<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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, 1999
[ ] 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
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PETROQUEST ENERGY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 98-0115468
<S> <C>
(State of Incorporation) (I.R.S. Employer Identification No.)
625 E. KALISTE SALOOM RD., LAFAYETTE, LOUISIANA 70508
(Address of principal executive offices) (Zip code)
</TABLE>
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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 12, 1999, there were 23,626,347 shares of the Registrant's
Common Stock, par value $.001 per share, outstanding.
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PETROQUEST ENERGY, INC.
INDEX
<TABLE>
<CAPTION>
Page
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Part I
<S> <C>
Item 1. Financial Statements:
Consolidated Balance
Sheets as of September 30, 1999
and December 31, 1998........................................................3
Consolidated Statements of
Operations for the three- and
nine-month periods ended
September 30, 1999 and 1998..................................................4
Consolidated Statements of Stockholders' Equity.................................5
Consolidated Statements of
Cash Flows for the nine-months
ended September 30, 1999 and 1998............................................6
Notes to Consolidated Financial Statements......................................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................10
Item 3. Quantitative and Qualitative disclosures about market risk.......................15
Part II
Item 1. Legal Proceedings................................................................16
Item 2. Changes in securities and use of proceeds .......................................16
Item 5. Other Information ...............................................................16
Item 6. Exhibits and Reports on Form 8-K.................................................17
</TABLE>
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PETROQUEST ENERGY, INC.
Consolidated Balance Sheets
(amounts in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 858 $ 1,081
Accounts Receivable 2,969 1,016
Other Current Assets 191 177
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Total Current Assets 4,018 2,274
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Oil and Gas Properties
Oil and Gas Properties, Full Cost Method 48,602 42,755
Unevaluated Oil and Gas Properties 6,415 5,747
Accumulated Depreciation,
Depletion and Amortization (34,037) (31,079)
------------- -------------
Net Oil and Gas Properties 20,980 17,423
Plugging and Abandonment Escrow 215 221
Other Assets 373 148
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$ 25,586 $ 20,066
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable & Accrued Liabilities $ 4,441 $ 2,330
Current Portion of Long-Term Debt 941 2,400
------------- -------------
Total Current Liabilities 5,382 4,730
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Long-term Debt 2,659 1,300
Other Liabilities 700 700
Stockholders' Equity
Common Stock 24 19
Paid-in Capital 48,345 43,795
Accumulated Deficit (31,524) (30,478)
------------- -------------
Total Stockholders' Equity 16,845 13,336
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$ 25,586 $ 20,066
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
3
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PETROQUEST ENERGY, INC.
Consolidated Statements of Operations
(Unaudited)
(amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Oil and Gas Sales $ 2,557 $ 760 $ 5,295 $ 1,860
Interest Income 19 10 59 101
------------ ------------ ------------ ------------
2,576 770 5,354 1,961
------------ ------------ ------------ ------------
Expenses:
Lease Operating Expenses 802 151 1,777 508
Production Taxes 105 28 262 120
Depreciation, Depletion and Amortization 1,046 521 3,058 1,814
Full Cost Ceiling Write-Down -- 11,233 -- 11,233
General and Administrative 344 840 1,055 1,393
Interest Expense 114 23 305 27
Foreign Exchange (Gain)/Loss (47) (49) (57) (137)
------------ ------------ ------------ ------------
Income (Loss) from Operations 212 (11,977) (1,046) (12,997)
Income Tax Expense -- 1 -- 10
------------ ------------ ------------ ------------
Net Income (Loss) $ 212 $ (11,978) $ (1,046) $ (13,007)
============ ============ ============ ============
Earnings (Loss) Per Common Share
Basic .01 (.89) (.05) (1.10)
============ ============ ============ ============
Diluted .01 (.89) (.05) (1.10)
============ ============ ============ ============
Average shares outstanding 21,322,825 13,466,067 20,906,937 11,837,023
============ ============ ============ ============
Average shares outstanding assuming dilution 21,519,395 13,524,579 20,981,464 11,957,868
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
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PETROQUEST ENERGY, INC.
Consolidated Statements of Stockholders' Equity
(Unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
Total
Common Paid-In Retained Stockholders'
Stock Capital Deficit Equity
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
December 31, 1998 $ 19 $ 43,795 $ (30,478) $ 13,336
Options Exercised -- 47 -- 47
Sale of Common Stock 5 4,503 -- 4,508
Net Loss -- -- (1,046) (1,046)
------------- ------------- ------------- -------------
September 30, 1999 $ 24 $ 48,345 $ (31,524) $ 16,845
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
5
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PETROQUEST ENERGY, INC.
Consolidated Statements of Cash Flows
(Unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1999 1998
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<S> <C> <C>
Cash Flows from Operating Activities:
Net (Loss) $ (1,046) $ (13,007)
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation, Depletion and Amortization 3,058 13,047
Changes in Working Capital Accounts:
Accounts Receivable (1,953) (180)
Other Current Assets (14) (14)
Accounts Payable & Accrued Liabilities 2,111 (205)
Plugging and Abandonment Escrow 6 (10)
Other (325) 274
------------ ------------
Net Cash Provided By (Used in) Operating Activities 1,837 (95)
------------ ------------
Cash flows from Investing Activities:
Investment in Oil and Gas Properties (8,383) (1,633)
Sale of Oil and Gas Properties 1,868 --
Cash Cost of American merger transaction, -- (1,800)
Net of Cash received ------------ ------------
Net Cash (Used in) Investing Activities (6,515) (3,433)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from Borrowings 5,900 1,600
Repayment of Debt (6,000) (210)
Sale of Common Stock and Warrants 4,508 --
Proceeds from Option Exercises 47 --
------------ ------------
Net Cash Provided by Financing Activities 4,455 1,390
------------ ------------
Net Increase (Decrease) in Cash (223) (2,138)
Cash Balance Beginning of Period 1,081 4,455
------------ ------------
Cash Balance End of Period $ 858 $ 2,317
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 305 $ 8
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
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PETROQUEST ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INTERIM FINANCIAL STATEMENTS -
The consolidated financial statements of PetroQuest Energy, Inc. (the
"Company") at September 30, 1999 and for the three- and nine- month periods then
ended are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and operating results for the
interim period. The financial statements reflect the results of the Company and
its predecessor entity, Optima Petroleum Corporation ("Optima"), for all periods
presented. The 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 the Company's Annual Report on Form 10-K for the year
ended December 31, 1998. The results of operations for the three- and nine-
month periods ended September 30, 1999 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 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 7,335,001 shares of the Company's common stock, issued 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 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 had the transaction occurred January 1, 1998.
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<TABLE>
<CAPTION>
Proforma Results for the
Nine Months Ended September 30, 1998
------------------------------------
(Unaudited)
<S> <C>
Revenues $ 6,088
=========
Net Loss $ (5,234)
=========
Loss per common share:
Basic (0.28)
=========
Diluted (0.28)
=========
</TABLE>
NOTE 3 - EARNINGS PER SHARE -
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 period. 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 approximately 987,000 shares and 58,512
shares in the third quarter of 1999 and 1998, respectively, and 971,835 shares
and 120,845 shares in the first nine months of 1999 and 1998, respectively.
Options and warrants which were considered antidilutive because the exercise
price of the options exceeded the average price for the applicable period
totaled 2,553,696 shares and 848,799 shares in the third quarter of 1999 and
1998, respectively, and 871,575 shares and 1,163,000 shares in the first nine
months of 1999 and 1998, respectively.
NOTE 4 - LONG-TERM DEBT -
There are no borrowings under the Company's reducing revolving line of
credit at September 30, 1999. The borrowing base is currently being
redetermined. Interest under the loan is payable monthly at prime plus 1/2%
(8 3/4% at September 30, 1999).
On April 21, 1999, the Company entered into a loan agreement for
non-recourse financing to fund completion, flow line and facility costs of its
High Island Block 494 property. The property is security for the loan. Interest
is payable at 12% and the lender receives a 2 1/2% overriding royalty interest
in the property. For the first three production months, all of the cash flow
from the property will be dedicated to payment of principal and interest on the
loan. Subsequently, 85% of the cash flow from the property (assuming certain
production levels) will be dedicated to debt service. The well began producing
during the first part of July 1999. Since payments are made based on production,
the current portion of the debt represents payments required from current
assets.
NOTE 5 - NEW ACCOUNTING STANDARDS -
In September 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
8
<PAGE> 9
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 is effective for the company during the first quarter
of the fiscal year 2001.
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 had 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 were operated by AEI and certain management
functions were performed by AEI. The officers of AEI are also the officers of
the Company. AEI charged the Company a management fee to cover its costs of
services for the Company ($600,000 for the four months ended December 31, 1998).
At December 31, 1998, the Company owed AEI approximately $1,053,000, which is
included in Accounts Payable. Effective January 1, 1999, the Company assumed the
operating and management functions from AEI, whose employees became employees of
the Company.
NOTE 7 - SALE OF COMMON STOCK AND WARRANTS -
In August, 1999 the Company received the funding of a private placement of
5 million units at a purchase price of $1.00 per unit for a total consideration
of $5,000,000 before fees and expenses. Net proceeds of $4,508,000 from sale of
the units was allocated between the stock and warrants based on their relative
fair market value on the date of the transaction. The proceeds from the private
placement will be used for drilling and exploration costs, delay rentals on oil
and gas leases and working capital and general corporate purposes.
Each unit sold in the private placement consists of one share of the
Company's common stock and one warrant exercisable to purchase one-half a share
of the Company's common stock. Each warrant is exercisable at any time through
the fourth year after issuance to purchase one-half of a share of the Company's
common stock at a per share purchase price of $1.25. In addition, the Company
issued to the placement agents of the units, warrants to purchase 500,000 shares
of the Company's common stock. The warrants received by the placement agents are
exercisable at any time for a period of five years to purchase one share of the
Company's common stock at a per share purchase price of $1.25 per share. The
Company has agreed to file a registration statement covering the resale of its
common stock underlying the units and the shares of its common stock issuable on
the exercise of the warrants.
NOTE 8 - 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
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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.
ITEM 2.
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 the 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 7,335,001 shares of the Company's common stock, issued 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 operating results of American have been consolidated in the
Company's statement of operations since September 1, 1998.
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<PAGE> 11
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- and nine- month
periods ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Production:
Oil (Bbls) 32,712 16,720 75,106 59,451
Gas (Mcf) 751,470 235,265 1,821,774 460,463
Total Production (Mcfe) 947,744 335,585 2,272,412 817,169
Sales:
Total oil sales $ 643,114 $ 212,026 $1,203,302 $ 797,285
Total gas sales 1,902,867 547,722 4,053,141 1,062,768
Average sales prices:
Oil (per Bbl) $ 19.66 $ 12.68 $ 16.02 $ 13.41
Gas (per Mcf) 2.53 2.33 2.22 2.31
Per Mcfe 2.69 2.26 2.31 2.28
</TABLE>
The net income totaled $212,000 for the quarter ended September 30, 1999 as
compared to the net loss of $12 million for the same quarter of 1998. Net loss
for the nine months ended September 30, 1999 was approximately $1,046,000 as
compared to net loss of approximately $13 million for the first nine months of
1998. The income in 1999 compared to the loss in 1998 for the third quarter and
the nine months is primarily the result of the full cost ceiling write-down
associated with the merger with American, (see "Full Cost Ceiling Write-Down")
and non-recurring cost associated with the merger in 1998. In addition,
production has increased as the result of the addition of the American wells and
new wells drilled and placed on production.
On a thousand cubic feet equivalent (Mcfe) basis, third quarter 1999
production volumes increased 182% over third quarter 1998 production volumes.
For the nine months ended 1999, the increase was 178% compared to the nine
months in 1998. This is due to the merger with American and the addition of the
CL&F #12 in the Turtle Bayou Field and the C-1 well at High Island 494. The CL&F
#12 discovery occurred in the fourth quarter of 1998 and commenced production in
December 1998. The C-1 well was placed on production in early July, 1999. The
properties previously owned by American produced 185,000 Mcfe and 945,000 Mcfe
for the three months and nine months ended September 30, 1999, respectively. The
CL&F #12 produced 38,000 Mcfe and 226,000 Mcfe for the three month and nine
month periods ended September 30, 1999, respectively. The C-1 well produced
420,000 Mcfe since commencing production this quarter.
11
<PAGE> 12
Oil and gas sales during the third quarter of 1999 increased 236% to $
2,557,000, as compared to third quarter 1998 revenues of $760,000. For the first
nine months of 1999, oil and gas sales increased 185% to $5,295,000, compared to
oil and gas revenues of $1,860,000 during the 1998 period. These increases
resulted from the production increases discussed above. Third quarter higher
product prices also contributed to the increase. Stated on a Mcfe basis, unit
prices received during the third quarter of 1999 were 19% higher than the prices
received during the comparable 1998 period, and were basically unchanged for the
nine month periods.
Lease operating expenses for the third quarter of 1999 increased to
$802,000 from $151,000 during the third quarter of 1998 due primarily to the
American merger and the addition of the related properties. Also, operating
expenses were added as the result of the new discoveries discussed above.
Operating expenses for the nine months ended September 30, 1999 increased to
$1,777,000 from $508,000 during the nine months ended September 30, 1998. On a
Mcfe basis, operating expenses for the third quarter increased from $ .45 per
Mcfe in 1998 to $ .85 in 1999 and increased from $ .62 per mcfe for the first
nine months of 1998 to $ .78 for the first nine months in 1999.
General and administrative expenses during the third quarter of 1999
totaled $344,000 as compared to expenses of $840,000 during the 1998 quarter.
Not included in the 1999 amount is $320,000 which was capitalized as related
directly to the acquisition, exploration and development effort. For the nine
month period ended September 30, 1999, general and administrative expenses
totaled $1,055,000, (excluding $891,000 which was capitalized), compared to
$1,393,000 for the same period in 1998. In total, general and administrative
expenses increased in 1999 due to additional staffing levels related to the
generation and operation of properties. The third quarter of 1998 included
non-recurring costs associated with closing the Company's Vancouver office and
termination of Canadian consultants and employees which was more than the cost
of the increased staffing in 1999.
Interest expense increased due to the addition of the debt associated with
the American merger and the addition of the non-recourse financing associated
with the completion, flow line and facility cost of High Island Block 494
property.
Depreciation, depletion and amortization ("DD&A") expense for the nine
months ended September 30, 1999 increased 69% from the 1998 period, resulting
from the additions to property cost on the balance sheet for the American
properties. On a Mcfe basis, which reflects the changes in production, the DD&A
rate for the first nine months of 1999 was $1.35 per Mcfe compared to $2.22 per
Mcfe for the same period in 1998. For the third quarter of 1999, DD&A per mcfe
was $1.10 compared to $1.55 for the comparable period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital and Cash Flow. Working capital (before considering the
current portion of debt) decreased from $0.1 million deficit at December 31,
1998 to a deficit of $0.4 million at September 30, 1999. This was caused
primarily by funds expended for principal payments on debt and oil and gas
properties.
The Company has no borrowings under its reducing revolving line of credit.
The borrowing base of this facility is currently being redetermined. Interest
under the loan is payable monthly at prime plus 1/2% (8 3/4% at September 30,
1999).
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On April 21, 1999, the Company entered into a loan agreement for
non-recourse financing to fund completion, flow line and facility costs of its
High Island Block 494 property. Interest is payable at 12% and the lender
received a 2 1/2% overriding royalty interest in the property as security for
the loan. For the first three production months, all of the net cash flow from
the property will be dedicated to payment of principal and interest on the loan.
Subsequently, 85% of the net cash flow from the property (assuming certain
production levels) will be dedicated to debt service. The well began producing
during the first part of July 1999.
For the first nine months of 1999, net cash flow from operations before
working capital changes increased from a negative $266,000 in 1998 to $2,012,000
in 1999. This was the result of the addition of the American properties, the
CL&F #12 discovery in the Turtle Bayou Field and the C-1 Well discovery at High
Island 494.
In August, the Company completed a private placement of 5 million units at
a purchase price of $1.00 per unit for a total consideration of $5,000,000
before fees and expenses. Net proceeds of $4,508,000 from the private placement
will be used for drilling and exploration costs, delay rentals on oil and gas
leases, and working capital and general corporate purposes. Each unit sold in
the private placement consists of one share of the Company's common stock and
one warrant exercisable to purchase one-half a share of the Company's common
stock. Each warrant is exercisable at any time through the fourth year after
issuance to purchase one-half of a share of the Company's common stock at a per
share purchase price of $1.25. In addition, the Company issued to the placement
agents of the units, warrants to purchase 500,000 shares of the Company's common
stock. The warrants received by the placement agents are exercisable at any time
for a period of five years to purchase one share of the Company's common stock
at a per share purchase price of $1.25 per share. The Company has agreed to file
a registration statement covering the resale of its common stock underlying the
units and the shares of its common stock issuable on the exercise of the
warrants. Funds not expended in the third quarter for the purposes stated above
were used to pay down the Company's reducing revolving line of credit.
Management believes the funds received from the private placement will be
sufficient in the near term to fund exploration activities, operations and debt
service. Future activities will depend on the success of current exploration and
potential additional financing which may be obtained including the sale of
additional 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 has assessed the Y2K risks associated with its
significant customers and suppliers.
The Company has evaluated its IT Systems for Y2K compliance. As part of
this evaluation, the Company contracted third-party consultants to assist in the
identification and replacement of non-compliant IT Systems. During 1998, the
Company modified all IT Systems for Y2K compliance. These modifications were
completed in the third quarter of 1999.
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The Non-IT Systems were assessed to determine which systems would be
affected by Y2K issues. All necessary replacements or modifications have been
made.
The assessment of third parties has the primary purpose of determining any
disruptions in operations due to non-compliance by an outside organization. This
was determined by contacting the Company's suppliers and customers to determine
their level of Y2K compliance and the steps they are taking towards compliance.
Based on the responses thus far, no corrective measures are necessary.
Total costs incurred to-date for consultants, software and hardware
applications for Y2K compliance are approximately $40,000. No additional costs
are anticipated. The Company does not separately account for the internal costs
incurred for its Y2K Compliance efforts.
Based on 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
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.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
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
14
<PAGE> 15
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.
Item 3. DISCLOSURE ABOUT MARKET RISKS
The Company's indebtedness under its line of credit is variable rate
financing. The Company believes that its exposure to market risk relating to
interest rate risk is not material. The Company believes that its business
operations are not exposed to market risks relating to foreign currency exchange
risk or equity price risk.
Price Risk
The Company's revenues are derived from the sale of its crude oil and-
natural gas production. Based on projected annual sales volumes for the
remaining three months of 1999, a 10% decline in the prices the Company receives
for its crude oil and natural gas production would have an approximate $350,000
impact on the Company's revenues.
15
<PAGE> 16
PART II
Item 1. LEGAL PROCEEDINGS
WILDHAY. In the Company's report on Form 10-K filed on March 31, 1999, the
Company disclosed that it was a party to court proceedings in the Court of
Queen's Bench of the Province of Alberta. These proceedings were commenced on
May 13, 1996 by a drilling contractor, Artisan Corporation, relative to the
drilling of a well on behalf of the Company and a joint venture partner. The
Company defended the proceedings and filed a counter claim for breach of
contract against Artisan Corporation and claims of negligence against Artisan
Corporation and Tuboscope Vetco Canada Inc. for an amount which exceeded the
claim of the drilling contractor. The Company recently entered into a settlement
agreement with Artisan Corporation and Tuboscope Vetco Canada Inc. pursuant to
which all claims of the parties to the proceedings were released in
consideration for which the Company received approximately $560,000.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In August 1999, the Company completed a private placement of 5 million
units to accredited investors at a purchase price of $1.00 per unit for a total
consideration of $5,000,000 before fees and expenses. Each unit sold in the
private placement consisted of one share of the Company's common stock and one
warrant to purchase one-half a share of the Company's common stock. Each warrant
is exercisable at any time for a period of four years after the date of issuance
to purchase one-half a share of the Company's common stock at a purchase price
of $1.25 per share. In addition, the Company issued to the placement agents of
the units, warrants to purchase 500,000 shares of the Company's common stock.
The warrants received by the placement agents are exercisable at any time for a
period of five years after the date of issuance to purchase one share of the
Company's common stock at a purchase price of $1.25 per share. In addition, the
Company agreed to file a registration statement covering the resale of its
common stock underlying the units and the shares of its common stock issuable on
the exercise of the warrants received by the unit holders and the placement
agents within 60 days of the closing of the private placement.
Item 5. OTHER INFORMATION
On September 14, 1999 and October 20, 1999, respectively, Francisco A.
Garcia and William W. Rucks, IV were elected to the Company's board of
directors.
Since January 1, 1999, Mr. Garcia has been the Director of Corporate
Finance for Cramer Rosenthal McGlynn, LLC, an investment management firm. Since
July 1997, Mr. Garcia has been a director at Logimetrics, Inc., a broadband
wireless equipment and component manufacturer and seller. From 1987 to December
1997, he served as chairman of the board of Neptune Management Company, Inc., a
manager of funds and accounts investing in distressed securities, obligations
and consumer receivables. From 1991 until December 1998, Mr. Garcia served as
president to Nethuns, Inc., a firm engaged in financial advisory, consumer
finance and investment activities. Mr. Garcia is a citizen of Spain.
16
<PAGE> 17
Mr. Rucks has been a private venture capitalist-investor since September
1996. He has served as a director of OMNI Energy Services, Inc. since 1997. He
served as president and vice chairman of Ocean Energy, Inc. formerly Flores &
Rucks, Inc., from July 1995 until September 1996 and as its president and chief
executive officer from its inception in 1992 until July 1995. From 1985 to 1992,
Mr. Rucks served as president to FloRuxco, Inc. Before then, Mr. Rucks worked as
a petroleum landman with Union Oil of California in its Southwest Louisiana
District, serving as area land manager from 1981 to 1984.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial data schedule
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K on August 9, 1999
reporting the private placement of its securities.
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 15, 1999 By: /s/ Robert R. Brooksher
----------------------------------
Robert R. Brooksher
Chief Financial Officer and Secretary
(Authorized Officer and Principal
Financial Officer)
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------------------
<S> <C>
27.1 Financial data schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 858,000
<SECURITIES> 0
<RECEIVABLES> 2,969,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,018,000
<PP&E> 55,017,000
<DEPRECIATION> 34,037,000
<TOTAL-ASSETS> 25,586,000
<CURRENT-LIABILITIES> 5,382,000
<BONDS> 3,359,000
0
0
<COMMON> 24,000
<OTHER-SE> 16,821,000
<TOTAL-LIABILITY-AND-EQUITY> 25,586,000
<SALES> 5,295,000
<TOTAL-REVENUES> 5,354,000
<CGS> 0
<TOTAL-COSTS> 1,777,000
<OTHER-EXPENSES> 4,318,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 305,000
<INCOME-PRETAX> (1,046,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,046,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,046,000)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</TABLE>
