EXHIBIT 99.2
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
AND THE PERIOD FROM JANUARY 13, 2000 (INCEPTION) THROUGH MARCH 31, 2004
RESTATED TO REFLECT THE ADOPTION OF THE FULL COST METHOD OF ACCOUNTING FOR OIL
AND GAS PROPERTIES
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2004 2003
------------ ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 38,340,610 $ 56,680
Notes receivable - related party - 837,928
Other receivables 4,516,767 87,080
Interest receivable - related party - 158,382
Marketable securities - related party - 207,480
Marketable securities - 512,000
Prepaid expenses and other current assets 1,463,629 1,461,194
------------ ------------
Total current assets 44,321,006 3,320,744
Property and Equipment, Net:
Oil and gas properties, using full cost method:
Proved oil and gas properties, net - 71,037
Oil and gas properties excluded from amortization 7,164,721 6,342,245
Other oil and gas assets 4,764,583 -
Furniture and fixtures 271,050 9,370
------------ ------------
Total property and equipment, net 12,200,354 6,422,652
Equity Interests in Oil and Gas Properties 2,824,641 2,838,536
Intangible Asset 4,800,000 -
Other Assets 3,500,000 -
------------ ------------
$ 67,646,001 $ 12,581,932
============ ============
See accompanying notes to consolidated financial statements.
1
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2004 2003
--------- ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 3,215,118 $ 5,235,725
Convertible notes - 3,242,654
Deferred equity option - 870,000
Other 94,003 23,643
-------------- ---------------
Total Current Liabilities 3,309,121 9,372,022
Long-term Obligations 3,624,330 29,505
-------------- ---------------
Total Liabilities 6,933,451 9,401,527
Commitments and Contingencies - -
Stockholders' Equity
Preferred stock, Series A; $0.001 par value; authorized - 9,500,000 shares;
Shares issued and outstanding - None at 2004 and 4,090,713 at 2003 - 4,091
Preferred stock, Series B; $0.001 par value; authorized - 500,000 shares;
Shares issued and outstanding - 19,714 shares at 2004 and 143,427 shares at 2003 20 144
Preferred stock, Series C; $0.001 par value; authorized - 1,500,000 shares;
Shares issued and outstanding - None at 2004 and 477,500 at 2003 - 478
Common Stock; $0.001 par value; authorized - 150,000,000;
Shares issued and outstanding - 69,145,819 shares at 2004 and 37,144,668 at 2003 69,146 37,145
Additional paid-in capital 135,096,790 50,175,898
Less stock subscription receivables - (250,000)
Less stock subscription receivable - related party - (175,000)
Accumulated other comprehensive loss - (489,036)
Deferred compensation (15,407,019) -
Other - (1,000)
Deficit accumulated during the development stage (59,046,387) (46,122,315)
-------------- ---------------
Total stockholders' equity 60,712,550 3,180,405
-------------- ---------------
Total Liabilities and Stockholders' Equity $ 67,646,001 $ 12,581,932
============== ===============
See accompanying notes to consolidated financial statements.
2
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months
Ended March 31, January 13, 2000
------------------------------- (Inception) to
2004 2003 March 31, 2004
-------------- ------------- ----------------
Revenues $ 7,885 $ - $ 51,722
Cost of Operations:
Operating expenses 1,419 - 23,707
Depreciation and amortization 132,341 - 1,629,066
Unproved property impairment - - 25,167,956
Loss on equity investments in oil and gas properties 56,975 19,375 1,302,014
Bad debt expense - related party - 900,000 2,350,601
General and administrative 2,532,331 227,355 5,917,160
General and administrative - related party - 18,000 219,000
-------------- ------------- --------------
Total Expenses 2,723,066 1,164,730 36,609,504
-------------- ------------- --------------
Loss From Operations (2,715,181) (1,164,730) (36,557,782)
-------------- ------------- --------------
Other (Income) Expense:
Consideration given in excess of fair value of
identifiable assets acquired 10,778,992 - 10,778,992
Interest income (83,036) (68,369) (783,001)
Interest expense 252,672 846,025 7,134,427
Gain on sale of oil and gas interest - related party (1,249,733) - (1,249,733)
Loss on sale of marketable securities - related party 206,971 24,454 1,866,191
Gain on sale of marketable securities - - (164,989)
Other (income) expense (3,647) (8,299) (89,959)
-------------- ------------- --------------
Total Other (Income) Expense 9,902,219 793,811 17,491,928
-------------- ------------- --------------
Net Loss (12,617,400) (1,958,541) (54,049,710)
Preferred Stock Dividends 306,672 370,829 4,996,678
-------------- ------------- --------------
Net Loss to Common Stockholders $ (12,924,072) $ (2,329,370) $ (59,046,388)
============== ============= ==============
Net Loss Per Common Share - Basic and Diluted $ (0.26) $ (0.07)
============== =============
Weighted Average Number of Common Shares
Outstanding - Basic and Diluted 49,075,947 32,751,269
============== =============
See accompanying notes to consolidated financial statements.
3
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three Months
Ended March 31, January 13, 2000
------------------------------- (Inception) to
2004 2003 March 31, 2004
-------------- ------------- ----------------
Cash Flows from Operating Activities:
Net loss $ (12,617,400) $ (1,958,541) $ (54,049,710)
Adjustments to reconcile net loss to net cash used in
operating activities:
DD&A expense 132,341 94 1,639,951
Impairment of oil and gas properties - - 25,167,956
Consideration given in excess of fair value of
identifiable assets acquired 10,778,992 - 10,778,992
Shares and options issued for services rendered 65,150 - 344,450
Amortization of deferred compensation 1,082,091 - 1,620,591
Fair market value adjustment of stock options 1,106,000 - 1,106,000
Gain on sale of assets (1,249,733) - (1,249,733)
Equity loss in affiliates 56,975 19,375 1,302,064
Loss on sale of marketable securities 206,971 24,454 1,866,191
Amortization of discount on notes payable 194,908 658,915 5,204,271
Amortization of discount on marketable securities - - (343,367)
Bad debt expense - 900,000 2,350,601
Warrant issued for loan extension - 78,227 78,227
Collection incentives - - 136,100
Contributed services - - 103,750
Amortization of loan costs - 15,000 337,685
Gain on share exchange - - (164,990)
Interest expense paid by stock issuance - - 13,225
Other (10,361) (8,298) (33,705)
Changes in assets and liabilities:
(Increase) Decrease in receivables (234,412) (22,618) (469,874)
(Increase) Decrease in other current assets (222,874) 54,621 (1,654,134)
Increase (Decrease) in accounts payable and accrued expenses 123,851 (762,590) 1,216,145
-------------- ------------- ----------------
Net Cash Used in Operating Activities (587,501) (1,001,361) (4,699,314)
-------------- ------------- ----------------
See accompanying notes to consolidated financial statements.
4
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three Months
Ended March 31, January 13, 2000
--------------------------------- (Inception) to
2004 2003 March 31, 2004
-------------- -------------- ----------------
Cash Flows From Investing Activities:
Capital expenditures (1,129,324) (2,430,489) (22,291,969)
Acquisitions, net of cash acquired (65,811) - (2,415,811)
Notes receivable - related party - (146,000) (176,000)
Notes receivable - - (1,438,117)
Repayment of notes receivable - related party - 20,000 1,316,000
Repayment of notes receivable - - 945,000
Investment in Limited Partnership (40,881) (521,500) (4,270,513)
Proceeds from sale of oil and gas interests 490,436 146,821 637,257
Purchase of marketable securities - - (4,309,067)
Proceeds from sale of marketable securities - 92,991 114,086
-------------- -------------- --------------
Net Cash Provided by (Used in) Investing Activities (745,580) (2,838,177) (31,889,134)
-------------- -------------- --------------
Cash Flows From Financing Activities:
Repayment of notes (1,751,063) (460,000) (2,951,063)
Repayment of notes - related party - - (1,399,340)
Proceeds from deferred equity option - - 870,000
Proceeds from borrowings - 1,320,000 17,199,300
Proceeds from borrowings - related party - 630,000 1,254,000
Loan costs - - (245,000)
Receipts of subscription receivable - 1,179,000 1,430,000
Receipts of subscription receivable - related party - 906,250 1,924,340
Purchase and retirement of common and preferred stock (5,030,948) - (5,030,948)
Proceeds from common and preferred stock issued and issuable 46,399,022 - 61,877,769
-------------- -------------- --------------
Net Cash Provided by Financing Activities 39,617,011 3,575,250 74,929,058
-------------- -------------- --------------
Net Increase (Decrease) in Cash and Cash Equivalents 38,283,930 (264,288) 38,340,610
Cash and Cash Equivalents, Beginning of Period 56,680 329,768 -
-------------- -------------- --------------
Cash and Cash Equivalents, End of Period $ 38,340,610 $ 65,480 $ 38,340,610
============== ============== ==============
See accompanying notes to consolidated financial statements.
5
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements of Endeavour International Corporation,
formerly Continental Southern Resources, Inc., a Nevada corporation, included
herein have been prepared, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC"), and, accordingly, certain
information normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States has been
condensed or omitted. As used in these Notes to the Consolidated Financial
Statements, the terms the "Company", "Endeavour", "we", "us", "our" and similar
terms refer to Endeavour International Corporation and, unless the context
indicates otherwise, its consolidated subsidiaries.
The financial statements herein reflect all normal recurring adjustments that,
in the opinion of management, are necessary for a fair presentation. Certain
amounts for prior periods have been reclassified to conform to the current
presentation. In preparing financial statements, management makes informed
judgments and estimates that affect the reported amounts of assets and
liabilities as of the date of the financial statements and affect the reported
amounts of revenues and expenses during the reporting period. Changes in facts
and circumstances may result in revised estimates and actual results may differ
from these estimates.
The accompanying consolidated financial statements of Endeavour should be read
in conjunction with the consolidated financial statements and notes included in
our Annual Report on Form 10 - KSB for the year ended December 31, 2003.
In 2004, the Company significantly restructured its business in a series of
simultaneous transactions (the Offering, Merger and Restructuring) and changed
its name to Endeavour International Corporation (see Note 3).
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
CHANGE IN METHOD OF ACCOUNTING FOR OIL AND GAS PROPERTIES
During the second quarter of 2004, we changed our method of accounting for oil
and gas properties from the successful efforts method to the full cost method.
We believe that the full cost method of accounting is more appropriate for
Endeavour in light of the significant changes in our operations that have
recently occurred. We believe capitalization of seismic and other exploration
technology expenditures as well as the cost of all exploratory wells recognizes
the value these expenditures add to the program of an exploration focused
company like Endeavour. Amortization of these costs over the life of the
discovered reserves provides a more appropriate method of matching revenues and
expenses related to our exploration strategy. Our technical strategy is founded
on a philosophy that regional petroleum systems analyses improve competitive
advantage, reduce exploration risk and optimize value creation. Regional
petroleum
6
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED STATEMENTS
(UNAUDITED)
systems analysis has been successfully employed by our new management and
technical team in their past experiences to identify and commercialize reserves
in basins worldwide.
On February 26, 2004, we completed a series of transactions that significantly
transformed the nature and scope of our business. These changes include:
- a new management team;
- a new business strategy of exploration, exploitation and acquisition
that will be focused on the North Sea;
- the acquisition of NSNV, Inc. which possessed the seismic data and
management team that will be central to the Company's new strategy;
and;
- a restructuring which resulted in the sale of all interests in U.S.
oil and gas properties.
Prior to February 2004, the Company had no technical exploration and production
staff and did not have any production until the fourth quarter of 2003. The only
producing property, which had minimal production, was sold in the February 2004
restructuring.
We believe that the full cost method of accounting will more accurately reflects
the results of our future operations. The full cost method of accounting is used
by many independent oil and gas companies and its use will allow investors to
better assess the performance of the company.
Under the full cost method, all acquisition, exploration and development costs,
including certain directly related employee costs and a portion of interest
expense, incurred for the purpose of finding oil and gas are capitalized. These
capitalized costs are accumulated in pools on a country-by-country basis.
Capitalized costs include the cost of drilling and equipping productive wells,
dry hole costs, lease acquisition costs, seismic and other geological and
geophysical costs, delay rentals and costs related to such activities. Employee
costs associated with production and other operating activities and general
corporate activities are expensed in the period incurred. For the three months
ended March 31, 2004 and 2003, we capitalized certain employee-related costs
of approximately $495,000 and none, respectively.
Where proved reserves are established, capitalized costs are limited on a
country-by-country basis (the ceiling test). The ceiling test is calculated as
the sum of the present value of future net cash flows related to estimated
production of proved reserves, using end-of-the-current-period prices,
discounted at 10%, plus the lower of cost or estimated fair value of unproved
properties, all net of expected income tax effects. Under the ceiling test, if
the capitalized cost of the full cost pool exceeds the ceiling limitation, the
excess is charged as an impairment expense.
We utilize a single cost center for each country where we have operations for
amortization purposes. Any conveyances of properties are treated as adjustments
to the cost of oil and gas properties with no gain or loss recognized unless the
operations are suspended in the entire cost center or the conveyance is
significant in nature.
7
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED STATEMENTS
(UNAUDITED)
The costs of investments in unproved properties and portions of costs associated
with major development projects are excluded from the depreciation, depletion
and amortization ("DD&A") calculation until the project is evaluated. As we are
in the start-up phase of our operations, all costs are currently associated with
undeveloped properties.
Unproved property costs include leasehold costs, seismic costs and other costs
incurred during the exploration phase. In areas where proved reserves are
established, significant unproved properties are evaluated periodically for
impairment. If a reduction in value has occurred, these property costs are
considered impaired and are transferred to the related full cost pool. Unproved
properties whose acquisition costs are not individually significant are
aggregated, and the portion of such costs estimated to be ultimately
nonproductive, based on experience, is amortized to the full cost pool over an
average holding period.
In countries where the existence of proved reserves has not yet been determined,
leasehold costs, seismic costs and other costs incurred during the exploration
phase remain capitalized in unproved property cost centers until proved reserves
have been established or until exploration activities cease. If exploration
activities result in the establishment of a proved reserve base, amounts in the
unproved property cost center are reclassified as proved properties and become
subject to depreciation, depletion and amortization and the application of the
ceiling test. If exploration efforts in a country are unsuccessful in
establishing proved reserves, it may be determined that the value of exploratory
costs incurred there have been permanently diminished in part or in whole.
Therefore, based on the impairment evaluation and future exploration plans, the
unproved property cost centers related to the area of interest could be
impaired, and accumulated costs charged against earnings.
We have restated all prior financial statements as a result of the conversion to
full cost accounting. As a part of this process, all previous charges related to
the successful efforts method of accounting for oil and gas assets were
reversed, raising the book value of those properties as well as our
stockholders' equity. The full cost method, however, requires performing
quarterly ceiling tests to ensure that the carrying value of oil and gas assets
on the balance sheet is not overstated. In ceiling tests performed for the
quarter ended December 31, 2003 a $10,125,367 impairment was recorded as
capitalized costs exceeded the ceiling test limits. The ceiling test was based
on natural gas prices of $4.735 per thousand cubic feet (Mcf) for natural gas
that included adjustments for basis differentials and other pricing factors.
Future quarterly full cost ceiling tests will be based on the then-current
market prices for both natural gas and oil, after adjustments. The end result of
the full cost conversion is that both the book value of our properties and
stockholders' equity are at approximately the same levels that would have
existed if we had continued with the successful efforts method of accounting.
8
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED STATEMENTS
(UNAUDITED)
The effect of the accounting change on net loss follows:
January 13,
2000
Three Months Ended March 31, Year Ended December 31, (Inception)
------------------------------- ------------------------------ to March 31,
2004 2003 2003 2002 2004
------------- ------------- -------------- ------------ -------------
Net loss to common shareholders under
successful efforts $ (15,638,775) $ (7,598,168) $ (37,248,463) $ (8,671,142) $ (61,675,108)
Adjustments to full cost 2,714,704 5,268,798 (3,985,995) 3,900,013 2,628,720
------------- ------------- -------------- ------------ -------------
Net loss to common shareholders under
full cost $ (12,924,071) $ (2,329,370) $ (41,234,458) $ (4,771,129) $ (59,046,388)
============= ============= ============== ============ =============
Loss per basic and diluted share under
successful efforts $ (0.32) $ (0.23) $ (1.06) $ (0.43)
============= ============= ============== ============
Loss per basic and diluted share under
full cost $ (0.26) $ (0.07) $ (1.18) $ (0.24)
============= ============= ============== ============
The effect of the accounting change on the balance sheet follows:
Net Oil and Gas Property and Deficit Accumulated During the
Equipment Development Stage
----------------------------------- -----------------------------------
March 31, 2004 December 31, 2003 March 31, 2004 December 31, 2003
-------------- ----------------- -------------- -----------------
Under successful efforts $ 9,300,583 $ 6,499,264 $ (61,675,108) $ (46,036,333)
Adjustments to full cost 2,628,721 (85,982) 2,628,721 (85,982)
-------------- ------------ -------------- -------------
Under full cost $ 11,929,304 $ 6,413,282 $ (59,046,387) $ (46,122,315)
============== ============ ============== =============
STOCK-BASED COMPENSATION ARRANGEMENTS
In accordance with the provisions of Statement of Financial Accounting Standard
("SFAS") No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
our stock-based employee compensation plans are accounted for under the
intrinsic value method that requires compensation expense to be recorded only
if, on the date of grant, the current market price of our common stock exceeds
the exercise price the employee must pay for the stock.
The net loss for 2003 does not include any stock-based compensation cost, as
there was no stock-based compensation outstanding during the first quarter of
2003. The modification in 2003 of options granted to prior directors triggered
variable accounting under APB 25 and FASB interpretation No. 44. This requires
recording compensation expense if the modified option price
9
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED STATEMENTS
(UNAUDITED)
is lower than the market price of the stock at the end of a reporting period
until the options expire or are exercised. Since the modified option exercise
price for the 700,000 options was lower than the market price of the stock at
March 31, 2004, we recorded non-cash compensation expense of $1,106,000 under
APB 25 for the quarter ended March 31, 2004. See Note 7 for a discussion of the
restricted stock and stock option grants during 2004.
Had compensation expense for stock option plans been determined based on the
fair value at the grant date for awards through March 31, 2004 consistent with
the provisions of SFAS No. 123, our net loss and net loss per share would have
been reduced to the pro forma amounts indicated below:
Quarter Ended
March 31, 2004
--------------
Net loss to common stockholders, as reported $ (12,924,072)
Add:
Stock-based compensation expense as reported 1,897,141
Less:
Total stock-based compensation expense determined
under fair-value-based method for all awards, net of tax (2,631,656)
--------------
Pro forma net loss $ (13,658,587)
==============
Loss per share:
Basic - as reported $ (0.26)
Basic - pro forma $ (0.28)
These pro forma amounts may not be representative of future disclosures since
the estimated fair value of stock options is amortized to expense over the
vesting period and additional options may be issued in future years. The
estimated fair value of each option granted was calculated using the
Black-Scholes Method. The following summarizes the weighted average of the
assumptions used in the method.
2004
----
Risk free rate 4%
Expected years until exercise 7
Expected stock volatility 33%
Dividend yield -
10
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED STATEMENTS
(UNAUDITED)
OTHER PROPERTY, PLANT AND EQUIPMENT
Other oil and gas assets and furniture and fixtures are recorded at cost, less
accumulated depreciation. The assets are depreciated using the straight-line
method over their estimated useful lives of two to five years.
NOTE 3 - THE OFFERING, MERGER AND RESTRUCTURING
On February 29, 2004, we completed a series of mutually interdependent
transactions to significantly expand our scope and objectives under the
leadership of a new management team.
THE OFFERING
In an offering of common stock (the "Offering") that closed February 26, 2004,
we issued 25 million shares of common stock at $2.00 per share in a private
placement. The estimated net proceeds of the Offering were $46,000,000, after
deduction of placement agent commissions of $2,500,000, financial advisory fees
of $1,250,000 and offering expenses of $101,000. In addition, warrants to
purchase 700,000 shares of common stock at $2.00 per share were issued to the
placement agent. The net proceeds were used for the purchase of approximately
14.1 million shares of common stock and 103,500.07 shares of our Series B
Preferred Stock for $5.3 million and for $1.5 million for repayment of the
principal amount of certain outstanding convertible notes, with the remainder of
the net proceeds to be used for general corporate purposes, including potential
acquisitions.
THE MERGER
Concurrent with the closing of the Offering, we acquired NSNV, Inc. ("NSNV"),
through a merger (the "Merger") of NSNV into a newly created Delaware corporate
subsidiary of the Company. The newly created subsidiary was the survivor of the
Merger and is a wholly-owned subsidiary of the company that was renamed
Endeavour Operating Corporation. NSNV was a private company owned by William L.
Transier, John N. Seitz and PGS Exploration (UK) Limited ("PGS"), a United
Kingdom corporation that is a provider of geophysical services. The former
shareholders of NSNV received an aggregate of 12.5 million shares of common
stock in the Merger, representing approximately 18.9% of outstanding common
stock immediately after the closing of the Merger.
The Merger was accounted for as a purchase of assets and not a business
combination. Therefore, the consideration given was allocated to the fair value
of the identifiable assets and liabilities acquired. Any consideration given in
excess of the fair value of identifiable assets acquired was expensed.
11
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED STATEMENTS
(UNAUDITED)
The following is a calculation of the consideration given:
Shares of common stock issued 12,500,000
Price per share of the Offering $ 2.00
---------------
Fair value of stock issued 25,000,000
Add: Capitalized merger costs 452,029
---------------
Consideration given $ 25,452,029
===============
Capitalized merger costs are the estimated professional expenses for legal and
accounting services.
The consideration given for the Merger was allocated, on a preliminary basis, as
follows:
Current assets $ 1,058,903
Property and equipment (1) 11,385,612
Intangible asset - workforce in place 4,800,000
Other assets 3,500,000
Current liabilities (2,477,475)
Long-term commitments (3,594,003)
---------------
Fair value of net identifiable assets acquired 14,673,037
Consideration (25,452,029)
---------------
Consideration given in excess of fair value of
identifiable assets acquired $ (10,778,992)
===============
(1) Includes $6.3 million of costs allocated to exploration seismic data.
THE RESTRUCTURING
Simultaneous with the consummation of the Merger and the Offering, we
restructured various financial and shareholder related items (the
"Restructuring"). Specifically, completed were the following:
- Repaid $1,500,000 principal amount of our outstanding convertible
notes;
- Issued 1,026,624 shares of our common stock in exchange for the
$1,550,000 principal balance and accrued interest due under the
Michael P. Marcus convertible debenture at a conversion price of
$1.75;
- Issued 375,000 shares of our common stock in exchange for the
$600,000 principal balance and accrued interest due under the
Trident convertible debenture at a conversion price of $1.60;
12
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED STATEMENTS
(UNAUDITED)
- Issued 2,808,824 shares of our common stock upon conversion of all
of the outstanding Series C Preferred Stock, and accrued dividends,
at a conversion price of $1.70 per share;
- Purchased all outstanding shares of Series A Preferred Stock and
20,212.86 shares of Series B Preferred Stock in exchange for certain
of our non-core assets (see below); and
- Purchased 14,097,672 shares of common stock and 103,500.07 shares of
Series B Preferred Stock from RAM Trading, Ltd. (who held more that
10% of our outstanding stock prior to this purchase) for $5,330,948
in cash.
As consideration for the acquisition of all of the Series A Preferred Stock and
20,212.86 shares of the Series B Preferred Stock, we exchanged the following
non-core assets with CSOR Preferred Liquidation, LLC, a newly created entity
owned by the former holders of the Series A Preferred Stock and certain former
holders of the Series B Preferred Stock:
- 100% of the ownership interest in BWP Gas, LLC.;
- 864,560 shares of restricted common stock of BPK Resources, Inc.;
- 400,000 shares of common stock of Trimedia Group, Inc.;
- Note receivable due from CSR Hackberry, LLC with a principal balance
of $25,000;
- Note receivable due from Snipes, LLC in the principal amount of
$122,500;
- Subscription receivable due from FEQ Investments in the principal
amount of $175,000;
- Subscription receivable due from GWR Trust in the principal amount
of $250,000; and
- Note receivable due from BPK Resources, Inc. with a principal
balance of $670,000.
As consideration for services rendered in connection with the purchase of the
shares of common stock and Series B Preferred stock from RAM, we issued to an
unrelated party 300,000 shares of our common stock.
During the first quarter of 2004, the Company sold all of its limited
partnership units in Knox Miss Partners, L.P. for $5,000,000 and received
$500,000 in cash and a $4,500,000 short-term note that is secured by a pledge of
the limited partnership interest.
NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION
We had noncash investing activities with the purchase of NSNV for 12.5 million
shares of our common stock with a total purchase price of approximately $25
million. Therefore, the Merger increased current assets by $1 million, oil and
gas property by $11.4 million, other assets by $8.3 million, current liabilities
by $2.5 million other liabilities by $3.5 million, and equity by $25 million
through a noncash transaction that was not reflected in the statement of cash
flows. However, $65,811 of acquisition costs reflected in "investing activities"
in the statement of cash flows represents the cash expenses paid in connection
with the Merger, less the cash of NSNV on the date of the Merger. Noncash
investing activities also were incurred with the exchange of certain non-core
assets, including BWP Gas, LLC, for all of the Series A Preferred Stock and
20,212.86 shares of the Series B Preferred Stock. Noncash financing activities
were also
13
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED STATEMENTS
(UNAUDITED)
incurred, including the conversion of all of our Series C Preferred Stock and
our convertible notes into common stock.
NOTE 5 - LEASES
We are the lessee of various computer equipment under capital leases expiring in
various years through 2006. The assets and liabilities under capital leases are
recorded at the lower of the present value of the minimum lease payments or the
fair value of the asset. The assets are depreciated over the lower of their
related lease terms or their estimated productive lives. Depreciation of assets
under capital leases is included in depreciation expense.
Minimum future lease payments under capital leases as of March 31, 2004, for
each of the next three years and in the aggregate are:
Year Ended December 31, Amount
------
2004 $ 84,979
2005 106,824
2006 3,982
----------
Net minimum lease payments 195,785
Less: Amount representing interest (7,779)
----------
Present value of net minimum lease payment $ 188,006
==========
Interest rates on capitalized leases are approximately 3.5% and are imputed
based on the lower of company's incremental borrowing rate at the inception of
each lease or the lessor's implicit rate of return.
NOTE 6 - LOSS PER SHARE
Loss per common share is calculated in accordance with SFAS No. 128, "Earnings
Per Share." Basic loss per common share is computed by dividing net loss
attributable to common stockholders by the weighted average number of common
shares outstanding. Diluted loss per share is computed similarly to basic loss
per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if potentially
dilutive common shares had been issued and if the additional common shares were
dilutive. Shares associated with stock options, warrants and convertible debt
are not included because their inclusion would be antidilutive (i.e., reduce the
net loss per share). At March 31, 2004, there were potentially dilutive shares
of 2,473,046. After giving effect to the Offering, Merger and Restructuring, we
have 69,145,819 shares of common stock outstanding at March 31, 2004.
14
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED STATEMENTS
(UNAUDITED)
NOTE 7 - DEFERRED COMPENSATION
Subsequent to the Merger, we issued restricted shares of common stock to our new
management, directors and employees as follows:
Number of Shares Vesting Period
---------------- --------------
Inducement Grants 1,600,000 One third on January 1, 2005; One
third on each January 1 thereafter
Inducement Grants 731,250 January 1, 2005
Grants under the 2004 Stock Incentive Plan (1) 500,000 One third on January 1, 2005; One
third on each January 1 thereafter
Grants under the 2004 Stock Incentive Plan (1) 278,375 January 1, 2005
----------------
3,109,625
================
(1) The 2004 Stock Incentive Plan is subject to the approval by a majority of
shareholders at our 2004 Annual Shareholders Meeting.
In addition to the above restricted share grants, we granted options to purchase
2,140,000 shares of common stock at an exercise price of $2.00 to employees and
directors. One third of these options vest on January 1, 2005 and an additional
one-third on each January 1 thereafter. These options were granted under the
2004 Stock Incentive Plan, which is subject to the approval by a majority of
shareholders at our 2004 Annual Shareholders Meeting.
NOTE 8 - EQUITY TRANSACTIONS - NOT DESCRIBED ELSEWHERE
On February 4, 2004, in a private placement offering, 125,000 shares of our
common stock, $.001 par value per share, were issued at a purchase price of
$2.00 per share.
We exercised our call option to buy back 10 of the Company's 99 limited
partnership units in Knox Miss Partners, L.P. from RAM Trading, Ltd. on February
10, 2004 and issued 835,000 shares of our common stock in full payment of the
option. All of our interest in Knox Miss Partners, L.P. was sold in February
2004.
15
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED STATEMENTS
(UNAUDITED)
NOTE 9 - COMPREHENSIVE LOSS
Excluding net loss, our source of comprehensive loss is from the net unrealized
loss on marketable debt securities, which are classified as available-for-sale.
The following summarizes the components of comprehensive loss:
Quarter Ended March 31,
--------------------------------
2004 2003
--------------- -------------
Net loss $ (12,617,399) $ (1,958,541)
Unrealized loss (282,065) (335,027)
Reclassification adjustment for loss
realized in net loss above 489,036 -
--------------- -------------
Net impact on comprehensive loss 206,971 (335,027)
--------------- -------------
Comprehensive loss $ (12,410,428) $ (2,293,568)
=============== =============
NOTE 10 - COMMITMENTS AND CONTINGENCIES
COMMITMENTS
As a part of the Merger, we acquired an obligation to purchase products and
services from PGS or its affiliates for a period of three years commencing on
December 16, 2003 as follows:
Year 1 $ 1,000,000
Year 2 1,500,000
Year 3 2,000,000
------------
$ 4,500,000
============
LEGAL PROCEEDING
On or about March 4, 2004, the GHK Company, LLC, GHK/Potato Hills Limited
Partnership, and Brian F. Egolf (collectively "Plaintiffs") commenced an action
against Endeavour International Corporation ("Endeavour"), f/k/a Continental
Southern Resources, Inc., as well as BWP Gas, L.L.C. ("BWP") and HBA Gas, Inc.
("HBA") (collectively "defendants") in the state court in Oklahoma City,
Oklahoma. In the petition, Plaintiffs allege that CSOR intended to acquire a
majority of the membership interests in BWP and that HBA in turn entered into an
agreement to assign Plaintiff 2.5 million common shares of CSOR stock upon
compliance by Plaintiffs with certain contractual obligations including but not
limited to completion and initial
16
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED STATEMENTS
(UNAUDITED)
commercial production of the Mary #2-34 well, along with the presentation of a
development plan and the commencement of the next exploration or development
well in the Potato Hills Deep Prospect. Plaintiffs further allege in their
petition that BWP, HBA and Endeavour are alter egos of each other and jointly
and severally liable to Plaintiffs for failing to deliver to Plaintiffs the CSOR
common stock. Plaintiffs seek delivery of the stock as well as a temporary
restraining order, a primary and permanent injunction (i) enjoining all
dilutions of Plaintiff rights pertaining to CSOR stock; (ii) enjoining Endeavour
from all future stock issuances and transfers of assets not in the ordinary
course of business and (iii) prohibiting the alienation or encumbrance of the
CSOR stock that is allegedly in Plaintiff's possession. On April 6, 2004, the
defendants removed the action from the state court to the United States District
Court for the Western District of Oklahoma. Subsequently, Endeavour made a
motion for dismissal of the action for lack of jurisdiction over Endeavour in
Oklahoma. Management intends to litigate vigorously and believes it has good and
valid defenses beyond its jurisdictional defense. However, the action has just
begun and counsel is unable to opine on the outcome of the litigation.
NOTE 11 - SUBSEQUENT EVENT
In May 2004, we completed the sale of our equity interest in Louisiana Shelf
Partners, L.P. for $2,250,000 and received $250,000 in cash and a $2,000,000
contingent deferred payment that is payable from proceeds of drilling activities
on the oil and gas leases held by Louisiana Shelf Partners, L.P. As of March 31,
2004, our net book value in Louisiana Shelf Partners, L.P. was approximately
$1.1 million.
17