e10vq
United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended March 31, 2006
or
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o |
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Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number: 1-13463
Endeavour International Corporation
(Exact name of registrant as specified in its charter)
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Nevada
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88-0448389 |
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(State or other jurisdiction of incorporation
or organization)
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(I.R.S. Employer Identification No.) |
1000 Main Street, Suite 3300, Houston, Texas 77002
(Address of principal executive offices) (Zip code)
(713) 307-8700
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer” in Rule 12b-2 of the Exchange
Act (check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
As of May 2, 2006, 79,259,359 shares of the registrant’s common stock were outstanding.
Endeavour International Corporation
Index
Item 1: Financial Statements
Endeavour International Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
(Amounts in thousands, except share data)
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March 31, 2006 |
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December 31, 2005 |
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Assets
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Current Assets: |
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Cash and cash equivalents |
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$ |
56,357 |
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$ |
76,127 |
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Accounts receivable |
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4,613 |
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4,876 |
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Prepaid expenses and other current assets |
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8,346 |
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8,070 |
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Total Current Assets |
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69,316 |
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89,073 |
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Property and Equipment, Net |
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66,647 |
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59,084 |
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Goodwill |
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27,795 |
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27,795 |
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Other Assets |
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8,718 |
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11,014 |
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Total Assets |
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$ |
172,476 |
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$ |
186,966 |
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Liabilities and Stockholders’ Equity
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Current Liabilities: |
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Accounts payable |
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$ |
8,367 |
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$ |
18,194 |
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Accrued expenses and other |
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9,892 |
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21,240 |
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Total Current Liabilities |
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18,259 |
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39,434 |
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Long-Term Debt |
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81,250 |
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81,250 |
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Deferred Taxes |
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22,857 |
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19,185 |
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Other Liabilities |
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7,093 |
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6,753 |
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Total Liabilities |
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129,459 |
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146,622 |
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Commitments and Contingencies |
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Stockholders’ Equity: |
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Preferred stock (Liquidation preference: $2,497) |
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— |
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— |
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Common stock; shares issued and outstanding –
79,036,750 at 2006 and 75,489,052 shares at 2005 |
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79 |
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75 |
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Additional paid-in capital |
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155,527 |
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155,734 |
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Accumulated other comprehensive loss |
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(4,201 |
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(4,578 |
) |
Deferred compensation |
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— |
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(9,437 |
) |
Accumulated deficit |
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(108,388 |
) |
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(101,450 |
) |
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Total Stockholders’ Equity |
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43,017 |
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40,344 |
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Total Liabilities and Stockholders’ Equity |
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$ |
172,476 |
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$ |
186,966 |
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See accompanying notes to condensed consolidated financial statements.
1
Endeavour International Corporation
Condensed Consolidated Statement of Operations
(Unaudited)
(Amounts in thousands, except per share data)
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Three Months Ended March 31, |
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2006 |
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2005 |
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Revenues |
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$ |
8,476 |
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$ |
7,703 |
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Cost of Operations: |
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Operating expenses |
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2,145 |
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2,416 |
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Depreciation, depletion and amortization |
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2,296 |
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2,218 |
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Impairment of oil and gas properties |
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849 |
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— |
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Equity loss from entities with oil and gas properties |
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— |
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79 |
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General and administrative |
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5,451 |
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4,152 |
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Total Expenses |
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10,741 |
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8,865 |
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Loss From Operations |
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(2,265 |
) |
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(1,162 |
) |
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Other (Income) Expense: |
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Interest income |
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(621 |
) |
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(318 |
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Interest expense |
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1,163 |
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783 |
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Other (income) expense |
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249 |
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(422 |
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Total Other Expense |
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791 |
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43 |
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Loss Before Minority Interest |
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(3,056 |
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(1,205 |
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Minority Interest |
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— |
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(470 |
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Loss Before Income Taxes |
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(3,056 |
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(1,675 |
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Income Tax Expense |
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3,843 |
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978 |
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Net Loss |
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(6,899 |
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(2,653 |
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Preferred Stock Dividends |
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39 |
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39 |
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Net Loss to Common Stockholders |
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$ |
(6,938 |
) |
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$ |
(2,692 |
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Basic and Diluted Loss per Common Share |
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$ |
(0.09 |
) |
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$ |
(0.04 |
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Weighted Average Number of Common Shares Outstanding -
Basic and Diluted |
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78,334 |
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73,402 |
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See accompanying notes to condensed consolidated financial statements.
2
Endeavour International Corporation
Condensed Consolidated Statement of Cash Flows
(Unaudited)
(Amounts in thousands)
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Three Months Ended March 31, |
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2006 |
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2005 |
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Cash Flows from Operating Activities: |
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Net loss |
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$ |
(6,899 |
) |
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$ |
(2,653 |
) |
Adjustments to reconcile net loss to net cash used in
operating activities: |
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Depreciation, depletion and amortization |
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2,296 |
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2,218 |
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Impairment of oil and gas properties |
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849 |
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— |
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Deferred tax expense (benefit) |
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3,031 |
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(360 |
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Amortization of non-cash compensation |
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2,832 |
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1,964 |
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Fair market value adjustment of stock options |
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— |
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(489 |
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Other |
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172 |
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798 |
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Changes in assets and liabilities: |
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Decrease in receivables |
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263 |
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1,268 |
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Increase in other current assets |
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(909 |
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(930 |
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Increase (decrease) in accounts payable and
accrued expenses |
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(15,058 |
) |
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1,655 |
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Net Cash Provided by (Used in) Operating Activities |
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(13,423 |
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3,471 |
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Cash Flows From Investing Activities: |
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Capital expenditures |
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(10,299 |
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(4,656 |
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Acquisitions, net of cash acquired |
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— |
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(1,437 |
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Investment in Limited Partnership |
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— |
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(223 |
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(Increase) decrease in restricted cash |
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2,873 |
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(2,011 |
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Net Cash Used in Investing Activities |
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(7,426 |
) |
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(8,327 |
) |
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Cash Flows From Financing Activities: |
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Proceeds from borrowings |
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— |
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81,250 |
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Proceeds from warrant and stock option exercises |
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— |
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461 |
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Financing costs paid |
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— |
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(3,608 |
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Proceeds from common and preferred stock issued and issuable |
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— |
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— |
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Other financing |
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— |
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(24 |
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Net Cash Provided by Financing Activities |
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— |
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78,079 |
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Net Increase (Decrease) in Cash and Cash Equivalents |
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(20,849 |
) |
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73,223 |
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Effect of Foreign Currency Changes on Cash |
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1,079 |
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(1,186 |
) |
Cash and Cash Equivalents, Beginning of Period |
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76,127 |
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8,975 |
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Cash and Cash Equivalents, End of Period |
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$ |
56,357 |
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$ |
81,012 |
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See accompanying notes to condensed consolidated financial statements.
3
Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 – Summary of Significant Accounting Policies
General
Endeavour International Corporation is an international oil and gas exploration and production
company primarily focused on the acquisition, exploration and development of energy reserves in the
North Sea. As used in these Notes to Condensed Consolidated Financial Statements, the terms
“Company”, “Endeavour”, “we”, “us”, “our” and similar terms refer to Endeavour International
Corporation and, unless the context indicates otherwise, its consolidated subsidiaries. The
accompanying consolidated financial statements of Endeavour should be read in conjunction with the
consolidated financial statements and notes included in our Annual Report on Form 10–K/A for the
year ended December 31, 2005.
Basis of Presentation and Use of Estimates
The accompanying financial statements have been prepared, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission (“SEC”), and, accordingly, certain
information normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States has been condensed or omitted.
The financial statements herein reflect all normal recurring adjustments that, in the opinion of
management, are necessary for a fair presentation. Certain amounts for prior periods have been
reclassified to conform to the current presentation. In preparing financial statements, management
makes informed judgments and estimates that affect the reported amounts of assets and liabilities
as of the date of the financial statements and affect the reported amounts of revenues and expenses
during the reporting period. Changes in facts and circumstances may result in revised estimates
and actual results may differ from these estimates.
Loss Per Share
Basic loss per common share is computed by dividing net loss attributable to common
stockholders by the weighted average number of common shares outstanding for the period. Diluted
loss per share includes the effect of our outstanding stock options, warrants and shares issuable
pursuant to convertible debt and certain stock incentive plans under the treasury stock method, if
including such instruments is dilutive. For each of the periods presented, shares associated with
stock options, warrants, convertible debt and certain stock incentive plans are not included
because their inclusion would be antidilutive (i.e., reduce the net loss per share).
The common shares potentially issuable arising from these instruments, which were outstanding
during the periods presented in the financial statements, consisted of:
4
Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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(Amounts in thousands) |
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March 31, |
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2006 |
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2005 |
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Options and stock-based compensation |
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1,131 |
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1,026 |
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Warrants |
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862 |
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1,286 |
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Convertible Debt |
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16,185 |
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16,185 |
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Common shares potentially issuable |
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18,178 |
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18,497 |
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Other-Than-Temporary Impairments of Debt and Equity Securities
In November 2005, accounting standards were revised to provide guidance for determining and
measuring other-than-temporary impairments of debt and equity securities. The new guidance is
effective for reporting periods beginning after December 15, 2005. At March 31, 2006,
available-for-sale investments in our marketable securities had unrealized losses totaling $0.5
million which are recorded in Other Accumulated Comprehensive Income. This investment represents
equity securities in a publicly traded oil and gas exploration company. We have determined that
the unrealized losses as of March 31, 2006 do not represent an other-than-temporary decline in
value, primarily due to both our assessment that there are no specific adverse conditions affecting
the investment, and our ability to hold the investment through a downturn in market value which may
be caused by result of short-term exploration activities. If our assessment regarding these
factors were to change, we may be required to record an impairment charge equal to the difference
between the fair value of the securities and the amortized cost of the securities.
Adoption of Fair Value Accounting for Share-Based Payments
In December 2004, the Financial Accounting Standards Board revised rules that require all
share-based payments to employees, including grants of employee stock options, to be recognized in
the financial statements based on their fair values. We adopted these new rules effective January
1, 2006 using the modified prospective method in which the prior period financial statements are
not restated. The share-based compensation cost is measured at the grant date, based on the
calculated fair value of the award, and is recognized as an expense over the employee’s requisite
service period (generally the vesting period of the equity award). Prior to January 1, 2006, we
accounted for share-based compensation to employees under the intrinsic value method.
The adoption of these new rules resulted in a cumulative effect of change in accounting principle,
net of tax, of less than $60,000. Because the amount was immaterial, we have included it in
general and administrative expense on our consolidated statement of income.
It is our policy to use unissued shares of stock when stock options are exercised. At March 31,
2006, we had approximately 2.0 million additional shares available for issuance pursuant to our
existing stock incentive plan.
5
Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 2 – Share-Based Compensation Arrangements
We grant restricted stock and stock options, including notional restricted stock and options,
to employees and directors as incentive compensation. The notional restricted stock and options
may be settled in cash or stock upon vesting, at the Company’s option. It has been the company’s
practice to settle in stock. The restricted stock and options generally vest over three years and
the options have a five year expiration. The vesting of these shares and options is dependent upon
the continued service of the grantees to the Company. Upon the occurrence of a change in control,
each share of restricted stock and stock option outstanding on the date on which the change in
control occurs will immediately become vested. For the first quarter of 2006, we included non-cash
stock-based compensation of $2.0 million and $0.8 million in general and administrative expenses
and capitalized general and administrative expenses, respectively. At March 31, 2006, total
compensation costs related to nonvested awards not yet recognized is approximately $19.8 million
and is expected to be recognized over a weighted average period of less than two years.
Stock Options
The fair value of each option award is estimated on the date of grant using the Black-Scholes
option-pricing model. Expected volatility is based on an average of our peer companies due to the
lack of relevant Endeavour volatility information for the length of the expected term. The
expected term is the average of the vesting date and the expiration of the option. We use
historical data to estimate option exercises and employee terminations within the valuation model.
The risk-free rate for periods within the contractual life of the option is based on the U.S.
treasury yield curve in effect at the time of grant. The following table sets forth the
assumptions used to determine compensation cost for our non-qualified stock options granted during
the first quarter of 2006.
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2006 |
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Risk free rate |
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4.3 |
% |
Expected years until exercise |
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4 |
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Expected stock volatility |
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38 |
% |
Dividend yield |
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— |
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6
Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Information relating to stock options, including notional stock options, is summarized as follows:
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Weighted |
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Weighted |
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Average |
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Average |
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Exercise |
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Contractual |
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Aggregate |
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Number |
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Price per |
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Life in |
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Intrinsic |
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(Amounts in thousands, except per share data) |
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of Shares |
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Share |
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Years |
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Value |
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Balance outstanding – December 31, 2005 |
|
|
4,907 |
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$ |
3.13 |
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Granted |
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|
795 |
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|
3.51 |
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Exercised |
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— |
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— |
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Forfeited |
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(83 |
) |
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|
2.44 |
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Balance outstanding – March 31, 2006 |
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|
5,619 |
|
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|
3.19 |
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|
3.4 |
|
|
$ |
2,030 |
|
|
Currently exercisable – March 31, 2006 |
|
|
2,518 |
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|
2.56 |
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|
2.6 |
|
|
$ |
1,474 |
|
|
The weighted average grant-date fair value of options granted during 2006 was $1.26 per option.
Prior to January 1, 2006, we recorded shared-based compensation under the intrinsic value method
and no compensation expense was recorded for stock options granted when the exercise price of
options granted was equal to or greater than the fair market value of our common stock on the date
of grant.
We apply the fair value method in accounting for share-based grants to non-employees using the
Black-Scholes option-pricing model.
Restricted Stock
At March 31, 2006, our employees and directors held 4.7 million restricted shares of our
common stock that vest over the service period of up to three years. The restricted stock awards
were valued based on the closing price of our common stock on the measurement date, typically the
date of grant, and compensation expense is recorded on a straight-line basis over the restricted
share vesting period.
Status of the restricted shares as of March 31, 2006 and the changes during the three months ended
March 31, 2006 is presented below:
7
Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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Weighted |
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Average Grant |
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Date Fair |
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Number of |
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Value per |
|
(Amounts in thousands, except per share data) |
|
Shares |
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|
Share |
|
|
Balance outstanding – December 31, 2005 |
|
|
4,412 |
|
|
$ |
3.99 |
|
Granted |
|
|
1,902 |
|
|
$ |
3.51 |
|
Vested |
|
|
(1,548 |
) |
|
$ |
3.83 |
|
Forfeited |
|
|
(67 |
) |
|
$ |
3.30 |
|
|
|
|
|
|
|
|
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|
|
Balance outstanding – March 31, 2006 |
|
|
4,699 |
|
|
$ |
3.85 |
|
|
|
|
|
|
|
|
|
|
|
Total fair value of shares vesting during the period |
|
$ |
4,504 |
|
|
|
|
|
|
Pro Forma Disclosures
Had compensation expense for the three months ended March 31, 2005 been determined under fair
value provisions, our net loss and net loss per share would have been the following:
|
|
|
|
|
(Amounts in thousands, except per share data) |
|
Three Months Ended March 31, |
|
|
|
2005 |
|
|
Net loss to common stockholders, as reported |
|
$ |
(2,692 |
) |
Add: |
|
|
|
|
Stock-based compensation expense as reported |
|
|
596 |
|
Less: |
|
|
|
|
Total stock-based compensation expense
determined under fair-value-based method
for all awards, net of tax |
|
|
(1,341 |
) |
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(3,437 |
) |
|
|
|
|
|
|
Loss per share: |
|
|
|
|
Basic – as reported |
|
$ |
(0.04 |
) |
|
Basic – pro forma |
|
$ |
(0.05 |
) |
|
The following summarizes the weighted average of the assumptions used in the method.
8
Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
|
|
|
|
|
|
2005 |
|
|
Risk free rate |
|
|
3.9 |
% |
Expected years until exercise |
|
|
5.0 |
|
Expected stock volatility |
|
|
48 |
% |
Dividend yield |
|
|
— |
|
|
During 2003, we granted 700,000 options to then-current directors and 495,000 of these options
remain outstanding at March 31, 2006. While all the options granted had an exercise price higher
than the market value of the stock on the date of grant, a subsequent modification of these options
has triggered variable accounting. Prior to the adoption of the fair value method of accounting
for stock-based compensation, we were required to record compensation expense if the modified
option price is lower than the market price of the stock at the end of a reporting period until the
options expire or are exercised. For the three months ended March 31, 2005, we recorded non-cash
general and administrative expenses of $(0.5) million related to these options.
Note 3
– Property and Equipment
Property and equipment included the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
(Amounts in thousands) |
|
2006 |
|
|
2005 |
|
|
Oil and gas properties under the full cost method: |
|
|
|
|
|
|
|
|
Subject to amortization |
|
$ |
52,738 |
|
|
$ |
50,424 |
|
Not subject to amortization: |
|
|
|
|
|
|
|
|
Acquired in 2006 |
|
|
8,315 |
|
|
|
— |
|
Acquired in 2005 |
|
|
15,785 |
|
|
|
15,785 |
|
Acquired in 2004 |
|
|
23,882 |
|
|
|
24,339 |
|
|
|
|
|
100,720 |
|
|
|
90,548 |
|
Other oil and gas assets |
|
|
4,875 |
|
|
|
4,875 |
|
|
|
|
|
|
|
|
|
|
Computers, furniture and fixtures |
|
|
1,550 |
|
|
|
1,351 |
|
|
Total property and equipment |
|
|
107,145 |
|
|
|
96,774 |
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation, depletion and amortization |
|
|
(40,498 |
) |
|
|
(37,690 |
) |
|
|
|
|
|
|
|
|
|
|
Net property and equipment |
|
$ |
66,647 |
|
|
$ |
59,084 |
|
|
The costs not subject to amortization relate to unproved properties which are excluded from
amortized capital costs until it is determined whether or not proved reserves can be assigned to
such properties. During 2006, we recorded $0.9 million in impairment of oil and gas properties
related to exploratory wells. We capitalized $2.8 million and $1.6 million in certain employee
9
Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
costs directly related to exploration activities for the quarter ended March 31, 2006 and 2005,
respectively.
Note 4 – Derivative Instruments
At March 31, 2006 we have an oil commodity swap where we pay market IPE Brent and receive a
fixed price that ranges from $41.80 per barrel to $40.00 per barrel. The contract covers 600
barrels per day through December 2006. During the first quarter of 2006 and 2005, we realized $1.1
million and $0.1 million, respectively, as a reduction to revenue related to settlements for this
contract and another $0.1 million in each period as an increase to other expenses related to hedge
ineffectiveness. We did not exclude any component of the hedging instrument’s gain or loss when
assessing effectiveness.
At March 31, 2006, the net deferred loss recognized in accumulated other comprehensive income was
$3.7 million, net of tax, all of which is expected to be transferred out of accumulated other
comprehensive income and recognized within earnings over the next nine months.
We discontinue hedge accounting prospectively when (1) we determine that the derivative is no
longer effective in offsetting changes in the fair value or cash flows of a hedged item (including
hedged items such as firm commitments or forecasted transactions); (2) the derivative expires; (3)
it is no longer probable that the forecasted transaction will occur; (4) a hedged firm commitment
no longer meets the definition of a firm commitment; or (5) management determines that designating
the derivative as a hedging instrument is no longer appropriate.
Note 5 – Supplemental Cash Flow Information
During the first quarter of 2006, we issued 1.5 million shares of our common stock in
connection with the settlement of litigation. See Note 7.
Note 6 – Comprehensive Loss
Excluding net loss, our source of comprehensive loss is from the net unrealized loss on
commodity derivative instruments and marketable securities, which are classified as
available-for-sale. The following summarizes the components of comprehensive loss:
10
Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
|
|
|
|
|
|
|
|
(Amounts in thousands) |
|
Quarter Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
Net loss |
|
$ |
(6,899 |
) |
|
$ |
(2,653 |
) |
|
|
|
|
|
|
|
|
|
Unrealized loss on commodity derivative
instruments, net of tax of $0.6 million and
$1.2 million, respectively |
|
|
(933 |
) |
|
|
(2,944 |
) |
Unrealized gain (loss) on marketable securities |
|
|
360 |
|
|
|
(12 |
) |
Reclassification adjustment for loss realized
in net loss above |
|
|
950 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net impact on comprehensive loss |
|
|
377 |
|
|
|
(2,956 |
) |
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(6,522 |
) |
|
$ |
(5,609 |
) |
|
Note 7 – Commitments and Contingencies
General
The oil and gas industry is subject to regulation by federal, state and local authorities. In
particular, gas and oil production operations and economics are affected by environmental
protection statutes, tax statutes and other laws and regulations relating to the petroleum
industry. We believe we are in compliance with all federal, state and local laws, regulations
applicable to the Company and its properties and operations, the violation of which would have a
material adverse effect on us or our financial condition.
Legal Proceeding
In March 2004, the GHK Company, LLC, GHK/Potato Hills Limited Partnership, and Brian F. Egolf
(collectively “Plaintiffs”) commenced an action against Endeavour International Corporation
(“Endeavour”), f/k/a Continental Southern Resources, Inc., as well as certain other entities in
state court in Oklahoma City, Oklahoma. During the fourth quarter of 2005, we recorded $5.3
million in litigation settlement expense to reflect the settlement of the litigation between
Endeavour and the Plaintiffs on January 25, 2006. The settlement provided for the issuance of 1.5
million shares of our common stock and the granting of certain registration rights. These shares
were issued in February 2006 and we have filed a registration statement on Form S-3 in accordance
with the terms of the settlement agreement.
11
Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 8 – Subsequent Events
Subsequent to March 31, 2006, a wholly-owned subsidiary entered into a rig commitment for 220
days over a one-year period beginning in March 2007 for the United Kingdom sector of the North Sea.
The value of this contact is approximately $66 million. The arrangement with Applied Drilling
Technology International, a division of GlobalSantaFe, will be for a heavy-duty harsh environment
jack-up suitable for most drilling activities we will operate in 2007-2008. We expect to finalize
the rig contract during the second quarter of 2006.
12
Endeavour International Corporation
Cautionary Statement for Forward-Looking Statements
The information contained in this Quarterly Report on Form 10-Q and in other public statements
by the Company and Company officers or directors includes or may contain certain forward-looking
statements. The words “may,” “will,” “expect,” “anticipate,” “believe,” “continue,” “estimate,”
“project,” “intend,” and similar expressions used in this Report are intended to identify
forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933 and
Section 21E of the U.S. Securities Exchange Act of 1934. You should not place undue reliance on
these forward-looking statements, which speak only as of the date made. We undertake no obligation
to publicly release the result of any revision of these forward-looking statements to reflect
events or circumstances after the date they are made or to reflect the occurrence of unanticipated
events. You should also know that such statements are not guarantees of future performance and are
subject to risks, uncertainties and assumptions. These factors include, but are not limited to,
those risks described in detail below and in the Company’s Annual Report on Form 10-K/A under the
caption “Risk Factors” and other filings with the Securities and Exchange Commission. Should any
of these risks or uncertainties materialize, or should any of these assumptions prove incorrect,
actual results may differ materially from those included within the forward-looking statements.
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context otherwise requires, references to the “Company”, “Endeavour”, “we”, “us” or
“our”, mean Endeavour International Corporation or any of our consolidated subsidiaries or
partnership interests. The following discussion should be read in conjunction with our Condensed
Consolidated Financial Statements and related Notes thereto included elsewhere in this Report.
General
We are an international oil and gas exploration and production company focused on the acquisition,
exploration and development of energy reserves in the North Sea. Since focusing our operations in
the North Sea in February 2004, we have established an exploration portfolio with prospects in the
United Kingdom and Norwegian sectors of the North Sea. To date, we have invested a significant
amount of our resources on various development, acquisition and exploration projects. We intend to
continue to allocate a significant portion of our capital to such projects.
Results of Operations
Our producing assets are concentrated in Norway with interests in two producing fields, both
operated by Norsk Hydro. Oil and condensate sales volumes decreased from the first quarter of 2005
to the first quarter of 2006 primarily due to the schedule of tanker liftings between the periods.
With the significant increases in worldwide oil and gas commodity prices from 2005 to 2006, our
revenues and realized prices have increased correspondingly, partially offset by the
losses realized under our oil hedging activities. During the first quarter of 2006 and 2005, we
13
Endeavour
International Corporation
realized $1.1 million and $0.1 million, respectively, as a reduction to revenue related to
settlements of oil hedging activities. The following table shows our average sales volumes and
sales prices:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
Oil and condensate sales (Bbl) |
|
|
144,051 |
|
|
|
161,900 |
|
Oil and condensate price ($ per Bbl) |
|
$ |
61.93 |
|
|
$ |
47.44 |
|
Oil and condensate price, including the
impact of hedging activities ($ per
Bbl) |
|
$ |
54.26 |
|
|
$ |
46.61 |
|
|
|
|
|
|
|
|
|
|
Gas sales (Mcf) |
|
|
54,353 |
|
|
|
40,812 |
|
Gas price ($ per Mcf) |
|
$ |
12.14 |
|
|
$ |
3.85 |
|
Operating expenses decreased by $0.3 million for the first quarter of 2006 as compared to the first
quarter of 2005 primarily due to the scheduling of tanker liftings between the periods.
Impairment of oil and gas properties of $0.9 million for the first quarter of 2006 represents the
final abandonment and rig demobilization costs incurred on the Turriff well which was determined to
be unsuccessful in the fourth quarter of 2005. All other costs for the Turriff well were included
in impairments during the fourth quarter of 2005.
General and administrative (“G&A”) expenses increased to $5.5 million during the first quarter of
2006 as compared to $4.2 million for the corresponding period in 2005. This increase was driven
primarily by increases in non-cash stock-based compensation as a result of the adoption of the fair
value method of accounting for share-based payments effective January 1, 2006 and the issuance of
additional stock-based compensation under the long-term incentive plan. Components of G&A expenses
for these periods are as follows:
14
Endeavour
International Corporation
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
(Amounts in thousands) |
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
Compensation |
|
$ |
3,209 |
|
|
$ |
2,528 |
|
Consulting, legal and accounting fees |
|
|
1,111 |
|
|
|
906 |
|
Occupancy costs |
|
|
223 |
|
|
|
286 |
|
Other expenses |
|
|
609 |
|
|
|
355 |
|
|
Total gross cash G&A expenses |
|
|
5,152 |
|
|
|
4,075 |
|
|
|
|
|
|
|
|
|
|
Non-cash stock-based compensation |
|
|
3,051 |
|
|
|
2,133 |
|
Fair market value adjustment of stock options |
|
|
— |
|
|
|
(489 |
) |
|
Total gross non-cash G&A expenses |
|
|
3,051 |
|
|
|
1,644 |
|
|
Gross G&A expenses |
|
|
8,203 |
|
|
|
5,719 |
|
Less: capitalized G&A expenses |
|
|
(2,752 |
) |
|
|
(1,567 |
) |
|
Net G&A expenses |
|
$ |
5,451 |
|
|
$ |
4,152 |
|
|
Interest expense increased to $1.2 million for the first quarter of 2006 as compared to $0.8
million for the corresponding period in 2005 primarily due to the issuance of our convertible
senior notes during the middle of the first quarter of 2005. The increase in cash generated as a
result of the issuance of our convertible senior notes is also the primary reason for the increase
in interest income to $0.6 million for the first quarter of 2006.
Income Taxes
Income taxes increased to $3.9 million for the first quarter of 2006 from $1.0 million for the
first quarter of 2005. Our income taxes relate solely to our Norwegian operations. The increase
in income taxes relates primarily to increases in commodity prices and the limited deductibility of
our hedging losses. Further, deferred taxes increased, with a corresponding decrease in current
taxes, as a result of the timing of deductions for exploration expenditures in Norway.
During the first quarter of 2006 and 2005, we did not record any income tax benefits on our
non-Norwegian operations as there was no assurance that we could generate any taxable earnings, and
therefore we recorded valuation allowances on the full amount of deferred tax assets generated.
Liquidity and Capital Resources
Cash flows used by operating activities decreased to $13.5 million for the first quarter of 2006
primarily due to the payment of accounts payable and accrued liabilities. Cash flows provided by
financing activities of $78 million for the first quarter of 2005 reflect primarily the net
proceeds from the offering of our senior notes.
The cash balance of $56 million at March 31, 2006 is expected to fund exploration drilling through
the end of 2006 while cash flows from our Norwegian operations are expected to be sufficient to
fund worldwide administrative expenses. Management expects exploration
15
Endeavour
International Corporation
successes to be self-funding with necessary development expenditures for each project to be funded
through a combination of debt, equity, changes in our working interest or other means.
During the first quarter of 2006, we have incurred approximately $10.2 million in exploration and
development capital expenditures, primarily related to our drilling activities on the Cygnus well,
which is currently being tested, final abandonment costs for the Turriff well, which was determined
to be unsuccessful in the fourth quarter of 2005, and development expenditures on our producing
fields in Norway. Exploration and development capital expenditures for the first quarter of 2005
were $2.8 million which were primarily incurred in Norway since we did not begin drilling in the UK
until the last half of 2005.
Anticipated Capital Expenditures
We originally anticipated exploration and development capital expenditures in 2006 to be
approximately $50 million. Due to timing of projects and rig commitments, we currently anticipate
exploration and development capital expenditures in 2006 to be approximately $42 million. It is
expected that nearly 75% of the 2006 capital program will be spent in the United Kingdom and $11
million in Norway. We may increase or decrease our planned activities for 2006 or high grade our
exploratory prospects, depending upon drilling results, potential acquisition candidates, product
prices, the availability of capital resources, and other factors affecting the economic viability
of such activities. In addition to the exploration and development budget, we expect to invest $12
million for the purchase of an eight percent interest in the Enoch Field located in Block 16/13a in
the North Sea. The transaction is expected to close during the second quarter of 2006.
Anticipated capital expenditures for 2006 reflect the continuation of our North Sea exploratory
drilling program and development expenditures for existing operations in Norway. The first of our
wells to begin drilling in 2006 was spud in early February 2006 in the UK sector of the North Sea.
The well has reached its target depth and is currently being tested with results anticipated in the
near future.
We also entered into a seismic acquisition contract for a proprietary 3-D survey covering 500
square kilometers on five blocks in the Inner Moray Firth acquired in the UK 23rd Seaward Licensing
Round in 2005. Acquisition and processing should be completed by the end of the year in
preparation for exploratory wells expected to be drilled in the area in 2007.
In the UK, we have a commitment for drilling services with a semi-submersible drilling rig for two
wells beginning in the last half of 2006 for approximately $13.5 million. In the first quarter of
2006, we joined with several other operators in the Norwegian Continental Shelf to form a
consortium that has entered into a contract for the use of a semi-submersible drilling rig for a
three-year period beginning the second half of 2006. The agreement allows us to move forward with
our exploration program in Norway and fulfill our role as an operator of Norwegian licenses. The
contract commits us to 100 days (for two wells) of drilling services, for approximately $37.8
million, between late 2007 and 2008. We believe these rig-contracting efforts offer compelling
economics and facilitate our drilling strategy.
16
Endeavour
International Corporation
Subsequent to March 31, 2006, a wholly owned subsidiary entered into a rig commitment for 220 days
over a one-year period beginning in March 2007 for the United Kingdom sector of the North Sea. The
value of this contact is approximately $66 million. The arrangement with Applied Drilling
Technology International, a division of GlobalSantaFe, will be for the GSF Magellan, a heavy-duty
harsh environment jack-up suitable for most drilling activities the company will operate in
2007-2008. We expect to finalize the rig contract soon.
Disclosures About Contractual Obligations and Commercial Commitments
See “Anticipated Capital Expenditures” above for a discussion of our rig commitments.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
Foreign Exchange Risk
The international scope of our business operations exposes us to the risk of fluctuations in
foreign currency markets. As a result, we are subject to foreign currency exchange rate risk due
to effects that foreign exchange rate movements of those currencies have on our costs and on the
cash flows that we receive from foreign operations. We operate a centralized currency management
operation to take advantage of potential opportunities to naturally offset exposures against each
other. To date, we have addressed our foreign currency exchange rate risks principally by
maintaining our liquid assets in interest-bearing accounts in U.S. dollars, until payments in
foreign currency are required, but we have not reduced this risk by hedging to date.
Commodity Price Risk
We produce and sell crude oil and natural gas. Realized pricing is primarily driven by the
prevailing worldwide price for crude oil and spot market prices applicable which has been volatile
and unpredictable for several years. As a result, our financial results can be significantly
impacted as these commodity prices fluctuate widely in response to changing market forces. We may
engage in oil and gas hedging activities to realize commodity prices which we consider favorable.
At March 31, 2006, we had an oil commodity swap where we pay market IPE Brent and receive a fixed
price that ranges from $41.80 per barrel to $40.00 per barrel covering 600 barrels per day through
December 2006. At March 31, 2006, a $1.00 change in the Brent oil price would result in a $0.2
million change in revenues under this contract through the remainder of 2006.
Interest Rate Risk
Our convertible senior notes bear interest at a fixed rate of 6%. We are exposed to changes in
interest rates through the effect on interest earned on cash and cash equivalents. We do not
currently use interest rate derivative financial instruments to manage exposure to interest rate
changes, but may do so in the future.
17
Endeavour
International Corporation
Item 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, our management carried out an evaluation,
with the participation of our co-chief executive officers (the “CEOs”), chief financial officer
(“CFO”), and chief accounting officer (the “CAO”), of the effectiveness of our disclosure controls
and procedures required by Rule 13a-15 of the Securities Exchange Act of 1934. Based on that
evaluation, the CEOs, CFO and CAO believe:
(i) that our disclosure controls and procedures are designed to ensure (a) that information
we are required to disclose in our reports filed or submitted under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and (b) that such information is accumulated and
communicated to our management, including the CEOs, CFO and CAO, as appropriate, to allow
timely decisions regarding required disclosure; and
(ii) that our disclosure controls and procedures are effective.
Changes in Internal Controls over Financial Reporting
There has been no significant change in our internal controls over financial reporting during
the period covered by this report that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.
Part II. Other Information
Item 1: Legal Proceedings
Information regarding our legal proceedings is included in Note 7 – Commitments and
Contingencies to our Condensed Consolidated Financial Statements included herewith and is
incorporated herein by reference.
Item 6: Exhibits
The following exhibits are included herein:
|
|
|
31.1 *
|
|
Certification of William L. Transier, Co-Chief Executive Officer, pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended. |
|
|
|
31.2 *
|
|
Certification of John N. Seitz, Co-Chief Executive Officer, pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended. |
|
|
|
31.3 *
|
|
Certification of Lance Gilliland, Chief Financial Officer, pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended. |
|
|
|
31.4 *
|
|
Certification of Robert L. Thompson, Chief Accounting Officer, pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended. |
18
Endeavour
International Corporation
|
|
|
32.1 *
|
|
Certification of William L. Transier, Co-Chief Executive Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2 *
|
|
Certification of John N. Seitz, Co-Chief Executive Officer, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.3 *
|
|
Certification of Lance Gilliland, Chief Financial Officer, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.4 *
|
|
Certification of Robert L. Thompson, Chief Accounting Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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.
Endeavour International Corporation
|
|
|
|
|
|
|
Date: May 5, 2006
|
|
/s/ Lance Gilliland
Lance Gilliland
|
|
/s/ Robert L. Thompson
Robert L. Thompson
|
|
|
|
|
Executive Vice President
|
|
Vice President and Chief |
|
|
|
|
and Chief Financial Officer
|
|
Accounting Officer |
|
|
|
|
(Principal Financial Officer)
|
|
(Principal Accounting Officer) |
|
|
19
Index to Exhibits
|
|
|
31.1 *
|
|
Certification of William L. Transier, Co-Chief Executive Officer, pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended. |
|
|
|
31.2 *
|
|
Certification of John N. Seitz, Co-Chief Executive Officer, pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended. |
|
|
|
31.3 *
|
|
Certification of Lance Gilliland, Chief Financial Officer, pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended. |
|
|
|
31.4 *
|
|
Certification of Robert L. Thompson, Chief Accounting Officer, pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended. |
|
|
|
32.1 *
|
|
Certification of William L. Transier, Co-Chief Executive Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2 *
|
|
Certification of John N. Seitz, Co-Chief Executive Officer, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.3 *
|
|
Certification of Lance Gilliland, Chief Financial Officer, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.4 *
|
|
Certification of Robert L. Thompson, Chief Accounting Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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