U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________________________ FORM 10-QSB /X/ Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 31, 2000 or / / Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period From __________ to ___________ ______________________ Commission File Number 0-7406 ______________________ PrimeEnergy Corporation (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 84-0637348 (IRS employer identification number) One Landmark Square, Stamford, Connecticut 06901 (Address of principal executive offices) (203) 358-5700 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 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 / / The number of shares outstanding of each class of the Registrant's Common Stock as of May 12, 2000 was: Common Stock, $0.10 par value, 4,311,705 shares. PrimeEnergy Corporation Index to Form 10-QSB March 31, 2000 Part I - Financial Information Consolidated Balance Sheets - March 31, 2000 and December 31, 1999 3-4 Consolidated Statements of Operations for the three months ended March 31, 2000 and 1999 5 Consolidated Statement of Stockholders' Equity for the three months ended March 31, 2000 6 Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999 7 Notes to Consolidated Financial Statements 8-15 Management's Discussion and Analysis of Financial Condition and Results of Operations 16-19 Part II - Other Matters 20 Signatures 21 PrimeEnergy Corporation Consolidated Balance Sheets March 31, 2000 and December 31, 1999 March 31, December 31, 2000 1999 (Unaudited) (Audited) ASSETS: Current assets: Cash and cash equivalents $ 506,000 $ 1,771,000 Restricted cash and cash equivalents (Note 2) 1,273,000 1,854,000 Accounts receivable (Note 3) 3,710,000 3,635,000 Due from related parties (Note 9) 3,189,000 2,844,000 Other current assets 178,000 204,000 Prepaid expenses 49,000 84,000 ---------- ---------- Total current assets 8,905,000 10,392,000 ---------- ---------- Property and equipment, at cost (Notes 1 and 4): Oil and gas properties (successful efforts method): Developed 49,548,000 49,249,000 Undeveloped 375,000 235,000 Furniture, fixtures and equipment including leasehold improvements 7,183,000 6,395,000 ---------- ---------- 57,106,000 55,879,000 Accumulated depreciation and depletion (37,978,000) (36,742,000) ---------- ---------- Net property and equipment 19,128,000 19,137,000 ---------- ---------- Other assets (Note 9) 635,000 621,000 Due from affiliates (Note 9) 325,000 325,000 ---------- ---------- Total assets $ 28,993,000 $30,475,000 ========== ========== See accompanying notes to the consolidated financial statements. PrimeEnergy Corporation Consolidated Balance Sheets March 31, 2000 and December 31, 1999 March 31, December 31, 2000 1999 (Unaudited) (Audited) LIABILITIES and STOCKHOLDERS' EQUITY: Current liabilities: Accounts payable $ 5,922,000 $ 7,900,000 Current portion of other long-term obligations (Note 6) 4,000 4,000 Accrued liabilities: Payroll, benefits and related items 1,032,000 798,000 Taxes 117,000 53,000 Interest and other 554,000 626,000 Due to related parties (Note 9) 1,126,000 943,000 ---------- ---------- Total current liabilities 8,755,000 10,324,000 ---------- ---------- Long-term bank debt (Note 5) 18,800,000 19,200,000 Other long-term obligations (Note 6) 16,000 17,000 ---------- ---------- Total liabilities 27,571,000 29,541,000 ---------- ---------- Stockholders' equity: Preferred stock, $.10 par, authorized 5,000,000 shares; none issued -- -- Common stock, $.10 par value, authorized 10,000,000 shares; issued 7,607,970 in 2000 and 1999 761,000 761,000 Paid in capital 10,902,000 10,902,000 Accumulated deficit (2,341,000) (2,859,000) ---------- ---------- 9,322,000 8,804,000 Treasury stock, at cost, 3,272,373 common shares in 2000 and 3,266,063 common shares in 1999 (7,900,000) (7,870,000) ---------- ---------- Total stockholders' equity 1,422,000 934,000 ---------- ---------- Total liabilities and equity $ 28,993,000 $30,475,000 ========== ========== See accompanying notes to the consolidated financial statements. PrimeEnergy Corporation Consolidated Statements of Operations Three Months Ended March 31, 2000 and 1999 (Unaudited) 2000 1999 Revenue: Oil and gas sales $ 4,181,000 $ 1,929,000 District operating income 3,000,000 2,858,000 Administrative revenue (Note 9) 375,000 399,000 Reporting and management fees (Note 9) 79,000 84,000 Interest and other income 77,000 44,000 ---------- ---------- Total revenue 7,712,000 5,314,000 ---------- ---------- Costs and expenses: Lease operating expense 1,894,000 1,364,000 District operating expense 2,466,000 2,020,000 Depreciation and depletion of oil and gas properties 1,074,000 805,000 General and administrative expense 1,187,000 621,000 Exploration costs 122,000 687,000 Interest expense (Note 5) 378,000 307,000 ---------- ---------- Total costs and expenses 7,121,000 5,804,000 ---------- ---------- Income (loss) from operations 591,000 (490,000) Gain (loss) on sale and exchange of assets (2,000) 3,000 - ---------- ---------- --------- Net income (loss) before income taxes 589,000 (487,000) Provision (benefit) for income taxes 71,000 (37,000) ---------- ---------- Net income (loss) $ 518,000 $ (450,000) ========== ========== Basic income (loss) per common share (Notes 1 and 10) $0.12 $(0.10) ==== ==== Diluted income (loss) per common share (Notes 1 and 10) $0.10 $(0.10) ==== ==== See accompanying notes to the consolidated financial statements. PrimeEnergy Corporation Consolidated Statement of Stockholders' Equity Three Months Ended March 31, 2000 <TABLE> <CAPTION> Common Stock Paid In Accumulated Treasury Shares Amount Capital Deficit Stock Total <S> <C> <C> <C> <C> <C> <C> Balance at December 31, 1999 7,607,970 $761,000 $10,902,000 ($2,859,000) ($7,870,000) $934,000 Purchased 6,310 shares of common stock (30,000) (30,000) Net income 518,000 518,000 Balance at March 31, 2000 7,607,970 $761,000 $10,902,000 ($2,341,000) ($7,900,000) $1,422,000 </TABLE> See accompanying notes to the consolidated financial statements. PrimeEnergy Corporation Consolidated Statements of Cash Flows Three Months Ended March 31, 2000 and 1999 (Unaudited) 2000 1999 Net cash provided by (used in) operating activities $ 720,000 $ (569,000) ---------- ---------- Cash flows from investing activities: Capital Expenditures, including dry hole costs (1,564,000) (2,035,000) Proceeds from sale of property and equipment 10,000 3,000 Proceeds from payments on note receivable -- 5,000 ---------- ---------- Net cash used in investing activities (1,554,000) (2,027,000) ---------- ---------- Cash flows from financing activities: Purchase of treasury stock (30,000) (61,000) Increase in long-term bank debt and other long-term obligations 7,915,000 7,565,000 Repayment of long-term bank debt and other long-term obligations (8,316,000) (4,995,000) ---------- ---------- Net cash provided by (used in) financing activities (431,000) 2,509,000 ---------- ---------- Net decrease in cash and cash equivalents (1,265,000) (87,000) Cash and cash equivalents at the beginning of the period 1,771,000 1,167,000 ---------- ---------- Cash and cash equivalents at the end of the period $ 506,000 $ 1,080,000 ========== ========== See accompanying notes to the consolidated financial statements. PrimeEnergy Corporation Notes to Consolidated Financial Statements March 31, 2000 1) Description of Operations and Significant Accounting Policies: Nature of Operations- PrimeEnergy Corporation ("PEC"), a Delaware corporation, was organized in March 1973. PrimeEnergy Management Corporation ("PEMC"), a wholly-owned subsidiary, acts as the managing general partner, providing administration, accounting and tax preparation services for 53 private and publicly-held limited partnerships and trusts (collectively, the "Partnerships"). PEC owns Eastern Oil Well Service Company ("EOWSC") and Southwest Oilfield Construction Company ("SOCC"), both of which perform oil and gas field servicing. PEC also owns Prime Operating Company ("POC") which serves as operator for most of the producing oil and gas properties owned by the Company and affiliated entities. PrimeEnergy Corporation and its wholly-owned subsidiaries are herein referred to as the "Company". The Company is engaged in the development, acquisition and production of oil and natural gas properties. The Company owns leasehold, mineral and royalty interests in producing and non- producing oil and gas properties across the continental United States, primarily in Texas, Oklahoma, and West Virginia. The Company operates 1,659 wells and owns non-operating interests in 843 additional wells. Additionally, the Company provides well- servicing support operations, site preparation and construction services for oil and gas drilling and re-working operations, both in connection with the Company's activities and in providing contract services for third parties. The Company is publicly traded on NASDAQ under the symbol "PNRG". The markets for the Company's products are highly competitive, as oil and gas are commodity products and prices depend upon numerous factors beyond the control of the Company, such as economic, political and regulatory developments and competition from alternative energy sources. Certain items on the prior year income and cash flow statements have been reclassified to conform with current year classification. Principles of Consolidation- The consolidated financial statements include the accounts of PrimeEnergy Corporation and its wholly-owned subsidiaries. All material inter-company accounts and transactions between these entities have been eliminated. Oil and gas properties include ownership interests in the Partnerships. The statement of operations includes the Company's proportionate share of revenue and expenses related to oil and gas interests owned by the Partnerships. Use of Estimates- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates of oil and gas reserves, as determined by independent petroleum engineers, are continually subject to revision based on price, production history and other factors. Depletion expense, which is computed based on the units of production method, could be significantly impacted by changes in such estimates. Additionally, SFAS No. 121 requires that, if the expected future cash flow from an asset is less than its carrying cost, that asset must be written down to its fair market value. As the fair market value of a property is generally substantially less than the total future cash flow expected from the asset, small changes in the estimated future net revenue from an asset could lead to the necessity of recording a significant impairment of that asset. The Company has significant deferred tax assets which have been fully reserved against based upon the assumption that at current and expected future levels of taxable income, and considering the Section 29 credits the Company expects to generate, the availability of these carryforwards will not lead to significant reductions in the Company's tax liability as compared to what it would pay if such carryforwards did not exist. Increases in estimates of future taxable income could lead to significant reductions in the amount of this reserve, which could have a material effect on the net income of the Company. Property and Equipment- The Company follows the "successful efforts" method of accounting for its oil and gas properties. Under the successful efforts method, costs of acquiring undeveloped oil and gas leasehold acreage, including lease bonuses, brokers' fees and other related costs are capitalized. Provisions for impairment of undeveloped oil and gas leases are based on periodic evaluations. Annual lease rentals and exploration expenses, including geological and geophysical expenses and exploratory dry hole costs, are charged against income as incurred. All other property and equipment are carried at cost. Depreciation and depletion of oil and gas production equipment and properties are determined under the unit-of-production method based on estimated proved recoverable oil and gas reserves. Depreciation of all other equipment is determined under the straight-line method using various rates based on useful lives. The cost of assets and related accumulated depreciation is removed from the accounts when such assets are disposed of, and any related gains or losses are reflected in current earnings. Income Taxes- The Company records income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". SFAS No. 109 is an asset and liability approach to accounting for income taxes, which requires the recognition of deferred tax assets and liabilities for the expected future consequences of events that have been recognized in the Company's financial statements or tax returns. Deferred tax liabilities or assets are established for temporary differences between financial and tax reporting bases and are subsequently adjusted to reflect changes in the rates expected to be in effect when the temporary differences reverse. A valuation allowance is established for any deferred tax asset for which realization is not likely. General and Administrative Expenses- General and administrative expenses represent costs and expenses associated with the operation of the Company. Certain of the Partnerships and joint ventures sponsored by the Company reimburse general and administrative expenses incurred on their behalf. Income per share- Income per share of common stock has been computed based on the weighted average number of common shares and common stock equivalents outstanding during the respective periods in accordance with SFAS No. 128, "Earnings per Share". Statements of cash flows- For purposes of the consolidated statements of cash flows, the Company considers short-term, highly liquid investments with original maturities of less than ninety days to be cash equivalents. Concentration of Credit Risk- The Company maintains significant banking relationships with financial institutions in the State of Texas. The Company limits its risk by periodically evaluating the relative credit standing of these financial institutions. The Company's oil and gas production purchasers consist primarily of independent marketers and major gas pipeline companies. Hedging- From time to time, the Company may enter into futures contracts in order to reduce its exposure related to changes in oil and gas prices. In accordance with Statement of Financial Accounting Standards No. 80, any gain or loss on such contracts is treated as an adjustment to oil and gas revenue. Cash activity related to hedging transactions is treated as operating activity on the Statements of Cash Flows. The Company did not have any open hedging transactions at March 31, 2000. Recently Issued Accounting Standards- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. It also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000 and cannot be applied retroactively. The Company has not yet quantified the impacts of adopting SFAS No. 133 on its financial statements and has not determined the timing of or method of adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings and other comprehensive income. (2) Restricted Cash and Cash Equivalents: Restricted cash and cash equivalents includes $1,273,000 and $1,854,000 at March 31, 2000 and December 31, 1999, respectively, of cash primarily pertaining to unclaimed royalty payments. There were corresponding accounts payable recorded at March 31, 2000 and December 31, 1999 for these liabilities. (3) Accounts Receivable: Accounts receivable at March 31, 2000 and December 31, 1999 consisted of the following: March 31, December 31, 2000 1999 Joint Interest Billing $ 1,709,000 $ 1,738,000 Trade Receivables 575,000 550,000 Oil and Gas Sales 1,463,000 1,423,000 Other 100,000 61,000 --------- --------- 3,847,000 3,772,000 Less, Allowance for doubtful accounts (137,000) (137,000) --------- --------- $ 3,710,000 $ 3,635,000 ========= ========= (4) Property and equipment: Property and equipment at March 31, 2000 and December 31, 1999 consisted of the following: March 31, December 31, 2000 1999 Developed oil and gas properties at cost $49,548,000 $49,249,000 Undeveloped oil and gas properties at cost 375,000 235,000 Less, accumulated depletion and depreciation (33,427,000) (32,342,000) ------------ ------------ 16,496,000 17,142,000 ------------ ------------ Furniture, fixtures and equipment 7,183,000 6,395,000 Less, accumulated depreciation (4,551,000) (4,400,000) ---------- ---------- 2,632,000 1,995,000 ---------- ---------- Total net property and equipment $19,128,000 $19,137,000 ========== ========== 5) Long-Term Bank Debt: At the beginning of 1999, the Company was party to a line of credit agreement with a bank with a non-reducing borrowing base of $20 million. In February 1999, the credit agreement was revised to require that the $20 million borrowing base, reestablished on October 14, 1998, would begin reducing monthly by $300,000 beginning February 1, 1999. Effective September 22, 1999, the credit agreement was amended, revising the borrowing base to $23.7 million, reducing monthly by $350,000 beginning on October 1, 1999. The credit agreement provides for interest on outstanding borrowings at the bank's base rate, as defined, payable monthly, or at rates ranging from 1 1/2% to 2% over the London Inter-Bank Offered Rate (LIBO rate) depending upon the Company's utilization of the available line of credit, payable at the end of the applicable interest period. Advances pursuant to the agreement are limited to the borrowing base as defined in the agreement. Most of the Company's oil and gas properties as well as certain receivables and equipment are pledged as security under this agreement. Under the Company's credit agreement, the Company is required to maintain, as defined, a minimum current ratio, tangible net worth, debt coverage ratio and interest coverage ratio, and restrictions are placed on the payment of dividends. (6) Other Long-Term Obligations: Other long term obligations at March 31, 2000 and December 31, 1999 consist of the following: March 31, December 31, 2000 1999 Capital lease obligations $ 20,000 $ 21,000 Less: current portion 4,000 4,000 ______ ______ $ 16,000 $ 17,000 ====== ====== (7) Contingent Liabilities: PEMC, as managing general partner of the affiliated Partnerships is responsible for all Partnership activities, including the review and analysis of oil and gas properties for acquisition, the drilling of development wells and the production and sale of oil and gas from productive wells. PEMC also provides the administration, accounting and tax preparation work for the Partnerships and is liable for all debts and liabilities of the affiliated Partnerships, to the extent that the assets of a given limited Partnership are not sufficient to satisfy its obligations. The Company is subject to environmental laws and regulations. Management believes that future expenses, before recoveries from third parties, if any, will not have a material effect on the Company's financial condition. This opinion is based on expenses incurred to date for remediation and compliance with laws and regulations which have not been material to the Company's results of operations. As a general partner, PEMC is committed to offer to purchase the limited partners' interests in certain of its managed Partnerships at various annual intervals. Under the terms of a partnership agreement, PEMC is not obligated to purchase an amount greater than 10% of the total partnership interest outstanding. In addition, PEMC will be obligated to purchase interests tendered by the limited partners only to the extent of one hundred fifty (150) percent of the revenues received by it from such partnership in the previous year. Purchase prices are based upon annual reserve reports of independent petroleum engineering firms discounted by a risk factor. Based upon historical production rates and prices, management estimates that if all such offers were to be accepted, the maximum annual future purchase commitment would be approximately $500,000. (8) Stock Options and Other Compensation: In May 1989, non-statutory stock options were granted by the Company to four key executive officers for the purchase of shares of common stock. Such options are exercisable, on a cumulative basis, as to twenty percent of the shares subject to option in each year, beginning one year after the granting of the option. At March 31, 2000 and 1999, options on 767,500 and 802,500 shares, respectively, were outstanding and exercisable at prices ranging from $1.00 to $1.25. On January 27, 1983, the Company adopted the 1983 Incentive Stock Option Plan. At March 31, 2000 and 1999, options on 87,000 and 111,000 shares were exercisable at $1.50 per share, respectively, and no additional shares were available for granting. PEMC has a marketing agreement with its current President to provide assistance and advice to PEMC in connection with the organization and marketing of oil and gas partnerships and joint ventures and other investment vehicles of which PEMC is to serve as general or managing partner. The Company had a similar agreement with its former Chairman. Although that agreement has expired, the former Chairman is still entitled to receive certain payments relating to partnerships formed during the time the agreement was in effect. The President is entitled to a percentage of the Company's carried interest depending on total capital raised and annual performance of the Partnerships and joint ventures. (9) Related Party Transactions: PEMC is a general partner in several oil and gas Partnerships in which certain directors have limited and general partnership interests. As the managing general partner in each of the Partnerships, PEMC receives approximately 5% to 12% of the net revenues of each Partnership as a carried interest in the Partnerships' properties. The Partnership agreements allow PEMC to receive management fees for various services provided to the Partnerships as well as reimbursement for property acquisition and development costs incurred on behalf of the Partnerships and general and administrative overhead, which is reported in the statements of operations as administrative revenue. In 1991, the Company loaned approximately $325,000 at 12% interest to a real estate limited partnership of which a Company Director is a general partner. This loan is secured by a mortgage on the underlying real estate in the partnership and the Company received a 23% equity participation in the partnership. The loan agreement provides for interest payments on a quarterly basis provided the cash flow from operations of the limited partnership are sufficient to pay interest for the quarter. If cash flows are not sufficient, the accrued interest is added to the principal. Amounts due, included in other non-current assets on the balance sheet, were $455,000 and $442,000 at March 31, 2000 and December 31, 1999, respectively. Due to related parties at March 31, 2000 and December 31, 1999 primarily represent receipts collected by the Company, as agent, from oil and gas sales net of expenses. Receivables from affiliates consist of reimbursable general and administrative costs, lease operating expenses and reimbursements for property acquisitions, development and related costs. (10) Income per share: Basic earnings per share are computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect per share amounts that would have resulted if dilutive potential common stock had been converted to common stock. The following reconciles amounts reported in the financial statements: <TABLE> <CAPTION> Three Months Ended Three Months Ended March 31, 2000 March 31, 1999 -------------------------------- --------------------------------- Net Number of Per Share Net Number of Per Share Income Shares Amount Loss Shares Amount <S> <C> <C> <C> <C> <C> <C> Net income (loss) per common share $518,000 4,338,759 $ 0.12 $(450,000) 4,443,561 $ (0.10) Effect of dilutive securities: Options ** 660,257 _________ _________ ________ __________ _________ __________ Diluted net income (loss) per common share $518,000 4,999,016 $ 0.10 $(450,000) 4,443,561 $ (.10) ======== ========= ======== ========== ========= ========== </TABLE> ** For the three months ended March 31, 1999, the number of options excluded from diluted loss per common share calculations were 726,721 as the conversion of these would have an anti- dilutive effect on net loss per share. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjunction with the financial statements of the Company and notes thereto. The Company's subsidiaries are defined in Note 1 of the financial statements. PEMC is the managing general partner or managing trustee in several Limited Partnerships and Trusts (collectively, the "Partnerships"). LIQUIDITY AND CAPITAL RESOURCES The Company feels that it has the ability to generate sufficient amounts of cash to meet long-term liquidity needs, as well as debt service. The Company's goal is to generate increased cash flows by increasing its reserve base through continued acquisition, exploration and development. By increasing its reserve base, the Company's borrowing ability is increased due to additional properties available as collateral. Capital expenditures during the first quarter of 2000 were financed by internally generated funds coupled with cash balances available at the prior year-end. At the beginning of 1999, the Company was party to a line of credit agreement with a bank with a non-reducing borrowing base of $20 million. In February 1999, the credit agreement was revised to require that the $20 million borrowing base, reestablished on October 14, 1998, would begin reducing monthly by $300,000 beginning February 1, 1999. Effective September 22, 1999, the credit agreement was amended, revising the borrowing base to $23.7 million, reducing monthly by $350,000 beginning on October 1, 1999. The credit agreement provides for interest on outstanding borrowings at the bank's base rate, as defined, payable monthly, or at rates ranging from 1 1/2% to 2% over the London Inter-Bank Offered Rate (LIBO rate) depending upon the Company's utilization of the available line of credit, payable at the end of the applicable interest period. Advances pursuant to the agreement are limited to the borrowing base as defined in the agreement. Most of the Company's oil and gas properties as well as certain receivables and equipment are pledged as security under this agreement. Under the Company's credit agreement, the Company is required to maintain, as defined, minimum current, tangible net worth, debt coverage and interest coverage ratios, and the payment of dividends is restricted. As of March 31, 2000, the Company had $18,800,000 outstanding against a line of credit of $21,600,000. In November of 1999 the Company purchased from a third party working interest owner additional interests in approximately 131 producing oil and gas oil and gas wells located in Oklahoma. The purchase price was $1,831,000. The Company already owned interests in, and was the operator of, the majority of the wells in which interests were purchased. These additional interests are expected to contribute significantly to oil and gas revenues and to cash flow in 2000. The Company spent approximately $686,000 on the acquisition, exploration and development of oil and gas properties in the first quarter of 2000, including $75,000 spent to repurchase limited partner interests in the Partnerships. The Company spent $31,000 on computer hardware and software, and $30,000 to repurchase treasury stock in open market transactions in the first quarter of 2000. In February of 2000 the Company spent approximately $537,000 to purchase three service rigs as part of an effort to expand its oil and gas well servicing operations in Midland Texas. In total, the Company spent $844,000 on equipment and vehicles used in its field service operations in the first quarter of 2000. Most of the Company's capital spending is discretionary and the ultimate level of spending will be dependent on the Company's assessment of the oil and gas business, the availability of capital, the number of oil and gas prospects, and oil and gas business opportunities in general. RESULTS OF OPERATIONS The Company had an income of $518,000 in the first quarter of 2000 as compared to a loss of $450,000 in the first quarter of 1999. The first quarter 1999 loss was attributable to extremely low oil and gas prices during that period, as well as $687,000 in exploration costs which were incurred primarily in the drilling of two dry holes. The Company had one dry hole and total exploration costs of $122,000 in the first quarter of 2000, and oil and gas prices were substantially higher. Oil and gas revenue more than doubled to $4,181,000 in the first quarter of 2000 as compared to $1,929,000 in 1999, due to a combination of increased production and sharply higher prices. Average prices received for both oil and gas increased significantly in the first quarter of 2000 as compared to the same period in 1999, to $26.88 per barrel as compared to $10.87 in the case of oil, and to $2.72 per Mcf as compared to $1.86 in the case of gas. Oil production increased to 70,400 barrels as compared to 58,100, and gas production increased to 840,000 Mcf as compared to 686,000 Mcf. The additional interests in the Oklahoma wells purchased in November 1999 contributed 10,000 barrels of oil and 132,000 Mcf of gas to first quarter 2000 production, and the Company's share of the Partnerships production increased by 5,500 barrels of oil and 30,000 Mcf of gas due to additional interests in these entities purchased during the year. District operating income increased 5%, to $3,000,000 in the first quarter of 2000. As discussed previously, the company purchased additional field service equipment for its Oklahoma and Midland, Texas field offices during the first quarter of 2000. As this equipment was being readied for use during the quarter, the ownership of this equipment did not contribute significantly to income in the current quarter, but the Company expects to increase its district operating income through the utilization of this equipment during the remainder of the year. Administrative revenue of $375,000 in the first quarter of 2000 represents a 6% decrease from the first quarter 1999 amount. Amounts received in both years from certain Partnerships are substantially less than amounts allocable to those partnerships under the applicable agreements. The lower amounts reflect the Company's efforts to limit costs incurred and the amounts allocable to the partnerships. Lease operating expense increased to $1,894,000 in the first quarter of 2000, a 39% increase over the 1999 amount of $1,364,000. This increase reflects both significantly increased production, and lower spending on the maintenance of oil and gas properties in the first quarter of 1999 due to extremely depressed prices at that time. The Company receives reimbursement for costs incurred related to the evaluation, acquisition and development of properties in which interests are owned by its joint venture partners and the Partnerships. To the extent that these costs are expended at the district level, the reimbursements reduce total district operating expenses. To the extent such expenses are incurred by PEMC, such reimbursements reduce total general and administrative expenses. Such reimbursement totaled approximately $200,000 in the first quarter of 2000 as compared to $500,000 for the same period in 1999. This decline reflects the reduction in both drilling activity and time spent evaluating possible acquisitions of producing properties. District operating expense increased 22% or $446,000 in the first quarter of 2000 as compared to the same period in 1999, due primarily to the additional employees hired in association with the equipment purchased for use in Midland Texas, as well as lower property acquisition cost reimbursement. General and administrative expenses increased 91% to $1,187,000 in the first quarter of 2000 as compared to $621,000 in 1999. The change in cost reimbursement, previously discussed, combined with nonrecurring compensation and employee benefit costs related to the resignation of a company employee, are the primary components of this increase. Depletion, depreciation and amortization expense increased 33% to $1,074,000 in the first quarter of 2000 as compared to $805,000 in 1999, primarily due to increased production volume. Interest expense increased by 23% to $378,000 in the first quarter of 2000 as compared to $307,000 in 1999, due to a combination of higher rates and higher average outstanding borrowings. The Company experienced no disruptions as a result of the Year 2000 date change. The Company expenditures for addressing Year 2000 issues were not material, nor does the Company expect to incur any significant costs addressing Year 2000 issues in the future. This Report contains forward-looking statements that are based on management's current expectations, estimates and projections. Words such as "expects," "anticipates," "intends," "plans," "believes," "projects" and "estimates," and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, and are subject to the safe harbors created thereby. These statements are not guarantees of future performance and involve risks and uncertainties and are based on a number of assumptions that could ultimately prove inaccurate and, therefore, there can be no assurance that they will prove to be accurate. Actual results and outcomes may vary materially from what is expressed or forecast in such statements due to various risks and uncertainties. These risks and uncertainties include, among other things, the possibility of drilling cost overruns and technical difficulties, volatility of oil and gas prices, competition, risks inherent in the Company's oil and gas operations, the inexact nature of interpretation of seismic and other geological and geophysical data, imprecision of reserve estimates, and the Company's ability to replace and expand oil and gas reserves. Accordingly, stockholders and potential investors are cautioned that certain events or circumstances could cause actual results to differ materially from those projected. PART II - OTHER MATTERS Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the period covered by this report. Item 5. OTHER INFORMATION Exhibit 27 - Financial Data Schedule is attached to the electronic filing of this report only. Item 6. EXHIBITS AND REPORTS ON FORM 8K No reports on form 8K were filed by the Company during the three months ended March 31, 2000. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PrimeEnergy Corporation (Registrant) May 12, 2000 /s/ Charles E. Drimal,Jr. (Date) -------------------------- Charles E. Drimal, Jr. President Principal Executive Officer May 12, 2000 /s/ Beverly A. Cummings (Date) -------------------------- Beverly A. Cummings Executive Vice President Principal Financial and Accounting Officer