UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(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: 1-10671
THE MERIDIAN RESOURCE CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 76-0319553
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
15995 N. BARKERS LANDING, SUITE 300, HOUSTON, TEXAS 77079
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 281-558-8080
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Number of shares of common stock outstanding at November 13, 1997 33,433,619
Page 1 of 18
THE MERIDIAN RESOURCE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
INDEX
PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations (unaudited) for
the Three Months and Nine Months Ended
September 30, 1997 and 1996 3
Consolidated Balance Sheets as of September 30, 1997
(unaudited) and December 31, 1996 4
Consolidated Statements of Cash Flows (unaudited) for the
Nine Months Ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II - OTHER INFORMATION
Item 1. Litigation 18
Item 2. Changes in Securities 20
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURE 22
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------ -------------------
1997 1996 1997 1996
------- ------- ------- --------
(in thousands, except per share information)
REVENUES:
Oil and natural gas .......... $ 5,846 $ 6,583 $20,791 $ 16,479
Interest and other ........... 66 273 368 1,084
------- ------- ------- --------
5,912 6,856 21,159 17,563
------- ------- ------- --------
COSTS AND EXPENSES:
Oil and natural gas operating 480 203 1,207 619
Severance and ad valorem taxes 564 500 1,697 1,042
Depletion, depreciation
and amortization .......... 2,696 2,473 8,275 6,408
General and administrative ... 1,289 947 3,901 2,769
Interest ..................... 237 8 301 16
------- ------- ------- --------
5,266 4,131 15,381 10,854
------- ------- ------- --------
INCOME BEFORE
INCOME TAXES ................. 646 2,725 5,778 6,709
------- ------- ------- --------
INCOME TAX EXPENSE:
Current ...................... 7 -- 7 (26)
Deferred ..................... 227 954 2,024 2,058
------- ------- ------- --------
234 954 2,031 2,032
------- ------- ------- --------
NET INCOME ...................... $ 412 $ 1,771 $ 3,747 $ 4,677
======= ======= ======= ========
Net income per common
and common equivalent share .. $ 0.03 $ 0.11 $ 0.24 $ 0.30
======= ======= ======= ========
Weighted average number of common
and common equivalent shares . 15,722 15,727 15,783 15,622
======= ======= ======= ========
See notes to consolidated financial statements
3
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,DECEMBER 31,
-------------------------
1997 1996
--------- ---------
(unaudited)
(in thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................... $ 2,863 $ 17,267
Accounts receivable ......................... 9,509 7,116
Due from affiliates ......................... 2,346 857
Prepaid expenses and other .................. 1,049 105
--------- ---------
Total current assets .................. 15,767 25,345
--------- ---------
PROPERTY AND EQUIPMENT:
Oil and natural gas properties, full cost
method (including $50,271,000 [1997]
and $29,718,000 [1996] not subject
to depletion) ............................ 137,517 92,902
Land ........................................ 478 478
Equipment ................................... 3,474 2,628
--------- ---------
141,469 96,008
Less accumulated depletion and
depreciation ............................. (26,696) (18,506)
114,773 77,502
OTHER ASSETS ................................... 329 415
--------- ---------
$ 130,869 $ 103,262
See notes to consolidated financial statements.
4
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
SEPTEMBER 30,DECEMBER 31,
-------------------------
1997 1996
--------- ---------
(unaudited)
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .............................. $ 7,683 $ 4,225
Revenues and royalties payable ................ 3,929 5,530
Accrued liabilities ........................... 5,089 11,752
Current maturities of long-term debt .......... 118 --
--------- ---------
Total current liabilities ............... 16,819 21,507
--------- ---------
LONG-TERM DEBT ................................... 25,116 --
--------- ---------
DEFERRED INCOME TAXES ............................ 5,404 3,380
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value
(25,000,000 shares authorized,
none issued and outstanding) ............... -- --
Common stock, $0.01 par value
(100,000,000 shares authorized,
14,453,811 [1997] and
14,453,298 [1996] issued) .................. 146 145
Additional paid-in capital .................... 76,460 75,265
Accumulated earnings .......................... 8,135 4,388
Unamortized deferred compensation ............. (369) (343)
--------- ---------
84,372 79,455
Treasury stock, at cost (46,792 [1997] and
60,000 [1996] shares) ...................... (842) (1,080)
--------- ---------
Total stockholders' equity .............. 83,530 78,375
--------- ---------
$ 130,869 $ 103,262
See notes to consolidated financial statements.
5
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
-------- --------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................... $ 3,747 $ 4,677
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depletion and depreciation .................. 8,190 6,335
Amortization of other assets ................ 85 73
Deferred income taxes ....................... 2,024 2,058
Non-cash compensation ....................... 1,406 297
Changes in assets and liabilities:
Accounts receivable ......................... (2,393) (5,100)
Due from affiliates ......................... (1,489) (916)
Prepaid expenses and other current assets ... (944) (82)
Accounts payable ............................ 3,458 (4,004)
Revenues and royalties payable .............. (1,601) 2,024
Accrued liabilities ......................... 361 500
-------- --------
Net cash provided by operating activities ...... 12,844 5,862
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions, net ....... (52,484) (25,632)
Other ....................................... -- (135)
-------- --------
Net cash used in investing activities .......... (52,484) (25,767)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings .......... 25,234 --
Deferred loan costs ......................... -- (9)
Exercise of stock options ................... 2 127
-------- --------
Net cash provided by financing activities ...... 25,236 118
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS ........... (14,404) (19,787)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD ......................... 17,267 35,658
-------- --------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD ............................... $ 2,863 $ 15,871
======== ========
See notes to consolidated financial statements.
6
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements reflect the accounts of The
Meridian Resource Corporation (the "Company" or "TMRC") and its subsidiaries
after elimination of all significant intercompany transactions and balances. The
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in TMRC's Annual Report on Form
10-K for the year ended December 31, 1996, as filed with the Securities and
Exchange Commission ("SEC").
The financial statements included herein as of September 30, 1997, and for the
three and nine month periods ended September 30, 1997 and 1996 are unaudited,
and, in the opinion of management, the information furnished reflects all
material adjustments, consisting of normal recurring adjustments, necessary for
a fair statement of the results for the interim periods presented.
2. LITIGATION
On July 7, 1997, a lawsuit was filed in the Delaware Court of Chancery against
Cairn Energy USA, Inc. ("Cairn"), certain of its directors and TMRC (Arnold
Finklestein v. Michael R. Gilbert, ET AL. C.A. No. 15793 NC). The lawsuit, a
proposed class action, alleges that those members of Cairn's Board of Directors
named as defendants breached their fiduciary duties to Cairn's stockholders in
connection with the merger of TMRC and Cairn (the "Merger"). The plaintiff
alleges that the Cairn Board of Directors approved the Merger and the agreement
and plan of merger relating thereto without making the requisite effort to
obtain the best offer possible and that the terms of the Merger (i) were not the
result of an auction process or active market check; (ii) were arrived at
without a full and thorough investigation by the Board of Directors; and (iii)
failed to include appropriate mechanisms to protect the Cairn stockholders
against a decline in the price of TMRC common stock. Plaintiff further alleges
that the adoption of the Cairn Rights Agreement was entrenching in purpose and
effect. Further, plaintiff alleges that TMRC aided and abetted the alleged
breach of fiduciary duty by the directors of Cairn named as defendants. The
lawsuit seeks rescission of the Merger. The lawsuit also seeks compensatory
damages, attorneys' fees and other costs from the defendants. No material action
has been taken by the plaintiff in this case since the date of its filing. TMRC
believes that the lawsuit is without merit and intends to vigorously contest it.
In June 1996, Amoco Production Company ("Amoco") filed suit against TMRC in
Louisiana State Court in Calcasieu Parish with respect to a dispute involving
the drilling by TMRC of TMRC's Ben Todd No. 1 (TMRC) well in the Southwest
Holmwood Field in which TMRC et al and Amoco each hold a 50% leasehold interest.
The case was removed to the United States District Court for the Western
District of Louisiana in July 1996. The Ben Todd No. 1 (TMRC) well was drilled
by TMRC under a participation agreement between TMRC and Amoco in which Amoco
had a right
7
to participate in the well. The well was drilled by TMRC after providing notice
to Amoco pursuant to the participation agreement of TMRC's intent to drill the
well and Amoco's failure to take action to elect to participate in the well.
Prior to the drilling of the well, TMRC had been advised by its advisors that
the drilling of the well by TMRC was permitted under the participation agreement
by virtue of Amoco's refusal to reasonably consent to the well following TMRC's
request to do so. Amoco also did not seek to enjoin the drilling of the well and
accepted the benefits of the well following the drilling thereof as well as
other benefits under the participation agreement and lease. Amoco has alleged in
its suit that the well was not permitted to be drilled under the agreement and
is seeking to recover all the revenues from the well or have the production from
the well stopped. Amoco is also requesting a cancellation of the participation
agreement and TMRC's leasehold interests in the prospect, which includes TMRC's
31% interest in the Ben Todd No. 2 (Amoco) well that was drilled prior to the
Ben Todd No. 1 (TMRC) well on an agreed basis. TMRC has filed a counterclaim for
breach of contract, unfair practices and other claims.
On September 9, 1997, the Federal District Court entered a summary judgment
finding that TMRC was not permitted under the participation agreement to drill
the Ben Todd No. 1 (TMRC) well and that the participation agreement and related
lease had been terminated by virtue of TMRC's drilling of the well. The trial
court's summary judgment was based on a finding that the participation agreement
was an unambiguous contract and that agreement allowed Amoco to withhold its
consent to the drilling of the Ben Todd No. 1 (TMRC) well for any reason. As a
result, the Court found that TMRC was precluded from drilling the Ben Todd No. 1
(TMRC) well by virtue of Amoco's failure to grant an express consent and that
the drilling of the well constituted a breach and termination of the agreement
and related lease. The potential effect of this judgment if it is not reversed
or modified is that TMRC's rights with respect to the Ben Todd No. 1 (TMRC) and
the Ben Todd No. 2 (Amoco) well would revert to Amoco and Amoco would have a
claim for damages for production from those wells. The judgment did not address
the date on which the participation agreement and lease were purportedly
terminated or damages. A trial on the remaining issues has commenced and is
expected to be completed in late November or early December.
TMRC is vigorously contesting the remaining issues at the trial court level.
Further, subject to the outcome of the trial on such issues, TMRC currently
intends to appeal the summary judgment regarding the termination of the
participation agreement and leases. In this regard, TMRC believes that a
termination of the participation agreement should not have affected the validity
of the lease, in particular its rights with respect to the Ben Todd No. 2
(Amoco) well. TMRC also believes that with respect to any damage claims by
Amoco, TMRC should be entitled to a recoupment of its expenses, including
approximately $7.3 million in seismic, drilling and other exploration and
development expenses.
The proved reserves attributable to TMRC's interests in the Ben Todd No. 1
(TMRC) well and Ben Todd No. 2 (Amoco) well were approximately 3.6 BCFE and 0.5
BCFE, respectively, at December 31, 1996, and 2.5 BCFE and .1 BCFE,
respectively, at September 30, 1997, after giving effect to production during
1997 and revisions to reserve estimates. The net present value of the reserves
(using a 10% discount rate) attributable to TMRC's interest in the Ben Todd No.
1 (TMRC) and Ben Todd No. 2 (Amoco) well was $13.3 million and $1.9 million,
respectively, at December 31, 1996, and $1.5 million and $.4 million,
respectively, at September 30, 1997. These reserve valuations reflect the
prevailing prices of oil of $23.96 and $21.80 per bbl at December 31, 1996 and
September 30, 1997, respectively, and a price per Mcf of natural gas of $4.48
and $2.36 at December 31, 1996 and September 30, 1997, respectively. Total
production from the Ben Todd No. 1 (TMRC) well attributable to TMRC's interest
through September 30, 1997, was 1.5 BCFE, with TMRC having received net revenues
from such production of $4.2 million. TMRC has also received production from the
Ben Todd No. 2 (Amoco) well since the date of drilling of the Ben Todd No. 1
(TMRC) well of approximately .4 BCFE, with TMRC having received net revenues
from such production of $1.1 million.
Although TMRC believes that it was entitled to drill the Ben Todd No. 1 (TMR)
well and that the leases related to such well and the Ben Todd No. 2 (Amoco)
well should have not been validly terminated, there can be no assurance as to
the outcome of this litigation. Further, unfavorable outcome on this litigation
could result in the loss of the reserves attributable to the wells in question
as well as damages for the production received by TMRC therefrom. TMRC will
continue to review the status of this litigation and any final decision that is
rendered by the trial court following the trial and the requirement of any
charge with respect thereto when a final decision by the trial court is entered.
8
The Company also recognized income, net of depletion, from the wells in the
Southwest Holmwood Field of approximately $0.4 million during the third quarter.
3. MERGER
On November 5, 1997, the Company combined with Cairn pursuant to a merger
agreement in which approximately 19.0 million shares of TMRC common stock are to
be issued in exchange for all of the outstanding common stock of Cairn. The
Company also reserved approximately 0.8 million shares for issuance in
connection with Cairn's outstanding employee stock options plans. The
transaction will be accounted for as a pooling of interests.
The following unaudited pro forma financial data of the Company assumes the
business combination with Cairn had occurred at the beginning of each of the
periods presented.
Pro forma financial data:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
-------- ------- -------- -------
Revenues: ($000)
Pre-merger:
TMR .................. $ 5,912 $ 6,856 $ 21,159 $17,563
Cairn ................ 6,503 7,554 21,221 22,357
-------- ------- -------- -------
Post-merger .............. $ 12,415 $14,410 $ 42,380 $39,920
======== ======= ======== =======
Net income: ($000)
Pre-merger:
TMR .................. $ 412 $ 1,771 $ 3,747 $ 4,677
Cairn ................ 334 893 3,203 4,354
Merger adjustments ....... (203) 807 (1,465) 1,870
-------- ------- -------- -------
Post-merger .............. $ 543 $ 3,471 $ 5,485 $10,901
======== ======= ======== =======
Post-merger net income
per share .................... $ 0.02 $ 0.10 $ 0.16 $ 0.31
======== ======= ======== =======
In connection with the Merger, the Company incurred, or will incur, significant
financial advisor, legal, accounting, printing, severance and other costs
related to the combination of the previously separated entities. Under pooling
of interest accounting these costs, currently estimated to be $10.0 million
before tax benefit of $1.4 million, will be expensed in the fourth quarter of
1997. Merger adjustments primarily relate to the recognition of deferred tax
benefits in 1996 as opposed to 1997.
4. NET INCOME PER SHARE
Net income per share is calculated by dividing net income by the weighted
average common shares and (in periods in which they have a dilutive effect)
common share equivalents outstanding during the period. Shares of common stock
issuable under stock
9
options, warrants and stock rights are treated as common share equivalents when
dilutive. For the periods presented, there is no difference between primary and
fully diluted net income per share.
5. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share," which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating "basic earnings per share" (which replaces the
current "primary earnings per share"), the dilutive effect of stock options will
be excluded. The impact of this statement is not expected to be material.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following is a discussion of the Company's financial operations for the
three and nine month periods ended September 30, 1997 and 1996. The notes to the
Company's consolidated financial statements included in this report, as well as
the Company's Annual Report on Form 10-K for the year ended December 31, 1996
(and the notes attached thereto), should be read in conjunction with this
discussion.
OVERVIEW
On November 5, 1997, the Company completed its merger (the "Merger") with Cairn
Energy USA, Inc. ("Cairn"). The Merger of Cairn resulted in the Company being
required to issue approximately 19.0 million shares of common stock, $0.01 par
value ("common stock"), and the reservations of an additional 0.8 million shares
of common stock for outstanding options of Cairn and the Company. The merger
with Cairn is expected to more than double the Company's proved reserves and
substantially increase the production and cash flow of the Company. In
connection with the merger with Cairn, the Company expanded its working capital
line of credit to $125.0 million and repaid all of Cairn's outstanding bank
debt. The merger with Cairn will be accounted for as a pooling of interests and
the Company's historical financial statements will be restated in the fourth
quarter of 1997. The Company currently expects to incur a one-time charge in the
fourth quarter of approximately $10 million before estimated tax benefit of
$1.4 million for costs associated with the merger.
Results for the first three quarters of 1997 reflect the Company's efforts in
continuing to increase its oil and natural gas production. Oil and natural gas
production increased 44% and 9%, respectively, for the first nine months of 1997
compared to the first nine months of 1996. These increases in production are a
direct result of the continuing increase in exploration and development
activities by the Company and the addition of new producing wells during the
last twelve months. Production in the third quarter of 1997, however, was
affected by an approximate 39% decline in production from wells in the Company's
Southwest Holmwood Field in Louisiana due to poor production performance, the
rights to which are currently subject to litigation with Amoco Production
Company ("Amoco"). Production at Cairn also was adversely affected during the
third quarter of 1997, primarily as a result of delays in completions of various
wells and disruptions pending consummation of the merger with TMRC. The Company,
however, currently expects that production should increase in the fourth quarter
of 1997 as recently completed wells are brought into production. In this regard,
during the first nine months of 1997, in addition to approximately $32.0 million
in capital expenditures made by Cairn before the Merger, the Company expended
over $44.6 million in property and equipment additions as part of its 1997
exploration and development program. The Company expects to spend over $12.0
million during the last quarter of 1997 including expenditures relating to
Cairn's properties.
Although there can be no assurance as to the results of the Company's current
drilling program, the increase in the Company's exploration activities is
expected to result in increased revenue and income for the remainder of 1997 and
into 1998. Future results, however, will be subject to the level of success in
the drilling program and prevailing prices of crude oil and natural gas.
11
AMOCO LITIGATION
As more fully described under "Litigation," the Company is currently engaged in
litigation with Amoco regarding the Company's interest in the Ben Todd No. 1
(TMRC) well and the Ben Todd No. 2 (Amoco) well in the Southwest Holmwood Field
in Calcasieu Parish, Louisiana. On September 9, 1997, a summary judgment was
entered against the Company finding that the Company's rights in the lease
relating to these wells has been terminated. The potential effect of this
summary judgment is that the Company's rights with respect to these wells would
revert to Amoco and Amoco would have a claim for damages for production from
those wells from the date on which the lease was terminated, which the judgment
did not address. A trial on the remaining issues has commenced and is expected
to be completed in late November or early December 1997. Net revenues from the
production received by the Company from the date on which the Company commenced
the drilling of the well that was the subject of Amoco's claim through September
30, 1997, was approximately $5.3 million. The Company also recognized income net
of depletion, from the wells in the Southwest Holmwood Field of approximately
$0.4 million during the third quarter. The Company currently intends to
vigorously litigate this matter. The Company, however, will continue to review
the status of this litigation and any final decision that is rendered by the
trial court following the trial and the requirement of any charge with respect
thereto when a final decision by the trial court is entered.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1997, the Company's liquidity needs were met
from oil and natural gas production sales, cash reserves and borrowings under
the Company's line of credit. As of September 30, 1997, the Company had a cash
balance of $2.9 million and negative working capital of $1.1 million. The
decrease in both the cash balance and working capital reflects capital
expenditures related to the Company's increasing exploration and development
activities.
In connection with the Company's merger with Cairn, the Company entered into a
new credit facility (the "Credit Facility"), which provides the Company with a
revolving line of credit with a borrowing base up to a maximum of $125.0
million, which is determined based upon the value of certain of the Company's
proved reserves. The Company utilized $92.0 million under the Credit Facility to
refinance Cairn's outstanding indebtedness and the indebtedness under the
Company's prior credit facility as well as to fund expenses relating to the
Merger. As a result, the Company had available borrowings of $33.0 million under
the Credit Facility following the Merger.
The Credit Facility has a term of five years and borrowings thereunder bear
interest at the bank's prime rate plus a floating margin ranging from 0% to
0.75% depending on the percentage of the borrowing base being utilized or a
libor rate plus a floating margin ranging from 1% to 1.75% depending upon the
percentage of the borrowing base being utilized. The Company is required to make
various prepayments under the Credit Facility to the extent, on a semi-annual
basis, its then existing borrowing base is less than the outstanding
indebtedness under the Credit Facility. The Credit Facility contains various
covenants customary in credit agreements of this type, including covenants
relating to maintenance of financial ratios relating to total debt and net
worth,
12
limitations on additional debt, limitations on sales of assets, and prohibitions
on the payment of dividends. The Credit Facility currently is secured by all of
Cairn's offshore properties and a pledge of the outstanding capital stock of all
of the Company's operating subsidiaries.
Capital expenditures for the first three quarters of 1997 consisted of $44.6
million for property and equipment additions related to exploration and
development of various prospects, including lease, seismic data acquisitions,
drilling and completion costs. The Company expects that capital expenditures for
property and equipment additions will increase significantly during the fourth
quarter of 1997 and during 1998 as the Company funds Cairn's continuing
exploration and development program. The Company has budgeted approximately $6.0
million in capital expenditures for the last quarter of 1997 for the further
development and drilling of its south Louisiana and southeast Texas prospects as
well as costs associated with additional acquisition of leases, seismic data and
interpretive work and an additional $6.0 million for the further development of
Cairn's offshore properties. The Company currently expects that capital
expenditures during 1998, including capital expenditures relating to Cairn's
offshore properties, will be approximately $80.0 million.
In management's opinion, the Company has sufficient capital resources available
to fund its current development and drilling plans and other obligations and
liquidity. Future cash requirements will be dependent upon the success of the
Company's current drilling program and the nature and extent of capital
expenditures that might be required for exploration and development activities
at that time. The Company anticipates that the majority of its capital needs for
1998, including capital to fund Cairn's exploration and development program,
will be funded through cash flow from operations and borrowings under the Credit
Facility, and if desirable, additional issuances of equity or debt securities.
While the Company may choose to utilize borrowings to fund the excess portion of
the combined companies exploration and development program, the Company intends
to maintain its historical strategy of funding exploration activities with cash
flow and equity and funding development activities with capital and debt.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997, COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 1996
OPERATING REVENUES. Third quarter 1997 oil and natural gas revenues decreased
$0.7 million as compared to third quarter 1996 revenues primarily due to
decreases in oil prices and natural gas production.
13
Oil and natural gas production decreased by 3% and 10%, respectively, due in
large part to poor production performance during the third quarter of 1997 from
the Company's properties in the Southwest Holmwood Field in Louisiana, which are
currently subject to litigation with Amoco. The Company, however, currently
expects that production should increase in the fourth quarter of 1997 as
recently completed wells are brought into production.
The following table summarizes operating revenues, production volumes and
average sales prices for the Company for the three months ended September 30,
1997 and 1996.
THREE MONTHS ENDED 1997
SEPTEMBER 30, 1997 PERCENTAGE
----------------- INCREASE INCREASE
1997 1996 (DECREASE) (DECREASE)
-------- ------ ---------- ----------
Production:
Oil (Mbbl) ......................... 135 138 (3) (3%)
Natural gas (Mmcf) ................. 1,328 1,469 (141) (10%)
------ ----- -----
Natural gas equivalent (Mmcfe) ..... 2,138 2,297 (159) (7%)
Average Price Per Unit:
Oil (Bbl) .......................... $18.90 $21.78 $(2.88) (13%)
Natural gas (Mcf) .................. $ 2.48 $ 2.44 $0.04 2%
Gross Revenues (000's):
Oil ................................ $2,551 $3,006 $(455) (15%)
Natural gas ........................ 3,295 3,577 (282) (8%)
------ ------ ----- ---
Total .......................... $5,846 $6,583 $(737) (11%)
====== ====== ===== ===
INTEREST AND OTHER INCOME. Interest and other income during the third quarter
1997 decreased $0.2 million from the same quarter of 1996. The decrease was the
result of lower cash balances as the Company continued to invest its cash
resources in exploration activities.
OPERATING EXPENSES. Oil and natural gas operating expenses increased $0.3
million to $0.5 million for the three months ended September 30, 1997, compared
to $0.2 million for the three months ended September 30, 1996. The increase was
primarily due to additional operating expenses related to new wells brought on
production during the previous twelve months.
SEVERANCE AND AD VALOREM TAXES. Third quarter 1997 severance and ad valorem
taxes of $0.6 million increased $0.1 million from the same period in 1996. The
increase as a percentage of revenues was caused by a significant increase in
Louisiana oil production, which has a higher severance tax burden relative to
natural gas, and the expiration of certain tax benefits in Louisiana.
14
DEPLETION, DEPRECIATION AND AMORTIZATION. DD&A increased during the quarter
ended September 30, 1997, to $2.7 million from $2.5 million for the comparable
period of 1996. DD&A increased primarily as a result of the increased capital
expenditures subject to depletion relating to the Company's increased drilling
activity.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense increased
$0.3 million during the third quarter of 1997 compared to the third quarter of
1996. The increase is primarily a result of increases in salaries and wages and
related employee costs associated with the Company's expanded exploration and
overall growth activities.
INTEREST EXPENSE. Interest expense increased to $0.2 million for the quarter as
a direct result of the borrowing under the Company's credit facility made during
this period. The Company's interest expense will increase as a result of the
recent merger with Cairn and the indebtedness incurred relating thereto and to
finance development activity.
INCOME TAX EXPENSE. The decrease in the provision for deferred income taxes is
due to the decrease in income for the current quarter as compared to the same
quarter of 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996
OPERATING REVENUES. Oil and natural gas revenues for the nine months ended
September 30, 1997, increased $4.3 million, or 26%, compared to the nine months
ended September 30, 1996. The increase was attributable to increases in both
production of oil and natural gas. The increase in revenues during the nine
months ended September 30, 1997, were partially offset by poor production during
the third quarter of 1997 from the Company's properties in the Southwest
Holmwood Field in Louisiana, which are currently subject to litigation with
Amoco. The Company currently expects that production should increase in the
fourth quarter of 1997 as recently completed wells are brought into production.
The following table summarizes operating revenues, production volumes and
average sales prices for the Company for the nine months ended September 30,
1997 and 1996.
NINE MONTHS ENDED 1997
SEPTEMBER 30, 1997 PERCENTAGE
------------------ INCREASE INCREASE
1997 1996 (DECREASE) (DECREASE)
-------- ------- ---------- ----------
Production:
Oil (Mbbl) ....................... 460 320 140 44%
Natural gas (Mmcf) ............... 4,328 3,967 361 9%
------- ------- -------
Natural gas equivalent (Mmcfe) ... 7,088 5,887 1,201 20%
Average Price Per Unit:
Oil (Bbl) ........................ $ 20.28 $ 21.04 $ (0.76) (4%)
Natural gas (Mcf) ................ $ 2.65 $ 2.46 $ 0.19 8%
Gross Revenues (000's):
Oil .............................. $ 9,331 $ 6,733 $ 2,598 39%
Natural gas ...................... 11,460 9,746 1,714 18%
------- ------- ------- ---
Total ........................ $20,791 $16,479 $ 4,312 26%
======= ======= ======= ===
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INTEREST AND OTHER INCOME. Interest and other income decreased $0.7 million
during the first nine months of 1997 compared to the first nine months of 1996.
This decrease was primarily the result of a decrease in average cash balances
reflecting the Company's increase in capital expenditures.
OPERATING EXPENSES. Oil and natural gas operating expenses increased $0.6
million to $1.2 million for the nine months ended September 30, 1997, compared
to $0.6 million for the nine months ended September 30, 1996. This increase was
primarily related to new wells brought on production during the last twelve
months.
SEVERANCE AND AD VALOREM TAXES. Severance and ad valorem taxes increased $0.7
million for the first three quarters of 1997 compared to the same period of
1996. The increase was a direct result of higher oil and natural gas revenues, a
significant increase in Louisiana oil production with its associated higher
severance tax burden and the expiration of certain tax benefits in Louisiana.
DEPLETION, DEPRECIATION AND AMORTIZATION. DD&A increased during the nine months
ended September 30, 1997 to $8.3 million from $6.4 million for the comparable
period of 1996. DD&A increased primarily as a result of increased capital
expenditures subject to depletion relating to the Company's increased drilling
activity.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense increased
$1.1 million to $3.9 million for the first nine months of 1997 when compared to
$2.8 million for the first nine months of 1996. The increase was due primarily
to an increase in salaries and wages and related employee costs associated with
the Company's expanded exploration activities and growth.
INTEREST EXPENSE. Interest expense increased to $0.3 million for the nine months
ended September 30, 1997, as a direct result of the borrowings under the
Company's credit facility made during this period.
INCOME TAX EXPENSE. The provision for deferred income taxes incurred a small
decrease for the first nine months of 1997 as compared to the first nine months
of 1996 due to the Company's decrease in income.
FORWARD LOOKING INFORMATION
From time to time, the Company may make certain statements that contain
"forward-looking" information (as defined in the Private Securities Litigation
Reform Act of 1995) and that involve risk and uncertainty. These forward-looking
statements may include, but are not limited to, TMRC's and Cairn's future
prospects, developments, oil and gas reserves and properties and business
strategies for their operations and synergies that are possible from the Merger,
exploration and seismic acquisition plans, anticipated results from current and
future exploration prospects, the anticipated results of wells based on logging
data and production tests, future sales of production, earnings, margins,
production levels and costs, market trends in the oil and gas industry and the
exploration and development sector thereof, environmental and other expenditures
and various business trends. These forward-looking statements are identified by
their use of terms and phrases such as "anticipate", "expect', "estimate",
"intend", "project", "believe", and similar terms and phrases. Forward-looking
statements may be made by management orally or in writing including, but not
limited to, the Management's Discussion and Analysis and Financial Condition
Results of Operations section and other sections of the Company's filings with
the Securities and Exchange Commission under the Securities Act of 1933 and the
Securities Exchange
16
Act of 1934.
Although TMRC believes that the expectations described in such forward-looking
statements are reasonable, these statements involve risks and uncertainties that
my cause actual future activities and results of operations to be materially
different from that suggested or described herein.
These risks include changes in market conditions in the oil and natural gas
industry and demand and prices for oil and gas, the ability of TMRC to integrate
and realize anticipated synergies related to the combination of TMRC and Cairn,
dependence on current managements, the ability of TMRC to achieve and execute
internal business plans, the ultimate outcome and results from the Company's
litigation with Amoco relating to its Southwest Holmwood properties, the impact
of any economic downturns and inflation and other market factors affecting the
demand and supply of oil and natural gas, the timing of drilling new prospects,
the ability of TMRC to successfully identify and complete its prospects and
Cairn's current prospects, variation in actual production results from that
estimated in existing reserve data, regulatory changes affecting exploration
activities and higher costs associated with drilling. Many of these risks are
more specifically described in TMRC's Annual Report on Form 10-K. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
expected, estimated or projected.
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PART II - OTHER INFORMATION
ITEM 1. LITIGATION
On July 7, 1997, a lawsuit was filed in the Delaware Court of Chancery against
Cairn Energy USA, Inc. ("Cairn"), certain of its directors and TMRC (Arnold
Finklestein v. Michael R. Gilbert, ET AL. C.A. No. 15793 NC). The lawsuit, a
proposed class action, alleges that those members of Cairn's Board of Directors
named as defendants breached their fiduciary duties to Cairn's stockholders in
connection with the merger of TMRC and Cairn (the "Merger"). The plaintiff
alleges that the Cairn Board of Directors approved the Merger and the agreement
and plan of merger relating thereto without making the requisite effort to
obtain the best offer possible and that the terms of the Merger (i) were not the
result of an auction process or active market check; (ii) were arrived at
without a full and thorough investigation by the Board of Directors; and (iii)
failed to include appropriate mechanisms to protect the Cairn stockholders
against a decline in the price of TMRC common stock. Plaintiff further alleges
that the adoption of the Cairn Rights Agreement was entrenching in purpose and
effect. Further, plaintiff alleges that TMRC aided and abetted the alleged
breach of fiduciary duty by the directors of Cairn named as defendants. The
lawsuit seeks rescission of the Merger. The lawsuit also seeks compensatory
damages, attorneys' fees and other costs from the defendants. No material action
has been taken by the plaintiff in this case since the date of its filing. TMRC
believes that the lawsuit is without merit and intends to vigorously contest it.
In June 1996, Amoco Production Company ("Amoco") filed suit against TMRC in
Louisiana State Court in Calcasieu Parish with respect to a dispute involving
the drilling by TMRC of TMRC's Ben Todd No. 1 (TMRC) well in the Southwest
Holmwood Field in which TMRC et al and Amoco each hold a 50% leasehold interest.
The case was removed to the United States District Court for the Western
District of Louisiana in July 1996. The Ben Todd No. 1 (TMRC) well was drilled
by TMRC under a participation agreement between TMRC and Amoco in which Amoco
had a right to participate in the well. The well was drilled by TMRC after
providing notice to Amoco pursuant to the participation agreement of TMRC's
intent to drill the well and Amoco's failure to take action to elect to
participate in the well. Prior to the drilling of the well, TMRC had been
advised by its advisors that the drilling of the well by TMRC was permitted
under the participation agreement by virtue of Amoco's refusal to reasonably
consent to the well following TMRC's request to do so. Amoco also did not seek
to enjoin the drilling of the well and accepted the benefits of the well
following the drilling thereof as well as other benefits under the participation
agreement and lease. Amoco has alleged in its suit that the well was not
permitted to be drilled under the agreement and is seeking to recover all the
revenues from the well or have the production from the well stopped. Amoco is
also requesting a cancellation of the participation agreement and TMRC's
leasehold interests in the prospect, which includes TMRC's 31% interest in the
Ben Todd No. 2 (Amoco) well that was drilled prior to the Ben Todd No. 1 (TMRC)
well on an agreed basis. TMRC has filed a counterclaim for breach of contract,
unfair practices and other claims.
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On September 9, 1997, the Federal District Court entered a summary judgment
finding that TMRC was not permitted under the participation agreement to drill
the Ben Todd No. 1 (TMRC) well and that the participation agreement and related
lease had been terminated by virtue of TMRC's drilling of the well. The trial
court's summary judgment was based on a finding that the participation agreement
was an unambiguous contract and that agreement allowed Amoco to withhold its
consent to the drilling of the Ben Todd No. 1 (TMRC) well for any reason. As a
result, the Court found that TMRC was precluded from drilling the Ben Todd No. 1
(TMRC) well by virtue of Amoco's failure to grant an express consent and that
the drilling of the well constituted a breach and termination of the agreement
and related lease. The potential effect of this judgment if it is not reversed
or modified is that TMRC's rights with respect to the Ben Todd No. 1 (TMRC) and
the Ben Todd No. 2 (Amoco) well would revert to Amoco and Amoco would have a
claim for damages for production from those wells. The judgment did not address
the date on which the participation agreement and lease were purportedly
terminated or damages. A trial on the remaining issues has commenced and is
expected to be completed in late November or early December.
TMRC is vigorously contesting the remaining issues at the trial court level.
Further, subject to the outcome of the trial on such issues, TMRC currently
intends to appeal the summary judgment regarding the termination of the
participation agreement and leases. In this regard, TMRC believes that a
termination of the participation agreement should not have affected the validity
of the lease, in particular its rights with respect to the Ben Todd No. 2
(Amoco) well. TMRC also believes that with respect to any damage claims by
Amoco, TMRC should be entitled to a recoupment of its expenses, including
approximately $7.3 million in seismic, drilling and other exploration and
development expenses.
The proved reserves attributable to TMRC's interests in the Ben Todd No. 1
(TMRC) well and Ben Todd No. 2 (Amoco) well were approximately 3.6 BCFE and 0.5
BCFE, respectively, at December 31, 1996, and 2.5 BCFE and .1 BCFE,
respectively, at September 30, 1997, after giving effect to production during
1997 and revisions to reserve estimates. The net present value of the reserves
(using a 10% discount rate) attributable to TMRC's interest in the Ben Todd No.
1 (TMRC) and Ben Todd No. 2 (Amoco) well was $13.3 million and $1.9 million,
respectively, at December 31, 1996, and $1.5 million and $.4 million,
respectively, at September 30, 1997. These reserve valuations reflect the
prevailing prices of oil of $23.96 and $21.80 per bbl at December 31, 1996 and
September 30, 1997, respectively, and a price per Mcf of natural gas of $4.48
and $2.36 at December 31, 1996 and September 30, 1997, respectively. Total
production from the Ben Todd No. 1 (TMRC) well attributable to TMRC's interest
through September 30, 1997, was 1.5 BCFE, with TMRC having received net revenues
from such production of $4.2 million. TMRC has also received production from the
Ben Todd No. 2 (Amoco) well since the date of drilling of the Ben Todd No. 1
(TMRC) well of approximately .4 BCFE, with TMRC having received revenues from
such production of $1.1 million.
Although TMRC believes that it was entitled to drill the Ben Todd No. 1 (TMR)
well and that the leases related to such well and the Ben Todd No. 2 (Amoco)
well should have not been validly terminated, there can be no assurance as to
the outcome of this litigation. Further, unfavorable outcome on this litigation
could result in the loss of the reserves attributable to the wells in question
as well as damages for the production received by TMRC therefrom. TMRC will
continue to review the status of this litigation and any final decision that is
rendered by the trial court following the trial and the requirement of any
charge with respect thereto when a final decision by the trial court is entered.
19
The Company also recognized during the third quarter income net of depletion,
depreciation and amortization from the wells in the Southwest Holmwood Field of
approximately $400,000.
ITEM 2. CHANGES IN SECURITIES.
On November 5, 1997, TMRC entered into a new $125,000,000 revolving credit
facility pursuant to a Credit Agreement between TMRC, The Chase Manhattan Bank,
as Administrative Agent, and the lenders a party thereto (the "Credit
Agreement"). The Credit Agreement prohibits the Company from paying dividends on
its Common Stock.
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Reports on Form 8-K.
On July 7, 1997, the Company filed its Current Report on Form 8-K
dated July 3, 1997, to report that it had entered into an Agreement
and Plan of Merger among TMRC, a wholly-owned subsidiary of TMRC,
and Cairn Energy USA, Inc. ("Cairn"), which provided that TMRC Sub
would be merged with and into Cairn and that the Cairn stockholders
would receive 1.08 shares of TMRC common stock in exchange for their
shares of Cairn common stock.
On September 12, 1997, TMRC filed its Current Report on Form 8-K to
report the status of its litigation with AMOCO.
(b) Exhibits.
2.1 Agreement and Plan of Merger dated July 3, 1997, among the
Company, C Acquisition Corp. and Cairn Energy USA, Inc.
(incorporated by reference from the Company's Current Report
on Form 8-K dated July 3, 1997). Pursuant to Item 601(b)(2) of
Regulation S-K, certain schedules and similar attachments to
the Agreement and Plan of Merger have not been filed with this
exhibit. Such schedules and attachments contain various items
relating to the representation and warranties made by the
parties to the Agreement and Plan of Merger. The Company
agrees to furnish supplementally any omitted schedule to the
Commission upon request.
4.1 Credit Agreement dated as of November 5, 1997, among The
Meridian Resource Corporation, the several Lenders from time
to time a party thereto and The Chase Manhattan Bank, as
Administrative Agent (incorporated by reference from Exhibit
4.16 to the Company's Registration Statement on Form S-8 (File
No. 333-40009).
4.2 Pledge Agreement dated as of November 5, 1997, by Cairn Energy
USA, Inc., Texas Meridian Resources Exploration, Inc., Texas
Meridian Production Corporation and Texas Meridian Finance
Corporation, in favor of The Chase Manhattan Bank
(incorporated by reference from Exhibit 4.16 to the Company's
Registration Statement on Form S-8 (File No. 333-40009).
4.3 Guarantee dated November 5, 1997, by Cairn Energy USA, Inc.,
Texas Meridian Resources Exploration, Inc., Texas Meridian
Production Corporation and Texas Meridian Finance Corporation,
in favor of The Chase Manhattan Bank (incorporated by
reference from Exhibit 4.16 to the Company's Registration
Statement on Form S-8 (File No. 333-40009).
27.1 Financial Data Schedule.
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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
theundersigned thereunto duly authorized.
THE MERIDIAN RESOURCE CORPORATION
Date: November 14, 1997 /s/ LLOYD V. DELANO
----------------------------
Lloyd V. Delano
Vice President
22