- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 2004
or
[ ] Transition Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period
from _________ to ___________
COMMISSION FILE NUMBER: 1-13463
ENDEAVOUR INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 88-0448389
------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 MAIN, SUITE 3300, HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip code)
(713) 307-8700
(Registrant's telephone number, including area code)
1001 FANNIN, SUITE 1700, HOUSTON, TEXAS
77002 (Former name, former address and former fiscal year, if
changed since last report.)
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of November 4, 2004, 69,792,616 shares of the registrant's common stock were
outstanding.
- -------------------------------------------------------------------------------
ENDEAVOUR INTERNATIONAL CORPORATION
INDEX
Part I:
Item 1: Unaudited Financial Statements
Balance Sheets.........................................................................................1
Statements of Operations...............................................................................3
Statements of Cash Flows...............................................................................4
Notes to Condensed Consolidated Financial Statements...................................................6
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.............20
Item 3: Quantitative and Qualitative Disclosures about Market Risk........................................24
Item 4: Controls and Procedures...........................................................................24
Part II. Other Information
Item 1: Legal Proceedings.................................................................................25
Item 4: Submission of Matters to a Vote of Security Holders...............................................25
Item 6: Exhibits..........................................................................................26
Signatures......................................................................................................27
ITEM 1: UNAUDITED FINANCIAL STATEMENTS
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
September 30, December 31,
2004 2003
-------------- -------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 36,258 $ 57
Notes receivable - related party - 838
Other receivables 161 87
Interest receivable - related party - 158
Marketable securities - related party - 207
Marketable securities - 512
Prepaid expenses and other current assets 1,691 1,461
-------------- ------------
Total current assets 38,110 3,320
Property and Equipment, Net:
Oil and gas properties, using full cost method:
Proved oil and gas properties, net - 71
Oil and gas properties excluded from amortization 10,072 6,342
Other oil and gas assets 4,102 -
Computer equipment 416 10
-------------- ------------
Total property and equipment, net 14,590 6,423
Equity Interests in Oil and Gas Properties 3,063 2,839
Intangible Asset 4,800 -
Marketable Securities 1,236 -
Other Assets 3,500 -
-------------- ------------
$ 65,299 $ 12,582
============== ============
See accompanying notes to consolidated financial statements.
1
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
September 30, December 31,
2004 2003
-------------- -------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 4,247 $ 5,236
Convertible notes - 3,243
Deferred equity option - 870
Other 116 23
-------------- ------------
Total current liabilities 4,363 9,372
Long-term Obligations 3,655 30
-------------- ------------
Total Liabilities 8,018 9,402
Commitments and Contingencies - -
Stockholders' Equity
Preferred stock - 4
Common stock 69 37
Additional paid-in capital 131,860 50,175
Less stock subscription receivables - (250)
Less stock subscription receivable - related party - (175)
Accumulated other comprehensive loss (612) (489)
Deferred compensation (8,637) -
Deficit accumulated during the development stage (65,399) 46,122)
-------------- ------------
Total stockholders' equity 57,281 3,180
-------------- ------------
Total Liabilities and Stockholders' Equity $ 65,299 $ 12,582
============== ============
See accompanying notes to consolidated financial statements.
2
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(Amounts in thousands, except per share data)
Three Months Nine Months
Ended September 30, Ended September 30, January 13, 2000
--------------------------- -------------------------- (Inception) to
2004 2003 2004 2003 Sept. 30, 2004
------------- ----------- ----------- ----------- ---------------
Revenues $ - $ - $ 8 $ - $ 52
Cost of Operations:
Operating expenses - - 1 - 24
Depreciation and amortization 382 - 890 - 2,387
Impairment of oil and gas properties - 14,990 - 14,990 25,168
Loss on equity investments in oil
and gas properties 90 614 224 667 1,469
Bad debt expense - related party - 334 - 1,234 2,351
General and administrative 3,658 933 9,141 1,872 12,525
General and administrative -
related party - 48 - 84 219
------------- ----------- ----------- ----------- ------------
Total Expenses 4,130 16,919 10,256 18,847 44,143
------------- ----------- ----------- ----------- ------------
Loss From Operations (4,130) (16,919) (10,248) (18,847) (44,091)
------------- ----------- ----------- ----------- ------------
Other (Income) Expense:
Consideration given in excess of
fair value of identifiable assets
acquired - - 10,779 - 10,779
Interest income (155) (50) (398) (199) (1,098)
Interest expense 8 1,008 262 2,943 7,144
(Gain) loss on sale of oil and gas
interest - - (355) - (355)
Loss on sale of marketable
securities - related party - 207 29 1,866
Gain on collection of promissory
notes - - (1,848) - (2,013)
Other (income) expense 4 (14) (3) (28) (90)
------------- ----------- ----------- ----------- ------------
Total Other (Income) Expense (143) 944 8,644 2,745 16,233
------------- ----------- ----------- ----------- ------------
Net Loss (3,987) (17,863) (18,892) (21,592) (60,324)
Preferred Stock Dividends 39 553 385 3,966 5,075
------------- ----------- ----------- ----------- ------------
Net Loss to Common Stockholders $ (4,026) $ (18,416) $ (19,277) $ (25,558) $ (65,399)
============ =========== =========== =========== ============
Net Loss Per Common Share - Basic and
Diluted $ (0.06) $ (0.51) $ (0.31) $ (0.74)
============ =========== =========== ============
Weighted Average Number of Common
Shares Outstanding - Basic and
Diluted 69,366 36,214 62,596 34,440
============ =========== =========== ============
See accompanying notes to consolidated financial statements.
3
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)
Nine Months
Ended September 30, January 13, 2000
---------------------------------- (Inception) to
2004 2003 Sept. 30, 2004
--------------- -------------- ----------------
Cash Flows from Operating Activities:
Net loss $ (18,892) $ (21,592) $ (60,324)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
DD&A expense 890 - 2,398
Impairment of oil and gas properties - 14,990 25,168
Consideration given in excess of fair value of
identifiable assets acquired 10,779 - 10,779
Gain on collection of promissory notes (1,848) - (1,848)
Shares and options issued for services rendered 129 262 408
Amortization of deferred compensation 4,733 413 5,272
Fair market value adjustment of stock options 574 - 574
Gain on sale of assets (355) - (355)
Equity loss in affiliates 224 667 1,469
Loss on sale of marketable securities 207 29 1,866
Amortization of debt discount and financing costs 195 2,295 5,542
Amortization of discount on marketable securities - - (343)
Bad debt expense - 1,234 2,351
Other (10) 32 130
Changes in assets and liabilities:
(Increase) decrease in receivables 4,121 (90) 3,886
(Increase) decrease in other current assets (450) (121) (1,881)
Increase (decrease) in accounts payable and
accrued expenses 1,480 (608) 2,573
--------------- -------------- ----------------
Net Cash Provided by (Used in) Operating Activities 1,777 (2,489) (2,335)
--------------- -------------- ----------------
See accompanying notes to consolidated financial statements.
4
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)
Nine Months
Ended September 30, January 13, 2000
------------------------------------- (Inception) to
2004 2003 Sept. 30, 2004
---------------- --------------- ----------------
Cash Flows From Investing Activities:
Capital expenditures (4,278) (3,401) (25,740)
Acquisitions, net of cash acquired (66) (2,350) (2,416)
Notes receivable - related party - (176) (176)
Notes receivable - (10) (1,438)
Repayment of notes receivable - related party - 1,316 1,316
Repayment of notes receivable - 153 945
Investment in limited partnerships (1,590) (2,720) (5,820)
Purchase of marketable securities - (5) (4,309)
Proceeds from sale of assets 741 253 1,002
--------------- -------------- ---------------
Net Cash Used in Investing Activities (5,193) (6,940) (36,636)
--------------- -------------- ---------------
Cash Flows From Financing Activities:
Repayment of notes (1,751) (1,200) (2,951)
Repayment of notes - related party - (905) (1,399)
Proceeds from deferred equity option - 696 870
Proceeds from borrowings - 1,768 17,199
Proceeds from borrowings - related party - 762 1,254
Loan costs paid - - (245)
Receipts of subscription receivable - 1,430 1,924
Receipts of subscription receivable - related party - 1,924 1,430
Purchase and retirement of common and preferred
stock (5,031) - (5,031)
Proceeds from common and preferred stock issued
and issuable - net 46,399 4,712 62,178
--------------- -------------- ---------------
Net Cash Provided by Financing Activities 39,617 9,187 75,229
--------------- -------------- ---------------
Net Increase (Decrease) in Cash and Cash
Equivalents 36,201 (242) 36,258
Cash and Cash Equivalents, Beginning of Period 57 330 -
--------------- -------------- ---------------
Cash and Cash Equivalents, End of Period $ 36,258 $ 88 $ 36,258
=============== ============== ================
See accompanying notes to consolidated financial statements.
5
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED 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 Condensed 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 and Form
8-K filed on July 12, 2004. As discussed in Note 2, the Company changed its
method of accounting for oil and gas properties in the second quarter of 2004.
The Form 8-K filed on July 12, 2004 provides restated financial information for
the years ended December 31, 2003 and 2002 and the quarters ended March 31,
2004 and 2003 under this new method of accounting.
In February 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). In
June 2004, our common stock began trading on the American Stock Exchange under
the symbol "END." Prior to June 2004, our common stock traded on the OTC
Bulletin Board.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
CHANGE IN METHOD OF ACCOUNTING FOR OIL AND GAS PROPERTIES
Effective April 1, 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
6
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
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 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:
o a new management team;
o a new business strategy of exploration, exploitation and acquisition
that will be focused on the North Sea;
o the acquisition of NSNV, Inc. which possessed the seismic data and
management team that will be central to the Company's new strategy;
and
o a restructuring which resulted in the sale of substantially all
interests in U.S. oil and gas properties.
Prior to February 2004, the Company had no technical exploration and production
staff, and the Company 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 reflect
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 all wells, 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 September 30, 2004
and 2003, we capitalized certain employee-related costs of approximately $1.3
million and none, respectively. For the nine months ended September 30, 2004
and 2003, we capitalized certain employee-related costs of approximately $3.1
million 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,
7
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
all net of expected income tax effects. Under the ceiling test, if the
capitalized cost of a 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 terminated in the entire cost center or the conveyance is
significant in nature.
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.
Since 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 have been permanently diminished in part or
in whole. Based on the impairment evaluation and future exploration plans, the
unproved property cost centers related to areas 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, increasing the book value of 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 $10.1 million 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) that included
adjustments for basis differentials and other pricing factors. Future quarterly
full cost ceiling tests will be based on the current market prices for both
natural gas and oil. The end
8
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
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 as of December 31, 2003.
The effect of the accounting change on net loss follows:
January 13,
Three Three Nine 2000
Months Months Months (Inception)
Ended Ended Ended Year Ended December 31 to March 31,
March 31, Sept. 30, Sept. 30, ------------------------ ------------
2004 2003 2003 2003 2002 2004
--------- -------- ------------ --------- ---------- ------------
Net loss to common $(15,639) $ (8,644) $ (21,467) $ (37,248) $ (8,671) $ (61,675)
stockholders under
successful efforts
Adjustments to full cost 2,715 (9,772) (4,091) (3,986) 3,900 2,629
-------- -------- ------------ --------- -------- ---------
Net loss to common
stockholders under
full cost $(12,924) $(18,416) $ (25,558) $ (41,234) $ (4,771) $ (59,046)
======== ======== ============ ========= ======== =========
Loss per basic and
diluted share under
successful efforts $ (0.32) $ (0.24) $ (0.62) $ (1.06) $ (0.43)
======== ======== ============ ========= ========
Loss per basic and
diluted share under
full cost $ (0.26) $ (0.51) $ (0.74) $ (1.18) $ (0.24)
======== ======== ============ ========= ========
The effect of the accounting change on the balance sheet at December 31, 2003
follows:
Deficit
Net Oil and Gas Accumulated
Property and During the
Equipment Development Stage
--------------- -----------------
Under successful efforts $ 6,499 $ (46,036)
Adjustments to full cost (86) (86)
-------------- ------------
Under full cost $ 6,413 $ (46,122)
============== ============
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 intrinsic value of
unvested stock-based compensation is recorded as deferred compensation and
amortized on a straight-line basis over the vesting period of the award.
9
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
The net loss for both the three and nine months ended September 30, 2003
includes stock-based compensation cost of $212,000 related to options and
restricted stock granted to a prior director. During 2003, the Company repriced
500,000 options granted to prior directors from an exercise price of $5.00 per
share to $2.30 per share. This modification in 2003 of the 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 is lower than the market price of the stock at the end of
each reporting period until the options expire or are exercised. For the third
quarter of 2004 and 2003, we recorded a non-cash increase (reduction) in
general and administrative expenses of $(84,000) and none, respectively,
related to these options. For the nine months ended September 30, 2004 and
2003, we recorded non-cash general and administrative expenses of $574,000 and
none, respectively, related to these options. See Note 9 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 September 30, 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:
(amounts in thousands, except per share data)
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------------- -----------------------------
2004 2003 2004 2003
---------- ----------- ------------ ------------
Net loss to common stockholders, as reported $ (4,026) $ (18,416) $ (19,277) $ (25,558)
Add:
Stock-based compensation expense as
reported 1,325 - 4,154 -
Less:
Total stock-based compensation expense
determined under fair-value-based method
for all awards, net of tax (2,652) (826) (4,881) (826)
---------- ----------- ------------ ------------
Pro forma net loss $ (5,353) $ (19,242) $ (20,004) $ (26,384)
========== =========== ============ ============
Loss per share:
Basic - as reported $ (0.06) $ (0.51) $ (0.31) $ (0.74)
Basic - pro forma $ (0.08) $ (0.53) $ (0.32) $ (0.76)
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
10
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
using the Black-Scholes Method. The following summarizes the weighted average
of the assumptions used in the method.
<Table>
<Caption>
2004 2003
---------- -----------
Risk free rate 4% 1.6% - 3.4%
Expected years until exercise 7 3 - 5
Expected stock volatility 31% 100%
Dividend yield - -
</Table>
OTHER PROPERTY, PLANT AND EQUIPMENT
Other oil and gas assets, computer equipment 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 26, 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 million, after
offering costs of $3.9 million. 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 our common stock and 103,500 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 of
11
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
the Company in the Merger, representing approximately 18.9% of outstanding
common stock of the Company 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.
The following is a calculation of the consideration given:
<Table>
<Caption>
(amounts in thousands, except per share data)
Shares of common stock issued 12,500
Price per share of the Offering $ 2.00
----------------
Fair value of stock issued 25,000
Add: Capitalized merger costs 452
----------------
Consideration given $ 25,452
================
</Table>
Capitalized merger costs are the professional expenses for legal and accounting
services.
The consideration given for the Merger was allocated as follows:
<Table>
<Caption>
(amounts in thousands)
Current assets $ 1,059
Property and equipment 11,386
Intangible asset - workforce in place 4,800
Other assets 3,500
Current liabilities (2,478)
Long-term commitments (3,594)
----------------
Fair value of net identifiable assets acquired 14,673
Consideration (25,452)
----------------
Consideration given in excess of fair value of
identifiable assets acquired $ (10,779)
=================
</Table>
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:
o Repaid $1.5 million principal amount of our outstanding convertible
notes;
12
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
o Issued 1,026,624 shares of our common stock in exchange for the $1.55
million principal balance and accrued interest due under the Michael
P. Marcus convertible debenture at a conversion price of $1.75;
o 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;
o 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;
o 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
o 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 than
10% of our outstanding stock prior to this purchase) for approximately
$5.3 million 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:
o 100% of the ownership interest in BWP Gas, LLC.;
o 864,560 shares of restricted common stock of BPK Resources, Inc.;
o 400,000 shares of common stock of Trimedia Group, Inc.;
o Note receivable due from CSR Hackberry, LLC in the principal amount of
$25,000;
o Note receivable due from Snipes, LLC in the principal amount of
$122,500;
o Subscription receivable due from FEQ Investments in the principal
amount of $175,000;
o Subscription receivable due from GWR Trust in the principal amount of
$250,000; and
o Note receivable due from BPK Resources, Inc. in the principal amount
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 million and received
$500,000 in cash and a $4.5 million short-term note that is secured by a pledge
of the limited partnership interest. At September 30, 2004, the $4.5 million
short-term note has been paid in full.
During the second quarter of 2004, we sold all of our equity interest in
Louisiana Shelf Partners, L.P. for $250,000 in cash and a $2 million contingent
deferred payment that is payable from proceeds from production of drilling
activities on the oil and gas leases held by Louisiana Shelf Partners, L.P.
With the uncertainty of collection of the contingent deferred payment, no
receivable was recorded at the time of the sale. In connection with the sale,
we recorded a loss of $895,000 during the second quarter of 2004.
13
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
NOTE 5 - MARKETABLE SECURITIES
In May 2004, we received 1.2 million common shares of Touchstone Resources USA,
Inc. (a public company trading on the OTC Bulletin Board) (the "Touchstone
Shares") in exchange for $3.6 million of convertible promissory notes of
Touchstone Resources, Ltd. (the "Touchstone Exchange"). The net book value of
the convertible promissory notes was zero; as such, we recorded a non-cash gain
on the Touchstone Exchange of approximately $1.8 million, the market value of
the Touchstone Shares on the date of the exchange. The Touchstone Shares
reflected in these financial statements are deemed by management to be
"available-for-sale" and, accordingly are reported at fair value, with
unrealized gains and losses reported in other comprehensive income. At
September 30, 2004, the fair value of the Touchstone Shares was $1.2 million
with a $612,000 unrealized loss recognized in other comprehensive income.
NOTE 6 - 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 properties 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, $66,000 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,
and the Touchstone Exchange. Noncash financing activities were also incurred,
including the conversion of all of our Series C Preferred Stock and a portion
of our convertible notes into common stock.
NOTE 7 - LEASES
We are the lessee of various items of 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 assets. 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 September 30, 2004,
for each of the next three years and in the aggregate are:
14
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
<Table>
<Caption>
(amounts in thousands)
Year Ended December 31, Amount
------------
2004 $ 32
2005 121
2006 26
------------
Net minimum lease payments 179
Less: Amount representing interest (11)
------------
Present value of net minimum lease payment $ 168
============
</Table>
Interest rates on capitalized leases are approximately 3.5% and are imputed
based on the lower of the Company's incremental borrowing rate at the inception
of each lease or the lessor's implicit rate of return.
NOTE 8 - 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 in the calculation of weighted average number of common shares
outstanding because their inclusion would be antidilutive (i.e., reduce the net
loss per share). At September 30, 2004, there were potentially dilutive shares
of approximately 1.9 million.
15
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
NOTE 9 - DEFERRED COMPENSATION
Through September 30, 2004, we issued stock options and restricted shares of
common stock to our new management, directors, employees and consultants as
follows:
Number of
Shares or
Options
---------------
Grants Under the 2004 Incentive Plan (1):
Restricted stock vesting on January 1, 2005 265,125
Restricted stock vesting in thirds on each January 1st 2005 through 2007 573,750
Common stock granted as directors' fees 18,796
Stock options vesting in thirds on each January 1st 2005 through 2007 (2) 1,902,500
---------------
2,760,171
===============
Inducement Grants of Restricted Stock:
Vesting on January 1, 2005 731,250
Vesting in thirds on each January 1st 2005 through 2007 1,600,000
---------------
2,331,250
===============
(1) The 2004 Incentive Plan was approved by a majority of the votes
entitled to be cast by holders of shares of Common Stock and Preferred
Stock, voting together as a class, who were represented in person or
by proxy at the 2004 annual meeting of stockholders.
(2) All options have an exercise price of $2.00 per share except 20,000
options which have an exercise price of $3.78 per share and 25,000
options which have an exercise price of $3.15.
Deferred compensation of $13.4 million was recorded in stockholders' equity for
the inducement grants and the grants under the 2004 Incentive Plan. For the
three and nine months ended September 30, 2004, $1.9 million and $4.8 million,
respectively, was amortized to compensation expense, of which $0.5 million and
$1.2 million, respectively, was included in the capitalization of certain
employee-related costs (see Note 2).
16
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
NOTE 10 - EQUITY
Our preferred stock and common stock outstanding follows:
September 30, December 31,
2004 2003
-------------- ---------------
(Amounts in thousands)
Preferred stock, Series A; $0.001 par value; authorized - None at 2004 and
9,500,000 shares at 2003; Shares issued and outstanding - None at 2004 and
4,090,713 at 2003 $ - $ 4
Preferred stock, Series B; $0.001 par value; authorized - 376,287 shares at
2004 and 500,000 shares at 2003; Shares issued and outstanding - 19,714
shares at 2004 and 143,427 shares at 2003 $ - $ -
Preferred stock, Series C; $0.001 par value; authorized - None at 2004 and
1,500,000 shares at 2003; Shares issued and outstanding - None at 2004 and
477,500 at 2003 $ - $ -
Common Stock; $0.001 par value; authorized - 150,000,000; Shares issued and
outstanding - 69,381,365 shares at 2004 and 37,144,668 at 2003 $ 69 $ 37
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.
During the second quarter of 2004, in a private offering, we issued 175,000
shares of our common stock to fulfill a commitment made for services performed
in connection with the Merger.
Effective June 21, 2004, certificates of withdrawal were filed with respect to
our Series A and Series C preferred stock.
Effective September 17, 2004, we registered for sale approximately 40 million
shares of our common stock that were previously issued to numerous stockholders
in the Offering or were required to be registered upon registration of the
Offering shares. We did not and will not receive any proceeds from the
registration of these shares of our common stock.
17
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
NOTE 11 - COMPREHENSIVE LOSS
Excluding net loss, our comprehensive loss is from the net unrealized loss on
marketable securities, which are classified as available-for-sale. The
following summarizes the components of comprehensive loss:
(amounts in thousands)
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- ------------- ---------------
2004 2003 2004 2003
------------ ------------- ------------- ------------
Net loss $ (3,987) $ (17,863) $ (18,892) $ (21,592)
Unrealized gain (loss) on marketable
securities (504) (523) (330) (1,105)
Reclassification adjustment for loss
realized in net loss above - 41 207 41
------------ ------------- ------------- ------------
Net impact on comprehensive loss (504) (482) (123) (1,064)
------------ ------------- ------------- ------------
Comprehensive loss $ (4,491) $ (18,345) $ (19,015) $ (22,656)
============= ============ ============= ============
NOTE 12 - 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:
<Table>
<Caption>
(amounts in thousands)
Year 1 $ 1,000
Year 2 1,500
Year 3 2,000
------------
$ 4,500
============
</Table>
During the third quarter of 2004, we executed a sublease for office space with
Reliant Energy Corporate Services, LLC through March 31, 2008. Our Co-Chief
Executive Officer is also a member of the Board of Directors of the parent
company of Reliant Energy Corporate Services, LLC. Lease payments are expected
to be approximately $180,000 for each of the years ended December 31, 2005,
2006 and 2007 and $45,000 for the year ended December 31, 2008.
18
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
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 state court in Oklahoma City, Oklahoma.
In the petition, Plaintiffs allege that Endeavour intended to acquire a
majority of the membership interests in BWP and that HBA in turn entered into
an agreement to assign Plaintiffs 2.5 million common shares of Endeavour stock
upon compliance by Plaintiffs with certain contractual obligations including
but not limited to completion and initial 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 Endeavour common stock.
Plaintiffs seek delivery of the stock as well as a temporary restraining order
and a primary and permanent injunction (i) enjoining all dilutions of
Plaintiffs rights pertaining to Endeavour 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
Endeavour stock that is allegedly in HBA'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. On October 21, 2004 the
United States District Court granted the motion to remand to state court filed
by the Plaintiffs and remanded the matter to the District Court of Oklahoma
County, Oklahoma. Management intends to litigate vigorously and believes it has
good and valid defenses in this litigation. However, as of this time, counsel
is unable to opine on the outcome of the litigation.
NOTE 13 - SUBSEQUENT EVENTS
On October 12, 2004, we announced that one of our wholly-owned subsidiaries
entered into an agreement to acquire a majority interest in OER Oil AS ("OER"),
a privately held Norwegian exploration and production company based in Oslo,
for approximately $26 million in cash. The transaction is expected to close by
the end of the year subject to necessary government approvals and certain other
conditions.
Following the closing, we will hold the approximately 76 percent interest in
OER previously held by Lundin Petroleum B.V. We have made an offer to purchase
the remaining minority interests in OER, which includes interests held by OER
management, for a combination of our common stock and cash. OER management has
endorsed the acquisition as a means to establish the combined entity as a
leading independent exploration and production company in the Norwegian sector.
19
ENDEAVOUR INTERNATIONAL CORPORATION
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
The information contained in this Quarterly Report on Form 10-Q and in other
public statements by the Company and Company officers or directors includes or
may contain certain forward-looking statements. The words "may," "will,"
"expect," "anticipate," "believe," "continue," "estimate," "project," "intend,"
and similar expressions used in this Report are intended to identify
forward-looking statements within the meaning of Section 27A of the U.S.
Securities Act of 1933 and Section 21E of the U.S. Securities Exchange Act of
1934. You should not place undue reliance on these forward-looking statements,
which speak only as of the date made. We undertake no obligation to publicly
release the result of any revision of these forward-looking statements to
reflect events or circumstances after the date they are made or to reflect the
occurrence of unanticipated events. You should also know that such statements
are not guarantees of future performance and are subject to risks,
uncertainties and assumptions. These factors include, but are not limited to,
those risks described in detail in the Company's Annual Report on Form 10-KSB
under the caption "Risk Factors" and other filings with the Securities and
Exchange Commission. Should any of these risks or uncertainties materialize, or
should any of these assumptions prove incorrect, actual results may differ
materially from those included within the forward-looking statements.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Unless the context otherwise requires, references to the "Company",
"Endeavour", "we", "us" or "our", mean Endeavour International Corporation or
any of our consolidated subsidiaries or partnership interests. The following
discussion should be read in conjunction with our Condensed Consolidated
Financial Statements and related Notes thereto included elsewhere in this
Report.
GENERAL
During the first quarter of 2004, we completed a series of mutually
interdependent transactions that significantly expanded our scope and
objectives - the Offering, the Merger and the Restructuring as discussed in
Note 3 to the Condensed Consolidated Financial Statements herein. With the
transactions, we have a new focus, primarily on international oil and gas
exploration.
As a result of these transactions, all of our producing operations were sold as
well as our exploration activities in Mississippi. We retained our equity
interests in Thailand and Louisiana through the end of the first quarter;
however our equity interest in Louisiana was sold in May 2004. In addition, all
of the outstanding balances of our convertible debt were either repaid or
converted to common stock. Further, substantially all of our outstanding
preferred stock was repurchased or converted to common stock.
20
ENDEAVOUR INTERNATIONAL CORPORATION
UNITED KINGDOM
During the second quarter of 2004, we participated in the 22nd Seaward
Licensing Round in the United Kingdom in a significant manner. Acting alone and
with others, we were awarded nine production licenses covering 18 blocks in
September 2004.
Endeavour will serve as operator of five production licenses located in the
Central North Sea. These licenses, and our interest therein, include:
o Blocks 21/11c and 20/15b (100 percent equity)
o Block 21/20c (100 percent equity)
o Blocks 22/24e (60 percent equity)
o Block 30/23b (60 percent equity )
o Blocks 31/26b and 39/1b (60 percent equity)
The company was also awarded a non-operated 47.5 percent equity in Blocks
23/16e and 23/17b in the Central North Sea. Other non-operated licenses and our
interests therein include the following in the Southern Gas Basin:
o Blocks 42/10 and 42/15 (50 percent equity)
o Blocks 43/22, 43/23, 43/27b, 43/28 and 43/29 (25 percent equity)
o Blocks 44/21c and 44/25b (25 percent equity)
The licenses cover more than a half million acres, approximately 2,160 square
kilometers, or the equivalent to more than 100 Gulf of Mexico blocks. Of the
production licenses, four licenses covering eight blocks were granted under
traditional terms that require the company to fulfill a work program within
four years from the date of award. The remaining five licenses covering 10
blocks are under "promote" terms that allow the company to pay reduced license
fees for a two-year period as exploratory evaluations are conducted.
NORWAY
On September 21, 2004, we announced that we were notified by the Ministry of
Petroleum and Energy in Norway of our pre-qualification as a licensee on the
Norwegian Continental Shelf. The process evaluates the competency of a company
from a financial, technical and organizational perspective to participate in
exploration and production activities on the Norwegian Continental Shelf. It
also considers the company's competency concerning issues related to health,
safety and the environment.
On October 12, 2004, our wholly-owned subsidiary, Endeavour Energy Norge AS,
entered into an agreement to acquire a majority interest in OER Oil AS ("OER"),
a privately held Norwegian exploration and production company based in Oslo,
for approximately $26 million in cash. The transaction is expected to close by
the end of the year subject to necessary government approvals and certain other
conditions.
Following the closing, we will hold the approximately 76 percent interest in
OER previously held by Lundin Petroleum B.V. We have made an offer to purchase
the remaining minority interests in OER, which includes interests held by OER
management, for a combination of our
21
ENDEAVOUR INTERNATIONAL CORPORATION
common stock and cash. OER management has endorsed the acquisition as a means
to establish the combined entity as a leading independent exploration and
production company in the Norwegian sector.
THAILAND
Through a limited liability company in which we hold an interest, we have an
interest in the Phu Horm Gas Field Project, an onshore gas discovery in
northern Thailand. In May 2004, the Phu Horm Project was approved as a
Production Area by the Thailand Department of Mineral Fuels. Drilling of two
additional appraisal wells commenced during the second quarter of 2004. These
wells have been completed successfully and tested gas and have expanded the
known limits of the reservoir. Engineering, design and permitting for the gas
production facilities for the project are continuing. A gas sales agreement is
in place to provide gas to the existing Nam Phong power plant. First gas sales
are expected to commence from the Phu Horm Project in 2006. In addition, we
have interests in two exploration licenses in proximity to the Phu Horm Project
which have certain work commitments and obligations.
RESULTS OF OPERATIONS
Impairment of oil and gas properties of $15 million during 2003 represents all
drilling costs incurred through September 30, 2003 plus 100% of the lease
acquisition costs for the entire Hell Hole Prospect. The wells were dry and all
of the leasehold for this prospect were relinquished.
Bad debt expenses were $1.2 million during the nine months ended September 30,
2003 and consisted of impairment charges related to our investment in
Touchstone Resources, Ltd. At December 31, 2003, all investments in Touchstone
Resources, Ltd. were fully impaired. As discussed in Note 5, we received 1.2
million shares of Touchstone USA, Inc. in exchange for our convertible
promissory notes of Touchstone Resources, Ltd. and recorded a gain of $1.8
million.
General and administrative ("G&A") expenses increased to $3.7 million during
the three months ended September 30, 2004 as compared to $981,000 for the
corresponding period in 2003 and increased to $9.1 million during the nine
months ended September 30, 2004 as compared to $1.9 million for the
corresponding period in 2003. Components of G&A expenses for these periods are
as follows:
22
ENDEAVOUR INTERNATIONAL CORPORATION
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------- -----------------------------
2004 2003 2004 2003
---------- ---------- ------------ ------------
Compensation $ 1,348 $ 40 $ 2,850 $ 122
Non-cash stock-based compensation 2,125 - 5,274 -
Fair market value adjustment of stock options (84) - 574 -
Consulting, legal and accounting fees 878 526 1,909 1,164
Occupancy costs 119 5 271 15
Other expenses 552 410 1,321 655
---------- ---------- ------------ ------------
Gross G&A expenses 4,938 981 12,199 1,956
Less: capitalized G&A expenses (1,280) - (3,058) -
---------- ---------- ------------ ------------
Net G&A expenses $ 3,658 $ 981 $ 9,141 $ 1,956
========== ========== ============ ============
Other income increased to $143,000 during the three months ended September 30,
2004 as compared to other expense of $944,000 for the corresponding period in
2003 primarily due to interest expense on convertible debt during 2003. Other
expense increased to $8.6 million during the nine months ended September 30,
2004 as compared to $2.7 million for the corresponding period in 2003. The 2004
expense consisted of a $10.8 million expense for consideration given in excess
of fair value of identifiable assets acquired in the Merger, interest expense of
$262,000 incurred primarily on outstanding convertible debt and a $207,000 loss
in on the sale of marketable securities as part of the Restructuring, partially
offset by $355,000 net gain in connection with our sales of our partnership
interests and $1.8 million in income related to the gain on the Touchstone
Exchange. The 2003 other expense consisted primarily of interest expense of $2.9
million incurred on outstanding convertible debt. All of the convertible debt
was sold or converted to common stock as part of the Restructuring. With the
Restructuring of all of the outstanding convertible debt, we do not expect to
incur significant interest expense for the remainder of 2004.
LIQUIDITY AND CAPITAL RESOURCES
On February 4, 2004, a private placement for 125,000 shares of our common
stock, $.001 par value per share, at a purchase price of $2.00 per share, was
completed.
On February 26, 2004, we completed an offering of 25 million shares of our
common stock for estimated net proceeds of $46 million, after offering costs of
$3.9 million. In addition, warrants to purchase 700,000 shares of common stock
at an exercise price of $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 shares of our Series B Preferred Stock for $5.3
million and for the repayment of $1.8 million of the principal amount of
certain outstanding convertible notes and other notes, with the remainder of
the net proceeds to be used for general corporate purposes, including potential
acquisitions.
In combination with the Offering of $50 million of gross proceeds, our ability
to issue additional equity or utilize our debt capacity, we believe we have
sufficient funding to continue to execute
23
ENDEAVOUR INTERNATIONAL CORPORATION
our business plan for the next several years. Our proposed purchase of OER,
including our intent to offer to purchase the remaining minority interests, is
anticipated to be initially financed through a combination of our common stock
and cash. We are currently discussing long-term debt options with financial
institutions and expect that our financing capacity will be adequate to fund a
portion of the cash acquisition cost of OER.
DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table sets forth the Company's obligations and commitments to
make future payments under its lease agreements and other long-term obligations
as of September 30, 2004:
Payments due by Period (in thousands)
----------------------------------------------------------------------------
Contractual Obligations Total 1 Year 2-3 Years 4-5 Years After 5 Years
------------ ----------- ----------- ----------- -------------
Capital leases for computer $ 168 $ 32 $ 136 $ - $ -
equipment
Purchase commitment 4,500 1,000 3,500 - -
------------ ----------- ----------- ----------- -------------
Total Contractual Cash
Obligations $ 4,668 $ 1,032 $ 3,636 $ - $ -
============ =========== =========== =========== =============
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our cash balances are primarily maintained in money market accounts with U.S.
financial institutions and as such, we do not believe we are exposed to
significant market or currency risk.
ITEM 4: CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, our management
carried out an evaluation, with the participation of our co-chief executive
officers (the "CEOs") and our chief accounting officer (the "CAO"), of the
effectiveness of our disclosure controls and procedures required by Rule 13a-15
of the Securities Exchange Act of 1934. Based on that evaluation, the CEOs and
CAO believe:
(i) that our disclosure controls and procedures are designed to
ensure that information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and
communicated to our management, including the CEOs and CAO, as
appropriate to allow timely decisions regarding required
disclosure; and
(ii) that our disclosure controls and procedures are effective.
24
ENDEAVOUR INTERNATIONAL CORPORATION
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There has been no significant change in our internal controls over
financial reporting during the period covered by this report that has
materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
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 state court in Oklahoma City, Oklahoma.
In the petition, Plaintiffs allege that Endeavour intended to acquire a
majority of the membership interests in BWP and that HBA in turn entered into
an agreement to assign Plaintiffs 2.5 million common shares of Endeavour stock
upon compliance by Plaintiffs with certain contractual obligations including
but not limited to completion and initial 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 Plaintiffs the Endeavour common stock.
Plaintiffs seek delivery of the stock as well as a temporary restraining order
and a primary and permanent injunction (i) enjoining all dilutions of
Plaintiffs rights pertaining to Endeavour 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
Endeavour stock that is allegedly in HBA'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. On October 21, 2004 the
United States District Court granted the motion to remand to state court filed
by the Plaintiffs and remanded the matter to the District Court of Oklahoma
County, Oklahoma. Management intends to litigate vigorously and believes it has
good and valid defenses in this litigation. However, as of this time counsel is
unable to opine on the outcome of the litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company held on August 24, 2004,
the stockholders elected five directors to serve terms expiring in 2005, 2006
and 2007, and approved the 2004 Incentive Plan.
25
ENDEAVOUR INTERNATIONAL CORPORATION
Votes cast were as follows:
Broker
For Against Abstained Non-Votes
---------- ----------- ----------- -----------
Election as a Director of the
Company of:
Barry J. Galt (1) 43,980,182 - 59,000 -
Nancy K. Quinn (2) 43,985,682 - 53,500 -
John N. Seitz (2) 44,010,682 - 28,500 -
John B. Connally III (3) 41,929,582 - 2,109,600 -
William L. Transier (3) 44,010,682 - 28,500 -
Approval of the 2004 Incentive Plan 36,715,060 2,291,840 2,831,911 2,220,371
(1) Elected to a three-year term.
(2) Elected to a two-year term.
(3) Elected to a one-year term.
ITEM 6: EXHIBITS
The following exhibits are included herein:
31.1 * Certification of William L. Transier, Co-Chief Executive Officer,
pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
of 1934, as amended.
31.2 * Certification of John N. Seitz, Co-Chief Executive Officer,
pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
of 1934, as amended.
31.3 * Certification of Robert L. Thompson, Chief Accounting Officer,
pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
of 1934, as amended.
32.1 * Certification of William L. Transier, Co-Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 * Certification of John N. Seitz, Co-Chief Executive Officer, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.3 * Certification of Robert L. Thompson, Chief Accounting Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
* Filed herewith.
26
ENDEAVOUR INTERNATIONAL CORPORATION
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.
ENDEAVOUR INTERNATIONAL CORPORATION
Date: November 5, 2004
/s/ William L. Transier /s/ John N. Seitz
------------------------ --------------------------
William L. Transier John N. Seitz
Co-Chief Executive Officer Co-Chief Executive Officer
/s/ Robert L. Thompson
-----------------------
Robert L. Thompson
Vice President and Chief Accounting Officer
27
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
31.1* Certification of William L. Transier, Co-Chief Executive
Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as amended.
31.2* Certification of John N. Seitz, Co-Chief Executive Officer,
pursuant to Rule 13a-14(a)/15d-14(a) of the Securities
Exchange Act of 1934, as amended.
31.3* Certification of Robert L. Thompson, Chief Accounting Officer,
pursuant to Rule 13a-14(a)/15d-14(a) of the Securities
Exchange Act of 1934, as amended.
32.1* Certification of William L. Transier, Co-Chief Executive
Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification of John N. Seitz, Co-Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.3* Certification of Robert L. Thompson, Chief Accounting Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed herewith.