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 MARCH 31, 1999
|_| 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 May 14, 1999 there were outstanding 20,749,968 shares of Common
Stock, $.10 par value per share, of the registrant.
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VAALCO ENERGY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited)
March 31, 1999 and December 31, 1998......................................3
Statements of Consolidated Operations (Unaudited)
Three months ended March 31, 1999 and 1998................................4
Statements of Consolidated Cash Flows (Unaudited)
Three months ended March 31, 1999 and 1998................................5
Notes to Consolidated Financial Statements...................................6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................................9
PART II. OTHER INFORMATION.................................................15
2
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VAALCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT PAR VALUE AMOUNTS)
MARCH 31, December 31,
1999 1998
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................ $ 4,999 $ 6,671
Funds in escrow ...................................... 103 5,248
Receivables:
Trade .............................................. 267 311
Accounts with partners ............................. 245 --
Other .............................................. 336 335
Materials and supplies, net of allowance for
obsolescence of $61 .................................... 346 326
Prepaid expenses and other ........................... 37 25
-------- --------
Total current assets ............................... 6,333 12,916
-------- --------
PROPERTY AND EQUIPMENT-SUCCESSFUL EFFORTS METHOD
Wells, platforms and other production facilities ..... 89 89
Undeveloped acreage .................................. 1,386 1,385
Work in progress ..................................... 2,670 1,820
Equipment and other .................................. 156 47
-------- --------
4,301 3,341
Accumulated depreciation, depletion and amortization ... (11) (10)
-------- --------
Net property and equipment ......................... 4,290 3,331
-------- --------
OTHER ASSETS:
Funds in escrow .................................... 12,426 12,400
Advances - related party ........................... -- 35
Investment in unconsolidated entities .............. 4,957 4,949
Deferred tax asset ................................. 533 533
Other long-term assets ............................. 296 --
-------- --------
TOTAL .................................................. $ 28,835 $ 34,164
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ............ $ 1,918 $ 2,041
Accounts with partners .............................. -- 4,567
-------- --------
Total current liabilities ......................... 1,918 6,608
-------- --------
MINORITY INTEREST ..................................... 13 --
FUTURE ABANDONMENT COSTS .............................. 3,217 3,217
-------- --------
Total liabilities ................................... 5,148 9,825
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $25 par value, 500,000 shares
authorized;
10,000 shares issued and outstanding in 1999 and
1998 .................................................. 250 250
Common stock, $.10 par value, 100,000,000 authorized
shares
20,755,363 shares issued of which 5,395
are in the treasury in 1999 and 1998 ............... 2,075 2,075
Additional paid-in capital .......................... 41,215 41,215
Accumulated deficit ................................. (19,841) (19,189)
Less treasury stock, at cost ........................ (12) (12)
-------- --------
Total stockholders' equity ........................ 23,687 24,339
-------- --------
TOTAL ................................................. $ 28,835 $ 34,164
======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
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VAALCO ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
March 31,
-------------------------
1999 1998
-------- --------
REVENUES:
Oil and gas sales .......................... $ 126 $ --
OPERATING COSTS AND EXPENSES:
Production expenses ........................ 59 --
Depreciation, depletion and
amortization ................................. 2 --
General and administrative
expenses ..................................... 490 --
-------- --------
Total operating costs and
expenses ..................................... 551 --
-------- --------
OPERATING LOSS ............................... (425) --
OTHER INCOME (EXPENSE):
Interest income ............................ 259 --
Interest expense and financing
charges ...................................... -- (424)
Equity loss in unconsolidated
entities ..................................... (511) --
Other, net ................................. 25 (1)
-------- --------
Total other income (expense) ............. (227) (425)
-------- --------
LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS ........................ $ (652) $ (425)
======== ========
LOSS PER COMMON SHARE:
BASIC AND DILUTED .......................... $ (0.03) $ (0.03)
======== ========
WEIGHTED AVERAGE COMMON SHARES:
BASIC ...................................... 20,755 15,567
======== ========
DILUTED .................................... 20,930 16,895
======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
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VAALCO ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
Three months Ended
March 31,
--------------------
1999 1998
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................... $ (652) $ (425)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, depletion and amortization ......... 2 --
Equity loss in unconsolidated entities ........... 511 --
Change in assets and liabilities that provided
(used) cash:
5,119 --
Funds in escrow
Trade receivables ................................ 44 --
Accounts with partners ........................... (4,812) --
Other receivables ................................ (1) --
Materials and supplies ........................... (20) --
Prepaid expenses and other ....................... (12) --
Accounts payable and accrued liabilities ......... (123) 425
------- -------
Net cash provided by operating activities ...... 56 --
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ................ (960) --
(519) --
Investment in unconsolidated entities
Other .............................................. (249) --
------- -------
Net cash used in investing activities .......... (1,728) --
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS .............. (1,672) --
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..... 6,671 32
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........... $ 4,999 $ 32
======= =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
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VAALCO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(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 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, 1998.
VAALCO Energy, Inc., a Delaware corporation, is a Houston-based
independent energy company principally engaged in the acquisition,
exploration, development and production of crude oil and natural gas.
VAALCO owns producing properties and conducts exploration activities as
operator of consortium internationally in the Philippines and Gabon.
Through participation in a partnership with Hunt Oil Company, VAALCO has
additional international exploration interests in Argentina, Peru,
Ethiopia, Ghana, Niger and Canada. Domestically, the Company has interests
in the Texas Gulf Coast area.
VAALCO's Philippine subsidiaries include Alcorn (Philippines) Inc. and
Alcorn (Production) Philippines Inc. VAALCO's Gabon subsidiaries are
VAALCO Gabon (Equata), Inc., VAALCO Gabon (Etame), Inc., VAALCO
Production (Gabon), Inc. and VAALCO Energy (Gabon), Inc. VAALCO (USA),
Inc. holds interests in certain properties in the United States.
2. ACQUISITION OF 1818 Oil Corp.
On April 21, 1998 VAALCO consummated the acquisition of 1818 Oil Corp. in
exchange for 10,000 shares of Convertible Preferred Stock, Series A. The
Preferred Stock is convertible into 27.5 million shares of VAALCO $0.10
par value per share Common Stock. 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 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
approximately 34 million acres in various countries, including Argentina,
Peru, Ethiopia, Ghana, Niger and Canada. 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
6
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VAALCO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
deposits which pre-drilling seismic and other data indicate to have
potential reserves in excess of 100 MMBOE.
Under the partnership agreement with Hunt, the Company will have an
obligation to contribute an estimated $5.1 million to fund its share of
the exploration costs of Hunt, $0.7 million of which was funded subsequent
to the acquisition. In addition, if Hunt discovers oil or gas deposits,
the Company will be required to contribute an additional $7.5 million to
fund appraisal costs. VAALCO has $12.4 million in cash in an escrow
account to fund its obligations under the partnership agreement.
1818 Oil Corp.'s equity as of December 31, 1998 has been retroactively
changed 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 credited to additional
paid-in capital. In addition, at the time of the merger, the 1818 Fund II,
L.P., a fund managed by Brown Brown Harriman & Co. (the "1818 Fund")
contributed the debt owed to it by 1818 Oil Corp. as additional paid-in
capital to 1818 Oil Corp.
The income statement presented for the prior year period is that 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 1999 and 1998 interim results is not meaningful. The legal
name of the registrant continues to be VAALCO Energy, Inc.
The following summarizes pro forma financial information assuming the
acquisition of 1818 Oil Corp. had occurred on January 1, 1998.
(THOUSANDS OF DOLLARS)
Three months Ended Three months Ended
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
Total revenues........................ $ 126 $ 155
Loss before income taxes.............. (652) (186)
Net loss attributable to common
stockholders.......................... (652) (172)
Basic net loss per share.............. (0.03) (0.01)
3. RECENT DEVELOPMENTS
The Company is the operator of a 3,073 square kilometer concession known
as the Etame Block offshore Gabon, West Africa, with a working interest
ownership of 17.9%. In June 1998, the Company announced the discovery of
the Etame field, with the drilling of the Etame No. 1 well. 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 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, 20 miles offshore.
7
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VAALCO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
In January 1999, the Company completed the drilling of the Etame 2V
delineation well. The well found oil pay in the Gamba Sandstone, however,
the reservoir was encountered at a lower depth than expected. The well was
not tested. A seismic reprocessing effort has been commenced to better
delineate the Gamba reservoir below the salt before additional wells will
be drilled. At least one additional delineation well is planned for 1999
or early 2000.
During February 1999, Hunt Oil Company drilled a 4,500 foot test on its
Rio Belgrano block in Argentina. The well did not encounter any commercial
hydrocarbons and was abandoned.
In December 1998, an Australian Company completed the acquisition of 3-D
seismic over the Company's interests in Service Contract 14 in the
Philippines. The Company and the other members of the Service Contract 14
Consortium assigned 35% of their working interest in the Service Contract
to the Australian Company pursuant to the farm-out agreement.
The Company participates in a joint venture with Paramount Petroleum, Inc.
to conduct exploration activities primarily in the onshore Gulf Coast
area, including Alabama, Mississippi and Louisiana. In July 1998, the
Company elected to participate at a 15% working interest level in the
first prospect developed by the joint venture, which did not encounter
productive hydrocarbon intervals and has been abandoned. The Company has
agreed to take a 10% interest in two additional prospects to be drilled
during the second quarter of 1999.
4. EARNINGS PER SHARE
The weighted average common shares outstanding represent those of
historical VAALCO for the applicable periods.
8
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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. 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'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 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 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
The Company's primary source of capital resources is derived predominantly from
the sale of marketable securities, and the private placement of Common Stock,
Preferred Stock and debt financing to fund its exploration operations.
The Company produces oil from the Matinloc and Nido fields in the South China
Sea, located in the Philippines. During the year ended December 31, 1998, total
production from the fields was
9
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VAALCO ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
approximately 287,000 gross barrels of oil. Production in the first quarter of
1999 was 64,000 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. in
exchange 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 financial accounting purposes. The
income statement presented for the prior year period 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 1999 and 1998 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
approximately 34 million acres in various 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 of which $0.7 million has been funded since
the acquisition. 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.
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,
$2.7 million of which 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
10
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VAALCO ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 1999, the Company anticipates that it will make capital expenditures on
oil and gas properties of approximately $4.0 million, including Hunt partnership
expenditures, and a contribution of $0.3 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
$22.6 million received from the 1998 private placement and cash acquired in 1818
Oil Corp. will be sufficient to fund the Company's capital budget through 1999.
YEAR 2000
- ---------
The Company, like other businesses, is facing the Year 2000 issue. Many computer
systems and equipment with embedded chips or processors use only two digits to
represent the calendar year. This could result in computational or operational
errors as dates are compared across the century boundary causing possible
disruptions in business operations. The Year 2000 issue can arise at any point
in the Company's operations.
STATE OF READINESS
The Company began addressing the Year 2000 issue in 1997, with an initial
assessment of Year 2000 readiness efforts for it's foreign and domestic business
units. Based on the initial assessment, the following items were acknowledged as
areas for attention to ensure Year 2000 compliance:
1. Assessment of all systems for Year 2000 compliance.
2. Development of a project schedule for remediation or replacement
of non-compliant systems.
3. Development of a project schedule for testing the compliant
systems.
4. Development of a list of significant vendors/suppliers for surveying
their Year 2000 readiness efforts.
The Year 2000 issue is being addressed within the Company by its domestic and
foreign business units, and progress is reported periodically to management. The
Company has committed necessary resources to conduct risk assessment and to take
corrective actions.
THIRD PARTY RELATIONSHIPS
The Company's business units have contacted significant external parties,
including suppliers and customers concerning their Year 2000 readiness efforts.
To the best of the Company's knowledge these suppliers, customers and other
entities appear to have addressed their Year 2000 issues as they pertain to the
Company's operations.
11
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VAALCO ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONTINGENCY PLANNING
The Company has evaluated the need for a contingency plan for Year 2000
readiness, and determined such a plan is not necessary given the safety manuals
and procedures already in effect for its production and other operations.
INDEPENDENT VERIFICATION AND VALIDATION
For the Philippine operations, an outside programmer was hired to review the
systems and make the appropriate changes for Year 2000 compliance in their
accounting systems. This is currently in process and it is expected the upgrade
will be completed on or before June 30, 1999 at a total cost of approximately
$20 thousand net to the Company. As of December 31, 1998, the Company had
incurred approximately $15 thousand of this expense. For VAALCO's domestic and
Gabon operations, upgrades of the current systems were completed by an
independent source in the third quarter of 1998 at no expense to the Company.
The Company relies on third party suppliers for raw materials, water, utilities,
transportation and other key services. Interruption of supplier operations due
to Year 2000 issues could affect the Company's operations. Although these and
other unanticipated Year 2000 issues could have an adverse effect on the results
of operations or financial condition of the Company, it is not possible to
anticipate the extent of impact or the worst case scenario at this time
ALL STATEMENTS REGARDING YEAR 2000 MATTERS CONTAINED IN THIS FORM 10-QSB ARE
"YEAR 2000 READINESS DISCLOSURES" WITHIN THE MEANING OF THE YEAR 2000
INFORMATION AND READINESS DISCLOSURE ACT.
12
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VAALCO ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
income statement presented for the prior year period 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 1999 and 1998 interim
results is not meaningful. The legal name of the registrant continues to be
VAALCO Energy, Inc.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
REVENUES
Total revenues from oil and gas sales were $126 thousand for the three months
ended March 31, 1999. Substantially all revenues were from the Philippines.
OPERATING COSTS AND EXPENSES
Total production expenses for the three months ended March 31, 1999 were $59
thousand. General and administrative expenses amounted to $490 thousand.
OTHER INCOME (EXPENSE)
Interest income of $259 thousand was received from amounts on deposit. Interest
rates received were approximately 5.0% on invested funds. The equity loss in
unconsolidated entities of $511 thousand consisted of partnership expenses of
$336 thousand associated with the Hunt partnership, (consisting primarily of
exploration expense for seismic in Ghana, dry hole expense for a well on the Rio
Belgrano concession in Argentina and expenses for partnership general and
administrative costs) and $175 thousand of exploration expenses associated with
the Paramount joint venture.
NET LOSS
Net loss attributable to common stockholders for the three months ended March
31, 1999 was $652 thousand, compared to a net loss attributable to common
stockholders of $425 thousand for the same period in 1998. The net loss in 1999
was primarily due to exploration costs associated with the Hunt Partnership and
the Paramount Joint Venture. The 1998 loss was due to accrued interest expense
on funds advanced to 1818 Oil Corp. by the 1818 Fund II.
13
<PAGE>
VAALCO ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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)
Three months Ended Three months Ended
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
Total revenues........................ $ 126 $ 155
Loss before income taxes.............. (652) (186)
Net loss attributable to common
stockholders.......................... (652) (172)
Basic net loss per share.............. (0.03) (0.01)
14
<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. Articles of Incorporation and Bylaws
3.1(b) Restated Certificate of Incorporation
3.2(b) Certificate of Amendment to Restated Certificate of
Incorporation
3.3(b) Bylaws
3.4(b) Amendment to Bylaws
3.5(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.
15
<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(c) Registration Rights Agreement among the Company and The 1818 Fund
II, L.P., dated April 21, 1998
10.17(c) Registration Rights Agreement dated April 21, 1998 by and among
the Company, Jefferies & Company, Inc. and the investors listed
therein.
10.18(i) Assignment Agreement between the Company, members of the Service
Contract 14 Consortium and SOCDET dated December 29, 1998
21.1(i) Subsidiaries of the Registrant
27. Financial Data Schedule
16
<PAGE>
_____________
(a) 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.
(b) 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.
(c) 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.
(d) 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.
(e) 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.
(f) 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.
(g) 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.
(h) Filed as an exhibit to the Company's Form 10-KSB for the year ended
December 31, 1997, and hereby incorporated by reference herein.
(i) Filed as an exhibit to the Company's Form 10-KSB for the year ended
December 31, 1998, and hereby incorporated by reference herein.
(b) Reports on Form 8-K.
None
17
<PAGE>
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 May 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE QUARTERLY PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,999
<SECURITIES> 0
<RECEIVABLES> 848
<ALLOWANCES> 0
<INVENTORY> 346
<CURRENT-ASSETS> 6,333
<PP&E> 4,301
<DEPRECIATION> (11)
<TOTAL-ASSETS> 28,835
<CURRENT-LIABILITIES> 1,918
<BONDS> 0
0
250
<COMMON> 2,075
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 28,835
<SALES> 126
<TOTAL-REVENUES> 126
<CGS> 0
<TOTAL-COSTS> 551
<OTHER-EXPENSES> (227)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (652)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (652)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
