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, 1999
-------------------------------------------------
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 9, 1999
- ----------------------------- ----------------------------
Common stock, $.20 par value 3,860,668
<PAGE>
COLUMBUS ENERGY CORP.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
February 28, 1999 and
November 30, 1998 3
Consolidated Statements of Operations -
Three Months Ended February 28, 1999
and 1998 5
Consolidated Statement of
Stockholders' Equity -
Three Months Ended February 28, 1999 6
Consolidated Statements of Cash Flows -
Three Months Ended February 28, 1999
and 1998 7
Notes to the Financial Statements 9
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Items 2-5. Not Applicable
Item 6. Exhibits and Reports
on Form 8-K 24
Signatures 25
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COLUMBUS ENERGY CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS
February 28, November 30,
1999 1998
------------ ------------
(unaudited)
(in thousands)
Current assets:
Cash and cash equivalents $ 916 $ 2,003
Accounts receivable:
Joint interest partners 1,225 1,570
Oil and gas sales 1,069 1,239
Allowance for doubtful accounts (116) (116)
Deferred income taxes (Note 3) 272 327
Inventory of oil field equipment,
at lower of average cost or market 87 95
Other 113 106
------- -------
Total current assets 3,566 5,224
------- -------
Property and equipment:
Oil and gas assets, successful efforts
method (Note 2) 36,969 36,039
Other property and equipment 1,812 1,804
------- -------
38,781 37,843
Less: Accumulated depreciation,
depletion and amortization
and valuation allowance (20,006) (19,118)
------- -------
Net property and equipment 18,775 18,725
------- -------
$ 22,341 $ 23,949
======== ========
(continued)
3
<PAGE>
COLUMBUS ENERGY CORP.
CONSOLIDATED BALANCE SHEETS - (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
February 28, November 30,
1999 1998
------------ ------------
(unaudited)
(in thousands)
Current liabilities:
Accounts payable $ 1,553 $ 1,846
Undistributed oil and gas
production receipts 154 317
Accrued production and property taxes 304 677
Prepayments from joint interest owners 225 374
Accrued expenses 394 415
Income taxes payable (Note 3) 45 2
Other 14 37
------ ------
Total current liabilities 2,689 3,668
------ ------
Long-term bank debt (Note 2) 5,000 4,900
Deferred income taxes (Note 3) 59 117
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
4,620,412 in 1999, and 4,611,001 in 1998
(outstanding 3,940,665 in 1999 and
4,046,552 in 1998) 924 922
Additional paid-in capital 19,711 19,656
Retained earnings (accumulated deficit) (1,412) (1,440)
------ ------
19,223 19,138
Less: Treasury stock at cost
679,747 shares in 1999 and
564,449 shares in 1998 (4,630) (3,874)
------ ------
Total stockholders' equity 14,593 15,264
------ ------
$ 22,341 $ 23,949
====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended February 28,
--------------------------------
1999 1998
---------- ---------
(in thousands, except per share data)
Revenues:
Oil and gas sales $ 2,033 $ 2,837
Operating and management
services 336 308
Interest and other income 27 42
-------- --------
Total revenues 2,396 3,187
-------- --------
Costs and expenses:
Lease operating expenses 422 560
Property and production taxes 244 260
Operating and management
services 251 271
General and administrative 336 287
Depreciation, depletion and
amortization 890 1,005
Impairments - 2,816
Exploration expense 119 263
Litigation expense (Note 4) 4 -
-------- --------
Total costs and expenses 2,266 5,462
-------- --------
Operating income (loss) 130 (2,275)
-------- --------
Other expenses (income):
Interest 84 43
Other 1 32
-------- --------
85 75
-------- --------
Earnings (loss) before
income taxes 45 (2,350)
Provision (benefit) for income
taxes (Note 3) 17 (893)
-------- --------
Net earnings (loss) $ 28 $ (1,457)
======== ========
Earnings (loss) per share (Note 7):
Basic $ .01 $ (.34)
======== ========
Diluted $ .01 $ (.34)
======== ========
Average number of common shares and
common equivalent shares outstanding:
Basic 4,009 4,258
======== ========
Diluted 4,039 4,258
======== ========
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 28, 1999
(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> <C>
Balances,
December 1, 1998 4,611,001 $ 922 $19,656 $(1,440) 564,449 $(3,874)
Exercise of employee
stock options 4,107 1 21 - 3,492 (22)
Purchase of shares - - - - 113,140 (743)
Shares issued for Stock
Purchase Plan 5,304 1 34 - (1,334) 9
Net earnings - - - 28 - -
--------- ------- ------- ------- ------ -------
Balances,
February 28, 1999 4,620,412 $ 924 $19,711 $(1,412) 679,747 $(4,630)
========== ======= ======= ======= ======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended February 28,
--------------------------------
1999 1998
---------- ---------
(in thousands)
Net earnings (loss) $ 28 $(1,457)
Adjustments to reconcile net earnings
(loss)to net cash provided by
operating activities:
Depreciation, depletion, and
amortization 890 1,005
Impairments -- 2,816
Deferred income tax provision (benefit) (3) (914)
Exploration expense, noncash portion 40 --
Other 30 21
Net change in operating assets and
liabilities (369) (98)
------- -------
Net cash provided by
operating activities 616 1,373
------- -------
Cash flows from investing activities:
Additions to oil and gas properties (1,085) (2,749)
Additions to other assets (10) 32
------- -------
Net cash used in
investing activities (1,095) (2,717)
------- -------
Cash flows from financing activities:
Proceeds from long-term debt 300 1,300
Reduction in long-term debt (200) (200)
Proceeds from issuance of
common stock 35 156
Purchase of treasury stock (743) (482)
Other -- (2)
------- -------
Net cash provided by (used in)
financing activities (608) 772
------- -------
Net decrease in cash and
cash equivalents (1,087) (572)
Cash and cash equivalents at
beginning of period 2,003 1,857
------- -------
Cash and cash equivalents at
end of period $ 916 $ 1,285
======= =======
(continued)
7
<PAGE>
COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
Three Months Ended February 28,
--------------------------------
1999 1998
---------- ---------
(in thousands)
Supplemental disclosure of
cash flow information:
Cash paid during the period for:
Interest $ 85 $ 40
==== ====
Income taxes, net of refunds $(23) $ 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 subsidiaries,
Columbus Gas Services, Inc. ("CGSI") and Columbus Texas, Inc. ("Texas"). All
significant intercompany balances have been eliminated in consolidation. The
term "Company" as used herein includes Columbus and its subsidiaries.
The consolidated financial statements of the Company have been
prepared in accordance with generally accepted accounting principles and require
the use of management's 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, 1999 and November 30, 1998, and 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.
The accounting policies followed by the Company are set forth in Note
2 to the Company's consolidated financial statements in the Annual Report on
Form 10-K for the year ended November 30, 1998. These accounting policies and
other footnote disclosures previously made have been omitted in this report so
long as the interim information presented is not misleading. These quarterly
financial statements should be read in conjunction with the consolidated
financial statements and notes included in the 1998 Form 10-K.
(2) LONG-TERM DEBT
The Company has a credit agreement with Norwest Bank Denver, N.A. ("Bank")
that was amended on September 8, 1998 to extend the revolving period to July 1,
2000 when it entirely converts to an amortizing term loan which matures July 1,
2003. The credit is collateralized by a first lien on oil and gas properties.
The interest rate options are the Bank's prime rate or LIBOR plus 1.50%.
The borrowing base is limited to $10,000,000 and subject to semi-annual
redetermination for any increase or decrease. A commitment fee of 1/4 of 1% for
any unused portion of the amount which is the difference between the borrowing
base and the outstan ding borrowings is payable quarterly.
9
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
(Unaudited)
(3) INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
Three Months Ended February 28,
-------------------------------
1999 1998
--------- --------
Current:
Federal $ 8 $ 1
State 12 20
----- -----
20 21
----- -----
Deferred:
Federal (9) (878)
Use of loss carryforwards 6 1
State - (37)
----- -----
(3) (914)
----- -----
Total income tax (benefit) expense $ 17 $ (893)
====== ======
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,
-------------------------------
1999 1998
---- ----
U.S. Statutory rate 34 % (34)%
State income taxes 4 (1)
Other - (3)
---- ----
38 % (38)%
==== ====
10
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
(Unaudited)
During the three months of fiscal 1999, 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
---------------------------------------
December 1, Operations/ February 28,
1998 Other 1999
----------- ----------- ------------
Deferred tax assets:
Pre-1987 loss carryforwards $ 1,124 $ -- $ 1,124
Post-1987 loss carryforward 540 -- 540
Percentage depletion
carryforwards 1,478 -- 1,478
State income tax loss
carryforwards 118 (6) 112
Other 329 8 337
------- ------- -------
Total 3,589 2 3,591
Valuation allowance
(long-term) (1,408) -- (1,408)
------- ------- -------
Deferred tax assets 2,181 2 2,183
------- ------- -------
Deferred tax liabilities-
Depreciation, depletion and
amortization and other (1,971) 1 (1,970)
------- ------- -------
Net tax asset (liability) $ 210 $ 3 $ 213
======= ======= =======
(4) LITIGATION
On October 7, 1998, Columbus was served with a complaint in a lawsuit
styled Maris E. Penn, Michael Mattalino, Bruce Davis, and Benjamin T. Willey,
Jr. vs. Columbus Energy Corp., Cause No. 98- 44940 in the District Court of
Harris County, Texas. The plaintiffs claim that Columbus breached the settlement
agreement reached in September 1994 of their previous lawsuit by failing to
develop properties located within the area of mutual interests and to act as a
reasonably prudent operator in the development of the property. Plaintiffs
allege damages under the contract but no amount is specified. Columbus has
responded with a First Set of Interrogatories to plaintiffs. Columbus has denied
the plaintiffs' allegations.
11
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
(Unaudited)
(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 entered
into 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, 1999.
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 $22,000 and $60,000 for the three months of 1999 and 1998,
respectively. Effective on March 31, 1999, the agreement for Columbus to
continue furnishing services was terminated following the 90 day notice period
as provided.
12
<PAGE>
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,
-------------------------------
1999 1998
------- -------
(in thousands,
except per share data)
Reconciliation of basic and diluted
EPS share computations:
Income (loss) available to common
shareholders - basic and
diluted EPS (numerator) $ 28 $(1,457)
======= =======
Shares (denominator):
Basic EPS 4,009 4,258
Effect of dilutive option shares 30 --
------- -------
Diluted EPS 4,039 4,258
======= =======
Per share amount:
Basic EPS $ .01 $ (.34)
======= =======
Diluted EPS $ .01 $ (.34)
======= =======
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 325 75
====== ======
Historical average number of shares outstanding and earnings per share
have been adjusted for the 10% stock dividend distributed March 9, 1998 to
shareholders of record as of February 23, 1998.
13
<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 1999 sales and financial results were dismal for the
fifth consecutive quarter. Average worldwide and domestic crude oil prices were
lower than in any quarter in more than ten years and on an inflation adjusted
basis dipped to a lower average price than in any year since the 1930's during
the Depression years. Also, these low prices led to the shut-in of numerous oil
wells which significantly reduced crude oil production for the 1999 quarter.
Furthermore, the Company's average natural gas prices were much lower than
1998's first quarter which was partially offset by improved natural gas
production. As a consequence, capital available was adversely affected since
cash flow for the present quarter was materially lower than in last year's first
quarter. Despite net earnings of only $28,000, this was substantially better
than last year's net loss of $1,457,000, or $0.34 per share, which included a
$2,816,000 impairment loss ($1,746,000 after income taxes or $.41 per share).
Shareholders' equity as of the end of the first quarter 1999 decreased
to $14,593,000 from $15,264,000 at November 30, 1998 and working capital was
down to $877,000 from $1,556,000. This was primarily the result of additional
purchases of treasury shares and the fact that additions to properties exceeded
cash provided by operating activities by an amount greater than the increase of
$100,000 in long term bank debt.
The Company's cash flow for the year should provide sufficient funds
for fiscal 1999's revised capital expenditure program of less than $4,000,000
which primarily includes developing undeveloped natural gas reserves and funding
the continued exploratory drilling in the lower Gulf Coast area at its El
Squared discovery. In the past, the unused portion of the $10,000,000 bank
credit facility has been primarily targeted by management for acquisitions of
oil and gas properties, but can be used for any corporate purpose. This bank
line is available should there be unforeseen capital expenditures required
during 1999 as a result of accelerating drilling activities as a result of
improved prices or outstanding successes from its exploratory program.
Net cash provided from operating activities was $616,000 for the first
three months of 1999, which compares with $1,373,000 last year. This cash flow
coupled with limited use of the Company's credit facility has provided
sufficient liquidity to fund all drilling capital expenditures incurred as well
as treasury share repurchases to date in 1999.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
As previously reported, management places greater reliance upon an
important alternative method of computing cash flow generally known as
Discretionary Cash Flow ("DCF") (which is not generally accepted accounting
principles ("GAAP") but is commonly used in the industry). This method
calculates cash flow before considering either working capital changes or
deduction of exploration expenses as the latter can be increased or decreased at
management's discretion. DCF is often used by successful efforts companies when
making comparisons with the cash flow results of independent energy companies
which use the full cost accounting method where exploration expenses are
capitalized and therefore do not adversely affect either operating cash flow or
net earnings immediately. Columbus' DCF for the first quarter of 1999 was
$1,064,000 down 39% from 1998's quarter which was $1,734,000. As previously
indicated, this decrease was attribut able to lower crude oil and natural gas
prices since daily production stated in either barrels or Mcf equivalent was
essentially flat compared with last year's similar period. DCF is also
calculated without any debt retirement being considered. However, in Columbus'
case this does not matter since outstanding bank debt requires no principal
payments before August 1, 2000 and interest expense, which has been relatively
insignificant, is dedu cted before arriving at DCF.
Management continues to note in all public filings and reports its
strong exception to the Statement of Financial Accounting Standards No. 95 as it
applies to Columbus since it directs that operating cash flow must only be
determined after consideration of working capital changes. It is our belief such
a requirement by GAAP ignores entirely the significant impact that the timing of
income received for, and expenses incurred on behalf of, third party owners in
properties has on working capital where Columbus owns only a small working
interest but is the operator.
Neither DCF nor operating cash flow before working capital changes may
be substituted for net income or for cash available from operations as defined
by GAAP. Furthermore, currently reported cash flows, however defined, are not
necessarily indicative that there will be sufficient funds for all future cash
requirements. For the first quarter of 1999, GAAP cash flow was lower than DCF
but has been the opposite in some prior quarters.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
At the present time, the Company has no hedges of either crude oil or
natural gas prices similar to those swaps it negotiated in prior years.
Therefore, the Company's current oil and gas revenues are fully exposed to the
risk of declining prices such as have occurred during most of fiscal 1998 and
first quarter 1999. Thus, it will be able to fully benefit from any price
increases should these occur during fiscal 1999. Subsequent to the end of the
quarter, there has been a significant price improvement of crude oil of about
50%.
Columbus had outstanding borrowings of $5,000,000 as of February 28,
1999 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
1999, the ratio of net long term debt (debt less working capital) to
shareholders' equity was 0.28 and to total assets was 0.18. Outstanding long
term debt utilized a LIBOR option with an average interest rate of 6.4%.
Subsequent to the end of the first quarter, Columbus has drawn down an
additional $400,000 to pay for its 1999 capital expenditure program as well as
to purchase treasury shares in March and April as discussed below. The net
increase (or decrease) of long-term debt directly affects cash flows from
financing activities as do the purchase of treasury shares or the proceeds from
the exercise of stock options.
Working capital at February 28, 1999 had declined to $877,000 from a
positive $1,566,000 at November 30, 1998 for reasons discussed above. Actual
three month's capital expenditures for 1999 only were $929,000 for additions to
oil and gas properties and $743,000 for the purchase of 113,140 treasury shares
which affected working capital. However, the aforementioned actual capital
expenditures differ from the amount shown in the consolidated Statement of Cash
Flows because the latter also includes cash payments made during 1999 for 1998
expenditures which had been incurred but not yet paid as of 1998's year end.
The Company has been authorized by its Board of Directors to
repurchase its common shares from the market at various prices during the last
several years. During February 1999 an additional 100,000 shares were authorized
for repurchase at prices not to exceed $6.00 per share, which was considerably
lower than the purchase price permitted for previously authorized share
purchases, some of which had not yet been acquired but subsequently have been.
During the first quarter of fiscal 1999, 113,140 shares were repurchased at an
average price of $6.52 per share. During March and April 1999, an additional
87,900 shares have been acquired at an average price of $5.82 per share leaving
approximately 23,000 shares yet to be purchased under the February 1999
authorization.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
RESULTS OF OPERATIONS
During 1999's first quarter, lower oil and gas sales were responsible
for gross revenues decreasing by 25% while operating income increased to
$130,000 compared with a loss of $2,275,000 in 1998 which included impairments
of $2,816,000. Other comparisons for the 1999 quarter versus 1998 related to
prices, production and oil and gas sales are covered below.
During 1999's first quarter three gross wells (1.23 net WI) were
drilled and/or completed. These included one (.07 net WI) successful development
gas well in the Laredo area and one (.615 net WI) development gas well was
drilled in Jim Wells County. Also, a second discovery gas well (.55 net WI) was
completed at its El Squared prospect in Bee County where most of management's
attention has been devoted toward selection of the exact surface locations where
vertical well bores will test various potentially productive sands in the Wilcox
formation by penetrating those horizons at apex of the structure immediately
underneath the sealing fault. This effort has also included a reprocessing of
all 3-D seismic using velocities from logs obtained from drilling and a special
program to obtain actual velocities by lowering an instrument into a well bore
below 10,000 feet and recording direct seismic traces of shock waves created on
the surface.
Oil and Gas Revenues and Operating Costs
The following table shows comparative crude oil and natural gas
revenues, sales volumes, average prices and percentage changes between periods
for the first quarters of 1999 and 1998 and the first quarter of 1999 versus the
fourth quarter of 1998.
<TABLE>
<CAPTION>
First Quarter
--------------------- % Fourth Qtr. %
1999 1998 Change 1998 Change
------ ------ ------ ----------- ------
<S> <C> <C> <C> <C> <C>
Natural gas revenues M$ $1,640* $1,916* (14)% $ 1,885 (13)%
Oil revenue M$ $ 393 $ 921 (57)% $ 619 (37)%
Natural gas sales volumes:
Millions of cubic feet (MMCF) 876* 861* 2 % 932 (6)%
MCF/day 9,738 9,572 10,245
Oil sales volumes:
Barrels 37,945 59,669 (36)% 50,114 (24)%
Barrels/day 422 663 551
Average price received:
Natural gas - $/MCF $ 1.87 $ 2.22 (16)% $ 2.02 (7)%
Oil - $/BBL $10.35 $15.44 (33)% $12.36 (16)%
</TABLE>
*These sales volumes should not be confused with actual production for
the period. First quarter sales volumes and revenues for 1999 and 1998
include adjustments consisting of a reduction of 15 Mmcf and $33,000
and an increase of 38 Mmcf and $68,000, respectively.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Natural gas revenues decreased 14% in the first quarter of 1999 when
compared to 1998's quarter which was solely the result of decreased prices since
volumes improved by 2%. Average gas prices were down 16% commensurate with
reduced demand due to a warm winter and available record level inventory of
storage gas. The latest quarter compared to the fourth quarter of 1998 showed 6%
lower sales volumes due to normal production declines which were not offset by
new wells and down time from workover of the Long #1 discovery well to
temporarily shut off the lower zone to test for source of water production. A
reversionary interest settlement which reduced sales and production from the
1999 first quarter's reported amounts by 15,000 MCF of gas and $33,000 of
revenues had been previously reported throughout 1998. The 7% decrease in
average prices for the quarter versus the fourth quarter was affected by the
same weather and storage fill influence. Gas revenues decreased 13% from 1998's
fourth quarter for the same reasons of sales volumes, lower prices and reversion
accounting.
Oil revenues for 1999's first quarter were down significantly by 57%
when compared to the similar 1998 quarter which was the result of a substantial
33% decrease in the average price and a lower sales volume of 36%. Also, during
1999's first quarter, several wells became unprofitable and were shut down
pending improved crude oil prices. Any wells which had pump or tubing problems
were not repaired nor were any workovers performed or oil wells drilled. A few
of these wells have recently been returned to production with improved crude oil
prices.
Likewise, when compared to 1998's fourth quarter results, first
quarter oil revenues were down 37%. This was a 16% decrease in the average price
while production declined 24% due to the aforementioned lack of workovers,
postponed downhole equipment repairs or replacements, and the election to shut
down wells that had become temporarily uneconomic.
Columbus' 1999 first quarter average sales volumes of natural gas of
9,738 Mcfd (as adjusted for reversion) and oil and liquids production of 427
barrels per day equates to an average daily production of 2,050 barrels of oil
equivalent (BOE) compared to 2,265 BOE of production during 1998's first
quarter. The curtailment and decline of oil production coupled with the
reversionary interest accounts for most of the difference. Incre ases generated
by new gas wells which were connected between those comparative periods could
not overcome those negative reductions.
Lease operating expenses for the first quarter were lower than 1998's.
Expensive workovers and replacements of downhole and surface equipment on older
wells had occurred during the first quarter of fiscal 1998. These type of costs
were deferred during first quarter 1999. Lease operating costs on a BOE basis
were
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
$2.29 in 1999 compared to $2.75 in 1998 which had higher production. Operating
costs as a percentage of revenues were up to 21% as a result of lower sales, and
despite lower costs versus 20% reported in 1998's first quarter when somewhat
better prices and higher oil production helped to generate higher revenues for
that period.
Production and property taxes approximated 12% of revenues in 1999 and
9% in 1998. These 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 most of the local
jurisdiction's property taxes in Texas 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 which includes compressor
operations and salt water disposal facilities.
Operating and management services gross profit was $85,000 during first
quarter 1999 compared to a $37,000 profit during the equivalent period in 1998
which included unusually high workover expenses required to clean out sand from
the well bore of a salt water disposal well in Texas. Revenues did improve
during 1999's first quarter as the number of operated wells increased along with
an increase from 50% to 100% ownership interest in four compressors operating in
South Texas.
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 decreased in 1999 to $27,000 from $42,000 in 1998's first
quarter primarily as a result of a lower 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.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The Company's general and administrative expenses for the first quarter of
1999 were 17% more than last year primarily due to the previously discussed
phase out of reimbursement for services provided by Columbus officers and
employees for managing Resources. Reimbursement of $22,000 for 1999 compares
with $60,000 during the first quarter of 1998 for providing services to
Resources. Also, expenses increased in 1999 due to salary increases which were
granted effective December 1, 1998 for non-officer employees and May 1, 1998 for
officers, higher medical claims under the Company's self-insured plan and higher
office rent.
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 is also dependent upon past
costs to find, develop, 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.
Charges for this expense item decreased from 1998's quarter as a
result of decreased production and despite development expenditures in the
intervening period as well as reduced oil reserves in several cost pools brought
about by lower crude oil prices. Impairment writedowns in 1998 did contribute to
a reduction in the depletion rate per BOE so that 1999's first quarter depletion
rate was $4.57 per BOE compared with the $4.91 per BOE for the like period of
fiscal 1998 and $4.64 per BOE for all of 1998.
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 including associated
leaseholds. 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 $119,000 for 1999's first
quarter were down from 1998's $263,000. In 1999 a total of $47,000 was expensed
for undeveloped leases in Texas as the result of an offset dry hole. In 1998
$199,000 was expensed due to a dry exploratory oil well in Montana.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Any time a company reporting under the successful efforts method of
accounting gets involved in a significant exploratory program, it becomes
subject to the risks that net earnings for a quarter or a year may be severely
impacted by significant expenses. With the numerous exploratory locations
involved at Columbus' El Squared Prospect that will be required to properly
evaluate the various fault blocks and potential producing horizons, shareholders
should take note that net earnings and GAAP cash flow may not be indicative of
the Company's operational potential. Management believes shareholders should
place the most emphasis on comparative Discretionary Cash Flows between periods
or with other company's cash flows who use the full cost accounting method and
capitalize their exploratory costs.
Impairments
No impairment loss was necessary for the 1999 first quarter even
though crude oil and natural gas prices declined further from the end of the
fiscal 1998.
A non-cash impairment loss of $2,816,000 in first quarter 1998 was
recognized. The extremely low crude oil prices were a major contributor along
with a Louisiana well's performance. These resulted in a reduction in reserve
quantities as well as the remaining carrying value of several successful efforts
pools when unamortized costs suddenly exceeded the newly calculated 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 over the remaining life of those pools. An additional $400,000 of
impairments were also provided for probable loss in value of undeveloped acreage
holdings (unproved properties) located primarily in Louisiana plus $56,000 was
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 1999's first quarter than in 1998. The average bank
interest rate paid this latest quarter was 6.7% which compares to 7.3% in 1998.
Income Taxes
During the first quarter of 1999, the net deferred tax asset increased
slightly to $213,000. The asset is comprised of a $272,000 current asset and a
$59,000 long-term liability. The estimated increase in deferred tax assets was
$3,000 during the first quarter. The effective tax rate for 1999 is 38%. See
Note 3 to the consolidated financial statements for further explanation of
income taxes.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Impact of the Year 2000 issue. The Year 2000 issue is the result of
computer programs being written using two digits rather than four, or other
methods, to define the applicable year. Computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000 and could result in a system failure or miscalculations
causing disruptions of operations such as a temporary inability to process
transactions, transmit invoices or engage in similar normal business activities.
The Company upgraded its major system computer software in 1997 to a
new release of a major software vendor that is compliant with the year 2000.
Columbus has started its review of other less important systems as well as its
significant suppliers, purchasers, and transporters of oil and gas to determine
the extent to which the Company might still be vulnerable to other failures and
what the impact might be on its operations.
The Company's interest in wells operated by other companies is not
considered to be as important but management is attempting to determine if those
companies are ready for the year 2000. Outside services are used for payroll and
medical benefits processing and those companies provided updates to their
software that is year 2000 compliant by year-end 1998. The Company is also
somewhat dependent upon personal computers as well as certain spreadsheet and
word processing software programs which may not be year 2000 ready at present.
Evaluations will be made to establish which of those systems are critical and
need to be remedied.
The Company also relies on non-information technology systems, such as
office telephones, facsimile machines, air conditioning, heating and elevators
in its leased office building, which may have embedded technology such as micro
controllers and are generally outside of its control to assess or remedy. These
might adversely impact the Company's business but in management's opinion would
not create a material disruption.
As previously disclosed, the major system computer software upgrade
performed in 1997 cost $16,000. Management expects that this represents the
majority of the costs, including replacement of any non-compliant information
technology system, required to meet its goal of being year 2000 ready for
mission-critical systems. The Company does not believe that any loss of revenue
will occur as a result of the year 2000 problem but regardless of efforts to
identify and remedy such problems, there could be year 2000 related failures
that cause some disruption. The Company has not yet established a contingency
plan should year 2000 failures occur and has not determined if it will in fact
create a contingency plan.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
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.
23
<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
27 - Financial data schedule - February 28, 1999
(b) Reports on Form 8-K
None
24
<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 12, 1999 /s/ Harry A. Trueblood, Jr.
----------------------------- ---------------------------
Harry A. Trueblood, Jr.
Chairman, President and
Chief Executive Officer
(a duly authorized officer)
DATE: April 12, 1999 /s/ Ronald H. Beck
----------------------------- ------------------
Ronald H. Beck
Vice President
(Chief Accounting Officer)
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE CONSOLIDATED BALANCE SHEET AS OF FEBRUARY 28, 1999 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE THREE MONTHS ENDED FEBRUARY 28, 1999.
</LEGEND>
<CIK> 0000823975
<NAME> Columbus Energy
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> FEB-28-1999
<EXCHANGE-RATE> 1
<CASH> 916
<SECURITIES> 0
<RECEIVABLES> 2,294
<ALLOWANCES> 116
<INVENTORY> 87
<CURRENT-ASSETS> 3,566
<PP&E> 38,781
<DEPRECIATION> 20,006
<TOTAL-ASSETS> 22,341
<CURRENT-LIABILITIES> 2,689
<BONDS> 0
0
0
<COMMON> 924
<OTHER-SE> 13,669
<TOTAL-LIABILITY-AND-EQUITY> 22,341
<SALES> 2,033
<TOTAL-REVENUES> 2,396
<CGS> 666
<TOTAL-COSTS> 2,266
<OTHER-EXPENSES> 1
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 84
<INCOME-PRETAX> 45
<INCOME-TAX> 17
<INCOME-CONTINUING> 28
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
