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 28, 1998
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 10, 1998
- ----------------------------- -----------------------------
Common stock, $.20 par value 4,242,185
1
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COLUMBUS ENERGY CORP.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
February 28, 1998 and November 30, 1997 3
Consolidated Statements of Operations -
Three Months Ended February 28, 1998 and 1997 5
Consolidated Statement of Stockholders' Equity -
Three Months Ended February 28, 1998 6
Consolidated Statements of Cash Flows -
Three Months Ended February 28, 1998 and 1997 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 25
Items 2-5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COLUMBUS ENERGY CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS
February 28, November 30,
1998 1997
------------ ------------
(unaudited)
(in thousands)
Current assets:
Cash and cash equivalents $ 1,285 $ 1,857
Accounts receivable:
Joint interest partners 1,850 1,932
Oil and gas sales 1,526 2,054
Allowance for doubtful accounts (116) (116)
Inventory of oil field equipment,
at lower of average cost or market 98 102
Other 41 82
------- -------
Total current assets 4,684 5,911
------- -------
Deferred income taxes (Note 3) 136 -
Property and equipment:
Oil and gas assets, successful efforts
method (Note 2) 32,356 33,803
Other property and equipment 1,765 2,053
------- -------
34,121 35,856
Less: Accumulated depreciation,
depletion and amortization
and valuation allowance (16,380) (15,632)
------- -------
Net property and equipment 17,741 20,224
------- -------
$ 22,561 $ 26,135
======== ========
(continued)
3
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COLUMBUS ENERGY CORP.
CONSOLIDATED BALANCE SHEETS - (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
February 28, November 30,
1998 1997
------------ ------------
(unaudited)
(in thousands)
Current liabilities:
Accounts payable $ 1,749 $ 3,023
Undistributed oil and gas
production receipts 52 393
Accrued production and property taxes 297 551
Prepayments from joint interest owners 332 565
Accrued expenses 366 377
Income taxes payable (Note 3) 59 42
Deferred income taxes (Note 3) 197 201
Other 15 37
------ ------
Total current liabilities 3,067 5,189
------ ------
Long-term bank debt (Note 2) 3,300 2,200
Deferred income taxes (Note 3) - 788
Commitments and contingent liabilities (Notes 4 and 5)
Stockholders' equity:
Preferred stock authorized 5,000,000
shares, no par value, none issued - -
Common stock authorized 20,000,000
shares of $.20 par value; shares issued
4,548,744 in 1998, and 4,492,068 in 1997
(outstanding 4,248,715 in 1998 and
3,883,557 in 1997) 910 898
Additional paid-in capital 18,967 18,124
Retained earnings (accumulated deficit) (1,662) 2,887
------ ------
18,215 21,909
Less: Treasury stock at cost
300,029 shares in 1998 and
608,511 shares in 1997 (2,021) (3,951)
------ ------
Total stockholders' equity 16,194 17,958
------ ------
$ 22,561 $ 26,135
====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
4
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COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended February 28,
---------------------------------
1998 1997
-------- --------
(in thousands, except per share data)
Revenues:
Oil and gas sales $ 2,837 $ 3,765
Operating and management
services 308 276
Interest and other income 42 37
-------- --------
Total revenues 3,187 4,078
-------- --------
Costs and expenses:
Lease operating expenses 560 518
Property and production taxes 260 321
Operating and management
services 271 197
General and administrative 287 338
Depreciation, depletion and
amortization 1,005 753
Impairments 2,816 -
Exploration expense 263 62
Litigation expense (Note 4) - 7
-------- --------
Total costs and expenses 5,462 2,196
-------- --------
Operating income (loss) (2,275) 1,882
-------- --------
Other (income) expenses:
Interest 43 35
Other 32 3
-------- --------
75 38
-------- --------
Earnings (loss) before
income taxes (2,350) 1,844
Provision (benefit) for income taxes
taxes (Note 3) (893) 701
-------- --------
Net earnings (loss) $ (1,457) $ 1,143
======== ========
Earnings (loss) per share (Note 7):
Basic $ (.34) $ .26
======== ========
Diluted $ (.34) $ .26
======== ========
Average number of common shares
and common equivalent shares outstanding:
Basic 4,258 4,361
======== ========
Diluted 4,262 4,463
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
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<TABLE>
<CAPTION>
COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Months Ended February 28, 1998
(Unaudited)
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, 1997 4,492,068 $ 898 $18,124 $ 2,887 608,511 $(3,951)
Exercise of employee
stock options 52,740 11 304 - 22,357 (193)
Purchase of shares - - - - 56,650 (482)
Shares issued for Stock
Purchase Plan 3,936 1 33 - (995) 7
10% stock dividend - - 492 (3,092) (386,494) 2,598
Tax benefit of disqualifying
disposition of incentive
stock options - - 14 - - -
Net loss - - - (1,457) - -
--------- ------- ------- ------- -------- -------
Balances,
February 28, 1998 4,548,744 $ 910 $18,967 $(1,662) 300,029 $(2,021)
========= ======= ======= ======= ======== =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
6
<PAGE>
COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended February 28,
-------------------------------
1998 1997
--------- --------
(in thousands)
Net earnings (loss) $(1,457) $ 1,143
Adjustments to reconcile net earnings
(loss)to net cash provided by
operating activities:
Depreciation, depletion, and
amortization 1,005 753
Impairments 2,816 -
Deferred income tax provision
(benefit) (914) 627
Other 21 14
Net change in operating assets and
liabilities (98) (366)
-------- -------
Net cash provided by
operating activities 1,373 2,171
-------- -------
Cash flows from investing activities:
Additions to oil and gas properties (2,749) (1,163)
Additions to other assets 32 -
-------- -------
Net cash used in
investing activities (2,717) (1,163)
-------- -------
Cash flows from financing activities:
Proceeds from long-term debt 1,300 -
Reduction in long-term debt (200) (900)
Proceeds from issuance of
common stock 156 235
Purchase of treasury stock (482) (131)
Other (2) -
-------- -------
Net cash provided by (used in)
financing activities 772 (796)
-------- -------
Net increase (decrease) in cash and
cash equivalents (572) 212
Cash and cash equivalents at
beginning of period 1,857 1,396
------ -------
Cash and cash equivalents at
end of period $ 1,285 $ 1,608
====== =======
(continued)
7
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COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
Three Months Ended February 28,
-------------------------------
1998 1997
------- ---------
(in thousands)
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 40 $ 48
====== =======
Income taxes $ 4 $ -
====== =======
Supplemental disclosure of non-cash
investing and financing activities None None
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Columbus Energy Corp. ("Columbus") and its wholly-owned subsidiary, Columbus Gas
Services, Inc.("CGSI"). All significant intercompany balances have been
eliminated in consolidation. The term "Company" as used herein includes Columbus
and its subsidiary.
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 28, 1998 and November 30, 1997, the results of its
operations and cash flows for the periods presented. 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.
When the Company uses crude oil and natural gas swaps to manage price
exposure, realized gains and losses on the swaps are recognized in oil and gas
sales as settlement occurs.
The Company adopted Financial Accounting Standards No. 128, "Earnings per
Share," ("SFAS No. 128") effective for the 1998 fiscal year. Prior period
earnings per share data presented has been restated to conform with the
provisions of SFAS No. 128. The purpose of SFAS No. 128 is to simplify the
computation of earnings per share. The new standard replaces the calculation of
"primary earnings per share" with a calculation called "basic earnings per
share" and redefines "diluted earnings per share".
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. Common stock
equivalents include shares issuable upon assumed exercise of dilutive stock
options using the average price for diluted shares. Historical average number of
shares outstanding and earnings per share have been adjusted for the
five-for-four stock split distributed June 16, 1997 to shareholders of record as
of May 27, 1997 and the 10% stock dividend distributed March 9, 1998 to
shareholders of record as of February 23, 1998.
9
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COLUMBUS ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
(Unaudited)
Financial Instruments and Concentrations of Credit Risk
The Company maintains demand deposit accounts with separate banks in
Denver, Colorado. The Company also invests cash in the highest rated commercial
paper of large U.S. companies, with maturities not over 30 days, which have
minimal risk of loss. At February 28, 1998 and November 30, 1997 the Company had
investments in commercial paper of $1,400,000 and $900,000, respectively. The
carrying amount of long-term debt approximates fair value because the interest
rate on this instrument changes with market interest rates.
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and cash equivalents
and accounts receivable. Columbus as operator of jointly owned oil and gas
properties, sells oil and gas production to relatively large U.S. oil and gas
purchasers and pays vendors for oil and gas services. The risk of non-payment by
the purchasers, counter parties to the crude oil and natural gas swap agreements
or joint owners is considered minimal. The Company does not obtain collateral
from its oil and gas purchasers for sales to them. Joint interest receivables
are subject to collection under the terms of operating agreements which provide
lien rights to the operator.
Oil and Gas Properties
The Company follows the successful efforts method of account ing. 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. Exploratory 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. When
estimated abandonment costs exceed the salvage value, the excess cost is accrued
and expensed. Maintenance and repairs are charged to operating expenses.
10
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COLUMBUS ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
(Unaudited)
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.
An impairment loss on oil and gas properties is reported as a component of
income from continuing operations. The Company recognizes an impairment loss
when the carrying value exceeds the expected undiscounted future net cash flows
of each property pool at which time the property pool is written down to the
fair value. Fair value is estimated to be a discounted present value of expected
future net cash flows with appropriate risk consideration.
The Company follows the entitlements method of accounting for gas
balancing of gas production. The Company's gas imbalances are immaterial at
November 30, 1997 and February 28, 1998.
Other Property and Equipment
Other property and equipment consists of office and computer 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 expenses. Depreciation of other
assets is provided on the straight line method over their estimated useful
lives.
Accounting for Stock-Based Compensation
The Financial Accounting Standards Board issued Statement No. 123,
"Accounting for Stock-Based Compensation". This statement prescribes the
accounting and reporting standards for stock-based employee compensation plans
and was effective for the Company's 1997 fiscal year. The Company uses the
alternative pro forma annual disclosures as permitted in the Standard.
New Accounting Pronouncements
The Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," was issued in June 1997 and establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses)
11
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COLUMBUS ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
(Unaudited)
in a full set of general-purpose financial statements. This statement is
effective for financial statements for periods beginning after December 15, 1997
and adoption of the statement is not anticipated to have a material impact on
the Company's financial position and results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information," effective for fiscal years beginning
after December 15, 1997. The Company must apply this statement no later than its
fiscal year ending November 30, 1999. SFAS No. 131 requires disclosing segment
information using the "management approach" and replaces the "industry segment"
approach using Statement No. 14. The segment information previously presented is
not expected to materially change when SFAS No. 131 is adopted.
(2) LONG-TERM DEBT
The Company has a credit agreement with Norwest Bank Denver, N.A. that was
amended and restated on October 23, 1996. The credit is collateralized by a
first lien on oil and gas proper ties.
As requested by the Company, the borrowing base was increased to a limit of
$10,000,000 from $7,000,000 effective May 13, 1997, without regard to the
maximum allowable amount that would be set by the bank during its semi-annual
redetermination. A commitment fee of .25% is payable for any unused portion of
the 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 these 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.
The Company uses the asset and liability method 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. 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 deprecia tion, depletion and amortization in different
periods for financial reporting and tax purposes.
12
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COLUMBUS ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Because of the Company's previous 1987 quasi-reorganization, the Company
is required 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.
The provision (benefit) for income taxes consists of the following (in
thousands):
Three Months Ended February 28,
-------------------------------
1998 1997
-------- ----------
Current:
Federal $ 1 $ 18
State 20 56
----- -----
21 74
----- -----
Deferred:
Federal (878) 452
Use of loss carryforwards 1 156
State (37) 19
----- -----
(914) 627
----- -----
Total income tax (benefit) expense $ (893) $ 701
====== ======
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:
Percent of Pretax Earnings
Three Months Ended February 28,
-------------------------------
1998 1997
---- ----
U.S. Statutory rate (34)% 34 %
State income taxes (1) 3
Other (3) 1
---- ---
(38)% 38 %
==== ====
13
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COLUMBUS ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
(Unaudited)
During the three months of fiscal 1998, certain tax assets (shown in the
table below) were utilized. The tax effect of significant temporary differences
representing deferred tax assets and liabilities and changes were estimated as
follows (in thousands):
Current Year
Stock- ------------
Dec. 1, holders' February 28,
1997 Equity Operations 1998
------- -------- ---------- ------------
Deferred tax assets:
Pre-1987 loss carryforwards $1,053 $ - $ - $1,053
Post-1987 loss carryforwards 540 - - 540
Percentage depletion
carryforwards 1,304 - - 1,304
State income tax loss
carryforwards 105 - (1) 104
Other 327 - 6 333
------ ---- ------ ------
Total 3,329 - 5 3,334
Valuation allowance
(long-term) (1,443) - - (1,443)
-------- ---- ------ ------
Deferred tax assets 1,886 - 5 1,891
-------- ---- ------ ------
Tax benefit of disqualifying
disposition of incentive
stock options - 14(a) (14) -
------- ---- ------ ------
Deferred tax liabilities-
Depreciation, depletion and
amortization and other (2,875) - 923 (1,952)
------- ---- ------ ------
Net tax asset (liability) $ (989) $ 14 $ 914 $ (61)
======== ==== ======= ======
(a)Credited to additional paid-in capital.
The Company has net operating loss carryforwards (in thousands) available
at November 30, 1997 as follows:
Net
Expiration Year Operating Loss
--------------- --------------
1999 $ 1,808
2000 903
2001 387
2010 1,589
-------
$ 4,687
=======
For Alternative Minimum Tax purposes the Company had net operating loss
carryforwards of approximately $5,848,000 as of November 30, 1997. The Company
also has percentage depletion carryforwards of $3,432,000 which do not expire.
State income tax operating loss carryforwards of $1,730,000 were available at
November 30, 1997.
14
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COLUMBUS ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
(Unaudited)
(4) LITIGATION
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.
(5) COMMITMENTS AND CONTINGENT LIABILITIES
When the Company uses natural gas and crude oil swaps they are considered
financial instruments with off-balance sheet risk which are in the normal course
of business to partially reduce its exposure to fluctuations in the price of
crude oil and natural gas. Those instruments involved, to varying degrees,
elements of market and credit risk in excess of the amount recognized in the
balance sheets. The Company had no natural gas or crude oil swaps outstanding as
of February 28, 1998.
The Company is not aware of any events of noncompliance in its operations
with any environmental laws and regulations nor of any material potential
contingencies related to environmental issues. The exact nature of environmental
control problems, if any, which the Company may encounter in the future cannot
be predicted, primarily because of the changing character of environmental
requirements that may be enacted with applicable jurisdictions.
(6) RELATED PARTY TRANSACTIONS
CEC Resources Ltd. ("Resources") was a wholly-owned subsidiary of Columbus
prior to its divestiture on February 24, 1995. 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 $60,000 and $67,000 for the three months of 1998 and 1997,
respectively.
15
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COLUMBUS ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
(Unaudited)
(7) EARNINGS PER SHARE
The following table provides a reconciliation of basic and diluted
earnings per share (EPS):
Three Months Ended February 28,
---------------------------------
1998 1997
-------- -------
(in thousands,
except per share data)
Reconciliation of basic and diluted
EPS share computations:
Income (loss) available to common
shareholders - basic and
diluted ESP (numerator) $(1,457) $1,143
====== =====
Shares (denominator):
Basic EPS 4,258 4,361
Effect of dilutive option shares 4 102
------ -----
Diluted EPS 4,262 4,463
====== =====
Per share amount:
Basic EPS $ (.34) $ .26
====== =====
Diluted EPS $ (.34) $ .26
====== =====
Number of shares (in thousands) not
included in basic EPS that would
have been antidilutive because
exercise price of options was
greater than the average
market price of the common shares 75 69
===== =====
Historical average number of shares outstanding and earnings per share have
been adjusted for the five-for-four stock split distributed June 16, 1997 to
shareholders of record as of May 27, 1997 and the 10% stock dividend distributed
March 9, 1998 to shareholders of record as of February 23, 1998.
16
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following summarizes the Company's financial condition and results of
operations and should be read in conjunction with the consolidated financial
statements and related notes.
Liquidity and Capital Resources
First quarter results suffered from the lowest average crude oil prices
since 1994 and at one point actually dipped to the lowest levels since the Arab
oil glut of 1986. Average natural gas prices were not much below normal but
appear weak when compared to 1997 prices which were extraordinarily high. These
price weaknesses overshadowed the fact that both natural gas and crude oil
production improved over last year's quarter. First quarter cash flow suffered
significantly from the same feeble prices which were mostly responsible for
impairment charges of $2,816,000 ($1,746,000 after income taxes or $0.41 per
share). The latter, coupled with increased exploratory charges, generated a net
loss of $1,457,000, or $0.34 per share, compared with last year's net earnings
of $1,143,000, or $0.26 per share when product prices were significantly higher.
As a result, at the end of the first quarter 1998, sharehold ers' equity
actually decreased to $16,194,000 from $17,958,000 at November 30, 1997.
Nevertheless, there was an improved working capital position of $1,617,000 as of
February 28, 1998 which, when combined with the Company's expected annual cash
flow, should be more than a sufficient source of capital to meet the planned
1998 program of $6,800,000 for developing undeveloped reserves along with
funding an increased exploratory program with an emphasis on natural gas
potential.
A significant portion of the costs incurred for the wells drilled in late
1997 have been paid for in 1998 and appears as additions to properties in the
consolidated Statements of Cash Flows. This required a short term draw from the
Company's bank credit facility pending repayment from the additional monthly
cash flow generated normally and as a result of those expenditures. The
$10,000,000 credit facility continues to be primarily targeted for use by
management for acquisitions of oil and gas properties, but can be used for any
legal corporate purpose and is always available for expanded operational
expenditures.
Generally accepted accounting principles ("GAAP") require cash flows from
operating activities to be determined after giving effect to working capital
changes. Accordingly, GAAP's net cash provided from operating activities was
$1,373,000 for the first three months of 1998 and compares with $2,171,000
during 1997's similar period. This cash flow (as defined), along with temporary
backup from available short term borrowings using the Company's credit facility
has provided sufficient liquidity to finance capital expenditures as well as
fund treasury stock repurchases.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
However, an important alternative measure of computing a company's cash flow
(not GAAP but one commonly used in the industry) upon which management places
even greater reliance is one determined before consideration of either working
capital changes or deduction of exploration expenses and is generally known by
industry as Discretionary Cash Flow ("DCF"). DCF is used by successful efforts'
companies when making comparisons with the cash flow results of a majority of
other independent energy companies who use the full cost accounting method
wherein all exploration costs are capitalized and do not adversely affect either
their operating cash flow or net earnings. Since exploration expenses can be
increased or decreased at manage ment's discretion, it is believed that DCF is
more comparable with those full cost accounting results. Columbus' DCF for the
first quarter of 1998 was $1,734,000 down from 1997's quarter which was a record
$2,599,000 and was later broken during the fourth quarter of 1997. This 33% drop
is directly attributable to lower natural gas and crude oil prices since crude
oil and natural gas production actually increased from last year's quarter.
While DCF is calculated without debt retirement requirements being considered,
in Columbus' case it does not matter. Outstanding bank debt requires no
principal payments before August 1, 1999 and interest expense on the outstanding
debt has been insignificant and is always deducted before arriving at DCF.
Management continues to note its strong exception to the Statement of
Financial Accounting Standards No. 95 which directs that operating cash flow
must only be determined after consider ation of working capital changes. We
continue to reflect that position in all public filings and reports based on our
belief such a requirement by GAAP ignores entirely the significant impact on
working capital that the timing of income received for, and expenses incurred on
behalf of, third party owners in wells has on a company, such as Columbus, which
serves as an operator of properties with only a small working interest therein.
However, neither DCF nor operating cash flow before working capital
changes may be substituted for net income or cash available from operations as
defined by GAAP. Furthermore, currently reported cash flows do not necessarily
indicate that there always will be sufficient funds for future cash requirements
however defined.
At the present time the Company has no hedges of either crude oil or
natural gas prices similar to the swaps it negotiated in prior years. As a
result the Company's oil and gas revenues are fully exposed to risk of declining
prices such as occurred during first quarter 1998. However, it will be able to
fully benefit from price increases, if any, which occur as fiscal 1998
progresses.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Columbus had outstanding borrowings of $3,300,000 as of February 28, 1998
against its $10,000,000 line of credit with Norwest Bank Denver, N.A. which is
collateralized by oil and gas properties. At the end of the first quarter 1998,
the ratio of bank debt to shareholders' equity was 0.20 and to total assets was
0.15 and outstanding debt used a LIBOR option with an average interest rate of
7.1%. The net increase or decrease of long-term debt directly affects cash flows
from financing activities as does the purchase of treasury shares (discussed
below) and the proceeds from the exercise of stock options.
Working capital at February 28, 1998 rose to $1,617,000 from $722,000 at
November 30, 1997 despite 1998's capital expenditures of $1,370,000 for
additions to oil and gas properties and $482,000 for purchase of 56,650 treasury
shares. These capital expenditure amounts differ from the amount shown in the
consolidated Statement of Cash Flows which also includes payments made during
1998 for 1997 expenditures which had been incurred but not yet paid as of 1997's
year end.
The Company has been authorized by the Board of Directors to repurchase
its common shares from the market at various prices during the last several
years. During the first quarter 1998 56,650 shares were repurchased (61,615
shares restated for the 10% stock dividend) at a restated average price of $7.77
per share.
As of February 28, 1998 a total of 86,350 shares have been authorized but
not yet repurchased at prices not to exceed $8.07 per share. Subsequently,
during March 1998, 28,100 more of those shares have been acquired at an average
price of $7.48 per share.
RESULTS OF OPERATIONS
During 1998's first quarter, the Company's gross revenues decreased by 22%
while operating income declined to $541,000 (excluding the 1998 impairment
charge) which compares with $1,882,000 in 1997. Other comparisons for the 1998
quarter versus 1997 related to prices, production and oil and gas sales are
covered later in this section.
During 1998's first quarter, seven gross wells (2.56 net) were drilled.
These included three (.22 net) successful gas wells in the Laredo area and one
(.67 net) oil well in the Sralla Road field in Texas and one discovery oil well
(.90 net) in Roosevelt County, Montana.
The latter wildcat, McCabe Farms #1-4, was discussed in detail in the 1997
annual report began sales in late December. After the usual initial decline,
this well appears to have settled to a rate
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
of about 60-70 BOPD with 30% water cut . The Sralla Road field well, Waitkus B
#2, commenced production January l, 1998 and has settled at a daily rate of
45-50 barrels of oil and 320-330 Mcf of gas.
Thus far during 1998, the Company has accelerated its exploration efforts
by acquiring acreage and 3-D seismic for approximately $700,000 in three new
onshore prospects along the Gulf Coast area of Texas between Houston and Corpus
Christi. These prospects already had one or more chosen drillsites and hold the
possibility for several more locations. These multi-zone prospects have the
potential to significantly expand the Company's production to equal or surpass
the more fully developed areas in Laredo and Sralla Road fields.
Oil and Gas Revenues and Operating Costs
The following table shows comparative crude oil and natural gas revenues,
sales volumes, average prices and percentage changes between periods for the
first quarters of 1998 and 1997 and the first quarter of 1998 versus the fourth
of 1997.
First Quarter
------------------ % Fourth Qtr. %
1998 1997 Change 1997 Change
------ ------ ------ ----------- ------
Natural gas revenues M$ $1,916 $2,511 (24)% $ 2,781 (31)%
Oil revenue M$ $ 921 $1,254 (27)% $ 1,115 (17)%
Natural gas sales volumes:
Millions of cubic feet 861 777 11 % 929 (7)%
MCF/day 9,572 8,628 10,210
Oil sales volumes:
Barrels 59,669 57,801 3 % 58,856 1 %
Barrels/day 663 642 647
Average price received:
Natural gas - $/MCF $ 2.22 $ 3.23 (31)% $ 2.99 (26)%
Oil - $/BBL $15.44 $21.69 (29)% $18.95 (19)%
Natural gas revenues decreased 24% in the first quarter of 1998 when
compared to 1997's quarter as a result of much lower prices and despite
increased volumes. Average prices for natural gas decreased 31% in the first
quarter of 1998 compared with last year due to reduced demand related to a warm
winter and abnormally high prices in 1997. Sales volumes improved by 11% over
1997's first quarter as a result of numerous gas wells being completed and
connected during the intervening months. The latest quarter as compared with the
fourth quarter of 1997 showed a sales volume decrease of 7% was primarily the
result of a production decline in the South Laredo area because a high interest,
high capacity well being off for repairs which have now been completed. There
was a 26% decrease in average prices received which reduced revenues by 31%.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Oil revenues for the 1998 first quarter were down signifi cantly when
compared to the similar 1997 quarter because a decrease in the average price of
29% overcame a sales volume increase of only 3%. Crude oil production seems to
have reversed its slide over a several year period as a few new wells have been
added which have generated the improvement. However, this may be short lived
because little or no exploration or development of crude oil can be justified in
this current price environment. In fact, consider ation was given to temporarily
halting production on several marginal oil wells or deferral of further
operations altogether. Fortunately, there has been modest improvement in crude
oil prices recently so such drastic action has been postponed albeit for an
unknown period. Oil revenues for the first quarter of 1997 had been reduced by
$92,660 ($1.60 per barrel) from crude oil swap participation but unfortunately
no swaps were in place this year to protect from this price debacle for crude
oil.
When comparisons are made with the fourth quarter results for 1997, first
quarter oil revenues were 17% lower because of the 19% decrease in average price
per barrel received and because the 1% increase in production had little effect.
Columbus' 1998 first quarter average sales volumes of natural gas of 9,572
Mcfd and oil and liquids production of 670 barrels per day equates to an average
daily production of 2,265 barrels of oil equivalent (BOE) compared to 2,086 BOE
during 1997's first quarter.
Lease operating expenses for the 1998 quarter were slightly higher than
during 1997 because this year's quarter had several expensive workovers
performed and equipment replaced on older wells. However, lease operating costs
on a BOE basis were $2.75 in 1998 compared to $2.76 in 1997. Operating costs as
a percentage of revenues was up to 20% in the 1998 first quarter primarily due
to reduced revenues versus 14% in 1997's comparable quarter when extraordinary
prices that prevailed produced record revenues.
Production and property taxes approximated 9% of revenues in both 1998 and
1997. These may vary based on Texas' percentage share of the total production
where oil tax rates are lower than gas tax rates. The relationship of taxes and
revenue is not always directly proportional since several of the local
jurisdiction's property taxes are based upon reserve evaluations as opposed to
revenues received or production rates for a given tax period.
Operating and Management Services
This segment of the Company's business is comprised of opera tions and
services conducted on behalf of third parties including compressor rentals and
salt water disposal facilities.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Operating and management services profit declined during first quarter
1998. With unusual expenses related to cleaning out sand from a salt water
disposal well, there was only a $37,000 profit during first quarter 1998
compared to a $79,000 profit last year. Revenues improved as the number of
operated wells and drilling activity increased.
Interest Income
Interest income is earned primarily from short-term invest ments whose
rates fluctuate with changes in the commercial paper rates and the prime rate.
Interest income increased slightly in 1998 to $42,000 from $37,000 in 1997's
first quarter primarily as a result of an increased amount of investments and
higher 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 also included.
The Company's general and administrative expenses in the first quarter of
1998 were 15% lower than last year. The 1997 quarter included $56,000 of costs
associated with a proposed preferred stock offering (which was withdrawn)
including professional services related thereto. There were some cost increases
in 1998 primarily due to upward salary adjustments granted in May 1997 for
officers and December 1997 for employees.
Reimbursement for services provided by Columbus officers and employees for
managing Resources is expected to decrease during 1998. This assumes that
another management will take over following an expected business combination
that Resources is currently aggressively seeking. Columbus' general and
administra tive expense will rise commensurately when Resources' merger occurs
since no staff reductions are contemplated. Reimbursement of $60,000 was down
10% from the $67,000 received during the first quarter of 1997 for providing
those services to Resources.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization of oil and gas assets are
calculated based upon the units of production for the period compared to proved
reserves of each successful efforts property pool. This expense is not only
directly related to the level of production, but also is dependent upon past
costs to find, develop,
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
and recover related reserves in each of the cost pools or fields. Depreciation
and amortization of office equipment and computer software is also included in
the total charge.
Total charges for this expense item increased over 1997 as a result of
increased production and added development expenditures in the intervening
period as well as lower reserves in several of the pools due to lower crude oil
prices. The 1998 first quarter depletion rate of $4.91 per BOE compared with the
$3.88 per BOE for the like period of fiscal 1997 and $3.91 per BOE for all of
1997. The 1998 rate is primarily a reflection of those lower quarter-end crude
oil prices although performance of some wells also contributed to reserve
quantities being reduced in addition to development costs incurred. This
required impairment of carrying values at quarter-end of several different pools
predominantly made up of crude oil reserves. The reduction will decrease the
depletable basis in future periods and reduce the per barrel depletion rate
accordingly. Had the Company been using the full cost accounting method,
impairment on a company-wide basis would have been only a fraction of the amount
reported.
Exploration Expense
In general, the exploration expense category includes the cost of
Company-wide efforts to acquire and explore new prospective areas. The
successful efforts method of accounting for oil and gas properties requires
expensing the costs of unsuccessful exploratory wells. Other exploratory charges
such as seismic and geologic costs must also be immediately expensed regardless
of whether a prospect is ultimately proved to be successful. Exploration charges
of $263,000 for 1998's first quarter was up dramatically from $62,000 for 1997
because $199,000 was expensed due to a dry exploratory oil well in Montana.
Exploration expenses not only decrease net earnings but also reduce reported
GAAP cash flow from operations even though they are discretionary expenses;
however, such charges are added back for purposes of determining DCF which is
why it is more comparable to cash flow reported by full cost accounting
companies. Approximately $570,000 of total 3-D seismic costs were originally
budgeted for 1998 in the S.E. Froid and Hay Creek areas in Montana but with the
decline in crude oil prices only a small portion of this program will actually
be undertaken in 1998.
Impairments
A non-cash impairment loss of $2,816,000 in 1998 was recognized during the
first quarter. The decline in crude oil prices was the major contributor
although performance of certain wells during the quarter also contributed to a
reduction in reserve quantities. Accordingly, the remaining carrying value of
several
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
cost pools exceeded the expected undiscounted future net cash flows. Certain
property pools were written down to a fair value based on an assumption that the
average future crude oil price would be $18.75 per barrel during the remaining
life. Some portion of these crude oil reserves will be restored as crude oil
prices improve but impairment charges of $2,360,000 are not reversible. An
additional $400,000 of impairments were provided for probable loss in value of
undeveloped acreage holdings (unproved properties) located primarily in
Louisiana along with $56,000 expensed for an expired lease.
Interest Expense
Interest expense varies in direct proportion to the amount of bank debt and
the level of bank interest rates. The average amount of bank debt outstanding
has been higher during 1998's first quarter than in 1997. The average bank
interest rate paid this latest quarter was 7.3% which compares to 7.0% in 1997.
Income Taxes
During the first quarter of 1998, the net deferred tax liability decreased
to only $61,000 as a result of the large financial statement impairment
write-off which substantially reduced the book versus tax temporary differences.
The net liability is comprised of $197,000 current portion and $136,000
long-term asset. A tax deduction of $14,000 from the benefit of disqualifying
disposition of incentive stock options was added to additional paid-in capital
during first quarter of 1998. The estimated increase in deferred tax assets was
$914,000 during the quarter. The valuation allowance has remained unchanged thus
far in 1998. The effective tax rate for 1998 is 38%. See also Note 3 to the
consolidated financial statements for further explanation of income taxes.
Statement Pursuant to Safe Harbor Provision of the Private
Securities Litigation Reform Act of 1995
This report may contain certain "forward-looking statements" that have
been based on imprecise assumptions with regard to production levels, price
realizations, and expenditures for exploration and development and anticipated
results therefrom. Such statements are subject to risks and uncertainties that
could cause actual results to differ materially from those expressed herein or
implied by such statements.
24
<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 Form 8-K
Report dated February 12, 1998 related to the amendment of
the By-laws providing that the annual meeting of
shareholders shall be held at 9:30 a.m. on the first
Thursday in May in each year beginning with the year 1998.
25
<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 14, 1998 /s/ Harry A. Trueblood, Jr.
----------------------------- ---------------------------
Harry A. Trueblood, Jr.
Chairman, President and
Chief Executive Officer
(a duly authorized officer)
DATE: April 14, 1998 /s/ Ronald H. Beck
----------------------------- ------------------
Ronald H. Beck
Vice President
(Chief Accounting Officer)
26
<PAGE>
Commission File No. 1-9872
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
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 28, 1998
COLUMBUS ENERGY CORP.
(Exact Name of Registrant)
1660 Lincoln Street
Denver, Colorado 80264
(Address of Principal Executive Office)
27
<PAGE>
EXHIBIT 11
COLUMBUS ENERGY CORP.
Statement of Computation of Per Share Earnings
(Unaudited)
(In Thousands Except Per Share Data)
Three Months Ended
-------------------------------------
February 28, 1998 February 28, 1997
----------------- -----------------
Diluted:
Based on weighted average
shares outstanding including
the effect of common stock
equivalents:
Weighted average shares
outstanding: 4,258 4,361
Incremental shares attributable
to dilutive stock options and
warrants outstanding based on
average market price during
the period 4 102
------- ------
Total average common and
common equivalent shares 4,262 4,463
======= ======
Net earnings (loss) $(1,457) $1,143
Earnings per share $ (.34) $ .26
======= ======
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Consolidated Balance Sheet As Of February 28, 1998 and
the Consolidated Statement Of Income For The Three Months
Ended February 28, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> FEB-28-1998
<EXCHANGE-RATE> 1
<CASH> 1,285
<SECURITIES> 0
<RECEIVABLES> 3,376
<ALLOWANCES> 116
<INVENTORY> 98
<CURRENT-ASSETS> 4,684
<PP&E> 34,121
<DEPRECIATION> 16,380
<TOTAL-ASSETS> 22,561
<CURRENT-LIABILITIES> 3,067
<BONDS> 0
0
0
<COMMON> 910
<OTHER-SE> 15,284
<TOTAL-LIABILITY-AND-EQUITY> 22,561
<SALES> 2,837
<TOTAL-REVENUES> 3,187
<CGS> 820
<TOTAL-COSTS> 5,462
<OTHER-EXPENSES> 32
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43
<INCOME-PRETAX> (2,350)
<INCOME-TAX> (893)
<INCOME-CONTINUING> (1,457)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,457)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
<FN>
<F1>
10% stock dividend February 23, 1998; Prior financial data schedules have not
been restated for this dividend.
</FN>
</TABLE>
