UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

ý  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2004

 

OR

 

o  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from          to

 

Commission File Number 1-7796

 

TIPPERARY CORPORATION

(Exact name of registrant as specified in its charter)

 

 

(303) 293-9379

(Issuer’s telephone number)

 

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý    No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o    No ý

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

TIPPERARY CORPORATION AND SUBSIDIARIES

 

Index to Form 10-Q

 

 

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets September 30, 2004 and December 31, 2003
	Consolidated Statements of Operations three and nine months ended September 30, 2004 and 2003
	Consolidated Statements of Stockholders’ Equity nine months ended September 30, 2004 and 2003
	Consolidated Statements of Cash Flows nine months ended September 30, 2004 and 2003
	Notes to Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosure About Market Risk
Item 4.	Controls and Procedures
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings
Item 2.	Changes in Securities
Item 6.	Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX

 

 

PART I - - FINANCIAL INFORMATION

 

Item 1.    Financial Statements

 

TIPPERARY CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

($in thousands except per share data)

(unaudited)

 

		September 30,			December 31,
		2004			2003
ASSETS
Current assets:
Cash and cash equivalents		$	8,590		$	2,996
Receivables		1,292			1,585
Other current assets		608			344
Total current assets		10,490			4,925
Property, plant and equipment, at cost:
Oil and gas properties, full cost method		127,654			120,703
Other property and equipment		4,517			4,431
		132,171			125,134
Less accumulated depreciation, depletion and amortization		(9,062		)	(8,078		)
Property, plant and equipment, net		123,109			117,056
Deferred loan costs		4,495			1,140
Other noncurrent assets		444			487
		$	138,538		$	123,608
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	4,000		$	—
Accounts payable		1,866			1,883
Accrued liabilities		1,308			2,329
Royalties payable		135			75
Total current liabilities		7,309			4,287
Long-term debt, net of current portion		90,834			74,126
Long-term asset retirement obligation		338			268
Commitments and contingencies (Note 6)
Minority interest		—			418
Stockholders’ equity
Preferred stock:
Cumulative; par value $1.00; 10,000,000 shares authorized; none issued		—			—
Non-cumulative, par value $1.00; 10,000,000 shares authorized; none issued		—			—
Common stock; par value $.02; 50,000,000 shares authorized; 41,343,594 and 39,231,087 shares issued, and 41,333,994 and 39,221,489 shares outstanding as of September 30, 2004 and December 31, 2003, respectively		827			785
Capital in excess of par value		158,310			149,970
Accumulated deficit		(124,583		)	(113,315		)
Accumulated other comprehensive income		5,528			7,094
Treasury stock, at cost; 9,598 shares		(25		)	(25		)
Total stockholders’ equity		40,057			44,509
		$	138,538		$	123,608

 

See accompanying notes to Consolidated Financial Statements.

 

1

 

TIPPERARY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)

 

		Three months ended						Nine months ended
		September 30,						September 30,
		2004			2003			2004			2003
Revenues		$	2,533		$	1,714		$	5,263		$	4,764
Costs and expenses:
Operating		1,483			1,257			4,124			3,320
Depreciation, depletion and amortization		539			455			1,146			1,161
Asset retirement obligation accretion		10			6			28			18
Impairment of oil and gas properties		—			165			150			2,386
General and administrative		2,081			1,353			5,635			4,165
Total costs and expenses		4,113			3,236			11,083			11,050
Operating loss		(1,580		)	(1,522		)	(5,820		)	(6,286		)
Other income (expense):
Interest and other income		42			13			149			30
Interest expense		(1,791		)	(1,403		)	(6,024		)	(3,883		)
Write-off of deferred loan costs		—			(5,069		)	—			(5,069		)
Foreign currency exchange gain (loss)		18			(1,053		)	9			2,060
Total other income (expense)		(1,731		)	(7,512		)	(5,866		)	(6,862		)
Loss before income taxes		(3,311		)	(9,034		)	(11,686		)	(13,148		)
Income tax benefit		—			—			—			—
Loss before minority interest and cumulative effect of accounting change		(3,311		)	(9,034		)	(11,686		)	(13,148		)
Minority interest in loss (income) of subsidiary		—			230			418			49
Loss before cumulative effect of accounting change		(3,311		)	(8,804		)	(11,268		)	(13,099		)
Cumulative effect of accounting change		—			—			—			(46		)
Net loss		$	(3,311	)	$	(8,804	)	$	(11,268	)	$	(13,145	)
Net loss per share basic and diluted		$	(.08	)	$	(.22	)	$	(.29	)	$	(.34	)
Weighted average shares outstanding basic and diluted		39,553			39,221			39,390			39,221

 

See accompanying notes to Consolidated Financial Statements.

 

2

 

TIPPERARY CORPORATION AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Unaudited)

For the Nine Months Ended September 30, 2003 and 2004

(in thousands)

 

		Common Stock					Capital in excess of			Accumulated			Accumulated Other Comprehensive			Treasury Stock
		Shares		Amount			par value			Deficit			Income			Shares		Amount			Total
Balance at December 31, 2002		39,221		$	785		$	149,953		$	(97,946	)	—			10		$	(25	)	$	52,767
Net loss		—		—			—			(13,145		)	—			—		—			(13,145		)
Other comprehensive income:
Foreign currency translation adjustment		—		—			—			—			3,663			—		—			3,663
Comprehensive loss																					(9,482		)
Compensatory warrants granted for services		—		—			17			—			—			—		—			17
Balance at September 30, 2003		39,221		$	785		$	149,970		$	(111,091	)	$	3,663		10		$	(25	)	$	43,302
Balance at December 31, 2003		39,221		$	785		$	149,970		$	(113,315	)	$	7,094		10		$	(25	)	$	44,509
Net loss		—		—			—			(11,268		)	—			—		—			(11,268		)
Other comprehensive loss:
Foreign currency translation adjustment		—		—			—			—			(1,566		)	—		—			(1,566		)
Comprehensive loss																					(12,834		)
Issuance of common stock for cash		2,000		40			7,960			—			—			—		—			8,000
Compensatory warrants granted for services		—		—			81			—			—			—		—			81
Stock options exercised		113		2			299			—			—			—		—			301
Balance at September 30, 2004		41,334		$	827		$	158,310		$	(124,583	)	$	5,528		10		$	(25	)	$	40,057

 

See accompanying notes to Consolidated Financial Statements.

 

3

 

TIPPERARY CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

		Nine months ended
		September 30,
		2004			2003
Cash flows from operating activities:
Net loss		$	(11,268	)	$	(13,145	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, depletion and amortization		1,146			1,161
Amortization of deferred loan costs		418			5,770
Compensatory warrants granted		81			6
Minority interest in loss of subsidiary		(418		)	(49		)
Asset retirement obligation accretion		28			18
Cumulative effect of accounting change		—			46
Impairment of oil and gas properties		150			2,386
Foreign currency exchange gain		—			(2,070		)
Changes in current assets and current liabilities:
Decrease (increase) in receivables		293			(178		)
Increase in other current assets		(264		)	(395		)
(Decrease) increase in accounts payable and accrued liabilities		(153		)	823
Increase (decrease) in royalties payable		60			(41		)
Net cash used in operating activities		(9,927		)	(5,668		)
Cash flows from investing activities:
Proceeds from asset sales		—			2,912
Capital expenditures		(12,858		)	(26,340		)
Net cash used in investing activities		(12,858		)	(23,428		)
Cash flows from financing activities:
Proceeds from issuance of common stock and exercise of stock options		8,301			—
Proceeds from borrowings		94,309			55,512
Principal repayments		(70,382		)	(27,129		)
Decrease in restricted cash		—			546
Payments for deferred loan costs		(3,790		)	(362		)
Net cash provided by financing activities		28,438			28,567
Effect of exchange rate changes on cash		(59		)	(130		)
Net increase (decrease) in cash and cash equivalents		5,594			(659		)
Cash and cash equivalents at beginning of period		2,996			1,725
Cash and cash equivalents at end of period		$	8,590		$	1,066

 

See accompanying notes to Consolidated Financial Statements.

 

4

 

TIPPERARY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

In the opinion of management, the accompanying unaudited Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the financial position of Tipperary Corporation and its subsidiaries (the “Company”) at September 30, 2004, and the results of their operations for the three-month and nine-month periods ended September 30, 2004 and 2003 and their cash flows for the nine-month periods ended September 30, 2004 and 2003. The Consolidated Financial Statements include the accounts of Tipperary Corporation and its wholly-owned subsidiaries, Tipperary Oil and Gas Corporation, Tipperary CSG Inc., Burro Pipeline Corporation, and its 90%-owned subsidiary, Tipperary Oil and Gas (Australia) Pty Ltd (“TOGA”). All intercompany balances have been eliminated. The accounting policies followed by the Company are included in Note 1 to the Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2003. These financial statements should be read in conjunction with the Form 10-K.

 

New Accounting Pronouncements

 

The Company follows the full cost method to account for its oil and gas exploration and development activities as more fully described in the Company’s Annual Report on Form 10-K for the year ended December 31,2003. SEC Staff Accounting Bulletin 106 (September 2004) requires estimated future asset retirement obligations to be included in the amortization base, whereby such costs are amortized over proved reserves. Such obligations are to be excluded in the determination of the ceiling for capitalized costs. Compliance with the bulletin, effective in the fourth quarter of 2004, is not expected to have a significant effect on the ceiling calculation or depreciation, depletion and amortization expense.

 

The Company has reviewed all other recently issued, but not yet adopted, accounting pronouncements and standards to determine their effects, if any, on its results of operations or financial position. Based on its review, the Company believes that none of these pronouncements will have a significant effect on its current or future financial position or results of operations.

 

Asset Retirement Obligation

 

On January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”), which provides accounting requirements for retirement obligations associated with tangible long-lived assets, including the timing of liability recognition, initial measurement of the liability, allocation of asset retirement costs to expense, subsequent measurement of the liability, and financial statement disclosures. SFAS No. 143 requires that asset retirement costs be capitalized along with the cost of the related long-lived asset. The asset retirement costs should then be allocated to expense using a systematic and rational method. The Company has determined that it has asset retirement costs associated with wells drilled in Australia and the United States. The Company also expects to incur retirement costs to dismantle two gas compression plant facilities located in Australia. The following table sets forth the changes in the asset retirement obligation:

 

 

 

 

5

 

Stock-Based Compensation

 

SFAS Nos. 148 and No. 123 encourage, but do not require, companies to record the compensation cost for stock-based employee compensation plans at fair value. At September 30, 2004, the Company had two stock-based employee option plans and warrants issued to directors and employees. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) and has applied the disclosure provisions of SFAS Nos. 123 and 148. Accordingly, compensation cost for fixed stock options and warrants is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock. Pro forma disclosures as if the Company had adopted the cost recognition provisions of SFAS Nos. 148 and 123 are presented below:

 

		Nine Months Ended September 30,
		2004			2003
		(in thousands, except per share data)
Net loss, as reported		$	(11,268	)	$	(13,145	)
Add:
Total compensation cost included in reported net loss, net of $0 tax		—			—
Deduct:
Total compensation cost determined under fair value based method for all awards, net of $0 tax		(43		)	(110		)
Pro forma net loss		$	(11,311	)	$	(13,255	)
Loss per share
Basic and diluted—as reported		$	(. 29	)	$	(.34	)
Basic and diluted—pro forma		$	(. 29	)	$	(.34	)

 

		Three Months Ended September 30,
		2004			2003
		(in thousands, except per share data)
Net loss, as reported		$	(3,311	)	$	(8,804	)
Add:
Total compensation cost included in reported net loss, net of $0 tax		—			—
Deduct:
Total compensation cost determined under fair value based method for all awards, net of $0 tax		(14		)	(37		)
Pro forma net loss		$	(3,325	)	$	(8,841	)
Loss per share
Basic and diluted—as reported		$	(. 08	)	$	(.22	)
Basic and diluted—pro forma		$	(. 08	)	$	(.23	)

 

 

6

 

Revenue Recognition and Gas Imbalances

 

The Company recognizes natural gas and oil revenue from its interests in producing wells as natural gas and oil are produced and sold from those wells. The Company uses the sales method of accounting for these revenues. Under the sales method, revenues are recognized based on actual volumes sold to purchasers. With natural gas production operations, joint owners may take more or less than the production volumes entitled to them under the governing operating agreement. The Company records a natural gas imbalance in other liabilities if its excess takes of natural gas exceed its remaining proved reserves for the property. As of September 30, 2004, the Company had taken and sold more than its entitled share of natural gas volumes produced from the Comet Ridge project, and was overproduced by approximately 1,821 MMcf (net of royalties). Based on the September 30, 2004 average sales price of $1.70 per Mcf, this overproduction represents approximately $3.1 million in gas revenues. No liability has been recorded for the excess volumes taken, as they do not exceed the Company’s share of remaining proved reserves. Under the terms of the governing gas balancing agreement, the Company may be required to reduce the monthly volumes it sells by up to 50% of its entitled share of sales, to enable underproduced parties to sell more than their entitled share of the gas sales and cure the imbalance.

 

Foreign Currency

 

The functional currency of the Company’s Australian subsidiary, TOGA, is the Australian dollar. As the functional currency is the local currency, the current rate method is used to translate Australian dollar financial statements into U.S. dollars for TOGA. All assets and liabilities are translated using current exchange rates, while revenues and expenses are translated at rates in existence when the transactions occurred. The translation adjustment that results from using varying rates in the translation process is reported as a component of other comprehensive income (loss) and is accumulated and reported as a separate component of stockholders’ equity in the Company’s Consolidated Financial Statements.

 

The cumulative foreign currency translation adjustment (net of $0 tax) as of September 30, 2004 and December 31, 2003 totaled $5.5 million and $7.1 million, respectively, of other comprehensive income.

 

Liquidity and Operations

 

The Company had cash and cash equivalents of $8.6 million as of September 30, 2004, compared to approximately $3.0 million as of December 31, 2003. In September 2004, the Company sold two million shares of its common stock in a private placement to 11 unaffiliated institutional investors for $4.00 per share.

 

The Company anticipates funding operations and capital expenditures in Australia for the remainder of 2004 using funds from a $150 million AUD (approximately $114 million USD) financing facility (see Note 3).

 

On October 30, 2004, the Company and Tri-Star entered into a settlement agreement covering the litigation between the two parties. Subject to certain events occurring within 45 days of the settlement agreement, the Company will pay $5 million to Tri-Star, and the Company will receive from Tri-Star approximately 96% of the registered titles for the Comet Ridge project and 2.25% working interest in the Comet Ridge project, subject to a 1.5% contractual overriding royalty interest to be retained by Tri-Star. See Note 6. The Company expects to fund this contingent commitment with funds from its available cash and with funds from TOGA’s Australian loan facility.

 

The Company anticipates funding operations and capital expenditures in the United States for the remainder of 2004 using (a) cash on hand at September 30, 2004 and (b) a commitment from Slough Estates USA Inc. (“Slough”), the Company’s majority shareholder, to provide funds for working capital, board-approved capital expenditures and operations through April 2005.

 

Property, Plant and Equipment

 

With regards to the aforementioned settlement agreement, the Company’s current assessment is that the fair market value of the registered titles collectively is at least the sum of (a) the $5 million the Company would pay Tri-Star and (b) the fair market value of the overriding royalty interest payable to Tri-Star, less (c) the fair market value of the working interest being received from Tri-Star, whereby the $5 million will be recorded as an addition to the Company’s Australian

 

 

7

 

 

full cost pool as the cost of acquiring the titles and working interest, subject to the overriding royalty.

 

NOTE 2 - RELATED PARTY TRANSACTIONS

 

At September 30, 2004, the Company owed Slough and Slough Trading Estates Limited (“STEL”), a United Kingdom company which is the parent of Slough, approximately $17.0 million.

 

As of September 30, 2004, the Company had one credit facility agreement with STEL allowing the Company to borrow on an unsecured basis up to $13.0 million for its U.S. operations. Using borrowings from this credit facility, the Company substantially funded its operating and capital needs in the United States during 2003 and through the first nine months of 2004. The Company may repay the loan in whole or in part without prepayment penalties. The credit facility bears interest at 13% per annum and is due April 2, 2012. STEL may demand repayment prior to the maturity date provided that STEL gives 18-months notice. So long as the STEL indebtedness exists, the Company may not obtain any additional third party indebtedness, either secured or unsecured, or making a priority payment in respect of any obligation without first obtaining written approval from STEL. In connection with this credit facility, the Company paid STEL arrangement fees of $40,000. The U.S. dollar value of the outstanding balance of this facility as of September 30, 2004 was $13.0 million.

 

In 2002, the Company borrowed $4 million from Slough which is evidenced by a note payable that bears interest at LIBOR plus 3.5% (5.30% as of September 30, 2004) and is payable in full on April 30, 2005.

 

Slough Estates plc, STEL’s parent, has guaranteed for a period up to five years through June 2009 a bank credit facility of $150.0 million AUD that closed in June 2004 (See Note 3). As consideration for the guarantee, the Company pays 1% per annum on the daily outstanding balance of the debt guaranteed. For the nine month period ended September 30, 2004, the Company had paid guarantee fees of $211,000.

 

In August 2003, TOGA borrowed $29.7 million ($45 million AUD) from STEL for the sole purpose of paying off a $22 million long-term debt owed TCW Asset Management Company (“TCW”) and to substantially fund a $7.7 million repurchase of the 6% overriding royalty held by TCW on the Company’s Comet Ridge properties. In addition, TOGA borrowed $55.0 million AUD under a credit facility agreement with STEL to fund its operations in Australia. These loans bore interest at 13% per annum. In connection with these loans, the Company paid arrangement fees of $250,000 USD and $100,000 AUD, respectively, to STEL. These loans were paid in full June 18, 2004 with funds from a bank credit facility (see Note 3).

 

For the nine month period ended September 30, 2004 and 2003, approximately $5.9 million and $2.0 million, respectively, in interest and fees were paid collectively to Slough and STEL under the financing agreements discussed herein.

 

NOTE 3 - BANK DEBT

 

On June 9, 2004, TOGA entered into a $150.0 million AUD senior credit facility agreement with Australia and New Zealand Banking Group Limited and BOS International (Australia) Limited for the purpose of paying in full TOGA’s borrowings of $100.0 million AUD from STEL (see Note 2) and to fund TOGA’s operating costs and its share of development costs of the Comet Ridge coalseam gas project in Queensland, Australia. Funds from the facility are expected to be available over five years and repayable in variable amounts beginning in 2007 and concluding in 2014. The interest rate for the facility (6.425% per annum as of September 30, 2004) varies with the Australian inter-bank rate plus other factors. Commitment fees of 0.425% per annum of committed but undrawn funds, as defined in the credit facility, are payable semi-annually. The facility’s effective interest rate at September 30, 2004, including interest, commitment and guarantee fees, and amortization of loan costs, is 8.725%. The facility is collateralized by, among other things, TOGA’s common stock and the Company’s consolidated interest in the Comet Ridge project and is guaranteed for up to five years by Slough Estates plc (See Note 2). The facility contains certain restrictive covenants, including maintenance of certain financial ratios and contains provisions that allow the Company to utilize the facility to finance facility interest expense. The U.S. dollar value of the outstanding balance of this facility and facility interest expense payable as of September 30, 2004 was approximately $77.8 million ($108.9 million AUD). TOGA incurred $4.5 million in loan costs which the Company has deferred and is amortizing over five years.

 

8

 

NOTE 4 - LOSS PER SHARE

 

The following tables set forth the computation of basic and diluted loss per share (“EPS”) (in thousands except per share data):

 

		Three Months Ended September 30,
		2004			2003
Numerator:
Net loss		$	(3,311	)	$	(8,804	)
Denominator:
Weighted-average shares outstanding		39,553			39,221
Effect of dilutive securities:
Assumed exercise of dilutive options and warrants		—			—
Weighted-average shares and dilutive potential common shares		39,553			39,221
Basic and diluted loss per share		$	(.08	)	$	(.22	)
Total options and warrants which could potentially dilute basic EPS in future periods		3,511			3,573

 

		Nine Months Ended September 30,
		2004			2003
Numerator:
Net loss		$	(11,268	)	$	(13,145	)
Denominator:
Weighted-average shares outstanding		39,390			39,221
Effect of dilutive securities:
Assumed exercise of dilutive options and warrants		—			—
Weighted-average shares and dilutive potential common shares		39,390			39,221
Basic and diluted loss per share		$	(.29	)	$	(.34	)
Total options and warrants which could potentially dilute basic EPS in future periods		3,511			3,573

 

NOTE 5 - MINORITY INTEREST IN TOGA

 

For the nine month period ended September 30, 2004, the 10% minority interest share of TOGA’s net loss totaled $866,000. The minority interest in TOGA’s net equity at January 1, 2004 totaled $418,000, resulting in the Company recognizing an additional loss of $468,000. The Company will continue recognizing 100% of TOGA’s net losses until TOGA becomes profitable. The Company will record 100% of TOGA’s net income until it has recouped the minority interest’s share of TOGA’s net losses.

 

9

 

NOTE 6 - COMMITMENTS AND CONTINGENCIES

 

The Company, TOGA and two unaffiliated working interest owners are plaintiffs in a lawsuit filed in 1998, styled Tipperary Corporation and Tipperary Oil & Gas (Australia) Pty Ltd v. Tri-Star Petroleum Company, James H. Butler, Sr., and James H. Butler, Jr., Cause No. CV42,265, District Court of Midland County, Texas involving the Comet Ridge project. The plaintiffs allege, among other matters, that Tri-Star and/or the individual defendants failed to operate the project in a good and workmanlike manner and committed various other breaches of a joint operating contract, breached a previous mediation agreement, committed certain breaches of fiduciary and other duties owed to the plaintiffs, and committed fraud in connection with the project. Tri-Star has answered the allegations, and filed amended pleadings denying liability and raising a number of affirmative defenses and asserting various counterclaims. TOGA has operated the project since March 2002, after the court entered its Writ of Temporary Injunction (the “Injunction”) to enforce the votes of a majority-in-interest of the parties under the joint operating agreement to remove Tri-Star as operator and replace it with TOGA.

 

On October 30, 2004, the Company and Tri-Star entered into a settlement agreement covering this litigation, as well as all other litigation between those parties originating in Queensland, Australia. Among other provisions, the settlement agreement provides that, upon receipt of necessary governmental consents and/or approvals in Queensland, Australia, Tri-Star will transfer to a newly-formed subsidiary of the Company, Tipperary Queensland, Inc., a 2.25% working interest in the Comet Ridge project, subject to a 1.5% contractual overriding royalty interest to be retained by Tri-Star out of the conveyed interest. Tri-Star will also transfer to the Company approximately 96% of each of the registered titles for the Comet Ridge project, including, but not limited to, the relevant Authorities to Prospect and Petroleum Leases. The remaining percentage of the registered titles will be conveyed to two unrelated intervening plaintiffs owning a present interest in the Comet Ridge project, representing their proportionate share of the Project. Upon receipt of the necessary consents and approvals in Queensland and the transfer of the interest subject to the overriding royalty interest, the Company will pay (U.S.) $5 million to Tri-Star and Tri-Star will acknowledge the Company’s right to be operator of the Comet Ridge project. The Company anticipates using TOGA’s Australian loan facility and existing Tipperary cash to fund the $5 million payment to Tri-Star. Should all necessary governmental consents and approvals be obtained within 45 days of the date of the settlement agreement, the Company and Tri-Star will dismiss all claims against the other in the action in Midland County, Texas with no ability to refile, seek the dismissal of all action pending in Queensland, Australia, and each party will release the other from all liability. If the necessary governmental consents, approvals or conditions in Queensland are denied, not received or otherwise not met within 45 days from the date of the settlement agreement, either party can avoid the settlement agreement and consider the settlement at an end. The District Court in Midland County, Texas has granted a continuance of the action for a period of time sufficient to allow the parties to attempt to obtain the requisite approvals and consents, and fulfill any other conditions, in Queensland, Australia. Should the settlement agreement come to an end, the case will be reassigned to the trial docket in Midland County, Texas.

 

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NOTE 7 - OPERATIONS BY GEOGRAPHIC AREA

 

Segment information has been prepared in accordance with SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information.” The Company has two geographic reporting segments, Australia and the United States. General and administrative expenses, interest expense and interest and other income are not allocated to segments. The segment data presented below was prepared on the same basis as the Consolidated Financial Statements. Reportable business segment information as of September 30, 2004 and 2003 and for the three and nine months ended September 30, 2004 and 2003 is as follows (in thousands):

 

As of and for the three months ended September 30, 2004

 

		Gas and Oil Operations
		Australia			United States			Total			Non-Segmented Items			Total
Revenues		$	2,531		$	2		$	2,533		$	—		$	2,533
Income (loss) before minority interest and income taxes		773			(258		)	515			(3,826		)(1)	(3,311		)
Property, plant and equipment, net		112,838			9,873			122,711			398			123,109

(1) Includes $975,000 of legal expenses for the Tri-Star trial (see Note 6) and $1.1 million of other general and administrative expenses, and $1.8 million of interest expense.

 

As of and for the three months ended September 30, 2003

 

		Gas and Oil Operations
		Australia			United States			Total			Non-Segmented Items			Total
Revenues		$	1,710		$	4		$	1,714		$	—		$	1,714
Income (loss) before minority interest and income taxes		287			(443		)	(156		)	(8,878		)(1)	(9,034		)
Property, plant and equipment, net		96,637			6,139			102,776			390			103,166

(1) Includes $1.4 million of general and administrative expenses, $1.4 million of interest expense, $5.1 million of write-off of deferred loan costs and $1.1 million of foreign currency exchange loss.

 

As of and for the nine months ended September 30, 2004

 

		Gas and Oil Operations
		Australia			United States			Total			Non-Segmented Items			Total
Revenues		$	5,256		$	7		$	5,263		$	—		$	5,263
Income (loss) before minority interest and income taxes		746			(889		)	(143		)	(11,543		)(1)	(11,686		)
Property, plant and equipment, net		112,838			9,873			122,711			398			123,109

(1) Includes $1.9 million of legal expenses for the Tri-Star trial (see Note 6) and $3.7 million of other general and administrative expenses and $6.0 million of interest expense.

 

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As of and for the nine months ended September 30, 2003

 

		Gas and Oil Operations
		Australia			United States			Total			Non-Segmented Items			Total
Revenues		$	4,753		$	11		$	4,764		$	—		$	4,764
Income (loss) before minority interest and income taxes		963			(3,046		)	(2,083		)	(11,065		)(1)	(13,148		)
Property, plant and equipment, net		96,637			6,139			102,776			390			103,166

(1) Includes $4.2 million of general and administrative expenses, $3.9 million of interest expense, $5.1 million of write-off of deferred loan costs and $2.1 million of foreign currency exchange gain.

 

NOTE 8 - PROPERTY, PLANT AND EQUIPMENT

 

A summary of property, plant and equipment follows:

 

		September 30, 2004			December 31, 2003
		(in thousands)
Evaluated oil and gas properties:
Australian properties		$	105,451		$	105,264
Domestic properties		—			—
Unevaluated oil and gas properties:
Australian properties		12,330			9,221
Domestic properties		9,874			6,218
Oil and gas properties		127,655			120,703
Other property and equipment		4,516			4,431
		132,171			125,134
Less accumulated depreciation, depletion and amortization		(9,062		)	(8,078		)
Property, plant and equipment, net		$	123,109		$	117,056

 

NOTE 9 - STATEMENT OF CASH FLOWS SUPPLEMENTAL INFORMATION

 

		Nine Months Ended September 30,
		2004			2003
		(in thousands)
Cash paid during the period for interest, net of amounts capitalized		$	4,734		$	2,860
Non-cash investing and financing activities—
Net increase in payables for capital expenditures		$	885		$		—

 

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