UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-10652
CONVEST ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 76-0312028
(State or jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
2401 FOUNTAIN VIEW DRIVE, SUITE 700
HOUSTON, TEXAS 77057
(Address of principal executive offices) (Zip Code)
(713) 780-1952
Registrant's telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the Registrant's Common Stock, par value $.01
per share, outstanding at August 6, 1997 was 10,554,878.
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<PAGE>
CONVEST ENERGY CORPORATION
Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 1997
INDEX
<TABLE>
<CAPTION>
I. FINANCIAL INFORMATION
PAGE NO.
<S> <C>
Item 1.Financial Statements of Convest Energy Corporation:
Consolidated Balance Sheets...................................................3
Consolidated Statements of Operations - Six Months Ended June 30, 1997....... 4
Consolidated Statements of Operations - Three Months Ended June 30, 1997......5
Consolidated Statements of Stockholders' Equity.............................. 6
Consolidated Statements of Cash Flows.........................................7
Notes to Consolidated Financial Statements....................................8
Item 2.Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................14
II. OTHER INFORMATION
Item 1.Legal Proceedings............................................................20
Item 6.Exhibits and Reports on Form 8-K.............................................20
</TABLE>
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<PAGE>
CONVEST ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ---------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................................. $ 7,036 $ 3,678
Restricted cash ....................................................................... 333 333
Accounts receivable:
Oil and gas production - less allowance
for doubtful accounts of $596 and $657, respectively ............................. 5,753 7,908
Other .............................................................................. 1,377 598
Other current assets .................................................................. 818 2,267
--------- ---------
Total current assets ............................................................... 15,317 14,784
--------- ---------
Property and equipment:
Oil and gas properties, successful efforts method ..................................... 118,117 117,307
Other ................................................................................. 533 478
Less accumulated depreciation and depletion ........................................... (64,068) (63,061)
--------- ---------
54,582 54,724
--------- ---------
Other noncurrent assets .................................................................. 2,618 2,704
--------- ---------
$ 72,517 $ 72,212
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Oil and gas production ............................................................. $ 7,095 $ 8,521
Affiliates ......................................................................... 372 667
Accrued liabilities and other ......................................................... 4,696 6,041
Deferred revenue ...................................................................... 1,906 2,113
--------- ---------
Total current liabilities .......................................................... 14,069 17,342
--------- ---------
Long-term liabilities:
Long-term debt ........................................................................ 3 4,003
Deferred revenue ...................................................................... 530 559
Other noncurrent liabilities .......................................................... 5,505 7,170
--------- ---------
6,038 11,732
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value; authorized 5 million shares;
none issued or outstanding .......................................................... -- --
Common Stock $.01 par value; 20,000,000 shares
authorized, 10,550,878 and 10,428,602 issued and outstanding at
June 30, 1997 and December 31, 1996, respectively ................................... 105 104
Additional paid-in capital ............................................................ 48,301 47,849
Retained earnings (deficit) ........................................................... 4,004 (4,815)
--------- ---------
52,410 43,138
--------- ---------
$ 72,517 $ 72,212
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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CONVEST ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
Six Months Ended
JUNE 30,
--------------------
1997 1996
------- -------
(Unaudited)
Revenues:
Oil and gas sales ................................. $24,905 $21,329
Gas plant revenues ................................ 1,002 704
Gain on asset sale ................................ 63 817
Other, net ........................................ 224 205
------- -------
26,194 23,055
------- -------
Expenses:
Production:
Lease operating expense ........................ 5,744 7,636
Gas plant operating expense .................... 230 232
Production taxes ............................... 533 617
Abandonment and exploration costs ................. 1,147 921
General and administrative expenses ............... 2,188 2,281
Interest expense .................................. 72 674
Depreciation, depletion and amortization .......... 7,305 7,908
Impairment of oil and gas properties .............. -- 1,120
------- -------
17,219 21,389
------- -------
Net income before income taxes ....................... 8,975 1,666
Income tax provision ................................. 156 217
------- -------
Net income ........................................... $ 8,819 $ 1,449
======= =======
Net income per share ................................. $ 0.84 $ 0.14
======= =======
Weighted average common shares outstanding ........... 10,472 10,413
======= =======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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CONVEST ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
THREE MONTHS ENDED
JUNE 30,
---------------------
1997 1996
-------- --------
(Unaudited)
Oil and gas sales ............................... $ 11,843 $ 10,170
Gas plant revenues .............................. 400 343
Gain (loss) on asset sale ....................... (59) 5
Other, net ...................................... 119 101
-------- --------
12,303 10,619
-------- --------
Expenses:
Production:
Lease operating expense ...................... 2,789 3,675
Gas plant operating expense .................. 56 110
Production taxes ............................. 240 307
Abandonment and exploration costs ............... 56 878
General and administrative expenses ............. 1,058 1,042
Interest expense ................................ 16 307
Depreciation, depletion and amortization ........ 3,682 3,770
Impairment of oil and gas properties ............ -- 1,120
-------- --------
7,897 11,209
-------- --------
Net income (loss) before income taxes .............. 4,406 (590)
Income tax provision ............................... 59 48
-------- --------
Net income (loss) .................................. $ 4,347 $ (638)
======== ========
Net income (loss) per share ........................ $ 0.41 $ (0.06)
======== ========
Weighted average common shares outstanding ......... 10,508 10,413
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE>
CONVEST ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
COMMON COMMON ADDITIONAL RETAINED
SHARES STOCK, PAID-IN EARNINGS
OUTSTANDING $.01 PAR CAPITAL (DEFICIT) TOTAL
------- ---- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 ........................ 10,428 $104 $47,849 $(4,815) $43,138
Exercised employee stock options .................... 107 1 347 -- 348
Stock issued pursuant to 1996
bonus plan ......................................... 18 -- 105 -- 105
Retirement of stock issued in
connection with the conversion
of the stock of Convest's
predecessor entity into stock
of Convest ....................................... (2) -- -- -- --
Net income .......................................... -- -- -- 8,819 8,819
------- ---- ------- ------- -------
Balance at June 30, 1997 ............................ 10,551 $105 $48,301 $ 4,004 $52,410
======= ==== ======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE>
CONVEST ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------
1997 1996
-------- --------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................................... $ 8,819 $ 1,449
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization ......................................... 7,305 7,908
Impairment to oil and gas properties ............................................. -- 1,120
Gain on sale of oil and gas properties ........................................... (63) (797)
Abandonment and exploration costs ................................................ 665 781
Decrease in accounts receivable .................................................. 1,031 560
Decrease in accounts payable and accrued liabilities ............................. (2,980) (345)
Other ............................................................................ 24 184
-------- --------
Net cash flow provided by operating activities ............................... 14,801 10,860
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition, exploration and development of oil and
gas properties ..................................................................... (9,534) (4,721)
Proceeds from sales of oil and gas properties ....................................... 740 2,210
Sale of short-term investments ...................................................... 1,110 1,257
Increase in other current and noncurrent assets ..................................... (107) (88)
-------- --------
Net cash used in investing activities ........................................ (7,791) (1,342)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt .......................................................... (4,000) (7,900)
Exercised employee stock options .................................................... 348 --
-------- --------
Net cash used in financing activities ........................................ (3,652) (7,900)
-------- --------
Net increase in cash and cash equivalents .............................................. 3,358 1,618
Cash and cash equivalents, beginning of period ......................................... 4,011 1,007
-------- --------
Cash and cash equivalents, end of period ............................................... $ 7,369 $ 2,625
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ............................................ $ 238 $ 844
======== ========
Cash paid during the period for taxes ............................................... $ 156 $ 296
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE>
CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
GENERAL
Convest Energy Corporation ("Convest" or the "Company"), a Texas
corporation whose Common Stock is traded on the American Stock Exchange, is an
active independent oil and gas exploration and production company. On June 26,
1995, Convest acquired all of the outstanding capital stock of Edisto
Exploration & Production Company, a Delaware corporation ("Edisto E&P"), from
Edisto Resources Corporation ("Edisto") in exchange for 6,185,400 newly issued
shares of Convest's Common Stock and $10,000 in cash (the "Edisto Transaction").
The newly issued shares of Convest Common Stock increased Edisto's interest in
Convest from 31% to 72%. During April 1996, Edisto purchased an additional
92,000 shares of Convest Common Stock on the open market.
These financial statements should be read in conjunction with the
audited financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996. Reference also
is made to the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this report. The information
presented in this Form 10-Q is unaudited, but in the opinion of management
reflects all adjustments (all of which were normal and recurring) necessary to
fairly present such information. Interim results are not necessarily indicative
of a full year of operations.
(2) PROPOSED MERGER WITH FORCENERGY INC
On June 19, 1997, Convest, Edisto, Forcenergy Inc ("Forcenergy") (NYSE
"FEN"), and a Forcenergy subsidiary executed a definitive Agreement and Plan of
Merger (the "Merger Agreement") providing for Convest and Edisto to be merged
into Forcenergy.
Under the Merger Agreement, (a) each issued and outstanding share of
Convest Common Stock will be converted into the right to receive a fractional
interest in a share of Forcenergy Common Stock equal to $8.88 divided by the
Weighted Average Trading Price of Forcenergy Common Stock, and (b) each issued
and outstanding share of Edisto Common Stock will be converted into the right to
receive (i) $4.886 in cash and (ii) a fractional interest in a share of
Forcenergy Common Stock equal to $5.064 divided by the Weighted Average Trading
Price of Forcenergy Common Stock; PROVIDED, HOWEVER, that in no event will the
Weighted Average Trading Price of Forcenergy Common Stock be less than $28.96
nor more than $34.96. The "Weighted Average Trading Price" of Forcenergy Common
Stock will be calculated by taking the average of the following daily
calculations for each of the ten trading days ending two trading days prior to
the closing date for the Merger: (i) grouping together all shares of Forcenergy
Common Stock traded on such day at the same trading price, (ii) multiplying the
aggregate number of shares in each price group by the trading price for such
group to calculate a product (the total sold shares value) for each group, (iii)
adding all of such products from each group, and (iv) dividing the resulting
total by the aggregate number of shares traded on such trading day. Cash will be
paid in lieu of fractional shares of Forcenergy Common Stock. The transaction is
expected to close in October 1997.
The majority shareholders of Convest and Edisto have agreed to vote
their respective shares in favor of the transaction thereby assuring the
required shareholder approval for the Merger Agreement. Edisto currently owns
approximately 72% of the outstanding shares of Common Stock of Convest, and has
agreed in the Merger Agreement to vote its shares of Convest Common Stock in
favor of the transaction. In addition, investment funds and accounts managed by
TCW Special Credits and Oaktree Capital Management, L.L.C., which hold slightly
in excess of 51% of Edisto's Common Stock, have agreed to vote for the
transaction. Also, such investment funds and accounts have contractually agreed
not to sell 80% of the Forcenergy Common Stock received in the transaction for a
period of six months after the closing.
The accompanying financial statements have been prepared on a going
concern basis and do not reflect any adjustments related to the proposed merger.
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CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RECLASSIFICATIONS AND CONSOLIDATION. Certain reclassifications have been
made to prior year financial statements to conform to the presentation for 1997.
All significant intercompany accounts and activities have been eliminated.
RESTRICTED CASH. Restricted cash consists of $333,000 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.
PROPERTY AND EQUIPMENT. The Company follows the successful efforts
method of accounting for its oil and gas properties. Costs of productive wells,
developmental drilling expenditures, including developmental dry holes, and
productive leases are capitalized. Exploratory drilling costs, including
stratigraphic test wells, are initially capitalized, but charged to expense if
and when the well is determined to be unsuccessful. The capitalized costs of oil
and gas properties are charged to operations as depreciation, depletion and
amortization using the unit-of-production method based on the ratio of current
production to proved recoverable oil and gas reserves (as defined by the
Securities and Exchange Commission) on a lease by lease basis. Reserve estimates
for the Company's properties were prepared or audited by independent petroleum
engineering firms at year end. Gas is converted to equivalent barrels of oil on
an energy content basis of 6 Mcf of gas to 1 barrel of oil. Depreciation,
depletion and amortization per equivalent unit of oil production was $4.74 and
$4.83 for the six month periods ended June 30, 1997 and 1996, respectively, and
$4.51 and $4.60 for the three month periods ended June 30, 1997 and 1996,
respectively. 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.
Under Statement of Financial Accounting Standards No. 121 ("SFAS 121")
regarding accounting for the impairment of long-lived assets, the Company is
required 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. 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 expected future cash flows. During the second
quarter of 1996, it was determined that one of the Company's offshore properties
had experienced a permanent decline in production. Accordingly, the Company
recorded an impairment loss of approximately $1.1 million during the second
quarter of 1996. No such provision has been required during 1997.
OTHER PROPERTY, PLANT AND EQUIPMENT. Other fixed assets are recorded at
cost and depreciated over their estimated useful lives using the straight-line
method of depreciation.
ABANDONMENT RESERVE. The Company records its estimate of future
abandonment costs of offshore properties. Such costs are accrued 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.
The Company is a party to a settlement with the United States Minerals
Management Service relating to estimated plugging and abandonment costs for 14
Gulf of Mexico OCS leases. Pursuant to this settlement, the operator of the
leases, Convest and other co-lessees were required to provide security for
payment of such costs through quarterly payments to an Abandonment Fund. During
the first quarter of 1997, the Company made its final scheduled payment under
the Abandonment Fund, and accordingly, is no longer subject to additional future
payments.
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CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 1997 and December 31, 1996, the Company had made payments
totaling approximately $4.8 million and $4.2 million to the Abandonment Fund,
respectively. These payments were applied to the total long-term abandonment
reserve of $7.5 million and $7.7 million, as of June 30, 1997 and December 31,
1996, respectively, resulting in a net long-term abandonment reserve of $2.7
million and $3.5 million as of those dates. The current portion of the
abandonment reserve was $2.1 million and $2.3 million as of June 30, 1997 and
December 31, 1996, 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., the Company
established a reserve for the expenses associated with the volumes sold and
amortizes this reserve as the volumes are delivered. As of June 30, 1997 and
December 31, 1996, the current balance of this reserve was $1.6 million,
respectively, and the long-term balance was $2.8 million and $3.7 million,
respectively, and were presented in "Accrued Liabilities and Other" and "Other
Noncurrent Liabilities," respectively, in the consolidated financial statements.
GAS BALANCING. The Company uses the entitlement method of accounting for
gas imbalances. Receivables resulting from undertakes of gas production at June
30, 1997 and December 31, 1996 were $2.4 million and $2.3 million, respectively,
and are included in "Accounts Receivable - Oil and Gas Production" and "Other
Noncurrent Assets" in the consolidated financial statements. Deferred revenue
and payables resulting from overtakes of gas production at June 30, 1997 and
December 31, 1996 were $2.4 million and $2.7 million, respectively, and are
included in "Current Liabilities Deferred Revenue" and "Long-Term Liabilities -
Deferred Revenue" in the consolidated financial statements.
ACCOUNTING FOR INCOME TAXES. The Company records income taxes in
accordance with the Financial Accounting Standards Board - Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." SFAS 109 requires the balance sheet approach of income tax accounting
whereby deferred income taxes are provided at the balance sheet date for the
differences existing in the tax basis of assets and liabilities and their
financial statement carrying amounts.
CONCENTRATION OF CREDIT RISK. The Company's oil and gas production
revenues are derived principally from uncollateralized 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. The Company has
not experienced significant credit losses on receivables from such sales.
NET INCOME PER SHARE. Net income per share is computed based on the
weighted average number of shares outstanding which were 10,472,100 and
10,412,722 for the six months ended June 30, 1997 and 1996, respectively, and
10,508,115 and 10,412,722 for the three months ended June 30, 1997 and 1996,
respectively. No effect has been given to options outstanding under the
Company's stock option plans because their effect is antidilutive or immaterial.
RISK MANAGEMENT/HEDGING ACTIVITIES. The Company from time to time
engages in commodity hedging activities to minimize the risk of market
fluctuations associated with the price of crude oil and natural gas production.
The hedging objectives include assurance of stable and known cash flows and
fixed favorable prices. The hedges are effected through the purchase and sale of
futures contracts on the New York Mercantile Exchange ("NYMEX") and over the
counter price swap agreements. The credit risk of futures contracts is limited
due to the daily cash settlement of the net change in the value of open
contracts and because of certain NYMEX procedures. Gains or losses on the
Company's hedging agreements are deferred and recognized as oil and gas sales
revenue when the hedged transaction occurs.
STATEMENT OF CASH FLOWS. For purposes of the consolidated statements of
cash flows, the Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
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
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<PAGE>
CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
revenues and expenses during the reporting period. Actual results could differ
from those estimates. All significant estimates are discussed herein.
(4) RELATED PARTY TRANSACTIONS
During December 1996, Edisto sold substantially all of the assets of its
wholly owned gas marketing subsidiary, Energy Source, Inc. , to an unrelated
third party. From January 1995 until its sale in December 1996, Energy Source
had marketed a substantial portion of the Company's gas production. Under the
gas marketing arrangement, Convest received a minimum price of 98% of the index
for the applicable pipeline. In connection with the sale of Energy Source,
Convest and Energy Source agreed to extend the gas marketing arrangement to
December 31, 1997. Effective January 1, 1997, the gas marketing arrangement was
amended to increase the price received by the Company from 98% to 100% of the
index price for the applicable pipeline.
In connection with the Energy Source sale, all Edisto employees other
than Michael Y. McGovern, the Chairman and Chief Executive Officer of Convest
and Edisto, became employees of the purchaser. Subsequently, Edisto's corporate
headquarters were moved to Convest's offices, and Mr. McGovern and four other
employees of Convest have divided their time between Edisto and Convest.
Effective December 1, 1996, Mr. McGovern's base salary and benefits have been
apportioned 70% to Convest and 30% to Edisto. The base salary and benefits of
the other Convest employees who perform work for Edisto also are apportioned
based on the approximate amount of time they work for each company.
Prior to the sale of Energy Source, Edisto had provided Convest with
access to an AS400 computer system to run its accounting system and had provided
MIS support. The monthly cost to Convest was approximately $12,555 per month. In
connection with the sale of Energy Source, Edisto sold the AS400 computer system
and its MIS personnel became employees of the purchaser of Energy Source. Since
Convest continued to need an AS400 computer system to run its accounting system,
the Energy Source purchaser agreed to provide Convest with access to the AS400
computer system and MIS support through December 31, 1997. The cost to Convest
is $12,645 per month. This agreement may be terminated by Convest at any time
after June 30, 1997 upon 90 days notice.
In addition, the Company and Edisto have a directors' and officers'
fiduciary insurance policy that covers both companies. The annual insurance
premium was allocated 32% to the Company, for a cost of $96,000 based on the
relative percentage that the assets of the Company bear to the total assets of
both the Company and Edisto.
Each of the affiliated party transactions described above was approved
by either a special committee of the Company's Board, which was composed of
outside directors with no affiliation to Edisto, or the unanimous consent of the
Company's Board.
(5) HEDGING ACTIVITIES
As previously stated, the Company conducts its hedging activities
through major financial institutions. Set forth below is the contract amount and
term of all futures contracts held for price risk management purposes by the
Company at June 30, 1997 and December 31, 1996:
JUNE 30, 1997 DECEMBER 31, 1996
OIL GAS OIL GAS
-------- -------- -------- ----------
Quantity Sold 30 Mbbls 740 Mmcf 90 Mbbls 3,300 Mmcf
Maximum Term 3 Months 3 Months 9 Months 10 Months
Average Price $21.07 $2.38 $22.50 $2.53
The Company will continue its hedging activities during 1997 in order to
mitigate the volatility of its crude oil and natural gas prices. Gains and
losses realized upon the settlement of the Company's hedge positions are
deferred and recognized as oil and gas sales revenue in the month of the
underlying physical production being hedged. The fair value of the Company's
open positions at June 30, 1997 were $182,150. As a result of fluctuations in
the price of crude oil
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<PAGE>
CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and natural gas subsequent to June 30, 1997, the stated fair value of the
Company's open positions is not indicative of the value which would be received
if the positions were closed at current prices. The fair value of the Company's
hedges was based on the cost that would have been incurred to buy out those
hedges in a loss position and the consideration that would have been received to
terminate those hedges in a gain position. The cash margin required by the
counterparties to the Company's hedging activities totaled $56,000 and $1.0
million as of June 30, 1997 and December 31, 1996, respectively, and are
included in other current assets.
(6) INCOME TAXES
The Company records current income taxes based on its estimated actual
tax liability for the year. The Company provides for deferred income taxes under
SFAS No. 109 based upon differences between the tax basis of the Company's
assets and liabilities and their financial statement carrying amounts multiplied
by the Company's expected future effective tax rate.
The Company recorded current income tax expense of $156,000 and $217,000
for the six months ended June 30, 1997 and 1996, respectively and $59,000 and
$48,000 for the three months ended June 30, 1997 and 1996, respectively. The
Company has provided a valuation allowance against substantially all of its net
deferred tax assets as the "more-likely-than-not" criteria for recognition under
SFAS No. 109 was not met. During 1995, the Company purchased approximately $3.3
million of NOL tax benefits from Edisto for $550,000 which is included in "Other
Noncurrent Assets" in the accompanying balance sheets. No valuation allowance
has been taken against such amount under SFAS No. 109 since the Company
anticipates that the purchased NOLs will be utilized against the Company's near
term income tax.
(7) CREDIT FACILITY AND LONG-TERM DEBT
The Company has a revolving credit facility with Bank One, Texas, N.A.
("Bank One"), and Compass Bank-Houston which terminates on January 1, 1999. Bank
One serves as agent bank of the facility. The facility is secured by a first
lien on all of the Company's assets, including its oil and gas properties and
gas plant. The borrowing base is redetermined semi-annually on May 31 and
November 30 of each year by the lending banks based on engineering criteria
established by the banks. Interest on borrowings under the facility is computed
at (i) the agent bank's prime lending rate (the "Base Rate") plus 3/4% or (ii)
the London InterBank Offering Rate ("LIBOR") plus 2-3/4%. In addition, the
Company pays a commitment fee equal to 1/2% on any commitment amount in excess
of outstanding borrowings.
Effective December 1, 1996, the borrowing base was $19.2 million which
reduces by $1.0 million per month beginning January 1, 1997 based on the lending
banks' estimate of production. Effective January 28, 1997 and June 12, 1997, the
borrowing base was reduced by $300,000 and $200,000, respectively, to give
effect to the sale of oil and gas properties securing the credit facility.
Pursuant to the terms of the credit facility, the Company is required to provide
the banks with semi annual estimates of its oil and gas reserves on or before
April 1 and October 1 of each year. Due to the proposed merger with Forcenergy,
the banks have agreed to extend the report required on October 1, 1997 until
December 1, 1997. As a result, the Company's borrowing base will continue to
reduce by $1.0 million per month until the updated reports are provided and the
borrowing base has been redetermined.
After giving effect to the monthly borrowing base reductions and the
reductions resulting from the property sales, the Company's borrowing base under
the credit facility was $12.7 million on June 30, 1997. The Company had no
outstanding borrowings under its credit facility at June 30, 1997 and $4.0
million outstanding at December 31, 1996. In addition, the Company had $200,000
of letters of credit outstanding at June 30, 1997 and December 31, 1996,
primarily related to performance bonds issued for oil and gas operations.
(8) COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS. ELIZABETH HOLT, ET AL. V. SUN E & P COMPANY, ET AL.,
No. 3,217 in the 84th District Court, Hansford County, Texas. This suit was
originally filed in August 1984, seeking to cancel a 13-section lease because
there
-12-
<PAGE>
CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
was no gas production for a period of approximately 120 days in 1983 when the
gas purchaser's pipeline was shutdown for repairs. The plaintiff sought to
terminate the lease by reason of non-production as of September 23, 1983. If the
plaintiff is successful, the Company would be liable for damages on past
production in the range of $300,000 to $350,000, plus pre-judgment interest and
attorneys fees, which would total approximately $400,000 to $450,000. The court
entered a judgment on December 20, 1996 denying all relief sought by the
plaintiffs against Convest. This judgment is being appealed by the plaintiffs.
The predecessor in interest to Convest has indemnified Convest to a maximum of
$357,000 in value for the well provided that total damages exceed $250,000.
In addition, the Company is named as defendant in several lawsuits
arising in the ordinary course of business. While the outcome of these lawsuits
and other proceedings against the Company cannot be predicted with certainty,
management does not expect these matters to have a material adverse effect on
the Company's financial position or results of operations.
-13-
<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
The significant events during the six months ended June 30, 1997 are
described below:
RESULTS OF OPERATIONS. The Company had net income for the quarter ended
June 30, 1997 of $4.3 million compared to a net loss of $.6 million for the
prior year quarter. The Company had net income of approximately $8.8 million for
the six months ended June 30, 1997 compared to net income of $1.4 million for
the corresponding six months of 1996. SEE "Results of Operations" below.
PROPOSED MERGER WITH FORCENERGY INC. On June 19, 1997, Convest, Edisto,
Forcenergy Inc ("Forcenergy") (NYSE "FEN"), and a Forcenergy subsidiary executed
a definitive Agreement and Plan of Merger (the "Merger Agreement") providing for
Convest and Edisto to be merged into Forcenergy.
Under the Merger Agreement, (a) each issued and outstanding share of
Convest Common Stock will be converted into the right to receive a fractional
interest in a share of Forcenergy Common Stock equal to $8.88 divided by the
Weighted Average Trading Price of Forcenergy Common Stock, and (b) each issued
and outstanding share of Edisto Common Stock will be converted into the right to
receive (i) $4.886 in cash and (ii) a fractional interest in a share of
Forcenergy Common Stock equal to $5.064 divided by the Weighted Average Trading
Price of Forcenergy Common Stock; PROVIDED, HOWEVER, that in no event will the
Weighted Average Trading Price of Forcenergy Common Stock be less than $28.96
nor more than $34.96. The "Weighted Average Trading Price" of Forcenergy Common
Stock will be calculated by taking the average of the following daily
calculations for each of the ten trading days ending two trading days prior to
the closing date for the Merger: (i) grouping together all shares of Forcenergy
Common Stock traded on such day at the same trading price, (ii) multiplying the
aggregate number of shares in each price group by the trading price for such
group to calculate a product (the total sold shares value) for each group, (iii)
adding all of such products from each group, and (iv) dividing the resulting
total by the aggregate number of shares traded on such trading day. Cash will be
paid in lieu of fractional shares of Forcenergy Common Stock. The transaction is
expected to close in October 1997.
The majority shareholders of Convest and Edisto have agreed to vote
their respective shares in favor of the transaction thereby assuring the
required shareholder approval for the Merger Agreement. Edisto currently owns
approximately 72% of the outstanding shares of Common Stock of Convest, and has
agreed in the Merger Agreement to vote its shares of Convest Common Stock in
favor of the transaction. In addition, investment funds and accounts managed by
TCW Special Credits and Oaktree Capital Management, L.L.C., which hold slightly
in excess of 51% of Edisto's Common Stock, have agreed to vote for the
transaction. Also, such investment funds and accounts have contractually agreed
not to sell 80% of the Forcenergy Common Stock received in the transaction for a
period of six months after the closing.
HIGH ISLAND BLOCK 195 DRILLING. During January 1997, the Company
participated in the drilling of an exploratory well on Block 195 of the High
Island area of the Gulf of Mexico to test a prospect identified by 3-D seismic.
The 195 #3 well was directionally drilled to approximately 13,000' and
discovered productive gas sands in the Upper Rob "M". Total cost of the well was
approximately $1.1 million net to the Company's 23.4% working interest.
During March 1997, the Company participated in an additional exploratory
test well on Block 195 to test a deeper prospect on the block. The 195 #4 well
was directionally drilled to approximately 15,200' and encountered productive
gas sands in the Lower Rob "M". Total cost of the well was approximately $1.4
million net to the Company's 23.4% working interest.
Gas production from the producing wells on Block 195 is being processed
from an existing platform located on High Island Block 176. During the second
quarter of 1997, the Company participated in the installation of flowlines and
certain facility enhancements on the platform on Block 176 at an aggregate cost
to date of approximately $200,000. Three of the four wells on Block 195 are
currently producing in excess of 60 Mmcf of gas per day and the fourth well is
projected to be placed on production during August 1997. The Company has a net
revenue interest of 19.5% in the
-14-
<PAGE>
production from the block. In addition, it is anticipated that the operator of
the High Island Block 195 will propose drilling an additional well during 1997.
WEST CAMERON BLOCK 607 DRILLING. In March 1997, the Company participated
in the drilling of an exploratory test well which was drilled from the existing
platform on Block 607 of the West Cameron area of the Gulf of Mexico. The 607
A-4 exploratory well successfully discovered gas reserves in three new sands and
was dually completed. Initial production from the well averaged approximately 20
MMcf of gas per day; however, the well has experienced mechanical problems
allowing water to channel into the wellbore restricting the gas flow rate to
approximately 7 Mmcf per day. During July 1997, the Company participated in an
unsuccessful operation to restrict the inflow of water. The Company and the
operator of the property are currently evaluating other operations to minimize
the effects of the water channeling. The Company owns a 49.6% working interest
in the block and a 36.0% net revenue interest. Total cost of the well was
approximately $2.2 million net to the Company's working interest.
REPAYMENT OF OUTSTANDING DEBT. During the first quarter of 1997, the
Company repaid the remaining $4.0 million of outstanding debt under its
long-term credit facility. Following the debt repayment, the credit facility
will continue to be available for future borrowings if needed. As of August 1,
1997, the borrowing base under the credit facility was $10.7 million. SEE
"Liquidity and Capital Resources - Credit Facility and Long-Term Debt" below.
-15-
<PAGE>
RESULTS OF OPERATIONS
The following table highlights the production volumes, average oil and
gas prices and revenues received by the Company and production and operating
expenses for the six month and three month periods ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE THREE MONTHS
ENDING JUNE 30, ENDING JUNE 30,
------------------------------ ------------------------------
PERCENTAGE PERCENTAGE
1997 1996 CHANGE 1997 1996 CHANGE
---------- ---------- ---------- ---------- ---------- ----------
(in thousands except per BOE data and price data)
<S> <C> <C> <C> <C> <C> <C>
PRODUCTION VOLUMES:
Oil (Mbbls) 490 460 7% 254 243 5%
Gas (including NGL's)(Mmcf) 6,213 7,006 (11%) 3,311 3,434 (4%)
BOE (Mbbls)(1) 1,526 1,627 (6%) 807 815 (1%)
PRICES:
Oil ($/Bbl) $ 19.29 $ 17.05 13% $ 17.66 $ 16.81 5%
Gas ($/Mcf) $ 2.49 $ 1.92 30% $ 2.22 $ 1.77 25%
GROSS OIL AND GAS REVENUE:
Oil $ 9,457 $ 7,845 21% $ 4,498 $ 4,085 10%
Gas (including NGL's) 15,448 13,484 15% 7,345 6,085 21%
---------- ---------- ---------- ----------
Total Oil and Gas Revenue $ 24,905 $ 21,329 17% $ 11,843 $ 10,170 16%
========== ========== ========== ==========
PRODUCTION EXPENSES:
Lease Operating Expenses $ 5,744 $ 7,636 (25%) $ 2,789 $ 3,675 (24%)
Production Taxes 533 617 (14%) 240 307 (22%)
---------- ---------- ---------- ----------
Total Production Expenses $ 6,277 $ 8,253 (24%) $ 3,029 $ 3,982 (24%)
========== ========== ========== ==========
ABANDONMENT AND EXPLORATION COSTS $ 1,147 $ 921 25% $ 56 $ 878 (94%)
========== ========== ========== ==========
GENERAL AND ADMINISTRATIVE EXPENSE $ 2,188 $ 2,281 (4%) $ 1,058 $ 1,042 2%
========== ========== ========== ==========
INTEREST EXPENSE $ 72 $ 674 (89%) $ 16 $ 307 (95%)
========== ========== ========== ==========
DEPRECIATION, DEPLETION & AMORTIZATION
OF OIL AND GAS PROPERTIES $ 7,225 $ 7,857 (8%) $ 3,639 $ 3,745 (3%)
========== ========== ========== ==========
PRODUCTION COSTS PER BOE $ 4.11 $ 5.07 (19%) $ 3.75 $ 4.89 (23%)
========== ========== ========== ==========
DEPRECIATION, DEPLETION & AMORTIZATION
PER BOE $ 4.74 $ 4.83 (2%) $ 4.51 $ 4.60 (2%)
========== ========== ========== ==========
</TABLE>
(1) Natural gas is converted into oil equivalents at a rate of six Mcf per
each barrel of oil.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996.
REVENUES. Oil and gas revenue increased by approximately $3.6 million or
17% between the six months ended June 30, 1997 and 1996. The average price the
Company received for its oil and gas sales increased by 13% and 30%,
respectively, between the corresponding periods. Oil production increased by 7%
between the periods while gas production decreased by 11%. During 1996 and early
1997, the Company participated in 21 new exploratory and development wells of
which 16 were successful. As a result of this drilling, production from several
of the Company's properties increased substantially. The additional production
associated with the Company's drilling success was partially offset by the sale
or abandonment of a number of marginal properties during 1996 and early 1997 and
the effects of depletion on the Company's offshore Gulf of Mexico gas producing
properties. Also, the
-16-
<PAGE>
Company's offshore gas properties are subject to inherent steep production
declines. These declines were partially offset during 1996 and early 1997 by the
drilling success mentioned above. In order to minimize the future effects of
such declines, the Company must replace its reserves through its exploratory and
development drilling and acquisition activities. The Company's gas plant revenue
increased by $298,000 or 42% between the corresponding periods due primarily to
higher prices received for output from the plant.
PRICE RISK MANAGEMENT/HEDGING. The Company uses a combination of futures
contracts traded on the NYMEX and over the counter price swaps with major
financial institutions to hedge against the volatility of natural gas and oil
prices. Gains and losses recognized upon settlement of the Company'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 the Company's
hedging activities, the Company recorded hedging income of approximately
$313,000 for the six month period ended June 30, 1997 and a hedging loss of
approximately $4.5 million for the corresponding period of 1996. 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
the Company received for its oil and gas sales.
PRODUCTION EXPENSES. Production expenses decreased by approximately $2.0
million or 24% between the corresponding periods. The decrease in lease
operating expenses was primarily due to the aforementioned sale or abandonment
of a number of marginal producing properties during 1996 and early 1997 which
tended to have high operating expense. Production expenses per barrel of oil
equivalent ("BOE") was $4.11 for the six months ended June 30, 1997 compared to
$5.07 for the corresponding period of 1996.
ABANDONMENT AND EXPLORATION COSTS. Abandonment and exploration costs
increased by approximately $226,000 due to (i) the aforementioned abandonment of
several offshore properties during the first quarter of 1997 and (ii) the write
off of approximately $757,000 associated with two unsuccessful exploratory wells
drilled during the first quarter of 1997 in accordance with the successful
efforts method of accounting. During the second quarter of 1996, the Company
expensed approximately $750,000 of drilling costs associated with two
unsuccessful exploratory test wells.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
decreased by approximately 4% between the corresponding periods due primarily to
the resignation of the former President and Chief Operating Officer and the
former Chief Financial Officer during late 1996. Subsequent to the resignation
of the two former executive officers, neither position has been replaced
resulting in lower salary expense for 1997.
INTEREST EXPENSE. Interest expense decreased by $602,000 or 89% between the
corresponding periods due to the repayment of all outstanding borrowing under
the Company's credit facility during early 1997.
DEPRECIATION, DEPLETION AND AMORTIZATION ("DD&A"). DD&A on oil and gas
properties decreased by approximately $632,000 or 8% between the corresponding
periods. The decrease in DD&A was primarily due to a 6% decline in overall
production volumes on a per BOE basis. DD&A per BOE was $4.74 for the six months
ended June 30, 1997 compared to $4.83 for the corresponding period of 1996.
IMPAIRMENT OF OIL AND GAS PROPERTIES. During the second quarter of 1996,
the Company recorded an impairment of $1.1 million on one of its offshore gas
properties. During the second quarter of 1996, the producing well on the
property experienced permanent mechanical difficulties and, accordingly, the
property was written off in accordance with SFAS 121. No such provision has been
required in 1997.
GAIN ON ASSET SALES. In January 1996, the Company completed the sale of an
offshore oil and gas property for sale proceeds of approximately $2.0 million.
As a result of the sale, the Company recorded a gain on the property sale of
approximately $620,000 during the first quarter of 1996. The Company has
continued to review its properties with a focus on profitability and as a result
has sold several non-strategic properties with marginal profitability during
1997. Aggregate sale proceeds totaled approximately $740,000 and resulted in a
gain of approximately $63,000 for the six months ended June 30, 1997.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996.
REVENUES. Oil and gas revenues increased by approximately $1.7 million or
16% between the three months ended June 30, 1997 and the corresponding period of
1996. The average price the Company received for its oil and gas sales increased
by 5% and 25%, respectively, between the corresponding periods. Oil production
increased by 5% between the periods while gas production decreased by 4%. As
previously stated, the Company's drilling success during 1996 and early 1997
served to mitigate the effects of depletion from the Company's oil and gas
properties. The Company's gas plant revenue increased by $57,000 and 17% between
the periods due to higher prices received for output from the plant.
-17-
<PAGE>
PRICE RISK MANAGEMENT/HEDGING. As previously stated, the Company uses
futures contracts and price swap agreements to hedge against the volatility of
natural gas and oil prices. For the three months ended June 30, 1997, the
Company recorded hedging income of approximately $406,000 compared to a hedging
loss of approximately $2.3 million for the corresponding period of 1996.
PRODUCTION EXPENSES. Production expenses decreased by approximately $1.0
million or 24% between the corresponding periods. The decrease in production
expenses was primarily due to the aforementioned sale or abandonment of a number
of marginal producing properties. Production expenses per BOE totaled $3.75 for
the three months ended June 30, 1997 compared to $4.89 for the corresponding
period of 1996.
ABANDONMENT AND EXPLORATION COSTS. Abandonment and exploration costs
increased by $822,000 or 94% due to the writeoff of two unsuccessful exploratory
wells during the second quarter of 1996 in accordance with the successful
efforts method of accounting.
INTEREST EXPENSE. Interest expense decreased by $291,000 or 95% due
primarily to the aforementioned repayment of all outstanding borrowings under
the Company's credit facility during early 1997.
DEPRECIATION, DEPLETION AND AMORTIZATION. DD&A on oil and gas properties
decreased by $106,000 due primarily to the aforementioned production declines.
DD&A per BOE was $4.51 for the three months ended June 30, 1997 compared to
$4.60 for the corresponding period of 1996.
IMPAIRMENT OF OIL AND GAS PROPERTIES. As previously stated, one of the
Company's offshore gas properties experienced a permanent decline in production
during the second quarter of 1996. In accordance with the applicable accounting
rules, the Company recorded an impairment of approximately $1.1 million during
June 1996. No such provision has been required in 1997.
LIQUIDITY AND CAPITAL RESOURCES
CREDIT FACILITY AND LONG-TERM DEBT
On June 26, 1995, the Company entered into a new credit agreement which
terminates January 1, 1999. This facility is secured by a first lien on
substantially all of the Company's assets, including its oil and gas properties
and gas plant. The borrowing base under the credit facility is subject to
redetermination semi-annually (on May 31 and November 30) using engineering
determinations and pricing and other assumptions designated by the bank group.
Effective December 1, 1996, the new borrowing base under the credit facility was
$19.2 million, based on the lending banks' semi-annual redetermination, which
began reducing by $1.0 million per month beginning January 1, 1997. Effective
January 28, 1997 and June 12, 1997, the borrowing base was reduced by $300,000
and $200,000, respectively, to give effect to the sale of oil and gas properties
securing the credit facility. Pursuant to the terms of the credit facility, the
Company is required to provide the banks with semi-annual estimates of its
reserves on or before April 1 and October 1 of each year. Due to the proposed
merger with Forcenergy, the banks have agreed to extend the report due on
October 1, 1997 until December 1, 1997. As a result, the Company's borrowing
base will continue to reduce by $1.0 million per month until the updated reports
are provided and the borrowing base has been redetermined. After giving effect
to the monthly borrowing base reductions and the reduction resulting from the
property sales, the Company's borrowing base under the credit facility was
approximately $10.7 million on August 1, 1997. Based on the scheduled borrowing
base reductions, the Company will have no borrowing capacity under the credit
facility after June 1, 1998 unless the lending banks provide a subsequent
redetermination of the borrowing base based on the reserve estimates to be
provided on December 1, 1997.
During 1997, the Company repaid the outstanding balance of $4.0 million
under the credit facility. The credit facility, however, will remain available
for future credit needs.
WORKING CAPITAL
The Company had working capital of $1.2 million at June 30, 1997 compared
to a working capital deficit of $2.6 million at December 31, 1996. The primary
contributor to the improvement in the Company's working capital position during
1997 was an overall increase in the price the Company received for its oil and
gas production. The higher oil and gas prices coupled with the additional
production associated with the Company's exploratory and development program
enabled the Company to reduce its current liabilities and accumulate higher cash
balances.
Based on the cash flow from the Company's oil and gas properties,
management believes that the Company has the financial capability to satisfy its
1997 capital expenditures program while meeting operating needs arising in the
ordinary course of business.
-18-
<PAGE>
CAPITAL EXPENDITURES
The Company has budgeted capital expenditures totaling $9.7 million for the
remainder of 1997. In addition, the Company anticipates that the operator for
the High Island Block 195 will propose drilling an additional well for which no
costs are currently included in the Company's capital budget. As previously
stated, management believes that the cash flow generated from the Company's
properties coupled with the available borrowings under the Company's credit
facility will be adequate to fund the anticipated capital expenditures for 1997.
VOLATILITY OF NATURAL GAS AND OIL PRICES
The revenues generated from operations are highly dependant upon the prices
of oil and natural gas. Historically, the markets for natural gas and oil have
been volatile and are likely to continue to be volatile in the future. Prices
for natural gas and oil are subject to wide fluctuation in response to
relatively minor changes in the supply of and demand for natural gas and oil,
market uncertainty and a variety of additional factors that are beyond the
control of the Company. These factors include the level of consumer product
demand, weather conditions, domestic and foreign governmental regulations, the
price and availability of alternative fuels, political conditions in the Middle
East, the foreign supply of natural gas and oil, the price of foreign imports
and overall economic conditions. It is impossible to predict future natural gas
and oil price movements with any certainty. Declines in natural gas and oil
prices may adversely affect the Company's financial condition, liquidity and
results of operations. Lower natural gas and oil prices also may reduce the
amount of the Company's natural gas and oil that can be produced economically.
-19-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Note 8 of the "Notes to the Consolidated Financial Statements" is
incorporated herein by reference.
ITEM 6. (A) EXHIBITS.
2.1 - Agreement and Plan of Merger dated as of June 19, 1997 among
Forcenergy Inc, EDI Acquisition Corporation, Convest Energy
Corporation and Edisto Resources Corporation (incorporated by
reference from Exhibit 2.1 to the Registrant's Form 8-K dated
June 19, 1997.)
2.2 - Shareholder Agreement dated as of June 19, 1997 among
Forcenergy Inc and certain shareholders of Edisto Resources
Corporation holding approximately 51% of the outstanding shares
of Common Stock of Edisto Resources Corporation (incorporated by
reference from Exhibit 2.2 to the Registrant's Form 8-K dated
June 19, 1997.)
(B) REPORTS ON FORM 8-K
Form 8-K dated June 19, 1997 describing the execution of a Plan and
Agreement of Merger among Convest Energy Corporation, Edisto Resources
Corporation, Forcenergy Inc and a Forcenergy subsidiary whereby
Convest and Edisto will be merged into Forcenergy.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
CONVEST ENERGY CORPORATION
(Registrant)
By:/S/ STEVEN G. IVES
Steven G. Ives
Vice President - Finance
(Principal Accounting Officer)
Date: August 14, 1997
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM CONVEST ENERGY CORPORATION'S 1997 FORM 10-Q FOR THE QUARTER ENDED JUNE 30,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 7,369
<SECURITIES> 0
<RECEIVABLES> 7,726
<ALLOWANCES> (596)
<INVENTORY> 97
<CURRENT-ASSETS> 15,317
<PP&E> 118,650
<DEPRECIATION> (64,068)
<TOTAL-ASSETS> 72,517
<CURRENT-LIABILITIES> 14,069
<BONDS> 0
0
0
<COMMON> 105
<OTHER-SE> 52,305
<TOTAL-LIABILITY-AND-EQUITY> 72,517
<SALES> 25,907
<TOTAL-REVENUES> 26,194
<CGS> 6,507
<TOTAL-COSTS> 17,147
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 72
<INCOME-PRETAX> 8,975
<INCOME-TAX> 156
<INCOME-CONTINUING> 8,819
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,819
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.84
</TABLE>
