1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-10753
WRT ENERGY CORPORATION
(Exact name of Issuer as specified in its charter)
DELAWARE 73-1521290
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1601 NW EXPRESSWAY, SUITE 700
OKLAHOMA CITY, OKLAHOMA 73118-1401
(405) 848-8808
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive office)
Indicate by check mark whether the Issuer (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 Issuer was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes[ ] No [ X ]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS.
Indicated by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No____.
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
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2
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
Prior to Effective Date of Plan of Reorganization:
Common Stock, $0.01 Par Value **
9% Convertible Preferred Stock, $0.01 par value **
Effective Date of Plan of Reorganization forward:
New Common Stock, $0.01 par value **
New 9% Convertible Preferred Stock $0.01 par value **
Effective July 11, 1997, all outstanding shares of common stock were
cancelled as part of WRT Energy Corporation's Plan of Reorganization under
Chapter 11 of the Federal Bankruptcy Code.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
** THE REGISTRANT'S COMMON STOCK AND 9% CONVERTIBLE PREFERRED STOCK WERE
QUOTED ON THE NASDAQ NATIONAL MARKET UNTIL FEBRUARY 29, 1996, AT WHICH TIME
NASDAQ TERMINATED ITS QUOTATION OF BOTH CLASSES OF SECURITIES DUE TO THE
FAILURE OF THE REGISTRANT TO MEET CERTAIN FINANCIAL AND OTHER CRITERIA FOR
CONTINUED QUOTATION. THE COMPANY'S NEW COMMON STOCK IS EXPECTED TO BE LISTED
ON THE NASDAQ NATIONAL MARKET AFTER THE COMPANY FILES CERTAIN DOCUMENTS WITH
NASDAQ AND THE SECURITIES AND EXCHANGE COMMISSION.
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WRT ENERGY CORPORATION
TABLE OF CONTENTS
FORM 10-Q QUARTERLY REPORT
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheet
September 30, 1997 (Unaudited) and December 31, 1996 5
Consolidated Statements of Operations (Unaudited)
For the Three and Nine Months Ended
September 30, 1997 and 1996 6
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 1997 and 1996 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 21
Disclosure Regarding Forward-Looking Statements 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 32
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WRT ENERGY CORPORATION
PART I. Financial Information
Item 1. Consolidated Financial Statements
September 30, 1997 and 1996
Forming a part of Form 10-Q Quarterly Report to the
Securities and Exchange Commission
This quarterly report on Form 10-Q should be read in
conjunction with WRT Energy Corporation's Annual Report
on Form 10-K for the year ended December 31, 1996
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WRT ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
(Reorganized (Predecessor
Company) Company)
ASSETS September 30, 1997 December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 6,730,000 $ 5,679,000
Accounts receivable, net of allowance for doubtful accounts of
$4,696,000 for September 30, 1997 and $4,716,000 for December 31, 1996 3,611,000 3,667,000
Prepaid expenses and other 514,000 633,000
------------- -------------
10,855,000 9,979,000
Cash held in escrow 861,000 831,000
Property and equipment:
Properties subject to depletion 77,793,000 77,541,000
Properties not subject to depletion 5,014,000 --
Other property, plant and equipment 3,062,000 5,118,000
------------- -------------
85,869,000 82,659,000
Accumulated depreciation, depletion and amortization (2,530,000) (25,760,000)
------------- -------------
83,339,000 56,899,000
Other assets 286,000 367,000
------------- -------------
$ 95,341,000 $ 68,076,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
- ---------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 6,852,000 $ 5,529,000
Due to affiliate 2,191,000 --
Pre-petition liabilities not subject to compromise -- 16,752,000
Pre-petition liabilities subject to compromise -- 136,346,000
------------- -------------
9,043,000 158,627,000
Long term liabilities:
Other non-current liabilities 351,000 --
Notes payable 15,209,000 --
------------- -------------
15,560,000 --
Shareholders' equity (deficit):
Preferred stock - $.01 par value, 1,000,000 authorized, none issued
and outstanding at September 30, 1997; 2,000,000 authorized,
1,265,000 issued and outstanding at December 31, 1996 -- 27,677,000
Common stock - $.01 par value, 50,000,000 authorized,
22,076,315 issued and outstanding at September 30, 1997; 221,000 95,000
50,000,000 authorized, 9,539,207 issued and outstanding at
December 31, 1996
Paid-in capital 71,772,000 39,571,000
Accumulated deficit (1,255,000) (157,562,000)
Treasury stock (35,100 shares at December 31, 1996;
none at September 30, 1997) -- (332,000)
------------- -------------
Total shareholders' equity (deficit) 70,738,000 (90,551,000)
------------- -------------
Commitments and contingencies $ 95,341,000 $ 68,076,000
============= =============
- See accompanying notes to consolidated financial statements -
- --------------------------------------------------------------------------------
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WRT ENERGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(Reorganized Company) (Predecessor Company)
Eighty-two Days Eleven Days Three Months Ended
Ended September 30, Ended July 11, September 30,
1997 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Revenues:
Gas sales $ 1,399,000 $ 211,000 $ 1,966,000
Oil and condensate sales 2,931,000 271,000 3,858,000
Other income 75,000 6,000 208,000
------------ ------------ -----------
Total revenues 4,405,000 488,000 6,032,000
Expenses:
Lease operating 1,762,000 232,000 1,529,000
Gross production taxes 400,000 43,000 488,000
Depreciation, depletion and amortization 2,530,000 190,000 2,014,000
General and administrative expenses 642,000 113,000 990,000
Provision for doubtful accounts -- -- --
Minimum production guarantee obligation -- -- --
------------ ------------ -----------
5,334,000 578,000 5,021,000
------------ ------------ -----------
Income (loss) from operations (929,000) (90,000) 1,011,000
------------ ------------ -----------
Interest expense 326,000 74,000 593,000
------------ ------------ -----------
Income (loss) before reorganization costs,
income taxes and extraordinary item (1,255,000) (164,000) 418,000
Reorganization costs -- 1,044,000 1,182,000
------------ ------------ -----------
Loss before income taxes and extraordinary item (1,255,000) (1,208,000) (764,000)
Income tax expense -- -- --
------------ ------------ -----------
Loss before extraordinary item (1,255,000) (1,208,000) (764,000)
Extraordinary item - gain on debt discharge -- (88,723,000) --
------------ ------------ -----------
Net income (loss) (1,255,000) 87,515,000 (764,000)
Dividends on preferred stock (undeclared on Predecessor Company) -- (87,000) (712,000)
------------ ------------ -----------
Net income (loss) available to common shareholders $ (1,255,000) $ 87,428,000 $(1,476,000)
============ ============ ===========
Per common share:
Income (loss) per common and common equivalent share $ (0.06) * *
============ ============ ===========
Average common and common equivalent
shares outstanding 22,076,000 * *
============ ============ ===========
* Amounts not meaningful as a result of the reorganization
- See accompanying notes to consolidated financial statements -
- --------------------------------------------------------------------------------
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WRT ENERGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(Reorganized Company) (Predecessor Company)
Eighty-two Days Six Months and 11 Nine Months Ended
Ended September 30, Days Ended July 11, September 30,
1997 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues:
Gas sales $ 1,399,000 $ 4,706,000 $ 7,665,000
Oil and condensate sales 2,931,000 5,432,000 10,571,000
Other income 75,000 126,000 262,000
------------ ------------ ------------
Total revenues 4,405,000 10,264,000 18,498,000
Expenses:
Lease operating 1,762,000 4,466,000 6,862,000
Gross production taxes 400,000 677,000 1,403,000
Depreciation, depletion and amortization 2,530,000 3,314,000 6,271,000
General and administrative expenses 642,000 2,474,000 3,157,000
Provision for doubtful accounts -- 71,000 4,278,000
Minimum production guarantee obligation -- -- 2,778,000
------------ ------------ ------------
5,334,000 11,002,000 24,749,000
------------ ------------ ------------
Income (loss) from operations (929,000) (738,000) (6,251,000)
------------ ------------ ------------
Interest expense 326,000 1,106,000 4,930,000
------------ ------------ ------------
Income (loss) before reorganization costs,
income taxes and extraordinary item (1,255,000) (1,844,000) (11,181,000)
Reorganization costs -- 4,771,000 6,040,000
------------ ------------ ------------
Loss before income taxes and extraordinary item (1,255,000) (6,615,000) (17,221,000)
Income tax expense -- -- --
------------ ------------ ------------
Net loss before extraordinary item (1,255,000) (6,615,000) (17,221,000)
Extraordinary item - gain on debt discharge -- (88,723,000) --
------------ ------------ ------------
Net income (loss) (1,255,000) 82,108,000 (17,221,000)
Dividends on preferred stock (undeclared on Predecessor Company) -- (1,510,000) (2,135,000)
------------ ------------ ------------
Net income (loss) available to common shareholders $ (1,255,000) $ 80,598,000 $(19,356,000)
============ ============ ============
Per common share:
Income (loss) per common and common equivalent share $ (0.06) * *
============ ============ ============
Average common and common equivalent
shares outstanding 22,076,000 * *
============ ============ ============
* Amounts not meaningful as a result of the reorganization
- See accompanying notes to consolidated financial statements -
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WRT ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Reorganized Company) (Predecessor Company)
Eighty-two Days Six Months and 11 Nine Months Ended
Ended September 30, Days Ended July 11, September 30,
1997 1997 1996
Cash flow from operating activities:
Net income (loss) $(1,255,000) $ 82,108,000 $(17,221,000)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Extraordinary item - gain on debt discharge -- (88,723,000) --
Depreciation, depletion, and amortization 2,530,000 3,314,000 6,271,000
Provision for doubtful accounts and notes receivable -- 71,000 4,278,000
Amortization of debt issuance costs -- (12,000) 681,000
Write-off of debt issuance costs and Senior Notes discount -- -- 5,605,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (324,000) 307,000 (3,676,000)
(Increase) decrease in prepaid expenses and other 244,000 (331,000) (110,000)
Increase (decrease) in accounts payable, distribution payables and
accrued liabilities 3,075,000 301,000 (17,392,000)
Pre-petition liabilities subject to compromise -- (268,000) 24,476,000
Pre-petition liabilities not subject to compromise -- -- 1,505,000
Minimum production guarantee obligation -- -- 2,778,000
Discharge of pre-petition liabilities -- (7,837,000) --
----------- ------------ ------------
Net cash provided (used) by operating activities 4,270,000 (11,070,000) 7,195,000
Cash flow from investing activities:
(Additions to) distributions from cash held in escrow 5,000 (22,000) (112,000)
Additions to property and equipment (2,888,000) (2,562,000) (3,548,000)
Proceeds from sale of oil and gas properties 35,000 -- --
----------- ------------ ------------
Net cash used in investing activities (2,848,000) (2,583,000) (3,660,000)
Cash flow from financing activities:
Proceeds from rights offering -- 13,300,000 --
Principal payments on borrowings (4,000) (15,014,000) (448,000)
Proceeds on borrowings -- 15,000,000 --
----------- ------------ ------------
Net cash (used in) provided by financing activities (4,000) 13,286,000) (448,000)
Net increase (decrease) in cash and cash equivalents 1,419,000 (367,000) 3,087,000
Cash and cash equivalents - beginning of period 5,311,000 5,679,000 1,608,000
----------- ------------ ------------
Cash and cash equivalents - end of period $ 6,730,000 $ 5,311,000 $ 4,695,000
=========== ============ ============
Supplemental Disclosures Of Cash Flow Information
Interest paid $ 66,000 $ 28,000 $ 28,000
Income taxes paid -- -- --
Supplemental Information Of Non-Cash Investing And Financing Activities
Accrued dividends on preferred stock (Undeclared on Predecessor Company) -- (1,510,000) (2,135,000)
- See accompanying notes to consolidated financial statements -
- --------------------------------------------------------------------------------
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WRT ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) DESCRIPTION OF BUSINESS
On February 14, 1996 ("Petition Date"), WRT Energy Corporation, a Texas
corporation and the predecessor of the Company ("Debtor") filed a petition with
the Bankruptcy Court for the Western District of Louisiana ("Bankruptcy Court")
for protection under Chapter 11 of the Federal Bankruptcy Code. Such case is
referred to herein as the "Reorganization Case". Upon filing of the voluntary
petition for relief, the Debtor, as debtor-in-possession, was authorized to
operate its business for the benefit of claim holders and interest holders, and
continued to do so, without objection or request for appointment of a trustee.
All debts of the Debtor as of the Petition Date were stayed by the bankruptcy
petition and were subject to compromise pursuant to such proceedings. The
Debtor operated its business and managed its assets in the ordinary course as
debtor-in-possession, and obtained court approval for transactions outside the
ordinary course of business. Based on these actions, all liabilities of the
Debtor outstanding at February 14, 1996 were reclassified to estimated
pre-petition liabilities.
By order dated May 2, 1997, the Bankruptcy Court confirmed the Joint
Plan of Reorganization (the "Plan") of WRT Energy Corporation and co-proponents
DLB Oil and Gas, Inc. ("DLB") and Wexford Management LLC ("Wexford," and
together with DLB "DLBW"). The Plan was consummated and became effective on July
11, 1997 (the "Effective Date"). On the Effective Date, the Debtor was merged
with and into a newly formed Delaware corporation named "WRT Energy Corporation"
("New WRT"). On the Effective Date, New WRT allocated the actual reorganization
value to the entity's assets as defined by Statement of Position Number 90-7
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7"). As used herein, "Debtor" refers to the registrant prior to the
Effective Date of the Plan, "New WRT" refers to the registrant following the
Effective Date of the Plan, and the "Company" or "WRT" refers to the registrant
prior to or after the Effective Date of the Plan, as the context requires.
Prior to bankruptcy, the Company was engaged in acquiring mature oil
and gas properties in the Louisiana Gulf Coast area and increasing both the
production and total oil and gas recovery through the use of advanced
technologies, including sophisticated radioactive logging equipment owned by the
Company and specialized fluid separation technologies. The Company also sought
to acquire properties that were developed prior to the invention of cased-hole
logging equipment in the 1970's and to reevaluate such properties with its own
radioactive logging equipment. This new cased-hole data was then analyzed by
experienced Company personnel to identify previously overlooked or deliberately
untested formations that may have yielded new commercial oil and gas production.
Previously produced formations were also studied to determine whether they could
have been restored to commercial production through the use of modern
completion, stimulation and production practices or the application of the
Company's fluid separation technologies. Subsequent to bankruptcy, the Company
seeks to exploit its existing properties and acquire additional Louisiana Gulf
Coast properties with exploitation and exploration potential.
The consolidated financial statements include the accounts of WRT and
its wholly owned subsidiary,
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WRT ENERGY CORPORATION
(A DEBTOR-IN-POSSESSION AS OF FEBRUARY 14, 1996)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
WRT Technologies, Inc. Until December 31, 1995, WRT owned 100% of the stock of
two subsidiaries, Tesla Resources, Inc. ("Tesla") and Southern Petroleum, Inc.
("Southern Petroleum"). On that date, both Tesla and Southern Petroleum were
merged into WRT with WRT emerging as the sole surviving corporation. In November
1995, WRT formed a wholly owned subsidiary, WRT Technologies, Inc., which was
established to own and operate WRT's proprietary, radioactive, cased-hole
logging technology. As part of the Plan, WRT Technologies, Inc. was dissolved
with the assets contributed to the New WRT. See Note 2 for a description of the
Plan. All significant intercompany transactions have been eliminated.
The accompanying consolidated financial statements and notes thereto
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and regulations.
The accompanying consolidated financial statements and note thereto should be
read in conjunction with the consolidated financial statements and notes
included in WRT's 1996 annual report on Form 10-K.
Certain reclassifications have been made to the 1996 and 1997
pre-effective date financial statements to conform to the 1997 post-effective
date presentation.
In the opinion of WRT's management, all adjustments (all of which are
normal and recurring) have been made which are necessary to fairly state the
consolidated financial position of WRT and its subsidiaries as of September 30,
1997, and the results of their operations, and their cash flows for the three
and nine month periods ended September 30, 1997 and 1996.
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities, the disclosure
of contingent assets and liabilities, and the reported amounts of revenues and
expenses during the reporting periods, to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(2) CHAPTER 11 BANKRUPTCY FILING
On February 14, 1996 ("Petition Date"), WRT Energy Corporation, a Texas
corporation and the predecessor of the Company ("Debtor") filed a petition with
the Bankruptcy Court for the Western District of Louisiana ("Bankruptcy Court")
for protection under Chapter 11 of the Federal Bankruptcy Code. Such case is
referred to herein as the "Reorganization Case". Upon filing of the voluntary
petition for relief, Debtor, as debtor-in-possession, was authorized to operate
its business for the benefit of claim holders and interest holders, and
continued to do so, without objection or request for appointment of a trustee.
All debts of the Debtor as of the Petition Date were stayed by the bankruptcy
petition and were subject to compromise pursuant to such proceedings. The
Debtor operated its business and managed its assets in the ordinary course as
debtor-in-possession, and obtained court approval for transactions outside the
ordinary course of business. Based on these actions, all liabilities of the
Debtor outstanding at February 14, 1996 were reclassified to estimated
pre-petition liabilities.
On October 22, 1996, the Company accepted and signed the proposal
("DLBW Proposal") submitted by DLB Oil & Gas, Inc. ("DLB") and Wexford
Management LLC, on behalf of its affiliated investment funds ("Wexford"),
providing the terms of a proposed capital investment in a plan of reorganization
for the
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WRT ENERGY CORPORATION
(A DEBTOR-IN-POSSESSION AS OF FEBRUARY 14, 1996)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Company. DLB and Wexford are collectively referred to herein as DLBW. The
Company subsequently obtained Bankruptcy Court approval of the expense
reimbursement provisions of the DLBW Proposal.
Subsequent to the Company's execution of the DLBW Proposal, DLB commenced
negotiations with Texaco Exploration and Production, Inc. ("TEPI") regarding,
(i) the claim asserted by TEPI against the Company and its affiliates ("Texaco
Claim"), (ii) the purchase of certain interests owned by TEPI in the West Cote
Blanche Bay Field (" WCBB Assets") and (iii) the Contract Area Operating
Agreement related to the WCBB Assets and various other agreements relating
thereto. As a result of the negotiations, TEPI and DLB reached an agreement
pursuant to which DLB (i) agreed to purchase the Texaco Claim, (ii) as required
by TEPI, agreed to purchase the WCBB Assets from TEPI, and (iii) agreed to
guarantee ("P&A Guarantee") the performance of all plugging and abandonment
obligations related to both the WCBB Assets and the Company's interests in West
Cote Blanche Bay Field ("WCBB") and, in order to implement the P&A Guarantee,
paid into a trust ("P&A Trust") established for the benefit of the State of
Louisiana, $1,000,000 on the July 11, 1997 Effective Date of the Plan.
By order dated May 2, 1997, the Bankruptcy Court approved WRT's and DLBW's
Joint Plan of Reorganization (the "Plan"). The Plan involved (i) the issuance
to WRT's unsecured creditors, on account of their allowed claims, an aggregate
of 10 million shares of New WRT Common Stock, (ii) the issuance to WRT's
unsecured creditors, on account of their allowed claims, of the right to
purchase an additional three million eight hundred thousand shares (3,800,000)
of New WRT Common Stock at a purchase price of $3.50 per share ("Rights
Offering"), (iii) the issuance to DLBW and affiliates of the number of shares
of New WRT Common Stock obtained by dividing DLBW's Allowed Secured Claim
("Secured Claim") amount by a purchase price of $3.50 per share, (iv) the
purchase by DLBW of all shares of New WRT Common Stock not otherwise purchased
pursuant to the Rights Offering, (v) the transfer by DLB of the WCBB Assets to
the Company along with the associated P&A trust fund and associated funding
obligation in exchange for five million shares (5,000,000) of New WRT Common
Stock, and (vi) the funding by WRT of $3,000,000 to an entity (the "Litigation
Entity") to which WRT will transfer any and all causes of action, claims,
rights of actions, suits or proceedings which have been or could be asserted by
WRT except for (a) the action to recover unpaid production proceeds payable to
WRT by Tri-Deck Oil & Gas Company and (b) the foreclosure action to recover
title to certain assets. Pursuant to the Plan, New WRT owns a 12% economic
interest in the Litigation Entity and the remainder of the economic interests
in the Litigation Entity will be allocated to unsecured creditors based on
their ownership percentage of the thirteen million eight hundred thousand
(13,800,000) shares issued as described in (i) and (ii) above. The Plan became
effective on July 11, 1997 (the "Effective Date").
Upon the July 11, 1997 Effective Date of the Plan, New WRT became the
owner of one hundred percent (100%) of the working interest in the shallow
contract area at WCBB. The proceeds from the Rights Offering were utilized to
provide the cash necessary to satisfy Administrative and Priority Claims
("APC"), fund the Litigation Entity with $3,000,000 and provide New WRT with
working capital. New WRT will continue to conduct business and own and operate
the oil and gas properties. The Litigation Entity will pursue Causes of Action
("Causes of Action") assigned to it under the Plan.
In accounting for the effects of emergence from Chapter 11, the Company
implemented Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code", issued by the American
Institute of Certified Public Accountants. Accordingly, the Company adopted
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WRT ENERGY CORPORATION
(A DEBTOR-IN-POSSESSION AS OF FEBRUARY 14, 1996)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
"fresh start" reporting in which the Company's assets and liabilities were
adjusted to reflect their estimated fair values and the accumulated deficit of
Old WRT was eliminated.
The July 11, 1997 effective date was used as the date for recording the
fresh start reporting adjustments. Adjustments to reflect the fair value of
individual assets and liabilities were based on independent reviews and
valuations and discounted present value of estimated future net cash flows.
Outside financial advisors assisted the Company and the Bankruptcy Court in
determining the reorganization value and the resulting beginning equity value in
compliance with SOP 90-7.
The adjustments to reflect the consummation of the Joint Plan,
including the $88,723,000 million gain on debt discharge of prepetition and
other liabilities and the adjustment for $11,260,000 million to record assets
at their estimated fair values, are reflected in the Company's Consolidated
Financial Statements as of and for the eighty-two day period ended September
30, 1997. The Company's emergence from Chapter 11 proceedings resulted in a new
reporting entity. Accordingly, the Company's Consolidated Financial Statements
for periods prior to July 11, 1997, are not comparable to the Consolidated
Financial Statements presented subsequent to July 11, 1997. Black lines on the
accompanying financial statements distinguish between pre-reorganization and
post-reorganization activity.
The effect of the Plan on the Company's Consolidated Balance Sheet as
of July 11, 1997, is as follows (in thousands):
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WRT ENERGY CORPORATION
PRO FORMA BALANCE SHEET
(UNAUDITED)
Predecessor Reorganized Reorganized
ASSETS Historical Adjustments Amounts
------------------------------------------------------------------- ------------- -------------
Current assets:
Cash and cash equivalents $ 3,714,000 $ (18,154,000)(c) $ 5,311,000
-- 14,906,000 (d) --
-- 13,300,000 (e) --
-- (3,000,000)(f) --
-- (2,963,000)(h) --
-- (2,492,000)(i) --
Accounts receivable 3,287,000 -- 3,287,000
Prepaid expenses and other 870,000 -- 870,000
------------- ------------- -------------
7,871,000 1,597,000 9,468,000
Cash held in escrow 852,000 -- 852,000
Property and equipment, net 56,147,000 11,726,000 (a) 83,017,000
15,144,000 (b) --
Debt issuance costs, net 379,000 (285,000)(c) 188,000
94,000 (d) --
------------- ------------- -------------
$ 65,249,000 $ 28,276,000 $ 93,525,000
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EARNINGS (DEFICIT)
-----------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 9,601,000 $ (2,059,000)(c) $ 5,830,000
(1,712,000)(i) --
Pre-petition liabilities not subject to compromise 16,734,000 (15,330,000)(c) 702,000
(272,000)(h)
(430,000)(i) --
Pre-petition liabilities subject to compromise 136,078,000 (765,000)(c) --
(123,106,000)(g)
(11,857,000)(h) --
(350,000)(i) --
------------- ------------- -------------
162,413,000 (155,881,000) 6,532,000
Long term debt -- 15,000,000 (d) 15,000,000
Shareholders' earnings (deficit):
Preferred stock 27,677,000 (27,677,000)(j) --
Common stock 95,000 56,000 (b) 221,000
38,000 (e) --
100,000 (g) --
27,000 (h) --
(95,000)(j)
Paid-in capital 39,570,000 15,088,000 (b) 71,772,000
13,262,000 (e) --
34,283,000 (g) --
9,139,000 (h)
(39,570,000)(j) --
Accumulated deficit (164,174,000) 11,726,000 (a) --
(285,000)(c) --
(3,000,000)(f)
88,723,000 (g) --
67,010,000 (j) --
Treasury stock (332,000) 332,000 (j) --
------------- ------------- -------------
Total shareholders' earnings (deficit) (97,164,000) 169,157,000 71,993,000
------------- ------------- -------------
Commitments and contingencies
$ 65,249,000 $ 13,276,000 $ 78,525,000
============= ============= =============
13
14
WRT ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Adjustments used in the preparation of the reorganized balance sheet are as
follows:
(a) To adjust oil and gas properties and other property and equipment to fair
market value in accordance with SOP 90-7.
(b) The Company issued 5,600,000 shares of New WRT stock in exchange for oil
and gas properties valued at $15,144,000.
(c) The INCC note of $15,000,000 was paid in full, including unpaid interest
accrued through July 11, 1997 of $3,154,000. Additionally, $285,000 of debt
issuance costs related to the INCC note were written-off.
(d) Financing was recorded from ING in the amount of $15,000,000 less $94,000
in loan fees which were deducted from the loan proceeds.
(e) The Stock Rights Offering in the amount of $13,300,000 was recorded
reflecting the issuance of 3,800,000 additional shares of New WRT stock at
$3.50 per share.
(f) Establishment of the Litigation Trust in the amount of $3,000,000.
(g) Unsecured claims in the amount of $123,106,000 were exchanged for
10,000,000 shares of New WRT stock and $2,963,000 in cash.
(h) Priority and secured claims in the amount of $12,129,000 were exchanged for
2,700,000 shares of New WRT stock.
(i) Payment of Administrative claims in the amount of $2,492,000.
(j) All of the currently outstanding preferred stock, common stock,
paid-in-capital and treasury stock were canceled, resulting in a decrease
in equity of $67,010,000.
Subsequent to the July 11, 1997 effective date, WRT adopted the same
accounting principles utilized by DLB, including the use of the full cost pool
method of accounting for oil and gas costs. Under the full cost method of
accounting, all costs of acquisition, exploration and development of oil and gas
reserves are capitalized into a "full cost pool" as incurred, and properties in
the pool are depleted and charged to operations using the units-of-production
method based on the ratio of current production to total proved oil and gas
reserves. To the extent that such capitalized costs, net of depreciation,
depletion and amortization, exceed the present value of estimated future net
revenues, discounted at 10%, from proved oil and gas reserves, after income tax
effects, such excess costs are charged to operations. Once incurred, a write
down of oil and gas properties is not reversible at a later date even if oil or
gas prices subsequently increase.
14
15
WRT ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
(3) SENIOR NOTE OFFERING AND CREDIT FACILITY
In December 1994, the Company entered into a $40,000,000 credit facility
(the "'Credit Facility") with International Nederlanden (U. S.) Capital
Corporation ("INCC") that was secured by substantially all of the Company's
assets. The Company borrowed $15,000,000 thereunder to purchase the Initial LLOG
Property ("LLOG"). In March 1995, $12,000,000 of the outstanding borrowings
under the Credit Facility was repaid from the proceeds of the Offering. During
1995, the Company borrowed an additional $12,000,000 under the Credit Facility,
bringing the outstanding borrowings to $15,000,000 the maximum amount of
borrowings available under the Credit Facility. On December 31, 1995, the Credit
Facility converted to a term loan whereby quarterly principal payments of
one-sixteenth of the outstanding indebtedness became due and payable.
In February 1995, the Company offered 100,000 Units consisting of
$100,000,000 aggregate principal amount of 13 7/8% Senior Notes Due 2002 (the
"Senior Notes") and warrants to purchase an aggregate of 800,000 shares of the
Company's Common Stock (the "Offering"'). The net proceeds from the Offering
were used to acquire a second group of oil and gas properties owned by LLOG (the
"Remaining LLOG Group"), to repay both the $7,500,000 bridge loan and
substantially all borrowings under the Credit Facility (defined herein), to
acquire an additional working interest in the West Cote Blanche Bay Field and
for general corporate purposes.
At July 10, 1997 and December 31, 1996, the Company was in default under
certain financial covenants of the Credit Facility. In addition, due to the
bankruptcy filing, the Company was in default under the Indenture ("Indenture")
pursuant to which the Senior Notes were issued. Accordingly, all such debt has
been classified as current in the Company's December 31, 1996 financial
statements. While in bankruptcy, INCC and holders of the Senior Notes were
stayed from enforcing certain remedies provided for in the Credit Facility and
the Indenture, respectively. The Company did not make the March 1, 1996 or
subsequent interest payments on the Senior Notes and pursuant to an order of the
Bankruptcy Court did not make the scheduled interest payment of $381,000 to INCC
on February 28, 1996 or any other subsequent interest payments. On the
Effective Date, the Company entered into a new loan agreement with ING (U.S.)
Capital Corporation (successor to INCC)("ING"), the terms of which required the
payoff of the $15,000,000 in principal and interest outstanding on the old
credit agreement with proceeds of the new loan. Also pursuant to the Plan, the
Senior Notes were cancelled.
On July 10, 1997, WRT entered into a New Credit Facility ("New Credit
Facility") with ING (U.S.) Capital Corporation. The maturity date of the New
Credit Facility is July 10, 1999. Under the terms of the New Credit Facility,
the Company may elect to be charged at the bank's fluctuating reference rate
plus 1.25% or the rate plus 3.0% at which Eurodollar deposits for one, two,
three or six months are offered to the bank in the Interbank Eurodollar. The New
Credit Facility contains restrictive covenants requiring, among other things,
specific financial ratios and restrictions on general and administrative
expenses.
(4) LOSS PER SHARE
Loss per share computations are calculated on the weighted average of
common shares and common share equivalents. Common stock options and warrants
are considered to be common share equivalents and are used to calculate loss per
common and common equivalent share except when they are anti-dilutive. Loss per
common and common equivalent share for the period ended September 30, 1997 does
not reflect the exercise of the options and warrants as the effect is
anti-dilutive.
15
16
WRT ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
(5) REORGANIZATION COSTS
During the eleven days ended July 11, 1997 of the Predecessor Company and the
three months ended September 30, 1996, the Company incurred $1,044,000 and
$1,182,000 in reorganization costs. During the six months and eleven days
ended July 11, 1997 of the Predecessor Company and the nine months ended
September 30, 1996 of the Reorganized Company, the Company incurred $4,771,000
and $6,040,000 in reorganization costs. Reorganization costs primarily consist
of legal and professional fee.
(6) JOINT VENTURE AGREEMENT
By a Joint Venture Agreement dated October 18, 1991 (the "Joint Venture
Agreement"), the Company entered into a joint venture to develop certain oil and
gas properties with Tricore Energy Venture, L.P., a Texas limited partnership
("Tricore"), and Stag Energy Corporation ("Stag").
Under the terms of the Tricore agreements, Tricore is to contribute the
capitalization required to complete the development of selected prospects, and
Stag and the Company are to contribute, or arrange for the contribution of, the
prospects to be developed.
The allocation of the net income, profits, credits, gains and losses of the
joint venture are distributed as follows:
Initial Ongoing
Party Allocation Allocation
----- ---------- ----------
Tricore 70% 55%
WRT 25% 35%
Stag 5% 10%
The distributions convert from the initial to the ongoing allocation upon
Tricore receiving aggregate distributions equal to 125% of its initial
contributions to the joint venture.
In March 1995, the Company contributed the K.G. Wilbert No. 1 well, located
in Iberville Parish, Louisiana, the Atkinson No. 2 well, located in Hayes Field
in Jefferson Davis Parish, Louisiana, and State Lease 8396 #1 and #2 wells,
located in South Atchafalaya Bay Field in St. Mary Parish, Louisiana, to the
joint venture and received $867,850 as compensation for the recompletion and
field services rendered. The cash received was a recovery of costs incurred, and
no field service revenues were recognized.
In July 1994, the Company contributed a portion of its interest in the
Exxon Fee #23 well, located in Lac Blanc Field in Vermilion Parish, to the
joint venture and received $1,200,000 as compensation for the recompletion of
the well. The cash received was a recovery of costs incurred and no field
service revenues were recognized.
In March 1993, the Company contributed the Delcambre No. 1 well, located
in Tigre Lagoon Field in Vermilion Parish, Louisiana and the Summers No. 1 well
located in North Rowan Field in Brazoria County, Texas, to the joint venture
and received $2,000,000 as compensation for recompletion and wireline services
rendered. The cash received was a recovery of costs incurred, and not field
service revenues related to the recompletion and wireline services rendered
were recognized.
In March 1992, Tricore paid the Company $1,300,000 for the turnkey
development of the Delcambre A-2 well located in Tigre Lagoon Field in
Vermilion Parish, Louisiana. The Company used the funds to recover the costs
of drilling the well and as compensation for wireline services rendered. The
Company recognized field service revenues to the extent that cash received
exceeded its costs in the property, however, no field service revenue was
recorded related to the initial 25% joint venture interest received.
The Company has provided Tricore with a limited production guarantee based
on the minimum production schedule attached to the Tricore joint venture
agreement. The minimum production schedule assumes that Tricore's cumulative
share of the future gross production from jointly-owned properties will average
4,250 Mcf per day during the period between October 1, 1996 and September 30,
1997, 2,350 Mcf per day during the period October 1, 1997 and September 30,
1998, and 699 Mcf per day during the period October 1, 1998 and September 30,
1999. The minimum production also assumes that all future gas production
allocated to Tricore will be sold at a price of $1.50 per Mcf. As long as either
the actual volume of natural gas delivered or the gross revenue allocated to
Tricore exceeds the cumulative values
16
17
WRT ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
reflected in the minimum production schedule, the Company will have no current
liability to Tricore under the production guarantee. Pursuant to the Joint
Venture Agreement, if the production during any annual period, commencing
October 1 through September 30, is less than the minimum production levels
required by the Joint Venture Agreement, the Company is required to eliminate
the annual production deficit by delivering sufficient quantities of gas from
other properties in twelve equal monthly installments, commencing the following
December 1, or by the issuance to the venture of registered debt or equity
securities which have a fair market value equal to the required payment. As
collateral for the Company's obligations under the production guarantee, Tricore
holds a partial assignment of an interest in the West Cote Blanche Bay Field.
This 4.68% working interest (3.72% net revenue interest) assignment was made
subject to the terms and provisions of the Joint Venture Agreement. Upon
satisfaction of the production guarantee, Tricore is required to execute and
deliver a release of the partial assignment.
As a result of significant production declines from jointly owned
properties, notably the Exxon Fee #23 well, production did not exceed the
minimum required under the guarantee for the period commencing October 1, 1995
to September 30, 1996. In addition, due to the substantial reserve losses
incurred during 1996 and 1995, the estimated future gross revenues from the
joint venture wells are not adequate over the remaining term of the guarantee.
As a result, the Company recorded in 1996 and 1995, minimum production guarantee
charges of $5,555,000 and $3,591,000, respectively. The $9,146,000 liability
recognized at December 31, 1996 represents the Company's estimated ultimate
obligation to the joint venture, including the disallowance of certain tax
credits as discussed below.
Pursuant to the terms of the production guarantee, if any of the gas
production from joint venture properties qualifies for the nonconventional fuels
tax credit provided for by Internal Revenue Code Section 29, then 150% of that
tax credit shall be included in the calculation of gross revenues for purposes
of the guarantee. Based upon a certification by the Louisiana Department of
Natural Resources ("DNR"), a significant amount of the production attributable
to the joint venture qualified under Section 107(c)(2) of the Natural Gas Policy
Act of 1978 (the "NGPA") as gas produced from geopressured brine. As required
under the NGPA, the DNR's determination was forwarded to the Federal Energy
Regulatory Commission ("FERC") for review. In April 1995, the FERC reversed the
position of the DNR, rejecting the qualification of the wells under Section
107(c)(2) of the NGPA. The Company appealed the FERC determination to the United
States Court of Appeals for the Fifth Circuit, located in New Orleans,
Louisiana. In February 1997, the United States Court of Appeals for the Fifth
Circuit affirmed the FERC's determination.
On January 14, 1997, the Company initiated an adversary proceeding to
obtain a declaration of the invalidity of the security interests or liens
securing Tricore's asserted secured claim of "up to $9,224,000" or alternatively
for avoidance of such security interests or liens pursuant to Sections 544 and
547 of the Bankruptcy Code. Such suit is pending as of the date of this report.
On March 7, 1997, the Company also filed an objection to the asserted claim of
Tricore (i) under Section 502(d) of the Bankruptcy Code seeking to disallow such
asserted claim in full on the grounds that Tricore is the transferee of a
transfer available under Sections 544 and 547 of the Bankruptcy Code, and (ii)
under Section 502(c) of the Bankruptcy Code seeking to estimate such asserted
claim on the grounds that it is a contingent claim the liquidation of which
would unduly delay the administration of the Reorganization Case. On June 19,
1997, Tricore filed an amendment to reduce their proof of claim to $9,064,000
from $9,224,000.
17
18
WRT ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Nevertheless, to the extent that Tricore is determined to be a secured claim,
the Plan provides for the claim to be paid in full. The Company is currently
negotiating a settlement with Tricore pursuant to their claim. See Part II,
Item 1 for further discussion.
(7) CONTINGENCIES
During 1996, WRT received notice from a third party claiming that WRT's
title has failed as to approximately 43 acres in the Bayou Pigeon Field. Some or
all of the acreage in dispute is considered to be productive in three separate
production units. Assuming that WRT's title is flawed, WRT's working interest in
three units would be reduced from 100% of each unit to approximately 7% (5%
NRI), 75% (63% NRI), and 95% (72% NRI), respectively. The financial statements
as of September 30, 1997 and for the year ended December 31, 1996 and for the
nine months ended September 30, 1997 and 1996, reflect operating results and
proved reserves discounted for this possible title failure. As the title failure
predates its ownership of the field, WRT is currently evaluating its recourse
against the predecessors-in-title relative to this issue.
During 1995, the Company entered into a marketing agreement with
Tri-Deck Oil and Gas Company ("Tri-Deck") pursuant to which Tri-Deck would
market all of WRT's oil and gas production. Subsequent to the agreement,
Tri-Deck's principal and WRT's Director of Marketing, James Florence,
18
19
WRT ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
assigned to Plains Marketing Tri-Deck's right to market WRT's oil production and
assigned to Perry Oil & Gas ("Perry Gas:) Tri-Deck's right to market WRT's gas
production. During early 1996, Tri-Deck failed to make payments to WRT
attributable to several months of WRT's gas production. Consequently, on May 20,
1996 the Company filed a Motion to Reject the Tri-Deck Marketing Agreement and
on May 29, 1996 the Company initiated an adversary proceeding against Tri-Deck
and Perry Gas. Perry Gas was the party which ultimately purchased the Company's
gas production for the months in question.
With respect to the Motion to Reject, the Bankruptcy Court authorized the
rejection and directed Tri-Deck and WRT to determine the amount of production
proceeds attributable to WRT's June 1996 gas production which are payable to
WRT. Thereafter, Perry Gas made payment to WRT of the June gas proceeds less
$75,000 for a set-off claim by Perry Gas, which is subject to further
consideration by the Bankruptcy Court.
Perry Gas subsequently filed an administrative claim in the Chapter 11
case, seeking recovery for damages allegedly arising out of WRT's conduct in
connection with its rejection of the Tri-Deck contract and related negotiations
with Perry Gas. By decision dated July 3, 1997, the Bankruptcy Court allowed,
in part, Perry Gas, administrative claim, in the aggregate amount of
approximately $64,000, and directed Perry Gas to obtain payment of such amount
from the Perry Setoff Escrow, which as result of this payment currently has a
balance of approximately $10,000.
With respect to the adversary proceeding, WRT sought recovery from Tri-Deck
and/or Perry Gas of all unpaid production proceeds payable to WRT under the
marketing agreement and the issuance of a temporary restraining order and
preliminary injunction against both parties to prevent further disposition of
such proceeds pending the outcome of the proceedings. On May 31, 1996, the
Bankruptcy Court entered a consensual temporary restraining order against both
Tri-Deck and Perry Gas. On June 18, 1996, a preliminary injunction was entered
by the Bankruptcy Court which required Perry Gas to segregate into a separate
depository account the funds due for the purchase of WRT's April and May 1996
gas production from Tri-Deck. Subsequently, upon motion by WRT the Bankruptcy
Court ordered such funds to be placed into the Bankruptcy Court's registry, as
Perry Gas had made certain withdrawals from the separate depository account
without authorization by the Bankruptcy Court. As of October 1, 1997, funds in
the amount of approximately $1,700,000 remain in the registry of the Bankruptcy
Court. On April 1, 1997, WRT moved for partial summary judgement with respect to
Perry Gas seeking release of the escrow funds, as well as additional funds from
Perry Gas attributable to previous miscalculations of the amounts owed by Perry
Gas. At a hearing held on May 27, 1997, the Bankruptcy Court denied WRT's
motion to the extent that it sought additional payments by Perry Gas to WRT and
reserved decision with respect to the disbursement to WRT of the funds currently
in the Court's registry. On July 9, 1997, Perry Gas filed its own summary
judgement motion with respect to its assertion that it is entitled to certain
adjustments for prior overpayments in the amount of approximately $120,000. At
oral argument on August 26, 1997, Perry requested permission to amend its motion
and subsequently filed an amended affidavit reducing the amount claimed to
approximately $51,000.
(8) EXAMINER'S REPORT
On August 13, 1996, the Bankruptcy Court executed and entered its Order
Appointing Examiner directing the United States Trustee to appoint a
disinterested person as examiner in the Company's bankruptcy case. The Court
ordered the appointed examiner ("Examiner") to file a report "of the
investigation conducted, including any fact ascertained by the examiner
pertaining to fraud, dishonesty, incompetence, misconduct, mismanagement or
irregularity in the management of the affairs of the Company".
Additionally, the Examiner investigated insider transactions involving
current and former officers of the Company, the Company's purchase of oil and
gas properties in the Napoleonville Field, the purchase of leases in the South
Hackberry and East Hackberry Fields, transactions related to the purchase and
sale of certain workover rigs and marine equipment and related contracts, the
marketing of the Company's oil and gas production, claims acquisition by an
investment company and transactions with a certain joint venture partner. The
Examiner's final report dated April 2, 1997 recommends numerous actions for
recovery of property or damages for the Company's estate which appear to exist
and should be pursued. Management does not believe the resolution of the matters
referred to in the Examiner's report will have a material impact on the
Company's consolidated financial statements or results of operations.
19
20
WRT ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Pursuant to the Plan, all of the Company's possible causes of action
against third parties (with the exception of certain litigation related to
recovery of marine and rig equipment assets and Tri-Deck), existing as of the
Effective Date of the Plan, transferred into a "Litigation Trust" controlled by
an independent party for the benefit of most of the Company's existing unsecured
creditors. The Company retains a 12% interest in the trust, net of Trustee fees
and expenses. Currently, management is aggressively pursuing those claims and
causes of action against Tri-Deck and Perry Gas relating to the recovery of
revenues for the sale of oil and gas production. See Note 7 above for additional
information concerning these claims. In addition, the Company has instituted
legal action to recover the aforementioned marine and rig equipment assets. The
Company has not recognized the potential value of recoveries which may
ultimately be obtained, if any, as a result of such causes of action, or
possible future actions, in the accompanying consolidated financial statements.
20
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DISCLOSURE REGARDING FORWARD - LOOKING STATEMENTS
This Form 10-Q includes "forward-looking statements" within the meaning
of Section 27A of the Securities Exchange Act of 1934 (the "Exchange Act"). All
statements, other than statements of historical facts, included in the Form 10-Q
that address activities, events or developments that the Company expects or
anticipates will or may occur in the future, including such things as estimated
future net revenues from oil and gas reserves and the present value thereof,
future capital expenditure (including the amount and nature thereof), business
strategy and measures to implement strategy, competitive strengths, goals,
expansion and growth of the Company's business and operations, plans, references
to future success, references to intentions as to future matters and other such
matters are forward-looking statements. These statements are based on certain
assumptions and analyses made by the Company in light of its experience and its
perception of historical trends, current conditions and expected future
developments as well as to other factors it believes are appropriate in the
circumstances. However, whether actual results and developments will conform
with the Company's expectations and predictions is subject to a number of risks
or uncertainties; general economic, market or business conditions; the
opportunities (or lack thereof) that may be presented to an pursued by the
Company; competitive actions by other oil and gas companies; changes in laws or
regulations; and other factors, many of which are beyond the control of the
Company. Consequently, all of the forward-looking statements made in the Form
10-Q are qualified by these cautionary statements and there can be no assurance
that the actual results or developments anticipated by the Company will be
realized, or even if realized, that they will have the expected consequences to
or effects on the Company or its business or operations.
The following discussion is intended to assist in an understanding of
the Company's financial position as of September 30, 1997, and its results of
operations for the three month and the nine month periods ended September 30,
1997 and 1996. The Consolidated Financial Statements and Notes included in this
report contain additional information and should be referred to in conjunction
with this discussion. It is presumed that the readers have read or have access
to WRT's 1996 annual report on Form 10-K.
21
22
FINANCIAL DATA (IN THOUSANDS)
(UNAUDITED) (Reorganized Company) (Predecessor Company)
Eighty-two Days Eleven Days Three Months Ended
Ended September 30, Ended July 11, September 30,
1997 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Revenues:
Oil and condensate sales $ 2,931 $ 271 $ 3,858
Gas sales 1,399 211 1,966
Other income 75 6 208
-------- --------- --------
Total revenues 4,405 488 6,032
Expenses:
Lease operating 1,762 232 1,529
Gross production taxes 400 43 488
General and administrative expenses 642 113 990
-------- --------- --------
2,804 388 3,007
EBITDA 1,601 100 3,025
Depreciation, depletion and amortization 2,530 190 2,014
Income (loss) before interest and taxes (929) (90) 1,011
Interest expense 326 74 593
Reorganization costs -- 1,044 1,182
Loss before income taxes and extraordinary item (1,255) (1,208) (764)
Income taxes deferred -- -- --
Net loss before extraordinary item (1,255) (1,208) (764)
Extraordinary item - gain on debt discharge -- 88,723 --
-------- --------- --------
Net income (loss) (1,255) 87,515 (764)
Dividends on preferred stock (undeclared on Predecessor Company) -- 87 712
-------- --------- --------
Net income (loss) available to common shareholders (1,255) 87,428 (1,476)
======== ========= ========
PER SHARE DATA
Net loss $ (0.06) (3) (3)
======== ========= ========
Weighted average common and common
equivalent shares (000's) 22,076 (3) (3)
======== ========= ========
(1) The components of production costs may vary substantially among wells
depending on the methods of recovery employed and other factors, but
generally include administrative overhead, maintenance and repairs and
labor and utilities.
(2) EBITDA is defined as earnings before interest, taxes, depreciation,
depletion and amortization. EBITDA is an analytical measure frequently used
by securities analysts and is presented to provide additional information
about the Company's ability to meet its future debt service, capital
expenditure and working capital requirements. EBITDA should not be
considered as a better measure of the Company's operating performance than
net income or as a better measure of liquidity than cash flow from
operations.
(3) Amounts are not meaningful as a result of the reorganization.
22
23
FINANCIAL DATA (IN THOUSANDS)
(UNAUDITED) (Reorganized Company) (Predecessor Company)
Eighty-two Days Six Months and 11 Nine Months Ended
Ended September 30, Days Ended July 11, September 30,
1997 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues:
Oil and condensate sales $ 2,931 $ 5,432 $ 10,571
Gas sales 1,399 4,706 7,665
Other income 75 126 262
-------- -------- --------
Total revenues 4,405 10,264 18,498
Expenses:
Lease operating 1,762 4,466 6,862
Gross production taxes 400 677 1,403
General and administrative expenses 642 2,474 3,157
Provision for doubtful accounts -- 71 4,278
Minimum production guarantee obligation -- -- 2,778
-------- -------- --------
2,804 7,688 18,478
-------- -------- --------
EBITDA 1,601 2,576 20
Depreciation, depletion and amortization 2,530 3,314 6,271
Income (loss) before interest and taxes (929) (738) (6,251)
Interest expense 326 1,106 4,930
Reorganization costs -- 4,771 6,040
-------- -------- --------
Loss before income taxes and extraordinary item (1,255) (6,615) (17,221)
Income taxes -- -- --
-------- -------- --------
Net loss before extraordinary item (1,255) (6,615) (17,221)
Extraordinary item - gain on debt discharge -- 88,723 --
-------- -------- --------
Net income (loss) (1,255) 82,108 (17,221)
Dividends on preferred stock (undeclared on Predecessor Company) -- 1,510 2,135
-------- -------- --------
Net income (loss) available to common shareholders (1,255) 80,598 (19,356)
======== ======== ========
PER SHARE DATA
Net loss $ (0.06) (3) (3)
======== ======== ========
Weighted average common and common
equivalent shares (000's) 22,076 (3) (3)
======== ======== ========
(1) The components of production costs may vary substantially among wells
depending on the methods of recovery employed and other factors, but
generally include administrative overhead, maintenance and repairs and
labor and utilities.
(2) EBITDA is defined as earnings before interest, taxes, depreciation,
depletion and amortization. EBITDA is an analytical measure frequently used
by securities analysts and is presented to provide additional information
about the Company's ability to meet its future debt service, capital
expenditure and working capital requirements. EBITDA should not be
considered as a better measure of the Company's operating performance than
net income or as a better measure of liquidity than cash flow from
operations.
(3) Amounts are not meaningful as a result of the reorganization.
23
24
COMPARISON OF THE EIGHTY-TWO DAYS ENDED SEPTEMBER 30, 1997 OF THE REORGANIZED
COMPANY AND THE ELEVEN DAYS ENDED JULY 11, 1997 OF THE PREDECESSOR COMPANY TO
THE THREE MONTHS ENDED SEPTEMBER 30, 1996
The following is a table which combines the operating results of the
eleven days ended July 11, 1997 of the Predecessor Company, herein after
referred to as "Old WRT", and the eighty-two days ended September 30, 1997 of
the Reorganized Company, herein after referred to as "New WRT". These combined
results are compared to the three months ended September 30, 1996 of Old WRT.
New WRT Old WRT Combined Results Old WRT
------------------ ----------------- ----------------- ------------------
Eighty-two days Eleven days Three Months Ended Three Months Ended
Ended September 30, Ended July 11, September 30, September 30,
1997 1997 1997 1996
------------------ ----------------- ----------------- ------------------
Revenues:
Gas sales $ 1,399,000 $ 211,000 $ 1,610,000 $ 1,966,000
Oil and condensate sales 2,931,000 271,000 3,202,000 3,858,000
Other income 75,000 6,000 81,000 208,000
------------------ ----------------- ----------------- ------------------
Total revenues 4,405,000 488,000 4,893,000 6,032,000
Expenses:
Lease operating 1,762,000 232,000 1,994,000 1,529,000
Gross production taxes 400,000 43,000 443,000 488,000
Depreciation, depletion and
amortization 2,530,000 190,000 2,720,000 2,014,000
General and administrative 642,000 113,000 755,000 990,000
------------------ ----------------- ----------------- ------------------
5,334,000 578,000 5,912,000 5,021,000
------------------ ----------------- ----------------- ------------------
Income (loss) from operations (929,000) (90,000) (1,019,000) 1,011,000
------------------ ----------------- ----------------- ------------------
Interest expense 326,000 74,000 400,000 593,000
------------------ ----------------- ----------------- ------------------
Income loss before reorgan-
ization costs, income taxes
and extraordinary item (1,255,000) (164,000) (1,419,000) 418,000
Reorganization costs -- 1,044,000 1,044,000 1,182,000
------------------ ----------------- ----------------- ------------------
Loss before income tax and
Extraordinary item (1,255,000) (1,208,000) (2,463,000) (764,000)
Income tax expense -- -- -- --
------------------ ----------------- ----------------- ------------------
Loss before extraordinary item (1,255,000) (1,208,000) (2,463,000) (764,000)
Extraordinary item-gain on debt
discharge - (88,723,000) (88,723,000) --
------------------ ----------------- ----------------- ------------------
Net income (loss) (1,255,000) 87,515,000 86,260,000 (764,000)
Dividends on preferred stock
(undeclared on Old WRT) - (87,000) (87,000) (712,000)
------------------ ----------------- ----------------- ------------------
Net income (loss) available
to common shareholders $ (1,255,000) $ 87,428,000 $ 86,173,000 $ (1,476,000)
================== ================= ================= ==================
Per common share:
Income (loss) per common and
common equivalent share $ (0.06) * * *
================== ================= ================= ==================
Average common share and common
equivalent shares outstanding 22,076,000 * * *
================== ================= ================= ==================
* Per share amounts are not meaningful due to reorganization.
24
25
During the three months ended September 30, 1997, Old and New WRT's
combined results report a net loss before extraordinary item, before undeclared
dividends on preferred stock on Old WRT, of $2.5 million. This is a 222%
increase from a net loss before undeclared dividends on preferred stock of $.8
million for the corresponding period in 1996. The increase in loss before
extraordinary item is due to the following factors:
OIL AND GAS REVENUES. During the three months ended September 30, 1997, the
Company's combined results report oil and gas revenue of $4.8 million, a 17%
decrease over $5.8 million for the comparable period in 1996. The decreased oil
and gas sales revenue during the combined period in 1997 is attributable
primarily to a combination of ordinary production declines, unexpected decreases
in production from several wells, and delays in expanding the Company's field
infrastructure to support its increased level of operations related to the West
Cote Blanche Bay properties. The following table summarizes the combined results
of the Company's oil and gas production and related pricing for the three months
ended September 30, 1997 and 1996:
Three months ended September 30,
1997 1996
------ ------
Oil production volumes (Mbbls) 168 179
Gas production volumes (Mmcf) 676 921
Average oil price (per Bbl) $19.06 $21.55
Average gas price (per Mcf) $2.38 $2.13
PRODUCTION COSTS. Production costs (lease operating expenses and gross
production taxes) increased $0.4 million, or 21%, from $2.0 million for the
three months ended September 30, 1996 to $2.4 million for the comparable period
in 1997. This increase is due primarily to the Company's acquiring an additional
50% working interest in WCBB in depths above the Rob "C" marker located at
approximately 10,500 feet, of which the Company is the operator.
DEPRECIATION, DEPLETION AND AMORTIZATION. Depreciation, depletion and
amortization increased $.7 million, or 35%, from $2.0 million for the three
months ended September 30, 1996 to $2.7 million for the comparable period in
1997. As a result of the fresh start accounting prescribed for companies exiting
bankruptcy, a new cost basis in assets is recognized based upon fair value of
the assets. Additionally, the Company, effective July 11, 1997, adopted the full
cost method of reporting property, plant and equipment (see Notes to
Consolidated Financial Statements for further discussion). These two factors do
not allow for a meaningful comparison to be made between the 1997 and 1996
periods. The increase in the cost of the oil and gas properties is offset
somewhat by a 3 Bcfe, or 16% decrease in oil and gas production.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased $0.2 million , or 24% from $1.0 million for the three months ended
September 30, 1996 to $0.8 million for the three months ended September 30, 1997
as a result of the Company's change in strategy resulting in a reduction in
personnel and general and administrative costs.
INTEREST EXPENSE. The decrease in interest expense of $.2 million, from $.6
million for the three months ended September 30, 1996 to $.4 million for the
comparable period in 1997, is primarily due to the Company having remained
current on miscellaneous notes payable during 1997.
25
26
REORGANIZATION COSTS. Reorganization costs decreased 12% from $1.2 million
for the three months ended September 30, 1996 to $1.0 million for the comparable
period in 1997. This decrease is primarily the result of the consummation of the
Company's Plan of Reorganization occurring on July 11, 1997 and a corresponding
decrease in bankruptcy related costs subsequent to that date.
26
27
COMPARISON OF THE EIGHTY-TWO DAYS ENDED SEPTEMBER 30, 1997 OF THE REORGANIZED
COMPANY AND THE SIX MONTHS AND ELEVEN DAYS ENDED JULY 11, 1997 OF THE
PREDECESSOR COMPANY TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996
The following is a table which combines the operating results of the
six months and eleven days ended July 11, 1997 of the Predecessor Company,
herein after referred to as "Old WRT", and the eighty-two days ended September
30, 1997 of the Reorganized Company, herein after referred to as "New WRT".
These combined results are compared to the nine months ended September 30, 1996
of Old WRT.
New WRT Old WRT Combined Results Old WRT
------------------ ----------------- ----------------- ------------------
Eighty-two days Six Months Eleven Nine Months Ended Nine Months Ended
Ended September 30, days Ended July 11, September 30, September 30,
1997 1997 1997 1996
------------------ ----------------- ----------------- ------------------
Revenues:
Gas sales $ 1,399,000 $ 4,706,000 $ 6,105,000 $ 7,665,000
Oil and condensate sales 2,931,000 5,432,000 8,363,000 10,571,000
Other income 75,000 126,000 201,000 262,000
------------------ ----------------- ----------------- ------------------
Total revenues 4,405,000 10,264,000 14,669,000 18,498,000
Expenses:
Lease operating 1,762,000 4,466,000 6,228,000 6,862,000
Gross production taxes 400,000 677,000 1,077,000 1,403,000
Depreciation, depletion and
amortization 2,530,000 3,314,000 5,844,000 6,271,000
General and administrative 642,000 2,474,000 3,116,000 3,157,000
Provision for doubtful accounts -- 71,000 71,000 4,278,000
Minimum production
guarantee obligation -- -- -- 2,778,000
------------------ ----------------- ----------------- ------------------
5,334,000 11,002,000 16,336,000 24,749,000
------------------ ----------------- ----------------- ------------------
Income (loss) from
operations (929,000) (738,000) (1,667,000) (6,251,000)
Interest expense 326,000 1,106,000 1,432,000 4,930,000
Loss before reorganization
costs, income taxes and
extraordinary item (1,255,000) (1,844,000) (3,099,000) (11,181,000)
Reorganization costs -- 4,771,000 4,771,000 6,040,000
------------------ ----------------- ----------------- ------------------
Loss before income tax
and extraordinary item (1,255,000) (6,615,000) (7,870,000) (17,221,000)
Income tax expense -- -- -- --
------------------ ----------------- ----------------- ------------------
Loss before extraordinary
item (1,255,000) (6,615,000) (7,870,000) (17,221,000)
Extraordinary item-gain on
debt discharge -- (88,723,000) (88,723,000) --
------------------ ----------------- ----------------- ------------------
Net income (loss) (1,255,000) 82,108,000 80,853,000 (17,221,000)
Dividends on preferred stock
(undeclared on Old WRT) -- (1,510,000) (1,510,000) (2,135,000)
------------------ ----------------- ----------------- ------------------
Net loss available to
common shareholders $ (1,255,000) $ 80,598,000 $ 79,343,000 $ (19,356,000)
================== ================= ================= ==================
Per common share:
Loss per common and
common equivalent share $ (0.06) * * *
================== ================= ================= ==================
Average common share and
common equivalent shares
outstanding 22,076,000 * * *
================== ================= ================= ==================
* Per share amounts are not meaningful due to reorganization
During the nine months ended September 30, 1997, the combined results
report a loss before extraordinary item before undeclared dividends on Preferred
Stock on Old WRT of $7.9 million. This is a 54% decrease from a net loss before
extraordinary item and undeclared dividends on preferred stock of $17.2 million
for the corresponding period in 1996. The decrease in loss is due to the
following factors:
OIL AND GAS REVENUES. During the nine months ended September 30, 1997, the
Company's combined results report oil and gas revenue of $14.5 million, a 21%
decrease over
27
28
$18.2 million for the comparable period in 1996. The decreased oil and gas sales
revenue during the combined period in 1997 is attributable primarily to a
combination of ordinary production declines, unexpected decreases in production
from several wells, and delays in expanding the Company's field infrastructure
to support its increased level of operations related to the West Cote Blanche
Bay field. The following table summarizes the combined results of the Company's
oil and gas production and related pricing for the nine months ended September
30, 1997 and 1996:
Nine months ended September 30,
1997 1996
------ -------
Oil production volumes (Mbbls) 414 531
Gas production volumes (Mmcf) 2,388 3,103
Average oil price (per Bbl) $20.20 $19.91
Average gas price (per Mcf) $2.56 $2.47
PRODUCTION COSTS. Production costs (lease operating expenses and gross
production taxes) decreased $1.0 million, or 12%, from $8.3 million for the nine
months ended September 30, 1996 to $7.3 million for the comparable period in
1997 due to decreases in production.
DEPRECIATION, DEPLETION AND AMORTIZATION. Depreciation, depletion and
amortization decreased $.5 million, or 7%, from $6.3 million for the nine months
ended September 30, 1996 to $5.8 million for the comparable period in 1997. This
decrease is due primarily to a 1.4 Bcfe, or 23% decrease in oil and gas
production. As a result of the fresh start accounting prescribed for companies
exiting bankruptcy, a new cost basis in assets is recognized based upon fair
value of the assets. Additionally, the Company, effective July 11, 1997,
adopted the full cost method of reporting property, plant and equipment (see
Notes to Consolidated Financial Statements for further discussion). These two
factors do not allow for a meaningful comparison to be made between the 1997
and 1996 periods.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses of
$3.2 million for the nine months ended September 30, 1996 remained consistent at
$3.1 million for the nine months ended September 30, 1997.
PROVISION FOR DOUBTFUL ACCOUNTS. Provision for doubtful receivables for the
nine months ended September 30, 1996, consists of an allowance of a receivable
in the amount of $4.3 million relating to the Tri-Deck legal proceeding (see
"Legal Proceedings"). During the nine months ended September 30, 1997, the
Company reserved $0.1 million of receivables.
MINIMUM PRODUCTION GUARANTEE OBLIGATION. The Company has provided Tricore
with a limited production guarantee based on the minimum production schedule
attached to the Tricore Joint Venture Agreement (see "Joint Venture Agreement").
Pursuant to the Joint Venture Agreement, if the production during any annual
period, commencing October 1 through September 30, is less that the minimum
production guarantee levels required by the Joint Venture Agreement, the Company
is required to eliminate the annual production deficit by delivering sufficient
quantities of gas from other properties in twelve equal monthly installments,
commencing the following December 1, or by the issuance to the venture of
registered debt or equity securities which have a full market value equal to the
required payment. As collateral for the Company's obligations under the
production guarantee, Tricore holds a partial assignment of an interest in the
WCBB Field. This 4.68% working interest (3.72% net revenue interest) assignment,
was made subject to the terms and provisions of the Joint Venture Agreement.
Upon satisfaction of the production guarantee, Tricore is required to execute
and deliver a release of the partial assignment. As a result, the Company
accrued $2.8 million during the nine months ended September 30, 1996 related to
its anticipated minimum production guarantee obligation.
INTEREST EXPENSE. The decrease in interest expense of $3.5 million from
$4.9 million during the nine months ended September 30, 1996 to $1.4 million for
the comparable period in
28
29
1997 is primarily due to the termination of the interest accrual on the $100
million in Senior Notes as of February 14, 1996 (the filing date of the Chapter
11 proceedings)
REORGANIZATION COSTS. Reorganization costs decreased 21% from $6.0 million
for the nine months ended September 30, 1996 to $4.8 million for the comparable
period in 1997. This decrease is primarily the result of the consummation of The
Company's Plan of Reorganization occurring on July 11, 1997 and a corresponding
decrease in bankruptcy related costs subsequent to that date.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow provided by operating activities for the nine months ended
September 30, 1997 was $6.8 million as compared to net cash flow provided by
operating activities of $7.2 million for the comparable period in 1996. This
increase is primarily due to the discharge of Pre-Petition liabilities in the
amount of $7,837,000 at the effective date of the Plan.
During the first nine months of 1997, the Company invested $5.5 million in
property acquisition and development, as compared to $3.5 million during the
comparable period in 1996.
Net cash provided in financing activities was $13.3 million for the nine
months ended September 30, 1997 as compared to net cash used of $0.5 million
during the same period in 1996. This decrease is a direct result of the
Company's Chapter 11 Bankruptcy filing in February 1996 and a resulting lack of
financing activity during 1996.
CAPITAL REQUIREMENTS AND RESOURCES
The Company continued the suspension of its property acquisition,
development and workover activities while remaining a debtor in possession,
performing only those workovers approved under court supervision. Commencing
with the Effective Date of the Plan, the Company commenced its program to
increase production rates, lengthen the productive life of wells and increase
total proved reserves primarily through sidetracks out of and recompletions of
shut-in wells and installation of hydrocyclones on gas wells producing large
volumes of formation water. In addition, certain sidetrack and development
drilling locations have been identified as improving reservoir drainage and
increasing the ultimate recovery of reserves. Pursuant to this strategy, the
Company will be required to make substantial capital expenditures to fully
develop its oil and gas reserves. The Company's capital budget for 1997 is
approximately $9,132,000. Funding for this capital budget is anticipated to come
primarily from cash flows form operations, including 50% interest in the West
Cote Blanche Bay properties acquired as part of the Reorganization Plan, along
with available net proceeds from the stock rights offering of approximately
$1,597,000.
On the Effective Date, the Company received gross proceeds from a stock
rights offering of $13,300,000. Proceeds of this offering were used to pay the
interest and loan fees in connection with the INCC loan of $3,248,000, fund the
litigation trust called for in the Plan of $3,000,000, pay pre-petition claims
of $2,963,000 and pay administrative claims of $2,492,000 leaving $1,597,000
which provided additional working capital for the Company.
In addition, on the effective date, the Company exchanged $123,845,000 in
unsecured debt for 10,000,000 common shares of New WRT stock and DLBW and Dublin
Acquisitions exchanged $9,293,000 of secured debt for 2,655,000 shares of New
WRT Stock.
ITEM 1. LEGAL PROCEEDINGS
On December 10, 1992, the Company, one of its executives, a former
executive and others instituted a lawsuit against Bear, Stearns & Co. Inc.
("Bear Stearns"), Drake Capital Securities, Inc. ("Drake"), Steven Antebi
("Antebi") and Jerry Friedman ("Friedman") in the District Court of Harris
County, Texas 133rd Judicial District. After settling with Drake and Friedman,
the plaintiffs commenced trial on February 28, 1995. On March 21, 1995, the jury
returned a verdict in favor of the Company and five of the Company's
shareholders against Antebi for approximately $1,100,000. Pursuant to the jury
verdict, advice of outside counsel and management's belief that recovery of its
legal fees was probable, the Company recorded as a receivable approximately
$1,100,000 of costs incurred in connection with the litigation. The Company,
however, considered the jury verdict to be insufficient. Accordingly, the
Company requested, and on August 4, 1995 was granted a new trial. Absent the
jury verdict from the original trial, and considering the uncertainty regarding
the timing of possible recovery in a new trial, the Company and its outside
counsel concluded that they could no longer consider the recovery of the
receivable to be probable. Therefore, the Company recorded a provision for this
receivable in the third quarter of 1995. Prior to commencement of the new
trial, the case went to mediation and was settled on February 16, 1996 for
$600,000 plus court costs of approximately $69,000,subject to the approval of
the Bankruptcy Court. Consequently on April 22, 1996, WRT filed a Motion for
Authority to Compromise the litigation, requesting that the settlement be
approved and that the distribution of proceeds generated therefrom be authorized
to the respective parties to the litigation pursuant to the settlement agreement
reached. Due to objections raised as to the distribution of the litigation
proceeds, the Bankruptcy Court approved the settlement agreement but instructed
that a subsequent Motion be provided to resolve the issue of disposition of the
proceeds. As a result, on August 27, 1996, WRT filed a Motion for Authorization
to finally settle distribution of the litigation proceeds. On September 10,
1996, the Bankruptcy Court approved such motion and the proceeds have since been
distributed accordingly, including the distribution of approximately $145,000 to
WRT, which was recorded as Other Income for the year ended December 31, 1996,
Settlement funds of $154,000 attributable to one of the Company's former
executives have been held in escrow, pending final resolution of claims of the
WRT's bankruptcy estate if any, against the former executive.
In 1994, the Company received a certification from the DNR qualifying
certain gas production under Section 107(c)(2) of the Natural Gas Policy Act of
1978 the NGPA as gas produced from geopressured brine. As required under the
NGPA, the DNR's determination was forwarded to the FERC for review. In April
1995, the FERC reversed the position of the DNR, rejecting the qualification of
the wells under Section 17(c)(2) of the NGPA. The Company appealed the FERC
determination to the United States Court of Appeals for the Fifth Circuit,
located in New Orleans, Louisiana. In February 1997, the United States Court
of appeals for the Fifth Circuit affirmed the FERC's determination.
On December 18 and 19, 1995, two class-action shareholders' suits were
filed in the United States District Court for the Southern District of
California, seeking damages on behalf of a purported class of persons who
purchased the publicly-traded securities of the Company between October 20, 1993
and October 27, 1995. In these complaints, the plaintiffs have sued the
Company, certain members of its Board of Directors, and others alleging joint
and several liability for violations of Section 12(2) and Section 15 of the
Securities Act of 1933. The plaintiffs also complain that all defendants
violated Section 10(b) of the Securities Exchange Act of 1934 and Rule l0b-5 of
the Securities Exchange Commission. The individual defendants are alleged to be
liable under Section 20(a) of the Securities Exchange Act of 1934. On February
23, 1996, a Notice of Stay by reason of the Company's bankruptcy was filed in
both actions. On March 21, 1996, all parties entered into a Stipulation whereby
plaintiffs agreed to consolidate the two actions under an amended and
consolidated complaint. On June 1, 1996, by agreement of all parties, the case
was transferred to the Southern District of New York. By order dated May 2,
1997, the Bankruptcy Court disallowed this lawsuit in full as it relates to the
Company. As a result of the Bankruptcy Court's disallowance of this lawsuit,
the litigation will not have an effect on the Company's financial condition or
results of operations.
On September 28, 1995, a lawsuit was served against the Company, Arnoult
Equipment and Construction, Inc., Steven S. McGuire, Donald J. Arnoult and
others in the 24th Judicial District Court for the Parish of Jefferson, State of
Louisiana. The plaintiff, the former president, chief executive officer and
stockholder in certain oilfield service companies used by the Company in its
field development activities, alleged that the Company and others interfered
with his employment, ultimately resulting in his forced resignation from such
companies. The plaintiff further alleged the Company and others acted in a
manner that resulted in the devaluing of the services company's assets and
plaintiff's corresponding equity holdings in the companies. On November 9, 1995,
the Company, et al filed with the Court exceptions of no cause of action, no
right of action and vagueness. On June 6, 1997, the Bankruptcy Court disallowed
this lawsuit in full.
During 1996, WRT received notice from a third party claiming that WRT's
title has failed as to approximately 43 acres in the Bayou Pigeon Field. Some
or all of the acreage in the dispute is considered to be productive in three
separate production units. Assuming that WRT's title is flawed, WRT's working
interest in three units may be reduced from 100% of each unit to approximately
7% (5% NRI), 75% (63% NRI), and 95% (72% NRI), respectively. The financial
statements as of June 30, 1997 and December 31, 1996 and for the six month
periods ended June 30, 1997 and 1996, reflect operating results and proved
reserves discounted for this possible title failure. As the title failure
predates its ownership of the field, WRT is currently evaluating its recourse
against the predecessors-in-title relative to this issue.
During 1995, the Company entered into a marketing agreement with Tri-Deck
Oil and Gas Company ("Tri-Deck") pursuant to which Tri-Deck would market all of
WRT's oil and gas production. Subsequent to the agreement, Tri-Deck's principal
and WRT's Director of Marketing, James Florence, assigned to Plains Marketing
Tri-Deck's right to market WRT's oil production and assigned to Perry Oil & Gas
("Perry Gas") Tri-Deck's right to market WRT's gas production. During early
1996, Tri-Deck failed to make payments to WRT attributable to several months of
WRT's gas production. Consequently, on May 20, 1996, the Company filed a Motion
to Reject the Tri-Deck Marketing Agreement, and on May 29, 1996, the Company
initiated an adversary proceeding against Tri-Deck and Perry Gas. Perry Gas was
the party which ultimately purchased the Company's gas production for the months
in question.
With respect to the Motion to Reject, the Bankruptcy Court authorized the
rejection and directed Tri-Deck and WRT to determine the amount of production
proceeds attributable to WRT's June 1995 gas production which are payable to
WRT. Thereafter, Perry Gas made payment to WRT of the June 1995 gas proceeds
less $75,000 for a set-off claim by Perry Gas, which is subject to further
consideration by the Bankruptcy Court. Perry Gas subsequently filed an
administrative claim in the Chapter 11 case, seeking recovery for damages
allegedly arising out of WRT's conduct in connection with its rejection of the
Tri-Deck contract and related negotiations with Perry. By decision dated July
3, 1997, the Bankruptcy Court allowed, in part, Perry Gas' administrative claim,
in the aggregate amount of approximately $64,000, and directed Perry Gas to
obtain payment of such amount from the Perry Setoff Escrow, which as result of
this payment, currently has a balance of approximately $10,000.
With respect to the adversary proceeding, WRT sought recovery from Tri-Deck
and/or Perry Gas of all unpaid production proceeds payable to WRT under the
marketing agreement and the issuance of a temporary restraining order and
preliminary injunction against both parties to prevent further disposition of
such proceeds pending the outcome of the proceedings. On May 31, 1996, the
Bankruptcy Court entered a consensual temporary restraining order against both
Tri-Deck and Perry Gas. On June 18, 1996, a preliminary injunction was entered
by the Bankruptcy Court which required Perry Gas to segregate in to a separate
depository account the funds due for the purchase of WRT's April and May 1996
gas production from Tri-Deck. Subsequently, upon motion by WRT the Bankruptcy
Court ordered such funds to be placed into the Bankruptcy Court's registry, as
Perry Gas had made certain withdrawals from the separate depository account
without authorization by the Bankruptcy Court. As of October 1, 1997, funds in
the amount of approximately $1,700,000 remained in the registry of the
Bankruptcy Court. On April 1, 1997, WRT moved for partial summary judgement
with respect to Perry Gas seeking release of the escrow funds, as well as
additional funds from Perry Gas attributable to previous miscalculations of the
amounts owed by Perry Gas. At a hearing held on May 27, 1997, the Bankruptcy
Court denied WRT's motion to extent that it sought additional payments by Perry
Gas to WRT and reserved decision with respect to the disbursement to WRT of the
funds currently in the Court's registry. On July 9, 1997, Perry Gas filed its
own summary judgement motion with respect to its assertion that it is entitled
to certain adjustments for prior overpayments in the amount of approximately
$120,000. On August 26, 1997, Perry requested permission to amend its motion
and subsequently filed an amended affidavit reducing the amount claimed to
approximately $51,000.
On August 21, 1997, WRT filed a motion for leave to amend the adversary
complaint, which amended would, among other things, name as defendants, in
addition to Tri-Deck and Perry Gas, James Florence, Beth Perry Sewell, Steve
McGuire, Ronald Hale and Mark Miller, and included several additional causes of
action against both the original and these additional defendants. Oral argument
with respect to WRT's motion for leave to amend was heard on September 16, 1997,
and the motion is currently under review. In light of the pendency of WRT's
motion to amend, by Order dated September 5, 1997, the Court denied WRT's motion
for partial summary judgement, which had been under advisement since May, 1997.
Ultimate resolution of the WRT - Tri-Deck - Perry Gas dispute, and thus
recovery by WRT of all amounts owed by Tri-Deck or Perry Gas, will also entail
Bankruptcy Court disposition of a counterclaim by Tri-Deck seeking, among other
things, damages for alleged tortious interference by WRT with Tri-Decks'
contractual relations with other Tri-Deck customers. Although management
believes that Tri-Deck's claim to the funds in the registry of the Bankruptcy
Court is invalid, and the aforementioned counterclaim is without merit, for
financial reporting purposes the receivable from Tri-Deck was fully reserved for
as of June 30, 1997.
On January 14, 1997, WRT initiated an adversary proceeding, WRT Energy
Corp. v Tri-Core Energy, L.P., (Adv. Pro. No 97AP-5003), in United States
Bankruptcy Court, Western District of Louisiana, Lafayette Opelousas Division,
to obtain a declaration of the invalidity of the security interest or liens
allegedly securing Tricore Energy Venture, LP's ("Tricore") asserted secured
claim of "up to $9,064,000" (as amended) or alternatively for avoidance of such
security interest or liens pursuant to Section 544 and 547 of the Bankruptcy
Code. Such suit is pending as of the date of this report. On March 7, 1997,
the Company also filed an objection to both the allowance and amount of
Tricore's claim. The objection has been consolidated with the adversary
proceeding. On August 6, 1997, the Bankruptcy Court issued an opinion holding
that Tricore's asserted security interest and liens were invalid under Louisiana
law. See further explanation regarding Tricore at Note 16, "Joint Venture
Agreement" to the Company's Consolidated Financial Statements. The Company is
currently negotiating a settlement with Tricore pursuant to their claim.
29
30
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by item 601 of Regulation S-K are as follows:
10.0 Final Order Authorizing Use of Proceeds from Oil and Gas Operations.
(1)
10.1 Letter agreement by and among WRT Energy Corporation, DLB Oil & Gas,
Inc. and Wexford Management, LLC dated October 22, 1996.(2)
10.2 Debtor's and DLBW's First Amended Joint Plan of Reorganization Under
Chapter 11 of the United States Bankruptcy Code dated January 20,
1997. (3)
10.3 First Amended Disclosure Statement Under 11 U.S.C. 1125 In Support of
Debtor's and DLBW's First Amended Joint Plan of Reorganization Under
Chapter 11 of the United States Bankruptcy Code dated January 20,
1997. (3)
10.4 Second Amended Joint Plan of Reorganization. (4)
10.5 Second Amended Disclosure Statement. (4)
3.1 Articles of Incorporation
3.2 Bylaws
4.2 Credit Agreement
4.3 Employment Agreement
(b) Registrant filed the following reports on Form 8-K's
Form 8-K filed on July 22, 1997 announcing consummation of the Second
Amended Joint Plan of Reorganization.
30
31
Reorganization as amended.
(1) Filed with Form 8-K dated March 14, 1997.
(2) Filed with Form 8-K dated November 6, 1996
(3) Filed with Form 8-K dated March 3, 1997.
(4) Filed with Form 8-K dated July 22, 1997.
31
32
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
WRT ENERGY CORPORATION
Date: December 1, 1997
/s/ Gary C. Hanna
--------------------------------
Gary C. Hanna
President
/s/ Ronald D. Youtsey
--------------------------------
Ronald D. Youtsey
Secretary and Treasurer
32
33
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.0 Final Order Authorizing Use of Proceeds from Oil and Gas Operations.
(1)
10.1 Letter agreement by and among WRT Energy Corporation, DLB Oil & Gas,
Inc. and Wexford Management, LLC dated October 22, 1996.(2)
10.2 Debtor's and DLBW's First Amended Joint Plan of Reorganization Under
Chapter 11 of the United States Bankruptcy Code dated January 20,
1997. (3)
10.3 First Amended Disclosure Statement Under 11 U.S.C. 1125 In Support of
Debtor's and DLBW's First Amended Joint Plan of Reorganization Under
Chapter 11 of the United States Bankruptcy Code dated January 20,
1997. (3)
10.4 Second Amended Joint Plan of Reorganization. (4)
10.5 Second Amended Disclosure Statement. (4)
3.1 Articles of Incorporation
3.2 Bylaws
4.2 Credit Agreement
4.3 Employment Agreement
27 FDS
(1) Filed with Form 8-K dated March 14, 1997.
(2) Filed with Form 8-K dated November 6, 1996
(3) Filed with Form 8-K dated March 3, 1997.
(4) Filed with Form 8-K dated July 22, 1997.