<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1999
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 333-31375*
----------------------
FORMAN PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
Louisiana 72-0954774
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
650 Poydras Street - Suite 2200 70130-6101
New Orleans, Louisiana (Zip code)
(Address of principal executive offices)
(504) 586-8888
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of November 15, 1998, there were 76,800 shares of the Registrant's Voting
Common Stock, no par value, and 13,200 shares of the Registrant's Non-voting
Common Stock, no par value, outstanding.
* The Commission file number refers to a Form S-4 Registration Statement filed
by the Company under the Securities Act of 1933, which became effective
September 26, 1997.
<PAGE>
FORMAN PETROLEUM CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
Page No.
<S> <C>
Item 1. Financial Information:
Balance Sheets as of September 30, 1999 and
December 31, 1998 1
Statement of Operations and Accumulated
Deficit for the Three and Nine Month Periods
Ended September 30, 1999 and September 30, 1998 2
Statement of Cash Flows for the Nine Month
Periods Ended September 30, 1999 and
September 30, 1998 3
Notes to Financial Statements 4-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20-21
Signatures 22
</TABLE>
ii
<PAGE>
PART I
Item 1. Financial Information
FORMAN PETROLEUM CORPORATION
(Debtor-in-Possession)
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- ---------------
ASSETS (Unaudited)
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,047,701 $ 1,474,488
Accounts receivable 126,292 47,830
Oil and gas revenue receivable 1,3716,196 655,433
Advance to operator - 1,200,000
Unbilled well costs 11,719 11,324
Prepaid expenses 72,930 297,154
-------------- --------------
Total current assets 3,574,838 3,687,229
-------------- --------------
PROPERTY AND EQUIPMENT, at cost:
Oil and gas properties, full cost method 84,756,161 77,067,569
Unevaluated oil and gas properties 1,602,740 4,485,359
Other property and equipment 1,758,512 1,718,757
-------------- --------------
82,586,286 83,271,685
Less- accumulated depreciation, depletion and amortization (64,905,619) (59,511,084)
-------------- --------------
Net property and equipment 23,211,794 23,760,601
-------------- --------------
OTHER ASSETS:
Deferred financing costs (net of accumulated amortization) 4,638,991 5,360,234
Recapitalization costs - 374,313
Escrowed and restricted funds 480,507 493,481
-------------- --------------
TOTAL ASSETS $ 31,906,130 $ 33,685,858
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES NOT SUBJECT TO COMPROMISE:
Accounts payable and accrued liabilities $ 671,824 $ 2,378,512
Interest payable - 5,512,640
Undistributed oil and gas revenues 1,289,723 1,590,223
Current portion of note payables 11,776 68,309,653
-------------- --------------
Total current liabilities not subject to compromise 1,973,323 77,791,028
-------------- --------------
CURRENT LIABILITIES SUBJECT TO COMPROMISE 83,033,442 -
-------------- --------------
Total current liabilities 85,006,765 77,791,028
-------------- --------------
Notes payable 5,331 17,121
Mandatorily redeemable Preferred Stock, no par value,
1,000,000 authorized shares, 200,000 shares outstanding 13,544,563 12,360,322
STOCKHOLDERS' DEFICIT:
Common stock, no par value, authorized 1,000,000
shares; issued and outstanding 90,000 shares 1,000 1,000
Treasury stock (10) (10)
Accumulated deficit (66,651,519) (56,483,603)
-------------- --------------
Total stockholder's deficit (66,650,529) (56,482,613)
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT $ 31,906,130 $ 33,685,858
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
FORMAN PETROLEUM CORPORATION
----------------------------
(Debtor-in-Possession)
----------------------
STATEMENTS OF OPERATIONS
------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales $ 3,761,167 $ 3,749,790 $ 9,281,974 $ 12,435,924
Interest income 4,636 6,535 14,078 200,333
Overhead reimbursements 16,516 18,192 49,181 56,103
Other income 24,174 17,509 32,644 9,652
------------- ------------- ------------- --------------
Total revenues 3,806,493 3,792,026 9,377,877 12,702,012
------------- ------------- ------------- --------------
Costs and expenses:
Production taxes 220,727 139,379 525,667 442,606
Lease operating expenses 779,134 931,339 2,566,755 2,737,323
General and administrative expenses 729,393 585,749 2,041,100 1,690,918
Interest expense 1,044,138 2,493,023 6,148,471 7,512,181
Full cost ceiling write-down - - - 12,039,831
Reorganization costs 83,356 - 963,787 -
Depreciation, depletion and amortization 2,073,743 2,421,994 6,115,778 7,613,429
------------- ------------- ------------- --------------
Total expenses 4,930,491 6,571,484 18,361,558 32,036,288
------------- ------------- ------------- --------------
Net loss from operations (1,123,998) (2,779,458) (8,983,681) (19,334,276)
Provision for income taxes - - - -
------------- ------------- ------------- --------------
Net loss (1,123,998) (2,779,458) (8,983,681) (19,334,276)
Preferred stock dividends (200,288) (439,925) (1,165,122) (1,272,647)
------------- ------------- ------------- --------------
Net loss attributable to common shares $ (1,324,286) $ (3,219,383) $ (10,148,803) $ (20,606,923)
============= ============= ============= ==============
Net loss per share $ (14.71) $ (35.77) $ (112.76) $ (228.97)
============= ============= ============= ==============
Weighted average shares outstanding 90,000 90,000 90,000 90,000
============= ============= ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
FORMAN PETROLEUM CORPORATION
----------------------------
(Debtor-in-Possession)
----------------------
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,983,681) $ (19,334,276)
Adjustments to reconcile net loss to net cash provided
by operating activities-
Depreciation and amortization 5,394,541 19,653,260
Withdrawal from interest escrow account - 3,978,147
Reduction of capitalized costs 384,313 -
Deferred financing costs 721,243 41,094
Change in assets and liabilities-
Decrease in oil and gas revenue receivable (659,763) 529,489
Decrease (Increase) in accounts receivable (78,462) 498,635
(Increase) in unbilled well costs and prepaids (395) (65,456)
Decrease in prepaid expenses 224,224 -
Increase in interest payable 5,642,011 3,149,970
(Decrease) Increase in accounts payable 1,638,548 (3,287,326)
(Decrease) in undistributed oil and gas revenues (300,500) (169,341)
Increase in other payables (14) -
Decrease in advances to operator 1,200,000 -
Increase in notes payable 223,902 224,849
-------------- --------------
Net cash provided by operating activities 5,405,967 5,219,045
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (4,805,973) (3,790,421)
Reduction of escrow account 12,974 48,882
Purchase of other property and equipment (39,755) (115,733)
-------------- --------------
Net cash used in investing activities (4,832,754) (3,857,272)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES: - -
NET INCREASE IN CASH AND CASH EQUIVALENTS 573,213 1,361,773
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 1,474,488 457,869
-------------- --------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 2,047,701 $ 1,819,642
============== ==============
SUPPLEMENTAL DISCLOSURES:
Cash paid for-
Interest $ - $ 4,791,488
============== ==============
Income taxes $ - $ -
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
FORMAN PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
1. Significant Accounting Policies
-------------------------------
The financial statements of the Company at September 30, 1999 and for the three
and nine-month periods then ended are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The financial statements should be
read in conjunction with the financial statements and notes thereto, for the
year ended December 31, 1998 contained in the Company's Form 10-K
(file number 333-31375) filed with the Commission on March 31, 1999.
The financial statements have been prepared using accounting principles
applicable to a going concern, which assumes realization of assets and
settlement of liabilities in the normal course of business. As fully described
in Note 2 below, however, the Company filed a petition for relief under
Chapter 11 of the United States Bankruptcy Code on August 6, 1999. The
appropriateness of using the going concern basis is dependent upon, among other
things, confirmation of a plan of reorganization and the ability to generate
sufficient cash flows from operations to meet obligations. In the event a plan
of reorganization is not confirmed by the Bankruptcy Court, the Company would
not be able to continue as a going concern.
The Company's financial statements as of September 30, 1999 have been presented
in conformity with the AICPA's Statement of Position 90-7, "Financial Reporting
By Entities In Reorganization Under the Bankruptcy Code", issued November 19,
1990 ("SOP 90-7"), which provides guidance for financial reporting by entities
that have filed petitions for relief under Chapter 11 of the Bankruptcy Code.
SOP-97 requires that the debtor in the Chapter 11 proceeding distinguish
transactions and events that are directly associated with the reorganization
from those of the operations of the ongoing business. In particular, SOP-97
requires a segregation of liabilities subject to compromise by the Bankruptcy
Court as of the bankruptcy filing dated and identification of all transactions
and events that are directly associated with the reorganization.
The Company's comparative balances for prior periods have not been reclassified
to conform with current balances under SOP 90-7. The most significant difference
between the current period and prior periods presentations is the
reclassification of substantially all of the outstanding debt and preferred
stock to "liabilities subject to compromise". See Note 5 for a detailed
description of liabilities subject to compromise as of September 30, 1999.
Pre-petition claims that are listed as "liabilities subject to compromise" are
recorded for the amounts the Company expects to be allowed on such claims rather
than estimates of the amounts for which such claims may be settled under the
plan of reorganization ultimately approved by the Bankruptcy Court.
4
<PAGE>
The Statement of Operations and Statement of Cash Flows separately disclose
expenses related to the Chapter 11 proceeding.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that may result from the Chapter 11 proceeding.
Upon confirmation of a plan of reorganization, adjustments to the carrying
values of the Company's assets and liabilities may be required to reflect the
terms of the plan.
2. Chapter 11 Bankruptcy Proceeding
--------------------------------
The Company has experienced financial difficulties since the sale in 1997 of the
Company's 13.5% Notes and the Company's Preferred Stock. On August 6, 1999, the
Company filed a voluntary petition to reorganize the Company under Chapter 11 of
the United States Bankruptcy Code (the "Petition"). The Petition was filed in
the United States Bankruptcy Court for the Eastern District of Louisiana (the
"Bankruptcy Court") and bears the caption In re Forman Petroleum Corporation,
Debtor (Case No. 99-14319). The Company is presently operating its business as
debtor-in-possession in accordance with the provisions of the Bankruptcy Code.
As previously reported, the Company entered into a Memorandum of Understanding
dated April 27, 1999 (the "Memorandum") with certain holders of the Company's
13.5% Senior Secured Notes Due June 1, 2004 (the "Noteholders") and certain
holders of the Company's Series A Cumulative Preferred Stock (the "Preferred
Stockholders") with respect to a proposed reorganization of the Company. Prior
to filing the Petition on August 6, 1999, the Company and the other parties to
the Memorandum executed a First Amendment to Memorandum of Understanding (the
"Amendment").
The provisions of the Memorandum, as amended by the Amendment, form the basis
for the Company's Joint Plan of Reorganization, which was filed in the
Bankruptcy Court on August 13, 1999. A First Amended Joint Plan of
Reorganization (the "Joint Plan") and a Disclosure Statement were filed in the
Bankruptcy Court on September 28, 1999. By execution of the Memorandum and the
Amendment, each of the Noteholders and Preferred Stockholders that is a party
thereto has agreed to vote for the Joint Plan, provided it complies in all
respects with the terms of the Memorandum as amended by the Amendment.
The Joint Plan, in general terms, provides for the cancellation of all currently
issued and outstanding common stock and for the conversion into newly issued
shares of common stock of all outstanding 13.5% Senior Secured Notes and Series
A Preferred Stock. The Joint Plan also provides for the issuance of warrants to
purchase common stock to certain classes of interest holders and other persons
and for the payment to lienholders and unsecured creditors of cash or notes in
varying amounts. In particular, (i) allowed M&M lien claims will receive, at the
election of the holders of such claims, either 60% in cash as of the initial
distribution date pursuant to the Joint Plan or 100% payable over 5 years,
(ii) allowed unsecured claims will receive, at the election of the holders of
such claims, either 50% in cash as of the initial distribution date pursuant to
the Joint Plan or 100% payable over 7 years, and (iii) convenience claims, which
are defined by the Joint Plan as unsecured claims of less than $30,000, will be
paid in full no later than the initial distribution date pursuant to the Joint
Plan. Current management of the Company will receive twenty seven and one-half
(27.5) month employment agreements
5
<PAGE>
with the reorganized Company. The Joint Plan also provides for the dismissal of
the pending litigation against Jefferies & Company, Inc. The foregoing summary
of the Joint Plan is not intended as a solicitation of acceptances. The Company
will not commence solicitation of acceptance of the Joint Plan unless and until
a Disclosure Statement has been approved by the Bankruptcy Court in accordance
with the provisions of the Bankruptcy Code.
As of the filing of the Petition, and pending confirmation of the Joint Plan, or
any other plan of reorganization, actions to collect pre-petition indebtedness
are stayed and other contractual obligations may not be enforced against the
Company. In connection with these claims, the Bankruptcy Court established
November 3, 1999 as the official bar date for filing pre-petition claims. Claims
filed after that date generally will be disallowed. Claims that the Company
believes will be allowed are reflected in the September 30, 1999 balance sheet
as "liabilities subject to compromise". See Note 5 for a discussion of
liabilities subject to compromise as of September 30, 1999. Additional claims
may arise resulting from the rejection of executory contracts, including leases,
and from the determination by the Bankruptcy Court (agreed to by the parties in
interest) of allowed claims for contingencies and other disputed amounts. No
provision has been recorded in the September 30, 1999 financial statements,
however, for any such claims.
While operating as a debtor-in-possession during the Chapter 11 proceedings, the
Company is stayed from paying interest on debts, except as authorized by the
Bankruptcy Court. In addition, interest expense on unsecured and undersecured
obligations cease to accrue as of the Petition Date. The Senior Notes are
undersecured. The additional interest which has not accrued on the Senior Notes
as a result of the Chapter 11 proceeding amounted to $2,604,558 as of
November 15, 1999. The Company is also stayed from paying dividends on its
Preferred Stock , except as authorized by the Bankruptcy Court. Dividends on the
Preferred Stock ceased to accrue as of the Petition Date. The Preferred Stock is
unsecured. The additional dividends which have not accrued on the Preferred
Stock as a result of the Chapter 11 proceeding amounted to $467, 733 as of
November 15, 1999.
The Company has obtained the approval of the Bankruptcy Court to continue to pay
for utility services, payroll and employee benefits, and applicable taxes in
connection therewith. The Company is also allowed to continue normal business
practices, but it may not engage in transactions outside the ordinary course of
business without first complying with the notice and hearing provisions of the
Bankruptcy Code and obtaining Bankruptcy Court approval where and when
necessary.
Two official committees of creditors have been formed in the bankruptcy
proceeding, the Official Committee of Unsecured Creditors and the Official
Committee Bondholders, and these committees will have the right to be heard with
respect to any matters outside the ordinary course of business.
On September 27, 1999, the Company and the Senior Noteholders Committee filed a
Motion for Authority to Use Cash Collateral and Granting the Senior Noteholders
Adequate Protection (the "Cash Collateral Motion"). An Interim Order Approving
the Cash Collateral Motion was entered by the Bankruptcy Court on September 30,
1999, and a Final Hearing on the Cash
6
<PAGE>
Collateral Motion and Interim Order was held on October 20, 1999. A motion and
final order regarding the use of cash collateral were filed in the Chapter 11
Case on November 17, 1999.
The Bankruptcy Court has scheduled a hearing to consider the Company's
Disclosure Statement on November 10, 1999. Upon approval by the Bankruptcy
Court, the Disclosure Statement will be sent to all members of each class of
creditors and equity security holders entitled to vote for acceptance or
rejection. Following acceptance or rejection of the Joint Plan by the impaired
classes of creditors and equity security holders, the Bankruptcy Court, at a
hearing presently scheduled for December 29, 1999 will consider whether to
confirm the Joint Plan. The Bankruptcy Court, however, may continue or
reschedule the hearings on the disclosure statement and plan confirmation. To
confirm a plan, the Bankruptcy Court is required to find, among other things,
that (i) with respect to each impaired class of creditors and equity security
holders each holder in such class will, pursuant to the plan, receive at least
as much as such holder would receive in liquidation, (ii) each impaired class of
creditors and equity security holders has accepted the plan by the requisite
vote, and (iii) confirmation of the plan is not likely to be followed by
liquidation or the need for further financial reorganization of the debtor or
any successor unless the plan proposes such liquidation or reorganization. If
any impaired class of creditors does not accept the Joint Plan, assuming that
all the other requirements of the Bankruptcy Court are met, the Company may
request the Bankruptcy Court to invoke the "cram down" provisions of the
Bankruptcy Code and seek confirmation of the Joint Plan over the creditors'
objections.
The Company cannot predict the outcome of any of the foregoing proceedings;
however, it is not uncommon for reorganization plans proposed by debtors in
bankruptcy proceedings to be amended on one or more occasions in response to a
variety of circumstances, including negotiations among the debtors, their
creditors and the equity security holders. At the present time however, the
Company is unable to predict whether the Joint Plan will be amended and, if so,
to what extent.
After a plan of reorganization is approved by the Bankruptcy Court, continuation
of the business thereafter is dependent upon the success of future operations
and the Company's ability to meet its obligations as they become due.
3. Issuance of Notes
-----------------
On June 3, 1997 the Company completed the private sale to Jefferies & Company,
Inc. ("Jefferies") of 70,000 units ("Note Units") consisting of $70 million
principal amount of 13.5% Senior Secured Notes due 2004, Series A (the "Notes")
and Warrants to purchase 29,067 shares of Common Stock, no par value (the
"Common Stock"), of the Company at a price of $65,667,000 in a transaction not
registered under the Securities Act (the "Act") in reliance upon Section 4(2) of
the Act and Rule 506 of Regulation D under the Act. Jefferies thereupon offered
and resold the Note Units only to qualified institutional buyers and a limited
number of institutional accredited investors at an initial price to such
purchasers of $68,467,000. Concurrently with the offering of the Note Units, the
Company completed a private sale to Jefferies of 200,000 units ("Equity Units")
consisting of 200,000 shares of Series A Cumulative Preferred Stock and warrants
to purchase 14,533 shares of Common Stock. The Equity Units were sold to
Jefferies for $9,200,000 in a transaction not registered under the Securities
Act in reliance upon Section 4 (2) of the Act and Rule 506 of Regulation D under
the Act. Jefferies
7
<PAGE>
thereupon offered and resold the Equity Units only to qualified institutional
buyers and a limited number of institutional accredited investors at an initial
price to such purchasers of $10,000,000. The offerings and sale of the Note
Units and the Equity Units are referred to herein as the "Offerings".
The net proceeds to the Company from the Offerings were approximately
$74.9 million. A portion of the net proceeds (approximately $9.5 million) was
segregated into a capitalized interest account to pay interest on the Notes
through June 1, 1998. The Company used the remaining net proceeds of the
Offerings as follows: (i) approximately $35.2 million was used to repay all of
the outstanding indebtedness (including accrued interest and associated fees)
due under the Endowment Energy Partners ("EEP) and Endowment Energy Co-
Investment Partnership ("EECIP") loans; (ii) approximately $10.5 million was
used to repay all of the outstanding indebtedness (including accrued interest
and associated fees) due under the Joint Energy Development Investments Limited
Partnership loan; (iii) $2.6 million was used to purchase from EEP and EECIP a
7.5% overriding royalty interest in the Company's Lake Enfermer Field, Manila
Village Field and Boutte Field; (iv) $5.0 million was used in connection with
the Company's acquisition from Forman Petroleum Corporation II ("FPCII"), a
company whose sole stockholder is McLain J. Forman (the Company's Chairman and
principal stockholder), all of FPCII's interest in the Bayou Fer Blanc Field and
the West Gueydan Field, of which $1.5 million was paid to FPCII, $1.0 million
was used to pay bank debt and $2.5 million was used to pay trade payables to
third parties; (v) Jefferies received a fee of $1.9 million for financial
advisory services provided to the Company and also received a warrant to
purchase 4,844 shares of Common Stock at the initial exercise price of $1.00 per
share; and (vi) $0.9 million was used to pay expenses of the Offerings. The
remaining net proceeds from the Offerings of $9.4 million were used for capital
expenditures, working capital and other general corporate purposes.
On December 30, 1998, the Company announced the nonpayment of the December 1,
1998 installment of interest due on the 13.5% Notes within the thirty-day grace
period provided for such payments. The Company also has failed to pay the June
1, 1999 installment. The Company does not presently have the funds to make the
December 1, 1998 or the June 1, 1999 interest installments on the 13.5% Notes,
which amount in the aggregate to $9,450,000 and does not anticipate having
sufficient funds to do so at any time in the near future. Nor does the Company
anticipate having sufficient funds to pay the additional $1,727,419 in interest
on the Senior Notes that accrued between June 1, 1999 and the Petition Date. On
March 10, 1999, the Trustee declared an Event of Default under the Indenture
with respect to the 13.5% Notes as a result of the nonpayment of the December 1,
1998 interest installment and declared the unpaid principal and accrued and
unpaid interest on the 13.5% Notes to be due and payable.
While operating as a debtor-in-possession during the Chapter 11 proceedings, the
Company is stayed from paying interest on debts, except as authorized by the
Bankruptcy Court. In addition, interest expense on unsecured and undersecured
obligations cease to accrue as of the Petition Date. The Senior Notes are
undersecured. The additional interest which has not accrued on the Senior Notes
as a result of the Chapter 11 proceeding amounted to $2,604,558 as of
November 15, 1999.
8
<PAGE>
4. Legal Proceedings
-----------------
As previously reported, the Company filed a Complaint on Friday, October 16,
1998 against Jefferies & Company, Inc. ("Jefferies") in the United States
District Court in and for the Eastern District of Louisiana. The Complaint
asserts causes of action against Jefferies for breach of fiduciary duty, breach
of contract, detrimental reliance, negligence, intentional misrepresentation,
and negligent misrepresentation in connection with a 1997 debt and equity
offering by the Company. The Company is seeking damages in an amount to be
determined at trial.
In accordance with the terms of the Memorandum, the Company has executed a stay
of the litigation currently pending against Jefferies in order to enable all
parties to execute such documents and instruments as may be necessary to pursue
confirmation of the Joint Plan. The Joint Plan provides for the dismissal of the
Jefferies litigation with prejudice and the release of all claims of the Company
against Jefferies.
As of the date of the filing of the Petition, substantially all pending
litigation and collection of outstanding claims against the Company are stayed
while the Company continues business operations as debtor-in-possession.
5. Hedging Activities - With the objective of achieving more predictable
------------------
revenues and cash flows and reducing the exposure to fluctuations in oil and
natural gas prices, the Company has entered into hedging transactions of various
kinds with respect to both oil and natural gas. While the use of these hedging
arrangements limits the downside risk of reverse price movements, it may also
limit future revenues from favorable price movements. During the 1997 and 1998,
the Company entered into forward sales arrangements with respect to a portion
(between 30-50%) of its estimated natural gas sales. As of November 1999, the
Company has open forward sales arrangements in the form of fixed price sales for
the months, volumes and prices as indicated in the following table:
<TABLE>
<CAPTION>
Volume Percent of Price per
------ ---------- ---------
Month Year MMBTU Production MCF
----- ---- ----- ---------- ---
<S> <C> <C> <C> <C>
November 1999 120,000 38% $ 3.08
December 1999 60,000 19% $ 3.10
January 2000 60,000 19% $ 3.10
February 2000 60,000 19% $ 3.10
March 2000 60,000 19% $ 3.10
</TABLE>
The Company hedged about 30% of its estimated oil production during the first
six months of 1997, but it did not hedge any oil production during 1998.
Beginning November 1, 1999, the Company contracted to sell 6,000 barrels of oil
per month at a fixed price of $20.90 per barrel for the next twelve months. This
forward sale of oil represents approximately 15% of the Company's current
monthly oil sales. The Company continuously reevaluates its hedging program in
light of market conditions, commodity price forecasts, capital spending and debt
service requirements. The Company may hedge additional volumes through the
remainder of 1999 and into 2000 or it may determine from time to time to
terminate its then existing hedging positions.
9
<PAGE>
6. Liabilities Subject to Compromise
---------------------------------
Those liabilities as of the Petition Date that are expected to be settled as
part of the plan of reorganization are classified in the balance sheet as
liabilities subject to compromise as of September 30, 1999 and December 31,
1998, and include the following:
<TABLE>
<CAPTION>
Description September 30, 1999 December 31, 1999
----------- ------------------ -----------------
<S> <C> <C>
Accrued Trade Payables $ 3,345,236 $ -
Notes Payable - Secured (Incl. Interest) $ 79,688,206 $ -
</TABLE>
Payment of the foregoing obligations is stayed while the Company continues to
operate as a debtor-in-possession until the Bankruptcy Court has confirmed a
plan of reorganization.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
General
The following discussion is intended to assist in an understanding of
the Company's historical financial position and the results of operations for
the three-month and nine-month periods ended September 30, 1999 and 1998. The
financial statements of the Company at September 30, 1999 and for the three and
nine-month periods then ended are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The financial statements should be
read in conjunction with the financial statements and notes thereto, for the
year ended December 31, 1998 contained in the Company's Annual Report on
Form 10-K (file number 333-31375) filed with the Commission on March 31, 1998.
The Company's historical financial statements and notes thereto included
elsewhere in this quarterly report contain detailed information that should be
referred to in conjunction with the following discussion.
Chapter 11 Proceeding
The Company has experienced financial difficulties since the sale in
1997 of the Company's 13.5% Notes and the Company's Preferred Stock. On August
6, 1999, the Company filed a voluntary petition to reorganize the Company under
Chapter 11 of the United States Bankruptcy Code (the "Petition"). The Petition
was filed in the United States Bankruptcy Court for the Eastern District of
Louisiana (the "Bankruptcy Court") and bears the caption In re Forman Petroleum
Corporation, Debtor (Case No. 99-14319). The Company is presently operating its
business as debtor-in-possession in accordance with the provisions of the
Bankruptcy Code.
As previously reported, the Company entered into a Memorandum of
Understanding dated April 27, 1999 (the "Memorandum") with certain holders of
the Company's 13.5% Senior Secured Notes Due June 1, 2004 (the "Noteholders")
and certain holders of the Company's Series A Cumulative Preferred Stock (the
"Preferred Stockholders") with respect to a proposed reorganization of the
Company. Prior to filing the Petition on August 6, 1999, the Company and the
other parties to the Memorandum executed a First Amendment to Memorandum of
Understanding (the "Amendment").
The provisions of the Memorandum, as amended by the Amendment, form the
basis for the Company's Joint Plan of Reorganization, which was filed in the
Bankruptcy Court on August 13, 1999. A First Amended Joint Plan of
Reorganization (the "Joint Plan") and a Disclosure Statement were filed in the
Bankruptcy Court on September 28, 1999. By execution of the Memorandum and the
Amendment, each of the Noteholders and Preferred Stockholders that is a party
thereto has agreed to vote for the Joint Plan, provided it complies in all
respects with the terms of the Memorandum as amended by the Amendment.
The Joint Plan, in general terms, provides for the cancellation of all
currently issued and outstanding common stock and for the conversion into newly
issued shares of common stock of
11
<PAGE>
all outstanding 13.5% Senior Secured Notes and Series A Preferred Stock. The
Joint Plan also provides for the issuance of warrants to purchase common stock
to certain classes of interest holders and other persons and for the payment to
lienholders and unsecured creditors of cash or notes in varying amounts. In
particular, (i) allowed M&M lien claims will receive, at the election of the
holders of such claims, either 60% in cash as of the initial distribution date
pursuant to the Joint Plan or 100% payable over 5 years, (ii) allowed unsecured
claims will receive, at the election of the holders of such claims, either 50%
in cash as of the initial distribution date pursuant to the Joint Plan or 100%
payable over 7 years, and (iii) convenience claims, which are defined by the
Joint Plan as unsecured claims of less than $30,000, will be paid in full no
later than the initial distribution date pursuant to the Joint Plan. Current
management of the Company will receive twenty seven and one-half (27.5) month
employment agreements with the reorganized Company. The Joint Plan also provides
for the dismissal of the pending litigation against Jefferies & Company, Inc.
The foregoing summary of the Joint Plan is not intended as a solicitation of
acceptances. The Company will not commence solicitation of acceptance of the
Joint Plan unless and until a Disclosure Statement has been approved by the
Bankruptcy Court in accordance with the provisions of the Bankruptcy Code.
As of the filing of the Petition, and pending confirmation of the Joint
Plan, or any other plan of reorganization, actions to collect pre-petition
indebtedness are stayed and other contractual obligations may not be enforced
against the Company. In connection with these claims, the Bankruptcy Court
established November 3, 1999 as the official bar date for filing pre-petition
claims. Claims filed after that date generally will be disallowed. Claims that
the Company believes will be allowed are reflected in the September 30, 1999
balance sheet as "liabilities subject to compromise". See Note 5 for a
discussion of liabilities subject to compromise as of September 30, 1999.
Additional claims may arise resulting from the rejection of executory contracts,
including leases, and from the determination by the Bankruptcy Court (agreed to
by the parties in interest) of allowed claims for contingencies and other
disputed amounts. No provision has been recorded in the September 30, 1999
financial statements, however, for any such claims.
While operating as a debtor-in-possession during the Chapter 11
proceedings, the Company is stayed from paying interest on debts, except as
authorized by the Bankruptcy Court. In addition, interest expense on unsecured
and undersecured obligations cease to accrue as of the Petition Date. The Senior
Notes are undersecured. The additional interest which has not accrued on the
Senior Notes as a result of the Chapter 11 proceeding amounted to $ 2,603,830 as
of November 15, 1999. The Company is also stayed from paying dividends on
preferred stock, except as authorized by the Bankruptcy Court. The Company's
Preferred Stock is cumulative, accruing dividends at an annual rate of 15%,
payable quarterly. The additional dividends which have not accrued on the
Preferred Stock as a result of the Chapter 11 proceeding amounted to $
The Company has obtained the approval of the Bankruptcy Court to
continue to pay for utility services, payroll and employee benefits, and
applicable taxes in connection therewith. The Company is also allowed to
continue normal business practices, but it may not engage in transactions
outside the ordinary course of business without first complying with the notice
and hearing provisions of the Bankruptcy Code and obtaining Bankruptcy Court
approval where and when necessary.
12
<PAGE>
Two official committees of creditors have been formed in the bankruptcy
proceeding, the Official Committee of Unsecured Creditors and the Official
Committee Bondholders, and these committees will have the right to be heard with
respect to any matters outside the ordinary course of business.
On September 27, 1999, the Company and the Senior Noteholders Committee
filed a Motion for Authority to Use Cash Collateral and Granting the Senior
Noteholders Adequate Protection (the "Cash Collateral Motion"). An Interim Order
Approving the Cash Collateral Motion was entered by the Bankruptcy Court on
September 30, 1999, and a Final Hearing on the Cash Collateral Motion and
Interim Order was held on October 20, 1999. A motion and final order regarding
the use of cash collateral were filed in the Chapter 11 Case on November 16,
1999.
The Bankruptcy Court has scheduled a hearing to consider the Company's
Disclosure Statement on November 10, 1999. Upon approval by the Bankruptcy
Court, the Disclosure Statement will be sent to all members of each class of
creditors and equity security holders entitled to vote for acceptance or
rejection. Following acceptance or rejection of the Joint Plan by the impaired
classes of creditors and equity security holders, the Bankruptcy Court, at a
hearing presently scheduled for December 29, 1999 will consider whether to
confirm the Joint Plan. The Bankruptcy Court, however, may continue or
reschedule the hearings on the disclosure statement and plan confirmation. To
confirm a plan, the Bankruptcy Court is required to find, among other things,
that (i) with respect to each impaired class of creditors and equity security
holders each holder in such class will, pursuant to the plan, receive at least
as much as such holder would receive in liquidation, (ii) each impaired class of
creditors and equity security holders has accepted the plan by the requisite
vote, and (iii) confirmation of the plan is not likely to be followed by
liquidation or the need for further financial reorganization of the debtor or
any successor unless the plan proposes such liquidation or reorganization. If
any impaired class of creditors does not accept the Joint Plan, assuming that
all the other requirements of the Bankruptcy Court are met, the Company may
request the Bankruptcy Court to invoke the "cram down" provisions of the
Bankruptcy Code and seek confirmation of the Joint Plan over the creditors'
objections.
The Company cannot predict the outcome of any of the foregoing
proceedings; however, it is not uncommon for reorganization plans proposed by
debtors in bankruptcy proceedings to be amended on one or more occasions in
response to a variety of circumstances, including negotiations among the
debtors, their creditors and the equity security holders. At the present time
however, the Company is unable to predict whether the Joint Plan will be amended
and, if so, to what extent.
After a plan of reorganization is approved by the Bankruptcy Court,
continuation of the business thereafter is dependent upon the success of future
operations and the Company's ability to meet its obligations as they become due.
Operating Environment
The Company's revenues, profitability and future growth and the carrying
value of its oil and natural gas properties are substantially dependent on
prevailing prices of oil and natural gas. The Company's ability to increase its
borrowing capacity and to obtain additional capital on
13
<PAGE>
attractive terms is also influenced by oil and natural gas prices. Prices for
oil and natural gas are subject to large fluctuation in response to relatively
minor changes in the supply of or demand for oil and natural gas, market
uncertainty and a variety of additional factors beyond the control of the
Company. While natural gas prices seem most dependent on weather in North
America and corresponding usage, oil prices are more subject to global economic
forces and supply. Because all of these factors are beyond the control of the
Company, its marketing efforts have been devoted to achieving the best price
available with a limited amount of fixed price sales and hedging transactions to
take advantage of short-term prices it believes to be attractive.
Any substantial and extended decline in the price of oil or natural gas
would have an adverse effect on the Company's carrying value of its proved
reserves, borrowing capacity, revenues, profitability and cash flows from
operations. Price volatility also makes it difficult to budget for and project
the return on either acquisitions or development and exploitation projects.
The Company uses the full cost method of accounting for its investment
in oil and natural gas properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of oil and natural gas
reserves are capitalized into a "full cost pool" as incurred, and properties in
the pool are depleted and charged to operations using the future gross revenue
method based on the ratio of current gross revenue to total proved future gross
revenues, computed based on current prices. To the extent that such capitalized
costs (net of accumulated depreciation, depletion and amortization) less
deferred taxes exceed the present value (using a 10% discount rate) of estimated
future net cash flow from proved oil and natural gas reserves, and the lower of
cost and fair value of unproved properties after income tax effects, excess
costs are charged to operations. Once incurred, a write-down of oil and natural
gas properties is not reversible at a later date even if oil or natural gas
prices increase. The Company was required to write down its asset base at the
end of 1997 due to a downward revision of quantity estimates attributable to a
single fault block in the Lake Enfermer Field, combined with significant
declines in oil and natural gas prices from the end of 1996. During the second
quarter of 1998, the Company was required to write down its asset base, again
due primarily to the continuing decline in oil and natural gas prices. The
Company had an additional full cost ceiling writedown of its asset base at the
end of 1998. This writedown was the result of a significant revision to the
reserves assigned to a single well in the Lake Enfermer Field, combined with
further declines in both oil and natural gas prices during the final quarter of
1998.
On June 3, 1997, the Company issued preferred stock as further described
under "Liquidity and Capital Resources. Long Term Financing." Prior to the
issuance of this preferred stock, the Company was taxed as an S Corporation. The
issuance of preferred stock terminated the S Corporation status effective June
3, 1997. For the short year beginning June 4, 1997 and subsequent years, the
Company is subject to Federal and state income tax.
Exploration Projects
The Company engaged in two material exploration projects during the
three-month and nine-month periods ended September 30, 1999. The first project
was the drilling and successful completion of a gas well in the Boutte Field.
The second project was a well in the West Gueydan Field which was drilled by
another operator through a partnership in which the Company had a 50% working
interest. The West Gueydan well resulted in a dry hole.
14
<PAGE>
Expenditures in connection with these two projects through November 15, 1999
were $3.8 million, with no additional expenditures expected over the balance of
1999.
Risk Factors
A detailed discussion of risks and uncertainties which could affect the
Company's future results and the forward looking statements contained in this
report can be found in the "Item 1. Business - Risk Factors" section of the
Company's Annual Report on Form 10-K for the year ended December 31, 1997. Those
risks and uncertainties remain applicable to the Company's operations. In
addition, the risks and uncertainties noted therein with respect to "Substantial
Leverage", "Substantial Capital Requirements", and "Technological Changes" are
supplemented by the additional risks and uncertainties with respect to liquidity
and Year 2000 readiness noted in the "Management Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
section of this report.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations, including but not limited to the discussions of Liquidity
and Capital Resources and Year 2000 Disclosure, includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements other than statements of historical fact included in the discussions
are forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, such
forward-looking statements are based on numerous assumptions (some of which may
prove to be incorrect) and are subject to risks and uncertainties which could
cause the actual results to differ materially from the Company's expectations.
Such risks and uncertainties include, but are not limited to, the timing and
extent of changes in commodity process for oil and gas, the need to develop and
replace reserves, environmental risks, drilling and operating risks, risks
related to exploration and development, uncertainties about the estimates of
reserves, competition, government regulations and the ability of the Company to
meet its stated business goals, issues and problems which may develop as the
Company continues to assess its Year 2000 readiness, as well as other risks and
uncertainties discussed in this and the Company's other filings with the
Securities and Exchange Commission (the "Cautionary Statements"). The Company
undertakes no obligation to update or revise any forward-looking statements,
whether as a result of changes in actual results, changes in assumptions or
other factors affecting such statements. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the Cautionary Statements.
Results of Operations
The following table sets forth certain operating information with
respect to the oil and gas operations of the Company for the three-month and
nine-month periods ended September 30, 1999 and 1998:
15
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- --------------------------------
1999 1998 1999 1998
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales:
Oil (Bbls) 89,513 96,776 261,926 300,330
Gas (Mcf) 721,064 1,200,635 2,212,314 3,755,543
Oil and Gas (BOE) 209,690 296,882 630,645 926,254
Sales Revenue:
Total Oil Sales $1,757,548 $1,129,818 $4,019,897 $3,802,198
Total Gas Sales 2,003,619 2,619,972 5,262,077 8,633,726
------------- ------------- ----------- -----------
Total Sales $3,761,167 $3,749,790 $9,281,974 $12,435,924
Average Sales Prices:
Oil (per Bbl) $ 19.63 $ 11.67 $ 15.35 $ 12.66
Gas (per Mcf) $ 2.78 $ 2.18 $ 2.38 $ 2.30
Per BOE $ 17.94 $ 12.63 $ 14.72 $ 13.43
Average Costs (per BOE):
Severance Taxes $ 1.05 $ 0.47 $ 0.83 $ 0.48
Lease operating expenses $ 3.72 $ 3.14 $ 4.07 $ 2.96
General and Administrative Exp. $ 3.48 $ 1.97 $ 3.24 $ 1.83
Depreciation, depletion and amort. $ 9.89 $ 8.16 $ 9.70 $ 21.22
</TABLE>
Revenues - The following table reflects an analysis of differences in
the Company's oil and gas revenues (expressed in thousands of dollars) between
the three and nine-month periods ended September 30, 1999 and the comparable
periods in 1998:
<TABLE>
<CAPTION> Third Quarter First Nine Months 1999
1999 Compared to Compared to First
Third Quarter 1998 Nine Months 1998
--------------------- ----------------------
<S> <C> <C>
Increase (decrease) in oil and gas
Revenues resulting from differences in:
Crude oil and condensate -
Prices $ 712,522 $ 703,896
Production (84,792) (486,197)
--------------- ---------------
627,730 267,249
Natural gas -
Prices 430,145 176,125
Production (1,046,498) (3,547,774)
--------------- ---------------
(616,353) (3,371,649)
--------------- ---------------
Increase (decrease) in oil and gas
Revenues $ 11,377 $ (3,153,950)
=============== ===============
</TABLE>
16
<PAGE>
The Company's oil and gas revenues decreased approximately $3.2 million, or
25% to $9.3 million for the nine months ended September 30, 1999 from $12.4
million for the comparable period in 1998. Production levels for the nine months
ended September 30, 1999 decreased 32% to 631 thousand barrels of oil equivalent
("MBOE") from 926 MBOE for the comparable period in 1998. During the first nine
months of 1999, gas production volumes decreased 41%, while oil volumes
decreased 13% over the comparable 1998 period. The Company's average sales
prices (including hedging activities) for oil and natural gas for the nine
months ended September 30, 1999 were $15.35 per Bbl and $2.38 per Mcf versus
$12.66 per Bbl and $2.30 per Mcf in the comparable 1998 period. During the first
nine months of 1999 revenues decreased $4.0 million due to the aforementioned
production decreases, and increased by $880,000 as a result of higher oil and
gas prices compared to the comparable 1998 period.
For the quarter ended September 30, 1999, total oil and gas revenues
decreased $11,000 from revenues for the third quarter of 1998. Oil production
for the quarter ended September 30, 1999 was down 7.5% from the comparable
quarter in 1998, and gas production between comparable periods was down 40%. Oil
prices for the quarter ended September 30, 1999 increased 68%, to $19.63 per Bbl
from $11.67 per Bbl from the third quarter of 1998. Gas prices also increased
during the quarter ended September 30, 1999 to $2.78 per Mcf from $2.18 per Mcf
for the third quarter of 1998.
Lease operating expenses - On a BOE basis, lease operating expenses
experienced an 18% increase, to $3.72 per BOE for the three months ended
September 30, 1999 from $3.14 per BOE in the comparable 1998 period. For the
first nine months of 1999, lease operating expenses per BOE were up 38%, from
$2.96 per BOE in 1998 to $4.07 in the comparable 1999 period. For the quarter
ended September 30, 1999, lease operating expenses were 16% lower than the
comparable quarter in 1998, and for the first nine months of 1999 lease
operating expenses were 6% lower than the comparable nine months in 1998. The
decreases for the quarter ended September 30, 1999 and for the first nine months
of 1999 resulted primarily from the reduced levels of oil and gas production
during the 1999 period versus the same periods in 1998.
Severance taxes - The effective severance tax rate as a percentage of oil
and gas revenues increased to 5.7% for the nine months ended September 30, 1999
from 3.6% for the comparable period in 1998. For the quarter ended September 30,
1999 the effective tax rate increased to 5.9% from 3.7% for the comparable
quarter in 1998. This relatively low effective rate is attributable to the
increased production from wells that have a state severance tax exemption under
Louisiana's severance tax abatement program, combined with the fact that, on a
value basis, the Company's production is approximately two-thirds natural gas,
which is taxed at a lower effective rate than oil. The increases in the
effective tax rates between 1998 period and comparable 1999 periods occurred
because the severance tax exemption periods for some wells expired during 1999.
General and administrative expenses - For the nine months ended
September 30, 1999 general and administrative ("G&A") expenses were $3.24 per
BOE, a 77% increase from the $1.83 per BOE for the first nine months of 1998.
For the first nine months of 1999, G&A increased 21%, from $1,691,000 in 1998 to
$2,041,000 in 1999. For the quarter ended September 30, 1999 G&A increased 25%,
from $586,000 in 1998 to $729,000 in 1999, and the G&A per BOE during the same
periods increased 76%. The third quarter and first nine months increases in G&A
per BOE in 1999 were due to decreases in production during the periods as
compared to
17
<PAGE>
the comparable periods for 1998. The increases in actual G&A expenses in the
third quarter and nine month periods ended September 30, 1999 were primarily the
result of salary adjustments made during the first nine months of 1999,
including the addition of a Chief Financial Officer, plus increased insurance
costs directly attributable to a Directors and Officers insurance policy
approved by the Board which became effective in December, 1998.
Depreciation, depletion and amortization expense - For the nine months
ended September 30, 1999 depreciation, depletion and amortization ("DD&A")
expense, before the write-down of the full cost pool during the second quarter
of 1998 (see "Full Cost Pool Write-down"), decreased 20% from the comparable
1998 period. Including the write-down of the full cost pool, DD&A decreased 54%
between the first nine months of 1998 and the first nine months of 1999. For the
quarter ended September 30, 1999, DD&A expense decreased 14% from the comparable
third quarter of 1998. Excluding the full cost pool write-down which occurred
during the second quarter of 1999, the DD&A decreases for both the third quarter
and the first nine months of 1999 are attributable to the Company's decreased
production and related future capital costs between the comparable periods for
1998 and 1999.
On a BOE basis, which reflects the increases in production, the DD&A rate
for the first nine months of 1999 was $9.70 per BOE compared to $8.22 per BOE
for the same period in 1998 (before the write-down of the full cost pool), an
increase of 18%. For the third quarter of 1999, DD&A per BOE was $9.89 compared
to $8.16 for the comparable period in 1998, for an increase of 21%. Including
the full cost pool write-down, the DD&A rate was $21.22 per BOE for the first
nine months of 1998.
Interest expense - For the nine months ended September 30, 1999 interest
expense decreased to $6.1 million from $7.5 million for the comparable 1998
period. This decrease of $1.4 million in interest expense is due specifically to
the suspension of interest accruing on the Notes as a result of the Company's
filing for Bankruptcy protection on August 6, 1999. For the quarter ended
September 30, 1999, interest expense decreased $1.4 million from the comparable
third quarter of 1998. This decrease was also the result of the suspension of
interest due on the Notes as previously discussed.
Net loss from operations - Due to the factors described above, net loss
from operations for the nine months ended September 30, 1999 was $9.0 million, a
decrease of $10.4 million from the net loss of $19.3 million reported for the
first nine months of 1998. The net loss for the quarter ended September 30, 1999
decreased $1.7 million, from $2.8 million in the third quarter of 1998 to $1.1
million during the third quarter of 1999. For nine-month period ended September
30, 1998, $12 million of the net loss from operations was due to the full cost
ceiling write-down discussed above.
Income tax expense - The Company issued a second class of stock on June 3,
1997, effectively terminating its S Corporation election. As a result, the
Company is subject to Federal and state income taxes for the results of
operations subsequent to June 2, 1997. In addition, due to the termination of
the Company's status as an S Corporation for federal income tax purposes, the
Company was also required to establish a net deferred tax liability calculated
at the applicable Federal and state tax rates resulting primarily from financial
reporting and income tax reporting basis differences in oil and gas properties.
Accordingly, a net deferred tax liability of
18
<PAGE>
$5,081,000 was accrued at June 3, 1998. The Company has a net deferred tax asset
at September 30, 1999 that has been fully reserved due to the Company's
operating losses.
Liquidity and Capital Resources
Working Capital and Cash Flow - The Company had a working capital deficit
at June 30, 1999 of $81.4 million, resulting primarily from declines in both
prices and production from 1998 levels, and from the acceleration of long term
debt due to the default discussed in Note 3 to the Company's financial
statements.
The foregoing discussion includes many forward looking statements which are
subject to the risks and uncertainties noted above in "Forward-Looking
Statements" which could cause the actual results to differ materially from the
Company's expectations.
The following summary table reflects comparative cash flows for the Company
for the nine-month periods ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1999 1998
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 5,406 $ 5,219
Net cash (used) by investing activities (4,833) (3,857)
Net cash provided by financing activities - -
</TABLE>
For the nine months ended September 30, 1999 net cash provided by operating
activities increased to $5.4 million from $5.2 million during the comparable
period in 1998.
Cash used in investing activities increased by $975,000, from $3.9 million
during the first nine months of 1998 to $4.8 million during the comparable
period in 1999. This increase was a result of increased capital spending during
the first nine months of 1999 as compared to the same period in 1998.
During the nine months ended September 30, 1999 no cash flow was provided
by financing activities.
Long-Term Financing - On June 3, 1997 the Company completed the private
sale to Jefferies & Company, Inc. ("Jefferies") of 70,000 units ("Note Units")
consisting of $70 million principal amount of the Series A Notes and warrants to
purchase 29,067 shares of Common Stock, no par value (the "Common Stock"), of
the Company at a price of $65,667,000 in a transaction not registered under the
Securities Act (the "Act") in reliance upon Section 4(2) of the Act and Rule 506
of Regulation D under the Act. Jefferies thereupon offered and resold the Note
Units only to qualified institutional buyers and a limited number of
institutional accredited investors at an initial price to such purchasers of
$68,467,000. Concurrently with the offering of the Note Units, the Company
completed a private sale to Jefferies of 200,000 units ("Equity Units")
consisting of 200,000 shares of Series A Cumulative Preferred Stock and warrants
to purchase 14,533 shares of Common Stock. The Equity Units were sold to
Jefferies for $9,200,000 in a transaction not registered under the Securities
Act in reliance upon Section 4(2)
19
<PAGE>
of the Act and Rule 506 of Regulation D under the Act. Jefferies thereupon
offered and resold the Equity Units only to qualified institutional buyers and a
limited number of institutional accredited investors at an initial price to such
purchasers of $10,000,000.The offerings and sale of the Note Units and the
Equity Units are referred to herein as the "Offerings". On November 5, 1997 the
Company completed an exchange offer of its 13.5% Senior Secured Notes due 2004,
Series B (the "Series B Notes") that were registered under the Securities Act of
1933, for the Series A Notes. The Series A Notes and the Series B Notes are
collectively referred to as the "Notes".
The net proceeds to the Company from these Offerings were approximately
$74.9 million. A portion of the net proceeds (approximately $9.5 million) was
segregated into a capitalized interest account to pay interest on the Notes
through June 1, 1998. The Company used the remaining net proceeds of the
Offerings as follows: (i) approximately $35.2 million was used to repay all of
the outstanding indebtedness (including accrued interest and associated fees)
due under the EEP and EECIP loans; (ii) approximately $10.5 million was used to
repay all of the outstanding indebtedness (including accrued interest and
associated fees) due under the JEDI loan; (iii) $2.6 million was used to
purchase from EEP and EECIP a 7.5% overriding royalty interest in the Company's
Lake Enfermer Field, Manila Village Field and Boutte Field; (iv) $5.0 million
was used in connection with the Company's acquisition from Forman Petroleum
Corporation II ("FPCII"), a company whose sole stockholder is McLain J. Forman
(the Company's Chairman and principal stockholder), all of FPCII's interest in
the Bayou Fer Blanc Field and the West Gueydan Field, of which $1.5 million was
paid to FPCII, $1.0 million was used to pay bank debt and $2.5 million was used
to pay trade payables to third parties; (v) Jefferies received a fee of $1.9
million for financial advisory services provided to the Company and also
received a warrant to purchase 4,844 shares of Common Stock at the initial
exercise price of $1.00 per share; and (vi) $0.9 million was used to pay
expenses of the Offerings. The remaining net proceeds from the Offerings of $9.4
million were used for capital expenditures, working capital and other general
corporate purposes.
Full Cost Pool Write-down - The Company uses the full cost method of
accounting for its investment in oil and natural gas properties. Under the full
cost method of accounting, all costs of acquisition, exploration and development
of oil and natural gas reserves are capitalized into a "full cost pool" as
incurred, and properties in the pool are depleted and charged to operations
using the future gross revenue method based on the ratio of current gross
revenue to total proved future gross revenues, computed based on current prices.
To the extent that such capitalized costs (net of accumulated depreciation,
depletion and amortization) less deferred taxes exceed the present value (using
a 10% discount rate) of estimated future net cash flow from proved oil and
natural gas reserves, and the lower of cost and fair value of unproved
properties after income tax effects, excess costs are charged to operations.
Once incurred, a write-down of oil and natural gas properties is not reversible
at a later date even if oil or natural gas prices increase. The Company was
required to write down its asset base at the end of the second quarter of 1998
due primarily to significant declines in oil and natural gas prices during 1998.
Hedging Activities - With the objective of achieving more predictable
revenues and cash flows and reducing the exposure to fluctuations in oil and
natural gas prices, the Company has entered into hedging transactions of various
kinds with respect to both oil and natural gas. While the use of these hedging
arrangements limits the downside risk of reverse price movements, it may also
limit future revenues from favorable price movements. During the 1997 and 1998,
the
20
<PAGE>
Company entered into forward sales arrangements with respect to a portion
(between 30-50%) of its estimated natural gas sales. As of November 1999, the
Company has open forward sales arrangements in the form of fixed price sales for
the months, volumes and prices as indicated in the following table:
<TABLE>
<CAPTION>
Volume Percent of Price per
------ ---------- ---------
Month Year MMBTU Production MCF
----- ---- ----- ---------- ---------
<S> <C> <C> <C> <C>
November 1999 120,000 38% $ 3.08
December 1999 60,000 19% $ 3.10
January 2000 60,000 19% $ 3.10
February 2000 60,000 19% $ 3.10
March 2000 60,000 19% $ 3.10
</TABLE>
The Company hedged about 30% of its estimated oil production during the
first six months of 1997, but it did not hedge any oil production during 1998.
Beginning November 1, 1999, the Company contracted to sell 6,000 barrels of oil
per month at a fixed price of $20.90 per barrel for the next twelve months. This
forward sale of oil represents approximately 15% of the Company's current
monthly oil sales. The Company continuously reevaluates its hedging program in
light of market conditions, commodity price forecasts, capital spending and debt
service requirements. The Company may hedge additional volumes through the
remainder of 1999 and into 2000 or it may determine from time to time to
terminate its then existing hedging positions.
Recent Accounting Pronouncements - In June 1998 the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities. The
Statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15,
1999. A company may also implement the Statement as of the beginning of any
fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998
and thereafter). Statement 133 cannot be applied retroactively. Statement 133
must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997 (and, at the company's election,
before January 1, 1998).
The Company has not yet quantified the impact of adopting Statement 133
on its financial statements and has not determined the timing of or method of
adoption of Statement 133. However, the Statement is unlikely to significantly
increase volatility in earnings and other comprehensive income, since the
Company does not currently have any derivative instruments as defined by
Statement 133 and does not anticipate entering into material amounts of such
investments in the future.
21
<PAGE>
District Court Complaint - As previously reported, the Company filed a
Complaint on Friday, October 16, 1998 against Jefferies & Company, Inc.
("Jefferies") in the United States District Court in and for the Eastern
District of Louisiana. The Complaint asserts causes of action against Jefferies
for breach of fiduciary duty, breach of contract, detrimental reliance,
negligence, intentional misrepresentation, and negligent misrepresentation in
connection with a 1997 debt and equity offering by the Company. The Company is
seeking damages in an amount to be determined at trial.
In accordance with the terms of the Memorandum, the Company has executed a
stay of the litigation currently pending against Jefferies in order to enable
all parties to execute such documents and instruments as may be necessary to
pursue confirmation of the Joint Plan. The Joint Plan provides for the dismissal
of the Jefferies litigation with prejudice and the release of all claims of the
Company against Jefferies.
As of the date of the filing of the Petition, substantially all pending
litigation and collection of outstanding claims against the Company are stayed
while the Company continues business operations as debtor-in-possession.
Year 2000 Disclosure - In August, 1998, the Securities and Exchange
commission issued a release that included guidance for Year 2000 ("Y2K")
disclosure in the MD&A portion of periodic filings under the securities Exchange
Act of 1934, as amended. In accordance with this release, the following
information is provided relating to the Company's Y2K issues:
1. Readiness - The Company has reviewed the status of all of its
---------
information technology ("IT") systems and has either received
certification from third-party vendors and/or certified to its
satisfaction that these IT systems are Y2K compatible. Concerning the
Company's non-IT systems, the Company has also assessed the extent to
which any such non-IT systems may exist within the Company's
operations and whether such systems are Y2K compatible. This
assessment was completed during the third quarter of 1999.
2. The Company has, to date, identified only one third party issue that
would have a direct material effect and must, therefore, be clarified.
This issue involves the oil and natural gas pipeline companies where
they are the sole pipeline within a producing field for delivery of
the Company's oil or natural gas. The Company has received assurances
from these third parties that they will be Y2K compliant by the end of
1999. The Company can provide no assurance that the Company's key
suppliers and customers have, or will have, technology systems,
information technology systems, and products that are Y2K compliant.
Any Y2K compliance problems facing such key suppliers and customers
could have a material adverse effect on the Company's business,
financial condition, and results of operations.
3. Cost to Address Company's Y2K Issues - The Company has not incurred
------------------------------------
any material costs to date related to Y2K issues, and at this time it
does not anticipate any material costs will be incurred to fix as yet
unidentified Y2K issues. The costs of these projects and the dates on
which the Company plans to complete modifications and replacements are
based on management's' best estimates, the estimates of any
22
<PAGE>
third-party specialists who assist the Company, the modification plans of
third parties and other factors. However, these estimates of future Y2K-
related costs may change, and actual results could differ materially from
the original estimates.
4. Risks - The Company's most reasonably likely worst case Y2K scenario
-----
at this time would be that one or more of the oil or natural gas
pipelines serving the Company's producing properties would be unable
to continue to take delivery of oil or natural gas produced by the
Company due to a Y2K problem within a third party's pipeline system.
While the Company believes the likelihood of the above occurring to be
low, there can be no assurance that the Company will not be materially
adversely affected by Y2K problems.
5. Contingency Plans - The Company presently does not have a contingency
-----------------
plan. The development of a contingency plan to handle the most
reasonably likely worst case Y2K scenario is dependent upon the
discovery Y2K issues or problems which have, to date, not been
identified. If and when such issues or problems may be identified, the
Company will develop a plan to deal with them. When completed, it is
intended that the Company's Y2K contingency plan will include
identified "point persons" to contact in the event of a Y2K problem,
as well as the availability of back-up systems. Due to the nature of
the issues at this time, which involve only non-IT systems and third
party issues, the Company does not currently anticipate the need for
any third party consultants for remediation efforts.
The foregoing discussion includes many forward looking statements which are
subject to the risks and uncertainties noted above in "Forward-Looking
Statements" which could cause the actual results to differ materially from the
Company's expectations.
23
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's revenues are derived from the sale of oil and natural gas
production. From time to time, the Company enters into hedging transactions
which fix, for specific periods and specific volumes of production, the prices
the Company will receive for its production. These agreements reduce the
Company's exposure to decreases in the commodity prices on the hedged volumes,
while also limiting the benefit the Company might otherwise have received from
increases in commodity prices of the hedged production.
The Company uses hedging transactions for price protection purposes on a
limited amount of its future production and does not use these agreements for
speculative or trading purposes. The impact of hedges is recognized in oil and
gas sales in the period the related production revenues are accrued.
Based on projected annual production volumes for 1999, a 10% decline in the
prices the Company receives for its oil and natural gas production would have an
approximate $5.8 million negative impact on the Company's discounted future net
revenues. This impact of a hypothetical 10% decline in prices is net of any
incremental gain that would be realized on hedge agreements in place as of
November 1, 1999.
24
<PAGE>
PART II
Item 1. Legal Proceedings
Reference is made to "PART I - FINANCIAL INFORMATION, Item 1. Financial
Statements, Note 4, Legal Proceedings", which is incorporated herein by
reference.
Item 3. Defaults upon Senior Securities
On December 30, 1998, the Company announced the nonpayment of the
December 1, 1998 installment of interest due on the 13.5% Notes within the
thirty-day grace period provided for such payments. The Company also has failed
to pay the June 1, 1999 installment. The Company does not presently have the
funds to make the December 1, 1998 or the June 1, 1999 interest installments on
the 13.5% Notes, which amount in the aggregate to $9,450,000 and does not
anticipate having sufficient funds to do so at any time in the near future. Nor
does the Company anticipate having sufficient funds to pay the additional $1.735
million in interest on the Senior Notes that accrued between June 1, 1999 and
the Petition Date. On March 10, 1999, the Trustee declared an Event of Default
under the Indenture with respect to the 13.5% Notes as a result of the
nonpayment of the December 1, 1998 interest installment and declared the unpaid
principal and accrued and unpaid interest on the 13.5% Notes to be due and
payable.
While operating as a debtor-in-possession during the Chapter 11
proceedings, the Company is stayed from paying interest on debts, except as
authorized by the Bankruptcy Court. In addition, interest expense on unsecured
and undersecured obligations cease to accrue as of the Petition Date. The Senior
Notes are undersecured. The additional interest which has not accrued on the
Senior Notes as a result of the Chapter 11 proceeding amounted to $2.6 million
as of November 15, 1999.
Item 5. Other Information
The Company did not pay any preferred stock dividends in the quarter ended
September 30, 1999 and has not paid preferred stock dividends since September 1,
1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The following instruments and documents are included as Exhibits
to this Form 10-Q. Exhibits incorporated by reference are so indicated by
parenthetical information:
Exhibit No. Exhibit
- ----------- -------
3(i) Restated Articles of Incorporation dated July 2, 1997 (filed
as Exhibit 3(i) to the Registration Statement on Form S-4
filed on July 16, 1997 and is incorporated herein by reference
(File No. 333-31375)).
25
<PAGE>
3(ii) Bylaws (filed as Exhibit 3(ii) to the Registration Statement
on Form S-4 filed on July 16, 1997 and is incorporated herein
by reference (File No. 333-31375)).
4.1 Indenture dated as of June 3, 1997 by and among Forman
Petroleum Corporation, as issuer, and U.S.Trust Company of
Texas, N.A. as trustee (filed as Exhibit 4.1 to the
Registration Statement on Form S-4 filed on July 16, 1997 and
is incorporated herein by reference (File No. 333-31375)).
4.2 Act of Mortgage, Security Agreement, Assignment of Production
and Financing Statement dated November 21, 1996, by Forman
Petroleum Corporation for the benefit of Joint Energy
Development Investments Limited Partnership (filed as
Exhibit 4.2) to the Registration Statement on Form S-4 filed
on July 16, 1997 and is incorporated herein by reference
(File No. 333-31375)).
4.3 Act of First Amendment to Mortgage, Security Agreement,
Assignment of Production and Financing Statement dated
December 23, 1996, by and among Forman Petroleum Corporation
and Joint Energy Development Investments Limited Partnership
(filed as Exhibit 4.3 to the Registration Statement on
Form S-4 filed on July 16, 1997 and is incorporated herein by
reference (File No. 333-31375)).
4.4 Act of Second Amendment to Mortgage, Security Agreement,
Assignment of Production and Financing Statement dated June 3,
1997, by and among Forman Petroleum Corporation and U.S. Trust
Company of Texas, N.A. (filed as Exhibit 4.4 to the
Registration Statement on Form S-4 filed on July 16, 1997 and
is incorporated herein by reference
(File No. 333-31375)).
4.5 Act of Assignment of Note and Liens dated June 3, 1997, by and
among Joint Energy Development Investments Limited
Partnership, as assignor, and U.S. Trust Company of Texas,
N.A., as assignee (filed as Exhibit 4.5 to the Registration
Statement on Form S-4 filed on July 16, 1997 and is
incorporated herein by reference
(File No. 333-31375)).
26
<PAGE>
4.6 Act of Mortgage, Security Agreement, Assignment of Production
and Financing Statement dated July 30, 1997, by Forman
Petroleum Corporation for the benefit of U.S. Trust Company of
Texas, N.A. as Trustee under the Indenture (filed as Exhibit
4.6 to the Registration Statement on Form S-4 filed on
July 16, 1997 and is incorporated herein by reference
(File No. 333-31375)).
10.2 Registration Rights Agreement dated June 3, 1997 by and
between Forman Petroleum Corporation and Jefferies & Company,
Inc. regarding Series A Cumulative Preferred Stock and
warrants to purchase Common Stock (filed as Exhibit 10.2 to
the Registration Statement on Form S-4 filed on July 16, 1997
and is incorporated herein by reference
(File No. 333-31375)).
27 Financial Data Schedule
99.1 Press Release (regarding engagement of CIBC Oppenheimer
Corp.)(filed as Exhibit 99.1 to the Current Report on Form 8-K
filed on October 20, 1998)
99.2 Complaint against Jefferies & Company, Inc. filed on October
16, 1998 in the United States District Court in and for the
Eastern District of Louisiana (filed as Exhibit 99.2 to the
Current Report on Form 8-K filed on October 20, 1998)
99.3 Press Release (regarding lawsuit against Jefferies & Company,
Inc.)(filed as Exhibit 99.3 to the Current Report on Form 8-K
filed on October 20, 1998)
(b) Reports on Form 8-K
1. Current Report on Form 8-K dated October 20, 1998
reporting the engagement of CIBC Oppenheimer Corp. 2.
2. Current Report on Form 8-K dated October 20, 1998
reporting the Complaint filed against Jefferies &
Company, Inc.
27
<PAGE>
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Forman Petroleum Corporation
Date: November 22, 1998 By: /s/ McLain J. Forman
---------------------
McLain J. Forman
Chairman of the Board, Chief
Executive Officer and President
By: /s/ Marvin J. Gay
-----------------
Marvin J. Gay
Vice President and Treasurer
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORMAN
PETROLEUM CORPORATION AND IS QUALIFED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 DEC-31-1998
<CASH> 2,047,701 1,474,488
<SECURITIES> 0 0
<RECEIVABLES> 126,292 47,830
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 3,574,838 3,687,229
<PP&E> 82,586,286 83,271,685
<DEPRECIATION> 64,905,619 59,511,084
<TOTAL-ASSETS> 31,906,130 33,685,858
<CURRENT-LIABILITIES> 85,006,765 77,791,028
<BONDS> 0 0
13,544,563 12,360,322
0 0
<COMMON> 1,000 1,000
<OTHER-SE> (66,651,519) (56,483,603)
<TOTAL-LIABILITY-AND-EQUITY> 31,906,130 33,685,858
<SALES> 9,281,974 15,950,329
<TOTAL-REVENUES> 9,377,877 16,275,843
<CGS> 3,092,422 3,900,037
<TOTAL-COSTS> 18,361,558 46,813,745
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,148,471 10,122,131
<INCOME-PRETAX> (8,983,681) (30,537,902)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (8,983,681) (30,537,902)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (8,983,681) (30,537,902)
<EPS-BASIC> (112.76) (358.52)
<EPS-DILUTED> (112.76) (358.52)
</TABLE>
