[Columbus Energy Corp. Logo and Letterhead]
MANAGEMENT'S REPORT TO SHAREHOLDERS
FOR FIRST QUARTER ENDED FEBRUARY 29, 2000
May 26, 2000
Dear Shareholder:
First we would like to let you know the status of the previously announced
program wherein the Board of Directors hired financial advisors to aid them in
exploring strategic alternatives which would maximize shareholder value. Also,
this letter will serve as our fiscal 2000 first quarter report to shareholders
so the reverse side includes basic financial information for the period. If you
desire more details, read the quarterly Form 10-Q filed with the Securities and
Exchange Commission during April which can be found on our website which is
www.columbusegy.com.
Following a review by those financial advisors of the general status of the
Company's assets, its financial statements and stock market activity of
Columbus' shares, your directors developed a general consensus that it would be
extremely difficult to generate new institutional/investor interest without
having a critical mass which is several times EGY's present market
capitalization. This would require some form of consolidation with one or more
larger companies. It is quite evident that significantly higher cash flows now
being generated by much improved commodity prices for crude oil and natural gas
will still not alone be sufficient for small cap domestic energy companies to
appeal to public investors' imagination such as the "dot com" companies have
been able to attract.
The Board of Directors made the decision in February to adopt a program
which would most likely lead to a sale of the Company either by merger or by the
outstanding stock being purchased for cash. This procedure involved mailing
letters with confidentiality agreements enclosed to several domestic exploration
and production companies and utilities who had expressed interest in possibly
acquiring EGY. All who responded with executed confidentiality agreements were
mailed a confidential information memorandum containing detailed information
about the Company's assets and its financial condition. It was believed that
such material would help companies to determine the extent of their interest and
to submit a preliminary indication of such interest along with a possible form
of transaction. Several companies responded with their indications which were
reviewed by the financial advisors with the Company's Board of Directors after
which the list was further narrowed to those companies who were invited to visit
the data room which procedure should not prove disruptive to Columbus' daily
operations. We expect to continue this auction process by soli- citing
transaction proposals from those companies still interested and then continuing
with the process. There is no assurance we will be able to reach an agreement
with any of these companies and we will issue a press release if we enter into a
transaction with anyone.
Now, to the discussion of the operational and financial results of fiscal
2000's first quarter. You may wish to glance at the financial statements on the
reverse side of this letter before reading the material appearing below.
Improved crude oil and natural gas prices were primarily responsible for a
35% improvement in first quarter sales since natural gas volumes were off 19%
and crude oil volumes were up only 9%. Last year's first quarter gas production
had benefitted from prior year fourth quarter completions of upper Wilcox Slick
Sand discoveries at the El Squared Prospect in Bee County, Texas, along with
several development gas wells drilled near Laredo. Because EGY had a very
limited development drilling program throughout fiscal 1999 and into early 2000
due to poor commodity prices and general industry turmoil, there had been a
steady production decline during last year which was not offset by exploration
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successes. Following recent resumption of a Laredo area develop- ment program,
we have enjoyed some excellent results particularly with one outstanding gas
well in which there had been numerous non- consents which EGY agreed to absorb.
As a consequence, when this well was recently connected, Columbus' net daily gas
production has climbed rapidly back up to the 10 million cubic feet per day
(MMCFD) level from an average of 7.8 MMCFD recorded during the first quarter of
2000. While this new well's larger working interest will revert back to a
relatively small interest some time in the next six months, we hope other new
gas producers will take up the slack in capacity when this occurs. Meantime, our
debt will be reduced as increased cash flow permits. Crude oil production thus
far in fiscal 2000 has remained fairly stable in the 450 plus barrel per day
range with prices that have been in the $25 per barrel range after hedging
deductions.
In the first quarter financials, the balance of exploratory charges related
to the two middle Wilcox exploratory dry holes at the Long #3 and Long #4 wells
at El Squared (which were discussed in detail in the fiscal 1999 Annual Report)
prevented Columbus from reporting net earnings for that period. Had the Company
been utilizing full cost accounting, there would have been substantial net
earnings since those exploratory charges alone equated to a reduction (after
tax) of 25 cents per share. Columbus' Discretionary Cash Flow (DCF), which is
not affected by exploration charges, rose to $1,506,000, up 42% from 1999's
first quarter, and has continued to escalate subsequent to the end of the
quarter because the significant improvement in natural gas prices had only just
begun to rise in February. As reported during the annual meeting, assuming there
are no major price declines during the balance of the year, it is believed that
fiscal 2000's DCF will become the second best year in history in terms of gross
amount and might even surpass the $2.25 per share reported for 1997's record
year (assuming a full year gets reported).
Needless to say, management is thoroughly enjoying these magnificent
prices. This is not only because of the huge increase in revenues being realized
and debt reduction under way, but we feel that the energy industry is finally
being vindicated for Washington's failure to pay attention to the dire warnings
domestic independents have issued for the past ten years about the perilous
situation Congress and the Administrations from both parties have helped to
create. There has been essentially no attempt to develop a realistic, coherent
domestic energy policy nor has there been a serious attempt undertaken to
eliminate the punitive tax penalties imposed during the 1970's and 1980's. Those
past tax changes removed most of the incentives that would have helped the
industry to raise capital needed to offset risks of exploring for new fields.
Now those failures have come home to roost and anything that might be done,
while helpful, will take several years to show up in industry results. It is
also much too late to avoid a lot of pain and suffering for U.S. citizens for
several years to come. They must now get used to paying world prices for
gasoline and fuel oil which almost led to anarchy when this occurred in the
1970's. Hopefully, expected shortfalls in natural gas production will not be so
severe that whole communities will suffer therefrom. Don't bet your life's
savings this won't happen, however.
Sincerely yours,
/s/ Harry A. Trueblood, Jr.
-----------------------------
Harry A. Trueblood, Jr.
Chairman and President
This document may contain projections or other forward-looking statements
regarding future events or the future financial performance of the Company that
involve risks and uncertainties. Readers are cautioned that these
forward-looking statements are only predictions and may differ materially from
actual future events or results. Readers are referred to the documents filed by
Columbus with the SEC, specifically the most recent reports on Form 10-K, 8-K
and 10-Q, including amendments thereto, which identify important risk factors
that could cause actual results to differ from those contained in the
forward-looking statements, including risks associated with imprecise
assumptions with regard to production levels, price realizations, and
expenditures for exploration and development and anticipated results therefrom,
competition, volatility of stock price, financial risk management, and potential
volatility in operating results, among others.
<PAGE>
COLUMBUS ENERGY CORP.
CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
February 29, 2000
-----------------
(in thousands)
Current assets $ 4,050
Oil and gas assets, successful efforts method 38,499
Less: Accumulated depreciation and depletion (23,231)
---------
Net property 15,268
Other 1,212
---------
$ 20,530
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 2,745
Long term debt, excluding current maturities 5,700
---------
Total liabilities 8,445
Stockholders' equity 12,085
---------
$ 20,530
=========
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COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
February 29, February 28
2000 1999
-----------------------------------
(in thousands)
Net income (loss) $ (444) $ 28
Income charges not requiring
cash 538 917
Exploration expense 1,412 119
------ -----
Discretionary cash flow 1,506 1,064
Changes in assets & liabilities, net (435) (369)
Exploration expense, cash portion (1,412) (79)
------ -----
Net cash from (used in)
operating activities (341) 616
Cash flow used in investing
activities (147) (1,095)
Cash flow used in financing
activities (78) (608)
------ ------
Net decrease in cash (566) (1,087)
Cash and cash equivalents:
Beginning of period 1,850 2,003
------ ------
End of period $ 1,284 $ 916
====== ======
<PAGE>
COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
February 29, 2000 February 28, 1999
----------------- -----------------
(in thousands, except per share data)
<S> <C> <C>
Revenues:
Oil and gas sales $ 2,740 $ 2,033
Operating and management
services 370 336
Interest and other income 33 27
-------- --------
Total revenues 3,143 2,396
-------- --------
Costs and expenses:
Lease operating expenses 545 422
Property and production taxes 284 244
Operating and management
services 231 251
General and administrative 328 336
Depreciation, depletion and
amortization 751 890
Exploration expense 1,412 119
Litigation expense 158 4
-------- --------
Total costs and expenses 3,709 2,266
-------- --------
Operating income (loss) (566) 130
-------- --------
Other expenses (income):
Interest 107 84
Other - 1
-------- --------
107 85
-------- --------
Earnings (loss) before
income taxes (673) 45
Provision (benefit) for income
taxes (229) 17
-------- --------
Net earnings (loss) $ (444) $ 28
======== ========
Earnings (loss) per share
Basic $ (.12) $ .01
======== ========
Diluted $ (.12) $ .01
======== ========
Average number of common shares and common
equivalent shares outstanding:
Basic 3,773 4,009
======== ========
Diluted 3,773 4,039
======== ========
</TABLE>
