UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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: March 31, 1999
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: 1-10671
THE MERIDIAN RESOURCE CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 76-0319553
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
15995 N. BARKERS LANDING, SUITE 300, HOUSTON, TEXAS 77079
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 281-558-8080
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 and 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 [ ]
Number of shares of common stock outstanding at May 4, 1999 45,831,757
Page 1 of 20
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THE MERIDIAN RESOURCE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
INDEX
PAGE
NUMBER
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations (unaudited) for the
Three Months Ended March 31, 1999 and 1998 3
Consolidated Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998 4
Consolidated Statements of Cash Flows (unaudited) for the
Three Months Ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURE 20
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED MARCH 31,
1999 1998
-------- --------
(in thousands, except for
per share information)
REVENUES:
Oil and natural gas .......................... $ 23,104 $ 11,766
Interest and other ........................... 202 131
-------- --------
23,306 11,897
COSTS AND EXPENSES:
Oil and natural gas operating ................ 4,170 1,518
Severance and ad valorem taxes ............... 2,239 460
Depletion and depreciation ................... 12,687 6,259
General and administrative ................... 2,794 1,977
Interest ..................................... 5,055 2,332
Impairment of long-lived assets .............. -- 40,278
-------- --------
26,945 52,824
INCOME (LOSS) BEFORE INCOME TAXES .............. (3,639) (40,927)
INCOME TAX EXPENSE (BENEFIT) ................... -- --
-------- --------
NET INCOME (LOSS) .............................. (3,639) (40,927)
DIVIDEND REQUIREMENT ON
PREFERRED STOCK .............................. ($ 1,350) --
-------- --------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS .......................... ($ 4,989) ($40,927)
======== ========
NET INCOME (LOSS) PER SHARE:
Basic ........................................ ($ .11) ($ 1.22)
======== ========
Diluted ...................................... ($ .11) ($ 1.22)
======== ========
See notes to consolidated financial statements.
3
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THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
MARCH 31, DECEMBER 31,
1999 1998
--------- ---------
(in thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................... $ 5,337 $ 9,478
Accounts receivable ............................ 28,434 32,558
Due from affiliates ............................ 5,285 4,848
Prepaid expenses and other ..................... 2,326 1,394
--------- ---------
Total current assets .................... 41,382 48,278
PROPERTY AND EQUIPMENT:
Oil and natural gas properties, full cost
method (including $89,968,000 [1999]
and $94,077,000 [1998] not subject to
depletion) ................................... 842,492 820,322
Land ........................................... 478 478
Equipment ...................................... 6,786 6,775
--------- ---------
849,756 827,575
Accumulated depletion and depreciation ......... (448,808) (436,120)
--------- ---------
400,948 391,455
OTHER ASSETS ..................................... 5,873 5,442
--------- ---------
$ 448,203 $ 445,175
========= =========
See notes to consolidated financial statements.
4
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THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(unaudited)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ---------
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable ....................................... $ 31,148 $ 19,138
Revenues and royalties payable ......................... 2,967 6,500
Accrued liabilities .................................... 13,815 24,440
Current maturities of long-term debt ................... 42 84
--------- ---------
Total current liabilities ....................... 47,972 50,162
LONG TERM DEBT ........................................... 250,000 240,000
COMMITMENTS AND CONTINGENCIES ............................ -- --
LITIGATION LIABILITIES ................................... 6,205 6,205
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value (25,000,000 shares
authorized, 3,982,906 [1999] and 3,982,906 [1998]
shares of Series A Cumulative Convertible
Preferred Stock issued at stated value ............... 135,000 135,000
Common stock, $0.01 par value (200,000,000 shares
authorized, 45,817,319 [1999] and 45,817,319 [1998]
issued ............................................... 463 461
Additional paid-in capital ............................. 270,748 270,477
Accumulated deficit .................................... (261,803) (256,814)
Unamortized deferred compensation ...................... (359) (293)
--------- ---------
144,049 148,831
Treasury stock, at cost (1,275 [1999] and
1,275 [1998] shares) ................................. (23) (23)
--------- ---------
Total stockholders' equity ............................. 144,026 148,808
--------- ---------
$ 448,203 $ 445,175
========= =========
</TABLE>
See notes to consolidated financial statements.
5
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THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
-------- --------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................. ($ 3,639) ($40,927)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depletion and depreciation ........................ 12,687 6,259
Amortization of other assets ...................... 487 23
Non-cash compensation ............................. 437 599
Impairment of long-lived assets ................... -- 40,278
Changes in operating assets and liabilities:
Accounts receivable ............................... 4,124 (1,131)
Due from affiliates ............................... (437) (218)
Accounts payable .................................. 12,010 110
Revenues and royalties payable .................... (3,533) (1,448)
Accrued liabilities and other ..................... (8,199) (4,475)
-------- --------
Net cash provided by (used in) operating activities . 13,937 (930)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net ............ (26,283) (18,406)
Other ............................................... -- (165)
-------- --------
Net cash used in investing activities ............... (26,283) (18,571)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt ........................ 15,000 17,897
Reductions in long-term debt ........................ (5,042) (19)
Exercise of stock options ........................... -- 72
Payment of preferred stock dividends ................ (1,350) --
Deferred loan costs and other ....................... (403) --
-------- --------
Net cash provided by financing activities ........... 8,205 17,950
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS ................ (4,141) (1,551)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD .............................. 9,478 8,083
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............. $ 5,337 $ 6,532
======== ========
See notes to consolidated financial statements.
6
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THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements reflect the accounts of The Meridian
Resource Corporation and its subsidiaries (the "Company") after elimination of
all significant intercompany transactions and balances. The Company acquired in
two separate transactions (the "Shell Transactions") certain Louisiana onshore
properties from Shell Oil Company ("Shell"). The Shell Transactions were
accounted for as purchases for financial accounting purposes. The financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998 as filed with the Securities and
Exchange Commission.
The financial statements included herein are unaudited, and, in the opinion of
management, the information furnished reflects all material adjustments,
consisting of normal recurring adjustments, necessary for a fair statement of
the results for the interim periods presented.
2. IMPAIRMENT OF LONG-LIVED ASSETS
No impairment of long-lived assets was recognized during the first quarter of
1999 due to significant reserve additions made during the quarter. During the
first quarter of 1998, the Company recognized a $40.3 million non-cash write
down of its oil and natural gas properties under the full cost method of
accounting, primarily as a result of declines in both oil and natural gas prices
which significantly lowered the present value of proved oil and natural gas
reserves as of March 31, 1998 and nonproductive investments in oil and gas
properties.
3. LONG-TERM DEBT
In May 1998, the Company amended and restated its credit facility with The Chase
Manhattan Bank as Administrative Agent (the "Credit Facility") to provide for
maximum borrowings, subject to borrowing base limitations, of up to $250
million. In November 1998, the Company amended the Credit Facility to increase
the then-existing borrowing base from $200 million to $250 million. The
borrowing base currently set at $250 million is scheduled to be redetermined on
August 23, 1999. In addition to the regularly scheduled semi-annual borrowing
base redeterminations, the lenders under the Credit Facility have the right to
redetermine the borrowing base at any time once during each calendar year and
the Company has the right to obtain a redetermination by the banks of the
borrowing base once during each calendar year. Borrowings under the Credit
Facility are secured by pledges of the outstanding capital stock of the
Company's material subsidiaries and a mortgage
7
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of all of the Company's offshore oil and natural gas properties and several
onshore oil and natural gas properties. In the event of a default, the Company
is obligated to pledge additional properties representing, in the aggregate, at
least 75% of the Company's present value of proved properties. The Credit
Facility contains various restrictive covenants, including, among other things,
maintenance of certain financial ratios and restrictions on cash dividends on
the Common Stock.
Borrowings under the Credit Facility mature on May 22, 2003.
Under the Credit Facility, as amended, the Company may secure either (i) an
alternative base rate loan that bears interest at a rate per annum equal to the
greatest of the administrative agent's prime rate, a certificate of deposit
based rate or federal funds based rate plus 0% to 1.5% or (ii) a Eurodollar base
rate loan that bears interest, generally, at a rate per annum equal to the
London interbank offered rate plus 1.0% to 2.5%, depending on the Company's
ratio of the aggregate outstanding loans and letters of credit to the borrowing
base. The Credit Facility also provides for commitment fees ranging from .3% to
.5% per annum. At March 31, 1998, the Company had outstanding borrowings of $250
million under the Credit Facility.
4. COMMITMENTS AND CONTINGENCIES
LITIGATION
In November 1998, Enron Capital & Trade Resources Corp. ("Enron") filed an
action in the District Court of Harris County, Texas, 11th Judicial District,
Texas against the Company and certain Shell affiliates alleging causes of action
against the Company and Shell for trespass and tortious interference with
contract and seeking declaratory and injunctive relief. Enron asserts that the
Company's drilling and operation of certain Louisiana oil and gas wells has and
will trespass upon Enron's Louisiana property interests and tortiously interfere
with a Participation Agreement dated June 12, 1996 between Enron and Shell (the
"Participation Agreement"). Enron asserts further that it is being denied its
right to participate in certain drilling projects allegedly included under the
Participation Agreement, including interests in wells drilled in the Weeks
Island Field. In response to Enron's claims, the Company filed an action against
Enron in the 31st Judicial District for the Parish of Jefferson Davis, Louisiana
seeking injunctive relief against Enron for interfering with the Company's
rights to operate and asserting that the matter should be addressed and resolved
by the Louisiana Commissioner of Conservation. The Company subsequently entered
into a stipulation with Enron whereby Enron agreed not to contest the Company on
three wells drilled, two of which are currently in operation in the Thornwell
Field, the Guidry 21-1, Guidry 16-1 and Lacassine #33-3.
The properties covered by the Participation Agreement are owned by the Company,
with record title in the Company's subsidiary, Louisiana Onshore Properties
Inc., which was acquired from Shell in the Shell Transactions. Subject to
certain agreed upon limitations, Enron, Shell and the Company have consented to
submit this dispute to arbitration. Enron has appointed an arbitrator and Shell
and
8
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the Company have together appointed a second arbitrator, and a third arbitrator
is expected to be selected by the two appointed arbitrators by the end of the
second quarter of 1999. After the arbitrators have been selected, a schedule
will be created for the arbitration of disputes between Enron on one hand and
Shell and the Company on the other hand.
The Company intends to vigorously defend against Enron's claims. The Company
believes that it is entitled to operate the referenced Louisiana properties and
that Enron is not entitled to any of the Company's interest in wells that have
been drilled in the Weeks Island Field. However, in the event of an adverse
determination resulting in a monetary judgment or property losses as a result of
Enron's claims, the Company believes that it is entitled to indemnification or
reimbursement from Shell under the agreements governing the Shell Transactions
as well as under common law and state and federal securities laws, and the
Company has informed Shell that it will pursue all available courses of action
in this regard in the event of an adverse determination. Absent Shell's failure
to timely honor its indemnity obligations, the Company currently does not
believe the dispute with Enron will have a material adverse effect on its
financial condition or results of operations.
5. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
(loss) per share:
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
-------- --------
(in thousands,
except per share)
Numerator:
Net income (loss) .................................. ($ 3,639) ($40,927)
Less: Preferred Dividend Requirements .............. (1,350) --
Net income (loss) used in Per Share Calculation .... ($ 4,989) ($40,927)
Denominator:
Denominator for basic net income (loss) per
share - weighted-average shares outstanding ...... 45,817 33,451
Effect of potentially dilutive common shares:
Employee and director stock options ................ N/A N/A
Warrants ........................................... N/A N/A
Denominator for diluted net income (loss) per
share - weighted average shares outstanding
and assumed conversions .......................... 45,817 33,451
======== ========
Basic net income (loss) per share ...................... ($ 0.11) ($ 1.22)
======== ========
Diluted net income (loss) per share .................... ($ 0.11) ($ 1.22)
======== ========
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following is a discussion of the Company's financial operations for the
three months ended March 31, 1999 and 1998. The notes to the Company's
consolidated financial statements included in this report, as well as the
Company's Annual Report on Form 10-K for the year ended December 31, 1998 (and
the notes attached thereto), should be read in conjunction with this discussion.
OVERVIEW
SHELL TRANSACTIONS. On June 30, 1998, the Company acquired (the "LOPI
Transaction") Louisiana Onshore Properties Inc. ("LOPI"), an indirect subsidiary
of Shell Oil Company ("Shell"), pursuant to a merger of a wholly-owned
subsidiary with LOPI. The consideration paid in the LOPI Transaction consisted
of 12,082,030 shares of our common stock, $.01 par value ("Common Stock"), and a
new issue of convertible preferred stock (the "Preferred Stock") that is
convertible into 12,837,428 shares of Common Stock, which together provided
Shell Louisiana Onshore Properties Inc., an indirect subsidiary of Shell
("SLOPI"), with beneficial ownership of 39.9% of our common stock on a
fully-diluted basis assuming the exercise of all outstanding stock options and
warrants and conversion of all preferred stock. In a transaction separate from
the LOPI Transaction, we also acquired on June 30, 1998 from Shell Western E&P
Inc., an indirect subsidiary of Shell ("SWEPI"), various other oil and gas
property interests located onshore in south Louisiana for a total cash
consideration of $38.6 million (the "SWEPI Acquisition").
The LOPI Transaction and the SWEPI Acquisition (together, the "Shell
Transactions") were effected to increase our reserves, lease acreage positions
and exploration prospects in Louisiana and are expected to substantially
increase our production and cash flow. The Shell Transactions were accounted for
utilizing the purchase method of accounting. Therefore, operations relating to
the oil and gas properties acquired in the Shell Transactions (the "Shell
Properties") are included in our results of operations beginning with the third
quarter of 1998.
INDUSTRY CONDITIONS. Our revenues, profitability and future rate of growth are
substantially dependent upon prevailing prices for natural gas and oil. Oil and
natural gas prices have been extremely volatile in recent years and are affected
by many factors outside of our control. In this regard, average worldwide oil
and natural gas prices have decreased substantially from levels existing during
1998. As a result of these declines, the price received by us during the quarter
ended March 31, 1999 was $1.87 per Mcfe compared to $2.29 per Mcfe during the
quarter ended March 31, 1998, which has negatively impacted our revenues and
cash flow during the first quarter of 1999. These industry conditions, and any
continuation thereof, will have several important consequences to us, including
decreasing the level of cash flow received from our producing properties,
delaying the timing of exploration of certain prospects and reducing our access
to capital markets, which could adversely affect our revenues, profitability and
ability to maintain or increase its exploration and development program.
10
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RESULTS OF OPERATIONS
OPERATING REVENUES. First quarter 1999 oil and natural gas revenues increased
96% primarily due to production volumes increasing by 142% on a natural gas
equivalent basis. This production increase was a direct result of the inclusion
of results from the Shell Properties, as well as new wells being placed on
production during the last twelve months. Prices fell by 18% on a natural gas
equivalent basis, which partially offset revenue increases from increased
production.
The following table summarizes our operating revenues, production volumes and
average sales prices for the three months ended March 31, 1999 and 1998.
THREE MONTHS ENDED
MARCH 31, 1999
------------------- 1999 PERCENTAGE
1999 1998 CHANGE OF CHANGE
-------- -------- -------- --------
Production Volumes:
Oil (Mbbl) .................... 1,044 210 834 397%
Natural Gas (Mmcf) ............ 6,109 3,858 2,251 58%
Natural Gas Equiv. (MCFE) ..... 12,373 5,118 7,255 142%
Average Sales Prices:
Oil ($/Bbl) ................... $ 11.44 $ 13.65 ($ 2.21) (16%)
Natural Gas ($/MCF) ........... $ 1.83 $ 2.29 ($ 0.46) (20%)
Natural Gas Equiv. ($/MCFE) ... $ 1.87 $ 2.29 ($ 0.42) (18%)
Gross Revenues (000's):
Oil ........................... $ 11,943 $ 2,867 $ 9,076 317%
Natural Gas ................... 11,161 8,850 2,311 26%
Pipeline ...................... -- 49 (49) (100%)
-------- -------- --------
Total ................. $ 23,104 $ 11,766 $ 11,338 96%
======== ======== ========
OPERATING EXPENSES. Oil and natural gas operating expenses increased $2.7
million to $4.2 million for the three months ended March 31, 1999, compared to
$1.5 million for the same time period in 1998. The increase was primarily due to
added operating expenses related to the inclusion of costs and expenses from the
Shell Properties as well as new wells brought on production in the last twelve
months. On a MCFE basis, base operating expenses have increased 14% in the first
three months of 1999 to $.34 from $.30 in the first three months of 1998. This
increase was primarily attributable to the fact that operating costs for the
more mature fields acquired from Shell are higher than those of our existing
properties with higher per well flow rates. The Company continues to implement
its plan to reduce the operating costs associated with the Shell Properties, and
during the first quarter of 1999 operating cost on a MCFE basis decreased by 8%
to $.34 compared to an average cost of $.39 on a MCFE basis during the second
half of 1998.
11
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SEVERANCE AND AD VALOREM TAXES. Severance and ad valorem taxes increased $1.7
million to $2.2 million in the first quarter of 1999, compared to $.5 million
during the same time period in 1998. This increase is largely attributed to the
additional production as a result of the purchase of the Shell Properties, all
of which are subject to state severance taxes and parish ad valorem taxes.
INTEREST AND OTHER INCOME. Interest and other income during the first quarter
1999 increased $0.1 million from the comparable period in 1998.
DEPLETION AND DEPRECIATION. Depletion and depreciation expense increased during
the first quarter of 1999 to $12.7 million from $6.3 million for the same time
period in 1998. This increase was primarily a result of the significant
production increase of 142% over the comparable period in 1998. Although
depletion and depreciation expense increased in the aggregate, on a MCFE basis
there was a decrease of $.19/MCFE from a $1.22/MCFE for the quarter ended March
31, 1998 to $1.03/MCFE during the comparable time period in 1999.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense increased
$.8 million to $2.8 million in the first three months of 1999 compared to $2.0
million during the first three months of 1998. This increase was primarily a
result of increases in the number of employees, salaries, wages and related
employee costs associated with our expanded exploration and production
activities associated with the Shell Transactions. On a per unit of production
basis, general and administrative expense has decreased 40% from $.39/MCFE in
the first quarter of 1998 to $.23/MCFE during the first three months of 1999 due
to the fact the Company has been able to integrate the oil and gas properties
acquired in the Shell Transactions and increase production levels without
corresponding increases in overhead.
INTEREST EXPENSE. Interest expense increased $2.8 million to $5.1 million during
the first quarter of 1999 compared to $2.3 million in 1998. The increase is a
combination of borrowings of approximately $37 million utilized to fund the
purchase of certain properties in the Shell Transactions and continued
borrowings to fund our exploration and development program during 1998 and the
first quarter of 1999.
IMPAIRMENT OF LONG-LIVED ASSETS. Although commodity prices decreased from
December 31, 1998 price of $1.95/MCFE to $1.91/MCFE March 31, 1999, we did not
record any impairment of long-lived assets during the first quarter of 1999 due
to significant reserve additions made during the quarter as a result of our
first quarter exploration and development program. The Company follows the full
cost method of accounting for its investments in oil and natural gas properties,
which requires that the net carrying value of oil and natural gas properties is
limited to the sum of the present value (10% discount rate) of the estimated
future net cash flows from proved reserves, based on the current prices and
costs, plus the lower of cost or estimated value of unproved properties. Due to
prevailing market conditions as of March 31, 1998, the average prices utilized
by the Company in determining the net carrying value of its oil and natural gas
properties were $2.44 per
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Mcf and $14.38 per Bbl, compared to $2.53 per Mcf and $17.31 per Bbl utilized to
calculate such value at December 31, 1997. As a result of this significant
decline in oil and natural gas prices and nonproductive investments, the Company
recognized a $40.3 million non-cash write down of its oil and natural gas
properties under the full cost method of accounting.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. During the first quarter of 1998, our liquidity needs were met
from cash from operations and borrowings under our credit facilities. As of
March 31, 1999, we had a cash balance of $5.3 million and negative working
capital of $6.4 million. The decrease in both the cash balance and working
capital from levels existing at December 31, 1998, reflects our capital
expenditures related to the exploration and development activities and reduced
operating cash flows resulting from lower oil and natural gas prices.
AMENDED CREDIT FACILITY. In May 1998, we amended and restated our credit
facility with The Chase Manhattan Bank as Administrative Agent (the "Credit
Facility") to provide for maximum borrowings, subject to borrowing base
limitations, of up to $250 million. In November 1998, we amended the Credit
Facility to increase the then-existing borrowing base from $200 million to $250
million. The borrowing base currently set at $250 million is scheduled to be
redetermined on August 23, 1999. In addition to regularly scheduled semi-annual
borrowing base redeterminations, the lenders under the Credit Facility have the
right to redetermine the borrowing base at any time once during each calendar
year and we have the right to obtain a redetermination by the banks of the
borrowing base once during each calendar year. Borrowings under the Credit
Facility are secured by pledges of the outstanding capital stock of our material
subsidiaries and a mortgage of all of the Company's offshore oil and natural gas
properties and several onshore oil and natural gas properties. In the event of a
default, we are obligated to pledge additional properties representing, in the
aggregate, at least 75% of our present value of proved properties. Borrowings
under the Credit Facility mature on May 22, 2003.
The Company's Credit Facility includes various restrictive covenants including
an interest coverage ratio, a total debt leverage ratio and a minimum net worth
requirement. Prior to obtaining an amendment to the Credit Facility, the Company
was in violation of the total debt leverage ratio at March 31, 1999 which
required a minimum 3.25:1.00 coverage of the Company's total indebtedness at
period end to twelve month trailing pro forma EBITDA. The amendment provided
for, among other things, a modification of the existing requirement to 4.00:1.00
at March 31, 1999 and June 10, 1999, 3.50:1.00 at September 30, 1999 and
3.25:1.00 at December 31, 1999 and for all future periods. Continued compliance
with this covenant and others is conditioned on an improvement in the Company's
financial and operational performance. Management believes these levels of
financial and operational performance will be met over the next year primarily
due to the significant increase in production scheduled to begin in the
near-term at two of the Company's most recent discoveries in addition to the
positive effects of higher oil and gas prices.
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<PAGE>
Under the Credit Facility, as amended, we may secure either (i) an alternative
base rate loan that bears interest at a rate per annum equal to the greatest of
the administrative agent's prime rate, a certificate of deposit based rate or
federal funds based rate plus 0% to 1.5% or (ii) a Eurodollar base rate loan
that bears interest, generally, at a rate per annum equal to the London
interbank offered rate plus 1.0% to 2.5%, depending on our ratio of the
aggregate outstanding loans and letters of credit to the borrowing base. The
Credit Facility also provides for commitment fees ranging from .3% to .5% per
annum, a 2.5% one time drawdown fee on first time borrowings in excess of $200
million, and certain closing fees aggregating $2.5 million paid in November 1998
in connection with the increase in the borrowing base.
CAPITAL EXPENDITURES. Capital expenditures during the first three months of 1999
consisted of $22 million for property and equipment additions related to
exploration and development of various prospects (including leases), seismic
data acquisitions, and drilling and completion costs. We currently expect
capital expenditures for the remainder of 1999 to be approximately $38 million
and anticipate that such capital expenditures will be funded from cash flows
from our producing properties and additional borrowings. We expect our capital
budget for the remainder of 1999 to focus on lower risk development projects,
concentrating on our Weeks Island, North Turtle Bayou/Ramos, Thornwell, Kings
Bayou and Rockerfeller projects. Availability of capital to fund the remainder
of our 1999 exploration and development program will depend upon the success of
our drilling program and the nature and extent of capital expenditures required
for development of discoveries. In this regard, we anticipate that based on our
current product price and production forecast, internal cash flow and borrowings
permitted by the Credit Facility should fully fund the remainder of our 1999
capital expenditure program as currently anticipated, however, we are
considering alternative ways to raise additional capital through equity or debt
financing, which the Company would use to provide additional working capital.
DIVIDENDS. It is our policy to retain existing cash for reinvestment in our
business, and therefore, we do not anticipate that we will pay dividends with
respect to the Common Stock in the foreseeable future. The Preferred Stock
issued upon closing of the LOPI Transaction accrues a quarterly cash dividend of
4% of its stated value with the dividend ceasing to accrue incrementally on
one-third of the shares of Preferred Stock on June 30, 2001, 2002 and 2003 so
that no dividends will accrue on any shares of Preferred Stock after June 30,
2003. Dividends on the Preferred Stock aggregating $1.4 million were accrued for
the first quarter of 1999.
STOCK RIGHTS AND RESTRICTIONS AGREEMENT. In light of the large ownership
position issued to SLOPI in the LOPI Transaction and in recognition of both our
and SLOPI's desire that the Company function as an independent oil and gas
company, we entered into a Stock Rights and Restrictions Agreement with SLOPI
that defines and limits SLOPI's and our respective rights and obligations. These
agreements limit SLOPI's and its affiliates' control while protecting their
interests in the context of certain extraordinary transactions by (i) allowing
SLOPI to maintain representation on our Board of Directors, (ii) restricting
SLOPI's and its affiliates' ability to effect certain business combinations with
us or to propose certain business combinations with us, (iii) restricting the
ability of SLOPI and its affiliates to sell certain portions of their shares of
Common Stock and Preferred
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Stock, subject to certain exceptions designed to permit them to sell such shares
over time and to sell such shares in the event of certain business combinations
involving us, (iv) limiting SLOPI's and its affiliates' discretionary voting
rights to 23% of the total voting shares, except with respect to certain
extraordinary events and in situations in which the price of the Common Stock
for a period of time has been less than $5.50 per share or we are in material
breach of our obligations under the agreements governing the LOPI Transaction,
(v) permitting SLOPI and its affiliates to purchase additional of our securities
in order to maintain a 21% beneficial ownership interest of the Common Stock if
we propose to issue additional shares of Common Stock or securities convertible
into Common Stock, (vi) extending certain statutory and corporate restrictions
on business combinations applicable to SLOPI and its affiliates and (vii)
obligating us, at our option, to issue a currently indeterminable number of
additional shares of Common Stock in the future, or pay cash, in satisfaction of
a make-whole provision contained in the Stock Rights and Restrictions Agreement
in the event SLOPI receives less than approximately $10.52 per share on the sale
of any Common Stock that is issuable upon conversion of the Preferred Stock.
SLOPI currently is restricted from selling shares of Common Stock owned by it
until June 30, 2000. Beginning on June 30, 2000, SLOPI may sell 25% of the
Common Stock owned by it and may sell an incremental 25% of the Common Stock
owned by it each year until June 30, 2003, at which time it is free to sell all
Common Stock owned by it. In the event SLOPI sold all Common Stock issued on
conversion of the Preferred Stock at the market prices existing on May 4, 1999,
our make-whole obligation would be approximately $54.8 million, which we may
satisfy at our option in cash or Common Stock, which could significantly dilute
all holders of our Common Stock other than Shell, or significantly reduce our
ability to raise additional funds for exploration and development.
YEAR 2000
We are currently conducting a company-wide Year 2000 readiness program ("Y2K
Program"). The Y2K Program is addressing the issue of computer programs and
embedded computer chips being unable to distinguish between the year 1900 and
the year 2000. Therefore, some computer hardware and software will need to be
modified prior to the year 2000 to remain functional. We anticipate that our
Year 2000 compliance will be substantially complete by June 1999.
Our Y2K Program is divided into three major categories: (i) internal information
and accounting ("IT") systems, (ii) non-"IT" equipment and systems and (iii)
third-party suppliers and customers. The general stages of review with respect
to each of the categories are (a) identifying and assessing items or systems
that are not Year 2000 compliant, (b) assessing costs and expenses associated
with the various alternatives for remedying items and systems that are not Year
2000 compliant and (c) repairing or replacing items that are determined not to
be Year 2000 compliant.
We are in varying stages of review with respect to each category within our Y2K
Program. We have completed our review of our IT equipment and systems and
currently believe that our internal information and accounting systems are Year
2000 compliant, except for certain field software that we currently do not
believe are material to our operations. We currently are reviewing various
alternatives for making such field software Year 2000 compliant, and believe the
costs associated therewith will not be material.
15
<PAGE>
We currently are in the process of reviewing our non-IT equipment and systems.
We do not believe such equipment and systems will present any material Year 2000
issues. At present, we have not identified any non-IT equipment and systems that
are not Year 2000 compliant that cannot be remedied or replaced at minimal cost
to us.
We have begun our assessment of third party Year 2000 issues during the first
quarter of 1999. Our third party review initially consists of written inquiries
to third party suppliers, subcontractors and customers requesting information
and representations from such third parties as to their readiness for the Year
2000. We are in the process of circulating these responses and, based upon such
responses, will determine the necessity for requesting additional information as
appropriate. We expect our initial review of third parties to be substantially
complete during the second quarter of 1999. We believe we have alternative
suppliers and product customers to mitigate material exposure if certain of our
current suppliers and customers are determined not to be Year 2000 ready.
Management believes that it has taken reasonable steps in developing its Y2K
Program. Notwithstanding these actions, there can be no assurance that all of
our Year 2000 issues or those of our key suppliers, subcontractors or customers
will be resolved or addressed satisfactorily before the Year 2000 commences. If
our key suppliers, subcontractors, customers and other third parties fail to
address their Year 2000 issues, and there are no alternatives available to us,
then our usual channels of supply and distribution could be disrupted, in which
event we could experience a material adverse impact on its business, results of
operations or financial position. In addition, although we believe our internal
planning efforts are adequate to address our internal Year 2000 concerns, there
can be no assurances that we will not experience unanticipated negative
consequences and material costs caused by undetected errors or defects in the
technology used in its internal systems, which could have material adverse
effect on our business, results of operations or financial condition. We
currently are unable to estimate the most reasonably likely worst-case effects
of the arrival of the year 2000 and currently do not have a contingency plan in
place for any such unanticipated negative effects. We intend to analyze
reasonably likely worst-case scenarios and the need for such contingency
planning once our review of third-party preparedness described above has been
completed, and we expect to complete this analysis by September 30, 1999.
It is anticipated that the total costs related to the Year 2000 issue will not
exceed $250,000. The majority of which will be incurred by us in 1999. To date,
there have been no material deferments of other IT projects resulting from the
work taking place on our Y2K Program.
FORWARD-LOOKING INFORMATION
From time to time, we may make certain statements that contain "forward-looking"
information as defined in the Private Securities Litigation Reform Act of 1995
and that involves risk and uncertainty. These forward-looking statements may
include, but are not limited to, exploration and seismic acquisition plans,
anticipated results from current and future exploration prospects, the
anticipated results of wells based on logging data and production tests,
anticipated results or expectations relating to litigation and other disputes,
future sales of production, earnings, margins, production levels and costs,
market trends in the oil and natural gas industry and the exploration and
16
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development sector thereof, environmental and other expenditures and various
business trends. Forward-looking statements may be made by management orally or
in writing including, but not limited to, the Management's Discussion and
Analysis of Financial Condition and Results of Operations section and other
sections of our filings with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended.
Actual results and trends in the future may differ materially depending on a
variety of factors including, but not limited to, the success of our exploration
and development program; changes in the price of oil and natural gas, which
could cause us to delay or suspend planned drilling operations or reduce
production levels; risks relating to the availability of capital to fund
drilling operations and our current estimates of our need for additional
capital, which can be adversely affected by adverse drilling results, production
declines, declines in oil and gas prices and declines in the overall economy;
world-wide political stability and economic growth; our successful execution of
internal exploration, development and operating plans; risks inherent in the
drilling of oil and natural gas wells, including risks of fire, explosion,
blowout, pipe failure, casing collapse, unusual or unexpected formation
pressures, unusual or unexpected weather conditions; litigation and disputes and
changes in information available to the Company relating thereto; environmental
hazards and other operating and production risks, which may temporarily or
permanently reduce production or cause initial production or test results to not
be indicative of future well performance or delay in timing of sales or
completion of drilling operations; environmental regulation and costs;
regulatory uncertainties and legal proceedings. The risks related to the year
2000, and the dates on which we believe our Y2K Program will be completed, are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third-party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved, or that there will not be
a delay in, or increased costs associated with, the implementation of our Y2K
Program. Specific factors that might cause differences between the estimates and
actual results include, but are not limited to, the availability and cost of
personnel trained in these areas, the ability to locate and correct all relevant
computer codes, timely responses to and corrections by third parties and
suppliers, the ability to implement interfaces between the new systems and the
systems not being replaced, and similar uncertainties. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third parties and the interconnection
of global businesses, we cannot ensure our ability to timely and cost
effectively resolve problems associated with the Year 2000 issue that may affect
our operations and business or expose us to third-party liability.
17
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As previously disclosed in the Company's Annual Report on Form 10-K,
the Company is involved in litigation with AMOCO Production Company
("AMOCO") relating to the Company's right to drill the Company's Ben
Todd No. 1 well. The Company expects a judgment to be entered in the
near future. The Company believes that it fully accrued for such
judgment during the fourth quarter of 1997.
In November 1998, Enron Capital & Trade Resources Corp. ("Enron")
filed an action in the District Court of Harris County, Texas, 11th
Judicial District, Texas against us and certain Shell affiliates
alleging causes of action against us and Shell for trespass and
tortious interference with contract and seeking declaratory and
injunctive relief. Enron asserts that our drilling and operation of
certain Louisiana oil and gas wells has and will trespass upon Enron's
Louisiana property interests and tortiously interfere with a
Participation Agreement dated June 12, 1996 between Enron and Shell
(the "Participation Agreement"). Enron asserts further that it is
being denied its right to participate in certain drilling projects
allegedly included under the Participation Agreement, including
interests in wells drilled in the Weeks Island Field. In response to
Enron's claims, we filed an action against Enron in the 31st Judicial
District for the Parish of Jefferson Davis, Louisiana seeking
injunctive relief against Enron for interfering with our rights to
operate and asserting that the matter should be addressed and resolved
by the Louisiana Commissioner of Conservation. We subsequently entered
into a stipulation with Enron whereby Enron agreed not to contest us
on three wells drilled two of which are currently in operation in the
Thornwell Field, the Guidry 21-1, Guidry 16-1 and Lacassine #33-3.
The properties covered by the Participation Agreement are owned by us,
with record title in our subsidiary, Louisiana Onshore Properties
Inc., which was acquired from Shell in the Shell Transactions. Subject
to certain agreed upon limitations, Enron, Shell and the Company have
consented to submit this dispute to arbitration. Enron has appointed
an arbitrator and Shell and the Company have together appointed a
second arbitrator, and a third arbitrator is expected to be selected
by the two appointed arbitrators by the end of the second quarter of
1999. After the arbitrators have been selected, a schedule will be
created for the arbitration of disputes between Enron on one hand and
Shell and us on the other hand.
We intend to vigorously defend against Enron's claims. We believe that
we are entitled to operate the referenced Louisiana properties and
that Enron is not entitled to any of our interest in wells that have
been drilled in the Weeks Island Field. However, in the event of an
adverse determination resulting in a monetary judgment or property
losses as a result of Enron's claims, we believe that we are entitled
to indemnification or
18
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reimbursement from Shell under the agreements governing the Shell
Transactions as well as under common law and state and federal
securities laws, and we have informed Shell that we will pursue all
available courses of action in this regard in the event of an adverse
determination. Absent Shell's failure to timely honor its indemnity
obligations, we currently do not believe the dispute with Enron will
have a material adverse effect on our financial condition or results
of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
3.1 - Amendment No. 1 to Amended and Restated Bylaws (incorporated
by reference from the Company's Current Report on Form 8-K
dated May 5, 1999).
4.1 Rights Agreement dated May 5, 1999, between the Company and
American Stock Transfer & Trust Co., as Rights Agent
(incorporated by reference from the Company's Current Report
on Form 8-K dated May 5, 1999).
4.2 Resolution Establishing a Series of Preferred Stock dated May
5, 1999 (incorporated by reference from the Company's Current
Report on Form 8-K dated May 5, 1999).
4.3 Form of Right Certificate (incorporated by reference from the
Company's Current Report on Form 8-K dated May 5, 1999).
10.1 Amendment No. 4 to Credit Agreement.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None.
19
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SIGNATURE
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.
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
(Registrant)
Date: May 15, 1999 By: P. RICHARD GESSINGER
--------------------
P. Richard Gessinger
Executive Vice President and
Chief Financial Officer
By: LLOYD V. DELANO
Lloyd V. DeLano
Vice President
Chief Accounting Officer
20
EXHIBIT 10.1
FOURTH AMENDMENT
FOURTH AMENDMENT, dated as of April 30, 1999 (this "FOURTH
AMENDMENT"), to the Amended and Restated Credit Agreement (as amended,
supplemented or otherwise modified from time to time), dated as of May 22, 1998
(the "CREDIT AGREEMENT"), among The Meridian Resource Corporation, a Texas
corporation (the "BORROWER"), the several lenders from time to time parties
thereto (the "LENDERS"), The Chase Manhattan Bank, as the Administrative Agent
for the Lenders (in such capacity, the "ADMINISTRATIVE AGENT"), Toronto Dominion
(Texas), Inc. and Mees Pierson N.V., as co-arrangers (each in such capacity, a
"CO-ARRANGER"), and Toronto Dominion (Texas), Inc., as documentation agent (in
such capacity, the "DOCUMENTATION AGENT").
W I T N E S S E T H:
WHEREAS, the Borrower, the Lenders and the Administrative Agent are
parties to the Credit Agreement; and
WHEREAS, the Borrower has requested, and the Administrative Agent
and the Lenders have agreed to certain modifications as set forth herein;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, the parties hereto hereby agree as follows:
1. DEFINED TERMS. Terms defined in the Credit Agreement and used
herein shall, unless otherwise indicated, have the meanings given to them in the
Credit Agreement.
2. AMENDMENTS TO SUBSECTION 1.1 OF THE CREDIT AGREEMENT. (a)
Subsection 1.1 of the Credit Agreement is hereby amended by deleting therefrom
the definitions of "Applicable Margin" "Borrowing Base" and "Commitment Fee
Rate" contained therein in their entirety and substituting in lieu thereof the
following definitions:
"APPLICABLE MARGIN": for any day with respect to Eurodollar Loans
and ABR Loans, the applicable per annum rate set forth below opposite the
Borrowing Base Usage in effect on such day:
BORROWING EURODOLLAR ABR
BASE USAGE MARGIN MARGIN
---------- ---------- ------
Greater than 1.25% .25%
Less than or 1.00% 0%
equal to 33%
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2
Greater than 1.25% .25%
33% and less
than or equal
to 66%
Greater than 1.50% .50%
66% and less
than 80%
Equal to or 2.25% 1.25%
greater than
80% and less
than 90%
Equal to or 2.50% 1.50%
greater than
90%
PROVIDED if there is no Borrowing Base Deficiency on the effective
date of the Applicable Redetermination (after giving effect thereto,
or if there is such a Borrowing Base Deficiency, such deficiency is
cured within 30 days, as contemplated herein), then commencing on
the later of such effective date or cure date, if applicable, the
Applicable Margin thereafter, for any day with respect to Eurodollar
Loans and ABR Loans shall be the applicable per annum rate set forth
below opposite the Borrowing Base Usage in effect on any such day:
BORROWING EURODOLLAR ABR
BASE USAGE MARGIN MARGIN
---------- ---------- ------
Less than or 1.00% 0%
equal to 33%
Greater than 1.25% .25%
33% and less
than or equal
to 66%
Greater than
66% 1.50% .50%
As used herein, "BORROWING BASE USAGE" on any day means the
percentage equivalent to the ratio of (i) the sum of the aggregate
principal amount of the Loans then outstanding and Letter of Credit
Outstandings on such day to (ii) the Borrowing Base in effect on
such day.
<PAGE>
3
"BORROWING BASE": at any time of determination, the amount then in
effect as determined in accordance with subsection 4.9; PROVIDED, HOWEVER,
that until the Applicable Redetermination, the Borrowing Base shall be
$250,000,000.
"COMMITMENT FEE RATE": for any day, a rate per annum equal to (a)
.30% if the Borrowing Base Usage in effect on such day is less than or
equal to 33%, (b) .375% if the Borrowing Base Usage in effect on such day
is greater than 33% and less than 80% and (c) .50% if the Borrowing Base
Usage in effect on such day is equal to or greater than 80%; PROVIDED
that if there is no Borrowing Base Deficiency on the effective date of
the Applicable Redetermination (after giving effect thereto, or if there
is such a Borrowing Base Deficiency, such deficiency is cured within 30
days, as contemplated herein), then commencing on the later of such
effective date or cure date, if applicable, the Commitment Fee Rate
thereafter for any day shall be a rate per annum equal to (a) .30% if the
Borrowing Base Usage in effect on such day is less than or equal to 33%
and (b) .375% if the Borrowing Base Usage in effect on such day is
greater than 33%.
(b) Subsection 1.1 of the Credit Agreement is hereby amended by
deleting the definition of "March '99 Redetermination" and adding thereto the
following new definitions in alphabetical order:
"APPLICABLE REDETERMINATION": the August `99 Redetermination unless
the Special Redetermination shall occur as provided in subsection 4.9(f)
in which case the Applicable Redetermination shall be the Special
Redetermination.
"AUGUST '99 REDETERMINATION": the redetermination of the Borrowing
Base scheduled for August 23, 1999, pursuant to subsection 4.9(c),
utilizing the June 30, 1999 Reserve Report, which is required to be
delivered prior to July 30, 1999.
"JUNE 30, 1999 RESERVE REPORT": a Reserve Report prepared by the
Borrower, dated as of June 30, 1999.
"SPECIAL REDETERMINATION": as defined in subsection 4.9(f).
3. AMENDMENTS TO SUBSECTION 4.9. Subsection 4.9 of the Credit
Agreement is hereby amended by deleting such subsection in its entirety and
substituting in lieu thereof the following:
"4.9 COMPUTATION OF BORROWING BASE. (a) BORROWING BASE. (i) The
Borrowing Base in effect from time to time shall represent the maximum
principal amount (subject to the aggregate amount of the Revolving Credit
Commitments) of Loans and Letter of Credit Outstandings that the Lenders
will allow to remain outstanding during the Commitment Period. The
Borrowing Base will be based upon the value of certain Proved Reserves
attributable to the Oil and Gas Properties of the Borrower and its
Subsidiaries and other assets of the Borrower and its Subsidiaries
acceptable to the Administrative
<PAGE>
4
Agent in its sole discretion, and will be determined by the Administrative
Agent in accordance with paragraph (d) of this subsection 4.9, subject to
approval by the Supermajority Lenders (or, with respect to the Applicable
Redetermination, all of the Lenders). Until the Commitments are no longer
in effect, all Letters of Credit have terminated and all of the Loans and
all other obligations under this Agreement are paid in full, this
Agreement shall be subject to the then effective Borrowing Base.
(b) RESERVE REPORTS. Except as provided below with respect to the
August '99 Redetermination, prior to March 1 and September 1 of each year,
the Borrower shall, at its own expense, furnish to the Administrative
Agent and to each Lender Reserve Reports, which Reserve Reports shall be
dated as of the immediately preceding December 31 (in the case of Reserve
Reports due on March 1) and June 30 (in the case of Reserve Reports due on
September 1), and shall set forth, among other things, (i) the Oil and Gas
Properties, then owned by the Borrower and its Subsidiaries, (ii) the
Proved Reserves attributable to such Oil and Gas Properties and (iii) a
projection of the rate of production and net income of the Proved Reserves
as of the date of such Reserve Report, all in accordance with the
guidelines published by the Securities and Exchange Commission and such
assumptions as the Administrative Agent shall provide. In connection with
the August '99 Redetermination, the June 30, 1999 Reserve Report normally
due to be delivered prior to September 1, 1999 shall be delivered prior to
July 30, 1999. Concurrently with the delivery of the Reserve Reports, the
Borrower shall furnish to the Administrative Agent and to each Lender a
certificate of a Responsible Officer showing any additions to or deletions
from the Oil and Gas Properties listed in the Reserve Report, which
additions or deletions were made by the Borrower and its Subsidiaries
since the date of the previous Reserve Report.
(c) REDETERMINATIONS OF THE BORROWING BASE. The Borrowing Base shall
be redetermined (i) after receipt by the Administrative Agent of each
scheduled Reserve Report, commencing with the June 30, 1999 Reserve
Report, (ii) upon the delivery of a Lender Redetermination Notice (which
shall not be delivered until after the Applicable Redetermination) to the
Borrower and (iii) upon the delivery of a Borrower Redetermination Notice
(which, except as provided in paragraph (f) below, shall not be delivered
until after the Applicable Redetermination) to the Administrative Agent,
all as provided in this subsection 4.9. Within 15 days after the delivery
of a Borrower Redetermination Notice or a Lender Redetermination Notice,
the Borrower shall furnish to the Administrative Agent and to each Lender
a Reserve Report as of the most recent practicable date. If the Borrower
fails to deliver a Reserve Report within the time period provided for in
the preceding sentence, then the Administrative Agent shall have the right
to rely on the last Reserve Report previously delivered by the Borrower
with any such adjustments and taking into account any additional
information as the Administrative Agent may deem appropriate, in its sole
discretion. Other than in connection with the August '99 Redetermination
or the Special Redetermination, on or before the date which is 30 days
after receipt (i) of a scheduled semi-annual Reserve Report or (ii) of a
Reserve Report in connection with a Lender Redetermination Notice or a
Borrower
<PAGE>
5
Redetermination Notice, the Administrative Agent shall redetermine the
Borrowing Base in its sole discretion, and the Administrative Agent shall
notify the Borrower and the Lenders of its redetermination of the
Borrowing Base. In connection with the August '99 Redetermination, the
Administrative Agent shall redetermine the Borrowing Base by August 13,
1999 provided the June 30, 1999 Reserve Report has been received by it no
later than July 30, 1999. In connection with a Special Redetermination,
the Administrative Agent shall redetermine the Borrowing Base within 14
days of receipt from the Borrower of the Reserve Report to be used in
connection therewith. Within 10 days after receipt from the Administrative
Agent of the amount of its redetermination of the Borrowing Base, each
Lender shall notify the Administrative Agent stating whether or not such
Lender agrees with that redetermination. Failure of any Lender to give
such notice within such period of time shall be deemed to constitute an
acceptance of such redetermination. If the Supermajority Lenders (or, with
respect to the Applicable Redetermination, all of the Lenders) agree with
that redetermination, then the Administrative Agent promptly shall notify
the Borrower of the Borrowing Base as so redetermined, whereupon that
redetermined value shall automatically become effective (and shall remain
effective until the Borrowing Base is again redetermined as provided in
this subsection 4.9(c)). If the Supermajority Lenders (or, with respect to
the Applicable Redetermination, all of the Lenders) have not approved or
are not deemed to have approved the Borrowing Base within the 10 day
period following their receipt of the proposed amount from the
Administrative Agent, the Borrowing Base shall be set at the amount of the
then current Borrowing Base and the Borrowing Base shall remain at such
level until the Supermajority Lenders (or, with respect to the Applicable
Redetermination, all of the Lenders), utilizing the procedure outlined
herein, agree on a new Borrowing Base. Each redetermination provided for
by this subsection 4.9(c) shall be made in accordance with the provisions
of subsection 4.9(d). Other than in connection with the Applicable
Redetermination, it is the intention of the Borrower and the Lenders that
the Borrowing Base be redetermined within 45 days after the furnishing of
each Reserve Report, subject to the provisions of this paragraph (c).
(d) CRITERIA. (i) All determinations and redeterminations by the
Administrative Agent provided for in this subsection 4.9 (and any
determinations and decisions by either or both of the Administrative Agent
and the Supermajority Lenders (or, with respect to the Applicable
Redetermination, all of the Lenders) in connection therewith, including
effecting any redetermination of the value of any component contained in a
Reserve Report) shall be made by the Administrative Agent and the Lenders
in their sole discretion and shall be made on a reasonable basis and in
good faith based upon the application by the Administrative Agent and the
Lenders of their respective normal oil and gas lending criteria as they
exist at the time of determination.
(ii) All redeterminations of the Borrowing Base referred to in this
subsection 4.9 shall become effective immediately upon the delivery of
notice by the Administrative Agent to the Borrower of the redetermination.
<PAGE>
6
(iii) Upon the issuance of any Subordinated Indebtedness, the
Borrowing Base shall be redetermined in accordance with the procedures set
forth in subsection 4.9 which would have applied had a Borrower
Redetermination Notice or a Lender Redetermination Notice been delivered.
(e) TITLE. Concurrently with the delivery to the Administrative
Agent of each Reserve Report, the Administrative Agent may request that
the Borrower furnish to the Administrative Agent reasonable evidence of
the Borrower's title to the Oil and Gas Properties which have been
developed or acquired by the Borrower subsequent to the Reserve Report
immediately preceding such Reserve Report.
(f) SPECIAL REDETERMINATION. On or before the August '99
Redetermination the Borrower may request a special redetermination of the
Borrowing Base by delivering a Borrowing Redetermination Notice and a
Reserve Report both as required by subsection 4.9(c) hereof. Such special
redetermination of the Borrowing Base shall become effective if it is
approved by all the Lenders and if, upon the effectiveness thereof, no
Borrowing Base Deficiency exists (such a special redetermination being
herein referred to as, the "SPECIAL REDETERMINATION"). If the Special
Redetermination becomes effective prior to July 15, 1999, then subsection
7.12(b)(i) hereof shall cease to be in effect. The occurrence of the
Special Redetermination shall eliminate the need for the August '99
Redetermination and the next scheduled Borrowing Base redetermination will
be in connection with the December 31, 1999 Reserve Report."
4. AMENDMENTS TO SECTION 4.10. Subsection 4.10 of the Credit
Agreement is hereby amended by deleting such subsection in its entirety, and
substituting in lieu thereof, the following:
"4.10 BORROWING BASE COMPLIANCE. If, upon any redetermination of the
Borrowing Base pursuant to subsection 4.9(c) other than in connection with
the issuance of Subordinated Indebtedness provided for in subsection
8.2(f), the Aggregate Revolving Credit Exposure of the Lenders exceeds the
Borrowing Base then in effect (any such excess, the "BORROWING BASE
DEFICIENCY"), the Borrower shall prepay the Revolving Credit Loans and
then to the extent necessary, cash collateralize the Letter of Credit
Outstandings in an amount equal to at least 50% of the Borrowing Base
Deficiency within 90 days after the effective date of the redetermination
resulting in such Borrowing Base Deficiency, and within the next 90 days
prepay the Revolving Credit Loans and then cash collateralize the Letter
of Credit Outstandings in an amount equal to the balance of such Borrowing
Base Deficiency in each case together with interest accrued to the date of
such payment or prepayment and any amounts payable under subsection 4.14;
PROVIDED that, if there exists a Borrowing Base Deficiency upon the
effectiveness of the Applicable Redetermination, the Borrower shall within
30 days of the effectiveness of the Applicable Redetermination, prepay the
Revolving Credit Loans and then cash collateralize the Letter of Credit
Outstandings (together with interest accrued to the date of such payment
or prepayment and any amounts payable under subsection 4.14) in an amount
equal to
<PAGE>
7
such Borrowing Base Deficiency. If at any other time there exists a
Borrowing Base Deficiency (including as a result of a redetermination in
connection with the incurrence of Subordinated Indebtedness provided for
in subsection 8.2(f)), the Borrower shall immediately prepay the Revolving
Credit Loans and then to the extent necessary, cash collateralize the
Letter of Credit Outstandings in an amount equal to 100% of such Borrowing
Base Deficiency together with (i) interest accrued to the date of such
payment or prepayment and (ii) any amounts payable under subsection 4.14.
Notwithstanding the foregoing, the Borrower shall immediately apply 100%
of the Net Proceeds of any Redetermination Event described in clauses (a),
(b), (c) or (d) of the definition thereof to prepay outstanding Loans and
then cash collateralize the Letter of Credit Outstandings. Prepayments and
collateralization pursuant to this subsection 4.10 shall be made as set
forth in subsection 4.5(c)."
5. AMENDMENT TO SUBSECTION 7.2. Subsection 7.2 of the Credit
Agreement is hereby amended by deleting the words "January 15, 1999" from clause
"(f)" thereof and substituting in lieu thereof the words "July 15, 1999".
6. AMENDMENTS TO SECTION 7.11. Subsection 7.11 of the Credit
Agreement is hereby amended by deleting such subsection in its entirety and
substituting in lieu thereof the following:
"7.11 FURTHER ASSURANCES. Upon the request of the Administrative
Agent, promptly perform or cause to be performed any and all acts and
execute or cause to be executed any and all documents (including, without
limitation, financing statements and continuation statements) for filing
under the provisions of the Uniform Commercial Code or any other
Requirement of Law which are necessary or advisable to maintain in favor
of the Administrative Agent, for the benefit of the Lenders, Liens on the
Pledged Securities and on the Oil and Gas Properties subject to the
Mortgages that are duly perfected in accordance with all applicable
Requirements of Law; PROVIDED that the Liens created by the Mortgages
shall be released after the effectiveness of the Applicable
Redetermination, (pursuant to documentation reasonably satisfactory to the
Administrative Agent) if (x) upon redetermination of the Borrowing Base in
connection with the Applicable Redetermination it is determined that there
is no Borrowing Base Deficiency, or if there is such a Borrowing Base
Deficiency, such deficiency is cured within 30 days, (y) at such time no
Default or Event of Default has occurred and is continuing and (z) unless
the Special Redetermination is applicable, the June 30, 1999 Reserve
Report was delivered by the Borrower to the Administrative Agent by July
30, 1999."
7. AMENDMENT TO SECTION 7.12. Subsection 7.12 of the Credit
Agreement is hereby amended by deleting paragraph (b) thereof in its entirety
and substituting in lieu thereof the following:
"(b) The Borrower hereby directs the Administrative Agent to file
and record the Additional Mortgage in all filing offices as the
Administrative Agent deems appropriate
<PAGE>
8
upon the occurrence of any of the following events (and the Administrative
Agent and the Lenders agree not to file or record the Additional Mortgage
until the occurrence of any of the following events):
(i) the Borrower fails to deliver the certificate required by
subsection 7.2(f) by July 15, 1999 or if the Borrower delivers such
certificate, subsequent information is received by the Borrower or the
Administrative Agent which demonstrates to the reasonable satisfaction of
the Administrative Agent that the Borrower is not in compliance with
subsection 8.1(d), (e), or (f); or
(ii) if the Special Redetermination has not occurred and Borrower
fails to deliver the June 30, 1999 Reserve Report to the Administrative
Agent by July 30, 1999 or if upon redetermination of the Borrowing Base in
connection with the August `99 Redetermination, it is determined that a
Borrowing Base Deficiency exists and the Borrower fails to cure such
deficiency within 30 days of the effective date of the August `99
Redetermination by prepaying the Revolving Credit Loans and/or cash
collateralizing Letter of Credit Outstandings."
8. AMENDMENTS TO SUBSECTION 8.1. (a) Subsection 8.1 of the Credit
Agreement is hereby amended by deleting clause (b) thereof and substituting in
lieu thereof the following:
"(b) Total Debt Leverage Ratio. Permit (i) the ratio of Indebtedness
of the Borrower and its Subsidiaries, as of the last day of the fiscal
quarters ending September 30, 1998 and December 31, 1998, to EBITDA, for
the period of four consecutive fiscal quarters then ended, to be greater
than 3.25 to 1.0, (ii) the ratio of Indebtedness of the Borrower and its
Subsidiaries, as of the last day of the fiscal quarters ending March 31,
1999 and June 30, 1999, to EBITDA, for the period of four consecutive
fiscal quarters then ended, to be greater than 4.0 to 1.0, (iii) the ratio
of Indebtedness of the Borrower and its Subsidiaries, as of the last day
of the fiscal quarter ending September 30, 1999, to EBITDA, for the period
of four consecutive fiscal quarters then ended, to be greater than 3.50 to
1.0, or (iv) the ratio of Indebtedness of the Borrower and its
Subsidiaries, as of the last day of any fiscal quarter thereafter
(commencing December 31, 1999), to EBITDA, for the period of four
consecutive fiscal quarters then ended, to be greater than 3.25 to 1.0."
(c) Subsection 8.1 of the Credit Agreement is hereby amended by
deleting paragraphs (d), (e) and (f) thereof in their entirety and
substituting in lieu thereof the following:
"(d) Average Daily Production. Permit the average daily production
of the Proved Reserves of the Borrower and its Subsidiaries for the
calendar month ending June 30, 1999 to be less than 150 MMCFE/D.
<PAGE>
9
(e) Proved Reserves. Permit the aggregate Proved Reserves of the
Borrower and its Subsidiaries as of June 30, 1999 to be less than 325
BCFE.
(f) Working Capital. Permit the Consolidated Working Capital as at
June 30, 1999 to be less than negative $10,000,000."
9. WAIVER OF SUBSECTION 4.9(B) OF THE CREDIT AGREEMENT. The
Administrative Agent and the Required Lenders hereby waive any Default or Event
of Default which may have occurred as a result of the receipt of a Reserve
Report dated March 31, 1999 furnished by the Borrower on March 25, 1999 in lieu
of the Reserve Report scheduled to be dated December 31, 1998 and furnished by
the Borrower prior to March 1, 1999 and as a result of the Borrowing Base not
being redetermined as provided in subsection 4.9 (as in effect prior to the
effectiveness of this Fourth Amendment).
10. CONDITIONS TO EFFECTIVENESS. The amendments and changes provided
for in this Fourth Amendment shall become effective on the date (the "FOURTH
AMENDMENT EFFECTIVE DATE") upon which the following conditions precedent are
satisfied and the Administrative Agent notifies the Borrower and the Lenders of
the occurrence of the Fourth Amendment Effective Date:
(a) the Administrative Agent shall have received counterparts of
this Fourth Amendment, duly executed by the Borrower and the Lenders
listed in the signature pages hereof;
(b) the Administrative Agent shall have received counterparts of the
Acknowledgment and Consent, confirming and agreeing that the Second
Amended and Restated Guarantee, dated as of June 30, 1998, is and shall
continue to be, in full force and effect, duly executed by the Guarantors
attached hereto;
(c) the Administrative Agent shall have received all fees and
expenses required to be paid on or before the Fourth Amendment Effective
Date; and
(d) the Administrative Agent shall have received a copy of the
resolutions, in form and substance satisfactory to the Administrative
Agent, of the Board of Directors of each applicable Loan Party (other than
the Borrower) and the executive committee of the Board of Directors of the
Borrower authorizing (i) the execution, delivery and performance of this
Fourth Amendment certified by its Secretary or Assistant Secretary as of
the Fourth Amendment Effective Date, which certificate shall state that
the resolutions thereby certified have not been amended, modified, revoked
or rescinded as of the date of such certificate.
11. REPRESENTATIONS AND WARRANTIES. The Borrower as of the date
hereof and after giving effect to the amendments contained herein, hereby (a)
represents and warrants to the Administrative Agent and each Lender that the
Additional Mortgage, together with the Existing
<PAGE>
10
Mortgage, when filed, shall give the Lenders a first lien on Proved Reserves of
the Borrower constituting at least 75% of the net present value of all the
Proved Reserves of the Borrower and its Subsidiaries as reflected in the Reserve
Report dated as of March 31, 1999, prepared by T. J. Smith & Company, Inc. and
delivered to the Lenders and (b) confirms, reaffirms and restates that (i)
representations and warranties made by it in Section 5 of the Credit Agreement
are true and correct on and as of the date hereof (except to the extent such
representations and warranties are stated to relate to a specific earlier date)
and (ii) no Default or Event of Default has occurred and is continuing on the
date hereof; PROVIDED, that each reference to the Credit Agreement therein shall
be deemed to be a reference to the Credit Agreement after giving effect to this
Fourth Amendment.
12. PAYMENT OF EXPENSES. The Borrower agrees to pay or reimburse the
Administrative Agent for all of its out-of-pocket costs and reasonable expenses
incurred in connection with this Fourth Amendment, any other documents prepared
in connection herewith and the transactions contemplated hereby, including,
without limitation, the reasonable fees and disbursements of counsel to the
Administrative Agent.
13. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS; LIMITED EFFECT.
On and after the date hereof and the satisfaction of the conditions contained in
Section 7 of this Fourth Amendment, each reference in the Credit Agreement to
"this Agreement", "hereunder", "hereof" or words of like import referring to the
Credit Agreement, and each reference in the other Loan Documents to "the Credit
Agreement", "thereunder", "thereof" or words of like import referring to the
Credit Agreement, shall mean and be a reference to the Credit Agreement as
amended hereby. The execution, delivery and effectiveness of this Fourth
Amendment shall not, except as expressly provided herein, operate as a waiver of
any right, power or remedy of any Lender or the Agent under any of the Loan
Documents, nor constitute a waiver of any provisions of any of the Loan
Documents. Except as expressly amended herein, all of the provisions and
covenants of the Credit Agreement and the other Loan Documents are and shall
continue to remain in full force and effect in accordance with the terms thereof
and are hereby in all respects ratified and confirmed.
14. COUNTERPARTS. This Fourth Amendment may be executed by one or
more of the parties hereto in any number of separate counterparts (which may
include counterparts delivered by facsimile transmission) and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument. Any executed counterpart delivered by facsimile transmission shall
be effective as for all purposes hereof.
15. SEVERABILITY. Any provision of this Fourth Amendment which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
<PAGE>
11
16. INTEGRATION. This Fourth Amendment and the other Loan Documents
represent the agreement of the Loan Parties, the Administrative Agent and the
Lenders with respect to the subject matter hereof, and there are no promises,
undertakings, representations or warranties by the Administrative Agent or any
Lender relative to the subject matter hereof not expressly set forth or referred
to herein or in the other Loan Documents.
17. GOVERNING LAW. THIS FOURTH AMENDMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES UNDER THIS FOURTH AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[Remainder of Page Intentionally Left Blank]
<PAGE>
12
IN WITNESS WHEREOF, the parties hereto have caused this Fourth
Amendment to be duly executed and delivered by their respective proper and duly
authorized officers as of the day and year first above written.
THE MERIDIAN RESOURCE CORPORATION
By: /s/ P RICHARD GESSINGER
Title:_____________________________
THE CHASE MANHATTAN BANK, as
Administrative Agent, Issuing Lender
and as a Lender
By: /s/ AUTHORIZED SIGNATORY
Title:_____________________________
<PAGE>
13
TORONTO DOMINION (TEXAS), INC., as
Arranger, Documentation Agent and as a
Lender
By: /s/ AUTHORIZED SIGNATORY
Title:_____________________________
<PAGE>
14
SOCIETE GENERALE, SOUTHWEST AGENCY,
as a Lender
By: /s/ AUTHORIZED SIGNATORY
Title:_____________________________
<PAGE>
15
NATIONSBANK, N.A., as a Lender
By: /s/ AUTHORIZED SIGNATORY
Title:_____________________________
<PAGE>
16
MEES PIERSON, N.V., as a Lender
By: /s/ AUTHORIZED SIGNATORY
Title:_____________________________
<PAGE>
17
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, as a Lender
By: /s/ AUTHORIZED SIGNATORY
Title:_____________________________
<PAGE>
18
ACKNOWLEDGMENT AND CONSENT
Each of the undersigned corporations, as a guarantor under that certain
Second Amended and Restated Guarantee, dated as of June 30, 1998 (as amended,
supplemented or otherwise modified from time to time, the "GUARANTEE"), made by
each of such corporations in favor of the Administrative Agent, confirms and
agrees that the Guarantee is, and shall continue to be, in full force and effect
and is hereby ratified and confirmed in all respects and the Guarantee and all
of the Collateral (as defined in the Guarantee Agreement) do, and shall continue
to, secure the payment of all of the Obligations (as defined in the Guarantee)
pursuant to the terms of the Guarantee. Capitalized terms not otherwise defined
herein shall have the meanings assigned to them in the Credit Agreement referred
to in the Fourth Amendment to which this Acknowledgment and Consent is attached.
CAIRN ENERGY USA, INC.
By:________________________________
Title:_____________________________
Address for Notices:
15995 N. Barker's Landing, Suite 300
Houston, Texas 77079
Fax: (281) 558-5595
THE MERIDIAN RESOURCE & EXPLORATION
COMPANY
By:________________________________
Title:_____________________________
Address for Notices:
15995 N. Barker's Landing, Suite 300
Houston, Texas 77079
Fax: (281) 558-5595
THE MERIDIAN PRODUCTION CORPORATION
By:________________________________
Title:_____________________________
Address for Notices:
15995 N. Barker's Landing, Suite 300
Houston, Texas 77079
Fax: (281) 558-5595
<PAGE>
19
THE MERIDIAN RESOURCES CORPORATION
(Delaware Subsidiary)
By:________________________________
Title:_____________________________
Address for Notices:
15995 N. Barker's Landing, Suite 300
Houston, Texas 77079
Fax: (281) 558-5595
LOUISIANA ONSHORE PROPERTIES, INC.
By:________________________________
Title:_____________________________
Address for Notices:
15995 N. Barker's Landing, Suite 300
Houston, Texas 77079
Fax: (281) 558-5595
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE MERIDIAN RESOURCE CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1998
<CASH> 5,337
<SECURITIES> 0
<RECEIVABLES> 28,434
<ALLOWANCES> 121
<INVENTORY> 0
<CURRENT-ASSETS> 41,382
<PP&E> 849,756
<DEPRECIATION> 448,808
<TOTAL-ASSETS> 448,203
<CURRENT-LIABILITIES> 47,972
<BONDS> 250,000
0
135,000
<COMMON> 463
<OTHER-SE> 8,563
<TOTAL-LIABILITY-AND-EQUITY> 448,203
<SALES> 23,104
<TOTAL-REVENUES> 23,306
<CGS> 18,785
<TOTAL-COSTS> 18,785
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,055
<INCOME-PRETAX> (3,639)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,639)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,639)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
