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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
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
(State or other jurisdiction
of incorporation or organization)
650 POYDRAS STREET - SUITE 2200
New Orleans, Louisiana 70130-6101
(Address of principal executive
offices)(Zip Code)
72-0954774
(I.R.S. Employer Identification No.)
(504) 586-8888
(Registrant's telephone number
including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 23, 1999, 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 Registrant under the Securities Act of 1933, which became effective
September 26, 1997.
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FORMAN PETROLEUM CORPORATION
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PART I..................................................................... 1
ITEM 1. BUSINESS.......................................................... 1
ITEM 2. PROPERTIES........................................................ 14
ITEM 3. LEGAL PROCEEDINGS................................................. 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 16
PART II.................................................................... 16
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS............................................................ 16
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA.............................. 17
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................. 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........ 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................ 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................... 26
PART III................................................................... 26
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................ 26
ITEM 11. EXECUTIVE COMPENSATION............................................ 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.... 29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 30
PART IV.................................................................... 31
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K... 31
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PART I
ITEM 1. BUSINESS
OVERVIEW
Forman Petroleum Corporation (the "Company") is an independent energy
company engaged in the acquisition, exploration, development, exploitation and
production of crude oil and natural gas. The Company and its predecesors have
conducted acquisition, exploration, development and production operations in the
Gulf Coast Basin since 1960, which gives the Company extensive geological,
geophysical, engineering and operational expertise in this area. As of December
31, 1998, the Company had estimated proved reserves of approximately 14.6 Bcf of
natural gas and 1.53 MMBbls of oil, or an aggregate of approximately 3.96 MMBOE,
with a present value of estimated pre-tax future net cash flows of $19.2 million
(based upon prices at December 31, 1998).
Since 1991, the Company has acquired five fields onshore in south
Louisiana. These fields have cumulative production of approximately 154 MMBoe
and contain complex geologic structures that are well suited to 3-D seismic
surveys and interpretation to identify potential reserves. Since 1994, the
Company has acquired and processed over 74 square miles of 3-D seismic data over
four of these fields from which the Company has identified additional
exploitation, development and exploration prospects.
Since 1991, the Company has experienced considerable growth with proved
reserves and present value increasing from 1.8 MMBoe and $13.7 million,
respectively, at September 30, 1991 to 3.96 MMBoe and $19.2 million,
respectively, at December 31, 1998. On a Boe basis, 75% of the Company's
reserves are classified as proved developed and the Company's reserve to
production ratio was 3.25 years as of December 31, 1998. The Company operates
four of the five fields where it is actively exploring for and developing oil
and natural gas reserves. The Company owns a weighted average working interest
of 91% in the four fields it operates, which enables the Company to control the
timing and implementation of all exploitation and exploration activities in
those fields. In the remaining field, the Company has a 50% working interest in
a well being drilled by another operator.
The Company believes that it can identify new drilling opportunities in its
fields by combining 3-D seismic survey data with other technologies, including
CAEX technology, as well as other available geological and engineering data. The
Company's advanced visualization and data analysis techniques and sophisticated
computing resources enable its geoscientists to view collectively large volumes
of information contained within the 3-D seismic data. These techniques and
resources also allow the Company's geoscientists to more easily identify
features such as shallow and deep amplitude anomalies, complex channel systems,
sharp structural details and fluid contacts, which might have been overlooked
using less sophisticated 3-D seismic data interpretation techniques. The Company
has made a significant investment in its 3-D seismic data visualization
technology, which is closely linked with the Company's well-log database and
other geoscience application software. The Company uses a series of Microsoft NT
workstations, and has licensed Seismic Micro-Technology's Kingdom software for
interpreting the geophysical data on the 3-D workstations, as well as for
analysis, mapping and interpretation of geological data.
The Company's technological success is dependent in part upon hiring and
retaining highly skilled technical personnel. The Company has assembled a
technical team that it believes has the capacity to adapt to the rapidly
changing technological demands in the field of oil and natural gas exploration.
This team consists of seven geoscientists and engineers with an average of 25
years industry experience, primarily concentrated in the Gulf Coast region. The
expertise of the Company's team of geoscientists and engineers reduces its
dependence on outside technical consultants and enables the Company to
internally generate substantially all of its prospects.
RECENT DEVELOPMENTS
The Company has experienced financial difficulties since the sale in 1997
of the Company's 13.5% Senior Secured Notes due 2004 (the "13.5% Notes") and the
Company's Series A Cumulative Convertible Preferred Stock (the "Preferred
Stock"). As previously reported, the Company engaged CIBC Oppenheimer Corp
("Oppenheimer") on October 16, 1998 as the Company's exclusive financial advisor
in connection with the possible debt restructuring or recapitalization of the
Company (the "Restructuring").
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The Company's financial difficulties are serious. 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 does not presently have the funds to make the
December 1, 1998 interest installment on the 13.5% Notes and does not anticipate
having sufficient funds to do so at any time in the near future. In fact,
pending the Restructuring, the Company intends to continue to use available
funds for exploration and development projects. 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. Certain holders of the 13.5% Notes have requested that
the Trustee withdraw the notice of acceleration. There can be no assurance that
the Trustee will withdraw the notice or that the Trustee will not pursue
available remedies under the Indenture arising upon an Event of Default,
including but not limited to filing suit against the Company to recover the
whole amount of principal and interest.
The Company's financial difficulties have also seriously impaired its
ability to make the capital investments necessary to maintain or expand its
asset base of oil and natural gas reserves. The Company has previously used
funds that would otherwise have been available to pay a portion of the December
1, 1998 interest installment for two exploration and development projects. 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 being
drilled by another operator in which the Company has a 50% working interest.
Expenditures in connection with these two projects through March 30, 1999 were
$1.7 million, with additional related expenditures of $2.6 million expected over
the balance of 1999. Three additional wells in other fields at an aggregate
estimated cost of $6.2 million have been scheduled by the Company for drilling
in 1999, pending the results of the Restructuring.
The foregoing uncertainties raise substantial doubt as to the Company's
ability to continue as a going concern. The Company is continuing in its
efforts to negotiate a Restructuring. It is the Company's policy, absent unusual
circumstances, not to comment publicly on discussions concerning proposals that
may be considered or transactions that may be pending with respect to the
Restructuring. The Company also intends, absent unusual circumstances, to
refrain from making any further announcements or reports with respect to the
Restructuring unless and until a definitive agreement has been executed by the
Company with respect to a transaction in connection with the Restructuring.
There can be no assurance that the Company will consummate any transactions in
connection with the Restructuring. If the Restructuring is not completed, the
Company may be forced to restructure the Company's outstanding obligations
within a Chapter 11 bankruptcy filing.
The foregoing discussion includes many forward looking statements which are
subject to the risks and uncertainties noted in "Forward-Looking Statements"
which could cause the actual results to differ materially from the Company's
expectations.
BUSINESS STRATEGY
The Company's business strategy is to expand its proven reserves,
production and cash flow through a disciplined technology-based program of
exploitation and exploration for crude oil and natural gas, emphasizing the
following key competitive strengths:
Control of Critical Exploration Functions - The Company owns substantially
all of the working interests in its fields and is the operator of four of the
five fields where it is actively exploring for and developing oil and natural
gas reserves. Controlling operations is a crucial element in the strategy of
the Company, since it allows the Company to control the critical functions in
the exploration and exploitation process. This has enabled the Company to manage
the land permitting and seismic option process; design the seismic surveys to
ensure optimum results; supervise the data acquisition and processing; integrate
and interpret the 3-D data with existing 2-D and subsurface geological data;
select well sites; and design and drill wells to exploit identified prospective
reserves. The Company is unable to control the operation in the remaining field,
where it has a 50% working interest in a well being drilled by another operator.
Technological Expertise - Many of the fields in south Louisiana are ideally
suited for the application of 3-D seismic data surveys to interpret the large
structures of the area, using an exploitation technique in which the Company has
extensive experience. The geological complexities in the Lake Enfermer Field
have in the past made
2
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conventional interpretation very difficult. The Company uses 3-D seismic data in
this field combined with existing well control and production information for
its interpretations. In addition to enhancing the interpretations of structures,
the Company uses 3-D seismic data to optimize its well programs.
Inventory of Exploratory Drilling Prospects - In addition to proved
undeveloped reserves, the Company has an inventory of what it believes are
significant unproven exploratory prospects. These exploratory prospects have
been identified through the application of 3-D seismic technology in the
Company's Lake Enfermer Field, Bayou Fer Blanc Field, West Gueydan and Manila
Village Fields. During the past year, third party petroleum engineering firms
completed an extensive review of the Company's geological and geophysical
interpretations of the Company's unproved exploratory prospects. The Company
believes that additional exploratory prospects will be identified as soon as a
3-D survey has been completed at the Boutte Field.
Geographic Specialization - The Company focuses its operations in the
environmentally sensitive coastal marshlands of south Louisiana. The Company's
reputation for preserving the integrity of these marshlands and its years of
experience in this area have enabled the Company to acquire fields owned by
landowners who restrict and carefully monitor all operations on their property.
This same expertise in south Louisiana has also enabled the Company to
successfully conclude joint ventures, farmout agreements and purchases of oil
and gas properties with large independent and major exploration and production
companies operating in the south Louisiana area.
Risk Management - To manage the technical and economic risks inherent in
drilling an exploratory property base with high ownership positions, the Company
has instituted a risk management program to minimize risk and maximize prospect
participation through diversification. In all cases, the Company will strive to
retain operating control but will actively pursue a program whereby it will
acquire farm-in or joint venture partners for its existing properties and will
consider reciprocal participation in other attractive exploration ventures.
SIGNIFICANT PROJECT AREAS
Set forth below are descriptions of the Company's south Louisiana fields
where it is actively exploring for and developing oil and natural gas reserves
and in many cases currently has production. The 3-D surveys which the Company is
using to analyze its project areas range from regional non-proprietary group
shoots to single field proprietary surveys.
Three additional wells in the project areas at an aggregate estimated cost
of $3.7 million have been scheduled by the Company for drilling in 1999, pending
the results of the Restructuring. There can be no assurance, however, that any
additional prospects will be drilled at all or within the expected time frame.
The final determination with respect to the drilling of any scheduled or
budgeted wells also will be dependent on a number of other factors, including
(i) results of the exploration efforts and the acquisition, review and analysis
of the seismic data, (ii) the availability of sufficient capital resources by
the Company and the other participants for the drilling of the prospects, (iii)
the approval of the prospects by the other participants after additional data
has been compiled, (iv) economic and industry conditions at the time of
drilling, including prevailing and anticipated prices for oil and natural gas
and the availability of drilling rigs and crews, (v) the financial resources and
operating results of the Company and (vi) the availability of leases on
reasonable terms and regulatory permitting for the prospect. There can be no
assurance that these projects can be successfully developed or that the
scheduled or budgeted wells discussed will, if drilled, encounter reservoirs of
commercially productive oil and natural gas.
Lake Enfermer Field - The Lake Enfermer Field is located on a deep,
complexly faulted, salt structure in Lafourche Parish in a coastal marsh that is
subsiding and grading into an open bay environment. The Company has acquired
3,650 acres in this field since 1992, has an average 98.5% working interest in,
and is the operator of the field. The field was first discovered in 1955 by Olin
Gas. Production through December 1998 for the field has been over 30 MMBoe. The
acquisition of the field included two production facilities and one satellite
location. In 1997, the Company built an additional production facility that cost
approximately $0.5 million. These three processing centers are located
approximately 1.5 miles apart from each other and are adequate to service all of
the Company's anticipated wells.
Upon the acquisition of the field, the Company used its extensive database
of 2-D seismic data to drill and complete three wells in 1993 and 1994 (two of
which are currently productive) for a cost of $5.3 million. The
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Company determined that an extensive 3-D survey of the Lake Enfermer Field area
was necessary to optimally develop the field. In April 1995, the Company
commenced a 33 square mile proprietary 3-D survey encompassing the entire Lake
Enfermer Field for the purpose of better identifying additional reserve
potential and more accurately determining drilling locations. The 3-D survey
resulted in the identification of numerous drilling opportunities. The Company
utilized this seismic data to drill and complete three wells in 1996 at a cost
of $12.3 million. The first post-3-D survey well, spudded in January 1996,
logged over 200 feet of productive sands and was successfully completed as a
dually producing oil well in March 1996. The second and third post-3-D survey
wells, spudded in April and July 1996, together logged over 312 feet of
productive sands. The Company drilled and completed two additional wells in
1997, and drilled and temporarily suspended operations on one well pending
further evaluation.
During 1999, pending the results of the current recapitalization efforts,
the Company plans to drill one additional well in the Lake Enfermer Field at an
estimated cost of approximately $1.9 million. In addition, the Company has
identified other exploratory and development locations that it could drill in
the future based upon its 3-D seismic survey and the wells drilled to date.
Manila Village Field - The Manila Village Field is located in Jefferson
Parish in a brackish water marsh environment. The Company acquired 825 acres in
this field in 1991 from Manila Village Production Company, has an average 65%
working interest in and is the operator of the field. The field was first
discovered by Whitestone in 1949 and through December 1997, the field had
produced 35 MMBoe. The Company undertook a 12 square mile 3-D survey over the
area and the data from that survey has been interpreted by the Company. During
1999, pending the results of the current recapitalization efforts, the Company
plans to drill one additional well at an estimated cost of approximately $2.7
million.
Boutte Field - The Boutte Field is located in a fresh water marsh in St.
Charles Parish. All well locations are accessible by roads. The Company acquired
in 1992 from Texaco and Apache a 100% working interest in 3,250 acres in this
field, which it operates. Discovered by Texaco in 1953, through December 1998
the field had produced a total of 36 MMBoe with a production mix of 80% natural
gas and 20% oil. In 1997, the Company recompleted five wells, and during 1998,
the company successfully recompleted one additional well. During the first two
months of 1999, the Company drilled and successfully completed another gas well
in the Boutte Field.
Bayou Fer Blanc Field - The Bayou Fer Blanc Field is located in Lafourche
Parish, adjacent to the Lake Enfermer Field. The Company used a portion of the
net proceeds of the Offerings (defined herein) to purchase a 100% working
interest in the Bayou Fer Blanc Field, which it now operates. Although
classified as two distinct fields, the Lake Enfermer Field and the Bayou Fer
Blanc Field have produced from a single geologic structure. Texaco discovered
the Bayou Fer Blanc Field in 1959 and through December 1998, the field had
produced 17 MMBoe. The Company completed a 25 square mile proprietary 3-D
seismic survey of the Bayou Fer Blanc Field in 1996, which was integrated with
the 33 square mile 3-D seismic survey of the Lake Enfermer Field for a total of
58 contiguous square miles for the two fields. The Company's initial analysis of
the 3-D survey suggests numerous undrilled amplitude anomalies with exploratory
potential. The Company drilled one unsuccessful exploratory well in this field
in 1997. Pending the results of the current recapitalization efforts, the
Company plans to drill one additional well in 1999 at an estimated cost of $1.6
million.
West Gueydan Field - The West Gueydan Field is located in rice fields in
Vermilion Parish on a deep salt structure. The Company used a portion of the net
proceeds of the Offerings to purchase a 90% working interest in 1,180 acres in
the field, which it now operates. The field includes a wellbore that has been
cleaned out to total depth and is available for re-entry and sidetracking.
Magnolia Oil Company discovered the field in 1938 and through December 1998, the
field had produced over 36 MMBoe. The Company has an extensive 2-D seismic data
grid of the field and recently acquired additional 3-D seismic data. In December
1998, the Company completed the farmout of a 50% interest in this prospect, and
drilling of the initial well commenced in the first quarter of 1999.
ACQUISITION, PRODUCTION AND DRILLING ACTIVITY
Acquisition and Development Costs - The following table sets forth certain
information regarding the costs incurred by the Company in its acquisition and
development activities during the periods indicated:
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YEAR END DECEMBER 31,
-----------------------------------------------------
1998 1997 1996
------------ ------------ ---------
(In thousands)
Acquisition costs...... $ 0 $ 6,100 $ 0
Development costs...... 2,119 4,105 3,853
Exploratory costs...... 2,414 18,464 12,448
------ ------- -------
Subtotal............ 4,533 28,669 16,301
Total costs incurred... $4,533 $28,669 $16,301
====== ======= =======
Drilling Activity - The following table sets forth the wells drilled and
completed by the Company during the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
GROSS NET Gross NET Gross NET
------- ------- ------- ------- ------- -------
Development:
<S> <C> <C> <C> <C> <C> <C>
Productive......................... 0.0 0.0 0.0 0.0 0.0 0.0
Non-productive..................... 0.0 0.0 1.0 1.0 0.0 0.0
--- --- --- --- --- ---
Total........................... 0.0 0.0 1.0 1.0 0.0 0.0
--- --- --- --- --- ---
Exploratory:
Productive......................... 0.0 0.0 2.0 2.0 3.0 3.0
Non-productive..................... 0.0 0.0 1.0 1.0 0.0 0.0
--- --- --- --- --- ---
Total........................... 0.0 0.0 3.0 3.0 3.0 3.0
--- --- --- --- --- ---
Total:
Productive......................... 0.0 0.0 2.0 2.0 3.0 3.0
Non-productive..................... 0.0 0.0 2.0 2.0 0.0 0.0
--- --- --- --- --- ---
Total........................... 0.0 0.0 4.0 4.0 3.0 3.0
--- --- --- --- --- ---
</TABLE>
Productive Well Summary - The following table sets forth the Company's
ownership in productive wells at December 31,1998. Gross oil and gas wells
include one well with multiple completions. Wells with multiple completions are
counted only once for purposes of the following table:
<TABLE>
<CAPTION>
Productive Wells
---------------------------------
Gross Net
------------- -------------
<S> <C> <C>
Gas.............................. 8.0 7.7
Oil.............................. 17.0 14.2
----------- -------------
Total....................... 25.0 21.9
</TABLE>
OIL AND GAS MARKETING
All of the Company's natural gas is sold at current market prices, either
under monthly spot price contracts or under longer term contracts that dedicate
the natural gas from a property or a well to a single purchaser for an extended
period of time at a fixed price for the period. The Company's oil and natural
gas condensate production is sold at current market prices under short term
contracts providing for market sensitive prices. From time to time, the Company
may enter into transactions hedging the price of oil. See "Item 7. Management
Discussion and Analysis of Financial Condition and Results of Operations" and
"Item 7A. Quantitative and Qualitative Disclosures About Market Risk."
COMPETITION AND MARKETS
The Company operates in a highly competitive environment. The Company
competes with major and independent oil and natural gas companies for the
acquisition of desirable oil and natural gas properties, as well as for the
equipment and labor required to develop and operate such properties. The Company
also competes with major and independent oil and natural gas companies in the
marketing and sale of oil and natural gas to marketers
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and end-users. Many of these competitors have financial and other resources
substantially greater than those of the Company.
The marketability of the Company's production depends upon the availability
and capacity of gas gathering systems, pipelines and processing facilities, and
the unavailability or lack of capacity thereof could result in the shut-in of
producing wells or the delay or discontinuance of development plans for
properties. In addition, federal and state regulation of oil and natural gas
production and transportation, general economic conditions and changes in supply
and demand could adversely affect the Company's ability to produce and market
its oil and natural gas on a profitable basis.
REGULATION
General - Various aspects of the Company's oil and natural gas operations
are subject to extensive and continually changing regulation, as legislation
affecting the oil and natural gas industry is under constant review for
amendment or expansion. Numerous departments and agencies, both federal and
state, are authorized by statute to issue, and have issued, rules and
regulations binding upon the oil and natural gas industry and its individual
members. The Federal Energy Regulatory Commission ("FERC") regulates the
transportation and sale for resale of natural gas in interstate commerce
pursuant to the Natural Gas Act of 1938 ("NGA") and the Natural Gas Policy Act
of 1978 ("NGPA"). In the past, the Federal government has regulated the prices
at which oil and natural gas could be sold. While sales by producers of natural
gas and all sales of crude oil, condensate and natural gas liquids can currently
be made at uncontrolled market prices, Congress could reenact price controls in
the future. Deregulation of wellhead sales in the natural gas industry began
with the enactment of the NGPA in 1978. In 1989, Congress enacted the Natural
Gas Wellhead Decontrol Act (the "Decontrol Act"). The Decontrol Act removed
all remaining NGA and NGPA price and nonprice controls affecting wellhead sales
of natural gas effective January 1, 1993.
Regulation of Oil and Natural Gas Exploration and Production - Exploration
and production operations of the Company are subject to various types of
regulation at the federal, state and local levels. Such regulations include
requiring permits and drilling bonds for the drilling of wells, regulating the
location of wells, the method of drilling and casing wells, and the surface use
and restoration of properties upon which wells are drilled. Many states also
have statutes or regulations addressing conservation matters, including
provisions for the utilization or pooling of oil and natural gas properties, the
establishment of maximum rates of production from oil and natural gas wells and
the regulation of spacing, plugging and abandonment of such wells. Some state
statutes limit the rate at which oil and natural gas can be produced from the
Company's properties. See "Risk Factors--Compliance with Governmental
Regulations."
Natural Gas Marketing, Gathering, Processing and Transportation - Federal
legislation and regulatory controls in the United States have historically
affected the price of natural gas and the manner in which such production is
marketed. Commencing in April 1992, the FERC issued Order Nos. 636, 636-A, 636-B
and 636-C ("Order No. 636"), which require interstate pipelines to provide
transportation separate, or "unbundled," from the pipelines' sales of natural
gas. Also, Order No. 636 requires pipelines to provide open-access
transportation on a basis that is equal for all natural gas supplies. Although
Order No. 636 does not directly regulate the Company's activities, the FERC has
stated that it intends for Order No. 636 to foster increased competition within
all phases of the natural gas industry. It is unclear what impact, if any,
increased competition within the natural gas industry under Order No. 636 will
have on the Company's activities. Although Order No. 636 could provide the
Company with additional market access and more fairly applied transportation
service rates, Order No. 636 could also subject the Company to more restrictive
pipeline imbalance tolerances and greater penalties for violation of those
tolerances.
In many instances, the results of Order No. 636 and related initiatives
have been to substantially reduce or eliminate the interstate pipelines'
traditional role as wholesalers of natural gas in favor of providing only
storage and transportation services. Order No. 636 has been implemented on all
interstate pipelines. In July 1996, the United States Court of Appeals for the
District of Columbia Circuit largely upheld Order No. 636. The Supreme Court
denied certiorari on May 12, 1997. Certain issues, however, were remanded to the
FERC by the District of Columbia Circuit. On remand, the FERC in Order No. 636-C
reaffirmed some elements of Order No. 636 and modified others. Order No. 636-C
may be the subject of further proceedings at the FERC and is subject to appeal.
Numerous parties also have filed petitions for review of orders in individual
pipeline restructuring proceedings.
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Upon judicial review, the FERC's orders may be remanded or reversed in whole or
in part. Consequently, it is difficult to predict Order No. 636's ultimate
effects.
The FERC has announced several important transportation-related policy
statements and proposed rule changes, including the appropriate manner in which
interstate pipelines release capacity under Order No. 636 and, more recently,
the price that shippers can charge for their released capacity. In addition, in
1995, FERC issued a policy statement on how interstate natural gas pipelines can
recover the costs of new pipeline facilities. In January 1996, the FERC issued a
policy statement and a request for comments concerning alternatives to its
traditional cost-of-service ratemaking methodology. A number of pipelines have
obtained FERC authorization to charge negotiated rates as one such alternative.
While any additional FERC action on these matters would affect the Company only
indirectly, these policy statements and proposed rule changes are intended to
further enhance competition in natural gas markets. In February 1997, the FERC
announced a broad inquiry into issues facing the natural gas industry to assist
the FERC in establishing regulatory goals and priorities in the post-Order No.
636 environment. The Company cannot predict what action the FERC will take on
these matters, nor can it predict whether the FERC's actions will achieve its
stated goal of increasing competition in natural gas markets. However, the
Company does not believe that it will be treated materially differently than
other natural gas producers and marketers with which it competes.
Regulation of onshore natural gas gathering activities is primarily a
matter of state oversight. Regulation of natural gas gathering and
transportation activities, depending upon the state involved, may include
various transportation, safety, rate, environmental and non-discriminatory
purchase and transport requirements.
Oil Sales and Transportation Rates - Sales prices of crude oil and natural
gas liquids by the Company are not regulated. The price the Company receives
from the sale of these products may be affected by the cost of transporting the
products to market. Effective January 1995, the FERC implemented regulations
establishing an indexing system under which oil pipelines will be able to change
their transportation rates, subject to prescribed ceiling levels. The indexing
system generally indexes such rates to inflation, subject to certain conditions
and limitations. The Company is not able at this time to predict the effects of
these regulations, if any, on the transportation costs associated with oil
production from the Company's oil producing operations.
Additional proposals and proceedings that might affect the oil and natural
gas industry are pending before the FERC and the courts. The Company cannot
predict when or whether any such proposals may become effective. In the past,
the natural gas industry has been heavily regulated. There is no assurance that
the regulatory approach currently pursued by the FERC will continue
indefinitely.
Operating Hazards and Environmental Matters - The oil and natural gas
business involves a variety of operating risks, including the risk of fire,
explosions, blow-outs, pipe failure, casing collapse, abnormally pressured
formations and hazards such as oil spills, natural gas leaks, ruptures and
discharges of toxic gases. The occurrence of any of these operating risks could
result in substantial losses to the Company due to injury or loss of life,
severe damage to or destruction of property and equipment, pollution or other
environmental damage, including damage to natural resources, clean-up
responsibilities, penalties and suspension of operations. Such hazards may
hinder or delay drilling, development and on-line operations.
Extensive federal, state and local laws regulating the discharge of
materials into the environment or otherwise relating to the protection of the
environment affect the Company's oil and natural gas operations. Numerous
governmental departments issue rules and regulations to implement and enforce
such laws, which are often difficult and costly to comply with and which carry
substantial penalties for failure to comply. Some laws, rules and regulations
relating to protection of the environment may, in certain circumstances, impose
"strict liability" for environmental contamination, rendering a person liable
for environmental damages and cleanup costs without regard to negligence or
fault on the part of such person. Other laws, rules and regulations may restrict
the rate of oil and natural gas production below the rate that would otherwise
exist or even prohibit exploration and production activities in sensitive areas.
In addition, state laws often require various forms of remedial action to
prevent pollution, such as closure of inactive pits and plugging of abandoned
wells. The regulatory burden on the oil and natural gas industry increases its
cost of doing business and consequently affects its profitability. The Company
believes that it is in substantial compliance with current applicable
environmental laws and regulations and that continued compliance with existing
requirements will not have a material adverse impact on the Company's
operations. However, environmental laws and regulations have been subject to
frequent changes over the years, and
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<PAGE>
the imposition of more stringent requirements could have a material adverse
effect upon the capital expenditures, earnings or competitive position of the
Company.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as "Superfund," imposes liability, without regard to
fault or the legality of the original conduct, on certain classes of persons
that are considered to be responsible for the release of a "hazardous
substance" into the environment. These persons include the current or former
owner or operator of the disposal site or sites where the release occurred and
companies that disposed or arranged for the disposal of hazardous substances.
Under CERCLA, such persons may be subject to joint and several liability for the
costs of investigating and cleaning up hazardous substances that have been
released into the environment, for damages to natural resources and for the
costs of certain health studies. In addition, companies that incur Superfund
liability frequently also confront third party claims because it is not uncommon
for neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by hazardous substances or other
pollutants released into the environment from a Superfund site.
The Federal Solid Waste Disposal Act, as amended by the Resource
Conservation and Recovery Act of 1976 ("RCRA"), regulates the generation,
transportation, storage, treatment and disposal of hazardous wastes and can
require cleanup of hazardous waste disposal sites. RCRA currently excludes
drilling fluids, produced waters and other wastes associated with the
exploration, development or production of oil and natural gas from regulation as
"hazardous waste." However, other wastes handled at exploration and
productions sites may not fall within this exclusion. Disposal of non-hazardous
oil and natural gas exploration, development and production wastes usually are
regulated by state law.
Stricter standards for waste handling and disposal may be imposed on the
oil and natural gas industry in the future. From time to time legislation has
been proposed in Congress that would revoke or alter the current exclusion of
exploration, development and production wastes from the RCRA definition of
"hazardous wastes," thereby potentially subjecting such wastes to more
stringent handling, disposal and cleanup requirements. If such legislation were
enacted, it could have a significant impact on the operating costs of the
Company, as well as the oil and natural gas industry in general. Furthermore,
although petroleum, including crude oil and natural gas, is exempt from CERCLA,
at least two courts have ruled that certain wastes associated with the
production of crude oil may be classified as "hazardous substances" under
CERCLA. The impact of future revisions to environmental laws and regulations
cannot be predicted.
The Oil Pollution Act of 1990 ("OPA") provides that persons responsible
for facilities and vessels (including the owners and operators of onshore
facilities) are subject to strict joint and several liability for cleanup costs
and certain other public and private damages arising from a spill of oil into
waters of the United States. OPA establishes a liability limit for onshore
facilities of $350.0 million. However, facilities located in coastal waters may
be considered "offshore" facilities subject to greater liability limits under
OPA (all removal costs plus $75.0 million). In addition, a party cannot take
advantage of this liability limit if the spill was caused by gross negligence or
willful misconduct or resulted from a violation of a federal safety,
construction or operating regulation. If a party fails to report a spill or
cooperate in the cleanup, liability limits likewise do not apply. OPA also
imposes other requirements on facility owners and operators, such as the
preparation of an oil spill response plan. Failure to comply with ongoing
requirements or inadequate cooperation in a spill event may subject the
responsible party to civil or criminal enforcement actions.
The OPA also imposes financial responsibility requirements on the person or
persons statutorily responsible for certain facilities. On March 25, 1997, the
U.S. Minerals Management Service ("MMS") proposed new regulations to implement
these financial responsibility requirements, and final regulations were issued
by the MMS, which became effective October 13, 1998. Under the final
regulations issued by the MMS, oil production and storage facilities that are
located in wetlands adjacent to coastal waters could be required to demonstrate
various levels of financial ability to reimburse governmental entities and
private parties for costs that they could incur in responding to an oil spill,
if the MMS determines that spills from those particular facilities could reach
coastal waters. Although the Company owns and operates oil production and
storage facilities in wetland areas in southern Louisiana, the Company has
determined that, at this time, only one of the Company's facilities (located in
the Lake Enfermer Field) will be subject to the financial responsibility
requirements imposed by the MMS. The amount of financial responsibility that
the Company will have to demonstrate (under the MMS's rules) will be $10.0
million, an
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<PAGE>
amount that the Company believes it can satisfy utilizing insurance without any
negative impact on its financial condition or cost of doing business.
The Federal Water Pollution Control Act ("FWPCA") imposes restrictions
and strict controls regarding the discharge of produced waters and other oil and
natural gas wastes into navigable waters. Permits must be obtained to discharge
pollutants to waters and to conduct construction activities in waters and
wetlands. The FWPCA and similar state laws provide for civil, criminal and
administrative penalties for any unauthorized discharges of pollutants and
unauthorized discharges of reportable quantities of oil and other hazardous
substances. Many state discharge regulations and the Federal National Pollutant
Discharge Elimination System general permits prohibit the discharge of produced
water and sand, drilling fluids, drill cuttings and certain other substances
related to the oil and natural gas industry to coastal waters. Although the
costs to comply with recently-enacted zero discharge mandates under federal or
state law may be significant, the entire industry is expected to experience
similar costs and the Company believes that these costs will not have a material
adverse impact on the Company's financial conditions and operations. In 1992 the
EPA adopted regulations requiring certain oil and natural gas exploration and
production facilities to obtain permits for storm water discharges. Costs may be
associated with the treatment of wastewater or developing and implementing storm
water pollution prevention plans.
The Company's operations are also subject to the Clean Air Act ("CAA")
and comparable state and local requirements. Amendments to the CAA were adopted
in 1990 and contain provisions that may result in the gradual imposition of
certain pollution control requirements with respect to air emissions from
operations of the Company. The Company may be required to incur certain capital
expenditures in the next several years for air pollution control equipment in
connection with obtaining and maintaining operating permits and approvals for
air emissions. However, the Company does not believe its operations will be
materially adversely affected by any such requirements, and the requirements are
not expected to be any more burdensome to the Company than to other similarly
situated companies involved in oil and natural gas exploration and production
activities.
OPERATIONAL RISKS AND INSURANCE
The oil and natural gas business involves a variety of operating risks,
including the risk of fire, explosions, blow-outs, pipe failure, casing
collapse, abnormally pressured formations and hazards such as oil spills,
natural gas leaks, ruptures or discharges of toxic gases. The occurrence of any
of these operating risks could result in substantial losses to the Company due
to injury or loss of life, severe damage to or destruction of property and
equipment, pollution or other environmental damage, including damage to natural
resources, clean-up responsibilities, penalties and suspension of operations. In
accordance with customary industry practice, the Company maintains insurance
against some, but not all, of the risks described above, including insuring the
cost of clean-up operations, public liability and physical damage. There can be
no assurance that any insurance obtained by the Company will be adequate to
cover any losses or liabilities or that such insurance will continue to be
available in the future or that such insurance will be available at premium
levels that justify its purchase. The occurrence of a significant event not
fully insured or indemnified against could have a material adverse effect on the
Company's financial condition and operations.
EMPLOYEES
On December 31, 1998, the Company employed 36 people, including 14 that
work in the Company's various field offices. None of the Company's employees
are covered by a collective bargaining agreement, and the Company believes that
its relationships with its employees are satisfactory. From time to time the
Company utilizes the services of independent contractors to perform various
field and other services.
FORWARD-LOOKING STATEMENTS
This Form 10-K Annual Report (the "Report") 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
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<PAGE>
Company's expectations. Such risks and uncertainties include, but are not
limited to, the timing and extent of changes in commodity prices 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.
RISK FACTORS
Dependence on Exploratory Drilling Activities - The success of the Company
will be materially dependent upon the success of its exploratory drilling
program. Exploratory drilling involves numerous risks, including the risk that
no commercially productive oil or gas reservoirs will be encountered. The cost
of drilling, completing and operating wells is often uncertain, and drilling
operations may be curtailed, delayed or canceled as a result of a variety of
factors, including unexpected drilling conditions, pressure or irregularities in
formations, equipment failures or accidents, adverse weather conditions,
compliance with governmental requirements and shortages or delays in the
availability of drilling rigs and the delivery of equipment. The use of 3-D
seismic data and other advanced technologies does not enable the interpreter to
determine whether hydrocarbons are in fact present in subsurface structures that
may be identified. In addition, the use of 3-D seismic data and other advanced
technologies requires greater pre-drilling expenditures than traditional
drilling strategies, and the Company could incur losses as a result of such
expenditures. Moreover, the Company may identify prospects through a number of
methods that do not include interpretation of 3-D seismic data or the use of
other advanced technologies. The Company's future drilling activities may not
be successful, and if unsuccessful, such failure will have a material adverse
effect on the Company's results of operations and financial condition. There
can be no assurance that the Company's overall drilling success rate or its
drilling success rate for activity within a particular project area will not
decline. The Company may choose not to acquire option and lease rights prior to
acquiring seismic data and may identify a prospect or drilling location before
seeking option or lease rights in the prospect or location. Although the
Company has identified or budgeted for numerous drilling prospects, there can be
no assurance that such prospects will ever be drilled (or drilled within the
scheduled time frame) or that oil or natural gas will be produced from any such
prospects or any other prospects.
Volatility of Oil and Natural Gas Prices - Revenues generated from the
Company's operations are highly dependent upon the price of, and demand for, oil
and natural gas. Historically, the markets for oil and natural gas have been
volatile and are likely to continue to be volatile in the future. Prices for
oil and natural gas are subject to wide fluctuations in response to relatively
minor changes in the supply of and demand for oil and natural gas, market
uncertainty and a variety of additional factors that are beyond the control of
the Company. These factors include the level of consumer product demand,
weather conditions, domestic and foreign governmental regulations, the price and
availability of alternative fuels, local and international political conditions,
including Middle East, the foreign supply of oil and natural gas, the price of
foreign imports and overall economic conditions. It is impossible to predict
future oil and natural gas price movements with any certainty. Declines in oil
and natural gas prices may materially adversely affect the Company's financial
condition, liquidity and results of operations. Lower oil and natural gas
prices also may reduce the amount of the Company's oil and natural gas that can
be produced economically. In order to reduce its exposure to price risks in the
sale of its oil and natural gas, the Company enters into hedging arrangements
from time to time; however, the Company's hedging arrangements apply to only a
portion of its production and provide only limited price protection against
fluctuations in the oil and natural gas markets.
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 revenues
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
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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 writedown of oil and
natural gas properties is not reversible at a later date even if oil or natural
gas prices increase. The Company wrote down its oil and gas properties at
December 31, 1997 by $10 million, and further wrote down its oil and gas
properties at June 30, 1998 by an additional $12 million. As of December 31,
1998 the Company again wrote down its oil and gas properties by $7.6 million.
Significant downward revisions of quantity estimates or declines in oil and
natural gas prices that are not offset by other factors could result in a
further write down of oil and natural gas properties.
Replacement of Reserves - In general, the volume of production from oil and
natural gas properties declines as reserves are depleted. Except to the extent
the Company acquires properties containing proved reserves or conducts
successful development and exploration activities, or both, the proved reserves
of the Company will decline as reserves are produced. The Company's future oil
and natural gas production is, therefore, highly dependent upon its level of
success in finding or acquiring additional reserves. The business of exploring
for, developing or acquiring reserves is capital intensive. The Company's
financial condition since the sale of the 13.5% Notes and the Preferred Stock
has seriously impaired its ability to make the necessary capital investment to
maintain or expand its asset base of oil and natural gas reserves. The
Company's ability to maintain or expand its asset base in the future is largely
dependent upon the successful completion of the current restructuring efforts.
In addition, there can be no assurance that the Company's future development,
acquisition and exploration activities will result in additional proved reserves
or that the Company will be able to drill productive wells at acceptable costs.
Uncertainty of Reserve Information and Future Net Revenue Estimates - There
are numerous uncertainties inherent in estimating oil and natural gas reserves
and their estimated values, including many factors beyond the control of the
producer. The reserve data set forth in this Report represents only estimates.
Reservoir engineering is a subjective process of estimating underground
accumulations of oil and natural gas that cannot be measured in an exact manner.
Estimates of economically recoverable oil and natural gas reserves and of future
net cash flows necessarily depend upon a number of variable factors and
assumptions, such as historical production from the area compared with
production from other producing areas, the assumed effects of regulations by
governmental agencies and assumptions concerning future oil and natural gas
prices, future operating costs, severance and excise taxes, development costs
and workover and remedial costs, all of which may in fact vary considerably from
actual results. For these reasons, estimates of the economically recoverable
quantities of oil and natural gas attributable to any particular group of
properties, classifications of such reserves based on risk recovery and
estimates of the future net cash flows expected therefrom prepared by different
engineers or by the same engineers at different times may vary substantially and
such reserve estimates may be subject to downward or upward adjustment based
upon such factors. Actual production, revenues and expenditures with respect to
the Company's reserves will likely vary from estimates, and such variances may
be material.
The present values of estimated future net cash flows referred to in this
Report should not be construed as the current market value of the estimated oil
and natural gas reserves attributable to the Company's properties. In
accordance with applicable requirements of the United States Securities and
Exchange Commission (the "Commission") the estimated discounted future net cash
flows from proved reserves are generally based on prices and costs as of the
date of the estimate, whereas actual future prices and costs may be materially
higher or lower. Actual future net cash flows also will be affected by factors
such as the amount and timing of actual production, supply and demand for oil
and natural gas, curtailments or increases in consumption by gas purchasers and
changes in governmental regulations or taxation. The timing of actual future
net cash flows from proved reserves, and their actual present value, will be
affected by the timing of both the production and the incurrence of expenses in
connection with development and production of oil and natural gas properties.
In addition, the calculation of the present value of the future net revenues
using a 10% discount, as required by the Commission, is not necessarily the most
appropriate discount factor based on interest rates in effect from time to time
and risks associated with the Company's reserves or the oil and natural gas
industry in general.
Substantial Leverage - As of December 31, 1998, the Company's currently due
debt and stockholder's deficit were $68.3 million and $56.5 million,
respectively. As of December 31, 1998, the Company had estimated proved
reserves of approximately 14.6 Bcf of natural gas and 1.53 MMBbls of oil, or an
aggregate of approximately 3.96 MMBOE, with a present value of estimated pre-tax
future net cash flows of $19.2 million (based upon prices at December 31, 1998).
An Event of Default with respect to the long-term debt has been declared and is
continuing.
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The Company's level of indebtedness in relation to the present value of pre-tax
future net cash flow of its proved reserves effectively precludes additional
financing at this time for working capital, capital expenditures, acquisitions,
general corporate purposes or other purposes.
Substantial Capital Requirements - The Company makes, and will need to
continue to make, substantial capital expenditures for the development,
exploration, acquisition and production of oil and natural gas reserves. The
Company has planned capital expenditures of approximately $10.5 million in 1999,
$1.7 of which has already been expended as of March 30, 1999. Without the
Restructuring, the Company will not have sufficient cash to fund remaining
planned capital expenditures in 1999.
Technological Changes - The oil and gas industry is characterized by rapid and
significant technological advancements and introductions of new products and
services utilizing new technologies. As others use or develop new technologies,
the Company may be placed at a competitive disadvantage, and competitive
pressures may force the Company to implement such new technologies at
substantial costs. In addition, other oil and gas companies may have greater
financial, technical and personnel resources that allow them to enjoy
technological advantages and may in the future allow them to implement new
technologies before the Company. There can be no assurance that the Company
will be able to respond to such competitive pressures and implement such
technologies on a timely basis or at an acceptable cost. One or more of the
technologies currently utilized by the Company or implemented in the future may
become obsolete. In such cases, the Company's business, financial condition and
results of operations could be materially adversely affected. If the Company is
unable to utilize the most advanced commercially available technology, the
Company's business, financial condition and results of operations could be
materially and adversely affected.
Risks of Hedging Transactions - In order to manage its exposure to price risks
in the marketing of its oil and natural gas, the Company has in the past and
expects to continue to enter into oil and natural gas price hedging arrangements
with respect to a portion of its expected production. These arrangements may
include futures contracts on the New York Mercantile Exchange (NYMEX), fixed
price delivery contracts and financial swaps. While intended to reduce the
effects of volatility of the price of oil and natural gas, such transactions may
limit potential gains by the Company if oil and natural gas prices were to rise
substantially over the price established by the hedge. In addition, such
transactions may expose the Company to the risk of financial loss in certain
circumstances, including instances in which (i) production is less than
expected, (ii) there is a widening of price differentials between delivery
points for the Company's production and the delivery point assumed in the hedge
arrangement, (iii) the counterparties to the Company's future contracts fail to
perform the contract or (iv) a sudden, unexpected event materially impacts oil
or natural gas prices.
Dependence on Key Personnel - The Company depends to a large extent on the
services of its founder, McLain J. Forman, and certain other senior management
personnel. The loss of the services of Mr. Forman and other senior management
personnel could have a material adverse effect on the Company's operations. The
Company does not currently have an employment contract with any senior
management or key personnel. The Company believes that its success is also
dependent upon its ability to continue to employ and retain skilled technical
personnel. The Company does not currently have any key-man insurance coverage
on McLain J. Forman, other senior management or any key personnel. The
inability of the Company to employ or retain skilled technical personnel could
have a material adverse effect on the Company's operations.
Compliance with Governmental Regulations - Oil and natural gas operations
are subject to various federal, state and local government regulations that may
be changed from time to time in response to economic or political conditions.
Matters subject to regulation include discharge permits for drilling operations,
drilling and abandonment bonds or other financial responsibility requirements,
reports concerning operations, the spacing of wells, utilization and pooling of
properties and taxation. From time to time, regulatory agencies have imposed
price controls and limitations on production by restricting the rate of flow of
oil and natural gas wells below actual production capacity to conserve supplies
of oil and natural gas. In addition, the production, handling, storage,
transportation and disposal of oil and natural gas, by-products thereof and
other substances and materials produced or used in connection with oil and
natural gas operations are subject to regulation under federal, state and local
laws and regulations primarily relating to protection of human health and the
environment. These laws and regulations have continuously imposed increasingly
strict requirements for water and air pollution control and solid waste
management.
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Environmental Risks - The Company is subject to a variety of federal, state
and local governmental laws and regulations related to the storage, use,
discharge and disposal of toxic, volatile or otherwise hazardous materials.
These regulations subject the Company to increased operating costs and potential
liability associated with the use and disposal of hazardous materials. Although
these laws and regulations have not had a material adverse effect on the
Company's financial condition or results of operations, there can be no
assurance that the Company will not be required to make material expenditures in
the future. Moreover, the Company anticipates that such laws and regulations
will become increasingly stringent in the future, which could lead to material
costs for environmental compliance and remediation by the Company.
Any failure by the Company to obtain required permits for, control the use
of, or adequately restrict the discharge of hazardous substances under present
or future regulations could subject the Company to substantial liability or
could cause its operations to be suspended. Such liability or suspension of
operations could have a material adverse effect on the Company's financial
condition and results of operations.
Marketability of Production - The marketability of the Company's production
depends upon the availability and capacity of gas gathering systems, pipelines
and processing facilities, and the unavailability or lack of capacity thereof
could result in the shut-in of producing wells or the delay or discontinuance of
development plans for properties. In addition, federal and state regulation of
oil and natural gas production and transportation, general economic conditions
and changes in supply and demand could adversely affect the Company's ability to
produce and market its oil and natural gas on a profitable basis.
Substantial Competition - The Company operates in a highly competitive
environment. The Company competes with major and independent oil and natural
gas companies for the acquisition of desirable oil and natural gas properties,
as well as for the equipment and labor required to develop and operate such
properties. The Company also competes with major and independent oil and
natural gas companies in the marketing and sale of oil and natural gas to
marketers and end-users. Many of these competitors have financial and other
resources substantially greater than those of the Company.
Operating Risks of Oil and Natural Gas Operations - The oil and natural gas
business involves a variety of operating risks, including the risk of fire,
explosions, blow-outs, pipe failure, casing collapse, abnormally pressured
formations and hazards such as oil spills, natural gas leaks, ruptures or
discharges of toxic gases. The occurrence of any of these operating risks could
result in substantial losses to the Company due to injury or loss of life,
severe damage to or destruction of property and equipment, pollution or other
environmental damage, including damage to natural resources, clean-up
responsibilities, penalties and suspension of operations. In accordance with
customary industry practice, the Company maintains insurance against some, but
not all, of the risks described above. There can be no assurance that any
insurance obtained by the Company will be adequate to cover any losses or
liabilities. The Company cannot predict the continued availability of insurance
or the availability of insurance at premium levels that justify its purchase.
No Intention to Pay Dividends - The Company currently intends to retain any
earnings for the future operation and development of its business and does not
currently intend to declare or pay any dividends on its Common Stock in the
foreseeable future. In addition, the payment of dividends by the Company is
restricted by the Indenture.
Going Concern - The Company did not pay the December 1, 1998 interest
installment on the 13.5% Notes and has been declared in default by the Trustee.
The Company is attempting to negotiate a restructuring of its obligations. If
such a restructuring is not negotiated, the Company may be forced to restructure
the Company's outstanding obligations within a Chapter 11 bankruptcy filing. The
uncertainties discussed above result in substantial doubt as to the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
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ITEM 2. PROPERTIES
The Company has grown principally through the acquisition and subsequent
development and exploitation of properties purchased since 1991. The Company's
proved oil and gas reserves at December 31, 1998 were attributable to three
properties, all of which are located in South Louisiana. The Company operates
four of the five fields where it is actively exploring for and developing oil
and natural gas reserves. The Company owns a weighted average working interest
of 91% in the four fields it operates, which enables the Company to control the
timing and implementation of all exploitation and exploration activities in
those fields. In the remaining field, the Company has a 50% working interest in
a well being drilled by another operator.
OIL AND NATURAL GAS RESERVES
The following table summarizes the estimates of the Company's proved
producing, proved non-producing and proved undeveloped reserves as of December
31, 1998, and the related present value of estimated future net revenues before
income taxes at such date, as estimated by independent petroleum engineers,
Ryder Scott Company, Petroleum Engineers.
<TABLE>
<CAPTION>
Producing Non-Producing Undeveloped Total
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Natural gas (MMcf)................................. 5,395 4,470 4,693 14,558
Oil and NGLs (MBbls)............................... 592 718 221 1,531
Natural gas equivalents (MMcfe).................... 8,946 8,780 6,016 23,742
Oil equivalents (Mboe)............................. 1,491 1,463 1,003 3,957
Present value of estimated future net revenues
before income taxes, discounted at 10% (000's )... $9,366 $6,436 $3,367 $19,169
</TABLE>
Oil prices have risen significantly and natural gas prices have remained
relatively stable subsequent to December 31, 1998. Accordingly, the discounted
future net cash flows would be increased if the standardized measure was
calculated at a later date. These estimates of the Company's proved reserves
have not been filed with or included in reports to any federal agency.
In accordance with applicable requirements of the Commission, estimates of
the Company's proved reserves and future net revenues are made using oil and
natural gas sales prices estimated to be in effect as of the date of such
reserve estimates and are held constant throughout the life of the properties
(except to the extent a contract specifically provides for escalation).
Estimated quantities of proved reserves and future net revenues therefrom are
affected by oil and natural gas prices, which have fluctuated widely in recent
years. There are numerous uncertainties inherent in estimating oil and natural
gas reserves and their estimated values, including many factors beyond the
control of the producer. The reserve data set forth herein represents only
estimates. Reservoir engineering is a subjective process of estimating
underground accumulations of oil and natural gas that cannot be measured in an
exact manner. The accuracy of any reserve estimate is a function of the quality
of available data and engineering and geological interpretation and judgment. As
a result, estimates of different engineers may vary. In addition, estimates of
reserves are subject to revision based upon actual production, results of future
development and exploration activities, prevailing oil and natural gas prices,
operating costs and other factors, which revisions may be material. Accordingly,
reserve estimates are often different from the quantities of oil and natural gas
that are ultimately recovered. The meaningfulness of such estimates is highly
dependent upon the accuracy of the assumptions upon which they are based.
In general, the volume of production from oil and natural gas properties
declines as reserves are depleted. Except to the extent the Company acquires
properties containing proved reserves or conducts successful exploration and
development activities, or both, the proved reserves of the Company will decline
as reserves are produced. The Company's future oil and natural gas production
is, therefore, highly dependent upon its level of success in finding or
acquiring additional reserves.
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As operator of domestic oil and gas properties, the Company has filed
Department of Energy Form EIA-23, "Annual Survey of Oil and Gas Reserves," as
required by Public Law 93-275. There are differences between the reserves as
reported on Form EIA-23 and as reported herein. The differences are
attributable to the fact that Form EIA-23 requires that an operator report on
the total reserves attributable to wells which are operated by it, without
regard to ownership (i.e. reserves are reported on a gross operated basis,
rather than on a net interest basis).
LEASEHOLD ACREAGE
The table below describes the Company's developed and undeveloped leasehold
acreage as of December 31, 1998:
<TABLE>
<CAPTION>
Developed Undeveloped
Acreage Acreage Total
------------------------ ------------------------ ------------------------
Field Gross NET GROSS NET GROSS NET
- ----- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Lake Enfermer........... 1,939 1,785 420 414 2,359 2,199
Manila Village.......... 742 530 0 0 742 530
Boutte.................. 3,090 3,090 0 0 3,090 3,090
Bayou Fer Blanc......... 0 0 320 320 320 320
West Gueydan (Note 1)... 0 0 1,508 754 1,508 754
----- ----- ----- ---- ----- -----
5,771 5,405 2,248 1488 8,019 6,893
===== ===== ===== ==== ===== =====
</TABLE>
Note 1: In December, 1998 the Company farmed out all of the acreage in the
West Gueydan prospect to a partnership of which the Company owns 50%, in
exchange for which the other 50% partner agreed to participate in the drilling
of an exploratory well on the West Gueydan prospect.
No possible or probable reserves have been assigned to the Company's
undeveloped acreage. As is customary in the oil and natural gas industry, the
Company can retain its interests in undeveloped acreage by drilling activity
that establishes commercial production sufficient to maintain the leases, or by
payment of delay rentals during the remaining primary term of such a lease.
Delay rentals paid in 1998 and those projected for 1999 are insignificant. The
Company's ability to pay the delay rentals in 1999 and thereafter, however, is
subject to the successful completion of the Restructuring. The oil and natural
gas leases in which the Company has an interest are for varying primary terms.
TITLE TO PROPERTIES
As is customary in the oil and natural gas industry, the Company makes only
a cursory review of title to farmout acreage and to undeveloped oil and natural
gas leases upon execution of any contracts. Prior to the commencement of
drilling operations, a thorough title examination is conducted and curative work
is performed with respect to significant defects. To the extent title opinions
or other investigations reflect title defects, the Company, rather than the
seller of the undeveloped property, is typically responsible to cure any such
title defects at its expense. If the Company were unable to remedy or cure any
title defect of a nature such that it would not be prudent to commence drilling
operations on the property, the Company could suffer a loss of its entire
investment in the property. The Company has obtained title opinions on
substantially all of its producing properties and believes that it has
satisfactory title to such properties in accordance with standards generally
accepted in the oil and natural gas industry. Prior to completing an acquisition
of producing oil and natural gas leases, the Company obtains title opinions on
all leases. The Company's oil and natural gas properties are subject to
customary royalty interests, liens for current taxes and other burdens that the
Company believes do not materially interfere with the use of or affect the value
of such properties.
All of the obligations of the Company under the 13.5% Notes are secured by
a lien on certain oil and gas properties of the Company in the Lake Enfermer
Field, Manila Village Field and Boutte Field (the "Collateral"). Such
obligations of the Company will not be secured by any other property, whether
currently existing or subsequently acquired, unless, under certain
circumstances, such property is acquired to replace Collateral disposed of in
certain asset dispositions. The Company has no obligation to maintain the value
of the Collateral in the event of declining prices or routine reserve depletion,
and the Company has no obligation to provide valuation reports relating to the
Collateral. The collateral release provisions of the Indenture permit the
release of Collateral without substitution of collateral of equal value under
certain circumstances.
15
<PAGE>
ITEM 3. 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 the 1997
offering of the 13.5% Notes and the Preferred Stock by the Company. The Company
is seeking damages in an amount to be determined at trial. Although the Company
is confident that the Complaint is well founded in law and fact, there can be no
assurance that the Company will prevail in the lawsuit.
The Company is not otherwise a party to any material pending legal
proceeding, other than ordinary routine litigation incidental to its business
that management believes would not have a material adverse effect on its
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following actions were taken by unanimous written consent of the
sole stockholder on October 9, 1998:
Revision of the Company's Bylaws - The Company's Bylaws were revised
to delete the requirement that Directors of the Company must be stockholders and
to add a provision permitting the election of Directors by written consent of
the stockholders as an additional exception to the provision in the Bylaws that
Directors shall be elected at the annual meeting of the stockholders.
Ratification of Action of Board - All actions taken by the Board of
Directors of the Company during periods when individuals who were not
stockholders served on the Board of Directors were ratified.
Election of a New Board of Directors - The following individuals were
elected as Directors of the Company, to serve until the next annual meeting of
the stockholders or until their successors are duly elected and have qualified:
McLain J. Forman (Re-elected)
Randolph R. Birkman (Re-elected)
Marvin J. Gay (Re-elected)
Harold C. Block (Re-elected)
Michael A. Hebetz (Re-elected)
Michael H. Price (Elected)
Pursuant to correspondence dated November 11, 1998, Mr. Randolph R.
Birkman resigned as Director effective immediately. Mr. Birkman cited, among
other things, what he perceived as a conflict of interest in connection with the
possible recapitalization of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of March 30, 1999, there were 76,800 shares of the Registrant's
Voting Common Stock, no par value, owned by McLain J. Forman, the Company's
Chairman of the Board, President and Chief Executive Officer, and 13,200 shares
of the Registrant's Non-voting Common Stock, no par value, owned by four (4)
beneficial holders, outstanding.
16
<PAGE>
The Company does not anticipate paying cash dividends with respect to
the Common Stock in the foreseeable future. In addition, the payment of
dividends by the Company is restricted by the Indenture governing the Company's
outstanding 13.5% Senior Secured Notes due 2004.
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth a summary of selected historical
financial information of the Company for the periods set forth below. This
information is derived from the financial statements of the Company and the
notes thereto. See "Item 7. Management Discussion and Analysis of Financial
Condition and Results of Operations" and "Item 8. Financial Statements and
Supplementary Data."
SELECTED HISTORICAL FINANCIAL INFORMATION
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Oil and natural gas revenue.................... $ 15,950 $ 14,235 $10,892 $ 6,919 $ 9,532
Costs and expenses:
Oil and natural gas operating expenses........ 3,359 2,709 2,526 2,196 2,775
Production taxes.............................. 541 699 585 661 791
Depreciation, depletion and amortization...... 10,442 9,391 4,259 3,558 2,391
Impairment expense............................ 19,575 10,008 - - -
General and administrative expense............ 2,774 2,007 1,539 921 1,204
-------- -------- ------- ------- -------
Total operating expenses..................... 36,691 24,814 8,909 7,336 7,161
-------- -------- ------- ------- -------
Operating income (loss)........................ (20,741) (10,579) 1,983 (417) 2,371
Interest expense.............................. 10,122 7,724 3,983 3,522 2,121
Other income:
Interest income............................... 239 371 37 194 14
Overhead reimbursements....................... 71 61 95 131 74
Other......................................... 15 42 93 61 119
-------- -------- ------- ------- -------
Net income (loss)............................ (30,538) (17,829) (1,775) (3,553) 457
Preferred stock dividends..................... (1,729) (923) - - -
Net income (loss) attributed to
Common shares............................. $(32,267) $(18,752) (1,775) (3,553) 457
-------- -------- ------- ------- -------
Net income (loss) per common share............. $(358.52) $(208.36) $(19.72) $(39.48) $ 5.08
-------- -------- ------- ------- -------
Weighted average shares outstanding............ 90,000 90,000 90,000 90,000 90,000
-------- -------- ------- ------- -------
UNAUDITED PRO FORMA DATA:
Operating income (loss) before income taxes.... $(30,538) $(17,829) $(1,775) $(3,553) $ 457
Pro forma benefit (expense) for income
taxes related to operations as an
S Corporation (1)......................... - 6,106 657 1,314 (169)
Preferred stock dividends...................... (1,729) (923) - - -
-------- -------- ------- ------- -------
Pro forma net income (loss) attributed to
Common shares............................. $(32,267) $(12,646) $(1,118) $(2,239) $ 288
-------- -------- ------- ------- -------
Pro forma net income (loss) per common
Share..................................... $(358.52) $(140.52) $(12.42) $(24.88) $ 3.20
======== ======== ======= ======= =======
Weighted average shares outstanding............ 90,000 90,000 90,000 90,000 90,000
======== ======== ======= ======= =======
</TABLE>
17
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION (CONTINUED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash Flow Data:
Operating cash flows........................... $ 5,752 $ 7,851 $ 9,083 $ 1,237 $ 2,217
Investing cash flows........................... $ (4,570) $(28,527) $(15,394) $(1,468) $(17,387)
Financing cash flows........................... $ (165) $ 21,003 $ 6,128 $(1,130) $ 14,812
Balance Sheet Data (at end of period):
Oil and gas properties, net.................... $ 23,615 $ 54,846 $ 37,052 $25,368 $ 20,339
Total assets................................... $ 33,686 $ 62,730 $ 42,377 $29,160 $ 32,962
Long-term debt, less current portion........... $ 17 $ 68,014 $ 39,021 $28,541 $ 27,049
Stockholders' equity........................... $(56,483) $(24,174) $ (5,033) $(3,258) $ 295
</TABLE>
(1) For all periods presented herein prior to 1997, the Company has operated as
an S Corporation for Federal and state income tax purposes. Upon the
issuance of its preferred stock on June 3, 1997, the Company terminated its
S Corporation election and has subsequently been treated as a C Corporation
for tax purposes (See Note 1 to the Financial Statements). The unaudited pro
forma data includes the effect of income taxes as if the Company were a C
Corporation.
ITEM 7. MANAGEMENT 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 each
year of the three-year period ended December 31, 1998. The Company's financial
statements and notes thereto contain detailed information that should be
referred to in conjunction with the following discussion. See "Item 8.
Financial Statements and Supplementary Data."
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 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.
18
<PAGE>
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 "Long Term Financing." Prior to the issuance of this preferred stock,
the Company was taxed as an S Corporation. See Note 1 to the financial
statements of the Company. 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.
RESULTS OF OPERATIONS
The following table sets forth certain operating information with respect
to the oil and natural gas operations of the Company and summary information
with respect to the Company's estimated proved oil and natural gas reserves.
See "Item 2. Properties-Oil and Gas Reserves."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Production:
Oil (MBbls).............................. 393 335 330
Gas (MMcf)............................... 4,944 2,613 1,325
Oil and gas (MBOE)....................... 1,217 770 551
Sales data (in thousands):
Total oil sales.......................... $ 4,752 $ 6,600 $ 6,964
Total gas sales.......................... $11,198 $ 7,636 $ 3,928
Average sales prices:
Oil (per Bbl)............................ $ 12.09 $ 19.72 $ 21.10
Gas (per Mcf)............................ 2.27 2.92 2.96
Per BOE ................................. 13.11 18.48 19.78
Average costs (per BOE):
Lease operating expenses................. $ 2.76 $ 3.52 $ 4.59
General and administrative............... 2.28 2.61 2.79
Depreciation, depletion and amortization. 8.58 12.20 7.73
Reserves at December 31:
Oil (MBbls).............................. 1,531 2,260 2,512
Gas (MMcf)............................... 14,558 22,105 23,223
Oil and gas (MBOE)....................... 3,957 5,944 6,382
Present value of estimated pre-tax future
Net cash flows (in thousands)....... $19,169 $52,256 $87,381
</TABLE>
19
<PAGE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
The Company's oil and gas revenues increased approximately $1.7 million, or
12% during 1998 to $15.9 million compared to $14.2 million in 1997. Production
levels for 1998 increased 58% to 1,217 thousand barrels of oil equivalent
("MBOE") from 770 MBOE for 1997. Gas production volumes increased 89%, while
oil volumes increased 17%. The Company's average sale prices (including hedging
activities) for oil and natural gas for 1998 were $12.09 per Bbl and $2.27 per
Mcf versus $19.72 per Bbl and $2.92 per Mcf in 1997. Revenues increased $7.9
million due to the aforementioned production increases, offset by a $6.2 million
decrease in revenues due to lower oil and gas prices during 1998.
On a BOE basis, lease operating expenses decreased 22%, to $2.76 per BOE
for 1998 from $3.52 per BOE in 1997. For 1998, lease operating expenses were up
26%, from $2.7 million in 1997 to $3.4 million in 1998. This increase was due to
an increase in 1998 in the volume of saltwater produced and handled, as well as
the higher production rates in 1998.
For 1998, depreciation, depletion and amortization ("DD&A") expense
increased 11% over 1997. The increase for the year is attributable to (i) the
Company's increased production and related future capital costs in 1999, and
(ii) the downward revision of reserves attributable primarily to a specific well
in the Lake Enfermer Field. On a BOE basis, which reflects the increases in
production, the DD&A rate for 1998 was $8.58 per BOE compared to $12.20 per BOE
for 1997, a decrease of 30%.
For 1998, on a BOE basis, general and administrative ("G&A") expenses
declined 13%, from $2.61 per BOE in 1997 to $2.28 in 1998. Actual G&A expenses
increased 40%, from $2.0 million in 1997 to $2.8 million in 1998. This increase
was due primarily to (i) salary increases resulting from the addition of a CFO
and a financial planning staff position, (ii) increased costs incurred for
independent reservoir engineering services, (iii) increased corporate franchise
taxes due to the increased debt, (iv) increased legal expenses related to the
pending litigation, and (v) increased insurance cost related to the addition of
D&O insurance for the Company.
The discounted present value of the Company reserves decreased 63%, from
$52.2 million at the end of 1997 to $19.2 million at the end of 1998, primarily
as a result of the negative revisions to reserves attributable specifically to
the A-2 well in the Company's Lake Enfermer Field, combined with the significant
decline in both oil and gas prices between December, 1997 and December, 1998.
Oil prices declined 39%, from an average price per barrel of $19.72 for the
calendar year 1997 to an average price of $12.09 for the calendar year 1998.
Average gas prices between the same periods declined 22%, from $2.92 per Mcf in
1997 to $2.27 in 1998. Based upon its ceiling test using the year-end 1998
discounted present value of the Company reserves, which were priced at the
average year-end prices of $10.45 per barrel and $1.90 per Mcf, the Company
experienced an impairment of its full cost pool in the amount of $19.6 million
during 1998. The write-down of the full cost pool in 1998 to recognize this
impairment is reflected as a separate expense item on the Company's financial
statements (see "Item 8. Financial Statements and Supplementary Data").
Interest expense for 1998 increased to $10.1 million from $7.7 million for
1997. This increase of $2.4 million in interest expense is due primarily to the
full year of interest due in 1998 versus only seven months of interest due in
1997 relating to the issuance of $70 million principal amount of 13.5% Senior
Secured Notes due 2004, Series A (the "Series A Notes"), on June 3, 1997 (see
"LIQUIDITY AND CAPITAL RESOURCES"). For the quarter ended December 31, 1998,
interest expense was essentially equal to the comparable fourth quarter of 1997.
Due to the factors described above, the net loss from operations increased
to $30.5 million for 1998, from a loss of $17.8 million for 1997.
The Company issued a second class of stock on June 3, 1997, effectively
terminating its S Corporation election. As a result, the Company will be 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
20
<PAGE>
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 $6,105,850 was accrued at June 3,
1997 and is included in income tax expense for the year ended December 31, 1997.
The Company recorded a tax benefit for its current net operating loss for the
period from June 1, 1997 to December 31, 1997 of $6,105,850, which is net of a
valuation allowance of $13,259 for that portion of deferred tax assets which
management believes will not be realized. The net result of these two accruals
was no tax effect for the Company for the year ended December 31, 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The Company's oil and gas revenues increased approximately $3.3 million, or
31% during 1997 to $14.2 million compared to $10.9 million in 1996. Production
levels for 1997 increased 40% to 770 thousand barrels of oil equivalent
("MBOE") from 551 MBOE for 1996. Gas production volumes increased 97%, while
oil volumes increased 2%. The Company's average sales prices (including hedging
activities) for oil and natural gas for 1997 were $19.72 per Bbl and $2.92 per
Mcf versus $21.10 per Bbl and $2.96 per Mcf in 1996. Revenues increased $3.9
million due to the aforementioned production increases, offset by a $575,000
decrease in revenues due to lower oil and gas prices during 1997.
On a BOE basis, lease operating expenses experienced a 23% decrease, to
$3.52 per BOE for 1997 from $4.59 per BOE in 1996. For 1997, lease operating
expenses were up 7%, from $2.5 million in 1996 to $2.7 million in 1997. This
increase was due to an increased number of wells operated and the higher
production rates in 1997.
For 1997, depreciation, depletion and amortization ("DD&A") expense
increased 120% over 1996. The increase for the year is attributable to (i) the
Company's increased production and related future capital costs in 1997, (ii)
the downward revision of reserves attributable to a specific fault block in the
Lake Enfermer Field, and (iii) the write-off of deferred financing costs related
to the loans that were repaid in June, 1997. The accelerated write-off of
deferred financing costs during 1997 resulted from the December, 1996, change in
the maturity dates of the Endowment Energy Partners ("EEP") and Endowment
Energy Co-Investment Partnership ("EECIP") loans from December 31, 1999, and
September 30, 1998, respectively, to June 30, 1997 for each loan.
Excluding the one-time write-off of deferred financing costs in 1997, the
DD&A expense for 1997 increased 107% over the comparable 1996 period. On a BOE
basis, which reflects the increases in production, the DD&A rate for 1997 was
$12.20 per BOE compared to $7.73 per BOE for 1996, an increase of 58%.
For 1997, general and administrative ("G&A") expenses increased 33%, from
$1.5 million in 1996 to $2.0 million in 1997. However, on a BOE basis, G&A
expenses declined 7%, from $2.79 per BOE in 1996 to $2.61 in 1997.
The discounted present value of the Company reserves decreased 40%, from
$87.3 million at the end of 1996 to $52.2 million at the end of 1997, primarily
as a result of the negative revisions to reserves attributable specifically to
the single fault block in the Company's Lake Enfermer Field, combined with the
significant decline in both oil and gas prices between December, 1996 and
December, 1997. Oil prices declined 33%, from $25.32 in December, 1996 to
$16.98 in December, 1997, while gas prices declined 30% during the same period,
from $3.78 in 1996 to $2.65 in 1997. Based upon its ceiling test using the year-
end 1997 discounted present value of the Company reserves, the Company
experienced an impairment of its full cost pool in the amount of $1.8 million.
Additionally, due to a decline in oil and gas prices subsequent to December 31,
1997, the Company recalculated its ceiling test using March, 1998 prices and
recorded an additional $8.2 million writedown of its full cost pool. The
writedown of the full cost pool in 1997 to recognize this impairment is
reflected as a separate expense item on the Company's financial statements (see
"Item 8. Financial Statements and Supplementary Data").
Interest expense for 1997 increased to $7.7 million from $4.0 million for
1996. This increase of $3.7 million in interest expense is due primarily to (i)
$275,000 of interest on a term loan from Joint Energy Development Investments
Limited Partnership ("JEDI") made in December 1996 which was repaid in June
1997, and (ii) $3.5 million of additional interest in 1997 relating to the
issuance of $70 million principal amount of 13.5% Senior Secured Notes due 2004,
Series A (the "Series A Notes"), on June 3, 1997 (see "LIQUIDITY AND CAPITAL
RESOURCES"). For the quarter ended December 31, 1997, interest expense
increased $1.48 million over the
21
<PAGE>
comparable fourth quarter of 1996. This increase was also the result of the
additional interest due on the Series A Notes as previously discussed.
Due to the factors described above, the net loss from operations increased
to $17.8 million for 1997, from a loss of $1.8 million for 1996.
The Company issued a second class of stock on June 3, 1997, effectively
terminating its S Corporation election. As a result, the Company will be 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 $6,105,850 was accrued at June 3, 1997 and is included
in income tax expense for the year ended December 31, 1997. The Company recorded
a tax benefit for its current net operating loss for the period from June 1,
1997 to December 31, 1997 of $6,105,850, which is net of a valuation allowance
of $13,259 for that portion of deferred tax assets which management believes
will not be realized. The net result of these two accruals was no tax effect
for the Company for the year ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital and Cash Flow - The Company had a working capital deficit
at December 31, 1998 of $74.1 million, resulting primarily from declines in both
prices and production from 1997 levels, and from the acceleration of long term
debt due to the default discussed in "Item 1. Business - Recent DevelopmeNTS".
The Company projects that 1999 product prices will likely increase while
production volumes should remain relatively stable.
The Company believes that its cash on hand plus the expected normal cash
flow from operations and available vendor financing will not be sufficient to
fund its working capital needs for the remainder of 1999, even with the deferral
of exploration and development projects. As expected, the receipt of the
advance payment for the December 1998 gas previously reported likely will
negatively impact the Company's ability to make the next scheduled interest
payment on the Notes due on June 1, 1999, as well as subsequent payments.
Pending the Restructuring, the Company intends to use available funds for
exploration and development projects.
The foregoing uncertainties raise substantial doubt as to the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
During the third quarter of 1998, the Company attempted to raise working
capital by offering to sell a working interest in the Company's oil and gas
properties to one or more industry partners. The Company deemed the offers it
received to be at unacceptably low prices. As previously reported, the Company
has now engaged Oppenheimer as the Company's exclusive financial advisor in
connection with the Restructuring.
It is the Company's policy, absent unusual circumstances, not to comment
publicly on discussions concerning proposals that may be considered or
transactions that may be pending with respect to the Restructuring. The Company
also intends, absent unusual circumstances, to refrain from making any further
announcements or reports with respect to the Restructuring unless and until a
definitive agreement has been executed by the Company with respect to a
transaction in connection with the Restructuring. There can be no assurance
that the Company will consummate any transactions in connection with the
Restructuring. If the Restructuring is not completed, the Company may be forced
to restructure the Company's outstanding obligations within a Chapter 11
bankruptcy filing.
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.
22
<PAGE>
The following summary table reflects comparative cash flows for the Company
for 1998 and 1997:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1998 1997
----------- -----------
(In thousands)
<S> <C> <C>
Net cash provided by operating activities.. $ 5,752 $ 7,851
Net cash used by investing activities...... ( 4,570) (28,527)
Net cash provided by financing activities.. ( 165) 21,003
</TABLE>
For the year 1998, net cash provided by operating activities decreased to
$5.7 million from $7.8 million in 1997. This decrease was due primarily to a
combination of several factors: (1) the net gain from operations, after
adjusting for non-cash items, decreased $3.5 million between 1997 and 1998; (2)
trade and oil and gas payable decreased $4.3 million between 1997 and 1998; (3)
interest payable increased $5.5 million during 1998; (4) oil and gas and trade
receivables decreased by $2.3 million between 1997 and 1998; and (5) advances
to operators increased $1.2 million during 1998.
Cash used in investing activities decreased by $23.9 million, from $28.5
million in 1997 to $4.6 million in 1998. This decrease was a result of
significant decline in drilling and workover activity in 1998 as compared to
1997, combined with the lack of any acquisitions during 1998.
During 1998, financing activities generated essentially no cash flow, as
compared to $21.0 million of cash flow from financing activities during 1997.
The 1997 cash flow from financing was primarily due to the $47.0 million
increase in net borrowings through the issuance of $70 million principal amount
of the Notes and $10 million of Series A Cumulative Preferred Stock during June
1997, as described below. Conversely, no financing activities were concluded
during 1998.
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) 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 an escrow 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
23
<PAGE>
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.
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 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 March 1999, the
company has open forward sales arrangements for the months, volumes and prices
as indicated in the following table:
<TABLE>
<CAPTION>
VOLUME ANTICIPATED % PRICE PER
---------- ------------- ----------
MONTH YEAR (MCF) OF PRODUCTION MCF
- ---------- ------------- ---------- -------------- ------
<S> <C> <C> <C> <C>
March 1999 250,000 58% $2.33
April 1999 90,000 21% $1.76
May 1999 90,000 21% $1.80
</TABLE>
The Company hedged approximately 30% of its estimated net oil production
during the first six months of 1997, but it did not hedge any oil production
during 1998 and it has no outstanding oil hedges as of March, 1999. 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 into 1999 or it may determine from time to
time to terminate its then existing hedging positions.
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 is
currently assessing the extent to which any such non-IT systems may exist within
the Company's operations and whether such systems are Y2K compatible.
Completion of this assessment is scheduled to be completed by year-end 1998.
Following completion of this assessment, the Company will determine the most
cost-effective method of bringing all such non-IT systems into compliance. This
process is scheduled to be completed by the end of the first quarter, 1999.
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 and
natural gas. The Company is preparing an appropriate questionnaire for these
third parties and will assess each third party's respective readiness based on
the responses to these questionnaires. 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.
2. Cost to Address Company's Y2K Issues - Total cost incurred to date
and estimated remaining cost for consultant, software and hardware applications
for the Y2K project is less than $10,000. The Company does not separately
account for internal cost incurred for its Y2K compliance efforts. 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 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 when the assessments of non-IT systems
and third party issues are completed, and actual results could differ materially
from those estimates.
24
<PAGE>
3. 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. The third party questionnaire
described in Item 1 above is intended to determine the extent of this risk and
the alternatives available to reduce or eliminate this risk. 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.
4. 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 completion of
the assessments of the non-IT systems and the third party questionnaires. The
Company currently expects to have such a contingency plan in place by the end of
the second quarter of 1999. When completed, it is intended that the Company's
written 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 open 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.
Recent Accounting Pronouncements - In June 1997, the Financial Accounting
Standards Board issued Statement No. 130 ("FAS 130"), Reporting Comprehensive
Income. FAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. FAS 130 is effective for fiscal years beginning after
December 15, 1997.
Also in 1997, the Financial Accounting Standards Board issued Statement No.
131 ("FAS 131"), Disclosures about Segments of an Enterprise and Related
Information. FAS 131 establishes standards for the way that public business
enterprises report information about segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This Statement is effective for
financial statements for periods beginning after December 15, 1997.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards that require every derivative instrument (including certain
derivative instruments embedded in other contracts) to be recorded in the
balance sheet as either an asset or a liability measured at its fair value and
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. The Company expects to adopt
SFAS No. 133 during the first quarter of 2000. Because of the nature of the
Company's only derivative instrument (see Note 7), the Company does not expect
that the adoption of SFAS No. 133 will have a material impact on the Company's
results of operations. However, the adoption may create volatility in equity
through changes in other comprehensive income
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Price 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. (See Item
1. Risks of Hedging Transactions).
25
<PAGE>
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 $3.6 million negative impact on the Company's discounted future net
revenues. This impact of a hypothetical 10% decline in prices is net of the
incremental gain that would be realized on hedge agreements in place as of March
25, 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information concerning this Item begins on Page F-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table provides information concerning the directors and
executive officers of the Company. All directors hold office until the next
annual meeting of stockholders of the Company and until their successors have
been duly elected and qualified. All officers serve at the discretion of the
Board of Directors.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION SINCE
---- --- --------- -----
<S> <C> <C> <C>
McLain J. Forman, Ph.D. 70 Chairman of the Board, Chief Executive Officer and President 1982
Harold C. Block 67 Vice President of Land and Acquisitions Director 1997
Marvin J. Gay 56 Vice President of Finance and Administration and Director 1997
Michael A. Habetz 50 Vice President, Manager of Operations and Director 1997
Michael H. Price 50 Chief Financial Officer and Director 1998
</TABLE>
A brief biography of each director and executive officer follows:
McLain J. Forman, Ph.D. founded the Company in 1982 and has served as the
Chairman of the Board, President and Chief Executive Officer of the Company
since inception. Dr. Forman began his career in 1955 as a consulting geologist
as a member of the predecessor firm of Atwater Consultants Ltd. Since 1960, Dr.
Forman has directed and supervised exploration and production activities for
clients and for his own account in the Gulf Coast Region. From 1972 to 1982, Dr.
Forman concentrated his efforts on originating and developing wildcat
exploration prospects with various industry and financial partners. With the
formation of the Company in 1982, his focus shifted to exploratory and
development prospects, and in 1991 the Company began to selectively acquire and
exploit producing properties. Dr. Forman earned a B.S. degree in Geology from
Tulane University and an M.A. degree and a Ph.D. in geology from Harvard
University.
Harold C. Block is the Vice President of Land and Acquisitions and a
director of the Company. Mr. Block joined Forman Exploration Company, the
predecessor of the Company, in 1973 as Manager of the Land Department, and in
1982 he moved to his current position with the Company. Mr. Block began his
career with F.A. Callery, Inc. in 1957, where he became Land Manager in 1959.
Upon leaving Callery in 1971 until he joined the Company, Mr. Block was a
consultant and organized and conducted an oil and gas exploration program. Mr.
Block has a B.B.A. degree in Management from the University of Houston.
Michael A. Habetz is Vice President, Manager of Operations and a director
of the Company. Mr. Habetz has been a Vice President and the Manager of
Operations since he joined the Company in 1993. From 1970 to 1987,
26
<PAGE>
he held various supervisory and management positions with Texaco and Edwin L.
Cox, where he was responsible for all phases of drilling, completion, workover
and production operations. From 1987 until 1991, Mr. Habetz provided consulting
engineering services through Energy Research and Development Corporation, and in
1991, he began to provide those services on a consulting basis for the Company.
Mr. Habetz holds a B.S. degree in Mechanical Engineering from Louisiana State
University.
Michael H. Price is the Chief Financial Officer of the Company. Before
joining the Company in December, 1997, Mr. Price was Vice President of the Chase
Manhattan Bank for twelve years, and was earlier employed by Atwater Consultants
and Amoco International Oil Company. Mr. Price holds an MBA from the University
of Chicago and earned an M.Sc. from the London School of Economics and Political
Science.
Marvin J. Gay is the Vice President of Finance and Administration and a
director of the Company. Mr. Gay has been a Vice President of the Company since
he joined the Company at its inception in 1982. Mr. Gay was the Controller and
Treasurer of Forman Exploration Company, the predecessor of the Company, from
1974 to 1982. Before joining the Company, Mr. Gay was a consultant with Arthur
Andersen & Co. Mr. Gay holds a B.B.A. in Accounting from the University of
Mississippi. He is a Certified Public Accountant and a member of the American
Institute of Certified Public Accountants.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information for each of the fiscal
years ended December 31, 1998 and 1997 with respect to the compensation paid to
Mr. Forman, the Chairman, President and Chief Executive Officer, and the four
other most highly compensated executive officers of the Company (collectively,
the "Named Executive Officers"). No other executive officers of the Company
received annual compensation (including salary and bonuses earned) that exceeded
$100,000 for the fiscal years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Compensation ------------------------
Name and -------------------------------- Securities Underlying All Other
Principal Position Year Salary Bonus Options Awarded Compensation
- ----------------------------- -------- --------- ---------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
McLain J. Forman, PhD., 1998 $225,000 -0- -0- -0-
Chairman of the Board, 1997 214,500 $16,875 12,614 -0-
Chief Executive Officer and
President
Harold C. Block, 1998 $131,000 -0- -0- -0-
Vice President of Land and 1997 $125,000 $ 9,825 4,890 -0-
Acquisitions
Michael A. Habetz, 1998 $130,000 -0- -0- -0-
Vice President, Manager of 1997 $119,500 $ 9,750 4,075 -0-
Operations
Mike H. Price, 1998 $ 36,000 -0- -0- $81,000 (1)
Chief Financial Officer 1997 -0- -0- -0- -0-
Marvin J. Gay 1998 $104,500 -0- -0- -0-
Treasurer, Vice President of 1997 $ 99,750 $ 7,838 4,075 -0-
Finance and Administration
</TABLE>
Note (1): The "Other Compensation" paid to Mr. Price was paid to him during the
time in which he was working for the Company on a contractual basis prior to his
employment by the Company.
27
<PAGE>
1997 STOCK OPTION PLAN
The 1997 Stock Option Plan (the "Stock Option Plan") was adopted by the
Board of Directors and approved by the sole stockholder of the Company in April
1997. A total of 36,333 shares of Common Stock have been reserved for issuance
pursuant to the Stock Option Plan. The Stock Option Plan provides for the grant
to employees, including officers of the Company, of "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), and non-statutory stock options (collectively, the
"Awards"). In addition, nonemployee directors (the "Outside Directors") are
eligible to receive non-statutory stock options. In 1997 the Company granted
incentive stock options to certain employees, including directors and executive
officers, of the Company entitling such persons to purchase 36,333 of the Common
Stock at an exercise price equal to the fair market value of the Common Stock as
of the date of issuance, as established by an independent appraiser selected by
the Company ($31.74 per share). No incentive stock options were granted by the
Company or exercised by holders in 1998.
The Stock Option Plan provides that Awards may be granted to employees
(including officers) and directors of the Company. The Stock Option Plan is
administered by a committee designated by the Board. Subject to special
provisions relating to Outside Directors, the Board's designated committee
selects the employees to which Awards may be granted and the type of Award to be
granted and determines, as applicable, the number of shares to be subject to
each Award, the exercise price and the vesting of each Award. In making such
determination, the Board's designated committee takes into account the
employee's present and potential contributions to the success of the Company and
other relevant factors.
401(K) PLAN
The Company has adopted a defined contribution retirement plan that
complies with Section 401(k) of the Code (the "401(k) Plan"). Pursuant to the
terms of the 401(k) Plan, all employees with at least one year of continuous
service are eligible to participate and may contribute up to 15% of their annual
compensation (subject to certain limitations imposed under the Code). The 401(k)
Plan provides that a discretionary match of employee contributions may be made
by the Company in cash. The Company made a $25,304 matching contributions to the
401(k) Plan in 1998 based upon each individual employee's plan contributions
during 1997. In December 1998 the Company made another matching contribution,
in the amount of $58,398, again based upon each individual employee's plan
contributions for 1998. These matching employer contributions to the 401(k)
Plan are fully vested to the individuals over a three-year period. Employee
contributions under the 401(k) Plan are 100% vested and participants are
entitled to payment of vested benefits upon termination of employment. The
amounts held under the 401(k) Plan are invested among various investment funds
maintained under the 401(k) Plan in accordance with the directions of each
participant.
COMPENSATION OF DIRECTORS
Directors of the Company do not presently receive compensation for their
services as directors. Directors of the Company are entitled to reimbursement of
their reasonable out-of-pocket expenses in connection with their travel to and
attendance at meetings of the Board of Directors or committees thereof. In
addition, the Board or its designated committee may from time to time grant
Awards to directors pursuant to the terms of the Stock Option Plan. See
"-- 1997 Stock Option Plan."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 31, 1998, the beneficial ownership of the voting Common
Stock was as follows: (i) 76,800 shares of Common Stock (representing 100% of
the issued and outstanding voting shares of Common Stock) were owned by McLain
J. Forman, and (ii) 67,444 shares of Common Stock were issuable upon exercise of
certain warrants. See "Warrants" below. Certain employees, including
directors and executive officers, of the Company have options to purchase
approximately 25% of the Common Stock (on a fully diluted basis). See
"Options" below. The 13,200 shares of non-voting Common Stock (representing
100% of the issued and outstanding non-voting
28
<PAGE>
shares of Common Stock) were owned by four individuals, three of whom are
members of Mr. Forman's immediate family.
Warrants- In connection with its loans from EEP and EECIP, the Company
issued (i) to EEP a warrant to purchase 9,000 shares of Common Stock for $25 per
share pursuant to the terms of the Common Stock Purchase Warrant dated March 5,
1991 and a warrant to purchase 5,000 shares of Common Stock for $44.57 per share
pursuant to the terms of the Common Stock Purchase Warrant dated March 17, 1994
(collectively, the "EEP Warrants"), (ii) to EECIP a warrant to purchase 4,000
shares of Common Stock for $44.57 per share pursuant to the terms of the Common
Stock Purchase Warrant dated March 17, 1994 (the "EECIP Warrant), and (iii) to
Associated Energy Managers, Inc., ("AEM," and together with EEP and EECIP,
the"Existing Holders"), a warrant to purchase 1,000 shares of Common Stock for
$44.57 per share pursuant to the terms of the Common Stock Purchase Warrant
dated March 17, 1994 (the "AEM Warrant"). The issuance of certain warrants
related to the Offerings has caused a minimal adjustment in the exercise price
of the EEP Warrants, the EECIP Warrants and the AEM Warrants.
The EEP Warrants, the EECIP Warrant and the AEM Warrant (collectively, the
"Loan Warrants") expire on December 31, 2025. The Loan Warrants may be
exercised on the earliest to occur of (a) the sale or merger of the Company or
the sale of substantially all of the assets of the Company, (b) an initial
public offering of Common Stock or (c) December 1, 2025. Pursuant to the terms
of the Loan Warrants, unexercised warrants are subject to adjustment if (i) the
Company issues Common Stock (or certain securities exercisable or exchangeable
for or convertible into Common Stock) for consideration per share less than the
fair market value per share of Common Stock at the time of issuance, (ii) there
is a subdivision or combination of the Common Stock, (iii) there is payment of a
stock dividend or distribution of assets to all holders of Common Stock or
(iv)there is any other increase or decrease in the number of shares of Common
Stock outstanding and the Company does not receive compensation therefor. In
addition, the number and type of securities subject to the Loan Warrants are
subject to adjustment if the Company is a party to a merger or consolidation. As
of the date of this Report, the Loan Warrants have not been exercised.
In December 1996, the Company, Mr. Forman and the Existing Holders entered
into the Put/Call Agreement, pursuant to which the Existing Holders granted to
Mr. Forman the right to purchase all of the Loan Warrants (a) during the period
of June 30, 1999 through December 31, 1999, (b) at any time at which the"Company
Value" (as determined pursuant to the terms of the Put/Call Agreement) reaches
$75.0 million or (c) when Mr. Forman sells all of his shares of Common Stock. In
addition, Mr. Forman granted to the Existing Holders the right to require Mr.
Forman to purchase all of the Existing Holders' Loan Warrants at anytime that
(i) the Company sells or transfers 33% or more of the Company's interest in the
Lake Enfermer Field, (ii) Mr. Forman sells or transfers 25% or more of his
shares of Common Stock, (iii) the Company Value reaches $125.0 million or (iv)
the Company makes a distribution of property to its shareholders, the value of
which exceeds 25% of the Company Value. The Put/Call Agreement provides that
the purchase price per share of the Loan Warrants is equal to Company Value plus
the exercise price of the employee options divided by the sum of the outstanding
shares of Common Stock and the number of shares of Common Stock covered by the
Loan Warrants and employee options.
In connection with the offering and sale of the 13.5% Notes, the Company
issued warrants to purchasers of the 13.5% Notes to entitle the holders thereof
to purchase, in the aggregate, 29,067 shares of Common Stock (the "Note
Warrants"). Each Note Warrant, when exercised, entitles the holder thereof to
receive 0.41524 shares of Common Stock at the exercise price, as adjusted (the
"Note Exercise Price"), which initially is $1.00 per share. The Note Exercise
Price, the number of shares of Common Stock received in respect of a Note
Warrant and the number of Note Warrants outstanding are subject to adjustment in
certain cases. The Note Warrants are currently exercisable and will
automatically expire on June 1, 2004. If the last day for the exercise of the
Note Warrants is not a business day, then the Note Warrants may be exercised on
the next succeeding business day. In connection with the offering and sale of
the 13.5% Notes, the Company also issued to Jefferies & Company, Inc. a warrant
to purchase 4,844 shares of Common Stock at an initial exercise price of $1.00
per share. In connection with the offering and sale of the Preferred Stock, the
Company issued warrants to purchasers of the Preferred Stock that entitle the
holders thereof to purchase, in the aggregate, 14,533 shares of Common Stock
(the "Equity Warrants"). Each Equity Warrant, when exercised, entitles the
holder thereof to receive 0.07267 shares of Common Stock at the exercise price,
as adjusted (the "Equity Exercise Price"), which initially is $1.00 per share.
The Equity Exercise Price, the number of shares of Common Stock received in
respect of an Equity Warrant and the number of Equity Warrants outstanding are
subject to adjustment in certain cases. The Equity Warrants are currently
exercisable
29
<PAGE>
immediately and will automatically expire on June 1, 2004. If the last day for
the exercise of the Equity Warrants is not a business day, then the Equity
Warrants may be exercised on the next succeeding business day.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
September 1996 Company Loan - In September 1996, McLain J. Forman, the
Chairman of the Board, President, Chief Executive Officer and sole stockholder
of the Company, loaned $1.0 million to the Company on an unsecured basis for the
purpose of paying certain trade payables. As of April 10, 1997, the outstanding
balance of this loan was $140,000. The Company used a portion of the net
proceeds from the Offerings to pay the outstanding balance of such loan in June
1997.
Sale of Bayou Fer Blanc Field and West Gueydan Field - In August 1996, the
Company sold its interests in the Bayou Fer Blanc Field and the West Gueydan
Field to FPC II, a company whose sole shareholder is Mr. Forman, for a purchase
price of $950,000. In connection with such sale, FPC II assumed certain
liabilities of the Company relating to the completion of the 3-D seismic survey
conducted on those fields and other related matters. The Company used $5.0
million of the net proceeds from the Offerings in connection with FPC II's sale
back to the Company of its interests in the fields, of which $1.5 million was
paid to FPC II, $1.0 million was used to pay bank debt incurred by Mr. Forman in
connection with FPC II's purchase of the fields and $2.5 million was used to pay
trade payables to third parties. As a consequence of this sale, the Company now
owns 100% of the working interest in the Bayou Fer Blanc Field and 90% of the
working interest in the West Gueydan Field. See ''Item 1. Business -
Significant Project Areas.''
Repurchase of Loan Warrants - The Company, Mr. Forman and the certain
holders of warrants are parties to an agreement pursuant to which such holders
granted to Mr. Forman the right to purchase all of such warrants. '
Purchase of Overriding Royalty Interests from EEP and EECIP - Pursuant to
the Repayment Agreement dated December 16, 1996, among the Company, Mr. Forman,
EEP and EECIP, upon the Company's repayment of the outstanding balance of the
loans from EEP and EECIP on a date prior to June 16, 1997, the Company purchased
for $2.6 million overriding royalty interests in the Lake Enfermer Field, the
Manila Village Field and the Boutte Field equal to 7.5% of the Company's
interests in those fields. The effective date of the Company's acquisition of
such overriding royalty interests is the date on which the Company repaid such
loans and pays the purchase price of $2.6 million. The Company used $2.6 million
of the net proceeds from the Offerings to purchase such interests on June 3,
1997.
30
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements of the Company and the Report of the
Company's Independent Public Accountants thereon are included on pages F-1
through F-18 of this Form 10-K.
Report of Independent Public Accountants
Balance Sheet as of the years ended December 31, 1998 and 1997
Statement of Operations for the three years in the period ended December 31,
1998
Statement of Stockholders' Equity for the three years in the period ended
December 31, 1998
Statement of Cash Flows for the three years in the period ended December 31,
1998
Notes to the Financial Statements
2. Financial Statement Schedules
All schedules are omitted because the required information is inapplicable or
the information is presented in the Financial Statements or the notes thereto.
3. Exhibits
The following instruments and documents are included as Exhibits to this
Registration Statement. 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 incorporated by reference (File No. 333-31375)).
3(ii) Bylaws (filed as Exhibit 3(ii) to the Registration Statement on
Form S-4 filed on July 16, 1997 and incorporated by reference
(File No. 333-31375)).
4.1 Indenture dated as of June 3, 1997 by and among the 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 incorporated by reference (File
No. 333-31375)).
4.2 Act of Mortgage, Security Agreement, Assignment of Production and
Financing Statement date 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 incorporated 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
incorporated by reference (File No. 333-31375)).
31
<PAGE>
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 incorporated 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
incorporated by reference (File No. 333-31375)).
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 incorporated by reference (File No.
333-31375)).
10.1 Registration Rights Agreement dated June 3, 1997 by and between
Forman Petroleum Corporation and Jefferies & Company, Inc. regarding
Notes and warrants to purchase Common Stock (filed as Exhibit 10.1 to
the Registration Statement on Form S-4 filed on July 16, 1997 and
incorporated 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 incorporated by reference (File No. 333-31375)).
10.3 Warrant Agreement dated June 3, 1997 by and between Forman Petroleum
Corporation and U.S. Trust Company of Texas, N.A. regarding warrants
issued in connection with issuance of Series A Cumulative Preferred
Stock (filed as Exhibit 10.3 to the Registration Statement on Form S-4
filed on July 16, 1997 and incorporated by reference (File No.
333-31375)).
10.4 Warrant Agreement dated June 3, 1997 by and between Forman Petroleum
Corporation and U.S. Trust Company of Texas, N.A. regarding warrants
issued in connection with issuance of Old Notes (filed as Exhibit 10.4
to the Registration Statement on Form S-4 filed on July 16, 1997 and
incorporated 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) (filed
as Exhibit 99.3 to the Current Report on Form 8-K filed on
October 20, 1998)
99.4 Press Release (regarding nonpayment of the December 1, 1998
installment of interest due on the Notes) (filed as Exhibit 99.4 to
the Current Report on Form 8-K filed on December 1, 1998)
99.5 Press Release (regarding nonpayment of the December 1, 1998
installment of interest due on the Notes within thirty day grace
period) (filed as Exhibit 99.5 to the Current Report on Form 8-K
filed on December 30, 1998)
* Filed herewith.
32
<PAGE>
(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. Current Report on Form 8-K dated October 20, 1998 reporting the
Complaint filed against Jefferies & Company, Inc.
3. Current Report on Form 8-K dated December 1, 1998 reporting the
nonpayment of the December 1, 1998 installment of interest on the
13.5% Notes.
4. Current Report on Form 8-K dated December 31, 1998 reporting the
nonpayment of the December 1, 1998 installment of interest on the
13.5% Notes within the thirty day grace period.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New
Orleans, the State of Louisiana on March 30, 1999.
FORMAN PETROLEUM CORPORATION
By: /s/ McLain J. Forman
---------------------------------
McLain J. Forman
Chairman of the Board, Chief
Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Form 10-K has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
Chairman of the Board, Chief
/s/ McLain J. Forman Executive Officer and President
- --------------------------------------- (Principal Executive Officer) March 30, 1999
McLain J. Forman
/s/ Harold C. Block Vice President of Land and
- --------------------------------------- Acquisitions and Director March 30, 1999
Harold C. Block
/s/ Michael A. Habetz Vice President, Manager of
- --------------------------------------- Operations and Director March 30, 1999
Michael A. Habetz
Chief Financial Officer and
/s/ Michael H. Price Director (Principal Financial
- --------------------------------------- and Accounting Officer) March 30, 1999
Michael H. Price
/s/ Marvin J. Gay Vice President of Finance and
- --------------------------------------- Administration and Director March 30, 1999
Marvin J. Gay
</TABLE>
________________________________
34
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Report of Independent Public Accountants......................... F-2
Balance Sheets as of the Years Ended December 31, 1998 and 1997.. F-3
Statements of Operations for the Three Years in the Period Ended
December 31, 1998.............................................. F-4
Statements of Stockholders' Equity for the Three Years in the
Period Ended December 31, 1998.................................. F-5
Statements of Cash Flows for the Three Years In the Period Ended
December 31, 1998.............................................. F-6
Notes to Financial Statements.................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of Forman Petroleum Corporation:
We have audited the accompanying balance sheets of Forman Petroleum Corporation
(a Louisiana corporation) as of December 31, 1998 and 1997, and the related
statements of operations and accumulated deficit and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Forman Petroleum Corporation as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
As discussed in Note 1, the Company did not pay the December 1998 interest
payment due on its Senior Secured Notes and has been declared in default by the
Trustee for the Notes. The Company is attempting to restructure its obligations
under the indenture. If such a restructuring is not negotiated, the Company may
be forced to liquidate, recapitalize or merge with another company. The
uncertainty discussed above results in substantial doubt as to the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
New Orleans, Louisiana,
March 25, 1999
F-2
<PAGE>
FORMAN PETROLEUM CORPORATION
----------------------------
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 1,474,488 $ 457,869
Accounts receivable 47,830 597,991
Oil and gas revenue receivable 656,433 2,407,315
Unbilled well costs 11,324 48,806
Restricted cash - 3,937,500
Prepaid expenses 297,154 -
Advance to operator 1,200,000 -
------------ ------------
Total current assets 3,687,229 7,449,481
------------ ------------
PROPERTY AND EQUIPMENT, at cost (Notes 1, 2 and 8):
Oil and gas properties, full cost method 77,067,569 73,172,144
Unevaluated oil and gas properties 4,485,359 3,857,195
Other property and equipment 1,718,757 1,650,793
------------ ------------
83,271,685 78,680,132
Less- accumulated depreciation, depletion and
amortization (Note 1) (59,511,084) (30,451,675)
------------ ------------
Net property and equipment 23,760,601 48,228,457
------------ ------------
OTHER ASSETS:
Recapitalization costs 384,313 --
Escrowed and restricted funds (Note 6) 493,481 515,096
Deferred financing costs (net of accumulated
amortization of $1,522,603 and $564,933
respectively) (Note 1) 5,360,234 6,366,367
Deferred charges (Note 1) - 170,529
------------ ------------
Total assets $ 33,685,858 $ 62,729,930
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 2,378,512 $ 6,438,278
Undistributed oil and gas revenues 1,590,223 1,848,497
Current portion of notes payable (Note 8) 68,309,653 13,992
Interest payable (Note 8) 5,512,640 -
------------ ------------
Total current liabilities 77,791,028 8,300,767
------------ ------------
Notes payable (Note 2) 17,121 68,013,552
Mandatorily redeemable Preferred Stock, no par
value, 1,000,000 authorized shares, 200,000 12,360,322 10,589,588
shares outstanding
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 defic (56,483,603) (24,174,967)
------------ ------------
Total stockholder's deficit (56,482,613) (24,173,977)
------------ ------------
$ 33,685,858 $ 62,729,930
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
FORMAN PETROLEUM CORPORATION
----------------------------
STATEMENTS OF OPERATIONS
------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues:
Oil and gas sales $ 15,950,329 $ 14,235,272 $10,891,640
Interest income 239,581 370,569 36,740
Overhead reimbursements 71,325 60,838 95,672
Other income 14,608 42,178 94,051
------------ ------------ -----------
Total revenues 16,275,843 14,708,857 11,118,103
------------ ------------ -----------
Costs and expenses:
Production taxes 540,837 699,638 584,710
Lease operating expenses 3,359,200 2,708,570 2,526,488
General and administrative expenses 2,774,498 2,006,768 1,539,245
Interest expense 10,122,131 7,723,717 3,982,797
Full cost ceiling writedown 19,575,047 10,008,121 -
Depreciation, depletion and amortization 10,442,032 9,391,640 4,259,412
------------ ------------ -----------
Total expenses 46,813,745 32,538,454 12,892,652
------------ ------------ -----------
Net loss from operations (30,537,902) (17,829,597) (1,774,549)
Provision for income taxes - - -
------------ ------------ -----------
Net loss (30,537,902) (17,829,597) (1,774,549)
Preferred stock dividends (1,729,068) (922,912) -
------------ ------------ -----------
Net loss attributable to common shares $(32,266,970) $(18,752,509) $(1,774,549)
============ ============ ===========
Net loss per share $(358.52) $(208.36) $(19.72)
============ ============ ===========
Weighted average shares outstanding 90,000 90,000 90,000
============ ============ ===========
UNAUDITED PRO FORMA DATA (Note 1):
Net loss from operations reported above $(30,537,902) $(17,829,597) $(1,774,549)
Pro forma benefit for income taxes related to
operations as an S Corp - 6,105,850 656,583
Preferred stock dividends (1,729,068) (922,912) -
------------ ------------ -----------
Pro forma net loss $(32,266,970) $(12,646,659) $(1,117,966)
============ ============ ===========
Pro forma net loss per share $(358.52) $(140.52) $(12.42)
======== ======== =======
Weighted average shares outstanding 90,000 90,000 90,000
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
FORMAN PETROLEUM CORPORATION
----------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------
<TABLE>
<CAPTION>
Additional
Common Treasury Paid-In Accumulated
Stock Stock Capital Deficit Total
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 $1,000 $(10) $ 785,823 $ (492,187) $ 294,626
Net loss - - - (3,552,645) (3,552,645)
---- ---------- ---------- ------------ -----------
BALANCE, December 31, 1995 1,000 (10) 785,823 (4,044,832) (3,258,019)
====== ==== =========== ============ ============
Net loss - - - (1,774,549) (1,774,549)
---- --------- ----------- ------------ ------------
BALANCE, December 31, 1996 1,000 (10) 785,823 (5,819,381) (5,032,568)
====== ==== =========== ============ ============
Net loss - - - (17,829,597) (17,829,597)
ISSUANCE OF WARRANTS
TO PURCHASE COMMON
STOCK (Note 4) - - 1,111,100 - 1,111,100
RECLASS ACCUMULATED
DEFICIT TO ADDITIONAL
PAID IN CAPITAL - - (1,896,923) 1,896,923 -
DISTRIBUTION TO SOLE
STOCKHOLDER (Note 8) - - - (1,500,000) (1,500,000)
ACCRUE DIVIDENDS ON
MANDATORILY REDEEMABLE
PREFERRED STOCK - - - (898,605) (898,605)
ACCRETION OF DISCOUNT
ON MANDATORILY
REDEEMABLE PREFERRED
STOCK - - - (24,307) (24,307)
------ ------ ------ ------------ ------------
BALANCE, December 31, 1997 $1,000 $(10) $ - $(24,174,967) $(24,173,977)
====== ==== =========== ============ =============
Net loss - - - (30,537,902) (30,537,902)
ACCRETION OF DISCOUNT
ON MANDATORILY
REDEEMABLE PREFERRED
STOCK - - - (41,666) (41,666)
ACCRUE DIVIDENDS ON
MANDATORILY REDEEMABLE
PREFERRED STOCK - - - (1,729,068) (1,729,068)
------- ------ ----------- ------------ ------------
BALANCE, December 31, 1998 $1,000 $(10) $ - $(56,483,603) $(56,482,613)
====== ==== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
FORMAN PETROLEUM CORPORATION
----------------------------
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(30,537,902) $(17,829,597) $ (1,774,549)
Adjustments to reconcile net loss to net cash provided
by operating activities-
Depreciation and amortization 30,017,079 19,399,761 4,259,412
Interest expense refinanced - - 3,627,948
Withdrawal from interest escrow account 3,978,148 5,471,852 -
Change in assets and liabilities-
Decrease (Increase) in oil and gas revenue receivable 1,750,882 96,163 (1,303,465)
Decrease (Increase) in accounts receivable 550,161 (97,389) (370,025)
(Increase) Decrease in unbilled well costs (3,166) 52,030 43,124
(Increase) in prepaid expenses (297,154) - -
(Decrease) Increase in accounts payable (4,059,766) 197,209 4,260,163
(Decrease) Increase in undistributed oil and gas revenues (258,274) 222,980 669,095
Increase (Decrease) in notes payable and deferred charges 299,230 - (1,350)
Increase in interest payable 5,512,640 - -
(Increase) in advance to operator (1,200,000) - -
Increase (Decrease) in due from related parties - 12,457 (327,828)
Decrease in due to stockholder - 327,828 -
------------ ------------ ------------
Net cash provided by operating activities 5,751,878 7,853,294 9,082,525
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (4,523,589) (28,669,449) (16,300,593)
Reduction of (deposit into) escrow account 21,615 366,874 15,692
Purchase of other property and equipment (67,964) (224,868) (59,334)
Proceeds from sale of oil and gas property - - 950,000
------------ ------------ ------------
Net cash used in investing activities (4,569,938) (28,527,443) (15,394,235)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable - 71,800,333 7,000,000
Repayment of notes payable - (43,542,096) (566,442)
Deposit into interest escrow account - (9,450,000) -
Proceeds from preferred stock - 9,666,667 -
Proceeds from issuance of warrants - 1,000,000 -
Distribution to stockholder - (1,500,000) -
Deferred financing costs (165,321) (6,973,437) (305,367)
------------ ------------ ------------
Net cash (used) provided by financing activities (165,321) 21,001,467 6,128,191
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1,016,619 327,318 (183,519)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 457,869 130,551 314,070
------------ ------------ ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 1,474,488 $ 457,869 $ 130,551
============ ============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for-
Interest $ 4,609,491 $ 7,723,717 $ 21,721
============ ============ ============
Income taxes $ - $ - $ -
============= ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
FORMAN PETROLEUM CORPORATION
-----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1998 AND 1997
--------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Organization
Forman Petroleum Corporation ("Forman" or the "Company"), a Louisiana
corporation, is an independent energy company engaged in the exploration,
development, acquisition and production of crude oil and natural gas, with
operations primarily in the onshore Gulf Coast area of Louisiana. Forman was
incorporated in Louisiana in 1982 and began operations in that year.
Liquidity
The Company had a working capital deficit at December 31, 1998 of $74.1 million,
resulting primarily from declines in both prices and production from 1997
levels, and from the acceleration of long term debt due to the default discussed
in Note 2 below. The Company projects that 1999 product prices will likely
increase while production volumes should remain relatively stable.
The Company believes that its cash on hand plus the expected normal cash flow
from operations and available vendor financing will be not sufficient to fund
its working capital needs for the remainder of 1999, even with the deferral of
exploration and development projects. As expected, the receipt of the advance
payment for the December 1998 gas previously reported likely will negatively
impact the Company's ability to make the next scheduled interest payment on the
Notes due on June 1, 1999, as well as subsequent payments. Pending the
Restructuring (defined below), the Company intends to use available funds for
exploration and development projects.
The foregoing uncertainties raise substantial doubt as to the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
During the third quarter of 1998, the Company attempted to raise working capital
by offering to sell a working interest in the Company's oil and gas properties
to one or more industry partners. The Company deemed the offers it received to
be at unacceptably low prices. The Company has now engaged CIBC Oppenheimer
Corp. as the Company's exclusive financial advisor in connection with the
possible debt restructuring or recapitalization of the Company (the
"Restructuring").
Oil and Gas Properties
Forman utilizes the full-cost method of accounting, which involves capitalizing
all exploration and development costs incurred for the purpose of finding oil
and gas reserves, including the costs of drilling and equipping productive
wells, dry hole costs, lease acquisition costs and delay rentals. The Company
also capitalizes certain related employee costs and general and administrative
costs which can be directly identified with significant acquisition, exploration
and development projects undertaken. Such costs are amortized on the future
gross revenue method whereby amortization is computed using the ratio of gross
revenues generated during the period to total estimated future gross revenues
from proved oil and gas reserves. Additionally, the capitalized costs of oil
and gas properties cannot exceed the present value of the estimated net cash
flow from its proved reserves, together with the lower of cost or estimated fair
value of its undeveloped properties (the full cost ceiling). Transactions
involving sales of reserves in place, unless extraordinarily large portions of
reserves are involved, are recorded as adjustments to accumulated depreciation,
depletion and amortization.
F-7
<PAGE>
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash and cash equivalents.
Depreciation of Other Property and Equipment
Depreciation of property and equipment other than oil and gas properties is
provided on the straight-line method over the estimated useful lives of the
assets.
Deferred Financing Costs
For oil and gas property acquisitions which were burdened by an overriding
royalty interest assigned to its lenders (see Note 3), the Company allocated a
portion of the purchase price of such acquisitions to deferred financing costs.
The amount allocated is proportional to the discounted future net cash flows
associated with the interest assigned as compared to the total discounted future
net cash flows for the acquisition (before carve-out of the overriding royalty
interest) as of the date of the acquisition. These allocated costs, along with
other costs of obtaining financing, were deferred and amortized using the
effective interest method over the original term of the related debt.
Fair Value of Financial Instruments
Fair value of cash, cash equivalents, accounts receivable and accounts payable
approximates book value at December 31, 1998. Fair value of long term debt was
based on the quoted market price for the debt as of the date of the last trade
concluded in calendar 1997. At December 31, 1998, given existing market
conditions and the existing default on the Company's 13.5% Notes, the Company is
unable to assess the fair value of these 13.5% Notes.
Income Taxes
Through its fiscal year ended December 31, 1996, Forman elected to file as an S
Corporation for income tax reporting purposes. Under this election, income from
the corporation is treated as taxable federal and state income of the individual
stockholder. Accordingly, no provision for income taxes has been included in
the accompanying financial statements for years ended prior to January 1, 1997.
As discussed in Note 2, 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 taxes. 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 and other basis
differences between cash and accrual basis accounting. (See Note 3)
For purposes of the unaudited pro forma income tax benefit and net loss per
share, the accompanying financial statements include income tax benefits for the
portion of the losses which would have been offset against the deferred tax
liability created as a result of the termination of the S Corporation election.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-8
<PAGE>
Deferred Charges
The Company capitalized $170,429 of legal and professional costs as of December
31, 1997, related to the preparation of documents for an initial public
offering. These costs were charged to expense in 1998.
Derivatives
The Company uses derivative financial instruments such as swap agreement
contracts for price protection purposes on a limited amount of its future
production and does not use them for trading purposes. Such derivatives are
accounted for on an accrual basis and amounts paid or received under the
agreements are recognized as oil and gas sales in the period in which they
accrue. For the year ended December 31, 1997, the Company recorded revenue of
$189,300 under these swap agreements. As of March 25, 1999, the Company's open
forward gas sales positions, including those positions entered into in 1999,
were as follows:
<TABLE>
<CAPTION>
Volume ANTICIPATED % PRICE PER
---------- ----------------- ----------
MONTH Year (MCF) OF PRODUCTION MCF
- ----------- ---------- ------------- ------------------- -----------
<S> <C> <C> <C> <C>
March 1999 250,000 58% $2.33
April 1999 90,000 21% $1.76
May 1999 90,000 21% $1.80
</TABLE>
Certain Concentrations
During 1998, 100% of the Company's oil and gas production was sold to five
customers. Based on the current demand for oil and gas, the Company does not
believe the loss of any of these customers would have a significant financially
disruptive effect on its business or financial condition.
Per Share Amounts
In February 1997, the Financial Accounting Standards Board issued SFAS 128,
"Earnings Per Share", which simplifies the computation of earnings per share
(EPS). The Company adopted SFAS 128 in the fourth quarter of 1997, and restated
prior year's EPS data. Net loss per share and pro forma net loss per share of
common stock were calculated by dividing net loss applicable to common stock by
the weighted-average number of common shares outstanding during the year. Due
to the net losses reported in all periods presented, all options (Note 7) and
warrants (Note 4) outstanding have not been considered because they would be
antidilutive
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No. 130
("FAS 130"), Reporting Comprehensive Income. FAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. FAS 130 is effective for fiscal years
beginning after December 15, 1997.
Also in 1997, the Financial Accounting Standards Board issued Statement No. 131
("FAS 131"), Disclosures about Segments of an Enterprise and Related
Information. FAS 131 establishes standards for the way that public business
enterprises report information about segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This Statement is effective for
financial statements for periods beginning after December 15, 1997.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards that require every derivative instrument (including certain
derivative instruments embedded in other contracts) to be recorded in the
balance sheet as either an asset or a liability measured at its fair value and
that changes in the derivative's fair value be recognized currently in earnings
F-9
<PAGE>
unless specific hedge accounting criteria are met. The Company expects to adopt
SFAS No. 133 during the first quarter of 2000. Because of the nature of the
Company's only derivative instrument (see Note 7), the Company does not expect
that the adoption of SFAS No. 133 will have a material impact on the Company's
results of operations. However, the adoption may create volatility in equity
through changes in other comprehensive income.
2. LONG-TERM DEBT AND PREFERRED STOCK:
On June 3, 1997, the Company closed offerings for 70,000 units consisting of
$70,000,000 of 13.5% Senior Secured Notes due 2004 (the "13.5% Notes) with
warrants to purchase common stock and 200,000 units consisting of $10,000,000 of
Series A Cumulative Preferred Stock (the "Preferred Stock") with warrants to
purchase common stock (see Note 4). A portion of the proceeds from the
offerings were used to repay the EEP, EECIP, and JEDI notes, purchase 75% of the
overriding royalty interests held by EEP and EECIP, and buy back its interests
in Bayou Fer Blanc and West Gueydan Fields (see Note 8). In addition, the
Company was required to escrow from the proceeds the first year's interest
obligation on the 13.5% Notes ($9,450,000). As part of the offerings, the
Company has publicly registered the 13.5% Notes and has agreed to publicly
register the Preferred Stock and bear all costs related thereto.
Long-term debt was composed of the following at:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
70,000 units of $1,000 principal amount Senior
Secured Notes due 2004, Series B, and bearing
interest at 13.5% per annum payable semi-annually in
cash in arrears on June 1 and December 1, with
warrants to purchase common stock $ 68,297,877 $67,984,814
Other 28,897 42,730
------------ -----------
68,326,774 68,027,544
Less: current portion (68,309,653) (13,992)
------------ -----------
$ 17,121 $68,013,552
============ ===========
</TABLE>
Dividends on the Preferred Stock are cumulative from June 3, 1997, and are
payable quarterly commencing September 1, 1997, in additional shares of
Preferred Stock (valued at $50.00 per share) through June 1, 1999, and
thereafter in cash, or at the Company's election, in shares of Preferred Stock.
On June 3, 1997, 200,000 shares of Preferred Stock were issued in the initial
offering. On September 1 and December 1, 1997, respectively, 7,500 and 7,781
additional shares of Preferred Stock were issued as the quarterly dividends for
the respective quarters. On March 1, June 1, and September 1, 1998, the Company
issued 8,073, 8,376, and 8,690 shares of Preferred Stock, respectively, as the
quarterly dividends for the respective quarters. The Company did not issue the
quarterly dividends due on December 1, 1998 or March 1, 1999.
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 does not presently have the
funds to make the December 1, 1998 interest installment on the 13.5% Notes and
does not anticipate having sufficient funds to do so at any time in the near
future. In fact, pending the Restructuring, the Company intends to continue to
use available funds for exploration and development projects. 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. Certain holders of the 13.5%
Notes have requested that the Trustee withdraw the notice of acceleration.
There can be no assurance that the Trustee will withdraw the notice or that the
Trustee will not pursue available remedies under the Indenture arising upon an
Event of Default, including but not limited to filing suit against the Company
to recover the whole amount of principal and interest.
F-10
<PAGE>
The aggregate principal payments required for each of the next five years are as
follows:
<TABLE>
<CAPTION>
December 31,
- ------------
<S> <C>
1999 $68,309,653
2000 17,121
2001 -
2002 -
2003 -
Thereafter -
-----------
$68,326,774
===========
</TABLE>
<TABLE>
<S> <C>
3. INCOME TAXES:
-------------
</TABLE>
The company follows the asset and liability method of accounting for deferred
income taxes prescribed by the Financial Accounting Standards Board Statement
No. 109 (FAS 109) "Accounting for Income Taxes". During 1997, as a result of
the termination of its S Corporation election, the Company was required to
provide a net deferred tax liability of $6,105,850, which was charged to income
tax expense. At December 31, the Company has the following deferred tax assets
and liabilities recorded:
<TABLE>
<CAPTION>
ASSET (LIABILITY)
------------------------------------------
1998 1997
------------------- ------------------
<S> <C> <C>
Federal net operating loss carryforward $ 7,726,010 $ 6,426,093
Temporary differences:
Oil and gas properties 829,201 (9,920,135)
Section 481(a) adjustment 1,857,188 3,507,301
Valuation allowance (10,412,399) (13,259)
------------ -----------
Net tax liability $ - $ -
============ ===========
</TABLE>
At December 31, 1998, the Company had, for tax reporting purposes, operating
loss carryforwards ("NOL") of $20,881,107, which expire in 2013. A valuation
allowance is provided for that portion of the tax asset for which it is deemed
more likely than not that it will not be realized. Due to the Company's recent
losses, management has provided a valuation allowance for the entire deferred
tax asset.
The provision for income taxes at the Company's effective tax rate differed from
the provision for income taxes at the statutory rate as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
1998 1997
----------------------- -----------------------
<S> <C> <C>
Computed benefit at the expected
Statutory rate...................................... $(11,310,076) $(6,240,358)
Provision upon termination of
S Corporation election.............................. - 6,105,850
Tax effect of losses attributable to
Operations as an S Corporation..................... - 703,594
Change in valuation allowance....................... 10,399,140 13,259
Other............................................... 910,936 (582,345)
------------ -----------
Income tax $ - $ -
expense........................................... ============ ===========
</TABLE>
F-11
<PAGE>
4. STOCK WARRANTS ISSUED:
As a condition precedent to the loan from EEP, Forman executed and delivered to
EEP a warrant assigning and conveying to EEP the right to purchase nine shares
of Forman's common stock, no par value per share, at an exercise price of
$25,000 per share. No value was assigned to this warrant because its exercise
price was substantially in excess of the estimated market value of Forman's
stock at the date of grant and the Company believed its value to be immaterial.
The exercise date of the warrant is the earliest of a) the date on which Forman
agrees to sell all or substantially all of the outstanding common stock or
assets of the Company; b) the date on which the Company files a registration for
public sale of the Company's stock; or c) thirty days prior to the expiration
date of the warrants, which is December 31, 2025. As a result of a stock split
during 1993, the number of common shares available for purchase under this
warrant increased from 9 to 9,000, with a corresponding reduction of the
exercise price from $25,000 per share to $25 per share.
In connection with the EECIP financing, Forman executed and delivered to EECIP a
warrant assigning and conveying the right to purchase ten shares of Forman's
common stock. The exercise price was based on a calculated value of the
Company, and was subsequently established at $44,567 per share. No value was
assigned to this warrant because its exercise price was substantially in excess
of the estimated market value of Forman's stock, at the date of grant and the
Company believed its value to be immaterial. The exercise date for this warrant
is the earliest of (a) the date Forman agrees to sell all or substantially all
of the outstanding shares of common stock or assets of the Company for cash or
securities in a publicly traded company; (b) the date Forman files a
registration for the public sale of its common stock; or (c) thirty days prior
to the expiration date, which is December 31, 2025. As a result of a stock
split during 1993, the number of common shares available for purchase under this
warrant increased from 10 to 10,000, with a corresponding reduction of the
exercise price from $44,567 per share to $44.57 per share.
In connection with the offerings discussed in Note 2, the Company issued
warrants to purchase 43,600 shares of common stock at an initial exercise price
of $1.00 per share, subject to adjustment in certain defined cases. The
warrants are immediately exercisable and will automatically expire on June 1,
2004. The Company has allocated $666,667 and $333,333 of the proceeds received
from the sale of the note units and equity units, respectively, to the warrants
issued, which has been recorded as additional paid in capital at December 31,
1997. In addition, the Company also issued warrants to purchase 4,844 shares of
common stock under the same conditions as discussed above. The Company has
recorded $111,100 of additional paid-in capital for these warrants, to be
amortized as deferred financing costs over the term of the note units.
5. COMMITMENTS UNDER OPERATING LEASES:
Forman has two noncancellable operating leases for the rental of office space,
which expire on July 31, 1999 and January 14, 2000. Future commitments under
these leases are as follows:
<TABLE>
<CAPTION>
December 31,
- -----------
<C> <S>
1999 $185,647
2000 -
2001 -
2002 -
2003 -
</TABLE>
Rental expense under operating leases during 1998, 1997 and 1996 was $200,841,
$204,046, and $192,633, respectively.
6. ESCROWED AND RESTRICTED FUNDS:
Cash restricted for payment of abandonment costs for the Boutte and Bayou
Dularge Fields is classified as a long-term asset. Such amounts are invested in
short-term interest-bearing investments. The cash is escrowed under an
F-12
<PAGE>
agreement which required Forman to make additional specified monthly
contributions through November 1995. As of December 31, 1998, the escrow
accounts are fully funded.
7. EMPLOYEE BENEFITS:
The Company has adopted a series of incentive compensation plans designed to
align the interests of executives and employees with those of its stockholders.
The following is a brief description of each plan.
1997 STOCK OPTION PLAN
The 1997 Stock Option Plan (the "Stock Option Plan") was adopted by the Board
of Directors and approved by the sole stockholder of the Company in April 1997.
A total of 36,333 shares of Common Stock have been reserved for issuance
pursuant to the Stock Option Plan. The Stock Option Plan provides for the grant
to employees, including officers of the Company, of "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), and non-statutory stock options (collectively, the
"Awards"). In addition, nonemployee directors (the "Outside Directors") are
eligible to receive non-statutory stock options. The Company has granted
incentive stock options to certain employees, including directors and executive
officers, of the Company entitling such persons to purchase approximately 36,333
shares of the Common Stock at an exercise price equal to the fair market value
of the Common Stock as of the date of issuance, as established by an independent
appraiser selected by the Company ($31.74 per share).
The Company accounts for the options issued pursuant to the stock incentive plan
under APB Opinion No. 25, under which no compensation cost has been recognized.
Had compensation cost for this plan been determined consistent with FAS 123, the
Company's net loss and loss per common share would have been increased to the
following pro forma amounts:
<TABLE>
<CAPTION>
1998 1997
-------------- ---------------
<S> <C> <C> <C>
Net loss attributed to
common shares: As Reported $32,266,970 $18,752,509
Pro Forma $32,500,161 $18,858,767
Loss per common share: As Reported $ 358.52 $ 208.36
Pro Forma $ 361.11 $ 209.54
</TABLE>
A summary of the status of the Company's stock option plan at December 31, 1998
and changes during the year then ended is presented in the table and narrative
below:
<TABLE>
<CAPTION>
Wtd Avg
Shares Ex Price
---------- --------
<S> <C> <C>
Outstanding, January 1, 1997
Granted 36,333 $31.74
Exercised - -
Forfeited 1,223 31.74
Expired - -
------ -------
Outstanding, December 31,1997 35,110 $31.74
======= ============
Granted - -
Exercised - -
Forfeited - -
Expired - -
------ -------
Outstanding, December 31,1998 35,110 $31.74
======= ============
Exercisable, end of year 26,552 $31.74
======= ============
Weighted average fair value of
options granted $ 14.75
=======
</TABLE>
F-13
<PAGE>
The options outstanding at December 31, 1998 all have an exercise price of
$31.74 with a remaining contractual life of 8.3 years.
No options were granted in 1998. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option model with the
following assumptions used for options granted during 1997:
<TABLE>
<CAPTION>
Assumption
----------------
<S> <C>
Risk free interest rate 6.35%
Expected life (years) 10 Years
Expected volatility -
Expected dividends -
</TABLE>
401(K) PLAN
The Company has adopted a defined contribution retirement plan that complies
with Section 401(k) of the Code (the "401(k) Plan"). Pursuant to the terms of
the 401(k) Plan, all employees with at least one year of continuous service are
eligible to participate and may contribute up to 15% of their annual
compensation (subject to certain limitations imposed under the Code). The 401(k)
Plan provides that a discretionary match of employee contributions may be made
by the Company in cash. The Company made a $25,304 matching contribution to the
401(k) Plan in January, 1998 based upon each individual employee's plan
contributions during 1997. In December, 1998 the Company made another matching
contribution, in the amount of $58,398, again based upon each individual
employee's plan contributions for 1998. These matching employer contributions
to the 401(k) Plan are fully vested to the individual employees after three
years of service. The amounts held under the 401(k) Plan are invested among
various investment funds maintained under the 401(k) Plan in accordance with the
directions of each participant. Employee contributions under the 401(k) Plan are
100% vested and participants are entitled to payment of vested benefits upon
termination of employment.
8. RELATED PARTY TRANSACTIONS:
In August 1996, the Company sold all of its interests in the Bayou Fer Blanc
Field and the West Gueydan Field to a company (the "Purchaser") that is owned by
the sole stockholder. The purchase price was $950,000, which was paid at the
closing. The Company did not recognize any gain or loss on the sale of these
properties. In connection with the sale, the Purchaser also agreed to assume
certain liabilities of the Company relating to the completion of the 3-D seismic
survey and other related matters. As of December 31, 1996, the Company had
incurred aggregate costs of $327,828 subsequent to the closing on behalf of the
Purchaser, which are recorded as due from affiliate. On June 3, 1997, the
Company repurchased its interests in these fields for $5,000,000 with the
proceeds from the offerings discussed in Note 2. At that time, the Purchaser's
cost basis in these fields was $3,500,000, which the Company has recorded as
unevaluated properties at December 31, 1997. The balance of the purchase price
of $1,500,000 was recorded as a distribution to the sole stockholder.
During 1996, the sole stockholder loaned the Company $1,000,000, of which
$500,000 had been repaid as of December 31, 1996. The remaining $500,000 was
repaid in 1997. The Company recorded interest expense of $27,361 during 1996
and $14,301 during 1997 related to this loan.
9. WRITEDOWN OF OIL AND GAS PROPERTIES:
During 1998, the Company wrote down its oil and gas property investments (full
cost pool) by $19,575,047. The amount of the writedown represents the excess
capitalized costs over estimated future net revenues attributable to oil and gas
reserves discounted at 10%, less estimated future income taxes. The estimated
future net revenues used in the calculation were based on year-end reserve
volumes (as determined by an independent petroleum engineer), utilizing
December, 1998 oil prices of $10.44 per barrel and December, 1998 gas prices of
$1.87 per thousand cubic feet, with no provision for future escalation. The
Company also wrote down its oil and gas property investments during 1997 by
$10,008,121. The estimated future net revenues used in the ceiling test
calculation for 1997 were
F-14
<PAGE>
based on year-end reserve volumes (as determined by an independent petroleum
engineer), utilizing March, 1998 oil prices of $14.47 per barrel and March, 1998
gas prices of $2.40 per thousand cubic feet, with no provision for future
escalation. The utilization of these prices resulted in an increase in the
amount charged to operations during 1997 of $8,167,879 over the amount that
would have been recorded using year-end prices.
10. OIL AND GAS ACTIVITIES:
This footnote provides unaudited information required by SFAS No. 69
"Disclosures About Oil and Gas Producing Activities."
CAPITALIZED COSTS - Capitalized costs and accumulated depreciation, depletion
and amortization relating to the Company's oil and gas producing activities, all
of which are conducted within the continental United States, are summarized
below:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Proved producing oil and gas
properties $77,067,569 $73,172,144 $48,359,890
Unevaluated properties 4,485,359 3,857,195 -
Accumulated depreciation, depletion
and amortization (57,938,060) (29,083,935) (11,307,719)
----------- ----------- -----------
Net capitalized costs $23,614,868 $47,945,404 $37,052,171
=========== =========== ===========
</TABLE>
The unevaluated properties at December 31, 1997, consist of $3.5 million of
acquisition costs for the interests in the Bayou Fer Blanc Field and the West
Gueydan Field, as discussed in Note 8 above, and $357,000 of subsequent 3-D
seismic costs related to the Bayou Fer Blanc Field. At December 31, 1998, these
costs include an additional $628,000 of delay rentals incurred on the properties
during 1998.
COSTS INCURRED - Costs incurred in oil and gas property acquisition, exploration
and development activities are summarized below:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Acquisition costs $ - $ 6,100,000 $ -
Exploration costs 2,413,719 18,463,989 12,448,239
Development costs 2,118,810 4,105,460 3,852,354
---------- ----------- -----------
Gross costs incurred 4,532,529 28,669,449 16,300,593
Less proceeds from sales of prospects - - 950,000
---------- ----------- -----------
Net cost incurred $4,532,529 $28,669,449 $15,350,593
========== =========== ===========
</TABLE>
Gross cost incurred excludes sales of proved and unproved properties which are
accounted for as adjustments of capitalized costs with no gain or loss
recognized, unless such adjustments would significantly alter the relationship
between capitalized costs and proved reserves.
RESERVES - (UNAUDITED) - Proved reserves are estimated quantities of oil and
natural gas which geological and engineering data demonstrate, with reasonable
certainty, to be recoverable in future years from known reservoirs under
existing economic and operating conditions. Proved developed reserves are
proved reserves that can reasonably be expected to be recovered through existing
wells with existing equipment and operating methods.
Proved oil and natural gas reserve quantities and the related discounted future
net cash flows before income taxes for the periods presented are based on
estimates prepared by Ryder Scott Company, independent petroleum engineers.
Such estimates have been prepared in accordance with guidelines established by
the Securities and Exchange Commission.
F-15
<PAGE>
The Company's net ownership interests in estimated quantities of proved oil and
natural gas reserves and changes in net proved reserves, all of which are
located in the continental United States, are summarized below:
<TABLE>
<CAPTION>
Oil, Condensate and Natural Gas Liquids
(Bbls)
---------------------------------------------------
Year Ended December 31,
---------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Proved developed and undeveloped reserves:
Beginning of year 2,259,567 2,511,562 1,999,859
Revisions of previous estimates (335,803) (254,540) 87,871
Purchases of oil and gas properties - 188,739 -
Extensions and discoveries - 148,468 753,776
Production (393,040) (334,662) (329,944)
--------- --------- ---------
End of year 1,530,724 2,259,567 2,511,562
========= ========= =========
Proved developed reserves at end of year 1,310,274 1,842,849 1,898,978
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Natural Gas (Mcf)
---------------------------------------------------
Year Ended December 31,
---------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Proved developed and undeveloped reserves:
Beginning of year 22,105,000 23,223,000 9,593,000
Revisions of previous estimates (2,602,860) (8,071,398) 619,282
Purchases of oil and gas properties - 1,867,721 -
Extensions and discoveries - 7,699,000 14,335,783
Production (4,944,140) (2,613,323) (1,325,065)
---------- ---------- ----------
End of year 14,558,000 22,105,000 23,223,000
========== ========== ==========
Proved developed reserves at end of year 9,865,000 16,237,000 8,485,000
========== ========== ==========
</TABLE>
STANDARDIZED MEASURE (UNAUDITED) - The table of the Standardized Measure of
Discounted Future Net Cash Flows related to the Company's ownership interests in
proved oil and gas reserves as of period end is shown below:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
(In Thousands)
<S> <C> <C> <C>
Future cash inflows $ 43,256 $ 96,925 $143,652
Future oil and natural gas operating expenses (14,598) (21,116) (12,598)
Future development costs (5,821) (10,372) (14,059)
-------- -------- --------
Future net cash flows before income taxes 22,837 65,437 116,995
Future income taxes - 9,328 -
-------- -------- --------
Future net cash flows 22,837 56,109 116,995
10% annual discount for estimating timing of
cash flows (3,668) (8,567) (29,614)
-------- -------- --------
Standardized measure of discounted future net
cash flows $ 19,169 $ 47,542 $ 87,381
======== ======== ========
</TABLE>
F-16
<PAGE>
Future cash flows are computed by applying year-end prices of oil and natural
gas to year-end quantities of proved oil and natural gas reserves. Future
operating expenses and development costs are computed primarily by the Company's
petroleum engineers by estimating the expenditures to be incurred in developing
and producing the Company's proved oil and natural gas reserves at the end of
the year, based on year end costs and assuming the continuation of existing
economic conditions. Future income taxes are computed using the Company's tax
basis in evaluated oil and gas properties and other related tax carryforwards.
Prior to 1997, the Company was not a taxable entity (See Note 3) and therefore
future income taxes have not been reflected in 1996. In 1998, the present value
of future net cash flows before income taxes was exceeded by the Company's tax
basis in the oil and gas properties and other tax attributes; therefore, future
income taxes have not been reflected in that year. The standardized measure of
discounted future net cash flows does not purport, nor should it be interpreted,
to present the fair value of the Company's oil and natural gas reserves. An
estimate of fair value would also take into account, among other things, the
recovery of reserves not presently classified as proved, anticipated future
changes in prices and costs, a discount factor more representative of the time
value of money and the risks inherent in reserve estimates.
CHANGES IN STANDARDIZED MEASURE (UNAUDITED) - Changes in standardized measure of
future net cash flows relating to proved oil and gas reserves are summarized
below:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998___ 1997 1996
------------ ----------- -----------
(In Thousands)
<S> <C> <C> <C>
Changes due to current year operations:
Sales of oil and natural gas, net of oil and
natural gas operating expenses $(12,050) $(10,827) $(7,781)
Extensions and discoveries - 16,915 42,983
Purchases of oil and gas properties - 4,691 -
Changes due to revisions in standardized
variables:
Prices and operating expenses (24,336) (33,229) 28,682
Revisions of previous quantity estimates (4,675) (16,109) 3,633
Estimated future development costs (2,192) 5,835 (7,784)
Accretion of discount 5,226 8,738 3,060
Net change in income taxes 4,715 (4,715) -
Production rates (timing) and other 4,939 (11,138) (6,008)
-------- -------- -------
Net Change (28,373) (38,839) 56,785
Beginning of year 47,542 87,381 30,596
-------- -------- -------
End of year $ 19,169 $ 47,542 $87,381
======== ======== =======
</TABLE>
F-17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 1,474,488 457,869
<SECURITIES> 0 0
<RECEIVABLES> 47,830 597,991
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 3,687,229 7,449,481
<PP&E> 83,271,685 78,680,132
<DEPRECIATION> (59,511,084) 30,451,675
<TOTAL-ASSETS> 33,685,858 62,729,930
<CURRENT-LIABILITIES> 77,791,028 8,300,767
<BONDS> 0 0
12,360,322 10,589,588
0 0
<COMMON> 1,000 1,000
<OTHER-SE> (56,483,603) (24,174,967)
<TOTAL-LIABILITY-AND-EQUITY> 33,685,858 62,729,930
<SALES> 15,950,329 14,235,272
<TOTAL-REVENUES> 16,275,843 14,708,857
<CGS> 3,900,037 3,408,208
<TOTAL-COSTS> 46,813,745 32,538,454
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 10,122,131 7,723,717
<INCOME-PRETAX> (30,537,902) (17,829,597)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (30,537,902) (17,829,597)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (30,537,902) (17,829,597)
<EPS-PRIMARY> (358.52) (208.36)
<EPS-DILUTED> (358.52) (208.36)
</TABLE>
