UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 29, 2000
-------------------------
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: 001-9872
----------------------
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
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(Registrant's telephone number, including area code)
Not Applicable
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(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 13, 2000
- ----------------------------- -----------------------------
Common stock, $.20 par value 3,744,374
1
<PAGE>
COLUMBUS ENERGY CORP.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
February 29, 2000 and
November 30, 1999 3
Consolidated Statements of Operations -
Three Months Ended February 29, 2000
and February 28, 1999 5
Consolidated Statement of
Stockholders' Equity -
Three Months Ended February 29, 2000 6
Consolidated Statements of Cash Flows -
Three Months Ended February 29, 2000
and February 28, 1999 7
Notes to the Financial Statements 9
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 15
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
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COLUMBUS ENERGY CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS
February 29, November 30,
2000 1999
----------- ------------
(unaudited)
(in thousands)
Current assets:
Cash and cash equivalents $ 1,284 $ 1,850
Accounts receivable:
Joint interest partners 1,245 1,780
Oil and gas sales 1,319 1,501
Allowance for doubtful accounts (116) (116)
Deferred income taxes (Note 3) 160 200
Inventory of oil field equipment,
at lower of average cost or market 97 106
Other 61 80
------- -------
Total current assets 4,050 5,401
------- -------
Deferred income taxes (Note 3) 1,212 937
Property and equipment:
Oil and gas assets, successful efforts
method (Note 2) 36,656 36,862
Other property and equipment 1,843 1,836
------- -------
38,499 38,698
Less: Accumulated depreciation,
depletion and amortization
and valuation allowance (23,231) (22,506)
------- -------
Net property and equipment 15,268 16,192
------- -------
$ 20,530 $ 22,530
======== ========
(continued)
3
<PAGE>
COLUMBUS ENERGY CORP.
CONSOLIDATED BALANCE SHEETS - (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
February 29, November 30,
2000 1999
----------- ------------
(unaudited)
(in thousands)
Current liabilities:
Accounts payable $ 1,348 $ 2,352
Undistributed oil and gas
production receipts 425 386
Accrued production and property taxes 309 738
Prepayments from joint interest owners 175 200
Accrued expenses 472 494
Income taxes payable (Note 3) 3 30
Other 13 32
------ ------
Total current liabilities 2,745 4,232
------ ------
Long-term bank debt (Note 2) 5,700 5,500
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
4,650,748 in 2000, and 4,645,303 in 1999
(outstanding 3,753,374 in 2000 and
3,800,558 in 1999) 930 929
Additional paid-in capital 20,097 20,069
Accumulated deficit (3,099) (2,655)
------ ------
17,928 18,343
Less: Treasury stock at cost
897,374 shares in 2000 and
844,745 shares in 1999 (5,843) (5,545)
------ ------
Total stockholders' equity 12,085 12,798
------ ------
$ 20,530 $ 22,530
====== ======
The accompanying notes are an integral part of these
consolidated financial statements.
4
<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 (Note 4) 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 (Note 3) (229) 17
-------- --------
Net earnings (loss) $ (444) $ 28
======== ========
Earnings (loss) per share (Note 7):
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>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Months Ended February 29, 2000
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional 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, 1999 4,645,303 $ 929 $20,069 $(2,655) 844,745 $(5,545)
Purchase of shares - - - - 54,000 (307)
Shares issued for Stock
Purchase Plan 5,445 1 28 - (1,371) 9
Net loss - - - (444) - -
--------- ------- ------- -------- ------- -------
Balances,
February 29, 2000 4,650,748 $ 930 $20,097 $(3,099) 897,374 $(5,843)
========== ======= ======= ======= ======= ======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------
February 29, 2000 February 28, 1999
----------------- -----------------
(in thousands)
<S> <C> <C>
Net earnings (loss) $ (444) $ 28
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation, depletion, and
amortization 751 890
Deferred income tax provision (benefit) (235) (3)
Exploration expense, noncash portion - 40
Other 22 30
Net change in operating assets and
liabilities (435) (369)
------- -------
Net cash provided by (used
in) operating activities (341) 616
------- -------
Cash flows from investing activities:
Proceeds from sale of assets 66 -
Additions to oil and gas properties (205) (1,085)
Additions to other assets (8) (10)
------- -------
Net cash used in
investing activities (147) (1,095)
------- -------
Cash flows from financing activities:
Proceeds from long-term debt 300 300
Reduction in long-term debt (100) (200)
Proceeds from issuance of
common stock 29 35
Purchase of treasury stock (307) (743)
------- -------
Net cash used in financing
activities (78) (608)
------- -------
Net decrease in cash and
cash equivalents (566) (1,087)
Cash and cash equivalents at
beginning of period 1,850 2,003
------ -------
Cash and cash equivalents at
end of period $ 1,284 $ 916
====== =======
</TABLE>
(continued)
7
<PAGE>
COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------
February 29, 2000 February 28, 1999
----------------- -----------------
(in thousands)
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest $ 95 $ 85
====== =======
Income taxes, net of refunds $ 33 $ (23)
====== =======
Supplemental disclosure of non-cash investing
and financing activities:
Non-cash compensation expense
related to common stock $ 22 $ 30
====== =======
</TABLE>
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 29, 2000 and November 30, 1999, 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, 1999. 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 1999 Form 10-K.
(2) LONG-TERM DEBT
The Company has a credit agreement with Norwest Bank Denver, N.A. ("Bank")
that was amended on May 12, 1999 to extend the revolving period to July 1, 2001
when it entirely converts to an amortizing term loan which matures July 1, 2005.
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. At February 29, 2000 outstanding
borrowings on the revolving line of credit were $5,700,000 and the unused
borrowing base available was $4,300,000. 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 outstanding 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 29, 2000 February 28, 1999
----------------- -----------------
Current:
Federal $ 1 $ 8
State 5 12
----- -----
6 20
----- -----
Deferred:
Federal (226) (9)
Use of loss carryforwards - 6
State (9) -
----- -----
(235) (3)
----- -----
Total income tax (benefit) expense $ (229) $ 17
===== =====
During the three months of fiscal 2000, 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):
<TABLE>
<CAPTION>
Current Year
--------------------------
December 1, Operations/ February 29,
1999 Other 2000
-------- ----- -----
<S> <C> <C> <C>
Deferred tax assets:
Pre-1987 loss carryforwards $ 440 $ - $ 440
Post-1987 loss carryforward 617 - 617
Percentage depletion
carryforwards 1,650 - 1,650
State income tax loss
carryforwards 124 - 124
Other 387 6 393
------- ------ ------
Total 3,218 6 3,224
Valuation allowance
(long-term) (1,286) - (1,286)
------ ------ ------
Deferred tax assets 1,932 6 1,938
------- ------ ------
Deferred tax liabilities-
Depreciation, depletion and
amortization and other (795) 229 (566)
------- ------ ------
Net tax asset (liability) $ 1,137 $ 235 $ 1,372
======= ======= =======
</TABLE>
10
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
(Unaudited)
(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 55th District Court of
Harris County, Texas. The plaintiffs are parties to a September 1994 settlement
agreement that provided for the conveyance of overriding royalty interests in
leases acquired by Columbus in certain portions of Harris County. Plaintiffs
claim Columbus is obligated under the settlement agreement to acquire all leases
available within a described portion of Harris County and that Columbus has
failed to develop those leases as a reasonably prudent operator. Plaintiffs are
claiming damages based upon their alleged right to a 3% overriding royalty
interest in leases taken and drilled by third parties within the described area.
Discovery is ongoing. Columbus denies all allegations of failure to develop and
instructed counsel to vigorously defend this lawsuit. The parties met for
mediation on April 11, 2000 with no resolution. The trial is set for May 22,
2000.
(5) COMMITMENTS AND CONTINGENT LIABILITIES
The Company's natural gas and crude oil swaps 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's crude oil hedge outstanding as of February 29, 2000
consists of a costless "collar" for 7,500 barrels per month for the 12 months
from September 1, 1999 through August 31, 2000. This "collar" is settled monthly
against the calendar monthly average price on the NYMEX with a $17.50 per barrel
floor and $22.25 per barrel ceiling. For any average price below or above those
prices Columbus receives or pays the difference which increases or reduces oil
revenues each month in which this occurs. During the first quarter of 2000, oil
sales would have been $117,000 higher had this hedge not been in place since oil
prices exceeded the $22.25 ceiling price for each month. During the month of
March 2000, oil sales were reduced by $57,000 because of the hedge. If during
the remaining period of April through August 2000 NYMEX prices equal the prices
quoted as of March 31, 2000 as an average for each of those months, the
settlement value would be $141,000 and would further reduce crude oil sales by
such an amount.
11
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
(Unaudited)
Two of the Company's working interest owners in the Long #4 well near
Beeville, Texas initially refused to pay for all of their 25% working interest
participation after paying $90,000 of approximately $300,000 for their share of
drilling costs by claiming imprudent conduct of operations subsequent to the
well being determined to be a dry hole. During March 2000, those two owners paid
the amounts due under protest after the Company had filed liens against their
interests. One of the working interest owners, who also is the lessor and
royalty owner, has since notified the Company that there has been a breach of
lease obligations and that he apparently plans to file suit against Columbus. In
the Company's opinion, such claims of a breach are unfounded and without merit.
The Company is not aware of any events of noncompliance in its
operations with environmental laws and regulations nor of any potentially
material contingencies related to environmental issues. There is no way
management can predict what future environmental control problems may arise. The
continually changing character of environmental regulations and requirements
that might be enacted by jurisdictional authorities in various operational areas
defies forecasting.
(6) RELATED PARTY TRANSACTIONS
CEC Resources Ltd. ("Resources") was a wholly-owned subsidiary of
Columbus prior to its divestiture on February 24, 1995. Reimbursement was made
by Resources to Columbus for services provided by its officers and employees for
managing Resources in the past which effectively reduced Columbus' general and
administrative expense. Such reimbursement totaled $22,000 for the first quarter
of 1999. On March 31, 1999, the agreement was terminated pursuant to a 90 day
notice period.
The Company has been a party to an arrangement with Mark Butler,
geologist and 50% owner of Trumark Production Company ("TPC"), during fiscal
1999 and 2000 whereby Mr. Butler would provide Columbus with 70 hours per month
of geological and geophysical consulting services (including related work
station usage) at a rate of $170 per hour. John B. Trueblood, son of Columbus'
CEO Harry A. Trueblood, Jr., owns the other 50% of TPC. The retainer fees paid
to TPC were $50,000 and $36,000 during first quarter 2000 and 1999,
respectively.
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):
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------
February 29, 2000 February 28, 1999
----------------- -----------------
(in thousands, except per share data)
<S> <C> <C>
Reconciliation of basic and diluted
EPS share computations:
Income (loss) available to common
shareholders - basic and
diluted EPS (numerator) $ (444) $ 28
====== =====
Shares (denominator):
Basic EPS 3,773 4,009
Effect of dilutive option shares - 30
------ -----
Diluted EPS 3,773 4,039
====== =====
Per share amount:
Basic EPS $ (.12) $ .01
====== =====
Diluted EPS $ (.12) $ .01
====== =====
Number of shares not included in dilutive EPS that
would have been antidilutive because exercise
price of options was greater than the average market
price of the common shares 646 325
====== =====
</TABLE>
13
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE FINANCIAL STATEMENTS - (continued)
(Unaudited)
(8) INDUSTRY SEGMENTS
The Company operates primarily in two business segments of (1) oil and
gas exploration and development, and (2) providing services as an operator,
manager and gas marketing advisor.
Summarized financial information concerning the business segments is as
follows:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------
February 29, 2000 February 28, 1999
----------------- -----------------
(in thousands)
<S> <C> <C>
Operating revenues from unaffiliated services:
Oil and gas $ 2,743 $ 2,058
Services 400 338
------- -------
Total $ 3,143 $ 2,396
======= =======
Depreciation, depletion
and amortization:
Oil and gas $ 735 $ 875
Services 16 15
------- -------
Total $ 751 $ 890
======= =======
Operating income (loss):
Oil and gas $ (234) $ 398
Services (4) 68
General corporate
expense (328) (336)
------- -------
Total operating income (566) 130
Interest expense and other (107) (85)
------- -------
Earnings (loss) before
income taxes $ (673) $ 45
======= =======
</TABLE>
14
<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
As previously announced, the Directors have selected Arthur Andersen
LLP's Global Energy Corporate Finance team to assist them in exploring various
strategic alternatives that could maximize shareholder value. While management
had previously indicated that several major shareholders had expressed a
preference for a tax free swap versus a cash sale, the Board of Directors
proposes to consider all offers submitted following an appropriate review by its
financial advisors. Meantime, the advisory team has prepared a detailed
informational report about Columbus' assets as well as its field, administrative
and technical personnel which will be available for interested parties who sign
a confidentiality agreement and submit an indication of their interest in
pursuing an acquisition. It is believed this procedure will eventually narrow
prospective suitors to a manageable number following discussions and intense
screening of such proposals by the financial advisors. An initial target date is
early summer for completing negotiations that might lead to a sale or merger.
Completion of a transaction by early fall, while desirable, is certainly not set
in concrete and there is no assurance that a satisfactory offer will be
forthcoming from this undertaking. Based on the current activity level of
mergers and acquisitions in the domestic energy industry, management is
optimistic that a deal can be consummated which shareholders will find
satisfactory.
During first quarter of 2000, oil and gas sales were considerably
improved over 1999 as natural gas prices were strong and crude oil prices surged
to near record levels. The Company's natural gas prices averaged 34% higher than
1999's first quarter and crude oil prices were 126% higher. These prices were
partially offset by declines in natural gas production and the crude oil hedge
which reduced the full effect of increased oil and gas sales. First quarter 2000
had substantially higher exploration expenses of $1,412,000 which, after being
tax effected, reduced earnings by $932,000, or $.25 per share. This generated a
net loss for the first quarter 2000 of $444,000, or $0.12 per share, compared
with last year's first quarter net earnings of $28,000, or $0.01 per share.
As of February 29, 2000, stockholders' equity had decreased to
$12,085,000 from $12,798,000 at November 30, 1999 primarily the result of those
exploration charges along with a repurchase of 54,000 treasury shares.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Positive working capital combined with the Company's anticipated cash
flow for the remainder of the year is expected to provide more than sufficient
funds for the fiscal 2000 capital expenditure program. The unused portion of the
$10,000,000 bank credit facility has previously been targeted by management for
acquisitions of oil and gas properties, but can be used for any legal corporate
purpose and also would be available should unforeseen capital expenditures arise
during the remainder of 2000 as a result of drilling successes.
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
can fluctuate widely. Net cash used by operating activities was $341,000 for the
first three months of 2000, which compares with $616,000 provided by operating
activities for the same period last year. The current quarter's GAAP defined
operating cash flow was adversely affected by the unusually large expenses
attributed to exploratory dry holes near Beeville, Texas.
As regularly noted in prior reports, management places greater
reliance upon an important alternative method of computing cash flow which is
generally known as Discretionary Cash Flow ("DCF"). DCF is not in accordance
with GAAP but is commonly used in the industry as this method calculates cash
flow before working capital changes or deduction of exploration expenses since
the latter can be increased or decreased at management's discretion. DCF is
often used by successful efforts companies to compare their cash flow results
with those independent energy companies who use the full cost accounting method
whereby exploration expenses are capitalized and do not immediately adversely
affect either operating cash flow or net earnings. Columbus' DCF for the first
quarter of fiscal 2000 was $1,506,000 up 42% from 1999's quarter of $1,064,000
when more shares were outstanding. DCF is calculated without debt retirement
being considered but in Columbus' case this does not matter as current bank debt
requires no principal payments before August 1, 2001. Interest expense is always
deducted before arriving at DCF.
Management notes in each of its public filings and reports its strong
exception to the Statement of Financial Accounting Standards No. 95 as it
applies to Columbus which directs that operating cash flow must only be
determined after consideration of working capital changes. Management believes
such a requirement by GAAP ignores entirely the significant impact that the
timing of income received
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
for, and expenses incurred on behalf of, third party owners in properties may
have on working capital. This is particularly significant where Columbus owns
only a small working interest but is the operator.
Neither DCF nor operating cash flow before working capital changes is
allowed to 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 both the first quarters of 2000 and 1999 GAAP cash
flow was lower than DCF.
As previously indicated, the Company partially hedged its crude oil
prices while the Company's natural gas revenues are fully exposed to price
fluctuations. The remaining portion of its crude oil revenues might be subjected
to the very low prices such as existed during fiscal 1998 and 1999's first half
although thus far in fiscal 2000 it appears such a risk is minimal.
The Company's natural gas and crude oil swaps 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's crude oil hedge outstanding as of February 29, 2000
consists of a costless "collar" for 7,500 barrels per month for the 12 months
from September 1, 1999 through August 31, 2000. This hedge is more fully
described in Note 5, "Commitments and Contingent Liabilities", in the Notes of
the Financial statements.
Columbus had outstanding bank borrowings of $5,700,000 as of February
29, 2000 against its $10,000,000 line of credit with Norwest Bank Denver, N.A.
which is collateralized by its oil and gas properties. On that same date, the
ratio of net long-term debt (debt less working capital) to total assets was
0.21. The outstanding debt used a LIBOR option with an average interest rate of
7.4%. Subsequent to the end of the first quarter and through the date of this
report, long-term debt has been reduced by $300,000. The net increase (or
decrease) in long-term debt directly affects cash flows from financing
activities as do the purchase of treasury shares. For the Company's floating
rate debt, interest rate changes generally do not affect its fair market value
but does impact future results of operations and cash flows, assuming other
factors remain constant. The carrying amount of the Company's debt approximates
its fair value.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Working capital at February 29, 2000 remained positive at $1,305,000
up from $1,169,000 at November 30, 1999. This increase was achieved despite
$146,000 spent for additions to oil and gas properties, a significant increase
in exploration expenditures along with the purchase of 54,000 shares of treasury
stock for $307,000 during the first quarter.
The Company has been authorized by its Board of Directors during the
last several years to repurchase its common shares from the market at various
"not to exceed" price levels. As of February 29, 2000 a total of 69,384 shares
remained to be purchased from the most recent authorizations to repurchase
shares at a price not to exceed $6.00 per share. A total of 9,000 additional
shares have been acquired subsequent to the end of the quarter at an average
price of $5.63 per share.
During first quarter 2000, capital expenditures actually incurred for
oil and gas properties totaled $146,000 (amount excludes $1.4 million for
exploratory dry holes and other exploration expenses) which amount differs from
the capital expenditure shown in the Consolidated Statement of Cash Flows. The
latter also includes cash payments made during 2000 for 1999 expenditures
incurred but not yet paid as of 1999's year end. Similarly, there were
expenditures accrued during fiscal 2000's first quarter that were not actually
paid until subsequent to the end of the quarter.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
RESULTS OF OPERATIONS
Gross revenues increased by 31% over last year's period but operating
income showed a loss of $566,000 primarily because of an exploration charge of
$1,412,000 whereas there was income of $130,000 in 1999 with $119,000 of
exploration expense. Other comparisons for the 2000 quarter versus 1999 related
to prices, production and oil and gas sales appear in tabular form below.
During 2000's first quarter four gross wells (1.94 net WI) were
drilled. These included one (.04 net WI) gas development well in Webb County,
Texas, and two (1.85 net WI) wildcat wells located in the El Squared prospect in
Bee County, Texas which were abandoned. One development gas well (.05 net WI)
which was actually drilled during 1999 and was in progress at the 1999 year end
in the Laredo, Texas operational area was plugged and abandoned during the first
quarter.
Oil and Gas Revenues and Operating Costs
The following table shows comparative crude oil and natural gas
revenues, sales volumes, average prices and percentage changes between the
periods presented as follows:
First Quarter
---------------------------------
2000 1999 Change
------ ------ ------
Natural gas revenues M$ $1,775 $1,640 8 %
Oil revenue M$ $ 965 $ 393 146 %
Natural gas sales volumes:
Millions of cubic feet (MMCF) 707 876 (19)%
MCF/day 7,765 9,738
Oil sales volumes:
Barrels 41,263 37,945 9 %
Barrels/day 453 422
Average price received:
Natural gas - $/MCF $ 2.51 $ 1.87 34 %
Oil - $/BBL $23.40 $10.35 126 %
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Natural gas revenues increased only 8% in 2000's first quarter versus
1999's because 34% higher prices were significantly offset by 19% lower sales
volumes. Average gas prices improved from a fairly depressed level for 1999
prices which resulted from a warm winter and a high level of storage inventory.
Last summer's strong demand for cooling load and storage refill combined with
lower supply contributed to improved gas prices. Comparable quarters showed 19%
lower sales volumes in 2000 as a result of normal production declines not offset
by newly completed development wells production since these were limited in
number or from any exploratory well successes.
Oil revenues for 2000's first quarter rose by 146% over the 1999
quarter because average prices rose by 126% and sales volumes were 9% higher.
Generally, oil production had declined steadily in prior years commensurate with
a lack of development drilling activity due to the uncertainty of oil prices.
However, one exploratory oil well in Harris County, Texas, drilled during fiscal
1998, was connected to a gas line and commenced flowing 200 barrels per day with
associated gas during June 1999. Columbus owns a 19.5% working interest. Crude
oil prices continued to move upwards due to strong demand and a restrictive
production program adhered to by OPEC. This was recently loosened by that group
with the objective being prices around $25 per barrel worldwide.
Columbus' 2000 first quarter sales volumes of natural gas averaged
7,765 Mcfd while oil and liquids sales were 461 barrels per day. This equates to
a daily sales volume of 10,528 MCF equivalent (Mcfe) compared to 1999's first
quarter rate of 12,300 Mcfe, a 14% decrease. This reduction was attributable to
the lack of gas production being supplemented by new development wells drilled,
as well as a lack of exploratory success at its El Squared prospect.
Lease operating expenses for the first quarter of 2000 were 29% higher
than in 1999. Most of the increase was in the Williston Basin in Montana and the
Sralla Road field in Texas where certain wells had workover costs along with
repairs and replacements of equipment. Expensive workovers and replacement of
downhole and surface equipment on older wells is expected to occur periodically
but several of those older Williston Basin wells were shut-in during 1999's
first half which accounts for lower costs last year. Lease operating costs on an
Mcfe basis were $0.57 in the first quarter of 2000 compared to $0.38 in 1999
while operating costs as a percentage of revenues were 20% in 2000 versus 21% in
1999 with its lower prices.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Production and property taxes approximated 10% of revenues in 2000 and
12% in 1999. 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 $139,000 during
first quarter 2000 compared to an $85,000 profit in the 1999 comparable period.
In 1999, sizable compressor repairs occurred. Effective March 1, 2000, the
Company no longer will serve as contract operator for wells in the Berry R. Cox
field in South Texas, which generated $23,000 of profit during 2000's first
quarter.
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 in the first quarter of 2000 to $33,000 from $27,000
in 1999's first quarter as a result of a higher amount of investments and
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.
The Company's general and administrative expenses for the first
quarter of 2000 were 2% less than last year despite the previously disclosed
total phase out of reimbursement for management services provided Resources
during 1999's first quarter of $22,000. Salary increases were granted effective
December 1, 1999 for non-officer employees while officer salaries remained
unchanged from May 1998. However, officer and directors' expense was lower
because there was one less officer and one less director
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
for the latest quarter. Medical claims under the Company's self- insured plan
were lower for 2000's first quarter while office rent was higher but will be
reduced in future as a result of a sublease of a portion of the leased space.
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 1999's first quarter
commensurate with decreased production even though there were additional
development expenditures incurred in the intervening period. Reduced proved
reserves last year which resulted from lower crude oil prices were responsible
for a higher depletion rate in 1999's quarter for some properties, but because
production was curtailed the rise in overall depletion expense for 1999 was
somewhat reduced. Despite the depreciation expense being lower in 2000's first
quarter, the depletion rate of $.76 per Mcfe was identical to 1999's like period
rate.
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. All such exploration charges 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 more nearly tracks cash flow
reported by full cost accounting companies which capitalize such costs.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Exploration charges of $1,412,000 for 2000 were up significantly over
1999's $119,000. Costs for the first quarter included $476,000 to sidetrack the
Long #3 which was under way over the expiration of the primary term of the lease
but had its operations ceased when it was learned that the Long #4 well had
failed to find commercial natural gas reserves in the upper Massive zone of the
middle Wilcox. For the Long #4 well, its dry hole costs totaled $805,000 during
the quarter. An additional $60,000 was accrued in the quarter for abandonment of
the Long #3 and #4 wells. During 1999's quarter, $47,000 was expensed for
undeveloped leases in Texas as a result of an offset dry hole being drilled.
Whenever a company using the successful efforts method of accounting
is involved in an exploratory program which represents a significant part of its
budget, that company is automatically subjected to the risk that its net
earnings for any given quarter or year will be impacted negatively by wildcat
dry holes. The numerous exploratory well bores involved at Columbus' El Squared
prospect that have already been or required to be drilled to properly evaluate
the various fault blocks and/or potential producing horizons certainly fit that
circumstance. Shareholders have been forewarned that net earnings and GAAP cash
flow may not be truly indicative of the Company's operational activity. This is
why management has suggested that shareholders may wish to follow its own
program of placing more emphasis on DCF from period to period and ignore net
earnings results. Comparing EGY's results with net earnings or cash flows of
other companies who use the full cost accounting method is unrealistic and ill
advised since they capitalize exploratory costs.
Impairments
No impairment loss was necessary for either of the first quarters. The
price recovery of both natural gas and crude oil has further increased the
current fair market value of reserves above remaining book value of each cost
pool.
Litigation Expense
The litigation expense relates to the Maris E. Penn, et al lawsuit
described in Note 4 of the Notes to the Financial Statements.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Interest Expense
Interest expense varies in direct proportion to the amount of bank debt
and the level of bank interest rates. The average level of bank debt outstanding
has been higher during the 2000 quarter than in 1999. The average bank interest
rate paid this latest quarter was 7.5% which compares to 6.7% in 1999.
Income Taxes
During the first quarter of 2000, the net deferred tax asset increased
to $1,372,000. The asset is comprised of a $160,000 current portion and
$1,212,000 long-term asset. The estimated increase in deferred tax assets was
$235,000 during the first quarter. The valuation allowance has remained
unchanged thus far in 2000. The effective tax rate for 2000 is 34%. See 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. See Notes (4) and (5) of the
Notes to the Financial Statements regarding the Maris E. Penn, et al lawsuit and
alleged breach of lease obligation.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial data schedule - February 29, 2000.
(b) Reports on Form 8-K
Report filed on March 1, 2000 related to press
release dated February 23, 2000.
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 13, 2000 /s/ Harry A. Trueblood, Jr.
----------------------------- ---------------------------
Harry A. Trueblood, Jr.
Chairman, President and
Chief Executive Officer
(a duly authorized officer)
DATE: April 13, 2000 /s/ Ronald H. Beck
----------------------------- ------------------
Ronald H. Beck
Vice President
(Chief Accounting Officer)
26
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