**FORM 10-QSB**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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

 

**For the quarterly period endedMarch 31, 2005**

 

**OR**

 

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

**For the transition period from                                  to                                  .**

 

 

**Commission File Number:   0-30598**

 

 

**WHITTIER ENERGY CORPORATION**

(Exact Name of Registrant as Specified in ItsCharter)

 

| **Nevada**                                                                                          | ** ** | **20-0539412**                       |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------|
| (State or Other Jurisdiction of                                                                     |       | (I.R.S. Employer Identification No.) |
| Incorporation or Organization)                                                                      |       |                                 |
| **333 Clay Street, Suite 1100**

**Houston, Texas 77002**

(Address of Principal Executive Offices) |

 

Registrant’s telephone number, including areacode: **(713) 850-1880**

 

 

Indicate by check mark whether the Registrant: (1)has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months, and (2) hasbeen subject to such filing requirements for the past 90 days.

 

                YES  ý                   NO  o

 

As of May 14, 2005 the Registrant had 11,583,502shares of its $.001 par value common stock issued and outstanding.

 

 

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**Part I —Summarized Financial Information**

**Item 1 —Financial Statements**

 

**WhittierEnergy Corporation**

**ConsolidatedBalance Sheets**

**(InThousands)**

** **
| ** **                                                                           | ** ** | **March 31,**   | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                           | ** ** | **2005**        | ** ** | **2004**         | ** ** |
| ** **                                                                           | ** ** | **(Unaudited)** | ** ** | ** **       | ** ** |
| **Assets**                                                                           |       |            |       |             |       |
| Current assets:                                                                      |       |            |       |             |       |
| Cash and cash equivalents                                                            |       | $               | 1,802      |             | $          | 1,461 |   |
| Accounts receivable, net of allowances                                               |       | 2,218           |       | 2,491            |       |
| Income tax receivable                                                                |       | —          |       | 28               |       |
| Deferred income tax asset - commodity price hedging contracts                        |       | 905             |       | 376              |       |
| Prepaid assets                                                                       |       | 95              |       | 108              |       |
|                                                                                 |       |            |       |             |       |
| Total current assets                                                                 |       | 5,020           |       | 4,464            |       |
|                                                                                 |       |            |       |             |       |
| Restricted cash                                                                      |       | 1,000           |       | —           |       |
| Investments in partnerships                                                          |       | 273             |       | 284              |       |
| Investments in marketable securities                                                 |       | 1,525           |       | 1,054            |       |
| Oil and gas properties (successful efforts method), and equipment and  fixtures, net |       | 19,991          |       | 19,244           |       |
|                                                                                 |       |            |       |             |       |
| Total assets                                                                         |       | $               | 27,809     |             | $          | 25,046 |   |

 

 

*See accompanying notes.*

 

2

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**WhittierEnergy Corporation**

**ConsolidatedBalance Sheets**

**(InThousands)**

 

* *
| ** **                                                                                                                                                        | ** ** | **March 31,**   | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                                                                                                        | ** ** | **2005**        | ** ** | **2004**         | ** ** |
| ** **                                                                                                                                                        | ** ** | **(Unaudited)** | ** ** | ** **       | ** ** |
| **Liabilities and stockholders’ equity**                                                                                                                     |       |            |       |             |       |
| Current liabilities:                                                                                                                                              |       |            |       |             |       |
| Accounts payable                                                                                                                                                  |       | $               | 3,256      |             | $          | 2,814 |   |
| Taxes payable                                                                                                                                                     |       | 42              |       | 29               |       |
| Commodity price hedging contracts, current portion                                                                                                                |       | 2,596           |       | 1,087            |       |
| Revolving credit facility, current portion                                                                                                                        |       | 1,500           |       | 1,650            |       |
| Total current liabilities                                                                                                                                         |       | 7,394           |       | 5,580            |       |
|                                                                                                                                                              |       |            |       |             |       |
| Deferred income tax liability                                                                                                                                     |       | 754             |       | 650              |       |
| Revolving credit facility                                                                                                                                         |       | 6,945           |       | 6,095            |       |
| Convertible subordinated note payable                                                                                                                             |       | 1,787           |       | 1,787            |       |
| Asset retirement obligation                                                                                                                                       |       | 127             |       | 121              |       |
| Commodity price hedging contracts                                                                                                                                 |       | 1,450           |       | 737              |       |
| Total liabilities                                                                                                                                                 |       | 18,457          |       | 14,970           |       |
|                                                                                                                                                              |       |            |       |             |       |
| Stockholders’ equity:                                                                                                                                        |       |            |       |             |       |
| Common stock, $.001 par value, 100,000,000 shares authorized,  11,523,402 shares issued and outstanding as of March 31, 2005 and December  31, 2004, respectively |       | 12              |       | 12               |       |
| Additional paid-in capital                                                                                                                                        |       | 5,165           |       | 5,171            |       |
| Accumulated other comprehensive income, unrealized gain on marketable  securities, net of taxes of $244 and $64, at March 31, 2005 and December 31,  2004         |       | 453             |       | 119              |       |
| Accumulated other comprehensive loss, hedging contracts, net of taxes  of $1,360 and $634, at March 31, 2005 and December 31, 2004                                |       | (2,502          | )          | (1,178           | )          |
| Retained earnings                                                                                                                                                 |       | 6,224           |       | 5,952            |       |
| Total stockholders’ equity                                                                                                                                   |       | 9,352           |       | 10,076           |       |
|                                                                                                                                                              |       |            |       |             |       |
| Total liabilities and stockholders’ equity                                                                                                                   |       | $               | 27,809     |             | $          | 25,046 |   |

 

 

*See accompanying notes.*

 

3

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**WhittierEnergy Corporation**

**ConsolidatedStatements of Operations (Unaudited)**

**(InThousands, Except Share Data)**

** **
| ** **                                | ** ** | **Three Months** | ** ** | **Three Months** | ** ** |
|-------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                | ** ** | **Ended**        | ** ** | **Ended**        | ** ** |
| ** **                                | ** ** | **March 31,**    | ** ** | **March 31,**    | ** ** |
| ** **                                | ** ** | **2005**         | ** ** | **2004**         | ** ** |
|                                      |       |             |       |             |       |
| Oil and gas revenues                      |       | $                | 2,801      |             | $          | 1,903 |   |
| Gain from property sales                  |       | —           |       | 242              |       |
|                                      |       |             |       |             |       |
| Gross income from operations              |       | 2,801            |       | 2,145            |       |
|                                      |       |             |       |             |       |
| Costs and expenses:                       |       |             |       |             |       |
| Lease operating expenses                  |       | 813              |       | 475              |       |
| Production taxes                          |       | 252              |       | 160              |       |
| Depreciation, depletion, and amortization |       | 688              |       | 519              |       |
| Exploration expense                       |       | 16               |       | —           |       |
| Ineffective portion of hedge contracts    |       | 185              |       | —           |       |
| General and administrative expenses       |       | 437              |       | 408              |       |
|                                      |       |             |       |             |       |
| Total costs and expenses                  |       | 2,391            |       | 1,562            |       |
|                                      |       |             |       |             |       |
| Income from operations                    |       | 410              |       | 583              |       |
|                                      |       |             |       |             |       |
| Other income (expense):                   |       |             |       |             |       |
| Interest and dividend income              |       | 1                |       | —           |       |
| Interest expense                          |       | (105             | )          | (51              | )          |
| Partnership income                        |       | 57               |       | 36               |       |
| Gain from sale of marketable securities   |       | 56               |       | —           |       |
| Impairment of marketable securities       |       | —           |       | (645             | )          |
|                                      |       |             |       |             |       |
| Other income (expense)                    |       | 9                |       | (660             | )          |
|                                      |       |             |       |             |       |
| Income (loss) before income taxes         |       | 419              |       | (77              | )          |
| Provision for income tax                  |       | (147             | )          | (199             | )          |
| Net income (loss)                         |       | $                | 272        |             | $          | (276 | ) |

 

 

*Seeaccompanying notes.*

 

4

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**WhittierEnergy Corporation**

**ConsolidatedStatements of Operations (Unaudited)**

**(InThousands, Except Share Data)**

 

 

 
| ** **                                                              | ** ** | **Three Months** | ** ** | **Three Months** | ** ** |
|-------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                              | ** ** | **Ended**        | ** ** | **Ended**        | ** ** |
| ** **                                                              | ** ** | **March 31,**    | ** ** | **March 31,**    | ** ** |
| ** **                                                              | ** ** | **2005**         | ** ** | **2004**         | ** ** |
| ** **                                                              | ** ** | ** **       | ** ** | ** **       | ** ** |
| Basic earnings (loss) per share:                                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net income (loss) per share                                             |       | $                | .02        |             | $          | (.03 | ) |
| Weighted average number of shares outstanding (basic)                   | ** ** | 11,523,402       | ** ** | 10,065,404       | ** ** |
| ** **                                                              | ** ** | ** **       | ** ** | ** **       | ** ** |
| Diluted earnings (loss) per share:                                      | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net income (loss) per share                                             |       | $                | .02        |             | $          | (.03 | ) |
| Weighted average number of shares outstanding (dilutive)                |       | 12,518,836       |       | 10,065,404       |       |
|                                                                    |       |             |       |             |       |
| Net income (loss)                                                       |       | $                | 272        |             | $          | (276 | ) |
| Diluted net income:                                                     |       |             |       |             |       |
| Interest on Convertible Subordinated Note                               |       | 23               |       | —           |       |
| Diluted net income                                                      |       | $                | 295        |             | $          | (276 | ) |
|                                                                    |       |             |       |             |       |
| Basic shares outstanding                                                |       |             |       |             |       |
| Dilutive securities outstanding:                                        |       | 11,523,402       |       | 10,065,404       |       |
| Stock options and warrants                                              |       | 101,769          |       | —           |       |
| Convertible Subordinated Note                                           |       | 893,665          |       | —           |       |
| Diluted shares outstanding, assuming conversion of dilutive  securities |       | 12,518,836       |       | 10,065,404       |       |

 

 

*See accompanying notes.*

 

5

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**WhittierEnergy Corporation**

**ConsolidatedStatements of Cash Flows (Unaudited)**

**(InThousands)**

 

 
| ** **                                                                            | ** ** | **Three Months** | ** ** | **Three Months** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                            | ** ** | **Ended**        | ** ** | **Ended**        | ** ** |
| ** **                                                                            | ** ** | **March 31,**    | ** ** | **March 31,**    | ** ** |
| ** **                                                                            | ** ** | **2005**         | ** ** | **2004**         | ** ** |
| **Cash flows from operating activities**                                              |       |             |       |             |       |
| Net income (loss)                                                                     |       | $                | 272        |             | $          | (276 | ) |
| Adjustments to reconcile net income (loss) to net cash used in  operating activities: |       |             |       |             |       |
| Depreciation, depletion, and amortization                                             |       | 688              |       | 519              |       |
| Deferred income tax provision                                                         |       | 147              |       | 199              |       |
| Gain on the sale of oil and gas properties                                            |       | —           |       | (242             | )          |
| Gain on the sale of marketable securities                                             |       | (56              | )          | —           |       |
| Exploration expense                                                                   |       | 16               |       | —           |       |
| Partnership income                                                                    |       | (57              | )          | (36              | )          |
| Impairment of marketable securities                                                   |       | —           |       | 645              |       |
| Ineffective portion of hedge loss                                                     |       | 185              |       | —           |       |
| (Increase) decrease in accounts receivable                                            |       | 273              |       | (10              | )          |
| (Increase) decrease in prepaids and other receivables                                 |       | 13               |       | (15              | )          |
| Increase (decrease) in accounts payable                                               |       | 442              |       | (165             | )          |
| Increase in taxes payable                                                             |       | 13               |       | —           |       |
| Net cash provided from operating activities                                           |       | 1,936            |       | 619              |       |
|                                                                                  |       |             |       |             |       |
| **Cash flows from investing activities**                                              |       |             |       |             |       |
| Investment in oil and gas properties                                                  |       | (1,362           | )          | (659             | )          |
| Increase in restricted cash                                                           |       | (1,000           | )          | —           |       |
| Proceeds from sale of oil and gas properties                                          |       | —           |       | 525              |       |
| Investments in partnerships                                                           |       | (6               | )          | (18              | )          |
| Distributions from partnerships                                                       |       | 73               |       | 57               |       |
| Net cash used in investing activities                                                 |       | (2,295           | )          | (95              | )          |
|                                                                                  |       |             |       |             |       |
| **Cash flows from financing activities**                                              |       |             |       |             |       |
| Payments on revolving credit facility                                                 |       | (300             | )          | (240             | )          |
| Proceeds from revolving credit facility                                               |       | 1,000            |       | —           |       |
| Net cash provided from financing activities                                           |       | 700              |       | (240             | )          |
|                                                                                       |            |                  |            |                  |            |  |  |

 

6

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**WhittierEnergy Corporation**

**ConsolidatedStatements of Cash Flows (Unaudited)**

**(InThousands)**

 

 

 

 
| ** **                                                                                  | ** ** | **Three Months**   | ** ** | **Three Months**   | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                                  | ** ** | **Ended**          | ** ** | **Ended**          | ** ** |
| ** **                                                                                  | ** ** | **March 31, 2005** | ** ** | **March 31, 2004** | ** ** |
|                                                                                        |       |               |       |               |       |
| Net increase in cash and cash equivalents                                                   |       | $                  | 341        |               | $          | 284 |   |
|                                                                                        |       |               |       |               |       |
| Cash and cash equivalents at beginning of period                                            |       | 1,461              |       | 1,037              |       |
|                                                                                        |       |               |       |               |       |
| Cash and cash equivalents at end of period                                                  |       | $                  | 1,802      |               | $          | 1,321 |   |
|                                                                                        |       |               |       |               |       |
| **Supplemental cash flow disclosure**                                                       |       |               |       |               |       |
| Interest paid                                                                               |       | $                  | 104        |               | $          | 52 |   |
| ** **                                                                                  | ** ** | ** **         | ** ** | ** **         | ** ** |
| **Supplemental schedule of non-cash investing and  financing activities**                   | ** ** | ** **         | ** ** | ** **         | ** ** |
| Issuance of common stock in exchange for settlement of outstanding  investment banking fees |       | —             |       | $                  | 40         |   |

 

*See accompanying notes.*

 

7

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**WhittierEnergy Corporation**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

**1.             General**

 

Whittier EnergyCorporation, formerly Olympic Resources Ltd, a Nevada corporation (“Whittier”),is an independent oil and gas exploration and production company engaged in theacquisition, exploration and development of oil and gas properties in thecontinental United States. As of March 31, 2005, Whittier had four wholly ownedsubsidiaries, including Whittier Energy Company (“Whittier Energy”), a Nevadacorporation, Whittier Operating, Inc. (“Whittier Operating”), a Texascorporation, Olympic Resources (Arizona) Ltd. (“Olympic Arizona”), an Arizonacorporation, and RPC Acquisition, Inc., a Delaware corporation. WhittierOperating is a direct subsidiary of Whittier Energy. References to the “Company”refer to Whittier and its subsidiaries.

 

On April 18, 2005,Whittier entered into a definitive agreement to acquire RIMCO ProductionCompany, Inc., a privately held Delaware corporation (“RIMCO”), for $56million, including $55 million in cash and $1 million in assumed bank debt.Whittier will acquire working interests in approximately 116 active wells andone unit in 18 producing fields principally located in the Gulf Coast region inTexas, Louisiana, and Alabama and in the Permian Basin. The transaction willadd approximately 4.1 million barrels of oil equivalent (“Mmboe”) of provedreserves, 1,400 barrels of oil equivalent (Boe) of daily production, andsignificant undeveloped acreage with multiple prospects. The board of directorsof both companies have unanimously approved the transaction which is expectedto close on or before June 17, 2005, subject to the approval of the RIMCOshareholders and the completion of customary due diligence. Whittier intends tofund the transaction with a combination of equity and bank debt. The proposedtransaction is more fully described in Note 13.

 

Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States have been condensed or omitted.Reference should be made to the relevant notes to the financial statementsincluded in the Company’s Annual Report on Form 10-KSB for the fiscal yearended December 31, 2004.

 

Prior period amounts have been reclassified to conform with currentyear presentation, including netting deferred tax assets and liabilities on theCompany’s consolidated balance sheet and reclassifying the Company’s liabilityfor its hedging commodity contracts between current and long-term liabilities.Such reclassifications had no effect on the Company’s net income orstockholders’ equity.

 

The informationfurnished herein was taken from the books and records of the Company withoutaudit. However, the information reflects all adjustments, which are, in theopinion of management, normal recurring adjustments necessary for the fairstatement of the results for the interim period presented. The results ofoperations for the interim period are not necessarily indicative of the resultsto be expected for any future interim period or for the year.

 

**2.             Earnings (Loss) Per Common Share**

 

Basicearnings/(loss) per common share is calculated by dividing net income or lossby the aggregate weighted average number of shares outstanding during theperiod. Diluted earnings/(loss) per share considers the dilutive effect of theaverage number of common stock equivalents, consisting of the Company’s commonstock options and warrants and common stock underlying a convertible note (seeNote 9) that were outstanding during the period. The Company’s total weightedaverage number of dilutive and anti-dilutive common stock equivalentsoutstanding as of March 31, 2005 were 995,434 and 1,709,813, respectively.

 

8

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**3.             New Accounting Standards**

 

In December 2004, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share—BasedPayment,” a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.”SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued toEmployees” and amends SFAS No. 95, “Statement of Cash Flows.” SFAS No. 123(R)requires a company to recognize equity based compensation, including stockoption grants, at fair value in the income statement, and discontinuesaccounting for equity based compensation under APB Opinion No. 25, theintrinsic value method. The requirements of this pronouncement are effectivefor fiscal periods beginning after December 15, 2005, for small businessfilers. Whittier currently accounts for equity based compensation using APBOpinion No. 25 under which no compensation cost for employee stock options hasbeen recognized. SFAS No. 123(R) also requires the benefits of tax deductionsin excess of recognized compensation cost to be reported as cash flow fromfinancing activities rather than as cash flow from operations, as requiredcurrently. The Company will adopt SFASNo. 123(R) as of January 1, 2006. The Company is currently evaluating theimpact of the adoption of SFAS No. 123(R) on its financial statements.

 

**4.             Stock Based Compensation**

 

The Company accounts for stock basedcompensation using the intrinsic value method under APB Opinion No. 25, “Accountingfor Stock Issued to Employees.” SFAS No. 123, “Accounting for Stock-basedCompensation” requires that pro forma information regarding net income andearnings per share be determined as if the Company had accounted for itsemployee stock options under the fair value method as defined in SFAS No. 123.We estimate the fair value for options issued during the period, if any, as ofthe date of grant using the Black-Scholes option pricing model by usingweighted average assumptions, volatility factors of the expected market priceof the Company’s common stock, and the weighted average life expectancy of theoptions.

 

In December 2003, the Company’s Board ofDirectors approved a Long Term Incentive Plan (the “Plan”), which was ratifiedby the Company’s stockholders in July 2004. The Plan sets aside a total of 1.56million shares of the Company’s common stock for issuance to the Company’sofficers, directors, employees, and consultants. During January 2004, theCompany granted a total of 729,000 options to purchase the Company’s commonstock at an average exercise price of $1.75 per share to certain directors,officers, and employees of the Company, of which 15,000 options were cancelledin May 2004. The options vest ratably over a three-year period from the date ofgrant and have a term of five years. The fair market value of the net optionsoutstanding on the date of grant was estimated to be $1,088,611, or $1.52 pershare, using the Black-Scholes option pricing model with the following weightedaverage assumptions: risk free interest rate of 4%, dividend yield of 0%,volatility factors of the expected market price of the Company’s common stockof 1.58, and a weighted average life expectancy of the options of 3.5 years.The Company issued an additional 59,500 options to various employees of theCompany during the year ended December 31, 2004, with an average exercise priceof $1.64 per share, also subject to three year ratable vesting with a term offive years. The fair market value of the options on the date of grant wasestimated to be approximately $51,000, or $0.86 per share, using the BlackScholes option pricing model using weighted average assumptions applicable onthe date of grant.

 

9

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For purposes ofpro forma disclosures, the estimated fair value of the options is amortized toexpense over the option’s vesting period. The Company’s pro forma information,in thousands, is as follows:

 

 

 
| ** **                                                                                         | ** ** | **Three Months** | ** ** | **Three Months** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                         | ** ** | **Ended**        | ** ** | **Ended**        | ** ** |
| ** **                                                                                         | ** ** | **March 31,**    | ** ** | **March 31,**    | ** ** |
| ** **                                                                                         | ** ** | **2005**         | ** ** | **2004**         | ** ** |
|                                                                                               |       |             |       |             |       |
| Net income (loss) under APB No. 25                                                                 |       | $                | 272        |             | $          | (276 | ) |
|                                                                                               |       |             |       |             |       |
| Deduct: Total stock-based compensation expense determined under the  fair value method, net of tax |       | (62              | )          | (84              | )          |
|                                                                                               |       |             |       |             |       |
| Pro forma net income (loss)                                                                        |       | $                | 210        |             | $          | (360 | ) |
|                                                                                               |       |             |       |             |       |
| Pro forma basic earnings (loss) per share                                                          |       | $                | .02        |             | $          | (.04 | ) |
|                                                                                               |       |             |       |             |       |
| Pro forma diluted earnings (loss) per share                                                        |       | $                | .02        |             | $          | (.04 | ) |

 

In April 2005,60,100 and 17,900 options to acquire the Company’s common stock at an exerciseprice of $2.50 Canadian were exercised and expired unexercised, respectively.

 

In April 2005, 122,834 options to acquire theCompany’s common stock at an average exercise price of $2.59 were granted toemployees and consultants of the Company.

 

**5.             Asset Retirement Obligation**

 

As of March 31, 2005, the Company had an estimated future abandonmentobligation of $126,723, including $102,625 in costs capitalized to oil and gasproperties and $24,098 in cumulative accretion expense.

 

**The activity related to the Company’sfuture asset retirement obligation for the quarter ended March 31, 2005, is asfollows (in thousands):**

** **

| ** **                             | ** ** | **Three Months**    | ** ** |
|----------------------------------------|------------|---------------------|------------|
| ** **                             | ** ** | **Ended March 31,** | ** ** |
| ** **                             | ** ** | **2005**            | ** ** |
| Beginning asset retirement obligation  |       | $                   | 121        |   |
| Liabilities incurred during the period |       | 2                   |       |
| Liabilities settled during the period  |       | —              |       |
| Accretion expense                      |       | 4                   |       |
| Ending asset retirement obligation     |       | $                   | 127        |   |

 

10

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**6.             Marketable Securities**

 

The Company’s investments in marketablesecurities are classified as “available-for-sale” in accordance with SFAS No.115, “Accounting for Certain Investments in Debt and Equity Securities.”  As a result, these investments are carried atfair market value as of the relevant balance sheet dates.  Unrealized gains and losses are excluded fromnet income and reported in a separate component of stockholder’s equity ascumulative other comprehensive income (loss).

 

The carrying amount and estimated marketvalue of the investments as of March 31, 2005 and December 31, 2004 are asfollows (in thousands):

 
| ** **                                | ** ** | **As of March 31, 2005**     | ** ** |
|-------------------------------------------|------------|------------------------------|------------|
| ** **                                | ** ** | **Cost**                     | ** ** | **Fair Value** | ** ** |
|                                      |       |                         |       |   |   |
| Chaparral Resources, Inc., 500,350 Shares |       | $                            | 500        |   | $ | 1,251 |   |
|                                      |       |                         |       |   |   |
| PYR Energy, Inc., 173,625 Shares          |       | 328                          |       | 274 |   |
|                                      |       |                         |       |   |   |
| Total                                     |       | $                            | 828        |   | $ | 1,525 |   |
|                                      |       |                         |       |   |   |
|                                      |       |                         |       |   |   |
| ** **                                | ** ** | **As of  December 31, 2004** | ** ** |
| ** **                                | ** ** | **Cost**                     | ** ** | **Fair  Value** | ** ** |
|                                      |       |                         |       |   |   |
| Chaparral Resources, Inc., 543,850 Shares |       | $                            | 544        |   | $ | 870 |   |
|                                      |       |                         |       |   |   |
| PYR Energy, Inc., 173,625 Shares          |       | 328                          |       | 184 |   |
|                                      |       |                         |       |   |   |
| Total                                     |       | $                            | 872        |   | $ | 1,054 |   |

 

 

The Company recognizes any unrealized gain or loss on its marketablesecurities when the securities are sold or when the Company determines that apermanent impairment has occurred. As of March 31, 2004, the Companyreclassified its unrealized loss in Chaparral Resources, Inc. (“Chaparral”) as “otherthan temporary” and recognized an impairment of $645,476, reducing the Company’sbook basis in the securities to $543,850. The Company intends to dispose of itsinvestment in Chaparral in order to utilize the proceeds for the acquisition,exploration and development of oil and gas properties. As of March 31, 2005,the Company had sold 43,500 shares of Chaparral for $99,540, realizing a gainof $56,040.

 

After considering the write-down of the Chaparral common stock, theCompany has classified the remaining unrealized gains and losses in itsmarketable securities as temporary in nature. The Company’s investment inChaparral has appreciated from the Company’s cost basis in the stock afterrecognition of the impairment in the first quarter of 2004. The Companyrecorded an unrealized gain as a component of other comprehensive income of$453,135, net of deferred taxes of $243,995, for the period ended March 31,2005 and recorded an unrealized gain of $118,708, net of deferred taxes of$63,920, for the period ended December 31, 2004.

 

The Company is subject to certain trading restrictions for itsinvestment in PYR due to SEC regulations regarding stock traded by an affiliateof a public company, which may limit or prohibit the Company’s ability todispose of its investment in the future. The Company’s President and ChiefExecutive Officer currently serves as an independent director on PYR’s Board ofDirectors, making him an insider of PYR.

 

11

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A reconciliation of the pre and post-tax impact of the Company’smarketable securities on accumulated other comprehensive income for the periodended March 31, 2005 is as follows (in thousands):

 
| ** **                                                  | ** ** | **Pre-tax** | ** ** | **After-tax** | ** ** |
|-------------------------------------------------------------|------------|-------------|------------|---------------|------------|
| Accumulated other comprehensive income,   December 31, 2004 |       | $           | 183        |          | $          | 119 |   |
| Reclassified into earnings                                  |       | (56         | )          | (36           | )          |
| Change in fair market value                                 |       | 569         |       | 370           |       |
| Accumulated other comprehensive income,   March 31, 2005    |       | $           | 696        |          | $          | 453 |   |

 

**7.             Investments in Partnerships**

** **

**Theoriginal cost basis, cumulative distributions and book value of the Company’spartnership investments as of March 31, 2005 and December 31, 2004, were asfollows (in thousands):**

** **

** **
| ** **                                                           | ** ** | **Investment** | ** ** | **Cumulative**    | ** ** | **March 31, 2005** | ** ** |
|----------------------------------------------------------------------|------------|----------------|------------|-------------------|------------|------------------------------|------------|
| ** **                                                           | ** ** | **Cost Basis** | ** ** | **Distributions** | ** ** | **Net Book Value**           | ** ** |
|                                                                 |       |           |       |              |       |                         |       |
| KAB Acquisition L.P. - II, 8.0% Limited Partnership Interest         |       | $              | 150        |              | $          | (251                         | )          | $ | — |   |
| KAB Acquisition L.P. - III, 6.4286% Limited Partnership Interest     |       | 150            |       | (187              | )          | —                       |       |
| KAB Acquisition L.L.L.P. - IV, 7.2% Limited Partnership Interest     |       | 150            |       | (234              | )          | —                       |       |
| KAB Acquisition L.L.L.P. — V, 7.5% Limited Partnership Interest |       | 150            |       | (152              | )          | —                       |       |
| KAB Acquisition L.L.L.P. - VI, 2.1825% Limited Partnership Interest  |       | 150            |       | (58               | )          | 92                           |       |
| Avalanche Royalty Partners LLC, 8.925% Membership Interest           |       | 341            |       | (457              | )          | —                       |       |
| Rincon Energy Partners, LLC, 10% Membership Interest                 |       | 181            |       | —            |       | 181                          |       |
|                                                                 |       |           |       |              |       |                         |       |
| Total                                                                |       | $              | 1,272      |              | $          | (1,339                       | )          | $ | 273 |   |

 

12

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| ** **                                                           | ** ** | **Investment** | ** ** | **Cumulative**    | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------------------------------------|------------|----------------|------------|-------------------|------------|---------------------------------|------------|
| ** **                                                           | ** ** | **Cost Basis** | ** ** | **Distributions** | ** ** | **Net Book Value**              | ** ** |
|                                                                 |       |           |       |              |       |                            |       |
| KAB Acquisition L.P. - II, 8.0% Limited Partnership Interest         |       | $              | 150        |              | $          | (247                            | )          | $ | — |   |
| KAB Acquisition L.P. - III, 6.4286% Limited Partnership Interest     |       | 150            |       | (178              | )          | —                          |       |
| KAB Acquisition L.L.L.P. - IV, 7.2% Limited Partnership Interest     |       | 150            |       | (218              | )          | —                          |       |
| KAB Acquisition L.L.L.P. — V, 7.5% Limited Partnership Interest |       | 150            |       | (139              | )          | 11                              |       |
| KAB Acquisition L.L.L.P. - VI, 2.1825% Limited Partnership Interest  |       | 150            |       | (52               | )          | 98                              |       |
| Avalanche Royalty Partners LLC, 8.925% Membership Interest           |       | 341            |       | (432              | )          | —                          |       |
| Rincon Energy Partners, LLC, 10% Membership Interest                 |       | 175            |       | —            |       | 175                             |       |
|                                                                 |       |           |       |              |       |                            |       |
| Total                                                                |       | $              | 1,266      |              | $          | (1,266                          | )          | $ | 284 |   |

** **

**TheCompany records its book value in partnership investments at the lower of costor fair market value, less cumulative cash distributions from each investment.Cash distributions in excess of basis are recorded as partnership income andany impairment of partnership investment is recorded as a charge toincome.  The Company periodically reviewsits partnership investments for impairment by comparing each investment’s bookvalue against its fair value. Management uses its best efforts to estimate fairvalue in its partnership investments, based on the historical and expectedfuture performance of each investment, as well as consideration of anysignificant events affecting the underlying assets of each partnership, whichmay limit the Company’s ability to recover its investment. Any resultingimpairment is recorded in earnings in the period the Company determines that animpairment exists. The Company recognized partnership income of $56,732 for thequarter ended March 31, 2005, compared to partnership income of $36,412 for thequarter ended March 31, 2004.**

 

**8.             Oil and Gas Properties, Equipment and Fixtures**

 

The Company recognized $688,234 in depletion,depreciation and amortization expense for the three months ended March 31,2005, compared to $519,433 for the three months ended March 31, 2004.

 

In February 2004, the Company sold all of its approximate 5% workinginterest in the Cascade Field in Los Angeles County, California to a privatecompany for $525,000, generating a gain of $242,018.  The Company utilized a portion of the proceedsto acquire an additional 10% working interest in the Bonnie View Field inRefugio County, Texas, for approximately $195,000, increasing the Company’soperated working interest in the property to 71.38%.

 

**9.             Notes Payable**

 

The Company’s outstanding debt obligations as of March 31, 2005,include a revolving credit facility and Convertible Subordinated Note, whichare described below in more detail.  Forthe quarter ended March 31, 2005, the Company incurred interest expense of$105,294, net of capitalized interest of $40,716.  The interest expense for the quarter endedMarch 31, 2005, included interest expense of $104,670 incurred on the CreditFacility, $31,278 of interest incurred on the Convertible Subordinated Note and$10,062 incurred on the amortization of debt issuance costs.  For the quarter ended March 31, 2004, theCompany incurred interest expense of $51,393 on the Credit Facility.

 

Revolving Credit Agreement

 

On July 17, 2002, the Company signed a revolving credit agreement witha financial institution to borrow up to $15 million, based upon the amount ofproved reserves attributable to the Company’s oil and gas properties. Interestexpense is payable monthly at an interest rate equal to 1/4% over prime, aspublished by the Wall Street Journal, which was 5.75% at March 31, 2005. Thecredit agreement was amended in November 2004 to extend its maturity date toOctober 1, 2007.

 

13

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The Company had net borrowings under the credit agreement of $8,445,000and $7,745,000 as of March 31, 2005 and December 31, 2004, respectively. As ofMarch 31, 2005, the Company’s total borrowing base was $8.8 million, of which$90,000 was available for borrowing.

 

As of March 31, 2005 and December 31, 2004, the Company utilized atotal of $265,000 of its available borrowing base under the credit facility toprovide letters of credit against required state bonds in Louisiana and Texasrelating to the Company’s operated oil and gas properties. The costs ofmaintaining the letters of credit, which are not reflected as principal drawdowns under the credit facility, are included in interest expense.

 

During the quarter ended March 31, 2005, the Company borrowed $1million under the credit agreement to finance an escrow account required aspart of the Company’s Merger Agreement with RIMCO Production Company, Inc.,entered into during April 2005. The Merger Agreement is more fully described inNote 13.

 

The credit agreement is collateralized by substantially all of theCompany’s assets and the Company is subject to various covenants,representations and warranties as established by the credit agreement. Theprimary covenants agreed to by the Company under the credit agreement, asamended, include the following:

 

**•**                  The Company will maintain a total Tangible Net Worthof not less than $7,300,000, plus (a) fifty percent (50%) of net income(excluding losses) subsequent to June 30, 2004, and (b) one hundred (100%) ofany increases in shareholders’ equity resulting from the sale or issuance ofequity interests subsequent to June 30, 2004.

 

**•****                 **The Companywill maintain a ratio of quarterly EBITDAX (net income before interestexpenses, taxes, depreciation, depletion, amortization, exploration costs, andother non-cash expenses less non-cash income and capitalized expenses) toquarterly interest expense of not less than 3.00.

 

**•****                 **The Companywill maintain a current ratio, determined quarterly, of Current Assets toCurrent Liabilities, exclusive of any current portion of principal outstandingunder the credit agreement and the current fair value of outstanding commodityprice hedging contracts, of at least one to one.

 

The Company was in compliance with these covenants as of March 31, 2005and December 31, 2004.

 

As of March 31, 2005 and December 31, 2004,the Company classified $1,500,000 and $1,650,000, respectively, of theoutstanding principal under the credit agreement as a current liability, basedon monthly principal payments required as a result of the Company’s latestapplicable borrowing base review performed by the bank. The bank reviews theCompany’s borrowing base every six months or in conjunction with a materialacquisition. The Company’s next borrowing base review is scheduled for May2005.

 

14

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Convertible Subordinated Note

 

In June 2004, the Company issued to thesellers of certain South Texas gas properties a Convertible Subordinated Notein the amount of $1,787,330, bearing interest at a rate of 7%. The ConvertibleSubordinated Note, including any accrued interest thereon, is convertible atany time during its term at a conversion price of $2.00 per share into 893,665shares of the Company’s common stock. The Convertible Subordinated Note isfully subordinated to the Company’s existing credit agreement and may be paidoff at any time without penalty to the Company. No principal payments arerequired on the Convertible Subordinated Note during the first two years it isoutstanding. In the event the Convertible Subordinated Note is not convertedinto the Company’s common stock during this two-year period, the Company willrepay the principal outstanding ratably over 48 months until either theConvertible Subordinated Note has been fully repaid or the remaining principaloutstanding on the Convertible Subordinated Note is converted into the Company’scommon stock. The Company granted “piggy back” registration rights for theshares of common stock underlying the Convertible Subordinated Note andregistered the underlying shares in December 2004. The Company incurred $31,278in interest expense on the Convertible Subordinated Note for the three monthsended March 31, 2005.

 

Anticipated future maturities of the credit agreement and theConvertible Subordinated Note, based on principal outstanding as of March 31,2005, are as follows (in thousands):

 

| **Year**   | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2005       |       | $          | 1,050      |   |   |
| 2006       |       | 2,060      |       |   |
| 2007       |       | 2,247      |       |   |
| 2008       |       | 2,247      |       |   |
| Thereafter |       | 2,628      |       |   |
|       |       |       |       |
| Total      |       | $          | 10,232     |   |   |

 

 

**10.          Commodity Price Risk Hedging Instruments**

 

**The Company held variousderivative instruments, including crude oil and natural gas option agreementsknown as “swaps” and “collars” as of March 31, 2005 and December 31, 2004.Swaps are designed to fix the price of anticipated sales of future production,while collars are designed to establish floor and ceiling prices on anticipatedsales of future production. The Company entered into the contracts at the timeit acquired certain operated oil and gas property interests as a means toreduce the future price volatility on its sales of oil and gas production, aswell as to achieve a more predictable cash flow from its oil and gasproperties. The Company has designated its price hedging instruments as cashflow hedges in accordance with SFAS No. 133.**

 

15

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Further details relating to the Company’shedging activities are as follows:

 

Hedging Contracts Held as of March 31, 2005:

 
| ** **                        | ** ** | ** ** | ** ** | **Nymex Contract Price** | ** ** | ** **       | ** ** |
|-----------------------------------|------------|------------|------------|--------------------------|------------|------------------|------------|
| ** **                        | ** ** | **Total**  | ** ** | ** **               | ** ** | **Ceiling/Swap** | ** ** | **Fair Value** | ** ** |
| **Contract Period and Type**      | ** ** | **Volume** | ** ** | **Floor**                | ** ** | **Price**        | ** ** | **(in thousands)** | ** ** |
|                              |       |       |       |                     |       |             |       |   |   |
| **Crude Oil Contracts (barrels)** |       |       |       |                     |       |             |       |   |   |
| Swap Contracts:                   |       |       |       |                     |       |             |       |   |   |
| April 2005 — December 2005   |       | 27,000     |       | N/A                      |       | $                | 34.75      |   | $ | (583 | ) |
|                              |       |       |       |                     |       |             |       |   |   |
| Collar Contracts:                 |       |       |       |                     |       |             |       |   |   |
| April 2005                        |       | 3,750      |       | $                        | 19.75      |             | $          | 22.75 |   | (123 | ) |
| April 2005 — December 2005   |       | 9,000      |       | $                        | 26.00      |             | $          | 29.20 |   | (244 | ) |
| April 2005 — December 2005   |       | 9,000      |       | $                        | 26.00      |             | $          | 28.95 |   | (246 | ) |
| April 2005 — December 2005   |       | 13,500     |       | $                        | 31.00      |             | $          | 36.95 |   | (264 | ) |
| January 2006 — December 2006 |       | 96,000     |       | $                        | 30.00      |             | $          | 34.25 |   | (1,843 | ) |
|                              |       |       |       |                     |       |             |       |   |   |
| **Natural Gas Contracts (mmbtu)** |       |       |       |                     |       |             |       |   |   |
| Swap Contracts                    |       |       |       |                     |       |             |       |   |   |
| April 2005 — December 2005   |       | 90,000     |       | N/A                      |       | $                | 6.02       |   | (154 | ) |
|                              |       |       |       |                     |       |             |       |   |   |
| Collar Contracts:                 |       |       |       |                     |       |             |       |   |   |
| April 2005 — December 2005   |       | 90,000     |       | $                        | 4.00       |             | $          | 7.20 |   | (85 | ) |
| April 2005 - September 2005       |       | 144,000    |       | $                        | 5.75       |             | $          | 6.05 |   | (211 | ) |
| October 2005 - December 2005      |       | 72,000     |       | $                        | 5.75       |             | $          | 6.75 |   | (118 | ) |
| January 2006 — December 2006 |       | 120,000    |       | $                        | 5.00       |             | $          | 6.45 |   | (175 | ) |
|                              |       |       |       |                     |       | Total            |       | $ | (4,046 | ) |

 

16

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Hedging Contracts Held as of December 31,2004:

 
| ** **                        | ** ** | ** ** | ** ** | **Nymex Contract Price** | ** ** | ** **       | ** ** |
|-----------------------------------|------------|------------|------------|--------------------------|------------|------------------|------------|
| ** **                        | ** ** | **Total**  | ** ** | ** **               | ** ** | **Ceiling/Swap** | ** ** | **Fair Value** | ** ** |
| **Contract Period and Type**      | ** ** | **Volume** | ** ** | **Floor**                | ** ** | **Price**        | ** ** | **(in thousands)** | ** ** |
|                              |       |       |       |                     |       |             |       |   |   |
| **Crude Oil Contracts (barrels)** |       |       |       |                     |       |             |       |   |   |
| Swap Contracts:                   |       |       |       |                     |       |             |       |   |   |
| January 2005 — December 2005 |       | 36,000     |       | N/A                      |       | $                | 34.75      |   | $ | (278 | ) |
|                              |       |       |       |                     |       |             |       |   |   |
| Collar Contracts:                 |       |       |       |                     |       |             |       |   |   |
| January 2005 — April 2005    |       | 15,000     |       | $                        | 19.75      |             | $          | 22.75 |   | (309 | ) |
| January 2005 — December 2005 |       | 12,000     |       | $                        | 26.00      |             | $          | 29.20 |   | (160 | ) |
| April 2005 — December 2005   |       | 9,000      |       | $                        | 26.00      |             | $          | 28.95 |   | (119 | ) |
| January 2005 — December 2005 |       | 18,000     |       | $                        | 31.00      |             | $          | 36.95 |   | (121 | ) |
| January 2006 — December 2006 |       | 96,000     |       | $                        | 30.00      |             | $          | 34.25 |   | (682 | ) |
|                              |       |       |       |                     |       |             |       |   |   |
| **Natural Gas Contracts (mmbtu)** |       |       |       |                     |       |             |       |   |   |
| Swap Contracts                    |       |       |       |                     |       |             |       |   |   |
| January 2005 — December 2005 |       | 120,000    |       | N/A                      |       | $                | 6.02       |   | (27 | ) |
|                              |       |       |       |                     |       |             |       |   |   |
| Collar Contracts:                 |       |       |       |                     |       |             |       |   |   |
| January 2005 — December 2005 |       | 120,000    |       | $                        | 4.00       |             | $          | 7.20 |   | (39 | ) |
| January 2005 - March 2005         |       | 72,000     |       | $                        | 6.20       |             | $          | 8.40 |   | 23 |   |
| April 2005 - September 2005       |       | 144,000    |       | $                        | 5.75       |             | $          | 6.05 |   | (34 | ) |
| October 2005 - December 2005      |       | 72,000     |       | $                        | 5.75       |             | $          | 6.75 |   | (23 | ) |
| January 2006 — December 2006 |       | 120,000    |       | $                        | 5.00       |             | $          | 6.45 |   | (55 | ) |
|                              |       |       |       |                     |       | Total            |       | $ | (1,824 | ) |

 

 

The Company accounts for its derivatives as cash flow hedginginstruments, and recognizes gains or losses on settlement of its hedginginstruments in oil and gas revenues, and changes in their fair value as acomponent of other comprehensive income, net of deferred taxes. The Companyrecognized pre-tax losses in oil and gas revenues of $567,126 and $199,389 forthe quarters ended March 31, 2005 and 2004, respectively, due to realizedsettlements of its price hedge contracts during the respective periods. The Company recorded unrealized losses oncash flow hedging contracts of $1,324,169, net of deferred taxes of $713,014,for the three months ended March 31, 2005. Comparatively, the Companyrecorded unrealized losses of $606,830 net of deferred taxes of $326,754, forthe three months ended March 31, 2004. As of March 31, 2005, the Companyanticipates $1,190,365 of unrealized losses, net of deferred taxes of $640,966,will be reclassified into earnings during 2005. The Company recorded a loss of$184,546 for the ineffective portion of the cash flow hedges for the quarterended March 31, 2005. As of December 31, 2004, the Company changed its methodof testing the effectiveness of its cash flow hedges from the dollar offsetmethod to regression analysis.

 

17

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The following table details the activity of the cash flow hedges on apre-tax and after-tax basis for the period ending March 31, 2005 (inthousands).

 

 
| ** **                                                | ** ** | **Pre-tax** | ** ** | **After-tax** | ** ** |
|-----------------------------------------------------------|------------|-------------|------------|---------------|------------|
| Accumulated other comprehensive loss,   December 31, 2004 |       | $           | (1,824     | )             | $          | (1,178 | ) |
| Reclassified into earnings                                |       | 567         |       | 369           |       |
| Change in fair market value                               |       | (2,790      | )          | (1,813        | )          |
| Ineffective portion of cash flow hedges                   |       | 185         |       | 120           |       |
| Accumulated other comprehensive loss,   March 31, 2005    |       | $           | (3,862     | )             | $          | (2,502 | ) |

 

**11.          Related PartyTransactions**

 

The Company’s Chief Operating Officer, Daniel Silverman, received a4.63% net profits interest (“NPI”) in the Company’s investment in the BeaverDam Creek Field upon completion of the transaction in 2002. The NPI entitledMr. Silverman to 4.63% of the Company’s net operational cash flow from thefield (i.e. revenues less operating costs and capital investment) afterdeducting related principal and interest payments under the Company’s creditfacility described in Note 9. The Company did not make any distributions to Mr.Silverman for the NPI in 2003 and paid Mr. Silverman a total of $16,408 in netprofits in 2002. In March 2004, the Company acquired the NPI from Mr. Silvermanfor $70,000.

 

**12.          Commitments and Contingencies**

 

TheCompany entered into a rental lease for approximately 2,910 square feet ofcorporate office space in Houston, Texas on April 1, 2004, for a renewable termof 90 months. The renewal option of the lease allows the Company to extend theterm of the lease for one term of five years with written notice nine monthsprior to the expiration date of the lease. The Company has a one-time option tocancel the lease after the 51st month of the inception of the lease. The leaserequires payments of approximately $5,000 per month. In February 2005, theCompany executed a preferential right to lease an additional 2,132 square feetadjacent to its existing office lease for approximately $3,700 per monthbeginning in June 2005, subject to the same general terms and conditions as theCompany’s existing lease.  The Company’sfuture minimum annual lease payments for the next five years are as follows (inthousands):

 

 

| **Year**   | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2005       |       | $          | 71         |   |   |
| 2006       |       | 104        |       |   |
| 2007       |       | 104        |       |   |
| 2008       |       | 104        |       |   |
| 2009       |       | 104        |       |   |
| Thereafter |       | 183        |       |   |
|       |       |       |       |
| Total      |       | $          | 670        |   |   |

 

18

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**13.          Subsequent Events**

 

On April 18, 2005, Whittier entered into anAgreement and Plan of Merger (the “Merger Agreement”) by and among Whittier,RPC Acquisition Company, Inc., a Delaware corporation and wholly-ownedsubsidiary of Whittier (“Merger Sub”), and RIMCO, pursuant to which Whittierhas agreed to purchase all of the issued and outstanding shares of RIMCO commonstock for approximately $56 million, including $55 million in cash and $1.0million in assumed bank debt.

 

The Merger Agreement was unanimously approvedby the boards of directors of Whittier and RIMCO.  Under the terms of the agreement, the MergerSub will merge with and into RIMCO (the “Merger”), with RIMCO surviving theMerger as a wholly owned subsidiary of Whittier.  The Merger is intended to qualify as atax-free reorganization under Section 368(a) of the Internal Revenue Code of1986, as amended.

 

Consummation of the Merger is conditioned upon,among other things, (1) attainment by Whittier of cash funds necessary to closethe transaction, (2) approval of the Merger by the stockholders of RIMCO, (3)the receipt of all required regulatory approvals, (4) absence of any order orinjunction prohibiting the consummation of the Merger, (5) subject to certainexceptions, the accuracy of representations and warranties with respect toRIMCO’s or Whittier’s business, as applicable. The Merger Agreement contains certain termination rights and providesthat, upon the termination of the Merger Agreement under specifiedcircumstances, Whittier may be required to pay RIMCO a termination fee of $1million, which Whittier has deposited into an escrow account. Otherwise, the $1million amount will be applied against the purchase price upon closing of theMerger pursuant to the terms of the Merger Agreement. It is anticipated thatthe Merger will be completed on or before June 17, 2005.

 

RIMCO has made customary representations andwarranties and covenants in the Merger Agreement, including among others, (i)to conduct its businesses in the ordinary course between the execution of theMerger Agreement and the consummation of the Merger and (ii) to cause a meetingof its stockholders to be held to consider the adoption of the MergerAgreement.

 

19

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**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

**ExecutiveSummary**

 

     Whittieris a rapidly growing independent oil and gas exploration and production companyprimarily engaged in the acquisition, exploration and development of oil andgas properties in the continental United States. Our assets consist of operatedand non-operated working interests, royalty interests, partnership interests,and mineral acreage in various oil and gas properties, principally located inTexas, Louisiana, Oklahoma, and California, with minor property interests inColorado, Utah, New Mexico, Wyoming, and Pennsylvania. The Company primarilyinvests in operated working interests in onshore properties in the Gulf Coastarea.

 

     Whittierintends to increase its reserves, production, revenues, net income and cashflows principally through the: (i) acquisition and development of producingproperties, leasehold acreage, and drilling prospects with exploitation andexploration potential; (ii) accelerated development of our existing provedproperties and identified exploration prospects; (iii) continued participationin attractive third-party generated development, exploitation and explorationprojects; (iv) identification and pursuit of corporate merger and acquisitionopportunities, and (v) disposition of marginally performing and other non-corebusiness assets.

 

Highlightsof Whittier’s activity for the quarter ended March 31, 2005 compared to thequarter ended March 31, 2004 are as follows:

 

•                        Average dailyproduction increased 31% to 920 barrels of oil equivalent (“Boe”) per day inthe first quarter of 2005 from 702 Boe per day in the first quarter of 2004,principally due to the Company’s 2004 acquisitions of the Cut Off field in Mayand July 2004, and the North Rincon, Tom Lyne and Scott & Hopper fields inJune 2004.

 

•                        Quarterlyrevenues increased 47% to $2.8 million in 2005 from $1.9 million in 2004,primarily due to a 30% increase in production and a 13% increase in higherrealized oil and gas prices per unit of production. Whittier recognized netincome of $272,000 in the first quarter of 2005 compared to a net loss of$276,000 in the first quarter of 2004, an increase of 199%.

 

•                        Cash flows fromoperations increased 213% from $619,000 in the first quarter of 2004 to $1.9million in the first quarter of 2005.

 

Wehave currently identified approximately $5.5 million in capital exploration anddevelopment projects on existing oil and gas properties for 2005, of whichapproximately $1.5 million has already been incurred as of March 31, 2005.  We intend to fund our 2005 capitalexpenditures using operating cash flows, sales of marketable securities,additional borrowings under our existing debt facility with Compass Bank (the “CreditFacility”), and/or through the issuance of additional equity or debtsecurities.

 

**Proposed Acquisition of RIMCOProduction Company, Inc.**

 

On April 18, 2005, Whittier entered into a definitive agreement toacquire RIMCO Production Company, Inc., a privately held Delaware corporation (“RIMCO”),for $56 million, including $55 million in cash and $1 million in assumed bankdebt. Whittier has agreed to acquire working interests in approximately 116active wells and one unit in 18 producing fields principally located in theGulf Coast region in Texas, Louisiana, and Alabama and in the Permian Basin.The transaction will add approximately 4.1 million barrels of oil equivalent (“Mmboe”)of proved reserves, 1,400 barrels of oil equivalent (Boe) of daily production,and significant undeveloped acreage with multiple prospects. The board ofdirectors of both companies have unanimously approved the transaction, which isexpected to close on or before June 17, 2005, subject to the approval of theRIMCO shareholders and the completion of customary due diligence. Whittierintends to fund the transaction with a combination of equity and bank debt. Theproposed transaction is more fully described in Note 13 to the accompanyingconsolidated financial statements.

 

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**Liquidity and Capital Resources**

 

During the quarter endedMarch 31, 2005, we generated approximately $1.9 million in net cash flows fromoperations and had a net working capital deficit of approximately $2.4 million.Not considering the current portion of our Credit Facility, which includesanticipated principal payments of $1.5 million through March 31, 2006, as wellas the current portion of our hedge liability of $2.6 million, net of a currenttax asset of $905,000, we had positive net working capital of approximately$817,000 as of March 31, 2005.  As of May2005, our average net daily production was approximately 950 Boe per day, including 528 barrels of oil per day (“Bopd”)and 2,520 million cubic feet ofgas per day (“Mmcfd”), and we are generating net positive cash flow from ouroperations.

 

The Credit Facility providesfor a total potential revolving credit line of $15 million, the availability ofwhich is determined based on the value of our proved oil and gas reserves.During the quarter ended March 31, 2005, we borrowed $1.0 million in principalfrom the Credit Facility to finance an escrow facility related to theacquisition of RIMCO and repaid $300,000 in principal. The Credit Facility iscollateralized by substantially all of Whittier’s assets and subjects us tovarious covenants, representations and warranties as established by theunderlying credit agreement.

 

As of March 31, 2005, we had$8.4 million in principal outstanding under the Credit Facility, of which $1.5million was classified as a current liability payable on or before March 31,2006. We expect to fund our future principal payments required on the CreditFacility using cash flows generated from operations. The ConvertibleSubordinated Note, described in Note 9 of the Company’s consolidated financialstatements, does not require any principal payments prior to June 2006 and willnot have any significant impact on Whittier’s short-term liquidity. Whittier iscurrently renegotiating its debt financing arrangements in light of theproposed RIMCO acquisition.

 

Whittier’s future liquidity,in both the short and long-term, is principally dependent upon the volume ofour oil and gas production, as well as the market price we receive on futuresales of that production. Our proved reserves are approximately 86% proveddeveloped, which we believe provides a core basis of future production andinternal cash flow necessary to fund our day-to-day business activities.

 

We have hedged a portion ofour production to manage our exposure to oil and gas price volatility, as wellas to achieve more predictable cash flows from our oil and gas properties. Wehave also utilized hedges to support a higher borrowing base under the CreditFacility, allowing us access to additional debt financing for our producing oiland gas property acquisitions. Hedging limits us from receiving the fulladvantage of increases in oil or gas prices above the fixed amount specified inthe underlying hedge agreement.

 

For 2005, Whittier hashedged total production of 90,000 barrels of oil (“Bbls”) with an effectiveceiling/swap price of $31.87 per Bbl and 528,000 thousand cubic feet of gas (“Mcf”)with an effective ceiling/swap price of $6.72 per Mcf.  Certain oil hedge contracts with a ceilingprice of $22.75 per barrel are due to expire as of April 30, 2005, reducingWhittier’s monthly hedged oil volumes by 2,750 Bbls of oil per month for theremainder of the year. As a result, we expect to realize the future availablecrude oil market price for an additional 2,750 Bbls of oil production per monthfor the period from May 2005 to December 2005. Whittier’s outstanding hedgepositions as of March 31, 2005 are more fully described in Note 10 to itsconsolidated financial statements included with this interim report.

 

Whittier’s long-term growthdepends on our ability to replace and extend our existing proved oil and gasreserve base, as well as to increase rates of production from new and existingproperties to generate higher oil and gas revenues. We seek to accomplishsteady and sustainable growth of our proved reserves and future productionrates through the acquisition, exploration and development of additional oiland gas properties, as well as continued exploitation and development ofexisting properties. We expect to fund future growth using a combination ofavailable working capital, third party debt financing, and the issuance of ourequity and/or debt securities.

 

 

**CapitalCommitments and Contingencies**

 

In connection with our June2004 acquisition of three gas fields in South Texas, we agreed to drill fourwells over a two-year period and pay certain drilling costs on behalf of theseller’s retained working interests in those wells.  Under the terms of the drilling commitment,we agreed to drill two wells each in the Scott & Hopper Field and the NorthRincon Field, or reassign a portion of the undeveloped acreage in each field tothe seller of the 

 

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properties. The drilling commitment requiresWhittier to begin drilling the two Scott & Hopper wells on or before March18, 2005 and December 18, 2005, respectively, and the two North Rincon wells onor before June 18, 2005 and June 18, 2006, respectively, in order for us toretain the undeveloped acreage rights in each field.  The first commitment well in each field earns50% of the undeveloped acreage rights for that particular property, while thesecond commitment well earns the remaining 50%. We have also agreed to pay theseller’s portion of the drilling costs for the four wells to “casing electionpoint” (i.e. the decision point on whether to complete the well or abandon itas a dry hole). The estimated capital costs to drill these wells, net to ourinterest and including the sellers’ carried interests, is approximately $3.1million, which we expect to fund using future cash flows from operations. Inthe event we do not drill the required wells, our interests in existing wellson the properties will be unaffected, along with our undeveloped acreage in theTom Lyne Field which is not subject to the drilling commitment.

 

Whittier successfully drilled the first Scott & Hopper #4commitment well during February 2005 and has staked the drilling location andhas contracted a drilling rig for the initial commitment well in the NorthRincon Field. The Scott & Hopper #4 well began production in May 2005 withan initial production rate of 1.2 Mmcf per day. The Company has an approximate56% working interest (42% net revenue interest) in the well.

 

 

**Results of Operations**

 

*Forthe Quarter Ended March 31, 2005 compared with the Quarter Ended March 31, 2004*

 

We generated net income ofapproximately $272,000, or $0.02 per share, for the quarter ended March 31,2005, compared to a net loss of $276,000, or $0.03 per share, for thecomparable period ended March 31, 2004. The $548,000 favorable variance wasprimarily attributable to higher oil and gas production and prices. The significant components of Whittier’sresults of operations for the quarters ended March 31, 2005 and 2004 are asfollows:

 

Oil and Gas Revenues. Oiland gas revenues increased 47% from approximately $1.9 million, or $29.80 perBoe, for the quarter ended March 31, 2004 to $2.8 million, or $33.82 per Boe, for the quarter endedMarch 31, 2005, based upon a 30% increase in production and 13% increase inrealized commodity prices per Boe after hedge settlements. Whittier recognizedpre-tax losses in oil and gas revenues of $567,126 and $199,389 during thequarter ended March 31, 2005 and 2004, respectively, due to realizedsettlements of its price hedge contracts. Whittier produced 82,824 Boe duringthe quarter ending March 31, 2005, consisting of 45,286 Bbls of oil and 225,226Mcf of gas, compared to production of 63,865 Boe for the quarter ending March31, 2004, consisting of 40,676 Bbls of oil and 139,134 Mcf of gas. The increasein production was principally due to its 2004 oil and gas propertyacquisitions, including the May and July 2004 acquisition of the Cut Off Fieldand the June 2004 acquisition of three gas fields in South Texas.

 

Costs and Expenses. Totaloperating costs and expenses increased by 53% from $1.6 million for the quarterending March 31, 2004 to $2.4 million for the quarter ending March 31, 2005,principally due to Whittier’s increased acquisition, development, andexploration activity from the prior year coupled with the increase in thenumber of employees from four to six. The breakdown of variances for the componentsof operating costs and expenses is as follows:

 

•                  Lease operatingexpenses increased 71% from $475,000, or $7.44 per Boe, for the quarter endingMarch 31, 2004 to $813,000, or $9.82 per Boe, for the quarter ending March 31,2005, reflecting Whittier’s 100% increase from four to eight operatedproperties;

•                  Productiontaxes increased 58%, from $160,000, or $2.51 per Boe, for the quarter endingMarch 31, 2004, to $252,000, or $3.04 per Boe, for the quarter ending March 31,2005. The 21% increase in production taxes per Boe from the first quarterending 2004 to 2005 was attributable to higher taxes incurred on Louisianaproduction, which is based on a percentage of revenue versus actual productionvolumes, and a larger ratio of natural gas production compared to overallproduction from the prior year;

•                  Depreciation,depletion and amortization (“DD&A”) increased by 33%, from $519,000, or$8.13 per Boe, for the quarter ending March 31, 2004 to $688,000, or $8.31 perBoe, for the quarter ending March 31, 2005. The 2.2% increase in DD&A perBoe is related to greater total production during the current period as aresult of acquisitions completed in late 2003 and in 2004, as well as a higherDD&A rate per Boe for our California and South Texas gas properties;

 

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•                  Explorationexpense for the quarter ending March 31, 2005 totaled $16,000, relating to theevaluation of Whittier’s unproved acreage in South Texas;

•                  The Companyrecognized a non-cash charge to earnings of $185,000 due to the ineffectiveportion of the fair value adjustment to our hedge contracts for the quarterending March 31, 2005;  and

•                  General andadministrative expense increased from $408,000 for the quarter ending March 31,2004 to $437,000 for the quarter ending March 31, 2005, reflecting our enhancedoperational activity from the prior year, including increasing the Company’sstaff from four to six full-time employees.

 

Off-Balance Sheet Arrangements

 

We are not a party to any off balance sheetarrangements.

 

**Forward-Looking Information**

 

The statements regarding future financialand operating performance and results, market prices, future hedgingactivities, and other statements that are not historical facts contained inthis report are forward-looking statements. The words “expect,” “project,” “estimate,” “believe,” “anticipate,”“intend,” “budget,” “plan,” “forecast,” “predict,” “may,” “should,” “could,”“will” and similar expressions are also intended to identify forward-lookingstatements.  These statements involverisks and uncertainties, including, but not limited to, market factors, marketprices (including regional basis differentials) of natural gas and oil, resultsof future drilling and marketing activity, future production and costs, andother factors detailed in this document and in our other Securities andExchange Commission (SEC) filings.  Ifone or more of these risks or uncertainties materialize, or if underlyingassumptions prove incorrect, actual outcomes may vary materially from thoseincluded in this Form 10-QSB.

** **

**Item 3. Controls and Procedures**

** **

**Evaluation of Disclosure Controls and Procedures**

** **

### **Theterm “disclosure controls and procedures” (defined in Rule 13a-15(e)) refers tothe controls and procedures of a company that are designed to ensure thatinformation required to be disclosed by a company in the reports that it filesunder the Securities and Exchange Act of 1934 (the “Exchange Act”) is recorded,processed, summarized and reported within required time periods.  Whittier’s Chief Executive Officer and ChiefFinancial Officer, who also serves as the principal accounting officer, haveevaluated the effectiveness of the Company’s disclosure controls and proceduresas of a date within 90 days before the filing of this quarterly report, andthey concluded that, as of such date, Whittier’s controls and procedures wereeffective.**

 

 

**Part II—Other Information**

** **

#### **Item 6 — Exhibitsand Reports on Form 8-K**

 

(a)                                  Exhibits

 

Exhibit 2.1                                          Agreementand Plan of Merger dated April 18, 2005 by and among Whittier EnergyCorporation,  RPC Acquisition Company,Inc. and RIMCO Production Company, Inc.

 

Exhibit 31.1                                    Certificationof Chief Executive Officer pursuant to Securities Exchange Act of 1934 Rule13a-14(a) or 15d-14(a)

 

Exhibit 31.2                                    Certificationof Chief Financial Officer pursuant to Securities Exchange Act of 1934 Rule13a-14(a) or 15d-14(a)

 

Exhibit 32.1                                    Certificationof Chief Executive Officer pursuant to Securities Exchange Act of 1934 Rule13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit 32.2                                    Certificationof Chief Financial Officer pursuant to Securities Exchange Act of 1934 Rule13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section906 of the Sarbanes-Oxley Act of 2002

 

(b)                                 Reports on Form8-K

 

 

(i)                                     8-K Report filed on January 18, 2005 —Item 4. Changes in Registrant’s Certifying Accountants.

 

(ii)                                  8-K Report filed on January 31, 2005 —Item 8. Other Events.

 

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(iii)                               8-K Report filed on March 3, 2005 — Item7. Regulation FD Disclosure.

 

(iv)                              8-K Report filed on March 22, 2005 — Item7. Regulation FD Disclosure.

 

### **Signatures**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

Dated:   May 12, 2005

 

 

 
|   | Whittier Energy  Corporation |
|--------|------------------------------|
|   |                         |
|   |                         |
|   | By:                          | */s/  Bryce W. Rhodes* |   |
|   |                         | Bryce W. Rhodes |
|   |                         | President, Chief Executive  Officer, and Director |
|   |                         |
|   |                         |
|   |                         |
|   | By:                          | */s/  Michael B. Young* |   |
|   |                         | Michael B. Young |
|   |                         | Chief Financial Officer,  Treasurer and Controller |
|   |                         | (Principal Financial and  Accounting Officer) |

 

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#### **Exhibit Index**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                      |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                 |
| Exhibit 2.1     |       | Agreement and Plan of  Merger dated April 18, 2005 by and among Whittier Energy Corporation. RPC  Acquisition Company, Inc. and RIMCO Production Company, Inc.                                                       |
|            |       |                                                                                                                                                                                                                 |
| Exhibit 31.1    |       | Certification of Chief  Executive Officer pursuant to Securities Exchange Act of 1934 Rule 13a-14(a)  or 15d-14(a)                                                                                                   |
|            |       |                                                                                                                                                                                                                 |
| Exhibit 31.2    |       | Certification of Chief  Financial Officer pursuant to Securities Exchange Act of 1934 Rule 13a-14(a)  or 15d-14(a)                                                                                                   |
|            |       |                                                                                                                                                                                                                 |
| Exhibit  32.1   |       | Certification  of Chief Executive Officer pursuant to Securities Exchange Act of 1934 Rule  13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |
|            |       |                                                                                                                                                                                                                 |
| Exhibit  32.2   |       | Certification  of Chief Financial Officer pursuant to Securities Exchange Act of 1934 Rule  13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |
|            |       |                                                                                                                                                                                                                 |

 

 

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