**FORM 10-QSBSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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

 

**For the quarterly period ended June 30,2005**

 

**OR**

 

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

 

**For the transition period from                 to                 .**

 

**CommissionFile Number:   0-30598**

 

**WHITTIER ENERGY CORPORATION**

(Exact Name ofRegistrant as Specified in Its Charter)

 
| **Nevada**                       |   | **20-0539412**                        |
|----------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction of |   | (I.R.S. Employer  Identification No.) |
| Incorporation or  Organization)  |   |                                  |

 

**333 ClayStreet, Suite 1100**

**Houston,Texas 77002**

(Address ofPrincipal Executive Offices)

 

Registrant’s telephonenumber, including area code: **(713) 850-1880**

 

Indicate by check markwhether the Registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months, and (2) has been subject to such filing requirements for the past90 days.

 

YES  ý            NO  o

 

 

As of August 12,2005 the Registrant had 3,981,991 shares of its $.001 par value common stockissued and outstanding.

 

 

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**Part I– Summarized Financial Information**

**Item 1 – Financial Statements**

 

**WhittierEnergy Corporation**

**ConsolidatedBalance Sheets**

**(InThousands)**

 
| ** **                                                     | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                     | ** ** | **(Unaudited)**         | ** ** | **(Restated)**              | ** ** |
|                                                           |       |                    |       |                        |       |
| **Assets**                                                     |       |                    |       |                        |       |
| Current  assets:                                               |       |                    |       |                        |       |
| Cash  and cash equivalents                                     |       | $                       | 4,087      |                        | $          | 1,461 |   |
| Accounts  receivable, net of allowances                        |       | 8,197                   |       | 2,491                       |       |
| Income  tax receivable                                         |       | —                  |       | 28                          |       |
| Deferred  income tax asset - commodity price hedging contracts |       | 847                     |       | 376                         |       |
| Prepaid  assets                                                |       | 304                     |       | 108                         |       |
|                                                           |       |                    |       |                        |       |
| Total  current assets                                          |       | 13,435                  |       | 4,464                       |       |
|                                                           |       |                    |       |                        |       |
| Investments  in partnerships                                   |       | 267                     |       | 284                         |       |
| Investments  in marketable securities                          |       | 972                     |       | 1,054                       |       |
| Other  assets                                                  |       | 301                     |       | —                      |       |
| Oil  and gas properties on the basis of full cost accounting:  |       |                    |       |                        |       |
| Proved  Properties, subject to amortization                    |       | 81,513                  |       | 23,360                      |       |
| Unproved  properties not subject to amortization               |       | 21,031                  |       | 2,442                       |       |
| Other  equipment and fixtures                                  |       | 208                     |       | 119                         |       |
| Accumulated  depletion, depreciation and amortization          |       | (7,764                  | )          | (6,108                      | )          |
|                                                           |       | 94,988                  |       | 19,813                      |       |
|                                                           |       |                    |       |                        |       |
| Total  assets                                                  |       | $                       | 109,963    |                        | $          | 25,615 |   |

 

*See accompanying notes.*

 

2

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**WhittierEnergy Corporation**

**ConsolidatedBalance Sheets**

**(InThousands)**

 
| ** **                                                                                                                                                                              | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                              | ** ** | **(Unaudited)**         | ** ** | **(Restated)**              | ** ** |
|                                                                                                                                                                                    |       |                    |       |                        |       |
| **Liabilities and stockholders’ equity**                                                                                                                                           |       |                    |       |                        |       |
| Current  liabilities:                                                                                                                                                                   |       |                    |       |                        |       |
| Accounts  payable                                                                                                                                                                       |       | $                       | 6,445      |                        | $          | 2,814 |   |
| Taxes  payable                                                                                                                                                                          |       | 36                      |       | 29                          |       |
| Commodity  price hedging contracts, current portion                                                                                                                                     |       | 2,430                   |       | 1,087                       |       |
| Revolving  credit facility, current portion                                                                                                                                             |       | —                  |       | 1,650                       |       |
| Total  current liabilities                                                                                                                                                              |       | 8,911                   |       | 5,580                       |       |
|                                                                                                                                                                                    |       |                    |       |                        |       |
| Deferred  income tax liability                                                                                                                                                          |       | 20,555                  |       | 834                         |       |
| Revolving  credit facility                                                                                                                                                              |       | 20,000                  |       | 6,095                       |       |
| Convertible  subordinated note payable                                                                                                                                                  |       | 1,787                   |       | 1,787                       |       |
| Asset  retirement obligation                                                                                                                                                            |       | 579                     |       | 121                         |       |
| Commodity  price hedging contracts                                                                                                                                                      |       | 1,587                   |       | 737                         |       |
|                                                                                                                                                                                    |       | 53,419                  |       | 15,154                      |       |
| Redeemable,  convertible, cumulative Preferred Stock, Series A, 8% 895,912 shares  issued and outstanding                                                                          |       | 46,066                  |       | —                      |       |
| Commitments  and contingencies                                                                                                                                                          |       |                    |       |                        |       |
| Stockholders’  equity:                                                                                                                                                             |       |                    |       |                        |       |
| Common  stock, $.001 par value, 33,333,334 shares authorized, 3,861,167 and 3,841,134  shares issued and outstanding as of June 30, 2005 and December 31,  2004, respectively |       | 4                       |       | 4                           |       |
| Additional  paid-in capital                                                                                                                                                             |       | 5,290                   |       | 5,176                       |       |
| Accumulated  other comprehensive income, unrealized gain on marketable securities, net of  taxes of $129 and $64, at June 30, 2005 and December 31, 2004                      |       | 239                     |       | 119                         |       |
| Accumulated  other comprehensive loss, hedging contracts, net of taxes of $1,362 and $634,  at June 30, 2005 and December 31, 2004                                            |       | (2,531                  | )          | (1,178                      | )          |
| Retained  earnings                                                                                                                                                                      |       | 7,476                   |       | 6,340                       |       |
| Total  stockholders’ equity                                                                                                                                                        |       | 10,478                  |       | 10,461                      |       |
|                                                                                                                                                                                    |       |                    |       |                        |       |
| Total  liabilities and stockholders’ equity                                                                                                                                        |       | $                       | 109,963    |                        | $          | 25,615 |   |

 

*See accompanying notes.*

 

3

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**WhittierEnergy Corporation**

**ConsolidatedStatements of Operations**

**(InThousands, Except Share Data)**

**(Unaudited)**

 
| ** **                                 | ** ** | **Three Months  Ended  June 30,  2005** | ** ** | **Three Months  Ended  June 30,  2004** | ** ** | **Six Months  Ended  June 30,  2005** | ** ** | **Six Months  Ended  June 30,  2004** | ** ** |
|--------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | ** **                                   | ** ** | **(Restated)**                               | ** ** | ** **                                 | ** ** | **(Restated)**                             | ** ** |
|                                       |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Oil  and gas revenues                      |       | $                                            | 3,857      |                                         | $          | 2,172                                      |       | $                                          | 6,658      |   | $ | 4,075 |   |
|                                       |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Costs  and expenses:                       |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Lease  operating expenses                  |       | 1,180                                        |       | 664                                          |       | 1,993                                      |       | 1,139                                      |       |
| Production  taxes                          |       | 314                                          |       | 213                                          |       | 566                                        |       | 373                                        |       |
| Depreciation,  depletion, and amortization |       | 1,006                                        |       | 619                                          |       | 1,657                                      |       | 975                                        |       |
| Ineffective  portion of hedge contracts    |       | (74                                          | )          | —                                       |       | 111                                        |       | —                                     |       |
| General  and administrative expenses       |       | 467                                          |       | 297                                          |       | 856                                        |       | 674                                        |       |
|                                       |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Total  costs and expenses                  |       | 2,893                                        |       | 1,793                                        |       | 5,183                                      |       | 3,161                                      |       |
|                                       |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Income  from operations                    |       | 964                                          |       | 379                                          |       | 1,475                                      |       | 914                                        |       |
|                                       |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Other  income (expense):                   |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Interest  and dividend income              |       | 9                                            |       | 1                                            |       | 9                                          |       | 1                                          |       |
| Interest  expense                          |       | (120                                         | )          | (47                                          | )          | (224                                       | )          | (89                                        | )          |
| Gain  from sales of marketable securities  |       | 309                                          |       | —                                       |       | 365                                        |       | —                                     |       |
| Impairment  of marketable securities       |       | —                                       |       | —                                       |       | —                                     |       | (645                                       | )          |
| Partnership  income                        |       | 66                                           |       | 85                                           |       | 123                                        |       | 121                                        |       |
|                                       |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Other  income (expense)                    |       | 264                                          |       | 39                                           |       | 273                                        |       | (612                                       | )          |
|                                       |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Income  before income taxes                |       | 1,228                                        |       | 418                                          |       | 1,748                                      |       | 302                                        |       |
| Provision  for income taxes                |       | 430                                          |       | 146                                          |       | 612                                        |       | 331                                        |       |
| Net  income (loss)                         |       | $                                            | 798        |                                         | $          | 272                                        |       | $                                          | 1,136      |   | $ | (29 | ) |

 

*See accompanying notes.*

 

4

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| ** **                                                              | ** ** | **Three Months  Ended  June 30,  2005** | ** ** | **Three Months  Ended  June 30,  2004** | ** ** | **Six Months  Ended  June 30,  2005** | ** ** | **Six Months  Ended  June 30,  2004** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                              | ** ** | ** **                                   | ** ** | **(Restated)**                               | ** ** | ** **                                 | ** ** | **(Restated)**                             | ** ** |
|                                                                    | ** ** | ** **                                   | ** ** | ** **                                   | ** ** | ** **                                 | ** ** | ** **                                 | ** ** |
| Basic  earnings (loss) per share:                                       | ** ** | ** **                                   | ** ** | ** **                                   | ** ** | ** **                                 | ** ** | ** **                                 | ** ** |
| Net  income (loss) per share                                            |       | $                                            | .21        |                                         | $          | .08                                        |       | $                                          | .30        |   | $ | (.01 | ) |
| Weighted  average number of shares outstanding (basic)                  |       | 3,859,406                                    |       | 3,419,556                                    |       | 3,850,320                                  |       | 3,388,448                                  | ** ** |
|                                                                    |       |                                         | ** ** | ** **                                   | ** ** | ** **                                 | ** ** | ** **                                 | ** ** |
| Diluted  earnings (loss) per share:                                     |       |                                         | ** ** | ** **                                   | ** ** | ** **                                 | ** ** | ** **                                 | ** ** |
| Net  income (loss) per share                                            |       | $                                            | .14        |                                         | $          | .07                                        |       | $                                          | .24        |   | $ | (.01 | ) |
| Weighted  average number of shares outstanding (dilutive)               |       | 5,757,603                                    |       | 3,721,057                                    |       | 4,953,032                                  |       | 3,388,448                                  |       |
|                                                                    |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Net  income (loss)                                                      |       | $                                            | 798        |                                         | $          | 272                                        |       | $                                          | 1,136      |   | $ | (29 | ) |
| Diluted  net income (loss):                                             |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Interest  on convertible subordinated note                              |       | 17                                           |       | 3                                            |       | 38                                         |       | 3                                          |       |
| Diluted  net income (loss)                                              |       | $                                            | 815        |                                         | $          | 275                                        |       | $                                          | 1,174      |   | $ | (26 | ) |
|                                                                    |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Dilutive  securities outstanding:                                       |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Basic  shares outstanding                                               |       | 3,859,406                                    |       | 3,419,556                                    |       | 3,850,320                                  |       | 3,388,448                                  |       |
| Stock  options and warrants                                             |       | 100,684                                      |       | 3,613                                        |       | 50,869                                     |       | —                                     |       |
| Convertible  subordinated note                                          |       | 297,888                                      |       | 297,888                                      |       | 297,888                                    |       | —                                     |       |
| Series A  preferred stock                                          |       | 1,499,625                                    |       | —                                       |       | 753,955                                    |       | —                                     |       |
| Diluted  shares outstanding, assuming conversion of dilutive securities |       | 5,757,603                                    |       | 3,721,057                                    |       | 4,953,032                                  |       | 3,388,448                                  |       |

 

*See accompanying notes.*

 

5

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**WhittierEnergy Corporation**

**ConsolidatedStatements of Cash Flows**

**(InThousands)**

**(Unaudited)**

 
| ** **                                                                            | ** ** | **Six Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2004** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                            | ** ** | ** **                                | ** ** | **(Restated)**                            | ** ** |
| **Cash flows from operating activities**                                              |       |                                      |       |                                      |       |
| Net  income (loss)                                                                    |       | $                                         | 1,136      |                                      | $          | (29 | ) |
| Adjustments  to reconcile net income (loss) to net cash used in operating activities: |       |                                      |       |                                      |       |
| Depreciation,  depletion, and amortization                                            |       | 1,657                                     |       | 975                                       |       |
| Deferred  income tax provision                                                        |       | 612                                       |       | 331                                       |       |
| Gain  on the sale of marketable securities                                            |       | (365                                      | )          | —                                    |       |
| Partnership  income                                                                   |       | (123                                      | )          | (121                                      | )          |
| Impairment  of marketable securities                                                  |       | —                                    |       | 645                                       |       |
| Ineffective  portion of hedge loss                                                    |       | 111                                       |       | —                                    |       |
| Increase  in accounts receivable                                                      |       | (2,386                                    | )          | (913                                      | )          |
| Increase  in prepaids and other receivables                                           |       | (44                                       | )          | (16                                       | )          |
| Increase  in accounts payable                                                         |       | 2,701                                     |       | 1,566                                     |       |
| Increase  in taxes payable                                                            |       | 7                                         |       | —                                    |       |
| Net  cash provided from operating activities                                          |       | 3,306                                     |       | 2,438                                     |       |
|                                                                                  |       |                                      |       |                                      |       |
| **Cash flows from investing activities**                                              |       |                                      |       |                                      |       |
| Net  investment in oil and gas properties                                             |       | (4,315                                    | )          | (8,417                                    | )          |
| Acquisition  of RIMCO Production Company, net of cash acquired                        |       | (55,377                                   | )          | —                                    |       |
| Proceeds  from the sale of oil and gas properties                                     |       | 96                                        |       | 525                                       |       |
| Investments  in partnerships                                                          |       | (6                                        | )          | (22                                       | )          |
| Distributions  from partnerships                                                      |       | 146                                       |       | 158                                       |       |
| Proceeds  from sale of marketable securities                                          |       | 632                                       |       | —                                    |       |
| Net  cash used in investing activities                                                |       | (58,824                                   | )          | (7,756                                    | )          |
|                                                                                  |       |                                      |       |                                      |       |
| **Cash flows from financing activities**                                              |       |                                      |       |                                      |       |
| Proceeds  from revolving credit facility                                              |       | 21,000                                    |       | 4,050                                     |       |
| Payments  on revolving credit facility                                                |       | (8,745                                    | )          | (240                                      | )          |
| Debt  issuance costs                                                                  |       | (288                                      | )          | —                                    |       |
| Net  proceeds from private placement                                                  |       | —                                    |       | 2,359                                     |       |
| Net  proceeds from preferred stock offering                                           |       | 46,066                                    |       | —                                    |       |
| Proceeds  from stock option exercises                                                 |       | 111                                       |       | —                                    |       |
| Net  cash provided from financing activities                                          |       | 58,144                                    |       | 6,169                                     |       |
|                                                                                       |            |                                           |            |                                           |            |  |  |

 

6

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| ** **                                                                                   | ** ** | **Six Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2004** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                   | ** ** | ** **                                | ** ** | **(Restated)**                            | ** ** |
|                                                                                         |       |                                      |       |                                      |       |
| Net  increase in cash and cash equivalents                                                   |       | $                                         | 2,626      |                                      | $          | 851 |   |
|                                                                                         |       |                                      |       |                                      |       |
| Cash  and cash equivalents at beginning of period                                            |       | 1,461                                     |       | 1,037                                     |       |
|                                                                                         |       |                                      |       |                                      |       |
| Cash  and cash equivalents at end of period                                                  |       | $                                         | 4,087      |                                      | $          | 1,888 |   |
|                                                                                         |       |                                      |       |                                      |       |
| **Supplemental cash flow disclosure**                                                        |       |                                      |       |                                      |       |
| Interest  paid                                                                               |       | $                                         | 314        |                                      | $          | 92 |   |
|                                                                                         | ** ** | ** **                                | ** ** | ** **                                | ** ** |
| **Supplemental schedule of non-cash investing    and financing activities**             | ** ** |                                      | ** ** | ** **                                | ** ** |
| Unrealized  (gain)/loss on marketable securities                                             |       | 120                                       |       | $                                         | (485       | ) |
| Convertible  note issued for purchase of South Texas properties                              |       | —                                    |       | $                                         | 1,787      |   |
| Value  of stock warrants issued for purchase of South Texas properties                       |       | $                                         | —     |                                      | $          | 135 |   |
| Issuance  of common stock in exchange for settlement of  outstanding investment banking fees |       | $                                         | —     |                                      | $          | 40 |   |

 

*Seeaccompanying notes.*

 

7

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**WhittierEnergy Corporation**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

**1.****             General**

 

Whittier Energy Corporation, a Nevada corporation (“Whittier”), is anindependent oil and gas exploration and production company engaged in theacquisition, exploration and development of oil and gas properties in thecontinental United States. As of June 30, 2005, Whittier had five whollyowned subsidiaries, including Whittier Energy Company (“Whittier Energy”), aNevada corporation, Whittier Operating, Inc. (“Whittier Operating”), aTexas corporation, Olympic Resources (Arizona) Ltd., an Arizona corporation, RIMCOProduction Company, Inc. (“RIMCO”), a Delaware corporation, and VaqueroGas Company, Inc. (“Vaquero”), a Texas corporation. Whittier Operating isa direct subsidiary of Whittier Energy and Vaquero is a direct subsidiary ofRIMCO. References to the “Company” refer to Whittier and its subsidiaries.

 

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. The information furnished herein was taken fromthe books and records of the Company without audit. However, the informationreflects all adjustments, which are, in the opinion of management, normalrecurring adjustments necessary for the fair statement of the results for theinterim periods presented. The results of operations for the interim period arenot necessarily indicative of the results to be expected for any future interimperiod or for the year.

 

The Company has adoptedthe full cost method of accounting for its oil and gas activities.  Management believes that the full cost methodis preferable for a company more actively involved in the exploration anddevelopment of oil and gas reserves.  Thefull cost method was also utilized by RIMCO prior to the acquisition, and theassets acquired from RIMCO constitute more than 50% of Whittier’s total assets. Additionally, the full cost method is used by the majority of Whittier’speers and management believes the change will improve the comparability ofWhittier’s financial statements with its peer group. Whittier’s financialresults have been retroactively restated to reflect the conversion to the fullcost method, which is further described in Note 8.

 

A comparison of theCompany’s previously presented net income (loss), in thousands, and earnings(loss) per share under the successful efforts method of accounting to itsresults of operations disclosed herein are as follows:

 

| ** **                                                                      | ** ** | **Three Months  Ended  June 30,  2004** | ** ** | **Six Months  Ended  June 30,  2004** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
|                                                                            |       |                                         |       |                                       |       |
| Net loss,  as originally presented                                              |       | $                                            | (37        | )                                          | $          | (313 | ) |
| Basic  net loss per share, as originally presented                              |       | $                                            | 0.00       |                                       | $          | (0.03 | ) |
| Diluted  net loss per share, as originally presented                            |       | $                                            | 0.00       |                                       | $          | (0.03 | ) |
|                                                                            |       |                                         |       |                                       |       |
| Net  income (loss), as adjusted                                                 |       | $                                            | 272        |                                       | $          | (29 | ) |
| Basic  net income (loss) per share,      as adjusted   |       | $                                            | 0.08       |                                       | $          | (0.01 | ) |
| Diluted  net income (loss) per share,      as adjusted |       | $                                            | 0.07       |                                       | $          | (0.01 | ) |

 

On July 1, 2005, theCompany effected a one-for-three reverse split of its authorized andoutstanding shares of common stock. All historical weighted average share andper share amounts have been restated to reflect the reverse stock split. Inaddition to the retroactive restatement to reflect the conversion to the fullcost method and the one-for-three reverse stock split, certain prior periodamounts have been reclassified to conform to the current period presentation,including netting deferred tax assets and liabilities on the Company’sconsolidated balance sheets and reclassifying the Company’s liability for itshedging commodity contracts between current and long-term liabilities. Suchreclassifications had no effect on the Company’s net income or stockholders’equity.

 

On June 15, 2005,Whittier completed the acquisition of RIMCO Production Company, Inc., aprivately held Delaware corporation, for approximately $57.1 million (the “Acquisition”).  The Acquisition was structured as a merger ofRPC Acquisition Company, Inc., a Delaware corporation wholly owned byWhittier, into RIMCO. Upon closing of the Acquisition, Whittier became the soleowner of RIMCO. The existing shareholders of RIMCO received total considerationof approximately $55 million in cash, subject to certain adjustments, which arediscussed below. Whittier is the accounting and legal acquirer of RIMCO. TheAcquisition is further described in Note 14.

 

Contemporaneously withthe Acquisition and to fund a portion of the purchase price, Whittier issuedand sold 852,912 shares of Series A 8% Automatically Convertible PreferredStock (the “Series A Preferred Stock”) for an aggregate offering amount ofapproximately $50 million. The Company’s Series A Preferred Stock isfurther described in Note 10. Whittier also entered into a new $75 millionrevolving credit facility with an initial borrowing base of $30.5 million asmore fully described in Note 9.

 

8

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

 

Basic earnings (loss) percommon share is calculated by dividing net income or loss by the aggregateweighted average number of shares outstanding during the periods. Dilutedearnings (loss) per share considers the dilutive effect of the average numberof common stock equivalents, consisting of the Company’s common stock optionsand warrants and common stock underlying a convertible note (see Note 9) andpreferred stock (See Note 10) that were outstanding during the periods.  The Company’s weighted average anti-dilutivecommon stock equivalents for the three and six months ended June 30, 2005were none and 4,545, respectively.

 

9

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**3.****            ****New Accounting Standards**

 

In December 2004,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 123(R), “Share–Based Payment,” arevision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R)supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”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 optionshas been recognized. SFAS No. 123(R) also requires the benefits of taxdeductions in excess of recognized compensation cost to be reported as cashflow from financing activities rather than as cash flow from operations, asrequired currently. The Company willadopt SFAS No. 123(R) as of January 1, 2006. The Company is currentlyevaluating the impact of the adoption of SFAS No. 123(R) on itsfinancial statements.

 

In July 2005, theFASB issued the exposure draft “Accounting for Uncertain Tax Positions, aproposed interpretation of FASB Statement No. 109.” The proposed interpretationwould apply to all open tax positions under SFAS No. 109. The conclusions inthis interpretation apply to the initial recognition of tax benefits,recognition of tax positions, measurement of tax benefits, and classificationof tax liabilities. The comment period on this exposure draft ends in September2005, and the Company is currently assessing the impact, if any, that thisinterpretation would have on our financial position and results of operations.The proposed enactment date would require adoption effective December 31, 2005.

 

**4.****             StockBased Compensation**

 

The Company accounts forstock based compensation using the intrinsic value method under APB Opinion No. 25,“Accounting for Stock Issued to Employees.” SFAS No. 123, “Accounting forStock-based Compensation” requires that pro forma information regarding netincome and earnings per share be determined as if the Company had accounted forits employee 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 of Directors approved a LongTerm Incentive Plan (the “Plan”), which was ratified by the Company’sstockholders in July 2004. The Plan sets aside a total of 520,000 sharesof the Company’s common stock for issuance to the Company’s officers,directors, employees, and consultants. During January 2004, the Companygranted a total of 243,000 options to purchase the Company’s common stock at anaverage exercise price of $5.25 per share to certain directors, officers, andemployees of the Company, of which 5,000 options were cancelled in May 2004.The options vest ratably over a three-year period from the date of grant andhave a term of five years. The fair market value of the net options outstandingon the date of grant was estimated to be $1,088,611, or $4.56 per share, usingthe Black-Scholes option pricing model with the following weighted averageassumptions: risk free interest rate of 4%, dividend yield of 0%, volatilityfactors of the expected market price of the Company’s common stock of $4.74,and a weighted average life expectancy of the options of 3.5 years. The Companyissued an additional 19,834 options to various employees of the Company duringthe year ended December 31, 2004, with an average exercise price of $4.92 pershare, also subject to three-year ratable vesting with a term of five years.The fair market value of the options on the date of grant was estimated to beapproximately $51,000, or $2.58 per share, using the Black Scholes optionpricing model using weighted average assumptions applicable on the date of grant.The Company issued an additional 39,278 options to various employees andconsultants of the Company during the three and six months ended June 30, 2005,with an average exercise price of $7.75 per share. The fair market value of theoptions on the date of grant was estimated to be approximately $132,000, or$3.36 per share, using the Black Scholes option pricing model using weightedaverage assumptions applicable on the date of grant.

 

10

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

 
| ** **                                                                                    | ** ** | **Three Months  Ended  June 30,  2005** | ** ** | **Three Months  Ended  June 30,  2004** | ** ** | **Six Months  Ended  June 30,  2005** | ** ** | **Six Months  Ended  June 30,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                    | ** ** | ** **                                   | ** ** | **(Restated)**                               | ** ** | ** **                                 | ** ** | **(Restated)**                             | ** ** |
|                                                                                          |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Net  income (loss) under APB No. 25                                                      |       | $                                            | 798        |                                         | $          | 272                                        |       | $                                          | 1,136      |   | $ | (29 | ) |
|                                                                                          |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Deduct:  Stock-based compensation expense determined under the fair value method, net  of tax |       | (104                                         | )          | (92                                          | )          | (198                                       | )          | (175                                       | )          |
|                                                                                          |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Pro  forma net income (loss)                                                                  |       | $                                            | 694        |                                         | $          | 180                                        |       | $                                          | 938        |   | $ | (204 | ) |
|                                                                                          |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Pro  forma basic earnings (loss) per share                                                    |       | $                                            | .18        |                                         | $          | .05                                        |       | $                                          | .24        |   | $ | (.06 | ) |
|                                                                                          |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Pro  forma diluted earnings (loss) per share                                                  |       | $                                            | .12        |                                         | $          | .05                                        |       | $                                          | .20        |   | $ | (.06 | ) |

 

In April 2005, 20,334and 5,967 options to acquire the Company’s common stock at an exercise price of$7.50 Canadian ($6.12 U.S.) were exercised and expired unexercised,respectively.

 

#### **5.**             Asset Retirement Obligation

 

As of June 30, 2005, the Company had an estimatedfuture abandonment obligation of $578,717, including $551,723 in costscapitalized to oil and gas properties and $26,994 in cumulative accretionexpense.

 

**Theactivity related to the Company’s future asset retirement obligation for the sixmonths ended June 30, 2005, is as follows (in thousands):**

 

| ** **                              | ** ** | **Six Months Ended  June 30,  2005** | ** ** |
|-----------------------------------------|------------|-------------------------------------------|------------|
| Beginning  asset retirement obligation  |       | $                                         | 121        |   |
| Liabilities  incurred during the period |       | 450                                       |       |
| Liabilities  settled during the period  |       | —                                    |       |
| Accretion  expense                      |       | 8                                         |       |
| Ending  asset retirement obligation     |       | $                                         | 579        |   |

 

11

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**6.****             MarketableSecurities**

 

The Company’s investmentsin marketable securities are classified as “available-for-sale” in accordancewith SFAS No. 115, “Accounting for Certain Investments in Debt and EquitySecurities.”  As a result, theseinvestments are carried at fair market value as of the relevant balance sheetdates.  Unrealized gains and losses areexcluded from net income and reported in a separate component of stockholder’sequity as accumulated other comprehensive income.

 

The carrying amount andestimated market value of the investments as of June 30, 2005 and December 31,2004 are as follows (in thousands):

 
| ** **                                      | ** ** | **As of June 30, 2005**      | ** ** |
|-------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                      | ** ** | **Cost**                          | ** ** | **Fair Value** | ** ** |
|                                            |       |                              |       |   |   |
| Chaparral  Resources, Inc., 277,075 Shares |       | $                                 | 277        |   | $ | 720 |   |
|                                            |       |                              |       |   |   |
| PYR  Energy, Inc., 173,625 Shares          |       | 328                               |       | 252 |   |
|                                            |       |                              |       |   |   |
| Total                                           |       | $                                 | 605        |   | $ | 972 |   |
|                                            |       |                              |       |   |   |
| ** **                                      |       | **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 onits marketable securities when the securities are sold or when the Companydetermines that a permanent impairment has occurred. As of March 31, 2004,the Company reclassified its unrealized loss in Chaparral Resources, Inc.(“Chaparral”) as “other than temporary” and recognized an impairment of$645,476, reducing the Company’s book basis in the securities to $543,850. TheCompany is monetizing its investment in Chaparral in order to utilize theproceeds for the acquisition, exploration and development of oil and gas properties.During the six months ended June 30, 2005, the Company sold 266,775 sharesof Chaparral for $631,642, realizing a gain of $364,867. During the three monthsended June 30, 2005, the Company sold 223,275 shares of Chaparral for $532,102,realizing a gain of $308,827.

 

After considering the write-down of the Chaparralcommon stock, the Company has classified the remaining unrealized gains andlosses in its marketable securities as temporary in nature. The Company’sinvestment in Chaparral has appreciated from the Company’s cost basis in thestock after recognition of the impairment in the first quarter of 2004. TheCompany recorded an unrealized gain as a component of other comprehensiveincome of $239,256 net of deferred taxes of $128,830, for the six months ended June 30,2005 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 restrictionsfor its investment in PYR due to SEC regulations regarding stock traded by anaffiliate of a public company, which may limit or prohibit the Company’sability to dispose of its investment in the future. The Company’s President andChief Executive Officer and an independent director currently serve as independentdirectors on PYR’s Board of Directors, making them both insiders of PYR.

 

12

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A reconciliation of the pre and post-tax impact of theCompany’s marketable securities on accumulated other comprehensive income forthe six months ended June 30, 2005 is as follows (in thousands):

 

| ** **                                                      | ** ** | **Pre-tax** | ** ** | **After-tax** | ** ** |
|-----------------------------------------------------------------|------------|-------------|------------|---------------|------------|
| Accumulated  other comprehensive income, December 31, 2004 |       | $           | 183        |          | $          | 119 |   |
| Reclassified into  earnings                                     |       | (365        | )          | (237          | )          |
| Change  in fair market value                                    |       | 550         |       | 357           |       |
| Accumulated  other comprehensive income, June 30, 2005     |       | $           | 368        |          | $          | 239 |   |

 

**7.****             Investmentsin Partnerships**

 

**Theoriginal cost basis, cumulative distributions and book value of the Company’spartnership investments as of June 30, 2005 and December 31, 2004, wereas follows (in thousands):**

** **
| ** **                                                            | ** ** | **Investment  Cost Basis** | ** ** | **Cumulative  Distributions** | ** ** | **June 30, 2005  Net Book Value**     | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|--------------------------------------------|------------|
|                                                                  |       |                       |       |                          |       |                                       |       |
| KAB  Acquisition L.P. - II, 8.0% Limited Partnership Interest         |       | $                          | 150        |                          | $          | (254                                       | )          | $ | — |   |
| KAB  Acquisition L.P. - III, 6.4286% Limited Partnership Interest     |       | 150                        |       | (197                          | )          | —                                     |       |
| KAB  Acquisition L.L.L.P. - IV, 7.2% Limited Partnership Interest     |       | 150                        |       | (251                          | )          | —                                     |       |
| KAB  Acquisition L.L.L.P. – V, 7.5% Limited Partnership Interest |       | 150                        |       | (163                          | )          | —                                     |       |
| KAB  Acquisition L.L.L.P. - VI, 2.1825% Limited Partnership Interest  |       | 150                        |       | (64                           | )          | 86                                         |       |
| Avalanche  Royalty Partners LLC, 8.925% Membership Interest           |       | 341                        |       | (483                          | )          | —                                     |       |
| Rincon  Energy Partners, LLC, 10% Membership Interest                 |       | 181                        |       | —                        |       | 181                                        |       |
|                                                                  |       |                       |       |                          |       |                                       |       |
| Total                                                                 |       | $                          | 1,272      |                          | $          | (1,412                                     | )          | $ | 267 |   |
|                                                                  |       |                       |       |                          |       |                                       |       |
| ** **                                                            | ** ** | **Investment  Cost Basis** | ** ** | **Cumulative  Distributions** | ** ** | **December 31, 2004  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 |   |

 

13

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**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 $66,360 and $123,360for the quarter and six months ended June 30, 2005, compared topartnership income of $84,801 and $121,213 for the quarter and six months endedJune 30, 2004, respectively.**

** **

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

 

Whittier has adopted thefull cost method of accounting for its oil and gas properties.  Previously, the Company followed thesuccessful efforts method of accounting for its oil and gas activities.  Whittier believes that the full cost methodis preferable for a company more actively involved in the exploration anddevelopment of oil and gas reserves. Additionally, the full cost method is usedby the majority of Whittier’s peers and management believes the change willimprove the comparability of Whittier’s financial statements with its peergroup. Furthermore, RIMCO has used the full cost method of accounting for itsoperations and RIMCO’s assets constitute more than 50% of the Company’s total assets.  Whittier’sfinancial results have been retroactively restated to reflect the full costmethod of accounting.

 

As prescribed by fullcost accounting rules, all costs associated with property acquisition,exploration, and development activities are capitalized. Exploration anddevelopment costs include dry hole costs, geological and geophysical costs,direct overhead related to exploration and development activities and othercosts incurred for the purpose of finding oil and gas reserves. Salaries andbenefits paid to employees directly involved in the exploration and developmentof oil and gas properties as well as other internal costs that can bespecifically identified with acquisition, exploration, and developmentactivities are also capitalized.

 

In accordance with fullcost accounting rules, Whittier is subject to a limitation on capitalizedcosts. The capitalized cost of oil and gas properties, net of accumulateddepreciation, depletion, and amortization, may not exceed the estimated futurenet cash flows from proved oil and gas reserves discounted at 10 percent,plus the lower of cost or fair market value of unproved properties as adjustedfor related tax effects. If capitalized costs exceed this limit (the “ceilinglimitation”), the excess must be charged to expense. Whittier did not have anyadjustment to earnings due to the ceiling limitation for the periods presentedherein.

 

The costs of certainunevaluated oil and gas properties and exploratory wells being drilled are notincluded in the costs subject to amortization. Whittier has assessed costs notbeing amortized for possible impairments or reductions in value. If a reductionin value had occurred, the portion of the carrying cost in excess of thecurrent value would have been transferred to the costs subject to amortization.

 

**9.****             NotesPayable**

 

The Company’s outstandingdebt obligations as of June 30, 2005 include $20 million in long-term debtunder its Credit Facility and a $1.8 million convertible subordinated noteissued by the Company in June 2004.  For the quarter and six months ended June 30,2005, the Company incurred total interest expense of $120,496, net ofcapitalized interest of $104,470, and $224,496, net of capitalized interest of$145,186, respectively.  For the quarterand six months ended June 30, 2004, the Company incurred total interestexpense of $46,574, net of capitalized interest of $22,299, and $89,048, net ofcapitalized interest of $31,218.

 

14

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Revolving CreditAgreement

 

In connection with theAcquisition, on June 15, 2005 Whittier entered into a $75 millionrevolving Credit Facility with BNP Paribas as the lead bank and administrativeagent. The Credit Facility had an initial borrowing base of $30.5 million.Whittier borrowed $20 million from the Credit Facility to partially fund theAcquisition and to fully repay approximately $8.5 million in principal and accruedinterest outstanding on the Company’s previous revolving credit facility withCompass Bank, as well as $1 million of bank debt held by RIMCO. The borrowingbase is subject to review and adjustment on a semi-annual basis. Amountsoutstanding under the revolver will bear interest at specified margins over theLondon Interbank Offered Rate (“LIBOR”) of 1.50% to 2.25%. Such margins willfluctuate based on the utilization of the facility. Borrowings under therevolver are secured by first priority liens on substantially all of ourassets, including equity interests in subsidiaries. The Company is subject tocertain financial covenants pertaining to minimum working capital levels,minimum coverage of interest expenses, and a maximum leverage ratio. Inaddition, Whittier is subject to covenants limiting dividends and otherrestricted payments, transactions with affiliates, incurrence of debt, changesof control, asset sales, and liens on properties. All amounts drawn under therevolver will mature June 15, 2008.

 

The Credit Agreement iscollateralized by substantially all of the Company’s assets and the Company issubject to various covenants, representations and warranties as established bythe credit agreement. The primary covenants agreed to by the Company under thecredit agreement, as amended, include the following:

 

**•**      The Company willmaintain a ratio of total debt to consolidated EBITDAX (net income beforeinterest expenses, taxes, depreciation, depletion, amortization, explorationcosts, and other non-cash expenses less non-cash income and capitalizedexpenses)for the most recent period offour fiscal quarters of at least 3.5 to 1.0, calculated on a pro-forma basisfor the Acquisition and exclusive of the Company’s Series A Preferred Stock;and

 

•      The Companywill maintain a current ratio, determined quarterly, of current assets to currentliabilities, inclusive of available borrowing base under the Credit Facilityand exclusive of any current portion of principal outstanding under the CreditFacility, the current fair value of outstanding commodity price hedgingcontracts, and the current balance of asset retirement obligations under FAS143, of at least one to one.

 

The Company was incompliance with these covenants as of June 30, 2005 and has classified allof its outstanding indebtedness as long-term. The bank reviews the Company’sborrowing base every six months or in conjunction with a material acquisition.The Company’s next borrowing base review is scheduled for October 2005.

 

Anticipated future maturitiesof the Credit Facility as of June 30, 2005, are as follows (in thousands):

 

| **Year** | ** ** | **Amount** | ** ** |
|----------|------------|------------|------------|
| 2005     |       | $          | —     |   |
| 2006     |       | —     |       |
| 2007     |       | —     |       |
| 2008     |       | 20,000     |       |
| Total    |       | $          | 20,000     |   |

 

15

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Convertible SubordinatedNote

 

In June 2004, theCompany issued a six-year, approximate $1.8 million subordinated note bearinginterest at a rate of 7% per annum and convertible into our common stock at aconversion price of $6.00 per share to Texas Independent Exploration Limitedand certain of its affiliates in connection with our acquisition of variousoperated working interests in three gas fields in South Texas. On July 22,2005, Texas Independent Exploration Limited and certain of its affiliatesconverted $714,936 of the outstanding principal on the note into 119,156 sharesof Whittier common stock at a conversion price of $6.00 per share. On that samedate, Whittier repaid all remaining principal and accrued but unpaid intereston the note for approximately $1.1 million in cash.

 

**10.****          Series A8% Automatically Convertible Preferred Stock**

 

In connection with theAcquisition, Whittier issued and sold 852,912 shares of Series A 8%Automatically Convertible Preferred Stock for an aggregate offering amount ofapproximately $50 million. Whittier received approximately $46.9 million in netproceeds from the offering, in which Whittier Ventures, LLC, an affiliate ofthe Company, and certain officers and directors participated.

 

Each share of Series APreferred Stock may be converted at any time at the holder’s election into 10shares of Whittier’s common stock and will automatically convert into 10 sharesof its common stock, or a total of 8,529,120 shares of common stock, in theevent Whittier’s common stock is listed on the Nasdaq National Market. TheCompany submitted an application to list its common stock on the NasdaqNational Market on May 16, 2005 and has taken steps necessary to meetNasdaq listing requirements, including effecting a one-for-three reverse splitof its common stock on July 1, 2005 to increase its stock price aboveNasdaq’s $5.00 minimum bid price and appointing additional independentdirectors to Whittier’s board. If conversion of the Series A PreferredStock has not occurred on or before December 31, 2005, holders of the Series APreferred Stock are entitled to receive quarterly dividends accruing from thedate of initial issuance at a rate of 8% per annum.

 

As a condition to theoffering, the Company agreed to register the common stock underlying the Series APreferred Stock with the U.S. Securities and Exchange Commission (“SEC”) on orbefore December 15, 2005 and to maintain the effectiveness of theregistration for two years following its effective date. The Company filed therequired registration statements on August 8, 2005. In the event theregistration statements are not declared effective on or before December 31,2005, the dividend rate payable on the Series A Preferred Stock willincrease to 8.5% per annum. If the Series A Preferred Stock has beenconverted into common stock, Whittier will make a quarterly payment of $0.03per common share until the Company achieves effective registration with theSEC.

 

The holders of the Series APreferred Stock may vote on an as-converted basis with the Company’s commonstock. If 51% or more of the Series A Preferred Stock has not converted byDecember 31, 2005, the holders of the Series A Preferred Stock,voting separately as a class, will be entitled to elect two additional membersto Whittier’s board of directors and one member if between 10% and 51% of the Series APreferred Stock has not converted. The Company is required to redeem all of theoutstanding Series A Preferred Stock on September 14, 2008 at 108% ofthe liquidation preference, including the face value of any outstanding Series APreferred Stock plus any accrued and unpaid dividends through the date ofredemption.

 

11.           CommodityPrice Risk Hedging Instruments

 

**TheCompany held various derivative instruments, including crude oil and naturalgas option agreements known as “swaps” and “collars” as of June 30, 2005and December 31, 2004. Swaps are designed to fix the price of anticipatedsales of future production, while collars are designed to establish floor andceiling prices on anticipated sales of future production. The Company enteredinto the contracts at the time it acquired certain operated oil and gasproperty interests as a means to reduce the future price volatility on itssales of oil and gas production, as well as to achieve a more predictable cashflow from its oil and gas properties. The Company has designated its pricehedging instruments as cash flow hedges in accordance with SFAS No. 133.**

 

16

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Further details relatingto the Company’s hedging activities are as follows:

 

Hedging contracts held asof June 30, 2005:

 
| ** **                                   | ** ** | ** **        | ** ** | **Nymex Contract Price** | ** ** | ** **              | ** ** |
|----------------------------------------------|------------|-------------------|------------|--------------------------|------------|-------------------------|------------|
| **Contract Period and Type**                 | ** ** | **Total  Volume** | ** ** | **Floor**                | ** ** | **Ceiling/Swap  Price** | ** ** | **Fair Value** | ** ** |
| ** **                                   | ** ** | ** **        | ** ** | ** **               | ** ** | ** **              | ** ** | **(in thousands)** | ** ** |
| **Crude Oil Contracts (barrels)**            |       |              |       |                     |       |                    |       |   |   |
| Swap  Contracts:                             |       |              |       |                     |       |                    |       |   |   |
| July 2005  – December 2005    |       | 18,000            |       | N/A                      |       | $                       | 34.75      |   | $ | (422 | ) |
| July 2005  – December 2005    |       | 36,000            |       | N/A                      |       | $                       | 58.10      |   | (12 | ) |
| January 2006  – December 2006 |       | 36,000            |       | N/A                      |       | $                       | 58.00      |   | (29 | ) |
|                                         |       |              |       |                     |       |                    |       |   |   |
| Collar  Contracts:                           |       |              |       |                     |       |                    |       |   |   |
| July 2005  – December 2005    |       | 6,000             |       | $                        | 26.00      |                    | $          | 29.20 |   | (174 | ) |
| July 2005  – December 2005    |       | 6,000             |       | $                        | 26.00      |                    | $          | 28.95 |   | (175 | ) |
| July 2005  – December 2005    |       | 9,000             |       | $                        | 31.00      |                    | $          | 36.95 |   | (192 | ) |
| July 2005  – December 2005    |       | 24,000            |       | $                        | 50.00      |                    | $          | 68.20 |   | (8 | ) |
| January 2006  – December 2006 |       | 96,000            |       | $                        | 30.00      |                    | $          | 34.25 |   | (2,231 | ) |
| January 2006  – December 2006 |       | 21,600            |       | $                        | 49.50      |                    | $          | 68.60 |   | (19 | ) |
| January 2007  – December 2007 |       | 54,000            |       | $                        | 47.50      |                    | $          | 69.00 |   | (57 | ) |
| January 2007  – December 2007 |       | 78,000            |       | $                        | 47.50      |                    | $          | 69.25 |   | (78 | ) |
|                                         |       |              |       |                     |       |                    |       |   |   |
| **Natural Gas Contracts (mmbtu)**            |       |              |       |                     |       |                    |       |   |   |
| Swap  Contracts                              |       |              |       |                     |       |                    |       |   |   |
| July 2005  – October 2005     |       | 140,000           |       | N/A                      |       | $                       | 7.47       |   | 45 |   |
| July 2005  – December 2005    |       | 60,000            |       | N/A                      |       | $                       | 6.02       |   | (70 | ) |
| November 2005  – March 2006   |       | 150,000           |       | N/A                      |       | $                       | 8.43       |   | 6 |   |
| April 2006  – October 2006    |       | 210,000           |       | N/A                      |       | $                       | 7.44       |   | (41 | ) |
| November 2006  – March 2007   |       | 150,000           |       | N/A                      |       | $                       | 8.16       |   | (39 | ) |
| April 2007  – October 2007    |       | 210,000           |       | N/A                      |       | $                       | 6.97       |   | (73 | ) |
|                                         |       |              |       |                     |       |                    |       |   |   |
| Collar  Contracts:                           |       |              |       |                     |       |                    |       |   |   |
| July 2005  – September 2005   |       | 72,000            |       | $                        | 5.75       |                    | $          | 6.05 |   | (47 | ) |
| July 2005  – October 2005     |       | 220,000           |       | $                        | 6.75       |                    | $          | 8.40 |   | 34 |   |
| July 2005  – December 2005    |       | 60,000            |       | $                        | 4.00       |                    | $          | 7.20 |   | (35 | ) |
| October 2005  – December 2005 |       | 72,000            |       | $                        | 5.75       |                    | $          | 6.75 |   | (84 | ) |
| November 2005  – March 2006   |       | 250,000           |       | $                        | 7.50       |                    | $          | 10.10 |   | 23 |   |
| April 2006  – October 2006    |       | 280,000           |       | $                        | 6.75       |                    | $          | 8.40 |   | (34 | ) |
| January 2006  – December 2006 |       | 120,000           |       | $                        | 5.00       |                    | $          | 6.45 |   | (203 | ) |
| November 2006  – March 2007   |       | 200,000           |       | $                        | 7.25       |                    | $          | 9.75 |   | (22 | ) |
| April 2007  – October 2007    |       | 280,000           |       | $                        | 6.25       |                    | $          | 7.95 |   | (80 | ) |
|                                         |       |              |       |                     |       |                    |       |   |   |
|                                         |       |              |       |                     |       | Total                   |       | $ | (4,017 | ) |

 

17

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Hedging Contracts Held asof December 31, 2004:

 
| ** **                                   | ** ** | ** **        | ** ** | **Nymex Contract Price** | ** ** | ** **              | ** ** |
|----------------------------------------------|------------|-------------------|------------|--------------------------|------------|-------------------------|------------|
| **Contract Period and Type**                 | ** ** | **Total  Volume** | ** ** | **Floor**                | ** ** | **Ceiling/Swap  Price** | ** ** | **Fair Value** | ** ** |
| ** **                                   | ** ** | ** **        | ** ** | ** **               | ** ** | ** **              | ** ** | **(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 forits derivatives as cash flow hedging instruments, and recognizes gains orlosses on settlement of its hedging instruments in oil and gas revenues, andchanges in their fair value as a component of other comprehensive income, netof deferred taxes. The Company recognized pre-tax losses in oil and gasrevenues of $564,255 and $1,131,381 for the three and six months ended June 30,2005, and $305,213 and $504,602 for the three and six months ended June 30,2004, respectively, due to realized settlements of its price hedge contractsduring the respective periods.

 

AtJune 30, 2005, the Company recorded unrealized losses on cash flow hedgingcontracts of $2,531,097, net of deferred taxes of $1,362,898, in accumulatedother comprehensive income.  Comparatively,at December 31, 2004, the Company recorded unrealized losses of $1,178,036,net of deferred taxes of $634,327 in accumulated other comprehensive income.  As of June 30, 2005, the Companyanticipates $1.1 million of unrealized losses, net of deferred taxes of $388,850,will be reclassified into earnings during 2005. The Company recorded income(loss) from hedge ineffectiveness of $73,552 and ($111,294) for the three andsix months ended June 30, 2005. As of December 31, 2004, the Companychanged its method of testing the effectiveness of its cash flow hedges fromthe dollar offset method to regression analysis.

 

18

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The following tabledetails the activity of the cash flow hedges on a pre-tax and after-tax basisfor the period ending June 30, 2005 (in thousands).

 

| ** **                                                    | ** ** | **Pre-tax** | ** ** | **After-tax** | ** ** |
|---------------------------------------------------------------|------------|-------------|------------|---------------|------------|
| Accumulated  other comprehensive loss, December 31, 2004 |       | $           | (1,824     | )             | $          | (1,178 | ) |
| Reclassified  into earnings                                   |       | 1,131       |       | 735           |       |
| Change  in fair market value                                  |       | (3,324      | )          | (2,168        | )          |
| Ineffective  portion of cash flow hedges                      |       | 123         |       | 80            |       |
| Accumulated  other comprehensive loss, June 30, 2005     |       | $           | (3,894     | )             | $          | (2,531 | ) |

 

**12.****          RelatedParty Transactions**

 

The Company’s ChiefOperating Officer, Daniel Silverman, received a 4.63% net profits interest (“NPI”)in the Company’s investment in the Beaver Dam Creek Field upon completion ofthe transaction in 2002. The NPI entitled Mr. Silverman to 4.63% of theCompany’s net operational cash flow from the field (i.e. revenues lessoperating costs and capital investment) after deducting related principal andinterest payments under the Company’s credit facility described in Note 9. TheCompany did not make any distributions to Mr. Silverman for the NPI in2003 and paid Mr. Silverman a total of $16,408 in net profits in 2002. In March 2004,the Company acquired the NPI from Mr. Silverman for $70,000.

 

**13.****          Commitments and Contingencies**

 

The Company entered intoa rental lease for approximately 2,910 square feet of corporate office space inHouston, Texas on April 1, 2004, for a renewable term of 90 months. Therenewal option of the lease allows the Company to extend the term of the leasefor one term of five years with written notice nine months prior to theexpiration date of the lease. The Company has a one-time option to cancel thelease 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 letter to lease an additional 2,132square feet adjacent to its existing office lease for approximately $3,700 permonth beginning in June 2005, subject to the same general terms andconditions as the Company’s existing lease. The Company has not executed an additional lease or assumed control overthe additional space as of August 12, 2005, however.

 

As a result of theAcquisition, the Company assumed two office leases held by RIMCO, including arental lease in Avon, Connecticut for 6,900 square feet, which expires in October 2005and an office lease in Houston, Texas for 9,110 square feet, which expires in October 2007.The RIMCO Connecticut lease requires payments of $12,075 per month and theRIMCO Houston lease requires payments of $21,350 per month. Whittier iscurrently considering alternatives to consolidate and sublease its corporateoffice space in Houston, Texas. The Company’s existing future minimum annuallease payments for the next five years are as follows (in thousands):

 

| **Year**   | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2005       |       | $          | 206        |   |
| 2006       |       | 316        |       |
| 2007       |       | 274        |       |
| 2008       |       | 60         |       |
| 2009       |       | 60         |       |
| Thereafter |       | 110        |       |
|       |       |       |       |
| Total      |       | $          | 1,026      |   |

 

19

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**14.****          Acquisitionof RIMCO Production Company, Inc.**

 

On June 15, 2005,Whittier acquired RIMCO Production Company, Inc., a privately heldDelaware corporation, by acquiring all of the outstanding capital stock ofRIMCO, for a total purchase price of $57.1 million. The Acquisitionsubstantially increased our properties, production and undevelopedacreage.  Specifically, we acquiredworking interests in approximately 116 active wells and one unit in 18producing fields principally located in the Gulf Coast region in Texas,Louisiana, and Alabama and added approximately 23.1 billion cubic feet ofnatural gas equivalent of proved reserves, approximately 8.4 million cubic feetof natural gas equivalent of daily production, and significant undevelopedacreage with multiple prospects.

 

The Acquisition was structuredas a merger of RPC Acquisition Company, Inc., a Delaware corporationwholly owned by Whittier, into RIMCO Production Company, Inc. Upon closingof the Acquisition, Whittier became the sole owner of RIMCO. The existingshareholders of RIMCO received total consideration of approximately $55 millionin cash, subject to certain adjustments, which are discussed below. Whittierwill treat the Acquisition as a stock purchase for federal income tax purposesand is the accounting acquirer. The Company’s interim results for the three andsix months ended June 30, 2005 include RIMCO’s operating results for theperiod from June 15, 2005 through June 30, 2005.

 

The merger agreementcontains customary representations and warranties of the parties which relateto various aspects of the businesses, financial statements and other matters ofthe parties. The representations and warranties of RIMCO and Whittier survivethe closing for a period of five months and there is a $2.125 million holdbackamount that Whittier can draw under indemnification provisions in the agreementin the event of (i) a breach of representations or warranties, (ii) certainenvironmental defects, (iii) certain third party costs to cure titledefects, and (iv) any breach or non-fulfillment of any covenant oragreement on the part of RIMCO. No recovery from the holdback can occur untilclaims totaling $250,000 have been made. After the deductible has been reached,the entire holdback is available for indemnification. No indemnification isavailable (a) in excess of the holdback or (b) for title defectclaims first asserted after May 18, 2005.

 

Whittier funded theAcquisition using a combination of net proceeds from a private offering of theCompany’s Series A Preferred Stock (approximately $46.9 million) and net borrowingsfrom a new revolving Credit Facility entered into on June 15, 2005(approximately $10.5 million).  TheCompany’s Series A Preferred Stock is more fully described in Note 10 andthe Company’s Credit Facility is more fully described in Note 9.

 

20

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The following tablepresents the allocation of the Company’s $57.1 million purchase price,including professional fees and other related acquisition costs, to RIMCO’sassets acquired and liabilities assumed, based upon their fair values as of June 15,2005:

 

| ** **                           | ** ** | **As of June 15, 2005** | ** ** |
|--------------------------------------|------------|------------------------------|------------|
| ** **                           | ** ** | **(in thousands)**           | ** ** |
|                                 |       |                         |       |
| Cash  and cash equivalents           |       | $                            | 1,727      |   |
| Accounts  receivable                 |       | 3,320                        |       |
| Other  current assets                |       | 152                          |       |
| Oil  and gas properties, evaluated   |       | 56,104                       |       |
| Oil  and gas properties, unevaluated |       | 16,717                       |       |
| Other  assets                        |       | 13                           |       |
| Total  assets acquired               |       | 78,033                       |       |
|                                 |       |                         |       |
| Accounts  payable                    |       | (930                         | )          |
| Asset  retirement obligation         |       | (446                         | )          |
| Deferred  income tax liability       |       | (19,553                      | )          |
|                                 |       |                         |       |
| Total  liabilities assumed           |       | (20,929                      | )          |
|                                 |       |                         |       |
| Net  assets acquired                 |       | $                            | 57,104     |   |

 

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The following unauditedpro forma consolidated results of operations have been prepared as if the Acquisitionhad occurred as of the beginning of the period being reported:

 
| ** **                                 | ** ** | **Three Months  Ended  June 30,  2005** | ** ** | **Three Months  Ended  June 30,  2004** | ** ** | **Six Months  Ended  June 30,  2005** | ** ** | **Six Months  Ended  June 30,  2004** | ** ** |
|--------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
|                                       |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Oil  and gas revenues                      |       | $                                            | 8,936      |                                         | $          | 6,485                                      |       | $                                          | 16,576     |   | $ | 13,709 |   |
|                                       |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Costs  and expenses:                       |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Lease  operating expenses                  |       | 1,582                                        |       | 1,304                                        |       | 2,868                                      |       | 3,040                                      |       |
| Production  taxes                          |       | 589                                          |       | 458                                          |       | 1,114                                      |       | 794                                        |       |
| Depreciation,  depletion, and amortization |       | 2,165                                        |       | 2,026                                        |       | 4,084                                      |       | 4,408                                      |       |
| Ineffective  portion of hedge contracts    |       | (74                                          | )          | —                                       |       | 111                                        |       | —                                     |       |
| General  and administrative expenses(1)    |       | 2,685                                        |       | 965                                          |       | 3,705                                      |       | 1,944                                      |       |
|                                       |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Total  costs and expenses                  |       | 6,947                                        |       | 4,753                                        |       | 11,882                                     |       | 10,186                                     |       |
|                                       |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Income  from operations                    |       | 1,989                                        |       | 1,732                                        |       | 4,694                                      |       | 3,523                                      |       |
| Other  income (expense)                    |       | 468                                          |       | 68                                           |       | 555                                        |       | (537                                       | )          |
|                                       |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Income  before income taxes                |       | 2,457                                        |       | 1,800                                        |       | 5,249                                      |       | 2,986                                      |       |
| Provision  for income taxes                |       | 860                                          |       | 630                                          |       | 1,837                                      |       | 1,271                                      |       |
| Net  income                                |       | $                                            | 1,597      |                                         | $          | 1,170                                      |       | $                                          | 3,412      |   | $ | 1,715 |   |
|                                       |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Basic  net income per share                |       | $                                            | 0.41       |                                         | $          | 0.34                                       |       | $                                          | 0.89       |   | $ | 0.51 |   |
| Diluted  net income per share              |       | $                                            | 0.13       |                                         | $          | 0.10                                       |       | $                                          | 0.27       |   | $ | 0.14 |   |
| Weighted  average shares outstanding:      |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Basic                                      |       | 3,859,406                                    |       | 3,419,556                                    |       | 3,850,320                                  |       | 3,388,448                                  |       |
| Fully  diluted                             |       | 12,787,098                                   |       | 12,250,164                                   |       | 12,728,197                                 |       | 12,219,056                                 |       |

 

----

(1)  General and administrativeexpenses for the three and six months ended June 30, 2005 reflect approximately2.0 million in change of control costs incurred by RIMCO as a result of theAcquisition.

 

22

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**Item 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

** **

**EXECUTIVE OVERVIEW**

 

Whittier is a rapidlygrowing independent oil and gas exploration and production company primarilyengaged in the acquisition, exploration and development of oil and gasproperties in the continental United States.  We operate in threeprincipal areas—the Gulf Coast region, South Texas and the Permian Basin.Financial and operating highlights for second quarter 2005 included the following:

 

•      Completion ofthe RIMCO Acquisition;

 

•      Net income of $798,000,a 193% percent increase over second quarter 2004;

 

•      Dilutedearnings per share of $0.14, a 100% percent increase over second quarter 2004;

 

•      Cash flowsprovided by operating activities of $3.3 million, year-to-date;

 

•      A 43% percentincrease in daily production over second quarter 2004; and

 

•      Increases of 43%in the average realized crude oil price and 5% in the average realized naturalgas price over second quarter 2004.

 

Additionally, we haveadopted the full cost method of accounting for our oil and gas activities andon July 1, 2005, we effected a one-for-three reverse split of ourauthorized and outstanding shares of common stock.

 

***RIMCO Acquisition***

 

On June 15, 2005, weacquired RIMCO Production Company, Inc., a privately held Delawarecorporation, for approximately $57.1 million, including $55 million in cash and$2.1 million in closing costs and net assumed liabilities. As a result of thistransaction, we acquired working interests in approximately 116 active wellsand one unit in 18 producing fields principally located in the Gulf Coastregion in Texas, Louisiana, and Alabama. The transaction added approximately23.1 billion cubic feet of natural gas equivalent (Bcfe) of proved reserves asof December 31, 2004, approximately 8.4 million cubic feet of natural gasequivalent (Mmcfe) of daily production, and significant undeveloped acreagewith multiple prospects.

 

***FullCost Method of Accounting***

 

In conjunction with theRIMCO acquisition, we adopted the full cost method of accounting for our oiland gas activities.  Management believesthat the full cost method is preferable for a company like Whittier, which isactively involved in the exploration and development of oil and gas reserves.  The full cost method was also utilized byRIMCO prior to the acquisition, and the assets acquired from RIMCO constitutemore than 50% of Whittier’s total assets. Additionally, the full cost method is used by the majority of Whittier’speers and management believes the change will improve the comparability ofWhittier’s financial statements with its peer group.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

We finance our businessusing a combination of cash flow from operations, bank debt and the issuance ofequity and/or debt securities. Our future liquidity, in both the short andlong-term, is principally dependent upon the volume of our oil and gasproduction and the market price we receive on future sales of that productionas affected by any hedges we may have in place.

 

Our primary source ofcash during the second quarter of 2005 was from funds obtained from financingactivities.  Proceeds from the issuanceof Series A preferred stock and the initial borrowing under our new creditfacility were offset by cash used in the acquisition of RIMCO.  In addition to these funds, Whittiergenerated cash flows from the sale of natural gas and crude oil.  Operating cash flow fluctuations aresubstantially driven by commodity prices and changes in our production volumes.  Working capital is substantially influencedby these variables.  Fluctuation in cashflow may 

 

23

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result in an increase ordecrease in our capital and exploration expenditures.  Cash flows provided by operating activitieswere primarily used to fund exploration and development expenditures.

 

***OperatingActivities***

 

Wehave approximately $2.5 million in available cash and approximately $10.5million in borrowing capacity under our new credit facility as of August 12,2005. Additionally, we are producing approximately 15 Mmcfe per day andgenerating net positive cash flows from operations. We have currentlyidentified approximately $19.3 million in capital exploration and developmentexpenditures on existing oil and gas properties for 2005, of whichapproximately $5.0 million has been incurred, and an estimated $20 million inadditional capital expenditures for 2006.  We intend to fund our 2005 and2006 capital expenditures using operating cash flows and additional borrowingsunder our credit facility, if necessary.

 

***FinancingActivities***

 

New Revolving CreditFacility

 

On June 15, 2005, weentered into a $75 million revolving credit facility with BNP Paribas as thelead bank and administrative agent (the “Credit Facility”). The Credit Facilityhas an initial borrowing base of $30.5 million, from which we borrowedapproximately $20 million to partially fund the RIMCO acquisition and to repayapproximately $8.5 million and $1 million of bank debt held by Whittier andRIMCO, respectively. The borrowing base is subject to review and adjustment ona semi-annual basis. Amounts outstanding under the Credit Facility will bearinterest at specified margins ranging between 1.50% to 2.25% over the LondonInterbank Offered Rate. Such margins will fluctuate based on the utilization ofthe facility. The credit facility is secured by first priority liens onsubstantially all of our assets, including equity interests in subsidiaries. Weare subject to certain financial covenants pertaining to minimum workingcapital levels, minimum coverage of interest expenses, and a maximum leverageratio. In addition, we are subject to covenants limiting dividends and otherrestricted payments, transactions with affiliates, incurrence of debt, changesof control, asset sales, and liens on properties. All amounts drawn under the CreditFacility will mature June 15, 2008. We have approximately $10.5 million inborrowing capacity under our Credit Facility as of August 12, 2005.

 

On July 22,2005, we repaid the $1.8 million subordinated convertible note held by TexasIndependent Exploration Limited using a combination of cash and equity. We paidapproximately $1.1 million in cash for 60% of the outstanding principal of thenote and $39,272 in accrued interest. We also issued 119,156 shares of commonstock to Texas Independent Exploration Limited upon its conversion of theremaining $714,932 in principal of the note at a conversion price of $6.00 pershare. We funded the retirement of the note using available working capital.

 

Issuanceof Series A Preferred Stock 

 

On June 15, 2005, weissued 852,912 shares of Series A 8% Automatically Convertible PreferredStock (“Series A Preferred Stock”) for an aggregate offering amount ofapproximately $50 million. We received approximately $46.9 million in netproceeds from the offering and used those proceeds to fund a portion of thepurchase price for the RIMCO acquisition.

 

The Series APreferred Stock is convertible into an aggregate of 8,529,120 shares of Whittiercommon stock, with each share of Series A Preferred Stock convertible into10 shares of common stock. The Series A Preferred Stock will automaticallyconvert in the event Whittier’s common stock is listed on the Nasdaq NationalMarket. If conversion of the Series A Preferred Stock has not occurred onor before December 31, 2005, holders of the Series A Preferred Stockare entitled to receive quarterly dividends accruing from the date of initialissuance at a rate of 8% per annum.

 

As a condition to theoffering, we agreed to register the common stock underlying the Series APreferred Stock with the U.S. Securities and Exchange Commission (“SEC”) on orbefore December 31, 2005 and to maintain the effectiveness of theregistration for two years following its effective date. Whittier filed therequired registration statements on August 8, 2005. In the event theregistration statements are not declared effective on or before December 12,2005, the dividend rate payable on the Series A Preferred Stock will increaseto 8.5% per annum. If the Series A Preferred Stock has been converted intocommon stock, Whittier will make a quarterly payment of $0.03 per common shareuntil we achieve effective registration with the SEC.

 

24

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In the event the Series APreferred Stock is not converted into our common stock, we are required toredeem all of the outstanding Series A Preferred Stock on September 14,2008 at 108% of the liquidation preference, including the face value of anyoutstanding Series A Preferred Stock plus any accrued and unpaid dividendsthrough the date of redemption.

 

***DerivativeInstruments and Hedging Activities***

 

We periodically enterinto commodity price hedging contracts with respect to our oil and gas production,including “swaps” and “collars”, in order to manage our exposure to oil and gasprice volatility and achieve more predictable cash flows. Swaps are designed to fix the price ofanticipated sales of future production, while collars are designed to establishfloor and ceiling prices on anticipated sales of future production. Wehave hedged approximately 70% of our proved developed forecasted productionthrough December 31, 2007. Our derivative commodity positions outstandingas of June 30, 2005 are in Note 11 to our consolidated financialstatements included herein.

 

**CAPITALCOMMITMENTS AND CONTINGENCIES**

 

In connection with our June 2004acquisition of three gas fields in South Texas, we agreed to drill four wellsover a two-year period and pay certain drilling costs on behalf of the seller’sretained working interests in those wells.  Under the terms of thedrilling commitment, we agreed to drill two wells each in the Scott &Hopper Field and the North Rincon Field, or reassign a portion of the undevelopedacreage in each field to the seller of the properties. We have drilled thefirst two commitment wells - the Scott & Hopper #4 during February 2005and the Cameron 137 #3 in June 2005. The Scott & Hopper #4 wellbegan production in May 2005 and the Cameron 137 #3 is currently beingtested, but is not expected to be commercially productive.

 

**RESULTSOF OPERATIONS**

 

As of July 1, 2005,we adopted the full cost method of accounting for our oil and gas properties.Under this method, all costs incurred in the acquisition, exploration anddevelopment of oil and gas properties are capitalized into the cost centers(the amortization base). Such amounts include the cost of drilling andequipping productive wells, dry hole costs, lease acquisition costs and delayrentals. Costs associated with production and general corporate activities areexpensed in the period incurred. The capitalized costs of our oil and gasproperties, plus an estimate of our future development and abandonment costs,are amortized on a unit-of-production method based on our estimate of totalproved reserves.

 

Resultsof operations for the three and six months ended June 30, 2005 reflectactivity from RIMCO for the period from June 15, 2005, the effective dateof the acquisition. Pro forma financial information for the periods presentedin these financial statements for the combined results of Whittier and RIMCO asif the acquisition had occurred at the beginning of each applicable interimperiod is presented in Note 14 to our financial statements included herein.

 

*For theQuarter Ended June 30, 2005 compared with the Quarter Ended June 30,2004*

 

We generated net incomeof approximately $798,000, or $0.14 per diluted share, for the quarter ended June 30,2005, compared to $272,000, or $0.07 per diluted share, for the period ended June 30,2004. The $526,000 favorable variance was primarily attributable to higher oiland gas production and prices. The significant components of Whittier’s resultsof operations for the quarters ended June 30, 2005 and 2004 are asfollows:

 

Oil and Gas Revenues.Oil and gas revenues increased 78% from approximately $2.2 million, or $31.14per Boe, for the quarter ended June 30, 2004 to $3.9 million, or $38.74per Boe, for the quarter ended June 30, 2005, based upon a 43% increase inproduction and 24% increase in realized commodity prices per Boe after hedgesettlements. Whittier recognized pre-tax losses in oil and gas revenues of$564,255 and $305,213 during the quarter ended June 30, 2005 and 2004,respectively, due to realized settlements of its price hedge contracts.Whittier produced 99,565 Boe during the quarter ending June 30, 2005,consisting of 49,996 Bbls of oil and 297,417 Mcf of gas, compared to productionof 69,746 Boe for the quarter ending June 30, 2004, consisting of 42,248Bbls of oil and 164,987 Mcf of gas. The increase in production was principallydue to Whittier’s 2004 oil and gas property acquisitions, including the May andJuly 2004 acquisition of the Cut Off Field and the June 2004acquisition of three gas fields in South Texas, as well as the Company’s June2005 acquisition of RIMCO.

 

Sale of MaketableSecurities. During the quarter ended June 30, 2005 we sold223,275 shares of Chapanal Resources, Inc. for $532,102, realizing a pre-taxgain of $308,827.

 

Costs and Expenses.Total operating costs and expenses increased by 61% from $1.8 million for thequarter ending June 30, 2004 to $2.9 million for the quarter ending June 30,2005, principally due to Whittier’s increased acquisition, development, andexploration activity from the prior year.

 

25

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The breakdown ofvariances for the components of operating costs and expenses is as follows:

 

•      Lease operatingexpenses increased 78% from $664,000, or $9.52 per Boe, for the quarter ending June 30,2004 to $1,180,000, or $11.85 per Boe, for the quarter ending June 30,2005, reflecting Whittier’s 100% increase from four to eight operatedproperties and additional non-recurring workover expenditures incurred onWhittier’s operated properties;

 

•      Productiontaxes increased 47%, from $213,000, or $3.05 per Boe, for the quarter ending June 30,2004, to $314,000, or $3.15 per Boe, for the quarter ending June 30, 2005due to higher production volumes.

 

•      Depreciation,depletion and amortization (“DD&A”) increased by 63%, from $619,000, or$8.88 per Boe, for the quarter ending June 30, 2004 to $1,006,000, or$10.10 per Boe, for the quarter ending June 30, 2005. The 14% increase inDD&A per Boe is related to greater total production during the currentperiod as a result of acquisitions completed in 2004 and the Rimco acquisition in June 2005.

 

•      TheCompany recognized a non-cash gain of $74,000 due to the ineffective portion ofthe fair value adjustment to our hedge contracts for the quarter ending June 30,2005; and

 

•      Generaland administrative expense increased from $297,000 for the quarter ending June 30,2004 to $467,000 for the quarter ending June 30, 2005, reflecting ourenhanced operational activity from the prior year, including increasing theCompany’s staff from five to 23 full-time employees.

 

*For theSix Months Ended June 30, 2005 compared with the Six Months Ended June 30,2004*

 

We generated net incomeof approximately $1,136,000, or $0.24 per diluted share, for the six monthsended June 30, 2005, compared to a net loss of $29,000, or $0.01 perdiluted share, for the comparable period ended June30, 2004. The $1,165,000favorable variance was primarily attributable to higher oil and gas productionand prices. The significant components of Whittier’s results of operations forthe six months ended June 30, 2005 and 2004 are as follows:

 

Oil and Gas Revenues.Oil and gas revenues increased 63% from approximately $4.1 million, or $30.50per Boe, for the six months ended June 30, 2004 to $6.7 million, or $36.50per Boe, for the six months June 30, 2005, based upon a 37% increase inproduction and 20% increase in realized commodity prices per Boe after hedgesettlements. Whittier recognized pre-tax losses in oil and gas revenues of$1,131,381 and $504,602 during the six months ended June 30, 2005 and2004, respectively, due to realized settlements of its price hedge contracts.Whittier produced 182,389 Boe during the six months ended June 30, 2005,consisting of 95,282 Bbls of oil and 522,643 Mcf of gas, compared to productionof 133,611 Boe for the six months ended June 30, 2004, consisting of82,924 Bbls of oil and 304,121 Mcf of gas. The increase in production wasprincipally due to oil and gas property acquisitions, including the May andJuly 2004 acquisition of the Cut Off Field the June 2004 acquisitionof three gas fields in South Texas, and the June 2005 acquisition of RIMCO.

 

Sale of MarketableSecurities. During the six months ended June 30, 2005, wesold 266,775 shares of Chaparral Resources, Inc. for $631,642, realizing apre-tax gain of $364,867.

 

Costs and Expenses.Total operating costs and expenses increased by 64% from $3.2 million for thesix months ended June 30, 2004 to $5.2 million for the six months ended June 30,2005, principally due to Whittier’s increased acquisition, development, andexploration activity from the prior year. The breakdown of variances for thecomponents of operating costs and expenses is as follows:

 

•      Leaseoperating expenses increased 75% from $1,139,000, or $8.52 per Boe, for the sixmonths ended June 30, 2004 to $1,993,000, or $10.93 per Boe, for the sixmonths ended June 30, 2005, reflecting Whittier’s 100% increase from fourto eight operated properties and additional non-recurring workover expendituresincurred on Whittier's operated properties;

 

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•      Productiontaxes increased 52%, from $373,000, or $2.79 per Boe, for the six months ended June 30,2004, to $566,000, or $3.10 per Boe, six months ended June 30, 2005. The11% increase in production taxes per Boe from the six months ended June 30,2004 to the six months ended June 30, 2005 was attributable to highertaxes incurred on Louisiana production, which is based on a percentage ofrevenue versus actual production volumes, and a larger ratio of natural gasproduction compared to overall production from the prior year;

 

•      DD&Aincreased by 70%, from $975,000, or $7.30 per Boe, for the six months ended June 30,2004 to $1,657,000, or $9.09 per Boe, for six months ended June 30, 2005.The 25% increase in DD&A per Boe is related to greater total productionduring the current period as a result of acquisitions completed in 2004, aswell as the RimCo acquisition inJune 2005.

 

•      TheCompany recognized a non-cash charge to earnings of $111,000 due to theineffective portion of the fair value adjustment to our hedge contracts for thesix months ended June 30, 2005;  and

 

•      Generaland administrative expense increased from $674,000 for the six months ended June 30,2004 to $856,000 for six months ended June 30, 2005, reflecting ourenhanced operational activity from the prior year, including increasing theCompany’s staff from four to 23 full-time employees.

 

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Off-Balance SheetArrangements

 

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” andsimilar 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.  If oneor 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**

 

**Evaluationof Disclosure Controls and Procedures**

 

### **The term “disclosure controls and procedures” (defined in Rule 13a-15(e))refers to the controls and procedures of a company that are designed to ensurethat information required to be disclosed by a company in the reports that itfiles under the Securities and Exchange Act of 1934 (the “Exchange Act”) isrecorded, 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. Whittier is in the process of integrating RIMCO into its existinginternal control structure. Whittier acquired RIMCO on June 15, 2005 andis in the process of evaluating RIMCO’s disclosure controls and procedures andintegrating them where appropriate.**

### ** **

**Part II–Other Information**

 

#### **Item 6 – Exhibits and Reports on Form 8-K**

#### ** **

**Needs to be updated**

 

(a)           Exhibits

 
| 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.,  incorporated by reference to Exhibit 2.1 of Whittier’s Quarterly Report  Form 10-QSB filed on May 13, 2005.       |
|-------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |   |                                                                                                                                                                                                                                                                                                                  |
| Exhibit 4.1  |   | Certificate of  Designation of Series A 8% Automatically Convertible Preferred Stock of  Whittier Energy Corporation incorporated by reference to Exhibit 4.1 of  Whittier’s Current Report on Form 8-K filed on June 21, 2005.                                                              |
|              |   |                                                                                                                                                                                                                                                                                                                  |
| Exhibit 4.2  |   | Registration Rights  Agreement dated June 15, 2005, between Whittier Energy Corporation and  Friedman, Billings, Ramsey & Co., Inc., incorporated by  reference to Exhibit 10.3 of Whittier’s Current Report on Form 8-K  filed on June 21, 2005.                              |
|              |   |                                                                                                                                                                                                                                                                                                                  |
| Exhibit 10.1 |   | Senior Revolving Credit  Facility dated June 15, 2005, among Whittier Energy Corporation, as  Borrower, and BNP Paribas, as Administrative Agent, and the lenders party  thereto incorporated by reference to Exhibit 10.1 of Whittier’s Current  Report on Form 8-K filed on June 21, 2005. |
|              |   |                                                                                                                                                                                                                                                                                                                  |
| Exhibit 10.2 |   | Guaranty and Pledge  Agreement dated June 15, 2005, made by Whittier Energy Corporation and  certain of its subsidiaries, as Obligors, in favor of BNP Paribas, as                                                                                                                                               |

 

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|               |   | Administrative Agent  incorporated by reference to Exhibit 10.2 of Whittier’s Current Report  on Form 8-K filed on June 21, 2005.                                                                                                            |
|--------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                                                                             |
| Exhibit 10.3  |   | Executive Employment  Agreement dated June 15, 2005, between Whittier Energy Corporation and  Bryce W. Rhodes, incorporated by reference to Exhibit 10.11 of  Whittier’s Registration Statement on Form SB-2 filed on August 9,  2005.  |
|               |   |                                                                                                                                                                                                                                                             |
| Exhibit 10.4  |   | Executive Employment  Agreement dated June 15, 2005, between Whittier Energy Corporation and  Daniel Silverman, incorporated by reference to Exhibit 10.11 of  Whittier’s Registration Statement on Form SB-2 filed on August 9,  2005. |
|               |   |                                                                                                                                                                                                                                                             |
| Exhibit 10.5  |   | Executive Employment  Agreement dated June 15, 2005, between Whittier Energy Corporation and  Michael B. Young, incorporated by reference to Exhibit 10.11 of  Whittier’s Registration Statement on Form SB-2 filed on August 9,  2005. |
|               |   |                                                                                                                                                                                                                                                             |
| Exhibit 18.1. |   | Letter dated  August 12, 2005 from Grant Thornton LLP to the Board of Directors of  Whittier Energy Corporation regarding the preferability of the full cost  method of accounting for the Company.                                                         |
|               |   |                                                                                                                                                                                                                                                             |
| 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                    |

 

### **Signatures**

### ** **

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

Dated:    August 15,2005

 
|   | 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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