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 June 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: 3,783,355 (August 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) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 7
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS 14
ITEM 5. OTHER INFORMATION 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 21
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ENERGY SEARCH, INCORPORATED
BALANCE SHEETS
JUNE 30, DECEMBER 31,
1998 1997<F*>
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 672,976 $ 2,252,316
Accounts receivable 897,586 976,065
Other current assets 96,784 91,670
----------- -----------
Total current assets 1,667,346 3,320,051
OIL AND GAS PROPERTIES
Proven properties 8,344,509 4,546,833
Unproven properties 202,339 193,965
Wells and related equipment 9,841,439 8,100,764
Less accumulated depreciation, depletion and
amortization (3,489,635) (3,140,678)
----------- -----------
Net oil and gas properties 14,898,652 9,700,884
OTHER ASSETS
Other property and equipment, net 334,702 363,180
Investments in and advances to related partnerships 1,949,759 1,863,095
Deferred tax asset 678,800 650,400
Other assets 289,433 223,090
----------- -----------
Total other assets 3,252,694 3,099,765
Total assets $19,818,692 $16,120,700
=========== ===========
<FN>
<F*>Condensed from audited financial statements
</FN>
-3-
ENERGY SEARCH, INCORPORATED
BALANCE SHEETS (CONTINUED)
JUNE 30, DECEMBER 31,
1998 1997<F*>
----------- -----------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 30,538 $ 29,184
Accounts payable and accrued expenses 1,072,343 1,356,748
----------- -----------
Total current liabilities 1,102,881 1,385,932
LONG-TERM DEBT, less current portion 4,851,322 788,279
SHAREHOLDERS' EQUITY
Common stock (no par value, 25,000,000 shares
authorized; 3,773,241 and 3,768,241 shares issued and
outstanding as of June 30, 1998 and December 31, 1997,
respectively) 15,436,823 15,448,073
Retained earnings (deficit) (1,572,334) (1,501,584)
----------- -----------
Total shareholders' equity 13,864,489 13,946,489
----------- -----------
Total liabilities and shareholders' equity $19,818,692 $16,120,700
=========== ===========
<FN>
<F*>Condensed from audited financial statements
</FN>
See notes to financial statements
-4-
ENERGY SEARCH INCORPORATED
STATEMENTS OF OPERATION (UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
(Unaudited) (Unaudited)
REVENUE
Net turnkey revenue $ 41,479 $ 599,616
Oil & gas revenue 1,220,621 225,226
Management fees 104,403 157,176
Other revenue 374,161 139,890
---------- ----------
Total revenue 1,740,664 1,121,908
OPERATING EXPENSES
Production expenses 319,301 121,141
Exploration expenses 93,639 43,754
Depreciation, depletion and amortization 454,085 257,433
Interest 73,592 42,526
General and administrative 851,661 938,111
---------- ----------
Total operating expenses 1,792,278 1,402,965
NET INCOME (LOSS) FROM OPERATIONS (51,614) (281,057)
OTHER INCOME (EXPENSE)
Program reimbursement (94,526) (23,673)
Equity in income of related partnerships 46,990 61,896
Gain on sale of assets -- 2,963
---------- ----------
Total other income (expense) (47,536) 41,186
NET INCOME (LOSS) BEFORE INCOME TAX (99,150) (239,871)
INCOME TAX BENEFIT (EXPENSE) 28,400 71,900
---------- ----------
NET INCOME (LOSS) $ (70,750) $ (167,971)
Earnings per common and common equivalent
share (0.02) (0.08)
-5-
Earnings per common share - assuming full
dilution (0.02) (0.08)
See notes to financial statements
-6-
ENERGY SEARCH INCORPORATED
STATEMENTS OF OPERATION (UNAUDITED) (CONTINUED)
FOR THE THREE MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
(Unaudited) (Unaudited)
REVENUE
Net turnkey revenue $ 135,319 $ (131,758)
Oil & gas revenue 573,547 134,423
Management fees 56,837 74,893
Other revenue 161,895 80,887
--------- ----------
Total revenue 927,598 158,445
OPERATING EXPENSES
Production expenses 162,638 77,216
Exploration expenses 40,560 (52,066)
Depreciation, depletion and amortization 232,125 106,718
Interest 53,159 21,876
General and administrative 332,443 626,363
--------- ----------
Total operating expenses 820,925 780,107
NET INCOME (LOSS) FROM OPERATIONS 106,673 (621,662)
OTHER INCOME (EXPENSE)
Program reimbursement (51,980) (14,824)
Equity in income of related partnerships 16,169 30,948
Gain on sale of assets -- --
--------- ----------
Total other income (expense) (35,811) 16,124
NET INCOME (LOSS) BEFORE INCOME TAX 70,862 (605,538)
INCOME TAX BENEFIT (EXPENSE) (21,900) 181,900
--------- ----------
NET INCOME (LOSS) $ 48,962 $ (423,638)
Earnings per common and common equivalent
share 0.01 (0.16)
Earnings per common share - assuming full
dilution 0.01 (0.16)
See notes to financial statements -7-
ENERGY SEARCH, INCORPORATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30,
1998 1997
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (70,750) $ (167,971)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation, depletion and amortization expense 454,085 257,433
(Gain) on sale of assets -- (2,963)
Equity in (income) losses of related partnerships (46,990) (61,896)
(Increase) decrease in deferred tax asset (28,400) (71,900)
(Increase) decrease in assets
Accounts receivable and due from partnerships (3,100) (73,317)
Other current assets (5,114) (2,687)
Other assets (78,109) 156
Increase (decrease) in liabilities
Accounts payable and accrued liabilities (284,405) (342,409)
Drilling advances -- (1,281,404)
----------- -----------
Net cash provided (used) in operating
activities (62,783) (1,746,958)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of proven properties (3,797,677) (1,323,085)
Proceeds from sale of other property and equipment -- 8,548
Purchase of wells and other related equipment (1,749,048) (582,935)
Purchase of other property and equipment (29,886) (94,513)
Distributions from affiliated partnerships 40,417 53,927
Contributions to affiliated partnerships (33,510) (231,215)
----------- -----------
Net cash used in investing activities (5,569,704) (2,169,273)
CASH FLOWS FROM FINANCING ACTIVITIES:
Gross proceeds from issuance of common stock 8,000,000
Proceeds from long-term debt 4,078,823 --
Payments of stock issuance costs (11,250) (1,182,287)
Payment of dividends on preferred stock -- (59,749)
Payments on long-term debt (14,426) (285,614)
----------- -----------
Net cash provided (used) in financing
activities 4,053,147 6,472,350
-8-
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (1,579,340) 2,556,119
CASH AND CASH EQUIVALENTS - Beginning of period 2,252,316 51,067
----------- -----------
CASH AND CASH EQUIVALENTS - End of period $ 672,976 $ 2,607,186
=========== ===========
See notes to financial statements
-9-
ENERGY SEARCH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The condensed Balance Sheets as of June 30, 1998 and December 31,
1997, the Statements of Operations for the three and six-month period ended
June 30, 1998 and June 30, 1997, and the Statements of Condensed Cash Flows
for the six month periods ended June 30, 1998 and June 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 June
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 exhibits of
this filing.
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.
-10-
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
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 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 in the Appalachian Basin. The Company's emphasis is on natural
gas production with approximately 90% of its production being from natural
gas and the small balance being oil. Daily net production averaged
approximately 0.9 Mmcfed in 1997, and reached a level of approximately
3.8 MMcfed as of June 30, 1998. The Company has successfully drilled
16 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.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
(CONTINUED)
EVENTS SUBSEQUENT TO JUNE 30, 1998
The Company has, per the terms of a Restructuring Plan, offered to
purchase all of the working interest owned by the five oldest Affiliated
Drilling Partnerships. See Part II 5(b) for discussion of Affiliated Drilling
Partnerships. The restructuring plan, if completed, would result
in the Company acquiring the working interest of the partnerships for a
combination of cash and stock in an aggregate amount estimated to be between
1.5 and 2.5 million dollars, which the Company contemplates funding out of
working capital or its Bank One credit facility or common stock. The plan
calls for an effective date of August 7, 1998 and is expected to be
completed in the third quarter of 1998.
SIX MONTHS ENDED JUNE 30, 1998
FINANCIAL CONDITION
Total assets increased $3,697,992 or 22.9% from December 31, 1997 to
June 30, 1998 primarily due to a $5,197,768 net increase in oil and gas
properties and after an offsetting decrease of $1,652,705 in current
assets.
Current assets for the six month period ended June 30, 1998 decreased
$1,652,705 to $1,667,346, or a 49.8% 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 $1,579,340 to $672,976 or 70.1% for
the six months ended June 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" section for further
discussion.
Oil and gas properties for the six months ended June 30, 1998
increased $5,197,768 to $14,898,652 or 53.6% from the amount reported at
December 31, 1997. The increase is primarily a result of continued
drilling activity for its own account, and the acquisition by the Company
of oil and gas lease interests in proven properties. The Company purchased
proven producing properties from Viking Resources Corporation in May 1998
for $1.75 million. Proven properties increased $3,797,676 to $8,344,509 or
83.5% from the amount reported at December 31, 1997. Included in this
amount are intangible drilling costs of approximately $2,808,000 associated
with Company drilled wells. The Company increased capital expenditures for
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
(CONTINUED)
drilling in well related equipment from December 31, 1997 to June 30, 1998
in the amount of $1,740,675.
Total liabilities increased $3,779,992 or 174.0% from December 31,
1997 to June 30, 1998, due primarily to an increase in long-term debt of
$4,063,043 or 515.0%. See "LIQUIDITY & CAPITAL RESOURCES" section for
further discussion. This increase in long-term debt was used primarily to
fund the drilling development and enhancement efforts on Company wells
described above. Current liabilities decreased $283,051 to $1,102,881 or
20.4% from December 31, 1997 to June 30, 1998 primarily due an decrease in
accounts payable and accrued expenses of $284,405 to $1,072,343 at June 30,
1998, a decrease of 21.0%.
RESULTS OF OPERATIONS
For the six months ended June 30, 1998, the Company had a net loss
after tax of $70,750, compared to net loss after tax of $167,971 for the
six months ended June 30, 1997. This reduction of loss is a result of
the transition from turnkey driller operator to drilling for the account
of the Company, resulting in increased revenue from oil and gas sales from
$225,226 to $1,220,621 for the same period.
For the three months ended June 30, 1998, the Company had net
income after tax of $48,962, compared to net loss after tax of $423,638
for the same period in 1997. This was again due primarily to an increase
in oil and gas revenues.
Total net revenues increased $618,756 or 55.2% due primarily to an
increase in oil and gas, and other revenue, and after an offsetting
decrease in turnkey revenue.
For the six months ended June 30, 1998, net turnkey revenue decreased
$558,137 or 93.1% as compared to the amounts reported for the six months
ended June 30, 1997. Net turnkey revenue is drilling profit recognized
upon the drilling to total depth of wells in Affiliated Drilling
Partnerships. The Company completed the required drilling and recognized
the related revenue for the 1997-A Affiliated Drilling Partnership by
December 31, 1997. The Company drilled to total depth nine gross wells
attributable to Affiliated Drilling Partnerships for which turnkey revenues
were recognized in the first two quarters of 1997 (seven wells in the first
quarter and two wells in the second quarter). For the first two quarters
of 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 eight gross wells for the six months ending June 30,
1998.
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
(CONTINUED)
The decrease in turnkey drilling in the second quarter of 1998
resulted in a decrease in net turnkey drilling revenue of $267,077 for the
three months ended June 30, 1998, a decrease of 202.7% less than that
reported for the three months ended June 30, 1997.
Oil and gas revenue increased $995,395 to $1,220,621 for the six
months ended June 30, 1998, an increase of 442.0% over that reported as of
June 30, 1997. This increase is consistent with the Company's changing
focus to drilling wells for its own account, and the Company anticipates
this trend to continue to a degree. The increase in oil and gas revenue
is consistent with the higher number of wells drilled for the Company's own
account resulting in increased production and revenues.
Oil and gas revenue increased $439,124 for the three months ended
June 30, 1998, an increase of 326.7% over that reported for the same period
in 1997. This increase is consistent with the higher number of Company
wells.
The increase in other revenue for the six month ended June 30, 1998 is
due primarily to the gross operating commission revenue of approximately
$240,000 earned by Equity Financial Corporation. The Company acquired Equity
Financial Corporation, an affiliate of the Company, in May of 1997 and thus
reported one month of income for the three months ended June 30, 1997. Other
income increased $81,008 for the three months ended June 30, 1998, an increase
of 100.1% over that reported for the same period in 1997 since a full three
months of income was reported. The Company expects Equity Financial
Corporation to continue to be a profitable segment of the Company's operation.
See Part II for discussion of Equity Financial Corporation.
Management fees for the six months ended June 30, 1998, decreased
$52,773 to $104,403, a decrease of 33.6% over that reported as of June 30,
1997. This trend is expected to continue given the proposed Restructuring
Plan discussed above.
Total operating expenses increased $389,313 or 27.7% for the six-month
period ending June 30, 1998 over the six-month period ending June 30, 1997.
This increase is due primarily to an increase in production expenses of
$198,160 or 163.6%, an increase in exploration costs of $49,885 or 114.0%,
and an increase in depreciation, depletion and amortization expense of
$196,652 or 76.4%. These increases are due to the increase in Company
owned and operated wells as discussed above.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
(CONTINUED)
General and administrative (G&A) expenses decreased $86,450 to
$851,661 or 9.2% for the six months ended June 30, 1998. This net decrease
is 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 $223,600 into the G&A
costs of the Company. Since Equity Financial Corporation was acquired in
May 1997, only one month of Equity Financial Corporation's G&A costs were
included in the reported six month period ending June 30, 1997. G&A
expenses for the three months ended June 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 $41,186 for the
six-month period ending June 30, 1997 to a net expense of $47,536 for the
six-month period ending June 30, 1998. The change is primarily a result of
an increase in program reimbursements of $70,853 or 299.3%. Other income and
expense changed from a net income of $16,124 for the three months ended June
30, 1997 to a net expense of $35,811 for the three months ended June 30, 1998.
The change is primarily a result of an increase in program reimbursements of
$37,156 or 250.6%. This cost fluctuates based on production of partnership
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 used $50,638 and $1,746,958 of net cash flow from
operating activities for the six months ended June 30, 1998 and 1997,
respectively. Cash was absorbed by a loss of $70,750 and a loss of
$167,971 for the six-month period ending June 30, 1998 and 1997,
respectively. Cash was absorbed by a decrease in drilling advances of
$1,281,404 for the six-month period ending June 30, 1997. Cash was used by
a decrease in accounts payable and accrued expenses of $284,405 and
$342,409 for the six-month period ending June 30, 1998 and 1997,
respectively. Cash was provided for the six months ending June 30, 1998
and 1997 by a decrease in accounts receivable. 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 $454,085 and $257,433. The increase in
DDA is a direct result of increased drilling and gas operations.
For the six month period ending June 30, 1998, cash flows used for
investing activities increased from $2,169,273 for the six month period
ending June 30, 1997 to $5,569,704. The primary investment activities for
the six-month period ending June 30, 1998 were purchases of proven
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
(CONTINUED)
properties of $3,797,677, purchases of wells and related equipment of
$1,749,048, purchases of other property and equipment of $29,886 and
contributions to Affiliated Drilling Partnerships of $33,510. The only
cash flow from investing activities for the six month period ending June
30, 1998 were distributions from Affiliated Drilling Partnerships of
$40,417. The more significant uses of cash flows for investing activities
for the six month period ending June 30, 1997 were purchases of proven
properties of $1,323,085, purchases of wells and related equipment of
$582,935, purchases of other property and equipment of $94,513 and
contributions to Affiliated Drilling Partnerships of $231,215. The only
significant cash flow from investing activities for the six month period
ending June 30, 1997 were distributions from Affiliated Drilling
Partnerships of $53,927.
Cash flows from financing activities decreased $2,431,348 or 37.6% to
cash provided in financing activities of $4,041,002. The primary cause of
the decrease for the six-month period ending June 30, 1998 was the net
proceeds from the sale of Common Stock in the amount of $6,551,765 for the
six-month period ending June 30, 1997. The other significant uses of cash
flows from financing activities for the six-month period ending June 30,
1997 were the payments on long-term debt of $285,614. The significant
source of financing activities in the second quarter of 1998 was from the
proceeds from the issuance of long-term debt. The majority of the funds
were used for the Company's continued development of its Beaver Lease and
Churchtown Lease area, enhancement efforts and development of the Simmons
Field, and the recent purchase of oil and gas wells and associated leases
and equipment from Viking Resources Corporation.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of funds for the six months ended June 30, 1998 has
been from the issuance of Common Stock in two offerings in 1997 raising
approximately $11,200,000, net of costs and the Company's Bank One credit
facility. The Company increased its long-term debt by $4,063,043 by drawing
on its credit facility with Bank One. The proceeds from these sources have
been spent on Company operations, including developing the Beaver Lease and
the Simmons Field, the Viking Resource acquisition and other developmental
drilling activities located generally in the southeastern Ohio and West
Virginia areas.
To a lesser degree the Company also had funds available from oil
and gas revenues and the collection of the 1997-A Affiliated Drilling
Partnership receivable. The Company expects oil and gas revenues to
increase and may or may not sponsor more Affiliated Drilling Partnerships
-16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
(CONTINUED)
in 1998. There can be no assurance that the Company will be successful in
sponsoring Affiliated Drilling Partnerships.
The Company intends to fund its budgeted capital expenditures through
the end of 1998 primarily from cash flow from operations and borrowings
under the Bank One credit facility, the credit limit of which is currently
$7.1 million. The Company may or may not pursue additional capital from
the issuance of Company securities.
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 fall of 1998. While
the Company believes that cash flow from operations and borrowings under
the Bank One credit facility should allow the Company to implement its
present business strategy through 1998, additional financing and/or the
issuance of Company securities may be required in the future to fund the
Company's growth, development and exploration program and continued
technological enhancement. In the event sufficient capital resources are
not available to the Company, its exploration and other activities may be
curtailed.
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.
EFFECTS OF INFLATION AND CHANGES IN PRICE
The Company's results of operations and cash flows are affected by
changing natural gas oil and prices. If the price of natural gas and oil
increases (decreases), there could be a corresponding increase (decrease)
in the operating cost that the Company is required to bear for operations,
as well as an increase (decrease) in revenues. Recent rates of inflation
have had a minimal effect on the Company.
ENVIRONMENTAL AND OTHER REGULATORY MATTERS
The Company's business is subject to certain federal, state and local
laws and regulations relating to the exploration for, and the development,
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
(CONTINUED)
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 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.
COMPUTER MODIFICATIONS FOR YEAR 2000
The Company 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. To date no material
expenditures had been made by the Company directly with respect to the Year
2000 issue. The Company estimates that approximately $10,000 will be
incurred in 1998 and 1999 on Year 2000 issues. These costs have consisted
and are expected to consist primarily of personnel expense for staff
dedicated to the effort and professional fees paid to third party providers
of remedial services.
The Company has a plan to address the Year 2000 issue and will
continue to assess the impact of the Year 2000 issue on the remainder of
its computer-based systems and applications throughout 1998.
If the Company's plans are not successful, there could be a
significant disruption of the Company's ability to bill customers and pay
suppliers, as well as a possible slowdown of certain computer-dependent
processes. Based on currently available information, management does not
presently anticipate that the costs to address the Year 2000 issues or
potential operating disruptions will have an adverse impact on the
Company's financial conditions, results of operations or liquidity.
In addition to reviewing its own computer operating systems and
applications, the Company plans to initiate formal communications with its
significant suppliers and large customers to determine the extent to which
the Company's interface systems are vulnerable to those third parties'
failure to resolve their own Year 2000 issues. There is no assurance that
-18-
the systems of other companies on which the Company's systems rely will be
converted in a timely manner. 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.
The costs of the project 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 similar uncertainties.
-19-
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On June 17, 1998, the Company's shareholders approved an amendment to
the Company's Charter increasing the number of authorized shares of Common
Stock, no par value, from 10,000,000 to 25,000,000 shares. In addition,
the Company's shareholders approved an amendment to the Company's Charter
authorizing the Board of Directors to issue up to 5,000,000 shares of
Preferred Stock.
All of the additional shares resulting from the increase in the
Company's authorized Common Stock are of the same class, with the same
dividend, voting and liquidation rights, as the shares of Common Stock
previously outstanding.
The Board of Directors is authorized to issue shares of Preferred
Stock, without additional shareholder authorization, with such relative
rights and preferences as may be established by resolution of the Board of
Directors. The terms of the shares of Preferred Stock to be authorized,
including dividend or interests rates, conversion prices, voting rights,
redemption prices, maturity dates and similar matters will be determined by
the Board of Directors.
Shareholders have no preemptive rights to acquire shares issued by the
Company under its Charter, and shareholders did not acquire any such rights
with respect to such additional shares under the amendment to the Company's
Charter.
On June 17, 1998, the Board of Directors of the Company authorized the
issuance of 2,500 options to purchase Common Stock of the Company to each
of 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 $9.25 per share, representing
the fair market value of the Common Stock of the Company as of the date
of grant of the options.
In July of 1998, certificates for 10,114 unregistered shares of Common
Stock were issued to nine individuals in connection with the Company's
acquisition of certain working interests and overriding royalty 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.
-20-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
The annual meeting of shareholders of the Company was held on June 17,
1998. The purpose of the meeting was to elect directors, to adopt a
proposal to increase the Company's authorized Common Stock, to adopt a
class of Preferred Stock, to adopt certain provisions in the Company's
Charter concerning the Company's Board of Directors, to adopt an
indemnification provision in the Company's Charter, to adopt factors in the
Company's Charter to consider in business combinations, to adopt the Stock
Option and Restricted Stock Plan of 1998, to adopt a form of
Indemnification Agreement for the Company's officers and directors and to
transact any other business that properly came before the meeting. The
total shares of Common Stock outstanding as of the record date was
3,773,241.
The name of each director elected (along with the number of votes cast
for or authority withheld) is as follows:
VOTES CAST
ELECTION OF DIRECTORS FOR WITHHELD
- --------------------- --- --------
Richard S. Cooper 2,696,112 54,300
Douglas A. Yoakley 2,706,112 44,300
Robert L. Remine 2,706,012 44,400
Kim A. Walbe 2,706,112 44,300
Charles P. Torrey 2,706,112 44,300
PROPOSAL FOR AGAINST ABSTAIN
- -------- --- ------- -------
Proposal to increase the number of
authorized shares of Common Stock
from 10 million to 25 million shares: 2,647,817 90,795 11,800
Proposal to adopt a class of Preferred
Stock in the Company's charter: 2,052,890 148,375 13,950
Proposal to adopt certain provisions in
the Company's charter concerning the
Company's Board of Directors: 2,109,840 107,885 10,800
Proposal to adopt an indemnification
provision in the Company's charter: 2,607,427 120,635 22,350
-21-
Proposal to adopt factors in the s
Company's charter to consider in
business combinations: 2,090,480 106,085 18,650
Proposal to adopt the Stock Option
and Restricted Stock Plan of 1998: 2,086,250 115,795 13,170
Proposal to adopt a form of
Indemnification Agreement for the
Company's officers and directors: 2,602,417 119,365 15,320
ITEM 5. OTHER INFORMATION.
(A) CERTAIN COMPANY TRANSACTIONS.
On May 18, 1998, the Board of Directors of the Company authorized the
Company to acquire from certain individuals ("Interest Owners") the working
interest and overriding royalty interest (the "Well Interests") in certain
natural gas wells operated by the Company in southeastern Ohio (the
"Wells.") Pursuant to this transaction, Interest Owners were given the
option to elect to receive cash consideration (the "Cash Option") or shares
of unregistered Common Stock of the Company (the "Stock Option") in
consideration for sale of their Well Interests. Pursuant to the Cash
Option, Interest Owners received 36 times the trailing 12-month average of
the distributions associated with their respective Well Interests.
Pursuant to the Stock Option, Interest Owners received Company Common Stock
valued at 1.75 times the Cash Option price associated with their respective
Well Interests.
The number of shares of Company Common Stock issued pursuant to the
Stock Option was equal to the Cash Option price multiplied by 1.75 and
divided by $10.50, the closing price of the Company's Common Stock as listed
and shown on the Nasdaq SmallCap Stock Market as of the offer termination
date of April 15, 1998. Pursuant to the Stock Option, the Company issued a
total of 10,114 shares of Common Stock to nine individuals in consideration
for the purchase of their Well Interests. Pursuant to the Cash Option, the
Company paid six Interest Owners a total of $121,543 in consideration for
their Well Interests. Of this amount, approximately $109,250 was paid to
certain officers and directors of the Company in consideration for their
Well Interests. Officers and directors of the Company were not permitted to
elect the Stock Option.
In June of 1998, the Company acquired oil and gas wells and associated
leases and equipment from Viking Resources Corporation for $1.75 million.
The purchase included 56 wells on leases located in Ohio and West Virginia,
wellhead equipment, surface equipment, gathering pipeline system and a
compression facility. The gas wells are currently producing an average of
-22-
900 MMcfed. The Company has begun remediation and increasing production of
existing wells. This property is another example of what the Company
targets as an acquisition candidate, I.E. a property with remediation and
enhanced production potential and unexploited uphole reserves. Neither the
Company, nor any of its officers, directors or associates or affiliates
have any material relationship with the seller, Viking Resources, Inc. The
Company used working capital and proceeds of its credit facility with Bank
One-Texas, N.A. to fund the acquisition.
In May of 1998, the Company acquired an approximately 24,000 acre
lease in Raleigh County, West Virginia to develop coalbed methane gas.
Since May, the Company has leased approximately 8,000 additional acres for
coalbed methane gas development in this area. These coalbed methane
leases were acquired at an initial aggregate cost of approximately
$165,000. The leases contain certain drilling commitments. The Company
expects that the cost of development of these leases will be funded from
Company working capital and its existing credit facilities. These coalbed
methane leases are proximate to coalbed methane properties in southwestern
Virginia currently being exploited by other companies. However, the leases
have no existing coalbed methane production and the coalbed methane
reserves underlying the leases are unproven. Although the Company has not
previously developed or produced coalbed methane gas, its senior engineer
possesses significant experience and expertise in coalbed methane drilling
and well completion. The Company plans to commence development of this
coalbed methane prospect in the fall of 1998.
(B) COMPANY'S ACTIVITIES WITH AFFILIATED PARTNERSHIPS.
Prior to 1997, substantially all of the Company's wells were drilled
in joint ventures with affiliated Tennessee limited partnerships managed by
the Company (the "Affiliated Drilling Partnerships") which were syndicated,
and over $40,000,000 in investor capital raised, primarily by the Company's
affiliate, Equity Financial Corporation ("EFC"), a member of the National
Association of Securities Dealers, Inc. ("NASD"). The Affiliated
Drilling Partnerships participated primarily in development drilling in
Washington, Athens and Meigs Counties, Ohio. The Company has drilled over
230 wells with Affiliated Drilling Partnerships, 191 of which the Company
operated as of December 31, 1997. In 1998, the Company has sponsored one
Affiliated Drilling Partnership which, as of June 30, 1998, has been
capitalized with approximately $120,000 in investor capital.
The Company operates an approximately 100-mile gas gathering system
servicing its primary areas of operation in southeastern Ohio. A portion
of the gas gathering system (approximately 92 miles of pipeline) is owned
by a Tennessee limited partnership (the "Pipeline Operating Partnership")
which is comprised of the Company, as managing general partner owning a
28.74% general partner interest, and a single limited partner which is
another Tennessee limited partnership (the "Pipeline Income Partnership")
-23-
for which the Company also serves as managing general partner. The
Pipeline Income Partnership was syndicated by EFC and capitalized with
investor funds raised in a private offering conducted in 1992 and 1993.
The Affiliated Drilling Partnerships have engaged in primarily
development drilling in southeastern Ohio. All of the Affiliated Drilling
Partnerships were structured in a similar fashion. The Affiliated Drilling
Partnerships typically enter into a joint venture with the Company to drill
and develop the wells (the "ADP Wells.") The joint venture is evidenced by
a joint drilling and operating agreement ("JDOA") between the Company, as
participant, project manager and driller-operator, and the Affiliated
Drilling Partnership, as participant. Pursuant to the JDOA, drillsites are
selected by the Company from its lease inventory. The Company is obligated
to contribute drillsites to the joint ventures evidenced by the JDOA for
each Affiliated Drillings Partnership on a drillsite-by-drillsite basis.
No Affiliated Drilling Partnership has any right to develop any acreage
"proved up" by the drilling of a well on its drillsite. The Company, as
driller-operator, has discretion under the JDOA to select the target
geological formation and depth of the ADP Wells to be drilled, and to make
all operational decisions regarding drilling, completion (if warranted) or
plugging and abandonment of the ADP Wells.
ADP Wells are drilled on a "functional allocation" basis. Pursuant to
this arrangement, the Affiliated Drilling Partnership contributes to the
joint venture drilling funds for intangible drilling costs in exchange for
direct ownership of a working interest in the ADP Wells. The Company, on
the other hand, contributes the drillsite, tangible well equipment, excess
intangible drilling funds in the event of cost overruns and services in
exchange for direct ownership of a working interest in the ADP Wells. The
allocation of the percentage of the working interest owned between the
Affiliated Drilling Partnership and the Company varies somewhat from
program to program, but is generally based on the Company's estimate of the
relative value contributed. The Company's direct ownership of the working
interest of the ADP Well ranges in various Affiliate Drilling Partnerships
from approximately 7.0% to 20.0%. Under the JDOA, the Company, in its
capacity as driller-operator under the JDOA, agrees to drill and complete
(if warranted) or plug and abandon the ADP Wells on a "turnkey" basis for a
"fixed price" or"adjustable fixed price" (based on depth of the well and
number of zones stimulated). To the extent actual well development costs
exceed the "turnkey price" or "adjustable turnkey price," the Company may
experience a loss on drilling operations. However, to the extent actual
drilling costs are less than the "turnkey price" or "adjustable turnkey
price" received, the Company may realize a profit. Typically under a JDOA,
the drilling funds are pre-paid to the Company, in its capacity as driller-
operator, to allow the Company the opportunity to inventory drill sites,
maintain a field office and line up drilling rigs, related equipment and
crews.
-24-
After ADP Wells are drilled and completed in its primary field of
operations in southeastern Ohio, a flow line is constructed and the well is
hooked up to the Company's gas gathering system so that natural gas
produced from the wells can be transported to market. The Company is
responsible for managing all production operations concerning the wells and
the gas gathering system. Such operations on the wells include equipment
repairs and maintenance, well swabbing, production chart reading,
accounting and administration. For performing such services, the Company
generally receives a monthly, per-producing-well "tending" fee and is
reimbursed, generally at cost, for equipment and generally charges standard
rates for services provided to the wells. With respect to the gas
gathering system, the Company maintains and repairs the equipment, monitors
and reads gas meters, negotiates gas sales contracts and otherwise manages
the system. For performing these services, the Company currently receives
from the Pipeline Operating Partnership a monthly fee of $2,500 and is
reimbursed for materials, services and administrative overhead contributed
toward managing the system. The Company, as the managing general partner
in the Pipeline Operating Partnership, maintains a 28.74% interest in such
partnership entitling it to 28.74% of the net revenues of the Pipeline
Operating Partnership.
After an ADP Well has been completed and produced, and when a well is
no longer capable of production in commercial quantities, the Company, as
operator under the JDOA, is responsible for plugging the well and restoring
the drillsite. Costs of plugging and restoration are shared by the
participants under a JDOA according to the particular agreement. The
Company's ownership interest in the wells results from, among other things,
its furnishing of the tangible well equipment. Accordingly, the Company is
responsible, under the JDOA, for paying reclamation costs allocable to such
tangible well equipment and is entitled to reclaim any salvageable tangible
well equipment.
(C) ACTIVITIES OF EQUITY FINANCIAL CORPORATION.
EFC, a wholly-owned subsidiary of the Company, is a securities
brokerage firm and member of the NASD. It is engaged primarily in the
business of providing investment services and products to its clients.
Charles P. Torrey, Jr., Chief Executive Officer of the Company, and Robert
L. Remine, Chief Financial Officer of the Company, are each licensed agents
and principals of EFC. They founded EFC in 1985. EFC has five additional
licensed sales agents. EFC maintains offices adjacent to the Company
offices in Knoxville, Tennessee.
At times, EFC serves as placement agent for the private placement of
the Company's securities, including, Common Stock, Preferred Stock and
partnership interests in Affiliated Drilling Partnerships. For these
services, EFC receives placement fees and sales commissions. These fees
-25-
and commissions are consistent with NASD requirements and commensurate with
what would be charged by unrelated firms performing similar services.
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
4.1 Specimen of Common Stock Certificate<F2>
4.2 Specimen of Redeemable Series A Common Stock Purchase
Warrant Certificate<F2>
4.3 Specimen of Underwriters' Warrant Certificate<F2>
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<F2>
10.2 Energy Search Natural Gas 1995-A L.P. Joint Drilling and
Operating Agreement, dated December 31, 1995<F2>
10.3 Energy Search Natural Gas 1996 L.P.-Limited Partnership
Agreement, dated June 10, 1996<F2>
10.4 Energy Search Natural Gas 1996 L.P.-Joint Drilling and
Operating Agreement, dated June 10, 1996<F2>
10.5 ESI Pipeline Operating Partnership-Limited Partnership
Agreement, dated January 7, 1993<F2>
10.6 Energy Search Natural Gas Pipeline Income Partnership-
Limited Partnership Agreement, dated January 7, 1993<F2>
10.7 Gas Servicing Agreement between the Registrant and ESI
Pipeline Operating L.P., dated January 5, 1993<F2>
10.8 Selling Agreement-Class B Convertible Preferred Shares
between Registrant and Equity Financial Corporation, dated
March 4, 1996<F2>
10.9 Selling Agreement-Class A and Class B Preferred Shares
between Registrant and Equity Financial Corporation, dated
March 4, 1996<F2>
10.10 Selling Agreement-Variable Rate Subordinated Debentures
between Registrant and Equity Financial Corporation, dated
September 19, 1994<F2>
10.11 Aircraft Lease between Charles P. Torrey, Jr. and the
Registrant dated February 1, 1995<F2>
10.12 Beaver Coal Company Lease between Beaver Coal Company
Limited and the Registrant, dated September 15, 1996<F2>
-26-
10.13 Employment Agreements with officers and key employees of the
Registrant
(a) John M. Johnston<F2><F*>
(b) Robert L. Remine<F2><F*>
(c) Charles P. Torrey, Jr.<F2><F*>
(d) Richard S. Cooper<F2><F*>
(e) Michael W. Mooney<F3><F*>
10.14 Promissory Notes of Executive Officers in Favor of
Registrant
(a) Charles P. Torrey, Jr.<F2>
(b) Robert L. Remine<F2>
(c) Richard S. Cooper<F2>
10.15 Stock Option Plan<F2><F*>
10.16 Outside Directors' Stock Option Plan<F2><F*>
10.17 Form of Lock-Up Agreement<F2>
10.18 Stock Option and Restricted Stock Plan of 1998 <F1><F*>
10.19 Form of Indemnification Agreement<F1><F*>
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 Registration Statement on Form
SB-2 (Registration No. 333-12755) filed with the Securities and
Exchange Commission, and here incorporated by reference.
<F3> Previously filed with the Company's Form 10-K Annual Report for the
fiscal year end March 31, 1998, and here incorporated by reference.
(b) REPORTS ON FORM 8-K.
On June 30, 1998, the Company filed a Report on Form 8-K with the
Securities and Exchange Commission announcing that the Board of Directors
of the Company had authorized the Company to purchase, from time to time in
the discretion of the officers of the Company, up to 100,000 shares of the
Company's Common Stock in accordance with Rule 10b-18 of the Securities
Exchange Act of 1934. The Form 8-K contained as an exhibit a press release
announcing the stock repurchase plan. The Form 8-K contained no financial
statements.
-27-
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
Date: August 14, 1998 By /s/ Richard S. Cooper
Richard S. Cooper, President
-28-
EXHIBIT INDEX
EXHIBIT NO. DOCUMENT
- ----------- --------
3.1 Fourth Amended and Restated Charter of the Registrant <F1>
3.2 Bylaws of the Registrant
4.1 Specimen of Common Stock Certificate<F2>
4.2 Specimen of Redeemable Series A Common Stock Purchase
Warrant Certificate<F2>
4.3 Specimen of Underwriters' Warrant Certificate<F2>
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<F2>
10.2 Energy Search Natural Gas 1995-A L.P. Joint Drilling and
Operating Agreement, dated December 31, 1995<F2>
10.3 Energy Search Natural Gas 1996 L.P.-Limited Partnership
Agreement, dated June 10, 1996<F2>
10.4 Energy Search Natural Gas 1996 L.P.-Joint Drilling and
Operating Agreement, dated June 10, 1996<F2>
10.5 ESI Pipeline Operating Partnership-Limited Partnership
Agreement, dated January 7, 1993<F2>
10.6 Energy Search Natural Gas Pipeline Income Partnership-
Limited Partnership Agreement, dated January 7, 1993<F2>
10.7 Gas Servicing Agreement between the Registrant and ESI
Pipeline Operating L.P., dated January 5, 1993<F2>
10.8 Selling Agreement-Class B Convertible Preferred Shares
between Registrant and Equity Financial Corporation, dated
March 4, 1996<F2>
10.9 Selling Agreement-Class A and Class B Preferred Shares
between Registrant and Equity Financial Corporation, dated
March 4, 1996<F2>
10.10 Selling Agreement-Variable Rate Subordinated Debentures
between Registrant and Equity Financial Corporation, dated
September 19, 1994<F2>
10.11 Aircraft Lease between Charles P. Torrey, Jr. and the
Registrant dated February 1, 1995<F2>
10.12 Beaver Coal Company Lease between Beaver Coal Company
Limited and the Registrant, dated September 15, 1996<F2>
10.13 Employment Agreements with officers and key employees of the
Registrant
(a) John M. Johnston<F2><F*>
(b) Robert L. Remine<F2><F*>
(c) Charles P. Torrey, Jr.<F2><F*>
(d) Richard S. Cooper<F2><F*>
(e) Michael W. Mooney<F3><F*>
10.14 Promissory Notes of Executive Officers in Favor of
Registrant
(a) Charles P. Torrey, Jr.<F2>
(b) Robert L. Remine<F2>
(c) Richard S. Cooper<F2>
10.15 Stock Option Plan<F2><F*>
10.16 Outside Directors' Stock Option Plan<F2><F*>
10.17 Form of Lock-Up Agreement<F2>
10.18 Stock Option and Restricted Stock Plan of 1998 <F1><F*>
10.19 Form of Indemnification Agreement<F1><F*>
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 Registration Statement on Form
SB-2 (Registration No. 333-12755) filed with the Securities and
Exchange Commission, and here incorporated by reference.
<F3> Previously filed with the Company's Form 10-K Annual Report for the
fiscal year end March 31, 1998, and here incorporated by reference.
-2-