<PAGE>
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 February 29, 1996
----------------------------------
or
[ ] 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: 1-9872
------------------------------------------
COLUMBUS ENERGY CORP.
- -----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-0891713
- -----------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
1660 Lincoln St., Denver, CO 80264
- -----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(303) 861-5252
- -----------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- -----------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
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
(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 each of the
issuer's classes of common stock, as of the latest practicable
date.
Class Outstanding at April 11, 1996
- ----------------------------- -----------------------------
Common stock, $.20 par value 3,036,399
<PAGE>
COLUMBUS ENERGY CORP.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
February 29, 1996 and
November 30, 1995 3
Consolidated Statements of Income -
Three Months Ended February 29,
1996 and February 28, 1995 5
Consolidated Statement of
Stockholders' Equity -
Three Months Ended February 29, 1996 6
Consolidated Statements of Cash Flows -
Three Months Ended February 29, 1996
and February 28, 1995 7
Notes to the Financial Statements 9
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Items 2-5. Not Applicable
Item 6. Exhibits and Reports
on Form 8-K 27
Signatures 28
2<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COLUMBUS ENERGY CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
February 29, November 30,
1996 1995
----------- -----------
(unaudited)
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,067 $ 1,414
Accounts receivable:
Joint interest partners 1,597 1,258
Oil and gas sales 1,312 817
Less allowance for doubtful accounts (116) (116)
Income tax receivable - 7
Deferred income taxes (Note 3) 861 1,290
Inventory of oil field equipment,
at lower of average cost or market 86 76
Other 30 78
------- -------
Total current assets 4,837 4,824
------- -------
Property and equipment:
Oil and gas assets, successful efforts
method (Note 2) 25,452 22,244
Other property and equipment 2,032 2,028
------- -------
27,484 24,272
Less: Accumulated depreciation,
depletion and amortization
and valuation allowance (11,440) (10,775)
------- -------
Net property and equipment 16,044 13,497
------- -------
$ 20,881 $ 18,321
======== ========
</TABLE>
(continued)
3<PAGE>
COLUMBUS ENERGY CORP.
CONSOLIDATED BALANCE SHEETS - (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
February 29, November 30,
1996 1995
----------- -----------
(unaudited)
(in thousands)
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,462 $ 1,314
Undistributed oil and gas
production receipts 344 348
Accrued production and property taxes 433 635
Prepayments from joint interest owners 59 189
Accrued expenses 305 318
Other 93 79
------ ------
Total current liabilities 2,696 2,883
------ ------
Long-term bank debt (excluding current
maturities) (Note 2) 4,000 1,600
Deferred income taxes (Note 3) 525 652
Commitments and contingent liabilities
(Note 2)
Stockholders' equity:
Preferred stock authorized 5,000,000
shares, no par value, none issued - -
Common stock authorized 20,000,000 shares
shares of $.20 par value; shares issued
3,333,974 in 1996, and 3,328,580 in 1995
(outstanding 3,054,899 in 1996 and
3,068,149 in 1995) 667 666
Additional paid-in capital 15,868 15,842
Retained earnings (accumulated
deficit), since December 1, 1987 (828) (1,378)
------ ------
15,707 15,130
Less: Treasury stock at cost
279,075 shares in 1996 and
260,431 shares in 1995 (2,047) (1,944)
------ ------
Total stockholders' equity 13,660 13,186
------ ------
$ 20,881 $ 18,321
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4<PAGE>
COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------
February 29, 1996 February 28, 1995
----------------- -----------------
(in thousands, except per share data)
<S> <C> <C>
Revenues:
Oil and gas sales $ 2,592 $ 2,557
Operating and management
services 288 426
Interest and other income 204 41
-------- --------
Total revenues 3,084 3,024
-------- --------
Costs and expenses:
Lease operating expenses 565 590
Property and production taxes 265 233
Operating and management
services 202 292
General and administrative 211 371
Depreciation, depletion and
amortization 675 750
Impairment of long-lived assets 165 -
Exploration expense 33 59
-------- --------
Total costs and expenses 2,116 2,295
-------- --------
Operating income 968 729
-------- --------
Other expenses (income):
Interest 71 82
Litigation (Note 4) 9 74
Other 1 -
-------- --------
81 156
-------- --------
Earnings before income taxes 887 573
Provision for income taxes
(Note 3) 337 218
-------- --------
Net earnings $ 550 $ 355
======== ========
Earnings per share $ .18 $ .11
======== ========
Average number of common shares 3,058 3,222
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5<PAGE>
COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Months Ended February 29, 1996
(Unaudited)
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings Treasury Stock
----------------------- Paid-in (Accumulated ------------------------
Shares Amount Capital Deficit) Shares Amount
---------- ---------- ------------ ------------ ---------- -----------
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balances,
December 1, 1995 3,328,580 $ 666 $15,842 $(1,378) 260,431 $(1,944)
Purchase of shares - - - - 20,000 (112)
Shares issued for Stock
Purchase Plan 5,394 1 26 - (1,356) 9
Net earnings - - - 550 - -
--------- ------- ------- ------- ------- -------
Balances,
February 29, 1996 3,333,974 $ 667 $15,868 $ (828) 279,075 $(2,047)
========= ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6<PAGE>
COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------
February 29, 1996 February 28, 1995
----------------- -----------------
(in thousands)
<S> <C> <C>
Net earnings $ 550 $ 355
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation, depletion, and
amortization 675 750
Impairment of assets 165 -
Deferred income tax provision 302 172
Gain on asset sale (176) -
Other 19 18
Changes in operating assets and
liabilities:
Accounts receivable (835) 499
Other current assets 30 (197)
Accounts payable 148 1,016
Undistributed oil and gas production
receipts (4) (27)
Accrued production and property taxes (202) (331)
Accrued expenses (13) (55)
Prepayments from joint interest owners (130) 120
Other current liabilities 22 (91)
-------- --------
(984) 934
-------- --------
Net cash provided by
operating activities 551 2,229
-------- --------
Cash flows from investing activities:
Additions to oil and gas properties (3,530) (966)
Additions to other assets (11) (2)
Proceeds from sale of Resources
common stock, net of cash - 4,082
Proceeds from sale of assets 330 4
-------- --------
Net cash from (used in)
investing activities $ (3,211) $ 3,118
-------- -------
</TABLE>
(Continued)
7<PAGE>
COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------
February 29, 1996 February 28, 1995
----------------- -----------------
(in thousands)
<S> <C> <C>
Cash flows from financing activities:
Proceeds from long-term debt $ 2,700 $ -
Reduction in long-term debt (300) (2,600)
Proceeds from issuance of
common stock 26 70
Purchase of treasury stock (113) (388)
Other - (2)
------ ------
Net cash provided by (used in)
financing activities 2,313 (2,920)
Effect of exchange rate on cash - 8
------ ------
Net increase (decrease) in cash and
cash equivalents (347) 2,435
Cash and cash equivalents at
beginning of period 1,414 1,819
------ ------
Cash and cash equivalents at
end of period $ 1,067 $ 4,254
======= =======
Supplemental disclosure of cash
flow information:
Cash paid during the period for:
Interest $ 61 $ 110
======= =======
Income taxes $ -0- $ 88
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
8<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS - (Continued)
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements include
the accounts of Columbus Energy Corp. ("Columbus") and its
wholly-owned subsidiaries, CEC Resources Ltd. ("Resources") and
Columbus Gas Services, Inc.("CGSI"). Resources activity is only
included through February 24, 1995 when it was divested by
Columbus by a rights offering to its shareholders. All
significant intercompany balances have been eliminated in
consolidation. The term "Company" as used herein includes
Columbus and its subsidiary or previously owned subsidiaries.
The consolidated financial statements of the Company have
been prepared in accordance with generally accepted accounting
principles and require the use of managements' estimates. The
financial statements contain all adjustments (consisting only of
normal recurring accruals) which, in the opinion of management,
are necessary to present fairly the financial position of the
Company as of February 29, 1996 and November 30, 1995, the
results of its operations and cash flows for the three months
ended February 29, 1996 and February 28, 1995. The results of
operations for such interim periods are not necessarily
indicative of results to be expected for the full year.
For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. Hedging
activities are included in cash flow from operations in the cash
flow statements.
The Company uses crude oil and natural gas hedges to manage
price exposure. Realized gains and losses on the hedges are
recognized in oil and gas sales as settlement occurs.
Earnings per share are computed using the weighted average
number of common shares outstanding. Stock options are included
as common stock equivalents, when dilutive, using the treasury
stock method.
The average shares outstanding for 1995 and the per share
earnings have been restated retroactively for the 10% stock
dividend paid to shareholders of record on February 24, 1995. A
total of 291,399 shares were issued from treasury stock and
$1,841 paid for fractional shares.
9<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Oil and Gas Properties
----------------------
The Company follows the successful efforts method of
accounting. Lease acquisition and development costs (tangible
and intangible) for expenditures relating to proved oil and gas
properties are capitalized. Delay and surface rentals are
charged to expense in the year incurred. Dry hole costs incurred
on exploratory operations are expensed. Dry hole costs
associated with developing proved fields are capitalized.
Expenditures for additions, betterments and renewals are
capitalized. Geological and geophysical costs are expensed when
incurred.
Upon sale or retirement of proved properties, the cost
thereof and the accumulated depreciation or depletion are removed
from the accounts and any gain or loss is credited or charged to
income, if significant. Abandonment, restoration, and
dismantlement costs and salvage value are taken into account in
determining depletion rates. These costs are generally about
equal to the proceeds from equipment salvage upon abandonment of
such properties. Maintenance and repairs are charged to
operating expenses.
Provision for depreciation and depletion of capitalized
exploration and development costs are computed on the unit-of-
production method based on proved developed reserves of oil and
gas, as estimated by petroleum engineers, on a property by
property basis. Unproved properties are assessed periodically to
determine whether they are impaired. When impairment occurs, a
loss is recognized by providing a valuation allowance. When
leases for unproved properties expire, any remaining cost is
expensed. Depreciation of other assets are provided on the
straight line method over their estimated useful lives.
Effective for the fourth quarter beginning September 1, 1995
the Company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" ("SFAS 121"). This
statement prescribes the accounting for the impairment of long-
lived assets, such as oil and gas properties. An impairment loss
is reported as a component of income from continuing operations.
When property pools are determined to be impaired, an impairment
loss equal to the difference between the carrying value and the
fair value of the pool is recognized in that period. After
consideration of risk, fair value is estimated as the present
value of future net cash flows over the economic life of the
reserves.
The Company follows the entitlements method of accounting
for gas balancing of gas production. The Company's gas
imbalances are immaterial at November 30, 1995 and February 29,
1996.
10<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Other Property and Equipment
----------------------------
Gains and losses from retirement or replacement of other
properties and equipment are included in income. Betterments and
renewals are capitalized. Maintenance and repairs are charged to
operating expense.
Accounting for Stock-Based Compensation
---------------------------------------
The Financial Accounting Standards Board issued Statement
No. 123 on the "Accounting for Stock-Based Compensation". This
statement prescribes the accounting and reporting standards for
stock-based employee compensation plans and is effective for the
Company's 1997 fiscal year unless adopted earlier. The Company
has not determined whether it will adopt this standard or use the
alternative pro forma disclosures as provided by the standard.
(2) LONG-TERM DEBT
The Company has a credit agreement with Norwest Bank Denver,
N.A. that was executed in July 1992. The credit is
collateralized by a first lien on oil and gas properties.
As directed by the Company, the borrowing base during 1995
was limited to $7,000,000, without regard to the maximum
allowable amount that would have been set by the bank during its
semi-annual redetermination. A fee of .25% is required for any
unused credit which is the difference between the borrowing base
and the outstanding borrowings.
(3) INCOME TAXES
The Company files a consolidated income tax return with CGSI
and has executed a tax allocation agreement which provides for
an allocation and payment of income taxes based upon each
company's separate tax liability calculation. Consolidated
income taxes are payable only when taxable income exceeds
available net operating loss carryforwards and other credits.
Pursuant to provisions enacted as part of the Tax Reform Act
of 1986, utilization of those corporate tax carryforwards in any
one taxable year is limited if a corporation experiences a 50%
change of ownership. Columbus experienced such a change of
ownership in October 1987 effectively limiting the utilization of
pre-change ownership net operating losses to approximately
$900,000 in each subsequent year. Additional accumulated
ownership changes again exceeded 50% by August 25, 1993,
thereby causing a second
11<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS - (Continued)
(Unaudited)
ownership change to occur which has further limited the
utilization of $593,000 of post-1987 net operating losses until
fiscal 1995 or subsequent years.
The Company has adopted Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" ("SFAS 109").
SFAS 109 requires the asset and liability approach be used to
account for income taxes. Under this method, deferred tax
liabilities and assets are determined based on the temporary
differences between financial statement and tax basis of assets
and liabilities using enacted rates in effect for the year in
which the differences are expected to reverse. Deferred tax
assets (net of a valuation allowance) primarily result from net
operating loss carryforwards, percentage depletion and certain
accrued but unpaid employee benefits. Deferred tax liabilities
result from the recognition of depreciation, depletion and
amortization in different periods for financial reporting and tax
purposes.
Because of the Company's previous 1987 quasi-organization,
SFAS 109 requires the Company to report the effect of its net
deferred tax asset arising prior to December 1, 1987 as an
increase in stockholders' equity rather than as an increase to
net earnings.
12<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The provision for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
------------------
February 29, 1996 February 28, 1995
----------------- -----------------
<S> <C> <C>
Current:
Federal $ 17 $ 7
Foreign (Canada) - 29
State 18 10
---- ----
35 46
---- ----
Deferred:
Federal 302 128
Foreign (Canada) - 44
---- ----
302 172
---- ----
Total income tax expense $ 337 $ 218
====== ======
</TABLE>
The components of earnings before income taxes are (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
------------------
February 29, 1996 February 28, 1995
----------------- -----------------
<S> <C> <C>
U.S. $ 887 $ 364
Canada - 209
------ ------
Total $ 887 $ 573
====== ======
</TABLE>
The total tax provision has resulted in effective tax rates
which differ from the statutory Federal income tax rates. The
reasons for these differences are:
<TABLE>
<CAPTION>
Percent of Pretax Earnings
------------------------------
Three Months Ended
------------------
February 29, 1996 February 28, 1995
----------------- -----------------
<S> <C> <C>
U.S. Statutory rate 34% 34%
Foreign taxes (Canada) - 13
Foreign tax credit - (13)
State income taxes 2 2
Other 2 2
----- -----
38% 38%
===== =====
</TABLE>
13<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS - (Continued)
(Unaudited)
During the three months of fiscal 1996, certain tax assets
were utilized as a result of the taxable income. The tax effect
of significant temporary differences representing deferred tax
assets and liabilities and changes were estimated as follows (in
thousands):
<TABLE>
<CAPTION>
Current Year
-------------------------------------
Dec. 1, Feb. 29,
1995 Operations 1996
------- ---------- -------
<S> <C> <C> <C>
Deferred tax assets:
Pre-1987 loss carryforwards $1,976 $ (142) $1,834
Post-1987 loss carryforwards 720 (180) 540
Percentage depletion
carryforwards 894 - 894
State income tax loss
carryforwards 197 (29) 168
Other 245 (6) 239
-------- ------ ------
Total 4,032 (357) 3,675
Valuation allowance (1,737) - (1,737)
-------- ------ ------
Deferred tax assets 2,295 (357) 1,938
-------- ------ ------
Deferred tax liabilities-
Depreciation, depletion and
amortization and other (1,657) 55 (1,602)
-------- ------ ------
Net tax asset (liability) $ 638 $ (302) $ 336
======== ====== ======
</TABLE>
The Company has net operating loss carryforwards (in
thousands) available at November 30, 1995 as follows:
Net
Expiration Year Operating loss
--------------- --------------
1999 $ 4,517
2000 907
2001 386
2003 478
2004 115
2010 1,525
-------
$ 7,928
=======
For U.S. Alternative Minimum Tax purposes the Company had
net operating loss carryforwards of $8,500,000 as of November 30,
1995. The Company also has percentage depletion carryforwards of
$2,300,000 which do not expire. State income tax operating loss
carryforwards of $3,400,000 were available at November 30, 1995.
14<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
(4) LITIGATION
Management is unaware of any asserted or unasserted claims
or assessments against the Company which would materially effect
the Company's future financial position or results of operations.
(5) CONTINGENCY
The Company recently entered into two separate swaps of
60,000 Mmbtu per month each of natural gas for the period from
April 1996 through November 1996. The first swap is at a price
of $1.74 per Mmbtu while the second swap is at a price of $1.88
per Mmbtu. These volumes represented approximately 55% of
Columbus' first quarter gas production. To partially protect
itself against expected higher gas prices for October and
November 1996, the Company also purchased NYMEX call contracts
for those two months for 60,000 Mmbtu of natural gas at $1.805
and $1.875, respectively. These contracts should limit the
Company's possible loss to the difference between those prices
and the $1.74 Mmbtu price of the original swap and can be
liquidated at any time prior to contract expiration which will
determine the amount of actual offset.
Columbus also entered into a swap of crude oil prices by
selling a strip of 10,000 barrels per month for the twelve month
period from January 1996 through December 1996 at an average
daily price of $17.25 per barrel with an upside cap of $19.50,
limiting the maximum shortfall to $2.25 per barrel, or $22,500 in
a month. The difference between the hedge price and the actual
daily closing price of the near month contract on the NYMEX is
settled monthly. This contract volume represents approximately
50% of recent monthly production.
The Company's natural gas and crude oil swaps are considered
financial instruments with off-balance sheet risk. These were
acquired in the normal course of business to reduce its exposure
to fluctuations in the price of crude oil and natural gas. Those
instruments involve, to varying degrees, elements of market and
credit risk in excess of the amount recognized in the balance
sheets. As of February 29, 1996, calculated as of April 8, 1996,
the Company had 1996 natural gas and crude oil swaps with a
notional value of approximately $3,463,000 and a market value of
approximately $2,910,000. The market value will change
constantly during the remaining term of the contracts and may
result in a loss or possibly even a gain for the Company over
that period. These swaps are primarily seen as "insurance"
against significant downside price fluctuations because losses
which occur when future prices are above the swap level are
mitigated somewhat by higher prices actually received in the
field for the equivalent volume.
15<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
(6) RELATED PARTY TRANSACTIONS
Reimbursement is made by Resources to Columbus for services
provided by Columbus officers and employees for managing
Resources and reduces general and administrative expense. This
reimbursement totaled $72,000 for the first three months of 1996.
16<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Columbus' financial condition remains substantially better
than most small capitalization energy companies. As of the close
of first quarter 1996, shareholders' equity was $13,660,000,
despite repurchase of 20,000 shares of treasury stock, up from
$13,186,000 at November 30, 1995. Substantial positive working
capital of $2,141,000 plus the Company's forecasted future cash
flow is a sufficient source of capital to fully fund its budget
to develop its undeveloped reserves as well as fund participation
in a modest exploratory drilling program. The amount its
outstanding loan balance is exceeded by its $7,000,000 bank
borrowing base is also available but has been designated by
management for acquisitions of new oil and gas properties. The
bank loan itself is not so restricted and may be used for any
legal corporate purpose.
First quarter 1996 net earnings and cash flow exceeded
1995's results by 55% and 16% respectively. This was
accomplished despite the fact the latter also included its
Canadian subsidiary's operations since a spin-off of Resources,
via a subscription rights offering to shareholders, was not
completed until February 24, 1995. Accordingly, first quarter
1996 to 1995 comparisons that include the Canadian subsidiary,
are relatively meaningless. A comparison with U.S. operations
only would be more meaningful since Resources contributed 26% of
the Company's revenues and $362,000 of discretionary cash flow in
the first quarter of 1995.
Reimbursement for services provided by Columbus officers and
employees for managing Resources is expected to decrease later in
fiscal 1996 after Canadian-based management takes over following
a Resources' merger. Columbus' general and administrative
expense will probably increase accordingly. Reimbursement of
$72,000 was realized in first quarter 1996 and $281,000 for
fiscal year 1995.
Management was fully cognizant that it could not easily
overcome the lost production and cash flow divested by the
Canadian spin-off but designed a 1995 program which was expected
to restore the decline of 600 BOE per day since mid-1994 in its
U.S. operations. However, it was frustrated in that effort due
to numerous delays primarily created by third parties. In
December 1995, an acquisition of $2.63 million of additional
working interests in producing natural gas wells where it
currently serves as operator and owner in several fields near
Laredo in Webb and Zapata Counties, Texas has helped to speed up
the process. This purchase was funded by additional bank
borrowings and was effective as of November 1, 1995. However,
accounting rules prohibited recording the acquisition or reserves
until fiscal 1996 because it was not closed until December. Net
proceeds for November approximated $110,000 after deduction of
taxes and operating
17<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
expenses which served to reduce the acquisition price by that
amount in December. The 1995 Annual Report discussed the
expected contribution of these interests in some detail. A
combination of successful drilling and higher prices in the first
quarter have shown those estimates to be conservative.
Revenues for 1996 increased by 2% compared to 1995 which
included Canadian operations. Comparative U.S. only operations
revenues increased 38% due to the aforementioned higher oil and
natural gas production and prices. Net income of $550,000 or
$.18 per share for 1996 compared to net earnings of $355,000, or
$.11 per share, in 1995 which also included Canada. Proved
developed and undeveloped natural gas and crude oil reserves as
of February 29, 1996 benefitted by higher prices which in turn
helped to reduce first quarter depletion expense percentagewise
and on a BOE unit basis.
Management believes that the best measure of a company's
cash flow is one determined before any consideration is given to
working capital changes or deduction of exploration expenses.
This is generally known as discretionary cash flow ("DCF").
Columbus' DCF for the first quarter 1996 was $1,568,000 compared
to $1,354,000 in 1995 which included $362,000 attributable to its
former Canadian subsidiary.
Management continues to object to the Financial Accounting
Standards Board Statement No. 95 which requires operating cash
flow to be determined after consideration of working capital
changes. It will continue to reflect its position on this
matter in all of its public filings and reports because this
pronouncement ignores entirely the significant impact that the
timing of income received for, or expenses incurred on behalf of,
third party owners in wells has on its working capital. This is
particularly true for a company such as Columbus where it serves
as an operator and only holds a small interest in several of
those properties.
The Company's U.S. sales volume of natural gas averaged
7,262 Mcfd during first quarter of 1996 which was up 10% from
1995's average of 6,612 Mcfd. Similarly oil sales reached 693
barrels per day in 1996 compared to 561 barrels per day in first
quarter 1995. Management's stated goal for 1996 is to reach
2,200 barrels of oil equivalent per day by mid-year and is on
target to accomplish this objective. First quarter 1996's
February production approximated 1,900 BOE/D with several wells
scheduled for connection during the second quarter.
No more dramatic example can be made of the positive effects
on the Company of the improved prices, production and reserves
than a comparison of future net revenues discounted at 10%,
before income taxes and prices not escalated (SEC method). At
the end of the quarter on February 29, 1996, this figure had
risen to
18<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
$35,343,000 from $24,163,000 as of fiscal year end of November
30, 1995 and from $28,140,000 on December 1, 1995 which is
inclusive of the acquisition.
Columbus previously hedged natural gas prices by selling a
"strip" of 100,000 Mmbtu per month for the twelve month period
from May 1994 through April 1995 at an average daily price of
$2.12 per Mmbtu. The "swap" was matched against the calendar
monthly average price on the NYMEX and settled monthly resulting
in a gain of $179,000 for the first quarter 1995 which
effectively increased its average U.S. gas price by $.30 per Mcf
for 1995. The Company has entered into two new similar swaps by
selling 60,000 Mmbtu per month each for eight month period from
April 1, 1996 through November 1996. The Company also entered
into a swap of crude oil prices by selling 10,000 barrels per
month for calendar year 1996 at an average daily price of $17.25
per barrel with an upside cap of $19.50. All of these swaps are
discussed in detail in Note 5 to the financial statements in this
Form 10-Q.
The Company's natural gas and crude oil swaps are considered
financial instruments with off-balance sheet risk. These were
acquired in the normal course of business to reduce its exposure
to fluctuations in the price of crude oil and natural gas. Those
instruments involve, to varying degrees, elements of market and
credit risk in excess of the amount recognized in the balance
sheets. As of February 29, 1996, calculated as of April 8, 1996,
the Company had 1996 natural gas and crude oil swaps with a
notional value of approximately $3,463,000 and a market value of
approximately $2,910,000. The market value will change
constantly during the remaining term of the contracts and may
result in a loss or possibly even a gain for the Company over
that period. These swaps are primarily seen as "insurance"
against significant downside price fluctuations because losses
which occur when future prices are above the swap level are
mitigated somewhat by higher prices actually received in the
field for the equivalent volume.
The Company's operation and management services segment
remains profitable despite divesting the principal source of past
profit generated in Canada from processing fees but both revenues
and expenses have been significantly reduced.
Columbus had outstanding borrowings of $4,000,000 as of
February 29, 1996 against its line of credit with Norwest Bank
Denver, N.A. of which $2,700,000 was borrowed in December 1995 to
finance the aforementioned property acquisition. A reduction in
its borrowing base to $7,000,000 was requested by the Company in
November 1995 which reduced its standby fee. This loan continues
to be collateralized by its oil and gas properties. At the end
of the first quarter 1996, the ratio of bank debt to
shareholders'
19<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
equity was 0.29 and to total assets was 0.19. The debt
outstanding at the end of the quarter used a LIBOR option at an
average interest rate of 7.2%.
During first quarter 1996, capital expenditures incurred on
oil and gas properties totaled $3,530,000 (including acquisitions
of $2,549,000) which was primarily directed for development
drilling and recompletions in the South Texas and Gulf Coast
areas. This amount may differ from the capital expenditure shown
in the Consolidated Statement of Cash Flows which includes cash
payments made in 1996 for 1995 expenditures which had been
incurred but had not yet been paid as of year end. Similarly,
there may be expenditures accrued in the first quarter 1996 that
will not be actually paid until second quarter. Therefore, that
Statement's expenditure amount is somewhat meaningless and is
little more than an accounting for invoices paid in any given
period.
Columbus has continued its share repurchase program during
the first quarter of 1996 by acquiring 20,000 shares additionally
out of a 300,000-share repurchase authorization in February,
1995. That resolution restricted purchases to a maximum price of
$8.75 from available cash and not using bank borrowings. So far
during the second quarter, an additional 18,500 shares have been
repurchased reducing the remaining authorized but unpurchased
shares to 63,600. Management plans to purchase additional stock
from time to time assuming blocks are available at a price level
that is attractive and further assuming it has excess cash flow
available not required for its budgeted drilling expenditures.
RESULTS OF OPERATIONS
Generally, 1996 first quarter revenues and expenses are not
really comparable to 1995 because the latter included the
Canadian subsidiary until February 24, 1995. When Canada's
operations are excluded from 1995, the Company's 1996 revenues
increased by 38% and operating income increased 87% which are
more truly comparable results. Other comparisons appear below.
20<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Oil and Gas Revenues and Operating Costs
----------------------------------------
For the U.S. only, the following table shows comparative
crude oil and natural gas revenues, sales volumes, average prices
and percentage changes between periods for the first quarters of
1996 and 1995 and the first quarter of 1996 versus the fourth
quarter of 1995.
<TABLE>
<CAPTION>
First Quarter
--------------------- % Fourth Qtr. %
1996 1995 Change 1995 Change
------ ------ ------ ----------- ------
<S> <C> <C> <C> <C> <C>
Natural gas revenues M$ $1,496 $1,092 37% $ 802 87%
Oil revenue M$ $1,096 $ 831 32% $ 941 16%
Natural gas sales volumes:
Millions of cubic feet 661 595 11% 467 42%
MCF/day 7,262 6,612 5,127
Oil sales volumes:
Barrels 63,087 50,457 25% 57,195 10%
Barrels/day 693 561 629
Average price received:
Natural gas - $/MCF $ 2.26 $ 1.84 23% $ 1.72 31%
Oil - $/BBL $17.37 $16.48 5% $16.45 6%
</TABLE>
Natural gas revenues increased 37% in the first quarter of
1996 when compared to 1995's quarter primarily from the Laredo
property acquisition as well as newly connected production and
improved prices. Average prices for natural gas rose 23% in the
first quarter of 1996 compared with last year due to increased
demand resulting from a colder than average winter in the eastern
two-thirds of the U.S. and lower storage levels. Reported 1995
revenues included gains of $179,000 from the hedging of natural
gas prices while 1996's quarter had no such activity. The first
quarter of 1996 compared to fourth quarter of 1995 showed a sales
volume increase of 42% as a result of the aforementioned
acquisition which was booked as of the beginning of the first
quarter. The 87% increase in natural gas revenues when compared
to fourth quarter 1995 was also due to 31% higher average prices.
Oil revenues for the first quarter were up 32% over the
similar 1995 quarter as a result of a 5% increase in the average
price received and 25% higher sales volumes. Crude oil
production improved with the addition of two new Jackson sand oil
wells in the Sralla Road field for most of the quarter. Total
oil revenues first quarter 1996 were reduced by $30,000, or $.47
per barrel, due to hedging losses in January and February. There
were no such losses in 1995.
When compared to the fourth quarter of 1995, first quarter
1996 U.S. oil revenues were 16% higher because of a 6% increase
in the average price per barrel plus a 10% increase in production
as a result of the aforementioned Sralla Road wells.
21<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
No comparisons of oil and gas revenues and operations in
Canada are possible because of the spin-off of Resources in
February 1995. The following amounts were included in the 1995
first quarter results.
<TABLE>
<CAPTION>
First Quarter
-----------------------
1995
----
<S> <C>
Natural gas revenues M$ $ 492
Oil and plant liquids
revenues M$ $ 141
Natural gas sales volumes:
Millions of cubic feet 453
MCF/day 5,035
Oil and plant liquids
sales volumes:
Barrels 12,107
Barrels/day 135
Average price received:
Natural gas - $/MCF $ 1.09
Oil and liquids - $/BBL $11.61
</TABLE>
Lease operating expenses in the U.S. for the 1996 quarter
were significantly higher than normal because of expensive work-
overs and repairs performed on a few older wells although
mitigated somewhat by that improved production. Accordingly,
lease operating costs on a barrel of oil equivalent basis were
$3.24 in 1996 compared to $2.50 in 1995. Operating costs in the
U.S. as a percentage of revenues have increased in 1996 to 22%
compared to 20% in 1995's first quarter.
Production and property taxes approximated 9 to 10% of
revenues in both periods and result from relatively lower
production tax rates in Texas for oil production compared to gas
production. The relationship of taxes and revenue is not always
directly proportional because some local jurisdiction's taxes are
based upon reserve evaluations as opposed to actual revenues or
production for a given period.
22<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
New Louisiana Prospect
----------------------
As reported in the Form 10-K for 1995, as the fiscal year
came to a close the Company joined with three individual
independents to jointly promote a prospect with an initial
requirement of drilling and completing two potential high volume
oil wells. This deal required drilling one single lateral well
and one dual lateral well to a geo-pressured limestone oil zone
in the fractured Austin Chalk formation. These wells were to be
located on an assembled acreage block of some 23,000 acres in
mid-Louisiana in St. Landry and Avoyelles Parishes. This block
fortunately includes one lease of some 17,000 acres which is in
the form of a continuing option which requires the exercise and
purchase of incremental 2,000-acre five-year leases each six
months without interruption until fully leased. This format will
allow ample time for an orderly development program.
As originally agreed upon between the co-venturers, this
prospect was to be promoted 50% by the Company and 50% by the
three individuals, two of whom were to serve as operator because
of their extensive expertise in drilling and completion
operations in this immediate area. Before the Company had
completed participation agreements with any of its industry
partners, an alternative arose during the first quarter of 1996
to sell the prospect in its entirety to one large independent
company. The co-venturers thereupon changed their prior
agreement related to the joint promotion of the prospect
concurrently with that large independent's assumption of the
obligation for 100% of the costs to drill and complete the two
initial horizontal test wells. It also agreed to the purchase of
a 75% working interest in all of the assembled acreage at the
then going rate for leases in the area which represented a
substantial improvement over original cost. Columbus withdrew
participations being offered to its industry partners when it
could no longer make representations as to the supervisory
drilling and completion expertise which is considered a key
component to the prospect's economic rate of return. The Company
was simultaneously relieved of its responsibility for promoting a
50% working interest in the initial two wells and agreed to a
one-fourth share in the new arrangement in addition to agreeing
to the new operator's appointment.
As a result, Columbus now has a fully paid up 6.25% working
interest in all of the leasehold acreage that has been acquired
to date in the Area of Mutual Interest as well as in the option
leases as they are exercised each year. This total acreage block
is already well in excess of the 23,000 acres but the total is
not being released as it has been rapidly changing in competition
with others. Columbus will also own a 6.25% reversionary working
interest after payout in the dual lateral horizontal well which
will be the second test well to be drilled this year.
Accordingly, the Company not only has received reimbursement for
its initial
23<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
acreage acquisition costs but has also realized a gain of approxi
mately $176,000 (included in other income) from the sale of
existing leases and has the potential for additional profit in
excess of $400,000 on option acreage when exercised over the next
four years. Columbus will pay for its pro rata 6.25% working
interest share of all subsequent wells to be drilled on the
prospect acreage after the first two horizontal test wells and
for its 6.25% share of additional acreage that might be acquired
in an Area of Mutual Interest which covers about three
townships. Hearings for the approval of the spacing unit for the
first single lateral re-entry well are scheduled for mid April
1996 after which operations can commence later in the month.
Operating and Management Services
---------------------------------
This segment of the Company's U.S. business includes
operations and services conducted on behalf of third parties
which also included compressor rentals. In Canada, the Company
previously received operating service revenue from its share of
processing fees at the Carbon area liquid extraction plant which
included processing Resources' own gas. Operating and management
services profit for U.S. only operations was aided in 1996 by
reduced costs as a result of the staff reductions made at the
beginning of fourth quarter 1995. There was an $86,000 profit
for the U.S. segment during first quarter 1996 compared to a
$14,000 profit for the equivalent quarter in 1995.
Interest Income
---------------
Interest income is primarily earned from short-term
investments whose rates fluctuate with changes in the commercial
paper rates and the prime rate. Interest income decreased in
1996 to $28,000 from $41,000 in 1995's first quarter primarily as
result of a decreased amount of investments and lower short-term
interest rates.
General and Administrative Expenses
-----------------------------------
General and administrative expenses are considered to be
those which relate to the direct costs of the Company which do
not originate from operation of properties or providing of
services. Corporate expense represents a major part of this
category although other nonbillable expenses are included herein.
The Company's U.S. general and administrative expenses in the
first quarter of 1996 were lower than last year because of salary
and staff reductions made in 1995 which overcame higher 1996
medical claims under the Company's self-insured plan.
24<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Litigation Expense
------------------
The legal costs of the Porter Farrell II lawsuit were
included in this expense item but his appeal was dismissed in
January 1996.
Depreciation, Depletion and Amortization
----------------------------------------
Depreciation, depletion and amortization of oil and gas
assets are calculated based upon the units of production compared
to proved reserves of each field. The expense is not only
directly related to the level of production, but also is
dependent upon past costs to find, develop, and recover those
reserves. Total charges for depletion expense for U.S. only oil
and gas properties increased over 1995 due to increased
production which overcame the 1995 write-down of the carrying
value of certain properties upon adoption of SFAS 121. The 1996
first quarter depletion rate was $3.68 per barrel of oil
equivalent compared to $2.86 per barrel of oil equivalent in the
like period of fiscal 1995 (which included the low depletion rate
on Canadian properties) and $3.83 per barrel of oil equivalent
for all of 1995. These amounts are below the industry average
primarily because of historically low finding costs. In the
first quarter of 1995 the rate for U.S. only properties was $3.85
per barrel of oil equivalent. Depreciation and amortization of
office equipment and computer software is also included in the
total charge.
A non-cash impairment loss of $165,000 was recognized during
the first quarter because a development well drilled in Oklahoma
proved to be uneconomic and its costs exceeded the remaining cash
flows from other producing properties in the field.
Exploration Expense
-------------------
In general, the exploration expense category relates to
Company-wide efforts to acquire and explore new prospective
areas. and primarily includes geological consulting, seismic
expense and exploratory dry holes. The successful efforts method
of accounting for oil and gas properties requires that the cost
of drilling unsuccessful exploratory wells be currently expensed.
During first quarter 1995 no exploratory dry holes were drilled
but seismic survey costs of $46,000 were incurred in Canada.
Accordingly, exploration expenses for comparative first quarters
amounted to $33,000 for 1996 and $59,000 for 1995 and reduced
reported cash flow from operations, in addition to net earnings,
even though these are considered discretionary expenses. These
charges are added back for purposes of calculating discretionary
cash flow which is reported each period by the Company.
25<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Interest Expense
----------------
Interest expense varies in a direct relationship to the
amount of bank debt and the level of bank interest rates. The
average amount of bank debt outstanding has been somewhat lower
for the 1996 first quarter than in 1995. The average bank
interest rate paid this quarter was 7.5% for U.S. debt which
compares to 7.6% in 1995.
Income Taxes
------------
During the first quarter of 1996 the U.S. net deferred tax
asset was reduced to a net asset of $336,000 which is comprised
of $861,000 current deferred tax asset and $525,000 long-term tax
liability. The estimated utilization of deferred tax assets was
$302,000 during the quarter. The valuation allowance was
unchanged in 1996. The effective tax rate for 1996 was 38%. See
also Note 3 to the consolidated financial statements for further
explanation of income taxes.
26<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Management is unaware of any asserted or unasserted claims
or assessments against the Company which would materially affect
the Company's future financial position or results of operations.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 - Computation of per share earnings
27 - Financial data schedule
(b) Reports on 8-K
None
27<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.
COLUMBUS ENERGY CORP.
----------------------------
(Registrant)
DATE: April 11, 1996 Harry A. Trueblood, Jr.
--------------------------- ---------------------------
Harry A. Trueblood, Jr.
Chairman, President and
Chief Executive Officer
(a duly authorized officer)
DATE: April 11, 1996 Ronald H. Beck
--------------------------- --------------------------
Ronald H. Beck
Vice President
(Chief Accounting Officer)
28
Commission File No. 1-9872
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBIT
TO
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED FEBRUARY 29, 1996
COLUMBUS ENERGY CORP.
(Exact Name of Registrant)
1660 Lincoln Street
Denver, Colorado 80264
(Address of Principal Executive Office)
<PAGE>
EXHIBIT 11
COLUMBUS ENERGY CORP.
Statement of Computation of Per Share Earnings
(Unaudited)
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------
February 29, 1996 February 28, 1995
----------------- -----------------
<S> <C> <C>
Primary:
Based on weighted average
shares outstanding including
the effect of common stock
equivalents:
Weighted average shares
outstanding: 3,058 3,222
Incremental shares attributable
to dilutive stock options and
warrants outstanding based on
average market price during
the period calculated using
the treasury method 1 17
----- -----
Total average common and
common equivalent shares 3,059 3,239
===== =====
Net earnings $ 550 $ 355
===== =====
Earnings per share $ .18 $ .11
===== =====
Note: Full diluted incremental shares in 1996 and 1995 were 1,000 and
17,000 with total average common and common share equivalent
shares 3,059,000 and 3,239,000, respectively.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEET AS OF FEBRUARY 29, 1996 AND
THE CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED
FEBRUARY 29, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1995
<PERIOD-END> FEB-29-1996
<CASH> 1,067
<SECURITIES> 0
<RECEIVABLES> 2,909
<ALLOWANCES> 116
<INVENTORY> 86
<CURRENT-ASSETS> 4,837
<PP&E> 27,484
<DEPRECIATION> (11,440)
<TOTAL-ASSETS> 20,881
<CURRENT-LIABILITIES> 2,696
<BONDS> 0
<COMMON> 667
0
0
<OTHER-SE> 12,993
<TOTAL-LIABILITY-AND-EQUITY> 20,881
<SALES> 2,592
<TOTAL-REVENUES> 3,084
<CGS> 830
<TOTAL-COSTS> 2,116
<OTHER-EXPENSES> 10
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71
<INCOME-PRETAX> 887
<INCOME-TAX> 337
<INCOME-CONTINUING> 550
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 550
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
