1
EXHIBIT 99.2
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF CAIRN ENERGY USA, INC.
AUDITED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED
DECEMBER 31, 1995 AND 1996
Report of Independent Auditors...........................................F-2
Consolidated Balance Sheets as of
December 31, 1995 and 1996...............................................F-3
Consolidated Statements of Operations for the years
ended December 31, 1994, 1995, and 1996..................................F-4
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1994, 1995, and 1996...............F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1994, 1995, and 1996 ........................F-6
Notes to Consolidated Financial Statement ...................................F-7
UNAUDITED FINANCIAL STATEMENTS AS OF AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997
Statement of Operations for the three and six months
ended June 30, 1997 and 1996...................................F-19
Balance Sheet as of June 30, 1997 and December 31, 1996.................F-20
Statement of Changes in Stockholders Equity for the
six months ended June 30, 1997.................................F-22
Statements of Cash Flows for the six months ended
June 30, 1997 and 1996.........................................F-23
Notes to Unaudited Financial Statements.................................F-24
F-1
2
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Cairn Energy USA, Inc.
We have audited the accompanying consolidated balance sheets of Cairn
Energy USA, Inc. (the Company), as of December 31, 1995 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Cairn Energy USA, Inc., at December 31, 1995 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Dallas, Texas
February 21, 1997
F-2
3
CAIRN ENERGY USA, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
--------------------
1995 1996
-------- --------
(IN THOUSANDS)
Current assets:
Cash and cash equivalents................................. $ 3,553 $ 6,438
Accounts receivable....................................... 4,340 4,904
Prepaid expenses.......................................... 447 482
-------- --------
Total current assets.............................. 8,340 11,824
Property and equipment, at cost:
Oil and gas properties, based on full-cost accounting..... 157,100 205,544
Other equipment........................................... 712 958
-------- --------
157,812 206,502
Less accumulated depletion, depreciation, and
amortization........................................... 59,905 75,877
-------- --------
97,907 130,625
Deferred charges, net of amortization....................... 564 909
======== ========
Total assets...................................... $106,811 $143,358
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 499 $ 6,303
Accrued lease operating expenses.......................... 578 492
Accrued well costs........................................ 6,194 3,803
Other accrued liabilities................................. 254 222
-------- --------
Total current liabilities......................... 7,525 10,820
Long-term debt.............................................. 15,500 42,000
Contingencies (Notes 3, 7, and 8)
Stockholders' equity:
Preferred stock, $.01 par value: 5,000,000 shares
authorized; none issued
Common stock, $.01 par value: 30,000,000 shares
authorized; shares issued and outstanding: December 31,
1995 - 17,550,480 and December 31, 1996 - 17,564,128... 176 176
Additional paid-in capital................................ 94,720 94,834
Accumulated deficit....................................... (11,110) (4,472)
-------- --------
Total stockholders' equity........................... 83,786 90,538
-------- --------
Total liabilities and stockholders' equity........ $106,811 $143,358
======== ========
See accompanying notes.
F-3
4
CAIRN ENERGY USA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------- ------- -------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS
Revenues:
Oil and gas............................................... $ 9,494 $25,742 $30,016
Other..................................................... 398 221 330
------- ------- -------
Total revenues.................................... 9,892 25,963 30,346
Expenses:
Lease operating expenses.................................. 2,274 3,101 3,731
Depletion, depreciation, and amortization................. 4,328 13,616 15,973
Administrative expense.................................... 1,522 1,511 1,481
Interest.................................................. 1,114 2,500 2,523
------- ------- -------
Total expenses.................................... 9,238 20,728 23,708
------- ------- -------
Net income.................................................. $ 654 $ 5,235 $ 6,638
======= ======= =======
Net income per common and common equivalent share........... $ .05 $ .32 $ .38
======= ======= =======
Weighted average common and common equivalent shares used in
per share computations.................................... 13,259 16,422 17,559
======= ======= =======
See accompanying notes.
F-4
5
CAIRN ENERGY USA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
--------------- ---------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ------ ------- ---------- ----------- -------------
Balance at December 31, 1993... -- $ -- 12,463 $ 125 $54,764 $(16,999) $ 37,890
Common stock issued for oil
and gas assets of Smith.... -- -- 3,500 35 23,219 -- 23,254
Net income................... -- -- -- -- -- 654 654
----- ------ ------ ------- ------- -------- --------
Balance at December 31, 1994... -- -- 15,963 160 77,983 (16,345) 61,798
Common stock issued for cash,
net........................ -- -- 1,562 16 16,573 -- 16,589
Exercise of stock options.... -- -- 20 -- 102 -- 102
Other........................ -- -- 5 -- 62 -- 62
Net income................... -- -- -- -- -- 5,235 5,235
----- ------ ------ ------- ------- -------- --------
Balance at December 31, 1995... -- -- 17,550 176 94,720 (11,110) 83,786
Exercise of stock options.... -- -- 7 -- 42 -- 42
Other........................ -- -- 7 -- 72 -- 72
Net income................... -- -- -- -- -- 6,638 6,638
----- ------ ------ ------- ------- -------- --------
Balance at December 31, 1996... -- $ -- 17,564 $ 176 $94,834 $ (4,472) $ 90,538
===== ====== ====== ======= ======= ======== ========
See accompanying notes.
F-5
6
CAIRN ENERGY USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
-------- -------- -------
OPERATING ACTIVITIES
Net income.................................................. $ 654 $ 5,235 $ 6,638
Adjustments to reconcile net income to net cash provided by
operating activities:
Depletion, depreciation, and amortization................. 4,328 13,616 16,019
Amortization of loan costs................................ 188 355 367
Loss on disposal of other equipment....................... 35 -- --
Changes in operating assets and liabilities:
Accounts receivable.................................... 473 (2,309) (564)
Prepaid expenses....................................... 32 (311) (35)
Accounts payable....................................... 763 (740) 4,638
Accrued liabilities.................................... (272) 151 (40)
Deferred revenue....................................... 152 (152) --
-------- -------- -------
Net cash provided by operating activities................... 6,353 15,845 27,023
INVESTING ACTIVITIES
Exploration and development expenditures.................... (20,501) (28,668) (50,178)
Acquisition of oil and gas assets of Smith.................. (281) 3,900 --
Proceeds from sale of oil and gas properties................ 3,727 1,920 502
Additions to other equipment................................ (157) (234) (246)
Proceeds from disposal of other equipment................... 4 2 --
-------- -------- -------
Net cash used in investing activities....................... (17,208) (23,080) (49,922)
FINANCING ACTIVITIES
Issuance of common stock.................................... -- 16,588 --
Proceeds from long-term debt................................ 14,000 11,000 26,500
Reductions of long-term debt................................ (100) (19,000) --
Financing costs and other................................... (1,206) 18 (716)
-------- -------- -------
Net cash provided by financing activities................... 12,694 8,606 25,784
Increase in cash and cash equivalents....................... 1,839 1,371 2,885
Cash and cash equivalents at beginning of year.............. 343 2,182 3,553
-------- -------- -------
Cash and cash equivalents at end of year.................... $ 2,182 $ 3,553 $ 6,438
======== ======== =======
Supplemental cash flow information - interest paid in
cash...................................................... $ 943 $ 2,143 $ 2,163
======== ======== =======
See accompanying notes.
F-6
7
CAIRN ENERGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Principles of Consolidation and Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of Cairn Energy
USA, Inc. (the Company) and its wholly owned subsidiary. All intercompany
accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
The Company is engaged in the exploration for and production of oil and
gas.
Property and Equipment
The Company follows the full-cost method of accounting for its investments
in oil and gas properties. The Company capitalizes all direct and certain
indirect costs associated with acquisition, exploration, and development costs
of oil and gas properties. Proceeds from sales of oil and gas properties are
credited to the full-cost pool. Capitalized costs of proved oil and gas
properties are amortized on a unit-of-production method using proved oil and gas
reserves as determined by independent petroleum engineers. Costs amortized
include all capitalized costs (less accumulated amortization); the estimated
future expenditures (based on current costs) to be incurred in developing proved
reserves; and estimated dismantlement, restoration, and abandonment costs.
Estimated future abandonment, dismantlement, and site restoration costs include
costs to dismantle, relocate, and dispose of the Company's offshore production
platforms, gathering systems, wells, and related structures. Such costs related
to onshore properties, net of estimated salvage values, are not expected to be
significant.
The Company capitalized approximately $866,000, $1,200,000, and $1,500,000
of internal costs during the years ended December 31, 1994, 1995, and 1996,
respectively. Such capitalized costs include salaries and related benefits of
individuals directly involved in the Company's acquisition, exploration, and
development activities, based on a percentage of their time devoted to such
activities.
Under rules of the Securities and Exchange Commission ("SEC") for the
full-cost method of accounting, the net carrying value of oil and gas properties
is limited to the sum of the present value (10% discount rate) of estimated
future net cash flows from proved reserves, based on period-end prices and
costs, plus the lower of cost or estimated fair value of unproved properties.
Furniture and equipment are depreciated on a straight-line basis based on
the estimated useful lives of the respective assets.
Cash and Cash Equivalents
Cash and cash equivalents include certificates of deposit or other highly
liquid investments with maturities of three months or less when purchased.
Deferred Charges
Deferred charges include prepaid pipeline charges that are recognized on a
unit of throughput basis, and loan costs that are amortized on a straight-line
basis over the terms of the respective loans.
F-7
8
CAIRN ENERGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Concentrations of Credit Risk
The Company operates exclusively in the oil and gas industry in the United
States. Accounts receivable terms are generally for 30 days. The Company does
not require collateral. Management periodically performs reviews as to the
creditworthiness of their customers. The Company has not sustained any
significant credit losses on sales of oil and gas.
Gas Imbalances
The Company follows the sales method of accounting for gas imbalances,
which recognizes over and under lifts of gas when sold, to the extent sufficient
gas reserves or balancing agreements are in place. Gas revenues are not
significantly different from the Company's share of production.
Oil and Gas Hedging Activities
In an effort to reduce the effects of the volatility of the price of oil
and gas on the Company's operations, management has adopted a policy of hedging
oil and gas prices whenever such prices are in excess of the prices anticipated
in the Company's operating budget and profit plan through the use of commodity
swap agreements with major financial institutions. These agreements involve the
receipt of fixed priced amounts in exchange for variable payments based on NYMEX
prices and specific volumes. The differential to be paid or received is recorded
in the month of the related production and recognized as a component of oil and
gas revenues. Hedging transactions are limited by the Board of Directors to 50%
of budgeted production for the succeeding 12 months and no more than 75% of
budgeted production in any one month. The Company does not hold or issue
financial instruments for trading purposes.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) in accounting for its
employee stock options. Under APB 25, if the exercise price of an employee's
stock option equals or exceeds the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Earnings (Loss) Per Common Share
Earnings (loss) per common share data is computed using the weighted
average number of common shares and dilutive common equivalent shares
outstanding. Fully diluted earnings per share data is not presented because it
would not differ from the amounts shown.
2. ACQUISITION OF OIL AND GAS ASSETS OF SMITH OFFSHORE EXPLORATION II
On October 10, 1994, the Company purchased substantially all of the oil and
gas assets (the Assets) of Smith Offshore Exploration II (Smith) from Phemus
Corporation (Phemus), a subsidiary of the President and Fellows of Harvard
College and sole stockholder of Smith, in exchange for 4,500,000 shares of the
Company's common stock, subject to adjustment pursuant to the terms of the
Agreement, and the assumption of certain liabilities related to the Smith
Assets. The acquisition gave the Company interests in 22 additional blocks in
the Outer Continental Shelf of the Gulf of Mexico. The Agreement provided that
1,000,000 of the shares issued be placed in escrow (the Escrow Shares) at the
closing and, thereafter, the Escrow Shares and certain warrants to acquire up to
a maximum of 800,000 shares of Common Stock would be issued to Phemus or
returned to the Company based on a valuation of oil and gas reserves
attributable to the Assets at a date to be selected prior to June 30, 1995, but
could be extended under certain circumstances until December 31, 1995. If such
valuation was less than $26,250,000, Smith and Phemus, jointly and severally,
would be obligated to pay the Company the amount by which $26,250,000 exceeded
the valuation, up to a maximum of
F-8
9
CAIRN ENERGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$3,900,000. The acquisition of Smith did not have a material effect on the
results of operations of the Company for 1994.
On the basis of a valuation of the Smith properties as of June 30, 1995, by
independent petroleum engineers reflecting a range of values below the Minimum
Valuation, Phemus and the Company entered into an agreement regarding the
purchase price adjustment under the Smith Acquisition Agreement pursuant to
which Phemus returned the Escrow Shares and paid $3.9 million to the Company.
The $3.9 million payment to the Company is reflected as a reduction of the cost
of the Smith properties. There was no adjustment in the Company's financial
statements for the return of the Escrow Shares because for financial accounting
purposes, the Escrow Shares were never recorded as having been issued.
3. LONG-TERM DEBT
The Company has a credit agreement as amended (the INCC Credit Agreement)
with ING (U.S.) Capital Corporation, f/k/a Internationale Nederlanden (U.S.)
Capital Corporation (INCC), Mees Pierson, N.V. (Mees Pierson) and Credit
Lyonnais (Credit Lyonnais). The INCC Credit Agreement is secured by
substantially all of the Company's assets. It contains financial covenants which
require the Company to maintain a ratio of current assets to current liabilities
(excluding the current portion of related debt) of no less than 1.0 to 1.0 and a
tangible net worth of not less than $40 million. The Company is currently in
compliance with such financial covenants. Prior to June 28, 1996, outstanding
borrowings accrued interest at either INCC's fluctuating base rate or INCC's
reserve adjusted Eurodollar rate plus 1.5% at the Company's option. On June 28,
1996, the INCC Credit Agreement was amended (the Third Amendment) to decrease
the addition to the INC reserve adjusted Eurodollar rate from 1.5% to 1.25% as
long as outstanding borrowings are less than 75% of the borrowing base. The
borrowing base was also increased from $45 million to $50 million.
On November 7, 1996, the Company further amended (the Fourth Amendment) the
INCC Credit Agreement. Under the Fourth Amendment, Credit Lyonnais joined as a
lender under the INCC Credit Agreement. Also under the Fourth Amendment, the
original facility under the INCC Credit Agreement was designated as Facility A
and the maximum amount of the facility was increased in amount from $50 million
to $75 million; provided, however, that the maximum amount available to the
Company cannot exceed the borrowing base of its properties as determined from
time to time by the lenders. The borrowing base under Facility A was reconfirmed
as of November 7, 1996, as $50 million. The revolving period of borrowings under
Facility A was extended from March 31, 1997 to September 30, 1997. On September
30, 1997, the borrowings outstanding under Facility A will be converted to a
term loan that requires quarterly repayments of principal on a revised schedule
through March 31, 2001. The Company's ability to borrow under Facility A is
dependent upon the reserve value of its oil and gas properties. If the reserve
value of the Company's borrowing base declines, the amount available to the
Company under Facility A will be reduced and, to the extent that the borrowing
base is less than the amount then outstanding under Facility A, the Company will
be obligated to repay such excess amount on 30-days notice from INCC or to
provide additional collateral. INCC, Mees Pierson, N.V., and Credit Lyonnais
have substantial discretion in determining the reserve value of the borrowing
base. At December 31, 1995 and 1996, the Company had outstanding borrowings of
$15.5 million and $42.0 million, respectively, under this facility.
In addition, a second facility was created under the Fourth Amendment. This
new standby credit facility, Facility B, is for the amount of $14 million.
Facility B provides for three levels of borrowings by the Company, two of $5
million each and one of $4 million. There are no restrictions on the Company's
ability to borrow the first $5 million under Facility B and the amount borrowed
may be used for general corporate purposes. The Company's ability to borrow
under the further two levels of borrowings of $5 million and $4 million,
respectively, under Facility B is dependent upon the Company establishing total
proved reserves at certain levels and appropriate ratios between the Company's
outstanding debt and the value of its proved reserves.
F-9
10
CAIRN ENERGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company must also submit detailed proposals, acceptable to its lenders,
outlining the manner in which the second two levels of borrowings under Facility
B will be used in the development of the Company's oil and gas properties.
Facility B is repayable on December 31, 1997. The interest margin over INCC
reserve adjusted Eurodollar rate for Facility B varies from 3.25% to 3.75%,
depending upon the ratio of the amount of the outstanding loans to the value of
the Company's proved reserves. Under the INCC Credit Agreement, interest is
payable quarterly on any base rate borrowings and payable on maturity of any
Eurodollar borrowings or at the end of three months if the maturity of the
Eurodollar borrowing is in excess of three months. At December 31, 1995 and
1996, there were no borrowings under Facility B.
The INCC Credit Agreement does not permit the Company to pay or declare any
cash or property dividends or otherwise make any distribution of capital. On
Facility A, the Company is obligated to pay a quarterly fee equal to 0.5% per
annum of the unused portion of the borrowing base under the facility and a
Letter of Credit fee for each Letter of Credit in the amount of 1.5% per annum
of the face amount of such Letter of Credit. On Facility B the Company is
obligated to pay a drawdown fee for each $5 million borrowed equal to 0.3% for
the first $5 million, 1.15% for the second $5 million and 1.6% for the last $4
million. Also, the Company must pay 0.5% per annum on the undrawn portion of
Facility B.
At December 31, 1996, the future minimum principal payments on the
Company's long-term debt subsequent to December 31, 1997 were as follows based
on borrowings outstanding at December 31, 1996: $16.8 million in 1998, $15.1
million in 1999, $6.7 million in 2000, and $3.4 million in 2001.
The carrying value of the Company's long-term debt approximates fair value.
4. STOCKHOLDERS' EQUITY
On October 10, 1994, the Company purchased substantially all of the oil and
gas assets of Smith in exchange for 4,500,000 shares of the Company's common
stock, subject to adjustment pursuant to the terms of the Agreement and the
assumption of certain liabilities (Note 2). For accounting purposes, the
1,000,000 Escrow Shares were not recorded as issued as a result of the June 30,
1995 valuation.
At the time of the Smith acquisition, the Company's then majority
shareholder, Cairn Energy PLC, sold 2,000,000 shares of the Company's common
stock to Phemus at a price of $7.50 per share. Cairn Energy PLC also sold
2,500,000 shares of Company common stock resulting in Cairn Energy PLC reducing
its ownership to approximately 17.5% of the Company's common stock in 1994.
A public offering of 1,562,500 shares of Common Stock at an offering price
of $11.25 per share was closed on September 18, 1995. The net proceeds,
aggregating approximately $16.6 million, were used to reduce borrowings under
the Company's credit agreement (Note 3). In conjunction with this offering, the
Company's principal shareholder, Phemus, sold 2,750,000 shares of the Company's
common stock.
In April and June 1995, Cairn Energy PLC sold its remaining 2,792,260
shares of Company common stock.
5. INCOME TAXES
The reconciliation of income taxes computed at the U.S. federal statutory
tax rates to income tax expense for the years ended December 31, 1994, 1995, and
1996, is as follows (in thousands):
LIABILITY METHOD
-----------------------------
1994 1995 1996
------- ------- -------
Income tax expense at statutory rate................ $ 222 $ 1,780 $ 2,257
Benefit of net operating loss carryforwards......... (222) (1,780) (2,257)
======= ======= =======
$ -- $ -- $ --
======= ======= =======
F-10
11
CAIRN ENERGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The computation of the net deferred tax asset (liability) at December 31,
1995 and 1996, follows (in thousands):
1995 1996
-------- --------
Deferred tax liabilities:
Property and equipment.................................... $ (8,702) $(12,780)
Deferred tax assets:
Net operating loss carryforward........................... 14,383 16,200
-------- --------
5,681 3,420
Less valuation allowance.................................... 5,681 3,420
======== ========
$ -- $ --
======== ========
At December 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $48 million. The net operating
losses will expire principally in 2005 through 2010, if not previously utilized.
Utilization of approximately $26 million of the net operating loss carryforwards
is subject to various limitations because of previous changes in ownership of
the Company, as defined in the Internal Revenue Code. Additional net operating
loss limitations may be imposed because of subsequent changes in stock ownership
of the Company.
6. EMPLOYEE BENEFIT PLANS
The Company sponsors a plan to provide retirement benefits under the
provisions of Section 401(k) of the Internal Revenue Code (the 401(k) Plan) for
all full-time employees. Employees may elect to contribute up to 15% of their
compensation. The Company matches 100% of the employee's contributions, up to 5%
of the employee's compensation. Beginning in 1995, at the end of each year, the
Company contributes Company common stock to each eligible employee's account
valued at the equivalent of 5% of each such employee's compensation. Benefits
under the 401(k) Plan are limited to the assets of the 401(k) Plan. The
Company's contributions in cash to the 401(k) Plan were $98,385, $62,678, and
$67,663 for the years ended December 31, 1994, 1995, and 1996, respectively. The
Company's contributions in Company common stock to the 401(k) Plan were 0,
4,864, and 6,669 shares for the years ended December 31, 1994, 1995, and 1996,
respectively.
The Company's Employee Incentive Bonus Plan was adopted in 1993 and revised
in 1994. The Employee Incentive Bonus Plan rewards those employees when the
Company has added proved reserves for the year in excess of its production for
the year, but only when such additional reserves have a finding and development
cost less than $1.00 per Mcf. Under the Employee Incentive Bonus Plan, the bonus
cannot exceed $250,000 in the aggregate and is allocated among the specified
employees based upon preset percentages except that individual bonuses can not
exceed 50% of salary. Any bonus earned for the year vests and is paid out to the
employees in three equal annual installments, subject to continued employment
with the Company. Based on reserve additions, the Company's employees were
awarded bonuses in the aggregate amount of $242,028 for the year ended December
31, 1994 under the Employee Incentive Bonus Plan. Such bonuses are being accrued
over the respective vesting periods. No incentive bonuses were awarded in 1995
or 1996.
In May 1993, the Company's stockholders ratified the adoption of the 1993
Stock Option Plan and the 1993 Directors' Stock Option Plan. The 1993 Stock
Option Plan authorizes the granting of incentive stock options and nonstatutory
stock options to key employees, including executive officers and directors of
the Company. The Company's Compensation Committee administers the 1993 Stock
Option Plan. Options granted under the 1993 Stock Option Plan may be either
incentive stock options or nonstatutory stock options, as determined in the
discretion of the Compensation Committee. The exercise price per share for an
option
F-11
12
CAIRN ENERGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shall be any price determined by the Compensation Committee; provided, however,
that the exercise price per share of incentive stock options shall not be less
than the fair market value of the Common Stock on the date of the grant of the
option. Each option is exercisable in such amounts, at such intervals, and on
such terms as the Compensation Committee determines in its sole discretion.
However, no option shall be exercisable during the six-month period following
the date of its grant, and no option shall be exercisable more than 10 years
after the date of its grant. The Company's stockholders approved an increase in
the number of shares reserved for issuance under the 1993 Stock Option Plan from
400,000 shares to 650,000 shares in May 1995 and another increase from 650,000
shares to 1,150,000 shares in May 1996. Also in May 1996, the stockholders
approved an amendment to the 1993 Stock Option Plan that provides that all
options held by an employee granted under the 1993 Stock Option Plan will vest
upon death of such employee and provides that the exercise period for such
options will be twenty-four months following death or termination of an
employee.
The 1993 Directors' Stock Option Plan authorizes the granting of
nonstatutory stock options to directors of the Company who are not and have not
been employees of the Company or any affiliated corporations except Cairn Energy
PLC (a Nonemployee Director). On the date a Nonemployee Director begins each
term that he serves as a member of the Board of Directors, such Nonemployee
Director will automatically receive an option to purchase 10,000 shares of
Common Stock. The exercise price per share for an option granted under the 1993
Directors' Stock Option Plan shall be the fair market value of the Common Stock
on the date of the grant. Each option is fully exercisable six months after the
date of its grant. However, no option may be exercised more than five years
after the date of its grant. In May 1996, the Company's stockholders approved an
increase in the number of shares reserved for issuance under the 1993 Directors'
Stock Option Plan from 150,000 shares to 270,000 shares.
A summary of the Company's stock option activity, and related information
for the years ended December 31, 1994, 1995, and 1996 follows:
1994 1995 1996
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
Outstanding at beginning of year..... 260,000 $5.38 460,000 $ 5.92 730,000 $ 8.42
Granted............................ 200,000 6.61 290,000 12.16 260,000 10.53
Exercised.......................... -- -- (20,000) 5.13 (7,000) 6.00
Canceled........................... -- -- -- -- (4,500) 11.67
------- ------- -------
Outstanding at end of year........... 460,000 $5.92 730,000 $ 8.42 978,500 $ 8.92
======= ======= =======
Exercisable at end of year........... 171,000 $5.52 324,500 $ 6.39 588,168 $ 7.95
======= ======= =======
Weighted-average fair value of
options granted during the year.... $ 2.28 $ 2.14
======= =======
Information related to options outstanding at December 31, 1996, is
summarized below:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- ------------------------
WEIGHTED
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AT REMAINING AVERAGE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISABLE PRICES 1996 LIFE (YEARS) PRICE 1996 PRICE
- --------------------------- ------------ ------------ -------- ------------ --------
$5.125 - $6.875............ 433,000 6.7 $ 5.95 376,000 $ 6.03
$10.00 - $12.50............ 545,500 6.5 11.27 212,168 11.35
------- -------
978,500 $ 8.92 588,168 $ 7.95
======= =======
F-12
13
CAIRN ENERGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation," (SFAS 123) requires the disclosure of pro forma net income
and earnings per share information computed as if the Company had accounted for
its employee stock options granted subsequent to December 31, 1994, under the
fair value method set forth in SFAS 123. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1995 and 1996, respectively: a
risk-free interest rate of 5.9%, a dividend yield of 0%, and a volatility factor
of 38.3%. The fair value of these options was estimated based on an expected
life of one year from the vesting date.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. In addition,
because SFAS 123 is applicable only to options granted subsequent to December
31, 1994, the pro forma information does not reflect the pro forma effect of all
previous stock option grants of the Company.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):
1995 1996
------ ------
Pro forma net income........................................ $5,032 $6,100
Pro forma earnings per share................................ $ .31 $ .35
7. OIL AND GAS HEDGING ACTIVITIES AND COMMITMENTS
While the use of hedging arrangements limits the downside risk of adverse
price movements, it may also limit future gains from favorable movements. All
hedging is accomplished pursuant to exchange-traded contracts or master swap
agreements based upon standard forms. The Company addresses market risk by
selecting instruments whose value fluctuations correlate strongly with the
underlying commodity being hedged. Credit risk related to hedging activities,
which is minimal, is managed by requiring minimum credit standards for
counterparties, periodic settlements, and mark to market valuations. The Company
has not historically been required to provide any significant amount of
collateral relating to its hedging activities.
At December 31, 1996, the Company had entered into various swap agreements
to fix selling prices for 630,000 MMBtus of natural gas during January through
March 1997 at a weighted average NYMEX price of $3.32 per MMBtu. While these
contracts have no carrying value, their fair value (the estimated amount that
would have been received by the Company upon termination of the swaps at
December 31, 1996) was approximately $198,000.
During the years ended December 31, 1994, 1995, and 1996, oil and gas
revenues were reduced by $54,000, increased by $323,000 and reduced by
$2,449,000 respectively, as a result of hedging transactions.
8. LEGAL PROCEEDINGS AND CLAIMS
The Company is subject to certain legal proceedings and claims that arise
in the ordinary conduct of its business. In the opinion of management, the
amount of ultimate liability, if any, with respect to these actions, will not
materially affect the consolidated financial condition or results of operations
of the Company.
F-13
14
CAIRN ENERGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. OPERATIONS
Nature of Operations
The Company, explores for, develops and produces oil and gas, principally
in the shallow waters of the Outer Continental Shelf ("OCS") of the Gulf of
Mexico. The Company's strategy is to expand its reserve base and production
principally through exploration and associated development drilling.
The Company's principal producing properties are located in the Gulf of
Mexico and consist of East Cameron Blocks 331/332, which began production in the
fourth quarter of 1994, Matagorda Block 710, which began production in the first
quarter of 1995, Galveston 343/363 Field which began production in 1990,
Vermilion Block 203 and Main Pass Block 262, which began production in the first
quarter of 1996 and Mustang Island Block 858 which began production in the third
quarter of 1996. Revenues from these six properties comprised approximately
74.1% of the Company's total revenues for the year ended December 31, 1996.
10. SUPPLEMENTARY INFORMATION
Capitalized Costs Related to Oil and Gas Producing Activities
The following table summarizes capitalized costs related to oil and gas
producing activities and the related amounts of accumulated depletion,
depreciation, and amortization at December 31, 1995 and 1996 (in thousands):
1995 1996
-------- --------
Proved oil and gas properties............................... $126,898 $180,808
Unproven properties......................................... 30,202 24,736
Accumulated depletion, depreciation, and amortization....... (59,502) (75,278)
-------- --------
Net capitalized costs....................................... $ 97,598 $130,266
======== ========
The unproven properties are excluded from the amortization base and consist
primarily of acreage acquisition costs, related geological and geophysical costs
and exploration drilling costs in progress or awaiting evaluation. The majority
of these costs are expected to be evaluated during the Company's 1997 and 1998
drilling programs.
Costs Incurred in Property Acquisition, Exploration, and Development
Activities
The table below represents costs incurred in oil and gas producing
activities (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------
1994 1995 1996
------- ------- -------
Acquisition of properties:
Proved.......................................... $ 1,405 $ -- $ --
Unproved........................................ 24,984 (1,372)(1) 7,197
Development costs.................................... 11,683 14,105 9,184
Exploration costs.................................... 7,827 16,529 32,566
------- ------- -------
$45,899 $29,262 $48,947
======= ======= =======
- ---------------
(1) Includes $3.9 million purchase price adjustment under the Smith Acquisition
Agreement. See Note 2.
F-14
15
CAIRN ENERGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Results of Operations from Oil and Gas Producing Activities
The table below presents revenue and expenses related to oil and gas
producing activities (in thousands):
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
------ ------- -------
Oil and gas sales...................................... $9,494 $25,742 $30,016
Expenses:
Operating costs...................................... 2,159 3,063 3,722
Production taxes..................................... 115 38 9
Depletion, depreciation, and amortization............ 4,255 13,490 15,973
------ ------- -------
6,529 16,591 19,704
------ ------- -------
Income from oil and gas producing activities........... $2,965 $ 9,151 $10,312
====== ======= =======
Depletion rate per equivalent Mcf...................... $ .94 $ 1.04 $ 1.33
====== ======= =======
The Company's oil and gas production is sold to various purchasers. The
following table lists purchasers of the Company's natural gas which accounted
for more than 10% of total revenues for the years indicated:
YEAR ENDED
DECEMBER 31,
--------------------
1994 1995 1996
---- ---- ----
Amoco Production Co......................................... 20% -- --
Coastal Corporation......................................... -- 22% 39%
Dow Hydrocarbons and Resources, Inc......................... 21% -- --
Enron Capital & Trade Resources............................. -- -- 10%
Mark Resources Corporation.................................. 11% -- --
Penn Union Energy Services.................................. -- -- 16%
Samedan Oil Corporation..................................... -- 12% --
Walter Oil and Gas Corporation.............................. 11% -- --
During 1995 and 1996, Samedan Oil Corporation also purchased oil from the
Company representing approximately 20% and 14%, respectively, of the Company's
total revenues. Management believes that the loss of these purchasers would not
have a material impact on the Company's consolidated financial condition or
consolidated results of operations.
Reserve Quantity Information (Unaudited)
All of the Company's reserves are located in the continental United States.
The Company's proved reserves at December 31, 1995 and 1996 were prepared by the
Company and reviewed by Ryder Scott Company, an independent petroleum
engineering firm.
Proved reserves (developed and undeveloped) are estimated quantities of oil
and gas that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under current
economic and operating conditions. The estimation of reserves is an interpretive
process that is subject to continuing revision as additional information becomes
available.
The Company's proved developed reserves are categorized as such based on
the availability of current production data, open-hole and cased-hole logs
analyses, and other productivity indications.
The estimation of proved undeveloped reserves was limited to direct offset
locations to existing wellbores and to geological formations that have shown to
be productive in the area.
F-15
16
CAIRN ENERGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reserve estimates are imprecise and may be expected to change as additional
information becomes available. Furthermore, estimates of oil and gas reserves,
of necessity, are projections based on engineering data, and there are
uncertainties inherent in the interpretation of such data as well as the
projection of future rates of production and the timing of development
expenditures. Reserve engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be measured in an exact
way, and the accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Accordingly, there can be no assurance that the reserves set forth herein will
ultimately be produced nor can there be assurance that the proved undeveloped
reserves will be developed within the periods anticipated. The Company
emphasizes with respect to the estimates prepared by independent petroleum
engineers that the discounted future net cash inflows should not be construed as
representative of the fair market value of the proved oil and gas properties
belonging to the Company, since discounted future net cash inflows are based
upon projected cash inflows which do not provide for changes in oil and gas
prices nor for escalation of expenses and capital costs. The meaningfulness of
such estimates is highly dependent upon the accuracy of the assumptions upon
which they are based.
The following is a reconciliation of the Company's estimated net quantities
of proved developed and undeveloped oil and gas reserves for the years ended
December 31, 1994, 1995, and 1996:
GAS OIL
(MMCF) (MBBL)
------- ------
Balance at December 31, 1993................................ 52,882 2,143
Acquisitions of reserves in-place......................... 3,018 32
Sales of reserves in-place................................ (2,902) (256)
Revisions of previous estimates........................... (1,690) (34)
Extensions and discoveries................................ 13,515 527
Production................................................ (3,940) (100)
------- -----
Balance at December 31, 1994................................ 60,883 2,312
Sales of reserves in-place................................ (2,060) (111)
Revisions of previous estimates........................... (4,596) (277)
Extensions and discoveries................................ 23,079 790
Production................................................ (10,403) (431)
------- -----
Balance at December 31, 1995................................ 66,903 2,283
Revisions of previous estimates........................... (2,777) 226
Extensions and discoveries................................ 28,127 2,656
Production................................................ (10,215) (273)
------- -----
Balance at December 31, 1996................................ 82,038 4,892
======= =====
Proved developed reserves:
December 31, 1993......................................... 20,637 525
December 31, 1994......................................... 44,893 1,813
December 31, 1995......................................... 52,996 1,292
December 31, 1996......................................... 56,734 1,656
The Company's principal developed properties are located in the Gulf of
Mexico, and are East Cameron Blocks 331/332, Vermilion Block 203, Main Pass
Block 262, Mustang Island Block 858, Matagorda Block 710, and Galveston 343/363
Field. As of December 31, 1995 and 1996, the Company's net interest in the
proved reserves of these properties was approximately 61.2 Bcfe and 63.9 Bcfe,
respectively. The Company's capital expenditures for 1997 are anticipated to be
approximately $47 million.
F-16
17
CAIRN ENERGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Standardized Measure of Discounted Future Net Cash Flows from Estimated
Production of Proved Oil and Gas Reserves After Income Taxes (Unaudited)
In the opinion of the Company's management, no major discovery or adverse
event has occurred since December 31, 1996, that would cause a significant
change in proved reserve quantities as estimated at December 31, 1996. Reserves
cannot be measured exactly because reserve estimates involve subjective
judgments. The estimates must be reviewed periodically and adjusted to reflect
additional information gained from reservoir performance, new geological and
geophysical data, and economic changes. The values expressed are estimates only
and may not reflect realizable values or fair market values of the oil and gas
ultimately extracted and recovered. The estimated future net revenues may not
accurately reflect proceeds of production to be received in the future from the
sale of crude oil, condensate, and natural gas currently owned. The present
value of estimated future net revenues does not necessarily reflect the actual
costs that would be incurred to acquire equivalent oil and gas reserves.
The following table sets forth a standardized measure of the discounted
future net cash flows attributable to the Company's proved oil and gas reserves.
Future cash inflows were computed by applying year-end oil and gas prices to the
estimated future production of proved reserves. The future production and
development costs represent the estimated future expenditures (based on current
costs) to be incurred in developing and producing the proved reserves, assuming
continuation of existing economic conditions. The timing of future development
costs is based on management's evaluation of the Company's projected cash flows
and financing resources. Future income tax expenses were computed by applying
statutory income tax rates to the difference between pretax net cash flows
relating to the Company's proved oil and gas reserves and the tax basis of
proved oil and gas properties and available net operating loss carryforwards and
statutory depletion, reduced by investment tax credits. Discounting the annual
net cash inflows at 10% illustrates the impact of timing on these future cash
inflows.
DECEMBER 31,
--------------------
1995 1996
-------- --------
(IN THOUSANDS)
Future cash inflows......................................... $204,357 $444,698
Future production costs..................................... 27,261 39,129
Future development costs.................................... 18,884 37,910
-------- --------
Future net cash inflows before future income taxes.......... 158,212 367,659
Future income taxes......................................... 16,378 70,138
-------- --------
Future net cash inflows..................................... 141,834 297,521
Adjustments to discount future annual inflows at 10%........ 38,272 94,908
-------- --------
Standardized measure of discounted future net cash
inflows................................................... $103,562 $202,613
======== ========
The average price for natural gas in the above computations was $2.40 and
$3.99 per Mcf at December 31, 1995 and 1996, respectively. The average price
used for crude oil in the above computations was $18.27 and $23.63 per barrel at
December 31, 1995 and 1996, respectively.
F-17
18
CAIRN ENERGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summary of Changes in the Standardized Measure of Discounted Future Net Cash
Flows from Estimated Production of Proved Oil and Gas Reserves After Income
Taxes (Unaudited)
The following table summarizes the principal factors comprising the changes
in the standardized measure of discounted future cash inflows (in thousands):
1994 1995 1996
-------- -------- --------
Standardized measure at beginning of year.......... $ 67,593 $ 74,635 $103,562
Sales and transfers, net of production costs....... (7,220) (22,641) (26,285)
Net change in sales prices and production costs.... (16,683) 15,078 67,559
Acquisitions of reserves in-place.................. 1,531 -- --
Extensions, discoveries, and improved recovery, net
of future production and development costs....... 19,495 46,251 100,001
Changes in estimated future development costs...... (7,085) (16,719) (6,293)
Development costs incurred during the period....... 11,683 14,105 9,184
Revisions of quantity estimates.................... (2,028) (8,803) (3,464)
Sales of reserves in place......................... (6,119) (3,262) --
Accretion of discount.............................. 7,834 7,870 11,552
Net change in income taxes......................... 7,354 (8,630) (32,650)
Changes in production rates (timing) and other..... (1,720) 5,678 (20,553)
======== ======== ========
Standardized measure at end of year................ $ 74,635 $103,562 $202,613
======== ======== ========
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1995 and 1996 is as follows (in
thousands, except per share amounts):
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
1995:
Revenues............................................ $5,034 $7,850 $7,206 $5,869
Net income.......................................... 807 1,564 1,297 1,567
Net income per common and common equivalent share... $ .05 $ .10 $ .08 $ .09
1996:
Revenues............................................ $7,287 $7,516 $7,554 $7,990
Net income.......................................... 2,590 871 893 2,284
Net income per common and common equivalent share... $ .15 $ .05 $ .05 $ .13
F-18
19
CAIRN ENERGY USA, INC.
STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(in thousands except per share amounts)
Revenues:
Oil and gas ..................... $ 6,293 $ 7,488 $ 14,583 $ 14,741
Other revenue ................... 68 28 135 62
--------- --------- --------- ---------
Total revenues .................. 6,361 7,516 14,718 14,803
Expenses:
Lease operating expenses ........ 1,000 1,004 1,765 1,632
Depreciation, depletion &
amortization .................. 3,763 4,653 7,234 7,897
Administrative expenses ......... 344 396 1,052 778
Interest ........................ 933 592 1,799 1,035
--------- --------- --------- ---------
Total expenses .................. 6,040 6,645 11,850 11,342
--------- --------- --------- ---------
Net income ............................ $ 321 $ 871 $ 2,868 $ 3,461
========= ========= ========= =========
Net income per common and
common equivalent share ......... $ 0.02 $ 0.05 $ 0.16 $ 0.20
========= ========= ========= =========
Weighted average common and
common shares outstanding ....... 17,566 17,559 17,565 17,557
========= ========= ========= =========
See accompanying notes.
F-19
20
CAIRN ENERGY USA, INC.
BALANCE SHEETS
ASSETS
June 30, December 31,
1997 1996
----------- -----------
(in thousands)
Current assets:
Cash and cash equivalent ........... $ 3,915 $ 6,438
Accounts receivable ................ 4,962 4,904
Prepaid expenses ................... 626 482
----------- -----------
Total current assets .......... 9,503 11,824
Property and equipment at cost:
Oil and gas properties, based on
full cost accounting .......... 223,516 205,544
Other equipment .................... 967 958
----------- -----------
224,483 206,502
Less accumulated depreciation,
depletion and amortization .... (83,106) (75,877)
----------- -----------
Net property and equipment ......... 141,377 130,625
Deferred charges, net of amortization .... 1,010 909
----------- -----------
Total assets ....................... $ 151,890 $ 143,358
=========== ===========
See accompanying notes.
F-20
21
CAIRN ENERGY USA, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
1997 1996
----------- -----------
(in thousands)
Current liabilities:
Accounts payable ......................... $ 5,519 $ 6,303
Accrued lease operating expenses ......... 368 492
Accrued well costs ....................... 2,408 3,803
Other accrued liabilities ................ 164 222
Current maturities of long-term debt ..... 10,000 --
----------- -----------
Total current liabilities ........... 18,459 10,820
Long-term debt ................................. 40,000 42,000
Stockholders' equity:
Common stock, $.01 par value;
30,000,000 shares authorized;
Shares issued and outstanding;
June 30, 1997 - 17,566,356 and
December 31, 1996 - 17,564,128 ...... 176 176
Additional paid-in capital ............... 94,859 94,834
----------- -----------
Accumulated deficit ...................... (1,604) (4,472)
----------- -----------
Total stockholders' equity .......... 93,431 90,538
----------- -----------
Total liabilities and
stockholders' equity ................ $ 151,890 $ 143,358
=========== ===========
See accompanying notes
F-21
22
CAIRN ENERGY USA, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
----------- ----------- ----------- ----------- -----------
Balance at
December 31, 1996 ...... 17,564 $ 176 $ 94,834 $ (4,472) $ 90,538
Net income ............ -- -- -- 2,868 2,868
Other ................. 2 -- 25 -- 25
----------- ----------- ----------- ----------- -----------
Balance at
June 30, 1997 .......... 17,566 $ 176 $ 94,859 $ (1,604) $ 93,431
=========== =========== =========== =========== ===========
See accompanying notes.
F-22
23
CAIRN ENERGY USA, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
1997 1996
----------- -----------
(in thousands)
Operating Activities:
Net income .......................................... $ 2,868 $ 3,461
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization ......... 7,234 7,897
Amortization of loan costs ....................... 193 191
Amortization of prepaid gathering costs .......... 42 --
Change in operating assets and liabilities:
Accounts receivable ............................ (59) (568)
Prepaid expenses ............................... (143) (313)
Accounts payable ............................... (1,280) 520
Accrued liabilities ............................ (158) (139)
Other .......................................... -- (6)
----------- -----------
Net cash provided by operating activities ............ 8,697 11,043
Investing Activities:
Exploration and development expenditures ......... (18,869) (31,902)
Proceeds from sale of natural gas and crude
oil properties ................................. -- 502
Additions to other equipment ..................... 15 (150)
----------- -----------
Net cash used in investing activities ................ (18,884) (31,550)
Financing Activities:
Proceeds from long-term debt .................... 8,000 18,500
Financing costs and other ....................... (336) 31
----------- -----------
Net cash provided by financing activities ............ 7,664 18,531
----------- -----------
Net change in cash and cash equivalents .............. (2,523) (1,976)
Cash and cash equivalents at beginning of period ..... 6,438 3,553
----------- -----------
Cash and cash equivalents at end of period ........... $ 3,915 $ 1,577
=========== ===========
Supplemental cash flow information
Interest paid in cash ................................ $ 1,606 $ 838
=========== ===========
F-23
24
CAIRN ENERGY USA, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) which are necessary for a fair presentation of the financial
position of the Company at June 30, 1997, the results of its operations for the
three and six months ended June 30, 1997 and 1996 and the results of its cash
flows for the six months ended June 30, 1997 and 1996. These financial
statements should be read in conjunction with the notes to the Company's annual
financial statements, which were included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996, filed with the Securities and
Exchange Commission (the "Commission") on March 5, 1997.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All intercompany accounts and
transactions have been eliminated in consolidation.
2. LONG-TERM DEBT.
Long-term debt at June 30, 1997 and December 31, 1996, consisted of
the following:
June 30, December 31,
1997 1996
------------- -------------
Revolving credit agreement ....................... $ 50,000,000 $ 42,000,000
Less: Current maturities of
long-term debt .......................... 10,000,000 --
------------- -------------
Long-term debt less current
maturities .............................. $ 40,000,000 $ 42,000,000
============= =============
The Company has a credit agreement, as amended (the "INCC Credit
Agreement") with ING (U.S.) Capital Corporation, f/k/a/ Internationale
Nederlanden (U.S.) Capital Corporation ("INCC"), Mees Pierson, N.V. ("Mees
Pierson") and Credit Lyonnais ("Credit Lyonnais") (together, the "Bank Group").
At June 30, 1997, the Company had outstanding borrowings of $50 million under
the INCC Credit Agreement. The INCC Credit Agreement is secured by
substantially all of the Company's assets. It contains financial covenants
which require the Company to
F-24
25
maintain a ratio of current assets to current liabilities (excluding the
current portion of related debt) of no less than 1.0 to 1.0 and a tangible net
worth of not less than $40 million. The Company is currently in compliance with
such financial covenants. Prior to June 28, 1996, outstanding borrowings
accrued interest at either INCC's fluctuating base rate or INCC's reserve
adjusted Eurodollar rate plus 1.5%, at the Company's option. On June 28, 1996,
the INCC Credit Agreement was amended, (the "Third Amendment") to decrease the
addition to the INCC reserve adjusted Eurodollar rate from 1.5% to 1.25% as
long as outstanding borrowings are less than 75% of the borrowing base. The
borrowing base was also increased from $45 million to $50 million.
On November 7, 1996 the Company further amended (the "Fourth
Amendment") the INCC Credit Agreement. Under the Fourth Amendment, Credit
Lyonnais joined as a lender under the INCC Credit Agreement. Also under the
Fourth Amendment, the original facility under the INCC Credit Agreement was
designated as Facility A and the maximum amount of the facility was increased
in amount from $50 million to $75 million; provided, however, that the maximum
amount available to the Company cannot exceed the borrowing base of its
properties as determined from time to time by the lenders. The borrowing base
under Facility A was reconfirmed as of November 7, 1996 at $50 million. The
revolving period of borrowings under Facility A was extended from March 31,
1997 to September 30, 1997. The Company's ability to borrow under Facility A is
dependent upon the reserve value of its oil and gas properties. If the reserve
value of the Company's borrowing base declines, the amount available to the
Company under Facility A will be reduced and, to the extent that the borrowing
base is less than the amount then outstanding under Facility A, the Company
will be obligated to repay such excess amount on 30-days' notice from INCC or
to provide additional collateral. The Bank Group has substantial discretion in
determining the reserve value of the borrowing base.
In addition a second facility was created under the Fourth Amendment .
The new standby credit facility, Facility B, was for the amount of $14 million.
Facility B provided for three levels of borrowings by the Company, two of $5
million each and one of $4 million. There are no restrictions on the Company's
ability to borrow the first $5 million under Facility B and the amount borrowed
may be used for general corporate purposes. The Company's ability to borrow
under the further two levels of borrowings of $5 million and $4 million,
respectively, under Facility B was dependent upon the Company establishing
total proved reserves at certain levels and appropriate ratios between the
Company's outstanding debt and the value of its proved reserves. The Company
must also submit detailed proposals, acceptable to its lenders, outlining the
manner in which the second two levels of borrowings under Facility B would be
used in the development of the Company's oil and gas properties. Facility B is
repayable on December 31, 1997. The interest margin over INCC's reserve
adjusted Eurodollar rate for Facility B is either 3.25% or 3.75%, depending
upon the ratio of the amount of the outstanding loans to the value of the
Company's proved reserves.
F-25
26
On March 17, 1997, a Fifth Amendment was added to the INCC Credit
Agreement. Under the Fifth Amendment, the borrowing base for Facility A was
increased from $50 million to $65 million and the amount available under
Facility B was reduced from $14 million to $10 million available in two levels.
The first level of borrowing under Facility B remained unchanged at $5 million
with no restrictions. The second level of borrowing under Facility B was set at
$5 million with similar restrictions as in the Fourth Amendment.
On July 1, 1997, a Sixth Amendment was added to the INCC Credit
Agreement. The only change resulting from the Six Amendment results in Facility
A converting to a term loan on January 1, 1998, instead of September 30, 1997,
as in the Fifth Amendment. On January 1, 1998, the borrowings outstanding under
Facility A will be converted to a term loan that requires quarterly repayments
of principal through April 1, 2001. Under the INCC Credit Agreement, interest
is payable quarterly on any base rate borrowings and payable quarterly and on
maturity of any Eurodollar borrowings if the maturity of the Eurodollar
borrowing is in excess of three months.
The INCC Credit Agreement does not permit the Company to pay or
declare any cash or property dividends or otherwise make any distribution of
capital. On Facility A the Company is obligated to pay a quarterly fee equal to
0.5% per annum of the unused portion of the borrowing base under the facility
and a Letter of Credit fee for each Letter of Credit in the amount of 1.5% per
annum of the face amount of such Letter of Credit. On Facility B the Company is
obligated to pay a drawdown fee for each $5 million borrowed equal to 0.5% for
the first $5 million, and 1.25% for the second $5 million. Also, the Company
must pay a quarterly fee equal to 0.5% per annum on the undrawn portion of
Facility B.
The carrying value of the Company's long-term debt approximates fair
value.
3. PROPERTY AND EQUIPMENT.
The Company capitalized approximately $810,000 and $758,000 of
internal costs during the six months ended June 30, 1997 and 1996,
respectively. Such capitalized costs include salaries and related benefits of
individuals directly involved in the Company's acquisition, exploration, and
development activities, based on a percentage of their time devoted to such
activities.
4. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact on both
primary and fully diluted earnings per share for the three and six month
periods ended June 30, 1997 and 1996 is not expected to be material.
F-26