<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
_______________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1998 Commission file number:019020
OPTIMA PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
CANADA 98-0115468
(State of Incorporation) (I.R.S. Employee Identification No.)
600-595 Howe Street, Vancouver V6C 2T5
British Columbia, Canada (Zip code)
Registrant's telephone number, including area code: (604) 684-6886
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
----- -----
Number of shares of Common Stock outstanding at August 7, 1998 11,002,346
1
<PAGE> 2
OPTIMA PETROLEUM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<S> <C> <C>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS .......................................... 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ..................................... 15
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........... 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .............................. 17
SIGNATURES
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OPTIMA PETROLEUM CORPORATION
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
------------ ------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents 2,386,015 $ 5,660,354
Accounts receivable (Note 12(b)) 2,037,814 2,220,151
Note receivable - current portion (Note 4) 133,592 129,861
Accrued interest receivable 51,486 --
Cash in trust -- 715,250
------------ ------------
4,608,907 8,725,616
OTHER
Cash held in trust (Note 5) 741,730 703,996
Advances to operators (Note 6) 760,720 547,200
Note receivable - long term portion (Note 4) 139,110 265,077
Loan receivable (Notes 2 and 13) 2,354,560 --
Petroleum and natural gas interests, full cost method (Note 7) 17,341,246 17,695,968
Deferred charges 410,883 205,486
------------ ------------
$ 26,357,156 $ 28,143,343
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued liabilities $ 514,939 $ 868,796
------------ ------------
514,939 868,796
REVENUE IN DISPUTE (Note 12(a)) 1,047,664 1,023,998
LONG-TERM DEBT (Note 8) 147,160 143,050
SITE RESTORATION AND ABANDONMENT 369,297 369,297
SHAREHOLDERS' EQUITY Share capital (Note 9)
Authorized 100,000,000 common shares
Issued 11,002,346 (1997 - 11,002,346) common shares 30,891,689 30,891,689
Contributed surplus 608,222 608,222
Deficit (7,221,825) (5,761,709)
------------ ------------
24,278,086 25,738,202
------------ ------------
$ 26,357,146 $ 28,143,343
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
ON BEHALF OF THE BOARD
/s/ R.P. Bourgeois /s/ R.L. Hodgkinson
- ---------------------------------- ------------------------------------
Director Director
3
<PAGE> 4
OPTIMA PETROLEUM CORPORATION
Consolidated Statements of Operations and Deficit
(unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUE
Petroleum and natural gas sales $ 1,028,788 $ 2,109,034 $ 2,148,261 $ 4,575,682
COSTS AND EXPENSES
Royalties and production taxes 268,892 680,870 624,519 1,411,155
Operating costs 230,851 253,741 569,026 439,240
Depletion and depreciation 1,042,504 828,795 1,915,218 1,694,795
Gain on sale of Canadian petroleum
and natural gas interests (Note 3) -- (701,351) -- (701,351)
General and administrative (Schedule) 488,739 517,014 874,778 912,004
Interest and other revenue (84,402) (47,927) (183,511) (61,271)
Foreign exchange loss (gain) (491,872) 30,738 (245,410) 37,989
Interest and bank charges 3,809 58,836 6,453 143,244
Amortization of deferred financing costs 17,082 17,083 34,164 34,165
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (446,815) 471,235 (1,446,976) 665,712
Income taxes 13,140 260,000 13,140 260,000
----------- ----------- ----------- -----------
NET INCOME (LOSS) (459,955) 211,235 (1,460,116) 405,712
DEFICIT, beginning of period (6,761,870) (732,012) (5,761,709) (926,489)
----------- ----------- ----------- -----------
DEFICIT, end of period $(7,221,825) $ (520,777) $(7,221,825) $ (520,777)
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE $ (0.04) $ 0.02 $ (0.13) $ 0.04
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
OPTIMA PETROLEUM CORPORATION
Consolidated Statements of Changes In Financial Position
(unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
CASH PROVIDED BY (USED IN)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Income for the period $ (459,955) $ 211,235 $ (1,460,116) $ 405,712
Items not involving cash
Gain on sale of Canadian petroleum
and natural gas interests (net of tax) -- (441,351) -- (441,351)
Depletion, depreciation and amortization 1,059,586 845,878 1,949,382 1,728,960
------------ ------------ ------------ ------------
599,631 615,762 489,266 1,693,321
Changes in non-cash working capital:
Accounts receivable (94,840) (337,820) 182,337 (379,478)
Accounts payable and accrued liabilities (147,154) (1,414,644) (353,857) (1,112,478)
Net working capital
adjustments on sale of Canadian
petroleum and natural gas interests -- 264,690 -- (517,260)
Cash in trust -- -- 715,250
Accrued interest receivable (51,486) -- (51,486) --
------------ ------------ ------------ ------------
306,151 (872,012) 981,510 (315,895)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES
Issue (repurchase) of
common shares (net of issue expenses) -- (278,391) -- (359,571)
Increase in (repayment of) bank debt 5,500 (6,746,837) 4,110 (6,712,567)
Collection of note receivable 118,399 126,738 122,236 121,727
Revenue in dispute -- -- 23,666 --
Loan receivable (1,504,600) -- (2,354,560) --
------------ ------------ ------------ ------------
(1,380,701) (6,898,490) (2,204,548) (6,950,411)
------------ ------------ ------------ ------------
INVESTING ACTIVITIES
Proceeds from the sale of
petroleum and natural gas interests -- 16,750,000 -- 16,750,000
Petroleum and natural gas interests (1,098,578) (1,847,812) (1,560,496) (2,951,611)
Advances to operators (286,834) 434,356 (213,520) 186,531
Cash held in trust (35,837) (35,728) (37,734) (52,838)
Deferred charges (151,657) 159 (239,561) --
------------ ------------ ------------ ------------
(1,572,906) 15,300,975 (2,051,311) 13,932,082
------------ ------------ ------------ ------------
INCREASE (DECREASE) IN CASH (2,647,456) 7,530,473 (3,274,349) 6,665,776
CASH AND CASH
EQUIVALENTS, beginning of period 5,033,461 1,190,365 5,660,354 2,055,062
------------ ------------ ------------ ------------
CASH AND CASH
EQUIVALENTS, end of period $ 2,386,005 $ 8,720,838 $ 2,386,005 $ 8,720,838
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
OPTIMA PETROLEUM CORPORATION
Schedules of Consolidated General and Administrative Expense
(unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Consultants $188,119 $207,170 $316,273 $384,227
Office expense 86,390 96,703 197,312 202,404
Legal, audit and tax 74,135 96,387 125,953 112,149
Investor communication 52,225 59,318 65,188 90,866
Public listing 11,476 5,662 43,947 30,887
Office rent 32,722 28,358 64,824 49,457
Travel 43,672 21,937 61,281 39,313
Directors -- 1,479 -- 2,701
-------- -------- -------- --------
$488,739 $517,014 $874,778 $912,004
======== ======== ======== ========
</TABLE>
6
<PAGE> 7
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
June 30, 1998
(unaudited) Page 7
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation
The consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended
December 31,1997, as filed with the Securities Exchange Commission.
The consolidated financial statements included herein as of June 30,
1998, and for the six month periods ended June 30, 1998 and June 30,
1997 are unaudited. Management has reflected all adjustments,
consisting of normal recurring adjustments, which it believes are
necessary to present fairly the financial position as at June 30,
1998 and the results of operations and cash flows for the six month
periods ended June 30, 1998 and June 30, 1997.
(b) Basis of consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Optima Energy (U.S.)
Corporation. All intercompany transactions and balances have been
eliminated.
(c) Cash and cash equivalents
Cash and cash equivalents include short-term investments with a
maturity of ninety days or less at the time of issue.
(d) Petroleum and natural gas interests
The Company follows the full cost method of accounting for petroleum
and natural gas interests whereby all costs of exploring and
developing petroleum and natural gas reserves, net of government
grants, are capitalized by individual country cost centre. Such costs
include land acquisition costs, geological and geophysical expenses,
costs of drilling both productive and non-productive wells and
overhead charges directly related to acquisition, exploration and
development activities.
The total carrying value of the Company's petroleum and natural gas
interests, less accumulated depletion, is limited to the estimated
future net revenue from production of proved reserves, based on
unescalated prices and costs plus the lower of cost and net
realizable value of unproved properties, less estimated future
development costs, general and administrative expenses, financing
costs and income taxes. The carrying value of unproved properties is
reviewed periodically to ascertain whether impairment has occurred.
Where impairment has occurred, the costs have been written down to
their net realizable value.
For each cost centre, the costs associated with proved reserves are
depleted on the unit-of-production method based on an independent
engineering estimate of proved reserves, after royalties, with
natural gas converted to its energy equivalent at a ratio of six
thousand cubic feet of natural gas to one barrel of oil.
Site restoration and abandonment costs, net of expected recoveries
for production equipment and facilities, at the end of their useful
life, are provided for on a unit-of-production basis.
- --------------------------------------------------------------------------------
<PAGE> 8
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
June 30, 1998
(unaudited) Page 8
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The resource expenditure deductions for income tax purposes related
to exploration and development activities funded by flow-through
share arrangements are renounced to investors in accordance with
income tax legislation. Petroleum and natural gas interests are
reduced by the estimated renounced income tax benefits when the
expenditures are incurred.
Equipment is depreciated on a straight-line basis over five years.
(e) Deferred charges
Debt financing costs are amortized on a straight line basis over the
terms of the related loans.
(f) Foreign currency translation
The operations of the Company's U.S. subsidiary are considered
integrated with the operations of the Company, and thus, are
translated under the temporal method. Under this method, transactions
of the Company and its subsidiaries that are denominated in foreign
currencies are recorded in Canadian dollars at exchange rates in
effect at the related transaction dates. Monetary assets and
liabilities denominated in foreign currencies are adjusted to reflect
exchange rates at the balance sheet date. Exchange gains and losses
arising on the translation of monetary assets and liabilities, except
as they relate to long-term debt, are included in the determination
of income for the year. Unrealized foreign exchange gains and losses
related to long-term debt are deferred and amortized over the
remaining term of the related debt.
(g) Use 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. Significant areas
requiring the use of management estimates relate to the determination
of rates for depreciation, depletion and amortization and the
impairment of petroleum and natural gas interests. Actual results
could differ from these estimates.
(h) Fair value of financial instruments
Financial instruments include cash and cash equivalents, cash in
trust, accounts receivable, note receivable, accounts payable and
accrued liabilities and the current and long term portions of long
term debt. Fair values approximate carrying values for these
financial instruments since they are short term in nature, receivable
or payable on demand, or bear interest at floating rates.
(i) Revenue recognition
Petroleum and natural gas sales are recognized upon delivery to the
metered gate at the common carrier pipeline.
- --------------------------------------------------------------------------------
<PAGE> 9
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
June 30, 1998
(unaudited) Page 9
- --------------------------------------------------------------------------------
2. MERGER OF OPTIMA ENERGY (U.S.) COMPANY
On February 11, 1998, the Company entered into a Plan and Agreement
of Merger ("Agreement") whereby the Company's wholly owned U.S.
subsidiary Optima Energy (U.S.) Corporation would merge with American
Explorer, L.L.C., ("American") a Louisiana limited liability company,
Goodson Exploration Company ("Goodson"), a Louisiana corporation, NAB
Financial, L.L.C. ("NAB"), a Louisiana limited liability company, and
Dexco Energy, Inc. ("Dexco"), a Louisiana corporation (American,
Goodson, NAB and Dexco collectively, referred to as the acquired
companies). Goodson, NAB and Dexco are holding companies which own
all the outstanding common shares of American. American is engaged in
the acquisition of and exploration for oil and natural gas.
Under the terms of the Agreement, the acquired companies would be
merged with the Company's U.S. subsidiary in exchange for 7,335,001
common shares of the Company to be issued to the former shareholders
of the acquired companies, which will represent approximately 40% of
the post acquisition outstanding common shares of the Company. In
addition, the Company will issue 1,667,001 in contingent stock issue
rights which will be exchangeable for common shares of the Company if
the Company's share price exceeds U.S. $5 per share for 20
consecutive trading days. The contingent stock issue rights will
terminate on the third anniversary after issuance if the condition
stated above is not met within the three year time limit. In
addition, the Company was required to provide American with a loan
agreement of U.S. $2.5 million prior to March 1, 1998, with an
initial draw of U.S. $500,000 available at that date and further
draws based on the consummation of this Agreement.
The Agreement is subject to a number of conditions which must be met
to give effect to the merger including but not limited to the
following:
- the receipt of various regulatory approvals;
- the approval of the Agreement by the shareholders of the
Company and the shareholders of the acquired companies;
and
- due diligence by both the Company and the acquired
companies.
If the agreement is consummated, the Company will account for the
acquisition using the purchase method.
The estimated purchase price based on the recent trading history of
the Company's common shares is approximately $12 million.
3. SALE OF CANADIAN PETROLEUM AND NATURAL GAS INTERESTS
On May 30, 1997 and with an effective date of January 1, 1997, the
Company closed the sale of a substantial portion of its Canadian
petroleum and natural gas interests for cash proceeds of $16,750,000.
4. NOTE RECEIVABLE
The note is due on June 18, 2000, bears no interest, is repayable in
four equal installments of $90,780 U.S. which commenced June 18, 1997
and is secured by a mortgage on certain U.S. oil and gas properties.
- --------------------------------------------------------------------------------
<PAGE> 10
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
June 30, 1998
(unaudited) Page 10
- --------------------------------------------------------------------------------
5. CASH HELD IN TRUST
As a condition of a U.S. oil and gas property acquisition, the
Company is obliged to keep cash on deposit to fund future abandonment
costs.
6. ADVANCES TO OPERATORS
The Company maintains joint accounts with operators engaged by the
Company to perform exploration and development work on its petroleum
and natural gas interests.
7. PETROLEUM AND NATURAL GAS INTERESTS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Petroleum and natural gas interests $ 36,133,874 $ 34,477,861
Other equipment 227,734 213,436
----------- -----------
36,361,608 34,691,297
Accumulated depreciation, depletion and write-offs (18,808,516) (16,995,329)
----------- -----------
$ 17,553,092 $ 17,695,968
============ ============
</TABLE>
As at June 30, 1998, unproved properties with capitalized costs of
$2,911,126 (December 31, 1997 - $2,911,126) were not subject to
depletion. It is expected that these properties will be evaluated
over the next one to three years.
8. LONG-TERM DEBT
Revolving $5,000,000 (U.S.) bank credit line, with a borrowing base
of $3,250,000 (U.S.) drawn to $100,000 (U.S.) bearing interest
monthly at U.S. Base Rate plus 1.5%, secured by a revolving note due
May 15, 1999 and U.S. oil and gas properties.
9. SHARE CAPITAL
(a) Authorized
The authorized share capital consists of 100,000,000 common shares
without par value.
(b) Issued
<TABLE>
<CAPTION>
Number of Share
Shares Capital
------ -------
<S> <C> <C>
Balance at June 30, 1998 and December 31, 1997 11,002,346 $30,891,689
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 11
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
June 30, 1998
(unaudited) Page 11
- --------------------------------------------------------------------------------
9. SHARE CAPITAL (CONTINUED)
(c) Reserved in respect of options
<TABLE>
<CAPTION>
Exercise Exercisable
Holder Number Price On or Before
------ ------ ----- ------------
<S> <C> <C> <C>
Options
Company directors and employees 52,500 $3.50 June 2, 1999
505,000 $4.15 June 12, 1999
100,000 $4.05 July 25, 1998
Non-related persons 125,000 $3.50 June 2, 1999
------- ----- ------------
782,500
</TABLE>
(d) Net income (loss) per share
Net income (loss) per share has been calculated based on the
following weighted average numbers of shares outstanding:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Weighted average number of shares 11,002,346 11,313,653
---------- ----------
</TABLE>
10. RELATED PARTY TRANSACTIONS
In the six months ended June 30, 1998, the Company was charged
consulting expenses of $210,000 (1997- $267,690) by companies related
by virtue of common directors. Office expense includes $59,554 (1997
- $58,800) paid to a related company.
11. RECONCILIATION BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN
CANADA AND THE UNITED STATES
(a) Accounting for income taxes
Under the asset and liability method of Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), deferred income tax assets
and liabilities, reduced by a valuation allowance to an amount more
likely than not to be recovered, are measured using enacted tax rates
for the future income tax consequences attributable to differences
between the financial statement carrying amount of existing assets
and liabilities and their respective tax bases. The approximate
effect of each component of deferred income tax assets and
liabilities at June 30, 1998 is as follows:
<PAGE> 12
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
June 30, 1998
(unaudited) Page 12
- --------------------------------------------------------------------------------
11. RECONCILIATION BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN
CANADA AND THE UNITED STATES (CONTINUED)
<TABLE>
<S> <C>
Net operating losses deferred tax assets $ 5,137,000
Petroleum and natural gas interests deferred tax liabilities (44,000)
-----------
Net deferred tax assets 5,093,000
Less valuation allowance (5,093,000)
Deferred tax assets, net of valuation allowance $ --
-----------
</TABLE>
The valuation allowance equals the entire amount of the net deferred
tax assets as the recognition criteria for deferred tax assets has
not been met. Therefore, there is no effect of applying the
provisions of SFAS 109 on the Company's financial statements.
(b) Consolidated statements of changes in financial position
Under United States accounting principles, the following items are
not considered to be cash items and would not appear in the
consolidated statements of changes in financial position:
(i) the conversion of debentures
(ii) the acquisition of subsidiary in exchange for the issuance of
shares; and
(iii) the issuance of shares on settlement of consulting fees and
directors fees payable.
As a result, cash flows from operating, financing and investing
activities would be presented as follows under United States
accounting principles:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from:
Operating activities $ 981,510 $ (303,001)
Financing activities (2,204,548) (6,963,305)
Investing activities (2,051,301) 13,932,082)
------------ ------------
Increase (Decrease) in cash $ (3,274,339) $ 6,665,776
------------ ------------
</TABLE>
Under United States accounting principles, the following
supplementary cash flow information would be disclosed:
<TABLE>
<CAPTION>
1998 1997
------ --------
<S> <C> <C>
Interest paid $6,453 $143,244
------ --------
Income taxes paid -- --
------ --------
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 13
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
June 30, 1998
(unaudited) Page 13
- --------------------------------------------------------------------------------
11. RECONCILIATION BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN
CANADA AND THE UNITED STATES (CONTINUED)
(c) Consolidated statements of operations and deficit
There are no significant or material differences between Canadian and
U.S. GAAP.
(d) Balance sheets
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Deficit reported $ (7,009,969) $ (5,761,709)
Reduction of common share stated capital (10,602,526) (10,602,526)
----------- -----------
Deficit for U.S. GAAP $(17,612,495) $(16,364,235)
============ ============
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- ----------
<S> <C> <C>
Share capital reported $30,891,689 $30,891,689
Reduction of common share stated capital 10,602,526 10,602,526
---------- ----------
Share capital for U.S. GAAP $41,494,215 $41,494,215
=========== ===========
</TABLE>
The reduction of common share stated capital by off-setting an
accumulated deficit against share capital is not allowed under U.S.
GAAP.
(e) Shareholders' equity under U.S. GAAP
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Opening shareholders' equity under U.S. GAAP $ 25,738,202 $ 30,672,428
Net income (loss) for U.S. GAAP (1,248,260) (4,035,220)
Net share capital issued (repurchased) -- (899,006)
------------ ------------
Closing shareholders' equity under U.S. GAAP $ 24,489,942 $ 25,738,202
============ ============
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 14
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
June 30, 1998
(unaudited) Page 14
- --------------------------------------------------------------------------------
12. LITIGATION
(A) S.W. HOLMWOOD
The Company is a party to litigation in the United States District
Court, Western District of Louisiana (Amoco Production Company vs.
Texas Meridian Resource Exploration, Inc.) by virtue of its master
participation agreement with Meridian Resource Corporation (formally
known as Texas Meridian Resource Corporation).
The litigation enures from a joint exploration agreement between the
plaintiff and defendant whereby adjoining petroleum and natural gas
leases were pooled on a 50% / 50% joint ownership basis. Two
producing oil wells have been drilled and placed on production. The
plaintiff is claiming a breach of trust and demands surrender of 100%
of the wells ownership on a retroactive basis and has received a
favorable summary judgement. The operator pending the court's
granting of damages intends to appeal the judgement.
The Company holds a beneficial 4% working interest. Since the outcome
of this litigation is not determinable, the Company has recorded 100%
of the cumulative net operating income to date aggregating to
$1,047,664 as Revenue in Dispute.
(B) WILDHAY
The Company is party to a statement of claim and counterclaim with a
drilling contractor in the Judicial District of Calgary, Court of
Queen's Bench, Alberta. The nature of this litigation is based on a
contract wherein the drilling contractor drilled a well on behalf of
the Company and a joint venture partner. The working interest
participants are demanding $2,738,568 in throw away costs and
expenses plus $1,001,755 for loss of the original well as well as
$5,932,000 of reservoir damage from the drilling contractor. The well
in question is reflected in property and equipment at $1.1 million
and an additional $1.2 million is included as a receivable from the
Company's joint venture partner.
13. SUBSEQUENT EVENT
On July 27, 1998, the company issued a draw of U.S. $550,025 under
the terms of the Plan and Agreement of Merger (see note #2).
- --------------------------------------------------------------------------------
<PAGE> 15
PART I - FINANCIAL INFORMATION CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's financial statements are stated in Canadian Dollars (CDN$) and are
prepared in accordance with Canadian Generally Accepted Accounting Principles.
The value of the U.S. Dollar in relation to the Canadian Dollar was CDN $1.5220
as at August 6, 1998.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Working Interest Quarter Ended June 30 1998 1998
- -----------------------------------------------------------------------------------------
Percentage
Increase Increase
CDN$ 1998 1997 (Decrease) (Decrease)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Volume
Natural Gas (mcf) 147,272 327,900 (180,628) (55)%
Oil (bbls) 27,306 40,412 (13,106) (32)%
Average Price per Unit
Commodity Pricing
Natural Gas (mcf) $ 3.45 $ 3.10 $ 0.35 11 %
Oil (bbls) $ 18.47 $ 27.01 $ (8.54) (32)%
Gross Revenue,
Natural Gas $ 524,444 $1,017,642 $ (493,198) (48)%
Oil $ 504,344 $1,091,392 $ (587,048) (54)%
- -----------------------------------------------------------------------------------------
Total Revenue $1,028,788 $2,109,034 $1,080,246
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</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
The Company realized a net loss of $459,855 for the second quarter of 1998 or
$0.04 per share as compared to a profit of $211,235 or $0.02 per share in the
second quarter of 1997. The weighted average of shares in the first quarter of
1998 was 11,002,346 as compared to 11,299,685 in 1997.
The decline in financial results is due to the following factors:
- decline in commodity prices of approximately 30% over the same reporting
period last year
- the Company's decision to curtail exploration and development activities
pending the merger with American Explorer, L.L.C.
- continuing decline in oil production at East Cameron.
OPERATING REVENUES
Gross revenue decreased by $1,080,246 to $1,028,788 from $2,109,034 a year
earlier, a decline of 51%. Actual production on a BOE basis (6 mcf of natural
gas equal 1 barrel of oil) fell 46% whereas commodity prices increased 11% for
natural gas but declined 32% for crude oil.
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<PAGE> 16
OPERATING EXPENSES
Oil and natural gas operating expenses were $230,851 as compared to $253,741 a
year earlier. On a BOE equivalent basis, operating expenses increased to $4.45
per BOE from $2.67 BOE in the second quarter of 1997. This increase reflects
lower productivity at Back Ridge and the elimination of the highly productive
S.W. Holmwood wells which were reflected in 1997 production.
INTEREST AND OTHER INCOME
Interest income increased to $84,402 from $47,927 a year earlier whereas
interest expense and bank charges fell to $3,809 from $58,836 in the first
quarter of 1997. This improvement is due to the cash proceeds on the sale of
Canadian assets which were received on May 30, 1997 as well as the loan to
American Explorer, L.L.C. which bears a 10% interest rate.
The foreign exchange gain of $491,872 as compared to a foreign exchange loss of
$30,738 a year earlier is due to the Canadian dollar decline against the US
dollar from $0.70592 to $0.67953 from March 31, 1998 to June 30, 1998.
DEPLETION, DEPRECIATION AND AMORTIZATION
The depletion and depreciation was $1,042,504 in the second quarter of 1998 as
compared to $828,795 a year earlier. On a BOE basis the 1998 expense was $20.10
per BOE as compared to $8.72 per BOE a year earlier (this calculation is based
on 6 MCF of natural gas equals 1 barrel of oil). A provision of $177,439 for
the Trinidad Onshore Study as well as a provision of $34,412 for the Ningxia,
China evaluation have been included. On a BOE basis second quarter depletion
and depreciation is $16.02 per BOE having excluded these two provisions.
The amortization expense of $17,082 is identical to a year earlier as it
reflects the amortization of costs on a straight line basis.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses of $488,739 reflect a modest decline of 5%
from $517,014 a year earlier. On a BOE basis, converting natural gas to its
equivalent barrels of oil at a ratio of 6 mcf equals 1 barrel, general and
administrative expenses increased to $9.43 per BOE as compared to $5.44 per BOE
in 1997 an increase of 73%. This increase on a BOE basis is a result of the
decline in production from the second quarter of 1997.
BALANCE SHEET
Total assets as at June 30, 1998 were $26,357,146 as compared to $28,143,343 as
at December 31, 1997. Petroleum and natural gas interests declined marginally
by $354,722 since the beginning of the fiscal year as capital expenditures of
$1,560,498 were offset by depletion and depreciation expenses of $1,915,218.
Working Capital decreased to $4,093,968 from $7,856,820 as at December 31,
1998. Shareholders' Equity has decreased by $1,460,116 reflecting the
cumulative loss for the first six months of 1998.
Certain of the foregoing statements may be deemed "forward-looking statements"
within the meaning of the Securities Exchange Act of 1934. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, there can be no assurance that such expectations will prove to have
been correct. Certain risks and uncertainties inherent in the Company's
business are set forth in the filings of the Company with the Securities and
Exchange Commission. These risks include price changes for oil and gas, risks
regarding estimates of reserves, production risks, governmental regulations and
general risks regarding the exploration for, and the production of, oil and gas
reserves.
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<PAGE> 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
All matter presented at the Annual General Meeting of shareholders held on June
30, 1998 were adopted.
The Company has called a special meeting of shareholders to be held on August
21, 1998 in Vancouver, British Columbia for the following purposes:
1. To approve, by a majority of disinterested shareholders, the Plan and
Agrement 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;
2. To approve, as a special resolution, the continuation of the Company
into the State of Delaware and adoption of a new Certificate of Incorporation;
3. To elect as additional directors for the ensuing year, Charles T.
Goodson, Alfred J. Thomas, II, Ralph J. Daigle, Robert Brooksher and Daniel G.
Fournerat;
4. To approve, as a special resolution, the change of the Company's name
to PetroQuest Energy, Inc.;
5. To approve, by a majority of disinterested shareholders, 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. To approve, by a majority of disinterested shareholders, 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. To approve, by a majority of disinterested shareholders, the
acquisition of a 5% working interest in the Valentine prospect;
8. To approve the transaction of such other business as may properly come
before the Meeting.
A Proxy Statement/InformationCircular/Prospectus was mailed on or about July
20, 1998 to shareholders of record at July 2, 1998
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Whereas the Company reported on a Form 8-K filed February 28, 1998 that it had
entered into a definite merger agreement with American Explorer, L.L.C. of
Lafayette, Louisiana, and in accordance with regulatory disclosure requirements
on April 17, 1998, it filed pro forma financial statements for the 1996 and
1997 fiscal years reflecting the combination of the Company with American
Explorer, L.L.C. On June 2, 1998 a Form 8-K/A-1 was filed to amend the April
17, 1998 filing to include the results of operations through the March 31, 1998
quarter end.
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
OPTIMA PETROLEUM CORPORATION AND SUBSIDIARIES
(Registrant)
Date: August 10, 1998 By: /s/R.L. Hodgkinson
Robert L. Hodgkinson
President-CEO
By: /s/ R.P. Bourgeois
Ronald P. Bourgeois
Chief Financial Officer-Secretary
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