SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
December 31, 1995 Commission File Number 0-13201
SHEFFIELD EXPLORATION COMPANY, INC.
1801 Broadway, Suite 600
Denver, Colorado 80202
Incorporated in Delaware IRS ID #06-1052062
Telephone: (303) 296-1908
Sheffield Exploration Company, Inc. ("the Company") (1) has filed all
reports required to be filed by Section 13 of the Securities Exchange
Act of 1934 during the preceding 12 months and (2) has been subject to
such filing requirements for the past 90 days.
3,447,979 shares of common stock, $.01 par value,
outstanding at February 7, 1996
INDEX
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Page
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Part One - Financial Information
Consolidated Balance Sheets - December 31, 1995
and June 30, 1995 1
Consolidated Statements of Operations - Six months
and three months ended December 31, 1995 and 1994 3
Consolidated Statements of Cash Flows - Six months
ended December 31, 1995 and 1994 4
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part Two - Other Information
Submission of Matters to a Vote of Security Holders 10
Exhibits and Reports on Form 8-K 11
Signatures 11
Exhibit Index 12
PART ONE - FINANCIAL INFORMATION
SHEFFIELD EXPLORATION COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
December 31, June 30,
1995 1995
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 2,885,261 $ 43,594
Receivables, net 1,116,607 1,156,837
Gas in storage -- 237,810
Assets held for sale 87,450 4,144,040
Deferred income taxes, net -- 670,000
Other 70,531 78,809
------------- -------------
4,159,849 6,331,090
PROPERTY AND EQUIPMENT
(Using the successful efforts method)
Unproved oil and gas properties 668,218 624,980
Proved properties 4,381,685 4,258,381
Gas plant and related equipment 2,201,782 2,071,328
Other property and equipment 149,312 123,402
------------- -------------
7,400,997 7,078,091
Accumulated depreciation, depletion and
amortization and impairment (4,101,723) (3,800,247)
------------- -------------
3,299,274 3,277,844
Deferred income taxes, net 321,000 321,000
Other assets 38,743 105,832
------------- -------------
$ 7,818,866 $ 10,035,766
============= =============
The accompanying notes are an integral part of these
consolidated financial statements
-1-
SHEFFIELD EXPLORATION COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
1995 1995
------------- -------------
CURRENT LIABILITIES
Accounts payable $ 836,103 $ 849,349
Deposits -- 12,783
Current portion of long-term debt -- 1,175,250
Production and ad valorem taxes payable 113,153 147,781
------------- -------------
949,256 2,185,163
LONG-TERM DEBT, net of current portion 100,050 1,374,050
STOCKHOLDERS' EQUITY
Preferred stock $.01 par value; 2,000,000 shares
authorized; none issued -- --
Common stock, $.01 par value; 10,000,000 shares
authorized; 3,423,598 and 3,389,261 shares
issued and outstanding at December 31, 1995
and June 30, 1995, respectively 34,236 33,893
Additional paid-in capital 6,856,217 6,805,550
Accumulated deficit (120,893) (362,890)
------------- -------------
6,769,560 6,476,553
------------- -------------
$ 7,818,866 $ 10,035,766
============= =============
The accompanying notes are an integral part of these
consolidated financial statements
-2-
SHEFFIELD EXPLORATION COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
----------------------------- -----------------------------
1995 1994 1995 1994
------------- ------------- ------------- -------------
Revenues
Gas processing, gathering and storage $ 445,702 $ 1,588,169 $ 2,590,323 $ 3,584,912
Oil and gas sales 264,736 309,154 506,416 617,933
------------- ------------- ------------- -------------
Total revenues 710,438 1,897,323 3,096,739 4,202,845
Expenses
Gas processing, gathering and storage 298,195 1,368,581 1,929,257 3,087,216
Operation of producing properties 117,181 95,172 214,734 189,286
Production taxes 28,465 30,346 55,473 58,448
Exploration 13,413 6,919 43,677 21,107
Depreciation, depletion and amortization:
Gas processing, gathering and storage assets 49,671 98,499 171,503 211,633
Oil and gas properties 108,536 110,965 202,134 199,523
Other 2,811 12,635 16,348 22,195
Impairments:
Unproved properties -- 100,951 -- 100,951
Proved properties -- 511,347 -- 511,347
General and administrative, net 345,759 111,151 581,736 238,254
------------- ------------- ------------- -------------
Total expenses 964,031 2,446,566 3,214,862 4,639,960
------------- ------------- ------------- -------------
Operating loss (253,593) (549,243) (118,123) (437,115)
Other income (expense)
Interest income and other 43,551 11,289 49,492 13,089
Gain on sale of fixed assets 1,037,517 10,411 1,050,954 17,552
Interest expense, net of capitalized interest (6,450) (42,651) (70,326) (87,704)
------------- ------------- ------------- -------------
1,074,618 (20,951) 1,030,120 (57,063)
------------- ------------- ------------- -------------
Income (loss) before income taxes 821,025 (570,194) 911,997 (494,178)
Provision (benefit) for income taxes 636,000 (28,000) 670,000 --
------------- ------------- ------------- -------------
Net income (loss) $ 185,025 $ (542,194) $ 241,997 $ (494,178)
============= ============= ============= =============
Net income (loss) per share $ 0.05 $ (0.17) $ 0.07 $ (0.15)
============= ============= ============= =============
Weighted average common shares outstanding 3,402,157 3,266,565 3,396,035 3,266,565
============= ============= ============= =============
The accompanying notes are an integral part of these
consolidated financial statements
-3-
SHEFFIELD EXPLORATION COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Six Months Ended
September 30,
------------------------------
1995 1995
------------- -------------
Cash flows from operating activities:
Net income (loss) $ 241,997 $ (494,178)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depletion, depreciation and amortization 389,985 433,351
Deferred income taxes 670,000 --
Impairment expense -- 612,298
(Gain) on asset sales (1,050,954) (5,628)
Cost of storage gas sales (purchases) 238,624 (110,600)
Stock as compensation 50,000 --
Other 12,330 8,631
Changes in current assets and liabilities:
Receivables 23,230 316,559
Payables (13,246) (73,649)
Taxes payable (34,628) 24,911
Other current assets 8,278 68,611
Other assets (3,972) 45,227
------------- -------------
Net cash provided by operating activities 531,644 825,533
Cash flows from investing activities:
Proceeds from asset sales 5,271,896 8,500
Additions to properties:
Producing properties (123,304) (190,637)
Gas plant, gathering and storage systems (130,836) (372,668)
Unproved properties (54,694) (97,406)
Other (25,910) (132,998)
Additions to assets held for sale (166,104) --
Gas in storage -- (266,000)
Deposits (12,783) 217,000
------------- -------------
Net cash provided by (used in) investing activities 4,758,265 (834,209)
Cash flows from financing activities:
Loan proceeds -- 173,715
Payment of loan principal (2,449,250) --
Proceeds from stock issuance 3,000 --
Purchase of common stock (1,992) --
------------- -------------
Net cash (used in) provided by financing activities (2,448,242) 173,715
------------- -------------
Net increase in cash and equivalents 2,841,667 165,039
Cash and equivalents at beginning of period 43,594 360,124
------------- -------------
Cash and equivalents at end of period $ 2,885,261 $ 525,163
============= =============
The accompanying notes are an integral part of these
consolidated financial statements
-4-
SHEFFIELD EXPLORATION COMPANY AND SUBSIDIARIES
("Sheffield" or "the Company")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) FINANCIAL STATEMENT ADJUSTMENTS AND FOOTNOTE DISCLOSURES:
The accompanying consolidated financial statements are unaudited.
However, in the opinion of management, the accompanying financial
statements reflect all adjustments, which are normal and recurring in
nature, necessary for a fair presentation.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the
Securities and Exchange Commission's rules and regulations.
Management believes the disclosures made are adequate to make the
information not misleading and suggests that these financial
statements be read in conjunction with the Company's June 30, 1995
Form 10-K.
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
(2) INCOME TAXES:
As a result of the Company's January 1, 1991 quasi-reorganization,
income tax benefits resulting from utilization in subsequent years of
net operating loss carryforwards existing at January 1, 1991 are
excluded from results of operations and, since the Company's adoption
of Statement of Financial Accounting Standard No. 109 in fiscal 1993,
credited to the deferred tax asset. From the date of quasi-
reorganization through June 30, 1992, benefits were credited to
additional paid-in capital.
The $670,000 tax provision for the six months ended December 31, 1995
consists of taxes at the federal statutory rate of 34 percent
($328,000), a 3 percent state provision ($27,000) and an increase in
the tax asset valuation allowance of $315,000.
As discussed in Note 5, the Company has executed a merger agreement.
Assuming the merger is consummated, it is anticipated that future use
of the Company's tax loss carryforward will be restricted.
5
(3) NET INCOME (LOSS) PER SHARE:
Warrants and options have been excluded from the income (loss) per
share calculation as they have no material dilutive effect.
(4) RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARD:
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 123 "Accounting for Stock-Based Compensation"
in October 1995. This statement, which is required to be adopted in
fiscal year 1997, introduces a fair-value based method of accounting
for stock-based compensation. The Company has not yet adopted the
statement and has not yet determined the impact it may have on the
Company's financial statements or on the financial statement
disclosure.
(5) PROPOSED MERGER WITH TRANSMONTAIGNE OIL COMPANY:
On February 6, 1996, the Company executed an agreement with
TransMontaigne Oil Company ("TransMontaigne"), a privately-held,
Denver-based holding company, to merge TransMontaigne into Sheffield.
Sheffield will be the surviving corporation and its name will be
changed to TransMontaigne Oil Company. The current stockholders of
TransMontaigne will own 91% of the surviving corporation. The board
of directors of the surviving entity will consist of the members of
the current TransMontaigne board, as well as Edwin H. Morgens,
chairman of Sheffield. It is expected that the current officers of
TransMontaigne will serve as officers after the merger.
The merger is subject to approval by the stockholders of
TransMontaigne and Sheffield. The Company expects to file with the
Securities and Exchange Commission a registration statement which
includes proxy material for a stockholders' meeting, presently
expected to be held in late April 1996.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. On October 2, the Company sold all of its gas gathering and
processing assets in Kansas and Oklahoma for a pre-adjustment price of
$5.5 million (the "Asset Sale"). The purchase and sale agreement
provided for an effective date of July 1, 1995. However, the purchase
and sale agreement specified that Sheffield was entitled to all
proceeds from the sale of natural gas from storage inventory provided
that at closing there be a minimum of 150,000 mmbtu in inventory.
Additionally, Sheffield continued to operate the assets until
January 31, 1996. The Company recorded a gain of approximately $1
million during the quarter ended December 31, 1995 as a result of the
Asset Sale. A portion of the proceeds have been used to substantially
reduce bank debt, leaving the Company with a cash balance of
approximately $3 million. This cash balance is significantly greater
than that needed for the capital projects Sheffield currently plans to
undertake in fiscal 1996.
As disclosed in Item 6, during February 1996, Sheffield issued a press
release to announce that it had signed an agreement to merge with a
company considerably larger than itself. Accordingly, Sheffield does
not presently intend to undertake any significant capital expenditures
outside its current areas of interest prior to the merger, which is
anticipated to consummate prior to Sheffield's June 30, 1996 fiscal
year end.
OPERATIONS. The primary difference in operating cash flows from 1994
to 1995 relates to the $317,000 increase in cash generated from
changes in receivable balances during the six months ended
December 31, 1994. Although the sale of the Kansas and Oklahoma
assets will ultimately have a negative effect on cash flows from
operating activities, that effect was not manifested during the six
months ended December 31, 1995. During the six months ended
December 31, 1994 additions were made to storage field gas inventory
balances, thereby decreasing cash flows; during the quarter ended
September 30, 1995 (the quarter prior to the Asset Sale), sales from
storage inventory were made, thereby increasing operating cash flows.
Other changes in the components of net income are discussed in RESULTS
OF OPERATIONS, below.
INVESTING. Proceeds from the Asset Sale during the six months ended
December 31, 1995 accounted for the significant change from the
comparable period in 1994. Expenditures during each of the periods
presented were for additions to projects in which the Company had
previously made investments.
Sheffield (through its joint venture partner) is in the final stages
of negotiating an agreement with a Canadian gas producer which,
assuming successful completion of the contract negotiations, will
result in the extension of the Company's Lignite, North Dakota
gathering system into Saskatchewan. Due to recent successful Canadian
drilling, the gas
7
processing facility serving the area north of Lignite is approaching
its processing capacity. As a prerequisite to finalizing the
agreement, the Company intends to obtain a commitment from a purchaser
for gas volumes sufficient to achieve an adequate return on the
capital expended for the extension.
FINANCING. Proceeds from the Asset Sale were used to pay down
substantially all the Company's bank debt. After reducing the
borrowing base to reflect the Asset Sale, the Company has
approximately $1.4 million of unused bank borrowing capacity.
RESULTS OF OPERATIONS
GAS GATHERING, PROCESSING AND STORAGE. The change in components of
gas processing and gathering revenue from 1994 to 1995 is comprised of
the following:
PRICE QUANTITY REVENUE
CHANGE CHANGE CHANGE
------ -------- -------
For the quarters:
Residue gas sales (28)% (82)% (87)%
Natural gas liquid sales 10% (25)% (18)%
For the six-month periods:
Residue gas sales (16)% (38)% (48)%
Natural gas liquid sales 7% (15)% (7)%
The quantity and revenue decreases from 1994 to 1995 are a result of
the October 1995 Asset Sale. However, the positive impact of storage
field sales during the quarter ended September 30, 1995 resulted in
higher operating income from gathering, processing and storage during
the six months ended December 31, 1995 versus the same six month
period of 1994.
With regard to the Lignite, North Dakota system (the only system the
Company owns after the Asset Sale), gas and liquids volumes have
declined together with gas prices from 1995 to 1994. These declines
have been offset somewhat by an increase in the price received for the
liquids.
Lower 1995 depreciation, depletion and amortization reflects the Asset
Sale.
8
OIL AND GAS EXPLORATION AND PRODUCTION. The change in components of
oil and gas revenue from 1994 to 1995 is comprised of the following:
PRICE QUANTITY REVENUE
CHANGE CHANGE CHANGE
------ -------- -------
For the quarters:
Oil 1% (9)% (8)%
Gas (3)% (24)% (26)%
For the six-month periods:
Oil (2)% (4)% (7)%
Gas (20)% (24)% (40)%
Gas volume declines result from normal well depletion combined with
the fact that no successful wells have been completed during the
current fiscal year. However, two wells in the Pinedale, Wyoming
field, which had been shut-in during April 1995 due to gas price
considerations, were put back on production during December 1995.
Production from those wells, together with production from another
Pinedale well, is now being sold pursuant to a ten-year contract at a
price of $1.85 per mmbtu (or $1.67 per mcf at the wellhead). The
contract contains an annual escalation factor of 4 percent.
Certain Williston Basin oil wells require repairs and reworking on a
recurring but irregular basis. Immediately prior to being reworked,
the wells typically experience a decrease in production. Such was the
case during the quarter ended December 31, 1995, when oil volume
declined and operating costs went up. Both volumes and costs are
expected to return to more normal levels during the remainder of the
fiscal year.
During 1994, impairment expense was recognized on the south Texas
properties.
INTEREST/GENERAL AND ADMINISTRATIVE EXPENSE. Proceeds from the Asset
Sale were used to pay down bank debt (resulting in lower 1995 interest
expense) and invested in short-term money market instruments
(resulting in higher 1995 interest income).
In December 1994, Trinity Petroleum Management, Inc. ("Trinity")
became a wholly-owned subsidiary of Sheffield. Trinity previously
provided management and administrative services to Sheffield and
another company; now the former Trinity employees provide these
services exclusively to Sheffield. Accordingly, certain personnel and
overhead costs formerly shared by Sheffield and a third party company
are now borne entirely by Sheffield. The increase in general and
administrative expense from 1994 to 1995 is attributable primarily to
the foregoing.
PROVISION FOR TAXES. As discussed in Note 2 to the Consolidated
Financial Statements, the tax provision for the six months ended
December 31, 1995 consists of taxes provided at the federal and state
statutory rates as well as an amount representing a change in the
deferred tax asset valuation allowance.
9
PART TWO
OTHER INFORMATION
Item 4. Submission of matters to a vote of security holders.
a. The Company's Annual Meeting of Shareholders was held
at the Norwest Bank Building, Forum Room, 1740
Broadway, Denver, Colorado at 10:30 a.m. on December 5,
1995.
b. Matters voted upon at the meeting and the results of
the vote are as follows:
PROPOSAL 1:
Election of Directors
FOR WITHHELD
--- --------
Edwin H. Morgens 2,426,886 277
J. Samuel Butler 2,426,886 277
David A. Melman 2,426,886 277
McLain J. Forman 2,426,886 277
Randall E. King 2,426,886 277
PROPOSAL 2:
Approval of the appointment of Coopers & Lybrand to serve as the
Company's independent auditors for the fiscal year ending June 30,
1996.
FOR AGAINST ABSTAIN
--- ------- -------
2,427,069 87 7
10
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits required by Item 601 of S-K
10.17 Key Employee Retention Plan dated January 19,
1996.
27 Financial Data Schedule
b. On February 7, 1996, the Company filed a Form 8-K
disclosing that it had issued a press release on
February 6, 1996 reporting the execution of a merger
agreement with privately-held TransMontaigne Oil
Company.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SHEFFIELD EXPLORATION COMPANY, INC.
Date: February 13, 1996 By: David L. Milanesi
------------------------------------
David L. Milanesi
On behalf of registrant as Treasurer;
Principal Financial Officer
11
INDEX TO EXHIBITS*
Exhibit Number Description
- -------------- -----------
10.17 Key Employee Retention Plan dated January 19, 1996
27 Financial Data Schedule
* Exhibits filed only with the Securities and Exchange Commission
and the American Stock Exchange.
12