SWIFT ENERGY COMPANY
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
INDEX

SWIFT ENERGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

 

See accompanying notes to condensed consolidated financial statements.

Liabilities and Stockholders' Equity

SWIFT ENERGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

 

See accompanying notes to condensed consolidated financial statements.

SWIFT ENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

SWIFT ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(1) $.01 Par Value

See accompanying notes to condensed consolidated financial statements.

SWIFT ENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

See accompanying notes to condensed consolidated financial statements.

SWIFT ENERGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 (UNAUDITED) AND DECEMBER 31, 1994

(1) General Information -

 

The condensed consolidated financial statements included herein have been prepared by Swift Energy Company (the "Company") and are unaudited, except for the balance sheet at December 31, 1994 which has been prepared from the audited financial statements at that date. The financial statements reflect necessary adjustments, all of which were of a recurring nature, and are in the opinion of management, 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 omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The Company believes that the disclosures presented are adequate to allow the information presented not to be misleading. The condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the latest Form 10-K and Annual Report.

Because of the volatility in oil and gas prices and other factors, interim results are not necessarily indicative of those for a full year.

Certain reclassifications have been made to the prior year balances to conform to current year presentation.

(2) Summary of Significant Accounting Policies -

Oil and Gas Properties

 

For financial reporting purposes, the Company follows the "full-cost" method of accounting for oil and gas property and equipment costs. Under this method of accounting, all productive and nonproductive costs incurred in the acquisition, exploration, and development of oil and gas reserves are capitalized. Such costs include lease acquisitions, geological and geophysical services, drilling, completion, equipment and certain general and administrative costs directly associated with acquisition, exploration and development activities. General and administrative costs related to production and general overhead are expensed as incurred. No gains or losses are recognized upon the sale or disposition of oil and gas properties, except in extraordinary transactions. Instead, the proceeds from the sale of oil and gas properties are treated as a reduction of oil and gas property costs. Fees from associated oil and gas exploration and development limited partnerships are credited to oil and gas property costs to the extent they do not represent reimbursement of general and administrative expenses currently charged to expense.

Future development, site restoration, dismantlement and abandonment costs, net of salvage values, are estimated on a property-by-property basis based on current economic conditions and are amortized to expense as the Company's capitalized oil and gas property costs are amortized. The Company's properties are all onshore and historically the salvage value of the tangible equipment offsets the Company's site restoration, dismantlement and abandonment costs. The Company expects this relationship will continue.

The Company computes the provision for depreciation, depletion, and amortization of oil and gas properties on the unit-of-production method. Under this method, the Company computes the provision by multiplying the total unamortized cost of oil and gas properties including future development, site restoration, dismantlement and abandonment costs but excluding costs of unproved properties, by an overall rate determined by dividing the physical units of oil and gas produced during the period by the total estimated units of proved oil and gas reserves. The cost of unproved properties not being amortized is assessed quarterly to determine whether the value has been impaired below the capitalized cost. Any impairment assessed is added to the cost of proved properties being amortized.

At the end of each quarterly reporting period, the unamortized cost of oil and gas properties, net of related deferred income taxes, is limited to the sum of the estimated future net revenues from proved properties using current prices, discounted at 10%, and the lower of cost or fair value of unproved properties, adjusted for related income tax effects.

Deferred Charges

 

Legal and accounting fees, underwriting fees, printing costs, and other direct expenses associated with the issuance of the Company's Convertible Subordinated Debentures in June 1993 have been capitalized and are being amortized over the life of the Debentures, which mature on June 30, 2003. The balance at September 30, 1995 of $1,185,787 is net of accumulated amortization of $239,213.

Hedging Activities

 

The Company engages periodically in certain limited hedging activities, but only to the extent of buying price protection floors for portions of its and the limited partnerships' oil and gas production. Costs and/or benefits derived from these price floors are accordingly recorded as a reduction or increase in oil and gas sales revenues and are not significant for any period presented.

Deferred Revenues

 

In May 1992, the Company purchased interests in certain wells using funds provided by the Company's sale of a volumetric production payment in these properties. Under the terms of the production payment agreement, the Company continues to own the properties purchased but is required to deliver a minimum quantity of hydrocarbons produced from the properties (meeting certain quality and heating equivalent requirements) over a specified period. Since entering into this agreement, the Company has met all scheduled deliveries. Net proceeds from the sale of the production payment were recorded as deferred revenues. Deliveries under the production payment agreement are recorded as oil and gas sales revenues and a corresponding reduction of deferred revenues.

Limited Partnerships and Joint Ventures

 

The Company forms limited partnerships and joint ventures for the purpose of acquiring interests in producing oil and gas properties, and since 1993, partnerships engaged in drilling for oil and gas reserves. The Company's investments in associated oil and gas partnerships and its joint ventures are accounted for using the proportionate consolidation method, whereby the Company's proportionate share of each entity's assets, liabilities, revenues and expenses is included in the appropriate classifications in the consolidated financial statements. Because the Company serves as the general partner of these entities, under state partnership law it is contingently liable for the liabilities of these partnerships, which liabilities are not material for any of the periods presented in relation to the partnerships' respective assets. These partnerships' liabilities generally consist of third party borrowings from time to time to fund capital expenditures for development of oil and gas properties, and will be repaid from oil and gas sales proceeds of the partnerships in future periods.

Under the Swift Depositary Interests limited partnership offering ("SDI Offering") which commenced in March 1991, the Company receives a reimbursement of certain costs and a fee, both payable out of revenues. The Company bears all front-end costs of the offering and partnership formations for which it receives an interest in the partnerships. Prior to 1994, the Company recognized as revenue, fees (earned interests) received in the form of additional interests in producing oil and gas properties acquired by these entities. As described in Note 3, effective January 1, 1994, the Company changed its revenue recognition policy for earned interests and under its newly adopted policy, will no longer recognize earned interests as revenue.

The Company acquires and transfers producing oil and gas properties to the entities at cost, including interest, other carrying costs, closing costs, and screening and evaluation costs of properties not acquired, or in certain instances at fair market value based upon the opinion of an independent expert. These costs are reduced by net operating revenues from the effective date of the acquisition to the date of transfer to the entities.

Certain designated oil and gas properties acquired in advance of formation of partnerships or joint ventures and held by the Company pending resale to those partnerships or joint ventures are classified as "Producing oil and gas properties held for transfer".

Commencing September 15, 1993, the Company began offering, on a private placement basis, general and limited partnership interests in limited partnerships formed to drill for oil and gas. As Managing General Partner, the Company pays for all front-end costs incurred in connection with this offering, for which the Company receives an interest in the partnerships. Through September 30, 1995, approximately $12,900,000 had been raised in four partnerships in which the proceeds are being invested in development drilling (approximately 50%) and exploratory drilling (approximately 25%), with the remaining 25% dependent upon the results of the initial drilling activities. The first four partnerships closed December 8, 1993, July 18, 1994, March 15, 1995, and August 1, 1995.

Costs of syndication and qualification of these limited partnerships incurred by the Company have been deferred. Under the current limited partnership offerings, selling and formation costs borne by the Company serve as the Company's general partner contribution to such partnerships.

Income Taxes

 

The Company accounts for Income Taxes using Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 utilizes the liability method and deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of the enacted tax laws.

Income taxes for the interim periods have been provided using the estimated annualized effective tax rate.

Income (Loss) Per Share

 

Primary income (loss) per share has been computed using the weighted average number of common shares outstanding during the respective periods, which reflects the additional 5,750,000 shares sold in a public offering in July and August of 1995. Stock options and warrants outstanding do not have an effect on primary income (loss) per share. The Company's Convertible Subordinated Debentures are not common stock equivalents for the purpose of computing primary income (loss) per share.

Primary income (loss) per share has been retroactively restated in all periods presented to give recognition to an equivalent change in capital structure as a result of a 10% stock dividend. On September 6, 1994, the Company declared a 10% stock dividend to shareholders of record on September 19, 1994, which was distributed on September 29, 1994, resulting in an additional 606,262 shares being issued.

The calculation of fully diluted income (loss) per share assumes conversion of the Company's Convertible Subordinated Debentures as of the beginning of the period and the elimination of the related after-tax interest expense and assumes, as of the beginning of the period, exercise (using the treasury stock method) of stock options and warrants. The conversion price of the Convertible Subordinated Debentures was revised to reflect the 10% stock dividend declared September 6, 1994. The original conversion price was $13.50 per common share and the revised conversion price per common share is $12.27. Fully diluted income (loss) per share has also been retroactively restated for all periods presented to give effect to the resulting conversion price revision stemming from the 10% stock dividend. The weighted average number of shares used in the computation of fully diluted per share amounts were 10,356,607 and 12,933,029 for the respective nine-month and three-month periods ended September 30, 1995. The weighted average number of shares used in the computation of fully diluted per share amounts were 9,064,308 and 9,100,530 for the respective nine-month and three-month periods ended September 30, 1994.

(3) Change in Accounting Principle

 

In the fourth quarter of 1994, the Company changed its revenue recognition policy for earned interests, effective January 1, 1994. Under the Company's newly adopted method of accounting for earned interests, such amounts will not be recognized as income. This change was made as the result of a transition in the Company's current business activities and changes in the oil and gas limited partnership syndication markets. The Company feels the change in policy results in more comparable financial statements in relation to its current business focus and in comparison to its current peers and competitors in the oil and gas exploration and production industry.

The effect of the change on the 1994 nine-month period results was to increase income before cumulative effect of change in accounting principle by approximately $694,500 or $.10 per share. This increase was a result of the decrease in depletion expense more than offsetting the decrease in revenues as a result of not recognizing earned interests. The effect of the change on the 1994 third quarter results was to increase income before cumulative effect of change in accounting principle by approximately $362,000 or $0.05 per share which increase was a result of the same factors. The cumulative effect of this change in accounting principle resulted in a first quarter 1994 adjustment of $16,772,698 or $(2.54) per share (after reduction for income taxes of $8,640,481), to retroactively apply the new method, thereby reducing net income for the nine-month period ended September 30, 1994.

(4) Short-Term Bank Borrowings

 

The Company had available through a two bank group, a revolving line of credit of $35,000,000 at September 30, 1995 and $29,000,000 at December 31, 1994 bearing interest at the banks' base rate plus 0.5% (9.25% at September 30, 1995 and 9% at December 31, 1994), secured by the Company's interests in certain oil and gas properties and general partner interests. This facility also allows, at the Company's option, draws which bear interest for specific periods at the London Interbank Offered Rate ("LIBOR") plus 2.25%. There was no outstanding balance under this line of credit at September 30, 1995. At December 31, 1994, $14,000,000 of the $18,600,000 outstanding was at the LIBOR plus 2.25% rates (7.875% on $3,000,000, 8.1875% on $6,000,000, and 8.5% on $5,000,000). The outstanding amount under this facility at December 31, 1994 ($18,600,000) was borrowed primarily to fund the advance purchase of producing properties on behalf of affiliated partnerships and/or joint ventures to be subsequently reimbursed and to fund the Company's working capital and capital expenditures needs.

The terms of the revolving line of credit include, among other restrictions, a limitation on the level of cash dividends (not to exceed $424,000 in any fiscal year), requirements as to maintenance of certain minimum financial ratios (principally pertaining to working capital, debt, and equity ratios) and limitations on incurring other debt. Since inception, no cash dividends have been declared on the Company's common stock. The Company presently intends to continue a policy of using retained earnings for expansion of its business. As of September 30, 1995 and December 31, 1994, the Company was in compliance with the provisions of these agreements. The revolving line of credit extends through May 1, 1996.

The Company's second credit line was an Acquisition Advance Agreement with the same two bank group, bearing interest at the greater of (a) the bank's base rate plus 1% or (b) the Federal Funds rate plus 1.5%, to be secured by producing oil and gas properties acquired and held for transfer. At December 31, 1994, $3,629,000 had been borrowed under this agreement to fund the advance purchase of producing properties on behalf of affiliated partnerships and/or joint ventures which were subsequently reimbursed. This credit agreement expired June 15, 1995.

The Company's third credit facility is an amended and restated revolving line of credit with the lead bank for $5,000,000 bearing interest at the bank's base rate (8.75% at September 30, 1995 and 8.5% at December 31, 1994), secured by certain Company receivables. At September 30, 1994, $5,000,000 was outstanding under this facility. There was no outstanding amount on this facility at September 30, 1995. This credit facility extends through May 1, 1996.

In addition to interest on these credit facilities, the Company pays a commitment fee to compensate the banks for making funds available. The fee on the revolving line of credit is calculated on the average daily remainder, if any, of the commitment amount less the aggregate principal amounts outstanding plus the amount of all outstanding letters of credit during the period. The fee on the Acquisition Advance Agreement was .5% of the amount of the advance. The aggregate amounts of commitment fees paid by the Company were $96,000 for the first nine months of 1995 and $150,000 for the twelve month period in 1994.

(5) Long-Term Debt

 

The Company's long-term debt consists of $28,750,000 of 6.5% Convertible Subordinated Debentures ("Debentures"). The Debentures were issued on June 30, 1993, and will mature on June 30, 2003. The Debentures are convertible into common stock of the Company by the holders at any time prior to maturity at a conversion price of $12.27 per share, subject to adjustment upon the occurrence of certain events. The conversion price reflects an adjustment of the original conversion price of $13.50 per share to reflect the 10% stock dividend declared September 6, 1994 and distributed September 29, 1994. Interest on the Debentures is payable semi-annually on June 30, and December 31, commencing with the payment made at December 31, 1993. After June 30, 1997 (or in certain circumstances after June 30, 1996), the Debentures are redeemable for cash at the option of the Company, with certain restrictions, at 104.55% of principal, declining to 100.65% in 2002. Upon certain changes in control of the Company, if the price of the Company's common stock is not above certain levels each holder of Debentures will have the right to require the Company to repurchase the Debentures at the principal amount thereof, together with accrued and unpaid interest to the date of repurchase but after the repayment of any Senior Indebtedness, as defined.

Interest expense on the Debentures, including amortization of debt issuance costs, totaled $1,485,730 for the nine-month period ending September 30, 1995. Interest expense on the Debentures, including amortization of debt issuance costs, totaled $1,973,931 for the twelve-month period ending December 31, 1994.

(6) Stockholders' Equity

 

On September 6, 1994, the Company declared a 10% stock dividend to shareholders of record on September 19, 1994, which was distributed on September 29, 1994. The transaction was valued based on the closing price ($11.00) of the Company's common stock on the New York Stock Exchange on September 6, 1994. As a result of the issuance of 606,262 shares of the Company's Common Stock as a dividend, retained earnings were reduced $6,668,882, with the Common Stock and additional paid-in capital accounts increased by the same amount. Primary and fully diluted income (loss) per share has been restated for all periods presented to reflect the effect of the stock dividend.

During the third quarter of 1995, the Company closed the sale to the public of 5,750,000 shares of common stock at a price of $8.50 per share. Net proceeds from the offering were used to repay outstanding indebtedness, and the remaining proceeds will be used to finance the Company's exploration and development activities, and to acquire producing oil and gas properties, including limited partnership interests. Net proceeds from these sales, before selling expenses, were $46,115,000.

(7) Foreign Activities

Russia

 

On September 3, 1993, the Company signed a Participation Agreement with Senega, a Russian Federation joint stock company (in which the Company has an indirect interest of less than 1%), to assist in the development and production of reserves from two fields in Western Siberia. The Company will receive a minimum 5% net profits interest from the sale of hydrocarbon products from the fields for providing managerial, technical and financial support to Senega limited to an initial budgeted capital expenditure of approximately $5,000,000. In May 1995, the Company executed a Management Agreement with Senega. In return for providing financing for development of these fields, Swift is given certain rights by Senega, including a 49% interest in production income derived by Senega from this project after repayment of costs. At September 30, 1995 the Company's investment in Russia was approximately $6,035,000 and is included in the unproved properties portion of oil and gas properties.

Venezuela

 

The Company formed a wholly-owned subsidiary, Swift Energy de Venezuela, C.A. for the purpose of submitting a bid on August 5, 1993 under the Venezuelan Marginal Oil Field Reactivation Program on the Quiriquire Unit located in Northeastern Venezuela. Swift (together with a minority interest holder) was one of six bidders on the Quiriquire Unit. The Company did not win the bid for the Quiriquire Unit; however, other fields and opportunities are continuing to be evaluated in Venezuela. At September 30, 1995 the Company's investment in Venezuela was approximately $1,055,000 and is included in the unproved properties portion of oil and gas properties, net of impairments of $45,668.

New Zealand

 

On October 12, 1995, the Company was approved for the grant of a Petroleum Exploration Permit by the New Zealand Minister of Energy, which was approved by the Company's board of directors on November 7, 1995. This permit (PEP 38717) covers approximately 50,000 acres in the Onshore Taranaki Basin region. This permit primarily requires the Company to : (a) post a $175,000 bond before January 11, 1996; (b) before December 31, 1997 analyze and interpret approximately 460 kilometers of existing seismic data and acquire approximately 100 kilometers of new seismic data; (c) commence drilling one well prior to July 31, 1998; (d) review results prior to July 31, 1999 and (e) prior to July 31, 2000 drill a development well or acquire additional seismic data. At September 30, 1995 the Company's investment in New Zealand was approximately $150,000 and is included in the unproved properties portion of oil and gas properties.

(8) Acquisition of Properties by Swift

 

During the second quarter of 1994, the Company acquired approximately $18,100,000 of producing oil and gas properties in a single acquisition transaction. Approximately $12,700,000 and $3,500,000 of the properties were transferred to affiliated partnerships formed under the Company's SDI offering, in 1994 and 1995, respectively. Approximately $1,900,000 of the properties were retained by the Company for its own account.

SWIFT ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto.

General

 

The Company has historically financed most of its growth with capital raised through limited partnership financing, having raised approximately $440 million through limited partnership financing from 1979 through 1994. Beginning in 1985, the Company increasingly emphasized this financing vehicle thereby enabling the Company to accelerate its growth and purchase larger producing properties. Commencing in 1991, the Company began to reduce its reliance on limited partnership financing as its reserve base expanded and its strategy shifted to re-emphasize internally-generated exploration and development activities. The Company intends to continue to reduce its dependence on limited partnership financing.

The Company's revenue is primarily comprised of the following components: oil and gas sales attributable to properties in which the Company owns a direct or indirect interest and supervision fees generated by the Company's role as operator of approximately 750 producing and drilling wells. Additionally, prior to 1994, the Company also recorded earned interests and fees from limited partnerships and joint ventures. Effective January 1, 1994, the Company changed its revenue recognition policy for earned interests. The cumulative effect in 1994 of this change in accounting principle resulted in a one-time accounting adjustment of $16.8 million, or a loss of $2.52 per share (after reduction for income taxes of $8.6 million), from applying the new method retroactively. Earned interests represented revenues in the form of interests in proved developed oil and gas properties conveyed to limited partnerships and joint ventures formed in connection with the Company's organization and management of limited partnerships and joint ventures, representing the difference between the Company's capital contributions to each limited partnership or joint venture and its earned revenue interest in the limited partnership's or venture's properties (based upon the expected levels of cash distributions to the limited partners or joint ventures). Under the Company's newly adopted method of accounting for earned interests, such amounts will not be recognized as income, thereby reducing the Company's investment in oil and gas property. The Company believes the change in policy results in financial statements that better reflect its current business focus and that are more comparable to current practices in the oil and gas exploration and production industry.

In May 1992, the Company purchased interests in certain wells from the Manville Corporation for $13.8 million using funds provided by the Company's sale of the Volumetric Production Payment in these properties to a subsidiary of Enron Corp. Net proceeds from the sale of the production were recorded as deferred revenues. Deliveries under the Volumetric Production Payments are recorded as oil and gas sales revenues which are offset by a corresponding reduction of deferred revenues. Under this arrangement, the Company is required to deliver a fixed quantity of hydrocarbons produced from the properties over specified periods through October 2000. Volumes remaining to be delivered under the Volumetric Production Payment are not included in the Company's proved reserves. Under the Volumetric Production Payment, hydrocarbons produced in excess of the amount required to be delivered are sold by the Company for its own account.

LIQUIDITY AND CAPITAL RESOURCES

 

The Company historically has relied on limited partnership capital as its principal financing vehicle to fund its acquisitions. Since 1991, the Company's strategy has shifted toward increased reliance on exploration and development activities, and it has significantly expanded reserves added through these efforts. As a result, the Company has reduced its reliance on cash flow generated from, and capital raised through, limited partnerships. Supplemental cash and working capital are provided through internally generated cash flow and debt and equity financing.

Net Cash From Operations

 

For the nine-month period ended September 30, 1995, cash flows from operating activities increased slightly to $8,547,184 as compared to $8,492,049 during the first nine months of 1994. Despite an 11% production increase (approximately 800,000 Mcf equivalents) in the first three quarters of 1995, the nine-month 1995 increase in operating cash flows of only $55,135 was primarily due to average gas prices received being 19% lower than a year earlier, as discussed below.

1995 Equity Offering

 

During the third quarter of 1995, the Company closed the sale to the public of 5,750,000 shares of common stock at a price of $8.50 per share. Net proceeds from the offering were used to repay outstanding indebtedness, and the remainder of the proceeds will be used to finance the Company's exploration and development activities, and to acquire producing oil and gas properties, including limited partnership interests. Net proceeds from these sales, before selling expenses, were $46,115,000. Consequently, the Company's stockholders' equity at September 30, 1995 has grown to over $90 million.

Other Financing Activities

 

On June 30, 1993, the Company issued $28,750,000 of Convertible Subordinated Debentures (Debentures) due June 30, 2003, in a public offering. Proceeds of the offering have been used primarily to acquire producing oil and gas properties and to finance the Company's expanding exploration and development programs. The principal terms of these Debentures are described in Note 5 to the Company's condensed financial statements included herein.

The Company offers interests in oil and gas production partnerships under its Swift Depositary Interests (SDI), offering and since late 1993 has offered private partnerships formed to drill for oil and gas. The Company does not intend to extend the SDI program past its current offering period, which ends April 30, 1996, and will continue to evaluate the market for the SDI program in the interim period. Due to market conditions, the formation of the first two SDI partnerships to be organized during 1995 was delayed from the end of the first quarter until April 28, 1995, with total subscriptions of approximately $7,000,000. Under the second two partnerships anticipated to be organized prior to year-end 1995, approximately $3,600,000 had been raised through September 30, 1995. These amounts compare to funds raised through nine months ended September 30, 1994 of $26,800,000. On March 15, 1995 and on August 1, 1995, the Company closed its third and fourth drilling partnership formed since 1993, with $8,900,000 of subscriptions ($5,000,000 in the third partnership and $3,900,000 in the fourth) compared to $2,600,000 of drilling partnership subscriptions in the first nine months of 1994. The Company anticipates that it will continue to offer the drilling partnerships for the foreseeable future.

At September 30, 1995, limited partnership formation and marketing costs (which under the current offerings are borne by the Company as part of the Company's general partner contribution) amounted to $3,346,133, an increase of $354,260, when compared with the December 31, 1994 balance. Should the Company make the determination that the SDI offering will expire without extension on or before April 30, 1996, the remaining limited partnership formation and marketing costs related to the SDI offering (approximately $2,100,000) will be transferred to the oil & gas properties account upon the date such determination is made.

Credit Facilities

 

The Company has established credit facilities which have been used principally to finance the Company's purchase of producing oil and gas properties on an interim basis pending transfer of the properties to newly formed partnerships and joint ventures, and to provide working capital. More recently the Company's credit facilities have been used to fund a portion of the Company's exploration and development activities. However, the proceeds from the Company's recent stock offering will be used to finance this activity in the near term and has allowed the Company to pay off these credit facilities. The principal terms and restrictions of these credit facilities are described in Note 4 to the Company's condensed financial statements included herein.

At December 31, 1994, the Company had $27,229,000 outstanding under these borrowing arrangements used for several purposes. Approximately $8,000,000 used to finance producing oil and gas property purchases was either reimbursed in January 1995 or reflected at December 31, 1994 in the "Producing oil and gas properties held for transfer" account on the balance sheet. The Company used the remainder of the outstanding balance on the credit facilities, along with internally generated cash flow, principally to fund the Company's capital expenditures in 1994, and to a lesser extent, to provide working capital.

At September 30, 1995, the Company had no outstanding balances under these borrowing arrangements which were repaid with proceeds from the Company's recent stock offering. The borrowings since year-end 1994 have been used primarily to fund a substantial portion of the Company's 1995 capital expenditures described below.

Working Capital

 

The Company's working capital has increased over the last nine months, from working capital deficit of $13,137,441 at December 31, 1994 to positive working capital of $19,258,831 at September 30, 1995. This increase is primarily the result of the $46,115,000 of net proceeds, before selling expenses, from the recent common stock offering.

Due to the nature of the Company's business highlighted above, the individual components of working capital fluctuate considerably from period to period. In the past, balance sheet changes in receivables, producing oil and gas properties held for transfer and payables related to producing oil and gas property acquisitions principally arise from the timing of property purchases and payments made by and to the Company related to the Company's management of limited partnerships. The Company incurs significant working capital requirements in connection with its role as operator of approximately 750 producing wells and the management of affiliated partnerships. In this capacity, the Company is responsible for certain day to day cash management, including the collection and disbursement of oil and gas revenues and related expenses.

Capital Expenditures

 

Additions to property, plant and equipment during the first nine months of 1995 were $21,076,168. These capital expenditures include: (a) $9,300,000 of drilling costs, both exploratory and developmental; (b) $4,800,000 of prospect costs (principally prospect leasehold, seismic and geological costs of unproved prospects for the Company's account); (c) $3,200,000 to fund the Company's general partner capital contribution to the partnerships formed under its limited partnerships; (d) $2,400,000 invested in foreign business opportunities in Russia (approximately $2,000,000), in Venezuela (approximately $240,000), and in New Zealand (approximately $150,000), as described in Note 7 to the Company's condensed financial statements included herein; (e) $700,000 to acquire producing properties and (f) $700,000 spent for furniture and fixtures, primarily computer equipment. In the remaining three months of 1995, the Company expects capital expenditures to be approximately $15,000,000, including investments in all areas in which investments were made during the first nine months of the year as described above, with a particular increase and focus on exploration and development drilling. The Company now has plans to participate in the drilling of 79 gross wells this year, compared to 44 wells in 1994. Fifteen of the wells planned for drilling in 1995 will be classified as exploratory. Through September 30, 1995, the Company had participated in drilling 6 exploratory and 39 development wells with 3 exploratory successes and 38 development successes. The Company anticipates that this drilling activity will lead to substantial reserves being added to the Company's reserve base by year-end 1995, although the effect on oil and gas sales will be somewhat delayed due to time periods necessary to place newly drilled wells on production.

The Company believes that 1995's anticipated internally generated cash flows (expected to increase as the Company's production base increases as a result of its accelerated drilling program) together with the $46,115,000 of net proceeds, before selling expenses, from the sale of 5,750,000 shares of common stock and its existing credit facilities, will be sufficient to finance the costs associated with its currently budgeted capital expenditures at least through 1996. Further liquidity needs may also be met by additional availability under its credit facilities based upon the value of the Company's proved reserves, as management continually evaluates future use of debt and/or equity to finance its capital needs.

RESULTS OF OPERATIONS -

     Nine Months Ended September 30, 1995 and 1994

 

Net income of $2,520,431 and earnings per share of $0.32 for the first nine months of 1995 were 26% and 39% lower, respectively than "Income before cumulative effect of change in accounting principle" of $3,417,197 and earnings per share of $0.52 in the same period for 1994. Lower net income primarily reflected the effect on revenues of substantially lower gas prices. The decrease in earnings per share in part reflects a 21% increase in weighted average shares outstanding for the period, as a result of the sale of 5,750,000 shares of common stock in the third quarter of 1995. The nine-month 1994 net loss of $13,355,501 included a cumulative effect of a change in accounting principle (see Note 3 to the Company's condensed financial statements included herein) of $16,772,698.

     Revenues

 

Oil and Gas Sales. Oil and gas sales increased 1% to $15,208,354 in the first nine months of 1995, compared to $15,014,095 for the comparative period in 1994. The 18% increase in oil production and the 9% increase in gas production were primarily the result of production from exploratory and developmental wells drilled in late 1994 and in the first nine months of 1995, and the acquisition of interests in producing properties by the Company for its own account in the third quarter of 1994. These increases were offset somewhat by declining production derived through the Company's general partner interests in its limited partnerships. The Company's net sales volume (including the volumetric production payment) in the first nine months of 1995 increased by 11% or 798,016 Mcfe (thousand cubic feet equivalent) over volumes in the comparable 1994 period; however, due to lower gas prices received, oil and gas sales revenues increased only 1%. Partially offsetting the effect of the 19% decrease in gas prices were oil price increases of 9% (comparing average prices received over the respective nine-month periods).

Oil and gas sales comprised 77% and 78%, respectively of total revenues for the first nine months of 1995 and 1994. The majority of these revenues were derived from the sale of the Company's gas production. The Company expects oil and gas sales to continue to increase as a direct consequence of the addition of oil and gas reserves through the Company's active drilling programs.

The following table provides additional information regarding the Company's oil and gas sales.

Supervision Fees. Supervision fees were relatively flat in the first nine months of 1995 when compared to the same period in 1994, due primarily to a reduction in the number of wells the Company operated, as it disposed of certain marginal wells between the periods.

     Expenses

 

General and administrative expenses for the first nine months of 1995 increased approximately $200,000 o