UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] 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 1-10376
EDISTO RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 54-0883077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10375 Richmond Avenue, Suite 300
Houston, Texas 77042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 713/782-0095
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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 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
At October 31, 1996, there were 13,850,552 shares of Common Stock
outstanding.
1
<PAGE>
EDISTO RESOURCES CORPORATION
Quarterly Report on Form 10-Q
for the Quarter Ended September 30, 1996
INDEX
I. FINANCIAL INFORMATION
Item 1. Financial Statements of Edisto Resources Corporation:
Consolidated Balance Sheets...............................3-4
Consolidated Statements of Operations.......................5
Consolidated Statement of Stockholders' Equity..............6
Consolidated Statements of Cash Flows.......................7
Notes to the Consolidated Financial Statements..............8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................16
II. OTHER INFORMATION
Item 1. Legal Proceedings..........................................25
Item 6. Exhibits and Reports on Form 8-K...........................25
Signatures .........................................................26
2
<PAGE>
EDISTO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
ASSETS
September 30, December 31,
1996 1995
Current assets:
Cash and cash equivalents .................. $ 46,538 $ 33,364
Restricted cash ............................ 1,217 333
Assets from risk management
activities .............................. 13,815 19,076
Accounts receivable:
Gas marketing ............................ 96,321 71,041
Oil and gas production ................... 3,262 3,229
Affiliates ............................... 50 --
Other .................................... 732 450
Storage inventory .......................... 4,212 5,437
Other current assets ...................... 2,813 3,114
--------- ---------
Total current assets .................... 168,960 136,044
Property and equipment:
Oil and gas properties using the
successful efforts method
of accounting ............................ 116,026 115,250
Other ...................................... 4,467 2,985
--------- ---------
120,493 118,235
Less - accumulated depreciation
and depletion ............................. (62,387) (51,418)
--------- ---------
58,106 66,817
Investments .................................. 213 242
Other assets ................................. 3,354 2,890
--------- ---------
$ 230,633 $ 205,993
========= =========
See the accompanying notes to the consolidated financial statements.
3
<PAGE>
EDISTO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
1996 1995
Current liabilities:
Current maturities of long-term debt .......... $ 308 $ 1,796
Accounts payable:
Gas marketing ............................... 99,749 69,067
Oil and gas production ...................... 10,140 9,609
Accrued liabilities and other ................. 12,825 10,568
Liabilities from risk management activities ... 1,095 4,686
Deferred revenue .............................. 2,120 2,590
--------- ---------
Total current liabilities .................. 126,237 98,316
Long-term liabilities:
Long-term debt, net of current maturities ..... 8,530 17,635
Deferred revenue .............................. 573 691
Minority interest ............................. 9,339 9,092
Other noncurrent liabilities .................. 8,383 12,731
--------- ---------
26,825 40,149
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares
authorized, 13,902,766 issued
at September 30, 1996 and 12,977,960 at
December 31, 1995 ............................. 139 130
Additional paid-in capital .................... 70,488 61,528
Retained earnings ............................. 7,391 6,154
Foreign currency translation .................. (85) (95)
Treasury stock, at cost, 52,214 shares at
September 30, 1996
and 23,714 shares at December 31, 1995 ........ (362) (189)
--------- ---------
Total stockholders' equity .............. 77,571 67,528
--------- ---------
$ 230,633 $ 205,993
========= =========
See the accompanying notes to the consolidated financial statements.
4
<PAGE>
<TABLE>
EDISTO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<CAPTION>
Nine Months Nine Months Three Months Three Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
<S> <C> <C> <C> <C>
1996 1995 1996 1995
Revenues:
Gas marketing .......................... $ 541,510 $ 271,811 $ 191,919 $ 95,770
Oil and gas production ................. 33,634 38,138 11,601 11,670
Energy trading ......................... -- 344 -- 559
--------- --------- --------- ---------
575,144 310,293 203,520 107,999
--------- --------- --------- ---------
Costs and expenses:
Gas purchases .......................... 535,349 270,071 191,264 94,950
Lease operating and production taxes ... 12,064 14,451 3,578 4,318
Abandonment and exploration costs ...... 1,724 1,274 803 159
Depreciation, depletion and amortization 12,966 16,680 4,629 5,309
Impairment of oil and gas properties ... 1,120 -- -- --
General and administrative ............. 11,990 11,105 4,585 3,580
--------- --------- --------- ---------
575,213 313,581 204,859 108,316
--------- --------- --------- ---------
Operating (loss) .................. (69) (3,288) (1,339) (317)
--------- --------- --------- ---------
Other income (expense):
Interest income ........................ 1,718 2,743 468 787
Interest expense ....................... (962) (1,669) (246) (463)
Equity in earnings of affiliates ....... 372 226 108 37
Gain (loss) on asset sales ............. 1,167 (510) -- (218)
Minority interest ...................... (679) (380) (300) (34)
Other, net ............................. 71 377 (286) 87
--------- --------- --------- ---------
1,687 787 (256) 196
--------- --------- --------- ---------
Income (loss) before income taxes ........ 1,618 (2,501) (1,595) (121)
Preacquisition loss of subsidiary ........ -- 1,478 -- --
Income tax (provision) benefit ........... (381) (856) (111) (334)
--------- --------- --------- ---------
Income (loss) from continuing operations . 1,237 (1,879) (1,706) (455)
--------- --------- --------- ---------
Discontinued operations:
Gain on sale of transmission operations -- 2,557 -- --
Gain on sale of manufacturing operations -- 3,824 -- --
--------- --------- --------- ---------
Net income (loss) .................... $ 1,237 $ 4,502 $ (1,706) $ (455)
========= ========= ========= =========
Net income (loss) per common share:
Continuing operations ................. $ .09 $ (.14) $ (.12) $ (.04)
Discontinued operations ............... -- .49 -- --
--------- --------- --------- ---------
Net income (loss) per common share .... $ .09 $ .35 $ (.12) $ (.04)
========= ========= ========= =========
Weighted average common shares
outstanding ........................... 13,408 12,954 13,846 12,954
========= ========= ========= =========
<FN>
See the accompanying notes to the consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
EDISTO RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)
<CAPTION>
Number of Additional Foreign
Common Common Paid-In Retained Currency Treasury
Shares Stock Capital Earnings Translation Stock Total
<S> <C> <C> <C> <C> <C> <C> <C>
Stockholders' equity,
December 31, 1995 ........ 12,978 $ 130 $ 61,528 $ 6,154 $ (95) $ (189) $ 67,528
Net income ................. -- -- -- 1,237 -- -- 1,237
Repurchase of common
shares ..................... -- -- -- -- -- (173) (173)
Exercise of warrants ....... 918 9 8,932 -- -- -- 8,941
Exercise of options ........ 7 -- 28 -- -- -- 28
Foreign currency translation -- -- -- -- 10 -- 10
-------- -------- -------- -------- -------- -------- --------
Stockholders' equity,
September 30, 1996 ....... 13,903 $ 139 $ 70,488 $ 7,391 $ (85) $ (362) $ 77,571
======== ======== ======== ======== ======== ======== ========
<FN>
See the accompanying notes to the consolidated financial statements.
</FN>
</TABLE>
6
<PAGE>
EDISTO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Nine Months
Ended Ended
September 30, September 30,
1996 1995
Cash flows from operating activities:
Net income ......................................... $ 1,237 $ 4,502
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation, depletion and amortization ........... 12,966 13,145
Abandonments and exploration costs ...... .......... 1,568 993
Impairment of oil and gas properties ............... 1,120 --
Gains on sales of assets ........................... (1,167) (5,871)
Equity in income of affiliates ..................... (372) (225)
Minority interest expense .......................... 679 379
Other .............................................. (186) --
Changes in assets and liabilities:
Accounts receivable and inventory ................ (17,899) (20,021)
Accounts payable and accrued liabilities.......... 23,845 8,944
Other ............................................ (225) (1,843)
-------- --------
Net cash provided by operating activities ..... 21,566 3
-------- --------
Cash flows from investing activities:
Net proceeds from sales of assets, including
discontinued operations 2,955 72,037
Sale (Purchase) of assets from risk management activities 1,022 (2,187)
Investment in subsidiaries .......................... . (419) 716
Acquisition, exploration and development costs ........ (9,000) (9,273)
Payments from affiliates ............................. 412 --
Purchase of other noncurrent assets .................. (760) (2,735)
-------- --------
Net cash provided (used) by investing activities (5,790) 58,558
-------- --------
Cash flows from financing activities:
Borrowings on long-term debt .......................... 3,318 2,075
Payments on long-term debt and capital leases ......... (13,842) (57,470)
Repurchase of common shares ........................... (173) --
Stock issue on exercise of warrants and options ....... 8,969 --
Currency translation .................................. 10 14
-------- --------
Net cash (used) by financing activities ......... (1,718) (55,381)
-------- --------
Net increase in cash and cash equivalents ............... 14,058 3,180
Cash and cash equivalents, including restricted cash,
at beginning of period ............................... 33,697 41,083
-------- --------
Cash and cash equivalents, including restricted cash,
at end of period ..................................... $ 47,755 $ 44,263
======== ========
SUPPLEMENTAL DISCLOSURES Cash paid during the period for:
Interest ............................................. $ 1,333 $ 379
======== ========
Taxes ................................................ $ 438 $ 848
======== ========
See the accompanying notes to the consolidated financial statements.
7
<PAGE>
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1996 and 1995
(1) Organization and Summary of Significant Accounting Policies
Organization and Presentation
The accompanying consolidated financial statements include the accounts
of Edisto Resources Corporation, a Delaware corporation ( the "Company" or
"Edisto"), and its wholly and majority owned subsidiaries. The Company conducts
its consolidated activities through two lines of business: (i) natural gas
marketing, and (ii) oil and gas exploration and production which is conducted
through a 73% interest in Convest Energy Corporation ("Convest"), an independent
oil and gas exploration and production company listed on the American Stock
Exchange. Edisto owns 7,598,771 shares of Common Stock of Convest.
Prior to March 1996, the Company conducted its natural gas marketing
operations through four wholly owned subsidiaries. In March 1996, Edisto
consolidated its domestic gas marketing operations into one subsidiary, Energy
Source, Inc. ("Energy Source"). Accordingly, Vesta Natural Gas Company
("Vesta"), Vesta Energy Company ("Vesta Energy") and Energy Trading, Inc.
("Energy Trading"), subsidiaries of Edisto, have been merged into Energy Source.
In connection with the consolidation, Energy Source Canada, Inc. (formerly Enex
Gas, Ltd.), and Energy Source Power, Inc., also subsidiaries of Edisto, have
become wholly owned subsidiaries of Energy Source. Prior to acquiring its
interest in Convest, the Company conducted its oil and gas activities through
Edisto Exploration & Production Company ("Edisto E&P"). See Note 3 "Acquisitions
- - Convest Energy Corporation."
References to "Energy Source" shall refer to the Company's wholly owned
gas marketing subsidiaries, without Convest. References to the "Company" or
"Edisto" shall refer to Edisto Resources Corporation and all of its consolidated
subsidiaries, including Convest. References to "Convest" shall refer to Convest
and the oil and gas activities conducted through Edisto E&P prior to acquiring
the interest in Convest.
Edisto conducted gas transmission activities through subsidiaries of
Vesta from July 1990 through the first quarter of 1994 when Vesta executed a
definitive agreement to sell its intrastate natural gas pipeline. The sale was
subject to regulatory approval and was closed in January 1995. In March 1994,
Edisto's 80% subsidiary, Multiflex International, Inc., sold all the stock of
its operating subsidiaries to Oceaneering International, Inc., at which time the
corporate name was changed to MINT Holding Company ("MINT"). See Note 4
"Discontinued Operations" for a discussion of both the sale of the pipeline and
the MINT subsidiaries.
On October 26, 1992, Edisto and certain of its affiliates, including
Edisto E&P, filed voluntary petitions under Chapter 11 of the Bankruptcy Code in
the U. S. Bankruptcy Court for the District of Delaware. On June 29, 1993,
Edisto's plan of reorganization became effective, and Edisto substantially
consummated its restructuring. Edisto's financial statements have been presented
in conformity with the AICPA's Statement of Position 90-7, "Financial Reporting
By Entities In Reorganization Under the Bankruptcy Code", issued November 19,
1990 ("SOP 90-7"). In accordance with SOP 90-7, Edisto adopted fresh start
reporting as of June 30, 1993, which provides for the allocation of the
reorganization value of the entity among the reorganized Edisto's assets on the
basis of the purchase method of accounting.
The accompanying unaudited interim financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and
regulations. In the opinion of management, the accompanying financial statements
include all adjustments, which are of a normal recurring nature, necessary for a
fair statement of the Company's financial position and operating results for the
interim periods presented. Interim results are not necessarily indicative of
those for a full year. These interim financial statements should be read in
conjunction with Edisto's audited financial statements, and footnotes thereto,
which are included in Edisto's Annual Report on Form 10-K for the year ended
December 31, 1995, filed with the Securities and Exchange Commission.
Summary of Significant Accounting Policies
Cash and Cash Equivalents. Cash equivalents consist of short-term highly
liquid investments which are readily convertible into cash and have original
maturities of three months or less. At September 30, 1996, the Company had cash
and cash equivalents, including restricted cash, of approximately $47.8 million.
Restricted Cash. Restricted cash of $0.9 million at Energy Source consisted
of funds held as collateral for letters of credit.
Risk Management. "Assets from Risk Management Activities" are primarily
cash on deposit with established brokerage firms and counterparties. At
September 30, 1996 and December 31, 1995, the Company had "Assets from Risk
Management Activities" of $13.8 million and $19.1 million, respectively.
Periodically, Edisto enters into financial instruments to hedge against the
volatility of natural gas and oil prices. The hedging objectives include
assurance of stable and known minimum cash flows and fixed favorable prices. The
hedges are effected through the sale and purchase of futures contracts and
options on the New York Mercantile Exchange
8
<PAGE>
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1996 and 1995
and price swap agreements with major financial institutions and companies. Gains
or losses on the hedging agreements are deferred and recognized in either oil
and gas production revenues or gas marketing revenues, as appropriate, when the
hedged transaction occurs, and are recorded as revenue or expense in the month
for which the hedged transaction is completed.
Net Income Per Share. Income (loss) per share is based on the weighted
average number of common shares outstanding. The effect of common share
equivalents was not dilutive for 1996 or 1995.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk. Edisto's oil and gas revenues are derived
principally from uncollaterallized sales to customers in the oil and gas
industry. The concentration of credit risk in a single industry affects the
Company's overall exposure to credit risk because customers may be similarly
affected by changes in economic and other conditions. Edisto has not experienced
significant credit losses on receivables from such sales.
Reclassifications and Consolidation. Certain reclassifications have been
made to the 1995 consolidated financial statements to conform to the
presentation for 1996. All significant intercompany balances and transactions
have been eliminated.
Convest Energy Corporation
Restricted Cash. Restricted cash of $0.3 million at Convest consisted of
certificates of deposit held by various financial institutions. The certificates
of deposit are held in escrow as collateral for letters of credit issued for (i)
lease payments on certain offshore platforms and (ii) estimated plugging and
abandonment costs expected to be incurred on certain onshore oil and gas
properties. Restricted cash is included in cash and cash equivalents in the
accompanying consolidated statements of cash flows.
Abandonment Reserve. Convest records its estimate of future abandonment
costs of offshore properties, and accrues such costs using a unit-of-production
method based upon estimated proved recoverable reserves. Abandonment costs are
estimated under current regulations using current costs and are reviewed
periodically and adjusted as new information becomes available. Abandonment
costs on onshore properties are typically nominal due to the salvage value of
well equipment, and accordingly, the Company does not provide for the
abandonment of its onshore properties.
Upon emerging from bankruptcy in July 1993, Edisto E&P entered into a
settlement with the United States Minerals Management Service relating to
estimated plugging and abandonment costs for 14 Gulf of Mexico OCS leases in
which Edisto E&P owned interests. Pursuant to this settlement, the operator of
the leases, Edisto E&P and other co-lessees are required to provide security for
payment of such costs through quarterly payments to an Abandonment Fund. As of
September 30, 1996 and December 31, 1995, Convest was subject to total
Abandonment Fund payments of $4.3 million.
As of September 30, 1996 and December 31, 1995, Convest had made
payments totaling $4.2 million and $3.7 million to the Abandonment Fund,
respectively. These payments were applied to Convest's total abandonment reserve
of $10.1 million and $10.8 million, as of September 30, 1996 and December 31,
1995, respectively, resulting in a net abandonment reserve of $5.9 million and
$7.1 million as of those dates. The current portion of the abandonment reserve
was $2.2 million and $556,000 as of September 30, 1996 and December 31, 1995,
respectively. The current portion of the abandonment reserve is included in
"Accrued Liabilities and Other" and the noncurrent portion is included in "Other
Noncurrent Liabilities" in the consolidated financial statements.
Lease Operating Expenses. In connection with a 1992 sale of certain
future production volumes of oil to Enron Reserve Acquisition Corp., Convest
established a reserve for the expenses associated with the volumes sold and
amortizes this reserve as the volumes are delivered. As of September 30, 1996
and December 31, 1995, the current balance of this reserve was $1.3 million and
$1.8 million, respectively, and the long-term balance was $4.2 million and $4.6
million, respectively, and are included in "Accrued Liabilities and Other" and
"Other Noncurrent Liabilities," in the consolidated financial statements.
Gas Balancing. Convest uses the entitlements method of accounting for
gas imbalances. Receivables resulting from undertakes of gas production at
September 30, 1996 and December 31, 1995 were $2.3 million and $1.4 million,
respectively. The current portion of these receivables is included in "Accounts
Receivable - Oil and Gas Production" and the long-term portion is included in
"Other Assets" in the consolidated financial statements. Deferred revenue and
payables resulting from overtakes of gas production at
9
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EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1996 and 1995
September 30, 1996 and December 31, 1995 were $2.7 million, and are included in
"Deferred Revenue" in the consolidated financial statements.
Property and Equipment. Convest follows the successful efforts method of
accounting for its oil and gas properties. Costs of productive wells,
developmental drilling expenditures, including dry holes, and productive leases
are capitalized and amortized by lease on a unit-of-production basis over the
life of the remaining proved reserves. Exploratory drilling costs, including
stratigraphic test wells, are initially capitalized, but charged to expense if
the well is determined to be unsuccessful. Gas is converted to equivalent
barrels of oil on an energy content basis of six Mcf of gas per barrel of oil.
Oil and gas leasehold costs are capitalized when incurred. Unproved properties
are assessed periodically on a property-by-property basis and impairments in
value are charged to expense. Exploratory expenses, including geological and
geophysical expenses and annual delay rentals, are charged to expense as
incurred.
In the fourth quarter of 1995, Convest adopted Statement of Financial
Accounting Standards No. 121 ("SFAS 121") regarding accounting for the
impairment of long-lived assets. SFAS 121 requires Convest to recognize an
impairment loss for its proved oil and gas properties if the carrying value of
such properties (i.e., total capitalized costs less accumulated depreciation and
depletion) exceeds the undiscounted expected future cash flows attributable to
such properties. Under SFAS 121, Convest must regularly assess the need for an
impairment of capitalized costs of oil and gas properties on a
property-by-property basis. If an impairment is indicated based on undiscounted
expected future cash flows, then an impairment loss is recognized to the extent
that net capitalized costs exceed discounted expected future cash flows.
The Company's SFAS 121 evaluation for the second and third quarters of
1996 was prepared using the Company's 1995 year end reserve estimates adjusted
for production and other known changes subsequent to the preparation of the
Company's year end reserve estimates. As a result of this evaluation, the
Company determined that an offshore property had less reserves than previously
estimated. Accordingly, the Company recorded an impairment loss on the property
of approximately $1.1 million during the second quarter of 1996 based on
production problems encountered during the period. No impairment loss was
recorded during the third quarter of 1996.
Fixed assets are depreciated using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized using
the straight-line method over the lesser of the term of the lease or the
estimated useful lives of the improvements.
10
<PAGE>
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1996 and 1995
(2) Business Segment Information
The Company conducts its activities through two lines of business: natural
gas marketing and oil and gas exploration and production.
Consolidating Balance Sheet
September 30, 1996
(in thousands)
<TABLE>
<CAPTION>
Edisto Gas
Marketing & Consolidating Edisto
Convest Corporate Adjustments (Consolidated)
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents ................. $ 4,605 $ 43,150 $ -- $ 47,755
Assets from risk management activities .... 817 12,998 -- 13,815
Storage inventory ......................... -- 4,212 -- 4,212
Accounts receivable ....................... 5,823 97,082 (2,540) 100,365
Other current assets ...................... 1,748 1,065 -- 2,813
--------- --------- --------- ---------
Total current assets .................... 12,993 158,507 (2,540) 168,960
--------- --------- --------- ---------
Property and equipment, net ............... 56,453 1,653 -- 58,106
Other assets .............................. 2,959 608 -- 3,567
--------- --------- --------- ---------
72,405 160,768 (2,540) 230,633
========= ========= ========= =========
LIABILITIES AND EQUITY:
Current portion of long-term debt ......... -- 308 -- 308
Accounts payable .......................... 10,140 103,394 (2,540) 110,994
Accrued liabilities and other ............. 7,596 6,244 -- 13,840
Liabilities from risk management activities -- 1,095 -- 1,095
--------- --------- --------- ---------
Total current liabilities ............... 17,736 111,041 (2,540) 126,237
--------- --------- --------- ---------
Long-term debt ............................ 8,503 27 -- 8,530
Minority interest ......................... -- 9,339 -- 9,339
Other noncurrent liabilities .............. 8,551 405 -- 8,956
--------- --------- --------- ---------
Total long-term liabilities ............. 17,054 9,771 -- 26,825
--------- --------- --------- ---------
Stockholder's equity ...................... 37,615 39,956 -- 77,571
--------- --------- --------- ---------
$ 72,405 $ 160,768 $ (2,540) $ 230,633
========= ========= ========= =========
</TABLE>
11
<PAGE>
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1996 and 1995
(3) Acquisitions/Dispositions
Convest Energy Corporation
On June 26, 1995, Convest acquired all of the capital stock of Edisto's
oil and gas exploration and production subsidiary, Edisto E&P, in exchange for
6,185,400 newly issued shares of Convest Common Stock and $10,000 in cash. These
newly issued shares increased Edisto's interest in Convest from 31% to 72%. Upon
the closing of the transaction with Convest (the "Convest Transaction"), the
Convest Board of Directors was restructured so that affiliates of Edisto
constituted a majority of the Convest Board.
Since Edisto acquired control of Convest in the Convest Transaction, the
Convest Transaction has been accounted for as a reverse acquisition with Edisto
E&P being considered the acquiring entity. As a result, Edisto E&P's historical
financial statements became the historical financial statements of Convest and
the purchase price was allocated to the assets and liabilities of Convest based
on their respective fair values at the acquisition date.
Edisto accounted for the Convest Transaction using the purchase method
of accounting. Edisto's Consolidated Statements of Operations include the
results of operations for Convest as if Convest was consolidated beginning
January 1, 1995. However, the share of the Convest loss attributable to the
interest not owned by Edisto prior to the date of the Convest Transaction has
been added back as a preacquisition loss in the accompanying Consolidated
Statement of Operations for such period.
In March 1996, the Board of Directors of Edisto authorized the open
market purchase of up to 1,160,000 shares of Common Stock of Convest from time
to time. The timing and amounts of purchases will be governed by applicable SEC
rules and market conditions. The purpose of the stock purchase is to increase
Edisto's ownership percentage of Convest to over 80% to allow Edisto and Convest
to consolidate for federal income tax purposes. Edisto has existing net
operating loss carryforwards that may be beneficial to Convest if the two
companies are consolidated for tax purposes. On a primary basis, Edisto needs to
acquire an additional 875,000 shares to allow it to reach 80.5% of Convest's
outstanding shares. On a fully diluted basis, however, Edisto needs to acquire
approximately 1,160,000 shares to reach 80.5% because of outstanding stock
options. As of October 31, 1996, Edisto had purchased an additional 92,000
shares of Convest Common Stock. Edisto presently owns 7,598,771 shares of Common
Stock of Convest which is 73% of the outstanding Common Stock.
Edisto Resources Corporation
In April 1996, Edisto sold its 11% interest in the Zarat Permit offshore
of Tunisia for $1.4 million in cash which resulted in a gain of approximately
$0.3 million. This was Edisto's last remaining international oil and gas
property.
(4) Discontinued Operations
Gas Transmission Operations/Sale of Pipeline. Edisto conducted its gas
transmission activities through wholly owned subsidiaries of Vesta during the
period from July 1990 through the execution of a definitive agreement in
February 1994 for the sale of Vesta's 218-mile Missouri intrastate natural gas
pipeline to UtiliCorp United Inc. The sale was subject to regulatory approval
and was closed in January 1995. Vesta continued to operate the pipeline from the
date of the definitive agreement until the close of the sale, and reported
assets, liabilities and results of operations as discontinued operations.
The gross sales price, including adjustments for net working capital and
capital expenditures, was $78.1 million in cash. $45.6 million of the proceeds
was used to pay outstanding debt, including interest and prepayment penalties,
to three lenders of Vesta. Edisto recorded a gain on the sale of the pipeline of
approximately $2.6 million in the first quarter of 1995.
Manufacturing Operations/Sale of MINT Subsidiaries. In March 1994, MINT
sold the stock of its operating subsidiaries to Oceaneering International, Inc.
for a purchase price of $12.6 million in cash. After the payment of
approximately $3.6 million to third party lenders to retire debt of MINT and
certain expenses associated with the sale, the net proceeds were approximately
$9 million. Under the terms of the indemnification in the purchase agreement,
MINT retained $9 million in cash for the one year indemnification period to
settle any possible indemnification claims after the sale. After the
indemnification period ended in March 1995 with no claims being made, MINT
repaid $8.8 million of its outstanding debt owed to Edisto. Approximately
$450,000 was left in MINT to cover potential remaining liabilities of MINT.
Edisto recognized a gain on the MINT sale of $3.8 million in March 1995.
12
<PAGE>
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1996 and 1995
(5) Related Party Transactions
In the Convest Transaction, Edisto retained the tax benefits of the net
operating loss carryforwards ("NOLs") of Edisto E&P. The tax benefits include a
$3.3 million NOL usable for regular taxable income and a $3.6 million NOL usable
for alternative minimum taxable income. Based on current projections of
Convest's future taxable income, Convest determined that the remaining NOLs of
Edisto E&P would be a valuable asset that could be utilized by Convest in the
near-term future. Accordingly, Edisto allowed Convest to utilize the NOLs of
Edisto E&P in consideration for $550,000.
During January 1995, Convest entered into a gas marketing arrangement
with Energy Source, whereby Energy Source markets a substantial portion of
Convest's gas production and assumes certain related administrative functions.
Effective November 1, 1995, Convest and Energy Source extended the term of the
agreement to December 31, 1996 with Convest having the right to renegotiate the
pricing structure at each six month interval of the extended term. In exchange
for its services, Energy Source receives a fee of no more than 2% of the spot
market price. The Company and Convest are currently reviewing the gas marketing
agreement to determine under what terms and conditions the agreement should be
extended.
Energy Source executes trades of futures contracts on the New York
Mercantile Exchange on behalf of Convest. These trades are made in connection
with Convest's risk management program to hedge against the volatility of
natural gas and crude oil prices. In this regard, Energy Source acts solely in a
ministerial capacity to purchase or sell the futures contracts at price levels
directed by Convest's management. Energy Source charges a commission of $.0025
per Mcf of gas or barrel of crude oil for each trade executed to cover Energy
Source's administrative costs to perform such service.
In July 1996, Edisto and Convest obtained a directors' and officers'
fiduciary insurance policy that covers both companies. The annual insurance
premium was allocated 68% to Edisto, for a cost of $204,000, based on the
relative percentage that the total assets of Edisto bear to the total assets of
both Edisto and Convest.
Effective July 1, 1995, the Company and Convest agreed to share certain
administrative costs to reduce the overall cost that would otherwise be incurred
by each of them in the absence of such an arrangement. Under the arrangement,
certain costs associated with shareholder communication services, costs of
computer hardware and software systems and certain administrative staff who
perform duties on behalf of both entities are shared by Edisto and Convest based
on their respective utilization. In addition, the salary of Michael Y. McGovern,
who serves as the Chairman and Chief Executive Officer of Edisto and Convest, is
shared equally between the two companies. Effective July 1, 1995, Convest began
reimbursing Edisto for one-half of Mr. McGovern's base salary ($275,000) plus
one-half of his payroll taxes and benefits (such as health, disability and life
insurance and 401(k) plan contributions).
Each of the affiliated party transactions described above was approved
by either a special committee of the Convest Board, which was composed of
outside directors with no affiliation to Edisto, or the unanimous consent of the
Convest Board.
(6) Long-Term Debt
Long-term debt consisted of the following (in thousands):
September 30, December 31,
1996 1995
Convest Credit Agreement ............ $ 8,503 $ 19,175
Energy Source Canada Credit Agreement 219 73
Capital leases ...................... 88 175
Other ............................... 28 8
-------- --------
Total debt .......................... 8,838 19,431
Less current maturities ............. (308) (1,796)
-------- --------
Total long-term debt ............ $ 8,530 $ 17,635
======== ========
13
<PAGE>
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1996 and 1995
Convest
Convest Energy Corporation Credit Agreement
On June 26, 1995, simultaneous with the closing of the Convest
Transaction, Convest and Edisto E&P entered into an Amended and Restated Secured
Revolving Credit Agreement (the "Convest Credit Agreement") with Bank One,
Texas, N.A. ("Bank One"), and Compass Bank-Houston, N.A. This facility, which
terminates January 1, 1998, combined the existing credit facilities of Convest
and Edisto E&P. Bank One serves as agent bank of the Convest Credit Agreement.
The facility is secured by a first lien on all of Convest's assets, including
the oil and gas properties and gas plant. Interest on borrowings under the
Convest Credit Agreement is computed at (i) the agent bank's prime lending rate
(the "Base Rate") plus 3/4% or (ii) the London Inter Bank Offering Rate
("LIBOR") plus 2-3/4%. In addition, Convest pays a commitment fee equal to 1/2%
on any commitment amount in excess of outstanding borrowings.
The borrowing base is redetermined semi-annually on or before May 31
and November 30 of each year by the lending banks based on engineering criteria
established by the banks. As of September 30, 1996 and December 31, 1995, the
borrowing base available under the facility was $21.5 million and $29.8 million,
respectively, and reduces by $1.0 million per month. During January 1996, Edisto
E&P sold its interest in an offshore oil and gas property, and accordingly, the
borrowing base was reduced by $1.8 million simultaneous with the sale of the
property.
As of September 30, 1996 and December 31, 1995, outstanding
indebtedness under the Convest Credit Agreement was $8.5 million and $19.2
million, respectively, with an additional $200,000 of letters of credit
outstanding as of those dates, primarily related to performance bonds issued for
oil and gas operations. At September 30, 1996, substantially all of the
outstanding borrowings were subject to an interest rate of prime plus 3/4% at an
effective rate of approximately 9% per annum.
Energy Source
Energy Source, Inc. Credit Facility
During 1994, Energy Source entered into a loan agreement with Bank One
establishing a revolving credit facility (the "Energy Source Credit Facility").
On March 31, 1996, the Energy Source Credit Facility was amended to, among other
things, increase the available borrowings from $8.0 million to $20.0 million and
extend the maturity date from June 1, 1996 to December 31, 1997. Borrowings
under the facility are limited to the lesser of (i) $20.0 million or (ii) the
sum of 80% of Energy Source's eligible accounts receivable plus certain liquid
collateral. Availability under the Energy Source Credit Facility may be used for
direct borrowings up to a sublimit of $5.0 million, or for the issuance of
letters of credit. Interest accrues at Bank One's Base Rate (8-1/4% at September
30, 1996) plus 1% and is payable monthly. At September 30, 1996, no debt was
outstanding under this facility and letters of credit of $3.5 million had been
issued.
Borrowings under the Energy Source Credit Facility are secured by a
pledge of all of Energy Source's accounts receivable, inventory and intangibles
and cash collateral equal to 25% of the outstanding letters of credit and/or
advances under the facility. The facility requires Energy Source to maintain a
minimum current ratio of 1.2 to 1.0 and a tangible net worth of $20.0 million.
Loan covenants prohibit dividends and place limits on general and administrative
expenses and certain open unhedged positions on fixed price commitments for the
purchase and sale of natural gas and natural gas products.
Energy Source Canada Credit Agreement
In March 1995, Energy Source Canada entered into a revolving credit
facility with the National Bank of Canada (the "ESC Credit Facility").
Borrowings under the facility are limited to the lesser of (i) $5.0 million
(CDN), (ii) the sum of 75% of Energy Source Canada's eligible accounts
receivable plus 50% of certain inventories or (iii) 200% of the equity position
of Energy Source Canada. Availability under the ESC Credit Facility may be used
for direct borrowings or for the issuance of letters of credit up to a sublimit
of $1.25 million (CDN). Interest accrues at National Bank of Canada's Prime Rate
(5-3/4% at September 30, 1996) plus 1% and is payable monthly. At September 30,
1996, $0.3 million (CDN) in borrowings were outstanding and letters of credit
for $3.6 million (CDN) had been issued.
Borrowings under this facility are secured by certain accounts
receivable and inventories. The facility contains covenants which prohibit
dividends and place limits on certain expenditures and open positions for the
purchase and sale of natural gas and natural gas products.
14
<PAGE>
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1996 and 1995
(7) Commitments and Contingencies
Litigation
MINT Lawsuit. In January 1993, Bruce W. McConkey and two other
shareholders of MINT, who collectively hold 20% of the outstanding MINT common
stock, filed a lawsuit against the Company, MINT and certain of its former
directors who were former officers of the Company. The lawsuit, among other
things, (i) alleges that MINT constructively terminated Mr. McConkey's
employment as the President and CEO of MINT, thereby breaching his employment
agreement; (ii) alleges that certain directors of MINT breached their fiduciary
duties to the plaintiffs, in their capacity as minority shareholders, and (iii)
asserts derivative claims on behalf of MINT against certain directors for
alleged mismanagement of MINT. The plaintiffs seek actual damages in an
unspecified amount, punitive damages and attorney's fees. The Company has filed
a counterclaim against Mr. McConkey seeking payment of a $250,000 guarantee and
a $12,500 promissory note plus interest. On October 16, 1996, the trial court
granted an interlocutory summary judgment in favor of Edisto, MINT and the
individual defendants on all claims against them other than the claim against
MINT that it constructively terminated Mr. McConkey's employment. Based on
developments of this case to date, the Company's management does not believe the
outcome of this lawsuit will have a material adverse effect on the Company's
consolidated financial position or results of operations.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's consolidated financial statements and the notes thereto.
OVERVIEW AND SIGNIFICANT DEVELOPMENTS
Financial Results
The Company had net income of $1.2 million for the nine months ended
September 30, 1996 and a net loss of $1.7 million for the three months ended
September 30, 1996. Set forth below is a table summarizing the Company's income
by business segment and subsidiary (in thousands):
Nine Months Three Months
Ended Ended
September 30, September 30,
1996 1996
Operating Income (Loss):
Energy Source, Inc. ......
U.S ................. $ (935) $(2,212)
Canada .............. (749) (130)
------- -------
(1,684) (2,342)
Convest Energy Corporation 2,860 1,542
Corporate and other ...... (1,245) (541)
------- -------
Total Operating Loss . (69) (1,341)
------- -------
Interest and other ....... 1,306 (365)
------- -------
NET INCOME (LOSS) ... $ 1,237 $(1,706)
======= =======
Edisto Resources Corporation
Gas Sales Volume Increases and Gross Margin Decreases
In accordance with the Company's business plan, the Company's gas
marketing sales volumes have increased significantly in 1996. The volumes of gas
sold for the nine and three months ended September 30, 1996 have increased 67%
and 90%, respectively, from the comparable periods in 1995, as shown by the
table set forth below:
Nine Months Nine Months
Ended Ended
September 30, September 30, Percentage
1996 1995 Increase
------- ------- -------
Volume sold (MMcf)
Domestic ....... 201,614 147,242 37%
Canadian ....... 88,273 26,702 231%
------- ------- -------
Total ....... 289,887 173,944 67%
Average Daily Volumes 1,058 637 67%
(MMcf)
16
<PAGE>
Three Months Three Months
Ended Ended
September 30, September 30, Percentage
1996 1995 Increase
------ ------ ---------
Volume sold (MMcf)
Domestic 71,557 56,568 26%
Canadian 52,840 8,788 501%
------- ------ ----
Total 124,397 65,356 90%
Average Daily Volumes 1,352 710 90%
(MMcf)
The Company's volumes have continued to increase in the fourth quarter
of 1996. The average daily volumes in October 1996 were approximately 1,974
MMcf/day and are expected to remain at this level or higher for the remainder of
the quarter. A large proportion of this growth has been due to volumes sold in
Canada.
The Company's gross margins remained constant at $.01 per Mcf in the
second and third quarters of 1996. The gross margins of $.05 per Mcf in the
first quarter of 1996 were unusually large due to the volatile market conditions
caused by the harsh winter conditions in many areas of the United States. In the
third quarter of 1996, the Company increased its total volumes sold from 85,123
MMcf to 124,397 MMcf, while maintaining a $.01 per Mcf margin.
The larger volumes also have required the Company to increase its
general and administrative expenses (for both additional personnel and new
computer systems) to support the Company's increased volumes in the third and
fourth quarters of 1996 and anticipated volume growth in 1997. The Company's
strategic plan is to seek increased volumes with higher margins in the Northeast
United States as gas utilities begin to deregulate. This plan has increased
overhead as additional staff has been hired for the Company's new Pittsburgh,
New York and New Jersey sales offices, but the results from the expansion will
not materialize until future periods. The increased overhead contributed to the
lower operating results during the second and third quarters of 1996.
The increased volumes were achieved during a period when the Company's
gas marketing operations were consolidated under Energy Source. This
consolidation, which included the physical consolidation of the Tulsa and
Houston offices, employee relocations and staff reorganizations, had a negative
impact on operations during the second and third quarters of 1996. Also, the
third quarter operating results include $580,000 of non-recurring expenses
associated with the consolidation.
The Company's third quarter results include the Company's equity share
in the earnings of its unconsolidated affiliate, CEG Energy Options, Inc.
("CEG"), a gas marketing company which operates in Saskatchewan, Canada. CEG
contributed $0.1 million of income during the third quarter of 1996.
Exercise of Warrants
Warrants for the purchase of 918,070 shares of Edisto Common Stock
were exercised prior to the June 28, 1996 expiration date. These Warrants were
issued in connection with the consummation of Edisto's bankruptcy on June 29,
1993 and entitled the holder to purchase Edisto Common Stock for $9.74 per
share. After the exercise of the Warrants and Options, Edisto has 13,850,552
outstanding shares of Common Stock. Edisto received $8.9 million from the
exercise of the Warrants, which adds to its existing working capital.
Sale of Offshore Tunisian Property
In April 1996, Edisto sold its 11% interest in the Zarat Permit
offshore of Tunisia for $1.4 million which resulted in a gain of approximately
$0.3 million. This was Edisto's last remaining international oil and gas
property.
Engagement of Investment Banking Firm
On March 8, 1996, the Company announced that it has engaged the
investment banking firm of Petrie Parkman & Co., Inc. to identify and evaluate
strategic partners for the Company's gas marketing operations. At this time, the
Company is still in the process of identifying and evaluating potential
strategic partners and does not expect this process to be concluded until later
in 1996.
Edisto Common Stock Repurchase
In December 1995, the Company's Board of Directors authorized the
Company to repurchase up to 1,000,000 shares of Edisto's Common Stock. In the
first quarter of 1996, the Company repurchased 28,500 shares.
17
<PAGE>
Convest Energy Corporation
Management Changes
In September 1996, Richard T. Howell resigned from his positions as
the President and Chief Operating Officer of Convest, and as a director.
Effective November 15, 1996, Gary L. Pittman is resigning from his positions as
an Executive Vice President and Chief Financial Officer of Convest. Michael Y.
McGovern, the Chairman and Chief Executive Officer of Convest and Edisto, will
assume the responsibilities of Mr. Howell and Mr. Pittman for the near future.
Impairment of Oil and Gas Properties under SFAS No. 121
As a result of Convest's SFAS No. 121 evaluation of its proved oil and
gas properties for the second quarter of 1996, Convest determined that an
offshore property had less reserves than as previously estimated. Accordingly,
the Company recorded an impairment loss on the property of approximately $1.1
million during the second quarter of 1996 based on production problems
encountered during the period. No impairment loss was recorded during the third
quarter of 1996. This impairment loss is described in more detail in Note 2 to
the Consolidated Financial Statements and "Results of Operations - Impairment of
Oil and Gas Properties Under SFAS No. 121" below.
Convest Drilling Operations
During 1996, Convest has invested a substantial portion of its cash
flow in drilling operations on its offshore properties. As described below under
"Liquidity and Capital Resources - Capital Expenditures," Convest's capital
expenditure budget for 1996 has increased from approximately $8.0 million to
$15.0 million. This drilling activity will continue in the fourth quarter of
1996 with three wells to be drilled and three workovers scheduled to be
completed during the period. The most significant drilling operations during
1996 are described below.
Eugene Island 281. During early 1996, Convest participated in the
drilling of a development well in Block 281 of the Eugene Island area in the
Gulf of Mexico. The well was drilled from an existing platform structure at an
estimated completed well cost of approximately $1.0 million, net to Convest's
37% working interest, and tested at a daily rate of 1,276 barrels of oil and
1,699 Mcf of gas. The well was connected to existing production facilities on
the platform and was flowing at approximately 600 barrels of oil per day and 300
Mcf of gas per day, but subsequently, the production rates have declined.
South Timbalier. During April 1996, Convest participated in the
drilling of a development well on Block 221 of the South Timbalier area of the
Gulf of Mexico. The well was drilled from an existing well bore to approximately
12,000 feet. The well encountered productive sands and was tested at a rate of
approximately 7,000 Mcf of gas per day. The cost of this well was approximately
$1.4 million, net to Convest's 40% interest. This well is producing at
approximately 6,500 Mcf of gas and 115 barrels of oil per day.
During June 1996, Convest participated in the drilling of an 8,000
foot exploratory test well on a prospect located across Block 144 and Block 109
of the South Timbalier area. During early July 1996, the well encountered no
commercial production and was subsequently abandoned. The cost of the well was
approximately $600,000, net to Convest's 50% working interest. Convest also has
written off the approximate $350,000 leasehold cost of this property.
During early July 1996, Convest participated in a second exploratory
well in the South Timbalier area. The 5,700 foot well was drilled on a prospect
situated across Block 109 and Block 102 and encountered no commercial
production. This well cost approximately $550,000, net to Convest's 50%
interest.
Grand Isle. During June 1996, Convest participated in the drilling of
an 8,000 foot development well on Block 82 of the Grand Isle area of the Gulf of
Mexico. The well encountered productive sands and test flowed at approximately
4,200 Mcf of gas per day. Total cost of the well was approximately $1.0 million,
net to Convest's 39% working interest.
High Island. During September 1996, Convest participated in the
drilling of a 12,000 foot development well on Block 195 of the High Island area
of the Gulf of Mexico. The well encountered the objective formation and tested
in excess of 5,000 Mcf of gas per day. Convest is currently laying the flowline
to the existing facilities and expects it to be in production by mid-November.
Total cost of the well was approximately $1.0 million, net to Convest's 24%
interest. Convest plans to drill a second well in this area late in the fourth
quarter of 1996 or early in the first quarter of 1997.
Expense for Unsuccessful Wells
Since Convest follows the successful efforts method of accounting, the
drilling costs and the leasehold writeoffs of approximately $1.5 million for the
two unsuccessful South Timbalier exploratory wells were expensed based on the
costs incurred during the second and third quarters of 1996. Although the two
wells were completed in July 1996, the leasehold writeoffs and a portion of the
exploration costs were incurred prior to that time. Therefore, $750,000 of this
cost was expensed during the second quarter of 1996 and $790,000 of additional
cost was expensed during the third quarter of 1996.
18
<PAGE>
Convest Property Sales
During January 1996, Convest sold its interest in Vermillion Block 284
for approximately $2.0 million. Convest also sold other nonstrategic oil and gas
properties during the first quarter for aggregate sales proceeds of
approximately $400,000. As a result of these sales, Convest recorded a gain of
approximately $820,000 during 1996.
Convest Common Stock Purchase
In March 1996, the Board of Directors of Edisto authorized the open
market purchase of up to 1,160,000 shares of Common Stock of Convest from time
to time. The timing and amounts of purchases will be governed by applicable SEC
rules and market conditions. The purpose of the stock purchase is to increase
Edisto's ownership percentage of Convest to over 80% to allow Edisto and Convest
to consolidate for federal income tax purposes. Edisto has existing net
operating loss carryforwards that may be beneficial to Convest if the two
companies are consolidated for tax purposes. In April 1996, Edisto purchased an
additional 92,000 shares of Convest Common Stock. Edisto presently owns
7,598,771 shares of Common Stock of Convest which is 73% of the outstanding
Common Stock.
19
<PAGE>
<TABLE>
RESULTS OF OPERATIONS
The following discussion and analysis is based on the historical
results of operations of the Company for the periods indicated. The financial
information set forth below should be reviewed in conjunction with the unaudited
consolidated financial statements of the Company and the notes thereto set forth
elsewhere in this Report.
<CAPTION>
Nine Months Nine Months Three Months Three Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Edisto Gas Marketing:
Domestic:
Gross margin (in thousands) ... $ 5,742 $ 498 $ 334 $ 38
=========== =========== =========== ==========
Volume sold (MMcf) ............ 201,614 147,242 71,557 56,568
Average prices ($ per Mcf):
Sales price ................ $ 2.25$ 1.67 $ 1.99$ 1.54
Purchase price ............. 2.22 1.67 1.99 1.54
----------- ----------- ----------- ----------
Gross margin ............... $ .03$ -- $ -- $ --
=========== =========== =========== ==========
Canadian:
Gross margin (in thousands) ... $ 419 $ 1,242 $ 321 $ 782
=========== =========== =========== ==========
Volume sold (MMcf): ........... 88,273 26,702 52,840 8,788
Average prices ($ per Mcf):
Sales price ................ $ .99$ .97 $ .93 $ .96
Purchase price ............. .98 .92 .92 .87
----------- ----------- ----------- ----------
Margin ..................... $ .01$ .05 $ .01 $ .09
=========== =========== =========== ==========
Total:
Gross margin (in thousands) ... $ 6,161 $ 1,740 $ 655 $ 820
=========== =========== =========== ==========
Volume sold (MMcf) ............ 289,887 173,944 124,397 65,356
Average prices ($ per Mcf):
Sales price ................ $ 1.87$ 1.56 $ 1.54 $ 1.47
Purchase price ............. 1.85 1.55 1.53 1.45
----------- ----------- ----------- ----------
Margin ..................... $ .02$ .01 $ .01 $ .02
=========== =========== =========== ==========
Convest Energy Corporation:
Revenue (in thousands):
Oil ........................ $ 12,746 $ 15,492 $ 4,901 $ 5,482
Gas ........................ 19,828 21,716 6,344 5,881
Gas Plant .................. 1,060 930 356 307
----------- ----------- ----------- ----------
$ 33,634 $ 38,138 $ 11,601 $ 11,670
=========== =========== =========== ==========
Production:
Oil (Mbbls) ................ 715 903 255 309
Gas (MMcf) ................. 10,494 14,562 3,488 4,416
Average sales price:
Oil (per Bbl)) ............. $ 17.83 $ 17.16 $ 19.22 $ 17.74
Gas (per Mcf) ............. $ 1.89 $ 1.49 $ 1.82 $ 1.33
Average expenses per equivalent
barrel:(1)
Production Costs ........... $ 4.75 $ 4.22 $ 4.12 $ 4.24
Depreciation and depletion . $ 4.98 $ 4.79 $ 5.28 $ 4.87
<FN>
(1) Natural gas is converted into oil equivalents at a rate of six Mcf of gas
per barrel of oil.
</FN>
</TABLE>
20
<PAGE>
Results of Operations for the Nine Months Ended September 30, 1996
compared to 1995
Energy Source, Inc.
Energy Source's operating loss for the nine months ended September 30, 1996
was $1.7 million. Gross margin was $6.2 million compared to $1.7 million in
1995. Total volumes sold increased 67 % over 1995.
The domestic gross margin of $.03 per Mcf for the nine months ended
September 30, 1996 was a substantial improvement over the breakeven margin for
the corresponding period in 1995. Volumes increased 37% over 1995. Energy
Source's first quarter of 1996 performance was caused by the volatile market
conditions experienced because of the harsh winter conditions in many areas of
the United States and Energy Source's strong supply positions. The improvement
in the first nine months of 1996 over the corresponding period of 1995 also was
due to the termination of any further expense in 1996 under the price protection
provision of a gas sales agreement with Laclede Gas Company for 55 MMcf of gas
per day. In 1995, the Company incurred $3.5 million of expense for the price
protection requirement under this agreement, $1.4 million of which was incurred
in the first nine months of 1995. There is no expense under this contract
provision for 1996.
The Canadian gross margin of $.01 per Mcf for the nine months ended
September 30, 1996 was a decrease of $.04 per Mcf compared to the same period in
1995. This decrease was caused by a market anomaly during the first quarter of
1996 in the correlation between prices used for the Company's purchase and sales
transactions and the NYMEX prices used to hedge these transactions. This
correlation anomaly was caused by the unexpectedly high demand during the winter
months.
Convest Energy Corporation
Oil and gas revenue decreased by approximately $4.6 million or 12%
between the nine month periods ended September 30, 1996 and 1995. The average
price Convest received for its oil and gas sales increased by 4% and 27%,
respectively, between the corresponding periods. Oil and gas production
decreased by 21% and 28%, respectively. The decrease in production volumes was
due primarily to the sale of producing oil and gas properties coupled with the
steep production decline associated with Convest's offshore Gulf of Mexico
properties. The effects of these production declines was partially offset by the
additional drilling on Convest's South Timbalier Block 144 property completed in
late 1995 and the addition of the Sensor properties purchased in mid 1995. As
previously stated, Convest's offshore properties are subject to inherent steep
production declines. In order to minimize the future effects of such declines,
Convest must replace its reserves through its exploratory and development
drilling and acquisition activities.
Convest uses a combination of futures contracts traded on the NYMEX and
price swaps with major financial institutions to hedge against the volatility of
natural gas and oil prices. Gains and losses recognized upon settlement of
Convest's hedge positions are deferred and recognized as oil and gas sales
revenue in the month of the underlying physical production being hedged. As a
result of Convest's hedging activities, Convest recorded hedging losses of
approximately $6.3 million for the nine month period ended September 30, 1996,
and hedging income of approximately $785,000 for the corresponding period of
1995. Such amounts were recorded as oil and gas sales revenue in the
accompanying statements of operations, and accordingly, such amounts are
reflected in the per unit price Convest received for its oil and gas sales.
The hedges affecting 1996 were implemented early in the fourth quarter
of 1995 when oil and gas prices were substantially lower. These hedges were made
as a defensive measure to assure stable cash flows in 1996. The past harsh
winter, however, drove prices up substantially and these high prices have
continued through most of 1996, which caused the hedging losses in 1996. Convest
has substantially decreased its hedging activities for the remainder of 1996 and
1997.
Production expenses decreased by approximately $2.4 million or 17%
between the corresponding periods. The decrease in production expenses is
primarily due to a decrease in workover activity during the nine months ended
September 30, 1996, and the sale of producing oil and gas properties during 1995
and early 1996. The decline in production expenses was offset by the incremental
operating expenses associated with the Sensor properties. Production expenses
per barrel of oil equivalent ("BOE") was $4.75 and $4.22 for the nine months
ended September 30, 1996 and 1995, respectively. The increase in production
expense per BOE is caused by the decreased offshore production without a
corresponding decrease in production expense.
Abandonment and exploration costs increased by approximately $1.0
million between the corresponding periods. The increase in abandonment and
exploration costs is primarily due to two unsuccessful South Timbalier wells of
costs of approximately $1,540,000. Also, Convest accrues its estimated cost of
abandonment of its offshore properties. Based upon a review of the reserve for
abandonment, it was determined that Convest had substantially provided for its
future abandonment liability, and accordingly, no additional accrual was
provided for in 1996.
Depreciation, depletion and amortization ("DD&A") on oil and gas
properties decreased by approximately $3.7 million or 23% between the
corresponding periods. The decrease in DD&A was due primarily to the production
declines discussed above. DD&A per BOE was $4.98 for the nine month period ended
September 30, 1996, compared to $4.79 for the corresponding period of 1995.
21
<PAGE>
In mid-January 1996, Convest completed the sale of an offshore oil and
gas property for sale proceeds of approximately $2.0 million, which resulted in
a gain of approximately $620,000. In addition, Convest sold several other
nonstrategic oil and gas properties during 1996 for aggregate sale proceeds of
approximately $400,000, which resulted in a gain of approximately $200,000.
Prior to 1995, Convest provided an impairment reserve for proved oil and
gas properties to the extent that total capitalized costs less accumulated
depreciation and depletion, exceed undiscounted future net revenues attributable
to proved oil and gas reserves on an overall basis. During March 1995, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standard No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). SFAS No. 121 requires
Convest to provide an impairment reserve for proved oil and gas properties to
the extent that total capitalized costs, less accumulated depreciation and
depletion, exceed undiscounted expected future cash flows attributable to proved
oil and gas reserves on a property-by-property basis. Convest adopted the
provisions of SFAS No. 121 during the fourth quarter of 1995.
Convest regularly assesses the need for an impairment of its oil and gas
properties. Convest's SFAS No. 121 evaluation for the second and third quarters
of 1996 was prepared using the Convest's 1995 year end reserve estimates
adjusted for production and other known changes subsequent to the preparation of
Convest's year end reserve estimates. As a result of this evaluation, Convest
determined that an offshore property had less reserves than as previously
estimated. Accordingly, Convest recorded an impairment loss on the property of
approximately $1.1 million during the second quarter based on production
problems encountered during the period. No impairment loss was recorded during
the third quarter of 1996.
Other Consolidated Income and Expenses
General and administrative expense increased by $0.9 million for the
nine months ended September 30, 1996 compared to the same period in 1995. This
increase is due to $1.2 million of non-recurring expenses associated with the
consolidation of the gas marketing subsidiaries.
Interest expense decreased by approximately 42% partially due to the
repayment of a short-term promissory note issued upon Convest's purchase of the
oil and gas assets of an affiliate. The short-term promissory note was repaid
simultaneous with the closing of the Convest Transaction. In addition, Convest
repaid a substantial portion of its outstanding borrowings under its long-term
credit facility during 1996.
The preacquisition loss of subsidiary is the loss attributable to the
shares of Convest owned by the Company prior to the effective date of the
Convest Transaction on June 26, 1995.
Edisto recognized gains on sales of assets of $1.2 million for the nine
months ended September 30, 1996 compared to a loss of $0.5 million for the same
period in 1995. The increase is due primarily to Edisto's sale of its Tunisian
property for a gain of $0.3 million and a gain of $0.8 million from the sale of
certain Convest properties.
Results of Operations for the Three Months Ended September 30, 1996
compared to 1995
Energy Source, Inc.
Energy Source experienced an operating loss of $2.3 million for the
three months ended September 30, 1996 compared to an operating loss of $0.4
million for the same period in 1995. Gross margin during this period was $0.7
million compared to $0.8 million during the same period in 1995. The combination
of lower demand for natural gas and the continued volatility of natural gas
prices in the third quarter contributed to the downward pressure on gross
margins. Volumes sold increased 90% over 1995. These larger volumes have
required the Company to increase its general and administrative expenses (for
both additional personnel and new computer systems) to support the increased
volumes in the third quarter and anticipated volume growth in the coming year.
The operating loss for the three months ended September 30, 1996 includes
$580,000 in non-recurring general and administrative expenses related to the
consolidation of the gas marketing subsidiaries.
The domestic gross margin was breakeven for the third quarters of 1996
and 1995. The gross margin for the third quarter of 1996 did not have any
expenses related to the price protection requirement in the gas sales agreement
with Laclede Gas Company whereas the corresponding period in 1995 had $0.2
million of expense for this contract provision. Volumes increased 26% over 1995
during the third quarter of 1996.
The Canadian gross margin decreased to $.01 per Mcf for the third
quarter of 1996 from $.09 per Mcf for the third quarter of 1995. Volumes
increased 501% over 1995 during the third quarter of 1996. Increased competition
in the maturing Canadian market exerted significant downward pressure on gross
margins during the third quarter of 1996.
22
<PAGE>
Convest Energy
Oil and gas revenue decreased by approximately $118,000 or 1% between
the three month periods ended September 30, 1996 and 1995. The average price
Convest received for its oil and gas sales decreased by 8% while the price
received for natural gas sales increased by 37%. Oil and gas production
decreased by 17% and 21%, respectively. As previously discussed, the primary
reason for the decrease in oil and gas sales volumes was due to the sale of
several properties during 1995 and 1996 coupled with the steep production
declines on Convest's offshore properties.
As previously stated, Convest uses futures contracts and swap agreements
to hedge its oil and gas production thereby assuring stable cash flow. As a
result of the sharp increase in oil and gas prices during the past winter,
Convest has experienced losses associated with the contracts. For the three
months ended September 30, 1996, Convest has recorded hedging losses of
approximately $1.8 million compared to hedging income of $385,000 for the
corresponding period of 1995. As previously stated, Convest records gains and
losses realized on its hedging activities as oil and gas sales revenue,
accordingly, such amounts are reflected in the per unit price Convest received
for its oil and gas sales.
Production expenses decreased by approximately $980,000 or 22% between
the three months ended September 30, 1996 and 1995. The decrease in production
expenses was primarily due to the aforementioned decrease in workover expense.
Production expenses per BOE were $4.12 and $4.24 for the corresponding periods.
Abandonment and exploration costs increased by $622,000 between the
corresponding periods. Convest accrues its estimated cost of abandonment of its
offshore properties. The increase in abandonment and exploration costs is
primarily due to two unsuccessful South Timbalier exploratory wells of costs of
approximately $790,000. Based upon a review of the reserve for abandonment, it
was determined that Convest had substantially provided for its future
abandonment liability, and accordingly, no additional accrual was provided for
1996.
Depreciation, Depletion and Amortization ("DD&A") on oil and gas
properties decreased by approximately $672,000 or 13% between the corresponding
periods. As previously stated, the decrease in DD&A was directly related to the
previously mentioned production declines.
Convest's SFAS No. 121 evaluation for the third quarter of 1996 was
prepared using the Company's 1995 year end reserve estimates adjusted for
production and other known changes subsequent to the preparation of the
Company's year end reserve estimates.
As a result of this evaluation, no impairment was required for the third quarter
of 1996.
Other Consolidated Income and Expenses
General and administrative expense increased by $1.0 million for the
three months ended September 30, 1996 compared to the same period in 1995. This
increase is primarily due to $580,000 of non-recurring expenses associated with
the consolidation of the gas marketing subsidiaries.
CAPITAL RESOURCES AND LIQUIDITY
Credit Facilities and Long-Term Debt
Energy Source, Inc.
Energy Source, Inc. During 1994, Energy Source entered into a loan
agreement with Bank One establishing a revolving credit facility (the "Energy
Source Credit Facility"). On March 31, 1996, the Energy Source Credit Facility
was amended to, among other things, increase the available borrowings from $8.0
million to $20.0 million and extend the maturity date from June 1, 1996 to
December 31, 1997. Borrowings under the facility are limited to the lesser of
(i) $20.0 million or (ii) the sum of 80% of Energy Source's eligible accounts
receivable plus certain liquid collateral. Availability under the Energy Source
Credit Facility may be used for direct borrowings up to a sublimit of $5.0
million, or for the issuance of letters of credit. Interest accrues at Bank
One's Base Rate (8-1/4% at September 30, 1996) plus 1% and is payable monthly.
At September 30, 1996, no debt was outstanding under this facility and letters
of credit of $3.5 million had been issued.
Borrowings under the Energy Source Credit Facility are secured by a
pledge of all of Energy Source's accounts receivable, inventory and intangibles
and cash collateral equal to 25% of the outstanding letters of credit and/or
advances under the facility. The facility requires the maintenance of a minimum
current ratio of 1.2 to 1.0 and a tangible net worth of $20.0 million. Loan
covenants prohibit dividends and place limits on general and administrative
expenses and certain open unhedged positions on fixed price commitments for the
purchase and sale of natural gas and natural gas products.
Energy Source Canada. In March 1995, Energy Source Canada entered into a
revolving credit facility with the National Bank of Canada (the "ESC Credit
Facility"). Borrowings under the facility are limited to the lesser of (i) $5.0
million (CDN), (ii) the sum of 75% of Energy Source Canada's eligible accounts
receivable plus 50% of certain inventories or (iii) 200% of the equity position
of Energy Source Canada. Availability under the ESC Credit Facility may be used
for direct borrowings or for the issuance of letters of credit up to a sublimit
of $1.25 million (CDN). Interest accrues at National Bank of Canada's Prime Rate
(5-3/4% at September 30,
23
<PAGE>
1996) plus 1% and is payable monthly. At September 30, 1996, $0.3 million (CDN)
in borrowings were outstanding and letters of credit for $3.6 million (CDN) had
been issued.
Borrowings under this facility are secured by certain accounts
receivable and inventories. The facility contains covenants which prohibit
dividends and place limits on certain expenditures and open positions for the
purchase and sale of natural gas and natural gas products.
Convest Energy Corporation
On June 26, 1995, simultaneous with the closing of the Convest
Transaction, Convest and Edisto E&P entered into an Amended and Restated Secured
Revolving Credit Agreement (the "Convest Credit Agreement") with Bank One,
Texas, N.A. ("Bank One"), and Compass Bank-Houston, N.A. This facility, which
terminates January 1, 1998, combines the existing credit facilities of Convest
and Edisto E&P. Bank One serves as agent bank of the Convest Credit Agreement.
The facility is secured by a first lien on all of Convest's assets, including
the oil and gas properties and gas plant. Interest on borrowings under the
Convest Credit Agreement is computed at (i) the agent bank's prime lending rate
(the "Base Rate") plus 3/4% or (ii) the London Inter Bank Offering Rate
("LIBOR") plus 2-3/4%. In addition, Convest and Edisto E&P pay a commitment fee
equal to 1/2% on any commitment amount in excess of outstanding borrowings.
The borrowing base is redetermined semi-annually on or before May 31 and
November 30 of each year by the lending banks based on engineering criteria
established by the banks. In May 1996, Convest was notified by the lending banks
that the new borrowing base under the facility was $25.5 million, which reduces
by $1.0 million per month beginning June 1, 1996. As of September 30, 1996 the
outstanding indebtedness under the Convest Credit Agreement was $8.5 million
with an additional $200,000 of letters of credit outstanding.
Convest Capital Expenditures
Convest has devoted a substantial portion of its available cash flow to
drilling opportunities on its offshore properties and the reduction of its
outstanding borrowings under its long-term credit facility. In addition to the
drilling activity discussed, the Company has been notified by the operators of
several of its offshore properties of their intentions to propose additional
exploratory and development drilling activity during the remainder of 1996.
Therefore, Convest has increased its original capital expenditure budget from
approximately $8.0 million to approximately $15.0 million.
If Convest does not participate in a drilling operation proposed on one
of its properties, under the terms of the pertinent Joint Operating Agreement,
Convest could be subject to a substantial penalty being imposed on its interest
in a specific well. Accordingly, management plans to carefully evaluate all
proposed projects which represent a substantial draw on corporate resources or
which reduce near term liquidity. In addition, Convest continues to evaluate
possible acquisition and divestiture opportunities in an effort to upgrade
Convest's reserve base, primarily in geographic areas where Convest possesses
operating expertise and where the property profiles have a longer reserve life.
It is anticipated that Convest's 1996 exploratory and development
drilling operations will be funded with cash flow from Convest's oil and gas
properties. However, significant changes in oil and gas prices or significant
revisions in the reserve volumes securing the Company's long-term credit
facility could require management to dedicate all or a substantial portion of
the Company's cash flow to meet working capital needs and debt maturities,
thereby precluding Convest from participating in proposed drilling
opportunities.
Working Capital
At September 30, 1996, Edisto had cash and cash equivalents including
restricted cash of $47.8 million and Assets from Risk Management Activities of
$13.8 million which are primarily cash on deposit with brokerage houses and
counterparties. When combined with future cash from operations and the
flexibility provided by the various credit facilities, management believes its
cash resources will be sufficient to execute its business plan, satisfy its
liabilities and maintain current operations.
During the nine months ended September 30, 1996, the Company's cash
inflows totalled approximately $38.2 million. This cash inflow resulted
primarily from (i) $21.6 million provided by operations, (ii) $3.0 million in
proceeds from the sale of certain assets, (iii) $9.0 million provided by the
exercise of warrants issued in connection with Edisto's bankruptcy in June 29,
1993, (iv) $3.3 million provided by borrowings and (v) $1.0 million provided by
the sale of risk management assets.
The Company's cash outflows totalled approximately $24.1 million for the
nine months ended September 30, 1996. This net cash outflow resulted primarily
from (i) repayment of debt of $13.8 million, (ii) development and acquisition
expenditures of $9.0 million, (iii) repurchase of common shares of Edisto of
$0.1 million, and (iv) the purchase of other noncurrent assets of $0.8 million.
24
<PAGE>
During the nine months ended September 30, 1995, Edisto's cash inflows
totalled approximately $74.8 million. This net cash inflow resulted primarily
from proceeds from the sale of the Missouri pipeline of $71.8 million and
included borrowings of $2.1 million.
Edisto's cash outflows totalled approximately $71.7 million for the nine
months ended September 30, 1995. This net cash outflow resulted primarily from
(i) repayment of debt of $57.5 million, (ii) development and acquisition
expenditures of $9.3 million, (iii) the purchase of natural gas hedging
contracts of $1.7 million and (iv) the purchase of other current and noncurrent
assets of $2.7 million. Edisto funded these cash outflows through available cash
and sales of assets.
25
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
The section entitled "Litigation" in Note 7 "Commitments and
Contingencies" of the "Notes to Consolidated Financial Statements" is
incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K.
None.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
EDISTO RESOURCES CORPORATION
By: /s/ Michael Y. McGovern
Michael Y. McGovern
Chairman of the Board and
Chief Executive Officer
By: /s/ Jerry L. McNeill
Jerry L. McNeill
Controller and
Chief Accounting Officer
Dated: November 13, 1996
27
<PAGE>
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 47,755
<SECURITIES> 0
<RECEIVABLES> 100,365
<ALLOWANCES> 0
<INVENTORY> 4,212
<CURRENT-ASSETS> 168,960
<PP&E> 120,493
<DEPRECIATION> 62,387
<TOTAL-ASSETS> 230,633
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0
0
<COMMON> 139
<OTHER-SE> 77,432
<TOTAL-LIABILITY-AND-EQUITY> 230,633
<SALES> 575,144
<TOTAL-REVENUES> 575,144
<CGS> 535,349
<TOTAL-COSTS> 575,213
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<INCOME-PRETAX> 1,618
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