assumed as part of the acquisition of the
natural gas processing business in 1992 and the effects of interest-rate swap
agreements entered into by the Company in 1993 to convert a portion of its
fixed-rate debt to variable (LIBOR-based) rates.
The effective tax rate for the current quarter was approximately
35.5 percent compared with 28.8 percent for the first quarter of 1993. The 1994
rate reflects the increase in the corporate tax rate that was enacted in
mid-1993 while the 1993 rate reflects a $0.3 million benefit related to
utilization of a capital loss carryforward.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and capital resources continued to improve
primarily as a result of strong net cash flows from operating activities. As
of March 31, 1994, the Company had cash and cash equivalents of $10.8 million
and unused borrowing capacity of $17 million under its revolving credit
facility.
Net cash provided by operating activities was $15.6 million for the
current quarter compared with $20.9 million for the first quarter of 1993. The
decrease primarily related to changes in the components of working capital.
Significant investing expenditures for the current quarter primarily consisted
of capital expenditures of $11.1 million related to expansion of the Company's
gas storage facilities.
8
<PAGE> 9
During 1993, the Company entered into two interest-rate swap
agreements that effectively converted a portion of its fixed-rate debt to
variable rates based on LIBOR. Under terms of one agreement, the Company pays
LIBOR, which is reset every six months in arrears, on $25 million of notional
principal in exchange for a fixed rate of 5.07 percent. Under the second
agreement, the Company pays LIBOR, which is reset every year in arrears, on
$10 million of notional principal in exchange for a fixed rate of 5.27 percent.
Differences between the estimated amounts to be received and paid under these
agreements are included in interest expense.
The Company's projected non-operating cash requirements for 1994 are
primarily for capital projects and debt service. Estimated capital expenditures
for the remainder of 1994 are approximately $10 million. Management of the
Company believes that future cash flows from operating activities, together
with the available borrowings under its $75 million revolving credit facility,
will be sufficient to meet these requirements. The Company also intends to
seek opportunities to construct or acquire additional gas gathering, processing
or transportation facilities, which may require additional financing and the
approval of its lenders.
On March 24, 1994, the Company and KNE entered into an agreement of
merger whereby KNE would exchange 0.47 share of its common stock for each
outstanding share of the Company's common stock. The merger is subject to,
among other things, the approval of the stockholders of each company at special
meetings of stockholders expected to be held in July 1994. A preliminary Joint
Proxy/Prospectus was filed with the Securities and Exchange Commission on
April 25, 1994.
9
<PAGE> 10
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material developments with respect to previously
reported legal proceedings of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Agreement and Plan of Merger dated as of March 24,
1994 among K N Energy, Inc., KNE Acquisition
Corporation and the Company hereby incorporated by
reference to Exhibit 2.1 to the Company's Form 8-K
dated March 30, 1994.
(b) Reports on Form 8-K
A Current Report on Form 8-K dated March 30, 1994
was filed to report under "Item 5. Other Events"
the execution of an Agreement and Plan of Merger
providing for the merger of the Company with KNE
Acquisition Corporation, a wholly-owned subsidiary
of K N Energy, Inc.
10
<PAGE> 11
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.
AMERICAN OIL AND GAS CORPORATION
Date: May 13, 1994 By: /s/ David M. Carmichael
----------------------------
David M. Carmichael
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 1994 By: /s/ Thomas H. Fanning
----------------------------
Thomas H. Fanning
Vice President and
Chief Financial Officer
(Principal Financial Officer)
11
