-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PHu9hVug+Y2NXycMGs7Z2QrQBSXpWx+AdRke943KpEbb+7wWU16vVqC+avSNZ2sQ bH0+z/FyV+QhenbHspVL0g== 0000891020-98-001336.txt : 19980818 0000891020-98-001336.hdr.sgml : 19980818 ACCESSION NUMBER: 0000891020-98-001336 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980817 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: OPTIMA PETROLEUM CORP CENTRAL INDEX KEY: 0000872248 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 980115468 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19020 FILM NUMBER: 98693099 BUSINESS ADDRESS: STREET 1: 600 595 HOWE STREET STREET 2: VANCOUVER BRITISH COLUMBIA CITY: CANADA V6C 2T5 STATE: A1 BUSINESS PHONE: 6046846886 MAIL ADDRESS: STREET 1: 600 595 HOWE ST STREET 2: VANCOUVER BRITISH COLUMBIA CITY: CANADA V6C 2T5 STATE: A1 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1998 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q _______________ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 1998 Commission file number:019020 OPTIMA PETROLEUM CORPORATION (Exact name of registrant as specified in its charter) CANADA 98-0115468 (State of Incorporation) (I.R.S. Employee Identification No.) 600-595 Howe Street, Vancouver V6C 2T5 British Columbia, Canada (Zip code) Registrant's telephone number, including area code: (604) 684-6886 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 ----- ----- Number of shares of Common Stock outstanding at August 7, 1998 11,002,346 1 2 OPTIMA PETROLEUM CORPORATION QUARTERLY REPORT ON FORM 10-Q INDEX PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS .......................................... 3 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ..................................... 15 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........... 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .............................. 17 SIGNATURES
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS OPTIMA PETROLEUM CORPORATION Consolidated Balance Sheets
June 30 December 31 1998 1997 ------------ ------------ (unaudited) (audited) ASSETS CURRENT Cash and cash equivalents 2,386,015 $ 5,660,354 Accounts receivable (Note 12(b)) 2,037,814 2,220,151 Note receivable - current portion (Note 4) 133,592 129,861 Accrued interest receivable 51,486 -- Cash in trust -- 715,250 ------------ ------------ 4,608,907 8,725,616 OTHER Cash held in trust (Note 5) 741,730 703,996 Advances to operators (Note 6) 760,720 547,200 Note receivable - long term portion (Note 4) 139,110 265,077 Loan receivable (Notes 2 and 13) 2,354,560 -- Petroleum and natural gas interests, full cost method (Note 7) 17,341,246 17,695,968 Deferred charges 410,883 205,486 ------------ ------------ $ 26,357,156 $ 28,143,343 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT Accounts payable and accrued liabilities $ 514,939 $ 868,796 ------------ ------------ 514,939 868,796 REVENUE IN DISPUTE (Note 12(a)) 1,047,664 1,023,998 LONG-TERM DEBT (Note 8) 147,160 143,050 SITE RESTORATION AND ABANDONMENT 369,297 369,297 SHAREHOLDERS' EQUITY Share capital (Note 9) Authorized 100,000,000 common shares Issued 11,002,346 (1997 - 11,002,346) common shares 30,891,689 30,891,689 Contributed surplus 608,222 608,222 Deficit (7,221,825) (5,761,709) ------------ ------------ 24,278,086 25,738,202 ------------ ------------ $ 26,357,146 $ 28,143,343 ============ ============
See accompanying notes to consolidated financial statements. ON BEHALF OF THE BOARD /s/ R.P. Bourgeois /s/ R.L. Hodgkinson - ---------------------------------- ------------------------------------ Director Director 3 4 OPTIMA PETROLEUM CORPORATION Consolidated Statements of Operations and Deficit (unaudited)
Three months ended June 30, Six months ended June 30, 1998 1997 1998 1997 ----------- ----------- ----------- ----------- OPERATING REVENUE Petroleum and natural gas sales $ 1,028,788 $ 2,109,034 $ 2,148,261 $ 4,575,682 COSTS AND EXPENSES Royalties and production taxes 268,892 680,870 624,519 1,411,155 Operating costs 230,851 253,741 569,026 439,240 Depletion and depreciation 1,042,504 828,795 1,915,218 1,694,795 Gain on sale of Canadian petroleum and natural gas interests (Note 3) -- (701,351) -- (701,351) General and administrative (Schedule) 488,739 517,014 874,778 912,004 Interest and other revenue (84,402) (47,927) (183,511) (61,271) Foreign exchange loss (gain) (491,872) 30,738 (245,410) 37,989 Interest and bank charges 3,809 58,836 6,453 143,244 Amortization of deferred financing costs 17,082 17,083 34,164 34,165 ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES (446,815) 471,235 (1,446,976) 665,712 Income taxes 13,140 260,000 13,140 260,000 ----------- ----------- ----------- ----------- NET INCOME (LOSS) (459,955) 211,235 (1,460,116) 405,712 DEFICIT, beginning of period (6,761,870) (732,012) (5,761,709) (926,489) ----------- ----------- ----------- ----------- DEFICIT, end of period $(7,221,825) $ (520,777) $(7,221,825) $ (520,777) =========== =========== =========== =========== NET INCOME (LOSS) PER SHARE $ (0.04) $ 0.02 $ (0.13) $ 0.04 =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. 4 5 OPTIMA PETROLEUM CORPORATION Consolidated Statements of Changes In Financial Position (unaudited)
Three months ended June 30, Six months ended June 30, 1998 1997 1998 1997 ------------ ------------ ------------ ------------ CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Income for the period $ (459,955) $ 211,235 $ (1,460,116) $ 405,712 Items not involving cash Gain on sale of Canadian petroleum and natural gas interests (net of tax) -- (441,351) -- (441,351) Depletion, depreciation and amortization 1,059,586 845,878 1,949,382 1,728,960 ------------ ------------ ------------ ------------ 599,631 615,762 489,266 1,693,321 Changes in non-cash working capital: Accounts receivable (94,840) (337,820) 182,337 (379,478) Accounts payable and accrued liabilities (147,154) (1,414,644) (353,857) (1,112,478) Net working capital adjustments on sale of Canadian petroleum and natural gas interests -- 264,690 -- (517,260) Cash in trust -- -- 715,250 Accrued interest receivable (51,486) -- (51,486) -- ------------ ------------ ------------ ------------ 306,151 (872,012) 981,510 (315,895) ------------ ------------ ------------ ------------ FINANCING ACTIVITIES Issue (repurchase) of common shares (net of issue expenses) -- (278,391) -- (359,571) Increase in (repayment of) bank debt 5,500 (6,746,837) 4,110 (6,712,567) Collection of note receivable 118,399 126,738 122,236 121,727 Revenue in dispute -- -- 23,666 -- Loan receivable (1,504,600) -- (2,354,560) -- ------------ ------------ ------------ ------------ (1,380,701) (6,898,490) (2,204,548) (6,950,411) ------------ ------------ ------------ ------------ INVESTING ACTIVITIES Proceeds from the sale of petroleum and natural gas interests -- 16,750,000 -- 16,750,000 Petroleum and natural gas interests (1,098,578) (1,847,812) (1,560,496) (2,951,611) Advances to operators (286,834) 434,356 (213,520) 186,531 Cash held in trust (35,837) (35,728) (37,734) (52,838) Deferred charges (151,657) 159 (239,561) -- ------------ ------------ ------------ ------------ (1,572,906) 15,300,975 (2,051,311) 13,932,082 ------------ ------------ ------------ ------------ INCREASE (DECREASE) IN CASH (2,647,456) 7,530,473 (3,274,349) 6,665,776 CASH AND CASH EQUIVALENTS, beginning of period 5,033,461 1,190,365 5,660,354 2,055,062 ------------ ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 2,386,005 $ 8,720,838 $ 2,386,005 $ 8,720,838 ============ ============ ============ ============
See accompanying notes to consolidated financial statements. 5 6 OPTIMA PETROLEUM CORPORATION Schedules of Consolidated General and Administrative Expense (unaudited)
Three months ended June 30, Six months ended June 30, 1998 1997 1998 1997 -------- -------- -------- -------- Consultants $188,119 $207,170 $316,273 $384,227 Office expense 86,390 96,703 197,312 202,404 Legal, audit and tax 74,135 96,387 125,953 112,149 Investor communication 52,225 59,318 65,188 90,866 Public listing 11,476 5,662 43,947 30,887 Office rent 32,722 28,358 64,824 49,457 Travel 43,672 21,937 61,281 39,313 Directors -- 1,479 -- 2,701 -------- -------- -------- -------- $488,739 $517,014 $874,778 $912,004 ======== ======== ======== ========
6 7 OPTIMA PETROLEUM CORPORATION Notes to Consolidated Financial Statements June 30, 1998 (unaudited) Page 7 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES (a) Basis of presentation The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31,1997, as filed with the Securities Exchange Commission. The consolidated financial statements included herein as of June 30, 1998, and for the six month periods ended June 30, 1998 and June 30, 1997 are unaudited. Management has reflected all adjustments, consisting of normal recurring adjustments, which it believes are necessary to present fairly the financial position as at June 30, 1998 and the results of operations and cash flows for the six month periods ended June 30, 1998 and June 30, 1997. (b) Basis of consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Optima Energy (U.S.) Corporation. All intercompany transactions and balances have been eliminated. (c) Cash and cash equivalents Cash and cash equivalents include short-term investments with a maturity of ninety days or less at the time of issue. (d) Petroleum and natural gas interests The Company follows the full cost method of accounting for petroleum and natural gas interests whereby all costs of exploring and developing petroleum and natural gas reserves, net of government grants, are capitalized by individual country cost centre. Such costs include land acquisition costs, geological and geophysical expenses, costs of drilling both productive and non-productive wells and overhead charges directly related to acquisition, exploration and development activities. The total carrying value of the Company's petroleum and natural gas interests, less accumulated depletion, is limited to the estimated future net revenue from production of proved reserves, based on unescalated prices and costs plus the lower of cost and net realizable value of unproved properties, less estimated future development costs, general and administrative expenses, financing costs and income taxes. The carrying value of unproved properties is reviewed periodically to ascertain whether impairment has occurred. Where impairment has occurred, the costs have been written down to their net realizable value. For each cost centre, the costs associated with proved reserves are depleted on the unit-of-production method based on an independent engineering estimate of proved reserves, after royalties, with natural gas converted to its energy equivalent at a ratio of six thousand cubic feet of natural gas to one barrel of oil. Site restoration and abandonment costs, net of expected recoveries for production equipment and facilities, at the end of their useful life, are provided for on a unit-of-production basis. - -------------------------------------------------------------------------------- 8 OPTIMA PETROLEUM CORPORATION Notes to Consolidated Financial Statements June 30, 1998 (unaudited) Page 8 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The resource expenditure deductions for income tax purposes related to exploration and development activities funded by flow-through share arrangements are renounced to investors in accordance with income tax legislation. Petroleum and natural gas interests are reduced by the estimated renounced income tax benefits when the expenditures are incurred. Equipment is depreciated on a straight-line basis over five years. (e) Deferred charges Debt financing costs are amortized on a straight line basis over the terms of the related loans. (f) Foreign currency translation The operations of the Company's U.S. subsidiary are considered integrated with the operations of the Company, and thus, are translated under the temporal method. Under this method, transactions of the Company and its subsidiaries that are denominated in foreign currencies are recorded in Canadian dollars at exchange rates in effect at the related transaction dates. Monetary assets and liabilities denominated in foreign currencies are adjusted to reflect exchange rates at the balance sheet date. Exchange gains and losses arising on the translation of monetary assets and liabilities, except as they relate to long-term debt, are included in the determination of income for the year. Unrealized foreign exchange gains and losses related to long-term debt are deferred and amortized over the remaining term of the related debt. (g) Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant areas requiring the use of management estimates relate to the determination of rates for depreciation, depletion and amortization and the impairment of petroleum and natural gas interests. Actual results could differ from these estimates. (h) Fair value of financial instruments Financial instruments include cash and cash equivalents, cash in trust, accounts receivable, note receivable, accounts payable and accrued liabilities and the current and long term portions of long term debt. Fair values approximate carrying values for these financial instruments since they are short term in nature, receivable or payable on demand, or bear interest at floating rates. (i) Revenue recognition Petroleum and natural gas sales are recognized upon delivery to the metered gate at the common carrier pipeline. - -------------------------------------------------------------------------------- 9 OPTIMA PETROLEUM CORPORATION Notes to Consolidated Financial Statements June 30, 1998 (unaudited) Page 9 - -------------------------------------------------------------------------------- 2. MERGER OF OPTIMA ENERGY (U.S.) COMPANY On February 11, 1998, the Company entered into a Plan and Agreement of Merger ("Agreement") whereby the Company's wholly owned U.S. subsidiary Optima Energy (U.S.) Corporation would merge with American Explorer, L.L.C., ("American") a Louisiana limited liability company, Goodson Exploration Company ("Goodson"), a Louisiana corporation, NAB Financial, L.L.C. ("NAB"), a Louisiana limited liability company, and Dexco Energy, Inc. ("Dexco"), a Louisiana corporation (American, Goodson, NAB and Dexco collectively, referred to as the acquired companies). Goodson, NAB and Dexco are holding companies which own all the outstanding common shares of American. American is engaged in the acquisition of and exploration for oil and natural gas. Under the terms of the Agreement, the acquired companies would be merged with the Company's U.S. subsidiary in exchange for 7,335,001 common shares of the Company to be issued to the former shareholders of the acquired companies, which will represent approximately 40% of the post acquisition outstanding common shares of the Company. In addition, the Company will issue 1,667,001 in contingent stock issue rights which will be exchangeable for common shares of the Company if the Company's share price exceeds U.S. $5 per share for 20 consecutive trading days. The contingent stock issue rights will terminate on the third anniversary after issuance if the condition stated above is not met within the three year time limit. In addition, the Company was required to provide American with a loan agreement of U.S. $2.5 million prior to March 1, 1998, with an initial draw of U.S. $500,000 available at that date and further draws based on the consummation of this Agreement. The Agreement is subject to a number of conditions which must be met to give effect to the merger including but not limited to the following: - the receipt of various regulatory approvals; - the approval of the Agreement by the shareholders of the Company and the shareholders of the acquired companies; and - due diligence by both the Company and the acquired companies. If the agreement is consummated, the Company will account for the acquisition using the purchase method. The estimated purchase price based on the recent trading history of the Company's common shares is approximately $12 million. 3. SALE OF CANADIAN PETROLEUM AND NATURAL GAS INTERESTS On May 30, 1997 and with an effective date of January 1, 1997, the Company closed the sale of a substantial portion of its Canadian petroleum and natural gas interests for cash proceeds of $16,750,000. 4. NOTE RECEIVABLE The note is due on June 18, 2000, bears no interest, is repayable in four equal installments of $90,780 U.S. which commenced June 18, 1997 and is secured by a mortgage on certain U.S. oil and gas properties. - -------------------------------------------------------------------------------- 10 OPTIMA PETROLEUM CORPORATION Notes to Consolidated Financial Statements June 30, 1998 (unaudited) Page 10 - -------------------------------------------------------------------------------- 5. CASH HELD IN TRUST As a condition of a U.S. oil and gas property acquisition, the Company is obliged to keep cash on deposit to fund future abandonment costs. 6. ADVANCES TO OPERATORS The Company maintains joint accounts with operators engaged by the Company to perform exploration and development work on its petroleum and natural gas interests. 7. PETROLEUM AND NATURAL GAS INTERESTS
June 30, December 31, 1998 1997 ----------- ----------- Petroleum and natural gas interests $ 36,133,874 $ 34,477,861 Other equipment 227,734 213,436 ----------- ----------- 36,361,608 34,691,297 Accumulated depreciation, depletion and write-offs (18,808,516) (16,995,329) ----------- ----------- $ 17,553,092 $ 17,695,968 ============ ============
As at June 30, 1998, unproved properties with capitalized costs of $2,911,126 (December 31, 1997 - $2,911,126) were not subject to depletion. It is expected that these properties will be evaluated over the next one to three years. 8. LONG-TERM DEBT Revolving $5,000,000 (U.S.) bank credit line, with a borrowing base of $3,250,000 (U.S.) drawn to $100,000 (U.S.) bearing interest monthly at U.S. Base Rate plus 1.5%, secured by a revolving note due May 15, 1999 and U.S. oil and gas properties. 9. SHARE CAPITAL (a) Authorized The authorized share capital consists of 100,000,000 common shares without par value. (b) Issued
Number of Share Shares Capital ------ ------- Balance at June 30, 1998 and December 31, 1997 11,002,346 $30,891,689
- -------------------------------------------------------------------------------- 11 OPTIMA PETROLEUM CORPORATION Notes to Consolidated Financial Statements June 30, 1998 (unaudited) Page 11 - -------------------------------------------------------------------------------- 9. SHARE CAPITAL (CONTINUED) (c) Reserved in respect of options
Exercise Exercisable Holder Number Price On or Before ------ ------ ----- ------------ Options Company directors and employees 52,500 $3.50 June 2, 1999 505,000 $4.15 June 12, 1999 100,000 $4.05 July 25, 1998 Non-related persons 125,000 $3.50 June 2, 1999 ------- ----- ------------ 782,500
(d) Net income (loss) per share Net income (loss) per share has been calculated based on the following weighted average numbers of shares outstanding:
1998 1997 ---- ---- Weighted average number of shares 11,002,346 11,313,653 ---------- ----------
10. RELATED PARTY TRANSACTIONS In the six months ended June 30, 1998, the Company was charged consulting expenses of $210,000 (1997- $267,690) by companies related by virtue of common directors. Office expense includes $59,554 (1997 - $58,800) paid to a related company. 11. RECONCILIATION BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES (a) Accounting for income taxes Under the asset and liability method of Statement of Financial Accounting Standards No. 109 ("SFAS 109"), deferred income tax assets and liabilities, reduced by a valuation allowance to an amount more likely than not to be recovered, are measured using enacted tax rates for the future income tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. The approximate effect of each component of deferred income tax assets and liabilities at June 30, 1998 is as follows: 12 OPTIMA PETROLEUM CORPORATION Notes to Consolidated Financial Statements June 30, 1998 (unaudited) Page 12 - -------------------------------------------------------------------------------- 11. RECONCILIATION BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES (CONTINUED) Net operating losses deferred tax assets $ 5,137,000 Petroleum and natural gas interests deferred tax liabilities (44,000) ----------- Net deferred tax assets 5,093,000 Less valuation allowance (5,093,000) Deferred tax assets, net of valuation allowance $ -- -----------
The valuation allowance equals the entire amount of the net deferred tax assets as the recognition criteria for deferred tax assets has not been met. Therefore, there is no effect of applying the provisions of SFAS 109 on the Company's financial statements. (b) Consolidated statements of changes in financial position Under United States accounting principles, the following items are not considered to be cash items and would not appear in the consolidated statements of changes in financial position: (i) the conversion of debentures (ii) the acquisition of subsidiary in exchange for the issuance of shares; and (iii) the issuance of shares on settlement of consulting fees and directors fees payable. As a result, cash flows from operating, financing and investing activities would be presented as follows under United States accounting principles:
1998 1997 ------------ ------------ Cash flows from: Operating activities $ 981,510 $ (303,001) Financing activities (2,204,548) (6,963,305) Investing activities (2,051,301) 13,932,082) ------------ ------------ Increase (Decrease) in cash $ (3,274,339) $ 6,665,776 ------------ ------------
Under United States accounting principles, the following supplementary cash flow information would be disclosed:
1998 1997 ------ -------- Interest paid $6,453 $143,244 ------ -------- Income taxes paid -- -- ------ --------
- -------------------------------------------------------------------------------- 13 OPTIMA PETROLEUM CORPORATION Notes to Consolidated Financial Statements June 30, 1998 (unaudited) Page 13 - -------------------------------------------------------------------------------- 11. RECONCILIATION BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES (CONTINUED) (c) Consolidated statements of operations and deficit There are no significant or material differences between Canadian and U.S. GAAP. (d) Balance sheets
June 30, December 31, 1998 1997 ----------- ----------- Deficit reported $ (7,009,969) $ (5,761,709) Reduction of common share stated capital (10,602,526) (10,602,526) ----------- ----------- Deficit for U.S. GAAP $(17,612,495) $(16,364,235) ============ ============
June 30, December 31, 1998 1997 ---------- ---------- Share capital reported $30,891,689 $30,891,689 Reduction of common share stated capital 10,602,526 10,602,526 ---------- ---------- Share capital for U.S. GAAP $41,494,215 $41,494,215 =========== ===========
The reduction of common share stated capital by off-setting an accumulated deficit against share capital is not allowed under U.S. GAAP. (e) Shareholders' equity under U.S. GAAP
June 30, December 31, 1998 1997 ------------ ------------ Opening shareholders' equity under U.S. GAAP $ 25,738,202 $ 30,672,428 Net income (loss) for U.S. GAAP (1,248,260) (4,035,220) Net share capital issued (repurchased) -- (899,006) ------------ ------------ Closing shareholders' equity under U.S. GAAP $ 24,489,942 $ 25,738,202 ============ ============
- -------------------------------------------------------------------------------- 14 OPTIMA PETROLEUM CORPORATION Notes to Consolidated Financial Statements June 30, 1998 (unaudited) Page 14 - -------------------------------------------------------------------------------- 12. LITIGATION (A) S.W. HOLMWOOD The Company is a party to litigation in the United States District Court, Western District of Louisiana (Amoco Production Company vs. Texas Meridian Resource Exploration, Inc.) by virtue of its master participation agreement with Meridian Resource Corporation (formally known as Texas Meridian Resource Corporation). The litigation enures from a joint exploration agreement between the plaintiff and defendant whereby adjoining petroleum and natural gas leases were pooled on a 50% / 50% joint ownership basis. Two producing oil wells have been drilled and placed on production. The plaintiff is claiming a breach of trust and demands surrender of 100% of the wells ownership on a retroactive basis and has received a favorable summary judgement. The operator pending the court's granting of damages intends to appeal the judgement. The Company holds a beneficial 4% working interest. Since the outcome of this litigation is not determinable, the Company has recorded 100% of the cumulative net operating income to date aggregating to $1,047,664 as Revenue in Dispute. (B) WILDHAY The Company is party to a statement of claim and counterclaim with a drilling contractor in the Judicial District of Calgary, Court of Queen's Bench, Alberta. The nature of this litigation is based on a contract wherein the drilling contractor drilled a well on behalf of the Company and a joint venture partner. The working interest participants are demanding $2,738,568 in throw away costs and expenses plus $1,001,755 for loss of the original well as well as $5,932,000 of reservoir damage from the drilling contractor. The well in question is reflected in property and equipment at $1.1 million and an additional $1.2 million is included as a receivable from the Company's joint venture partner. 13. SUBSEQUENT EVENT On July 27, 1998, the company issued a draw of U.S. $550,025 under the terms of the Plan and Agreement of Merger (see note #2). - -------------------------------------------------------------------------------- 15 PART I - FINANCIAL INFORMATION CONTINUED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's financial statements are stated in Canadian Dollars (CDN$) and are prepared in accordance with Canadian Generally Accepted Accounting Principles. The value of the U.S. Dollar in relation to the Canadian Dollar was CDN $1.5220 as at August 6, 1998.
- ----------------------------------------------------------------------------------------- Working Interest Quarter Ended June 30 1998 1998 - ----------------------------------------------------------------------------------------- Percentage Increase Increase CDN$ 1998 1997 (Decrease) (Decrease) - ----------------------------------------------------------------------------------------- Volume Natural Gas (mcf) 147,272 327,900 (180,628) (55)% Oil (bbls) 27,306 40,412 (13,106) (32)% Average Price per Unit Commodity Pricing Natural Gas (mcf) $ 3.45 $ 3.10 $ 0.35 11 % Oil (bbls) $ 18.47 $ 27.01 $ (8.54) (32)% Gross Revenue, Natural Gas $ 524,444 $1,017,642 $ (493,198) (48)% Oil $ 504,344 $1,091,392 $ (587,048) (54)% - ----------------------------------------------------------------------------------------- Total Revenue $1,028,788 $2,109,034 $1,080,246 - -----------------------------------------------------------------------------------------
RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1998 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 1997 The Company realized a net loss of $459,855 for the second quarter of 1998 or $0.04 per share as compared to a profit of $211,235 or $0.02 per share in the second quarter of 1997. The weighted average of shares in the first quarter of 1998 was 11,002,346 as compared to 11,299,685 in 1997. The decline in financial results is due to the following factors: - decline in commodity prices of approximately 30% over the same reporting period last year - the Company's decision to curtail exploration and development activities pending the merger with American Explorer, L.L.C. - continuing decline in oil production at East Cameron. OPERATING REVENUES Gross revenue decreased by $1,080,246 to $1,028,788 from $2,109,034 a year earlier, a decline of 51%. Actual production on a BOE basis (6 mcf of natural gas equal 1 barrel of oil) fell 46% whereas commodity prices increased 11% for natural gas but declined 32% for crude oil. 15 16 OPERATING EXPENSES Oil and natural gas operating expenses were $230,851 as compared to $253,741 a year earlier. On a BOE equivalent basis, operating expenses increased to $4.45 per BOE from $2.67 BOE in the second quarter of 1997. This increase reflects lower productivity at Back Ridge and the elimination of the highly productive S.W. Holmwood wells which were reflected in 1997 production. INTEREST AND OTHER INCOME Interest income increased to $84,402 from $47,927 a year earlier whereas interest expense and bank charges fell to $3,809 from $58,836 in the first quarter of 1997. This improvement is due to the cash proceeds on the sale of Canadian assets which were received on May 30, 1997 as well as the loan to American Explorer, L.L.C. which bears a 10% interest rate. The foreign exchange gain of $491,872 as compared to a foreign exchange loss of $30,738 a year earlier is due to the Canadian dollar decline against the US dollar from $0.70592 to $0.67953 from March 31, 1998 to June 30, 1998. DEPLETION, DEPRECIATION AND AMORTIZATION The depletion and depreciation was $1,042,504 in the second quarter of 1998 as compared to $828,795 a year earlier. On a BOE basis the 1998 expense was $20.10 per BOE as compared to $8.72 per BOE a year earlier (this calculation is based on 6 MCF of natural gas equals 1 barrel of oil). A provision of $177,439 for the Trinidad Onshore Study as well as a provision of $34,412 for the Ningxia, China evaluation have been included. On a BOE basis second quarter depletion and depreciation is $16.02 per BOE having excluded these two provisions. The amortization expense of $17,082 is identical to a year earlier as it reflects the amortization of costs on a straight line basis. GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expenses of $488,739 reflect a modest decline of 5% from $517,014 a year earlier. On a BOE basis, converting natural gas to its equivalent barrels of oil at a ratio of 6 mcf equals 1 barrel, general and administrative expenses increased to $9.43 per BOE as compared to $5.44 per BOE in 1997 an increase of 73%. This increase on a BOE basis is a result of the decline in production from the second quarter of 1997. BALANCE SHEET Total assets as at June 30, 1998 were $26,357,146 as compared to $28,143,343 as at December 31, 1997. Petroleum and natural gas interests declined marginally by $354,722 since the beginning of the fiscal year as capital expenditures of $1,560,498 were offset by depletion and depreciation expenses of $1,915,218. Working Capital decreased to $4,093,968 from $7,856,820 as at December 31, 1998. Shareholders' Equity has decreased by $1,460,116 reflecting the cumulative loss for the first six months of 1998. Certain of the foregoing statements may be deemed "forward-looking statements" within the meaning of the Securities Exchange Act of 1934. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to have been correct. Certain risks and uncertainties inherent in the Company's business are set forth in the filings of the Company with the Securities and Exchange Commission. These risks include price changes for oil and gas, risks regarding estimates of reserves, production risks, governmental regulations and general risks regarding the exploration for, and the production of, oil and gas reserves. 16 17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS All matter presented at the Annual General Meeting of shareholders held on June 30, 1998 were adopted. The Company has called a special meeting of shareholders to be held on August 21, 1998 in Vancouver, British Columbia for the following purposes: 1. To approve, by a majority of disinterested shareholders, the Plan and Agrement of Merger dated February 11, 1998 among the Company, Optima Energy (U.S.) Corporation, Goodson Exploration Company, NAB Financial, L.L.C., Dexco Energy, Inc. and American Explorer, L.L.C. and the issuance of up to 7,335,001 common shares and contingent rights to receive an additional 1,667,001 common shares pursuant to that agreement; 2. To approve, as a special resolution, the continuation of the Company into the State of Delaware and adoption of a new Certificate of Incorporation; 3. To elect as additional directors for the ensuing year, Charles T. Goodson, Alfred J. Thomas, II, Ralph J. Daigle, Robert Brooksher and Daniel G. Fournerat; 4. To approve, as a special resolution, the change of the Company's name to PetroQuest Energy, Inc.; 5. To approve, by a majority of disinterested shareholders, the amendment of 465,000 outstanding stock options to change the exercise price and expiry date and the cancellation of all other options outstanding under the Company's current stock option plans; 6. To approve, by a majority of disinterested shareholders, the replacement of the current stock option plans with a new stock option plan authorizing the issuance of stock options exercisable for up to 1,800,000 shares of the Company; 7. To approve, by a majority of disinterested shareholders, the acquisition of a 5% working interest in the Valentine prospect; 8. To approve the transaction of such other business as may properly come before the Meeting. A Proxy Statement/InformationCircular/Prospectus was mailed on or about July 20, 1998 to shareholders of record at July 2, 1998 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Whereas the Company reported on a Form 8-K filed February 28, 1998 that it had entered into a definite merger agreement with American Explorer, L.L.C. of Lafayette, Louisiana, and in accordance with regulatory disclosure requirements on April 17, 1998, it filed pro forma financial statements for the 1996 and 1997 fiscal years reflecting the combination of the Company with American Explorer, L.L.C. On June 2, 1998 a Form 8-K/A-1 was filed to amend the April 17, 1998 filing to include the results of operations through the March 31, 1998 quarter end. 18 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 there unto duly authorized. OPTIMA PETROLEUM CORPORATION AND SUBSIDIARIES (Registrant) Date: August 10, 1998 By: /s/R.L. Hodgkinson Robert L. Hodgkinson President-CEO By: /s/ R.P. Bourgeois Ronald P. Bourgeois Chief Financial Officer-Secretary 18 -----END PRIVACY-ENHANCED MESSAGE-----