FORM - 10Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Quarter Ended May 31, 1998 Commission File Number 0-9098 OIL CITY PETROLEUM, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its Charter) Texas 75-1614001 - ------------------------------- -------------------------------------- (State or other jurisdiction of (I. R. S. Employer Identification No.) incorporation or organization) 3015 East Skelly Dr., Ste #450 74105 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (918) 743-6555 ---------------------------------------------------- (Registrant's telephone number, including area code) 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 such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes No X ---------- The Registrant had 29,300,000 shares of common stock, no par value outstanding as of the close of the period covered by this report. OIL CITY PETROLEUM, INC. INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Balance Sheet - May 31, 1998 and August 31, 1997 3 Statement of Operations - Nine Months Ended May 31, 1998 and 1997 5 Statement of Cash Flows - Nine Months Ended May 31, 1998 and 1997 6 Consolidated Statements of Stockholders' Equity 7 Notes to Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 9 SIGNATURES PART I - FINANCIAL INFORMATION OIL CITY PETROLEUM, INC. Notes to Consolidated Financial Statements Unaudited May 31, 1998 (1) General The accompanying interim condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results for the interim periods presented have been included. Operating results for the periods presented are not necessarily indicative of the results which may be expected for the year ending August 31, 1997. These condensed interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10K for the year ended August 31, 1997. The Company Oil City Petroleum Inc., a Texas corporation ("the Company"), is an oil and natural gas company headquartered in Tulsa, Oklahoma. The Company has historically been engaged in the production. and exploration of crude oil and natural gas in Oklahoma and Texas and currently operates 142 wells and produces 167 BOPD and 619 MCFPD to the Company's interest. Historical Background Oil City Petroleum, Inc. was incorporated in the State of Texas on August 4, 1978. The Company has historically been an oil and natural gas producer in the Oklahoma and Texas. On September 2, 1997, the Company acquired all. of the issued and outstanding capital stock of Double Eagle Petroleum, Inc., a privately held oil and natural gas producer located in Tulsa, Oklahoma. Under the terms of the Agreement, Double Eagle became a wholly-owned subsidiary of the Company in exchange for the issuance of 21,366,620 shares of the Company's common stock to the shareholders of Double Eagle. As a result of the acquisition of Double Eagle, two of the Directors of the Company resigned, Mr. Herman E. Nichols and Mr. Jay D. Kipfer. Messers R.A. Sellers Jr., James G. Borem, and R.A. Sellers III were elected to the Board and appointed Chairman President and Vice President, respectively. In addition the Company appointed Mr. Bill W. Carter as Vice President- Operations; Mr. L. C. Cobb as Vice President- Land and Acquisitions and Faye E. Cobb as Controller. (2) ACCOUNTING POLICIES The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form. 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management all adjustments (consisting of only normal recurring items) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the Report on Form 8-K disclosure statement for the acquisition of Double Eagle and included herein by this reference. (3) NOTE PAYABLE Subsequent to the acquisition of Double Eagle, the Company executed a promissory note and mortgage with a bank providing a Line of Credit facility of $25,000,000 and bearing interest at the bank's prime lending rate plus 1%. Included in the Line of Credit facility is a Term Loan Line of Credit in the amount of $700,000 and bearing interest at 17% per annum payable in quarterly installments of $43,570, plus accrued interest and beginning February 28, 1998, with all principal and interest due November 30, 1999. As of May 31, 1998 $3,200,000 has been advanced on the note. Accrued interest is due and payable monthly at the bank's prime rate which was 9.5 % on November 30, 1997. The note is secured by a mortgage on substantially all of the oil and gas properties owned by the Company. OIL CITY PETROLEUM. INC. BALANCE SHEET (UNAUDITED) ASSETS May 31, Aug. 31, 1998 1997 --------------- ------------- Current Assets: Cash $ 116,649 $ 0 Short-term Investments 25,000 Accounts Receivable 1,756,036 27,961 Crude Oil Inventory 36,616 6,005 Shop and Yard Inventory 56,126 0 Other Current Assets 15,601 3,275 --------------- ------------- Total Current Assets 1,981,028 62,241 --------------- ------------- Property and Equipment, at Cost: Oil and Gas Properties 4,964,090 218,885 Field Equipment 0 7,945 Building, Land and Office Equipment 315,325 261,101 --------------- ------------- Total Property and Equipment, at Cost 5,279,415 487,931 Less Accumulated Depreciation, Depletion, and Amortization (798,263) (207,401) --------------- ------------- Net Property and Equipment 4,481,152 280,530 --------------- ------------- Other Assets Investments - Double Eagle Management Services, Inc. 116,341 0 Deferred & Organizational Cost 55,730 0 Total Other Assets 6,634,251 342,771 --------------- ------------- SEE NOTES TO FINANCIAL STATEMENT 3 OIL CITY PETROLEUM, INC. BALANCE SHEET (UNAUDITED) May 31, Aug. 31, LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997 - ------------------------------------ -------------- ------------- Current Liabilities: Accounts Payable $ 2,045,867 $ 42,035 Accrued Liablilities 106,305 Deferred Costs 104,942 Current Portion of Long-Term Debt 888,850 13,512 Note and Accrued Interest Payable to Affiliate -------------- ------------- Total Current Liabilities 3,145,964 55,547 -------------- ------------- Long-Term Debt 2,454,525 133,878 -------------- ------------- Shareholders' Equity: Common Stock, .001 Value - Authorized 30,000,000 Shares, Issued and Outstanding 29,300,000 Shares 29,300 5,692,571 Treasury Stock (14,318) Additional Paid-In Capital 9,855,500 3,265,614 Retained Earnings (8,673,202) (8,804,839) Net Income (Loss) (163,518) -------------- ------------- Total Shareholder's Equity 1,033,762 153,346 -------------- ------------- Total Liabilities and Shareholders' Equity 6,634,251 342,771 -------------- ------------- SEE NOTES TO FINANCIAL STATEMENTS 4 OIL CITY PETROLEUM, INC. STATEMENT OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED May 31, May 31, 1997 1998 1997 1996 Revenues: Oil and Gas Sales 252,352 9,916 1,151,895 39,606 ----------- --------- ----------- ---------- Costs and Expenses: Lease Operating Exp. 178,989 15,603 850,378 40,084 Deprec., Depletion & Amortization 217,020 4,974 347,366 14,922 General @ Admin. 12,242 26,482 318,327 82,926 Interest 95,110 27,419 237,860 80,982 Total Operating Expense 503,361 74,478 1,753,931 218,914 ----------- ---------- ----------- ---------- Net Operating Income or (Loss) (251,009) (64,562) (602,036) (179,308) ----------- ---------- ----------- ---------- Other Income (Expenses) Interest Income 10 324 516 970 Other Income 225,821 431,845 0 Gain/Loss on Write Down 0 0 0 Gain(Loss)on Sale of Assets 742 (1,875) 100 Rental Income 0 10,960 8,032 31,824 Rental Expense 0 (4,891) 0 (19,534) Total Other Income & Expense 226,573 6,393 438,518 13,360 ----------- ---------- ----------- ---------- Net Income Before Taxes (24,436) (58,169) (163,518) (165,948) Income Tax - Current Income Tax - Deferred ----------- ---------- ----------- ---------- Net Income (Loss) (24,436) (58,169) (163,518) (165,948) Net Income or (Loss) Per Share (0.001) (0.01) (0.005) (0.01) ----------- ---------- ----------- ---------- Average Number of Shares Outstanding 29,300,000 14,912,492 29,300,000 14,912,492 ----------- ---------- ------------ ----------- SEE NOTES TO FINANCIAL STATEMENTS 5 OIL CITY PETROLEUM, INC. STATEMENT OF CASH FLOWS (UNAUDITED NINE MONTHS ENDED May 31, ------------------------ 1998 1997 ------------- --------- Cash Flows from Operating Activities: Net Loss (163,518) (165,948) ------------- --------- Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: 0 Depreciation, Depletion, and Amortization (189,078) 14,922 Interest Expense - Affiliates 0 68,726 Reduction in Deferred Oil/Gas Income 0 0 Net (Gain) Loss on Sale of Assets 0 (100) Change in Assets and Liabilities: (Increase) Decrease in Receivables 442,028 697 (Increase) Decrease in Revenue Receivables (86,362) 0 (Increase) Decrease in Inventory (15,548) 0 Increase in Accounts Payable (31,960) (977) Increase in Accrued Liabilities 20,016 0 Increase in Deferred Cost (159,048) 0 Decrease in Deferred Income Tax 0 0 Increase in Other Assets (18,406) 1,726 Total Adjustments (38,358) 84,994 ------------- --------- Net Cash Used in Operating Activities (201,876) (80,954) ------------- --------- Cash Flows from Investing Activities: Investments - Double Eagle Management Services Inc. (6,655) 0 Expenditures for Property and Equipment 1,264,923 (6,670) Net Cash used in Investing Activities 1,258,268 (6,670) ------------- --------- Cash Flows from Financing Activities: Increase in Borrowings from Affiliate 0 102,531 Principle Payments on Long-term Debt (154,229) (9,008) Borrowing on Debt 0 0 Increase in Restructuring Oil City Petroleum (932,786) 0 Equity Net Cash Provided by Financing Activities: (1,087,015) 93,523 ------------- --------- Net Increase (Decrease) in Cash (30,623) 5,899 Cash at Beginning of Year 147,272 311 ------------- --------- Cash at End of Period 116,649 6,210 SEE NOTES TO FINANCIAL STATEMENTS 6 OIL CITY PETROLEUM, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY THREE MONTHS ENDED May 31, 1998 - YEAR ENDED AUGUST 31, 1997 Additional Total Common Stock Paid-In Retained Treasury Stockholders' -------------------------- Par Value Capital Earnings Stock Equity Shares ----------- ------------ ----------- ----------- --------- ------------ Balance, August 31, 1994 14,912,492 $5,692,571 $1,567,243 (7,732,215) (472,401) Net loss (252,945) (252,945) ------------ ------------ ------------ ----------- --------- ------------ Balance, August 31, 1995 14,912,492 5,692,571 1,567,243 (7,985,160) (725,346) Net loss (222,095) (222,095) ---------- ------------ ----------- ------------ ----------- Balance, August 31, 1996 14,912,492 5,692,571 1,567,243 (8,207,255) (947,441) Issuance of common stock 1,605,806 1,698,371 1,698,371 Surrender of common stock 8,285,998 Net loss (597,584) (597,584) ---------- ------------ ----------- ------------ --------- ----------- Balance, August 31, 1997 16,518,298 $5,692,571 $3,265,614 (8,804,838) 8,285,998 153,346 ---------- ------------ ----------- ------------ --------- ----------- Treasury Stock 8/31/97 (8,285,998) Issuance of Common Stock 20,767,700 (5,663,571) 7,647,738 131,637 2,115,804 Net Loss for 6 months ended (139,082) (139,082) Balance, February 28, 1998 29,000,000 29,000 10,913,352 (8,812,284) 2,130,068 ------------ ------------ ----------- ------------- --------- ------------ Issuance of Common Stock 300,000 300 300 Stock exchange for Sale of properties & Equipment (1,057,852) (14,318) (1,072,170) Net Loss for 3 Months ended (24,436) (24,436) Balance, May 31, 1998 29,300,000 29,300 9855,500 (8,836,720) (14,318) 1,033,762 ------------ ------------ ----------- ------------ ---------- ----------- Less Treasury Shares (14,317,700) ------------ TOTAL OUTSTANDING 14,982,300 SEE NOTES TO FINANCIAL STATEMENTS 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL RESULT OF OPERATIONS The following is a discussion of the results of operations of the Company for the three months ended May 31, 1998. This discussion should be read in conjunction with the Company's unaudited Consolidated Financial Statements and the notes thereto included in Part I of this Quarterly Report. The factors which most significantly affect the Company's results of operations are (i) the sale prices of crude oil and natural gas, (ii) the level of total sales volumes, (iii) the level of lease operating expenses, and (iv) the level of and interest rates on borrowings. Total sales volumes for oil and natural gas are significantly impacted by the degree of success the Company experiences in its efforts to maintain or increase production from its existing oil and gas properties through its development activities. Average sales prices received by the Company for oil and gas have historically fluctuated significantly from period to period. Fluctuations in oil prices during these periods reflect market uncertainty as well as concerns related to the global supply and demand for crude oil. Average gas prices received by the Company fluctuate generally with changes in the spot market price for gas. Spot market gas prices have generally declined in recent years because of lower worldwide energy prices as well as excess deliverability of natural gas in the United States. Relatively modest changes in either oil or gas prices significantly impact the Company's results of operations and cash flow and could significantly impact the Company's borrowing capacity. Management presently believes that the level of crude prices worldwide are too low to be sustained for any extended period and that prices will rebound to previous levels. Quarter ended May 31, 1998 compared to Quarter ended May 31, 1997. Revenues for the three months ending May 31, 1998 were $ 252,352 compared to $ 9,916 for the comparable quarter ended May 31, 1997 and reflects an increase in the operating revenue from the Company's oil and gas operations as a result of the acquisitions of (1) Double Eagle and the oil and gas properties acquired from (2) Enserch Exploration, Inc. Production operating expenses were $ 178,989 for the quarter ended May 31, 1998 compared to $ 4,974 for the quarter ended May 31, 1997 and reflects an increase due to the acquisition of Double Eagle Petroleum Corporation and the oil and gas properties acquired from Enserch Exploration, Inc. General and administrative costs decreased to $ 12,242 for the three months ending May 31, 1998 from $ 26,482 for the same period a year earlier and primarily reflects an adjustment in G & A for start up cost related to the oil and gas acquisition the company completed. G & A should increase significantly as the Company continues to acquire additional properties and initiates a corporate public relations campaign. We are estimating that the Companys future G & A based on our current operations and management fee rembursement to be approximately $ 20,000 per month. The Company had an after-tax net loss of $ 24,436 ($0.0008 per share) for the quarter ended May 31, 1998 compared to a net. loss of $ 58,169 ($0.039 per share) for the comparable quarter a year earlier. The decrease in the net loss in income is attributable primarily to an increase in the revenues as a result of the Double Eagle acquisition and is offset by an attendant increase in G & A. The Company expects to continue to experience losses during the periods of significant growth of the Company. CAPITAL RESOURCES AND LIQUIDITY The Company's capital requirements relate primarily to the development of its oil and gas properties. Prior to the change in control, the Company funded its very limited activities from cash flow. The Company, through its subsidiaries, has established credit facilities with a bank to facilitate the funding of its operations, has sold oil and gas properties to provide working capital and has from time to received unsecured loam from its principal shareholder. The level of the Company's capital expenditures will vary in the future depending on energy market conditions and upon the level of acquisition activity achieved by the Company. The Company anticipates that its cash flow will not be sufficient to fund its operations and debt service at their current levels for the next year and that additional capital will be required. There is no assurance that the Company will have sufficient funds to meet its obligations. The Company's bank credit facility consists of a revolving credit facility under which the Company has available to it a revolving line of credit in the principal amount of $3,400,000 including the term loan discussed under Notes Payable above. The Company is required to make interest payments monthly with interest accruing at a varying rate based on the sum of the bank's prime lending rate ( 9.5 % at November 30, 1997 ). The revolving line of credit is secured by substantially all of the Company's oil and gas properties. At November 30, 1997 the outstanding balance under the Company's credit facilities with its Bank totaled $ 3,200,000. At May 31, 1998 the Company had current assets of $ 1,981,028 and current liabilities of $ 3,145,964 which resulted in negative working capital of $ 1,164,936 which is primarily comprised of senior bank debt and notes payable to shareholders and accounts payable. The Company believes that its cash flow from operations will not be sufficient to meet its anticipated capital requirements. As a result the Company believes it will require additional financing in order to carry on its operations. Because future cash flows and the availability of financing are subject to a number of variables, such as the level of production, the prices of oil and gas, and the Company's ability to successfully acquire additional oil and natural gas properties at reasonable prices, there can be no assurance that the Company's capital resources or ability to attract financing will be sufficient to maintain currently planned levels of capital expenditures. If the Company is unable to maintain its current level of operations, management believes the Company may be compelled to sell certain assets to meet its obligations or to otherwise curtail its activities. SEASONALITY The results of operations of the Company are somewhat seasonal due to seasonal fluctuations in the price for crude oil and natural gas. Due to these seasonal fluctuations, results of operations for individual quarterly periods may not be indicative of results which may be realized on an annual basis. INFLATION AND PRICES The Company's revenues and the value of its oil and gas properties have been and will be affected by changes in oil and gas prices. The Company's ability to maintain current borrowing capacity and to obtain additional capital on attractive terms is also substantially dependent on oil and gas prices. Oil and gas prices are subject to significant fluctuations that are beyond the Company's ability to control or predict. PART I[ OTHER INFORMATION Item 1. Legal Proceedings. Not applicable. Item 2. Changes in Securities. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission to Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. Not applicable. Item 6, Exhibits and Reports on Form 8-K (a) Exhibits Not applicable. (b) Current Report on Form 8-K Acquisition of Double Eagle Petroleum, Inc. Dated September 1, 1997 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 there unto duly authorized. Oil City Petroleum, Inc. By: /s/ James G. Borem ----------------------- James G. Borem President and Chief Executive Officer Dated: April 5, 1999