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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended JUNE 30, 2004
or
[ ] 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)
Nevada 88-0448389
------ ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1001 FANNIN, SUITE 1700, 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. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
As of August 5, 2004, 69,332,422 shares of the registrant's common stock were
outstanding.
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ENDEAVOUR INTERNATIONAL CORPORATION
INDEX
Part I:
Item 1: Unaudited Condensed Financial Statements
Balance Sheets........................................................................................ 1
Statements of Operations.............................................................................. 3
Statements of Cash Flows.............................................................................. 4
Notes to Condensed Consolidated Financial Statements.................................................. 6
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations............. 20
Item 3: Quantitative and Qualitative Disclosures about Market Risk........................................ 23
Item 4: Controls and Procedures........................................................................... 23
Part II. Other Information
Item 1: Legal Proceedings................................................................................. 23
Item 2: Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.................. 24
Item 5: Other Information................................................................................. 24
Item 6: Exhibits and Reports On Form 8-K.................................................................. 25
Signatures...................................................................................................... 26
ITEM 1: UNAUDITED FINANCIAL STATEMENTS
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
June 30, December 31,
2004 2003
------------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 37,045 $ 57
Notes receivable - related party - 838
Other receivables 2,496 87
Interest receivable - related party - 158
Marketable securities - related party - 207
Marketable securities - 512
Prepaid expenses and other current assets 1,646 1,461
------------- ------------
Total current assets 41,187 3,320
Property and Equipment, Net:
Oil and gas properties, using full cost method:
Proved oil and gas properties, net - 71
Oil and gas properties excluded from amortization 8,476 6,342
Other oil and gas assets 4,433 -
Computer equipment 426 10
------------- ------------
Total property and equipment, net 13,335 6,423
Equity Interests in Oil and Gas Properties 2,498 2,839
Intangible Asset 4,800 -
Marketable Securities 1,740 -
Other Assets 3,500 -
------------- ------------
$ 67,060 $ 12,582
============= ============
See accompanying notes to consolidated financial statements.
1
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
June 30, December 31,
2004 2003
------------- ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 3,319 $ 5,236
Convertible notes - 3,243
Deferred equity option - 870
Other 115 23
------------- ------------
Total current liabilities 3,434 9,372
Long-term Obligations 3,660 30
------------- ------------
Total Liabilities 7,094 9,402
Commitments and Contingencies - -
Stockholders' Equity
Preferred stock - 4
Common stock 69 37
Additional paid-in capital 132,898 50,175
Less stock subscription receivables - (250)
Less stock subscription receivable - related party - (175)
Accumulated other comprehensive loss (108) (489)
Deferred compensation (11,520) -
Deficit accumulated during the development stage (61,373) (46,122)
------------- ------------
Total stockholders' equity 59,966 3,180
------------- ------------
Total Liabilities and Stockholders' Equity $ 67,060 $ 12,582
============= ============
See accompanying notes to consolidated financial statements.
2
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(Amounts in thousands, except per share data)
Three Months Six Months
Ended June 30, Ended June 30, January 13, 2000
-------------------------- ------------------------- (Inception) to
2004 2003 2004 2003 June 30, 2004
----------- ---------- ---------- --------- ----------------
Revenues $ - $ - $ 8 $ - $ 52
Cost of Operations:
Operating expenses - - 1 - 24
Depreciation and amortization 376 - 508 - 2,005
Impairment of oil and gas properties - - - - 25,168
Loss on equity investments in oil
and gas properties 77 34 134 53 1,378
Bad debt expense - related party - - - 900 2,351
General and administrative 2,950 712 5,483 939 8,868
General and administrative -
related party - 18 - 36 219
----------- ---------- ---------- --------- ----------
Total Expenses 3,403 764 6,126 1,928 40,013
----------- ---------- ---------- --------- ----------
Loss From Operations (3,403) (764) (6,118) (1,928) (39,961)
----------- ---------- ---------- --------- ----------
Other (Income) Expense:
Consideration given in excess of
fair value of identifiable assets
acquired - - 10,779 - 10,779
Interest income (160) (80) (244) (149) (943)
Interest expense - 1,089 254 1,935 7,135
(Gain) loss on sale of oil and gas
interest 895 - (355) - (355)
Loss on sale of marketable
securities - related party - 5 207 29 1,866
Gain on collection of promissory
notes (1,848) - (1,848) - (1,848)
Other (income) expense (3) (8) (6) (15) (258)
----------- ---------- ---------- --------- ----------
Total Other (Income) Expense (1,116) 1,006 8,787 1,800 16,376
----------- ---------- ---------- --------- ----------
Net Loss (2,287) (1,770) (14,905) (3,728) (56,337)
Preferred Stock Dividends 39 3,042 346 3,413 5,036
----------- ---------- ---------- --------- ----------
Net Loss to Common Stockholders $ (2,326) $ (4,812) $ (15,251) $ (7,141) $ (61,373)
=========== ========== ========== ========= ==========
Net Loss Per Common Share - Basic and
Diluted $ (0.03) $ (0.14) $ (0.26) $ (0.21)
========== ========== ========== =========
Weighted Average Number of Common
Shares Outstanding - Basic and
Diluted 69,271 34,316 59,173 33,538
========== ========== ========== =========
See accompanying notes to consolidated financial statements.
3
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)
Six Months
Ended June 30, January 13, 2000
-------------------------- (Inception) to
2004 2003 June 30, 2004
--------- -------- ----------------
Cash Flows from Operating Activities:
Net loss $ (14,905) $ (3,729) $ (56,337)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
DD&A expense 508 - 2,016
Impairment of oil and gas properties - - 25,168
Consideration given in excess of fair value of
identifiable assets acquired 10,779 - 10,779
Gain on collection of promissory notes (1,848) - (1,848)
Shares and options issued for services rendered 65 - 344
Amortization of deferred compensation 2,868 123 3,407
Fair market value adjustment of stock options 658 - 658
Gain on sale of assets (355) - (355)
Equity loss in affiliates 134 53 1,379
Loss on sale of marketable securities 207 29 1,866
Amortization of debt discount and financing costs 195 1,368 5,542
Amortization of discount on marketable securities - - (343)
Bad debt expense - 900 2,351
Other (11) 57 132
Changes in assets and liabilities:
(Increase) decrease in receivables 1,786 (51) 1,550
(Increase) decrease in other current assets (405) (88) (1,836)
Increase (decrease) in accounts payable and
accrued expenses 596 (586) 1,688
--------- -------- ---------
Net Cash Provided by (Used in) Operating Activities 272 (1,924) (3,839)
--------- -------- ---------
See accompanying notes to consolidated financial statements.
4
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)
Six Months
Ended June 30, January 13, 2000
--------------------- (Inception) to
2004 2003 June 30, 2004
--------- ------- ----------------
Cash Flows From Investing Activities:
Capital expenditures (2,640) (5,445) (24,103)
Acquisitions, net of cash acquired (66) - (2,416)
Notes receivable - related party - (136) (176)
Notes receivable - (20) (1,438)
Repayment of notes receivable - related party - 381 1,316
Repayment of notes receivable - 152 945
Investment in limited partnerships (936) (819) (5,165)
Purchase of marketable securities - (5) (4,309)
Proceeds from sale of assets 741 255 1,001
--------- ------- ---------
Net Cash Used in Investing Activities (2,901) (5,637) (34,345)
--------- ------- ---------
Cash Flows From Financing Activities:
Repayment of notes (1,751) - (2,951)
Repayment of notes - related party - (666) (1,399)
Proceeds from deferred equity option - - 870
Proceeds from borrowings - 1,348 17,199
Proceeds from borrowings - related party - 546 1,254
Loan costs paid - - (245)
Receipts of subscription receivable - 1,430 1,924
Receipts of subscription receivable - related party - 1,476 1,430
Purchase and retirement of common and preferred
stock (5,031) - (5,031)
Proceeds from common and preferred stock issued
and issuable 46,399 4,092 62,178
--------- ------- ---------
Net Cash Provided by Financing Activities 39,617 8,226 75,229
--------- ------- ---------
Net Increase in Cash and Cash Equivalents 36,988 665 37,045
Cash and Cash Equivalents, Beginning of Period 57 330 -
--------- ------- ---------
Cash and Cash Equivalents, End of Period $ 37,045 $ 995 $ 37,045
========= ======= =========
See accompanying notes to consolidated financial statements.
5
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements of Endeavour International Corporation,
formerly Continental Southern Resources, Inc., a Nevada corporation, included
herein 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. As used in these Notes to Condensed Consolidated Financial
Statements, the terms the "Company", "Endeavour", "we", "us", "our" and similar
terms refer to Endeavour International Corporation and, unless the context
indicates otherwise, its consolidated subsidiaries.
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.
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 - KSB for the year ended December 31, 2003 and Form
8-K filed on July 12, 2004. As discussed in Note 2, the Company changed its
method of accounting for oil and gas properties in the second quarter of 2004.
This Form 8-K provides restated financial information for the years ended
December 31, 2003 and 2002 and the quarters ended March 31, 2004 and 2003 under
this new method of accounting.
In 2004, the Company significantly restructured its business in a series of
simultaneous transactions (the Offering, Merger and Restructuring) and changed
its name to Endeavour International Corporation (see Note 3). In June 2004, our
common stock began trading on the American Stock Exchange under the symbol
"END." Prior to June 2004, our common stock traded on the OTC Bulletin Board.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
CHANGE IN METHOD OF ACCOUNTING FOR OIL AND GAS PROPERTIES
Effective April 1, 2004, we changed our method of accounting for oil and gas
properties from the successful efforts method to the full cost method. We
believe that the full cost method of accounting is more appropriate for
Endeavour in light of the significant changes in our operations that have
recently occurred. We believe capitalization of seismic and other
6
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
exploration technology expenditures as well as the cost of all exploratory wells
recognizes the value these expenditures add to the program of an exploration
focused company like Endeavour. Amortization of these costs over the life of the
discovered reserves provides a more appropriate method of matching revenues and
expenses related to our exploration strategy. Our technical strategy is founded
on a philosophy that regional petroleum systems analyses improve competitive
advantage, reduce exploration risk and optimize value creation. Regional
petroleum systems analysis has been successfully employed by our new management
and technical team in their past experiences to identify and commercialize
reserves in basins worldwide.
On February 26, 2004, we completed a series of transactions that significantly
transformed the nature and scope of our business. These changes include:
- a new management team;
- a new business strategy of exploration, exploitation and acquisition
that will be focused on the North Sea;
- the acquisition of NSNV, Inc. which possessed the seismic data and
management team that will be central to the Company's new strategy;
and
- a restructuring which resulted in the sale of substantially all
interests in U.S. oil and gas properties.
Prior to February 2004, the Company had no technical exploration and production
staff, and the Company did not have any production until the fourth quarter of
2003. The only producing property, which had minimal production, was sold in the
February 2004 restructuring.
We believe that the full cost method of accounting will more accurately reflect
the results of our future operations. The full cost method of accounting is used
by many independent oil and gas companies and its use will allow investors to
better assess the performance of the Company.
Under the full cost method, all acquisition, exploration and development costs,
including certain directly related employee costs and a portion of interest
expense, incurred for the purpose of finding oil and gas are capitalized. These
capitalized costs are accumulated in pools on a country - by - country basis.
Capitalized costs include the cost of drilling and equipping all wells, lease
acquisition costs, seismic and other geological and geophysical costs, delay
rentals and costs related to such activities. Employee costs associated with
production and other operating activities and general corporate activities are
expensed in the period incurred. For the three months ended June 30, 2004 and
2003, we capitalized certain employee - related costs of approximately $1.3
million and none, respectively. For the six months ended June 30, 2004 and 2003,
we capitalized certain employee - related costs of approximately $1.8 million
and none, respectively.
Where proved reserves are established, capitalized costs are limited on a
country - by - country basis (the ceiling test). The ceiling test is calculated
as the sum of the present value of future net cash flows related to estimated
production of proved reserves, using end - of - the-current-period prices,
discounted at 10%, plus the lower of cost or estimated fair value of unproved
properties,
7
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
all net of expected income tax effects. Under the ceiling test, if the
capitalized cost of a full cost pool exceeds the ceiling limitation, the excess
is charged as an impairment expense.
We utilize a single cost center for each country where we have operations for
amortization purposes. Any conveyances of properties are treated as adjustments
to the cost of oil and gas properties with no gain or loss recognized unless the
operations are suspended in the entire cost center or the conveyance is
significant in nature.
The costs of investments in unproved properties and portions of costs associated
with major development projects are excluded from the depreciation, depletion
and amortization ("DD&A") calculation until the project is evaluated. Since we
are in the start-up phase of our operations, all costs are currently associated
with undeveloped properties.
Unproved property costs include leasehold costs, seismic costs and other costs
incurred during the exploration phase. In areas where proved reserves are
established, significant unproved properties are evaluated periodically for
impairment. If a reduction in value has occurred, these property costs are
considered impaired and are transferred to the related full cost pool. Unproved
properties whose acquisition costs are not individually significant are
aggregated, and the portion of such costs estimated to be ultimately
nonproductive, based on experience, is amortized to the full cost pool over an
average holding period.
In countries where the existence of proved reserves has not yet been determined,
leasehold costs, seismic costs and other costs incurred during the exploration
phase remain capitalized in unproved property cost centers until proved reserves
have been established or until exploration activities cease. If exploration
activities result in the establishment of a proved reserve base, amounts in the
unproved property cost center are reclassified as proved properties and become
subject to depreciation, depletion and amortization and the application of the
ceiling test. If exploration efforts in a country are unsuccessful in
establishing proved reserves, it may be determined that the value of exploratory
costs incurred have been permanently diminished in part or in whole. Based on
the impairment evaluation and future exploration plans, the unproved property
cost centers related to areas of interest could be impaired, and accumulated
costs charged against earnings.
We have restated all prior financial statements as a result of the conversion to
full cost accounting. As a part of this process, all previous charges related to
the successful efforts method of accounting for oil and gas assets were
reversed, increasing the book value of properties as well as our stockholders'
equity. The full cost method, however, requires performing quarterly ceiling
tests to ensure that the carrying value of oil and gas assets on the balance
sheet is not overstated. In ceiling tests performed for the quarter ended
December 31, 2003 a $10.1 million impairment was recorded as capitalized costs
exceeded the ceiling test limits. The ceiling test was based on natural gas
prices of $4.735 per thousand cubic feet (Mcf) that included adjustments for
basis differentials and other pricing factors. Future quarterly full cost
ceiling tests will be based on the current market prices for both natural gas
and oil. The end
8
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
result of the full cost conversion is that both the book value of our properties
and stockholders' equity are at approximately the same levels that would have
existed if we had continued with the successful efforts method of accounting as
of December 31, 2003.
The effect of the accounting change on net loss follows:
January 13,
Three Three 2000
Months Months (Inception)
Ended Ended Six Months Year Ended December 31, to March 31,
March 31, March 31, Ended June 30, ------------------------- ------------
2004 2003 2003 2003 2002 2004
-------- -------- ------------ --------- --------- ------------
Net loss to common
stockholders under
successful efforts $(15,639) $ (7,598) $ (12,823) $ (37,248) $ (8,671) $ (61,675)
Adjustments to full cost 2,715 5,269 5,682 (3,986) 3,900 2,629
-------- -------- ------------ --------- -------- ---------
Net loss to common
stockholders under
full cost $(12,924) $ (2,329) $ (7,141) $ (41,234) $ (4,771) $ (59,046)
======== ======== ============ ========= ======== =========
Loss per basic and
diluted share under
successful efforts $ (0.32) $ (0.23) $ (0.39) $ (1.06) $ (0.43)
======== ======== ============ ========= ========
Loss per basic and
diluted share under
full cost $ (0.26) $ (0.07) $ (0.21) $ (1.18) $ (0.24)
======== ======== ============ ========= ========
The effect of the accounting change on the balance sheet at December 31, 2003
follows:
Deficit
Net Oil and Gas Accumulated
Property and During the
Equipment Development Stage
--------------- -----------------
Under successful efforts $ 6,499 $ (46,036)
Adjustments to full cost (86) (86)
------------ -------------
Under full cost $ 6,413 $ (46,122)
============ =============
STOCK-BASED COMPENSATION ARRANGEMENTS
In accordance with the provisions of Statement of Financial Accounting Standard
("SFAS") No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
our stock-based employee compensation plans are accounted for under the
intrinsic value method that requires compensation expense to be recorded only
if, on the date of grant, the current market price of our common stock exceeds
the exercise price the employee must pay for the stock. The intrinsic value of
unvested stock-based compensation is recorded as deferred compensation and
amortized on a straight-line basis over the vesting period of the award.
9
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
The net loss for 2003 does not include any stock-based compensation cost, as
there were no stock-based compensation arrangements outstanding through June 30,
2003. Stock-based compensation was granted in the fourth quarter of 2003 by our
previous Board of Directors. The modification in 2003 of options granted to
prior directors triggered variable accounting under APB 25 and FASB
interpretation No. 44. This requires recording compensation expense if the
modified option price is lower than the market price of the stock at the end of
each reporting period until the options expire or are exercised. For the second
quarter of 2004, we recorded a non-cash reduction in general and administrative
expenses of $448,000 related to these options. For the six months ended June 30,
2004, we recorded non-cash general and administrative expenses of $658,000
related to these options. See Note 9 for a discussion of the restricted stock
and stock option grants during 2004.
Had compensation expense for stock option plans been determined based on the
fair value at the grant date for awards through June 30, 2004 consistent with
the provisions of SFAS No. 123, our net loss and net loss per share would have
been reduced to the pro forma amounts indicated below:
Quarter Ended Six Months Ended
June 30, 2004 June 30, 2004
------------- ----------------
Net loss to common stockholders, as reported $ (2,326) $ (15,251)
Add:
Stock-based compensation expense as reported 701 2,667
Less:
Total stock-based compensation expense determined under
fair-value-based method for all awards, net of tax (2,572) (3,379)
--------- ----------
Pro forma net loss $ (4,197) $ (15,963)
========= ==========
Loss per share:
Basic - as reported $ (0.03) $ (0.26)
Basic - pro forma $ (0.06) $ (0.27)
These pro forma amounts may not be representative of future disclosures since
the estimated fair value of stock options is amortized to expense over the
vesting period and additional options may be issued in future years. The
estimated fair value of each option granted was calculated using the
Black-Scholes Method. The following summarizes the weighted average of the
assumptions used in the method.
10
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
2004
----
Risk free rate 4%
Expected years until exercise 7
Expected stock volatility 33%
Dividend yield -
OTHER PROPERTY, PLANT AND EQUIPMENT
Other oil and gas assets, computer equipment and furniture and fixtures are
recorded at cost, less accumulated depreciation. The assets are depreciated
using the straight-line method over their estimated useful lives of two to five
years.
NOTE 3 - THE OFFERING, MERGER AND RESTRUCTURING
On February 26, 2004, we completed a series of mutually interdependent
transactions to significantly expand our scope and objectives under the
leadership of a new management team.
THE OFFERING
In an offering of common stock (the "Offering") that closed February 26, 2004,
we issued 25 million shares of common stock at $2.00 per share in a private
placement. The estimated net proceeds of the Offering were $46 million, after
offering costs of $3.9 million. In addition, warrants to purchase 700,000 shares
of common stock at $2.00 per share were issued to the placement agent. The net
proceeds were used for the purchase of approximately 14.1 million shares of our
common stock and 103,500 shares of our Series B Preferred Stock for $5.3 million
and for $1.5 million for repayment of the principal amount of certain
outstanding convertible notes, with the remainder of the net proceeds to be used
for general corporate purposes, including potential acquisitions.
THE MERGER
Concurrent with the closing of the Offering, we acquired NSNV, Inc. ("NSNV"),
through a merger (the "Merger") of NSNV into a newly created Delaware corporate
subsidiary of the Company. The newly created subsidiary was the survivor of the
Merger and is a wholly-owned subsidiary of the company that was renamed
Endeavour Operating Corporation. NSNV was a private company owned by William L.
Transier, John N. Seitz and PGS Exploration (UK) Limited ("PGS"), a United
Kingdom corporation that is a provider of geophysical services. The former
shareholders of NSNV received an aggregate of 12.5 million shares of common
stock of the Company in the Merger, representing approximately 18.9% of
outstanding common stock of the Company immediately after the closing of the
Merger.
11
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
The Merger was accounted for as a purchase of assets and not a business
combination. Therefore, the consideration given was allocated to the fair value
of the identifiable assets and liabilities acquired. Any consideration given in
excess of the fair value of identifiable assets acquired was expensed.
The following is a calculation of the consideration given:
(amounts in thousands, except per share data)
Shares of common stock issued 12,500
Price per share of the Offering $ 2.00
---------
Fair value of stock issued 25,000
Add: Capitalized merger costs 452
---------
Consideration given $ 25,452
=========
Capitalized merger costs are the professional expenses for legal and accounting
services.
The consideration given for the Merger was allocated as follows:
(amounts in thousands)
Current assets $ 1,059
Property and equipment (*) 11,386
Intangible asset - workforce in place 4,800
Other assets 3,500
Current liabilities (2,478)
Long-term commitments (3,594)
----------
Fair value of net identifiable assets acquired 14,673
Consideration (25,452)
----------
Consideration given in excess of fair value of
identifiable assets acquired $ (10,779)
==========
(*) Includes $6.3 million of costs allocated to exploration seismic data.
THE RESTRUCTURING
Simultaneous with the consummation of the Merger and the Offering, we
restructured various financial and shareholder related items (the
"Restructuring"). Specifically, completed were the following:
- Repaid $1.5 million principal amount of our outstanding convertible
notes;
- Issued 1,026,624 shares of our common stock in exchange for the
$1.55 million principal balance and accrued interest due under the
Michael P. Marcus convertible debenture at a conversion price of
$1.75;
12
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
- Issued 375,000 shares of our common stock in exchange for the
$600,000 principal balance and accrued interest due under the
Trident convertible debenture at a conversion price of $1.60;
- Issued 2,808,824 shares of our common stock upon conversion of all
of the outstanding Series C Preferred Stock, and accrued dividends,
at a conversion price of $1.70 per share;
- Purchased all outstanding shares of Series A Preferred Stock and
20,212.86 shares of Series B Preferred Stock in exchange for certain
of our non-core assets (see below); and
- Purchased 14,097,672 shares of common stock and 103,500.07 shares of
Series B Preferred Stock from RAM Trading, Ltd. (who held more than
10% of our outstanding stock prior to this purchase) for
approximately $5.3 million in cash.
As consideration for the acquisition of all of the Series A Preferred Stock and
20,212.86 shares of the Series B Preferred Stock, we exchanged the following
non-core assets with CSOR Preferred Liquidation, LLC, a newly created entity
owned by the former holders of the Series A Preferred Stock and certain former
holders of the Series B Preferred Stock:
- 100% of the ownership interest in BWP Gas, LLC.;
- 864,560 shares of restricted common stock of BPK Resources, Inc.;
- 400,000 shares of common stock of Trimedia Group, Inc.;
- Note receivable due from CSR Hackberry, LLC in the principal amount
of $25,000;
- Note receivable due from Snipes, LLC in the principal amount of
$122,500;
- Subscription receivable due from FEQ Investments in the principal
amount of $175,000;
- Subscription receivable due from GWR Trust in the principal amount
of $250,000; and
- Note receivable due from BPK Resources, Inc. in the principal amount
of $670,000.
As consideration for services rendered in connection with the purchase of the
shares of common stock and Series B Preferred stock from RAM, we issued to an
unrelated party 300,000 shares of our common stock.
During the first quarter of 2004, the Company sold all of its limited
partnership units in Knox Miss Partners, L.P. for $5 million and received
$500,000 in cash and a $4.5 million short-term note that is secured by a pledge
of the limited partnership interest.
During the second quarter of 2004, we sold all of our equity interest in
Louisiana Shelf Partners, L.P. for $250,000 in cash and a $2 million contingent
deferred payment that is payable from proceeds from production of drilling
activities on the oil and gas leases held by Louisiana Shelf Partners, L.P. With
the uncertainty of collection of the contingent deferred payment, no receivable
was recorded at the time of the sale. In connection with the sale, we recorded a
loss of $895,000 during the second quarter of 2004.
13
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
NOTE 5 - MARKETABLE SECURITIES
In May 2004, we received 1.2 million common shares of Touchstone Resources USA,
Inc. (a public company trading on the OTC Bulletin Board) (the "Touchstone
Shares") in exchange for $3.6 million of convertible promissory notes of
Touchstone Resources, Ltd. (the "Touchstone Exchange"). At December 31, 2003,
the net book value of the convertible promissory notes was zero; as such, we
recorded a non-cash gain on the Touchstone Exchange of approximately $1.8
million, the market value of the Touchstone Shares on the date of the exchange.
The Touchstone Shares reflected in these financial statements are deemed by
management to be "available-for-sale" and, accordingly are reported at fair
value, with unrealized gains and losses reported in other comprehensive income.
At June 30, 2004, the fair value of the Touchstone Shares was $1.7 million with
a $108,000 unrealized loss recognized in other comprehensive income.
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
We had noncash investing activities with the purchase of NSNV for 12.5 million
shares of our common stock with a total purchase price of approximately $25
million. Therefore, the Merger increased current assets by $1 million, oil and
gas properties by $11.4 million, other assets by $8.3 million, current
liabilities by $2.5 million, other liabilities by $3.5 million, and equity by
$25 million through a noncash transaction that was not reflected in the
statement of cash flows. However, $66,000 of acquisition costs reflected in
"investing activities" in the statement of cash flows represents the cash
expenses paid in connection with the Merger, less the cash of NSNV on the date
of the Merger. Noncash investing activities also were incurred with the exchange
of certain non-core assets, including BWP Gas, LLC, for all of the Series A
Preferred Stock and 20,212.86 shares of the Series B Preferred Stock, and the
Touchstone Exchange. Noncash financing activities were also incurred, including
the conversion of all of our Series C Preferred Stock and a portion of our
convertible notes into common stock.
NOTE 7 - LEASES
We are the lessee of various items of computer equipment under capital leases
expiring in various years through 2006. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum lease
payments or the fair value of the assets. The assets are depreciated over the
lower of their related lease terms or their estimated productive lives.
Depreciation of assets under capital leases is included in depreciation expense.
Minimum future lease payments under capital leases as of June 30, 2004, for each
of the next three years and in the aggregate are:
14
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
Amount
(amounts in thousands) ------
Year Ended December 31,
2004 $ 64
2005 121
2006 26
------
Net minimum lease payments 211
Less: Amount representing interest (9)
------
Present value of net minimum lease payment $ 202
======
Interest rates on capitalized leases are approximately 3.5% and are imputed
based on the lower of the Company's incremental borrowing rate at the inception
of each lease or the lessor's implicit rate of return.
NOTE 8 - LOSS PER SHARE
Loss per common share is calculated in accordance with SFAS No. 128, "Earnings
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. Diluted loss per share is computed similarly to basic loss
per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if potentially
dilutive common shares had been issued and if the additional common shares were
dilutive. Shares associated with stock options, warrants and convertible debt
are not included because their inclusion would be antidilutive (i.e., reduce the
net loss per share). At June 30, 2004, there were potentially dilutive shares of
approximately 2.8 million.
15
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
NOTE 9 - DEFERRED COMPENSATION
Through June 30, 2004, we issued stock options and restricted shares of common
stock to our new management, directors and employees as follows:
Number of
Shares or
Options
-------
Grants Under the 2004 Incentive Plan (1):
Restricted stock vesting on January 1, 2005 278,375
Restricted stock vesting in thirds on each January 1st 2005 through 2007 520,000
Stock options vesting in thirds on each January 1st 2005 through 2007 (2) 1,877,500
---------
2,675,875
=========
Inducement Grants of Restricted Stock:
Vesting on January 1, 2005 731,250
Vesting in thirds on each January 1st 2005 through 2007 1,600,000
---------
2,331,250
=========
(1) The 2004 Incentive Plan is subject to the approval by a majority of the
votes entitled to be cast by holders of shares of Common Stock and
Preferred Stock, voting together as a class, who are represented in person
or by proxy at the 2004 annual meeting of stockholders, which is scheduled
to be held on August 24, 2004.
(2) All options have an exercise price of $2.00 per share except 20,000
options which have an exercise price of $3.78 per share.
Deferred compensation of $14.4 million was recorded in stockholders' equity for
the inducement grants and the grants under the 2004 Incentive Plan. For the
three and six months ended June 30, 2004, $1.8 million and $2.9 million,
respectively, was amortized to compensation expense, of which $0.4 million and
$0.7 million, respectively, was included in the capitalized certain employee -
related costs (see Note 2).
16
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
NOTE 10 - EQUITY
Our preferred stock and common stock outstanding follows:
June 30, December 31,
2004 2003
---- ----
(Amounts in thousands)
Preferred stock, Series A; $0.001 par value; authorized - None at 2004 and
9,500,000 shares at 2003; Shares issued and outstanding - None at 2004 and
4,090,713 at 2003 $ - $ 4
Preferred stock, Series B; $0.001 par value; authorized - 376,287 shares at
2004 and 500,000 shares at 2003; Shares issued and outstanding - 19,714 shares
at 2004 and 143,427 shares at 2003 $ - $ -
Preferred stock, Series C; $0.001 par value; authorized - None at 2004 and
1,500,000 shares at 2003; Shares issued and outstanding - None at 2004 and
477,500 at 2003 $ - $ -
Common Stock; $0.001 par value; authorized - None at 2004 and 150,000,000
at 2003; Shares issued and outstanding - 69,329,569 shares at 2004 and
37,144,668 at 2003 $ 69 $ 37
On February 4, 2004, in a private placement offering, 125,000 shares of our
common stock, $.001 par value per share, were issued at a purchase price of
$2.00 per share.
We exercised our call option to buy back 10 of the Company's 99 limited
partnership units in Knox Miss Partners, L.P. from RAM Trading, Ltd. on February
10, 2004 and issued 835,000 shares of our common stock in full payment of the
option. All of our interest in Knox Miss Partners, L.P. was sold in February
2004.
During the second quarter of 2004, in a private offering, we issued 175,000
shares of our common stock to fulfill a commitment made for services performed
in connection with the Merger.
Effective June 21, 2004, certificates of withdrawal were filed with respect to
our Series A and Series C preferred stock.
NOTE 11 - COMPREHENSIVE LOSS
Excluding net loss, our comprehensive loss is from the net unrealized loss on
marketable securities, which are classified as available-for-sale. The following
summarizes the components of comprehensive loss:
17
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
(amounts in thousands)
Quarter Ended June 30, Six Months Ended June 30,
------------------------ -------------------------
2004 2003 2004 2003
--------- --------- --------- --------
Net loss $ (2,287) $ (1,770) $ (14,905) $ (3,728)
Unrealized gain (loss) on marketable
securities (108) (247) 174 (582)
Reclassification adjustment for loss
realized in net loss above - - 207 -
--------- --------- --------- --------
Net impact on comprehensive loss (108) (247) 381 (582)
--------- --------- --------- --------
Comprehensive loss $ (2,395) $ (2,017) $ (14,524) $ (4,310)
========= ========= ========= ========
NOTE 12 - COMMITMENTS AND CONTINGENCIES
COMMITMENTS
As a part of the Merger, we acquired an obligation to purchase products and
services from PGS or its affiliates for a period of three years commencing on
December 16, 2003 as follows:
(amounts in thousands)
Year 1 $ 1,000
Year 2 1,500
Year 3 2,000
-------
$ 4,500
=======
LEGAL PROCEEDING
On or about March 4, 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 BWP Gas, L.L.C. ("BWP") and HBA Gas, Inc.
("HBA") (collectively "defendants") in the state court in Oklahoma City,
Oklahoma. In the petition, Plaintiffs allege that Endeavour intended to acquire
a majority of the membership interests in BWP and that HBA in turn entered into
an agreement to assign Plaintiff 2.5 million common shares of Endeavour stock
upon compliance by Plaintiffs with certain contractual obligations including but
not limited to completion and initial commercial production of the Mary #2-34
well, along with the presentation of a development plan and the commencement of
the next exploration or development well in the Potato Hills Deep Prospect.
Plaintiffs further allege in their petition that BWP, HBA and Endeavour are
alter egos of each other and jointly and severally liable to Plaintiffs for
failing to deliver to Plaintiffs the Endeavour common stock. Plaintiffs seek
delivery of the stock as well as a temporary
18
ENDEAVOUR INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
restraining order, a primary and permanent injunction (i) enjoining all
dilutions of Plaintiff rights pertaining to Endeavour stock; (ii) enjoining
Endeavour from all future stock issuances and transfers of assets not in the
ordinary course of business and (iii) prohibiting the alienation or encumbrance
of the Endeavour stock that is allegedly in Plaintiff's possession. On April 6,
2004, the defendants removed the action from the state court to the United
States District Court for the Western District of Oklahoma. Subsequently,
Endeavour made a motion for dismissal of the action for lack of jurisdiction
over Endeavour in Oklahoma. Management intends to litigate vigorously and
believes it has good and valid defenses beyond its jurisdictional defense.
However, as of this time, counsel is unable to opine on the outcome of the
litigation.
19
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 in the Company's Annual Report on Form 10-KSB 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
During the first quarter of 2004, we completed a series of mutually
interdependent transactions that significantly expanded our scope and objectives
- - the Offering, the Merger and the Restructuring as discussed in Note 3 to the
unaudited financial statements herein. With the transactions, we have a new
focus, primarily on international oil and gas exploration.
As a result of these transactions, all of our producing operations were sold as
well as our exploration activities in Mississippi. We retained our equity
interests in Thailand and Louisiana through the end of the first quarter;
however our equity interest in Louisiana was sold in May 2004. In addition, all
of the outstanding balances of our convertible debt were either repaid or
converted to common stock. Further, substantially all of our outstanding
preferred stock was repurchased or converted to common stock.
During the second quarter of 2004, we participated in the 22nd licensing round
in the United Kingdom in a significant manner. Acting alone and with others, we
submitted eight applications covering 21 blocks. Four of these applications were
promote applications and four were
20
ENDEAVOUR INTERNATIONAL CORPORATION
traditional applications. Pursuant to the applications, we committed to
undertake certain work obligations. We expect the United Kingdom government to
announce the results of the 22nd licensing round in August or September 2004. We
are also considering other opportunities in the United Kingdom sector of the
North Sea, including possible farm-ins to existing licenses.
Through a limited liability company in which we hold an interest, we have an
interest in the Phu Horm Gas Field Project, an onshore gas discovery in northern
Thailand. In May 2004, the Phu Horm Project was approved as a Production Area by
the Thailand Department of Mineral Fuels. Drilling of two additional appraisal
wells commenced during the second quarter of 2004, which are expected to be
completed in the fall of 2004. Engineering, design and permitting for the gas
production facilities for the project are continuing at this time. A gas sales
agreement is in place to provide gas to the existing Nam Phong power plant.
First gas sales are expected to commence from the Phu Horm Project in early
2006. In addition, we have interests in two exploration licenses in proximity to
the Phu Horm Project which have certain work commitments and obligations.
RESULTS OF OPERATIONS
General and administrative expenses increased to $3.0 million during the three
months ended June 30, 2004 as compared to $730,000 for the corresponding period
in 2003 and increased to $5.5 million during the six months ended June 30, 2004
as compared to $975,000 for the corresponding period in 2003. For the second
quarter of 2004, we recorded a non-cash reduction in general and administrative
expenses of $448,000 related to the mark-to-market adjustment of options under
variable plan accounting. For the six months ended June 30, 2004, we recorded
non-cash general and administrative expenses of $658,000 related to these same
options. In addition, general and administrative expenses for the second quarter
of 2004 included approximately $1.9 million in non-cash charges for the
amortization of deferred compensation granted to the new management and
employees after the Merger in February 2004, and $2.9 million for the six months
ended June 30, 2004. For the three months ended June 30, 2004 and 2003, we
capitalized certain employee - related costs of approximately $1.3 million and
none, respectively. For the six months ended June 30, 2004 and 2003, we
capitalized certain employee - related costs of approximately $1.8 million and
none, respectively. Expenses for the three months and six months ended June 30,
2003 consisted primarily of professional fees, compensation and consulting fees.
Bad debt expenses were $900,000 during the six months ended June 30, 2003 and
consisted of impairment charges related to our investment in Touchstone
Resources, Ltd. At December 31, 2003, all investments in Touchstone Resources,
Ltd. were fully impaired. As discussed in Note 5, we received 1.2 million shares
of Touchstone USA, Inc. in exchange for our convertible promissory notes of
Touchstone Resources, Ltd.
Other income increased to $1.1 million during the three months ended June 30,
2004 as compared to other expense of $1.0 million for the corresponding period
in 2003. The other income for the second quarter of 2004 consisted primarily of
$1.8 million in income related to the gain on the Touchstone Exchange, partially
offset by the $895,000 loss on the sale of our
21
ENDEAVOUR INTERNATIONAL CORPORATION
interest in Louisiana Shelf Partners, Inc. The other expense for the second
quarter of 2003 consisted primarily of interest expense on convertible debt.
Other expense increased to $8.8 million during the six months ended June 30,
2004 as compared of $1.8 million for the corresponding period in 2003. The 2004
expense consisted of a $10.8 million expense for consideration given in excess
of fair value of identifiable assets acquired in the Merger, interest expense of
$254,000 incurred primarily on outstanding convertible debt and a $207,000 loss
in on the sale of marketable securities as part of the Restructuring, partially
offset by $355,000 net gain in connection with our sales of our partnership
interests The 2003 other expense consisted primarily of interest expense of $1.9
million incurred on outstanding convertible debt. All of the convertible debt
was sold or converted to common stock as part of the Restructuring. With the
Restructuring of all of the outstanding convertible debt, we do not expect to
incur significant interest expense for the remainder of 2004.
LIQUIDITY AND CAPITAL RESOURCES
On February 4, 2004, a private placement for 125,000 shares of our common stock,
$.001 par value per share, at a purchase price of $2.00 per share, was
completed.
On February 26, 2004, we completed an offering of 25 million shares of our
common stock for estimated net proceeds of $46 million, after offering costs of
$3.9 million. In addition, warrants to purchase 700,000 shares of common stock
at an exercise price of $2.00 per share were issued to the placement agent. The
net proceeds were used for the purchase of approximately 14.1 million shares of
common stock and 103,500 shares of our Series B Preferred Stock for $5.3 million
and for the repayment of $1.8 million of the principal amount of certain
outstanding convertible notes and other notes, with the remainder of the net
proceeds to be used for general corporate purposes, including potential
acquisitions.
After completion of the Offering with $50 million of gross proceeds, we believe
we have sufficient funding at least through the end of 2005 to continue to
execute our business plan. Through the Restructuring, there is no outstanding
debt and only immaterial amounts of outstanding preferred stock. Therefore, we
do not expect to incur significant interest expense nor pay significant
preferred dividends for the remainder of 2004.
DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table sets forth the Company's obligations and commitments to make
future payments under its lease agreements and other long - term obligations as
of June 30, 2004:
Payments due by Period (in thousands)
----------------------------------------------------------------------
Total 1 Year 2-3 Years 4-5 Years After 5 Years
----- ------ --------- --------- -------------
Contractual Obligations
Capital leases for computer
equipment $ 211 $ 64 $ 147 $ - $ -
Purchase commitment 4,500 1,000 3,500 - -
------ ------ ------ ---- ----
Total Contractual Cash
Obligations $4,711 $1,064 $3,647 $ - $ -
====== ====== ====== ==== ====
22
ENDEAVOUR INTERNATIONAL CORPORATION
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our cash balances are primarily maintained in money market accounts and as such,
we do not believe we are exposed to significant market risk.
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") and our chief accounting officer (the "CAO"), of the effectiveness
of our disclosure controls and procedures pursuant to Rule 13a-15 of the
Securities Exchange Act of 1934. Based on those evaluations, the CEOs and CAO
believe:
(i) that our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports that we
file or submit 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 that such information is accumulated and
communicated to our management, including the CEOs 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 have been no significant changes in our internal controls over
financial reporting during the period covered by this report that has materially
affected, or are reasonably likely to materially affect, our control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On or about March 4, 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 BWP Gas, L.L.C. ("BWP") and HBA Gas, Inc.
("HBA") (collectively "defendants") in the state court in Oklahoma City,
Oklahoma. In the petition, Plaintiffs allege that Endeavour intended to acquire
a majority of the membership interests in BWP and that HBA in turn entered into
an agreement to assign Plaintiff 2.5 million common shares of Endeavour stock
upon compliance by Plaintiffs with certain contractual obligations including but
not limited to completion and initial
23
ENDEAVOUR INTERNATIONAL CORPORATION
commercial production of the Mary #2-34 well, along with the presentation of a
development plan and the commencement of the next exploration or development
well in the Potato Hills Deep Prospect. Plaintiffs further allege in their
petition that BWP, HBA and Endeavour are alter egos of each other and jointly
and severally liable to Plaintiffs for failing to deliver Plaintiffs the
Endeavour common stock. Plaintiffs seek delivery of the stock as well as a
temporary restraining order, a primary and permanent injunction (i) enjoining
all dilutions of Plaintiff rights pertaining to Endeavour stock; (ii) enjoining
Endeavour from all future stock issuances and transfers of assets not in the
ordinary course of business and (iii) prohibiting the alienation or encumbrance
of the Endeavour stock that is allegedly in Plaintiff's possession. On April 6,
2004, the defendants removed the action from the state court to the United
States District Court for the Western District of Oklahoma. Subsequently,
Endeavour made a motion for dismissal of the action for lack of jurisdiction
over Endeavour in Oklahoma. Management intends to litigate vigorously and
believes it has good and valid defenses beyond its jurisdictional defense.
However, as of this time counsel is unable to opine on the outcome of the
litigation.
ITEM 2: CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
In each of the following transactions, the securities were issued in a private
placement exempt from the registration requirements of the Securities Act of
1933, as amended, pursuant to Section 4(2) thereof or Rule 506 of Regulation D
promulgated thereunder without payment of underwriting discounts or commissions
to any persons.
On April 29, 2004, to fulfill a commitment made for services performed in
connection with the Merger, we issued 175,000 shares of our common stock in a
private offering.
ITEM 5. OTHER INFORMATION
Effective June 21, 2004, Certificates of Withdrawal to Certificate of
Designation were filed in Nevada with respect to the elimination of the Series A
Preferred Stock and the Series C Preferred Stock.
Effective July 7, 2004 the Board of Directors adopted an amendment to the
Company's Bylaws implementing a classified board consisting of Class I, Class II
and Class III directors. The initial term of the directors elected at the 2004
Annual Meeting of Stockholders (the "Annual Meeting"), which is scheduled to be
held on August 24, 2004, will be for (i) Class I directors until the next annual
meeting of stockholders after the Annual Meeting, (ii) Class II directors until
the second annual meeting of stockholders after the Annual Meeting and (iii) for
Class III directors until the third annual meeting of stockholders after the
Annual Meeting. Thereafter at each subsequent annual meeting of the Company's
stockholders, the directors of the class elected at such meeting will serve for
three-year terms.
24
ENDEAVOUR INTERNATIONAL CORPORATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
3.1 * Amended and Restated Bylaws.
3.2* Amended and Restated Articles of Incorporation.
3.3* Amended and Restated Certificate of Designation of Series B Preferred Stock filed February 26, 2004.
3.4* Articles of Merger filed February 27, 2004.
3.5* Certificate of Withdrawal to Certificate of Designation regarding Elimination of Series A Preferred Stock filed
June 21, 2004.
3.6* Certificate of Withdrawal to Certificate of Designation regarding Elimination of Series C Preferred Stock filed
June 21, 2004.
3.7* Specimen of Common Stock Certificate.
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 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 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.
* Filed herewith.
(b) Current Reports on Form 8-K filed during the three-month period ended June
30, 2004:
On April 2, 2004, we filed a Form 8-K/A dated February 27, 2004,
concerning the Offering, Merger and Restructuring. The item reported in such
Current Report was Item 7 (Financial Statements and Exhibits).
On May 4, 2004, we filed a Form 8-K dated April 29, 2004, concerning a
change in our independent auditors. The items reported in such Current Report
were Item 4 (Changes in Registrant's Certifying Accountant) and 7 (Financial
Statements and Exhibits).
On July 12, 2004, we filed a Form 8-K dated June 7, 2004, concerning our
change to the full cost method of accounting for oil and gas properties. The
items reported in such Current Report were Items 5 (Other Events and Regulation
FD Disclosure) and 7 (Financial Statements and Exhibits).
25
ENDEAVOUR INTERNATIONAL CORPORATION
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: August 6, 2004 /s/ William L. Transier /s/ John N. Seitz
-------------------------- ------------------------
William L. Transier John N. Seitz
Co-Chief Executive Officer Co-Chief Executive
Officer
/s/ Robert L. Thompson
-------------------------
Robert L. Thompson
Vice President and Chief
Accounting Officer
26
INDEX TO EXHIBITS
3.1 * Amended and Restated Bylaws.
3.2* Amended and Restated Articles of Incorporation.
3.3* Amended and Restated Certificate of Designation of Series B Preferred Stock filed February 26, 2004.
3.4* Articles of Merger filed February 27, 2004.
3.5* Certificate of Withdrawal to Certificate of Designation regarding Elimination of Series A Preferred Stock filed
June 21, 2004.
3.6* Certificate of Withdrawal to Certificate of Designation regarding Elimination of Series C Preferred Stock filed
June 21, 2004.
3.7* Specimen of Common Stock Certificate.
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 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 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.
* Filed herewith.
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