ITEM 3. LEGAL PROCEEDINGS
As of December 31, 1996, the Company is not aware of any current or potential legal proceeding.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the fourth quarter of 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since June 21, 1996, the Company's Common Stock, $0.01 par value (the "Common Stock"), has been traded on the NASDAQ National Market System under the symbol "RMOC." As of March 10, 1997, there were 25,651,338 shares of Common Stock outstanding. The Company has never paid dividends on its Common Stock and does not expect to pay dividends in the near future.
The following table shows the high and low prices, at each quarter, of the Common Stock on the NASDAQ Stock Exchange since inception:
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The financial data as of and for the years ended December 31, 1992 through 1996 were derived from audited and unaudited consolidated financial statements of the Company and its predecessors. The data set forth in this table should be read in connection with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the more detailed consolidated financial statements and related notes included elsewhere herein.
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(a) RMOC became a public entity in June 1996. See Notes to Consolidated Financial Statements -- Note 2 -- Significant Accounting Policies.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion is intended to assist in understanding the Company's financial position and results of operations for each year in the three-year period ended December 31, 1996. The Consolidated Financial Statements and the notes thereto should be referred to in conjunction with this discussion.
From time to time, the Company may elect to make certain statements that provide the Company's stockholders and the investing public with "forward-looking" information (as defined in the Private Securities Litigation Reform Act of 1995). Words such as "anticipate", "estimate", "project" and similar expressions are intended to identify such forward-looking statements. Forward-looking statements may be made by management orally or in writing, including, but not limited to, in press releases, as part the "Business and Properties" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of this report and as part of other sections of the Company's filings with the Securities and Exchange Commission under the Securities Act of 1933 and the Securities Exchange Act of 1934. Such forward-looking statements may include, but not be limited to, statements concerning estimates of current and future results of operations, earnings, reserves, the timing and commencement of wells and the production therefrom, production estimates based upon drill stem tests and other test data, future capacity under its credit arrangements, and future capital expenditures and liquidity requirements.
Such forward-looking statements are subject to certain risks, uncertainties and assumptions, including without limitation those identified below. Should one or more of these risks or uncertainties materialize, or should any of the underlying assumptions prove incorrect, actual results of current and future operations may vary materially from those anticipated, estimated or projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates.
Among the factors that have a direct bearing on the Company's results of operations and the oil and gas exploration industry in which it operates are uncertainties inherent in estimating reserves and future cash flows; changes in the price of oil and natural gas; the limited production and exploration histories in Block B8/32; the status of the Company's existing and future contractual relationships with the Government of Thailand, including the Concession, the Gas Sales Agreement and the Oil Sales Agreement; risks associated with having the Government of Thailand as the sole purchaser of the Company's oil and gas production, including, political instability and economic downturns in the Thailand economy and a reduction in demand for oil and natural gas in Thailand; foreign currency fluctuation risks; the presence of competitors with greater financial resources and capacity; difficulties, and risks associated with, delivering the Company's production, including inherent risks associated with offshore oil and gas exploration and development operations and risks associated with offshore marine operations such as capsizing, sinking, grounding, collision and damage from severe weather conditions; and the Company's successful execution of internal operating plans as well as regulatory uncertainties in Thailand and legal proceedings.
OVERVIEW
RMEC, currently a wholly owned subsidiary of the Company, was formed on September 21, 1990 (date of inception) for the purpose of holding an interest in an oil and gas concession in Thailand. RMEC paid all of the expenses of the concession on behalf of Thai Romo through November 4, 1993.
Effective September 24, 1990, the stockholders of RMEC elected to have it treated as an S Corporation under the Internal Revenue Code of 1986, as amended. As such, RMEC did not incur federal income taxes at the corporate level prior to June 18, 1996, and its taxable income or loss was passed through to its stockholders based on their interests.
In November 1993, Thai Romo amended its Article of Association so that it would be treated as a partnership for U.S. income tax purposes and added additional partners, including the Company's current Chairman of the Board and current President and Chief Executive Officer. As such, Thai Romo was not subject to federal income taxes from November 1993 to June 17, 1996. Income and losses earned by Thai Romo were passed through to the partners on the basis of their interest in Thai Romo.
In June 1996, the Company entered into an exchange transaction (the "Exchange") whereby the partners of Thai Romo (other than RMEC) exchanged their interests (including outstanding notes payable to them) in Thai Romo for common stock, $.01 par value ("Common Stock"), of the Company, which interests in Thai Romo were simultaneously transferred to TRH, a wholly owned subsidiary of the Company, and the stockholders of RMEC (the Company's current Chairman of the Board and current President and Chief Executive Officer) exchanged their shares of RMEC for shares of Common Stock. Immediately following the Exchange, RMEC and Thai Romo (indirectly) were wholly owned by the Company. The Company's results of operations and financial positions prior to the Exchange reflect the results of operations and financial position of RMEC, TRH and Thai Romo as the Company's predecessors.
Following the Exchange, the Company completed its initial public offering of the Common Stock, raising net proceeds, after deducting underwriting commissions and discounts and expenses of the offering, of $84.3 million, which were utilized to repay outstanding debt to the Company's principal stockholders, repay bank debt and fund cash outlays.
As of December 31, 1996, the Company's exploration and development activities have not generated revenues. As a result, the Company's historical results of operations have been presented as a development stage company and period-to-period comparisons of such results and certain financial data may not be meaningful or indicative of future results. In this regard, future results of the Company will be materially dependent upon the success of the Company's operations within Block B8/32.
As of December 31, 1996, the Company had not sold any oil and gas. Initial sales from the Tantawan Field of Block B8/32 began on February 1, 1997. The natural gas and crude oil production from the two wellhead platforms is being moved to the FPSO in the field. Natural gas and crude oil revenues are recorded using the entitlements method, whereby any production volumes received in excess of the Company's ownership percentage in the property is recorded as a liability. If less than the Company's entitlement is received, the underproduction is recorded as a receivable.
The Company uses the full cost method of accounting for its investment in oil and gas properties. Under the full cost method of accounting, all costs of acquisition, exploration and development of oil and natural gas reserves are capitalized into a "full cost pool" as incurred, and properties in the pool are depleted and charged to operations using the unit-of-production method based on the ratio of current production to total proved oil and natural gas reserves.
RESULTS OF OPERATIONS
Year ended December 31, 1996, compared with the year ended December 31, 1995
The Company's net loss of $4,324,000 for the twelve months ended December 31, 1996 increased from the Company's net loss of $512,000 for the twelve months ended December 31, 1995 due primarily to increases in deferred income taxes caused by a one time non-cash charge of $1,921,000 and general and administrative expenses and less significantly due to increases in interest expense, and salaries and wages, offset partially by an increase in interest income.
As RMEC and Thai Romo became part of the Company's consolidated federal tax return following the Exchange, RMEC and Thai Romo recorded an income tax expense and a corresponding deferred tax liability expense of $1,921,000 for the difference between the book basis and tax basis of oil and gas properties on June 17, 1996. This charge was offset by a benefit of $530,000 recorded in the third and fourth quarters for the operating loss generated by the Company.
Interest income of $170,000 for the twelve months ended December 31, 1996, increased compared to $5,000 for the twelve months ended December 31, 1995. This increase is due to the increase in cash available from the proceeds of the initial public offering.
Interest expense of $806,000 for the twelve months ended December 31, 1996, increased compared to $190,000 for the twelve months ended December 31, 1995. This increase is caused by higher levels of outstanding debt and an increase in the amortization of deferred financing costs.
Salaries and wages and general and administrative expenses of $535,000 and $1,733,000, respectively, for the twelve months ended December 31, 1996, increased compared to $114,000 and $208,000, respectively, for the twelve months ended December 31, 1995. These increases are primarily due to the capitalization of a greater portion of salaries and wages and direct costs related to oil and gas property development in 1995 compared to 1996 and, to a lesser extent, an increase in compensation expense.
Year Ended December 31, 1995, compared with year ended December 31, 1994
The Company's net loss of $512,000 in 1995 increased compared to the Company's net loss of $393,000 in 1994 due to increases in interest expense and general and administrative expenses.
Noncapitalized interest expense of $190,000 for 1995 increased compared to $107,000 in 1994. This increase is due to the significant additions of debt incurred under loans from banks and stockholders. Balances under such loan facilities were $42.9 million and $2.9 million at December 31, 1995 and 1994, respectively.
General and administrative expenses of $208,000 for 1995 increased compared to $181,000 in 1994. This increase is due to increased legal costs incurred for general corporate purposes.
Year ended December 31, 1994, compared with year ended December 31, 1993
The Company's net loss of $393,000 in 1994 increased compared to the Company's net loss of $239,000 in 1993 due to increases in interest expense and general and administrative expenses.
Interest expense of $107,000 for 1994 increased compared to $76,000 in 1993. This increase is due to an increase in variable interest rates from 1993 to 1994.
General and administrative expenses of $181,000 for 1994 increased compared to $74,000 in 1993. This increase is due to additional rent and additional legal fees incurred for general corporate purposes.
LIQUIDITY AND CAPITAL RESOURCES
During the period from the inception of the Company on September 21, 1990 through December 31, 1996, the Company invested approximately $123 million primarily for development and exploration activities conducted in Block B8/32 and the acquisitions of interests in or rights to the Concession. During this period, the Company had negative operating cash flow. Since its inception, the Company has financed its growth with a combination of equity infusions by its principal stockholders (primarily Messrs. Rutherford and Moran), bank and stockholders loans, and the sale of common stock.
In June 1996, RMOC completed the IPO which resulted in RMOC raising net proceeds of approximately $97 million. The proceeds were used to repay outstanding bank and stockholder indebtedness, redeem notes and shares of RMEC, and fund capital expenditures.
On September 20, 1996, the Company entered into a $150,000,000 Revolving Credit Facility (the "Revolving Credit Facility") with a group of commercial lenders. The Revolving Credit Facility has a final maturity of September 30, 1999, and a borrowing base limitation at December 31, 1996 of $60,000,000. The Revolving Credit Facility is secured by the stock of certain subsidiaries of the Company. The Company currently is in the process of increasing the borrowing base in its Revolving Credit Facility, which additional capacity will be utilized to fund budgeted capital expenditures, acquisition financing and for working capital and other general purposes.
Under the terms of the Revolving Credit Facility, outstanding borrowings will bear interest at the Base Rate (defined as the greater of the Federal Funds Rate plus .5% or the agent bank's prime rate) plus .25% or the Eurodollar Rate (defined as an average of the London Interbank Offered Rate of two banks) plus 1.75%, at the Company's option. Interest is payable quarterly. The Company is also assessed a commitment fee equal to .5% per annum on the average daily balance of the unused borrowing base. The Revolving Credit Facility provides for semi-annual borrowing base redeterminations as well as certain covenants, including limitations on additional indebtedness, payment of dividends and an interest coverage ratio.
At December 31, 1996, $22,842,000 was outstanding under the Revolving Credit Facility at interest rates ranging from 7.125% to 7.4375% per annum.
To explore and develop Block B8/32, the Company anticipates capital expenditures of approximately $108 million for 1997, which includes approximately $28 million for the MOTL acquisition which was consummated on March 3, 1997. Of such capital expenditures, approximately $34 million is budgeted for development of the Tantawan Field which has commenced production in early 1997 and $36 million is budgeted for the Benchamas Field. In addition to such capital expenditures, the Company expects to incur additional cash expenses and working capital requirements of approximately $27 million, primarily relating to cash expenses, including interest.
RMOC financed the purchase of its interest in MOTL by utilizing $20,000,000 from a new credit facility which is to be repaid no later than June 30, 1997. The credit facility contains terms which are substantially identical to those in the Company's Revolving Credit Facility. The remainder of the payment was financed by its Revolving Credit Facility. The Company anticipates that it will finance remaining expenditures during 1997 and repay the new credit facility with internally generated cash flow and borrowings under the Revolving Credit Facility after redetermination of the borrowing base.
FOREIGN CURRENCY FLUCTUATIONS
The Company does not currently hold significant amounts of cash, cash equivalents, long-term financial instruments or investments denominated in foreign currencies. However, virtually all of its operating revenues will be denominated in Thai Baht. Although the Thai Baht/U.S. dollar exchange rate has historically been stable, the Company will consider instruments intended to mitigate the foreign currency risks associated with such holdings through currency rate hedging transactions such as options, futures or other derivative financial instruments.
EFFECTS OF INFLATION
Currently annual inflation in terms of the decrease in the general purchasing power of the dollar is running much below the general annual inflation rates experienced in the past. While the Company, like other companies, continues to be affected by fluctuations in the purchasing power of the dollar, such effect is not currently considered significant.
CHANGING OIL PRICES
The Company is dependent on crude oil prices, which have historically been volatile. The Company has used crude oil price swaps and other similar arrangements to hedge against potential adverse effects of fluctuations in future prices for the Company's future oil production. While the swaps are intended to reduce the Company's exposure to declines in the market price of crude oil, they may limit the Company's gain from increases in the market price. At December 31, 1996, crude oil price swap agreements were in place for the Company's oil production of one million barrels (MMBbl) of aggregate oil volumes for April through December 1997 at a weighted average price of $15.92 per Bbl and 1.75 MMBbl of aggregate oil volumes for January through December 1998 at a weighted average of $15.92 per Bbl. At December 31, 1996, the Company estimates the cost of unwinding this position to be $8,516,000. Embedded within the crude oil price swaps, the Company has provided to the affiliate of a lender a swap option for 1.25 MMBbl of aggregate oil volumes for January through December 1999 at a price of $18.30 per Bbl. The Company has accounted for the swap option separately as it does not qualify as a hedge. After March 31, 1977 future changes in value of the swap option will be recorded in the statement of operations. At December 31, 1996, the Company estimates the value of this position to be $1,400,000 and has recorded the amount as a liability on the balance sheet.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors Rutherford-Moran Oil Corporation (A Development Stage Company):
We have audited the accompanying consolidated balance sheet of Rutherford-Moran Oil Corporation as of December 31, 1996 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the period June 18, 1996 through December 31, 1996 and the consolidated balance sheet of the Company's Predecessors as of December 31, 1995 and the related Predecessors' consolidated statements of operations, changes in partners' equity and cash flows for the period January 1, 1996 through June 17, 1996 and for the years ended December 31, 1995 and 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Rutherford-Moran Oil Corporation and its Predecessors as of December 31, 1996 and 1995, respectively, and the results of its operations and its cash flows and those of its Predecessors for the period June 18, 1996 through December 31, 1996 and the period January 1, 1996 through June 17, 1996 and for the years ended December 31, 1995 and 1994, respectively, in conformity with generally accepted accounting principles.
KMPG Peat Marwick LLP
March 25, 1997 Houston, Texas
RUTHERFORD-MORAN OIL CORPORATION (A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See accompanying notes to consolidated financial statements.
RUTHERFORD-MORAN OIL CORPORATION (A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
ASSETS
See accompanying notes to consolidated financial statements.
RUTHERFORD-MORAN OIL CORPORATION (A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' AND PREDECESSORS' EQUITY (IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
See accompanying notes to consolidated financial statements.
RUTHERFORD-MORAN OIL CORPORATION (A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See accompanying notes to consolidated financial statements.
RUTHERFORD-MORAN OIL CORPORATION (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION
The accompanying consolidated financial statements of Rutherford-Moran Oil Corporation ("RMOC" or Company), a Delaware corporation, have been prepared pursuant to the rules and regulation of the Securities and Exchange Commission ("SEC").
The Company is an independent energy company engaged in the acquisition, exploration, development and production of oil and gas properties in Southeast Asia. As of December 31, 1996, the Company's exploration activities are entirely in the Gulf of Thailand and are conducted through its subsidiary, Thai Romo, Limited ("Thai Romo").
The financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
In April 1996, Rutherford/Moran Oil Corporation changed its name to Rutherford-Moran Exploration Company ("RMEC"). RMEC was formed on September 21, 1990 (date of inception), for the purpose of holding an interest in an oil and gas concession in Thailand through its subsidiary, Thai Romo, which was organized as a foreign corporation under the laws of the Kingdom of Thailand. Thai Romo was formed as a wholly owned subsidiary of RMEC. Thai Romo is one of the concessionaires under the Petroleum Concession No. 1/2534/36 (the "Concession") awarded by the Ministry of Industry of the Kingdom of Thailand for the development and production of oil and gas reserves in offshore Block B8/32 in the central portion of the Gulf of Thailand. The Concession was awarded on August 1, 1991, to Thai Romo, Thaipo, a wholly owned subsidiary of Pogo Producing Company, and Maersk Oil (Thailand), Limited ("MOTL"), a wholly-owned subsidiary of Maersk Olie og Gas As. Subsequent to the award, the Sophonpanich Co., Limited ("Sophonpanich") elected to participate in the Concession as a co-venturer. Thaipo has been the operator of the Tantawan Field within the Concession, and until March 1997 the remainder of the Concession was operated by Maersk Oil (Thailand) Ltd. Subsequent to March 1997, Thaipo operated the remainder of the concession, as the shares of Maersk Oil (Thailand) Limited were sold to the concessionaires. Effective June 17, 1996, the stockholders of RMEC and the partners of Thai Romo exchanged their interests for shares of common stock of a newly formed entity, RMOC. RMOC is the parent company of RMEC and Thai Romo Holdings, Inc. RMEC and Thai Romo Holdings, Inc. collectively own the outstanding shares of Thai Romo. During June 1996, RMOC sold 16% of its common stock in an initial public offering (the "Offering") in conjunction with the consummation of the exchange of RMEC common stock and Thai Romo interests for common stock of RMOC. In conjunction with the Offering, RMEC redeemed for $12.4 million approximately 56,000 shares of its common stock from Patrick R. Rutherford and John A. Moran, majority stockholders of RMEC (the "Redemption"), exercised RMEC's call option on 3% of the partners' interest in Thai Romo held by Red Oak Holdings, Inc. for $3.1 million and repaid outstanding debt of $62 million owed stockholders and banks. On June 18, 1996, the stockholder's equity accounts were adjusted to reflect the deficit accumulated during the development stage to additional paid-in capital upon RMEC and Thai Romo becoming subject to federal income taxes. During July 1996, an additional 2.4% of RMOC's common stock was sold when the underwriters exercised their over-allotment option.
The consolidated financial statements for the period from June 18, 1996 to December 31, 1996 include the accounts of RMOC and its wholly owned subsidiaries, RMEC, Thai Romo and Thai Romo Holdings, Inc. All material intercompany accounts and transactions have been eliminated in consolidation.
The financial statements for each of the years in the two-year period ended December 31, 1995, and the period from January 1, 1996 to June 17, 1996 include the accounts of RMEC, Thai Romo and Thai Romo
Holdings, Inc. (the "Predecessors") (combined). All material intercompany accounts and transactions have been eliminated in the combination. The combined financial statements are presented due to the commonality of the stockholders and partners of RMEC and Thai Romo.
The Company's planned principal operations have commenced, but revenue from production did not begin until February 1997. As a result, the Company is considered a development stage company.
CASH AND CASH EQUIVALENTS
The Company considers all currency and any liquid investments with a maturity of three months or less to be cash equivalents.
OIL AND GAS PROPERTIES
The Company and its subsidiaries follow the full cost method of accounting for its investment in oil and gas properties. Under this method of accounting, all costs of acquisition, exploration and development of oil and gas reserves (including such costs as leasehold acquisition costs, geological expenditures, dry hole costs and tangible and intangible development costs and directly associated internal costs) are capitalized into a "full cost pool" as incurred. Oil and gas properties, the estimated future expenditures to develop proved reserves, and estimated future abandonment, environmental and dismantlement costs are depleted and charged to operations using the unit-of-production method based on the ratio of current production to proved oil and gas reserves as estimated by engineering consultants. The Concession, a major development project, has had no production of reserves, and accordingly, no depreciation, depletion, or amortization of oil and gas properties has been provided since inception. Production began in February 1997 at which time depletion will begin. Disposition of oil and gas properties are recorded as adjustments to capitalized costs, with no gain or loss recognized unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas. To the extent that capitalized costs of oil and gas properties, net of accumulated depletion and amortization, exceed the tax-effected discounted future net revenues of proved oil and gas reserves, such excess capitalized costs would be charged to operations. No such write-down in book value was required during the years ending December 31, 1994, 1995, and 1996.
OTHER PROPERTY AND EQUIPMENT
Other property consists primarily of furniture, office equipment, leasehold improvements and computers. The majority of these assets are depreciated on a straight-line basis with useful lives of seven years.
HEDGING
During the first quarter of 1996, the Company entered into crude oil price swaps with an affiliate of its lender. While the swaps serve as hedges intended to reduce the Company's exposure to declines in the market price of crude oil, they may limit the Company's gain from increases in the market price. At December 31, 1996, the crude oil price swap agreements incorporated one million barrels ("MMBbl") of oil volumes from April through December 1997 at a weighted average price of $15.92 per Bbl and 1.75 MMBbl of oil volumes from January through December 1998 at a weighted average price of $15.92 per Bbl. At December 31, 1996, the Company estimates the cost of liquidating this position to be approximately $8.5 million.
Also, the Company sold to an affiliate of its bank lender an option to purchase 1.25 MMBbl of aggregate oil volumes from January through December 1999 at a price of $18.30 per Bbl. The Company has accounted for the swap option separately as it does not qualify as a hedge. At December 31, 1996, the Company estimates the fair market value of this position to be $1.4 million and has recorded the amount as a liability on the consolidated balance sheet.
REVENUE RECOGNITION
The Company records revenues using the entitlements method, whereby production volumes received in excess of the Company's ownership percentage in the property is recorded as a liability. If less than the Company's entitlement is received, the underproduction is recorded as a receivable.
GEOGRAPHICAL CONCENTRATION
The Concession is located in the Gulf of Thailand. Consequently, substantially all of Thai Romo's assets are subject to regulation by the government of Thailand. Political changes, such as increases in tax rates or nationalization of strategic or other assets by the government of Thailand, could adversely affect the Company.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the reporting of quantities of proved oil and gas reserves, and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
VALUE ADDED TAX REFUND RECEIVABLE
Expenditures on certain concession joint operations are assessed a value added tax by the government of Thailand. Because the concession operators have obtained an exemption from value added taxes, all value added taxes are refundable. Accordingly, a refund due is recorded when value added taxes are paid by the operator.
STOCK-BASED COMPENSATION
During 1996, the Company adopted Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"). SFAS No. 123 allows a company to adopt a fair value based method of accounting for a stock-based employee compensation plan or to continue to use the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25"). The Company has chosen to continue to account for stock-based compensation under APB No. 25. Under this method, the Company has not recorded any compensation expense related to stock options granted. The disclosures required by SFAS No. 123, however, have been included in Note 8.
NOTE 3 INCOME TAXES
Deferred taxes are accounted for under the asset and liability method of accounting for income taxes. Under this method deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period the change occurs.
The Predecessors were a limited partnership and an S Corporation under the Internal Revenue Code of 1986, as amended. As such, they did not incur federal income taxes; the taxable income or loss was passed through to the partners or stockholders. As a result of the initial public offering in June 1996, the Company became a taxable entity and recorded a one-time charge of $1,921,000, representing the difference between the financial statement and income tax basis of its foreign oil and gas properties. Income tax expense for the period June 18, 1996, through December 31, 1996, was a benefit of $530,000, which represents a deferred foreign income tax benefit.
Total income tax benefit for the period June 18, 1996, through December 31, 1996, differs from the amount computed by applying the Federal income tax rate to the loss before income taxes. The reasons for this difference follows (amounts in thousands):
The tax effects of temporary differences that result in a significant portion of the deferred income tax assets and liabilities and a description of the financial statement items creating these differences are as follows on December 31, 1996 (amounts in thousands):
At December 31, 1996, the Company had a net operating loss carryforward of $12.4 million for Thailand, tax purposes, which does not expire. No valuation allowance has been recorded as of December 31, 1996, as the Company believes it is more likely than not that the deferred tax asset is realizable.
NOTE 4 ACQUISITIONS
On December 19, 1996, Rutherford-Moran Oil Corporation, through its wholly owned subsidiary, Thai Romo, exercised its preferential right to purchase 46.34% of the outstanding shares of Maersk Oil (Thailand), Limited ("MOTL"), a wholly owned subsidiary of Maersk Olie og Gas As of Copenhagen, Denmark ("Maersk"). MOTL is a former co-concessionaire in Block B8/32 located offshore Thailand owning a 31.67% interest. The purchase was consummated on March 3, 1997, with Thai Romo Holdings, Inc., a wholly owned subsidiary of the Company and Thai Romo's nominee under the Share Sales Agreement with Maersk, purchasing the shares for $28,617,000, which included $1,554,000 in satisfaction of outstanding debt. After the closing, MOTL is in the process of being renamed B8/32 Partners.
The purchase price was established in a Share Sale Agreement dated November 2, 1996, between Maersk and BG Egypt S.A. Pursuant to the Joint Operating Agreement among the co-concessionaires, Thai Romo and the remaining co-concessionaires jointly had a preferential right to purchase the stock of MOTL on the terms and conditions agreed between Maersk and BG Egypt S.A.
The remaining 53.66% of MOTL's stock was purchased by Pogo Producing Company, and by Palang Sophon Limited of Bangkok, Thailand. Thaipo Limited and Palang Sophon Limited and MOTL were co-concessionaires with Thai Romo Limited prior to the sale of MOTL. As a result, RMOC's interest in the entire Block B8/32 has now effectively increased from 31.67% to 46.34%.
The Company financed the purchase of MOTL by utilizing $20,000,000 from a new credit facility entered into with Chase Manhattan Bank ("Chase") which term expires on June 30, 1997. The remainder of the payment was financed with borrowings under the Company's existing revolving credit facility with Chase. The credit facility contains terms which are substantially identical to those in the Company's Revolving Credit Facility. The Company expects to repay the new credit facility with proceeds from the redetermined borrowing base in its Revolving Credit Facility.
NOTE 5 DEBT
CREDIT FACILITY
On September 20, 1996, the Company entered into a $150,000,000 Revolving Credit Facility with a group of commercial lenders. The Revolving Credit Facility has a final maturity of September 30, 1999 and a borrowing base limitation at December 31, 1996, of $60,000,000. The Revolving Credit Facility is secured by the stock of certain subsidiaries of the Company.
Under the terms of the Revolving Credit Facility, outstanding borrowings will bear interest at the Base Rate (defined as the greater of the Federal Funds Rate plus .5% or the agent bank's prime rate) plus .25% or the Eurodollar Rate (defined as an average of the London Interbank Offered Rate (LIBOR) of two banks) plus 1.75%, at the Company's option. Interest is payable quarterly. The Company is also assessed a commitment fee equal to .5% per annum on the average daily balance of the unused borrowing base. The Revolving Credit Facility provides for semi-annual borrowing base redeterminations as well as certain covenants, including restrictions on additional indebtedness, payment of dividends and an interest coverage ratio.
At December 31, 1996, $22,842,000 was outstanding under the Credit Facility at interest rates ranging from 7.125% to 7.4375% per annum. Such facility is payable in 1999.
NOTES PAYABLE
In November 1994, Thai Romo executed a Loan Facility Agreement with a commercial lender under which Thai Romo could borrow up to $5,000,000 at any time during the period from November 1994 to the final maturity date in April 1995. In December 1994, Thai Romo borrowed $1,400,000 under this Loan Facility Agreement. The annual interest rate on amounts borrowed under the Loan Facility Agreement was the LIBOR rate plus 4%. During July 1995, December 1995, and April 1996, Thai Romo amended the Loan Facility Agreement to allow it to borrow up to $44,000,000 with a maturity date of June 28, 1996. At December 31, 1995 the amount outstanding under the Loan Facility Agreement was $21,000,000.
In September 1995, RMEC obtained a Line of Credit from the same commercial lender to borrow up to $5,000,000. This amount was increased in November 1995 to $15,000,000 with a maturity date of June 28, 1996. The annual interest rates on amounts borrowed under the Line of Credit ranged from prime plus 1/2% to prime plus 1% and from LIBOR plus 2 1/4% to LIBOR plus 2 3/4%, at the Company's option. At December 31, 1995, the amount outstanding under the Line of Credit was $13,385,000.
All debt pertaining to the Loan Facility Agreement and the Line of Credit was retired on June 28, 1996, with proceeds from the initial public offering.
LOANS FROM STOCKHOLDERS
RMEC had loans from stockholders at December 31, 1995 as follows (amounts in thousands):
The loans from stockholders were retired on June 28, 1996 with proceeds from the initial public offering.
Interest of $368,000, $190,000 and $107,000 was expensed by RMEC under the above loans during January 1, 1996 through June 17, 1996 and the years ended December 31, 1995 and 1994, respectively, and $924,000 was expensed during the period September 21, 1990 (date of inception), to June 17, 1996.
NOTE 6 CAPITAL STOCK
COMMON AND PREFERRED STOCK
The Certificate of Incorporation of the Company authorizes the issuance of up to 40,000,000 shares of common stock and 10,000,000 shares of preferred stock, the terms, preferences, rights and restrictions of which will be established by the Board of Directors of the Company. All shares of common stock have equal voting rights of one vote per share on all matters to be voted upon by stockholders. Cumulative voting for the election of directors is not permitted.
On June 17, 1996, the Company sold 4,000,000 shares of its common stock in an initial public offering at $23 per share. During July 1996, the Company sold an additional 600,000 shares at $23 per share when the underwriters exercised their over-allotment option.
NOTE 7 RELATED PARTY TRANSACTIONS
Historically, Rutherford Oil Corporation ("Rutherford Oil"), which is controlled by Patrick R. Rutherford, obtained certain oil and gas related and medical insurance on behalf of the Company and performed certain payroll related services for the Company. The Company has reimbursed Rutherford Oil for its out of pocket expenses relating to such insurance and services, which aggregated $133,000, $731,000, $366,000 and $1,723,000 during period January 1, 1996 to June 17, 1996 and the years ended December 31, 1995 and 1994 and the period from September 21, 1990 (date of inception) to December 31, 1996. Subsequent to June 1996 Rutherford Oil has no longer obtained such insurance or performs any such services on behalf of the Company.
NOTE 8 EMPLOYEE BENEFIT PLANS
KEY EMPLOYEE STOCK PLAN
During 1996, the Company established its 1996 Key Employee Stock Plan (the "Stock Plan"). Under the Stock Plan, an aggregate of 500,000 shares will be available for the granting of either stock options or restricted stock awards. The Compensation Committee of the Board of Directors administers this plan.
Stock options issued under the Stock Plan may not exceed a term of more than ten years and the stock option price may not be less than the fair market value of the shares at the time the option is granted. The options are exercisable ratably over a five year period. At December 31, 1996, a total of 105,750 stock options were granted under the Stock Plan, none of which are currently exercisable. The exercise price of all options granted is $23.
The Compensation Committee may award shares of restricted stock to employees for no payment by the employee or for a payment below the fair market value on the date of grant. Issuance of the stock may be subject to certain restrictions, but in no case can the conditions continue for more than ten years from the date of the award. As the shares vest, each employee receiving such restricted stock has all of the rights of a stockholder, including without limitation, the right to vote such shares. At December 31, 1996, restricted stock awards for 51,338 shares had been granted, at no cost to the employees. Deferred compensation is recorded at the date of the restricted stock award and is amortized into compensation expense over the vesting period. At December 31, 1996, deferred compensation of $1,185,000 was recorded and related compensation expense of $127,000 was recognized during the period June 18, 1996 to December 31, 1996. Substantially all restricted stock awards outstanding at December 31, 1996, vest ratably over a five year period.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
During 1996, the Company established its 1996 Non-Employee Director Stock Option Plan (the "Director Plan"). Under the Director Plan, an aggregate of 50,000 shares of common stock will be available for the granting of stock options. The exercise price of a stock option granted pursuant to the Director Plan may not be less than the fair market value of the common stock on the date of grant and the stock option term may not exceed ten years. Stock options granted under the Director Plan are exercisable in full after the first anniversary of grant. The Director Plan provides for an initial grant of stock options to each non-employee
director to purchase 2,500 shares of common stock contemporaneously with the initial public offering and the annual grant of stock options to acquire 1,000 shares of stock to each non-employee director serving on the board of directors following each annual meeting of the stockholders. As of December 31, 1996, non-employee directors have been granted stock options to acquire 10,000 shares of common stock, none of which are exercisable. The exercise price of all options granted to date is $23.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for its Stock Plan and Director Plan. Accordingly, no compensation has been recognized for stock-based compensation other than for restricted stock awards. Had compensation cost for the stock options issued under the Stock Plan and Director Plan been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under the Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", the Company's net loss and net loss per share would have been increased by approximately $1,812,000, or $0.07 per share. The fair value of the stock options granted during the twelve-month period ended December 31, 1996, is estimated as $16.32 on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, volatility of 23%, risk-free interest rate of 6.42%, assumed forfeiture rate of 0%, and an expected life of 9.5 years.
At December 31, 1996, 342,912 and 40,000 shares of common stock were reserved for issuance pursuant to the Stock Plan and the Director Plan, respectively. The remaining weighted average life of the 115,750 options outstanding at December 31, 1996, is 9.5 years.
NOTE 9 COMMITMENTS AND CONTINGENCIES
GUARANTY AND INDEMNITY AGREEMENT
On February 9, 1996, Thai Romo Limited entered into a Guaranty and Indemnity Agreement associated with a Bareboat Charter agreement between Tantawan Services, LLC, as charterer, and Tantawan Production B.V., as lessor, for the leasing and operation of a Floating Production Storage and Offloading system (FPSO) known as the Tantawan Explorer. The initial duration of the Bareboat Charter Agreement is 10 years commencing upon delivery of crude oil to the FPSO. The hire rate under the Bareboat Charter is $55,000 per day. Thai Romo has guaranteed payment of 46.3% of these costs or approximately $25,448 per day. The guaranty terminates upon the expiration of the Bareboat Charter Agreement, notwithstanding the lawful termination or cancellation of the Bareboat Charter Agreement. Should the initial term of the agreement be extended or the FPSO purchased, Thai Romo would remain obligated for 46.3% of any subsequent obligations incurred by Tantawan Services.
LEASE COMMITMENTS
RMEC is subject to an office lease which expires in February 2002. The commitment under this lease is as follows (amounts in thousands):
Rental expense paid during the periods June 18, 1996 to December 31, 1996 and January 1, 1996 to June 17, 1996 and the years ended December 31, 1995 and 1994 and the period from September 21, 1990
(date of inception), to December 31, 1996, was $45,000, $52,000, $67,000, $77,000 and $285,000, respectively.
NOTE 10 LITIGATION
As of December 31, 1996, the Company is not aware of any current or potential legal proceeding.
NOTE 11 SINGLE CUSTOMER
All oil and natural gas produced from the Tantawan Field will be sold to PTT, which maintains a monopoly over oil and gas transmission and distribution in Thailand. The Concessionaires are required to give first priority to the Thai government to purchase the oil and natural gas produced by the Concessionaires.
A gas sales agreement (GSA) with PTT was signed on November 7, 1995. Under the GSA, which is a take or pay agreement, contracted deliveries of gas to PTT are required to commence at the conclusion of a 72-hour production test, which was completed in March 1997. The natural gas price is based on a formula which provides adjustments to the base price for natural gas on each April 1 and October 1. Adjustments will be made to reflect changes in (i) wholesale prices in Thailand, (ii) the U.S. producer price index for oil field machinery and tools, and (iii) medium fuel oil prices. Adjustment factors for oil field machinery and medium fuel oil prices may be subsequently adjusted for Thai Baht/U.S. Dollar fluctuations, since payments from PTT will be in Thai Baht. The base price was estimated to be equivalent to $2.12 per thousand cubic feet (Mcf) at January 1, 1997.
The oil and condensate will be purchased by PTT, which has the right of first refusal on any hydrocarbon liquids produced domestically. The terms and conditions of a sales agreement are under negotiation pursuant to a Memorandum of Understanding signed on November 14, 1996. If PTT does not wish to purchase this oil, then the Company believes that it can sell the oil to a variety of purchasers.
NOTE 12 SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
At December 31, 1996, and 1995 the Concession accounted for 100% of the Company's future net cash flow from proved reserves.
Included herein is information with respect to oil and gas acquisition, exploration, development and production activities, which is based on estimates of year-end oil and gas reserve quantities and estimates of future development costs and production schedules. The prices used in the reserve estimates are prices the Company estimated it would have received at the respective date had the Tantawan and Benchamas fields had been producing at such time, except where fixed and determinable price escalations or oil hedges are provided by contract. Reserve quantities and future production are based primarily upon reserve reports prepared by the independent petroleum engineering firm of Ryder Scott Company. These estimates are inherently imprecise and subject to substantial revision.
All reserve estimates presented herein were prepared by Ryder Scott Company, independent petroleum engineers. The Company cautions that there are many uncertainties inherent in estimating proved reserve quantities, and in projecting future production rates and the timing of future development expenditures, including many factors beyond the control of the producer. Accordingly, these estimates are subject to change as additional information becomes available. Reservoir engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing and production subsequent to the date of an estimate may justify revision of the estimate. Accordingly, reserve estimates are often different from the quantities of oil and gas that are ultimately recovered.
Estimates of future net cash flows from proved reserves of oil and gas were made in accordance with Statement of Financial Accounting Standards No. 69, Disclosures about Oil and Gas Producing Activities. The estimates are based on prices the Company estimated it would have received at the respective date had the Tantawan and Benchamas fields been producing at such time. Estimated future cash inflows are reduced
by estimated future development and production costs based on year-end cost levels, assuming continuation of existing economic conditions, and by estimated future revenue tax expense. Tax expense is calculated by applying the existing U.S. and Thailand statutory tax rates, including any known future changes. The results of these disclosures should not be construed to represent the fair market value of the Company's oil and gas properties. A market value determination would include many additional factors including: (i) anticipated future increases and decreases in oil and gas prices and production and development costs; (ii) an allowance for return on investment; (iii) the value of additional reserves not considered proved at the present, which may be recovered as a result of further exploration and development activities; and (iv) other business risks.
In computing the present value of the estimated future net cash flows, a discount factor of 10% was used pursuant to SEC regulations to reflect the timing of those net cash flows. Present value, regardless of the discount rate, used is materially affected by assumptions about timing of future production, which may prove to have been inaccurate. The following reserve value data represent estimates only, which are subject to uncertainty given the current energy markets.
Capitalized Costs of Oil and Gas Producing Activities
The following table sets forth the aggregate amounts of capitalized costs relating to the Company's oil and gas producing activities and the aggregate amount of related accumulated depreciation and amortization as of the dates indicated (amounts in thousands).
Costs Incurred in Oil and Gas Producing Activities
The following table reflects the costs incurred in oil and gas property acquisition, exploration and development activities during the periods indicated (amounts in thousands).
The following table sets forth the Company's interest in estimated total proved oil and gas reserves for the years ended December 31, 1996, 1995, and 1994:
Proved reserves are estimated quantities of natural gas, crude oil, and condensate which geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Total reserves do not include reserves acquired in the MOTL purchase on March 3, 1997.
Standardized Measure of Discounted Future Net Cash Flows
The following table reflects the Standardized Measure of Discounted Future Net Cash Flows relating to the Company's interest in proved oil and gas reserves as of December 31, 1996, 1995 and 1994 (amounts in thousands):
Principal changes in the "Standardized Measure of Discounted Futures Net Cash Flows" attributable to the Company's proved oil and gas reserves for the periods indicated are as follows (amounts in thousands):
NOTE 13 FINANCIAL INSTRUMENTS
Determination of Fair Values of Financial Instruments
Fair value for cash and cash equivalents, short-term investments, receivables and payables at December 31, 1996, and December 31, 1995, approximates carrying value.
The carrying amount of cash equivalents and value added tax refund receivable approximates fair value because of the short maturity of these instruments. The carrying amount of joint interest receivables and payables and accounts payable and accrued expenses approximates fair value because they are generally paid or earned within sixty days. The carrying amount of note payable to bank and loans from stockholders approximates fair value because the interest rate is reset at periodic intervals. See Note 2 for discussion of the fair value of hedging and swap options.
ITEM 9.
ITEM 9. CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION
For the information called for by Items 10, 11, 12 and 13, reference is made to the Company's definitive proxy statement for its 1996 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1996, and portions of which are incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements
The following financial statements and the Reports of Independent Public Accountants are filed as a part of this report:
Independent Auditors' Report
Consolidated Statements of Operations, for the periods June 18, 1996 through December 31, 1996 (Company), and January 1, 1996 through June 17, 1996 and for the years ended December 31, 1995 and 1994 (Predecessors) and Inception to December 31, 1996
Consolidated Balance Sheets, December 31, 1996 (Company), and 1995 (Predecessors)
Consolidated Statements of Changes in Stockholder's and Predecessors' Equity, for the periods June 18, 1996 through December 31, 1996 (Company), and January 1, 1996 through June 17, 1996 and for the years ended December 31, 1995 and 1994 and Inception to December 31, 1993 (Predecessors)
Consolidated Statements of Cash Flows, for the periods June 18, 1996 through December 31, 1996 (Company), and January 1, 1996 through June 17, 1996 and for the years ended December 31, 1995 and 1994 (Predecessors) and Inception to December 31, 1996
Notes to Consolidated Financial Statements
2. Financial Statements Schedules
Financial statement schedules have been omitted because they are not applicable for the information required therein or are included elsewhere in the financial statements or notes thereto.
3. Exhibits
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* Incorporated by reference from the Company's Registration Statement on Form S-1, as amended (File No. 333-4122).
** Incorporated by reference from the Company's Form 8-K dated March 3, 1997.
*** Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1996.
**** Filed with this Report on Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the fourth quarter of the year ended December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
RUTHERFORD-MORAN OIL CORPORATION
BY: /s/ PATRICK R. RUTHERFORD ------------------------------------ Patrick R. Rutherford Chief Executive Officer (Principal Executive Officer)
Date: March 20, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
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* Incorporated by reference from the Company's Registration Statement on Form S-1, as amended (File No. 333-4122).
** Incorporated by reference from the Company's Form 8-K dated March 3, 1997.
*** Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1996.
**** Filed with this Report on Form 10-K.