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 SEPTEMBER 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 _________________________
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
- -------------------------------------------------------------------------------
(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 September 30, 1999 46,368,939
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BENZ ENERGY INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For the Quarter Ended For the Nine Months Ended
September 30, September 30,
---------------------------------- -------------------------------
1999 1998 1999 1998
----------------- --------------- --------------- --------------
REVENUES
Oil and gas sales $ 1,999,254 $ 1,249,316 $ 5,277,582 $ 3,289,721
EXPENSES
Depreciation, depletion and amortization 1,296,517 659,942 3,449,215 1,750,398
Operating costs 123,587 277,614 606,159 624,202
General and administrative 836,679 1,367,070 2,500,947 4,531,320
Interest expense 840,488 1,183,654 2,741,670 3,458,226
Debt issuance costs 240,134 279,202 1,254,335 764,297
----------------- --------------- --------------- --------------
3,337,405 3,767,482 10,552,326 11,128,443
================= =============== =============== ==============
LOSS FROM OPERATIONS BEFORE OTHER INCOME (EXPENSES) AND
PROVISION FOR INCOME TAXES (1,338,151) (2,518,166) (5,274,744) (7,838,722)
Interest income 97,495 167,495 260,789 486,856
Loss on sale of assets (217) 295 (330,619) (16,744)
----------------- --------------- --------------- --------------
Total Other Income (Expense) 97,278 167,790 (69,830) 470,112
================= =============== =============== ==============
LOSS BEFORE PROVISION FOR INCOME TAXES (1,240,873) (2,350,376) (5,344,574) (7,368,610)
Provision for income taxes -- -- -- --
----------------- --------------- --------------- --------------
NET LOSS BEFORE PREFERRED STOCK DIVIDEND AND
EXTRAORDINARY ITEM (1,240,873) (2,350,376) (5,344,574) (7,368,610)
Cumulative preferred stock dividends (1,071,778) (246,100) (1,540,914) (631,945)
----------------- --------------- --------------- --------------
NET LOSS BEFORE EXTRAORDINARY ITEM (2,312,651) (2,596,476) (6,885,488) (8,000,555)
Extraordinary loss on early extinguishment of debt (2,384,931) -- (2,384,931) --
----------------- --------------- --------------- --------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (4,697,582 $ (2,596,476) $ (9,270,419) $ (8,000,555)
================= =============== =============== ==============
BASIC LOSS PER SHARE ON COMMON STOCK:
LOSS BEFORE EXTRAORDINARY ITEM $ (0.06) $ (0.08) $ (0.19) $ (0.25)
EXTRAORDINARY LOSS (0.07) -- (0.07) --
----------------- --------------- --------------- --------------
NET LOSS $ (0.13) $ (0.08) $ (0.26) $ (0.25)
================= =============== =============== ==============
DILUTED LOSS PER SHARE ON COMMON STOCK:
LOSS BEFORE EXTRAORDINARY ITEM $ (0.06) $ (0.08) $ (0.19) $ (0.25)
EXTRAORDINARY LOSS (0.07) -- (0.07) --
----------------- --------------- --------------- --------------
NET LOSS $ (0.13) $ (0.08) $ (0.26) $ (0.25)
================= =============== =============== ==============
Weighted average common shares outstanding used to
compute earnings per share:
Basic 39,674,399 32,907,633 35,863,435 32,099,156
Diluted 39,674,399 32,907,633 35,863,435 32,099,156
The accompanying notes to consolidated financial statements are an integral part of this statement.
1
BENZ ENERGY INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
For the Nine Months Ended
September 30,
--------------------------------------
1999 1998
------------------ ----------------
Net loss applicable to common stockhol $ (9,270,419) $ (8,000,555)
Other comprehensive income, net of tax:
Foreign currency translation adjustment 8,621 (46,756)
Unrealized gains on marketable securities 85,630 (216,118)
------------------ ----------------
Comprehensive loss $ (9,176,168) $ (8,263,429)
================== ================
The accompanying notes to consolidated financial statements are an integral part of this statement.
2
BENZ ENERGY INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended
September 30,
--------------------------------------------
1999 1998
--------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,729,505) $ (7,368,610)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, depletion and amortization 3,449,215 1,750,398
Amortization of deferred loan costs and discount 1,446,153 2,065,715
Extraordinary loss on early extinguishment of debt 2,384,931 --
Loss on sale of stock held for investment 148,091 17,136
Reserve for bad debt 68,328 --
Write-off of investment in equipment 182,310 --
Changes in operating assets and liabilities:
(Increase) decrease in receivables (97,267) 17,773
(Increase) decrease in prepaid expenses 245,988 (405,403)
Increase in amounts due from related parties (43,645) (3,830,593)
Decrease in other assets 425,000 8,467
Increase (decrease) in accounts payable and accrued expenses (3,802,856) 3,527,522
Increase (decrease) in drilling advances -- (81,809)
--------------------- --------------------
NET CASH USED IN OPERATING ACTIVITIES (3,323,257) (4,299,404)
===================== ====================
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development expenditures (18,480,510) (29,052,385)
Proceeds from sale of oil and gas properties 6,819,013 600,000
Proceeds from sale of stock held for investment 160,515 970,940
Other capital expenditures, net (79,385) (727,192)
Other, net 69,586 (315,537)
--------------------- --------------------
NET CASH USED IN INVESTING ACTIVITIES (11,510,781) (28,524,174)
===================== ====================
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings 32,687,365 3,000,000
Payments on long-term debt (24,145,833) (5,000,000)
Net increase in short-term borrowings (100,000) 2,472,350
Proceeds from issuance of convertible debentures and special notes -- 36,512,000
Proceeds from issuance of common stock and warrants -- 170,298
Proceeds from issuance of preferred stock 9,270,000 --
Cost of debt and equity transactions (3,157,563) (4,399,030)
Payment on notes -- (885,000)
Other (983,439) (154,178)
--------------------- --------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,570,530 31,716,440
===================== ====================
Effect of change in translation (16,305) (46,360)
--------------------- --------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,279,813) (1,153,498)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,319,302 3,162,320
--------------------- --------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,039,489 $ 2,008,822
===================== ====================
The accompanying notes to consolidated financial statements are an integral part of this statement.
3
BENZ ENERGY INC.
CONSOLIDATED BALANCE SHEET
September 30, December 31,
1999 1998
-------------------- -------------------
ASSETS (unaudited) (audited)
CURRENT ASSETS
Cash and cash equivalents $ 1,039,489 $ 2,319,302
Receivables, net of allowance for doubtful accounts of $257,009 and
$197,008, respectively 5,490,504 5,461,565
Advances to related parties 597,996 538,336
Available for sale marketable securities -- 195,671
Prepaid expenses 248,622 493,459
-------------------- -------------------
Total Current Assets 7,376,611 9,008,333
-------------------- -------------------
OIL AND GAS PROPERTIES, USING FULL COST ACCOUNTING
Costs being amortized 57,401,571 48,409,232
Costs not being amortized 36,357,927 33,748,769
-------------------- -------------------
93,759,498 82,158,001
Less: Accumulated amortization (7,026,673) (3,840,604)
-------------------- -------------------
Net Oil and Gas Properties 86,732,825 78,317,397
-------------------- -------------------
PROPERTY AND EQUIPMENT 1,267,138 1,572,342
Less: Accumulated depreciation (567,278) (477,498)
-------------------- -------------------
Net Property and Equipment 699,860 1,094,844
-------------------- -------------------
Debt issuance costs, net of accumulated amortization of $1,208,948 and
$1,230,991, respectively 3,591,303 5,287,340
Due from related parties 118,083 130,311
Other assets 1,892,863 1,402,022
-------------------- -------------------
Total Other Assets 5,602,249 6,819,673
-------------------- -------------------
TOTAL ASSETS $ 100,411,545 $ 95,240,247
==================== ===================
The accompanying notes to consolidated financial statements are an integral part of this statement.
4
BENZ ENERGY INC.
CONSOLIDATED BALANCE SHEET
September 30, December 31,
1999 1998
---------------------- ---------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited) (audited)
CURRENT LIABILITIES
Accounts payable $ 1,820,847 $ 14,320,846
Revenue payable 719,231 444,826
Accrued interest 149,185 1,342,664
Accrued preferred dividends 381,261 239,568
Accrued loss on termination of employee 927,957 1,000,425
Other accrued expenses 651,476 1,763,331
Drilling advances 20,774 20,774
Notes payable -- 137,933
Current maturities of long-term debt -- 17,228,912
---------------------- ---------------------
Total Current Liabilities 4,670,731 36,499,279
---------------------- ---------------------
LONG-TERM DEBT, net of unamortized discount of $-0- and $1,000,000,
respectively 61,021,715 42,262,000
COMMITMENTS AND CONTINGENCIES -- --
REDEEMABLE PREFERRED STOCK, $1.00 par value; 100,000,000 shares authorized;
13,888,140 and 9,488,140 shares issued and outstanding, respectively;
redemption value of $13,888,140 and $9,488,140, respectively. 13,888,140 9,488,140
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $1.00; 100,000,000 shares authorized; 239,701
and no shares issued and outstanding, respectively; redemption value of
$25,168,605 and $-0-, respectively 239,701 --
Common Stock, $0.01 par value, 300,000,000 shares authorized, 46,368,939
shares issued and outstanding and no par value, unlimited shares
authorized, 33,727,724 shares issued and outstanding, respectively. 463,689 20,424,996
Common Stock reserved for issuance; no shares and 1,927,436 shares
reserved, respectively. -- 2,496,030
Additional paid-in capital 46,112,002 878,067
Accumulated deficit (25,842,073) (16,571,654)
Unrealized losses on available for sale marketable securities -- (85,630)
Cumulative foreign currency translation adjustment (142,360) (150,981)
---------------------- ---------------------
Total Stockholders' Equity 20,830,959 6,990,828
---------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 100,411,545 $ 95,240,247
====================== =====================
The accompanying notes to consolidated financial statements are an integral part of this statement.
5
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 the Company believes
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 the Company's recent registration statement on Form
SB2.
1. DEBT
September 30, December 31,
1999 1998
----------------------- ------------------------
Aquila Financing $ 27,163,339 $ --
EnCap Junior Note 2,886,821 --
Debt Restructuring Agreement 10,154,555 --
EnCap Credit Facility -- 12,000,000
BOCP Credit Facility -- 3,000,000
Shell Financing (Face Value of $-0- and $7,000,000,
respectively) -- 6,000,000
Old Ocean Financing -- 2,200,000
Cogneseis Development -- 28,912
Convertible Debentures 12,055,000 27,250,000
Special Notes 8,762,000 9,012,000
----------------------- ------------------------
Total 61,021,715 59,490,912
Current Portion -- 17,228,912
----------------------- ------------------------
Total Long-Term Debt $ 61,021,715 $ 42,262,000
======================= ========================
During the third quarter of 1999, the company restructured its debt obligations
through the following transactions:
AQUILA FINANCING - In August 1999, the Company closed a new long-term
production financing facility with Aquila Energy Capital Corporation in the
initial amount of $26.8 million. The facility may be extended by up to $1.5
million based on results of reservoir stimulation in the Fortenberry well.
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 Company has a firm commitment
from Aquila for an additional $3.8 million of funding for development
drilling at its Oakvale Dome Field.
6
The new production financing is secured by the Company's 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 the Company's interest in the proven properties following full
repayment of the production financing.
ENCAP JUNIOR NOTE - In August 1999, the company borrowed $2.9 million
under a Junior Note with EnCap Energy Capital Fund III, L.P. The note matures
December 31, 2000 and accrues interest at a rate of 10% per annum. Proceeds
were used to repay existing debt under the EnCap and BOCP credit facilities.
DEBT RESTRUCTURING AGREEMENT - In August 1999 the company 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 represents $11.2 million in past due
accounts, equal to over 90% of all accounts payable of the Company over
$10,000. Under the agreement, Benz 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 the Company's 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 properties of
the Company.
EXCHANGE OF CONVERTIBLE DEBENTURES - In July 1999, the Company closed
its private placement and exchange offer with European holders of the
Company's 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, the Company 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. The company received gross cash proceeds of $3.8 million from new
investors and $1.5 million from debenture holders through the exchange above.
2. ACQUISITIONS AND DIVESTITURES
In January 1999, the Company acquired on behalf of the Company and its
partner in the Wausau prospect, a gas pipeline in Mississippi for approximately
$425,000 to provide access for gas sales. Included in the purchase were a 100%
and a 93.75% BPO working interest in two producing wells. The Company does not
anticipate these wells reaching defined payout. The Company owns a 53.8%
interest in the pipeline and the Fairchild #1 well and a 50.5% interest in the
A. Foote Estate #1 well. Gas reserves net to the Company are estimated to be in
excess of 150 MMCFG and net production of over 150 MCFGPD.
In May 1999, the Company sold its interest in the Lisbon Field, comprising
essentially all of its proven reserves in Louisiana, for $507,500 in gross
proceeds to an unrelated party.
In August, the Company sold a 37.5% interest in its Old Ocean prospect to
Prime Natural Resources, Inc. Prime paid $3.5 million at closing and paid an
additional $1,978,098 in September 1999 for consideration of
7
the interest purchased. Prime has an option for a six month period to
purchase an additional 12.5% of the Company's interest in the Old Ocean at a
purchase price of $1,826,033, plus $214,276 at the end of the six month
period.
In September 1999, the Company sold its interest in the Plum Grove Field
located in Liberty County, Texas to an unrelated party for $1.1 million in
gross proceeds.
3. CAPITAL STOCK
In May 1999, the Company migrated from the Yukon Territory, Canada and
became a Delaware corporation, changing its name to Benz Energy Inc. Authorized
capital stock is 300,000,000 shares of $0.01 par value common stock and
100,000,000 shares of $1.00 par value preferred stock.
On July 9, 1999, the Company consummated an offering pursuant to which it
offered to exchange up to 354,250 shares of its class A, series II preferred
stock for any and all of its outstanding 9% convertible debentures series I,
due March 31, 2003 and an offering to sell up to 121,000 shares of class A,
series II convertible preferred stock. At the closing, the Company exchanged
$15,145,000 principal amount of the 9% convertible debentures for 159,201
shares of class A, series II preferred stock and issued 44,600 shares under
the primary offering. In addition the Company issued 34,596 shares of class
A, series II convertible preferred stock and warrants to purchase 3,974,923
shares of common stock in connection with the retirement of 95.45% of the Old
Ocean loan and the re-conveyance of the applicable net profits interest. The
balance of the Old Ocean financing and re-conveyance was settled through a
cash payment. The remaining proceeds from the exchange offer and the offering
of convertible preferred stock were used to pay a portion of the seismic
costs relating to the old Ocean Prospect and to pay fees and expenses of the
transactions. The preferred stock issued has a dividend rate of 8% payable
semi-annually on September 30th and March 31st in cash or common stock at the
election of the Company. The conversion price is Cdn. $0.35 per share. The
Company has the right to redeem the preferred stock in cash at any time upon
thirty days notice at 105% of the principal amount.
The Company also closed a private placement in August 1999 of $4 million
in new equity through the issuance of $4.4 million of redeemable Class A
Preferred Stock, Series I to investment entities affiliated with and managed
by EnCap Investments, L.C. The Company paid a placement fee of $100,000 to
EnCap Investments, L.C. Proceeds were used to fund arrangements per the
creditor agreement and for other general corporate purposes.
8
4. INVESTMENT IN EQUITY SECURITIES
At September 30, 1999 and 1998, marketable investments classified as
available for sale were comprised of the following:
September 30, September 30,
1999 1998
------------- --------------
Common Stocks:
Market value $ -- $ 90,706
Cost -- 396,872
------------- --------------
Gross Unrealized Holding Losses $ -- $ (306,166)
============= ==============
The Company realized the following gross losses from the sale of equity
securities for the periods indicated:
Nine months ended September 30, 1999 $ 148,091
Nine months ended September 30, 1998 $ 17,136
Benz utilizes the average cost method in computing realized gains and
losses which is included in other income (expense) in the accompanying
Consolidated Statement of Operations.
5. NON-CASH INVESTING AND FINANCING ACTIVITIES
Supplemental Disclosure of Cash Flow Information
The Company considers 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.
Certain holders of the convertible debentures ($7,050,000 principal
amount) elected to be paid for the six-month period ending March 31, 1999
with 1,057,500 shares of common stock in lieu of $317,250 of interest. The
stock price used in the swap was based on the 10 day trailing closing
average through March 26, 1999.
The Company exchanged $15,145,000 principal amount of 9% convertible
debentures series I for 159,201 shares of class A, series II convertible
preferred stock. In addition, 2,984,530 shares of common stock were issued
as payment for costs of the exchange offer including commissions and finance
fees.
The Company issued 34,596 shares of class A, series II convertible
preferred stock and warrants to purchase 3,974,923 shares of common stock in
connection with the retirement of 95.45% of the Old Ocean loan and
reconveyance of the applicable net profits interest.
In July 1999, $300,000 principal amount of debentures was converted
into 598,982 common shares.
The Company paid dividends on its preferred shares, series I and II
with 5,622,777 common shares of the company valued at $1,407,399.
9
The following table provides additional disclosure of cash payments:
For the Nine Months Ended
September 30,
------------------------------------
1999 1998
---------------- ----------------
Cash paid during the period for:
Interest (net of amounts capitalized) $ 6,102,069 $ 2,926,646
Income taxes (net of refunds) -- --
6. STOCK OPTIONS
The Company accounts for its stock option transactions under the provisions
of APB No. 25. The following pro forma information is based on estimating
the fair value of grants based upon the provisions of SFAS No. 123. The fair
value of each option granted during the periods indicated has been estimated
as of the date of grant using the Black-Scholes option pricing model with
the following assumptions:
Year Ended
December 31, Four Months Ended Ten Months
1998 December 31, 1997 Ended August 31, 1997
--------------- ------------------- -----------------------
Risk Free Interest Rate 4.59% 5.57% 5.57%
Life of the Options 2 years 2-3 years 2-3 years
Expected Dividend Yield 0% 0% 0%
Expected Volatility 138% 30% 30%
Weighted Average Fair value of
Options Granted $0.14 $0.40 $0.60
No options were granted during the nine-month period ended September
30, 1999. The Company's pro forma net loss and net loss per share assuming
compensation cost was determined under SFAS No. 123 would have been the
following:
For the Nine Months Ended September 30,
---------------------------------------
1999 1998
---------------- ----------------
Net Loss $ (10,369,569) $ (8,414,365)
Net Loss Per Basic Share $ (0.29) $ (0.26)
10
September 30, September 30,
1999 1998
--------------- --------------
Weighted Average Option Price Per
Share (Cdn.$):
Granted $ -- $ 1.71
Repriced 0.51 --
Exercised -- 0.27
Cancelled 2.25 1.95
Outstanding at End of Period 0.80 2.34
Exercisable at End of Period 0.80 2.34
Weighted Average Remaining Life of
Options Outstanding 26 months 25 months
7. 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:
September 30, September 30,
1999 1998
-------------- --------------
Warrants 6,212,826 5,543,241
Options 2,867,349 3,122,617
-------------- --------------
Total shares 9,080,175 8,665,858
============== ==============
8. SUBSEQUENT EVENTS
The company has proposed the drilling of a development well in the Oakvale
Dome Field in Mississippi currently carried as proved undeveloped in its
independent engineering report. Correspondingly, the company has applied for,
and received into escrow, funding for its share of the drilling and test costs
as provided for under the Aquila Credit Facility. The sole working interest
partner of the company in the proposed well has also placed into escrow its
share of the drilling and test costs and operations will commence shortly.
The company has also received, and is reviewing, the first well proposal in
the Old Ocean Project in Texas.
11
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 the Company's
Consolidated Financial Statements included herein.
RECENT DEVELOPMENTS
The Company has proposed the drilling of a development well in the Oakvale Dome
Field in Mississippi currently carried as proved undeveloped in its engineering
report. The Company has also received, and is reviewing, the first well proposal
in the Old Ocean Project in Texas.
OVERVIEW
The following matters had a significant impact on the Company's results of
operations and financial position for the nine months ended September 30, 1999:
OUTSTANDING DEBT - During the third quarter of 1999, the company
restructured its debt obligations through a new long-term production financing
facility with Aquila Energy Capital Corporation, an agreement with certain
vendors and suppliers to convert their past due accounts payable to a secured
10% note maturing in 2002 and the exchange of $15.1 million principal amount of
debentures for $14.3 million principal amount of 8% Class A Convertible
Preferred Stock Series II. Proceeds from these transactions were used to pay
existing senior secured debt including the EnCap Credit Facility, the BOCP
Credit Facility and the Shell production financing. In addition, the Company
repaid the Old Ocean bridge loan with proceeds from new equity raised through
the private placement of preferred stock in Europe. As of September 30, 1999 all
of the Company's existing credit facilities are considered long-term.
PRODUCTION - Revenue for the nine months ended September 30, 1999 was
significantly improved by first sales of production from the Howell 32-4 #1 and
the Fortenberry wells (Oakvale Dome development wells), the BOE 16-12 #1 well
(Wausau exploratory well) and the BOE 16-14 #1 well (E. Morgantown exploratory
well). Production from these wells averaged 4,279 Mcfe/d, increasing revenue
$2.4 million for the nine months ended September 30, 1999.
RESULTS OF OPERATIONS
For the third quarter of 1999, revenue from crude oil and natural gas
production increased 60% over the same period in 1998. Natural gas contributed
88% and crude oil contributed 12% of total oil and gas production revenue.
For the nine months ended September 30, 1999, revenue from crude oil and
natural gas production increased 60% over the same period in 1998. Natural gas
contributed 86% and crude oil contributed 14% of total oil and gas production
revenue.
12
The following table summarizes volume and price information with respect to
the Company's oil and gas production for the quarter and nine-month periods
ended September 30, 1999 and 1998:
For the Quarter Ended
September 30, For the Nine Months Ended September 30,
-------------------------------- ---------------------------------------
Increase Increase
1999 1998 (Decrease) 1999 1998 (Decrease)
------ ------ ------------ ------ ------ ------------
Gas Volume - MCFGD 9,619 5,702 3,917 8,874 4,929 3,945
Average Gas Price - per MCF $ 1.99 $ 2.25 $(0.26) $ 1.87 $2.24 $(0.37)
Oil Volume - BOD 120 87 33 190 98 92
Average Oil Price - per barrel $21.26 $ 8.53 $12.73 $14.40 $10.52 $ 3.88
THIRD QUARTER 1999 COMPARED TO THIRD QUARTER 1998
Natural gas sales increased 49%, from $1.2 million for the third quarter of
1998 to approximately $1.8 million for the same period in 1999 due primarily to
increased production compared to the prior year period. The Howell 32-14 #1 well
was completed in late February 1999 and contributed approximately $549,600 in
natural gas revenue on average production of 2,851 Mcf/d during the third
quarter of 1999. In addition, two exploratory wells had first sales in 1999. The
BOE 16-12 #1 and the BOE 16-14 #1 each averaged over 640 Mcf/d for the third
quarter of 1999 for combined natural gas revenue of approximately $215,350. The
Fortenberry well had first sales in August 1999 and contributed approximately
$157,900 in natural gas revenue for the third quarter of 1999. The increase in
average production from these new wells more than offset the effect of a decline
in production due to properties sold during 1999. Partially offsetting the
impact of the increased production was a decline in the average realized price
for natural gas sales from $2.25 per MCF in the third quarter of 1998 to $1.99
per MCF in the comparable 1999 period. If the Company had received the same
pricing as in the prior year period at current production levels, natural gas
revenue would be higher by approximately $227,400 for the third quarter period.
The company was adversely affected in the third quarter 1999 by the physical
price swaps entered into by Shell Capital as part of the Shell production
financing. The physical price swaps were terminated for production after
September 1999 as part of the Aquila financing in August 1999.
For the third quarter of 1999, oil sales increased 243% to $234,300,
compared to $68,200 for the same period in 1998, due primarily to higher
realized average oil prices. The Company's average realized price for sales of
crude oil in the third quarter of 1999 increased by $12.73 per barrel, or 149%,
increasing revenue by $140,300 compared to the same period in 1998. A net
increase in production contributed $25,800 to the higher 1999 oil sales revenue
as production from new wells drilled and completed in 1999 offset production
lost from the sale of various properties during 1999. The BOE 16-12 #1 had oil
sales totaling approximately $102,400 for the period reported on average
production of 61 Bopd. In addition, the Rau Allen and the BOE 16-14 #1
contributed combined revenue of approximately $87,300 on average net production
of 52 Bopd.
13
YEAR-TO-DATE 1999 COMPARED TO YEAR-TO-DATE 1998
Natural gas sales increased 51%, from $3.0 million for the nine months
ended September 30, 1998 to approximately $4.5 million for the same period in
1999, due primarily to increased production compared to the prior year period.
The Howell 32-14 #1 well was completed in late February 1999 and contributed
over $1.1 million in natural gas revenue on average production of 2,153 Mcf/d
during the nine months ended September 30, 1999. Two exploratory wells also had
first sales in 1999. The BOE 16-12 #1 and the BOE 16-14 #1 averaged 622 Mcf/d
and 542 Mcf/d, respectively, in 1999 for combined natural gas revenue of
approximately $600,000. The Fortenberry well had first sales in August 1999 and
contributed approximately $157,900 in natural gas revenue for 1999. The addition
of these new wells in 1999 mitigated the effect of lost production from wells
sold in 1999 and resulted in an overall increase in revenue of approximately
$2.4 million. The favorable impact of increased production was partially offset
by a decline in the average realized price for natural gas sales from $2.24 per
MCF in 1998 to $1.87 per MCF in the comparable 1999 period. The average realized
price in 1999 was adversely affected by the Shell production financing physical
price swaps. If the Company had received the same pricing as in the prior year
period at current production levels, natural gas revenue would be higher by
approximately $886,400.
For the nine months ended September 30, 1999, oil sales increased 166% to
$748,800, compared to $282,000 for the same period in 1998, due primarily to
sales of production from new wells drilled and completed. The BOE 16-12 #1 had
first oil sales totaling approximately $353,600 for the period reported on
average production of 94 Bopd. In addition, the Rau Allen and the BOE 16-14 #1
contributed combined revenue of approximately $200,200 on average net production
of 48 Bopd. Oil revenue was also impacted by improved average realized prices.
The Company's average realized price for sales of crude oil in 1999 increased by
$3.88 per barrel, or 37%, increasing revenue by $201,500 compared to the same
period in 1998.
OPERATING EXPENSES AND OTHER INCOME (EXPENSE)
The Company's depreciation, depletion and amortization ("DD&A") expense for
the third quarter and nine-month period ended September 30, 1999 totaled $1.3
million and $3.4 million, respectively, compared to $0.7 million and $1.75
million in the comparable 1998 periods. Full cost DD&A totaled $1.2 million for
the third quarter of 1999 and $3.2 million for the nine months ended September
30, 1999 compared to $575,000 for the third quarter of 1998 and $1.5 million for
the year-to-date period in 1998. On an equivalent MCF basis, full cost DD&A
increased $0.29 per MCFE, from $1.00 per MCFE to $1.29 per MCFE, in the third
quarter of 1999 compared to the same period in 1998. For the nine months ended
September 30, 1999, the full cost DD&A rate averaged $1.17 per MCFE compared to
$1.02 in 1998. The increase in DD&A is consistent with an increase in production
for the 1999 period compared to the prior year period. In addition, prospect
sales in the third quarter of 1999 resulted in additional costs that were added
to the amortizable base. DD&A of other assets for the third quarter and the nine
months ended September 30, 1999 totaled $73,800 and $263,100, respectively,
compared to $85,000 and $215,700 in the comparable 1998 periods. The decrease in
the quarterly depreciation was due primarily to the sale of geophysical
equipment in 1999. Year-to-date costs reflect the overall increase in the
related asset base from 1998 to 1999.
Operating costs, including lease operating expense and severance taxes,
decreased 55 percent from $277,600 in the third quarter of 1998 to $123,600 for
the same period in 1999. For the nine months ended September 30, 1999, operating
costs totaled $606,200, a decrease of $18,000 compared to the same period in
1998. For the third quarter and year-to-date period ended September 30, 1999,
lease operating expense, excluding severance taxes, totaled $103,700 and
$545,200, respectively, compared to $259,700 and $558,100 for the comparable
periods in 1998. On an equivalent MCF basis, lease operating expense for the
third quarter declined from $.45 per MCFE in 1998 to $0.11 per MCFE in 1999. For
the nine months ended September 30, 1999, lease operating expense averaged $.20
per MCFE, a 46 percent decrease from $0.37 per
14
MCFE for the same period in 1998. The decrease in operating costs from 1998
to 1999 resulted primarily from the sale of higher cost, lower producing
wells in the Lisbon and Reedy Creek Fields.
General and administrative expense for the third quarter of 1999 decreased
$530,400, or 39 percent, from the comparable period in 1998. Costs for the nine
months ended September 30, 1999 decreased $2.0 million, or 45%, compared to the
same period in 1998. On an equivalent MCF basis, general and administrative
costs declined 70% to $0.91 per MCFE for the nine months ended September 30,
1999 compared to $3.01 for the same period in 1998. The decrease in G&A costs
was due primarily to lower compensation expense generated by staff reductions
during the fourth quarter of 1998 and the first quarter of 1999.
Interest expense for the third quarter of 1999 decreased $382,200, or 26
percent, from the comparable prior year. For the nine months ended September 30,
1999 interest expense totaled $4.0 million compared to $4.2 million in the
comparable prior year period. Average debt was approximately $59.6 million for
the nine months ended September 30, 1999, resulting in gross interest costs of
$5.8 million. Other financing costs include the amortization of discount and the
amortization of the original issue discount for the EnCap NPI totaling $205,000.
Partially offsetting these costs was capitalized interest of $3.3 million, which
is based on the carrying value of unproved properties. Financing costs also
included amortization of debt issuance costs totaling $1.3 million for the
year-to-date period in 1999. For the comparable 1998 year-to-date period,
average debt was approximately $42.7 million, resulting in gross interest costs
of $3.4 million. Other financing costs included the amortization of the original
issue discount for the EnCap NPI of $1.3 million. Partially offsetting these
costs was capitalized interest of $1.2 million. Amortization of debt issuance
costs totaled $764,300 for the nine months ended September 30, 1998.
Other income (expense) for the third quarter of 1999 and 1998 consisted
primarily of interest income of $97,500 and $167,500, respectively. For the nine
months ended September 30, 1999 other income included losses on the sale of
marketable securities totaling $148,300 and the write-off of an investment in
equipment for a loss of $182,300, partially offset by interest income of
$260,800. For the comparable year-to-date period in 1998, other income included
interest income of $486,900 slightly offset by losses on the sale of marketable
securities totaling $16,700.
The Company recorded an extraordinary loss of $2.4 million, or $0.07 per
share, on the early extinguishment of debt as a result of its restructuring
during the third quarter of 1999. Such amount included costs associated with the
early retirement of the Shell production financing with proceeds from the Aquila
production financing and also costs related to the early retirement of $15.1
million principal amount of convertible debentures exchanged for preferred
stock, series II.
For the third quarter of 1999, the Company reported a net loss applicable
to common stockholders of $4.7 million, or $0.13 per share, compared to a loss
of $2.6 million, or $0.08 per share, for the same period in 1998. For the nine
months ended September 30, 1999, the Company reported a net loss applicable to
common stockholders of $9.3 million, or $0.26 per share, compared to a net loss
of $8.0 million, or $0.25 per share, in the comparable 1998 period. Weighted
average shares outstanding increased from approximately 32.1 million for the
nine months ended September 30, 1998 to 35.9 million in the comparable 1999
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 exchange offer.
15
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs are for exploration, development and
acquisition of oil and gas properties, and repayment of principal and interest
on outstanding debt. The Company's sources of financing include equity
placements, revenue generated from operations, ongoing sales of non-core assets
and excess interests in core prospects, and proceeds from additional production
financings. Based on the foregoing, the Company will require capital from
certain of the sources identified above to fund its ongoing activities and debt
service over the next 12 months. If the Company is unable to obtain such
capital, the Company will either have to sell interests in its prospects to fund
its drilling program, curtail its exploration activities and/or curtail ongoing
activities, or restructure scheduled debt service. Such curtailing of activities
could include reducing the number of wells drilled, slowing activities on
projects that the Company operates, selling additional interests in the
Company's prospect inventory or a combination of the foregoing.
Many of the factors that may affect the Company's future operating
performance and long-term liquidity are beyond the Company's control, including,
but not limited to, oil and natural gas prices, governmental actions and taxes,
the availability and attractiveness of financing and its operational results.
The Company continues 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 its prospects, and various forms of joint venture
financing. In addition, the prices the Company receives for its future oil and
natural gas-production and the level of the Company's production will have a
significant impact on future operating cash flows.
LIQUIDITY
At September 30, 1999, the Company had cash and cash equivalents on hand of
$1.0 million and working capital of $2.7 million, as compared to a cash balance
of $2.3 million and a working capital deficit of $27.4 million at December 31,
1998. The Company's ratio of current assets to current liabilities was 1.58:1 at
September 30, 1999 compared to 0.25:1 at December 31, 1998. The working capital
surplus and increased current ratio at September 30, 1999 resulted from the
Company's debt restructuring in the third quarter of 1999.
CASH FLOWS
Cash flows used in operating activities totaled $3.3 million for the nine
months ended September 30, 1999 due primarily to changes in working capital.
Cash used in investing activities for the nine months ended September 30, 1999
was $11.5 million. Cash outlays for exploration and development expenditures
totaled approximately $18.5 million and capital expenditures for furniture and
equipment totaled $79,400. Partially offsetting these costs was $6.8 million in
proceeds from the sale of oil and gas properties and $160,500 in proceeds from
the sale of marketable securities.
Cash provided by financing activities totaled $13.6 million for the nine
months ended September 30, 1999 and included borrowings under the Aquila
production financing of $26.8 million, proceeds from the issuance of preferred
shares of $9.3 million and $2.9 million borrowed under the EnCap Junior Note.
Proceeds from such financing were used to repay obligations under the BOCP
Credit Facility of approximately $3.0 million, the EnCap facility of $12.0
million, the Shell production financing of $6.1 million and accrued interest.
Proceeds were further reduced by the costs of the debt and equity transactions
totaling approximately $3.2 million for the nine months ended September 30,
1999.
16
YEAR 2000
The Company operates on an internally designed software package that is
compliant with the year 2000. The year 2000 problem is the result of software
that uses two digits (rather than four) to define the applicable year. Any
software or hardware that utilizes time-sensitive coding may recognize a day
using "00" as the year 1900 rather than the year 2000, which could result in
miscalculations or system failures. An external computer consultant has
conducted a test of the Company's systems and determined what upgrades, if any,
were required to address the Y2K issue. The Company attempted to identify other
potential areas of risk in its planning, purchasing and daily operations. Based
on preliminary information, costs of addressing potential problems are not
currently expected to have a material adverse impact on the Company's financial
position, results of operations, or cash flows in future periods. If, however,
the Company, its customers, or vendors are unable to adequately resolve such
processing issues in a timely manner, the Company's operations and financial
results may be adversely affected.
17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGE IN SECURITIES
Amount of
Date of Transaction Type of Securities Securities Sold Description of the Transaction
- -------------------- ---------------------- ------------------ --------------------------------
September 1999 Common Stock 1,927,426 1998 Property Purchase
September 1999 Common Stock 4,570,896 Preferred Dividend
July 1999 Common Stock 57,282 Exchange for Debentures
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.
18
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: November 15, 1999 /s/ Robert S. Herlin
------------------- -------------------------------------------------
Robert S. Herlin
Senior Vice President and Chief Financial Officer
Dated: November 15, 1999 /s/ Kirsten A. Hink
------------------- -------------------------------------------------
Kirsten A. Hink
Controller
(Chief Accounting Officer)
19