SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ______________________
Commission file number 333-83651
BENZ ENERGY INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 76-0577348
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Louisiana Street, 15th Floor
Houston, Texas 77002
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (713) 739-0351
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 / /
Number of shares of Benz Energy Inc. common stock, $.01 par value, outstanding
as of June 30, 2000 62,113,409
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BENZ ENERGY INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For the three Months Ended
June 30,
------------------------------------
2000 1999
------------------------------------
REVENUES
Oil and gas sales $ 1,536,276 $ 1,907,371
Impairment of oil and gas properties 31,030,350 -
Depreciation, depletion and amortization 2,633,915 988,853
Operating costs 107,676 314,404
General and administrative 1,729,290 730,303
Interest expense 1,856,295 1,352,160
---------------- -----------------
37,357,526 3,385,720
---------------- -----------------
LOSS FROM OPERATIONS BEFORE OTHER INCOME
(EXPENSE) AND PROVISION FOR INCOME TAXES (35,821,250) (1,478,349)
Interest income 181,589 75,075
Loss on sale of investments and other assets - (271,849)
---------------- -----------------
Total Other Income (Expense) 181,589 (196,774)
---------------- -----------------
LOSS BEFORE PROVISION FOR INCOME TAXES (35,639,661) (1,675,123)
Provision for income taxes - -
---------------- -----------------
NET LOSS BEFORE PREFERRED DIVIDEND (35,639,661) (1,675,123)
Cumulative preferred stock dividends (834,880) (231,932)
---------------- -----------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (36,474,541) $ (1,907,055)
================ ================
BASIC AND DILUTED LOSS PER SHARE ON COMMON STOCK $ (0.59) $ (0.06)
================ ================
WEIGHTED AVERAGE COMMON SHARES USED TO COMPUTE:
Basic Loss per Share 62,113,409 34,122,834
Diluted Loss per Share 62,113,409 34,122,834
The accompanying notes to consolidated financial statements are an integral part
of this statement.
1
BENZ ENERGY INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For the six Months Ended
June 30,
--------------------------------------
2000 1999
------------------ -----------------
REVENUES
Oil and gas sales $ 3,724,339 $ 3,278,328
Impairment of oil and gas properties 31,030,350 -
Depreciation, depletion and amortization 3,904,582 2,152,698
Operating costs 361,847 482,572
General and administrative 2,324,776 1,664,268
Interest expense 3,739,287 2,915,383
------------------ -----------------
41,360,842 7,214,921
------------------ -----------------
LOSS FROM OPERATIONS BEFORE OTHER INCOME
(EXPENSE) AND PROVISION FOR INCOME TAXES (37,636,503) (3,936,593)
Interest income 418,848 163,294
Loss on sale of investments and other assets (1,104,173) (330,402)
------------------ -----------------
Total Other Income (Expense) (685,325) (167,108)
------------------ -----------------
LOSS BEFORE PROVISION FOR INCOME TAXES (38,321,828) (4,103,701)
Provision for income taxes - -
------------------ -----------------
NET LOSS BEFORE PREFERRED DIVIDEND (38,321,828) (4,103,701)
Cumulative preferred stock dividends (1,655,745) (469,136)
------------------ -----------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (39,977,573) $ (4,572,837)
================== =================
BASIC AND DILUTED LOSS PER SHARE ON COMMON STOCK $ (0.71) $ (0.13)
================== =================
WEIGHTED AVERAGE COMMON SHARES USED TO COMPUTE:
Basic Loss per Share 56,635,148 33,926,370
Diluted Loss per Share 56,635,148 33,926,370
The accompanying notes to consolidated financial statements are an integral part
of this statement.
2
BENZ ENERGY INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
For the six Months Ended
June 30,
--------------------------------------
2000 1999
------------------ -----------------
Net loss $ (38,321,828) $ (4,103,701)
Other comprehensive income, net of tax:
Foreign currency translation adjustment (34,139) 11,475
Unrealized gains on marketable securities -- 85,630
------------------ -----------------
Comprehensive loss $ (38,355,967) $ (4,006,596)
================== =================
The accompanying notes to consolidated financial statements are an integral part
of this statement.
3
BENZ ENERGY INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the six Months Ended
June 30,
--------------------------------------
2000 1999
------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (38,321,828) $ (4,103,701)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation, depletion and amortization 3,904,582 2,152,698
Impairment of oil and gas properties 31,030,350 -
Amortization of deferred loan costs 545,120 1,169,857
Loss on sale of investments 750,000 148,091
Provision for doubtful accounts 824,000 68,328
Non-cash general and administrative expense 500,000 -
Write-off of investment in Calibre Ecuador 144,970 -
Write-off investment in equipment - 182,310
Loss on sale of office furniture and equipment 209,203 -
Changes in operating assets and liabilities:
Decrease in receivables 4,707,490 583,570
(Increase) decrease in prepaid expenses (13,546) 48,386
Decrease (increase) in amounts due from related parties 61,875 (41,252)
Decrease (increase) in other assets (37,662) 425,000
Increase (decrease) in accounts payable and accrued expenses (501,834) 3,350,235
Decrease in drilling advances (560,365) (3,113)
----------------- -----------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,242,355 3,980,409
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development expenditures (1,912,796) (9,970,236)
Proceeds from sale of oil and gas properties 131,793 534,730
Proceeds from sale of investments 375,000 160,515
Other capital expenditures, net 22,485 (65,675)
Other, net - 69,483
----------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES (1,383,518) (9,271,183)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings 432,866 3,000,000
Payments on long-term debt (3,615,590) (550,161)
Net decrease in short-term borrowings (7,366) 1,096,635
Cost of debt and equity transactions (31,362) (605,389)
Cash overdraft position - 196,454
Other 22,034 (125,132)
----------------- -----------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (3,199,418) 3,012,407
----------------- -----------------
Effect of change in translation (34,139) (11,867)
----------------- -----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,374,720) (2,290,234)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,126,175 2,319,302
----------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,751,455 $ 29,068
================= =================
The accompanying notes to consolidated financial statements are an integral part
of this statement.
4
BENZ ENERGY INC.
CONSOLIDATED BALANCE SHEET
June 30, December 31,
2000 1999
------------------- ------------------
ASSETS (unaudited) (audited)
CURRENT ASSETS
Cash and cash equivalents $ 1,751,455 $ 3,126,175
Receivables, net of allowance for doubtful accounts
of $245,718 in 2000 and $180,718 in 1999 1,320,130 6,796,722
Advances to related parties - 622,454
Prepaid expenses 239,389 225,843
------------------- ------------------
Total Current Assets 3,310,974 10,771,194
------------------- ------------------
OIL AND GAS PROPERTIES, USING FULL COST ACCOUNTING
Costs being amortized 67,598,019 62,201,144
Costs not being amortized 17,197,938 20,433,950
------------------- ------------------
84,795,957 82,635,094
Less: Accumulated amortization (43,976,025) (9,107,788)
------------------- ------------------
Net Oil and Gas Properties 40,819,932 73,527,306
------------------- ------------------
PROPERTY AND EQUIPMENT 437,703 1,147,315
Less: Accumulated depreciation (165,974) (556,171)
------------------- ------------------
Net Property and Equipment 271,729 591,144
------------------- ------------------
Notes receivable 10,913,333 12,000,000
Debt issuance costs, net of accumulated amortization of $2,094,628 and
$1,547,973, respectively 3,001,064 3,546,184
Due from related parties 200,008 113,962
Other assets 268,450 575,591
------------------- ------------------
Total Other Assets 14,382,855 16,235,737
------------------- ------------------
TOTAL ASSETS $ 58,785,490 $ 101,125,381
=================== ==================
The accompanying notes to consolidated financial statements are an integral
part of this statement.
5
BENZ ENERGY INC.
CONSOLIDATED BALANCE SHEET
June 30, December 31,
2000 1999
--------------------- --------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited) (audited)
CURRENT LIABILITIES
Accounts payable $ 1,471,711 $ 1,821,701
Revenue payable 1,571,445 1,628,905
Accrued interest 1,546,064 1,525,022
Accrued preferred dividends 698,265 974,603
Accrued loss on termination of employee 883,624 900,957
Other accrued expenses 559,308 1,409,504
Drilling advances 20,774 581,139
Notes payable 29,750 37,116
Current maturities of long-term debt 3,381,132 1,212,212
--------------------- --------------------
Total Current Liabilities 10,162,073 10,091,159
--------------------- --------------------
LONG-TERM DEBT 55,163,545 60,515,189
OTHER LONG-TERM LIABILITIES 682,462 13,196
COMMITMENTS AND CONTINGENCIES -- --
REDEEMABLE PREFERRED STOCK, $1 par value; 100,000,000 shares authorized;
13,888,140 shares issued and outstanding, respectively; redemption value
of $13,888,140, respectively. 13,558,140 13,518,140
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $1 par value; 100,000,000 shares authorized; 244,251 and
239,701 shares issued and outstanding, respectively; redemption value
of $23,925,100 and $23,970,100, respectively. 244,251 239,701
Common Stock, $0.01 par value; 300,000,000 shares authorized; 62,113,409
shares and 47,583,888 shares issued and outstanding, respectively. 621,134 475,839
Additional paid-in capital 47,224,452 45,131,014
Accumulated deficit (68,725,806) (28,748,234)
Cumulative foreign currency translation adjustment (144,761) (110,623)
--------------------- --------------------
Total Stockholders' Equity (20,780,730) 16,987,697
--------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 58,785,490 $ 101,125,381
===================== ====================
The accompanying notes to consolidated financial statements are an integral
part of this statement.
6
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
These financial statements have been prepared by Benz Energy without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission, and reflect all adjustments that are, in the opinion of management,
necessary for a fair statement of the results for the interim periods, on a
basis consistent with the annual audited financial statements. All such
adjustments are of a normal recurring nature. Certain information, accounting
policies, and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations, although we believe that the
disclosures are adequate to make the information presented not misleading. These
financial statements should be read in conjunction with the financial statements
and the summary of significant accounting policies and notes thereto included in
our 1999 annual report on Form 10-KSB filed on April 14, 2000.
1. IMPAIRMENT OF OIL AND GAS PROPERTIES
As of June 30, 2000 we recognized an impairment loss of $31,030,000 on our
oil and gas properties. This loss results from a decline in our estimated
oil and gas reserve values as reflected in our mid-year independent reserve
evaluation prepared by R.A. Lenser & Associates, Inc. Generally accepted
accounting principles require that capitalized costs (as defined) of oil
and gas properties not exceed a cost ceiling that is based on estimated
reserve values.
2. DUE FROM RELATED PARTIES
At June 30, 2000, amounts due from related parties include a promissory
note from Starbucks Trust of approximately $3,011,000 plus accrued interest
of $531,500, $251,500 due from Slattery Trust, $354,000 due from Texstar
Holdings and $284,500 due on joint interest billings. These receivables
offset a note payable to Starbucks of $1,211,500 plus accrued interest of
$238,400 and a note payable to Starbucks of $200,000 plus accrued interest
of $43,900. Due to a decline in the value of our common stock that
collateralizes the note receivable from Starbucks Trust, we have
established an allowance for uncollectible accounts in the amount of
$2,538,700 at June 30, 2000. This loss provision was offset by the
forgiveness by Prentis Tomlinson of $1,779,700 in debt that we owed to him.
Our Form 10-KSB for the year ended December 31, 1999 contains a discussion
of the transactions giving rise to these related party receivables and
payables.
7
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30, 2000:
3-D Workstations $ -
Furniture and Fixtures -
Telephone and Computer Equipment -
Leasehold Improvements 368,654
Software -
Other 69,049
---------------------
437,703
Less: Accumulated Depreciation (165,974)
=====================
Net Property and Equipment $ 271,729
=====================
We recorded the following depreciation expense related to property and
equipment in the Consolidated Statements of Operations for the periods
indicated:
Three months ended June 30, 2000 $ 18,433
Three months ended June 30, 1999 $ 76,481
Six months ended June 30, 2000 $ 66,695
Six months ended June 30, 1999 $ 179,010
In February 2000, we sold all office furniture, equipment and personal
property to WIN-Houston Limited Partnership and signed an agreement to lease
back such furniture, equipment and personal property for one year for lease
payments of approximately $487 per month. We recorded a loss on the
sale-leaseback of $209,203 in our Consolidated Statements of Operations.
4. NOTE RECEIVABLE
On December 30, 1999, we sold a farm-out of our exploratory program to
Harken Energy Corporation. The sale involved three prospects in Texas, including
the Old Ocean project, and six prospects in Mississippi and certain assets
related to those prospects. The sales price for the exploratory assets was $12
million principal amount of 5% convertible subordinated notes of Harken Energy
Corporation due May 26, 2003. The notes are convertible at the holder's sole
election into Harken Energy common shares based on a conversion price of $6.50
per share. The notes are mandatorily convertible if the market price per share
of Harken Energy common share over any consecutive 30 day period is equal to or
greater than $8.125 per share. During the year prior to maturity, Harken Energy
may redeem the convertible notes for Harken common shares based on its then
market price, provided that the redemption must be at a 10% premium if the
redemption occurs within six months of maturity. In addition to the convertible
notes, Benz retained a reversionary 20% working interest in the prospects, which
vests after pay-out of 100% of Harken Energy's drilling costs, land costs,
certain administrative costs, purchase price, plus a 10% rate of return.
On March 30, 2000, we sold $1.125 million of notes back to Harken for $375,000
in cash, resulting in a loss on investment of $750,000 recorded in our
Consolidated Statements of Operations. As part of the transaction, the maturity
on a portion of the remaining notes was extended six months.
8
5. PARTICIPATION AGREEMENT
In November 1998, we entered into a participation agreement with Burlington
Resources International Inc. ("Burlington") to pursue government contracts to
participate in the redevelopment of oil and gas fields in Ecuador. The company
and Burlington had participation interests of 25% and 75%, respectively.
Burlington did not renew the agreement; however, we retained a 25% interest in
any project related to the subject area pursued by Burlington for one year. Such
interest lapsed in April 2000 and we elected to write off the investment in
March 2000 for a loss of $144,970 in our Consolidated Statements of Operations.
6. DEBT
June 30, December 31,
2000 1999
----------------------- ----------------------
Aquila Financing $ 25,979,259 $ 27,724,544
EnCap Junior Note 2,886,821 2,886,821
Debt Restructuring Agreement 8,786,597 10,224,036
Weisser Johnson Note 75,000 75,000
Convertible Debentures 20,817,000 20,817,000
----------------------- ----------------------
Total 58,544,677 61,727,401
Current Portion 3,381,132 1,212,212
----------------------- ----------------------
Total Long-Term Debt $ 55,163,545 $ 60,515,189
======================= ======================
During the first quarter of 2000, we repaid approximately $1.7 million
towards the Debt Restructuring Agreement with proceeds from the collection of a
receivable from an industry partner. In addition, we borrowed approximately
$432,900 under the Aquila production financing to fund sidetracking of the PEOC
#1 well and stimulation of the BOE 16-14 well. Repayments on the Aquila
financing totalled approximately $2.2 million during the six months ended June
30, 2000.
During the third quarter of 1999, we restructured our debt obligations
through the following transactions:
AQUILA FINANCING - In August 1999, we closed a long-term production
financing facility with Aquila Energy Capital Corporation in the initial amount
of $26.8 million. The proceeds were used to retire existing senior secured debt
and accrued interest including the Shell production financing, the EnCap Credit
Facility and the BOCP Credit Facility. In addition, the facility included a firm
commitment from Aquila for an additional $3.8 million of funding for development
drilling at our Oakvale Dome Field.
The production financing is secured by our proven oil and gas properties
and is repaid through a dedicated portion of the property income. Terms of the
financing include a 12% interest rate and assignment of 1/16th of our interest
in the collateral properties following full repayment of the production
financing.
ENCAP JUNIOR NOTE - In August 1999, we borrowed $2.9 million under a Junior
Note with EnCap Energy Capital Fund III, L.P. The note matures March 31, 2001
and accrues interest at a rate of 10% per annum. Proceeds were used to repay
existing debt under the EnCap and BOCP credit facilities.
9
DEBT RESTRUCTURING AGREEMENT - In August 1999, we reached an agreement with
certain vendors and suppliers to convert their past due account payables to a
secured 10% note maturing August 23, 2002. The trade group agreeing to the
financing plan represented $11.2 million in past due accounts, equal to over 90%
of our accounts payable then over $10,000. Under the agreement, we paid the
group $1.12 million in September 1999 with proceeds from the private placement
of $4.0 million in new equity. The note will be retired using a portion of the
proceeds from the future sale of certain prospects, collections of amounts owed
to Benz from an industry partner and a portion of our income after debt service
and capital expenditures. The remaining balance with accrued interest will be
paid at maturity. The note is secured by a subordinate lien on certain of our
properties.
EXCHANGE OF CONVERTIBLE DEBENTURES - In July 1999, we closed our private
placement and exchange offer with European holders of our 9% Debentures, Series
1. Holders exchanged $15.1 million principal amount of debentures for $14.3
million principal amount of 8% Class A Convertible Preferred Stock Series II and
purchased an incremental $1.5 million principal amount of the same preferred
stock.
REPAYMENT OF OLD OCEAN FINANCING AND PRIVATE PLACEMENT - In conjunction
with the exchange offer discussed above, we raised new equity in Europe through
the private placement of the same preferred stock series. Of the $8.5 million of
new equity raised, $3.15 million was preferred stock issued to redeem the
outstanding Old Ocean project bridge loan obtained in December 1998, and to
re-purchase the net profits interest assigned to the lenders. We received gross
cash proceeds of $3.8 million from new investors and $1.5 million from debenture
holders through the exchange above.
7. CAPITAL STOCK
In early January 2000, we issued 3,702,299 common shares as payment of
preferred dividends accrued through December 31, 1999. On March 31, 2000, we
issued 10,639,368 common shares as payment of the preferred dividend due March
31, 2000 on the preferred stock, series II. In addition, 450 shares of preferred
stock, series II was converted to 187,854 common shares in March 2000 at a
conversion price of $0.35 per share.
Effective March 31, 2000 the preferred stock, series II conversion price
was reduced to Cdn. $0.12 as required under the terms of the stock and based
upon the trailing average price of our common stock for the proceeding 20
trading days.
On April 1, 2000 we issued 5,000 shares of Class A Series III preferred
stock to RP&C International for professional services in connection with
strategic transaction discussions. The Series III shares have similar rights,
preferences, limitations and restrictions as the Series II preferred shares.
This transaction, which is valued at $500,000, is reflected in our financial
statements at June 30, 2000 as a charge to general and administrative expense.
8. NON-CASH INVESTING AND FINANCING ACTIVITIES
Supplemental Disclosure of Cash Flow Information
We consider all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. These
investments are carried at cost, which approximates market.
10
In March 2000, 450 shares of preferred stock, series II were converted
into 187,854 common shares.
We paid dividends due March 31, 2000 on our preferred shares, series I
and II with 14,341,667 common shares of the company valued at approximately
$1.3 million.
In April 2000, Prentis B. Tomlinson forgave $1.8 million in debt and
accrued interest owing to him from the Calibre acquisition.
See Note 7 regarding the issuance of 5,000 shares of preferred stock for
services.
The following table provides additional disclosure of cash payments:
For the Six Months Ended
June 30,
---------------------------------------------------
2000 1999
----------------------- -----------------------
Cash paid during the period for:
Interest $ 3,171,590 $ 1,809,444
Income taxes -- --
9. EARNINGS PER SHARE
Securities that could potentially dilute basic earnings per share in the
future that were not included in the computation of diluted earnings per share
because their effect would have been antidilutive are as follows:
June 30,
------------------------------------------
2000 1999
------------------- ------------------
Warrants 6,212,826 6,212,826
Options 2,469,730 2,837,349
------------------- ------------------
Total shares 8,682,556 9,050,175
=================== ==================
The exercise prices of the above securities are substantially above the
trading range of the common stock.
10. GOING CONCERN ISSUE
The accompanying financial statements have been prepared assuming that
we will continue as a going concern. We currently have minimal cash reserves
and inadequate working capital to fund our operations and other near term
obligations. A semi-annual interest payment on our convertible debentures is
due on September 30, 2000 totalling a maximum of $937,000 and payments of
$675,000 are due under terms of the termination agreement with a former
officer. In the event such payments are not made, we would be in default
under the trust indenture after 60 days from notification by the trustee or
holders of at least 25% of the principal amount of debentures, as well as
other debt covenants. Such debt may ultimately be called. The company may not
be able to meet such demand and currently does not have sufficient cash or
equivalents to meet such demand. Further, as described under Management
Discussion and Analysis, our estimated proved reserves have substantially
declined since December 31, 1999 and our assets are less than our liabilities.
11
In January 2000, we announced that we were considering various
strategies and options that could include a sale or merger of the company or
major re-capitalization. We are in discussions with third parties, including
our major creditors regarding these options, but can give no assurance as to
the successful completion of such discussions or what the ultimate impact on
the Company will be from such discussions.
11. OTHER EVENTS
In April 2000, an agreement with Prentis B. Tomlinson was signed that
included the forgiveness of the $1.7 million note payable, plus accrued
interest, due Mr. Tomlinson as a result of the Calibre acquisition in 1998.
In January 2000, Mr. Tomlinson resigned his positions as President and Chief
Executive Officer of the company while remaining on our board of directors.
Our attempt to sidetrack the PEOC #1 development well was unsuccessful
and the well was plugged and abandoned in May 2000. Our cost for this attempt
was approximately $1.5 million. This dry hole reduced our estimated proved
reserves by approximately 13%. Further, the production from wells in the
Oakvale Dome Field in Mississippi began declining prematurely and at a
greater rate than was estimated in our reserve estimates at January 1, 2000.
Our mid-year reserve estimates prepared by R.A. Lenser & Associates Inc.
indicates that the revised proved reserves are insufficient to pay off the
outstanding production facility in the required period of time. As a result,
Aquila may elect to increase their share of dedicated revenues from 85% to
95%. Such action would have a severe adverse impact on our viability. We are
involved in discussions with Aquila regarding resolution of this shortfall.
12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations ("MD&A") should be read in conjunction with our Consolidated
Financial Statements included herein.
RESULTS OF OPERATIONS
REVENUE. For the second quarter of 2000, revenue from crude oil and
natural gas production decreased 19% from the same period in 1999, due to a
24% decline in natural gas production and a 76% decline in oil production.
Natural gas contributed 90% and crude oil contributed 10% of total oil and
gas production revenue.
For the six months ended June 30, 2000, revenue from crude oil and
natural gas production increased 14% over the same period in 1999, despite a
6% decrease in gas production and a 61% decrease in oil production. Natural
gas contributed 88% and crude oil contributed 12% of total oil and gas
production revenue during this period.
The following table summarizes volume and price information with respect
to our oil and gas production for the periods ended June 30, 2000 and 1999:
Quarter ended June 30,
-----------------------------------------
Increase
2000 1999 (Decrease)
----------- --------- ------------
Gas Volume - MCFGD 6,908 9,070 (2,162)
Average Gas Price - per MCF $ 2.21 $ 1.89 $ 0.32
Oil Volume - BOD 62 261 (199)
Average Oil Price - per barrel $25.69 $14.77 $ 10.92
Six Months Ended June 30,
-----------------------------------------
Increase
2000 1999 (Decrease)
----------- --------- ------------
Gas Volume - MCFGD 7,948 8,494 (546)
Average Gas Price - per MCF $ 2.27 $ 1.80 $ 0.47
Oil Volume - BOD 89 226 (137)
Average Oil Price - per barrel $27.67 $12.56 $15.11
The majority of our gas production through August 2002 is subject to a hedge
contract. Hedging activities resulted in losses of $601,050, or $.96 per Mcf
for the second quarter of 2000, and $566,530, or $.39 per Mcf for the six
months ended June 30, 2000. For the first half of 1999, hedging activities
resulted in small gains.
13
SECOND QUARTER 2000 COMPARED TO SECOND QUARTER 1999
GAS SALES. Revenues from natural gas sales decreased 11%, from $1.56
million for the second quarter of 1999 to approximately $1.39 million for the
same period in 2000 due primarily to early production declines in our Oakvale
Dome and Wausau wells. This production decline was partially offset by higher
gas prices in 2000. Our average realized price for sales of natural gas
increased from $1.89 per Mcf in the second quarter of 1999 to $2.21 per Mcf
for the same period in 2000. For the second quarter of 2000, this price
reflects the effects of hedging activity which resulted in a decrease of $.96
per Mcf.
OIL SALES. For the second quarter of 2000, revenues from oil sales
decreased 58% to $145,808, compared to $351,006 for the same period in 1999,
due primarily to production declines which were partially offset by higher
oil prices. Our average realized price for sales of crude oil in the second
quarter of 2000 increased from $14.77 to $25.69, an increase of $10.92 per
barrel, or 74%. Oil production, however, declined from 261 barrels per day in
the first quarter of 1999 to 62 barrels per day for the same period in 2000,
adversely impacting oil sales revenue. This was due primarily to loss of
production from properties sold in 1999 and production declines in two key
wells.
DEPRECIATION, DEPLETION AND AMORTIZATION. Our depreciation, depletion
and amortization ("DD&A") expense for the quarter ended June 30, 2000 totaled
$2.6 million compared to $1.0 million in the comparable 1999 period. Full
cost DD&A totaled $2.6 million for the second quarter of 2000 compared to
$900,000 for the second quarter of 1999. On an equivalent MCF basis, full
cost DD&A increased $3.02 per MCFE, from $.93 per MCFE to $3.95 per MCFE, in
the first quarter of 2000 compared to the same period in 1999. This was due
primarily to a 59% reduction in estimated reserve values since year end. In
addition, some costs currently being amortized were previously classified as
unevaluated. In accordance with generally accepted accounting principles,
full cost DD&A was computed before consideration of the impairment loss
provision discussed below. If DD&A had been computed after the impairment
loss provision, the impairment loss would have been approximately $33.6
million and full cost DD&A would have been $1.18 million, or $1.78 per MCFE.
We engaged R.A. Lenser & Associates, Inc. to conduct a study of our
reserves at July 1, 2000. The report included the effects of the following
major events:
(a) The plugging and abandonment of the PEOC #1 proved location.
(b) Poorer than expected performance from two of the Oakvale producing wells
due to reservoir communication between the two wells.
(c) Reclassification of one Oakvale location from the proved category to
the probable category.
14
The following is a summary of our proved reserve estimates at July 1, 2000:
Oil Gas Present value
(MBBL) (MMCF) DISCOUNTED AT 10%
------ ------ -----------------
(in thousands)
Producing 142 4,771 $11,931
Non producing 111 5,816 8,919
Undeveloped 6 2,547 2,048
------- ------- -------
Totals 259 13,134 $22,898
======= ======= =======
DD&A of other assets for the second quarter of 2000 totaled $18,433
compared to $86,863 in the comparable 1999 period. We sold furniture,
equipment and personal property to a third party in February 2000 and leased
back such furniture, equipment and personal property for monthly payments of
approximately $487 per month resulting in lower depreciation expense for 2000.
IMPAIRMENT OF OIL AND GAS PROPERTIES. For the second quarter of 2000, we
recognized an impairment loss on our oil and gas properties of $31,030,350.
There was no similar item in 1999. This loss results from a decline in our
estimated oil and gas reserve values as discussed above. Based on current
reserve estimates, the recognition of this loss will result in future
reductions in DD&A of $2.11 per equivalent MCF.
OPERATING COSTS. Operating costs, including lease operating expense and
severance taxes, decreased 66% from $314,404 in the second quarter of 1999 to
$107,676 for the same period in 2000. For the second quarter of 2000, lease
operating expense, excluding severance taxes, totaled $120,082 compared to
$303,856 for the comparable period in 1999. On an equivalent MCF basis, lease
operating expense for the second quarter decreased from $0.31 per MCFE in
1999 to $0.18 per MCFE in 2000. The decrease in operating costs from 1999 to
2000 resulted primarily from repair costs incurred in 1999.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
("G&A") increased from approximately $730,300 in the second quarter of 1999
to $1,729,300 in the second quarter of 2000, an increase of $999,000, or
137%. This includes the effects of a provision for uncollectible related
party receivables of $759,000 in the second quarter of 2000, as well as a
non-cash charge of $500,000 for professional services rendered in connection
with merger discussions, which was paid with shares of preferred stock. The
total of other recurring categories of G&A decreased by $260,000. On an
equivalent MCF basis, recurring G&A declined 5% to $0.71 per MCFE for the
three months ended June 30, 2000 compared to $.75 for the same period in
1999. The decrease in recurring G&A costs was due primarily to downsizing of
our operations and related cost reduction measures. Compensation and employee
benefits decreased from $325,000 in the second quarter of 1999 to $149,000
for the same period in 2000, for a decrease of $176,000, or 54%. We reduced
our staff level from 23 employees at June 30, 1999 to six employees at June
30, 2000. In addition, legal and other professional fees decreased by
approximately $141,000.
INTEREST EXPENSE. Interest expense for the second quarter of 2000
increased $504,000, or 37 percent, from the comparable prior year period.
Average debt was approximately $58.5 million for the three months ended June
30, 2000, resulting in gross interest costs of $1.6 million. Partially
offsetting these costs was capitalized interest of $59,800, which is based on
the carrying value of unproved properties. Interest costs also included
amortization of debt issuance costs totaling $256,000 for the three-month
period in 2000. For the comparable 1999 three-month period, average debt was
approximately $63.1 million, resulting in gross interest costs of $2.1
million, of which $1.2 million was capitalized as costs of carrying
undeveloped properties. Interest expense for this period also includes
amortization of debt costs of $432,000.
15
NET LOSS. For the second quarter of 2000, we reported a net loss
applicable to common stockholders of $36.5 million, or $0.59 per share,
compared to a loss of $1.9 million, or $0.06 per share, for the same period
in 1999. As discussed above, the 2000 loss includes non-cash expenses and
losses from (a) Impairment of oil and gas properties of $31,030,000, (b) a
bad debt provision of $759,000 and (c) non-cash professional services of
$500,000. Weighted average shares outstanding increased from approximately
34.1 million for the three months ended June 30, 1999 to 62.1 million in the
comparable 2000 period as a result of the issuance of common stock as
dividend payment on preferred shares as well as shares issued as payment of
commissions and finance fees for the July 1999 exchange offer.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
GAS SALES. Revenues from natural gas sales increased 19%, from $2.8
million in the first half of 1999 to approximately $3.3 million for the same
period in 2000 due to higher realized average gas prices compared to the
prior year period. Our average realized price for sales of natural gas
increased from $1.80 per Mcf in the first half of 1999 to $2.27 per Mcf for
the same period in 2000. The price for 2000 reflects the negative effects of
hedging activity that reduced our average price by $0.39 per Mcf. This
increase in prices was partially offset by early production declines from our
Oakvale Dome and Wausau wells. Production volumes decreased from 1,537,500
Mcf in the first half of 1999 to 1,447,000 MCF in the first half of 2000, for
a decrease of 91,000 Mcf, or 6%.
OIL SALES. For the first half of 2000, revenue from oil sales decreased
13%, from $514,000 in 1999 to $447,000. Average oil prices increased from
$12.56 per barrel in the first half of 1999 to $27.67 for the same period in
2000, an increase of $15.11 per barrel, or 120%. This price increase was more
than offset by production declines, particularly in the Oakvale Dome and
Wausau wells. Oil production declined from an average of 226 barrels per day
in the first half of 1999 to 89 barrels per day for the same period in 2000.
DEPRECIATION, DEPLETION AND AMORTIZATION. Our depreciation, depletion
and amortization ("DD&A") expense for the first half of 2000 totaled $3.9
million compared to $2.2 million in the comparable 1999 period. Full cost
DD&A totaled $3.8 million for the first six months of 2000 compared to $2.0
million for the first six months of 1999. On an equivalent MCF basis, full
cost DD&A increased $1.39 per MCFE, from $1.10 per MCFE to $2.49 per MCFE, in
the first half of 2000 compared to the same period in 1999. This was due
primarily to a 59% decline in estimated reserve values since year end and, to
a lesser extent, the transfer of some property cost from unevaluated to
amortizable. If DD&A had been computed after the impairment loss provision,
the impairment loss would have been approximately $33.6 million and full cost
DD&A would have been $2.35 million, or $1.52 per MCFE.
DD&A of other assets for the first half of 2000 totaled $66,700 compared
to $189,000 in the comparable 1999 period. We sold furniture, equipment and
personal property to a third party in February 2000 and leased back such
furniture, equipment and personal property for monthly payments of
approximately $487 per month resulting in lower depreciation expense for the
first half of 2000 compared to the prior year period.
IMPAIRMENT OF OIL AND GAS PROPERTIES. For the second half of 2000, we
recognized an impairment loss on our oil and gas properties of $31,030,350.
There was no similar item in 1999. This loss results from a
16
decline in our estimated oil and gas reserve values as discussed above. Based
on current reserve estimates, the recognition of this loss will result in
future reductions in DD&A of $2.11 per equivalent MCF.
OPERATING COSTS. Operating costs, including lease operating expense and
severance taxes, decreased 25% from $482,500 in the first half of 1999 to
$361,800 for the same period in 2000. For the first half of 2000, lease
operating expense, excluding severance taxes, totaled $351,900 compared to
$441,600 for the comparable period in 1999. On an equivalent MCF basis, lease
operating expense for the first half of 2000 decreased from $0.25 per MCFE in
1999 to $0.23 per MCFE in 2000.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense for
the first half of 2000 was approximately $2,325,000 compared to $1,664,000 for
the same period in 1999, for an increase of $661,000, or 40%. This includes the
effects of a provision for uncollectible related party receivables of $759,000
in the first half of 2000, as well as the aforementioned non-cash charge of
$500,000 for professional services. The total of other categories of G&A
decreased $598,000 in the first half of 2000, or 36% from the first half of
1999. On an equivalent MCF basis, recurring general and administrative costs
declined 26% to $0.69 per MCFE for the six months ended June 30, 2000 compared
to $.93 for the same period in 1999. This decrease reflects the downsizing of
our operations and related cost reduction efforts. Compensation and employee
benefits decreased from $721,700 in the first half of 1999 to $329,700 in 2000,
for a decrease of $392,000, or 54%. We reduced our staff level from 23 employees
at June 30, 1999 to six employees at June 30, 2000. In addition, legal and other
professional costs for the first half of 2000 decreased to $215,000 from
$354,000 for the same period in 1999, for a decrease of $139,000, or 39%. For
the first half of 2000, professional services included $50,300 related to our
annual audit for 1999 and $19,400 for our annual third party engineering report.
INTEREST EXPENSE. Interest expense for the first half of 2000 increased
$823,904, or 28 percent, from the comparable prior year. Average debt was
approximately $58.5 million for the three months ended June 30, 2000, resulting
in gross interest costs of $3.3 million. Partially offsetting these costs was
capitalized interest of $59,800, which is based on the carrying value of
unproved properties. Interest costs also included amortization of debt issuance
costs totaling $547,000 for the six-month period in 2000. For the comparable
1999 six-month period, average debt was approximately $63.1 million, resulting
in gross interest costs of $4.2 million, which includes $2.3 million capitalized
as costs of carrying unproved properties. Interest expense also included $1.0
million of amortization of debt finance costs.
OTHER. Other income (expense) for the first half of 2000 included a
$750,000 loss on the sale of Harken notes, $209,200 loss on the sale-leaseback
of furniture, equipment and personal property and $145,000 on the write-off of
our interest in Ecuador. These costs were partially offset by interest income of
$418,800. For the comparable three-month period in 1999, other income included
interest income of $163,300 partially offset by losses on the sale of marketable
securities totaling $148,100 and loss on the disposal of office equipment of
$182,300.
NET LOSS. For the first half of 2000, we reported a net loss applicable to
common stockholders of $39.9 million, or $0.71 per share, compared to a loss of
$4.6 million, or $0.13 per share, for the same period in 1999. As discussed
above, the 2000 loss includes non-cash expenses and losses from (a) Impairment
of oil and gas properties of $31,030,350, (b) a bad debt provision of $759,000
and (c) non-cash professional services of $500,000. Weighted average shares
outstanding increased from approximately 33.9 million for the three months ended
June 30, 1999 to 56.6 million in the comparable 2000 period as a result of the
issuance of
17
common stock as dividend payment on preferred shares as well as shares issued as
payment of commissions and finance fees for the July 1999
exchange offer.
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash needs are for development of oil and gas properties,
repayment of trade accounts payable and principal and interest on outstanding
debt. Our sources of financing include potential equity placements, revenue
generated from operations, ongoing sales of non-core assets and excess
interests in core prospects, negotiated settlements with creditors and
proceeds from additional production financings. Based on the foregoing, we
will require capital from certain of the sources identified above to fund our
ongoing activities and debt service over the next 12 months. If we are unable
to obtain such capital, we will either have to sell or farm out interests in
our prospects, curtail our drilling activities and restructure scheduled debt
service. Such curtailing of activities could include reducing the number of
wells drilled, loss of property interests, slowing activities on projects
that we operate, selling additional interests in our prospect inventory,
filing for protection under the bankruptcy laws or a combination of the
foregoing. An absence of additional capital would further endanger our
viability.
Many of the factors that may affect our future operating performance and
long-term liquidity are beyond our control, including, but not limited to, oil
and natural gas prices, governmental actions and taxes, the availability and
attractiveness of financing and our operational results. We continue to examine
alternative sources of long-term capital, including bank borrowings, the
issuance of debt instruments, the sale of common stock or other equity
securities, the issuance of net profits interests, sales of promoted interests
in our prospects, and various forms of joint venture financing. In addition, the
prices we receive for our future oil and natural gas production and the level of
our production will have some impact on future operating cash flows.
LIQUIDITY
At June 30, 2000, we had cash and cash equivalents on hand of $1.75 million
and a working capital deficit of $6.85 million as compared to a cash balance of
$3.1 million and working capital of $680,000 at December 31, 1999. Our ratio of
current assets to current liabilities was 0.33:1 at June 30, 2000 compared to
1.07:1 at December 31, 1999.
CASH FLOWS
Cash flows provided by operating activities totaled $3.2 million for the
six months ended June 30, 2000 due primarily to collections of accounts
receivables. Joint interest receivables decreased $1.4 million due primarily to
payment by a significant industry partner. In addition, oil and gas receivables
decreased $2.9 million due to more timely collection of revenues. At year-end,
receivables represented three months of production as compared to one month at
June 30, 2000.
Cash used in investing activities for the first half of 2000 was $1.4
million. Cash outlays for exploration and development expenditures totaled
approximately $1.9 million consisting primarily of costs associated with
drilling the PEOC well. Partially offsetting these costs were proceeds from the
sale of Harken Energy notes for cash of $375,000 and sales of unproved oil and
gas properties of $132,000.
18
Cash used in financing activities totaled $3.2 million for the six months
ended June 30, 2000 and included repayment of amounts under the debt
restructuring agreement of $1.7 million and the Aquila production financing of
$2.2 million. In addition, we borrowed $432,900 under the Aquila production
financing to fund the side-track operations on the PEOC #1 well and stimulate
the BOE 16-14 well and added $200,000 of vendor payables to the Debt
Restructuring Agreement.
NOTE: The information in this document includes forward-looking statements
that are made pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements,
and the business prospects of Benz Energy Inc., are subject to a number
of risks and uncertainties which may cause actual results in future
periods to differ materially from the forward-looking statements. These
risks and uncertainties include, among other things, volatility of oil
and gas prices, product supply and demand, competition, government
regulation or action, litigation, the costs and results of drilling and
operations, our ability to replace reserves or implement our business
plan, access to and cost of capital, uncertainties inherent in the
estimation of reserves, quality of technical data and environmental
risks. These and other risks are described in our 1999 Form 10-KSB
which is available from the Securities and Exchange Commission.
19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGE IN SECURITIES
Amount of Description of the
Date of Transaction Type of Securities Securities Sold Transaction
- ------------------------------ ------------------------ --------------------- --------------------------
January 2000 Common Stock 3,702,299 Preferred Dividend
Exchange for Preferred
March 2000 Common Stock 187,854 Stock,Series II
March 2000 Common Stock 10,639,368 Preferred Dividend
April 2000 Preferred Stock,
Series II 5,000 Services
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 - Financial Data Table
(b) Reports filed on Form 8-K.
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned therunto duly authorized.
BENZ ENERGY INC.
Dated: September 8, 2000 /s/ Robert S. Herlin
--------------------- ----------------------------------------
Robert S. Herlin
President , Chief Executive Officer and
Chief Financial Officer
21