<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
or
[ ] 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: 0-26444
FORCENERGY INC
(Exact name of registrant as specified in its charter)
Delaware 65-0429338
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2730 S.W. 3rd Avenue, Suite 800
Miami, Florida
33129-2356
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (305) 856-8500
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 twelve 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 No X.
--- ---
As of May 31, 1999, there were 24,755,241 shares of the registrant's
Common Stock, $.01 par value outstanding.
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<PAGE> 2
FORCENERGY INC
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements (Unaudited)
a) Consolidated Balance Sheets - March 31, 1999 and
December 31, 1998............................................................ 1
b) Consolidated Statements of Operations - Three months ended
March 31, 1999 and 1998...................................................... 2
c) Consolidated Statements of Cash Flows - Three months ended
March 31, 1999 and 1998...................................................... 3
d) Notes to Consolidated Financial Statements................................... 4
Item 2. Management's Discussion and Analysis of financial Condition and
Results of Operations.............................................................. 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................... 11
</TABLE>
FORWARD-LOOKING STATEMENTS
THIS QUARTERLY REPORT ON FORM 10-Q INCLUDES FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE
EXCHANGE ACT. THE WORDS "ANTICIPATE," "BELIEVE," "EXPECT," "PLAN," "INTEND,"
"ESTIMATE," "PROJECT," "WILL," "COULD," "MAY," "PREDICT" AND SIMILAR EXPRESSIONS
ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. ALL STATEMENTS OTHER THAN
STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS FORM 10-Q, INCLUDING STATEMENTS
UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" REGARDING PLANNED CAPITAL EXPENDITURES, THE AVAILABILITY TO FUND
CAPITAL EXPENDITURES, ESTIMATES OF PROVED RESERVES, THE COMPANY'S FINANCIAL
POSITION, BUSINESS STRATEGY AND OTHER PLANS AND OBJECTIVES FOR FUTURE
OPERATIONS, ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT
THE EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT
CAN GIVE NO ASSURANCE THAT ACTUAL RESULTS MAY NOT DIFFER MATERIALLY FROM THOSE
IN THE FORWARD-LOOKING STATEMENTS HEREIN FOR REASONS INCLUDING, WITHOUT
LIMITATION, PETITIONS FILED OR ACTIONS TAKEN IN CONNECTION WITH ITS BANKRUPTCY
PROCEEDINGS, THE EFFECT OF COMPETITION, THE LEVEL OF PETROLEUM INDUSTRY
EXPLORATION AND PRODUCTION EXPENDITURES, WORLD ECONOMIC CONDITIONS, PRICES OF
AND THE DEMAND FOR CRUDE OIL AND NATURAL GAS, DRILLING ACTIVITY, WEATHER, AND
THE LEGISLATIVE ENVIRONMENT IN THE UNITED STATES AND OTHER COUNTRIES, OPEC
POLICY, CONFLICT IN THE MIDDLE EAST AND OTHER MAJOR PETROLEUM PRODUCING REGIONS
AND THE CONDITION OF THE CAPITAL AND EQUITY MARKETS. IN ADDITION, RESERVE
ENGINEERING IS A SUBJECTIVE PROCESS OF ESTIMATING AND UNDERGROUND ACCUMULATIONS
OF OIL AND GAS, AND RESERVE ESTIMATES ARE GENERALLY DIFFERENT FROM QUANTITIES OF
OIL AND GAS THAT ARE ULTIMATELY RECOVERED. ALL SUBSEQUENT WRITTEN AND ORAL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS
BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY SUCH FACTORS.
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FORCENERGY INC
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS:
- -------
CURRENT ASSETS:
Cash.................................................................. $ 15,269 $ 1,690
Accounts receivable, net.............................................. 33,045 28,433
Other current assets.................................................. 22,277 19,668
----------- -----------
Total current assets.............................................. 70,591 49,791
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost (full cost
method) net of accumulated depletion, depreciation
and amortization...................................................... 592,760 610,948
----------- -----------
OTHER ASSETS............................................................... 17,023 17,729
----------- -----------
$ 680,374 $ 678,468
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
- --------------------------------------
LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES:
Accrued liabilities................................................... $ 3,225 $ --
----------- -----------
Total current liabilities......................................... 3,225 --
----------- -----------
LIABILITIES SUBJECT TO COMPROMISE:
Accounts payable...................................................... 53,405 42,183
Accrued liabilities................................................... 44,462 64,837
Long-term debt........................................................ 689,473 671,700
----------- -----------
Total liabilities subject to compromise........................... 787,340 778,720
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; none issued or outstanding........................... -- --
Common stock, $.01 par value; 50,000,000 shares
authorized; 24,754,043 and 24,747,445 issued
and outstanding at March 31, 1999 and December 31, 1998,
respectively...................................................... 248 247
Capital in excess of par value........................................ 346,446 346,135
Accumulated deficit................................................... (456,885) (446,634)
----------- -----------
Total stockholders' deficit....................................... (110,191) (100,252)
----------- -----------
$ 680,374 $ 678,468
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
FORCENERGY INC
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
REVENUES:
Oil and gas sales................................... $ 59,480 $ 71,785
Other............................................... 258 170
----------- -----------
59,738 71,955
----------- -----------
EXPENSES:
Lease operating..................................... 25,564 23,631
Depletion, depreciation and amortization............ 32,474 35,512
Production taxes.................................... 845 1,035
General and administrative.......................... 4,212 4,793
----------- -----------
63,095 64,971
----------- -----------
INCOME (LOSS) FROM OPERATIONS.......................... (3,357) 6,984
Interest and other income.............................. 5,861 503
Interest expense, net of amounts capitalized........... (12,755) (10,259)
------------ ------------
LOSS BEFORE INCOME TAXES............................... (10,251) (2,772)
Income tax benefit..................................... -- 1,173
----------- -----------
NET LOSS............................................... $ (10,251) $ (1,599)
============ ===========
NET LOSS PER SHARE:
Basic............................................... $ (.41) $ (.06)
=========== ===========
Diluted............................................. $ (.41) $ (.06)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic............................................... 24,749 25,371
Diluted............................................. 24,749 25,371
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
FORCENERGY INC
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
----------------------------------
1999 1998
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (10,251) $ (1,599)
----------- -----------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depletion, depreciation and amortization.................... 32,807 35,991
Deferred taxes.............................................. -- (1,173)
Equity in earnings of affiliate............................. (218) (369)
Decrease (increase) in accounts receivable.................. (4,612) 1,610
Decrease (increase) in other current assets................. (2,609) 3,701
Decrease in accounts payable and accrued liabilities........ (5,928) (3,495)
------------ -----------
Net cash provided by operating activities........................ 9,189 34,666
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions................................................ -- (19,780)
Capital expenditures........................................ (15,203) (82,966)
Proceeds from sale of assets................................ 918 --
Change in other assets...................................... 591 622
----------- -----------
Net cash used in investing activities............................ (13,694) (102,124)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under senior credit facility..................... 26,473 129,900
Repayments under senior credit facility..................... (8,700) (77,764)
Issuance of common stock.................................... 311 --
Other....................................................... -- (116)
----------- -----------
Net cash provided by financing activities........................ 18,084 52,020
----------- -----------
Net increase (decrease) in cash.................................. 13,579 (15,438)
Cash at beginning of period...................................... 1,690 16,048
----------- -----------
Cash at end of period............................................ $ 15,269 $ 610
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest:..................................... $ 14,242 $ 11,141
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
FORCENERGY INC
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND CHAPTER 11 BANKRUPTCY
The accompanying unaudited interim consolidated financial statements
include the accounts of Forcenergy Inc and its subsidiaries (the "Company")
after elimination of intercompany balances and transactions.
The unaudited interim consolidated financial statements of the Company
for the periods indicated herein have been prepared by the Company pursuant to
the rules and regulations of the Securities and Exchange Commission and in
accordance with generally accepted accounting principles for interim financial
reporting. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments, consisting of normal
recurring accruals, necessary to present fairly the information in the
accompanying consolidated financial statements have been included. Interim
period results are not necessarily indicative of the results of operations or
cash flows for a full year period. Certain minor amounts previously reported in
the financial statements of the prior periods have been reclassified here to
conform to the current period presentation. Capitalized terms not defined herein
have the meanings as defined in the notes to the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
On March 21, 1999 (the "Petition Date"), the Company and its
wholly-owned subsidiary, Forcenergy Resources Inc., filed a voluntary petition
for relief under Chapter 11 of the U.S. Bankruptcy Code in order to facilitate
the restructuring of the Company's long-term debt, revolving credit, trade and
other obligations. The filing was made in the U.S. District Court for the
Eastern District of Louisiana in New Orleans (the "Bankruptcy Court"). The
Company continues to operate as a debtor-in-possession subject to the Bankruptcy
Court's supervision and orders.
The bankruptcy petitions were filed in order to preserve cash and to
give the Company the opportunity to restructure its debt. The consummation of a
plan of reorganization is the primary objective of the Company. The plan of
reorganization will set forth the means for satisfying claims, including
liabilities subject to compromise, and interests in the Company. A plan of
reorganization may result in, among other things, dilution or elimination of
existing security holders as a result of the issuance of securities to creditors
or new investors. The Company is currently negotiating with the secured and
unsecured creditors in an effort to reach a mutually acceptable plan of
reorganization. The consummation of any plan of reorganization will require
approval of the Bankruptcy Court.
At this time, it is not possible to predict the outcome of the
bankruptcy proceedings, in general, or the effect on the business of the Company
or on the interests of creditors, royalty owners or stockholders. As a result of
the bankruptcy filing, all of the Company's liabilities incurred prior to the
Petition Date, including certain secured debt, are subject to compromise.
The accompanying financial statements have been prepared on a going
concern basis which contemplates continuity of operations, realization of assets
and liquidation of liabilities in the ordinary course of business. As a result
of the bankruptcy filing and related events, there is no assurance that the
carrying amounts of assets will be realized or that liabilities will be
liquidated or settled for the amounts
4
<PAGE> 7
FORCENERGY INC
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
recorded. In addition, a plan of reorganization, or rejection thereof, could
change the amounts reported in the financial statements. As a result, there is
substantial doubt about the Company's ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent upon
confirmation of a plan of reorganization, adequate sources of capital and the
ability to sustain positive results of operations and cash flows sufficient to
continue to explore for and develop oil and gas reserves.
In the ordinary course of business, the Company makes substantial
capital expenditures for the exploration and development of oil and natural gas
reserves. Historically, the Company has financed its capital expenditures, debt
service and working capital requirements with cash flow from operations, public
offerings of equity, private offerings of debt, asset sales, a senior credit
facility and other financings. Cash flow from operations is sensitive to the
prices the Company receives for its oil and natural gas. A reduction in planned
capital spending or an extended decline in oil and gas prices could result in
less than anticipated cash flow from operations in the current fiscal year and
in later years which could have a material adverse effect on the Company.
Management's plans are to continue to incur capital expenditures with
the goal of increasing production and reserves. To finance these planned capital
expenditures, the Company will be required to supplement its anticipated cash
flow from operations with a combination of asset sales, financings or other
capital-raising transactions. The ability to incur capital expenditures, sell
properties and obtain additional financing is subject to the approval and
ongoing supervision of the Bankruptcy Court. There is no assurance that adequate
funds can be obtained on a timely basis or that the Bankruptcy Court will
approve such transactions.
NOTE 2 - EARNINGS PER SHARE
There are no reconciling items between basic and diluted earnings per
share in either period presented.
NOTE 3 - STOCK OPTION PLANS
On February 1, 1999, the Board of Directors of the Company authorized a
repricing of stock options whereby all options then outstanding were cancelled
and reissued with an exercise price of $1.275 per share, the current fair market
value of the underlying stock plus 20%. As a result of this repricing of
options, the plan changed from a fixed option plan to a compensatory plan for
accounting purposes. All other terms of options previously granted to
non-executives remained unchanged. The number of options held by executives and
directors was reduced by approximately 114,000 shares in conjunction with the
repricing.
NOTE 4 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE -SHEET RISK
During 1998 and prior to March 21, 1999, the Company was a party to
various financial instruments with off-balance-sheet risk in the normal course
of business to reduce its exposure to changing commodity prices. The Company
normally utilizes these arrangements for portions of its current oil and gas
production to achieve more predictable cash flows and to reduce its exposure to
fluctuations in oil and gas prices for varying time periods. The remaining
portion of current production is not hedged so as to provide the Company the
opportunity to benefit from increases in prices on that portion of the
production, should price increases materialize. The
5
<PAGE> 8
FORCENERGY INC
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Company had various instruments in place, all of which were cancelled at the
option of the counterparties subsequent to the Company's March 21, 1999 filing
for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The Company
received $5.5 million (fair market value) in settlement of the contracts
pursuant to the cancellations. The settlements were accrued in the quarter ended
March 31, 1999 and are included in Interest and Other Income. The Company may
enter into new arrangements in the future as part of its strategy to reduce
exposure to commodity price fluctuations. The instruments contain an element of
credit risk and price risk. The Company attempts to minimize the extent of
credit risk by limiting the counterparties to major banks or significant
industry participants. All of these arrangements are entered into on a no-cash
basis and are settled monthly. The Company accounts for these arrangements as
hedging activities and, accordingly, gains or losses are included in oil and gas
revenues for the period the production was hedged. Under these agreements,
monthly settlements are based on the differences between the prices specified in
the instrument and/or the settlement price of certain oil and gas futures
contracts quoted on the New York Mercantile Exchange ("NYMEX"). In instances
where the applicable settlement price is less than the price specified in the
contract, the Company receives a settlement based on the difference and in
instances where the applicable settlement price is higher than the specified
prices, the Company pays an amount based on the difference. Prior to and
excluding the cancellations and settlement payments discussed above, the Company
recognized $7.7 million and $2.4 million in additional oil and gas sales revenue
in the quarters ended March 31, 1999 and 1998, respectively, as a result of the
hedging transactions.
6
<PAGE> 9
FORCENERGY INC
(DEBTOR-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
PRODUCTION DATA
The following table sets forth the Company's historical liquids and
natural gas production data for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
Production in thousands:
Liquids (MBbls) (1)......................... 2,039 2,136
Natural Gas (MMcf).......................... 17,969 18,314
Total (MBOE)................................ 5,034 5,188
Average realized sales prices (2):
Liquids (per Bbl) (1)....................... $ 11.15 $ 14.13
Natural gas (per Mcf)....................... 2.04 2.27
Expenses (per BOE):
Lease operating............................. $ 5.08 $ 4.55
Depletion, depreciation and
amortization.............................. 6.45 6.84
General and administrative, net............. .84 .92
</TABLE>
- -------------
(1) Includes crude oil, condensate and natural gas liquids.
(2) Net of hedging results (but excluding cancellation settlements)
COMPARISON OF THE THREE MONTH PERIODS ENDED MARCH 31, 1999 AND MARCH 31, 1998
OPERATING INCOME AND NET INCOME/LOSS. The Company had a net operating
loss of $3.4 million for the three months ended March 31, 1999 as compared to
net operating income of $7.0 million for the same period during 1998. The net
loss for the three months ended March 31, 1999 was $10.3 million compared to a
net loss of $1.6 million reported for the same period last year. Operating
income declined primarily due to lower average liquids and natural gas prices
and higher lease operating expenses. Net income declined primarily due to lower
average liquids and natural gas prices and higher interest expense, partially
offset by $5.5 million in other income received by the Company in connection
with the settlement of its hedging contracts outstanding on March 21, 1999 that
were terminated by the counterparty subsequent to the bankruptcy filing.
7
<PAGE> 10
PRODUCTION. Net liquids production was 2,039 thousand barrels ("MBbls") in
the first quarter of 1999 and 2,136 MBbls for the comparable 1998 period. The
Company reported net gas production of 17,969 million cubic feet of natural gas
("MMcf") in the 1999 quarter and 18,314 MMcf in the 1997 period. On an
equivalent unit basis, liquids and gas production amounted to 5,034 thousand
barrels of oil equivalent ("MBOE") in the first quarter of 1999 and 5,188 MBOE
during the comparable 1997 period. Production of both liquids and natural gas
remained relatively flat between the periods as the Company's capital
expenditure program was decreased significantly beginning in the third quarter
of 1998 pursuant to arising liquidity issues and the Company's failed attempt to
raise additional equity capital. See "Liquidity and Capital Resources."
REVENUES. Revenues were $59.7 million for the 1999 first quarter compared
to the $72.0 million reported for last year's first quarter, the decrease being
primarily a result of declines in liquids and natural gas prices. Average net
realized (net of hedging effects) liquids prices declined to $11.15 per barrel
("Bbl") for the 1999 first quarter, a 21% decrease compared to the $14.13 per
Bbl received during the same period last year. Average net realized natural gas
prices declined to $2.04 per thousand cubic feet of natural gas ("Mcf") for the
three months ended March 31, 1999, a 10% decrease from the $2.27 per Mcf
reported for the 1998 period.
More dramatic declines in oil and gas prices were experienced in the field.
Average prices received at the field level for the first quarter of 1999 were
$10.43 per Bbl and $1.70 per Mcf for liquids and natural gas, respectively.
After taking into account hedging activities, specifically, a $1.5 million and a
$6.3 million increase in liquids and natural gas revenue, respectively, net
realized prices increased to $11.15 per Bbl for liquids and $2.04 per Mcf for
natural gas, respectively. Average prices received at the field level for the
1998 periods were $13.70 per Bbl and $2.19 per Mcf for liquids and natural gas,
respectively. After the effects of hedging activities for 1998, specifically, a
$900,000 increase in liquids revenue and a $1.5 million increase in natural gas
revenue, net realized 1998 prices were adjusted to $14.13 per Bbl for liquids
and $2.27 per Mcf for natural gas.
LEASE OPERATING EXPENSES. Lease operating expenses were $25.6 million for
the three months ended March 31, 1999 compared to the $23.6 million reported for
the same period last year. The increase related primarily to lease operating
expenses on new oil and gas properties acquired in mid- 1998. On an equivalent
unit of production basis, lease operating expenses were $5.08 and $4.55 per
barrel of oil equivalent ("BOE") for the 1999 and 1998 first quarters,
respectively, an increase primarily due to higher than normal workover expenses
incurred in the first quarter of 1999.
DEPLETION, DEPRECIATION AND AMORTIZATION ("DD&A"). DD&A expense was $32.5
million for the 1999 first quarter, compared with $35.5 million reported for the
same period in 1998. The decrease was primarily the result of a decrease in the
DD&A rate per unit of production to $6.45 per BOE for the 1999 first quarter,
compared to $6.84 per BOE for the same period last year.
GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs, net of
capitalized internal costs and overhead reimbursements, were $4.2 million for
the three months ended March 31, 1999, and $4.8 million for the 1998 first
quarter. On a per BOE produced basis, general and administrative expenses
declined to $.84 per BOE for the first quarter of 1999 compared with the $.92
per BOE reported for the 1998 period.
INTEREST AND OTHER INCOME. Interest and other income increased to $5.9
million in the 1999 first quarter, from $500,000 in the same period last year.
The increase is due to the Company recognizing a gain on the cancellation of all
hedging contracts by the counterparties subsequent to the Company's filing
8
<PAGE> 11
of Chapter 11 under the U.S. Bankruptcy Code. The Company received $5.5 million
(fair market value) in settlement on these contract cancellations.
INTEREST EXPENSE. Interest expense, net of amounts capitalized, was $12.8
million for the 1999 first quarter compared to $10.3 million for the 1998
period. The increase in interest expense in 1999 was primarily due to higher
long-term debt levels.
LIQUIDITY AND CAPITAL RESOURCES
On March 21, 1999, the Company and its wholly-owned subsidiary,
Forcenergy Resources Inc., ("Resources") filed a voluntary petition for relief
under Chapter 11 of the U.S. Bankruptcy Code in order to facilitate the
restructuring of the Company's long-term debt, revolving credit, trade and other
obligations. The filing was made in the U.S. District Court for the Eastern
District of Louisiana in New Orleans (the "Bankruptcy Court"). The Company
continues to operate as a debtor-in-possession subject to the Bankruptcy Court's
supervision and orders.
The bankruptcy petitions were filed in order to preserve cash and to
give the Company the opportunity to restructure its debt. The consummation of a
plan of reorganization is the primary objective of the Company. The plan of
reorganization will set forth the means for satisfying claims, including
liabilities subject to compromise, and interests in the Company. A plan of
reorganization may result in, among other things, material dilution or
elimination of existing security holders as a result of the issuance of
securities to creditors or new investors. The consummation of a plan of
reorganization will require approval of the Bankruptcy Court.
At this time, it is not possible to predict the outcome of the
bankruptcy proceedings, in general, or the effect on the business of the Company
or on the interests of creditors, royalty owners or stockholders. The Company is
currently negotiating with the secured and unsecured creditors in an effort to
reach a mutually acceptable plan of reorganization. There can be no assurance
that the plan of reorganization to be submitted by the Company will be approved
or that the Bankruptcy Court will permit the Company to continue to operate as a
debtor-in-possession. As a result, there is substantial doubt about the
Company's ability to continue as a going concern.
In the ordinary course of business, the Company makes substantial
capital expenditures for the exploration and development of oil and natural gas
reserves. Historically, the Company has financed its capital expenditures, debt
service and working capital requirements with cash flow from operations, public
offerings of equity, private offerings of debt, asset sales, a senior credit
facility and other financings. Cash flow from operations is sensitive to the
prices the Company receives for its oil and natural gas. A reduction in planned
capital spending or an extended decline in oil and gas prices could result in
less than anticipated cash flow from operations in the current fiscal year and
in later years which could have a material adverse effect on the Company.
After the bankruptcy Petition Date, Forcenergy and Resources filed an
Emergency Motion for Interim Order Authorizing Use of Cash Collateral (the "Cash
Collateral Motion"), pursuant to which Forcenergy and Resources sought the use
of various purported secured parties' cash collateral in on-going operations. On
March 22, 1999, the Bankruptcy Court signed a Preliminary Order Authorizing Use
of Cash Collateral, thereby authorizing Forcenergy's and Resource's use of cash
collateral in accordance with a budget attached thereto. Since the preliminary
order, the Bankruptcy Court has conducted several hearings on Forcenergy's and
Resource's continued use of cash collateral and on May 14, 1999, the Order
Authorizing the Use of Cash Collateral ("Cash Collateral Order") was signed and
is the order under which the Company currently operates. To the extent that
on-going expenses are for post-petition goods and services (after March 21,
1999), are within the ordinary course of business, and are reflected on the
court-approved budget, Forcenergy and Resources are permitted to make such
expenditures without further
9
<PAGE> 12
Bankruptcy Court order. Any expenditure, however, that is outside the ordinary
course of business, or that is not reflected on the budget, or not otherwise
authorized by the Cash Collateral Order, must be specifically authorized by the
Bankruptcy Court. The procedures for payment of such expenses may be further
specified in a debtor-in-possession financing facility. The Company had
approximately $42 million in cash on hand on May 31, 1999 that can be used for
operations pursuant to the terms of the Cash Collateral Order.
Forcenergy is presently in negotiations to obtain additional
debtor-in-possession financing.
The Company has historically financed its capital expenditures, debt
service and working capital requirements with cash flow from operations, public
offerings of equity, private offerings of debt, asset sales, a senior credit
facility and other financings. The Company's primary sources of funds were as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
Net cash provided by operating activities $ 9,189 $ 34,666
Borrowings under the Senior Credit Facility 26,473 129,900
Repayments under the Senior Credit Facility (8,700) (77,764)
</TABLE>
Cash flow from operations, before changes in operating assets and
liabilities, was $22.3 million for the three months ended March 31, 1999,
compared with $32.9 million in 1998. The decrease in cash flow resulted
primarily from lower oil and gas prices and higher interest expense, partially
offset by the increase in interest and other income resulting from the $5.5
million gain recognized by the Company on the cancellation of all the hedging
contracts.
Capital expenditures were $15.2 million for the quarter ended March
31, 1999, compared with $102.7 million for the 1998 period. Capital expenditures
were funded by the Company's existing Senior Credit Facility and cash generated
from operations. As a result, the Company's long-term debt (all classified as
subject to compromise) increased from $671.7 million at the end of 1998 to
$689.5 million at March 31, 1999. The Company was fully drawn under the Senior
Credit Facility on March 21, 1999.
The Company's capital expenditures for 1999 will remain subject to the
approval and supervision of the Bankruptcy Court and may vary significantly due
to a variety of other factors, including drilling results, oil and gas prices,
industry conditions and outlook, future acquisitions of properties, the
availability of capital and the approval of the Company's creditors.
YEAR 2000 COMPLIANCE
Forcenergy has established a "Year 2000" project (the "Project") to
assess, to the extent possible, its Year 2000 risk exposure, to take remedial
actions necessary to minimize the Year 2000 risk exposure to Forcenergy and to
test its systems and processes once remedial actions have been taken. Because of
the importance of occurrence dates in the oil and gas industry, the consequences
of not pursuing Year 2000 modifications could be critical to Forcenergy's
ability to manage and report operating activities. The final costs
10
<PAGE> 13
associated with the Project are expected to be minimal.
The assessment phase of the Project is 90% complete as of May 31, 1999,
with the remainder being the assessment of risk related to year 2000 failure on
the part of the Company's customers and vendors. This phase included, among
other procedures: the assessment of information technology applications and
systems; the assessment of non-information technology exposures; the initiation
of inquiry and dialogue with significant third party business partners,
customers and suppliers in an effort to understand their Year 2000 readiness and
its potential impact on Forcenergy; and, the formulation of contingency plans
for mission-critical information technology systems. Forcenergy expects to
complete the assessment phase of its Year 2000 project by the end of the second
quarter of 1999 but is being delayed by limited responses to inquiries made to
third party businesses. The Company believes, however, that any equipment
failure at the customer/vendor level could be overcome by a change in provider
or by the implementation of manual procedures. The remedial phase of the Project
was approximately 80% complete as of March 31, 1999, subject to the results of
third party inquiry assessments. The remediation of non-information technology
is expected to be completed by mid-1999. The testing phase of the Project is
expected to be completed by mid-1999, subject to the Company's assessment of
customer and vendor inquiries.
Although Forcenergy is making every effort to mitigate the risks
associated with the Year 2000 problem, and currently believes that no material
risk exists that has not been mitigated, there can be no assurance that the
Project or resulting contingency plans will have anticipated all Year 2000
scenarios. A failure to remedy a critical Year 2000 problem could result in
information and non-information technology failures, the receipt or transmission
of erroneous data, lost data or a combination of similar problems of a magnitude
that cannot be accurately assessed at this time.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 -- Financial Data Schedule
(b) Reports on Form 8-K
On March 23, 1999, the Company filed a Current Report on Form 8-K
reporting that on March 21, 1999, Forcenergy Inc and its subsidiary
Forcenergy Resources, Inc. filed voluntary petitions for reorganization
under Chapter 11 of the U.S. Bankruptcy Code in the U.S. District Court
for the Eastern District of Louisiana in New Orleans.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto, duly authorized, in the City of Miami, State of Florida,
on the 17th day of June, 1999.
FORCENERGY INC
By: /s/ E. Joseph Grady
----------------------------------------
E. Joseph Grady
Vice President - Chief Financial Officer
11
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED INTERIM MARCH 31, 1999 BALANCE SHEET AND STATEMENT OF OPERATIONS OF
FORCENERGY INC FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1999, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1999
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