UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-10753
WRT ENERGY CORPORATION
(Exact name of Issuer as specified in its charter)
Delaware 73-1521290
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1601 NW Expressway, Suite 700
Oklahoma City, Oklahoma 73118-1401
(405) 848-8808
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive office)
Indicate by check mark whether the Issuer (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 Issuer was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes [ ] No [ X ]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEEDING FIVE YEARS.
Indicated by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No .
--- ---
1
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
Prior to Effective Date of Plan of Reorganization:
Common Stock, $0.01 Par Value **
9% Convertible Preferred Stock, $0.01 par value **
Effective Date of Plan of Reorganization forward:
New Common Stock, $0.01 par value **
New 9% Convertible Preferred Stock $0.01 par value **
Effective July 11, 1997, all outstanding shares of common stock were cancelled
as part of WRT Energy Corporation's Plan of Reorganization under Chapter 11 of
the Federal Bankruptcy Code.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
** The registrant's common stock and 9% Convertible Preferred Stock were quoted
on the NASDAQ National Market until February 29, 1996, at which time NASDAQ
terminated its quotation of both classes of Securities due to the failure of the
registrant to meet certain financial and other criteria for continued quotation.
The Company's new common stock is expected to be listed on the NASDAQ
National Market after the Company files certain documents with NASDAQ and the
Securities and Exchange Commission.
2
WRT ENERGY CORPORATION
TABLE OF CONTENTS
FORM 10-Q QUARTERLY REPORT
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements :
Consolidated Balance Sheet
March 31, 1997 (Unaudited) and December 31, 1996 ..................... 5
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended March 31, 1997 and 1996.................... 6
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 1997 and 1996.................... 7
Notes to Consolidated Financial Statements................................ 8
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition............................. 19
Disclosure Regarding Forward-Looking Statements........................... 19
PART II. Other Information
Item 1. Legal Proceedings......................................................... 24
Item 6. Exhibits and Reports on Form 8-K.......................................... 28
Signatures................................................................ 30
3
WRT ENERGY CORPORATION
PART I. Financial Information
Item 1. Consolidated Financial Statements
March 31, 1997 and 1996
Forming a part of Form 10-Q Quarterly Report to the
Securities and Exchange Commission
This quarterly report on Form 10-Q should be read in conjunction with WRT Energy
Corporation's Annual Report on Form 10-K for the year ended December 31, 1996.
4
WRT ENERGY CORPORATION
(A DEBTOR-IN-POSSESSION AS OF FEBRUARY 14, 1996)
CONSOLIDATED BALANCE SHEET
ASSETS MARCH 31, DECEMBER 31,
1997 1996
------------- -------------
Current assets: (Unaudited)
Cash and cash equivalents $ 7,776,000 $ 5,679,000
Accounts receivable, net of allowance for doubtful accounts of
$4,716,000 for March 31, 1997 and December 31, 1996, respectively 1,906,000 3,667,000
Prepaid expenses and other 1,159,000 633,000
------------- -------------
10,841,000 9,979,000
Cash held in escrow 841,000 831,000
Property and equipment, net - successful efforts method 55,698,000 56,899,000
Debt issuance costs, net 326,000 367,000
------------- -------------
Total assets $ 67,706,000 $ 68,076,000
============= =============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 6,253,000 $ 5,529,000
Pre-petition liabilities not subject to compromise 16,740,000 16,752,000
Pre-petition liabilities subject to compromise 136,079,000 136,346,000
------------- -------------
159,072,000 158,627,000
Shareholders' deficit:
Preferred stock - $.01 par value, 2,000,000 authorized,
1,265,000 issued and outstanding at March 31, 1997 and
December 31, 1996, respectively 27,677,000 27,677,000
Common stock - $.01 par value, 50,000,000 authorized,
9,539,207 issued and outstanding at March 31, 1997 and 95,000 95,000
December 31, 1996, respectively
Paid-in capital 39,571,000 39,571,000
Accumulated deficit (158,377,000) (157,562,000)
Treasury stock (35,100 shares at March 31, 1997 and
December 31, 1996, respectively) (332,000) (332,000)
------------- -------------
Total shareholders' deficit (91,366,000) (90,551,000)
Commitments and contingencies
============= =============
Total liabilities and shareholders' deficit $ 67,706,000 $ 68,076,000
============= =============
- See accompanying notes to consolidated financial statements -
5
WRT ENERGY CORPORATION
(A DEBTOR-IN-POSSESSION AS OF FEBRUARY 14, 1996)
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
1997 1996
----------- -----------
Revenues:
Gas sales $ 2,508,000 $ 2,968,000
Oil and condensate sales 2,873,000 3,264,000
----------- -----------
Total revenues 5,381,000 6,232,000
Expenses:
Production costs 2,144,000 6,201,000
Depreciation, depletion and amortization 1,451,000 2,161,000
General and administrative expenses 919,000 988,000
Provision for doubtful receivable 91,000 -
Minimum production guarantee obligation - 2,778,000
----------- -----------
4,605,000 12,128,000
----------- -----------
Income (loss) from operations 776,000 (5,896,000)
----------- -----------
Interest expense 615,000 3,746,000
Other income, net 50,000 11,000
----------- -----------
Income (loss) before reorganization costs and
income taxes 211,000 (9,631,000)
Reorganization costs 1,026,000 4,048,000
----------- -----------
Loss before income taxes (815,000) (13,679,000)
Income taxes - -
----------- -----------
Net loss (815,000) (13,679,000)
Undeclared dividends on preferred stock (712,000) (712,000)
----------- -----------
Net loss available to common shareholders $(1,527,000) $(14,391,000)
=========== ============
Per common share:
Loss per common and common equivalent
share $ (0.16) $ (1.51)
=========== ============
Average common and common equivalent
shares outstanding 9,539,000 9,539,000
=========== ============
- See accompanying notes to consolidated financial statements -
6
WRT ENERGY CORPORATION
(A DEBTOR-IN-POSSESSION AS OF FEBRUARY 14, 1996)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
1997 1996
----------- ------------
Cash flow from operating activities:
Net loss $ (815,000) $(13,679,000)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation, depletion, and amortization 1,451,000 2,161,000
Provision for doubtful accounts and notes receivable 91,000 --
Amortization of debt issuance costs 41,000 227,000
Write-off of debt issuance costs and Senior Notes discount -- 5,379,000
Changes in operating assets and liabilities:
Accounts receivable 1,668,000 416,000
Prepaid expenses and other (526,000) 24,000
Accounts payable and accrued liabilities 725,000 (20,908,000)
Pre-petition liabilities subject to compromise (267,000) 24,476,000
Pre-petition liabilities not subject to compromise -- 1,505,000
Minimum production guarantee obligation -- 2,778,000
----------- ------------
Net cash provided by operating activities 2,368,000 2,379,000
Cash flow from investing activities:
Additions to cash held in escrow (10,000) (65,000)
Additions to property and equipment (250,000) (1,235,000)
----------- ------------
Net cash used in investing activities (260,000) (1,300,000)
Cash flow from financing activities:
Principal payments on borrowings (11,000) (44,000)
----------- ------------
Net cash (used in) provided by financing activities (11,000) (44,000)
Net increase (decrease) in cash and cash equivalents 2,097,000 1,035,000
Cash and cash equivalents - beginning of period 5,679,000 1,608,000
----------- ------------
Cash and cash equivalents - end of period $ 7,776,000 $ 2,643,000
=========== ============
Supplemental disclosures of cash flow information
Interest paid $ 28,000 $ 11,000
Income taxes paid -- --
Supplemental information of non-cash investing and financing activities
Undeclared dividends on preferred stock (712,000) (712,000)
- See accompanying notes to consolidated financial statements -
7
WRT ENERGY CORPORATION
(A DEBTOR-IN-POSSESSION AS OF FEBRUARY 14, 1996)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
(1) DESCRIPTION OF BUSINESS
On February 14, 1996 ("Petition Date"), WRT Energy Corporation, a Texas
corporation and the predecessor of the Company ("Debtor"), filed a petition with
the Bankruptcy Court for the Western District of Louisiana ("Bankruptcy Court")
for protection under Chapter 11 of the Federal Bankruptcy Code. Such case is
referred to herein as the "Reorganization Case". Upon filing of the voluntary
petition for relief, the Debtor, as debtor-in-possession, was authorized to
operate its business for the benefit of claim holders and interest holders, and
continued to do so, without objection or request for appointment of a trustee.
All debts of the Debtor as of the Petition Date were stayed by the bankruptcy
petition and were subject to compromise pursuant to such proceedings. The Debtor
operated its business and managed its assets in the ordinary course as
debtor-in-possession and obtained court approval for transactions outside the
ordinary course of business. Based on these actions, all liabilities of Debtor
outstanding at February 14, 1996 were reclassified to estimated pre-petition
liabilities.
By order dated May 2, 1997, the Bankruptcy Court confirmed the Joint
Plan of Reorganization (the "Plan") of WRT Energy Corporation and co-proponents
DLB Oil and Gas, Inc. ("DLB") and Wexford Management LLC ("Wexford," and
together with DLB "DLBW"). The Plan was consummated and became effective on July
11, 1997 (the "Effective Date"). On the Effective Date, the Debtor was merged
with and into a newly formed Delaware corporation named "WRT Energy
Corporation" ("New WRT"). On the Effective Date, New WRT allocated the actual
reorganization value to the entity's assets as defined by Statement of Position
Number 90-7 "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("SOP 90-7"). As used herein, "Debtor" refers to the
registrant prior to the Effective Date of the Plan, "New WRT" refers to the
registrant following the Effective Date of the Plan, and the "Company" or "WRT"
refers to the registrant prior to or after the Effective Date of the Plan, as
the context requires.
Prior to bankruptcy, the Company was engaged in acquiring mature oil
and gas properties in the Louisiana Gulf Coast area and increasing both the
production and total oil and gas recovery through the use of advanced
technologies, including sophisticated radioactive logging equipment owned by the
Company and specialized fluid separation technologies. The Company also sought
to acquire properties that were developed prior to the invention of cased-hole
logging equipment in the 1970's and to reevaluate such properties with its own
radioactive logging equipment. This new cased-hole data was then analyzed by
experienced Company personnel to identify previously overlooked or deliberately
untested formations that may have yielded new commercial oil and gas production.
Previously produced formations were also studied to determine whether they could
have been restored to commercial production through the use of modern
completion, stimulation and production practices or the application of the
Company's fluid separation technologies. Subsequent to bankruptcy, the Company
seeks to exploit its existing properties and acquire additional Louisiana Gulf
Coast properties with exploitation and exploration potential.
8
WRT ENERGY CORPORATION
(A DEBTOR-IN-POSSESSION AS OF FEBRUARY 14, 1996)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
The consolidated financial statements include the accounts of WRT and
its wholly owned subsidiary, WRT Technologies, Inc. Until December 31, 1996, WRT
owned 100% of the stock of two subsidiaries, Tesla Resources, Inc. ("Tesla") and
Southern Petroleum, Inc. ("Southern Petroleum"). On that date, both Tesla and
Southern Petroleum were merged into WRT with WRT emerging as the sole surviving
corporation. In November 1996, WRT formed a wholly owned subsidiary, WRT
Technologies, Inc., which was established to own and operate WRT's proprietary,
radioactive, cased-hole logging technology. As of March 31, 1997, WRT
Technologies, Inc. held only immaterial assets and had no operating activities.
As part of the Plan, WRT Technologies, Inc. was dissolved with the assets
contributed to New WRT. See Note 2 for a description of the Plan. All
significant intercompany transactions have been eliminated.
The accompanying consolidated financial statements and notes thereto
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and regulations.
The accompanying consolidated financial statements and notes thereto should be
read in conjunction with the consolidated financial statements and notes
included in WRT's 1996 annual report on Form 10-K.
In the opinion of WRT's management, all adjustments (all of which are
normal and recurring) have been made which are necessary to fairly state the
consolidated financial position of WRT and its subsidiaries as of March 31,
1997, and the results of their operations, and their cash flows for the three
month period ended March 31, 1997 and 1996.
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities, the disclosure
of contingent assets and liabilities, and the reported amounts of revenues and
expenses during the reporting periods, to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(2) CHAPTER 11 BANKRUPTCY FILING
On February 14, 1996 ("Petition Date"), WRT Energy Corporation, a Texas
corporation and the predecessor of the Company ("Debtor"), filed a petition with
the Bankruptcy Court for the Western District of Louisiana ("Bankruptcy Court")
for protection under Chapter 11 of the Federal Bankruptcy Code. Such case is
referred to herein as the "Reorganization Case". Upon filing of the voluntary
petition for relief, the Debtor, as debtor-in-possession, was authorized to
operate its business for the benefit of claim holders and interest holders, and
continued to do so, without objection or request for appointment of a trustee.
All debts of the Debtor as of the Petition Date were stayed by the bankruptcy
petition and were subject to compromise pursuant to such proceedings. The Debtor
operated its business and managed its assets in the ordinary course as
debtor-in-possession and obtained court approval for transactions outside the
ordinary course of business. Based on these actions, all liabilities of Debtor
outstanding at February 14, 1996 were reclassified to estimated pre-petition
liabilities.
9
WRT ENERGY CORPORATION
(A DEBTOR-IN-POSSESSION AS OF FEBRUARY 14, 1996)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
On October 22, 1996, the Company accepted and signed the proposal
("DLBW Proposal") submitted by DLB Oil & Gas, Inc. ("DLB") and Wexford
Management LLC, on behalf of its affiliated investment funds ("Wexford"),
providing the terms of a proposed capital investment in a plan of reorganization
for the Company. DLB and Wexford are collectively referred to herein as DLBW.
The Company subsequently obtained Bankruptcy Court approval of the expense
reimbursement provisions of the DLBW Proposal.
Subsequent to the Company's execution of the DLBW Proposal, DLB
commenced negotiations with Texaco Exploration and Production, Inc. ("TEPI")
regarding, (i) the claim asserted by TEPI against the Company and its affiliates
("Texaco Claim"), (ii) the purchase of certain interests owned by TEPI in the
West Cote Blanche Bay Field (" WCBB Assets") and (iii) the Contract Area
Operating Agreement related to the WCBB Assets and various other agreements
relating thereto. As a result of the negotiations, TEPI and DLB reached an
agreement pursuant to which DLB (i) agreed to purchase the Texaco Claim, (ii)
as required by TEPI, agreed to purchase the WCBB Assets from TEPI, and (iii)
agreed to guarantee ("P&A Guarantee") the performance of all plugging and
abandonment obligations related to both the WCBB Assets and the Company's
interests in West Cote Blanche Bay Field ("WCBB") and, in order to implement
the P&A Guarantee, paid into a trust ("P&A Trust") established for the benefit
of the State of Louisiana, $1,000,000 on the July 11, 1997 Effective Date of
the Plan.
By order dated May 2, 1997, the Bankruptcy Court approved WRT's and
DLBW's Joint Plan of Reorganization (the "Plan"). The Plan involved (i) the
issuance to WRT's unsecured creditors, on account of their allowed claims, an
aggregate of 10 million shares of New WRT Common Stock, (ii) the issuance to
WRT's unsecured creditors, on account of their allowed claims, of the right to
purchase an additional three million eight hundred thousand shares (3,800,000)
of New WRT Common Stock at a purchase price of $3.50 per share ("Rights
Offering"), (iii) the issuance to DLBW and affiliates of the number of shares of
New WRT Common Stock obtained by dividing DLBW's Allowed Secured Claim ("Secured
Claim") amount by a purchase price of $3.50 per share, (iv) the purchase by DLBW
of all shares of New WRT Common Stock not otherwise purchased pursuant to the
Rights Offering, (v) the transfer by DLB of the WCBB Assets to the Company along
with the associated P&A trust fund and associated funding obligation in exchange
for five million shares (5,000,000) of New WRT Common Stock, and (vi) the
funding by WRT of $3,000,000 to an entity (the "Litigation Entity") controlled
by an independent party for the benefit of most of the Company's existing
unsecured creditors. WRT transferred to the Litigation Entity any and all causes
of action, claims, rights of actions, suits or proceedings which have been or
could be asserted by WRT except for (a) the action to recover unpaid production
proceeds payable to WRT by Tri-Deck Oil & Gas Company and (b) the foreclosure
action to recover title to certain assets. Pursuant to the Plan, New WRT owns a
12% economic interest in the Litigation Entity and the remainder of the economic
interests in the Litigation Entity were allocated to unsecured creditors based
on their ownership percentage of the thirteen million eight hundred thousand
(13,800,000) shares distributed and issued as described in (i) and (ii) above.
The Plan became effective on July 11, 1997 (the "Effective Date").
Upon the July 11, 1997 Effective Date of the Plan, New WRT became the
owner of one hundred percent (100%) of the working interest in the shallow
reservoirs above the Rob "C" marker located at approximately 10,500 feet, at
WCBB. The proceeds from the Rights Offering were utilized to provide the cash
necessary to satisfy Administrative and Priority Claims ("APC"), fund the
Litigation Entity with $3,000,000 and provide New WRT with working capital. New
WRT will continue to conduct business and own and
10
WRT ENERGY CORPORATION
(A DEBTOR-IN-POSSESSION AS OF FEBRUARY 14, 1996)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
operate its oil and gas properties. The Litigation Entity will pursue Causes of
Action ("Causes of Action") assigned to it under the Plan.
The accompanying financial statements of the Company have been prepared
on a going concern basis, which contemplates the realization of assets and the
liquidation of liabilities in the ordinary course of business. As described
above, the Company filed for reorganization under Chapter 11 of the United
States Bankruptcy Code. The consolidated financial statements do not include any
adjustments relating to recoverability and classification of reported asset
amounts or the amounts and classification of liabilities that might result from
the ultimate resolution of the Plan of Reorganization. On the Effective Date of
the Plan, the Company utilized fresh-start reporting in accordance with the
requirements of Statement of Position number 90-7 "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). The
application of SOP 90-7 will result in the creation of a new reporting entity
for financial reporting purposes having no retained earnings or accumulated
deficit.
An unaudited pro forma condensed balance sheet reflecting the
anticipated fresh start reporting had the Plan become effective on March 31,
1997 follows:
11
WRT ENERGY CORPORATION
(A DEBTOR-IN-POSSESSION AS OF FEBRUARY 14, 1996)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
WRT
HISTORICAL REORGANIZATION PRO FORMA
ASSETS WRT ADJUSTMENTS CONSOLIDATED
--------- --------- -------
Current assets:
Cash and cash equivalents $ 7,776 $ 1,598 $ 9,374
Accounts receivable 1,906 -- 1,906
Prepaid expenses and other 1,159 -- 1,159
--------- --------- -------
Total current assets 10,841 1,598 12,439
--------- --------- -------
Property and equipment, at cost
Oil and natural gas properties
subject to amortization 78,028 (2,754) 75,274
Oil and natural gas properties
not subject to amortization -- 5,000 5,000
Other property and equipment 5,193 (2,255) 2,938
Accumulated depreciation,
depletion and amortization (27,523) 27,523 --
--------- --------- -------
55,698 27,514 83,212
--------- --------- -------
Other assets 1,167 (97) 1,070
--------- --------- -------
Total assets $ 67,706 $ 29,015 $96,721
========= ========= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued expenses, and other $ 6,253 $ (862) $ 5,391
Pre-petition liabilities not subject to compromise 16,740 (16,740) --
Pre-petition liabilities subject to compromise 136,079 (136,079) --
--------- --------- -------
Total current liabilities 159,072 (153,681) 5,391
--------- --------- -------
Long-term debt -- 15,000 15,000
Shareholders' equity:
Preferred stock 27,677 (27,677) --
Common stock 95 126 221
Additional paid-in capital 39,571 36,538 76,109
Retained earnings (deficit) (158,377) 158,377 --
Treasury stock (332) 332 --
--------- --------- -------
Total shareholders' equity (91,366) 167,696 76,330
--------- --------- -------
Total liabilities and shareholder's equity $ 67,706 $ 29,016 $96,721
========= ========= =======
12
WRT ENERGY CORPORATION
(A DEBTOR-IN-POSSESSION AS OF FEBRUARY 14, 1996)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
(3) SENIOR NOTE OFFERING AND CREDIT FACILITY
In December 1994, the Company entered into a $40,000,000 credit facility
(the "'Credit Facility") with International Nederlanden (U. S.) Capital
Corporation ("INCC") that was secured by substantially all of the Company's
assets. The Company borrowed $15,000,000 thereunder to purchase the Initial LLOG
Property ("LLOG") In March 1995, $12,000,000 of the outstanding borrowings under
the Credit Facility was repaid from the proceeds of the Offering. During 1995,
the Company borrowed an additional $12,000,000 under the Credit Facility,
bringing the outstanding borrowings to $15,000,000 the maximum amount of
borrowings available under the Credit Facility. On December 31, 1995, the Credit
Facility converted to a term loan whereby quarterly principal payments of
one-sixteenth of the outstanding indebtedness became due and payable.
In February 1995, the Company offered 100,000 Units consisting of
$100,000,000 aggregate principal amount of 13 7/8% Senior Notes Due 2002 (the
"Senior Notes") and warrants to purchase an aggregate of 800,000 shares of the
Company's Common Stock (the "Offering"). The net proceeds from the Offering
were used to acquire a second group of oil and gas properties owned by LLOG (the
"Remaining LLOG Group"), to repay both the $7,500,000 bridge loan and
substantially all borrowings under the Credit Facility (defined herein), to
acquire an additional working interest in the West Cote Blanche Bay Field and
for general corporate purposes.
At March 31, 1997 and December 31, 1996, the Company was in default under
certain financial covenants of the Credit Facility. In addition, due to the
bankruptcy filing, the Company was in default under the Indenture ("Indenture")
pursuant to which the Senior Notes were issued. Accordingly, all such debt has
been classified as current in the Company's March 31, 1997 and December 31, 1996
financial statements. While in bankruptcy, INCC and holders of the Senior Notes
were stayed from enforcing certain remedies provided for in the Credit Facility
and the Indenture, respectively. The Company did not make the March 1, 1996 or
subsequent interest payments on the Senior Notes and pursuant to an order of the
Bankruptcy Court did not make the scheduled interest payment of $381,000 to INCC
on February 28, 1996 or any other subsequent interest payments. On the
Effective Date, the Company entered into a new loan agreement with ING (U.S.)
Capital Corporation (successor to INCC) ("ING"), the terms of which required
the payoff of the $15,000,000 in principal and interest outstanding on the old
credit agreement with proceeds of the new loan. Also pursuant to the Plan, the
Senior Notes were cancelled.
(4) LOSS PER SHARE
Loss per share computations are calculated on the weighted average of
common shares and common share equivalents. Common stock options and warrants
are considered to be common share equivalents and are used to calculate earnings
(loss) per common and common equivalent share except when they are
anti-dilutive. Loss per common and common equivalent share for the three months
ended March 31, 1997 and 1996 do not reflect the exercise of the options and
warrants or conversion of the preferred stock as the effect is anti-dilutive.
13
WRT ENERGY CORPORATION
(A DEBTOR-IN-POSSESSION AS OF FEBRUARY 14, 1996)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
(5) REORGANIZATION COSTS
During the three months ended March 31, 1997, the Company incurred
$1,026,000 in reorganization costs, primarily consisting of professional fees.
(6) JOINT VENTURE AGREEMENT
Pursuant to a Joint Venture Agreement dated October 18, 1991 (the "Joint
Venture Agreement"), the Company entered into a joint venture to develop certain
oil and gas properties with Tricore Energy Venture, L.P., a Texas limited
partnership ("Tricore"), and Stag Energy Corporation ("Stag").
Under the terms of the Tricore agreements, Tricore is to contribute the
capitalization required to complete the development of selected prospects, and
Stag and the Company are to contribute, or arrange for the contribution of, the
prospects to be developed.
The allocation of the net income, profits, credits, gains and losses of the
joint venture are distributed as follows:
Initial Ongoing
Party Allocation Allocation
----- ---------- ----------
Tricore 70% 55%
WRT 25% 35%
Stag 5% 10%
The distributions convert from the initial to the ongoing allocation upon
Tricore receiving aggregate distributions equal to 125% of its initial
contributions to the joint venture.
In March 1995, the Company contributed the K.G. Wilbert No. 1 well, located
in Iberville Parish, Louisiana, the Atkinson No. 2 well, located in Hayes Field
in Jefferson Davis Parish, Louisiana, and State Lease 8396 #1 and #2 wells,
located in South Atchafalaya Bay Field in St. Mary Parish, Louisiana, to the
joint venture and received $867,850 as compensation for the recompletion and
field services rendered. The cash received was a recovery of costs incurred, and
no field service revenues were recognized.
In July 1994, the Company contributed a portion of its interest in the
Exxon Fee #23 well, located in Lac Blanc Field in Vermilion Parish, to the
joint venture and received $1,200,000 as compensation for the recompletion of
the well. The cash received was a recovery of costs incurred and no field
service revenues were recognized.
In March 1993, the Company contributed the Delcambre No. 1 well, located
in Tigre Lagoon Field in Vermilion Parish, Louisiana and the Summers No. 1 well
located in North Rowan Field in Brazoria County, Texas, to the joint venture and
received $2,000,000 as compensation for recompletion and wireline services
rendered. The cash received was a recovery of costs incurred, and not field
service revenues related to the recompletion and wireline services rendered
were recognized.
In March 1992, Tricore paid the Company $1,300,000 for the turnkey
development of the Delcambre A-2 well located in Tigre Lagoon Field in
Vermilion Parish, Louisiana. The Company used the funds to recover the costs of
drilling the well and as compensation for wireline services rendered. The
Company recognized field service revenues to the extent that cash received
exceeded its costs in the property, however, no field service revenue was
recorded related to the initial 25% joint venture interest received.
The Company has provided Tricore with a limited production guarantee based
on the minimum production schedule attached to the Tricore joint venture
agreement. The minimum production schedule assumes that Tricore's cumulative
share of the future gross production from jointly-owned properties will average
4,250 Mcf per day during the period between October 1, 1996 and September 30,
1997, 2,350 Mcf per day during the period October 1, 1997 and September 30,
1998, and 699 Mcf per day during the period October 1, 1998 and September 30,
1999. The minimum production also assumes that all future gas production
allocated to Tricore will be sold at a price of $1.50 per Mcf. As long as either
the actual volume of natural gas delivered or the gross revenue allocated to
Tricore exceeds the cumulative values reflected in the
14
WRT ENERGY CORPORATION
(A DEBTOR-IN-POSSESSION AS OF FEBRUARY 14, 1996)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
minimum production schedule, the Company will have no current liability to
Tricore under the production guarantee. Pursuant to the Joint Venture Agreement
if the production during any annual period, commencing October 1 through
September 30, is less than the minimum production levels required by the Joint
Venture Agreement, the Company is required to eliminate the annual production
deficit by delivering sufficient quantities of gas from other properties in
twelve equal monthly installments, commencing the following December 1, or by
the issuance to the venture of registered debt or equity securities which have a
fair market value equal to the required payment. As collateral for the Company's
obligations under the production guarantee, Tricore holds a partial assignment
of an interest in the West Cote Blanche Bay Field. This 4.68% working interest
(3.72% net revenue interest) assignment was made subject to the terms and
provisions of the Joint Venture Agreement. Upon satisfaction of the production
guarantee, Tricore is required to execute and deliver a release of the partial
assignment.
As a result of significant production declines from jointly-owned
properties, notably the Exxon Fee #23 well, production did not exceed the
minimum required under the guarantee for the period commencing October 1, 1995
to September 30, 1996. In addition, due to the substantial reserve losses
incurred during 1996 and 1995, the estimated future gross revenues from the
joint venture wells are not adequate over the remaining term of the guarantee.
As a result, the Company recorded in 1995 and 1996, minimum production guarantee
charges of $5,555,000 and $3,591,000, respectively. The $9,146,000 liability
recognized at March 31, 1997 represents the Company's estimated ultimate
obligation to the joint venture, including the disallowance of certain tax
credits as discussed below, net of estimated production volumes and gross
revenues accruing to the joint venture based upon the Company's year-end
estimates of proved oil and gas reserves which are zero.
Pursuant to the terms of the production guarantee, if any of the gas
production from joint venture properties qualifies for the nonconventional fuels
tax credit provided for by Internal Revenue Code Section 29, then 150% of that
tax credit shall be included in the calculation of gross revenues for purposes
of the guarantee. Based upon a certification by the Louisiana Department of
Natural Resources ("DNR"), a significant amount of the production attributable
to the joint venture qualified under Section 107(c)(2) of the Natural Gas Policy
Act of 1978 (the "NGPA") as gas produced from geopressured brine. As required
under the NGPA, the DNR's determination was forwarded to the FERC for review. In
April 1995, the FERC reversed the position of the DNR, rejecting the
qualification of the wells under Section 107(c)(2) of the NGPA. The Company
appealed the FERC determination to the United States Court of Appeals for the
Fifth Circuit, located in New Orleans, Louisiana. In February 1997, the United
States Court of Appeals for the Fifth Circuit affirmed the FERC's determination.
On January 14, 1997, the Company initiated an adversary proceeding to
obtain a declaration of the invalidity of the security interests or liens
securing Tricore's asserted secured claim of "up to $9,224,000" or alternatively
for avoidance of such security interests or liens pursuant to Sections 544 and
547 of the Bankruptcy Code. Such suit is pending as of the date of this report.
On March 7, 1997, the Company also filed an objection to the asserted claim of
Tricore (i) under Section 502(d) of the Bankruptcy Code seeking to disallow such
asserted Claim in full on the grounds that Tricore is the transferee of a
transfer available under Sections 544 and 547 of the Bankruptcy Code, and (ii)
under Section 502(c) of the Bankruptcy Code seeking to estimate such
15
WRT ENERGY CORPORATION
(A DEBTOR-IN-POSSESSION AS OF FEBRUARY 14, 1996)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
asserted claim on the grounds that it is a contingent claim the liquidation of
which would unduly delay the administration of the Reorganization Case. On June
19, 1997, Tricore filed an amendment to reduce their proof of claim to
$9,064,000 from $9,224,000. Nevertheless, to the extent that Tricore is
determined to be a secured claim, the Plan provides for the claim to be paid in
full. See Part II Item 1 for further discussion. The Company is currently
negotiating a settlement with Tricore pursuant to their claim.
(7) CONTINGENCIES
On December 10, 1992, the Company, one of its executives, a former
executive and others instituted a lawsuit against Bear, Stearns & Co. Inc.
("Bear Stearns"), Drake Capital Securities, Inc. ("Drake"), Steven Antebi
("Antebi") and Jerry Friedman ("Friedman") in the District Court of Harris
County, Texas 133rd Judicial District. After settling with Drake and Friedman,
the plaintiffs commenced trial on February 28, 1995. On March 21, 1995, the jury
returned a verdict in favor of the Company and five of the Company's
shareholders against Antebi for approximately $1,100,000. Pursuant to the jury
verdict, advice of outside counsel and management's belief that recovery of its
legal fees was probable, the Company recorded as a receivable approximately
$1,100,000 of costs incurred in connection with the litigation. The Company,
however, considered the jury verdict to be insufficient. Accordingly, the
Company requested, and on August 4, 1995 was granted, a new trial. Absent the
jury verdict from the original trial, and considering the uncertainty regarding
the timing of possible recovery in a new trial, the Company and its outside
counsel concluded that they could no longer consider the recovery of the
receivable to be probable. Therefore, the Company wrote off this receivable in
the third quarter of 1995. Prior to commencement of the new trial, the case went
to mediation and was settled on February 16, 1996 for $600,000 plus court costs
of approximately $69,000, subject to the approval of the Bankruptcy Court.
Consequently on April 22, 1996, WRT filed a Motion for Authority to Compromise
the Litigation, requesting that the settlement be approved and that the
distribution of proceeds generated therefrom be authorized to the respective
parties to the litigation pursuant to the Settlement Agreement reached. Due to
objections raised as to the distribution of the litigation proceeds, the
Bankruptcy Court approved the Settlement Agreement but instructed that a
subsequent motion be provided to resolve the issue of disposition of the
proceeds. As a result, on August 27, 1996, WRT filed a Motion for Authorization
to finally settle distribution of the litigation proceeds. On September 10,
1996, the Bankruptcy Court approved such motion and the proceeds have since been
distributed accordingly, including the distribution of approximately $145,000 to
WRT, which was recorded as Other Income for the year ended December 31, 1996.
Settlement funds of $154,000 attributable to one of the Company's former
executives has been held in escrow, pending final resolution of claims of the
WRT bankruptcy estate, if any, against the former executive.
During 1996, WRT received notice from a third party claiming that WRT's
title has failed as to approximately 43 acres in the Bayou Pigeon Field. Some
or all of the acreage in dispute is considered to be productive in three
separate production units. Assuming that WRT's title is flawed, WRT's working
interest in three units would be reduced from 100% of each unit to
approximately 7% (5% NRI), 75% (63% NRI), and 95% (72% NRI), respectively. The
financial statements as of March 31, 1997 and for the year ended December 31,
1996 and for the three months ended March 31, 1997 and 1996, reflect operating
results and proved reserves
16
WRT ENERGY CORPORATION
(A DEBTOR-IN-POSSESSION AS OF FEBRUARY 14, 1996)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
discounted for this possible title failure. As the title failure predates its
ownership of the field, WRT is currently evaluating its recourse against the
predecessors-in-title relative to this issue. The Company is currently
negotiating settlement with the Third Party pursuant to their claim.
During 1995, the Company entered into a marketing agreement with Tri-Deck
Oil and Gas Company ("Tri-Deck") pursuant to which Tri-Deck would market all of
WRT's oil and gas production. Subsequent to the agreement, Tri-Deck's principal
and WRT's Director of Marketing, James Florence, assigned to Plains Marketing
Tri-Deck's right to market WRT's oil production and assigned to Perry Oil & Gas
("Perry Gas") Tri-Deck's right to market WRT's gas production. During early
1996, Tri-Deck failed to make payments to WRT attributable to several months of
WRT's gas production. Consequently, on May 20, 1996 the Company filed a Motion
to Reject the Tri-Deck Marketing Agreement and on May 29, 1996 the Company
initiated an adversary proceeding against Tri-Deck and Perry Gas. Perry Gas was
the party which ultimately purchased the Company's gas production for the months
in question.
With respect to the Motion to Reject, the Bankruptcy Court authorized the
rejection and directed Tri-Deck and WRT to determine the amount of production
proceeds attributable to WRT's June 1996 gas production which are payable to
WRT. Thereafter, Perry Gas made payment to WRT of the June gas proceeds less
$75,000 for a set-off claim by Perry Gas, which is subject to further
consideration by the Bankruptcy Court. Perry Gas subsequently filed an
administrative claim in the Chapter 11 case, seeking recovery for damages
allegedly arising out of WRT's conduct in connection with its rejection of the
Tri-Deck contract and related negotiations with Perry Gas. By decision dated
July 3, 1997, the Bankruptcy court allowed, in part, Perry Gas' administrative
claim, in the aggregate amount of approximately $64,000, and directed Perry Gas
to obtain payment of such amount from the Perry Setoff Escrow, which as result
of this payment currently has a balance of approximately $10,000.
With respect to the adversary proceeding, WRT sought recovery from Tri-Deck
and/or Perry Gas of all unpaid production proceeds payable to WRT under the
marketing agreement and the issuance of a temporary restraining order and
preliminary injunction against both parties to prevent further disposition of
such proceeds pending the outcome of the proceedings. On May 31, 1996, the
Bankruptcy Court entered a consensual temporary restraining order against both
Tri-Deck and Perry Gas. On June 18, 1996, a preliminary injunction was entered
by the Bankruptcy Court which required Perry Gas to segregate into a separate
depository account the funds due for the purchase of WRT's April and May 1996
gas production from Tri-Deck. Subsequently, upon motion by WRT the Bankruptcy
Court ordered such funds to be placed into the Bankruptcy Court's registry, as
Perry Gas had made certain withdrawals from the separate depository account
without authorization by the Bankruptcy Court. As of October 1, 1997, funds in
the amount of approximately $1,700,000 remain in the registry of the Bankruptcy
Court. On April 1, 1997, WRT moved for partial summary judgement with respect
to Perry Gas seeking release of the escrow funds, as well as additional funds
from Perry Gas attributable to previous miscalculations of the amounts owed by
Perry Gas. At a hearing held on May 27, 1997, the Bankruptcy Court denied
WRT's motion to the extent that it sought additional payments by Perry Gas to
WRT and reserved decision with respect to the disbursement to WRT of the funds
currently in the Court's registry. On July 9, 1997, Perry Gas filed its own
summary judgement motion with respect to its assertion that it is entitled to
certain adjustments for prior overpayments in the amount of approximately
$120,000. At oral argument on August 26, 1997, Perry requested permission to
amend its motion and subsequently filed an amended affidavit reducing the
amount claimed to approximately $51,000.
Other unasserted claims against the Company may be alleged as a result of
the Plan. Management cannot estimate the impact of such unasserted claims on the
consolidated financial statements at March 31, 1997.
17
WRT ENERGY CORPORATION
(A DEBTOR-IN-POSSESSION AS OF FEBRUARY 14, 1996)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
(8) EXAMINER'S REPORT
On August 13, 1996, the Bankruptcy Court executed and entered its Order
Appointing Examiner directing the United States Trustee to appoint a
disinterested person as examiner in the Company's bankruptcy case. The Court
ordered the appointed examiner ("Examiner") to file a report "of the
investigation conducted, including any fact ascertained by the examiner
pertaining to fraud, dishonesty, incompetence, misconduct, mismanagement or
irregularity in the management of the affairs of the Company".
Additionally, the Examiner investigated insider transactions involving
current and former officers of the Company, the Company's purchase of oil and
gas properties in the Napoleonville Field, the purchase of leases in the South
Hackberry and East Hackberry Fields, transactions related to the purchase and
sale of certain workover rigs and marine equipment and related contracts, the
marketing of the Company's oil and gas production, claims acquisition by an
investment company and transactions with a certain joint venture partner. The
Examiner's final report dated April 2, 1997 recommends numerous actions for
recovery of property or damages for the Company's estate which appear to exist
and should be pursued. Management does not believe the resolution of the matters
referred to in the Examiner's report will have a material impact on the
Company's consolidated financial statements or results of operations.
Pursuant to the Plan, all of the Company's possible causes of action
against third parties (with the exception of certain litigation related to
recovery of marine and rig equipment assets and Tri-Deck), existing as of the
effective date of the Plan, transferred into a "Litigation Trust" controlled by
an independent party for the benefit of most of the Company's existing unsecured
creditors. The Company retains a 12% interest in the trust, net of Trustee fees
and expenses. Currently, management is aggressively pursuing those claims and
causes of action against Tri-Deck and Perry Gas relating to the recovery of
revenues for the sale of oil and gas production. See Part II Item 1 for
additional information. In addition, the Company has instituted legal action to
recover the aforementioned marine and rig equipment assets. See Part II Item 1
for further details. The Company has not recognized the potential value of
recoveries which may ultimately be obtained, if any, as a result of such causes
of action, or possible future actions, in the accompanying consolidated
financial statements.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DISCLOSURE REGARDING FORWARD - LOOKING STATEMENTS
This Form 10-Q includes "forward-looking statements" within the meaning
of Section 27A of the Securities Exchange Act of 1934 (the "Exchange Act"). All
statements, other than statements of historical facts, included in the Form 10-Q
that address activities, events or developments that the Company expects or
anticipates will or may occur in the future, including such things as estimated
future net revenues from oil and gas reserves and the present value thereof,
future capital expenditure (including the amount and nature thereof), business
strategy and measures to implement strategy, competitive strengths, goals,
expansion and growth of the Company's business and operations, plans, references
to future success, references to intentions as to future matters and other such
matters are forward-looking statements. These statements are based on certain
assumptions and analyses made by the Company in light of its experience and its
perception of historical trends, current conditions and expected future
developments as well as to other factors it believes are appropriate in the
circumstances. However, whether actual results and developments will conform
with the Company's expectations and predictions is subject to a number of risks
or uncertainties; general economic, market or business conditions; the
opportunities (or lack thereof) that may be presented to an pursued by the
Company; competitive actions by other oil and gas companies; changes in laws or
regulations; and other factors, many of which are beyond the control of the
Company. Consequently, all of the forward-looking statements made in the Form
10-Q are qualified by these cautionary statements and there can be no assurance
that the actual results or developments anticipated by the Company will be
realized, or even if realized, that they will have the expected consequences to
or effects on the Company or its business or operations.
The following discussion is intended to assist in an understanding of
the Company's financial position as of March 31, 1997 and December 31, 1996, and
its results of operations for the three months ended March 31, 1997 and 1996.
The Consolidated Financial Statements and Notes included in this report contain
additional information and should be referred to in conjunction with this
discussion. It is presumed that the readers have read or have access to WRT's
1996 annual report on Form 10-K.
19
FINANCIAL DATA (in thousands) THREE MONTHS ENDED
MARCH 31,
---------------------
1997 1996
------- --------
(UNAUDITED)
Revenues
Gas Sales $ 2,508 $ 2,968
Oil and condensate sales 2,873 3,264
Other 50 11
------- --------
5,431 6,243
------- --------
Expenses
Production costs 2,144 6,201
General & administrative 919 988
Minimum production guarantee obligations -- 2,778
Provision for doubtful accounts 91 --
------- --------
3,154 9,967
EBITDA 2,277 (3,724)
Depreciation, depletion & amortization 1,451 2,161
Earnings before interest and taxes 826 (5,885)
Interest expense 615 3,746
Reorganization costs 1,026 4,048
------- --------
Earnings (loss) before income taxes (815) (13,679)
Income taxes - deferred -- --
------- --------
Net loss (815) (13,679)
Dividends on preferred stock 712 712
------- --------
Net loss available to common shareholders $(1,527) $(14,391)
======= ========
PER SHARE DATA
Net loss $ (0.16) $ (1.51)
======= ========
Weighted average common and
common equivalent shares (000's) 9,539 9,539
======= ========
- ----------------------------------------
(1) The components of production costs may vary substantially among wells
depending on the methods of recovery employed and other factors, but
generally include administrative overhead, maintenance and repairs and
labor and utilities.
(2) EBITDA is defined as earnings before interest, taxes, depreciation,
depletion and amortization. EBITDA is an analytical measure frequently
used by securities analysts and is presented to provide additional
information about the Company's ability to meet its future debt
service, capital expenditure and working capital requirements. EBITDA
should not be considered as a better measure of the Company's operating
performance than net income or as a better measure of liquidity than
cash flow from operations.
20
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 AND 1996
During the three months ended March 31, 1997, the Company reported a net
loss before dividends on preferred stock of $0.8 million, an 94% decrease from
net loss before dividends on preferred stock of $13.7 million for the
corresponding period in 1996. After consideration of dividends on preferred
stock, the Company reported a net loss available to common shareholders of $1.5
million for the three months ended March 31, 1997, compared to a loss of $14.4
million in 1996. The decrease is due to the following factors:
OIL AND GAS REVENUES. During the three months ended March 31, 1997, the
Company reported oil and gas revenues of $5.4 million, a 13% decrease from $6.2
million for the comparable period in 1996. The decreased oil and gas sales
revenue during 1997 is attributable primarily to a combination of ordinary
production declines, unexpected losses of production from several key wells,
delays in expanding the Company's field infrastructure to support its increased
level of operations, mechanical difficulties in the Lac Blanc Field and
significant production declines in the West Cote Blanche Bay Field, which was
not operated by the Company during the first quarter of 1996 or 1997. The
decreases in production were partially offset by higher average oil and gas
prices for the three months ended March 31, 1997 compared to the same period in
1996. The following table summarizes the Company's oil and gas production and
related pricing for the three months ended March 31, 1997 and 1996:
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
Oil production volumes (Mbbls) 127 174
Gas production volumes (Mmcf) 833 1,081
Average oil price (per Bbl) $ 22.62 $ 18.71
Average gas price (per Mcf) $ 3.01 $ 2.75
PRODUCTION COSTS. Production costs decreased $4.1 million, or 65%, from
$6.2 million to $2.1 million for the three months ended March 31, 1997,
primarily as a result of higher non-operated lease expenses for the three months
ended March 31, 1996.
DEPRECIATION, DEPLETION AND AMORTIZATION. The $0.7 million, or 33%,
decrease in depreciation, depletion and amortization for the three months ended
March 31, 1997 was due to a 5 Bcfe, or 25% decrease in oil and gas production.
PROVISION FOR DOUBTFUL RECEIVABLES. At March 31, 1997, the Company charged
to expense a $0.01 million receivable. No such provisions were required during
the 1996 period.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 7% from $1.0 million for the three months ended March 31, 1996 to $0.9
million for the comparable period in 1997 as a result of the Company's change in
strategy resulting in a reduction in personnel and general and administrative
costs.
INTEREST EXPENSE. Interest expense decreased from $3.7 million for the
three months ended March 31, 1996 to $0.6 million for the comparable period in
1997 due to the Company's discontinuing the recording of interest expense on the
13 7/8% Senior Notes and Credit Facility as a result of the Reorganization Case.
21
REORGANIZATION COSTS. Reorganization costs decreased 75% from $4.0 million
for the three months ended March 31, 1996 to $1.0 million for the comparable
period in 1997 primarily as a result of the write off of $3.8 million of
capitalized debt issuance costs during the three months ended March 31, 1996.
Reorganization costs primarily consist of professional fees for the three months
ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow provided by operating activities for each of the three month
periods ended March 31, 1996 and 1997 was $2.4 million.
During the first three months of 1997, the Company invested $0.3 million in
property acquisition and development, as compared to $1.2 million during the
comparable period in 1996. This decrease is a result of the Chapter 11
Bankruptcy filing.
Net cash used in financing activities was $0.01 million for the three
months ended March 31, 1997 as compared to net cash used of $0.04 million during
the same period in 1996. This decrease is a direct result of the Company's
Chapter 11 Bankruptcy filing in February 1996 and a resulting lack of financing
activity during 1997.
CAPITAL REQUIREMENTS AND RESOURCES
The Company continued the suspension of its property acquisition,
development and workover activities while remaining a debtor in possession,
performing only those workovers approved by the Bankruptcy Court. Commencing
with the Effective Date of the Plan, the Company commenced its program to
increase production rates, lengthen the productive life of wells and increase
total proved reserves primarily through sidetracks out of and recompletions of
shut-in wells and installation of hydrocyclones on gas wells producing large
volumes of formation water. In addition, certain sidetrack and development
drilling locations have been identified as improving reservoir drainage and
increasing the ultimate recovery of reserves. Pursuant to this strategy, the
Company will be required to make substantial capital expenditures to fully
develop its oil and gas reserves. The Company's capital budget for 1997 is
approximately $9,132,000. Funding for this capital budget is anticipated to
come primarily from cash flow from operations, including the 50% interest in the
West Cote Blanche Bay properties acquired as part of the Reorganization Plan,
along with available net proceeds from the stock rights offering of
approximately $1,597,000.
On the Effective Date, the Company received gross proceeds from stock
rights offering of $13,300,000. Proceeds of this offering were used to pay the
interest and loan fees in connection with the INCC loan of $3,248,000, fund the
litigation trust called for in the plan of reorganization of $3,000,000, pay
pre-petition claims of $2,963,000 and pay administrative claims of $2,492,000,
leaving $1,597,000 which provided additional working capital for the Company.
22
In addition, on the Effective Date, the Company exchanged $123,845,000 in
unsecured debt for 10,000,000 shares of New WRT Stock and DLBW and Dublin
Acquisitions exchanged $9,293,000 of secured debt for 2,655,000 shares of New
WRT Stock.
23
PART II
ITEM 1. LEGAL PROCEEDINGS
On December 10, 1992, the Company, one of its executives, a former
executive and others instituted a lawsuit against Bear, Stearns & Co. Inc.
("Bear Stearns"), Drake Capital Securities, Inc. ("Drake"), Steven Antebi
("Antebi") and Jerry Friedman ("Friedman") in the District Court of Harris
County, Texas 133rd Judicial District. After settling with Drake and Friedman,
the plaintiffs commenced trial on February 28, 1995. On March 21, 1995, the jury
returned a verdict in favor of the Company and five of the Company's
shareholders against Antebi for approximately $1,100,000. Pursuant to the jury
verdict, advice of outside counsel and management's belief that recovery of its
legal fees was probable, the Company recorded as a receivable approximately
$1,100,000 of costs incurred in connection with the litigation. The Company,
however, considered the jury verdict to be insufficient. Accordingly, the
Company requested, and on August 4, 1995 was granted a new trial. Absent the
jury verdict from the original trial, and considering the uncertainty regarding
the timing of possible recovery in a new trial, the Company and its outside
counsel concluded that they could no longer consider the recovery of the
receivable to be probable. Therefore, the Company recorded a provision for this
receivable in the third quarter of 1995. Prior to commencement of the new trial,
the case went to mediation and was settled on February 16, 1996 for $600,000
plus court costs of approximately $69,000,subject to the approval of the
Bankruptcy Court. Consequently on April 22, 1996, WRT filed a Motion for
Authority to Compromise the litigation, requesting that the settlement be
approved and that the distribution of proceeds generated therefrom be authorized
to the respective parties to the litigation pursuant to the settlement agreement
reached. Due to objections raised as to the distribution of the litigation
proceeds, the Bankruptcy Court approved the settlement agreement but instructed
that a subsequent Motion be provided to resolve the issue of disposition of the
proceeds. As a result, on August 27, 1996, WRT filed a Motion for Authorization
to finally settle distribution of the litigation proceeds. On September 10,
1996, the Bankruptcy Court approved such motion and the proceeds have since been
distributed accordingly, including the distribution of approximately $145,000 to
WRT, which was recorded as Other Income for the year ended December 31, 1996.
Settlement funds of $154,000 attributable to one of the Company's former
executives have been held in escrow, pending final resolution of claims of the
WRT's bankruptcy estate if any, against the former executive.
In 1994, the Company received a certification from the DNR qualifying
certain gas production under Section 107(c)(2) of the Natural Gas Policy Act of
1978 the NGPA as gas produced from geopressured brine. As required under the
NGPA, the DNR's determination was forwarded to the FERC for review. In April
1995, the FERC reversed the position of the DNR, rejecting the qualification of
the wells under Section 17(c)(2) of the NGPA. The Company appealed the FERC
determination to the United States Court of Appeals for the Fifth Circuit,
located in New Orleans, Louisiana. In February 1997, the United States Court of
appeals for the Fifth Circuit affirmed the FERC's determination.
On December 18 and 19, 1995, two class-action shareholders' suits were
filed in the United States District Court for the Southern District of
California, seeking damages on behalf of a purported class of persons who
purchased the publicly-traded securities of the Company between October 20, 1993
and October 27, 1995. In these complaints, the plaintiffs have sued the Company,
certain members of its Board of Directors, and others alleging joint and several
24
liability for violations of Section 12(2) and Section 15 of the Securities Act
of 1933. The plaintiffs also complain that all defendants violated Section 10(b)
of the Securities Exchange Act of 1934 and Rule l0b-5 of the Securities Exchange
Commission. The individual defendants are alleged to be liable under Section
20(a) of the Securities Exchange Act of 1934. On February 23, 1996, a Notice of
Stay by reason of the Company's bankruptcy was filed in both actions. On March
21, 1996, all parties entered into a Stipulation whereby plaintiffs agreed to
consolidate the two actions under an amended and consolidated complaint. On June
1, 1996, by agreement of all parties, the case was transferred to the Southern
District of New York. By order dated May 2, 1997, the Bankruptcy Court
disallowed this lawsuit in full as it relates to the Company. As a result of the
Bankruptcy Court's disallowance of this lawsuit, the litigation will not have an
effect on the Company's financial condition or results of operations.
On September 28, 1995, a lawsuit was served against the Company,
Arnoult Equipment and Construction, Inc., Steven S. McGuire, Donald J. Arnoult
and others in the 24th Judicial District Court for the Parish of Jefferson,
State of Louisiana. The plaintiff, the former president, chief executive officer
and stockholder in certain oilfield service companies used by the Company in its
field development activities, alleged that the Company and others interfered
with his employment, ultimately resulting in his forced resignation from such
companies. The plaintiff further alleged the Company and others acted in a
manner that resulted in the devaluing of the services company's assets and
plaintiff's corresponding equity holdings in the companies. On November 9, 1995,
the Company, et al filed with the Court exceptions of no cause of action, no
right of action and vagueness. On June 6, 1997, the Bankruptcy Court disallowed
this lawsuit in full.
During 1996, WRT received notice from a third party claiming that WRT's
title has failed as to approximately 43 acres in the Bayou Pigeon Field. Some
or all of the acreage in the dispute is considered to be productive in three
separate production units. Assuming that WRT's title is flawed, WRT's working
interest in three units may be reduced from 100% of each unit to approximately
7% (5% NRI), 75% (63% NRI), and 95% (72% NRI), respectively. The financial
statements as of March 31, 1997 and December 31, 1996 and for the three-month
periods ended March 31, 1997 and 1996, reflect operating results and proved
reserves discounted for this possible title failure. As the title failure
predates its ownership of the field, WRT is currently evaluating its recourse
against the predecessors-in-title relative to this issue.
During 1995, the Company entered into a marketing agreement with
Tri-Deck Oil and Gas Company ("Tri-Deck") pursuant to which Tri-Deck would
market all of WRT's oil and gas production. Subsequent to the agreement,
Tri-Deck's principal and WRT's Director of Marketing, James Florence, assigned
to Plains Marketing Tri-Deck's right to market WRT's oil production and assigned
to Perry Oil & Gas ("Perry Gas") Tri-Deck's right to market WRT's gas
production. During early 1996, Tri-Deck failed to make payments to WRT
attributable to several months of WRT's gas production. Consequently, on May 20,
1996, the Company filed a Motion to Reject the Tri-Deck Marketing Agreement, and
on May 29, 1996, the Company initiated an adversary proceeding against Tri-Deck
and Perry Gas. Perry Gas was the party which ultimately purchased the Company's
gas production for the months in question.
With respect to the Motion to Reject, the Bankruptcy Court authorized
the rejection and directed Tri-Deck and WRT to determine the amount of
production proceeds attributable to WRT's June 1995 gas production which are
payable to WRT. Thereafter, Perry Gas made payment to WRT of the June 1995 gas
proceeds less $75,000 for a set-off claim by Perry Gas,
25
which is subject to further consideration by the Bankruptcy Court. Perry Gas
subsequently filed an administrative claim in the Chapter 11 case, seeking
recovery for damages allegedly arising out of WRT's conduct in connection with
its rejection of the Tri-Deck contract and related negotiations with Perry. By
decision dated July 3, 1997, the Bankruptcy Court allowed, in part, Perry Gas'
administrative claim, in the aggregate amount of approximately $64,000, and
directed Perry Gas to obtain payment of such amount from the Perry Setoff
Escrow, which as result of this payment, currently has a balance of
approximately $10,000.
With respect to the adversary proceeding, WRT sought recovery from
Tri-Deck and/or Perry Gas of all unpaid production proceeds payable to WRT under
the marketing agreement and the issuance of a temporary restraining order and
preliminary injunction against both parties to prevent further disposition of
such proceeds pending the outcome of the proceedings. On May 31, 1996, the
Bankruptcy Court entered a consensual temporary restraining order against both
Tri-Deck and Perry Gas. On June 18, 1996, a preliminary injunction was entered
by the Bankruptcy Court which required Perry Gas to segregate in to a separate
depository account the funds due for the purchase of WRT's April and May 1996
gas production from Tri-Deck. Subsequently, upon motion by WRT the Bankruptcy
Court ordered such funds to be placed into the Bankruptcy Court's registry, as
Perry Gas had made certain withdrawals from the separate depository account
without authorization by the Bankruptcy Court. As of October 1, 1997, funds in
the amount of approximately $1,700,000 remained in the registry of the
Bankruptcy Court. On April 1, 1997, WRT moved for partial summary judgement with
respect to Perry Gas seeking release of the escrow funds, as well as additional
funds from Perry Gas attributable to previous miscalculations of the amounts
owed by Perry Gas. At a hearing held on May 27, 1997, the Bankruptcy Court
denied WRT's motion to extent that it sought additional payments by Perry Gas to
WRT and reserved decision with respect to the disbursement to WRT of the funds
currently in the Court's registry. On July 9, 1997, Perry Gas filed its own
summary judgement motion with respect to its assertion that it is entitled to
certain adjustments for prior overpayments in the amount of approximately
$120,000. On August 26, 1997, Perry requested permission to amend its motion and
subsequently filed an amended affidavit reducing the amount claimed to
approximately $51,000.
On August 21, 1997, WRT filed a motion for leave to amend the adversary
complaint, which amended would, among other things, name as defendants, in
addition to Tri-Deck and Perry Gas, James Florence, Beth Perry Sewell, Steve
McGuire, Ronald Hale and Mark Miller, and included several additional causes of
action against both the original and these additional defendants. Oral argument
with respect to WRT's motion for leave to amend was heard on September 16, 1997,
and the motion is currently under review. In light of the pendency of WRT's
motion to amend, by Order dated September 5, 1997, the Court denied WRT's motion
for partial summary judgement, which had been under advisement since May 1997.
Ultimate resolution of the WRT - Tri-Deck - Perry Gas dispute, and thus
recovery by WRT of all amounts owed by Tri-Deck or Perry Gas, will also entail
Bankruptcy Court disposition of a counterclaim by Tri-Deck seeking, among other
things, damages for alleged tortious interference by WRT with Tri-Decks'
contractual relations with other Tri-Deck customers. Although management
believes that Tri-Deck's claim to the funds in the registry of the Bankruptcy
Court is invalid, and the aforementioned counterclaim is without merit, for
financial reporting purposes the receivable from Tri-Deck was fully reserved for
as of March 31, 1997.
26
On January 14, 1997, WRT initiated an adversary proceeding, WRT Energy
Corp. v Tri-Core Energy, L.P., (Adv. Pro. No 97AP-5003), in United States
Bankruptcy Court, Western District of Louisiana, Lafayette Opelousas Division,
to obtain a declaration of the invalidity of the security interest or liens
allegedly securing Tricore Energy Venture, LP's ("Tricore") asserted secured
claim of "up to $9,064,000" (as amended) or alternatively for avoidance of such
security interest or liens pursuant to Section 544 and 547 of the Bankruptcy
Code. Such suit is pending as of the date of this report. On March 7, 1997, the
Company also filed an objection to both the allowance and amount of Tricore's
claim. The objection has been consolidated with the adversary proceeding. On
August 6, 1997, the Bankruptcy Court issued an opinion holding that Tricore's
asserted security interest and liens were invalid under Louisiana law. See
further explanation regarding Tricore at Note 16, "Joint Venture Agreement" to
the Company's Consolidated Financial Statements. The Company is currently
negotiating a settlement with Tricore pursuant to their claim.
Other unasserted claims against the Company may be alleged as a result
of the Plan of Reorganization. Management cannot estimate the impact of such
unasserted claims on the consolidated financial statements at March 31, 1997.
27
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by item 601 of Regulation S-K are as follows:
10.0 Final Order Authorizing Use of Proceeds from Oil and Gas
Operations. (1)
10.1 Letter agreement by and among WRT Energy Corporation, DLB Oil &
Gas, Inc. and Wexford Management, LLC dated October 22, 1996.(2)
10.2 Debtor's and DLBW's First Amended Joint Plan of Reorganization
Under Chapter 11 of the United States Bankruptcy Code dated
January 20, 1997. (3)
10.3 First Amended Disclosure Statement Under 11 U.S.C. 1125 In
Support of Debtor's and DLBW's First Amended Joint Plan of
Reorganization Under Chapter 11 of the United States Bankruptcy
Code dated January 20, 1997. (3)
10.4 Second Amended Joint Plan of Reorganization. (4)
10.5 Second Amended Disclosure Statement. (4)
(b) Registrant filed the following reports on Form 8-K's
Form 8-K filed January 5, 1996, announcing filing of class action
suit by two shareholders of the Company.
Form 8-K filed February 14, 1996 announcement of filing of
Chapter 11 proceeding in the United States Bankruptcy Court for
the Western District of Louisiana in Opelousas and the retaining
of Jefferies & Company, Inc. as financial advisor to the Company.
Form 8-K filed November 6, 1996 announcement of Commitment
Agreement between WRT Energy Corporation, DLB Oil & Gas, Inc. and
Wexford Management LLC.
Form 8-K filed March 3, 1997 announcing the First Amended Joint
Plan of Reorganization, First Amended Disclosure Statement.
Form 8-K filed March 14, 1997 concerning March 5, 1997 hearing on
ongoing operations and use of available cash.
Form 8-K filed on June 16, 1997 to correct Form 8-K filing of Pro
Forma Statement of Operations.
Form 8-K filed on July 22, 1997 announcing consummation of the
Second Amended Joint Plan of Reorganization as amended.
(1) Filed with Form 8-K dated March 14, 1997.
28
(2) Filed with Form 8-K dated November 6, 1996
(3) Filed with Form 8-K dated March 3, 1997.
(4) Filed with Form 8-K dated July 22, 1997.
29
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WRT ENERGY CORPORATION
Date: December 1, 1997
/s/ Gary C. Hanna
------------------------------
Gary C. Hanna
President
/s/ Ronald D. Youtsey
------------------------------
Ronald D. Youtsey
Secretary and Treasurer
30
INDEX TO EXHIBITS
Exhibit No. Description
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27 Financial Data Schedule