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 March 31, 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 April 30, 1996, there were 12,925,746 shares of Common Stock
outstanding.
1
<PAGE>
EDISTO RESOURCES CORPORATION
Quarterly Report on Form 10-Q
for the Quarter Ended March 31, 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 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
2
<PAGE>
EDISTO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
ASSETS
March 31, December 31,
1996 1995
Current assets:
Cash and cash equivalents .................. $ 37,926 $ 33,364
Restricted cash ............................ 333 333
Assets from risk management
activities .............................. 19,161 19,076
Accounts receivable:
Oil and gas production ................... 2,980 3,229
Gas marketing ............................ 93,948 71,041
Affiliates ............................... 55 --
Other .................................... 624 450
Storage inventory .......................... 3,169 5,437
Other current assets ...................... 2,981 3,114
--------- ---------
Total current assets .................... 161,177 136,044
Property and equipment:
Oil and gas properties using the
successful efforts method
of accounting ............................ 112,206 115,250
Other ...................................... 4,022 2,985
--------- ---------
116,228 118,235
Less - accumulated depreciation
and depletion ............................. (52,819) (51,418)
--------- ---------
63,409 66,817
Investments .................................. 231 242
Other assets ................................. 3,042 2,890
--------- ---------
$ 227,859 $ 205,993
========= =========
See the accompanying notes to the consolidated financial statements.
3
<PAGE>
<TABLE>
EDISTO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
March 31, December 31,
1996 1995
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt ...................... $ 1,963 $ 1,796
Accounts payable:
Oil and gas production .................................. 9,015 9,609
Gas marketing ........................................... 94,840 69,067
Accrued liabilities and other ............................. 10,693 10,568
Liabilities from risk management activities ............... 2,501 4,686
Deferred revenue .......................................... 2,114 2,590
--------- ---------
Total current liabilities .............................. 121,126 98,316
Long-term liabilities:
Long-term debt, net of current maturities ................. 12,885 17,635
Deferred revenue .......................................... 615 691
Minority interest ......................................... 9,663 9,092
Other noncurrent liabilities .............................. 12,094 12,731
--------- ---------
35,257 40,149
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares authorized,
12,977,960 issued at March 31, 1996 and December 31, 1995 . 130 130
Additional paid-in capital ................................ 61,528 61,528
Retained earnings ......................................... 10,257 6,154
Foreign currency translation .............................. (77) (95)
Treasury stock, at cost, 52,214 shares at March 31, 1996
and 23,714 shares at December 31, 1995 .................... (362) (189)
--------- ---------
Total stockholders' equity .......................... 71,476 67,528
--------- ---------
$ 227,859 $ 205,993
========= =========
<FN>
See the accompanying notes to the consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
EDISTO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three Months Three Months
Ended Ended
March 31, March 31,
1996 1995
Revenues:
Oil and gas production ................. $ 11,520 $ 13,247
Gas marketing .......................... 183,377 79,815
Energy trading ......................... -- (1,647)
--------- ---------
194,897 91,415
--------- ---------
Costs and expenses:
Lease operating and production taxes ... 4,393 4,852
Gas purchases .......................... 179,093 79,422
Abandonment and exploration costs ...... 42 981
Depreciation, depletion and amortization 4,365 5,473
General and administrative ............. 3,881 3,433
--------- ---------
191,774 94,161
--------- ---------
Operating income (loss) ........... 3,123 (2,746)
--------- ---------
Other income (expense):
Interest income ........................ 695 927
Interest expense ....................... (388) (595)
Equity in earnings of affiliates ....... 113 131
Gain on asset sales .................... 815 --
Minority interest ...................... (582) (349)
Other, net ............................. 288 13
--------- ---------
941 127
--------- ---------
Income (loss) before income taxes ........ 4,064 (2,619)
Preacquisition loss of subsidiary ........ -- 798
Income tax (provision) benefit ........... 39 (308)
--------- ---------
Income (loss) from continuing operations . 4,103 (2,129)
--------- ---------
Discontinued operations:
Gain on sale of transmission operations -- 2,557
Gain on sale of manufacturing operations -- 3,824
--------- ---------
Net income ........................... $ 4,103 $ 4,252
========= =========
Net income (loss) per common share:
Continuing operations ................. $ .32 $ (.16)
Discontinued operations ............... -- .49
--------- ---------
Net income (loss) per common share .... $ .32 $ .33
========= =========
Weighted average common shares
outstanding ........................... 12,934 12,966
========= =========
See the accompanying notes to the consolidated financial statements.
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>
Stockholder's equity,
December 31, 1995 .......................... 12,978 $ 130 $ 61,528 $ 6,154 $ (95) $ (189) $ 67,528
Net income ................................... -- -- -- 4,103 -- -- 4,103
Repurchase of common
shares ....................................... -- -- -- -- -- (173) (173)
Foreign currency translation ................. -- -- -- -- 18 -- 18
---------- -------- --------- -------- -------- -------- --------
Stockholder's equity,
March 31, 1996 ............................. 12,978 $ 130 $ 61,528 $ 10,257 $ (77) $ (362) $ 71,476
========== ======== ========= ======== ======== ======== ========
<FN>
See the accompanying notes to the consolidated financial statements.
</FN>
</TABLE>
6
<PAGE>
<TABLE>
EDISTO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income ....................................................... $ 4,103 $ 4,252
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation, depletion and amortization ......................... 4,365 3,806
Abandonments and exploration costs ............................... -- 963
Gains on sales of assets ......................................... (815) (6,381)
Equity in income of affiliates ................................... (113) 54
Minority interest expense ........................................ 582 --
Other ............................................................ 133 4
Changes in assets and liabilities:
Accounts receivable and inventory .............................. (25,411) 5,542
Accounts payable and accrued liabilities ....................... 30,130 (13,431)
Other .......................................................... (2,345) (845)
-------- --------
Net cash provided (used) by operating activities ............ 10,629 (6,036)
-------- --------
Cash flows from investing activities:
Net proceeds from sales of assets, including discontinued operations 3,538 71,416
Purchase of hedging instruments .................................... (954) (258)
Acquisition, exploration and development costs ..................... (2,557) 89
Payments to affiliates ............................................. (69) (36)
Purchase of other current and noncurrent assets .................... (831) (1,369)
-------- --------
Net cash provided (used) by investing activities ............. (873) 69,842
-------- --------
Cash flows from financing activities:
Payments on long-term debt and capital leases ...................... (5,020) (49,448)
Repurchase of common shares ........................................ (173) --
Currency translation ............................................... (1) (34)
-------- --------
Net cash used by financing activities ........................ (5,194) (49,482)
-------- --------
Net increase in cash and cash equivalents ............................ 4,562 14,324
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 ................................................... $ 38,259 $ 55,407
======== ========
SUPPLEMENTAL DISCLOSURES Cash paid during the period for:
Interest ........................................................... $ 431 $ 42
======== ========
Taxes .............................................................. $ 259 $ 277
======== ========
<FN>
See the accompanying notes to the consolidated financial statements.
</FN>
</TABLE>
7
<PAGE>
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 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, Ltd. (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 72%
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 four 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 72% 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 March 31, 1996, the Company had cash and
cash equivalents, including restricted cash, of approximately $38.3 million.
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.
8
<PAGE>
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 1996 and 1995
Risk Management. "Assets from Risk Management Activities" are primarily
cash on deposit with established brokerage firms and counterparties. At March
31, 1996 and December 31, 1995, the Company had "Assets from Risk Management
Activities" of $19.2 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 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
in the month for which the hedged transaction is completed.
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
Restricted Cash. At December 31, 1995, restricted cash of $333,000 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.
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
March 31, 1996 and December 31, 1995, Convest was subject to total Abandonment
Fund payments of $4.3 million.
As of March 31, 1996 and December 31, 1995, Convest had made payments
totaling $3.9 million and $3.7 million to the Abandonment Fund. These payments
were applied to the total long-term abandonment reserve of $10.4 million and
$10.2 million, as of March 31, 1996 and December 31, 1995, respectively,
resulting in a net long-term abandonment reserve of $6.5 million as of those
dates. The current portion of the abandonment reserve was $357,000 and $556,000
as of March 31, 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 March 31, 1996 and
December 31, 1995, the current balance of this reserve was $1.8 million, 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,"
respectively, 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 March
31, 1996 and December 31, 1995 were $1.6 million and $1.4 million, respectively,
and are included in "Accounts Receivable - Oil and Gas Production" and "Other
Assets" in the consolidated financial statements. Deferred revenue and payables
resulting from overtakes of gas production at March 31, 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
and when the well is determined to be unsuccessful. Gas is converted to
equivalent barrels of oil on an energy content basis of 6 Mcf to 1 barrel. Oil
and gas leasehold costs are capitalized when incurred.
9
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EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 1996 and 1995
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 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. No such provision was required for
the quarter ended March 31, 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 Three Months Ended March 31, 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.
<TABLE>
Consolidating Balance Sheet
March 31, 1996
(in thousands)
<CAPTION>
Edisto Gas
Marketing & Consolidating Edisto
Convest Corporate Adjustments (Consolidated)
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents .................................................... $ 951 $ 37,308 $ -- $ 38,259
Assets from risk management activities ....................................... 4,457 14,704 -- 19,161
Storage inventory ............................................................ -- 3,169 -- 3,169
Accounts receivable ........................................................... 8,893 94,314 (5,600) 97,607
Other current assets ......................................................... 1,636 1,345 -- 2,981
--------- --------- --------- ---------
Total current assets ....................................................... 15,937 150,840 (5,600) 161,177
--------- --------- --------- ---------
Property and Equipment, net .................................................. 60,819 2,590 -- 63,409
--------- --------- --------- ---------
Other assets ................................................................. 2,474 799 -- 3,273
--------- --------- --------- ---------
$ 79,230 $ 154,229 $ (5,600) $ 227,859
========= ========= ========= =========
LIABILITIES AND EQUITY:
Current portion of long-term debt ............................................ $ 1,354 $ 609 $ -- $ 1,963
Accounts payable ............................................................. 9,652 99,803 (5,600) 103,855
Accrued liabilities and other ................................................ 7,001 5,806 -- 12,807
Liabilities from risk management activities .................................. -- 2,501 -- 2,501
--------- --------- --------- ---------
Total current liabilities .................................................. 18,007 108,719 (5,600) 121,126
--------- --------- --------- ---------
Long-term debt ............................................................... 12,824 61 -- 12,885
Other noncurrent liabilities ................................................. 11,295 11,077(1) -- 22,372
--------- --------- --------- ---------
Total long-term liabilities ................................................ 24,119 11,138 -- 35,257
--------- --------- --------- ---------
Stockholder's equity ......................................................... 37,104 34,372 -- 71,476
--------- --------- --------- ---------
$ 79,230 $ 154,229 $ (5,600) $ 227,859
========= ========= ========= =========
<FN>
(1) Includes $9,662,000 for Edisto's minority interest in Convest.
</FN>
</TABLE>
11
<PAGE>
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 1996 and 1995
(3) Acquisitions
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 May 10, 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.
(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.
(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. Convest determined that the use of these
NOLs would reduce Convest's federal income taxes for 1995 by approximately
$437,000. In addition, 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 the payment by Convest of $550,000.
12
<PAGE>
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 1996 and 1995
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.
In July 1995, Edisto and Convest obtained a directors' and officers'
fiduciary insurance policy that covers both companies. The annual insurance
premium was allocated 56% to Edisto, for a cost of $198,000, based on the
relative percentage that the total assets of Edisto bear to the total assets of
both Edisto and Convest.
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.
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):
March 31, December 31,
1996 1995
Convest Credit Agreement ............ $ 14,175 $ 19,175
Energy Source Canada Credit Agreement 511 73
Capital leases ...................... 155 175
Other ............................... 7 8
-------- --------
Total debt .......................... 14,848 19,431
Less current maturities ............. (1,963) (1,796)
-------- --------
Total long-term debt ............ $ 12,885 $ 17,635
======== ========
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 March 31, 1996 and December 31, 1995, the
borrowing base available
13
<PAGE>
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 1996 and 1995
under the facility was $25.0 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. In
May 1996, the Company 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 March 31, 1996 and December 31, 1995, outstanding indebtedness
under the Convest Credit Agreement was $14.2 million and $19.2 million,
respectively, with an additional $200,000 letters of credit outstanding as of
those dates, primarily related to performance bonds issued for oil and gas
operations. At March 31, 1996, substantially all of the outstanding borrowings
were subject to LIBOR interest at an effective rate of approximately 8-1/4% 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 March 31,
1996) plus 1% and is payable monthly. At March 31, 1996, no amounts were
outstanding under this facility.
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) $2.5 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
(6-3/4% at March 31, 1996) plus 1% and is payable monthly. At March 31, 1996,
$700,000 (CDN) was outstanding and letters of credit for $1.3 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.
(7) Commitments and Contingencies
Firm Transportation Agreements
Energy Source has entered into long-term firm transportation
agreements with certain pipelines in order to ensure available transportation
services for its marketing activities. Energy Source's most significant firm
transportation agreements at March 31, 1996 are as follows:
Pipeline Firm Volume Contracted Contract Expiration
Panhandle Eastern 70 MMcf/day October 1996
Missouri Pipeline 55 MMcf/day (1) October 1996
(1) Includes an option to increase contracted volumes by up to an additional
15 MMcf/day during the winter months.
In connection with the sale of the Company's Missouri intrastate
pipeline in January 1995, Vesta Energy and a UtiliCorp pipeline subsidiary
entered into a new firm transportation agreement. The new agreement provides for
firm transportation for 55
14
<PAGE>
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 1996 and 1995
MMcf/day of natural gas for the period from January 1995 through October 1996,
and a supplemental firm transportation agreement for up to 15 MMcf/day of
natural gas. Also as part of the pipeline sale, Edisto guaranteed to the
UtiliCorp pipeline subsidiary the payment by Vesta Energy of the demand charges
under the new firm transportation agreement until October 1996. Energy Source
(as the successor by merger to Vesta Energy) uses these firm transportation
agreements to service its existing gas sales contract with Laclede and other
industrial customers in St. Louis, Missouri.
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 Edisto, MINT and certain of its former directors who were former
officers of Edisto. 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 intends to vigorously defend its position. The
Company is unable to determine a range of possible loss relating to the McConkey
litigation because the plaintiffs seek actual damages in an unspecified amount
and the Company believes it has meritorious defenses available in this matter.
Based on developments of the 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 for the three months ended March 31, 1996
of $4.1 million. Set forth below is a table summarizing the Company's income by
business segment and subsidiary (in thousands):
Three Months
Ended
March 31, 1996
Energy Source, Inc.
U.S. $2,876
Canada (768)
2,108
Convest Energy Corporation 1,708
Corporate and other (693)
Total Operating Income 3,123
Interest and other 980
NET INCOME $4,103
======
Gas Sales Volume Increases and Improved Gross Margins at Energy Source, Inc.
In accordance with the Company's business plan, the Company's gas
marketing sales volumes have increased significantly in 1995 and the first
quarter of 1996. The volumes of gas sold for the three months ended March 31,
1996 have increased 52% from the comparable period in 1995, as shown by the
table set forth below:
Three Months Three Months
Ended Ended Percentage
March 31, 1996 March 31, 1995 Increase
Volume sold (MMcf)
Domestic .... 67,074 42,089 59%
Canadian .... 13,293 10,915 22%
------ ------ --
Total .... 80,367 53,004 52%
The domestic gross margin of $.07 per Mcf for the first quarter of
1996 was a substantial improvement over the gross margin of $.01 per Mcf over
the corresponding period in 1995. This improvement was due to Energy Source's
strong transportation and supply positions combined with the volatile market
conditions experienced because of the harsh winter conditions in many areas of
the United States. The improvement was also 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, $1.0 million of which was incurred in the first quarter of
1995. There is no expense under this contract provision for 1996.
The Canadian gross margin, however, decreased to $(.03) per Mcf for
the first quarter of 1996 from $.01 per Mcf for the first quarter of 1995. This
loss was caused by a market anomaly during the first quarter of 1996 in the
correlation between the 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 and pipeline capacity constraints, which have now returned to normal.
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. The Company made
this decision because it
16
<PAGE>
has concluded that the critical mass necessary to compete effectively in the gas
market industry in the long term, has risen substantially and will continue to
rise in the future. The Company also has concluded that its lack of strategic
assets, such as pipelines or gas processing plants, will continue to hinder the
Company's growth as the gas marketing industry consolidates. Therefore, the
Company will seek to find a strategic partner for its gas marketing operations
that has strategic assets that can create operational and financial synergies
with Edisto's gas marketing operations. At this time, the Company is very early
in the process of identifying and evaluating potential strategic partners and
does not expect this process will be concluded until much later in 1996.
Consolidation of Gas Marketing Operations
Effective March 1, 1996, Vesta Energy Company, Vesta Natural Gas
Company and Energy Trading were merged into Energy Source. The consolidated
entity uses the name "Energy Source" and is headquartered in Houston, Texas. In
connection with the consolidation, the bulk of Vesta Energy's operations are
being moved from Vesta Energy's Tulsa, Oklahoma office to Energy Source's
offices in Houston, Texas. Energy Source Canada will continue operating as a
separate subsidiary of Energy Source from its Calgary headquarters. Energy
Source also will maintain sales offices in Tulsa, Oklahoma; Fayetteville,
Arkansas; and Pittsburgh, Pennsylvania.
The purpose of the consolidation was to complete the transition from
three regional-based gas marketing companies to one integrated North American
operation. The combined operations allow Energy Source to have a stronger
balance sheet and a stronger market presence with combined average daily gas
sales volumes of approximately 1 Bcf/day. The merger of the Tulsa and Houston
offices will allow the Company to consolidate many administrative functions and
to reduce its operating costs. The merger of the two offices also will enhance
the Company's management efficiency and allow it to react quicker to market
opportunities.
Sale of Offshore Tunisian Property
In April 1996, Edisto closed the sale of its 11% interest in the Zarat
Permit offshore Tunisia, subject to Tunisian government approval, for $1.4
million. This was Edisto's last remaining international oil and gas property.
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 $815,000 during the first quarter of 1996.
Additional Drilling Activities at Convest
During the first quarter of 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 1,020 barrels of oil and 1.6 Mcf of gas.
The well was connected to existing production facilities on the platform and is
presently flowing at approximately 950 barrels of oil per day.
During May 1996, Convest and the operator of Convest's South Timbalier
144 property interest executed an agreement to jointly develop an exploratory
prospect located across Block 144 and Block 109 of the South Timbalier area of
the Gulf of Mexico. Convest presently owns a 50% working interest in Block 144
and will receive a 50% working interest in Block 109 under the joint development
agreement in exchange for a payment of approximately $355,000. The operator of
Blocks 109 and 144 plans to drill an 8,000' exploratory test well in the
prospect area for an aggregate cost of between $800,000 and $1.1 million, net to
Convest's 50% working interest. Depending upon the success of the first well, it
is anticipated that two additional wells will be drilled and a platform
installed. If all of the proposed wells are successful, Convest's total cost in
the prospect would aggregate approximately $6.0 million, net to Convest's
working interest.
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. At April 30, 1996,
the Company had 12,925,476 outstanding shares of Common Stock.
17
<PAGE>
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. 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 May 10, 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.
18
<PAGE>
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.
Three Months Three Months
Ended Ended
March 31, March 31,
1996 1995
Edisto Gas Marketing:
Domestic:
Gross margin (in thousands) .............. $ 4,720 $ 235
========== ==========
Volume sold (MMcf) ....................... 67,074 42,089
Average prices ($ per Mcf):
Sales price ........................... $ 2.51 $ 1.64
Purchase price ........................ 2.44 1.63
---------- ----------
Gross margin .......................... $ .07 $ .01
========== ==========
Canadian:
Gross margin (in thousands) .............. $ (436) $ 158
========== ==========
Volume sold (MMcf): ...................... 13,293 10,915
Average prices ($ per Mcf):
Sales price ........................... $ 1.11 $ .99
Purchase price ........................ 1.14 .98
---------- ----------
Margin ................................ $ (.03) $ .01
========== ==========
Total:
Gross margin (in thousands) .............. $ 4,284 $ 393
========== ==========
Volume sold (MMcf) ....................... 80,367 53,004
Average prices ($ per Mcf):
Sales price ........................... $ 2.28 $ 1.51
Purchase price ........................ 2.23 1.50
---------- ----------
Margin ................................ $ .05 $ .01
========== ==========
Convest Energy Corporation:
Revenue (in thousands):
Oil ................................... $ 3,760 $ 4,843
Gas ................................... 7,399 8,101
Gas Plant ............................. 361 303
---------- ----------
$ 11,520 $ 13,247
========== ==========
Production:
Oil (Mbbls) ........................... 217 289
Gas (MMcf) ............................ 3,572 5,005
Average sales price:
Oil (per Bbl)) ........................ $ 17.37 $ 16.77
Gas (per Mcf) ........................ $ 2.07 $ 1.62
Average expenses per equivalent barrel:(1)
Production Costs ...................... $ 5.26 $ 4.15
Depreciation and depletion ............ $ 5.07 $ 4.56
(1) Natural gas is converted into oil equivalents at a rate of six Mcf
per barrel of oil.
19
<PAGE>
Results of Operations for the Three Months Ended March 31, 1996 compared to 1995
Energy Source, Inc.
Energy Source's operating income for the three months ended March 31,
1996 was $2.1 million. Gross margin was $4.3 million compared to $0.4 million
in 1995. Volumes sold increased 52% over 1995.
The domestic gross margin of $.07 per Mcf for the first quarter of 1996 was a
substantial improvement over the gross margin of $.01 per Mcf over the
corresponding period in 1995. This improvement was due to Energy Source's strong
transportation and supply positions combined with the volatile market conditions
experienced because of the harsh winter conditions in many areas of the United
States. The improvement was also 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, $1.0 million of which was incurred in the first quarter of 1995.
There is no expense under this contract provision for 1996.
The Canadian gross margin, however, decreased to $(.03) per Mcf for the
first quarter of 1996 from $.01 per Mcf for the first quarter of 1995. This loss
was caused by a market anomaly during the first quarter of 1996 in the
correlation between the 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 and pipeline capacity constraints, which have now returned to normal.
Convest Energy Corporation
Oil and gas revenue decreased by approximately $1.8 million or 14%
between the three month periods ending March 31, 1996 and 1995. The average
price Convest received for its oil and gas sales increased by 4% and 28%,
respectively, between the corresponding periods. Oil and gas production
decreased by 25% and 29%, respectively. The decrease in production volumes was
due primarily to the sale of producing oil and gas properties coupled with the
steep production declines 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 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 needs to
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 expense of
approximately $2.2 million for the three month period ended March 31, 1996 and
hedging income of approximately $638,000 for the corresponding period of 1995.
Such amounts were recorded as oil and gas sales revenue in the accompanying
statements of operations.
The hedges affecting the first quarter of 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 which caused
the hedging losses in the first quarter of 1996.
Production expenses decreased by approximately $385,000 or 9% between
the corresponding periods. The decrease in production expenses is primarily due
to a decrease in workover activity during the three months ended March 31, 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 expense per barrel of oil
equivalent ("BOE") was $5.26 and $4.15 for the three months ended March 31, 1996
and 1995, respectively.
Abandonment and exploration costs decreased by $323,000 between the
corresponding periods. Convest accrues its estimated cost of abandonment of its
offshore properties. Based upon a review of the reserve for abandonment, it was
determined that no additional accrual was required for the three months ended
March 31, 1996.
Depreciation, Depletion and Amortization ("DD&A") on oil and gas
properties decreased by approximately 20% between the corresponding periods. The
decrease in DD&A was due primarily to the production declines discussed above.
DD&A per BOE, however, was $5.07 for the three month period ended March 31,
1996, compared to $4.56 for the corresponding period of 1995.
In mid-January 1996, Convest completed the sale of an offshore oil and
gas property for sale proceeds of approximately $2.0 million. As a result of the
sale, Convest recorded a gain on the property sale of approximately $620,000
during the first quarter of 1996. In addition, Convest sold several other
nonstrategic oil and gas properties during the first quarter of 1996. Aggregate
sale proceeds of these nonstrategic oil and gas properties totaled approximately
$400,000 and resulted in a gain of approximately $195,000 for the three months
ended March 31, 1996.
20
<PAGE>
Other Consolidated Income and Expenses
General and administrative expense increased by $0.5 million for the
three months ended March 31, 1996 compared to the same period in 1995 primarily
due to increased personnel cost associated with implementing the Company's
business plan.
Interest expense decreased by approximately 35% 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
portion of its outstanding borrowings under its long-term credit facility during
the first quarter of 1996.
The preacquisition loss of subsidiary is the loss attributable to the
shares of Convest not owned by the Company prior to the effective date of the
Convest Transaction on June 26, 1995.
The Company recognized a gain from the sale of its Missouri pipeline of
$2.6 million for the three months ended March 31, 1995. The sale of this
pipeline closed in January 1995. The Company also recorded a gain on the sale of
its MINT subsidiaries of $3.8 million for the three months ended March 31, 1995.
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 March 31, 1996) plus 1% and is payable monthly. At
March 31, 1996, no amounts were outstanding under this facility.
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) $2.5
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
(6-3/4% at March 31, 1996) plus 1% and is payable monthly. At March 31, 1996,
$700,000 (CDN) was outstanding and letters of credit for $1.3 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. As of March 31, 1996 and December 31, 1995, the
borrowing base available under the Convest Credit Agreement was $25.0 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
21
<PAGE>
$1.8 million simultaneous with the sale of the property. 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 March 31, 1996 and December 31, 1995, outstanding indebtedness
under the Convest Credit Agreement was $14.2 million and $19.2 million,
respectively, with an additional $200,000 letters of credit outstanding as of
those dates, primarily related to performance bonds issued for oil and gas
operations. At March 31, 1996, substantially all of the outstanding borrowings
were subject to LIBOR interest at an effective rate of approximately 8-1/4% per
annum.
Convest Capital Expenditures
Convest's capital expenditures budget for 1996 is approximately $8.0
million primarily related to development and workover activities. Due to the
recent increase in drilling activity in the Gulf of Mexico, Convest 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.
During May 1996, Convest and the operator of Convest's South Timbalier
144 property interest executed an agreement to jointly develop an exploratory
prospect located across Block 144 and Block 109 of the South Timbalier area of
the Gulf of Mexico. Convest presently owns a 50% working interest in Block 144
and will receive a 50% working interest in Block 109 under the joint development
agreement in exchange for a payment of approximately $355,000. The operator of
Blocks 109 and 144 plans to drill an 8,000' exploratory test well in the
prospect area for an aggregate cost of between $800,000 and $1.1 million, net to
Convest's 50% working interest. Depending upon the success of the first well, it
is anticipated that two additional wells will be drilled and a platform
installed. If all of the proposed wells are successful, Convest's total cost in
the prospect would aggregate approximately $6.0 million, net to Convest's
working interest.
If Convest were to elect not to participate in an 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 or in some cases, may result in a loss of
Convest's ownership interest in the affected well. Accordingly, management plans
to carefully evaluate all proposed projects which represent a substantial draw
on corporate resources of 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.
Working Capital
At March 31, 1996, Edisto had cash and cash equivalents including
restricted cash of $38.3 million and Assets from Risk Management Activities of
$19.2 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 three months ended March 31, 1996, the Company's cash inflows
totalled approximately $13.3 million. This cash inflow resulted primarily from
operations and proceeds from the sale of certain assets.
The Company's cash outflows totalled approximately $8.7 million for the
three months ended March 31, 1996. This net cash outflow resulted primarily from
(i) repayment of debt of $5.0 million, (ii) development and acquisition
expenditures of $2.6 million, (iii) the purchase of assets from risk management
activities of $0.8 million, (iv) repurchase of common shares of Edisto of $0.2
million, and (v) the purchase of other current and noncurrent assets of $0.1
million. The Company funded these cash outflows through available cash and sales
of assets.
During the three months ended March 31, 1995, Edisto's cash inflows
totalled approximately $73.0 million. This net cash inflow resulted primarily
from proceeds from the sale of the Missouri pipeline of $71.8 million.
Edisto's cash outflows totalled approximately $59.0 million for the
three months ended March 31, 1995. This net cash outflow resulted primarily from
(i) cash used by operations of $5.0 million, (ii) the purchase of natural gas
hedging contracts of $1.7 million, and (iii) repayment of debt of $51.0 million.
Edisto funded these cash outflows through available cash and sales of assets.
22
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
The section entitled "Litigation" in the Note "Commitments and
Contingencies" of the "Notes to Consolidated Financial Statements" is
incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
(b) Reports on Form 8-K.
Edisto filed a Current Report on Form 8-K dated January 10, 1996,
disclosing that Edisto had settled a lawsuit between Vesta Energy Company and
NOARK Pipeline System Limited Partnership and Southwestern Energy Corp.
23
<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: Michael Y. McGovern
Michael Y. McGovern
Chairman of the Board and
Chief Executive Officer
By: Jerry L. McNeill
Jerry L. McNeill
Controller and Chief
Accounting Officer
Dated: May 14, 1996
<PAGE>
24
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