FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ____________
COMMISSION FILE NUMBER: 0-21663
OFFSHORE ENERGY DEVELOPMENT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
76-0509791
(I.R.S. Employer
Identification No.)
1400 WOODLOCH FOREST DRIVE, SUITE 200
THE WOODLANDS, TEXAS 77380
(Address of principal executive offices)
(Zip Code)
(281) 364-0033
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of November 13, 1997, there were 8,701,885 shares of the registrant's Common
Stock, par value $.01 per share, outstanding.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
OFFSHORE ENERGY DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 18,407,768 $ 2,024,302
Accounts receivable - trade, net ............................................ 2,308,439 3,042,222
Accounts receivable - affiliate ............................................. 87,979 329,378
Accounts receivable - other ................................................. 1,788,284 1,505,846
Prepaids and other assets ................................................... 45,491 500,496
------------ ------------
Total current assets ................................................... 22,637,961 7,402,244
Oil and gas properties-at cost (successful efforts method) .................. 36,769,166 60,415,462
Other property and equipment ................................................ 372,946 689,093
Accumulated depreciation, depletion and amortization ........................ (11,439,301) (15,652,751)
------------ ------------
25,702,811 45,451,804
Investments in affiliates and others ........................................ 729,784 1,655,523
Investments in certificates of deposits, restricted ......................... 1,445,442 2,204,161
Deferred and other assets ................................................... 424,855 574,013
------------ ------------
Total Assets .......................................................... $ 50,940,853 $ 57,287,745
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable ............................................................ $ 6,392,031 $ 7,956,296
Current maturities of long-term debt ........................................ -- 700,000
Capital lease payable - current ............................................. 187,444 144,161
Accrued liabilities ......................................................... 404,138 628,784
------------ ------------
Total current liabilities ............................................. 6,983,613 9,429,241
Long-term debt ................................................................... -- 8,800,000
Deferred tax liability ........................................................... 1,442,844 --
Capital lease payable - noncurrent ............................................... 462,380 365,880
Reserve for abandonment .......................................................... 480,906 693,936
------------ ------------
Total Liabilities ..................................................... 9,369,743 19,289,057
Stockholders' Equity:
Preferred stock, $.01 par value, authorized 1,000,000
shares, none issued or outstanding ..................................... -- --
Common stock - Offshore Energy Development
Corporation $.01 par value; authorized 10,000,000
shares; issued and outstanding 8,701,885 at
December 31, 1996 and September 30, 1997 .............................. 87,019 87,019
Additional paid-in capital .................................................. 42,645,778 42,645,778
Accumulated deficit ......................................................... (1,161,687) (4,734,109)
------------ ------------
Total stockholders' equity ............................................ 41,571,110 37,998,688
------------ ------------
Commitments and contingencies
Total Liabilities and Stockholders' Equity ....................................... $ 50,940,853 $ 57,287,745
============ ============
See accompanying notes to consolidated financial statements.
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OFFSHORE ENERGY DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
(PREDECESSORS) (COMPANY) (PREDECESSORS) (COMPANY)
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ------------ ------------
Income:
Exploration and production ....................... $ 1,665,632 $ 2,681,155 $ 7,214,461 $ 7,033,196
Pipeline operating and marketing ................. 224,668 279,132 718,418 822,654
Equity in earnings of equity investments ......... 18,582 42,708 41,753 83,430
Gain on sales of oil and gas properties
or partnership investments, net .............. -- 57,763 10,661,433 61,146
----------- ----------- ------------ ------------
Total Income ............................. 1,908,882 3,060,758 18,636,065 8,000,426
----------- ----------- ------------ ------------
Expenses:
Operations and maintenance ....................... 495,929 612,457 1,520,932 1,649,820
Exploration charges .............................. 497,406 582,457 918,774 5,157,174
Depreciation, depletion and amortization ......... 1,000,216 1,882,060 3,876,782 4,041,549
Abandonment expense .............................. 94 442,861 216,215 577,102
General and administrative ....................... 467,676 930,698 1,622,591 2,483,241
----------- ----------- ------------ ------------
Total Expenses ........................... 2,461,321 4,450,536 8,155,294 13,908,886
----------- ----------- ------------ ------------
Earnings (loss) before interest and taxes .......... (552,439) (1,389,778) 10,480,771 (5,908,460)
Interest Income (Expense) and Other:
Interest expense ................................. (87,058) (66,895) (709,190) (153,049)
Interest income and other, net ................... 23,843 (308) (40,980) 1,046,243
----------- ----------- ------------ ------------
Total Interest Income (Expense)
and Other ........................... (63,215) (67,203) (750,170) 893,194
----------- ----------- ------------ ------------
Income (Loss) Before Income Taxes .................. (615,654) (1,456,981) 9,730,601 (5,015,266)
Income Tax Benefit (Expense) ....................... 8,352 233,028 (4,778) 1,442,844
----------- ----------- ------------ ------------
Net Income (Loss) .................................. (607,302) (1,223,953) 9,725,823 (3,572,422)
Preference unit payments and accretion
of discount .............................. (439,119) -- (1,332,357) --
----------- ----------- ------------ ------------
Income (loss) available to common unit holders
and stockholders ................................. $(1,046,421) $(1,223,953) $ 8,393,466 $ (3,572,422)
=========== =========== ============ ============
Income (loss) available to common unit holders
and stockholders per common share ................ $ (0.21) $ (0.14) $ 1.66 $ (0.41)
=========== =========== ============ ============
Weighted average number of common shares
and common share equivalents outstanding ......... 5,051,882 8,701,885 5,051,882 8,701,885
=========== =========== ============ ============
See accompanying notes to consolidated financial statements.
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OFFSHORE ENERGY DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
(PREDECESSORS) (COMPANY)
(UNAUDITED) (UNAUDITED)
------------ ------------
OPERATING ACTIVITIES
Net income (loss) ............................................................. $ 9,725,823 $ (3,572,422)
Adjustments to reconcile net income (loss) to cash provided by
(used in) operations
Depreciation, depletion and amortization ................................. 3,984,982 4,106,637
Abandonment expense ...................................................... 68,644 195,512
Gain on sales, net ....................................................... (10,661,433) (61,146)
Dry hole expense ......................................................... 301,750 3,971,197
Equity in earnings of equity investments ................................. (41,753) (83,430)
Change in interest of oil and gas partnerships ........................... 753,382 5,645,281
Deferred taxes ........................................................... 4,778 (1,442,844)
Changes in assets and liabilities:
Accounts receivable .................................................. 755,218 (975,182)
Deferred and other assets ............................................ (1,910,033) (1,069,996)
Accounts payable ..................................................... 213,359 3,007,834
Accrued liabilities .................................................. 550,276 257,450
------------ ------------
Total adjustments ............................................... (5,980,830) 13,551,313
------------ ------------
Net cash provided by operating activities ............................ 3,744,993 9,978,891
INVESTING ACTIVITIES
Investment in equity interests ................................................ (243,748) (842,309)
Repayments from equity investees .............................................. 512,640 --
Proceeds from the sales of properties and other investments ................... 11,340,093 100,760
Restricted investments in certificates of deposit ............................. (50,215) (758,719)
Capital expenditures for property and equipment ............................... (4,492,440) (34,222,306)
------------ ------------
Net cash provided by (used in) investing activities .................. 7,066,330 (35,722,574)
FINANCING ACTIVITIES
Principal payments on borrowings .............................................. (12,260,962) --
Proceeds from borrowings ...................................................... 2,633,606 9,500,000
Fees paid to acquire financing ................................................ (98,971) --
Preference unit payments ...................................................... (802,500) --
Principal payments on capital lease ........................................... (110,331) (139,783)
------------ ------------
Net cash used in financing activities ................................ (10,639,158) 9,360,217
Increase (decrease) in cash and cash equivalents ..................... 172,165 (16,383,466)
Cash and cash equivalents balance, beginning of period ........................ 710,306 18,407,768
------------ ------------
Cash and cash equivalents balance, end of period .............................. $ 822,471 $ 2,024,302
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ................................. $ 712,545 $ 103,199
============ ============
Cash paid during the period for income taxes ............................. $ -- $ --
============ ============
Supplemental disclosure of non-cash activity:
Accretion of discount on preference units ................................ $ 529,857 $ --
See accompanying notes to consolidated financial statements.
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OFFSHORE ENERGY DEVELOPMENT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements include, in
the opinion of management, all adjustments necessary to present fairly the
consolidated financial position of Offshore Energy Development Corporation
("OEDC" or the "Company") at September 30, 1997 and its results of operations
and cash flows for the three and nine months ended September 30, 1997 and 1996.
The financial statements should be read in conjunction with the historical
financial statements and notes to the consolidated historical financial
statements of Offshore Energy Development Corporation as of and for the period
ended December 31, 1996 as presented in the Company's Form 10-K filed with the
Securities and Exchange Commission.
2. PRINCIPLES OF PRESENTATION AND ORGANIZATION
OEDC is a Delaware corporation formed on July 24, 1996 for the purpose of
acquiring the common stock of OEDC, Inc. and the partners' interest in OEDC
Partners, L.P. (the "Combination"). At formation, OEDC issued a share of stock
to three of its officers.
The Combination was consummated on November 6, 1996 and OEDC issued
5,051,882 shares of common stock to the stockholders of OEDC, Inc. ("Inc.") and
the partners of OEDC Partners, L.P. ("Partners"), collectively (the
"Predecessors"). The Combination was accounted for by assigning the
Predecessors' carryover basis to the acquired assets. In conjunction with the
Combination, the Company completed a public issuance of 3,650,000 shares of
common stock.
The Predecessors were formed on August 31, 1992 for the purpose of
investing in certain partnerships involved in drilling, producing, marketing,
gathering and storing oil and gas. Upon completion of the Combination, all of
Partners' assets and liabilities were transferred to OEDC, the partners of
Partners were issued common stock in exchange for their interests and Partners
was dissolved. The shareholders of Inc. exchanged their Inc. common stock for
OEDC common stock and Inc. became a wholly-owned subsidiary of OEDC.
Prior to the Combination, Partners was a limited partnership. As such, it
was not subject to federal income taxes; the taxable income or loss was passed
through to the partners.
PRINCIPLES OF CONSOLIDATION
The Company's investments in associated oil and gas partnerships are
accounted for using the proportionate consolidation method, whereby the
Company's proportionate share of each oil and gas partnerships' assets,
liabilities, revenues, and expenses is included in the appropriate
classifications in the Company's financial statements. Investments in non-oil
and gas partnerships where the Company has ownership interest of less than 50%
are accounted for on the equity method, investments with an ownership interest
of less than 20% are accounted for on the cost method. All
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of the Company's material intercompany accounts and transactions have been
eliminated in the consolidation.
The consolidated financial statements include the consolidated accounts of
Inc. and Partners prior to the Combination. The consolidated financial
statements are presented due to Inc.'s sole general partner interest and control
over Partners.
3. CREDIT FACILITY
In 1996, the Company entered into a two-year $10,000,000 line of credit
with Union Bank of California, N.A. In July, 1997, the line of credit agreement
was restated, raising the borrowing base to $11,000,000 and extending the
commitment period of the agreement to September 30, 1999. On November 7, 1997,
the credit facility was revised, increasing the borrowing base to $16 million.
Beginning January 31, 1998, the borrowing base is reduced by $800,000 per month
for the first twelve months, by $640,000 per month for the succeeding six months
and by $450,000 per month for the final two months of the agreement, with a
balloon payment at maturity for any outstanding amounts, unless changed by the
bank at the time of a borrowing base redetermination. Borrowings under this
facility bear interest at a rate equal to, at the Company's option, either the
bank's reference rate plus .25% to 2.5% depending on amounts outstanding or
LIBOR plus 1.75% to 4.0% depending on amounts outstanding. At September 30,
1997, there was $9.5 million outstanding under this facility and the
classification of the outstanding balance between current and long-term is
reflective of the terms of the restated credit agreement.
The credit facility contains restrictive covenants imposing limitations of
the incurrence of indebtedness, the sale of properties, payment of dividends,
mergers or consolidations, capital expenditures, transactions with affiliates,
making loans and investments outside the ordinary course of business. The
facility requires that the Company maintain at the subsidiary level certain
minimum financial ratios including a modified current ratio of at least 1:1 and
interest coverage ratio of 2.5:1. In addition, the weighted average maturity of
indebtedness incurred on ordinary terms to vendors, suppliers and others
supplying goods and services to the Company in the ordinary course of business
may not exceed 60 days. The credit facility requires the Company to maintain a
certain volume of hedging contracts in effect during the term of the credit
facility.
Indebtedness under the credit facility is secured by a first lien upon
substantially all of the properties owned by OEDC Exploration and Production,
L.P. and by pledge of the Company's limited partnership interests in South
Dauphin II Limited Partnership and its general partnership interest in DIGP. All
assets not subject to a lien in favor of the lender are subject to a negative
pledge, with certain exceptions.
4. SALE OF INVESTMENT IN PARTNERSHIP AND OIL AND GAS PROPERTIES
During the nine months ended September 30, 1996, the Company sold
approximately 96% of its interest in Dauphin Island Gathering Partners ("DIGP")
to a subsidiary of MCN Investment Corporation ("MCN"). The Company received net
proceeds of approximately $10,800,000 from
-6-
MCN resulting in a gain of approximately $10,800,000. The Company continues to
operate DIGP and retained a 1% ownership interest.
Also, during the first three quarters of 1996, the Company sold its interest in
a non-producing oil and gas property for approximately $500,000 resulting in a
loss of $166,000.
5. ABANDONMENT OF OIL AND GAS PROPERTIES
The Company's oil and gas properties are accounted for on the successful
efforts method. The successful efforts method requires that exploratory dry
holes be expensed as incurred. During the nine months ended September 30, 1996
and 1997, approximately $300,000 and $4,000,000, respectively, were charged to
operations for exploratory dry holes.
6. NATURAL GAS HEDGING ACTIVITIES
The Company periodically enters into natural gas price swaps with third
parties to hedge against potential adverse effects of fluctuations in future
prices for the Company's anticipated production volumes based on current
engineering estimates. At September 30, 1997, the Company had commitments under
natural gas price swaps for volumes of 1.9 Bcf at prices from $2.009 to 2.755
per mmbtu. Such commitments expire periodically through March 1998. At September
30, 1997, the Company estimates the cost of unwinding these positions to be
$805,000.
7. OTHER INCOME
As a result of a settlement over disputed mineral rights with a third
party, the Company recorded a settlement of $734,000 during the second quarter
of 1997. The amount was paid to the Company in July 1997. The Company received
an additional $28,000 in the third quarter of 1997 from other working interest
owners for reimbursement of legal fees.
8. HOLDER LAWSUIT
The Company is a defendant in a suit styled H.E. (Gene) Holder, Jr. and
Dan H. Montgomery V. Offshore Energy Development Corporation, which was filed in
1995 alleging that the idea, design and location of the Dauphin Island Gathering
System was a confidential trade secret owned by the plaintiffs which had been
revealed to OEDC during confidential discussions in furtherance of a proposed
joint venture. The plaintiffs alleged that OEDC made misrepresentations
regarding its intention to form a joint venture with the plaintiffs in order to
obtain the confidential information and to induce the plaintiffs into executing
a confidentially agreement which thereafter prevented the plaintiffs from
further pursuing the project independently. The plaintiffs also alleged that
OEDC orally agreed to form a joint venture and that OEDC breached its fiduciary
duties to the plaintiffs. As a consequence, the plaintiffs alleged "million of
dollars in profits" as actual damages and also sought the award of unspecified
punitive damages, attorneys' fees, pre- and post- judgment interest and costs of
suit.
-7-
On March 10, 1997, OEDC filed a motion for summary judgment as to all of
the plaintiffs' claims. Subsequently, the plaintiffs amended their petition,
dropping their claims of misrepresentation and conversion of trade secrets and
adding a claim of alleged fraudulent inducement to execute a covenant not to
compete. Further, the plaintiffs specified that they seek $6.5 million in actual
damages and punitive damages of five times the amount of actual damages. OEDC
denies the plaintiffs' claims. Trial is set for January 5, 1998. Although a
decision adverse to the Company in this litigation could have a material adverse
effect on OEDC's financial condition and results of operation, OEDC does not
believe that the final resolution of the case will result in a material
liability to OEDC.
9. SUBSEQUENT EVENTS
In September 1997, the Company and Titan Exploration Inc. ("Titan"),
entered into an Agreement and Plan of Merger. The merger is expected to be
effective in December 1997. As a result of the merger, (i) Titan Offshore, Inc.,
a wholly owned subsidiary of Titan, will be merged with the Company, and the
Company, the surviving corporation in the merger, will become a wholly owned
subsidiary of Titan and (ii) each share of the common stock of the Company
outstanding immediately prior to the effective time of the merger will be
converted into the right to receive 0.630 of a share of the common stock of
Titan.
Subsequent to September 30, 1997, the Company was named as a defendant in
a suit filed October 20, 1997 in Harris County, Texas. The suit seeks class
certification on behalf of certain holders of the Company's common stock,
excluding the defendants and holders related to the defendants. The suit alleges
generally that the defendants wrongfully made false or misleading statements or
omissions relating to the Company's business and prospects in the course of the
Company's initial public offering and subsequent thereto. The suit seeks
rescission of sales of the Company's common stock and unspecified monetary
damages, including punitive damages. The Company and its legal counsel are
currently evaluating the claim.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Offshore Energy Development Corporation (the "Company") was formed for the
purpose of becoming the holding company for OEDC, Inc. and OEDC Partners, L.P.
pursuant to the terms of an Agreement and Plan of Reorganization dated August
30, 1996 (the "Combination"). Under the terms of the Combination, which was
consummated on November 6, 1996, the Company (i) acquired all of the outstanding
capital stock of OEDC, Inc. previously owned by Company management and by
Natural Gas Partners, L.P. ("NGP"), (ii) acquired by merger 50% of the common
limited partnership units of OEDC Partners, L.P. from the Texas corporation
having the same name as the company, and (iii) acquired 50% of the common units
of OEDC Partners, L.P. held by NGP and certain of its employees. The Company
completed an initial public offering (the "Offering") of shares of its common
stock contemporaneously with the consummation of the Combination.
On November 6, 1997, the Company, Titan Exploration, Inc. ("Titan") and
Titan Offshore, Inc., a wholly owned subsidiary of Titan ("Titan Sub"), entered
into an Amended and Restated Agreement and Plan of Merger (the "Merger
Agreement") pursuant to which Titan Sub would be merged (the "Merger") with and
into the Company with the Company surviving as a wholly owned subsidiary of
Titan and each outstanding share of Common Stock, par value $.01 per share, of
the Company being converted into the right to receive 0.63 of a share of the
Common Stock, par value $.01 per share, of Titan. Consummation of the Merger is
subject to the satisfaction of certain conditions, including the approval of the
Merger by the stockholders of OEDC and Titan. For more information about the
Merger and the Merger Agreement, see "Item 5 - Other Information."
This report contains certain forward-looking statements regarding the
Company's future financial condition, results of operations, liquidity and
prospects and the Company's business operations. The words "expect," "estimate,"
"anticipate," "predict," "believe" and similar expressions are intended to
identify forward-looking statements. Such statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
indicated in a forward-looking statement. Such risks and uncertainties include,
but are not limited to, those relating to: (i) the speculative nature of the
assumptions underlying the forward-looking statements, (ii) the volatility of
natural gas and oil prices, (iii) the Company's ability to replace its reserves,
(iv) the costs and uncertainties relating to oil and gas exploration and
development, (v) the substantial capital requirements associated with the
Company's business strategy and the sufficiency of the Company's capital
resources to satisfy those requirements, and (vi) the other risks and
uncertainties described herein and in the other documents filed by the Company
with the Securities and Exchange Commission.
-9-
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997.
INCOME. Total income for the Company increased by $1,152,000 (60%) from
$1,909,000 in the three months ended September 30, 1996 to $3,061,000 in the
three months ended September 30, 1997.
Exploration and production revenue increased by $1,015,000 (61%) from
$1,666,000 in the three months ended September 30, 1996 to $2,681,000 in the
three months ended September 30, 1997. Production volumes increased from 1.10
Bcf to 1.31 Bcf (a 19% increase) in the three months ended September 30, 1996
and 1997, respectively. The production increase was attributable to initial
production from the Company's successful drilling efforts at North Padre Island
A59 and Viosca Knoll 35. The North Padre Island A59 A4 well commenced production
in early June 1997 and the North Padre Island A59 A5 well commenced production
in August, 1997 (OEDC has a 60.6% working interest in both North Padre Island
wells). Production from the Viosca Knoll 35 well (100% working interest)
commenced in August, 1997. The increase in production from the above new wells
was partially offset by expected declines in mature fields located at Mobile 959
and South Timbalier 162. Average natural gas prices received (inclusive of
hedging) were $1.51 per Mcf in the three months ended September 30, 1996
compared to $2.05 per Mcf in the three months ended September 30, 1997,
respectively (a 36% increase).
Pipeline operating and marketing income increased by $54,000 (24%) from
$225,000 for the three month period ended September 30, 1996 to $279,000 for the
three month period ended September 30, 1997. The Company receives a management
fee of $188,000 per quarter for operating the Dauphin Island Gathering System
(the "DIGS"). Effective late September, 1997, the Company elected to resign as
operator of the DIGS no later than December 1, 1997. A portion of the DIGS was
recently determined to be regulated by the Federal Energy Regulatory Commission,
and in connection with the regulated status, the compliance and reporting burden
will increase significantly. Therefore, the Company deemed it appropriate to
resign as operator to pursue other opportunities. However, the Company will
remain as the manager of commercial development and construction and will
receive $275,000 per year for these duties compared to the $750,000 per year the
Company has received as operator of the system. The Company will perform these
duties for a minimum of two years. The Company also markets third-party gas on a
limited basis. Marketing revenue received in the three months ended September
30, 1997 was $91,000.
EXPENSES. Total expenses increased by $1,990,000 (81%) from $2,461,000 for
the third quarter of 1996 compared to $4,451,000 for the third quarter of 1997.
Operations and maintenance expense increased during the third quarter of
1997 to $612,000 compared to $496,000 for the third quarter of 1996 (a 23%
increase). In general, a significant portion of operations expense is fixed and,
therefore, does not fluctuate from period to period as changes occur in
production volume and prices received for those volumes. However, operation
expenses increased, as expected, as a result of the North Padre Island A59
platform coming online
-10-
in the second quarter of 1997 and the Viosca Knoll 35 well commencing production
in the third quarter of 1997. Average operations and maintenance expense per Mcf
were $.45 per Mcf in the three months ended September 30, 1996 compared to $.47
per Mcf in the three months ended September 30, 1997 (a 4% increase).
Exploration charges increased $85,000 from $497,000 in the third quarter
of 1996 to $582,000 in the third quarter of 1997. The increase was primarily
attributable to seismic related charges of $341,000 in the third quarter of 1997
compared to seismic charges of $100,000 in the comparable quarter in 1996. The
1997 expenditures consisted of geological consulting, seismic data and
processing for areas offshore Louisiana and Texas covering blocks acquired by
the Company in a Federal lease sale. As a result of the Company's use of the
successful efforts method of accounting, the Company expenses rather than
capitalizes geological and seismic costs.
As natural gas production volumes increased by 19% for the three months
ended September 30, 1997 compared to the same period in 1996, the Company's
depreciation, depletion and amortization ("DD&A") increased by $882,000 (88%).
The Company's average DD&A rates per Mcf of production were $.91 per Mcf and
$1.44 per Mcf for the third quarter of 1996 and 1997, respectively (a 58%
increase). The increase in average DD&A rate per Mcf was due to the new
production coming on line, which had a higher finding cost than previously
existing production. The higher finding cost is partially the result of
increased day rates for drilling rigs, boats and equipment used by the Company
to drill and develop wells.
Abandonment expense incurred during the third quarter of 1997 was $443,000
which represents one-time charges of $277,000 associated with the South
Timbalier 162 B-6 well and $151,000 associated with non-cash abandonment
accruals for the Company's wells and platforms. Abandonment expenses during the
similar quarter in 1996 were nominal.
General and administrative expenses increased $463,000 (99%) from $468,000
in the third quarter of 1996 to $931,000 in the same quarter of 1997. The
increase was primarily the result of additional staffing combined with annual
compensation increases that occurred in the fourth quarter of 1996. The
additional staffing is representative of the Company's increase in scope of
operations. Other factors leading to the 1997 increase were various costs
associated with the Company's status as a public company and increased insurance
costs. Average general and administrative expenses per Mcf were $.43 per Mcf in
the three months ended September 30, 1996 compared to $.71 per Mcf in the three
months ended September 30, 1997 (a 65% increase).
INTEREST INCOME (EXPENSE). The Company incurred net interest expense (net
of interest income) of $63,000 for the third quarter of 1996 compared to net
interest expense of $67,000 for the third quarter of 1997. The 1996 amount
represented interest paid to an affiliate of Enron Corp. ("Enron") relating to
borrowings utilized for working capital and hedging needs as well as interest
paid to a third party on leased equipment. The third quarter of 1997 net
interest expense was the result of borrowings on the Company's line of credit
with Union Bank as well as interest on leased equipment.
-11-
NET INCOME (LOSS). The Company had a net loss before income taxes of
$616,000 in the third quarter of 1996 compared to a net loss of $1,457,000 in
the third quarter of 1997. The net loss for the third quarter of 1996 was
primarily the result of the Company's successful efforts method of accounting
that requires the Company to expense rather than capitalize exploration
activities (dry holes, seismic charges and lease rentals). The third quarter of
1997 loss was the result of expensing certain exploration activities, an
abandonment charge for a well and increased general and administrative expenses.
Net income (loss) after giving effect to income taxes and tax benefits was a net
loss of $607,000 in the third quarter of 1996 compared to a net loss of
$1,224,000 for the third quarter of 1997.
Income (loss) available to common unit holders and stockholders, which
gives effect to preference unit payments and accretion of discount, was a loss
of $1,046,000 in the three month period ended September 30, 1996 compared to a
net loss of $1,224,000 in the three month period ended September 30, 1997. In
the fourth quarter of 1996, the Company redeemed all of the outstanding
preference units of OEDC Partners, L.P. with proceeds of the Offering.
Therefore, in periods after the fourth quarter of 1996 all net income will be
available to common stockholders.
During the third quarter of 1996, the Company made preference payments to
NGP totaling $263,000. The Company began accreting the $2 million discount of
preference units following the purchase of additional preference units by NGP in
1995. The accretion of discount was $177,000 in the third quarter of 1996. As
the Company redeemed all preference units outstanding following the Offering,
the Company will not incur accretion of discount charges nor will preference
payments have to be made.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997.
INCOME. Total income for the Company decreased by $10,636,000 (57%) from
$18,636,000 in the nine months ended September 30, 1996 to $8,000,000 in the
nine months ended September 30, 1997. The higher income amount in the first
three quarters of 1996 was primarily attributable to the Company's sale of all
but a one percent general partnership interest in Dauphin Island Gathering
Partners ("DIGP"), the partnership that owns the DIGS, which resulted in a gain
of $10,827,000.
Exploration and production revenue decreased $181,000 (3%) from $7,214,000
in the nine months ended September 30, 1996 compared to $7,033,000 in the nine
months ended September 30, 1997. Production volumes decreased from 3.63 Bcf to
3.43 Bcf (a 6% decrease) in the nine months ended September 30, 1996 and 1997,
respectively. The slight production decrease was attributable to expected
production declines at the Company's Mobile area 959 cluster and South Timbalier
162 B7 well, which were partially offset by increased production volumes from
initial production from the Company's successful drilling efforts at North Padre
Island A59 and Viosca Knoll 35. The Viosca Knoll 35 well (100% working interest)
commenced production in August 1997 and the North Padre Island A59 A5 well
(60.6% working interest) commenced production in August 1997. The decrease in
production volume was positively impacted by slightly higher average natural gas
prices. Average natural gas prices received (inclusive of hedging) were $1.99
per Mcf in the nine months
-12-
ended September 30, 1996 compared to $2.05 per Mcf in the nine months ended
September 30, 1997 (a 3% increase).
Pipeline operating and marketing income increased by $105,000 (15%) from
$718,000 for the nine month period ended September 30, 1996 to $823,000 for the
nine month period ended September 30, 1997. The Company receives a management
fee of $188,000 per quarter for operating the DIGS. Effective late September,
1997, the Company elected to resign as operator of the DIGS no later than
December 1, 1997. A portion of the DIGS was recently determined to be regulated
by the Federal Energy Regulatory Commission, and in connection with the
regulated status, the compliance and reporting burden will increase
significantly. Therefore, the Company deemed it appropriate to resign as
operator to pursue other opportunities. However, the Company will remain as the
manager of commercial development and construction and will receive $275,000 per
year for these duties compared to the $750,000 per year the Company has received
as operator of the system. The Company will perform these duties for a minimum
of two years. The Company also markets third-party gas on a limited basis.
Marketing revenue received in the first three quarters of 1997 was $260,000.
EXPENSES. Total expenses increased by $5,754,000 (71%) from $8,155,000 for
the first three quarters of 1996 to $13,909,000 for the first three quarters of
1997.
Operations and maintenance expense increased moderately for the first
three quarters of 1997 at $1,650,000 compared to $1,521,000 for the first three
quarters of 1996 (an 8% increase). In general, a significant portion of
operations expense is fixed and, therefore, does not fluctuate from period to
period as changes occur in production volume and prices received for those
volumes. However, operation expenses increased, as expected, as a result of the
second well at North Padre Island A59 and Viosca Knoll 35 coming online in the
third quarter of 1997. Average operations and maintenance expense per Mcf were
$.42 per Mcf in the nine months ended September 30, 1996 compared to $.48 per
Mcf in the nine months ended September 30, 1997 (a 14% increase).
Exploration charges increased $4,238,000 from $919,000 in the first three
quarters of 1996 to $5,157,000 in the first three quarters of 1997. The major
component of the 1997 increase was attributable to first quarter 1997 charges
relating to dry hole expenses of $3,675,000, of which $3,473,000 relates to the
Company's unsuccessful attempts to repair and sidetrack out of the existing
South Timbalier 162 B6 non-producing wellbore. An additional $220,000 in dry
hole expense relates to the Viosca Knoll block 80 dry hole that was drilled in
fourth quarter of 1996, as the Company received additional invoices in the first
quarter of 1997 relating to the drilling of that well. Also contributing to the
increase were additional seismic related charges of $1,103,000 in the first nine
months of 1997 compared to seismic charges of $371,000 in the comparable period
in 1996. The 1997 expenditures consisted of geological consulting, seismic data
and processing for areas offshore Louisiana and Texas covering blocks acquired
by the Company in a Federal lease sale. As a result of the Company's use of the
successful efforts method of accounting, the Company expenses rather than
capitalizes such geological and seismic costs.
-13-
Although natural gas production volumes decreased by 5% for the nine
months ended September 30, 1997 compared to the same period in 1996, the
Company's DD&A increased by $165,000 (4%). The Company's average DD&A rates per
Mcf of production were $1.07 per Mcf and $1.18 per Mcf for the first three
quarters of 1996 and 1997, respectively (a 10% increase). The increase in
average DD&A rate per Mcf was a function of new production coming on line that
had a higher finding cost per Mcf as compared to previously existing production.
The higher finding cost is partially the result of increased day rates for
drilling rigs, boats and equipment used by the Company to drill and develop
wells.
Abandonment expense increased 167% from $216,000 in the first nine months
of 1996 to $577,000 in the first nine months of 1997. The Company incurred cash
abandonment expense of $104,000 relating to the previous abandonment of the
Company's Eugene Island 163 block platform, $277,000 of abandonment expense
associated with the previously noted South Timbalier 162 B6 well and abandonment
accruals of $196,000 in the first three quarters of 1997. This compares to
actual cash abandonment expense of $147,000 relating to the above noted Eugene
Island 163 platform and abandonment accruals of $69,000 in the first three
quarters of 1996.
General and administrative expenses increased $860,000 (53%) from
$1,623,000 for the nine months ended September 30, 1996 to $2,483,000 for the
nine months ended September 30, 1997. The increase was primarily the result of
additional staffing combined with annual compensation increases that occurred in
the fourth quarter of 1996. The additional staffing is representative of the
Company's increase in scope of operations. Other factors leading to the 1997
increase were various costs associated with the Company's status as a public
company and increased insurance costs. Average general and administrative
expenses per Mcf were $.45 per Mcf in the nine months ended September 30, 1996
compared to $.72 per Mcf in the nine months ended September 30, 1997 (a 60%
increase).
INTEREST INCOME (EXPENSE). The Company incurred net interest expense (net
of interest income) of $750,000 for the first three quarters of 1996 compared to
net interest income of $131,000 for the comparable period in 1997. The net
interest expense in the first three quarters of 1996 primarily represented
interest paid to an affiliate of Enron relating to borrowings utilized for
working capital and hedging needs. The Company's net interest income in the
first three quarters of 1997 compared to a net interest expense in the first
three quarters of 1996 was the result of paying off all outstanding debt after
the Offering in November, 1996 coupled with increased interest income from
increased cash balances following the Offering. The Company had other income of
$762,000 received in the second quarter of 1997 resulting from a settlement of
disputed mineral rights.
NET INCOME (LOSS). The Company had net income before income taxes of
$9,731,000 in the first three quarters of 1996 compared to a net loss of
$5,015,000 in the first three quarters of 1997. The net loss in the 1997 period
was primarily the result of the above noted dry hole cost during early 1997. Net
income (loss) after giving effect to income taxes and tax benefits was net
income of $9,726,000 in the first three quarters of 1996 compared to a net loss
of $3,572,000 for the first three quarters of 1997.
-14-
Income (loss) available to common unit holders and stockholders, which
gives effect to preference unit payments and accretion of discount, was net
income of $8,393,000 in the nine month period ended September 30, 1996 compared
to a net loss of $3,572,000 in the nine month period ended September 30, 1997.
In the fourth quarter of 1996, the Company redeemed all of the outstanding
preference units of OEDC Partners, L.P. with proceeds of the Offering.
Therefore, in periods after the fourth quarter of 1996 all net income will be
available to common stockholders.
During the first three quarters of 1996, the Company made preference
payments to NGP totaling $803,000. The Company began accreting the $2 million
discount of preference units following the purchase of additional preference
units by NGP in 1995. The accretion of discount was $530,000 in the nine months
ended September 30, 1996. As the Company redeemed all preference units
outstanding following the Offering, the Company will not incur accretion of
discount charges nor will preference payments have to be made.
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY
The Company's cash position decreased by $16,383,000 during the first
three quarters of 1997. This decrease is primarily the result of the Company's
ongoing investment in oil and gas drilling and development activities.
Net cash provided by operating activities was $9,979,000 for the nine
months ended September 30, 1997, as compared to $3,745,000 for the same period
in 1996. The cash provided by operating activities was significantly greater in
the first three quarters of 1997 as compared to the first three quarters of 1996
as a result of ordinary changes in current assets and liabilities creating a
source of cash of $1,220,000, a change in oil and gas partnership interest in
the South Dauphin II Limited Partnership of $5,645,000 (which was offset by a
similar amount as investment in oil and gas properties) and $3,971,000 in dry
hole expense, primarily relating to the Company's South Timbalier 162 B-6 well,
which is added back to net income for purposes of calculating cash provided by
operating activities, but is ultimately a use of cash as dry hole expense is
considered a capital expenditure.
Net cash utilized in investing activities was $35,723,000 in the nine
months ended September 30, 1997 compared to $7,066,000 of cash that was provided
from investing activities in the nine months ended September 30, 1996. The first
three quarters of 1997 use of cash represents the Company's continued investment
in various oil and gas projects. The cash provided in the first three quarters
of 1996 was the result of selling all but one percent of the Company's general
partnership interest in DIGP and selling a non-strategic lease block, generating
$11,340,000 from these transactions.
Financing activities provided $9,360,000 of cash in the first nine months
of 1997 as a result of borrowings under the Company's line of credit. During the
comparable period in 1996, the
-15-
Company utilized $10,639,000 which primarily consisted of principal repayment to
Enron on outstanding loans.
The Company's primary sources of liquidity are, and if the proposed Merger
with Titan is not consummated will continue to be, cash flows from the Company's
operating activities and credit available under the Company's credit agreement
described below. The Company believes that these sources will be sufficient to
fund the Company's current drilling and development program in the event that
the Merger is not consummated. However, if results from the Company's drilling
and development efforts do not meet the Company's expectations, the Company may
be required to curtail its drilling or seek additional financing. No assurance
may be given, therefore, as to the adequacy of the Company's existing sources of
liquidity or as to the availability of any such additional financing. In
addition, the Company intends to continue its efforts to acquire additional
acreage and participate in other drilling and development opportunities when
those opportunities become available. If the Merger is not consummated, pursuing
any such opportunities may require the Company to increase its borrowings under
its credit facility or seek other financing sources. No assurance may be given
as the adequacy of the Company's capital resources to pursue new opportunities
or as to the availability to the Company of additional resources for that
purpose.
WORKING CAPITAL
The Company had a working capital deficit of $2,027,000 as of September
30, 1997. The September 30, 1997 working capital deficit is primarily the result
of continued investment in drilling projects and oil and gas properties. The
Company periodically has experienced substantial working capital deficits. The
Company has incurred substantial expenditures for the acquisition and
development of capital assets either on vendor open accounts payable or under
short-term financings. The Company has been able to refinance the accounts
payable balances by including them in line of credit and longer-term project
financings. Generally, capital investments in properties have converted to cash
or generated borrowing capacity rapidly enough to finance the Company's working
capital deficits. At September 30, 1997, the Company had $9,500,000 outstanding
under its credit facility. On November 7, 1997, the Company increased its lines
of credit to $16,000,000.
FINANCING ACTIVITIES
The Company budgeted a total of $38.6 million for capital expenditures in
1997. During the first nine months of 1997, the Company made capital
expenditures of approximately $34.2 million. Given the dynamic nature of the
Company's business, management considers it possible that actual capital
expenditures in 1997 could exceed the previously budgeted amount. The Company
believes that borrowings under the existing credit facility described below and
cash flows generated from operations will be sufficient to fund these
expenditures. However, no assurance may be given as to the adequacy of these
sources.
CREDIT FACILITY. On November 7, 1997, the Company increased its existing
line of credit. The revised credit facility is a 23 month line of credit with
Union Bank of California, N.A. Borrowing under the line of credit may not exceed
at any time the lesser of $30 million or the
-16-
borrowing base (computed with reference to the Company's oil and gas reserves
and other assets) as determined by the bank in its sole discretion. The
borrowing base may be redetermined quarterly. On November 7, 1997, the borrowing
base was redetermined to be $16,000,000 and there was $10,500,000 outstanding
under this facility as of that date. The credit facility will be interest only
for the first three months, and then the borrowing base will be reduced by
$800,000 per month for the next twelve months, then by $640,000 per month for
the succeeding six months and by $450,000 per month for the final two months of
the agreement, unless changed by the bank at the time of a borrowing base
redetermination. All remaining principal and interest become due on September
30, 1999. Borrowings under this facility bear interest at a rate equal to, at
the Company's option, either the bank's reference rate plus .25% to 2.5%
(depending on amounts outstanding) or LIBOR plus 1.75% to 4.0% (depending on
amounts outstanding). There was $9,500,000 outstanding under the credit
agreement as of September 30, 1997.
The credit facility contains restrictive covenants imposing limitations on
the incurrence of indebtedness, the sale of properties, payment of dividends,
mergers or consolidations, capital expenditures, transactions with affiliates,
making loans, and investments outside the ordinary course of business. The
facility requires that the Company maintain at the subsidiary level certain
minimum financial ratios, including a current ratio of at least 1:1 and interest
coverage ratio of 2.5:1. In addition, the weighted average maturity of
indebtedness incurred on ordinary terms to vendors, suppliers and others
supplying goods and services to the Company in the ordinary course of business
may not exceed 60 days. The credit facility requires the Company to maintain a
certain volume of hedging contracts in effect during the term of the credit
facility.
Indebtedness under the credit facility is secured by a first lien upon
substantially all of the properties owned by OEDC Exploration and Production,
L.P. and by the pledge of the Company's limited partnership interests in South
Dauphin II Limited Partnership ("SDPII") and its general partnership interest in
DIGP. All assets not subject to a lien in favor of the lender are subject to a
negative pledge, with certain exceptions.
SOUTH DAUPHIN II LIMITED PARTNERSHIP The Company and an affiliate of Enron
("ECT Affiliate") formed SDPII to fund drilling and development, with the
Company generally responsible for costs in excess of budgeted amounts. The
financing of SDPII is non-recourse to the Company's other assets. Pursuant to
the terms of the partnership agreement, the ECT Affiliate receives 85% of the
net cash flows from the subject wells (provided a minimum payment schedule is
met) until it has been repaid all of its original investment plus a 15% pre-tax
rate of return ("Payout"). Once Payout has occurred, the ECT Affiliate's
interest will decrease to 25% and the Company's interest will increase to 75%.
SDPII has the option to prepay the ECT Affiliate's investment and accelerate the
ownership change. If such prepayment is from financing activities instead of
cash flow from operations, the Company is required to make an additional payment
to the ECT Affiliate equal to 10% of the ECT Affiliate's net investment (funds
advanced less distributions received) and five percent of the unfunded portion
of the ECT Affiliate's commitment. Under the terms of a letter agreement between
OEDC and the ECT Affiliate, the parties funded essential repairs on two wells in
25%/75% proportions. Initial revenues from those wells will be shared 25%/75%
until the repair
-17-
costs are recovered with a 10% rate of return. Thereafter, sharing ratios will
revert to the arrangement described above.
During July, 1997 the Company and its Board of Directors elected not to
prepay the ECT Affiliate's investment and accelerate the SDPII Payout as
previously planned. The Board of Directors concluded such an investment by the
Company would be imprudent and a potential waste of the Company's assets unless
substantial production history indicates that the acceleration of SDPII Payout
is financially attractive.
HEDGING ACTIVITIES
The Company continues to utilize financial futures to hedge its natural
gas production. In the first nine months of 1996, total natural gas income
decreased by $1,076,000 compared to a decrease of $823,000 for the first nine
months of 1997 as a result of the Company's hedging position. As of September
30, 1997, the Company had .65 Bcf of natural gas hedged from September, 1997
through December, 1997 at an average price of $2.14 per Mcf. In August 1997, the
Company entered into a participating price collar on 1.2 Bcf of natural gas for
the period of December 1997 through March 1998. Under the terms of the
participating price collar, the Company receives the actual price on volumes
hedged if the actual price is between $2.20 and $2.76 per Mcf; if the actual
price is less than $2.20 per Mcf, the Company receives $2.20; and if actual
prices are above $2.76, then the Company receives $2.76 plus 50% of the amount
above $2.76 per Mcf. The Company estimates that as of September 30, 1997, the
cost to unwind its hedged position was approximately $805,000. Although hedging
reduces the Company's susceptibility to declines in the sales prices of its
natural gas production, it also prevents the Company from receiving the full
benefit of any increases in the sales prices of such production. Further,
significant reductions in production at times when the Company's production is
hedged could require the Company to make payments under the hedge agreements in
the absence of offsetting income.
NATURAL GAS BALANCING
It is customary in the natural gas industry for various working interest
partners to produce more or less than their entitlement share of natural gas
from time to time. OEDC's net overproduced position at September 30, 1997 was
74,735 Mcf. Under the terms of typical natural gas balancing agreements, the
underproduced party can take a certain percentage, typically 25% to 50% of the
overproduced party's entitled share of gas sales in future months to eliminate
such imbalance. during the make-up period, the overproduced party's cash flow
will be adversely affected.
EFFECTS OF INFLATION
The Company's results of operations and cash flow are affected by changing
oil and gas prices. Increases in oil and gas prices often result in increased
drilling activity, which in turn increases the demand for and cost of
exploration and development. Thus, increased prices may generate increased
revenue without necessarily increasing profitability. These industry market
conditions have been far more significant determinants of Company earnings than
have
-18-
macroeconomic factors such as inflation, which has had only minimal impact on
Company activities in recent years. While it is impossible to predict the
precise effect of changing prices and inflation on future Company operations,
the short-lived nature of the Company's gas reserves makes it more possible to
match development costs with predictable revenue streams than would long-lived
reserves. No assurance can be given as to the Company's future success at
reducing the impact of price changes on the Company's operating results.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective December 1997, the Company will be required to adopt Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 introduces the concept of basic earnings per share, which represents
net income divided by the weighted average common shares outstanding without the
dilutive effects of common stock equivalents (options, warrants, etc.). Diluted
earnings per share, giving effect for common stock equivalents, will be reported
when SFAS 128 is adopted in the fourth quarter of 1997. The impact of adopting
SFAS 128 is anticipated to be immaterial.
Effective December 1997, the Company will be required to adopt Statement
of Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure" ("SFAS 129"). SFAS 129 requires that all entities disclose in
summary form within the financial statements the pertinent rights and privileges
of the various securities outstanding. An entity is to disclose within the
financial statements the number of shares issued upon conversion, exercise or
satisfaction of required conditions during at least the most recent annual
fiscal period and any subsequent interim period presented. Other special
provisions apply to preferred and redeemable stock. The Company's adoption of
SFAS 129 in the fourth quarter of 1997 is not expected to have a material impact
on reported results.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), which establishes standards for reporting and display of
comprehensive income and its components. The components of comprehensive income
refer to revenues, expenses, gains and losses that are excluded from net income
under current accounting standards, including unrecognized foreign currency
translation items, minimum pension liability adjustments and unrealized gains
and losses on certain investments in debt and equity securities. SFAS 130
requires that all items that are recognized under accounting standards as
components of comprehensive income be reported in a financial statement
displayed in equal prominence with the other financial statements; the total of
other comprehensive income for a period is required to be transferred to a
component of equity that is separately displayed in a statement of financial
position at the end of an accounting period. SFAS 130 is effective for both
interim and annual periods beginning after December 15, 1997, at which time the
Company will adopt the provisions. The Company does not expect SFAS 130 to have
a material effect on reported results.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131
-19-
establishes standards for the way public enterprises are to report information
about operating segments in annual financial statements and requires the
reporting of selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS 131 is effective for periods beginning after December 15, 1997, at which
time the Company will adopt the provisions. The Company does not expect SFAS 131
to have a material effect on its reported results.
-20-
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company, David B. Strassner (President and a director of the Company),
Douglas H. Kiesewetter (Executive Vice President and a director of the Company)
and David R. Albin (a director of the Company), as well as NGP (the Company's
largest stockholder), the managing underwriters of the Company's initial public
offering and an analyst from each of the managing underwriters, have been named
as defendants in a suit styled ERIC BARON AND EDWARD C. ALLEN, ON BEHALF OF
THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, V. DAVID B. STRASSNER, DOUGLAS H.
KIESEWETTER, DAVID R. ALBIN, NATURAL GAS PARTNERS, L.P., DAVID GARCIA, JOHN J.
MYERS, OFFSHORE ENERGY DEVELOPMENT CORPORATION, MORGAN KEEGAN & COMPANY, INC.
AND PRINCIPAL FINANCIAL SECURITIES, INC., which was filed October 20, 1997, in
the Texas State District Court of Harris County, Texas, 270th Judicial District.
The suit seeks class certification on behalf of certain holders of the Company's
common stock, excluding the defendants and holders related to or affiliated with
the defendants. The suit alleges generally that the defendants wrongfully made
false or misleading statements or omissions relating to the Company's business
and prospects in the course of the Company's initial public offering and
subsequent thereto. The suit seeks rescission of sales of the Company's common
stock and unspecified monetary damages, including punitive damages.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) (1) The effective date of the registration statement (the
"Registration Statement") for which use of proceeds information is
being disclosed herein was October 31, 1996 and the Securities and
Exchange Commission file number assigned to the Registration
Statement was 333-11269.
(2) The offering (the "Offering") to which the Registration
Statement related commenced on October 9, 1996.
(3) The Offering has been terminated following the sale of all
securities registered.
(4) The managing underwriters for the Offering were Morgan Keegan &
Company, Inc. and Principal Financial Securities, Inc.
(5) The class of securities registered by the Registration Statement
was the Company's Common Stock, par value $.01 per share ("Common
Stock").
-21-
(6) For the account of the Company, the number of shares of Common
Stock registered and sold was 3,650,000 and the aggregate offering
price of such shares was $43,800,000. For the account of selling
stockholders, the number of shares of Common Stock registered and
sold was 584,300 and the aggregate offering price of such shares was
$7,011,600.
(7) In connection with the Offering, the Company incurred expenses
of $3,066,000 for underwriters' discounts, expenses of $15,257 for
expenses of the underwriters paid by the Company and estimated other
expenses of $577,743, resulting in estimated total expenses of
$3,659,000. No Offering expenses were paid to an affiliate of the
Company.
(8) The net proceeds of the Offering to the Company were
$40,141,000.
(9) The Company's estimated uses of Offering proceeds were as
follows:
Payments to affiliates:
$12,000,000 for redemption of preference units of a
subsidiary
$6,915,558 for contributions to a partnership
Payments to others:
$3,163,749 for repayment of indebtedness
$4,410,280 for working capital
$13,651,413 for capital expenditures relating to the
Company's oil and gas and pipeline activities
(10) The use of proceeds described above represents a material
change from the use of proceeds described in the prospectus
contained in the Registration Statement. Such prospectus indicated
that the Company would use up to $14,000,000 of Offering proceeds
for contribution to a partnership to increase the Company's interest
in that partnership. The Company's board of directors subsequently
determined that such a use of proceeds was not in the best interests
of the Company and would possibly be wasteful of the Company's
assets and approved the use of such proceeds for other purposes. See
"Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity - Financing
Activities South Dauphin II Limited Partnership."
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
On November 6, 1997, the Company, Titan Exploration, Inc. ("Titan") and
Titan Offshore, Inc., a wholly owned subsidiary of Titan ("Titan Sub") entered
into an Amended and Restated Agreement and Plan of Merger (the "Merger
Agreement") pursuant to which Titan Sub would be merged (the "Merger") with and
into the Company, with the Company surviving as a wholly owned subsidiary of
Titan and each issued and outstanding share of the Company's common stock being
converted in the right to receive .63 of a share of the common stock of Titan.
Consummation of the Merger is subject to the satisfaction of certain conditions
including the approval of the Merger by the stockholders of both the Company and
Titan. For more information regarding the Merger and the Merger Agreement, see
the descriptions thereof under the captions "The Merger" and "Certain Provisions
of the Merger Agreement" in the Joint Proxy Statement/Prospectus of Titan and
the Company contained in Titan's Registration Statement on Form S-4 filed with
the Securities and Exchange Commission on November 14, 1997, which descriptions
are incorporated herein by reference thereto.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed with this report:
Exhibit
NUMBER DESCRIPTION OF EXHIBIT
2 - Amended and Restated Agreement and Plan of Merger dated
November 6, 1997 among Titan Exploration, Inc., Titan Offshore,
Inc. and Offshore Energy Development Corporation (incorporated
herein by reference to Exhibit 2.2 to Titan Exploration, Inc.'s
Registration Statement on Form S-4 filed with the Securities and
Exchange Commission on November 14, 1997).
10 - First Restated Credit Agreement dated July 8, 1997 by and among
OEDC Exploration and Production, L.P., Offshore Energy
Development Corporation, OEDC, Inc., OEDC Partners, L.P., Dauphin
Island Gathering Company, L.P., OEDC Processing, L.P. and Union
Bank of California, N.A. (incorporated herein by reference to
Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997).
27 - Financial Data Schedule.
(b) The Company did not file any reports on Form 8-K during the
quarterly period ended September 30, 1997.
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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.
OFFSHORE ENERGY DEVELOPMENT
CORPORATION
Date: November 13, 1997 By: /S/ DOUGLAS H. KIESEWETTER
Douglas H. Kiesewetter
Executive Vice President and Chief
Operating Officer (for the registrant
and as its principal financial officer)
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EXHIBIT INDEX
Exhibit
NUMBER DESCRIPTION OF EXHIBIT
2 - Amended and Restated Agreement and Plan of Merger dated
November 6, 1997 among Titan Exploration, Inc., Titan Offshore,
Inc. and Offshore Energy Development Corporation (incorporated
herein by reference to Exhibit 2.2 to Titan Exploration, Inc.'s
Registration Statement on Form S-4 filed with the Securities and
Exchange Commission on November 14, 1997).
10 - First Restated Credit Agreement dated July 8, 1997 by and among
OEDC Exploration and Production, L.P., Offshore Energy
Development Corporation, OEDC, Inc., OEDC Partners, L.P., Dauphin
Island Gathering Company, L.P., OEDC Processing, L.P. and Union
Bank of California, N.A. (incorporated herein by reference to
Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997).
27 - Financial Data Schedule.
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