SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number: 0-10156
CAIRN ENERGY USA, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2169839
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8115 Preston Road, Suite 500, Dallas, Texas 75225
(Address of principal executive offices) (Zip Code)
(214) 369-0316
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
The number of shares outstanding of each of the issuer's classes of common stock
as of July 31, 1997:
17,567,301 shares of common stock, par value $.01
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CAIRN ENERGY USA, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for the three and six
months ended June 30, 1997 and 1996.................................. 3
Balance Sheets at June 30, 1997 and December 31, 1996 ................. 4
Statement of Changes in Stockholders' Equity for the
six months ended June 30, 1997....................................... 6
Statements of Cash Flows for the six months
ended June 30, 1997 and 1996......................................... 7
Notes to Financial Statements ......................................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 17
Item 2. Changes in Securities............................................. 17
Item 3. Defaults Upon Senior Securities................................... 17
Item 4. Submission of Matters to a Vote of Security Holders............... 17
Item 5. Other Information................................................. 17
Item 6. Exhibits and Reports on Form 8-K.................................. 18
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
CAIRN ENERGY USA, INC.
STATEMENTS OF OPERATIONS
Three and six months ended June 30, 1997 and 1996
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
1997 1996 1997 1996
-------- ------- -------- --------
(in thousands except per share amounts)
Revenues:
<S> <C> <C> <C> <C>
Oil and gas..................... $ 6,293 $ 7,488 $ 14,583 $ 14,741
Other revenue................... 68 28 135 62
------- ------- -------- --------
Total revenues................. 6,361 7,516 14,718 14,803
Expenses:
Lease operating expenses........ 1,000 1,004 1,765 1,632
Depreciation, depletion &
amortization................... 3,763 4,653 7,234 7,897
Administrative expenses......... 344 396 1,052 778
Interest........................ 933 592 1,799 1,035
------- ------- -------- --------
Total expenses................. 6,040 6,645 11,850 11,342
------- ------- -------- --------
Net income........................... $ 321 $ 871 $ 2,868 $ 3,461
======= ======= ======== ========
Net income per common and common
equivalent share................ $ 0.02 $ 0.05 $ 0.16 $ 0.20
======= ======= ======== ========
Weighted average common and common
shares outstanding.............. 17,566 17,559 17,565 17,557
======= ======= ======== ========
See accompanying notes.
</TABLE>
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<TABLE>
<CAPTION>
CAIRN ENERGY USA, INC.
BALANCE SHEETS
ASSETS
June 30, December 31,
1997 1996
---------- --------------
(in thousands)
Current assets:
<S> <C> <C>
Cash and cash equivalent............ $ 3,915 $ 6,438
Accounts receivable................. 4,962 4,904
Prepaid expenses.................... 626 482
--------- ---------
Total current assets....... 9,503 11,824
Property and equipment at cost:
Oil and gas properties, based on
full cost accounting.............. 223,516 205,544
Other equipment..................... 967 958
--------- ---------
224,483 206,502
Less accumulated depreciation,
depletion and amortization (83,106) (75,877)
--------- ---------
Net property and equipment.......... 141,377 130,625
Deferred charges, net of amortization.... 1,010 909
--------- ---------
Total assets........................ $ 151,890 $ 143,358
========= =========
See accompanying notes.
</TABLE>
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<TABLE>
<CAPTION>
CAIRN ENERGY USA, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
1997 1996
---------- ------------
(in thousands)
Current liabilities:
<S> <C> <C>
Accounts payable..................... $ 5,519 $ 6,303
Accrued lease operating expenses..... 368 492
Accrued well costs................... 2,408 3,803
Other accrued liabilities .......... 164 222
Current maturities of long-term debt. 10,000 -
--------- ---------
Total current liabilities....... 18,459 10,820
Long-term debt ........................... 40,000 42,000
Stockholders' equity:
Common stock, $.01 par value;
30,000,000 shares authorized;
Shares issued and outstanding;
June 30, 1997 - 17,566,356 and
December 31, 1996 - 17,564,128. 176 176
Additional paid-in capital............ 94,859 94,834
--------- ---------
Accumulated deficit................... (1,604) (4,472)
--------- ---------
Total stockholders' equity....... 93,431 90,538
--------- ---------
Total liabilities and
stockholders' equity............ $ 151,890 $ 143,358
========= =========
See accompanying notes
</TABLE>
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<TABLE>
<CAPTION>
CAIRN ENERGY USA, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY Six months ended June 30,
1997
(in thousands)
Additional Total
Common Stock Paid-in Accumulated Stockholders'
--------------
Shares Amount Capital Deficit Equity
------ ------ -------- ----------- -------------
Balance at
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1996.. 17,564 $ 176 $ 94,834 $ (4,472) $ 90,538
Net income....... - - - 2,868 2,868
Other............ 2 - 25 - 25
------ ------ -------- ---------- ----------
Balance at
June 30, 1997...... 17,566 $ 176 $ 94,859 $ (1,604) $ 93,431
====== ====== ======== ========== ==========
See accompanying notes.
</TABLE>
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<TABLE>
<CAPTION>
CAIRN ENERGY USA, INC.
STATEMENTS OF CASH FLOWS
Six months ended June 30, 1997 and 1996
1997 1996
-------- --------
(in thousands)
Operating Activities:
<S> <C> <C>
Net income...................................... $ 2,868 $ 3,461
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization..... 7,234 7,897
Amortization of loan costs................... 193 191
Amortization of prepaid gathering costs ..... 42 -
Change in operating assets and liabilities:
Accounts receivable........................ (59) (568)
Prepaid expenses........................... (143) (313)
Accounts payable........................... (1,280) 520
Accrued liabilities........................ (158) (139)
Other...................................... - (6)
-------- --------
Net cash provided by operating activities........ 8,697 11,043
Investing Activities:
Exploration and development expenditures..... (18,869) (31,902)
Proceeds from sale of natural gas and crude
oil properties............................. - 502
Additions to other equipment ................ 15 (150)
-------- --------
Net cash used in investing activities............ (18,884) (31,550)
Financing Activities:
Proceeds from long-term debt................ 8,000 18,500
Financing costs and other................... (336) 31
-------- --------
Net cash provided by financing activities........ 7,664 18,531
-------- --------
Net change in cash and cash equivalents.......... (2,523) (1,976)
Cash and cash equivalents at beginning of period. 6,438 3,553
-------- --------
Cash and cash equivalents at end of period....... $ 3,915 $ 1,577
======== ========
Supplemental cash flow information
Interest paid in cash............................ $ 1,606 $ 838
======== ========
See accompanying notes.
</TABLE>
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CAIRN ENERGY USA, INC.
Notes to Financial Statements
1. Basis of Presentation
In the opinion of management, the accompanying unaudited financial statements
reflect all adjustments (consisting only of normal recurring adjustments) which
are necessary for a fair presentation of the financial position of the Company
at June 30, 1997, the results of its operations for the three and six months
ended June 30, 1997 and 1996 and the results of its cash flows for the six
months ended June 30, 1997 and 1996. These financial statements should be read
in conjunction with the notes to the Company's annual financial statements,
which were included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, filed with the Securities and Exchange Commission (the
"Commission") on March 5, 1997.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All intercompany accounts and transactions have
been eliminated in consolidation.
2. Long-term debt.
Long-term debt at June 30, 1997 and December 31, 1996, consisted of the
following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
<S> <C> <C>
Revolving credit agreement ....... $50,000,000 $42,000,000
Less: Current maturities of
long-term debt................. 10,000,000 -
------------ ------------
Long-term debt less current
maturities..................... $40,000,000 $42,000,000
============ ============
</TABLE>
The Company has a credit agreement, as amended (the "INCC Credit Agreement")
with ING (U.S.) Capital Corporation, f/k/a/ Internationale Nederlanden (U.S.)
Capital Corporation ("INCC"), Mees Pierson, N.V. ("Mees Pierson") and Credit
Lyonnais ("Credit Lyonnais") (together, the "Bank Group"). At June 30, 1997, the
Company had outstanding borrowings of $50 million under the INCC Credit
Agreement. The INCC Credit Agreement is secured by substantially all of the
Company's assets. It contains financial covenants which require the Company to
maintain a ratio of current assets to current liabilities (excluding the current
portion of related debt) of no less than 1.0 to 1.0 and a tangible net worth of
not less than $40 million. The Company is currently in compliance with such
financial covenants. Prior to June 28, 1996, outstanding borrowings accrued
interest at either INCC's fluctuating base rate or INCC's reserve adjusted
Eurodollar rate plus 1.5%, at the Company's option. On June 28, 1996, the INCC
Credit Agreement was amended, (the "Third Amendment") to decrease the addition
to the INCC reserve adjusted Eurodollar rate from 1.5% to 1.25% as long as
outstanding borrowings are less than 75% of the borrowing base. The borrowing
base was also increased from $45 million to $50 million.
On November 7, 1996 the Company further amended (the "Fourth Amendment") the
INCC Credit Agreement. Under the Fourth Amendment, Credit Lyonnais joined as a
lender under the INCC Credit Agreement. Also under the Fourth Amendment, the
original facility under the INCC Credit Agreement was designated as Facility A
and the maximum amount of the facility was increased in amount from $50 million
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<PAGE>
to $75 million; provided, however, that the maximum amount available to the
Company cannot exceed the borrowing base of its properties as determined from
time to time by the lenders. The borrowing base under Facility A was reconfirmed
as of November 7, 1996 at $50 million. The revolving period of borrowings under
Facility A was extended from March 31, 1997 to September 30, 1997. The Company's
ability to borrow under Facility A is dependent upon the reserve value of its
oil and gas properties. If the reserve value of the Company's borrowing base
declines, the amount available to the Company under Facility A will be reduced
and, to the extent that the borrowing base is less than the amount then
outstanding under Facility A, the Company will be obligated to repay such excess
amount on 30-days' notice from INCC or to provide additional collateral. The
Bank Group has substantial discretion in determining the reserve value of the
borrowing base.
In addition a second facility was created under the Fourth Amendment . The new
standby credit facility, Facility B, was for the amount of $14 million. Facility
B provided for three levels of borrowings by the Company, two of $5 million each
and one of $4 million. There are no restrictions on the Company's ability to
borrow the first $5 million under Facility B and the amount borrowed may be used
for general corporate purposes. The Company's ability to borrow under the
further two levels of borrowings of $5 million and $4 million, respectively,
under Facility B was dependent upon the Company establishing total proved
reserves at certain levels and appropriate ratios between the Company's
outstanding debt and the value of its proved reserves. The Company must also
submit detailed proposals, acceptable to its lenders, outlining the manner in
which the second two levels of borrowings under Facility B would be used in the
development of the Company's oil and gas properties. Facility B is repayable on
December 31, 1997. The interest margin over INCC's reserve adjusted Eurodollar
rate for Facility B is either 3.25% or 3.75%, depending upon the ratio of the
amount of the outstanding loans to the value of the Company's proved reserves.
On March 17, 1997, a Fifth Amendment was added to the INCC Credit Agreement.
Under the Fifth Amendment, the borrowing base for Facility A was increased from
$50 million to $65 million and the amount available under Facility B was reduced
from $14 million to $10 million available in two levels. The first level of
borrowing under Facility B remained unchanged at $5 million with no
restrictions. The second level of borrowing under Facility B was set at $5
million with similar restrictions as in the Fourth Amendment.
On July 1, 1997, a Sixth Amendment was added to the INCC Credit Agreement. The
only change resulting from the Six Amendment results in Facility A converting to
a term loan on January 1, 1998, instead of September 30, 1997, as in the Fifth
Amendment. On January 1, 1998, the borrowings outstanding under Facility A will
be converted to a term loan that requires quarterly repayments of principal
through April 1, 2001. Under the INCC Credit Agreement, interest is payable
quarterly on any base rate borrowings and payable quarterly and on maturity of
any Eurodollar borrowings if the maturity of the Eurodollar borrowing is in
excess of three months.
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The INCC Credit Agreement does not permit the Company to pay or declare any cash
or property dividends or otherwise make any distribution of capital. On Facility
A the Company is obligated to pay a quarterly fee equal to 0.5% per annum of the
unused portion of the borrowing base under the facility and a Letter of Credit
fee for each Letter of Credit in the amount of 1.5% per annum of the face amount
of such Letter of Credit. On Facility B the Company is obligated to pay a
drawdown fee for each $5 million borrowed equal to 0.5% for the first $5
million, and 1.25% for the second $5 million. Also, the Company must pay a
quarterly fee equal to 0.5% per annum on the undrawn portion of Facility B.
The carrying value of the Company's long-term debt approximates fair value.
3. Property and Equipment.
The Company capitalized approximately $810,000 and $758,000 of internal costs
during the six months ended June 30, 1997 and 1996, respectively. Such
capitalized costs include salaries and related benefits of individuals directly
involved in the Company's acquisition, exploration, and development activities,
based on a percentage of their time devoted to such activities.
4. Earnings per Share
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact on both primary and fully diluted
earnings per share for the three and six month periods ended June 30, 1997 and
1996 is not expected to be material.
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<PAGE>
CAIRN ENERGY USA, INC.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This document includes and incorporates "forwarding looking" statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements relate to, among other things, the Company's future
prospects, developments, level of capital expenditures, cash flow from
operations, oil and gas reserves and properties, business strategies for its
operations and the financing of the Company's exploration and development
program. These forward-looking statements are identified by their use of terms
and phrases such as "anticipate," "expect," estimate," "intend," "project,"
"believe," "will seek" and similar terms and phrases contained herein. Although
the Company believes that the expectations described in such forward- looking
statements are reasonable, these statements involve risks and uncertainties that
may cause actual future activities and results of operations to be materially
different from that suggested or described in this document. These risks include
changes in market conditions in the oil and gas industry and demand and prices
for oil and gas, the impact of any economic downturns and inflation and other
market factors affecting the demand and supply of oil and gas, the timing of
drilling new prospects, variation in actual production results from that
estimated in existing reserve data, regulatory changes affecting exploration
activities, higher costs associated with drilling, and the availability of
financing for the Company's activities. Many of these risks are more
specifically set forth under the caption "Risk Factors" in the Company's
Prospectus, dated September 14, 1995, and under the caption "Oil and Gas
Reserves" in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, and are disclosed in conjunction with the forward looking
statements included herein. Should one or more of these risks or uncertainties
materialize or should underlying assumptions prove incorrect, actual results may
vary materially from those expected, estimated or projected. Subsequent written
and oral forward looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by such
cautionary disclosures, including without limitation the President's Letter
contained in the Second Quarter Report to Stockholders.
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<PAGE>
Results of Operations
The following table sets forth certain information regarding the production
volumes of, average sales prices received for, average production costs
associated with and average depletion rate associated with the Company's sales
of oil and gas for the periods indicated.
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
-------------- --------------
1997 1996 1997 1996
------ ------ ------ ------
Net Production:
<S> <C> <C> <C> <C>
Gas (MMcf) .................... 2,332 2,820 4,559 5,188
Oil (MBbl)..................... 59 72 129 142
Average Sales Price:
Gas (per Mcf) (1) ............. $ 2.22 $ 2.12 $ 2.60 $ 2.28
Oil (per Bbl).................. $18.35 $20.30 $20.50 $20.08
Average Production Costs:
(per Mcfe) (2)................. $ 0.37 $ 0.31 $ 0.33 $ 0.27
Depletion rate: (per Mcfe) .... $ 1.39 $ 1.42 $ 1.34 $ 1.29
(1) Includes natural gas liquids.
(2) Includes direct lifting costs (labor, repairs and maintenance, materials
and supplies) and the administrative costs of production offices,
insurance and property and severance taxes.
</TABLE>
Three months ended June 30, 1997 and 1996
Revenues
Total revenues decreased $1.2 million (15%) to $6.4 million for the three months
ended June 30, 1997, from $7.5 million for the three months ended June 30, 1996.
Revenues decreased primarily as a result of natural declining oil and gas
production.
Expenses
Total expenses decreased $606,000 (9%) to $6 million for the three months ended
June 30, 1997, from $6.7 million for the three months ended June 30, 1996. A
decrease in depreciation, depletion and depreciation ("DD&A") is the main reason
for the decrease in expenses. DD&A decreased $891,000 (19%) to $3.8 million for
the three months ended June 30, 1997, from $4.7 million for the same period in
1996 due to a decrease in the depletion rate coupled with reduced production
volume. Administrative costs decreased $52,000 (13%) to $344,000 for the quarter
ended June 30, 1997, from $396,000 for the same period in 1996. Decreased
consulting fees coupled with an increase in capitalized salaries and benefits of
individuals directly involved in the Company's acquisition, exploration and
development activities partially offset by increased office rent accounted for
the majority of the reduction. Interest expense increased $341,000 (58%) to
$933,000 for the three month period ended June 30, 1997, compared with $592,000
for the same period in 1996. Interest expense increased due to increased
borrowing coupled with a slight increase in interest rates. The changes in
production costs between the second quarter 1997 and the second quarter 1996
were insignificant.
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<PAGE>
Net Income
Net Income decreased $550,000 (63%), or $0.03 per share, to $321,000, or $0.02
per share, for the quarter ended June 30, 1997 from $871,000, or $0.05 per
share, for the same period in 1996. The primary reason for the decrease was
decreased oil and gas production.
Six months ended June 30, 1997 and 1996
Revenues
Total revenues of $14.7 million for the six months ended June 30, 1997, were
virtually unchanged from the same period in 1996. Revenues were greater due to
increased gas prices but were offset by lower oil and gas production volumes
than in the comparable period in 1996.
Expenses
Total expenses increased $507,000 (4%) to $11.8 million for the six months ended
June 30, 1997, from $11.3 million for the six months ended June 30, 1996.
Interest expense increased $764,000 (74%) to $1.8 million for the six months
ended June 30, 1997, from $1 million for the same period in 1996 due to
increased borrowing to fund the Company's exploration and development program
coupled with a slight increase in interest rates. Administrative expense
increased $274,000 (35%) to $1.1 million for the first six months of 1997 from
$778,000 for the same period in 1996 due primarily to a severance payment made
to the Company's former Chief Financial Officer during the first quarter of
1997. Depreciation, depletion and amortization decreased $663,000 (8%) to $7.2
million for the six months ended June 30, 1997, from $7.9 million for the six
months ended June 30, 1996. This decrease was due to a decrease in the depletion
rate coupled with decreased production. Production costs increased $133,000 (8%)
to $1.8 million for the six months ended June 30, 1997, from $1.6 million for
the same period.
Net Income
Net income decreased $593,000 (17%), or $0.04 per share, to $2.9 million, or
$0.16 per share, for the six months ended June 30, 1997, from $3.5 million, or
$0.20 per share, for the same period in 1996. The primary reason for the
decrease was higher interest expense due to increased borrowings from the
Company's credit facility.
Capital Resources and Liquidity
At June 30, 1997, the Company had existing cash and cash investments of $3.9
million. Net cash provided by operating activities was $8.7 million for the six
months ended June 30, 1997, compared with $11 million for the same period in
1996. The primary reason for this decrease in cash provided by operating
activities was increased working capital requirements coupled with lower results
of operations (or earnings before depreciation, depletion and amortization). Net
cash used in investing activities for the six months ended June 30, 1997, was
$18.9 million compared with $31.5 million for the same period in 1996. This
decrease was principally due to less expenditures for exploration and
development projects in the first half of 1997 when compared with the same
period in 1996.
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<PAGE>
Net cash provided by financing activities for the first six months of 1997 was
$7.7 million compared with $18.5 million for the same period in 1996. The cash
provided by financing activities for the period consisted mainly of borrowings
under the Company's revolving credit facility which were used to fund a portion
of the Company's capital spending program.
In the second quarter, the Company continued its development operations on East
Cameron Block 331/332 with the drilling of the A-6 sidetrack #1 and the A-11
sidetrack #1. The A-11 sidetrack #1 has been completed and brought on production
at a rate of 804 BOPD and 1.2 MMCFD. The A-6 sidetrack #1 is scheduled for
completion during the third quarter. Re-completion operations of the A-4 well
were finalized and production commenced in July 1997. Completion operations of
the A-14 well are now finished with production expected to commence in
mid-August.
In April, the Company completed the Ship Shoal Block 261 discovery and flow
tested this well at a rate of 13 MMCFD and 215 BOPD. A three pile, three well
slot production facility capable of processing 25 MMCFD and 1,500 BOPD was
installed in May 1997. Production from this field commenced in late May and is
currently producing at a rate of 14.4 MMCFD and 304 BOPD. The Company is
operator of Ship Shoal Block 261 and owns a 50% working interest in the project.
During the second quarter, the Company participated in the drilling of three
exploratory wells. A well drilled on Grand Isle Block 77 encountered three
non-commercial, gas bearing zones and was plugged and abandoned.
The Company owns a 33% working interest in Grand Isle Block 77.
The Company participated in the drilling of an exploratory well on High Island
Block A-364. This well encountered 105 feet of indicated oil and gas pay in two
Pleistocene sands. After several unsuccessful attempts to free stuck logging
tools and drill pipe, the well was junked and abandoned. The Company is
currently evaluating future plans to develop the potential discovery in addition
to reviewing the remaining prospectivity on the block. The Company owns a 25%
working interest in High Island Block A-364.
The Company participated in an exploratory well drilled on Eugene Island Block
60 in June of this year. This well was plugged and abandoned after encountering
a non-commercial pay in the primary objective. The Company owns a 25% working
interest in Eugene Block 60.
The Company's development of East Cameron 349 area (East Cameron Blocks 349,
350, 355 and 356) is underway. In May, a three pile jacket with separation
facilities was set over the existing two discovery wells. In mid-July a jack up
drilling rig moved on location and began completion operations for these two
wells. Additional drilling operations for this development are scheduled
following the completion of the two existing wells. Production is scheduled to
commence from this development late in the third quarter 1997. The Company owns
a 37.5% working interest in the East Cameron 349 project area.
Development of West Cameron Block 263 began in late July. Development plans are
to set a minimal caisson supported deck and facility capable of processing 25
MMCFD and 1,500 barrels of fluid per day. Completion of the well is currently
underway with first production expected in early September. The Company operates
and owns a 50% working interest in West Cameron Block 263.
The Company is participating in the drilling of an exploratory well on Ship
Shoal Block 11. This well was spud in early July and is drilling to a total
depth of 16,600 feet. The Company owns a 25% working interest in this well.
In general, because the Company's oil and gas reserves are depleted by
production, the success of its business stragegy is dependent on a continuous
CORPDAL:69591.1 15467-00006
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<PAGE>
exploration and development program. Therefore, the Company's capital
requirements relate primarily to the acquisition of undeveloped leasehold
acreage and exploration and development activities. In addition to pursuing a
number of existing exploration prospects, the Company and its partners were the
high bidder on 8 blocks in the Gulf of Mexico Central Area Lease Sale held on
March 5, 1997. The Company's interest in these blocks ranges from 20 to 100
percent. All eight blocks have been awarded to the Company and its partners for
a cost to the Company of $3.8 million.
The Company's operating needs and capital spending programs have been funded by
borrowings under its bank credit facilities, proceeds from public offerings of
its Common Stock and cash flows from operations. The Company expects capital
expenditures during 1997 to total approximately $50 million of which
approximately $20 million has been expended as of June 30, 1997. The Company's
capital resources consist primarily of borrowing capacity under the INCC Credit
Agreement ($15.0 million remaining under Facility A and up to $10 million under
Facility B which are available to the Company assuming that it satisfies the
conditions to borrow under such facilities) and cash flow from operations.
If the Company is successful in a substantial number of its currently scheduled
exploration prospects, additional funds may be required in order to conduct the
necessary development activities. Additionally, if the Company is unsuccessful
in its currently scheduled exploration program, additional funds may be required
in order to continue the exploration and development program.
Projections of budgeted capital expenditures and cash flow from operations
through the end of 1997 indicate that Facility A under the INCC Credit Agreement
will be fully drawn by year-end, and therefore, the Company has decided to
postpone sufficient non-essential capital expenditures necessary to maintain $50
million of capital expenditures for 1997. Additional funds, if needed, will have
to be drawn from Facility B. Borrowings outstanding under Facility A will be
converted to a term loan that requires quarterly repayments of principal
beginning April 1, 1998 on an amortization schedule through April 1, 2001, and
all borrowings under Facility B will be due on December 31, 1997. The Company
has entered into an Agreement and Plan of Merger with The Meridian Resource
Corporation ("TMRC") providing for the combination of the Company and TMRC (the
"Merger"). The Company believes that one of the benefits to be realized by it in
the Merger is that the combined company following the Merger should have
available resources to fully develop its prospects and diversify its existing
reserve portfolio. TMRC has advised the Company that it intends to enter into a
new credit facility to refinance its and the Company's existing indebtedness
upon consummation of the Merger. If the proposed Merger is not consummated,
management will seek to re-negotiate its credit facility or raise additional
capital in the public or private equity or debt market. There is no assurance
that management would be successfully in re-negotiating its credit facility or
raising additional capital on terms that are favorable to the Company. The lack
of sufficient capital could require the Company to reduce it interest in
properties, to forego developing reserves or may require the Company to curtail
its exploration and development program. In addition, the Company does not act
as operator with respect to a majority of its properties. The Company may not be
able to control the development activities or the associated costs with respect
to properties operated by other parties.
CORPDAL:69591.1 15467-00006
15
<PAGE>
The Company's revenues and the value of its oil and gas properties have been and
will continue to be affected by changes in oil and gas prices. The Company's
ability to maintain current borrowing capacity and to obtain additional capital
on attractive terms is also substantially dependent on oil and gas prices (Note
2). Oil and gas prices are subject to significant seasonal and other
fluctuations that are beyond the Company's ability to control or predict.
Although certain of the Company's costs and expenses are affected by the level
of inflation, inflation has not had a significant effect on the Company's
results of operations during 1996 or the first six months of 1997.
In an effort to reduce the effects of the volatility of the price of oil and gas
on the Company's operations, management has adopted a policy of hedging oil and
gas prices, usually when such prices are at or in excess of the prices
anticipated in the Company's operating budget, through the use of commodity
futures, options, forward contracts and swap agreements. Hedging transactions
are limited by the Board of Directors such that no transaction may fix an oil
and gas price for a term of more than 12 months, and the aggregate oil and gas
production covered by all transactions may not exceed 50% of the Company's
budgeted production for any 12-month period from the date of the transaction or
75% of the Company's budgeted production for any single month from the date of
the transaction. By hedging its oil and gas prices, the Company intends to
mitigate the risk of future declines in oil and gas prices. Under certain
contracts should oil or gas prices increase above the contract rate, the Company
will not participate in the higher prices for the production.
The Company entered into a number of gas price swap transactions under which the
Company received a fixed price per MMBtu and paid a floating price based on the
settlement prices for the NYMEX Natural Gas futures contract for the delivery
month. During the first six months of 1997 and 1996 oil and gas revenues were
increased $1,000 and decreased $1.6 million, respectively, as a result of
hedging transactions. The Company currently has no swap hedging transactions in
place.
The Company may enter into certain interest rate hedging contracts. By hedging
its interest rate under its credit facility, the Company would intend to
mitigate the risk of future increases in interest rates. Should interest rates
decrease below the contract rate, the Company will not participate in the lower
interest rate for the portion of the credit facility under the hedging contract.
The Company currently has no interest rate hedging contracts in place.
Proposed Merger
On July 3, 1997, the Company entered into an Agreement and Plan of Merger (the
"Merger") with The Meridian Resources Corporation (TMRC) providing for the
combination of TMRC and the Company pursuant to an expected tax free exchange of
stock in which the stockholders of the Company will be entitled to receive 1.08
shares of TMRC's common stock in exchange for each outstanding share of the
Company's common stock. The Merger is subject to certain conditions, including
shareholder approval of both the Company and TMRC.
CORPDAL:69591.1 15467-00006
16
<PAGE>
CAIRN ENERGY USA, INC.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On July 7, 1997, a lawsuit was filed in the Delaware Chancery Court in the
county of New Castle against the Company, certain of its directors and The
Meridian Resource Corporation ("TMRC"). The lawsuit, a proposed class action,
alleges that the Company's Board of Directors breached their fiduciary duties to
the Company's stockholders in connection with the proposed merger of the Company
and TMRC. The lawsuit also alleges that TMRC aided and abetted the alleged
breach of fiduciary duties by the directors of the Company. The lawsuit seeks to
enjoin the Merger, and, in the alternative, seeks recession of the Merger. The
lawsuit also seeks compensatory damages, attorneys fees and other costs from the
defendants. The Company believes that the lawsuit is without merit and intends
to vigorously contest it.
ITEM 2 - CHANGES IN SECURITIES
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
I. Merger
On July 3, 1997, Cairn Energy USA, Inc., a Delaware corporation (the "Company"),
entered into an Agreement and Plan of Merger (the "Merger Agreement") with The
Meridian Resource Corporation, a Texas corporation ("TMRC"), and a wholly-owned
subsidiary ("Sub") of TMRC, providing for the combination of TMRC and the
Company pursuant to an expected tax-free merger (the "Merger") in which the
stockholders of the Company will be entitled to receive 1.08 shares of TMRC's
common stock, $.01 par value ("TMRC Stock"), in exchange for each outstanding
share of the Company's common stock, $.01 par value (the "Company's Stock"). The
Merger is subject to various conditions, including stockholder approval of both
the Company and TMRC.
The description of the terms and conditions of the Merger Agreement in this
report are qualified in their entirety by reference to the Merger Agreement that
has been filed as an exhibit to the Company's Form 8-K, which was filed with the
Securities and Exchange commission on July 16, 1997, and is hereby incorporated
herein by reference.
CORPDAL:69591.1 15467-00006
17
<PAGE>
II. Amendment of Rights Agreement
In connection with the Merger, the Board of Directors of the Company amended
(the "Amendment") the Rights Agreement (the "Rights Agreement") dated as of
April 1, 1997, between the Company and Stock Transfer Company of America, Inc.,
as Rights Agent. See the Company's Form 8-K filed April 3, 1997.
The Amendment specifically permits the Merger and the acquisition by TMRC of the
Company's Common Stock pursuant to the Merger Agreement. The Amendment further
provides for the expiration of the Rights (as that term is defined in the Rights
Agreement) upon the closing of the Merger.
III. Amendment of Employment Agreements
In connection with the Merger, the Board of Directors of the Company approved an
amendment to the employment agreements (the "Agreements") of Michael R. Gilbert
and Robert P. Murphy, extending the term of each of the Agreements for one (1)
year. As amended, the Agreements will expire on December 31, 1998.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Each of the following exhibits is filed herewith:
2.1 Agreement and Plan of Merger dated as of July 3, 1997, by
and among The Meridian Resource Corporation, C Acquisition
Corp. and Cairn Energy USA, Inc. (Incorporated by reference
to Exhibit 2.1 of the Company's Form 8-K filed on July 16,
1997).
4.1 First Amendment to Rights Agreement, dated as of July 3,
1997, by and between Cairn Energy USA, Inc. and Stock
Transfer Company of America, Inc. (Incorporated by
referenced to Exhibit 4.1 of the Company's Form 8-K filed on
July 16, 1997).
10.1 Filed herewith. Sixth Amendment to First Amended and
Restated Credit Agreement, dated as of June 30, 1997, by and
among Cairn Energy USA, Inc., ING (U.S.) Capital
Corporation, f/k/a Internationale Nederlanden (U.S.) Capital
Corporation, as agent, and ING (U.S.) Capital Corporation,
MeesPierson N.V. and Credit Lyonnais New York Branch, as
lenders (with certain exhibits omitted pursuant to Item
601(b)(2) of Regulation S-K).
27.1 Filed herewith. Financial Data Schedule
(b) Reports on Form 8-K
A Form 8-K was filed on July 16, 1997 to report that the Company
had entered into an agreement and plan of merger with TMRC
providing for the combination of TMRC and the Company pursuant to
an expected tax free merger in which the stockholders of the
Company will be entitled to receive 1.08 shares of TMRC's common
stock in exchange for each outstanding share of the Company's
common stock.
CORPDAL:69591.1 15467-00006
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAIRN ENERGY USA, INC.
(Registrant)
Date: August 14, 1997 /s/ Michael R. Gilbert
----------------------
Michael R. Gilbert
President
/s/ A. Allen Paul
----------------------
A. Allen Paul
Senior Vice President and Treasurer
(Principal Financial Officer)
CORPDAL:69591.1 15467-00006
19
SIXTH AMENDMENT TO FIRST AMENDED AND RESTATED CREDIT AGREEMENT
THIS SIXTH AMENDMENT TO FIRST AMENDED AND RESTATED CREDIT AGREEMENT (this
"Amendment") is made as of the 1st day of July, 1997, by and among CAIRN ENERGY
USA, INC., a Delaware corporation ("Borrower"), ING (U.S.) CAPITAL CORPORATION,
f/k/a Internationale Nederlanden (U.S.) Capital Corporation, as agent ("Agent"),
and ING (U.S.) capital corporation ("ING Capital"), MEESPIERSON N.V.
("MeesPierson"), and CREDIT LYONNAIS NEW YORK BRANCH ("Credit Lyonnais"), as
lenders (collectively, "Lenders").
RECITALS:
--------
Borrower, Agent and Lenders entered into that certain First Amended and
Restated Credit Agreement dated as of December 20, 1994, as amended by a First
Amendment to First Amended and Restated Credit Agreement dated December 12,
1995, a Second Amendment to First Amended and Restated Credit Agreement dated
January 15, 1996, a Third Amendment to First Amended and Restated Credit
Agreement dated June 28, 1996, a Fourth Amendment to First Amended and Restated
Credit Agreement dated November 7, 1996 and a Fifth Amendment to First Amended
and Restated Credit Agreement dated March 14, 1997 (the "Original Agreement"),
for the purposes and consideration therein expressed, pursuant to which Lenders
made and became obligated to make loans to Borrower as therein provided; and
Borrower, Agent and Lenders desire to amend the Original Agreement as provided
herein.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein and in the Original Agreement, in consideration
of the loans which may hereafter be made by Lenders to Borrower, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I - Definitions and References
Section 1.1 Terms Defined in the Original Agreement. Unless the context
otherwise requires or unless otherwise expressly defined herein, the terms
defined in the Original Agreement shall have the same meanings whenever used in
this Amendment, and the following terms when used in this Amendment shall have
the following meangins: Original Agreement shall have the same meanings:
"Amendment" means this Sixth Amendment to First Amended and Restated
Credit Agreement.
"Amendment/Allonge" has the meaning given it in Section 3.1(ii)
hereof.
"Amendment Documents" means this Amendment and each Amendment/Allonge.
"Credit Agreement" means the Original Agreement as amended hereby.
ARTICLE II - Amendments to Original Agreement
Section 2.1. Defined Terms. The definition of "Facility A Commitment
Period" set forth in Section 1.1 of the Original Agreement is hereby amended in
its entirety to read as follows:
"Facility A Commitment Period" means the period from and including the
date hereof until and inculding January 1, 1998 (or, if earlier, the day on
which the Facility A Notes first become due and payable in full).
Section 2.2. Amendment to Regular Payments. Section 2.8 of the
Original Agreement is hereby amended in its entirety to read as follows:
Section 2.8 Regular Payments. Borrower will pay interest on the
Loans as specified in the Notes. Borrower will repay the aggregate
principal amount of the Facility A Loans outstanding on the last day
of the Facility A Commitment period in thirteen (13) quarterly
installments, on the first day of each April, July, October and
January, beginning April 1, 1998. The first such installment shall be
in an amount equal to twenty percent (20%) of the aggregate unpaid
principal balance of the Facility A Loans at the end of the Facility A
Commitment Period; each of the next two (2) such installments shall be
in an mount equal to ten percent (10%) of the aggregate unpaid
principal balance of the Facility A Loans at the end of the Facility A
Commitment Period; each of the next four (4) such installments shall
be in an amount equal to nine percent (9%) of the aggregate unpaid
principal balance of the Facility A Loans at the end of the Facility A
Commitment Period; and each of the last six (6) such installments
shall be in an amount equal to four percent (4%) of the aggregate
unpaid principal balance of the Facility A Loans at the end of the
Facility A Commitment Period. Such amounts shall be rounded upwards to
the nearest $1,000. Agent shall determine the amount of each such
principal installment, which amount shall be conclusive, absent
manifest error. Borrower will repay the aggregate principal amount of
the Facility B Loans on the maturity date set forth in the Facility B
Notes.
ARTICLE III - Conditions of Effectiveness
Section 3.1. Effective Date. This Amendment shall become effective as of
the date first above written when (i) Agent shall have received this Amendment
at Agent's office duly authorized, executed and delivered by Borrower and each
Lender, (ii) Borrower shall have issued and delivered to each Lender an
Amendment and Allonge (each an "Amendment/Allonge") to each Facility A Note in
the form attached hereto as Attachment 1, duly executed on behalf of Borrower,
and (iii) Agent shall have additionally received all of the following documents
each being duly authorized, executed and delivered, and in form and substance
satisfactory to Agent and each Lender:
(a) Omnibus Certificate. An Omnibus Certificate of the Secretary and
of the Chairman of the Board, President or a Senior Vice President of
Borrower of even date with this Amendment, which shall contain the names
and signatures of the officers authorized to execute this Amendment and
which shall certify to the truth, correctness and completeness as of the
date hereof of: (i) all of the exhibits attached to that certain Omnibus
Certificate dated as of November 7, 1996 made by such officers of Borrower,
and (ii) a copy of resolutions duly adopted by the Board of Directors of
Borrower and in full force and effect at the time this Amendment is entered
into, authorizing the execution of this Amendment.
(b) Compliance Certificate. A Compliance Certificate of the Senior
Vice President-Finance of Borrower, of even date with this Amendment, in
which such officer shall certify, to the best of his knowledge and belief
after due inquiry, to the satisfaction of the conditions set out in
subsections (a) through (d), inclusive of Section 3.2 of the Original
Agreement as of the date hereof.
ARTICLE IV - Representations, Warranties and Covenants
Section 4.1. Representations, Warranties and Covenants of Borrower. In
order to induce Agent and Lenders to enter into this Amendment, Borrower
represents, warrants and covenants to Agent and each Lender that:
(a) The representations and warranties contained in Section 4.1 of the
Original Agreement are true and correct at and as of the time of the
effectiveness hereof, except to the extent that such representations and
warranties are made in the Original Agreement only in reference to a
specific date and except to the extent that the facts upon which such
representations are based have been changed by the extension of credit
under the Credit Agreement.
(b) Borrower is duly authorized to execute and deliver this Amendment
and each other Amendment Document and is and will ctoninue to be duly
authorized to borrower and to perform its obligations hereunder and
thereunder.
(c) The execution and delivery by borrower of this Amendment and each
other Amendment Document and the performance by it of its obligations
hereunder and under the Credit Agreement and the consummation of the
transactions contemplated hereby and thereby do not and will not conflict
with any provision of law, statute, rule or regulation or of the articles
of incorporation or bylaws of Borrower or of any material agreement,
judgment, license, order or permit applicable to or binding upon Borrower
or result in the creation of any lien, charge or encumbrance upon any
assets or properties of Borrower, except as expressly contemplated in the
Loan Documents. Except for those which have been duly obtained, no consent,
approval, authorization or order of any court or governmental authority or
third party is required in connection with the execution and delivery by
Borrower of this Amendment or any Amendment Document or to consummate the
transactions contemplated hereby and thereby.
(d) When this Amendment and each other Amendment Document is duly
executed and delivered, each of this Amendment, the other Amendment
Documents and the Credit Agreement will be a legal and binding instrument
and agreement of Borrower, enforceable in accordance with its terms, except
as limited by bankruptcy, insolvency and similar laws and be general
principles of equity.
(e) The audited annual Consolidated financial statements of Borrower
dated as of December 31, 1996 and the unaudited quarterly Consolidated
financial statements of Borrower dated as of March 31, 1997 fairly present
the Consolidated financial position at such dates and the Consolidated
statement of operations and cash flows for the periods ending on such dates
for Borrower. Copies of such financial statements have heretofore been
delivered to Lender. Since March 31, 1997, no material adverse change has
occurred in the financial condition or business or in the Consolidated
financial condition or businesses of Borrower.
ARTICLE V - Miscellaneous
Section 5.1. Ratification of Agreements. The Original Agreement as
hereby amended is hereby ratified and confirmed in all respects. The Loan
Documents, as they may be amended or affected by this Amendment and the
other Amendment Documents, are hereby ratified and confirmed in all
respects. Any reference to the Credit Agreement in any Loan Document shall
be deemed to refer to this Amendment also and any referenced in any Loan
Document to any other document or instrument amended, renewed, extended or
otherwise affected by this Amendment or the other Amendment Documents shall
also refer to such Amendment and such Amendment Documents. The execution,
delivery and effectiveness of this Amendment and each other Amendment
Document shall not operate as a waiver of any right, power or remedy of
Agent or any Lender under the Credit Agreement or any other Loan Document
nor constitute a waiver of any provision of the Credit Agreement or any
other Loan Document.
Section 5.2. Survival of Agreements. All representations, warranties,
covenants and agreements of Borrower herein shall survive the execution and
delivery of this Amendment and the performance hereof, including without
limitation the making or granting of the Loans, and shall further survive
until all of the obligations are paid in full. All statements and
agreements contained in any certificate or instrument delivered by Borrower
hereunder or under the Credit Agreement to Agent or any Lender shall be
deemed to constitute representations and warranties by, or agreements and
covenants of, Borrower under this Amendment and under the Credit Agreement.
Section 5.3. Protection of Security Interests and Liens. Borrower
agrees to deliver to Agent within fifteen days after request any additional
amendments or supplements to any Security Documents, properly completed and
executed (and acknowledged when required) by Borrower, in form and
substance satisfactory to Agent, which Agent reasonably requests for the
purpose of perfecting, confirming, or protecting any Liens or other rights
in Collateral securing any Obligations.
Section 5.4. Loan Documents. This Amendment and each other Amendment
Document is a Loan Document, and all provisions in the Credit Agreement
pertaining to Loan Documents apply hereto.
Section 5.5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND ANY
APPLICABLE LAWS OF THE UNITED STATES OF AMERICA IN ALL RESPECTS, INCLUDING
CONSTRUCTION, VALIDITY AND PERFORMANCE.
Section 5.6. Counterparts. This Amendment may be separately executed
in counterparts and by the different parties hereto in separate
counterparts, each of which when so executed shall be deemed to constitute
one and the same Amendment.
IN WITNESS WHEREOF, this Amendment is executed as of the date first
above written.
CAIRN ENERGY USA, INC.
By: /s/ A. Allen Paul
A. Allen Paul, Senior Vice President
Finance
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