<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1998
[ ] 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: 019020
---------------------------
PETROQUEST ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 98-0115468
(State of Incorporation) (I.R.S. Employee Identification No.)
625 E. KALISTE SALOOM RD., LAFAYETTE, LOUISIANA 70508
(Address of principal executive offices) (Zip code)
---------------------------
Registrant's telephone number, including area code: (318) 232-7028
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
As of November 16, 1998 there were 18,537,347 shares of the
Registrant's Common Stock, par value $.001 per share, outstanding.
<PAGE> 2
PETROQUEST ENERGY, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I
Item 1. Financial Statements:
Condensed Consolidated Balance
Sheets as of September 30, 1998
and December 31, 1997........................................................ 3
Condensed Consolidated Statements of
Operations for the three- and
nine-month periods ended
September 30, 1998 and 1997.................................................. 4
Condensed Consolidated Statements of Stockholders' Equity....................... 5
Condensed Consolidated Statements of
Cash Flows for the nine months
ended September 30, 1998 and 1997............................................ 6
Notes to Condensed Consolidated Financial Statements............................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................. 11
Part II
Item 4. Submission of matters to a vote of security holders............................... 15
Item 5. Other Information................................................................. 16
Item 6. Exhibits and Reports on Form 8-K................................................... 16
</TABLE>
2
<PAGE> 3
PETROQUEST ENERGY, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 2,316,807 $ 4,455,348
Accounts Receivable 2,369,694 1,642,216
Other Current Assets 19,351 --
------------- -------------
Total Current Assets 4,705,852 6,097,564
------------- -------------
Oil and Gas Properties
Oil and Gas Properties, Full Cost Method 39,652,297 25,722,001
Unevaluated Oil and Gas Properties 6,059,501 2,189,475
Accumulated Depreciation,
Depletion and Amortization (28,040,240) (15,049,129)
------------- -------------
Net Oil and Gas Properties 17,671,588 12,862,347
Plugging and Abandonment Escrow 1,367,769 491,961
Other Assets 489,287 711,226
------------- -------------
$ 24,234,466 $ 20,163,098
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable & Accrued Liabilities $ 3,034,825 $ 607,125
Current portion of Long-term Debt 1,930,000 --
------------- -------------
Total Current Liabilities 4,964,825 607,125
------------- -------------
Long-term Debt 2,000,000 99,965
Other Liabilities 700,000 715,582
Stockholders' Equity
Common Stock 18,537 32,450,315
Paid-in capital 43,795,314 527,787
Accumulated Deficit (27,244,210) (14,237,676)
------------- -------------
Total Stockholders' Equity 16,569,641 18,740,426
------------- -------------
$ 24,234,466 $ 20,163,098
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
PETROQUEST ENERGY, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Revenues:
<S> <C> <C> <C> <C>
Oil and Gas Sales $ 759,748 $ 862,092 $ 1,860,053 $ 3,344,954
Interest Income 10,362 69,162 101,214 114,091
------------ ------------ ------------ ------------
770,110 931,254 1,961,267 3,459,045
------------ ------------ ------------ ------------
Expenses:
Lease Operating Expenses 151,221 181,916 507,848 502,112
Production Taxes 28,229 79,889 119,678 259,068
Depreciation, Depletion and Amortization 521,184 529,679 1,813,633 1,788,928
Full Cost Ceiling Write-down 11,232,972 -- 11,232,972 --
General and Administrative 824,169 277,920 1,435,676 942,148
Interest Expense 22,692 1,111 27,177 105,181
Foreign Exchange (Gain)/Loss (49,049) 13,179 (137,394) 40,857
Loss (Gain) on Sale of Canadian Properties -- 85,165 -- (423,839)
Other Expense/(Income) (2,309) -- (42,268) --
------------ ------------ ------------ ------------
Loss from Operations (11,977,999) (237,604) (12,996,055) 244,590
Income Tax Expense 1,452 860 10,479 189,750
Net Income (Loss) $(11,978,451) $ (238,464) $(13,006,534) $ 54,840
============ ============ ============ ============
Earnings Per Common Share
Basic $ (0.89) $ (0.02) $ (1.10) --
============ ============ ============ ============
Diluted $ (0.89) $ (0.02) $ (1.09) --
============ ============ ============ ============
Average shares outstanding 13,466,067 11,212,969 11,837,023 11,159,507
============ ============ ============ ============
Average shares outstanding assuming dilution 13,524,579 11,212,969 11,957,868 11,159,507
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
PETROQUEST ENERGY, INC.
Condensed Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Total
Common Paid-In Retained Stockholders'
Stock Capital Deficit Equity
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
December 31, 1997 $ 32,450,315 $ 527,787 $(14,237,676) $ 18,740,426
Conversion of Common Shares (Note 2):
Optima no par Shares Surrendered (32,450,315) (527,787) -- (32,978,102)
PetroQuest Energy, Inc. $.001 par value
Shares Issued 11,002 32,967,098 -- 32,978,100
American Merger Issuance of Shares (Note 2) 7,535 10,828,216 -- 10,835,751
Net Loss -- -- (13,006,534) (13,006,534)
------------ ------------ ------------ ------------
September 30, 1998 $ 18,537 $ 43,795,314 $(27,244,210) $ 16,569,641
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
PETROQUEST ENERGY, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (13,006,534) $ 54,840
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 13,046,605 1,788,928
Gain on sale of Canadian oil and gas properties -- (234,089)
Changes in working capital accounts:
Accounts receivable (179,897) 169,364
Other current assets (13,609) --
Accrued liabilities (205,354) (1,278,859)
Plugging and Abandonment escrow (10,306) (218,889)
Net working capital of Canadian oil and gas
properties sold -- (474,128)
Other 273,739 88,018
-------------- --------------
Net cash used in operating activities (95,356) (104,815)
-------------- --------------
Cash flows from investing activities:
Investment in oil and gas properties (1,632,805) (2,977,545)
Sale of oil and gas properties 12,128,014
Cash cost of American merger transaction,
net of cash received (Note 2) (1,800,340) --
-------------- --------------
Net cash provided by (used in) investing activities (3,433,185) 9,150,469
-------------- --------------
Cash flows from financing activities:
Proceeds from borrowings 1,600,000 --
Repayment of debt (210,000) (4,860,261)
Repurchase of common stock -- (654,877)
Net cash provided by financing activities 1,390,000 (5,515,138)
-------------- --------------
Net increase (decrease) in cash (2,138,541) 3,530,516
Cash balance beginning of period 4,455,348 1,499,389
-------------- --------------
Cash balance end of period $ 2,316,807 $ 5,029,905
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 8,008 $ 105,181
============== ==============
Income Taxes $ 10,479 $ 189,750
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
PETROQUEST ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INTERIM FINANCIAL STATEMENTS -
The condensed consolidated financial statements of PetroQuest Energy,
Inc. (the "Company") at September 30, 1998 and for the three- and nine-month
periods then ended are unaudited and reflect all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of management, necessary
for a fair presentation of the financial position and operating results for the
interim period. The financial statements reflect the results of the Company and
its predecessor entity, Optima Petroleum Corporation ("Optima"), for all periods
presented. The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto,
together with management's discussion and analysis of financial condition and
results of operations, contained in Optima's Annual Report on Form 10-K for the
year ended December 31, 1997. The results of operations for the three- and
nine-month periods ended September 30, 1998 are not necessarily indicative of
future financial results. Certain prior period amounts have been reclassified to
conform to current period presentation.
NOTE 2 - MERGER OF OPTIMA (U.S.) ENERGY CORPORATION -
On September 1, 1998, the Company completed its previously announced
transaction to merge its wholly owned subsidiary Optima Energy (U.S.)
Corporation with American Explorer, L.L.C. (American). Concurrent with the
transaction, the Company became a Delaware corporation and converted each share
of Optima no par value common stock into one share of the Company's $.001 par
value common stock and changed its name from Optima Petroleum Corporation to
PetroQuest Energy, Inc. American conducted oil and natural gas exploration
activities in the Gulf Coast Region.
Under the terms of the transaction, American merged with the Company in
exchange for 7,535,001 shares of the Company's common stock, issued primarily to
the three former members of American, representing about 40% of the post
acquisition shares outstanding. Additionally, the Company issued 1,667,001
contingent stock rights exchangeable for common shares should the market share
price of the Company's common stock exceed $5 per share for 20 consecutive
trading days during the three year term of the rights. The rights terminate on
September 1, 2001.
The transaction was treated as a purchase for accounting purposes. No
value was assigned to the contingent stock rights. The purchase price of
approximately $10.6 million was allocated to the assets and liabilities based on
estimated fair value. The purchase price allocation is preliminary and subject
to final review.
The operating results of American have been consolidated in the
Company's statement of operations since September 1, 1998. The following
summarized unaudited income statement data reflects the impact the transaction
would have had on the Company's results of operations for the nine months ended
September 30, 1998 and 1997 had the transaction occurred January 1, 1997.
7
<PAGE> 8
<TABLE>
<CAPTION>
Proforma Results for the
Nine Months Ended September 30,
------------------------------------
1998 1997
--------------- ---------------
(Unaudited)
<S> <C> <C>
Revenues $ 6,088,081 $ 7,766,360
=============== ===============
Net Loss $ (5,234,100) $ (928,849)
=============== ===============
Earnings per common share:
Basic $ (0.28) $ (0.05)
=============== ===============
Diluted $ (0.28) $ (0.05)
=============== ===============
</TABLE>
NOTE 3 - EARNINGS PER SHARE -
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"),
"Earnings Per Share," which simplifies the computation of earnings per share
("EPS"). The Company adopted SFAS No. 128 in the fourth quarter of 1997 and
restated prior periods' EPS data as required by SFAS No. 128. All EPS data in
the financial statements and accompanying footnotes reflects the adoption of
SFAS No. 128.
Basic net income per share of common stock was calculated by dividing
net income applicable to common stock by the weighted-average number of common
shares outstanding during the periods. Diluted net income per share of common
stock was calculated by dividing net income applicable to common stock by the
weighted-average number of common shares outstanding during the period plus the
weighted-average number of dilutive stock options granted to outside directors
and certain employees which totaled 58,512 shares and -0- shares in the third
quarter of 1998 and 1997, respectively, and 120,845 shares and -0- shares in the
first nine months of 1998 and 1997, respectively. The weighted average number of
options which were considered antidilutive as a result of the exercise price of
the options exceeding the average price for the applicable period totaled
848,799 shares and -0- shares during nine months and third quarter periods of
1998, and 1,163,000 shares during the nine month and third quarter periods of
1997. The contingent stock rights assigned in connection with the merger are
excluded from the calculation of diluted earnings per share.
NOTE 4 - LONG-TERM DEBT -
In connection with the Merger described in Note 2, the Company and its
lender amended American's reducing revolving line of credit to provide for
borrowings of up to $25 million, subject to a cap calculated on the Company's
borrowing base, as defined. At September 30, 1998, the borrowing base was $4.3
million. Beginning October 1, 1998, and each month thereafter, the borrowing
base is reduced by $200,000. The borrowing base amount and the amount by which
it will be reduced, is established by the lender and is based on their
evaluation of the Company's oil and gas properties. The borrowing base is
redetermined semi-annually on February 1 and August 1 of each year. Interest
under the loan is payable monthly at prime plus 1/2% (9 1/4% at September 30,
1998).
8
<PAGE> 9
NOTE 5 - NEW ACCOUNTING STANDARDS -
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
display of comprehensive income in the financial statements. Comprehensive
income is the total of net income and all other non-owner changes in equity.
SFAS No. 131 requires that companies disclose segment data based on how
management makes decisions about allocating resources to segments and measuring
their performance. SFAS Nos. 130 and 131 are effective for 1998. The Company
adopted these standards in 1998 with no effect on the Company's financial
statements, financial position or results of operations.
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 liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999 and must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued, acquired,
or substantively modified after December 31, 1997 (and, at the company's
election, before January 1, 1998).
Because the Company does not currently use derivative instruments, the
adoption of SFAS No. 133 will not impact the Company's financial statements.
NOTE 6 - RELATED PARTY TRANSACTIONS -
In conjunction with the merger discussed at Note 2, the employees and
consultants of Optima were terminated. American has no employees. It was managed
and its properties (and certain of Optima's properties) were operated by
American Explorer, Inc. (AEI), a corporation owned by two officers of the
Company and former members of American. From September 1, 1998 through December
31, 1998, the Company's properties will be operated by AEI and certain
management functions will be performed by AEI. The officers of AEI are also the
officers of the Company. AEI charges the Company a management fee to cover its
costs of services for the Company ($150,000 for the month of September, 1998).
At September 30, 1998, the Company owed AEI approximately $2,600,000. This
amount is included in Accounts Payable. After the transition period, the Company
will assume the operating and management functions from AEI, whose employees
will become employees of the Company.
9
<PAGE> 10
NOTE 7 - FULL COST CEILING WRITE-DOWN -
The Company uses the full cost method of accounting for its investment
in oil and natural gas properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of oil and natural gas
reserves are capitalized into a "full cost pool" (the pool) as incurred, and
properties in the pool are depleted and charged to operations using the units of
production method based on the ratio of current production to total proved
future production. Additionally, the cost in excess of the net book value of
assets and liabilities acquired in the merger with American of $7.9 million,
discussed above, is recorded in the pool at September 30, 1998, and is subject
to depletion or write-down. To the extent that costs capitalized in the pool
(net of accumulated depreciation, depletion and amortization) 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, excess costs are charged to operations. Once incurred, a write-down
of oil and natural gas properties is not reversible at a later date even if oil
or natural gas prices increase. The Company was required to write down its asset
base at the end of the third quarter of 1998 due primarily to the cost in excess
of net book value recorded in the merger with American and significant declines
in oil prices during 1998.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
PetroQuest Energy, Inc. is an independent oil and gas company engaged
in the development, exploration, acquisition and operation of oil and gas
properties onshore and offshore in the Gulf Coast Region. The Company and its
predecessors have been active in this area since 1986, which gives the Company
extensive geophysical, technical and operational expertise in this area. The
Company's business strategy is to increase production, cash flow and reserves
through exploration, development and acquisition of properties located in the
Gulf Coast Region.
MERGER OF OPTIMA (U.S.) ENERGY CORPORATION -
On September 1, 1998, the Company completed its previously announced
transaction to merge its wholly owned subsidiary Optima Energy (U.S.)
Corporation with American Explorer, L.L.C. (American). Concurrent with the
transaction, the Company became a Delaware corporation and converted each share
of Optima no par value common stock into one share of the Company's $.001 par
value common stock and changed its name from Optima Petroleum Corporation to
PetroQuest Energy, Inc. American conducted oil and natural gas exploration
activities in the Gulf Coast Region.
Under the terms of the transaction, American merged with the Company in
exchange for 7,535,001 shares of the Company's common stock, issued primarily to
the three former members of American, representing about 40% of the post
acquisition shares outstanding. Additionally, the Company issued 1,667,001
contingent stock rights exchangeable for common shares should the market share
price of the Company's common stock exceed $5 per share for 20 consecutive
trading days during the three year term of the rights. The rights terminate on
September 1, 2001.
The transaction was treated as a purchase for accounting purposes. No
value was assigned to the contingent stock rights. The purchase price of
approximately $10.6 million was allocated to the assets and liabilities based on
estimated fair value. The purchase price allocation is preliminary and subject
to final review. The operating results of American have been consolidated in the
Company's statement of operations since September 1, 1998.
RESULTS OF OPERATIONS
The following table sets forth certain operating information with
respect to the oil and gas operations of the Company for the three-month and
nine-month periods ended September 30, 1998 and 1997.
11
<PAGE> 12
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Production:
Oil (Bbls) 16,720 24,316 59,451 82,694
Gas (Mcf) 235,265 145,498 460,463 618,043
Total Production (Mcfe) 335,585 291,394 817,169 1,114,207
Sales:
Total oil sales $ 212,026 $ 477,588 $ 797,285 $ 1,696,787
Total gas sales $ 547,722 $ 384,504 $ 1,062,768 $ 1,648,167
Average sales prices:
Oil (per Bbl) $ 12.68 $ 19.64 $ 13.41 $ 20.51
Gas (per Mcf) $ 2.33 $ 2.64 $ 2.31 $ 2.66
Per Mcfe $ 2.26 $ 2.95 $ 2.28 $ 3.00
</TABLE>
The net loss totaled $12 million and $200,000 for the quarters ended
September 30, 1998 and 1997, respectively. Net loss for the nine months ended
September 30, 1998 was $13 million as compared to net income of $50,000 for the
first nine months of 1997. The change in both periods is primarily the result of
the full cost ceiling write-down associated with the American merger, (see "Full
Cost Ceiling Write-Down") and non-recurring costs associated with the merger.
On a thousands of cubic feet equivalent (mcfe) basis, third quarter
1998 production volumes increased 15% over third quarter 1997 production
volumes. This is the result of the merger with American and one month of its
production included in 1998 production. This was partially offset by depletion
of properties owned prior to the merger. Production volumes of both oil and gas
for the first nine months of 1998, compared to the 1997 period, declined 28% and
25% respectively. This was caused by depletion without a significant increase in
reserves.
Oil and gas sales during the third quarter of 1998 decreased 12% to
$760,000, as compared to third quarter 1997 revenues of $860,000. For the first
nine months of 1998, oil and gas sales decreased 44% to $1,860,000, compared to
oil and gas revenues of $3,340,000 during the 1997 period. Prices received
during the third quarter of 1998 averaged $12.68 per barrel of oil and $2.33 per
Mcf of gas, as compared to averages of $19.64 per barrel and $2.64 per Mcf
received in the 1997 period. Stated on a mcfe basis, unit prices received during
the third quarter and first nine months of 1998 were 23% and 24% lower,
respectively, than the prices received during the comparable 1997 periods.
Operating expenses for the third quarter of 1998 decreased to $150,000
from $180,000 during the third quarter of 1997 due to a decrease in the number
of properties partially offset by one month of American properties. Operating
expenses for the nine months ended September 30, 1998 did not change
significantly from the same period in 1997. The Company did not experience any
significant increases in operating costs as a result of storms during the third
quarter of 1998.
General and administrative expenses during the third quarter of 1998
totaled $820,000 as compared to expenses of $280,000 during the 1997 quarter.
The increase is primarily related to non-recurring
12
<PAGE> 13
costs of $450,000 associated with closing the Company's Vancouver office and
termination of Canadian consultants and employees. General and Administrative
expenses increased 52% for the nine months ended September 30, 1998 compared to
1997 for the same reason.
Depreciation, depletion and amortization ("DD&A") expense for the nine
months ended September 30, 1998 before the write-down of the full cost pool
during the third quarter of 1998 (see "Full Cost Ceiling Write-Down"), did not
change significantly from the 1997 period. For the quarter ended September 30,
1998, DD&A expense, before the write-down of the full cost pool, also remained
relatively constant compared to third quarter of 1997. The write-down of the
full cost pool was primarily attributable to cost in excess of net book value
recorded in the merger with American and significant price declines in oil
prices during 1998.
On a mcfe basis, which reflects the changes in production, the DD&A
rate (before the write-down of the full cost pool) for the first nine months of
1998 was $2.22 per mcfe compared to $1.61 per mcfe for the same period in 1997.
For the third quarter of 1998, DD&A per mcfe (before the full cost pool
write-down) was $1.55 compared to $1.82 for the comparable period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital and Cash Flow. Working capital (before considering
debt) decreased from $5.5 million at December 31, 1997 to $1.6 million at
September 30, 1998. This was caused primarily by funds expended for unevaluated
oil and gas properties as well as costs associated with the merger.
In September, 1998, the Company and its lender amended American's
reducing revolving line of credit to provide a new borrowing base of $4.3
million at September 30, 1998. The borrowing base reduces $200,000 per month and
is redetermined semi-annually.
Net cash flow from operations before working capital changes decreased
for the third quarter of 1998 to $20,000 compared to $1.7 million for 1997. For
the first nine months of 1998, net cash flow from operations before working
capital changes declined from $295,000 in 1997 to a negative $266,000 in 1998.
Included in the 1998 amounts are approximately $450,000 of non-recurring costs
associated with closing the Company's Vancouver office and termination of
Canadian consultants and employees.
The Company presently has no commitments regarding capital expenditures
and believes that its current sources of liquidity are sufficient to fund its
current operations. However, in order to continue its exploration and
development activities, the Company will need additional financing. The Company
anticipates that in the future this financing may include sale of equity and
debt securities and additional bank financing. There can be no assurances that
such additional financing will be available on acceptable terms, if at all.
Year 2000 Compliance. During 1998, the Company's executive management
and Board of Directors implemented a program to identify, evaluate and address
the Company's Year 2000 ("Y2K") risks to ensure that all its Information
Technology ("IT") Systems and Non-IT Systems will be able to process dates from
and after January 1, 2000 without critical systems failure. In addition to
evaluating its own systems, the Company will also assess the Y2K risks
associated with its significant customers and suppliers.
13
<PAGE> 14
The Company is currently evaluating its IT Systems for Y2K compliance.
As part of this evaluation, the Company has contracted third-party consultants
to assist in the identification and replacement of non-compliant IT Systems.
During 1998, the Company began modification of IT Systems for Y2K compliance.
The modifications are planned to be completed in the second quarter of 1999.
The Non-IT Systems are currently being assessed to determine which
systems would be affected by Y2K issues. Once assessment is completed, any
necessary replacements or modifications will be performed. Management believes
that any Non-IT issues will be minor and should be corrected by first quarter of
1999.
The assessment of third parties has the primary purpose of determining
any disruptions in operations due to non-compliance by an outside organization.
This will be determined by contacting the Company's suppliers and customers to
determine their level of Y2K compliance and the steps they are taking towards
compliance. These assessment and corrective measures are scheduled for
completion during the second quarter of 1999.
The Company has not incurred significant costs related to Y2K
compliance as of September 30, 1998 and does not expect that the cost to modify
or replace its non-compliant IT and Non-IT Systems will be material to its
financial condition or results of operations. The costs of these projects and
the dates on which the Company plans to complete modifications and replacements
are based on managements' best estimates, the estimates of third-party
specialists assisting the Company, the modification plans of third-parties and
other factors. There can be no guarantee that these estimates will be achieved
and actual results could differ materially from those plans.
Based on preliminary risk assessments, the Company believes the most
likely Y2K related failure would be a temporary disruption in certain materials
and services provided by third-parties, which would not be expected to have a
material adverse effect on the Company's financial condition or results of
operations. If during our assessment it is determined that Y2K related failure
would have a material adverse effect on the Company, contingency plans will be
developed. There can be no assurance that the Company will not be materially
adversely affected by Y2K problems.
Full Cost Ceiling Write-Down. The Company uses the full cost method of
accounting for its investment in oil and natural gas properties. Under the full
cost method of accounting, all costs of acquisition, exploration and development
of oil and natural gas reserves are capitalized into a "full cost pool" (the
pool) as incurred, and properties in the pool are depleted and charged to
operations using the units of production method based on the ratio of current
production to total proved future production. Additionally, the cost in excess
of the net book value of assets and liabilities acquired in the merger with
American of $7.9 million, discussed above, is recorded in the pool at September
30, 1998, and is subject to depletion or write-down. To the extent that costs
capitalized in the pool (net of accumulated depreciation, depletion and
amortization) 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, excess costs are charged to
operations. Once incurred, a write-down of oil and natural gas properties is not
reversible at a later date even if oil or natural gas prices increase. The
Company was required to write down its asset base at the end of the third
quarter of 1998 due primarily to the cost in excess of net book value recorded
in the merger with American and significant declines in oil prices during 1998.
14
<PAGE> 15
This Report includes certain statements that may be deemed to be
"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 facts, included
in this Report that address activities, events or developments that the Company
expects, believes or anticipates will or may occur in the future, including
drilling of wells, reserve estimates, future production of oil and gas, future
cash flows and other such matters are forward-looking statements. These
statements are based on certain assumptions and analyses made by the Company in
light of its experience and its perception of historical trends, current
conditions, expected future developments and other factors it believes are
appropriate under the circumstances. Such forward-looking statements are subject
to certain risks, uncertainties and other factors, many of which are beyond the
control of the Company, which could cause actual results to differ materially
from those currently anticipated. These factors include, without limitation, the
numerous uncertainties inherent in estimating quantities of proven oil and gas
reserves and in projecting future rates of production and timing of development
expenditures which may vary significantly from reserves and production
estimates; the results of exploratory and developmental drilling; operating
hazards attendant to the oil and gas business, including downhole drilling and
completion risks that are generally not recoverable from third parties or
insurance; actions or inactions of third-party operators of the Company's
properties; lease and rig availability; the successful identification,
acquisition and development of properties; changes in the price received for oil
and/or gas which may effect results of operations and cash flows; the demand for
and supply of gas and oil; the weather; pipeline capacity; general economic
conditions; governmental regulation; changes in interest rates; the Company's
ability to find and retain skilled personnel; labor relations; Year 2000
compliance by the Company and third parties; competitors of the Company having
greater resources than those of the Company; or other unanticipated external
developments materially impacting the Company's operational and financial
performance. Readers are cautioned that any such statements are not guarantees
of future performance and the Company can give no assurances that actual results
or developments will not differ materially from those projected in the
forward-looking statements. Stockholders, potential investors and other readers
are urged to consider these factors carefully in evaluating the forward-looking
statements and are cautioned not to place undue reliance on such forward-looking
statements. The forward-looking statements made herein are only made as of the
date of this Report and the Company undertakes no obligation to publicly update
such forward-looking statements to reflect subsequent events or circumstances.
Part II
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the special meeting of the stockholders held on August 21,
1998, the following business was conducted:
1. Approved, by a majority of disinterested stockholders, the
Plan and Agreement of Merger dated February 11, 1998 among the
Company, Optima Energy (U.S.) Corporation, Goodson Exploration
Company, NAB Financial L.L.C., Dexco Energy, Inc. and American
Explorer, L.L.C. and the issuance of up to 7,335,001 common
shares and contingent rights to receive an additional
1,667,001 common shares pursuant to that agreement;
15
<PAGE> 16
2. Approved, as a special resolution, the continuation of the
Company into the State of Delaware and adoption of a new
Certificate of Incorporation;
3. Elected as additional directors for the ensuing year, Charles
T. Goodson, Alfred J. Thomas, II, Ralph J. Daigle, Robert R.
Brooksher and Daniel G. Fournerat;
4. Approved, as a special resolution, the change of the Company's
name to PetroQuest Energy, Inc.;
5. Approved, by a majority of disinterested stockholders, the
amendment of 465,000 outstanding stock options to change the
exercise price and expiry date and the cancellation of all
other options outstanding under the Company's current stock
option plans;
6. Approved, by a majority of disinterested stockholders, the
replacement of the current stock option plans with a new stock
option plan authorizing the issuance of stock options
exercisable for up to 1,800,000 shares of the Company;
7. Approved, by a majority of the disinterested stockholders, the
acquisition of a 5% working interest in the Valentine
prospect;
Item 5. OTHER INFORMATION
On November 9, 1998, the Company announced that its CL&F #12
well at the Turtle Bayou Field was drilled to a total measured
depth of 8,027 feet and encountered 40 net feet of natural
gas/condensate pay over a gross interval from 6,620 feet to 7,290
feet. The well is scheduled to be on production by mid December,
1998. The Company is the operator of the well and owns a 40%
working interest.
In addition, the Company will drill an exploratory test at its
Snapper Prospect Offshore Texas OCS commencing in December, 1998.
This well will be drilled before the previously announced well in
the Valentine Field which is being evaluated for projected
drilling in early 1999.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits are filed.
(b) The Company filed a Form 8-K on September 16, 1998 reporting
that the Company's stockholders had approved the business
discussed at Item 4 above.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PETROQUEST ENERGY, INC.
Date: November 16, 1998 By: /s/ Robert R. Brooksher
------------------------------------
Robert R. Brooksher
Chief Financial Officer and Secretary
(Authorized Officer and Principal
Financial Officer)
16
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,316,807
<SECURITIES> 0
<RECEIVABLES> 2,369,694
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,705,852
<PP&E> 45,711,798
<DEPRECIATION> 28,040,240
<TOTAL-ASSETS> 24,234,466
<CURRENT-LIABILITIES> 4,964,825
<BONDS> 2,000,000
0
0
<COMMON> 18,537
<OTHER-SE> 16,551,104
<TOTAL-LIABILITY-AND-EQUITY> 24,234,466
<SALES> 759,748
<TOTAL-REVENUES> 770,110
<CGS> 0
<TOTAL-COSTS> 179,450
<OTHER-EXPENSES> 11,775,857
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,692
<INCOME-PRETAX> (11,977,999)
<INCOME-TAX> 1,452
<INCOME-CONTINUING> (11,978,451)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,978,451)
<EPS-PRIMARY> (.89)
<EPS-DILUTED> (.89)
</TABLE>
