<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
For the transition period from ____________ to _____________
Commission file number 001-12679
ENERGY SEARCH, INCORPORATED
(Exact Name of Small Business Issuer as Specified in its Charter)
TENNESSEE 62-1423071
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
280 FORT SANDERS WEST BLVD., SUITE 200
KNOXVILLE, TENNESSEE 37922
(Address of Principal Executive Offices)
(800) 551-5810
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 [ ]
The number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 4,017,308 (November 14,
1998)
Transitional Small Business Disclosure Format (check one): Yes [ ]
No [X]
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ENERGY SEARCH, INCORPORATED
Page
Part I Financial Information
Item 1. Financial Statements 1
Notes to Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis 7
Part II Other Information
Item 2. Changes in Securities and Use of Proceeds 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 22
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
ENERGY SEARCH, INCORPORATED
BALANCE SHEETS
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997<F*>
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 171,767 $ 2,252,316
Accounts receivable 897,052 976,065
Other current assets 88,816 91,670
----------- -----------
Total current assets 1,157,635 3,320,051
OIL AND GAS PROPERTIES
Proven properties 12,549,502 4,546,833
Unproven properties 203,701 193,965
Wells and related equipment 10,821,782 8,100,764
Less accumulated depreciation, depletion and
amortization (3,740,081) (3,140,678)
----------- -----------
Net oil and gas properties 19,834,904 9,700,884
OTHER ASSETS
Other property and equipment, net 304,892 363,180
Investments in and advances to related partnerships 1,736,378 1,863,095
Deferred tax asset 660,100 650,400
Other assets 224,878 223,090
----------- -----------
Total other assets 2,926,248 3,099,765
Total assets $23,918,787 $16,120,700
=========== ===========
<FN>
<F*>Condensed from audited financial statements
</FN>
</TABLE>
<PAGE>
<TABLE>
ENERGY SEARCH, INCORPORATED
BALANCE SHEETS (CONTINUED)
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997<F*>
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt 31,245 29,184
Accounts payable and accrued expenses 1,122,624 1,356,748
----------- -----------
Total current liabilities 1,153,869 1,385,932
LONG-TERM DEBT, less current portion 6,856,674 788,279
SHAREHOLDERS' EQUITY
Common stock (no par value, 25,000,000 shares
authorized; 4,005,308 and 3,768,241 shares issued
and outstanding as of September 30, 1998 and
December 31, 1997, respectively) 17,231,343 15,448,073
Preferred stock (no par value, 5,000,000 shares
authorized; 36,000 shares of 9% Redeemable
Convertible issued and outstanding at $7.50 per
share initial issue price) 201,255 --
Retained earnings (deficit) (1,524,354) (1,501,584)
----------- -----------
Total shareholders' equity 15,908,244 13,946,489
----------- -----------
Total liabilities and shareholders' equity $23,918,787 $16,120,700
=========== ===========
<FN>
<F*>Condensed from audited financial statements
</FN>
</TABLE>
See notes to financial statements
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<PAGE>
<TABLE>
ENERGY SEARCH INCORPORATED
STATEMENTS OF OPERATION (UNAUDITED)
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C>
REVENUE
Net turnkey revenue $ 77,241 $ 670,892
Oil & gas revenue 1,969,650 335,454
Management fees 118,366 210,708
Other revenue 528,918 264,110
---------- ----------
Total revenue 2,694,175 1,481,164
OPERATING EXPENSES
Production expenses 514,756 175,064
Exploration expenses 147,107 74,535
Depreciation, depletion and amortization 769,077 400,187
Interest 221,175 63,045
General and administrative 1,013,610 1,234,597
---------- ----------
Total operating expenses 2,665,725 1,947,428
NET INCOME (LOSS) FROM OPERATIONS 28,450 (466,264)
OTHER INCOME (EXPENSE)
Program reimbursement (146,034) (35,395)
Equity in income of related partnerships 85,114 92,844
Gain on sale of assets -- 4,177
---------- ----------
Total other income (expense) (60,920) 61,626
NET INCOME (LOSS) BEFORE INCOME TAX (32,470) (404,638)
INCOME TAX BENEFIT 9,700 121,000
---------- ----------
NET (LOSS) $ (22,770) $ (283,638)
Earnings (loss) per common and common
equivalent share (0.01) (0.12)
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Earnings (loss) per common share - assuming full
dilution (0.01) (0.12)
</TABLE>
See notes to financial statements
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<PAGE>
<TABLE>
ENERGY SEARCH, INCORPORATED
STATEMENTS OF OPERATION (UNAUDITED) (CONTINUED)
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C>
REVENUE
Net turnkey revenue $ 35,762 $ (14,386)
Oil & gas revenue 749,029 195,890
Management fees 13,963 53,532
Other revenue 154,757 124,220
---------- ----------
Total net revenue 953,511 359,256
OPERATING EXPENSES
Production expenses 195,455 53,923
Exploration expenses 53,468 30,781
Depreciation, depletion and amortization 314,992 142,754
Interest 147,583 20,519
General and administrative 161,949 296,486
---------- ----------
Total operating expenses 873,447 544,463
NET INCOME (LOSS) FROM OPERATIONS 80,064 (185,207)
OTHER INCOME (EXPENSE)
Program reimbursement (51,508) (11,722)
Equity in income of related partnerships 38,124 30,948
Gain on sale of assets -- 1,214
---------- ----------
Total other income (expense) (13,384) 20,440
NET INCOME (LOSS) BEFORE INCOME TAX 66,680 (164,767)
INCOME TAX BENEFIT (EXPENSE) (18,700) 49,100
---------- ----------
NET INCOME (LOSS) $ 47,980 $(115,667)
Earnings (loss) per common and common
equivalent share 0.01 (0.06)
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Earnings (loss) per common share - assuming
full dilution 0.01 (0.06)
</TABLE>
See notes to financial statements
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<PAGE>
<TABLE>
ENERGY SEARCH, INCORPORATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (22,770) $ (283,638)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation, depletion and amortization expense 769,077 400,187
Dry holes and abandonments of previously capitalized oil 2,865
and gas properties:
(Gain) on sale of assets -- (4,177)
Equity in (income) losses of related partnerships (85,114) (92,844)
(Increase) decrease in deferred tax asset (9,700) (121,000)
(Increase) decrease in assets
Accounts receivable and due from partnerships 212,963 319,794
Other current assets 2,854 (17,235)
Other assets (29,726) 250,786
Increase (decrease) in liabilities
Accounts payable and accrued liabilities (234,124) (264,923)
Drilling advances -- (1,335,124)
----------- -----------
Net cash provided (used) in operating
activities 603,460 (1,145,309)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of proven properties (6,189,460) (2,392,152)
Proceeds from sale of other property and equipment -- 10,048
Purchase of wells and other related equipment (2,721,018) (1,153,815)
Purchase of other property and equipment (30,951) (114,073)
Distributions from affiliated partnerships 58,894 72,521
Contributions to affiliated partnerships (33,510) (237,215)
----------- -----------
Net cash used in investing activities (8,916,045) (3,814,686)
CASH FLOWS FROM FINANCING ACTIVITIES:
Gross proceeds from issuance of common stock -- 8,000,000
Gross proceeds from issuance of preferred stock 270,000
Proceeds from long-term debt 6,092,093 --
</TABLE>
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<PAGE>
<TABLE>
ENERGY SEARCH, INCORPORATED
STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Payments of stock issuance costs-common stock (39,675) (1,448,235)
Payments of stock issuance costs-preferred stock (68,745)
Payment of dividends on preferred stock -- (59,749)
Payments on long-term debt (21,637) (300,995)
----------- -----------
Net cash provided in financing activities 6,232,036 6,191,021
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (2,080,549) 1,231,026
CASH AND CASH EQUIVALENTS - Beginning of period 2,252,316 51,067
----------- -----------
CASH AND CASH EQUIVALENTS - End of period $ 171,767 $ 1,282,093
=========== ===========
Supplemental Schedule of Non-cash Investing
And Financing Activities
Purchase of proven properties from issuance $ 1,822,945 $ --
of common stock =========== ===========
</TABLE>
See notes to financial statements
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<PAGE>
ENERGY SEARCH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
The condensed Balance Sheets as of September 30, 1998 and December 31,
1997, the Statements of Operations for the three and nine-month period
ended September 30, 1998 and September 30, 1997, and the Statements of
Condensed Cash Flows for the nine month periods ended September 30, 1998
and September 30, 1997 have been prepared by the Company.
In the opinion of management all adjustments (which include
reclassifications and normal recurring adjustments) necessary to present
fairly the financial position, results of operations, and cash flows at
September 30, 1998 and for all periods presented, have been made.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues, and expenses. Actual results may differ from these estimates.
Interim results are not necessarily indicative of results for a full year.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
these condensed financial statements be read in conjunction with the 1997
audited financial statements and notes thereto included in the Company's
Form 10-KSB for the year ended December 31, 1997.
EARNINGS PER SHARE
Earnings (loss) per share of common and common equivalent stock are
based on the weighted average common shares outstanding and are
retroactively adjusted for stock splits.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This discussion and analysis of financial condition and results of
operations, and other sections of this Form 10-QSB, contain forward-looking
statements that are based on management's beliefs, assumptions, current
expectations, estimates, and projections about the oil and gas industry,
the economy, and about the Company itself. Words such as "anticipates,"
"believes," "estimates," "expects," "forecasts," "intends," "is likely,"
"plans," "predicts," "projects," variations of such words, and similar
expressions are intended to identify such forward-looking statements.
These statements are not guarantees of future performance and involve
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
certain risks, uncertainties, and assumptions that are difficult to predict
with regard to timing, extent, likelihood, and degree of occurrence.
Therefore, actual results and outcomes may materially differ from what may
be expressed or forecasted in such forward-looking statements.
Furthermore, the Company undertakes no obligation to update, amend, or
clarify forward-looking statements, whether as a result of new information,
future events, or otherwise.
Important factors that could cause actual results to differ materially
from the forward-looking statements include, but are not limited to,
changes in production volumes, worldwide demand and commodity prices for
petroleum natural resources; the timing and extent of the Company's success
in discovering, acquiring, developing, and producing natural gas and oil
reserves; risks incident to the drilling and operation of natural gas and
oil wells; future production and development costs; the effect of existing
and future laws, governmental regulations and the political and economic
climate of the United States; the effects of the Year 2000 issues on the
Company's business; the effect of hedging activities; and conditions in the
capital markets.
OVERVIEW
The Company is an independent oil and gas company organized as a
Tennessee corporation in 1990 and engaged in and focused exclusively on the
exploration, development, production, and acquisition of natural gas
properties and to a limited extent oil in the Appalachian Basin. The
Company's emphasis is on natural gas production with approximately 90% of
its production being from natural gas. Daily net production averaged
approximately 0.9 MMcfed in 1997, and reached a level of approximately 4.8
MMcfed as of September 30, 1998. The Company has successfully drilled 20
net wells to date in 1998.
The Company's future growth is expected to be driven by development,
exploitation, and controlled exploration drilling on its existing
properties and the continuation of an opportunistic acquisition strategy in
the Appalachian Basin region.
EVENTS SUBSEQUENT TO SEPTEMBER 30, 1998
In August 1998, the Company initiated the private placement of up to
700,000 shares of 9% redeemable convertible preferred stock (the "Preferred
Stock") at an issue price of $7.50 per share. In November 1998, the
private placement was amended to offer up to 800,000 shares of the
Preferred Stock at an issue price of $6.50 per share, subject to an
adjustment of the issue price as of termination of the offering (no later
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
than December 31, 1998). See Part II, Item 2, for further discussion of the
Preferred Stock offering. As of November 14, 1998, the Company has raised
approximately $670,220, net of commission expense, from the sale of
Preferred Stock.
In November 1998, the Company increased its loan facility availability
from SunTrust Bank, East Tennessee to $500,000. The current outstanding
balance is $142,652.
NINE MONTHS ENDED SEPTEMBER 30, 1998
FINANCIAL CONDITION
Total assets increased $7,798,087 or 48.4% from December 31, 1997 to
September 30, 1998 primarily due to a $10,134,020 net increase in oil and
gas properties and after an offsetting decrease of $2,162,416 in current
assets.
Current assets for the nine month period ended September 30, 1998
decreased $2,162,416 to $1,157,635, or a 65.1% decrease, compared to
current assets for the year ended December 31, 1997. The decrease in
current assets is due primarily to a decrease in cash of $2,080,549 to
$171,767, or 92.4%, for the nine months ended September 30, 1998. This is
due to the Company's continued expenditures of cash for drilling and
development of wells in its Beaver Lease and Churchtown Lease areas as well
as enhancement efforts and development of wells in its Simmons Field and
Viking Field. See "CASH FLOW FROM OPERATIONS, INVESTING AND FINANCING
ACTIVITIES" for further discussion.
Oil and gas properties for the nine months ended September 30, 1998
increased $10,134,020 to $19,834,904 or 104.5% from the amount reported at
December 31, 1997. The increase is primarily a result of continued
successful drilling activity for the Company's own account, and the
acquisition by the Company of oil and gas lease interests in proven
properties.
The Company increased capital expenditures for drilling and well
related equipment by $2,721,018 from December 31, 1997 to September 30,
1998. The increase is primarily a result of increased Company drilling and
the acquisition of oil and gas equipment of approximately $980,000 from
Viking Resources Corporation in June of 1998.
Proven properties increased $8,002,669 to $12,549,502 or 176.0% from
the amount reported at December 31, 1997. The increase is primarily due to
the acquisition by the Company of oil and gas leases interests in proven
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
properties and the capitalization of intangible drilling costs
(approximately $4,414,755) associated with the Company drilled wells. In
May 1998, the Company acquired from certain individuals the working
interest and overriding royalty interest in certain natural gas wells
operated by the Company in southeastern Ohio. The total purchase
consideration for the Well Interests was $227,740 comprised of $106,197
(10,114 shares) in Company common stock and $121,543 in cash. In June
1998, the Company purchased approximately $773,000 in proven producing
properties from Viking Resources Corporation. In the third quarter of 1998,
the Company purchased all of the working interests in a total of 145 gross
natural gas or oil wells located in southeastern Ohio in consideration for
cash and Company common stock. The aggregate purchase price was $2,223,941
comprised of $1,716,748 in Company common stock (221,453 shares) and
$507,193 in cash.
Total liabilities increased $5,836,332 or 268.4% from December 31,
1997 to September 30, 1998, due primarily to an increase in long-term debt
of $6,068,395. See "LIQUIDITY & CAPITAL RESOURCES" for further
discussion. This increase in long-term debt was used primarily to fund the
drilling, development, and enhancement efforts on Company oil and gas
properties. Current liabilities decreased $232,063 to $1,153,869 or 16.7%
from December 31, 1997 to September 30, 1998 primarily due to a decrease in
accounts payable and accrued expenses of $234,124 to $1,122,624 at
September 30, 1998, a decrease of 17.3%.
RESULTS OF OPERATIONS
For the nine months ended September 30, 1998, the Company had a net
loss after tax of $22,770, compared to net loss after tax of $283,638 for
the nine months ended September 30, 1997. This reduction of loss is a
result of the transition from turnkey driller operator to drilling for the
account of the Company.
For the three months ended September 30, 1998, the Company had net
income after tax of $47,980, compared to net loss after tax of $115,667 for
the same period in 1997. This reduction of loss was again due primarily to
the Company's change in direction highlighted above.
For the nine months ended September 30, 1998, total net revenues
increased $1,213,011 or 81.9% from $1,481,164 to $2,694,175 for the same
period in 1997 due primarily to an increase in oil and gas revenue and
other revenue, and after an offsetting decrease in turnkey revenue and
management fees.
For the nine months ended September 30, 1998, net turnkey revenue
decreased $593,651 or 88.5% as compared to the amounts reported for the
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
nine months ended September 30, 1997. Net turnkey revenue is drilling
profit recognized upon the drilling to total depth of wells in Affiliated
Drilling Partnerships. The Company drilled to total depth ten gross wells
attributable to Affiliated Drilling Partnerships for which turnkey revenues
were recognized in the first three quarters of 1997 (seven wells in the
first quarter, two wells in the second quarter, and one well in the third
quarter). In 1998, the Company drilled to total depth and recognized
revenue for only one well (in the second quarter) for the 1998 Affiliated
Drilling Partnership. This is a decrease of nine gross wells for the nine
months ending September 30, 1998.
Turnkey drilling revenue increased in the third quarter of 1998 by
$50,148 from that reported for the three months ended September 30, 1997.
This increase in turnkey revenue is primarily a result of adjustments made
in the third quarters of 1998 and 1997 to adjust the turnkey revenue and
expense accruals made at the end of the second quarters to reflect the
actual revenues and expenses.
Oil and gas revenue increased $1,634,196 to $1,969,650 for the nine
months ended September 30, 1998, an increase of 487.2% over that reported
as of September 30, 1997. This increase is consistent with the Company's
changing focus to drilling wells for its own account. The increase in oil
and gas revenue is a result of the higher number of wells drilled for the
Company's own account, the purchase of proven producing properties from
Viking Resources Corporation in May 1998, and the purchase from certain
individuals and five Affiliated Drilling Partnerships of working interests
and overriding royalty interests in proven producing properties operated by
the Company in the third quarter of 1998, all resulting in increased
production and revenues.
Oil and gas revenue increased $553,139 for the three months ended
September 30, 1998, an increase of 282.4% over that reported for the same
period in 1997. This increase is consistent with the increased production
from the Company wells and acquisitions as discussed above.
Management anticipates continued growth in oil and gas revenues;
however, management does not expect the growth to continue at the same high
levels reflected in the first nine months of 1998. The continued growth of
the Company's oil and gas revenues and reserves will be dependent on future
drilling success, capital raising efforts, the ability to find other fairly
priced acquisitions, and the pricing of the Company's primary commodity
product, natural gas.
Other revenue increased $264,808 for the nine months ended September
30, 1998, an increase of 100.3% over that reported for the same period in
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
1997. This increase is due primarily to the gross operating commission
revenue of approximately $382,000 earned by Equity Financial Corporation,
an increase in revenue of $247,124 over that reported for the same period
in 1997. The Company acquired Equity Financial Corporation, an affiliate
of the Company, in May of 1997 and thus reported only four months of income
for the nine months ended September 30, 1997. The Company expects Equity
Financial Corporation to continue to be a profitable segment of the
Company's operation. Interest income decreased approximately $92,000 due
to the decrease in the Company's cash balances, and transportation revenue
increased approximately $100,000 due to increased production and
transportation rates.
Other revenue increased $30,537 for the three months ended September
30, 1998, an increase of 24.6% over that reported for the same period in
1997 due to a decrease in interest income and an increase in transportation
revenue as discussed above.
Management fees for the nine months ended September 30, 1998,
decreased $92,342 to $118,366, a decrease of 43.8% over that reported as of
September 30, 1997. This decrease is primarily a result of the purchase
of the working interests owned by the 1989, 1990, 1991, 1992, and 1992-A
Affiliated Drilling Partnerships discussed earlier and the reduction in the
management fee charged to the Pipeline Operating L.P. from $5,000 per month
in 1997 to $2,500 per month in 1998. The trend of decreased management
fees is expected to continue.
Total operating expenses increased $718,297 or 36.9% for the nine-
month period ending September 30, 1998 over the nine-month period ending
September 30, 1997. This increase is due primarily to an increase in
production expenses associated with the larger number of wells now operated
by the Company of $339,692 or 194.0%, an increase in exploration costs
associated with increased drilling of $72,572 or 97.4%, and an increase in
depreciation, depletion, and amortization expense associated with the
larger number of net wells now owned by the Company of $368,890 or 92.2%.
These increases are due to the increase in Company owned and operated wells
as discussed above.
General and administrative (G&A) expenses decreased $220,987 to
$1,013,610 or 17.9% for the nine months ended September 30, 1998. This
net decrease is primarily a result of the change in business plan of the
Company to drill primarily for the account of the Company. Certain costs
directly related to drilling of Company wells have been included in the
cost of oil and gas properties. An offsetting increase in G&A expenses is
due primarily to the inclusion of Equity Financial Corporation's G&A of
approximately $364,470 into the G&A costs of the Company, an increase in
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
expense of $263,431 over that reported for the same period in 1997. Since
Equity Financial Corporation was acquired in May 1997, only four months of
Equity Financial Corporation's G&A costs were included in the reported nine
month period ending September 30, 1997. G&A expenses for the three months
ended September 30, 1998 decreased as noted above from G&A expenses for the
same period in 1997.
Other income and expense changed from a net income of $61,626 for the
nine-month period ending September 30, 1997 to a net expense of $60,920 for
the nine-month period ending September 30, 1998. The change is primarily a
result of an increase in program reimbursements of $110,639. Other income
and expense changed from a net income of $20,440 for the three months ended
September 30, 1997 to a net expense of $13,384 for the three months ended
September 30, 1998. The change is primarily a result of an increase in
program reimbursements of $39,786. This cost fluctuates based on
production revenues from Affiliated Drilling Partnerships wells for which
the Company is the managing general partner and will continue to some
degree during 1998.
CASH FLOW FROM OPERATIONS, INVESTING, AND FINANCING ACTIVITIES
The Company provided $603,460 of net cash flow from operating
activities for the nine months ended September 30, 1998 and used $1,145,309
of net cash flow from operating activities for the same period in 1997.
Cash was absorbed by a loss of $22,770 and a loss of $283,638 for the nine-
month period ending September 30, 1998 and 1997, respectively. Cash was
absorbed by a decrease in drilling advances of $1,335,124 for the nine-
month period ending September 30, 1997. Cash was used by a decrease in
accounts payable and accrued expenses of $234,124 and $264,923 for the
nine-month period ending September 30, 1998 and 1997, respectively. Cash
was provided for the nine months ending September 30, 1998 and 1997 by a
decrease in accounts receivable of $212,963 and $319,794, respectively. The
decrease in accounts receivable is a result of the collection of the year-
end Affiliated Drilling Partnership receivable. Cash was provided by
depreciation, depletion, and amortization (DDA) of $769,077 and $400,187
for the nine-months ending September 30, 1998 and 1997, respectively. The
increase in DDA is a direct result of increased drilling and gas
operations.
For the nine month period ending September 30, 1998, cash flows used
for investing activities increased from $3,814,686 to $8,916,045 over the
nine month period ending September 30, 1997. The primary investment
activities for the nine-month period ending September 30, 1998 were
purchases of proven properties of $6,189,460, purchases of wells and
related equipment of $2,721,018, purchases of other property and equipment
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
of $30,951, and contributions to Affiliated Drilling Partnerships of
$33,510. The only cash flow from investing activities for the nine month
period ending September 30, 1998 were distributions from Affiliated
Drilling Partnerships of $58,894. The more significant uses of cash flows
for investing activities for the nine month period ending September 30,
1997 were purchases of proven properties of $2,392,152, purchases of wells
and related equipment of $1,153,815, purchases of other property and
equipment of $114,073, and contributions to Affiliated Drilling
Partnerships of $237,215. The only significant cash flow from investing
activities for the nine month period ending September 30, 1997 were
distributions from Affiliated Drilling Partnerships of $72,521.
Cash flows from financing activities increased $41,015 or 0.7% to a
level of $6,232,036. The primary source of financing activities in 1998
was from the expansion of long-term debt in the amount of $6,092,093, and
the net proceeds from the sale of Preferred Stock in the amount of
$201,255. The majority of these funds have been used for the Company's
continued development of its Beaver Lease and Churchtown Lease area,
enhancement efforts and development of the Simmons Field, the recent
purchase of oil and gas wells and associated leases and equipment from
Viking Resources Corporation, and the recent acquisition of working
interests and overriding royalty interests from certain individuals and the
Affiliated Drilling Partnerships discussed earlier. The primary cause of
the decrease in cash flows from financing activities was the decrease in
net proceeds from the issuance of common stock from $6,551,765 in 1997 to
a net expense of $39,675 in 1998, a decrease of $6,591,440. The other
significant use of cash flows from financing activities for the nine-month
period ending September 30, 1997 was the payments on long-term debt of
$300,995.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of funds has been net proceeds from the issuance of
Common Stock in two offerings in 1997 raising approximately $11,200,000,
net of costs, borrowing against the Company's Bank One credit facility in
the amount of approximately $6,092,093, and the net proceeds from the
issuance of Preferred Stock raising approximately $201,255, net of costs.
The proceeds from these sources have been spent on Company operations,
including developing the Beaver Lease and the Simmons Field, the
acquisition of proven producing properties from Viking Resources
Corporation, the purchase of working interests from and overriding royalty
interest from certain individuals and Affiliated Drilling Partnerships, and
other developmental drilling activities located generally in the
southeastern Ohio and Southern West Virginia areas.
The Company also had funds available from oil and gas revenues, the
collection of the 1997-A Affiliated Drilling Partnership receivable, and
-16-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
the turnkey revenues from the 1998 Affiliated Drilling Partnership. The
Company expects oil and gas revenues to continue to increase and additional
funds to be available from turnkey revenues associated with the 1998
Affiliated Drilling Partnership. There can be no assurance, however, that
the Company will realize any additional funds by the sponsoring of the 1998
Affiliated Drilling Partnership. Unit sales have totaled $120,000 in the
1998 Affiliated Drilling Partnership as of November 14, 1998.
The Company intends to fund its budgeted capital expenditures through
the end of 1998 primarily from cash flow from operations, borrowings under
the Bank One credit facility, the credit limit of which is currently $7.1
million, borrowings from the SunTrust loan facility, the credit limit of
which is currently $500,000, and the offer and sale of additional Preferred
Stock.
The Company has experienced and expects to continue to experience
substantial working capital requirements due primarily to the Company's
active exploration and development programs. The Company also plans to
begin development of its coal bed methane lease in the fourth quarter of
1998. While the Company believes that cash flow from operations and
borrowings under the Bank One credit facility and issuance of Preferred
Stock should allow the Company to implement its present business strategy
through 1998, in the event sufficient capital resources are not available
to the Company, its drilling of new wells and oil and gas property
development activities may be curtailed.
EFFECTS OF COMMODITY PRICING, INFLATION AND ENVIRONMENTAL MATTERS
The Company's revenues, profitability, future growth, and ability to
borrow funds or obtain additional capital, and the carrying value of its
properties, substantially are dependent on prevailing prices of natural gas
and oil. The Company cannot predict future natural gas and oil price
movements with certainty. Declines in prices received for natural gas and
oil may have an adverse effect on the Company's financial condition,
liquidity, ability to finance capital expenditures, and results of
operations. Lower prices also may impact the amount of reserves that can
be produced economically by the Company. Inflation may adversely impact
the Company. However, recent rates of inflation have had a minimal effect
on the Company the Company's business is also subject to certain federal,
state, and local laws and regulations relating to the exploration for, and
the development, production, and transportation of, natural gas and oil, as
well as environmental and safety matters. Many of these laws and
regulations have become more stringent in recent years. Although the
Company believes it is in substantial compliance with all applicable laws
and regulations, the requirements imposed by laws and regulations may
-17-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
change. The Company is unable to predict the ultimate cost of compliance
with these requirements. Inability to meet environmental requirements could
materially adversely affect the Company's business, financial condition and
results of operations. Compliance has not had a material adverse effect on
the earnings or competitive position of the Company to date. Future
regulations may add to the cost of, or limit, drilling activity.
YEAR 2000 READINESS DISCLOSURE
This Year 2000 Readiness Disclosure is based upon and partially
repeats information provided by the Company's outside consultants and
others regarding the Year 2000 readiness of the Company and its customers,
suppliers, financial institutions and other parties. Although the Company
believes this information to be accurate, it has not independently verified
such information.
STATE OF READINESS
The Company is acutely aware of and has assessed and will continue to
assess the impact of the Year 2000 issue on the Company's reporting systems
and operations. The Year 2000 issue exists because many computer systems
and applications abbreviate dates by eliminating the first two digits of
the year, assuming that these two digits would always be "19." Unless
corrected, this shortcut may cause problems with some computers systems and
equipment with embedded computer chips.
The Company has developed a plan to identify those systems that could
be effected by the Year 2000 problem. Management has identified and
assessed the Year 2000 problem with respect to both information technology
(I.T.) and non-information technology (Non-I.T.) systems. Management has
concluded that it has minimal Non-I.T. systems issues which affect day to
day operations. The primary I.T. systems for the Company are its
accounting software system and its geological/engineering software
products.
The Company's current accounting system is not presently Year 2000
ready. The Company has been advised via correspondence from the software
manufacturer that the system will be fully Year 2000 compliant by February
1999. If the Company does not change its accounting software (see below),
it will use the remainder of 1999 for validation and testing of the system.
The Company is evaluating its current system in comparison with four
alternative systems.
The Company has engaged outside consultants as well as the Company's
auditors to assist in the decision of whether to change I.T. accounting
-18-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
software systems as of December 31, 1998. If the Company determines to
change its I.T. accounting software systems, the Company has been advised
that those systems will be Year 2000 compliant and the Company will not be
required to remediate and/or test those systems.
The Company uses two primary non-accounting software products, a
specialized engineering software for the evaluation of reserves and
geologic software for reservoir evaluation and modeling. Both of these
systems are already Year 2000 compliant.
Lastly, the Company has evaluated Year 2000 issues relating to third
parties with whom the Company does business. These relate primarily to
financial institutions, vendors of products and vendors to whom the Company
sells goods in its normal business operations.
Vendors generally include suppliers of well equipment and services.
Management does not expect the ability of these vendors to supply goods and
services to be adversely affected by the Year 2000 event. The vendor's
billing and invoice systems may experience change and/or delays during the
transition, however. Gas marketers to whom the Company sells its end
product likewise have advised the Company that they are aware of the Year
2000 issue and are or will timely be Year 2000 compliant. Management does
not expect an adverse impact on the Company's day to day operations as a
result of third parties' unreadiness. There is no assurance that the
systems of other companies on which the Company's systems rely will be
converted in a timely manner. Unreadiness by these third parties could
expose the Company to the potential for loss and impairment of business
processes and activities. The Company is assessing these risks and is
creating contingency plans intended to address perceived risks. If such
modifications and conversions are not made, or are not completed in a
timely manner, the Year 2000 issue could have an adverse impact on the
operations of the Company.
COST TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
As of September 30, 1998, the Company has spent approximately $3,500
on identifying and assessing the Year 2000 issue in connection with the
Company's computer programs and applications. Financial expenditure on
outside consultants to date has been minimal. If the decision is made to
change the Company's I.T. accounting software systems, the estimated cost
is expected to be between $25,000 and $50,000. These costs would be
primarily for the cost and implementation of the new system. This amount
would be paid from the operating capital budget and would represent less
than one percent of the Company's expected general and administrative (G &
A) expenses for 1998. If no change of accounting software is deemed
-19-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
prudent, the total cost to the Company to become Year 2000 compliant is
expected to be under $15,000.
Based on currently available information, management does not
anticipate that the costs to address the Year 2000 issues will have a
material adverse impact on the Company's financial condition, results of
operations or liquidity. However, the extent to which the computer
operations and other systems of the Company's important third parties are
adversely affected could, in turn, affect the Company's ability to
communicate with third parties and could have a material adverse effect on
the operations of the Company.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES
The Company does not reasonably expect any material lost revenue as a
result of the Year 2000 issue. The most likely worst case scenario would
be a delay in financial analytical abilities of the Company in the event of
a delay in implementing a new I.T. financial software system. Similar
delays in third party vendor invoicing and/or gas marketing reporting
and/or payment could be temporarily experienced. Management does not
expect the Year 2000 to have a materially adverse effect on the Company's
results of operation, liquidity or financial condition.
THE COMPANY'S CONTINGENCY PLAN
The Company is implementing steps to have its internal operating
systems fully Year 2000 compliant and tested by February 1999. At that
time, the Company will evaluate further the need and extent to which a
"contingency plan" should be developed with respect to Year 2000 readiness.
If the Company's plans as outlined above are not successful, there
could be a disruption of the Company's ability to render distributions and
complete monthly accounting functions as well as a possible slowdown of
certain computer-dependent processes.
The costs of becoming Year 2000 compliant and the date that the
Company expects to complete the Year 2000 modifications as outlined above
are based on management's best estimates. There can be no guarantee that
these estimates will be achieved and actual results could differ from those
anticipated. Specific factors that might cause differences include, but
are not limited to, the ability of other companies on which the Company's
systems rely to modify or convert their systems to be Year 2000 compliant,
the ability to locate and correct all relevant computer codes and the
ability of vendors with whom the Company deals to timely become Year 2000
compliant.
-20-
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In August of 1998, the Company initiated a private placement offering
of up to 700,000 shares of 9% redeemable convertible preferred stock (the
"Preferred Stock") at an issue price of $7.50 per share. In November of
1998, the offering was amended to offer up to 800,000 shares of Preferred
Stock at an issue price of $6.50, subject to adjustment downward if the
Company's Common Stock closes at less than $6.50 per share as of
termination date to a price equal to the closing price of the Company's
Common Stock as of the termination of the offering (to occur no later than
December 31, 1998). As of November 14, 1998, the Company has sold 99,000
shares of Preferred Stock, subject to adjustment, and raised approximately
$670,220, net of commissions. The offer and sale of Preferred Stock is
exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, and Regulation D promulgated thereunder.
On September 29, 1998, the Board of Directors of the Company
authorized the issuance of 221,453 unregistered shares of Common Stock to
various persons, including former limited partners in certain Affiliated
Drilling Partnerships, in connection with the Company's acquisition of
certain working interests in certain natural gas wells operated by the
Company in southeastern Ohio, as described in Item 5, paragraph (a) below.
The issuance of these shares of Common Stock was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, and Regulation D
promulgated thereunder.
On September 29, 1998, the Board of Directors of the Company
authorized the issuance of 2,500 common stock purchase options each to
Douglas A. Yoakley and Kim A. Walbe, as non-employee directors, pursuant to
the Stock Option and Restricted Stock Plan of 1998 adopted by the
shareholders of the Company at the June 17, 1998 annual meeting of
shareholders. These options were granted at an exercise price of $5.25 per
share. This action by the Board of Directors amended and superceded the
terms of the issuance of 2,500 common stock purchase options granted to
Messrs. Yoakley and Walbe pursuant to the Stock Option and Restricted Stock
Plan of 1998 at an exercise price of $9.25 per share, referred to in the
Quarterly Report on Form 10-QSB filed by the Company for the quarterly
period ended June 30, 1998.
On September 29, 1998, the Board of Directors of the Company
authorized the issuance of 500 unregistered shares of Common Stock to Mitzi
Kopotic, controller of the Company, pursuant to the Company's Stock Option
and Restricted Stock Plan of 1998. There was no issue price for the
shares.
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<PAGE>
On September 29, 1998, the Board of Directors of the Company
authorized the issuance of 2,500 common stock purchase options to Dick
Wentner, a former marketing agent of the Company, pursuant to the Stock
Option and Restricted Stock Plan of 1998. These options were granted at an
exercise price of $6.50 per share.
On September 29, 1998, the Board of Directors authorized and adopted,
subject to final review by the President and legal counsel, the 1998 Stock
Option and Restricted Stock Plan for Outside Advisors and Consultants.
This plan calls for the issuance of up to 25,000 shares of Common Stock
pursuant to terms to be determined by the Board of Directors of the
Company. The Board of Directors preliminarily authorized, pursuant to this
plan, subject to final review by the President and opinion of legal
counsel, the issuance of 12,000 shares of Common Stock of the Company to
Continental Capital & Equity Corporation in partial consideration for
certain public and investor relations work to be performed for the Company.
ITEM 5. OTHER INFORMATION.
(A) CERTAIN COMPANY TRANSACTIONS.
On September 29, 1998, the board of directors of the Company resolved
to close the acquisition of working interests (the "Subject Interests") in
a total of 145 gross natural gas or oil wells (the "Wells") located in
southeastern Ohio. The effective date of the acquisition was June 30, 1998.
All of the Wells involved in the acquisition are operated by the Company.
The Subject Interests were owned by the following Tennessee limited
partnerships (the "Affiliated Drilling Partnerships"), each of which are
affiliates of the Company: Equity Financial Corporation Natural Gas/Tax
Credit 1989 Limited Partnership (the "1989 LP"); Equity Financial
Corporation Natural Gas/Tax Credit 1990 Limited Partnership (the "1990
LP"); Equity Financial Corporation Natural Gas/Tax Credit 1991 Limited
Partnership (the "1991 LP"); Equity Financial Corporation Natural Gas/Tax
Credit 1992 Limited Partnership (the "1992 LP"); Energy Search Natural
Gas/Tax Credit 1992-A Limited Partnership (the "1992-A LP").
The Affiliated Drilling Partnerships were each syndicated by Equity
Financial Corporation. Charles P. Torrey, Jr. and Robert L. Remine, each
executive officers and directors of the Company, were the managing general
partners of the 1989 LP and the 1990 LP, together owning an aggregate 2%
partnership interest in each such partnership. Messrs. Torrey and Remine,
as well as Richard S. Cooper, an executive officer and director of the
Company, were managing general partners of the 1991 LP and 1992 LP,
together owning an aggregate 9% partnership interest in each partnership.
The Company was the managing general partner of the 1992-A LP, and owned a
3% partnership interest in such partnership.
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<PAGE>
The Company paid aggregate purchase consideration amounting to
$2,223,941 for the Subject Interests acquired from the Affiliated
Partnerships. This total amount was comprised of $1,716,748 in Company
common stock (221,453 shares) and $507,193 in cash.
The purchase consideration for the Subject Interests was based on a
market valuation of the Affiliated Partnership's oil and gas assets as of
January 1, 1998, independently reviewed as to reasonableness by an
independent petroleum consultant. The purchase consideration for each
Affiliated Drilling Partnership's Subject Interests was payable in cash,
Company common stock, or a combination of both. The cash portion of the
total purchase (the "Cash Out Value") was equal to the percentage of the
aggregate interest of limited partners in the Affiliated Drilling
Partnership who had elected the Cash Out Option. The Common Stock portion
of the total purchase consideration of the Affiliated Drilling
Partnership's Subject Interests was equal to the percentage of the
aggregate interest of limited partners in the Affiliated Drilling
Partnership who elected the Stock Option. The value of Company Common Stock
issued in satisfaction of the common stock portion of the purchase
consideration, (the "Stock Value"), was equal to 1.75 times what would have
been the Cash Out Value had that portion of the purchase consideration been
paid for in cash pursuant to the Cash Out Option, rather than in common
stock. The number of shares of Company common stock issued to the
Affiliated Drilling Partnership was equal to the Stock Value divided by
$7.75 per share.
Each Affiliated Drilling Partnership approved the sale of its Subject
Interests to the Company by majority vote of its limited partners. The
limited partners in each Affiliated Drilling Partnership voted on a
restructuring plan (the "Restructuring Plan") whereby an Affiliated
Drilling Partnership's Subject Interests were sold to the Company in
consideration for cash and Company Common Stock, and the Affiliated
Drilling Partnership was thereafter to be liquidated. Each limited partner
of an Affiliated Drilling Partnership had the opportunity to elect to have
his or her Affiliated Drilling Partnership interest liquidated for cash
(the "Cash Out Option") or Company common stock (the "Stock Option"). Final
tabulation of the elections of limited partners in the Affiliated
Partnerships was completed at closing as of September 24, 1998, which was
ratified by resolution of the Board of Directors of the Company as of
September 29, 1998.
The Company's acquisition of Subject Interests included interests in
oil and gas wells and all associated equipment, casing, tubing, leases and
right-of-ways. These assets will be used by the Company to continue to
produce oil and gas for sale from the Wells.
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<PAGE>
(B) ADOPTION OF 1998 STOCK OPTION AND RESTRICTED STOCK PLAN FOR
OUTSIDE ADVISORS AND CONSULTANTS.
On September 29, 1998, the Board of Directors authorized and adopted,
subject to final review by the President and legal counsel, the 1998 Stock
Option and Restricted Stock Plan for Outside Advisors and Consultants.
This plan calls for the issuance of up to 25,000 shares of Common Stock
pursuant to terms to be determined by the Board of Directors of the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. The following documents are filed as an exhibit
to this report on Form 10-QSB:
EXHIBIT NO. DOCUMENT
- ----------- --------
3.1 Fourth Amended and Restated Charter of the Registrant<F1>
3.2 Bylaws of the Registrant<F2>
4.1 Specimen of Common Stock Certificate<F3>
4.2 Specimen of Redeemable Series A Common Stock Purchase
Warrant Certificate<F3>
4.3 Specimen of Underwriters' Warrant Certificate<F3>
4.4 Charter (See Exhibit 3.1)
4.5 Bylaws (See Exhibit 3.2)
10.1 Energy Search Natural Gas 1995-A L.P. Limited Partnership
Agreement, dated December 31, 1995<F3>
10.2 Energy Search Natural Gas 1995-A L.P. Joint Drilling and
Operating Agreement, dated December 31, 1995<F3>
10.3 Energy Search Natural Gas 1996 L.P.-Limited Partnership
Agreement, dated June 10,1996<F3>
10.4 Energy Search Natural Gas 1996 L.P.-Joint Drilling and
Operating Agreement, dated June 10, 1996<F3>
10.5 ESI Pipeline Operating Partnership-Limited Partnership
Agreement, dated January 7, 1993<F3>
10.6 Energy Search Natural Gas Pipeline Income Partnership-
Limited Partnership Agreement, dated January 7, 1993<F3>
10.7 Gas Servicing Agreement between the Registrant and ESI
Pipeline Operating L.P., dated January 5, 1993<F3>
10.8 Selling Agreement-Class B Convertible Preferred Shares
between Registrant and Equity Financial Corporation, dated
March 4, 1996<F3>
10.9 Selling Agreement-Class A and Class B Preferred Shares
between Registrant and Equity Financial Corporation, dated
March 4, 1996<F3>
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<PAGE>
10.10 Selling Agreement-Variable Rate Subordinated Debentures
between Registrant and Equity Financial Corporation, dated
September 19, 1994<F3>
10.11 Aircraft Lease between Charles P. Torrey, Jr. and the
Registrant dated February 1,1995<F3>
10.12 Beaver Coal Company Lease between Beaver Coal Company
Limited and the Registrant, dated September 15, 1996<F3>
10.13 Employment Agreements with officers and key employees of the
Registrant
(a) John M. Johnston<F3><F*>
(b) Robert L. Remine<F3><F*>
(c) Charles P. Torrey, Jr.<F3><F*>
(d) Richard S. Cooper<F3><F*>
(e) Michael W. Mooney<F4><F*>
10.14 Promissory Notes of Executive Officers in Favor of
Registrant
(a) Charles P. Torrey, Jr.<F3>
(b) Robert L. Remine<F3>
(c) Richard S. Cooper<F3>
10.15 Stock Option Plan<F3><F*>
10.16 Outside Directors' Stock Option Plan<F3><F*>
10.17 Form of Lock-Up Agreement<F3>
10.18 Stock Option and Restricted Stock Plan of 1998 <F1><F*>
10.19 Form of Indemnification Agreement<F1><F*>
10.20 1998 Stock Option and Restricted Stock Plan for Outside
Advisors and Consultants
27.1 Financial Data Schedule
- ------------------------
<F*> Management contract or compensatory plan or arrangement.
<F1> Previously filed with the Company's Definitive Proxy Statement filed
on April 28, 1998 with the Securities and Exchange Commission, and
here incorporated by reference.
<F2> Previously filed with the Company's Form 10-QSB Quarterly Report for
the quarter end June 30, 1998, and here incorporated by reference.
<F3> Previously filed with the Company's Registration Statement on Form SB-
2 (Registration No. 333-12755) filed with the Securities and Exchange
Commission, and here incorporated by reference.
<F4> Previously filed with the Company's Form 10-K Annual Report for the
fiscal year end March 31, 1998, and here incorporated by reference.
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<PAGE>
(b) REPORTS ON FORM 8-K.
On September 24, 1998, the Company filed a Report on Form 8-K with the
Securities and Exchange Commission announcing the acquisition of working
interests and overriding royalty interests in certain natural gas wells
located in southeastern Ohio and operated by the Company. The well
interests were purchased from nine individuals and five Affiliated Drilling
Partnerships. Further information about these transactions is set forth in
Part II, Item 5(A), CERTAIN COMPANY TRANSACTIONS, above. The Form 8-K
contained no financial statements.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Energy Search, Incorporated
(Company)
Date: November 16, 1998 /S/ RICHARD S. COOPER
Richard S. Cooper, President
Date: November 16, 1998 /S/ ROBERT L. REMINE
Robert L. Remine, Chief Financial
Officer
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<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DOCUMENT
- ----------- --------
3.1 Fourth Amended and Restated Charter of the Registrant<F1>
3.2 Bylaws of the Registrant<F2>
4.1 Specimen of Common Stock Certificate<F3>
4.2 Specimen of Redeemable Series A Common Stock Purchase
Warrant Certificate<F3>
4.3 Specimen of Underwriters' Warrant Certificate<F3>
4.4 Charter (See Exhibit 3.1)
4.5 Bylaws (See Exhibit 3.2)
10.1 Energy Search Natural Gas 1995-A L.P. Limited Partnership
Agreement, dated December 31, 1995<F3>
10.2 Energy Search Natural Gas 1995-A L.P. Joint Drilling and
Operating Agreement, dated December 31, 1995<F3>
10.3 Energy Search Natural Gas 1996 L.P.-Limited Partnership
Agreement, dated June 10,1996<F3>
10.4 Energy Search Natural Gas 1996 L.P.-Joint Drilling and
Operating Agreement, dated June 10, 1996<F3>
10.5 ESI Pipeline Operating Partnership-Limited Partnership
Agreement, dated January 7, 1993<F3>
10.6 Energy Search Natural Gas Pipeline Income Partnership-
Limited Partnership Agreement, dated January 7, 1993<F3>
10.7 Gas Servicing Agreement between the Registrant and ESI
Pipeline Operating L.P., dated January 5, 1993<F3>
10.8 Selling Agreement-Class B Convertible Preferred Shares
between Registrant and Equity Financial Corporation, dated
March 4, 1996<F3>
10.9 Selling Agreement-Class A and Class B Preferred Shares
between Registrant and Equity Financial Corporation, dated
March 4, 1996<F3>
10.10 Selling Agreement-Variable Rate Subordinated Debentures
between Registrant and Equity Financial Corporation, dated
September 19, 1994<F3>
10.11 Aircraft Lease between Charles P. Torrey, Jr. and the
Registrant dated February 1,1995<F3>
10.12 Beaver Coal Company Lease between Beaver Coal Company
Limited and the Registrant, dated September 15, 1996<F3>
10.13 Employment Agreements with officers and key employees of the
Registrant
(a) John M. Johnston<F3><F*>
(b) Robert L. Remine<F3><F*>
(c) Charles P. Torrey, Jr.<F3><F*>
(d) Richard S. Cooper<F3><F*>
(e) Michael W. Mooney<F4><F*>
<PAGE>
10.14 Promissory Notes of Executive Officers in Favor of
Registrant
(a) Charles P. Torrey, Jr.<F3>
(b) Robert L. Remine<F3>
(c) Richard S. Cooper<F3>
10.15 Stock Option Plan<F3><F*>
10.16 Outside Directors' Stock Option Plan<F3><F*>
10.17 Form of Lock-Up Agreement<F3>
10.18 Stock Option and Restricted Stock Plan of 1998 <F1><F*>
10.19 Form of Indemnification Agreement<F1><F*>
10.20 1998 Stock Option and Restricted Stock Plan for Outside
Advisors and Consultants
27.1 Financial Data Schedule
- ------------------------
<F*> Management contract or compensatory plan or arrangement.
<F1> Previously filed with the Company's Definitive Proxy Statement filed
on April 28, 1998 with the Securities and Exchange Commission, and
here incorporated by reference.
<F2> Previously filed with the Company's Form 10-QSB Quarterly Report for
the quarter end June 30, 1998, and here incorporated by reference.
<F3> Previously filed with the Company's Registration Statement on Form SB-
2 (Registration No. 333-12755) filed with the Securities and Exchange
Commission, and here incorporated by reference.
<F4> Previously filed with the Company's Form 10-K Annual Report for the
fiscal year end March 31, 1998, and here incorporated by reference.
<PAGE>
EXHIBIT 10.20
ENERGY SEARCH, INCORPORATED
1998 STOCK OPTION AND RESTRICTED STOCK PLAN
FOR OUTSIDE ADVISORS AND CONSULTANTS
SECTION 1
ESTABLISHMENT OF PLAN; PURPOSE OF PLAN
1.1 ESTABLISHMENT OF PLAN. Energy Search, Incorporated (the
"Company") hereby establishes the 1998 Stock Option and Restricted Stock
Plan for Outside Advisors and Consultants (the "Plan"). The Plan permits
the grant or award of Options and Restricted Stock.
1.2 PURPOSE OF PLAN. The purpose of the Plan is to provide those
individuals who provide business advertising, marketing, financial,
investment, public relations and other advice and counsel to the Company or
its subsidiaries with the right to receive or purchase the Common Stock of
the Company so as to join the interests of these persons with the interests
of the Company and its shareholders through the increased opportunity for
stock ownership.
SECTION 2
DEFINITIONS
The following words have the following meanings unless a different
meaning is plainly required by the context:
2.1 "Act" means the Securities Exchange Act of 1934, as amended.
2.2 "Board" means the Board of Directors of the Company.
2.3 "Code" means the Internal Revenue Code of 1986, as amended.
2.4 "Committee" means the Executive Management and Compensation
Committee of the Board or such other committee as the Board shall
designate to administer the Plan. The Committee shall consist of
at least two members of the Board all of whom shall be "non-
employee directors" as defined in Rule 16b-3 under the Act. In
addition, at least two of the directors of the Committee shall be
"outside directors" as defined in the regulations issued pursuant
to Section 162(m) of the Code.
<PAGE>
2.5 "Common Stock" means the common stock, without par value, of the
Company.
2.6 "Company" means Energy Search, Incorporated, a Tennessee
corporation.
2.7 "Competition" means participation, directly or indirectly, in the
ownership, management, financing or control of any business that
is the same as or similar to the present or future businesses of
the Company or any Subsidiary. Such participation could be by
way of employment, consulting services, directorship or
officership. Ownership of less than five percent (5%) of the
shares of any corporation whose shares are traded publicly on any
national or regional stock exchange or over the counter shall not
be deemed Competition.
2.8 "Incentive Award" means the award or grant of an Option or
Restricted Stock to a Participant under the Plan.
2.9 "Market Value" of any security on any given date means: (a) if
the security is listed for trading on one or more national
securities exchanges (including The NASDAQ SmallCap Market), the
mean of the highest and lowest sales prices on the principal such
exchange on the date in question, or if such security shall not
have been traded on such principal exchange on such date, the
last reported sales price on such principal exchange on the first
day prior thereto on which such security was so traded; or (b) if
the security is not listed for trading on a national securities
exchange (including The NASDAQ SmallCap Market) but is traded in
the over-the-counter market, the mean of highest and lowest bid
prices for such security on the date in question, or if there are
no such bid prices for such security on such date, the mean of
the highest and lowest bid prices on the first day prior thereto
on which such prices existed; or (c) if neither (a) or (b) is
applicable, the value as determined by any means deemed fair and
reasonable by the Committee, which determination shall be final
and binding on all parties.
2.10 "Option" means the right to purchase Common Stock at a stated
price for a specified period of time. For purposes of the Plan,
an Option may not be an incentive stock option within the meaning
of Section 422(b) of the Code.
2.11 "Outside Advisor" means an individual who by reason of his or her
position or past or future dealings or knowledge of the Company
or any subsidiary is in a position to provide business
advertising, marketing, financial, investment, public relations
and other advice and counsel. The Board of Directors shall
-2-
<PAGE>
determine the persons deemed to be Outside Advisors or the
standard or method used to determine the persons to be considered
Outside Advisors.
2.12 "Participant" means an Outside Advisor who the Committee
determines is eligible to participate in the Plan and who is
designated to be granted an Incentive Award under the Plan.
2.13 "Restricted Period" means the period of time during which
Restricted Stock awarded under the Plan is subject to
restrictions. The Restricted Period may differ among
Participants and may have different expiration dates with respect
to shares of Common Stock covered by the same Incentive Award.
In no event shall the Restriction Period be for a shorter time
than the applicable holding period under Rule 144, as amended,
promulgated under the Securities Act of 1933.
2.14 "Restricted Stock" means Common Stock awarded to a Participant
under Section 6 of the Plan.
2.15 "Subsidiary" means any corporation of which a majority of the
outstanding voting stock is directly or indirectly owned or
controlled by the Company, or by one or more Subsidiaries.
SECTION 3
ADMINISTRATION
3.1 POWER AND AUTHORITY. The Committee shall administer the Plan,
shall have full power and authority to interpret the provisions of the
Plan, and shall have full power and authority to supervise the
administration of the Plan. All determinations, interpretations and
selections made by the Committee regarding the Plan shall be final and
conclusive. The Committee shall hold its meetings at such times and places
as it deems advisable. Action may be taken by a written instrument signed
by all of the members of the Committee, and any action so taken shall be
fully as effective as if it had been taken at a meeting duly called and
held. The Committee shall make such rules and regulations for the conduct
of its business as it deems advisable. The members of the Committee shall
receive reasonable fees for their services.
3.2 GRANTS OR AWARDS TO PARTICIPANTS. In accordance with and subject
to the provisions of the Plan, the Committee shall have the authority to:
determine whether and when Incentive Awards will be granted, the persons or
entities to be granted Incentive Awards, the amount of Incentive Awards to
be granted to each person and the terms of the Incentive Awards to be
granted; vary and amend vesting schedules, if any; and waive any
-3-
<PAGE>
restrictions or conditions applicable to any Incentive Award. Incentive
Awards shall be granted or awarded by the Committee, and Incentive Awards
may be amended by the Committee consistent with the Plan, provided that no
such amendment may become effective without the consent of the Participant,
except to the extent that the amendment operates solely to the benefit of
the Participant.
3.3 INDEMNIFICATION OF COMMITTEE MEMBERS. Each person who is or
shall have been a member of the Committee shall be indemnified and held
harmless by the Company from and against any cost, liability or expense
imposed or incurred in connection with such person's or the Committee's
taking or failing to take any action under the Plan. Each such person
shall be justified in relying upon information furnished in connection with
the Plan's administration by any appropriate person or persons.
SECTION 4
SHARES SUBJECT TO THE PLAN
4.1 NUMBER OF SHARES. Subject to adjustment as provided in
subsection 4.2 of the Plan, a maximum of 25,000 shares of Common Stock
shall be available for Incentive Awards under the Plan. Such shares shall
be authorized and unissued shares.
4.2 ADJUSTMENTS. If the number of shares of Common Stock outstanding
changes by reason of a stock dividend, stock split, recapitalization,
merger, consolidation, combination, exchange of shares or any other change
in the corporate structure or shares of the Company, the aggregate number
and class of shares available for grants or awards under the Plan, together
with the Option prices, shall be appropriately adjusted. No fractional
shares shall be issued pursuant to the Plan, and any fractional shares
resulting from adjustments shall be eliminated from the respective
Incentive Award, with an appropriate cash adjustment for the value of any
Incentive Awards eliminated. If an Incentive Award is canceled,
surrendered, modified, expired or terminated during the term of the Plan
but before the exercise or vesting of the Incentive Award in full, the
shares subject to but not delivered under such Incentive Award shall be
available for other Incentive Awards.
SECTION 5
OPTIONS
5.1 GRANT. A Participant may be granted one or more Options under the
Plan. Options shall be subject to such terms and conditions, consistent
with the other provisions of the Plan, as shall be determined by the
-4-
<PAGE>
Committee in its sole discretion. The Committee may vary, among
Participants and among Options granted to the same Participant, any and all
of the terms and conditions of the Options granted under the Plan. The
Committee shall have complete discretion in determining the number of
Options granted to each Participant.
5.2 OPTION AGREEMENTS. Each Option shall be evidenced by an Option
agreement containing such terms and conditions, consistent with the
provisions of the Plan, as the Committee from time to time determines.
Option Agreements may be amended by the Committee consistent with the Plan,
but no such amendment shall be effective as to a Participant without the
Participant's consent unless the amendment operates solely to the benefit
of the Participant.
5.3 OPTION PRICE. The per share Option price shall not be less than
the Market Value on the date of the grant, unless the Committee concludes
that particular circumstances render a lesser Option price beneficial to
the Company. The date of grant of an Option shall be the date the Option
is authorized by the Committee or such future date specified by the
Committee as the date for issuing the Option.
5.4 MEDIUM AND TIME OF PAYMENT. The exercise price for each share
purchased pursuant to an Option granted under the Plan shall be payable in
cash or, if the Committee consents, in shares of Common Stock (including
Common Stock to be received upon a simultaneous exercise). The time and
terms of payment may be amended with the consent of the Participant before
or after exercise of the Option, but such amendment shall not reduce the
Option price. The Committee may from time to time authorize payment of all
or a portion of the Option price in the form of a promissory note or
installments according to such terms as the Committee may approve. The
Board may restrict or suspend the power of the Committee to permit such
loans and may require that adequate security be provided.
5.5 LIMITS ON EXERCISABILITY. Options shall be exercisable for such
periods as may be fixed by the Committee, not to exceed 10 years from the
grant date. At the time of the exercise of an Option, the holder of the
Option, if requested by the Committee, must represent to the Company that
the shares are being acquired for investment and not with a view to the
distribution thereof. The Committee also may vary, among Participants and
among Options granted to the same Participant, any and all of the terms and
conditions of Options granted under the Plan.
5.6 TRANSFERABILITY.
(a) GENERAL. Unless the Committee otherwise consents or
unless the terms of the Option agreement provide otherwise, no
Option granted under the Plan may be sold, transferred, pledged,
-5-
<PAGE>
assigned or otherwise alienated or hypothecated, other than by
will or by the laws of descent and distribution if the
Participant is a natural person. In addition, all Options
granted to a Participant during the Participant's lifetime shall
be exercisable during the Participant's lifetime only by such
Participant, the Participant's guardian, or legal representative.
(b) OTHER RESTRICTIONS. The Committee may impose such
restrictions on any shares of Common Stock acquired pursuant to
the exercise of an Option under the Plan as it deems advisable,
including, without limitation, restrictions under applicable
federal or state securities laws.
5.7 RESTRICTIONS ON EXERCISE.
(a) GENERAL. The Committee may impose such restrictions as it
deems appropriate on the Participant's right to exercise any options
granted. Such restrictions shall be specified in the Option Agreement
entered into with the Participant under Section 5.2.
(b) SPECIFIC RESTRICTIONS. Notwithstanding the Committee's
right to impose additional restrictions under Section 5.7(a), the
following restrictions shall also apply:
(i) If the Participant ceases to be an Outside Advisor or
Consultant for any reason other than death or disability, the
Option issued to such Participant shall no longer be exercisable.
If a Participant dies or becomes disabled, the Option shall be
exercisable by the Participant or personal representative for a
period of three months after the date the Participant ceases to
be Outside Advisor or Consultant, but only to the extent that the
Participant was entitled to exercise the option on the date
Participant ceases to be Outside Advisor or Consultant, unless
the Option Agreement provides otherwise or the Committee
otherwise consents;
(ii) If the Committee determines that the Participant has
entered into Competition with the Company or any subsidiary, the
Participant's right to exercise any outstanding Option shall
terminate as of that date of entry into Competition. The
Committee shall have sole discretion in making such
determination.
-6-
<PAGE>
SECTION 6
RESTRICTED STOCK
6.1 GRANT. A Participant may be granted Restricted Stock under the
Plan. Restricted Stock shall be subject to such terms and conditions,
consistent with the other provisions of the Plan, as shall be determined by
the Committee in its sole discretion. Restricted Stock shall be awarded on
the condition that the Participant continues to perform certain services or
meets certain requirements as provided by the Committee in the Restricted
Stock Agreement.
6.2 RESTRICTED STOCK AGREEMENTS. Each award of Restricted Stock
shall be evidenced by a Restricted Stock Agreement containing such terms
and conditions, consistent with the provisions of the Plan, as the
Committee from time to time determines. Restricted Stock Agreements may be
amended by the Committee consistent with the Plan, but no such amendment
shall be effective as to a Participant without the Participant's consent
unless the amendment operates solely for the benefit of the Participant.
6.3 TERMINATION OF OUTSIDE ADVISOR STATUS. In addition to any
restrictions that the Committee may impose on the award of Restricted Stock
the following restrictions shall apply:
(a) COMPETITION. If the Committee determines that the
Participant has entered into Competition with the Company or any
subsidiary or ceases to be an Outside Advisor other than by reason of
discontinuance of business, death or disability, then any shares of
Restricted Stock still subject to restrictions on the date of such
determination automatically shall be forfeited and returned to the
Company.
(b) DISCONTINUANCE OF BUSINESS, DEATH OR DISABILITY. Unless the
terms of the Restricted Stock Agreement or grant provide otherwise, in
the event a Participant is no longer an Outside Advisor because of
discontinuance of business, death or disability during the Restricted
Period, the Participant's right to all of the Participant's Restricted
Stock shall vest as of the date of discontinuance of business, death
or disability, and the Participant's Restricted Stock may be
transferred free of any restrictions under the Plan, except any
restrictions as the Company may reasonably specify to ensure
compliance with federal and state securities laws.
6.4 RESTRICTIONS ON TRANSFERABILITY.
(a) GENERAL. Unless the Committee otherwise consents or
unless the terms of the Restricted Stock Agreement provide
otherwise, shares of Restricted Stock shall not be sold,
-7-
<PAGE>
exchanged, transferred, pledged or otherwise disposed of by a
Participant during the Restricted Period other than to the
Company pursuant to subsection 6.3 or 6.4(b) or by will or the
laws of descent and distribution.
(b) SURRENDER TO THE COMPANY. If any sale, exchange,
transfer, pledge or other disposition, voluntary or involuntary,
of Restricted Stock that has not vested shall be made or
attempted during the Restricted Period, except as provided above
in subsections 6.3 and 6.4(b), the Participant's right to the
Restricted Stock immediately shall cease and terminate, and the
Participant promptly shall surrender to the Company all such
Restricted Stock in the Participant's possession.
(c) OTHER RESTRICTIONS. The Committee may impose other
restrictions on any shares of Common Stock acquired pursuant to
an award of Restricted Stock as the Committee deems advisable,
including, without limitation, restrictions under applicable
federal or state securities laws.
6.5 RIGHTS AS A SHAREHOLDER. During the Restricted Period, a
Participant shall have all rights of a shareholder with respect to his
Restricted Stock, including (a) the right to vote any shares at
shareholders' meetings; (b) the right to receive, without restriction, all
cash dividends paid with respect to such Restricted Stock; and (c) the
right to participate with respect to such Restricted Stock in any stock
dividend, stock split, recapitalization or other adjustment in the Common
Stock of the Company or any merger, consolidation or other reorganization
involving an increase or decrease or adjustment in the Common Stock of the
Company. Any new, additional or different shares or other security
received by the Participant pursuant to any such stock dividend, stock
split, recapitalization or reorganization shall be subject to the same
terms, conditions and restrictions as those relating to the Restricted
Stock for which such shares were received.
6.6 DEPOSIT OF CERTIFICATES; LEGENDING OF RESTRICTED STOCK.
(a) DEPOSIT OF CERTIFICATES. Any certificates evidencing
shares of Restricted Stock awarded pursuant to the Plan shall be
registered in the name of the relevant Participant and deposited,
together with a stock power endorsed in blank, with the Company.
In the discretion of the Committee, any such certificates may be
deposited in a bank designated by the Committee or delivered to
the Participant. Certificates for shares of Restricted Stock
that have vested shall be delivered to the Participant upon
request within a reasonable period of time. The Participant
shall sign all documents necessary or appropriate to facilitate
such delivery.
-8-
<PAGE>
(b) LEGEND. Any certificates evidencing shares of
Restricted Stock awarded pursuant to the Plan shall bear the
following legend:
The shares represented by this certificate were issued
subject to certain restrictions under the Energy
Search, Incorporated 1998 Stock Option and Restricted
Stock Plan for Outside Advisors and Consultants (the
"Plan"). A copy of the Plan is on file in the office
of the Secretary of Energy Search, Incorporated. This
certificate is held subject to the terms and conditions
contained in a restricted stock agreement that includes
a prohibition against the sale or transfer of the stock
represented by this certificate except in compliance
with that agreement, and that provides for forfeiture
upon certain events.
6.7 REPRESENTATIONS AND WARRANTIES. A Participant who is awarded
Restricted Stock shall represent and warrant that the Participant is
acquiring the Restricted Stock for the Participant's own account and
investment and without any intention to resell or redistribute the
Restricted Stock. The Participant shall agree not to resell or
redistribute such Restricted Stock after the Restricted Period except upon
such conditions as the Company reasonably may specify to ensure compliance
with federal and state securities laws.
SECTION 7
GENERAL PROVISIONS
7.1 NO RIGHTS TO AWARDS. No Participant or other person shall have
any claim to be granted any Incentive Award, and there is no obligation of
uniformity of treatment of Participants or holders or beneficiaries of
Incentive Awards. The terms and conditions of Incentive Awards of the same
type and the determination of the Committee to grant a waiver or
modification of any Incentive Award and the terms and conditions thereof
need not be the same with respect to each Participant.
7.2 COMPLIANCE WITH LAWS; LISTING AND REGISTRATION OF SHARES. All
Incentive Awards granted under the Plan (and all issuances of Common Stock
or other securities under the Plan) shall be subject to applicable laws,
rules and regulations, and to the requirement that if at any time the
Committee determines, in its sole discretion, that the listing,
registration or qualification of the shares covered thereby upon any
securities exchange or under any state or federal law, or the consent or
approval of any governmental regulatory body, is necessary or desirable as
a condition of, or in connection with, the granting of such Incentive Award
-9-
<PAGE>
or the issue or purchase of shares thereunder, such Incentive Award may not
be exercised in whole or in part, or the restrictions on such Incentive
Award shall not lapse, unless and until such listing, registration,
qualification, consent or approval shall have been effected or obtained
free of any conditions not acceptable to the Committee.
7.3 NO LIMIT ON OTHER COMPENSATION ARRANGEMENTS. Nothing contained
in the Plan shall prevent the Company or any Subsidiary from adopting or
continuing in effect other or additional compensation arrangements,
including the grant of options and other stock-based awards, and such
arrangements may be either generally applicable or applicable only in
specific cases.
7.4 GOVERNING LAW. The validity, construction and effect of the Plan
and any rules and regulations relating to the Plan shall be determined in
accordance with the laws of the State of Michigan and applicable federal
law.
7.5 SEVERABILITY. In the event any provision of the Plan shall be
held illegal or invalid for any reason, the illegality or invalidity shall
not affect the remaining parts of the Plan, and the Plan shall be construed
and enforced as if the illegal or invalid provision had not been included.
SECTION 8
EFFECTIVE DATE AND DURATION OF THE PLAN
This Plan shall take effect September 1, 1998. Unless earlier
terminated by the Board of Directors, the Plan shall terminate on August
31, 2008. No Incentive Award shall be granted under this Plan after such
date.
SECTION 9
TERMINATION AND AMENDMENT
The Board may terminate the Plan at any time, or may from time to time
amend the Plan as it deems proper and in the best interests of the Company,
provided that without shareholder approval no such amendment may
(a) materially increase either the benefits to Participants under the Plan
or the number of shares that may be issued under the Plan; (b) materially
modify the eligibility requirements; (c) reduce the Option price (except
pursuant to adjustments under subsection 4.2); or (d) impair any
outstanding Incentive Award without the consent of the Participant, except
according to the terms of the Incentive Award. No termination, amendment
-10-
<PAGE>
or modification of the Plan shall become effective with respect to any
Incentive Award previously granted under the Plan without the prior written
consent of the Participant holding such Incentive Award unless such
amendment or modification operates solely to the benefit of the
Participant.
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FINANCIAL STATEMENTS OF ENERGY SEARCH, INCORPORATED AND
SUBSIDIARIES FOR THE PERIOD ENDED SEPTEMBER 30, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 171,767
<SECURITIES> 0
<RECEIVABLES> 897,052
<ALLOWANCES> 0
<INVENTORY> 60,034
<CURRENT-ASSETS> 1,157,635
<PP&E> 24,312,224
<DEPRECIATION> (4,172,428)
<TOTAL-ASSETS> 23,918,787
<CURRENT-LIABILITIES> 1,153,869
<BONDS> 6,856,674
<COMMON> 17,231,343
201,255
0
<OTHER-SE> (1,524,354)
<TOTAL-LIABILITY-AND-EQUITY> 23,918,787
<SALES> 1,969,650
<TOTAL-REVENUES> 2,779,289
<CGS> 54,051
<TOTAL-COSTS> 2,444,550
<OTHER-EXPENSES> (146,034)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 221,175
<INCOME-PRETAX> (32,470)
<INCOME-TAX> 9,700
<INCOME-CONTINUING> (22,770)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,770)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
