UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number: 1-1525
GLADSTONE ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 91-0234563
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3500 Oak Lawn Ave
Suite 590
Dallas, Texas 75219
(Address of principal executive offices) (Zip Code)
(214) 528-9620
(Registrant's telephone number, including area code)
GLADSTONE RESOURCES, INC.
(Former Name)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90
days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of
the issuer's classes of common stock at June 30, 1999.
Class: Common Stock, $.001 par value per share
Outstanding at June 30, 1999: 4,244,060
GLADSTONE ENERGY, INC.
INDEX
Page
Part 1 Financial Information Number
- ------------------------------- -------
Item 1. Financial Statements 2
Balance Sheets -
June 30, 1999 and December 31, 1999 3
Statements of Operations -
For the Three Months and Six Months Ended
June 30, 1999 and 1998 4
Statements of Stockholders'
Equity For the Six Months Ended June 30, 1999
and the Year Ended December 31, 1998 5
Statements of Cash Flow -
For the Six Months Ended June 30, 1999 and 1998 6
Notes to Financial
Statements(unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II. Other Information:
- ----------------------------
Item 4. Submission of Matters to a Vote of Security
Holders 15
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures
-1-
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
-2-
GLADSTONE ENERGY, INC. BALANCE SHEETS
At June 30, 1999 and December 31, 1998
ASSETS
June 30, December 31,
1999 1998
--------- ----------
Current assets:
Cash $ 840,322 $ 23,372
Accounts receivable 42,732 6,129
--------- --------
Total current assets 850,017 29,501
---------- ---------
Property and equipment:
Gas and oil properties (successful
efforts method) 914,537 1,754,651
Unproved oil and gas properties 116,312 56,584
Field equipment 17,128 17,128
---------- ---------
1,047,977 1,828,363
Less accumulated depletion and
depreciation (426,501) (280,631)
---------- ---------
Total property and equipment 621,476 547,732
---------- --------
Other assets:
Cost on excess of amount assigned to
net assets of subsidiary at date
of acquisition 337,000 337,000
Less accumulated amortization (297,607) (293,783)
---------- ---------
39,393 43,217
---------- ----------
$1,543,923 $ 620,450
========= ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 538,220 $ 21,729
Working interest owner's drilling
prepayments 467,154 --
---------- ---------
Total current liabilities 1,005,374 21,729
---------- ---------
Deferred income taxes -- --
Stockholders' equity:
Common stock 150,000 150,000
Capital in excess of stated value 1,230,134 1,230,134
Retained earnings (deficit) (841,585) (781,413)
---------- ---------
538,549 598,721
---------- ---------
$1,543,923 $ 620,450
========== =========
See accompanying notes
Page 3
GLADSTONE ENERGY, INC. STATEMENTS OF OPERATIONS
For the three months and six months ended June 30, 1999 and 1998
For the three months For the six months
ended June 30, ended June 30,
----------------------- ------------------------
1999 1998 1999 1998
---------- --------- --------- ----------
Sales:
Gas and oil $ 52,121 $ 59,765 $ 60,270 $ 144,292
Cost of sales: --------- -------- --------- ---------
Production taxes 5,626 2,668 6,250 6,312
Well operating expense 10,585 26,385 14,273 60,330
--------- -------- --------- ---------
16,211 29,053 20,523 66,642
--------- -------- --------- ---------
Gross profit on sales 35,910 30,172 39,737 77,650
--------- -------- --------- ---------
Expenses:
Dry hole and abandonment loss
(recovery) (1,685) 179,629 (5,032) 193,255
Depletion 13,292 22,187 19,430 48,331
Depreciation and amortization 1,972 2,220 3,824 5,867
General and administrative 18,780 2,445 26,499 5,179
Taxes 108 43 108 112
Legal, auditing and accounting 41,975 5,860 60,167 10,953
--------- --------- --------- ---------
74,442 212,384 104,996 263,697
--------- --------- --------- ---------
Net income (loss) from operations (38,532) (181,672) (65,259) (186,047)
Other income:
Interest income 4,549 1,434 5,087 2,870
Net unrealized gain (losses)
on marketable securities -- (32,500) -- (59,384)
--------- --------- --------- ---------
Income (loss) before taxes (33,983) (212,738) (60,172) (242,561)
Income taxes -- (3,367) -- (1,300)
--------- --------- --------- ---------
NET INCOME (LOSS) $ (33,983) $(209,371) $ (60,172) $(241,261)
========= ========= ========= =========
Earnings per share:
Basic earnings per share $ (0.01) $ (0.05) $ (0.01) $ (0.06)
========= ========= ======== =========
Diluted earnings per share $ (0.01) $ (0.05) $ (0.01) $ (0.06)
========== ======== ======== =========
See accompanying notes
Page 4
GLADSTONE ENERGY, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the six months ended June 30, 1999
and the year ended December 31, 1998
Capital in
Excess of Retained
Stated Stated Earnings
Value (A) Value (Deficit) Total
--------- ---------- ---------- ------------
Balance at December 31, 1997 $ 150,000 $1,230,134 $(295,146) $ 1,084,988
Net loss for the year 1998 -- -- (486,267) (486,267)
---------- ---------- --------- ------------
Balance at December 31, 1998 150,000 1,230,134 (781,413) 598,721
Net loss for the period -- -- (60,172) (60,172)
---------- ---------- --------- ------------
Balance at June 30, 1999 $ 150,000 $1,230,134 $(841,585) $ 538,549
---------- ---------- --------- -----------
(A) Common stock consisted of no par value shares only at December
31, 1997, December 31, 1998 and June 30, 1999. At June 30, 1999,
there were 6,000,000 shares authorized and 4,244,060 shares
issued and outstanding. The stated value at June 30, 1999 for
all outstanding shares is $150,000. All share numbers and the
common stock description are prior to the Company's 1 for 5 reverse
stock split effective August 10, 1999 and the reincorporation of the
Company in Delaware on August 13, 1999. See NOTE 13 - SUBSEQUENT EVENTS.
See accompanying notes
Page 5
GLADSTONE ENERGY, INC.
STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1999 and 1998
For the six months
ended June 30,
----------------------------
1999 1998
------------ -------------
Cash flows from operating activities:
Net earnings (loss) $ (60,172) $ (241,261)
Adjustments to reconcile net earning to net
cash provided by (to) operating activities:
Depreciation, depletion and amortization 23,254 54,198
Decrease in accounts receivable (36,603) 28,989
Marketable securities unrealized loss -- 59,384
Decrease in oil and gas properties -- 58,969
Increase (decrease) in accounts payable 516,491 10,884
Prepayments from working interest owners 467,154 --
Increase (decrease) in deferred taxes -- (1,300)
--------- -----------
Net cash from (to) operating activities 910,124 (30,137)
--------- -----------
Cash flows from (to) investing activities:
Sale of oil and gas properties 315,000 --
Investment in oil and gas properties (408,174) (30,572)
--------- -----------
Net cash (to) from investing activities (93,174) (30,572)
--------- -----------
Net increase in cash 816,950 (60,709)
--------- -----------
Cash at beginning of period 23,372 114,071
--------- -----------
Cash at end of period $ 840,322 $ 53,362
---------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ -- $ --
========== ===========
Federal income taxes $ -- $ --
========== ===========
See accompanying notes
Page 6
NOTES TO FINANCIAL STATEMENTS (Unaudited)
GLADSTONE ENERGY, INC.
June 30, 1999
NOTE 1 - ORGANIZATION
Gladstone Energy, Inc. (the "Company") (formerly known as
Gladstone Resources, Inc.) is a Delaware corporation whose
predecessor was incorporated in the State of Washington
on July 19, 1916. In March, 1973, the Company acquired 100%
ownership of Brooks NM, Inc., a Texas corporation (which
changed its name to NM Corporation). The Company merged NM
Corporation back into the Company on August 10, 1999. The
Company reincorporated as a Delaware corporation on August
13, 1999. The Company sells oil and gas in Texas and New
Mexico.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On an accrual basis, the Company uses the successful efforts
method of accounting. The method follows the premise that
an enterprise is to capitalize only those costs it incurs
that directly result in an asset has future benefits
measured in terms of future cash flows.
For purpose of consolidation all intercompany transactions
have been eliminated.
For purposes of the statements of cash flows, the Company
considers all short-term debt securities purchased with a
maturity of three months or less to be cash equivalents.
There were no cash equivalents at June 30, 1999, or December
31, 1998. There were no significant non-cash investing or
financing activities during the periods ended June 30, 1999
and December 31, 1998.
Depreciation, depletion and amortization are calculated
using the straight-line and unit of production method over
the estimated useful lives of the assets or production of
the estimated recoverable oil and gas reserves.
For income tax reporting, the Company uses accounting
methods that recognize depreciation sooner than for
financial statement reporting. As a result, the basis of
property and equipment for financial reporting exceeds its
tax basis by the cumulative amount that accelerated
depreciation exceeds straight-line depreciation. Also, for
tax purposes the Company deducts intangible drilling costs
and capitalizes them on the successful efforts accounting
method. Deferred income taxes had been recorded in prior
years for the excess deductions, which will be taxable in
future periods through reduced depreciation and cost
depletion deductions for tax purposes. Currently no
deferred tax and no tax benefits have been calculated since
the Company does not have the ability to generate taxable
income in excess of the net operating loss carryover.
Management uses estimates and assumptions in preparing
financial statements in accordance with generally accepted
accounting principles. Those estimates and assumptions
affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could vary
from the estimates that were used.
Page 7
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - MARKETABLE (TRADING) SECURITIES
Cost and fair market value of marketable securities at June
30, 1999, and December 31, 1998, are as follows:
Gross
Unrealized Fair
June 30, 1999 Cost Gain (Loss) Value
- ------------------ -------- ------------- ------
Trading Securities:
Equity (common)
securities $109,071 $ (109,071) $ --
December 31, 1998
- -------------------
Trading Securities:
Equity (common)
securities 109,071 (109,071) --
NOTE 4 - ACCOUNTS RECEIVABLE
Of the net revenue interest amount of $42,732 due from oil
and gas sales at July 10, 1999, $21,195 has been received
from the operators as of the date of this report. The sales
to the customers are on open accounts receivable, which are
unsecured.
NOTE 5 - PROPERTY AND EQUIPMENT
Gas and oil properties
- ----------------------
In March 1973, the Company acquired 100% of Brooks NM, Inc.
(NM Corporation), a Texas corporation, in exchange for
453,000 shares of common stock. On August 10, 1999, NM
Corporation was merged into the Company.
The Company owns a 28.71% net revenue interest in 5
producing gas wells in San Juan County, New Mexico. In
1994, the Company participated in a re-entry well drilled to
replace a shut-in well. The new well began production in
October 1994.
Currently, the Company has producing wells in Pecos County
in Texas and San Juan County in New Mexico. On January 19,
1999, the Company sold its oil and gas properties in
Schleicher and Kent Counties, Texas to EXCO Resources, Inc.,
a Texas corporation ("EXCO"). These properties included 66
gross productive wells (9.75 net productive wells) with
current net production of approximately 42.18 barrels of oil
and 126,000 cubic feet of natural gas per day, and 6 gross
(.75 net) non-producing wells. These properties constituted
approximately 90.418% of the gross productive wells (71.17%
net productive wells) and approximately 88.68% of the
barrels of oil and 59.38% of the cubic feet of natural gas
per day produced by all of the Company's oil and gas
properties.
The Company closed, on July 15, 1999, with an effective
date of May 1, 1999, an acquisition of 12.25% working
interest in the Right Hand Creek Field located in Beauregard
and Allen Parishes of Louisiana (collectively, the " Right Hand
Creek Properties"). The Right Hand Creek Properties include 6
gross productive wells (.735 net productive wells) with
current net production of approximately 55 barrels of oil and
no cubic feet of natural gas per day, 1 injection well, and
2 gross (.245 net) non producing wells that will require
recompletions and/or workovers. The Right Hand Creek Properties
include 725.3 gross (88.85 net) developed acres and 234.22 gross
(28.69 net) undeveloped acres. Based on independent
engineering estimates as of June 1, 1999, the Right Hand Creek Properties
are estimated to contain 956,097 gross (85,396 net) barrels
of oil and no gross or net million cubic feet of natural gas
or proved reserves.
Page 8
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - PROPERTY AND EQUIPMENT (CONTINUED)
A summary of changes in the Company's gas reserves (in
MCF's) is as follows (oil reserves have been included as
MCF's by multiplying barrels by 6). ALL RESERVE AMOUNTS
INCLUDING THE REVISIONS HAVE BEEN FURNISHED BY THE COMPANY
AND HAVE NOT BEEN VERIFIED BY ANY INDEPENDENT PETROLEUM
ENGINEERS. The Company believes there were no "proved
undeveloped reserves" at June 30, 1999.
Total for United States in MCF's
------------------------------
June 30 December 31
1999 1998
------------ ---------------
Beginning of period (Jan. 1) 1,160,243 1,293,559
Deduction for sale of leases (976,459) --
Purchase of reserves 512,376 --
Adjustment to reserve (1) -- (4,284)
Production (total to date) (17,089) (129,032)
------------- -------------
Balance at end of period 679,074 1,160,243
============= =============
(1) Based on reevaluation of estimated reserves by the
Company. The estimates were based on current production
levels of all properties.
NOTE 6 - FEDERAL AND STATE INCOME TAXES
A reconciliation of income tax expense (benefit) computed by
applying the U.S. federal tax rates to loss from continuing
operations before income taxes and extraordinary items and
recorded income tax expense (benefit) is as follows:
1998
-----------
Tax expense (benefit) at statutory rate $ (73,135)
Non-deductible items 34,158
Change in valuation allowance 37,677
-----------
Provision for income tax $ (1,300)
===========
The components of the Company's deferred
income taxes for 1998 are as follows: 1998
-----------
Amortization of asset cost $ (5,556)
Depreciation 11,323
Cost depletion (61,237)
Intangible development costs 29,540
Impairment of asset value 27,292
Net operating loss carryforward 43,150
Valuation allowance (44,512)
-----------
Total $ --
===========
Page 9
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Net operating loss deductions and credit carryforward
consists of the following:
From year Year
ended Expires Losses Credit
- ----------- --------- ------- -------
12-31-84 12-31-99 $ -- $ 384
12-31-94 12-31-09 100,759
12-31-97 12-31-12 57,877
12-31-98 12-31-13 129,028
--------- --------
$ 287,664 $ 384
========= ========
Utilization of losses will be limited due to change of
control which occurred in this period.
The Company has filed a consolidated tax return in prior
years.
At December 31, 1998, there was $289,609 of statutory
depletion carryforward to 1999.
At December 31, 1998, there was a Section 179 depreciation
carryforward of $55,000 to 1999.
NOTE 7 - COMMITMENT AND CONTINGENCY
At June 30, 1999, the Company had committed to acquire the
12.25% working interest in the Righthand Creek field in
Louisiana for a purchase price of $349,125, of which
$230,000 would be funded by a bank loan.
NOTE 8 - COMMON STOCK
Currently the Company's common stock is not traded on any
exchange or automated quotation system.
At June 30, 1999, there were no outstanding stock options
issued by the Company.
The following shares of common stock were outstanding for
the periods under report.
June 30 December 31
1999 1998
----------- ------------
Common stock, no par value 4,244,060 4,244,060
All share numbers and common stock description are prior to the
Company's 1 for 5 reverse stock split effective August 10, 1999
and the reincorporation of the Company in Delaware on August 13, 1999.
See NOTE 13 - SUBSEQUENT EVENTS.
Page 10
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - SIGNIFICANT ESTIMATE AND CONCENTRATIONS
Generally accepted accounting principals require disclosure
of certain significant estimates and current vulnerabilities
due to certain concentrations. Those matters included the
following:
1. Year 2000 Readiness Disclosure
Like all entities, the Company is exposed to risks
associated with the Year 2000 issue which affects
computer software and hardware; transactions with
customers, vendors and other entities; and equipment
dependent on microchips. The Company has begun but not
yet completed the process of identifying and
remediating potential Year 2000 problems. It is not
possible for any entity to guarantee the results of its
own remediation efforts or to accurately predict the
impact of the Year 2000 issue on third parties with
which the Company does business. If remediation
efforts of the Company or third parties with which it
does business are not successful, the Year 2000 problem
could have negative effects on the Company's financial
condition and results of the operations in the near
term.
2. Major Customers
In 1998, the Company had two customers which
represented 47% and 23% of their total revenue.
NOTE 10 - RENT EXPENSE
The Company is renting space from Humphrey Oil Corporation
at a rate of $500 per month and $75 per month for telephone
and fax service. The Company does not have a commitment on
a lease contract. Rent expense for 1998 was $6,606.
NOTE 11 - ACQUISITION OF PROPERTIES
The Company closed, on July 15, 1999, with an effective date
of May 1, 1999, an acquisition of 12.25% working interest in
the Right Hand Creek Field located in Beauregard and Allen Parishes
of Louisiana (collectively, the "Right Hand Creek Properties") from
Humphrey Oil Interests, L.P., a Texas limited partnership ("Humphrey")
(Charles B. Humphrey, a Director of the Company, is the limited
partner in Humphrey and President of Humphrey Oil Corporation, its
general partner) being 50% of the interest acquired by Humphrey from
EXCO Resources, Inc. effective May 1, 1999. The Right Hand Creek Properties
include 6 gross productive wells (.735 net productive wells) with current
net production of approximately 55 barrels of oil and 2 gross (.245 net)
non producing wells that will require recompletions and/or workovers. The
Right Hand Creek Properties include 725.3 gross (88.85 net) developed acres
and 234.22 gross (28.69 net) undeveloped acres. Based on independent
engineering estimates as of June 1, 1999, the Right Hand Creek Pproperties
are estimated to contain 956,097 gross (85,396 net) barrels of oil and no
gross or net million cubic feet of natural gas or proved reserves. The
aggregate purchase price paid for the Right Hand Creek Properties was
$349,125. The Company borrowed $230,000 of the purchase price under a new
credit facility and the balance of the purchase price was paid out of
working capital.
NOTE 12 - CREDIT AGREEMENT
On July 15, 1999, the Company entered into a credit facility (the "Credit
Facility") with Compass Bank (the "Lender"). The Credit Facility provides
for borrowings up to $15 million, subject to borrowing base limitations.
The Credit Facility consists of a regular revolver which at July 15, 1999,
had a borrowing base of $230,000. A portion of the borrowing base is available
for the issuance of letters of credit. All borrowings under the Credit Facility
are secured by a first lien deed of trust providing a security interest in
certain oil and natural gas working interests in the Right Hand Creek
Properties.
The Credit Facility provides that the unpaid principal balance of the
loans shall bear interest, payable as it accrues on the 1st day of each
month, commencing September 1, 1999, and at maturity (stated or by
acceleration), at a rate per annum equal to the lesser of the (i) Highest
Lawful Rate or (ii) 1% over the CBIR rate from time to time in effect, as
therein defined. The Credit Facility also permits the Company to repay
and reborrow amounts under the Credit Facility without any penalty, thereby,
allowing the Company the flexibility to utilize any available cash to reduce
its outstanding indebtedness and thus, its cost of borrowed funds.
Under the terms of the Credit Facility, the Company must not permit its
Current Ratio (as defined) of Current Assets (as defined) to its Current
Liabilities (as defined) to be less than 1.25 to 1.0 at any time. Furthermore,
the Company must not permit its Tangible Net Worth (as defined) to be less
at any time than $1.00 plus (i) 50% of positive Net Income (as defined) for all
quarterly periods ending subsequent to Decemeber 31,, 1998, plus (ii) 100% of
any Equity Infusions (as defined) to Debt Service (as defined) to be less than
1.25 to 1.0, determined as of the end of each fiscal quarter of the Company on
or after September 30, 1999.
A new Borrowing Base shall be determined as of each April 1 and October 1
during the Revolving Credit Period (the "semi-annual determinations"), or at
such other or additional times during the Revolving Credit Period as the Lender
in its reasonable discretion and at its sole cost may elect ("discretionary
determinations"), and the Lender shall determine a new Borrowing Base at such
additional times, but no more often than one (1) time in any 12-month period
without Lender's consent, as the Company may request ("Borrower requested
determinations").
The Borrowing Base shall be automatically reduced as of the 1st day of
each month commencing February 1, 2000, and continuing through the Revolving
Credit Period. The initial monthly reduction shall be in the amont of $5,000
per month. At the time of each new semi-annual determination, the Lender, in
its sole discretion may increase or decrease the amount of such monthly
reduction. If a Borrowing Base Deficiency (as defined) exists after giving
effect to a redetermination, then the Company must either (i) prepay the
principal of the outstanding Loans or (ii) cause to be created first and prior
perfected Liens (subject only to Permitted Liens, as defined) in favor of the
Lender, by instruments satisfactory to the Lender, onn producing oil and
gas properties, which in the opinion of the Lender would increase the
Borrowing Base by an amount sufficient, in combination with clause (i)
preceding, to eliminate such Borrowing Base deficiency.
The Credit Facility contains a number of convenant affecting the Company's
liquidity and capital resources, including restrictions a the Company's ability
(i) to incur indebtedness other than (a) under the Credit Facility or (b)
Permitted Indebtedness, as defined, or (ii) to pledge assets outside of the
Credit Facility, other than Permitted Liens, and with respect to the Company's
maintenance of a minimum net worth.
NOTE 13 - SUBSEQUENT EVENTS
At the Company's Annual Meeting of Stockholders, the stockholders of
the Company approved an amendment to the Company's Restated Articles of
Incorporation authorizing a 1 for 5 reverse stock split, which became
effective August 10, 1999. All share and per share numbers contained herein
are prior to and without giving effect to the reverse stock split.
On August 10, 1999, the Company changed its name to Gladstone Energy, Inc.
and merged its wholly owned subsidiary, NM Corporation, into the Company.
At the Company's 1999 Annual Meeting of Stockholders, the stockholders
of the Company also approved the merger of the Company into a wholly-owned
subsidiary of the Company organized under the laws of the State of Delaware
("Gladstone-Delaware") in order to effect the change of the Company's state of
incorporation from Washington to Delaware (the "Reincorporation"). In
connection with the Reincorporation, the stockholders adopted provisions of
the Certificate of Incorporation of Gladstone-Delaware which, among other
provisions, authorizes up to 10 million shares of common stock, par value
$.001 per share and up to 5 million shares of preferred stock, par value
$.001 per share. The Reincorporation occurred on August 13, 1999. In
the Reincorporation, each outstanding share of the Company's common stock,
no par value (after giving effect to the reverse stock split) was
automactically converted into one share of the common stock, par value
$.001 of Gladstone-Delaware.
Page 11
Item 2.
Gladstone Energy, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This quarterly report on form 10-Q of the Company
contains "forwarding-looking statements" within the meaning
of, Section 27a of the Securities Act of 1933, as amended
(the "Securities Act"), and section 21e of the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
Specifically, all statements other than statements of
historical facts included in this report regarding the
Company's financial position, business strategy and plans
and objectives of management of the Company for future
operations are forward- looking statements. These forward-
looking statements are based on the beliefs of the Company's
management as well as assumptions made by and information
currently available to the Company's management. When used
in this report, the words "anticipate," "believe,"
"estimate," "expect" and "intend" and words or phrases of
similar import, as they relate to the Company or Company
management, are intended to identify forward-looking
statements. Such statements reflect the current view of the
Company with respect to future events and are subject to
certain risks, uncertainties and assumptions related to
certain factors including, without limitation, price levels
for oil and natural gas, concentration of oil and natural
gas reserves and production, drilling risks, uncertainty of
oil and gas reserves, risks associated with the development
of additional revenues and with the acquisition of oil and
gas properties and other energy assets, operating hazards
and uninsured risks, general economic conditions,
governmental regulation, changes in industry practices,
marketing risks, one time events and other factors described
herein ("cautionary statements"). Although the Company
believes that the expectations reflected in such forward-
looking statements are reasonable, it can give no assurance
that such expectations will prove to have been correct.
Based upon changing conditions, should any one or more of
these risks or uncertainties materialize, or should any
underlying assumptions prove incorrect, actual results may
vary materially from those described herein as anticipated,
believed, estimated, expected or intended. The Company does
not intend to update these forward- looking statements. All
subsequent written and oral forward- looking statements
attributable to the Company or persons acting on its behalf
are expressly qualified in their entirety by the applicable
cautionary statements. Reference is made to "Management's
Discussion and Analysis of Financial Condition and Results
of Operations - Forward-Looking Information - Cautionary
Statements" included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998, which is
incorporated herein by reference.
Results of Operations - Comparison of Three Month Periods and
- -------------------------------------------------------------
Six Month Periods Ended June 30, 1999 and 1998
- ----------------------------------------------
Sale and Acquisition of Properties. On January 19, 1999,
the Company sold its oil and gas properties in Schleicher and Kent
Counties, Texas (the "Properties Sale") to EXCO Resources,
Inc., a Texas corporation ("EXCO"). These properties included
66 gross productive wells (9.75 net productive wells) with current
net production of approximately 42.18 barrels of oil and
126,000 cubic feet of natural gas per day, and 6 gross (.75
net) non-producing wells. These properties constituted
approximately 90.418% of the gross productive wells (71.17%
net productive wells) and approximately 88.68% of the
barrels of oil and 59.38% of the cubic feet of natural gas
per day produced by all of the Company's oil and gas
properties. The Company's results of operations were
significantly affected by the Properties Sale.
The Company closed, on July 15, 1999, with an effective date
of May 1, 1999, an acquisition of 12.25% working interest in the
Right Hand Creek Field located in Beauregard and Allen Parishes
of Louisiana (collectively, the "Right Hand Creek Properties")
from Humphrey Oil Interest, L.P., a Texas limited partnership
("Humphrey")(Charles B. Humphrey, a Director of the Company, is
the limited partner in Humphrey and President of Humphrey Oil
Corporation, its general partner) being 50% of the interest
acquired by Humphrey from EXCO Resources, Inc. effective May 1, 1999.
The Right Hand Creek Properties include 6 gross productive wells
(.735 net productive wells) with current net production of approximately
55 barrels of oil and no cubic feet of natural gas per day, 1 injection
well, and 2 gross (.245 net) non producing wells that will require
recompletions and/or workovers. The Right Hand Creek Properties include
725.3 gross (88.85 net) developed acres and 234.22 gross (28.69 net)
undeveloped acres. Based on independent engineering estimates as of
June 1, 1999, the Right Hand Creek Properties are estimated to contain
956,097 gross (85,396 net) barrels of oil and no gross or net million
cubic feet of natural gas or proved reserves. The Company's revenues were
significantly affected by the acquisition.
Page 12
Net Income (Loss). The Company had a net loss for the
three month period ended June 30, 1999 of $33,983 compared
to the net loss of $209,371 for the corresponding quarter of 1998,
representing ($.01) and ($.05) per share, respectively.
The Company had a net loss for the six month period ended
June 30, 1999 of $60,172 compared to the net loss of $241,261
for the corresponding six month period of 1998. These amounts
represented ($.01) and ($.06) per share, respectively.
Revenues. Revenues for the three month period ended
June 30, 1999 were $52,121 compared with $59,765 for the
corresponding period in 1998, a 13% decrease. Revenues for
the six month period ended June 30, 1999 were $60,260
compared with $144,292 for the six month period ended June
30, 1998, a 59% decrease. These decreases in revenues were
primarily a result of the Properties Sale, which occurred in
the first quarter of 1999. However, revenues increased from
$8,139 in the first quarter of 1999, to $52,121, a 640%
increase, primarily due to The Right Hand Creek Properties acqisition
and oil price increases during the second quarter.
Costs and Expenses. Costs and expenses for the three
month period ended June 30, 1999 decreased $137,942, or 65%,
to $74,442 versus $212,384 for the corresponding period of 1998.
Costs and expenses for the six month period ended June 30, 1999
decreased $158,701 or 60%, to $104,996 versus $263,697 for the
corresponding period of 1998. Decreases in most expense items
were primarily a result of the Properties Sale during the
period. General and administrative, legal, auditing, and accounting
fees increased $52,450 and $70,534 respectively for the
three month period ended June 30, 1999, and the six month
period ended June 30, 1999, from the corresponding periods
of 1998. These amounts represent a 731% increase, from
$8,305 in the three month period ended June 30, 1998, and a
537% increase, from $16,132 for the six month period ended
June 30, 1998. The increases are due to improving reporting
procedures in readiness of future activities as well as
preparation for the annual stockholders meeting, the reincorporation
of the Company in the State of Delaware and the one for five
reverse stock split.
Liquidity and Capital Resources
- -------------------------------
The Company has financed its operating and capital
expenditure requirements to date principally through cash
flow from operations.
Cash increased $816,950 to $840,322 at June 30, 1999,
from $23,372 at December 31, 1998, as a result of the
Properties Sale and the prepayment by participating parties
of the Cache Creek #1 well. The sale price received in the
Properties Sale was $315,000, and has been utilized for the
payment of expenses with the remainder being invested in a
money market savings until it can be used for future acquisitions.
The amount of participating parties prepayment of drilling costs for the
Cache Creek #1 well was $613,499. Accounts receivable increased
$36,603 to $42,732 from $6,129 during the six months ended June 30, 1999
and accounts payable increased $516,491 to $538,220 from $21,729 during
the six months ended June 30, 1999. The increase in accounts receivable
is primarily due to the Right Hand Creek Properties acquisition as well as
higher oil prices for the period, while the increase in accounts payable is
primarily due to the accrual for the acquisition price of $349,125 for the
Right Hand Creek Properties, which acquisition did not close until
July 15, 1999, and to the drilling of the Cache Creek #1 well.
Earnings before interest, taxes, depreciation,
depletion and amortization ("EBITDA") for the three-month
period ended June 30, 1999 was ($23,268) or (.01) per share
compared to ($157,265), or ($.04) per share for the
corresponding period of 1998. EBITDA for the six-month
period ended June 30, 1999 was ($42,005) or ($.01) per share
compared to ($131,849), or ($.03) for the corresponding
period of 1998. Management is of the opinion that any
significant acquisitions, projects or drilling and/or
recompletion work will require debt and/or equity financing.
There is no assurance that the Company will be able to borrow additional
amounts under the Credit Facility or obtain other debt and/or equity
financing for any significant activities. The Company plans to raise
capital through a private offering to qualified investors with the capital
raised being used to acquire oil and gas properties to increase and solidify
the company's cash flow and reserve base.
On July 15, 1999, the Company entered into a credit facility
(the "Credit Facility") with Compass Bank (the "Lender"). The Credit
Facility provides for borrowings up to $15 million, subject to borrowing
base limitations.
The Credit Facility consists of a regular revolver which at July 15,
1999, had a borrowin base of $230,000. The Company borrowed $230,000
under the Credit Facility on July 15, 1999 to pay a portion of the purchase
price for the Company's interest in the Right Hand Creek Properties. A
porrion of the borrowing base is available for the issuance of letter of
credit. All borrowings under the Credit Facility are secured by a first lien
deed of trust providing a security interst in certain oil and natural gas
working interests in the Right Hand Creek Properties.
The Credit Facility provides that the unpaid principal balance of the
loans shall bear interest, payable as it accrues on the 1st day of each
motnh, commencing September 1, 1999, and at maturity (stated or by
acceleration), at a rate per annum equal to the lesser of th (i) Highest
Lawful Rate or (ii) 1% over the CBIR rate from time to time in effect, as
therein defined. The Credit Facility also permits the Company to repay and
reborrow amounts under the Credit Facility without any penalty, thereby
allowing the Company the flexibility to utilize any available cash to reduce
its outstanding indebtedness and, thus, its cost of borrowed funds.
Under the terms of the Credit Facility, the Company must not permit its
Current Ratio (as defined) of Current Assets (as defined) to its Current
Liabilities (as defined) to be less than 1.25 to 1.0 at any time. Furthermore,
the Company must not permit its Tangible Net Worth (as defined) to be less at
any time than $1.00 plus (i) 50% of positive Net Income (as defined) for all
quarterly periods ending subsequent to December 31, 1998, plus (ii) 100% of
any Equity Infusions (as defined) occurring subsequent to December 31, 1998.
Furthermore, the Company must not permit the ratio of Cash Flow (as defined)
to Debt Service (as defined) to be less than 1.25 to 1.0, determined as of the
end of each fiscal quarter of the Company on or after September 30, 1999.
A new Borrowing Base shall be determined as of each April 1 and October 1
during the Revolving Credit Period (the "semi-annual determinations"), or at
such other or additional times during the Revolving Credit Period as the Lender
in it reasonable discretion and at its sole cost may elect ("discretionary
determinations"), and the Lender shall determine a new Borrowing Base at such
additional times, but no more often than one (1) time in any 12-month period
without Lender's consent, as the Company may request ("Borrower requested
determinations").
The Borrowing Base shll be automatically rduced as of the 1st day of each
month commencing February 1, 2000, and continuing through the Revolving Credit
Period. The initial monthly reduction shall in the amount of $5,000 per month.
At the time of each new semi-annual determination, the Lender in its sole
discretion may incrase of decrease the amount of such monthly reduction. If a
Borrowing Base Deficiency (as defined) exists after giving effect to a
redetermination, then the the Company mut eith (i) prepay the principal of the
outstanding Loans or (ii) cause to be created first and prior prefected Liens
(subject only to Permitted Liens, as defined) in favor of the Lender, by
instruments satisfactory to the Lender, on producing oil and gas properties,
which in the opinion of the Lender would increase the Borrowing Base by an
amount sufficient, in combination with clause (i) preceding, to eliminate such
Borrowing Base deficiency.
The Credit Facility contains a number of covenants affecting the Company's
liquidity and cpital resources, including restrictons on the Company's ability
(i) to incur indebtedness other than (a) under the Credit Facility or (b)
Permitted Indebtedness, as defined, or (ii) to pedge assets outside of the
Credit Facility, other than Permitted Liens, and with respect to the Company's
maintenance of a minimum net worth.
Inflation and Changing Prices
- -----------------------------
The impact of inflation, as always, is difficult to
assess. During the three years ended December 1998, the oil and gas industry
remained depressed. As a result, the Company experienced continued weakness
in demand and in prices received for its oil and gas production. The general
softening of the market has, however, also reduced the cost of labor,
materials, contract services, and other operating costs. The Company cannot
anticipate whether the present trend of low inflation will remain; however,
a sudden increase in inflation and/or an increase in operating costs
coupled with a continuation of low oil prices could have an
adverse effect on the operations of the Company.
YEAR 2000 READINESS DISCLOSURE
- -------------------------------
"Year 2000," or the ability of computer systems to
process dates with years beyond 1999, affects almost all
companies and organizations. Computer systems that are not
Year 2000 compliant by January 1, 2000 may cause material
adverse effects to companies and organizations that rely
upon those systems.
The Company's timely receipt of royalty income will
largely depend upon performance of computer
Page 13
systems and computer-controlled equipment of the operators
of the Company's oil and gas producing properties and other
third parties including oil and natural gas purchasers and
significant service providers such as electric utility
companies and natural gas plant, pipeline and gathering
system operators. The Company is seeking written
verification from its operators that they will be Year 2000
compliant. The Company anticipates that the cost of seeking
verification will be minimal. The Company believes that it
is not practical to independently verify the response it
receives because the cost would not be affordable.
The Company has undertaken an inventory of its financial
software and hardware systems for Year 2000 readiness. The
Company used an outside consultant to assist in this review.
The outside consultant has completed his review and
identified the required upgrades. All required upgrades to
the Company's financial software and hardware system are
expected to be complete by October 30, 1999. The cost of the
outside consultant, as well as the cost of upgrades, is
expected to be minimal.
The failure to remediate critical systems (software or
hardware), or the failure of a material third party to
resolve critical Year 2000 issues could have a serious
adverse impact on the Company's ability to continue
operations and meet obligations. Any Year 2000 problems that
do occur will likely manifest themselves in reduced
production through equipment shut down or impaired liquidity
through an inability of the Company's customers to take
delivery or to process payment. At the current time, the
Company believes that any interruption in operation will be
minor and short-lived. However, until the Company's review
has progressed, it is impossible to accurately identify the
risks, quantify potential impacts or establish a contingency
plan. The Company currently intends to complete its
contingency planning by October 30, 1999.
Page 14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
- ------------------------------------------------------
Holders
- -------
At the Annual Meeting of the Company's shareholders
held July 15, 1999, the shareholders approved the
following items with the number of votes cast (prior to
giving effect to the reverse stock split) for, against,
or withheld, and abstentions:
(1) Directors. The following members were elected to
the Board of Directors:
Votes
VOTES FOR Withheld
------------- -----------
Johnathan M. Hill 3,243,467 1,050
Charles B. Humphrey 3,243,717 800
Fred Oliver 3,243,717 800
H. Wayne Gifford 3,243,717 800
Katherine R. Murphy 3,243,467 1,050
(2) Reverse Stock Split. The shareholders voted to
amend the Company's Restated Articles of Incorporation
to effect a one-for-five reverse stock split of the
Company's common stock. The votes were cast as
follows:
For Against Abstain
----- --------- ---------
3,237,717 6,650 150
(3) Reincorporation. The shareholders voted to
approve the merger of the Company into a wholly
owned subsidiary of the Company to be organized
under the laws of the State of Delaware
("Gladstone-Delaware") in order to effect the
change of the Corporation's state of incorporation
from Washington to Delaware. The votes were cast
as follows:
For Against Abstain
----- --------- ----------
3,241,192 3,300 25
(4) Common Stock. The shareholders voted to approve
and adopt the provisions of the Certificate of
Incorporation of Gladstone-Delaware ("Delaware
Certificate") which would authorize up to 10
million shares of Common Stock. The votes were
cast as follows:
For Against Abstain
----- ---------- -----------
3,238,792 5,700 25
Page 15
(5) Preferred Stock. The shareholders voted to
approve the provision of the Delaware Certificate
which would authorize up to 5 million shares of
Preferred Stock. The votes were cast as follows:
For Against Abstain
----- -------- ----------
3,238,792 5,700 25
(6) Required Shareholder Meetings. The shareholders
voted to approve the provision of the Delaware
Certificate which would require all shareholder
action be taken at a shareholder meeting. The
votes were cast as follows:
For Against Abstain
------ ---------- ---------
3,240,792 3,700 25
(7) Eliminate Cumulative Voting. The shareholders
voted to approve the provision of the Delaware
Certificate which would eliminate cumulative
voting. The votes were cast as follows:
For Against Abstain
----- -------- ----------
3,240,692 3,500 25
(8) Indemnification. The shareholders voted to
approve the provision of the Delaware Certificate
which would permit officers and directors to
receive indemnification to the fullest extent
permitted by Delaware law. The votes were cast as
follows:
For Against Abstain
----- -------- ----------
3,224,742 14,350 5,425
(9) Supermajority Stockholder Approval. The
shareholders voted to approve the provision of the
Delaware Certificate which would require a 66-2/3%
vote of stockholders to amend the provisions of
the Delaware Certificate described at (6) and (8)
and to amend the Bylaws when shareholder
amendments are sought. The votes were cast as
follows:
For Against Abstain
----- -------- ----------
3,225,442 16,050 3,025
Page 16
Item 5. Other Information
- ---------------------------
On August 10, 1999, the Company changed its name from
Gladstone Resources, Inc. to Gladstone Energy, Inc.
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
See exhibit index
(b) Reports on Form 8-K - The Company filed one
Report on Form 8-K during the three months
ended June 30, 1999. On May 21, 1999, the
Company filed an Amended Report on Form 8-K,
amending the Report on Form 8-K, Date of
Report January 19, 1999, relating to a change
of control of the Registrant, the disposition
of assets, and the change of address of Registrant's
principal executive offices. On July 15, 1999,
the Company filed a Report on Form 8-K reporting
an acquisition of assets and incurring bank debt.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
GLADSTONE ENERGY, INC.
Date: August 20, 1999 By: /s/ KATHERINE R. MURPHY
--------------------------
Katherine R. Murphy,
Treasurer
EXHIBIT INDEX
Exhibit Description
- ------- -----------
2.1 Assignment and Bill of Sale made and entered into
January 19, 1999, but effective as of October 1, 1998,
by and between Gladstone Resources, Inc. and EXCO
Resources, Inc. incorporated by reference from the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1998 (Exhibit 2.1)
2.2 Agreement and Plan of Merger entered into August 13, 1999
by and between Gladstone Energy, Inc., a Washington
corporation, and Gladstone Energy, Inc., a Delaware
corporation, incorporated by reference from the Company's
Definitive Schedule 14/A Information, Proxy Statement Pursuant to
Section 14(a) of the Securities Exchange Act of 1934 for the
1999 Annual Meeting of Shareholders (the "1999 Proxy
Statement") (Exhibit A)
3.1 Certificate of Incorporation of Gladstone Energy, Inc.
incorporated by reference from the 1999 Proxy Statement
(Exhibit C)
3.2 Bylaws (filed herewith)
10.1 Purchase and Sale Agreement between Humphrey Oil Interests,
L.P., and Gladstone Resources, Inc., dated July 8, 1999,
incorporated by reference from the Report on Form 8-K, Date of
Report July 15, 1999 (Exhibit 10.1)
10.2 Credit Agreement between Gladstone Resources, Inc., as
Borrower, and Compass Bank, as Lender, dated July 15, 1999,
incorporated by reference from the Report on Form 8-K,
Date of Report July 15, 1999 (Exhibit 10.2)
10.3 Mortgage and Security Agreement from Gladstone Resources,
Inc., as Mortgagee, in favor of Compass Bank, as Lender,
dated July 15, 1999 incorporated by reference from the
Report on Form 8-K, Date of Report July 15, 1999
(Exhibit 10.3)
27.1 Financial Data Schedule