UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
COMMISSION FILE NUMBER 0-20928
-----------------------
VAALCO ENERGY, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 76-0274813
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4600 POST OAK PLACE
SUITE 309
HOUSTON, TEXAS 77027
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (713) 623-0801
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 13, 1998 there were outstanding 20,749,968 shares of Common
Stock, $.10 par value per share, of the registrant.
<PAGE>
VAALCO ENERGY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
September 30, 1998 (Unaudited) and December 31, 1997.....................3
Statements of Consolidated Operations (Unaudited)
Three months and nine months ended September 30, 1998 and 1997............4
Statements of Consolidated Cash Flows (Unaudited)
Three months and nine months ended September 30, 1998 and 1997............5
Notes to Consolidated Financial Statements...................................6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................................9
PART II. OTHER INFORMATION.................................................14
2
<PAGE>
VAALCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents .................................... $ 6,208 $ 32
Funds in escrow ......................................... 1,125 --
Receivables:
Trade ................................................. 547 --
Accounts with partners ................................ 1,422 --
Other ................................................. 791 --
Materials and supplies .................................. 366 --
Prepaid expenses and other .............................. 67 --
------------- -------------
Total current assets .................................. 10,526 32
------------- -------------
PROPERTY AND EQUIPMENT-SUCCESSFUL EFFORTS METHOD
Wells, platforms and other production facilities ........ 909 --
Investment in partnership ............................... 2,146 1,804
Undeveloped acreage and work in progress ................ 2,780 --
Equipment and other ..................................... 245 --
------------- -------------
6,080 1,804
Accumulated depreciation, depletion and amortization ...... (7) --
------------- -------------
Net property and equipment ............................ 6,073 1,804
------------- -------------
OTHER ASSETS:
Funds in escrow ....................................... 12,896 --
Advances - related party .............................. 37 --
Other investments ..................................... 1,569 --
Other long-term assets ................................ 128 --
------------- -------------
TOTAL ..................................................... $ 31,229 $ 1,836
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ........................................ $ 2,250 $ --
Accrued liabilities ..................................... 93 2,872
Deferred income tax - current ........................... 112 --
------------- -------------
Total current liabilities ............................. 2,455 2,872
------------- -------------
FUTURE ABANDONMENT COSTS .................................. 4,277 --
LONG TERM DEBT ............................................ -- 12,295
------------- -------------
Total liabilities ....................................... 6,732 15,167
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $25 par value, 500,000 shares authorized
10,000 and 0 shares issued and outstanding in 1998
and 1997, respectively ................................ 250 --
Common stock, $.10 par value, 100,000,000 and
50,000,000 authorized shares 20,755,363 and 15,571,922
shares issued of which 5,395 are in the treasury in
1998 and 1997, respectively ............................ 2,075 1,557
Additional paid-in capital .............................. 41,030 2,554
Accumulated deficit ..................................... (18,845) (17,429)
Less treasury stock, at cost ............................ (13) (13)
------------- -------------
Total stockholders' equity (deficit) .................. 24,497 (13,331)
------------- -------------
TOTAL ..................................................... $ 31,229 $ 1,836
============= =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
VAALCO ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales ............. $ 196 $ -- $ 407 $ --
OPERATING COSTS AND EXPENSES:
Production expenses ........... 192 -- 330 --
Depreciation, depletion and
amortization ................ 5 -- 7 --
General and administrative
expenses .................... 396 -- 903 --
--------- --------- --------- ---------
Total operating costs and
expenses .................. 593 -- 1,240 --
--------- --------- --------- ---------
OPERATING LOSS .................. (397) -- (833) --
OTHER INCOME (EXPENSES):
Interest income ............... 325 -- 627 1
Interest expense and financing
charges ..................... -- (381) (424) (1,057)
Partnership reserve ........... (68) -- (696) --
Other, net .................... 4 -- (44) --
--------- --------- --------- ---------
Total other income (expenses) 261 (381) (537) (1,056)
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES ........ (136) (381) (1,370) (1,056)
INCOME TAX ...................... 14 -- 46 --
--------- --------- --------- ---------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS ........... $ (150) $ (381) $ (1,416) $ (1,056)
========= ========= ========= =========
LOSS PER COMMON SHARE:
BASIC AND DILUTED ............. $ (0.01) $ (0.04) $ (0.08) $ (0.12)
WEIGHTED AVERAGE COMMON SHARES:
BASIC AND DILUTED ............. 20,750 8,865 18,635 8,865
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
VAALCO ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................... $ (1,416) $ (1,056)
Adjustments to reconcile net loss to net cash
Provided by (used in) operating activities:
Depreciation, depletion and amortization ......... 7 --
Partnership reserve .............................. 696 --
Accrued interest payable ......................... 424 1,057
Change in assets and liabilities that provided
(used) cash:
Funds in escrow ................................... (12,029) --
Trade receivables ................................ (301) --
Accounts with partners ........................... (1,508) --
Other receivables ................................ 65 --
Materials and supplies ........................... (8) --
Prepaid expenses and other ....................... 23 --
Accounts payable ................................. (271) --
Accrued liabilities .............................. (147) --
--------- ---------
Net cash (used in) provided by operating
activities ................................... (14,465) 1
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in merger with 1818 Oil Corp. ........ 15,812 --
Investment in partnership .......................... (1,039) (5,406)
Additions to property and equipment ................ (2,014) --
Investment in joint venture ........................ (1,216) --
Other .............................................. 103 --
--------- ---------
Net cash provided by (used in) investing
activities ................................... 11,646 (5,406)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings ........................... -- 4,055
Proceeds from the issuance of common stock ......... 8,995 1,351
--------- ---------
Net cash provided by financing activities ...... 8,995 5,406
--------- ---------
NET CHANGE IN CASH AND EQUIVALENTS ................... 6,176 1
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD .......... 32 31
--------- ---------
CASH AND EQUIVALENTS AT END OF PERIOD ................ $ 6,208 $ 32
========= =========
NON-CASH ITEMS:
Contribution of debt to additional paid in
capital ......................................... $ 15,591 --
========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
VAALCO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements of VAALCO Energy, Inc. and
Subsidiaries (collectively, "VAALCO" or the "Company"), included herein
are unaudited, but include all adjustments consisting of normal recurring
accruals which the Company deems necessary for a fair presentation of its
financial position, results of operations, changes in stockholders' equity
(deficit) and cash flows for the interim period. Such results are not
necessarily indicative of results to be expected for the full year. These
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-KSB for the
year ended December 31, 1997 and reports filed on Form 8-K.
On April 21, 1998 VAALCO consummated the acquisition of 1818 Oil Corp. for
10,000 shares of Convertible Preferred Stock, Series A. The Preferred
Stock is convertible into 27.5 million shares of Common Stock $0.10 par
value per share of VAALCO. As a result of the voting control 1818 Oil
Corp.'s shareholder obtained in the transaction, the 1818 Oil Corp.
acquisition has been accounted for as a reverse acquisition and 1818 Oil
Corp. is the acquiring entity for accounting purposes. The financial
statements presented for the prior year periods are those of 1818 Oil
Corp., not VAALCO the legal acquirer. The results of operations of VAALCO
are included in the accompanying financial statements for the periods
subsequent to the date of the acquisition. Accordingly, a comparison of
1998 and 1997 interim results is not meaningful. The legal name of the
registrant continues to be VAALCO Energy, Inc. (See Note 2 for pro forma
information.)
2. ACQUISITION OF 1818 OIL CORP.
In April 1998, the Company acquired from The 1818 Fund II, L.P., a fund
managed by Brown Brothers Harriman & Co., all of the outstanding capital
stock of 1818 Oil Corp. The assets of 1818 Oil Corp. at closing consisted
of a 7.5% limited partnership interest in Hunt Overseas Exploration
Company, L.P. ("Hunt") with book value of $2.8 million and $12.6 million
in cash. The $12.6 million of cash which 1818 Oil Corp. had at the time of
the acquisition has been pledged as cash collateral to secure a letter of
credit payable to Hunt for cash calls associated with the partnership. If
Hunt does not call such capital contributions as provided in the
partnership agreement of Hunt, the cash collateral will be released to the
Company.
Hunt has entered into production sharing contracts and other arrangements
which entitle it to explore for oil and gas, both onshore and offshore, on
34 million acres in countries including Argentina, Canada, Ethiopia,
Ghana, Niger and Peru. The general partner of Hunt is Hunt Overseas
Operating Company, a subsidiary of Hunt Oil Company. Hunt explores for
high risk, large reserve accumulations, generally targeting deposits which
pre-drilling seismic and other data indicate to have potential in excess
of 100 MMBOE.
Under the partnership agreement of Hunt, the Company will have an
obligation to contribute an estimated $5.1 million to fund its share of
the exploration costs of Hunt. In
6
<PAGE>
addition, if Hunt discovers oil or gas deposits, the Company will be
required to contribute an additional $7.5 million to fund appraisal costs.
The 1818 Oil Corp. acquisition has been accounted for as a reverse
acquisition and 1818 Oil Corp. is the acquiring entity for accounting
purposes. Therefore, because 1818 Oil Corp. is the acquirer for accounting
purposes, the financial statements for prior years are those of 1818 Oil
Corp., not VAALCO the legal acquirer. Accordingly, a comparison of 1998
and 1997 interim results is not meaningful. 1818 Oil Corp.'s equity as of
September 30, 1998 and December 31, 1997 have been retroactively charged
for the equivalent number of shares of VAALCO's common stock received in
the transaction. The difference between the par value of the common stock
of 1818 Oil Corp. and VAALCO has been charged to additional paid in
capital. In addition, at the time of the merger, 1818 Fund II, L.P.
contributed the debt owed to it by 1818 Oil Corp. as additional paid in
capital to 1818 Oil Corp.
The following summarizes pro forma financial information assuming the
acquisition of 1818 Oil Corp. had occurred on January 1, 1998.
(THOUSANDS OF DOLLARS)
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ ------------------
Total revenues.................... $ 562 $ 6,437
Loss before income taxes ......... (1,130) (12,128)
Net loss attributable to common
stockholders ..................... (1,162) (12,310)
Basic net loss per share ......... (0.06) (0.73)
Total assets ..................... 31,229 33,228
3. CURRENT DEVELOPMENTS
In September 1998, the Company elected to participate in a two well
exploration program in Lafourche Parish, Louisiana. The prospects are gas
prospects generated from a 3-D seismic survey over the leases. The Company
has taken a 15 percent working interest in the two prospects, and expects
its share of the cost of the well to be approximately $0.7 million. In
October 1998, drilling of the first prospect was completed and no
commercial gas zones were encountered. The second well of the program is
anticipated to spud in December 1998.
Concurrent with the acquisition with 1818 Oil Corp., the Company formed a
joint venture with Paramount Petroleum, Inc. to conduct exploration
activities primarily in the onshore Gulf Coast area, including Alabama,
Mississippi and Louisiana. The agreement entitles the Company to acquire,
at its option, 25% of any prospect generated by the joint venture, on a
non-promoted basis taking into account the Company's interest in the joint
venture. The joint venture agreement also provides for the sharing of any
revenues attributable to prospects generated by the joint venture and sold
to others. The Company has committed to expend $3.0 million to fund
overhead, leases, seismic and other amounts in connection
7
<PAGE>
with the joint venture, $2.0 million of which has been funded as of the
date of this filing. The Company has posted a letter of credit to secure
such commitment.
In July 1998, the Company elected to participate at a 15 percent working
interest level in the first prospect developed by the joint venture. The
well was drilled in October 1998 and did not encounter productive
hydrocarbon intervals and has been abandoned. The Company's share of the
cost of well was approximately $0.1 million
On April 30, 1998, the Company spudded the Etame No. 1 well offshore Gabon
on the Etame Block. The well was drilled to a depth of 8,000 feet and
resulted in an oil discovery, which tested at a rate of 3,700 barrels oil
per day on a 32/64's inch choke from perforations in the Gamba sandstone.
The Etame Block is a 3,073 square kilometer block, which in addition to
the Etame-1 discovery, contains two former Gulf Oil Company discoveries,
the North and South Tchibala discoveries. All three discoveries consist of
subsalt reservoirs that lie in approximately 250 feet of water depth, 40
miles offshore. The consortium plans to drill two delineation wells
beginning in December of this year on the Etame-1 structure to assist in
determining recoverable reserves. The Company's share of the cost of the
delineation program is expected to be approximately $1.7 million. The
Consortium is also conducting facilities studies, to determine optimum
development options and timing. The Company has a 17.9% working interest
in the well.
4. LONG-TERM DEBT
Pursuant to the subscription agreement entered into at the time of
organization of 1818 Oil Corp., capital contributions from The 1818 Fund
II, L.P. were apportioned between long term debt and paid in capital. The
percentages set forth in the agreement were 75 percent long-term debt and
25 percent capital contribution. Interest accrued on the long-term debt at
a rate of 14 percent per annum. There were no payments of interest by 1818
Oil Corp. to The 1818 Fund II, L.P. In April 1998, at the time of the
acquisition of 1818 Oil Corp. by VAALCO, the long-term debt and accrued
interest were contributed back to 1818 Oil Corp. by The 1818 Fund II, L.P.
and added to additional paid in capital.
5. EARNINGS PER SHARE
The weighted average common shares outstanding represent those of
historical VAALCO for the applicable periods.
8
<PAGE>
VAALCO ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIS REPORT INCLUDES "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED ("EXCHANGE ACT"). ALL STATEMENTS OTHER THAN
STATEMENTS OF HISTORICAL FACT INCLUDED IN THIS REPORT (AND THE EXHIBITS HERETO),
INCLUDING WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S FINANCIAL
POSITION AND ESTIMATED QUANTITIES AND NET PRESENT VALUES OF RESERVES, ARE
FORWARD LOOKING STATEMENTS. THE COMPANY CAN GIVE NO ASSURANCES THAT THE
ASSUMPTIONS UPON WHICH SUCH STATEMENTS ARE BASED WILL PROVE TO HAVE BEEN
CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THE COMPANY'S EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED IN THE
SECTION "RISK FACTORS" INCLUDED IN THE COMPANY'S FORMS 10-KSB AND OTHER PERIODIC
REPORTS FILED UNDER THE EXCHANGE ACT, WHICH ARE HEREIN INCORPORATED BY
REFERENCE. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY
QUALIFIED BY THE CAUTIONARY STATEMENTS.
INTRODUCTION
The Company's results of operations are dependent upon the difference between
prices received for its oil and gas production and the costs to find and produce
such oil and gas. Oil and gas prices have been and are expected in the future to
be volatile and subject to fluctuations based on a number of factors beyond the
control of the Company. The Company's production in the Philippines
(representing substantially all of the Company's oil production since 1994) is
from mature offshore fields with high production costs. The Company's margin on
sales from these fields (the price received for oil less the production costs
for the oil) is lower than the margin on oil production from many other areas.
As a result, the profitability of the Company's production in the Philippines is
affected more by changes in oil prices than production located in other areas.
The Company's results of operations are also affected by currency exchange
rates. As of January 1, 1998, the Company and Seaoil Corporation, the purchaser
of the Company's Philippines production, have agreed that 20% of the price of
oil paid by Seaoil to the Company will be paid in Philippine pesos at the
prevailing rate, up to 40 pesos to the dollar. A decrease in the exchange rate
of pesos to the dollar will have the effect of reducing the price received for
oil (in U.S. dollars). This reduction will be partially offset because certain
operating costs paid by the Company and Seaoil are paid in Philippine pesos.
A substantial portion of the Company's oil production is located offshore of the
Philippines. Since 1996, the Company has produced into barges, which transport
the oil to market. Due to weather and other factors, the Company's production is
generally highest during the first and fourth quarters of the year.
The Company uses the successful efforts method to account for its investment in
oil and gas properties whereby costs of productive wells, developmental dry
holes and productive leases are capitalized and amortized using the
units-of-production method based on estimated net proved reserves. The costs of
development wells are capitalized but charged to expense if and when the
9
<PAGE>
well is determined to be unsuccessful. Geological and geophysical costs and the
costs of carrying and retaining undeveloped properties are expensed as incurred.
CAPITAL RESOURCES AND LIQUIDITY
Historically, the Company's primary source of capital resources has been from
cash flows from operations, assets sales, private sales of equity, bank
borrowings and purchase money debt. During 1994 and 1995, the Company's primary
source of cash flow was sales of production from the West Linapacan "A" Field.
In 1996, 1997 and 1998, cash was derived predominantly from asset sales, the
sale of marketable securities, and the private placement of Common Stock. The
Company's primary uses of capital have been to fund acquisitions and to fund its
exploration and development operations.
The Company produces oil from the Matinloc and Nido fields in the South China
Sea, the Philippines. During the nine months ended September 30, 1998, total
production from the fields was approximately 214,000 gross barrels of oil.
Substantially all of the Company's crude oil and natural gas is sold at the well
head at posted or index prices under short-term contracts, as is customary in
the industry. The Company markets its share of crude oil under an agreement with
SeaOil, a local Philippines refiner. While the loss of this buyer might have a
material effect on the Company in the near term, management believes that the
Company would be able to obtain other customers for its crude oil.
On April 21, 1998 VAALCO consummated the acquisition of 1818 Oil Corp. for
10,000 shares of Convertible Preferred Stock, Series A. The assets of 1818 Oil
Corp. consisted at closing of a 7.5% limited partnership interest in Hunt with
book value of $2.8 million and $12.6 million in cash. As a result of the voting
control 1818 Oil Corp.'s shareholder obtained in the transaction, the 1818 Oil
Corp. acquisition has been accounted for as a reverse acquisition and 1818 Oil
Corp. is the acquiring entity for accounting purposes. The financial statements
presented for the prior year periods are those of 1818 Oil Corp., not VAALCO the
legal acquirer. The results of operations of VAALCO are included in the
accompanying financial statements for the periods subsequent to the date of the
acquisition. Accordingly, a comparison of 1998 and 1997 interim results is not
meaningful. The legal name of the registrant continues to be VAALCO Energy, Inc.
Hunt has entered into production sharing contracts and other arrangements which
entitle it to explore for oil and gas, both onshore and offshore, on 34 million
acres in countries including Argentina, Canada, Ethiopia, Ghana, Niger and Peru.
The partnership agreement of Hunt obligates the Company to contribute, when
requested by Hunt, up to $5.1 million to fund Hunt's exploration program. In
addition, if Hunt discovers oil, the Company may be required to contribute an
additional $7.5 million to fund the appraisal of the discovery. The $12.6
million of cash which 1818 Oil Corp. had at the time of the acquisition has been
pledged as cash collateral to secure a letter of credit payable to Hunt for cash
calls associated with the partnership. If Hunt does not call such capital
contributions as provided in the partnership agreement of Hunt, the cash
collateral will be released to the Company. No cash calls have been made to Hunt
since the acquisition of the partnership
10
<PAGE>
During 1998, the Company issued 5.2 million shares of Common Stock in a private
placement for proceeds of $9.0 million net of $0.8 million in fees and expenses.
These amounts will be used to fund the Company's capital expenditure program,
including investments in the Paramount joint venture and possible future
acquisitions, and for general corporate purposes.
The Company has committed to invest $3.0 million in the Paramount joint venture,
of which $2.0 million has already been funded as of the date of this filing.
There can be no assurance that the Company will realize a return on this
investment or that the Company's investment in the Paramount joint venture will
be successful.
The Company continues to seek financing to fund the development of existing
properties and to acquire additional assets. The Company will rely on the
issuance of equity and debt securities, assets sales and cash flow from
operations to provide the required capital for funding future operations. While
there can be no assurance the Company will be successful in raising new
financing, management believes the prospects the Company has in hand will enable
it to attract sufficient capital to fund required oil and gas activities.
During 1998, the Company anticipates that it will make capital expenditures on
oil and gas properties of approximately $7.0 million, including Hunt partnership
expenditures, and a contribution of $2.7 million to the Paramount joint venture.
The Company has postponed drilling plans for exploration activities in Brazos
County, Texas due to low oil prices. The anticipated capital expenditures
exclude potential acquisitions. The Company believes the total net proceeds of
$22.8 million received from the private placement and cash acquired in 1818 Oil
Corp. will be sufficient to fund the Company's capital budget through 1998.
The Company has evaluated the impact of the year 2000 processing issues
considering current financial and accounting software and systems utilized in
the U.S. and foreign operations. The U.S. and Gabon financial and accounting
systems were updated during the third quarter of 1998 at no expense to the
Company. The Philippines system is in the process of being upgraded to year 2000
compliance. It is expected the upgrade will be completed on or before March 31,
1999 at a total cost of approximately $20 thousand net to the Company. As of
September 30, 1998, the Company had incurred approximately $10 thousand of this
expense, with the majority of the remaining cost to be incurred by year-end. The
Company currently anticipates that it will not incur a material disruption of
operations relating to year 2000 processing issues. The Company is in the
process of preparing a contingency plan and assessing the readiness of material
suppliers, customers and other entities as it relates to year 2000 issues, which
it intends to complete by March 31, 1999. There can be no assurance that the
Company will not incur unexpected year 2000 costs or be adversely affected by
year 2000 issues of its suppliers, customers and other entities.
11
<PAGE>
RESULTS OF OPERATIONS
The 1818 Oil Corp. acquisition has been accounted for as a reverse acquisition
and 1818 Oil Corp. is the acquiring entity for accounting purposes. As such, the
financial statements presented for the prior year periods are those of 1818 Oil
Corp., not VAALCO, the legal acquirer. The results of operations of VAALCO are
included in the accompanying financial statements for the periods subsequent to
the date of the acquisition. Accordingly, a comparison of 1998 and 1997 interim
results in not meaningful. The legal name of the registrant continues to be
VAALCO Energy, Inc.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
REVENUES
Total revenues from oil and gas sales were $196 thousand for the three months
ended September 30, 1998. Substantially all revenues were from the Philippines.
EXPENSES
Total production expenses for the three months ended September 30, 1998 were
$192 thousand. General and administrative expenses amounted to $396 thousand.
OTHER INCOME (EXPENSES)
Interest income of $325 thousand was received from amounts on deposit. Interest
rates received were approximately 5.5% on invested funds. Partnership expenses
of $68 thousand were reserved associated with the Hunt partnership, consisting
of partnership exploration expense and general administrative costs. No
partnership expenses for dry holes were reserved during the quarter. As a result
of the debt restructuring at the time of the merger, interest expense was $0
compared to $381 thousand in the quarter ended September 30, 1997
NET LOSS
Net loss attributable to common stockholders for the three months ended
September 30, 1998 was $150 thousand, compared to a net loss attributable to
common stockholders of $381 thousand for the same period in 1997. The decreased
net loss in 1998 was due primarily to lower interest expense as a result of the
debt restructuring associated with the merger with 1818 Oil Corp.
12
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
REVENUES
Total revenues from oil and gas sales were $407 thousand for the nine months
ended September 30, 1998. Substantially all of these revenues were associated
with Philippines production from the effective date of the merger.
EXPENSES
Total production expenses for the nine months ended September 30, 1998 were $330
thousand. General and administrative expenses amounted to $903 thousand.
OTHER INCOME (EXPENSES)
Interest income of $627 thousand was received on amounts on deposit during the
nine months period ending September 30, 1998, compared to $1 thousand in the
comparable 1997 period. Interest rates received were approximately 5.5% on
invested funds. Partnership expenses of $696 thousand were reserved associated
with the Hunt partnership, consisting of partnership exploration expense and
general administrative costs. No partnership expenses for dry holes were
reserved during the period. As a result of the debt restructuring at the time of
the merger, interest expense was $424 compared to $1,057 thousand in the nine
months ended September 30, 1997
NET LOSS
Net loss attributable to common stockholders for the nine months ended September
30, 1998 was $1,416 thousand, compared to a net loss attributable to common
stockholders of $1,056 thousand for the same period in 1997. The increased net
loss in 1998 was mainly due to reserves for partnership expenses associated with
the Hunt venture.
UNAUDITED PRO FORMA INFORMATION
The following summarizes pro forma financial information assuming the
acquisition of 1818 Oil Corp. had occurred on January 1, 1998.
(THOUSANDS OF DOLLARS)
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------- -------------------
Total revenues ............. $ 562 $ 6,437
Loss before income taxes ... (1,130) (12,128)
Net loss attributable to
common stockholders ....... (1,162) (12,310)
Basic net loss per share ... (0.06) (0.73)
Total assets ............... 31,229 33,228
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not presently a party to any material legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
2. Plan of acquisition, reorganization , arrangement, liquidation or
succession
2.1 (a) Stock Acquisition Agreement and Plan of Reorganization dated
February 17, 1998 by and among the Company and the 1818 Fund II,
L.P.
2.2 (c) First Amendment to Stock Acquisition Agreement and Plan of
Reorganization, dated April 21, 1998
4. Instruments defining rights of security holders, including indentures
4.1(b) Restated Certificate of Incorporation
4.2(b) Certificate of Amendment to Restated Certificate of
Incorporation
4.3(b) Bylaws
4.4(b) Amendment to Bylaws
4.5(c) Designation of Convertible Preferred Stock, Series A
10. Material Contracts
10.1(d) Service Contract No. 6, dated September 1, 1973, among the
Petroleum Board of the Republic of the Philippines and Mosbacher
Philippines Corporation, ET AL, as amended.
10.2(d) Operating Agreement, dated January 1, 1975, among Mosbacher
Philippines Corporation, Husky (Philippines) Oil, Inc. and Amoco
Philippines Petroleum Company.
10.3(d) Service Contract No. 14, dated December 17, 1975, among the
Petroleum Board of the Republic of the Philippines and
Philippines--Cities Service, Inc., ET AL, as amended.
14
<PAGE>
10.4(d) Operating Agreement, dated July 17, 1975, among
Philippines-Cities Service, Inc., Husky (Philippines) Oil, Inc.,
Oriental Petroleum and Minerals Corporation,
Philippines-Overseas Drilling & Oil Development Corporation,
Basic Petroleum and Minerals, Inc., Landoil Resources
Corporation, Westrans Petroleum, Inc. and Philippine National
Oil Company, as amended.
10.5(d) Memorandum of Understanding, dated April 2, 1979, among the
Bureau of Energy Development of the Republic of the Philippines
and Philippines--Cities Service, Inc., ET AL.
10.6(d) Indemnity Agreement entered into among the Company and certain
of its officers and directors listed therein.
10.7(e) Exploration and Production Sharing contract between the Republic
of Gabon and VAALCO Gabon (Equata), Inc. dated July 7, 1995.
10.8(e) Exploration and Production Sharing contract between the Republic
of Gabon and VAALCO Gabon (Etame), Inc. dated July 7, 1995.
10.9(e) Deed of Assignment and Assumption between VAALCO Gabon (Etame),
Inc., VAALCO Energy (Gabon), Inc. and Petrofields Exploration &
Development Co., Inc. dated September 28, 1995.
10.10(e) Deed of Assignment and Assumption between VAALCO Gabon
(Equata), Inc., VAALCO Production (Gabon), Inc. and Petrofields
Exploration & Development Co., Inc. dated September 8, 1995.
10.11(f) Letter of Intent for Etame Block, Offshore Gabon dated January
22, 1997 between the Company and Western Atlas International,
Inc.
10.12(f)Farm In Agreement for Service Contract No. 14 Offshore Palawan
Island, Philippines dated September 24, 1996 between the Company
and SOCDET Production PTY, Ltd.
10.13(f) Letter Agreement between the Company and Northstar Interests
LLC. dated December 5, 1996.
10.14(g) Registration Rights Agreement, dated July 28, 1997, by and
among the Company, Jefferies & Company, Inc. and the investors
listed therein.
10.15(h) Warrant Agreement to Purchase Shares of Common Stock of VAALCO
Energy, Inc., dated July 31, 1997, between VAALCO Energy, Inc.
and Jefferies & Company, Inc.
10.16(h) Employment Agreement between the Company and W. R. Scheirman
dated March 15, 1996, as amended.
10.17(h) Employment Agreement between the Company and Robert L. Gerry,
III dated August 1, 1997.
10.18(c) Registration Rights Agreement among the Company and The 1818
Fund II, L.P., dated April 21, 1998
10.19(c) Registration Rights Agreement dated April 21, 1998 by and among
the Company, Jeffries & Company, Inc. and the investors listed
therein.
15
<PAGE>
27. Financial Data Schedule
Filed as an exhibit to the Company's report on Form 8-K filed with the
Commission on March 4, 1998 (file no. 000-20928) and hereby incorporated by
reference herein.
(a) Filed as an exhibit to the Company's Registration Statement on Form
S-3 filed with the Commission on July 15, 1998 and hereby
incorporated by reference herein.
(b) Filed as an exhibit to the Company's Report on Form 8-K filed with
the Commission on May 6, 1998 and hereby incorporated by reference
herein.
(c) Filed as an exhibit to the Company's Form 10 (File No. 0-20928)
filed on December 3, 1992, as amended by Amendment No. 1 on Form 8
on January 7, 1993, and by Amendment No. 2 on Form 8 on January 25,
1993, and hereby incorporated by reference herein.
(d) Filed as an exhibit to the Company's Form 10-QSB for the quarterly
period ended September 30, 1995, and hereby incorporated by
reference herein.
(e) Filed as an exhibit to the Company's Form 10-KSB for the quarterly
period ended December 31, 1996, and hereby incorporated by reference
herein.
(f) Filed as an exhibit to the Company's Form 10-QSB for the quarterly
period ended June 30, 1997, and hereby incorporated by reference
herein.
(g) Filed as an exhibit to the Company's Form 10-KSB for the quarterly
period ended December 31, 1997, and hereby incorporated by reference
herein.
SIGNATURES
In accordance with 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.
VAALCO ENERGY, INC.
(Registrant)
By /s/W. RUSSELL SCHEIRMAN
------------------------------------------
W. RUSSELL SCHEIRMAN, PRESIDENT,
CHIEF FINANCIAL OFFICER AND DIRECTOR
(on behalf of the Registrant and as the
principal financial officer)
Dated November 13, 1998
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE QUARTERLY PERIOD ENDED SEPTEMBER 3O, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,208
<SECURITIES> 0
<RECEIVABLES> 2,760
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,526
<PP&E> 6,080
<DEPRECIATION> (7)
<TOTAL-ASSETS> 31,229
<CURRENT-LIABILITIES> 2,455
<BONDS> 0
0
250
<COMMON> 2,075
<OTHER-SE> 22,172
<TOTAL-LIABILITY-AND-EQUITY> 31,229
<SALES> 407
<TOTAL-REVENUES> 407
<CGS> 1,240
<TOTAL-COSTS> 1,240
<OTHER-EXPENSES> 113
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 424
<INCOME-PRETAX> (1,370)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,416)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,416)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
