UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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 333-31375*
---------------
FORMAN PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
LOUISIANA 72-0954774
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
650 POYDRAS STREET - SUITE 2200 70130-6101
NEW ORLEANS, LOUISIANA (Zip code)
(Address of principal executive offices)
(504) 586-8888
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
As of August 10, 1998, there were 70,000 shares of the Registrant's Voting
Common Stock, no par value, and 20,000 shares of the Registrant's Non-voting
Common Stock, no par value, outstanding.
* The Commission file number refers to a Form S-4 Registration Statement filed
by the Company under the Securities Act of 1933, which became effective
September 26, 1997.
FORMAN PETROLEUM CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
PART I
Page No.
Item 1. Financial Information:
Balance Sheets as of June 30, 1998 and
December 31, 1997 1
Statement of Operations and Accumulated
Deficit for the Three and Six Month Periods
Ended June 30, 1998 and June 30, 1997 2
Statement of Cash Flows for the Six Month
Periods Ended June 30, 1998 and June 30, 1997 3
Notes to Financial Statements 4-5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-12
PART II
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14-15
Signatures 16
ii
FORMAN PETROLEUM CORPORATION
BALANCE SHEETS
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 606,308 $ 457,869
Accounts receivable 228,532 597,991
Oil and gas revenue receivable 2,178,715 2,407,315
Restricted cash - 3,937,500
Other assets 56,791 48,806
------------ ------------
Total current assets 3,070,346 7,449,481
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Oil and gas properties, full cost method 80,808,804 77,029,339
Other property and equipment 1,748,910 1,650,793
------------ ------------
82,557,714 78,680,132
Less- accumulated depreciation, depletion and
amortization (47,198,711) (30,451,675)
------------ ------------
Net property and equipment 35,359,003 48,228,457
------------ ------------
OTHER ASSETS:
Deferred financing costs
(net of accumulated amortization) 5,833,753 6,366,367
Deferred charges 177,818 170,529
Funds on deposit in escrow 466,214 515,096
------------ ------------
TOTAL ASSETS $ 44,907,134 $ 62,729,930
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 4,267,485 $ 6,438,278
Interest payable 787,470 -
Undistributed oil and gas revenues 1,836,637 1,848,497
Current portion of note payables 13,992 13,992
------------ ------------
Total current liabilities 6,905,584 8,300,767
------------ ------------
Notes payable (long-term portion) 68,140,758 68,013,552
Mandatorily redeemable Preferred Stock, no par
value, 1,000,000 authorized shares, 200,000
shares outstanding 11,443,124 10,589,588
STOCKHOLDERS' DEFICIT:
Common stock, no par value, authorized
1,000,000 shares; issued and outstanding
90,000 shares 1,000 1,000
Treasury stock (10) (10)
Accumulated deficit (41,583,322) (24,174,967)
------------ ------------
Total stockholder's deficit (41,582,332) (24,173,977)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT $ 44,907,134 $ 62,729,930
============ ============
The accompanying notes are an integral part of these financial statements.
1
FORMAN PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------------------------------------
1998 1997 1998 1997
----------------- ----------------- ----------------- -----------------
Revenues:
Oil and gas sales $ 4,478,576 $ 2,525,928 $ 8,686,134 $ 6,262,454
Interest income 29,105 44,932 193,798 54,111
Overhead reimbursements 17,548 20,421 37,911 35,165
Other income 9,014 2,887 (7,857) 20,262
------------ ----------- ------------ -----------
Total revenues 4,534,243 2,594,168 8,909,986 6,371,992
------------ ----------- ------------ -----------
Costs and expenses:
Production taxes 146,530 174,495 303,227 303,647
Lease operating expenses 901,440 641,970 1,805,984 1,198,679
General and administrative expenses 576,173 413,789 1,105,169 842,437
Interest expense 2,570,834 1,640,358 5,019,158 2,824,601
Full cost ceiling write-down 12,039,831 - 12,039,831 -
Depreciation, depletion and amortization 2,640,442 2,052,445 5,191,435 3,595,006
------------ ----------- ------------ -----------
Total expenses 18,875,250 4,923,057 25,464,804 8,764,370
------------ ----------- ------------ -----------
Net loss from operations (14,341,007) (2,328,889) (16,554,818) (2,392,378)
Provision for income taxes - 4,746,000 - 4,746,000
------------ ----------- ------------ -----------
Net loss (14,341,007) (7,074,889) (16,554,818) (7,138,378)
Preferred stock dividends (424,005) - (833,103) -
------------ ----------- ------------ -----------
Net loss attributable to common shares $(14,765,012) $(7,074,889) $(17,387,921) $(7,138,378)
============ =========== ============ ===========
Net loss per share $(164.05) $(78.61) $(193.20) $(79.32)
============ =========== ============ ===========
Weighted average shares outstanding 90,000 90,000 90,000 90,000
============ =========== ============ ===========
UNAUDITED PRO FORMA DATA:
Net loss from operations reported above $(14,341,007) $(2,328,889) $(16,554,818) $(2,392,378)
Pro forma benefit for income taxes related to
operations as an S Corp - 861,689 - 885,180
Preferred stock dividends (424,005) - (833,103) -
------------ ----------- ------------ -----------
Pro forma net loss $(14,765,012) $(1,467,200) $(17,387,921) $(1,507,198)
============ =========== ============ ===========
Pro forma net loss per share $(164.05) $(16.30) $(193.20) $(16.75)
======== ======= ======== =======
Weighted average shares outstanding 90,000 90,000 90,000 90,000
======== ======= ======== =======
The accompanying notes are an integral part of these financial statements.
2
FORMAN PETROLEUM CORPORATION
STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
------------------------------------
1998 1997
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(16,554,818) $ (2,392,378)
Adjustments to reconcile net loss to net cash provided
by operating activities-
Depreciation and amortization 17,231,266 3,595,006
Withdrawal from interest escrow account 3,963,071
Change in assets and liabilities-
Decrease in oil and gas revenue receivable 228,600 1,422,707
Decrease in accounts receivable 369,459 112,299
(Increase) Decrease in unbilled well costs and prepaids 48,633 (65,884)
Increase in interest payable 787,470 --
Increase (Decrease) in accounts payable (2,192,834) 306,068
(Decrease) in undistributed oil and gas revenues (11,860) (582,756)
Decrease in due from affiliate -- 327,828
Increase (Decrease) in notes payable 149,247 (500,000)
------------ ------------
Net cash provided by operating activities 4,018,234 2,222,890
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (3,779,465) (16,555,572)
Reduction of escrow account 48,882 371,325
(Purchase) Sale of other property and equipment (98,117) 2,236
------------ ------------
Net cash used in investing activities (3,828,700) (16,182,011)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable -- 72,467,000
Repayment of notes payable -- (43,028,501)
Deposit into interest escrow account -- (9,450,000)
Proceeds from preferred stock -- 9,666,667
Proceeds from issuance of warrants -- 1,000,000
Distribution to stockholder -- (1,500,000)
Deferred financing costs (41,095) (6,926,745)
------------ ------------
Net cash (used) provided by financing activities (41,095) 22,228,421
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 148,439 8,269,300
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 457,869 130,551
------------ ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 606,308 $ 8,399,851
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for-
Interest $ 5,019,158 $ 2,824,601
============ ============
Income taxes $ -- $ --
============ ============
The accompanying notes are an integral part of these financial statements.
3
FORMAN PETROLEUM CORPORATION
JUNE 30, 1998
1. Interim Financial Statements
The financial statements of the Company at June 30, 1998 and for the three and
six-month periods then ended are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The financial statements should be
read in conjunction with the financial statements and notes thereto, for the
year ended December 31, 1997 contained in the Company's Form 10-K (file number
333-31375) filed with the Commission on March 31, 1998.
2. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement No.
128 ("SFAS 128"), "Earnings Per Share", which simplifies the computation of
earnings per share ("EPS"). SFAS 128 is effective for financial statements
issued for periods ending after December 15, 1997, and requires restatement for
all prior period EPS data presented. EPS calculated under SFAS 128 is the same
as those indicated on the Statement of Operations for the respective periods.
3. ISSUANCE OF NOTES
On June 3, 1997 the Company completed the private sale to Jefferies & Company,
Inc. ("Jefferies") of 70,000 units ("Note Units") consisting of $70 million
principal amount of 13.5% Senior Secured Notes due 2004, Series A (the "Notes")
and warrants to purchase 29,067 shares of Common Stock, no par value (the
"Common Stock"), of the Company at a price of $65,667,000 in a transaction not
registered under the Securities Act (the "Act") in reliance upon Section 4(2) of
the Act and Rule 506 of Regulation D under the Act. Jefferies thereupon offered
and resold the Note Units only to qualified institutional buyers and a limited
number of institutional accredited investors at an initial price to such
purchasers of $68,467,000. Concurrently with the offering of the Note Units,
the Company completed a private sale to Jefferies of 200,000 units ("Equity
Units") consisting of 200,000 shares of Series A Cumulative Preferred Stock and
warrants to purchase 14,533 shares of Common Stock. The Equity Units were sold
to Jefferies for $9,200,000 in a transaction not registered under the Securities
Act in reliance upon Section 4 (2) of the Act and Rule 506 of Regulation D under
the Act. Jefferies thereupon offered and resold the Equity Units only to
qualified institutional buyers and a limited number of institutional accredited
investors at an initial price to such purchasers of $10,000,000. The offerings
and sale of the Note Units and the Equity Units are referred to herein as the
"Offerings".
The net proceeds to the Company from the Offerings were approximately $74.9
million. A portion of the net proceeds (approximately $9.5 million) was
segregated into a capitalized interest account to pay interest on the Notes
through June 1, 1998. The Company used the remaining net proceeds of the
Offerings as follows: (i) approximately $35.2 million was used to
4
repay all of the outstanding indebtedness (including accrued interest and
associated fees) due under the Endowment Energy Partners ("EEP) and Endowment
Energy Co-Investment Partnership ("EECIP") loans; (ii) approximately $10.5
million was used to repay all of the outstanding indebtedness (including accrued
interest and associated fees) due under the Joint Energy Development Investments
Limited Partnership loan; (iii) $2.6 million was used to purchase from EEP and
EECIP a 7.5% overriding royalty interest in the Company's Lake Enfermer Field,
Manila Village Field and Boutte Field; (iv) $5.0 million was used in connection
with the Company's acquisition from Forman Petroleum Corporation II ("FPCII"), a
company whose sole stockholder is McLain J. Forman (the Company's Chairman and
principal stockholder), all of FPCII's interest in the Bayou Fer Blanc Field and
the West Gueydan Field, of which $1.5 million was paid to FPCII, $1.0 million
was used to pay bank debt and $2.5 million was used to pay trade payables to
third parties; (v) Jefferies received a fee of $1.9 million for financial
advisory services provided to the Company and also received a warrant to
purchase 4,844 shares of Common Stock at the initial exercise price of $1.00 per
share; and (vi) $0.9 million was used to pay expenses of the Offerings. The
remaining net proceeds from the Offerings of $9.4 million were used for capital
expenditures, working capital and other general corporate purposes.
4. INCOME TAXES
As discussed in Note 3, the Company issued a second class of stock on June 3,
1997, effectively terminating its S Corporation election. As a result, the
Company is subject to Federal and state income taxes for the results of
operations subsequent to June 2, 1997. In addition, due to the termination of
the Company's status as an S Corporation for federal income tax purposes, the
Company was also required to establish a net deferred tax liability calculated
at the applicable Federal and state tax rates resulting primarily from financial
reporting and income tax reporting basis differences in oil and gas properties.
Accordingly, a net deferred tax liability of $5,081,000 was accrued at June 3,
1997. The Company has a net deferred tax asset at June 30, 1998 that has been
fully reserved due to the Company's operating losses.
For purposes of the pro forma net loss presentation, income taxes have been
adjusted to reflect the actual income tax benefit that would have been recorded
by the Company had it operated as a C Corporation throughout each of the periods
presented.
5. Per Share Amounts
Historical and pro forma net loss per share amounts are calculated by dividing
historical and pro forma net loss by the weighted average number of common
shares outstanding (90,000 for each period presented).
5
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The following discussion is intended to assist in an understanding of the
Company's historical financial position and the results of operations for the
three-month and six-month periods ended June 30, 1998 and 1997. The financial
statements of the Company at June 30, 1998 and for the three and six-month
periods then ended are unaudited and reflect all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of management, necessary
for a fair presentation of the financial position and operating results for the
interim periods. The financial statements should be read in conjunction with
the financial statements and notes thereto, for the year ended December 31, 1997
contained in the Company's Annual Report on Form 10-K (file number 333-31375)
filed with the Commission on March 31, 1998. The Company's historical financial
statements and notes thereto included elsewhere in this quarterly report contain
detailed information that should be referred to in conjunction with the
following discussion.
RESULTS OF OPERATIONS
The following table sets forth certain operating information with respect to
the oil and gas operations of the Company for the three-month and six-month
periods ended June 30, 1998 and 1997:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
Sales:
Oil (Bbls) 102,961 75,077 203,554 153,312
Gas (Mcf) 1,374,295 439,161 2,554,908 995,409
Oil and Gas (BOE) 332,010 148,271 629,372 319,214
Sales Revenue:
Total Oil Sales $1,263,309 $1,509,871 $2,672,380 $3,308,323
Total Gas Sales 3,215,267 1,016,056 6,013,754 2,954,131
---------- ---------- ---------- ----------
Total Sales $4,478,576 $2,525,927 $8,686,134 $6,262,454
Average Sales Prices:
Oil (per Bbl) $ 12.27 $ 20.11 $ 13.13 $ 21.58
Gas (per Mcf) $ 2.34 $ 2.31 $ 2.35 $ 2.97
Per BOE $ 13.49 $ 17.04 $ 13.80 $ 19.62
Average Costs (per BOE):
Severance Taxes $ 0.44 $ 1.18 $ 0.48 $ 0.95
Lease operating expenses $ 2.72 $ 4.33 $ 2.87 $ 3.76
General and Administrative Expenses $ 1.74 $ 2.79 $ 1.76 $ 2.64
Depreciation, depletion and amort. $ 44.22 $ 13.84 $ 27.38 $ 11.26
6
REVENUES - The following table reflects an analysis of differences in the
Company's oil and gas revenues (expressed in thousands of dollars) between the
three and six-month periods ended June 30, 1998 and the comparable periods in
1997:
SECOND QUARTER FIRST SIX MONTHS 1998
1998 COMPARED TO COMPARED TO FIRST
SECOND QUARTER 1997 SIX MONTHS 1997
------------------- --------------------
Increase (decrease) in oil and
gas revenues resulting from
differences in:
Crude oil and condensate -
Prices $ (807,338) $(1,720,116)
Production 560,775 1,084,173
---------- -----------
(246,563) (635,943)
Natural gas -
Prices 35,664 (1,568,589
Production 2,163,547 4,628,212
---------- -----------
2,199,211 3,059,623
Increase (decrease) in oil and gas
Revenues $1,952,648 $2,423,680
========== ==========
The Company's oil and gas revenues increased approximately $2.4 million, or
39% to $8.7 million for the six months ended June 30, 1998 from $6.3 million for
the comparable period in 1997. Production levels for the six months ended June
30, 1998 increased 97% to 629 thousand barrels of oil equivalent ("MBOE") from
319 MBOE for the comparable period in 1997. Gas production volumes increased
157%, while oil volumes increased 33%. The Company's average sales prices
(including hedging activities) for oil and natural gas for the six months ended
June 30, 1998 were $13.13 per Bbl and $2.35 per Mcf versus $21.58 per Bbl and
$2.97 per Mcf in the comparable 1997 period. Revenues increased $5.7 million due
to the aforementioned production increases, and decreased by $3.3 million as a
result of sharply lower oil and gas prices.
For the quarter ended June 30, 1998 total oil and gas revenues increased
$2.0 million over revenues for the second quarter of 1997. Oil production for
the quarter ended June 30, 1998 was up 37% from the comparable quarter in 1997,
and gas production between comparable periods was up 213%. Oil prices for the
quarter ended June 30, 1998 declined 39%, to $12.27 per Bbl from $20.11 per Bbl
from the second quarter of 1997. Gas prices rose slightly during the quarter
ended June 30, 1998 to $2.34 per Mcf from $2.31 per Mcf for the second quarter
of 1997.
LEASE OPERATING EXPENSES - On a BOE basis, lease operating expenses
experienced a 24% decrease, to $2.87 per BOE for the three months ended June 30,
1998 from $3.76 per BOE in the comparable 1997 period. For the first six months
of 1998, lease operating expenses were up 50%, from $1,199,000 in 1997 to
$1,806,000 in the comparable 1998 period. For the quarter ended June 30, 1998
lease operating expenses were 40% higher than the comparable quarter in 1997.
The increases for the quarter ended June 30, 1998 and for the first six months
of 1998 resulted primarily from the six producing wells which were added between
the first half of 1997 and the first half of 1998. Two new wells were drilled
and four non-producing wells were successfully worked over and put into
production between the two periods.
7
SEVERANCE TAXES- The effective severance tax rate as a percentage of oil
and gas revenues decreased to 3.5% for the six months ended June 30, 1998 from
4.8% for the comparable period in 1997. For the quarter ended June 30, 1998 the
effective tax rate decreased to 3.3% from 6.9% for the comparable quarter in
1997. This relatively low effective rate is attributable to the increased
production from wells that have a state severance tax exemption under
Louisiana's severance tax abatement program, combined with the fact that, on a
value basis, the Company's production is approximately two-thirds natural gas,
which is taxed at a lower effective rate than oil.
GENERAL AND ADMINISTRATIVE EXPENSES - For the six months ended June 30,
1998 general and administrative ("G&A") expenses were $1.76 per BOE, a 33%
decrease from the $2.64 per BOE for the first six months of 1997. For the first
six months of 1998, G&A increased 31%, from $842,000 in 1997 to $1,105,000 in
1998. For the quarter ended June 30, 1998 G&A increased 39%, from $414,000 in
1997 to $ 576,000 in 1998, although the G&A per BOE during the same periods
decreased 37%. The second quarter and first six months decreases in G&A per BOE
in 1998 were due to increases in production during the periods as compared to
the comparable periods for 1997. The increases in actual G&A expenses in the
second quarter and six month periods ended June 30, 1998 were primarily the
result of salary adjustments made during the second half of 1997, including the
addition of a Chief Financial Officer, plus increased insurance costs directly
attributable to a Directors and Officers insurance policy approved by the Board
which became effective in December, 1997.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE - For the six months ended
June 30, 1998 depreciation, depletion and amortization ("DD&A") expense, before
the write-down of the full cost pool during the second quarter of 1998 (see
"FULL COST POOL WRITE-DOWN"), increased 44% over the comparable 1997 period.
Including the write-down of the full cost pool, DD&A increased 379% between the
first six months of 1997 and the first six months of 1998. For the quarter
ended June 30, 1998, DD&A expense, before the write-down of the full cost pool,
increased 29% over the comparable second quarter of 1997. Including the second
quarter 1998 write-down of the full cost pool, DD&A increased 615% between the
second quarter of 1997 and the second quarter of 1998. The write-down of the
full cost pool was primarily attributable to significant price declines in oil
and natural gas prices during 1998. Excluding the full cost pool write-down, the
DD&A increases for both the second quarter and the first six months of 1998 are
attributable to the Company's increased production and related future capital
costs between the comparable periods for 1997 and 1998.
On a BOE basis, which reflects the increases in production, the DD&A rate
(before the write-down of the full cost pool) for the first six months of 1998
was $8.25 per BOE compared to $11.26 per BOE for the same period in 1997, a
decrease of 27%. For the second quarter of 1998, DD&A per BOE (before the full
cost pool write-down) was $7.95 compared to $13.84 for the comparable period in
1997, for a decrease of 43%. Including the full cost pool write-down, the DD&A
rate was $27.38 per BOE for the first six months of 1998 and $44.22 per BOE for
the second quarter of 1998.
INTEREST EXPENSE - For the six months ended June 30, 1998 interest expense
increased to $5.0 million from $2.8 million for the comparable 1997 period. This
increase of $2.2 million in interest expense is due primarily to additional
interest in 1998 relating to the issuance of the
8
Notes on June 3, 1997 (see LIQUIDITY AND CAPITAL RESOURCES). For the quarter
ended June 30, 1998 interest expense increased $930,000 over the comparable
second quarter of 1997. This increase was also the result of the additional
interest due on the Notes as previously discussed.
NET LOSS FROM OPERATIONS - Due to the factors described above, net loss
from operations for the six months ended June 30, 1998 was $16.6 million, an
increase of $14.2 million over the net loss of $2.4 million reported for the
first six months of 1997. The net loss for the quarter ended June 30, 1998
increased $12.0 million, from $2.33 million in the second quarter of 1997 to
$14.30 million during the second quarter of 1998. For both the three and six-
month periods ended June 30, 1998, $12 million of the net loss from operations
was due to the full cost ceiling write-down discussed above.
INCOME TAX EXPENSE - The Company issued a second class of stock on June 3,
1997, effectively terminating its S Corporation election. As a result, the
Company is subject to Federal and state income taxes for the results of
operations subsequent to June 2, 1997. In addition, due to the termination of
the Company's status as an S Corporation for federal income tax purposes, the
Company was also required to establish a net deferred tax liability calculated
at the applicable Federal and state tax rates resulting primarily from financial
reporting and income tax reporting basis differences in oil and gas properties.
Accordingly, a net deferred tax liability of $5,081,000 was accrued at June 3,
1997. The Company has a net deferred tax asset at June 30, 1998 that has been
fully reserved due to the Company's operating losses.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL AND CASH FLOW - The Company had a working capital deficit
at June 30, 1998 of $3.8 million. The Company believes that its cash on hand
plus the expected cash flow from operations and available vendor financing will
be sufficient to fund its working capital needs for 1998, although exploration
and development projects have been deferred until additional financing is
developed. If oil and gas prices were to significantly decline from the levels
being received in August, 1998 the Company would likely need to complete an oil
and gas asset sale prior to December 1, 1998 to meet its debt obligations. There
can be no assurance that the Company would be able to conclude such a sale
within this time frame (See additional discussion below).
The Company will require additional financing to service its existing debt
and to complete its planned capital expenditures in 1998 and 1999. Management
has reviewed alternative sources of financing, including an initial public
offering, to satisfy these requirements. The Company has postponed any initial
public offering of equity until market conditions improve. At the beginning of
the second quarter of 1998, the Company initiated a process to raise working
capital by offering to sell an interest in the Company's oil and gas properties
to one or more industry partners, along with a commitment by the partner(s) to
participate in a representative number of the Company's exploration projects.
This process is expected to be concluded by the end of the third quarter in
1998. There can be no assurance that the Company will be able to obtain this
additional financing.
9
The following summary table reflects comparative cash flows for the Company
for the six-month periods ended June 30, 1998 and 1997:
SIX MONTHS ENDED JUNE 30,
---------------------------
1998 1997
-------- ---------
Net cash provided by operating activities $ 4,018 $ 2,223
Net cash (used) by investing activities (3,829) (16,182)
Net cash provided by financing activities 41 22,228
For the six months ended June 30, 1998 net cash provided by operating
activities increased to $4.0 million from $2.2 million during the comparable
period in 1997. This increase was primarily due to the Company's funding of
interest expense on the Notes from funds escrowed for the interest payment due
May 1, 1998.
Cash used in investing activities decreased by $12.4 million, from $16.1
million during the first six months of 1997 to $3.8 million during the
comparable period in 1998. This decrease was a result of decreased capital
spending during the first six months of 1998 as compared to the same period in
1997.
During the six months ended June 30, 1998 financing activities utilized
cash flow of $41,000, as compared to $22.2 million of cash flow generated from
financing activities during the comparable period in 1997. The decrease in cash
provided by financing activities during 1998 was the result of no new borrowings
by the Company during the first half of 1998.
LONG-TERM FINANCING - On June 3, 1997 the Company completed the private
sale to Jefferies & Company, Inc. ("Jefferies") of 70,000 units ("Note Units")
consisting of $70 million principal amount of the Series A Notes and warrants to
purchase 29,067 shares of Common Stock, no par value (the "Common Stock"), of
the Company at a price of $65,667,000 in a transaction not registered under the
Securities Act (the "Act") in reliance upon Section 4(2) of the Act and Rule 506
of Regulation D under the Act. Jefferies thereupon offered and resold the Note
Units only to qualified institutional buyers and a limited number of
institutional accredited investors at an initial price to such purchasers of
$68,467,000. Concurrently with the offering of the Note Units, the Company
completed a private sale to Jefferies of 200,000 units ("Equity Units")
consisting of 200,000 shares of Series A Cumulative Preferred Stock and warrants
to purchase 14,533 shares of Common Stock. The Equity Units were sold to
Jefferies for $9,200,000 in a transaction not registered under the Securities
Act in reliance upon Section 4 (2) of the Act and Rule 506 of Regulation D under
the Act. Jefferies thereupon offered and resold the Equity Units only to
qualified institutional buyers and a limited number of institutional accredited
investors at an initial price to such purchasers of $10,000,000.The offerings
and sale of the Note Units and the Equity Units are referred to herein as the
"Offerings". On November 5, 1997 the Company completed an exchange offer of its
13.5% Senior Secured Notes due 2004, Series B (the "Series B Notes") that were
registered under the Securities Act of 1933, for the Series A Notes. The Series
A Notes and the Series B Notes are collectively referred to as the "Notes".
10
The net proceeds to the Company from these Offerings were approximately
$74.9 million. A portion of the net proceeds (approximately $9.5 million) was
segregated into a capitalized interest account to pay interest on the Notes
through June 1, 1998. The Company used the remaining net proceeds of the
Offerings as follows: (i) approximately $35.2 million was used to repay all of
the outstanding indebtedness (including accrued interest and associated fees)
due under the EEP and EECIP loans; (ii) approximately $10.5 million was used to
repay all of the outstanding indebtedness (including accrued interest and
associated fees) due under the JEDI loan; (iii) $2.6 million was used to
purchase from EEP and EECIP a 7.5% overriding royalty interest in the Company's
Lake Enfermer Field, Manila Village Field and Boutte Field; (iv) $5.0 million
was used in connection with the Company's acquisition from Forman Petroleum
Corporation II ("FPCII"), a company whose sole stockholder is McLain J. Forman
(the Company's Chairman and principal stockholder), all of FPCII's interest in
the Bayou Fer Blanc Field and the West Gueydan Field, of which $1.5 million was
paid to FPCII, $1.0 million was used to pay bank debt and $2.5 million was used
to pay trade payables to third parties; (v) Jefferies received a fee of $1.9
million for financial advisory services provided to the Company and also
received a warrant to purchase 4,844 shares of Common Stock at the initial
exercise price of $1.00 per share; and (vi) $0.9 million was used to pay
expenses of the Offerings. The remaining net proceeds from the Offerings of
$9.4 million were used for capital expenditures, working capital and other
general corporate purposes.
HEDGING ACTIVITIES - With the objective of achieving more predictable
revenues and cash flows and reducing the exposure to fluctuations in oil and
natural gas prices, the Company has entered into hedging transactions of various
kinds with respect to both oil and natural gas. While the use of these hedging
arrangements limits the downside risk of reverse price movements, it may also
limit future revenues from favorable price movements. In January 1997, the
Company entered into forward sales arrangements with respect to approximately
40% of its estimated net natural gas production in the Lake Enfermer Field
through April 1997, at a weighted average price of approximately $3.18 per Mcf.
At the same time, the Company hedged approximately 30% of its estimated net oil
production through June 1997 at a weighted average price of $23.75 per Bbl. In
October 1997, the Company entered into forward sales arrangements with respect
to approximately 25% of its estimated net natural gas production in the Lake
Enfermer Field through March 1998, at a weighted average price of approximately
$3.19 per Mcf. In March, 1998 the Company entered into a forward sales
arrangement with respect to approximately 32% of its net natural gas production
in the Lake Enfermer Field for the six month period of April through October
1998, at a weighted price of approximately $2.34 per Mcf. The Company
continuously reevaluates its hedging program in light of market conditions,
commodity price forecasts, capital spending and debt service requirements. The
Company may hedge additional volumes through the remainder of 1998 and into 1999
or it may determine from time to time to terminate its then existing hedging
positions.
FULL COST POOL WRITE-DOWN - The Company uses the full cost method of
accounting for its investment in oil and natural gas properties. Under the full
cost method of accounting, all costs of acquisition, exploration and development
of oil and natural gas reserves are capitalized into a "full cost pool" as
incurred, and properties in the pool are depleted and charged to operations
using the future gross revenue method based on the ratio of current gross
revenue to total proved future gross revenues, computed based on current prices.
To the extent that such capitalized costs (net of accumulated depreciation,
depletion and amortization) less deferred taxes exceed the present value (using
a 10% discount rate) of estimated future net cash flow from
11
proved oil and natural gas reserves, and the lower of cost and fair value of
unproved properties after income tax effects, excess costs are charged to
operations. Once incurred, a write-down of oil and natural gas properties is not
reversible at a later date even if oil or natural gas prices increase. The
Company was required to write down its asset base at the end of the second
quarter of 1998 due primarily to significant declines in oil and natural gas
prices during 1998.
FORWARD-LOOKING STATEMENTS - The foregoing discussion of Liquidity and
Capital Resources includes forwarding looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Although the Company believes that its expectations are
based on reasonable assumptions, it can give no assurance that its goals will be
achieved. Important factors that could cause actual results to differ
materially from those in the forward looking statements herein include the
timing and extent of changes in commodity prices for oil and gas, the need to
develop and replace reserves, environmental risks, drilling and operating risks,
risks related to exploration and development, uncertainties about the estimates
of reserves, competition, government regulations and the ability of the Company
to meet its stated business goals.
RECENT ACCOUNTING PRONOUNCEMENTS - In June, 1998 the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities. The Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 1999.
A company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). Statement 133 cannot be applied retroactively. Statement 133 must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998).
The Company has not yet quantified the impact of adopting Statement 133 on
its financial statements and has not determined the timing of or method of
adoption of Statement 133. However, the Statement is unlikely to significantly
increase volatility in earnings and other comprehensive income, since the
Company does not currently have any derivative instruments as defined by
Statement 133 and does not anticipate entering into material amounts of such
investments in the future.
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PART II
Item 5. Other Information
OPERATIONAL ACTIVITIES - The Company has concentrated its efforts during
the second quarter of 1998 on the process of selling a working interest to one
or more industry partners in all of the Company's properties, including a
commitment by the purchaser(s) to participate in drilling a representative
selection of the Company's drilling projects. This process is continuing. The
Company has received some offers to date, and expects additional offers to be
tendered before a final decision is made.
PREFERRED STOCK DIVIDEND - The Company declared a dividend payable on June
1, 1998 to the holders of record of the Series A Cumulative Preferred Stock
payable at the rate of .0375 shares of Series A Cumulative Preferred Stock per
share of Series A Cumulative Preferred Stock of the Company, or a total of 8,376
dividend shares.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following instruments and documents are included as Exhibits to this
Form 10-Q. Exhibits incorporated by reference are so indicated by parenthetical
information.
Exhibit No. EXHIBIT
- ----------- -------
3(i) Restated Articles of Incorporation dated July 2, 1997 (filed as
Exhibit 3(i) to the Registration Statement on Form S-4 filed on
July 16, 1997 and is incorporated herein by reference (File No.
333-31375)).
3(ii) Bylaws (filed as Exhibit 3(ii) to the Registration Statement on
Form S-4 filed on July 16, 1997 and is incorporated herein by
reference (File No. 333-31375)).
4.1 Indenture dated as of June 3, 1997 by and among Forman Petroleum
Corporation, as issuer, and U.S.Trust Company of Texas, N.A. as
trustee (filed as Exhibit 4.1 to the Registration Statement on
Form S-4 filed on July 16, 1997 and is incorporated herein by
reference (File No. 333-31375)).
4.2 Act of Mortgage, Security Agreement, Assignment of Production and
Financing Statement dated November 21, 1996, by Forman Petroleum
Corporation for the benefit of Joint Energy Development
Investments Limited Partnership (filed as Exhibit 4.2) to the
Registration Statement on Form S-4 filed on July 16, 1997 and is
incorporated herein by reference (File No. 333-31375)).
4.3 Act of First Amendment to Mortgage, Security Agreement, Assignment
of Production and Financing Statement dated December 23, 1996, by
and among Forman Petroleum Corporation and Joint Energy
Development Investments Limited Partnership (filed as Exhibit 4.3
to the Registration Statement on Form S-4 filed on July 16, 1997
and is incorporated herein by reference (File No. 333-31375)).
4.4 Act of Second Amendment to Mortgage, Security Agreement,
Assignment of Production and Financing Statement dated June 3,
1997, by and among Forman Petroleum Corporation and U.S. Trust
Company of Texas, N.A. (filed as Exhibit 4.4 to the Registration
Statement on Form S-4 filed on July 16, 1997 and is incorporated
herein by reference (File No. 333-31375)).
4.5 Act of Assignment of Note and Liens dated June 3, 1997, by and
among Joint Energy Development Investments Limited Partnership, as
assignor, and U.S. Trust Company of Texas, N.A., as assignee
(filed as Exhibit 4.5 to the Registration Statement on Form S-4
filed on July 16, 1997 and is incorporated herein by reference
(File No. 333-31375)).
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4.6 Act of Mortgage, Security Agreement, Assignment of Production and
Financing Statement dated July 30, 1997, by Forman Petroleum
Corporation for the benefit of U.S. Trust Company of Texas, N.A.
as Trustee under the Indenture (filed as Exhibit 4.6 to the
Registration Statement on Form S-4 filed on July 16, 1997 and is
incorporated herein by reference (File No. 333-31375)).
10.2 Registration Rights Agreement dated June 3, 1997 by and between
Forman Petroleum Corporation and Jefferies & Company, Inc.
regarding Series A Cumulative Preferred Stock and warrants to
purchase Common Stock (filed as Exhibit 10.2 to the Registration
Statement on Form S-4 filed on July 16, 1997 and is incorporated
herein by reference (File No. 333-31375)).
27 Financial Data Schedule
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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.
Forman Petroleum Corporation
Date: August 14, 1998 By: /s/ McLain J. Forman
----------------------------------
McLain J. Forman
Chairman of the board, Chief
Executive Officer and President
By: /s/ Marvin J. Gay
-----------------------------------
Marvin J. Gay
Vice President and Treasurer
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