-----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, Ru5lpi2Pb39aT7ddJcXDPoPCyYtbmsq3FeADyt4r8Z0OnzGeP6MHP7COwSuqIJ4c 0bi2Fg6uJeEb3BFv3ATtQw== 0000950134-02-002044.txt : 20020415 0000950134-02-002044.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950134-02-002044 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020313 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PETROQUEST ENERGY INC CENTRAL INDEX KEY: 0000872248 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 980115468 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19020 FILM NUMBER: 02574111 BUSINESS ADDRESS: STREET 1: 400 E KALISTE SALOOM RD SUITE 3000 CITY: LAFAYETTE STATE: LA ZIP: 70508 BUSINESS PHONE: 3372327028 MAIL ADDRESS: STREET 1: 600 595 HOWE ST STREET 2: VANCOUVER BRITISH COLUMBIA CITY: CANADA V6C 2T5 STATE: A1 FORMER COMPANY: FORMER CONFORMED NAME: OPTIMA PETROLEUM CORP DATE OF NAME CHANGE: 19950726 10-K 1 d94918e10-k.txt FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 2001 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) |X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001 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: 019020 PETROQUEST ENERGY, INC. (Exact name of registrant as specified in its charter) State of incorporation: Delaware I.R.S. Employer Identification No. 98-0115468 400 E. Kaliste Saloom Road, Suite 3000 Lafayette, Louisiana 70508 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (337) 232-7028 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock, Par Value $.001 Per Share (Title of Class) 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. |X| Yes | | No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. | | The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $218,988,808 as of March 11, 2002 (based on the last reported sale price of such stock on the Nasdaq National Market System). As of March 11, 2002, the registrant had outstanding 37,756,691 shares of Common Stock, par value $.001 per share. Document incorporated by reference: Proxy Statement of PetroQuest Energy, Inc. relating to the Annual Meeting of Stockholders to be held on April 30, 2002 which is incorporated into Part III of this Form 10-K. TABLE OF CONTENTS
Page No. -------- PART I Item 1. Business ...................................................... 1 Item 2. Properties .................................................... 14 Item 3. Legal Proceedings ............................................. 16 Item 4. Submission of Matters to a Vote of Security Holders ........... 16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ....................................................... 16 Item 6. Selected Financial Data ....................................... 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..................................... 18 Item 7A. Quantitative and Qualitative Disclosure About Market Risks .... 23 Item 8. Financial Statements and Supplementary Data ................... 23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...................................... 23 PART III Item 10. Directors and Executive Officers of the Registrant ............ 24 Item 11. Executive Compensation ........................................ 24 Item 12. Security Ownership of Certain Beneficial Owners and Management .................................................... 24 Item 13. Certain Relationships and Related Transactions ................ 24 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ...................................................... 24 Index to Financial Statements ................................. F-1
This Form 10-K contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts included in and incorporated by reference into this Form 10-K are forward looking statements. These forward looking statements include, without limitation, statements regarding our estimate of the sufficiency of our existing capital resources and our ability to raise additional capital to fund cash requirements for future operations, and regarding the uncertainties involved in estimating quantities of proved oil and natural gas reserves, in prospect development and property acquisitions and in projecting future rates of production, timing of development expenditures and drilling of wells and the operating hazards attendant to the oil and gas business. Although we believe that the expectations reflected in these forward looking statements are reasonable, we cannot give any assurance that such expectations reflected in these forward looking statements will prove to have been correct. When used in this Form 10-K, the words "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements for a number of important reasons, including those discussed under "Management's Discussions and Analysis of Financial Condition and Results of Operations," "Risk Factors" and elsewhere in this Form 10-K. You should read these statements carefully because they discuss our expectations about our future performance, contain projections of our future operating results or our future financial condition, or state other "forward-looking" information. Before you invest in our common stock, you should be aware that the occurrence of any of the events described in these risk factors and elsewhere in this Form 10-K could substantially harm our business, results of operations and financial condition and that upon the occurrence of any of these events, the trading price of our common stock could decline, and you could lose all or part of your investment. We cannot guarantee any future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update any of the forward-looking statements in this Form 10-K after the date of this Form 10-K. PART I ITEM 1. BUSINESS OVERVIEW PetroQuest Energy, Inc. ("PetroQuest" or the "Company") is incorporated in the State of Delaware and is an independent oil and gas company engaged in the generation, exploration, development, acquisition and operation of oil and gas properties onshore and offshore in the Gulf Coast Region. PetroQuest and its predecessors have been active in this area since 1986. The Company's business strategy is to increase production, cash flow and reserves through generation, exploration, development and acquisition of properties located in the Gulf Coast Region. On September 1, 1998, the Company, formerly known as Optima Petroleum Corporation ("Optima"), completed a merger and reorganization (the "Merger") pursuant to a Plan and Agreement of Merger dated February 11, 1998 by and among Optima, Optima Energy (U.S.) Corporation ("Optima (U.S.)"), Goodson Exploration Company ("Goodson"), NAB Financial, L.L.C. ("NAB") and Dexco Energy, Inc. ("Dexco"), pursuant to which Optima (U.S.) merged into PetroQuest Energy, Inc., a newly formed Louisiana corporation ("PetroQuest Louisiana"). Concurrently, PetroQuest Louisiana, through a merger of PetroQuest Louisiana with Goodson, NAB and Dexco, acquired 100% of the ownership interest of American Explorer L.L.C. ("American Explorer"), all which were owned by Goodson, NAB and Dexco prior to the Merger. Concurrent with the Merger, PetroQuest continued from a Canadian corporation to a Delaware corporation, converted each share of Optima no par value common stock into one share of the Company's $.001 par value common stock, changed its name to "PetroQuest Energy, Inc." and adopted a new certificate of incorporation. The operating results of American Explorer have been consolidated in the Company's consolidated statement of operations since September 1, 1998. 1 In addition, management of PetroQuest was changed to the management of American Explorer. The Canadian offices were closed and the Company's headquarters were moved to Lafayette, Louisiana. PetroQuest maintains an offshore exploration office in Houston, Texas. On December 31, 2000, the Company underwent a corporate reorganization. The Company's subsidiary, PetroQuest Energy, Inc., a Louisiana corporation, was merged into PetroQuest Energy One, L.L.C., a Louisiana limited liability company. In addition, PetroQuest Energy One, L.L.C. changed its name to PetroQuest Energy, L.L.C., a single-member Louisiana limited liability company, and PetroQuest Energy, Inc., a Delaware corporation, continues to be its sole member. DEFINED TERMS Natural gas is stated in billion cubic feet ("Bcf"), million cubic feet ("MMcf") or thousand cubic feet ("Mcf"). Oil is stated in barrels ("Bbl") or thousand barrels ("MBbl). Mmcfe and Mcfe represent the equivalent of one million and one thousand cubic feet of natural gas, respectively. Oil is converted to gas at a ratio of one barrel of liquids per six Mcf of gas, based on relative energy content. "Net" acres, production or wells refers to the total acres, production or wells in which PetroQuest has a working interest, multiplied by the percentage working interest owned by PetroQuest. EXPLORATION AND DEVELOPMENT The Company is engaged in the exploration, development, acquisition and operation of oil and gas properties onshore and offshore in the Gulf Coast Region. As of December 31, 2001, the Company's estimated proved reserves totaled 6,213 MBbl of oil and 44,944 MMcf of natural gas, with pre-tax present value discounted at 10% of the estimated future net revenues based on constant prices in effect at year-end ("discounted cash flow") of $88,230,449. Approximately 55% of the Company's reserves are proved developed reserves. The Company operates nine fields representing approximately 95% of the total discounted cash flow attributable to estimated proved reserves. SIGNIFICANT PROPERTIES SHIP SHOAL 72, FEDERAL OUTER CONTINENTAL SHELF WATERS. PetroQuest acquired an 85% working interest in 14,000 acres in the fourth quarter of 2000 and the remaining 15% working interest in this field during 2001. This field has produced in excess of 350 billion cubic feet equivalent to date. During 2001, the Company drilled and completed four wells that produced over 4.9 Bcf net to the Company. The Company had a fifth well in progress at year-end that was completed in February 2002. Additional developmental opportunities and exploration potential in a deeper horizon have been identified and are currently being evaluated for future drilling. Current plans call for nine additional developmental wells and three exploratory wells. Reprocessed 3-D data is currently being reviewed for additional opportunities. TURTLE BAYOU FIELD, TERREBONNE PARISH, LA. To date, the Company has participated in the drilling of fifteen wells in the Turtle Bayou Field. As of December 31, 2001, there are four producing wells in the field in which we hold a working interest. Collectively, the four producing wells averaged approximately 26,000 Mcf of natural gas and 570 barrels of oil per day for the month of December 2001. Our working interest varies between 14% and 43% with a weighted average working interest of approximately 34%. PetroQuest acquired a 3-D regional seismic survey shot in 1998, which incorporates the Turtle Bayou Field. As a result of studying this data, six additional prospects with multiple objectives have been identified. The first five wells have been drilled and the Company has completed four of these wells as of December 31, 2001. VERMILION BLOCK 376, FEDERAL OUTER CONTINENTAL SHELF WATERS ("FALCON PROSPECT"). The Company and its partners drilled a well on this property in the fourth quarter of 1999 and logged 285 feet of gross hydrocarbon column (136 feet net). An additional well was drilled in the second quarter of 2000 logging 112 feet of gross hydrocarbon pay (74 feet net). PetroQuest is the operator of the project and owns a 43% working interest. During 2000, an approximately 2,500 ton production platform was fabricated and placed in service. The field began production in December 2000 and, during 2001, produced at an average rate of approximately 750 Bbls per day of oil and 2,500 Mcf per day of natural gas, net to the Company. EUGENE ISLAND 147, FEDERAL OUTER CONTINENTAL SHELF WATERS. PetroQuest initially had a 25% working interest in this lease and acquired the remaining 75% working interest from a major oil and gas company. A 63.5% working interest was subsequently sold to other oil and gas companies and we currently hold a 36.5% working interest. During 2000, we drilled two successful wells on this offshore block and 2001 production averaged approximately 2,500 Mcfe per day net to PetroQuest. Additional exploration opportunities have been identified and are currently being evaluated for future drilling. 2 VALENTINE FIELD, LAFOURCHE PARISH, LA. The Valentine Field has to date produced in excess of one trillion cubic feet of gas equivalent. For the month of December 2001, production averaged 250 Bbls of oil per day and 3,100 Mcf of natural gas per day from six wells. We recently sold our interest in this field for $18.6 million, effective January 1, 2002. At December 31, 2001, our independent reservoir engineering firm attributed 7.3 Bcfe of proved reserves net to our interest in this field. MARKETS PetroQuest's ability to market oil and gas from the Company's wells depends upon numerous factors beyond the Company's control, including the extent of domestic production and imports of oil and gas, the proximity of the gas production to gas pipelines, the availability of capacity in such pipelines, the demand for oil and gas by utilities and other end users, the availability of alternative fuel sources, the effects of inclement weather, state and federal regulation of oil and gas production and federal regulation of gas sold or transported in interstate commerce. No assurance can be given that PetroQuest will be able to market all of the oil or gas produced by the Company or that favorable prices can be obtained for the oil and gas PetroQuest produces. In view of the many uncertainties affecting the supply and demand for oil, gas and refined petroleum products, the Company is unable to predict future oil and gas prices and demand or the overall effect such prices and demand will have on the Company. For the year ended December 31, 2001, the Company had four customers who accounted for 19%, 19%, 15% and 13% of total revenues, respectively. For the year ended December 31, 2000, the Company had three customers who accounted for 58%, 15% and 11% of total revenues, respectively. For the year ended December 31, 1999, the Company had three customers who accounted for 22%, 12% and 10% of total revenues, respectively. PetroQuest does not believe that the loss of any of the Company's oil or gas purchasers would have a material adverse effect on the Company's operations due to the availability of other purchasers. FEDERAL REGULATIONS SALES AND TRANSPORTATION OF NATURAL GAS. Historically, the transportation and sales for resale of natural gas in interstate commerce have been regulated pursuant to the Natural Gas Act of 1938 ("NGA"), the Natural Gas Policy Act of 1978 ("NGPA") and Federal Energy Regulatory Commission ("FERC") regulations. Effective January 1, 1993, the Natural Gas Wellhead Decontrol Act deregulated the price for all "first sales" of natural gas. Thus, all sales of gas by the Company may be made at market prices, subject to applicable contract provisions. Sales of natural gas are affected by the availability, terms and cost of pipeline transportation. Since 1985, the FERC has implemented regulations intended to make natural gas transportation more accessible to gas buyers and sellers on an open-access, non-discriminatory basis. Beginning in April 1992, the FERC issued Order No. 636 and a series of related orders, which required interstate pipelines to provide open-access transportation on a not unduly discriminatory basis for all natural gas shippers. The FERC has stated that it intends for Order No. 636 and its future restructuring activities to foster increased competition within all phases of the natural gas industry. Although Order No. 636 does not directly regulate our production and marketing activities, it does affect how buyers and sellers gain access to the necessary transportation facilities and how we and our competitors sell natural gas in the marketplace. The courts have largely affirmed the significant features of Order No. 636 and the numerous related orders pertaining to individual pipelines. However, some appeals remain pending and the FERC continues to review and modify its regulations regarding the transportation of natural gas. For example, the FERC issued Order No. 637 which; - lifts the cost-based cap on pipeline transportation rates in the capacity release market until September 30, 2002, for short-term releases of pipeline capacity of less than one year, - permits pipelines to file for authority to charge different maximum cost-based rates for peak and off-peak periods, - encourages, but does not mandate, auctions for pipeline capacity, - requires pipelines to implement imbalance management services, - restricts the ability of pipelines to impose penalties for imbalances, overruns and non-compliance with operational flow orders, and 3 - implements a number of new pipeline reporting requirements. Order No. 637 also requires the FERC staff to analyze whether the FERC should implement additional fundamental policy changes. These include whether to pursue performance-based or other non-cost based ratemaking techniques and whether the FERC should mandate greater standardization in terms and conditions of service across the interstate pipeline grid. In April 1999 the FERC issued Order No. 603, which implemented new regulations governing the procedure for obtaining authorization to construct new pipeline facilities. In September 1999, the FERC issued a related policy statement establishing a presumption in favor of requiring owners of new pipeline facilities to charge rates for service on new pipeline facilities based solely on the costs associated with such new pipeline facilities. We cannot predict what further action the FERC will take on these matters, nor can we accurately predict whether the FERC's actions will achieve the goal of increasing competition in markets in which our natural gas is sold. However, we do not believe that any action taken will affect the Company in a way that materially differs from the way it affects other natural gas producers, gatherers and marketers. The Outer Continental Shelf Lands Act, which the FERC implements as to transportation and pipeline issues, requires that all pipelines operating on or across the Outer Continental Shelf provide open-access, non-discriminatory service. Historically, the FERC has opted not to impose regulatory requirements under its Outer Continental Shelf Lands Act authority on gatherers and other entities outside the reach of its NGA jurisdiction. However, the FERC in 2000 issued Order No. 639 and 639-A, requiring that virtually all non-proprietary pipeline transporters of natural gas on the Outer Continental Shelf report information on their affiliations, rates and conditions of service. The reporting requirements established by the FERC in Order No. 639 and 639-A may apply, in certain circumstances, to operators of production platforms and other facilities on the Outer Continental Shelf, with respect to gas movements across such facilities. Certain offshore service providers have requested FERC to treat certain information as confidential and not subject to public review. On September 13, 2001, FERC issued an order denying confidential treatment; however, on January 11, 2002, the United States District Court for the District of Columbia granted the motion for summary judgment of the offshore service providers seeking confidential treatment of certain information they are required to report. FERC has indicated that it will appeal. Among the FERC's stated purposes in issuing such rules was the desire to increase transparency in the market, to provide producers and shippers on the Outer Continental Shelf with greater assurance of (a) open-access services on pipelines located on the Outer Continental Shelf and (b) non-discriminatory rates and conditions of service on such pipelines. The FERC retains authority under the Outer Continental Shelf Lands Act to exercise jurisdiction over gatherers and other entities outside the reach of its NGA jurisdiction if necessary to ensure non-discriminatory access to service on the Outer Continental Shelf. We do not believe that any FERC action taken under its Outer Continental Shelf Lands Act jurisdiction will affect us in a way that materially differs from the way it affects other natural gas producers, gatherers and marketers. Additional proposals and proceedings that might affect the natural gas industry are pending before Congress, the FERC and the courts. The natural gas industry historically has been very heavily regulated; therefore, there is no assurance that the less stringent regulatory approach recently pursued by the FERC and Congress will continue. SALES AND TRANSPORTATION OF CRUDE OIL. Sales of crude oil, condensate and natural gas liquids by the Company are not currently regulated, and are subject to applicable contract provisions made at market prices. In a number of instances, however, the ability to transport and sell such products is dependent on pipelines whose rates, terms and conditions of service are subject to the FERC's jurisdiction under the Interstate Commerce Act. In other instances, the ability to transport and sell such products is dependent on pipelines whose rates, terms and conditions of service are subject to regulation by state regulatory bodies under state statutes. The regulation of pipelines that transport crude oil, condensate and natural gas liquids is generally more light-handed than the FERC's regulation of gas pipelines under the NGA. Regulated pipelines that transport crude oil, condensate, and natural gas liquids are subject to common carrier obligations that generally ensure non-discriminatory access. With respect to interstate pipeline transportation subject to regulation of the FERC under the Interstate Commerce Act, rates generally must be cost-based, although market-based rates or negotiated settlement rates are permitted in certain circumstances. Pursuant to FERC Order No. 561, pipeline rates are subject to an indexing methodology. Under this indexing methodology, pipeline rates are subject to changes in the Producer Price Index for Finished Goods, minus one percent. A pipeline can seek to increase its rates above index levels provided that the pipeline can establish that there is a substantial divergence between the actual costs experienced by the pipeline and the rate resulting from application of the index. A pipeline can seek to charge market-based 4 rates if it establishes that it lacks significant market power. In addition, a pipeline can establish rates pursuant to settlement if agreed upon by all current shippers. A pipeline can seek to establish initial rates for new services through a cost-of-service proceeding, a market-based rate proceeding, or through an agreement between the pipeline and at least one shipper not affiliated with the pipeline. The FERC indicated in Order No. 561 that it will assess in 2000 how the rate-indexing method is operating. The FERC issued a Notice of Inquiry on July 27, 2000 seeking comment on whether to retain or to change the existing index. After consideration of all the initial and reply comments, the FERC concluded on December 14, 2000 that the PPI-1 index has reasonably approximated the actual cost changes in the oil pipeline industry during the preceding five year period, and that it should be continued for the subsequent five year period. FEDERAL LEASES. The Company maintains operations located on federal oil and gas leases, which are administered by the Minerals Management Service pursuant to the Outer Continental Shelf Lands Act. These leases are issued through competitive bidding and contain relatively standardized terms. These leases require compliance with detailed Minerals Management Service regulations and orders that are subject to interpretation and change by the Minerals Management Service. For offshore operations, lessees must obtain Minerals Management Service approval for exploration, development and production plans prior to the commencement of such operations. In addition to permits required from other agencies such as the Coast Guard, the Army Corps of Engineers and the Environmental Protection Agency, lessees must obtain a permit from the Minerals Management Service prior to the commencement of drilling. The Minerals Management Service has promulgated regulations requiring offshore production facilities located on the Outer Continental Shelf to meet stringent engineering and construction specifications. The Minerals Management Service also has regulations restricting the flaring or venting of natural gas, and has proposed to amend such regulations to prohibit the flaring of liquid hydrocarbons and oil without prior authorization. Similarly, the Minerals Management Service has promulgated other regulations governing the plugging and abandonment of wells located offshore and the installation and removal of all production facilities. To cover the various obligations of lessees on the Outer Continental Shelf, the Minerals Management Service generally requires that lessees have substantial net worth or post bonds or other acceptable assurances that such obligations will be met. The cost of these bonds or assurances can be substantial, and there is no assurance that they can be obtained in all cases. Under some circumstances, the Minerals Management Service may require operations on federal leases to be suspended or terminated. The Minerals Management Service also administers the collection of royalties under the terms of the Outer Continental Shelf Lands Act and the oil and gas leases issued under the Act. The amount of royalties due is based upon the terms of the oil and gas leases as well as of the regulations promulgated by the Minerals Management Service. These regulations are amended from time to time, and the amendments can affect the amount of royalties that we are obligated to pay to the Minerals Management Service. However, we do not believe that these regulations or any future amendments will affect the Company in a way that materially differs from the way it affects other oil and gas producers, gathers and marketers. FEDERAL, STATE OR AMERICAN INDIAN LEASES. In the event the Company conducts operations on federal, state or American Indian oil and gas leases, such operations must comply with numerous regulatory restrictions, including various nondiscrimination statutes, and certain of such operations must be conducted pursuant to certain on-site security regulations and other appropriate permits issued by the Bureau of Land Management ("BLM") or Minerals Management Service or other appropriate federal or state agencies. The Mineral Leasing Act of 1920 ("Mineral Act") prohibits direct or indirect ownership of any interest in federal onshore oil and gas leases by a foreign citizen of a country that denies "similar or like privileges" to citizens of the United States. Such restrictions on citizens of a "non-reciprocal" country include ownership or holding or controlling stock in a corporation that holds a federal onshore oil and gas lease. If this restriction is violated, the corporation's lease can be cancelled in a proceeding instituted by the United States Attorney General. Although the regulations of the BLM (which administers the Mineral Act) provide for agency designations of non-reciprocal countries, there are presently no such designations in effect. The Company owns interests in numerous federal onshore oil and gas leases. It is possible that holders of equity interests in the Company may be citizens of foreign countries, which at some time in the future might be determined to be non-reciprocal under the Mineral Act. STATE REGULATIONS Most states regulate the production and sale of oil and natural gas, including requirements for obtaining drilling permits, the method of developing new fields, the spacing and operation of wells and the prevention of waste of oil and gas 5 resources. The rate of production may be regulated and the maximum daily production allowable from both oil and gas wells may be established on a market demand or conservation basis or both. The Company may enter into agreements relating to the construction or operation of a pipeline system for the transportation of natural gas. To the extent that such gas is produced, transported and consumed wholly within one state, such operations may, in certain instances, be subject to the jurisdiction of such state's administrative authority charged with the responsibility of regulating intrastate pipelines. In such event, the rates which the Company could charge for gas, the transportation of gas, and the construction and operation of such pipeline would be subject to the rules and regulations governing such matters, if any, of such administrative authority. LEGISLATIVE PROPOSALS In the past, Congress has been very active in the area of natural gas regulation. There are legislative proposals pending in the various state legislatures which, if enacted, could significantly affect the petroleum industry. At the present time it is impossible to predict what proposals, if any, might actually be enacted by Congress or the various state legislatures and what effect, if any, such proposals might have on the Company's operations. ENVIRONMENTAL REGULATIONS GENERAL. The Company's activities are subject to existing federal, state and local laws and regulations governing environmental quality and pollution control. Although no assurances can be made, the Company believes that, absent the occurrence of an extraordinary event, compliance with existing federal, state and local laws, regulations and rules regulating the release of materials in the environment or otherwise relating to the protection of the environment will not have a material effect upon the capital expenditures, earnings or the competitive position of the Company with respect to its existing assets and operations. The Company cannot predict what effect additional regulation or legislation, enforcement policies thereunder, and claims for damages to property, employees, other persons and the environment resulting from the Company's operations could have on its activities. Activities of PetroQuest with respect to natural gas facilities, including the operation and construction of pipelines, plants and other facilities for transporting, processing, treating or storing natural gas and other products, are subject to stringent environmental regulation by state and federal authorities including the United States Environmental Protection Agency ("EPA"). Such regulation can increase the cost of planning, designing, installation and operation of such facilities. In most instances, the regulatory requirements relate to water and air pollution control measures. Although the Company believes that compliance with environmental regulations will not have a material adverse effect on it, risks of substantial costs and liabilities are inherent in oil and gas production operations, and there can be no assurance that significant costs and liabilities will not be incurred. Moreover it is possible that other developments, such as stricter environmental laws and regulations, and claims for damages to property or persons resulting from oil and gas production, would result in substantial costs and liabilities to the Company. SOLID AND HAZARDOUS WASTE. The Company owns or leases numerous properties that have been used for production of oil and gas for many years. Although the Company has utilized operating and disposal practices standard in the industry at the time, hydrocarbons or other solid wastes may have been disposed or released on or under these properties. In addition, many of these properties have been operated by third parties. The Company had no control over such entities' treatment of hydrocarbons or other solid wastes and the manner in which such substances may have been disposed or released. State and federal laws applicable to oil and gas wastes and properties have gradually become stricter over time. Under these laws, the Company could be required to remove or remediate previously disposed wastes (including wastes disposed or released by prior owners or operators) or property contamination (including groundwater contamination by prior owners or operators) or to perform remedial plugging operations to prevent future contamination. The Company generates wastes, including hazardous wastes, that are subject to the Federal Resource Conservation and Recovery Act ("RCRA") and comparable state statutes. The EPA has limited the disposal options for certain hazardous wastes. Furthermore, it is possible that certain wastes currently exempt from regulation as "hazardous wastes" generated by the Company's oil and gas operations may in the future be designated as "hazardous wastes" under RCRA or other applicable statutes, and therefore be subject to more rigorous and costly disposal requirements. SUPERFUND. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on certain 6 persons with respect to the release or threatened release of a "hazardous substance" into the environment. These persons include the owner and operator of a site and persons that disposed or arranged for the disposal of the hazardous substances found at a site. CERCLA also authorizes the EPA and, in some cases, third parties to take actions in response to threats to the public health or the environment and to seek to recover from the responsible persons the costs of such action. Neither the Company nor its predecessors have been designated as a potentially responsible party by the EPA under CERCLA with respect to any such site. OIL POLLUTION ACT. The Oil Pollution Act of 1990 (the "OPA") and regulations thereunder impose a variety of regulations on "responsible parties" related to the prevention of oil spills and liability for damages resulting from such spills in United States waters. A "responsible party" includes the owner or operator of a facility or vessel, or the lessee or permittee of the area in which an offshore facility is located. The OPA assigns liability to each responsible party for oil removal costs and a variety of public and private damages. While liability limits apply in some circumstances, a party cannot take advantage of liability limits if the spill was caused by gross negligence or willful misconduct or resulted from violation of a federal safety, construction or operating regulation. If the party fails to report a spill or to cooperate fully in the cleanup, liability limits likewise do not apply. Few defenses exist to the liability imposed by the OPA. The OPA establishes a liability limit for onshore facilities of $350 million and for offshore facilities of all removal costs plus $75 million, and lesser limits for some vessels depending upon their size. The regulations promulgated under OPA impose proof of financial responsibility requirements that can be satisfied through insurance, guarantee, indemnity, surety bond, letter of credit, qualification as a self-insurer, or a combination thereof. The amount of financial responsibility required depends upon a variety of factors including the type of facility or vessel, its size, storage capacity, oil throughput, proximity to sensitive areas, type of oil handled, history of discharges and other factors. The Company believes it currently has established adequate financial responsibility. While financial responsibility requirements under OPA may be amended to impose additional costs on the Company, the impact of any change in these requirements should not be any more burdensome to the Company than to others similarly situated. CLEAN WATER ACT. The Clean Water Act ("CWA") regulates the discharge of pollutants to waters of the United States, including wetlands, and requires a permit for the discharge of pollutants, including petroleum, to such waters. Certain facilities that store or otherwise handle oil are required to prepare and implement Spill Prevention, Control and Countermeasure Plans and Facility Response Plans relating to the possible discharge of oil to surface waters. The Company is required to prepare and comply with such plans and to obtain and comply with discharge permits. The Company believes it is in substantial compliance with these requirements and that any noncompliance would not have a material adverse effect on it. The CWA also prohibits spills of oil and hazardous substances to waters of the United States in excess of levels set by regulations and imposes liability in the event of a spill. State laws further provide civil and criminal penalties and liabilities for spills to both surface and groundwaters and require permits that set limits on discharges to such waters. AIR EMISSIONS. The operations of the Company are subject to local, state and federal regulations for the control of emissions from sources of air pollution. Administrative enforcement actions for failure to comply strictly with air regulations or permits may be resolved by payment of monetary fines and correction of any identified deficiencies. Alternatively, regulatory agencies could impose civil and criminal liability for non-compliance. An agency could require the Company to forego construction or operation of certain air emission sources. The Company believes that it is in substantial compliance with air pollution control requirements and that, if a particular permit application were denied, it would have enough permitted or permittable capacity to continue its operations without a material adverse effect on any particular producing field. OSHA. The Company is subject to the requirements of the federal Occupational Safety and Health Act ("OSHA") and comparable state statutes. The OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of the federal Superfund Amendments and Reauthorization Act and similar state statutes require the Company to organize and/or disclose information about hazardous materials used or produced in its operations. Certain of this information must be provided to employees, state and local governmental authorities and local citizens. Management believes that the Company is in substantial compliance with current applicable environmental laws and regulations and that continued compliance with existing requirements will not have a material adverse impact on the Company. 7 EMPLOYEES The Company had 53 employees as of December 31, 2001. In addition to the services of its full time employees, the Company utilizes the services of independent contractors to perform certain services. PetroQuest believes that its relationships with its employees are satisfactory. None of the Company's employees are covered by a collective bargaining agreement. RISK FACTORS RISKS RELATED TO OUR BUSINESS, INDUSTRY AND STRATEGY Our future success depends upon our ability to find, develop and acquire additional oil and natural gas reserves that are economically recoverable. As is generally the case in the Gulf Coast Basin, many of our producing properties are characterized by a high initial production rate, followed by a steep decline in production. As a result, we must locate and develop or acquire new oil and natural gas reserves to replace those being depleted by production. We must do this even during periods of low oil and natural gas prices when it is difficult to raise the capital necessary to finance our exploration, development and acquisition activities. Without successful exploration, development or acquisition activities, our reserves and revenues will decline rapidly. We may not be able to find and develop or acquire additional reserves at an acceptable cost or have access to necessary financing for these activities. We may not be able to maintain our historical rates of growth. We may not be able to maintain the rate of growth in our reserves, production and financial results that we have achieved since our management team acquired its equity interest in PetroQuest. Our growth rates have to a certain extent been unusually high because PetroQuest was a very small company, with total reserves of approximately 14 Bcfe as of December 31, 1998. As a result, as we continue to grow, our growth rates may be lower than those achieved in our recent history. Oil and natural gas prices are volatile, and a substantial and extended decline in the prices of oil and natural gas would likely have a material adverse effect on us. Our revenues, profitability and future growth, and the carrying value of our oil and natural gas properties, depend to a large degree on prevailing oil and natural gas prices. Our ability to maintain or increase our borrowing capacity and to obtain additional capital on attractive terms also substantially depend upon oil and natural gas prices. Prices for oil and natural gas are subject to large fluctuations in response to a variety of other factors beyond our control. These factors include: - relatively minor changes in the supply of and the demand for oil and natural gas; - market uncertainty; - the level of consumer product demand; - weather conditions in the United States; - the condition of the United States economy; - the action of the Organization of Petroleum Exporting Countries; - domestic and foreign governmental regulation, including price controls adopted by the Federal Energy Regulatory Commission; - political instability in the Middle East and elsewhere; - the foreign supply of oil and natural gas; - the price of foreign imports; and 8 - the availability of alternate fuel sources. At various times, excess domestic and imported supplies have depressed oil and natural gas prices. We cannot predict future oil and natural gas prices and prices may decline. Declines in oil and natural gas prices may adversely affect our financial condition, liquidity and results of operations. Lower prices may also reduce the amount of oil and natural gas that we can produce economically and require us to record ceiling test write-downs when prices decline. Substantially all of our oil and natural gas sales are made in the spot market or pursuant to contracts based on spot market prices. Our sales are not made pursuant to long-term fixed price contracts. To attempt to reduce our price risk, we periodically enter into hedging transactions with respect to a portion of our expected future production. We cannot assure you that such transactions will reduce the risk or minimize the effect of any decline in oil or natural gas prices. Any substantial or extended decline in the prices of or demand for oil or natural gas would have a material adverse effect on our financial condition and results of operations. You should not place undue reliance on reserve information because reserve information represents estimates. This document contains estimates of oil and natural gas reserves, and the future net cash flows attributable to those reserves, prepared by Ryder Scott Company, L.P., our independent petroleum and geological engineers. There are numerous uncertainties inherent in estimating quantities of proved reserves and cash flows from such reserves, including factors beyond our control and the control of Ryder Scott. Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner. The accuracy of an estimate of quantities of reserves, or of cash flows attributable to these reserves, is a function of: - the available data; - assumptions regarding future oil and natural gas prices; - estimated expenditures for future development and exploitation activities; and - engineering and geological interpretation and judgment. Reserves and future cash flows may also be subject to material downward or upward revisions based upon production history, development and exploitation activities and oil and natural gas prices. Actual future production, revenue, taxes, development expenditures, operating expenses, quantities of recoverable reserves and the value of cash flows from those reserves may vary significantly from the assumptions and estimates in this document. In addition, reserve engineers may make different estimates of reserves and cash flows based on the same available data. In calculating reserves on a Mcfe basis, oil was converted to natural gas equivalent at the ratio of six Mcf of natural gas to one Bbl of oil. While this ratio approximates the energy equivalency of natural gas to oil on a Btu basis, it may not represent the relative prices received by us from the sale of our oil and natural gas production. Over 40% of our estimated proved reserves are undeveloped. Estimates of undeveloped reserves, by their nature, are less certain. Recovery of undeveloped reserves requires significant capital expenditures and successful drilling operations. The reserve data assumes that we will make significant capital expenditures to develop our reserves. Although we have prepared estimates of our oil and natural gas reserves and the costs associated with these reserves in accordance with industry standards, we cannot assure you that the estimated costs are accurate, that development will occur as scheduled or that the actual results will be as estimated. You should not assume that the present value of future net revenues referred to in this document and the information incorporated by reference is the current market value of our estimated oil and natural gas reserves. In accordance with Securities and Exchange Commission requirements, the estimated discounted future net cash flows from proved reserves are generally based on prices and costs as of the date of the estimate. Actual future prices and costs may be materially higher or lower than the prices and costs as of the date of the estimate. Any changes in consumption by natural gas purchasers or in governmental regulations or taxation may also affect actual future net cash flows. The timing of both the production and the expenses from the development and production of oil and natural gas properties will affect the timing of actual future net cash flows from proved reserves and their present value. In addition, the 10% discount factor, which is required by the Securities and Exchange Commission to be used in calculating discounted future net cash flows for reporting purposes, is not necessarily the most accurate discount factor. The effective interest rate at various times and the risks associated with our operations or the oil 9 and natural gas industry in general will affect the accuracy of the 10% discount factor. Lower oil and natural gas prices may cause us to record ceiling test write-downs. We use the full cost method of accounting to account for our oil and natural gas operations. Accordingly, we capitalize the cost to acquire, explore for and develop oil and natural gas properties. Under full cost accounting rules, the net capitalized costs of oil and natural gas properties may not exceed a "ceiling limit" which is based upon the present value of estimated future net cash flows from proved reserves, discounted at 10%, plus the lower of cost or fair market value of unproved properties. If net capitalized costs of oil and natural gas properties exceed the ceiling limit, we must charge the amount of the excess to earnings. This is called a "ceiling test write-down." This charge does not impact cash flow from operating activities, but does reduce our stockholders' equity. The risk that we will be required to write down the carrying value of oil and natural gas properties increases when oil and natural gas prices are low or volatile. In addition, write-downs may occur if we experience substantial downward adjustments to our estimated proved reserves. Factors beyond our control affect our ability to market oil and natural gas. The availability of markets and the volatility of product prices are beyond our control and represent a significant risk. The marketability of our production depends upon the availability and capacity of natural gas gathering systems, pipelines and processing facilities. The unavailability or lack of capacity of these systems and facilities could result in the shut-in of producing wells or the delay or discontinuance of development plans for properties. Our ability to market oil and natural gas also depends on other factors beyond our control. These factors include: - the level of domestic production and imports of oil and natural gas; - the proximity of natural gas production to natural gas pipelines; - the availability of pipeline capacity; - the demand for oil and natural gas by utilities and other end users; - the availability of alternate fuel sources; - the effect of inclement weather; - state and federal regulation of oil and natural gas marketing; and - federal regulation of natural gas sold or transported in interstate commerce. If these factors were to change dramatically, our ability to market oil and natural gas or obtain favorable prices for our oil and natural gas could be adversely affected. We face strong competition from larger oil and natural gas companies that may negatively affect our ability to carry on operations. We operate in the highly competitive areas of oil and natural gas exploration, development and production. Factors that affect our ability to compete successfully in the marketplace include: - the availability of funds and information relating to a property; - the standards established by us for the minimum projected return on investment; and - the intermediate transportation of natural gas. Our competitors include major integrated oil companies, substantial independent energy companies, affiliates of major interstate and intrastate pipelines and national and local natural gas gatherers, many of which possess greater financial and other resources than we do. 10 RISKS RELATING TO FINANCING OUR BUSINESS We may not be able to obtain adequate financing to execute our operating strategy. We have historically addressed our long-term liquidity needs through the use of credit facilities, the issuance of equity securities and the use of cash provided by operating activities. We continue to examine the following alternative sources of long-term capital: - borrowings from banks or other lenders; - the issuance of debt securities; - the sale of common stock, preferred stock or other equity securities; - joint venture financing; and - production payments. The availability of these sources of capital will depend upon a number of factors, some of which are beyond our control. These factors include general economic and financial market conditions, oil and natural gas prices and our market value and operating performance. We may be unable to execute our operating strategy if we cannot obtain capital from these sources. We may not be able to fund our planned capital expenditures. We spend and will continue to spend a substantial amount of capital for the development, exploration, acquisition and production of oil and natural gas reserves. If low oil and natural gas prices, operating difficulties or other factors, many of which are beyond our control, cause our revenues or cash flows from operations to decrease, we may be limited in our ability to spend the capital necessary to complete our drilling program. We may be forced to raise additional debt or equity proceeds to fund such expenditures. We cannot assure you that additional debt or equity financing or cash generated by operations will be available to meet these requirements. Leverage may materially affect our operations. We presently have and may incur from time to time debt under our bank credit facility. The borrowing base limitation on our bank credit facility is periodically redetermined and upon such redetermination, we could be forced to repay a portion of our bank debt. We may not have sufficient funds to make such repayments. Our level of debt affects our operations in several important ways, including the following: - a portion of our cash flow from operations is used to pay interest on borrowings; - the covenants contained in the agreements governing our debt limit our ability to borrow additional funds or to dispose of assets; - the covenants contained in the agreements governing our debt may affect our flexibility in planning for, and reacting to, changes in business conditions; - a high level of debt may impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes; - our leveraged financial position may make us more vulnerable to economic downturns and may limit our ability to withstand competitive pressures; - any debt that we incur under our credit facilities will be at variable rates, which could make us vulnerable to increases in interest rates; and 11 - a high level of debt will affect our flexibility in planning for or reacting to changes in market conditions. In addition, we may significantly alter our capitalization in order to make future acquisitions or develop our properties. These changes in capitalization may significantly increase our level of debt. A higher level of debt increases the risk that we may default on our debt obligations. Our ability to meet our debt obligations and to reduce our level of debt depends on our future performance. General economic conditions and financial, business and other factors affect our operations and our future performance. Many of these factors are beyond our control. If we are unable to repay our debt at maturity out of cash on hand, we could attempt to refinance such debt, or repay such debt with the proceeds of an equity offering. We cannot assure you that we will be able to generate sufficient cash flow to pay the interest on our debt or that future borrowings or equity financing will be available to pay or refinance such debt. The terms of our bank credit facility may also prohibit us from taking such actions. Factors that will affect our ability to raise cash through an offering of our capital stock or a refinancing of our debt include financial market conditions and our market value and operating performance at the time of such offering or other financing. We cannot assure you that any such offering or refinancing can be successfully completed. RISKS RELATING TO OUR ONGOING OPERATIONS The loss of key personnel could adversely affect our ability to operate. Our operations are dependent upon a relatively small group of key management and technical personnel. We cannot assure you that such individuals will remain with us for the immediate or foreseeable future. The unexpected loss of the services of one or more of these individuals could have a detrimental effect on our operations. Operating hazards may adversely affect our ability to conduct business. Our operations are subject to risks inherent in the oil and natural gas industry, such as: - unexpected drilling conditions including blowouts, cratering and explosions; - uncontrollable flows of oil, natural gas or well fluids; - equipment failures, fires or accidents; - pollution and other environmental risks; and - shortages in experienced labor or shortages or delays in the delivery of equipment. These risks could result in substantial losses to us from injury and loss of life, damage to and destruction of property and equipment, pollution and other environmental damage and suspension of operations. Our offshore operations are also subject to a variety of operating risks peculiar to the marine environment, such as hurricanes or other adverse weather conditions and more extensive governmental regulation. These regulations may, in certain circumstances, impose strict liability for pollution damage or result in the interruption or termination of operations. Losses and liabilities from uninsured or underinsured drilling and operating activities could have a material adverse effect on our financial condition and operations. We maintain several types of insurance to cover our operations, including maritime employer's liability and comprehensive general liability. Amounts over base coverages are provided by primary and excess umbrella liability policies with maximum limits of $50 million. We also maintain operator's extra expense coverage, which covers the control of drilled or producing wells as well as redrilling expenses and pollution coverage for wells out of control. We may not be able to maintain adequate insurance in the future at rates we consider reasonable, or we could experience losses that are not insured or that exceed the maximum limits under our insurance policies. If a significant event that is not fully insured or indemnified occurs, it could materially and adversely affect our financial condition and results of operations. 12 Compliance with environmental and other government regulations is costly and could negatively impact production. Our operations are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations may: - require the acquisition of permits before drilling commences; - restrict the types, quantities and concentration of various substances that can be released into the environment from drilling and production activities; - limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas; - require remedial measures to mitigate pollution from former operations, such as plugging abandoned wells; and - impose substantial liabilities for pollution resulting from our operations. The recent trend toward stricter standards in environmental legislation and regulation is likely to continue. The enactment of stricter legislation or the adoption of stricter regulations could have a significant impact on our operating costs, as well as on the oil and natural gas industry in general. Our operations could result in liability for personal injuries, property damage, oil spills, discharge of hazardous materials, remediation and clean-up costs and other environmental damages. We could also be liable for environmental damages caused by previous property owners. As a result, substantial liabilities to third parties or governmental entities may be incurred which could have a material adverse effect on our financial condition and results of operations. We maintain insurance coverage for our operations, including limited coverage for sudden and accidental environmental damages, but this insurance may not extend to the full potential liability that could be caused by sudden and accidental environmental damages and further may not cover environmental damages that occur over time. Accordingly, we may be subject to liability or may lose the ability to continue exploration or production activities upon substantial portions of our properties if certain environmental damages occur. The Oil Pollution Act of 1990 imposes a variety of regulations on "responsible parties" related to the prevention of oil spills. The implementation of new, or the modification of existing, environmental laws or regulations, including regulations promulgated pursuant to the Oil Pollution Act, could have a material adverse impact on us. Ownership of working interests in certain of our properties by certain of our officers and directors may create conflicts of interest. Certain of our executive officers and directors, and their respective affiliates, are working interest owners in our Turtle Bayou Field. These interests were acquired by these officers and directors and their respective affiliates prior to the acquisition of their equity interests in PetroQuest in 1998. In their capacity as working interest owners, they are required to pay their proportionate share of all costs and are entitled to receive their proportionate share of revenues in the normal course of business. A conflict of interest may exist between us and such officers and directors with respect to the drilling of additional wells or other development operations with respect to this property. RISKS RELATING TO OUR COMMON STOCK OUTSTANDING Our management controls a significant percentage of our outstanding common stock and their interests may conflict with those of our stockholders. Our directors and executive officers and their affiliates beneficially own about 29% of our outstanding common stock at March 1, 2002. If these persons were to act in concert, they would, as a practical matter, be able to effectively control our affairs. This concentration of ownership could also have the effect of delaying or preventing a change in control of or otherwise discouraging a potential acquiror from attempting to obtain control of us. This could have a material adverse effect on the market price of our common stock or prevent our stockholders from realizing a premium over the then prevailing market prices for their shares of our common stock. 13 Our stock price could be volatile, which could cause you to lose part or all of your investment. The stock market has from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. In particular, the market price of our common stock, like that of the securities of other energy companies, has been and may be highly volatile. Factors such as announcements concerning changes in prices of oil and natural gas, the success of our exploration and development drilling program, the availability of capital, and economic and other external factors, as well as period-to-period fluctuations and financial results, may have a significant effect on the market price of our common stock. From time to time, there has been limited trading volume in our common stock. In addition, there can be no assurance that there will continue to be a trading market or that any securities research analysts will continue to provide research coverage with respect to our common stock. It is possible that such factors will adversely affect the market for our common stock. Provisions in our corporate documents could delay or prevent a change in control of our company, even if that change would be beneficial to our stockholders. Certain provisions of our certificate of incorporation and bylaws may delay, discourage, prevent or render more difficult an attempt to obtain control of our company, whether through a tender offer, business combination, proxy contest or otherwise. These provisions include: - the charter authorization of "blank check" preferred stock; - provisions that directors may be removed only for cause, and then only on approval of holders of a majority of the outstanding voting stock; and - a restriction on the ability of stockholders to take actions by written consent. ITEM 2. PROPERTIES For a description of the Company's exploration and development activities and its significant properties, see Item 1. Business-Exploration and Development and - Significant Properties. OIL AND GAS RESERVES The following table sets forth certain information about the estimated proved reserves of the Company as of December 31, 2001.
Oil (Mbbls) Gas (MMcfs) ----------- ----------- Proved developed: 3,104 26,847 Proved undeveloped: 3,109 18,097 Total proved: 6,213 44,944
Estimated pre-tax future net cash flows $116,035,936 Discounted pre-tax future net cash flows $ 88,230,449 Standardized measure of discounted future $ 75,046,568 net cash flows
Ryder Scott Company prepared the estimates of proved reserves and future net cash flows (and present value thereof) attributable to such proved reserves at December 31, 2001. Reserves were estimated using oil and gas prices and production and development costs in effect at December 31, 2001 without escalation, and were prepared in accordance with Securities and Exchange Commission regulations regarding disclosure of oil and gas reserve information. The product prices used in 14 developing the above estimates averaged $18.49 per Bbl of oil and $2.65 per MMBtu of gas. Because of the high Btu content of the Company's Gulf Coast gas, this equates to an average price realized of approximately $2.69 per Mcf. The Company has not filed any reports with other federal agencies which contain an estimate of total proved net oil and gas reserves. OIL AND GAS DRILLING ACTIVITY The following table sets forth the wells drilled and completed by the Company during the periods indicated. All such wells were drilled in the continental United States:
2001 2000 1999 ---- ---- ---- Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- Exploration: Productive 1 0.41 3 1.32 4 1.33 Non-productive 2 0.68 1 0.40 1 0.05 ---- ---- ---- ---- ---- ---- Total 3 1.09 4 1.72 5 1.38 ==== ==== ==== ==== ==== ==== Development: Productive 9 5.78 3 1.23 1 0.41 Non-productive 1 0.54 1 0.40 -- -- ---- ---- ---- ---- ---- ---- Total 10 6.32 4 1.63 1 0.41 ==== ==== ==== ==== ==== ====
The Company owned working interests in 57 gross (35.6 net) producing oil and gas wells at December 31, 2001. At December 31, 2001, the Company had one well in progress. LEASEHOLD ACREAGE The following table shows the approximate developed and undeveloped (gross and net) leasehold acreage of the Company as of December 31, 2001:
Leasehold Acreage ----------------- Developed Undeveloped --------- ----------- Gross Net Gross Net ----- --- ----- --- Mississippi (onshore) 721 450 8,110 5,190 Louisiana (onshore) 7,566 4,190 16,361 11,127 Texas (offshore) 1,440 636 -- -- Federal Waters 40,970 22,078 61,561 32,969 ------ ------ ------ ------ Total 50,697 27,354 86,032 49,286
TITLE TO PROPERTIES The Company believes that the title to its oil and gas properties is good and defensible in accordance with standards generally accepted in the oil and gas industry, subject to such exceptions which, in the opinion of the Company, are not so material as to detract substantially from the use or value of such properties. The Company's properties are typically subject, in one degree or another, to one or more of the following: royalties and other burdens and obligations, express or implied, under oil and gas leases; overriding royalties and other burdens created by the Company or its predecessors in title; a variety of contractual obligations (including, in some cases, development obligations) arising under operating agreements, farmout agreements, production sales contracts and other agreements that may affect the properties or their titles; back-ins and reversionary interests existing under purchase agreements and leasehold assignments; liens that arise in the normal course of operations, such as those for unpaid taxes, statutory liens securing obligations to unpaid suppliers and contractors and contractual liens under operating agreements; pooling, unitization and communitization agreements, declarations and orders; and easements, restrictions, rights-of-way and other matters that commonly affect property. To the extent that such burdens and obligations affect the Company's rights to production revenues, they have been taken into account in calculating the Company's 15 net revenue interests and in estimating the size and value of the Company's reserves. The Company believes that the burdens and obligations affecting its properties are conventional in the industry for properties of the kind owned by the Company. ITEM 3. LEGAL PROCEEDINGS There are no legal proceedings to which the Company or its subsidiaries is a party or by which any of its property is subject, other than ordinary and routine litigation due to the business of producing and exploring for oil and natural gas, except as follows: PetroQuest Energy, Inc. f/k/a Optima Energy (U.S.) Corp. v. The Meridian Resource & Exploration Company f/k/a Texas Meridian Resources Exploration, Inc., bearing Civil Action No. 99-2394 of the United States District Court for the Western District of Louisiana was filed on February 24, 2000. The Company asserts a claim for damages against Meridian resulting from Meridian's activities as operator of the Southwest Holmwood property, Calcasieu Parish, Louisiana. Meridian's activities as operator resulted in a final judgment of the United States District Court for the Western District of Louisiana ordering cancellation of the Company's rights to a productive oil and gas lease and the associated joint exploration agreement , forfeiture to two producing wells on the lease and substantial damages against Meridian causing the Company the loss of its investment and profits. The Meridian Resource & Exploration Company v. PetroQuest Energy, Inc., bearing Docket No. 996192A of the 15th Judicial District Court in and for the Parish of Lafayette, Louisiana was filed on December 17, 1999. Meridian asserts that the Company is responsible as an investor under its participation agreement with Meridian for $530,004 of the losses, costs, expense and liability of Meridian resulting from the final judgment that was rendered in favor of Amoco and against Meridian in legal proceedings relative to the Southwest Holmwood Field, Calcasieu Parish, Louisiana in the matter "Amoco Production Company v. Texas Meridian Resource & Exploration Company," bearing Civil Action No. 96-1639 in the United States District Court for the Western District of Louisiana (Civil Action No. 98-30724 in the United States Court of Appeals for the Fifth Circuit). Although the Company accrued $555,000 when the district court decision was rendered against Meridian in December 1997, the Company denies liability to Meridian for losses sustained by Meridian as operator as a result of the Amoco litigation and is vigorously defending the lawsuit. Meridian initially withheld $737,620 from production revenues due the Company from other properties. On January 9, 2002 Meridian released to the Company $211,476 of the withheld revenues. The Company is pursuing recovery of the balance of the withheld revenues from Meridian as discussed in PetroQuest Energy, Inc. f/k/a Optima Energy (U.S.) Corp. v. The Meridian Resource & Exploration Company f/k/a Texas Meridian Resources Exploration, Inc. PetroQuest Energy, Inc. and PetroQuest Energy One, L.L.C. v. Schlumberger Technology Corporation, et al, bearing Civil Action No. 00-2823 of the United States District Court, Western District of Louisiana was filed on December 29, 2000. This matter is a lawsuit filed by the Company's subsidiaries, PetroQuest Energy, Inc., a Louisiana corporation, and PetroQuest Energy One, L.L.C. (now PetroQuest Energy, L.L.C.) seeking to recover cost overruns in the amount of approximately $2,850,000 which were incurred in the completion of theOCSG-15243 #2 Well located at Eugene Island Block 147. The Company asserts that cost overruns were incurred due to the negligence of Schlumberger Technology Corporation. On May 17, 2001, Schlumberger Technology Corporation filed a counter-claim for $437,200, plus interest, attorney's fees and costs for goods and services allegedly provided in connection with the OCSG-15243 #2 Well. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of 2001. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK The Company's Common Stock trades on The Nasdaq Stock Market under the symbol "PQUE". On January 19, 2001, the Company voluntarily delisted its Common Stock from the Toronto Stock Exchange ("TSE") where it formally traded under the symbol "PQU." The Company delisted its stock from the TSE because it no longer had Canadian operations and 16 substantially all of its trading volume was on The Nasdaq Stock Market. The following table lists high and low sales prices per share for the periods indicated:
Nasdaq Stock Market Toronto Stock Exchange ------------------- ---------------------- Quarter Ended High Low High Low ------------- ---- --- ---- --- (U.S.$) (U.S.$) (CDN $) (CDN $) 2000 1st Quarter 2.25 1.38 3.00 2.10 2nd Quarter 3.00 1.38 4.50 2.05 3rd Quarter 4.38 2.13 6.75 2.50 4th Quarter 4.94 2.81 6.80 4.00 2001 1st Quarter 5.63 3.69 6.50 5.05 2nd Quarter 8.99 4.00 N/A N/A 3rd Quarter 7.34 3.95 N/A N/A 4th Quarter 7.35 4.66 N/A N/A
As of February 15, 2002, there were approximately 595 common stockholders of record. The Company has not paid dividends on the Common Stock and intends to retain its cash flow from operations for the future operation and development of its business. In addition, the Company's credit facility with Hibernia National Bank, Royal Bank of Canada and Union Bank of California, N.A. restricts the declaration or payment of any dividends or distributions without prior written consent of Hibernia National Bank and either Royal Bank of Canada or Union Bank of California N.A. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth, as of the dates and for the periods indicated, selected financial information for the Company. The financial information for each of the five years in the period ended December 31, 2001 have been derived from the audited Consolidated Financial Statements of the Company for such periods. The information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and notes thereto. The following information is not necessarily indicative of future results of the Company. All amounts are stated in U.S. dollars unless otherwise indicated.
Years Ended December 31, ------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (in thousands except share data) Revenues $ 55,281 $22,561 $ 8,607 $ 3,377 $ 4,145 Net Income (Loss) 11,645 9,924 (310) (16,240) (2,914) Net Income (Loss) per share: Basic 0.37 0.37 (0.01) (1.20) (0.26) Diluted 0.34 0.35 (0.01) (1.20) (0.26) Oil and Gas Properties, net 101,029 56,344 21,490 17,423 12,862 Total Assets 114,639 83,072 29,901 20,066 20,163 Long-term Debt 33,000 6,804 2,927 1,300 100 Stockholders' Equity 54,215 41,456 18,105 13,336 18,740
17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL PetroQuest is an independent oil and gas company engaged in the exploration, development, acquisition and operation of oil and gas properties onshore and offshore in the Gulf Coast Region. We have been active in this area since 1986, which gives us extensive geophysical, technical and operational expertise in this area. Our business strategy is to increase production, cash flow and reserves through exploration, development and acquisition of properties located in the Gulf Coast Region. MERGER OF OPTIMA ENERGY (U.S.) CORPORATION On September 1, 1998, the Company, formerly known as Optima Petroleum Corporation, completed a merger and reorganization (the "Merger") pursuant to a Plan and Agreement of Merger dated February 11, 1998 by and among Optima, Optima Energy (U.S.) Corporation ("Optima (U.S.)"), Goodson Exploration Company ("Goodson"), NAB Financial, L.L.C. ("NAB") and Dexco Energy, Inc. ("Dexco"), pursuant to which Optima (U.S.) merged into PetroQuest Energy, Inc., a newly formed Louisiana corporation ("PetroQuest Louisiana"). Concurrently, PetroQuest Louisiana, through a merger of PetroQuest Louisiana with Goodson, NAB and Dexco, acquired 100% of the ownership interest of American Explorer L.L.C. ("American Explorer"), all which were owned by Goodson, NAB and Dexco prior to the Merger. Pursuant to the Merger, the Company issued to the original owners of American Explorer and their respective affiliates, certain of whom currently serve as officers and directors of the Company, 7,335,001 shares of the Company's common stock, par value $.001 per share (the "Common Stock"), and 1,667,001 Contingent Stock Issue Rights (the "CSIRs"). The CSIRs entitle the holders to receive an additional 1,667,001 shares of Common Stock at such time within three years of the anniversary date of the issuance of the CSIRs as the trading price for the Common Stock closes at $5.00 or higher for 20 consecutive trading dates. On May 3, 2001 the Common Stock closed higher than $5.00 for the twentieth consecutive trading day, and 1,667,001 shares of Common Stock were issued under the terms of the CSIRs. On December 31, 2000, we underwent a subsequent corporate reorganization. Our subsidiary, PetroQuest Energy, Inc., a Louisiana corporation, was merged into PetroQuest Energy One, L.L.C., a Louisiana limited liability company. In addition, PetroQuest Energy One, L.L.C. changed its name to PetroQuest Energy, L.L.C., a single-member Louisiana limited liability company, and PetroQuest Energy, Inc., a Delaware corporation, continues to be its sole member. NEW ACCOUNTING STANDARDS On January 1, 2001, we adopted Statement of Financial Accounting Standards No. 133, as amended (SFAS 133) pertaining to the accounting for derivative instruments and hedging activities. SFAS 133 requires an entity to recognize all of its derivatives as either assets or liabilities on its balance sheet and measure those instruments at fair value. If the conditions specified in SFAS 133 are met, those instruments may be designated as hedges. Changes in the value of hedge instruments would not impact earnings, except to the extent that the instrument is not perfectly effective as a hedge. At January 1, 2001, we recognized a liability of $609,295 related to costless collars; the cumulative catch-up adjustment is recorded as a charge to other comprehensive income. These collars were designated as cash flow hedges. We recognized $1,630,000 in oil and gas revenues during the year ended December 31, 2001 as a result of the settlement of costless collars. We had no open commodity hedging contracts at December 31, 2001. During the fourth quarter, we entered into three $5 million interest rate swaps covering our floating rate debt. The swaps which are for one, two and three year periods have fixed interest rates of 2.78%, 2.78%-4.56% and 3.05%-5.665%, respectively. The swaps are stated at their fair value and are marked-to-market through other income in our income statement. As of December 31, 2001, the fair value of open interest rate swaps was a liability of $61,000. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations," which requires recording the fair value of a liability for an asset retirement obligation in the period incurred. The standard is effective for fiscal years beginning after June 15, 2002, with earlier application permitted. The Company expects to adopt this standard effective January 1, 2003. We have not completed an evaluation of the impact of this new standard. 18 CRITICAL ACCOUNTING POLICIES Full cost method We use the full cost method of accounting, which involves capitalizing all acquisition, exploration and development costs. Once incurred, costs are recorded in the full cost pool or in unevaluated properties. Unevaluated property costs are not subject to depletion. We review our unevaluated costs on an ongoing basis, and we expect for such costs to be evaluated in one to three years and transferred to the full cost pool at that time. We calculate depletion using the units-of-production method. Under this method, the full cost pool and all estimated future development costs are divided by the total amount of proved reserves. This rate is applied to our total production for the period, and the appropriate expense is recorded. We capitalize a portion of the interest costs incurred on our debt. Capitalized interest is calculated using the amount of our unevaluated property and our effective borrowing rate. We also capitalize the portion of general and administrative costs that are attributable to our acquisition, exploration and development activities. To the extent that total capitalized oil and gas property costs (net of accumulated depreciation, depletion and amortization) exceed the present value (using a 10% discount rate) of estimated future net cash flow from proved oil and natural gas reserves, and the lower of cost and fair value of unproved properties, 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. We could be required to write-down our oil and gas properties if there is a decline in oil and natural gas prices, or downward adjustments are made to our proved reserves. Reserves Oil and gas reserve estimates are prepared by our independent petroleum and geological engineers. Proved reserves, and the cash flows related to these reserves, are estimated based on a combination of historical data and estimates of future activity. Reserve estimates are used in calculating depletion and in preparation of the full cost ceiling test. Derivative Instruments We follow SFAS 133 accounting for derivative instruments. The accounting standard requires that we record our derivatives at fair market value as of the balance sheet date. The calculations of fair value are estimates of the derivatives future values based on current factors. For a more complete discussion of our accounting policies see our Notes to Consolidated Financial Statements on page F-7. 19 RESULTS OF OPERATIONS The following table sets forth certain operating information with respect to our oil and gas operations for the years ended December 31, 2001, 2000 and 1999:
Year Ended December 31, ----------------------- 2001 2000 1999 ---- ---- ---- Production: Oil (Bbls) 791,405 160,631 104,761 Gas (Mcf) 9,025,240 3,984,461 2,830,803 Total Production (Mcfe) 13,773,670 4,948,246 3,459,369 Sales: Total oil sales $20,171,659 $ 4,809,382 $1,933,192 Total gas sales 34,794,876 17,457,307 6,583,026 Average sales prices: Oil (per Bbl) $ 25.49 $ 29.94 $ 18.45 Gas (per Mcf) 3.86 4.38 2.33 Per Mcfe 3.99 4.50 2.46
The above sales include income related to gas collars of $1,247,000 and oil collars of $384,000 for the year ended December 31, 2001. We were not hedged during 2000 and 1999. COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 Net income totaled $ 11,645,000 and $9,924,000 for the years ended December 31, 2001 and 2000, respectively. The positive results are attributable to the following components: Production Oil production in 2001 increased 393% over the year ended December 31, 2000. Natural gas production in 2001 increased 127% over the year ended December 31, 2000. On a Mcfe basis, production for the year ended December 31, 2001 increased 178% over the same period in 2000. The increase in 2001 production volumes, as compared to 2000, was due to our successful drilling program, which had a 77% success rate completing 10 of 13 wells drilled in 2001. Prices Average oil prices per Bbl during 2001 were $25.49 as compared to $29.94 for the same period in 2000. Average gas prices per Mcf were $3.86 during 2001 as compared to $4.38 for the same period in 2000. Stated on a Mcfe basis, unit prices received during 2001 were 11% lower than the prices received during 2000. Revenue Oil and gas sales during 2001 increased 147% to $54,967,000 as compared to 2000 revenues of $22,267,000. The significant growth in production volumes partially offset by reduced commodity prices resulted in significant increases in revenue. Expenses Lease operating expenses for 2001 increased to $7,172,000 from $2,831,000 during 2000. The increase during 2001 is primarily due to the 178% increase in production on a Mcfe basis. On a Mcfe basis, lease operating expenses decreased from $0.57 per Mcfe in 2000 to $0.52 in 2001. 20 General and administrative expenses during 2001 totaled $4,752,000 as compared to expenses of $3,248,000 during 2000, net of amounts capitalized of $2,651,000 and $2,084,000, respectively. The increases in general and administrative expenses are primarily due to an 33% increase in staffing levels related to the generation of prospects, exploration for oil and gas reserves and operation of properties. Additionally, we have recognized $765,000 of non-cash compensation expense during 2001. As a result of extending the life of two directors' options, we recognized $413,000 of non-cash compensation expense during the fourth quarter. We also recognized $352,000 of non-cash compensation expense related to the amortization of unearned deferred compensation. Depreciation, depletion and amortization ("DD&A") expense for 2001 increased 265% to $23,094,000 as compared to $6,386,000 in 2000. The rise in DD&A is primarily due to increased production from bringing new wells on-line since the first quarter of 2000. On a Mcfe basis, which reflects the changes in production, the DD&A rate for 2001 was $1.68 per Mcfe as compared to $1.29 per Mcfe for 2000. The increase in 2001 as compared to 2000 is due primarily to the significant capital and future development costs related to our offshore projects. Interest expense, net of amounts capitalized on unevaluated prospects, increased $2,033,000 during 2001 as compared to 2000. The increase is the result of an increase in debt levels during 2001 resulting from property acquisitions and a higher capital budget, which has been partially funded by borrowings. We capitalized $1,001,000 and $439,000 of interest during 2001 and 2000, respectively. Income tax expense of $5,411,000 was recognized during 2001 as compared to an $850,000 benefit being recorded during 2000. The increase is the result of fully reversing the valuation allowance on our deferred tax asset during 2000. We provide for income taxes at a statutory rate of 37% adjusted for permanent differences expected to be realized, primarily statutory depletion. COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 The net income for the year ended December 31, 2000 was $9,924,000 as compared to a net loss of $310,000 for the same period ended 1999. The positive results are due to the following components: Production Oil production in 2000 increased 53% over the year ended December 31, 1999. Natural gas production in 2000 increased 41% over the year ended December 31, 1999. On an Mcfe basis, production for the year ended December 31, 2000 increased 43% over the same period in 1999. The increase in 2000 production volumes, as compared to 1999, was primarily due to three new wells that were not producing in 1999. CL&F #14 and CL&F #15 at Turtle Bayou and Valentine Sugars #1 came on-line during December 1999, May 2000, and August 2000, respectively. Prices Average oil and natural gas prices realized were $29.94 and $4.38 for the year ended December 31, 2000, as compared to $18.45 and $2.33 for the same period ended 1999. This represents price increases of 62% for oil, 88% for natural gas and 83% on an Mcfe basis. Oil and Gas Revenues Oil and gas sales increased from $8,516,000 to $22,267,000 in 2000 or an increase of 162%. This increase is the result of both increases in production volumes and higher product prices for both oil and gas. Lease Operating Expenses Lease operating expenses increased 7% from $2,638,000 to $2,831,000. This resulted from the additional wells discussed above as well as high initial costs of three new wells drilled in the fourth quarter of 2000. On an Mcfe basis, operating expenses for the year decreased from $.76 in 1999 to $.57 in 2000 as a result of increased production. 21 Depreciation, Depletion and Amortization Depreciation, depletion and amortization (DD&A) increased 43% from $4,472,000 to $6,386,000. This is due to the increased production for the year and capital additions to property. On a Mcfe basis, which reflects changes in production, the DD&A rate for 2000 and 1999 was $1.29 per Mcfe. General and Administrative Expenses Expensed general and administrative costs increased from $1,625,000 in 1999 to $3,248,000 in 2000. In 2000 and 1999, $2,084,000 and $1,361,000 of general and administrative costs were capitalized as related directly to the acquisition, exploration and development efforts of our resources. Total general and administrative costs increased in 2000 due to an increase of 79% in staffing levels related to the generation of prospects, exploration for oil and gas reserves and operation of properties. Interest Expense Interest expense increased from $0 in 1999 to $78,000 in 2000, net of amounts capitalized, as a result of interest incurred on producing properties. We capitalized interest of $434,000 in 1999, as compared to $439,169 in 2000. LIQUIDITY AND CAPITAL RESOURCES We have financed our exploration and development activities to date principally through cash flow from operations, bank borrowings, and private and public offerings of Common Stock. Net cash flow from operations before working capital changes during the year increased from $15,927,000 in 2000 to $42,317,000 in 2001. This increase resulted from increased production as the result of successful exploration and development activities. However, working capital (before considering debt) decreased from $(1.9) million at December 31, 2000 to $(10.4) million at December 31, 2001. This was caused primarily by capital expenditures related to our active exploration and development program during 2001. The proceeds from our recent underwritten public offering and the sale of the Valentine Field discussed below have eliminated our working capital deficit (before considering debt) of approximately $10.4 million at December 31, 2001, and significantly reduced the balance due on our credit facility. During February and March 2002, we completed the offering of 5,193,600 shares of our common stock. The shares were sold to the public for $4.40 per share. After underwriting discounts, we realized proceeds of approximately $21.9 million. On March 1, 2002, we closed the sale of our interest in Valentine Field for $18.6 million. The transaction had an effective date of January 1, 2002. At December 31, 2001, our independent reservoir engineering firm attributed 7.3 Bcfe of proved reserves net to our interest in this field. Consistent with the full cost method of accounting, we will not recognize any gain or loss as a result of this sale. PetroQuest and our subsidiary PetroQuest Energy, L.L.C. (the "Borrower") have a $100 million revolving credit facility with Hibernia National Bank, Royal Bank of Canada and Union Bank of California, N.A. which permits us to borrow amounts from time to time based on our available borrowing base as determined in the credit facility. The credit facility is secured by a mortgage on substantially all of the Borrower's oil and gas properties, a pledge of the membership interest of the Borrower and PetroQuest's corporate guarantee of the indebtedness of the Borrower. The borrowing base under this credit facility is based upon the valuation on March 31 and September 30 of the Borrower's mortgaged properties, projected oil and gas prices, and any other factors deemed relevant by the lenders. We or the lenders may also request additional borrowing base redeterminations. On March 1, 2002, the borrowing base under the credit facility was adjusted to $28 million and is subject to quarterly reductions of $3 million commencing on April 30, 2002. Outstanding balances on the revolving credit facility bear interest at either the prime rate (plus 0.375% per year whenever the borrowing base usage under the credit facility is greater than or equal to 90%) or the Eurodollar rate plus a margin (based on a sliding scale of 1.625% to 2.375% depending on borrowing base usage). The credit facility also allows us to use up to $10 million of the borrowing base for letters of credit for fees of 2% per annum. At March 7, 2002, we had $5 million of borrowings and a $2.6 million letter of credit issued pursuant to the credit facility. 22 The credit facility contains covenants and restrictions common to borrowings of this type, including maintenance of certain financial ratios. We were in compliance with all of our covenants at March 7, 2002. The credit facility matures on June 30, 2004. As of December 31, 2001, $19 million of the outstanding balance under the credit facility was classified as long term debt reflecting the remaining borrowing base that would be available at December 31, 2002. Based upon this determination, the remaining balance outstanding under the credit facility at December 31, 2001 of $14 million was classified as debt subsequently refinanced as a result of the public offering in February and March of 2002. We have an exploration and development program budget for the year 2002 which will require significant capital. Our budget for direct capital for new projects in 2002 is approximately $40-$45 million. Our management believes the cash flows from operations, available borrowing capacity under our credit facility, proceeds from the underwritten public offering and sale of the Valentine Field will be sufficient to fund planned 2002 exploration and development activities. In the future, our exploration and development activities could require additional financings, which may include sales of additional equity or debt securities, additional bank borrowings, or joint venture arrangements with industry partners. There can be no assurances that such additional financings will be available on acceptable terms, if at all. If we are unable to obtain additional financing, we could be forced to delay or even abandon some of our exploration and development opportunities. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS The Company experiences market risks primarily in two areas: interest rates and commodity prices. The Company believes that its business operations are not exposed to significant market risks relating to foreign currency exchange risk. The Company's revenues are derived from the sale of its crude oil and natural gas production. Based on projected annual sales volumes for 2002, a 10% decline in the estimated average 2002 prices the Company receives for its crude oil and natural gas production would have an approximate $4.7 million impact on the Company's revenues. In a typical hedge transaction, the Company will have the right to receive from the counterparts to the hedge, the excess of the fixed price specified in the hedge over a floating price based on a market index, multiplied by the quantity hedged. If the floating price exceeds the fixed price, the Company is required to pay the counterparts this difference multiplied by the quantity hedged. The Company is required to pay the difference between the floating price and the fixed price (when the floating price exceeds the fixed price) regardless of whether the Company has sufficient production to cover the quantities specified in the hedge. Significant reductions in production at times when the floating price exceeds the fixed price could require the Company to make payments under the hedge agreements even though such payments are not offset by sales of production. Hedging will also prevent the Company from receiving the full advantage of increases in oil or gas prices above the fixed amount specified in the hedge. The Company had no open commodity hedging contracts as of December 31, 2001. During the fourth quarter, we entered into three interest rate swaps covering $5 million of our floating rate debt. The swaps which are for one, two and three year periods have fixed interest rates of 2.78%, 2.78%-4.56% and 3.05%-5.665%, respectively. The swaps are stated at their fair value and are marked-to-market through other income in our income statement. The Company also evaluated the potential effect that reasonably possible near term changes may have on the Company's credit facility. Debt outstanding under the facility is subject to a floating interest rate and represents approximately 99% of the Company's total debt as of December 31, 2001. Based upon an analysis utilizing the actual interest rate in effect and balances outstanding as of December 31, 2001 and assuming a 10% increase in interest rates and no changes in the amount of debt outstanding, the potential effect on interest expense for 2002 is approximately $157,000. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information concerning this Item begins on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 23 PART III ITEMS 10, 11, 12 & 13 For information concerning Item 10. Directors and Executive Officers of the Registrant, Item 11. Executive Compensation, Item 12. Security Ownership of Certain Beneficial Owners and Management and Item 13. Certain Relationships and Related Transactions, see the definitive Proxy Statement of PetroQuest Energy, Inc. relating to the Annual Meeting of Stockholders to be held April 30, 2002, which will be filed with the Securities and Exchange Commission and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS The following financial statements of the Company and the Report of the Company's Independent Public Accountants thereon are included on pages F-1 through F-17 of this Form 10-K. Report of Independent Public Accountants Consolidated Balance Sheets as of December 31, 2001 and 2000 Consolidated Statements of Operations for the three years ended December 31, 2001 Consolidated Statements of Stockholder's Equity for the three years ended December 31, 2001 Consolidated Statements of Cash Flows for the three years ended December 31, 2001 Notes to Consolidated Financial Statements 2. FINANCIAL STATEMENT SCHEDULES: All schedules are omitted because the required information is inapplicable or the information is presented in the Financial Statements or the notes thereto. 3. EXHIBITS: 2.1 Plan and Agreement of Merger by and among Optima Petroleum Corporation, Optima Energy (U.S.) Corporation, its wholly-owned subsidiary, and Goodson Exploration Company, NAB Financial L.L.C., Dexco Energy, Inc., American Explorer, L.L.C. (incorporated herein by reference to Appendix G of the Proxy Statement on Schedule 14A filed July 22, 1998). 3.1 Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 4.1 to Form 8-K dated September 16, 1998) 3.2 Bylaws of the Company (incorporated herein by reference to Exhibit 4.2 to Form 8-K dated September 16, 1998). 3.3 Certificate of Domestication of Optima Petroleum Corporation (incorporated herein by reference to 4.4 to Form 8-K dated September 16, 1998). 3.4 Certificate of Designations, Preferences, Limitations And Relative Rights of The Series a Junior Participating Preferred Stock of PetroQuest Energy, Inc. (incorporated herein by reference to Exhibit A of the Rights Agreement attached as Exhibit 1 to Form 8-A filed July 27, 2001). 4.1 Registration Rights Agreement dated as of September 1, 1998 among Optima Petroleum Corporation, Charles T. Goodson, Alfred J. Thomas, II, Ralph J. Daigle, Janell B. Thomas, Alfred J. Thomas, III, Blaine A. Thomas, and Natalie A. Thomas (incorporated herein by reference to Exhibit 99.1 to Form 8-K dated September 16, 1998). 4.2 Form of Certificate of Contingent Stock Issue Right (incorporated herein by reference to Exhibit 4.3 to Form 8-K dated September 16, 1998). 4.3 Form of Warrant to Purchase Shares of Common Stock of PetroQuest Energy, Inc. (incorporated herein by reference to Exhibit 4.1 to Form 8-K dated August 9, 1999) 24 4.4 Form of Placement Agent Warrant to Purchase Shares of Common Stock of PetroQuest Energy, Inc. (incorporated herein by reference to Exhibit 4.2 to Form 8-K dated August 9, 1999) 4.5 Rights Agreement dated as of November 7, 2001 between PetroQuest Energy, Inc. and American Stock Transfer & Trust Company, as Rights Agent, including exhibits thereto (incorporated herein by reference to Exhibit 1 to Form 8-A filed July 27, 2001). 4.6 Form of Rights Certificate (incorporated herein by reference to Exhibit C of the Rights Agreement attached as Exhibit 1 to Form 8-A filed July 27, 2001). 10.1 PetroQuest Energy, Inc. 1998 Incentive Plan, as amended and restated effective December 1, 2000 (incorporated herein by reference to Appendix A to Proxy Statement on Schedule 14A filed April 20, 2001). 10.2 Amended and Restated Credit Agreement dated as of May 11, 2001, by and among PetroQuest Energy, L.L.C., a Louisiana limited liability company, PetroQuest Energy, Inc., a Delaware corporation, and Hibernia National Bank, and the Financial Institutions named therein as Lenders, and Hibernia National Bank as Administrative Agent (incorporated herein by reference to Exhibit 10.3 to Form 10-Q filed May 15, 2001). 10.3 Revolving Note dated May 11, 2001 in the principal amount of $50,000,000.00 payable to Hibernia National Bank (incorporated herein by reference to Exhibit 10.4 to Form 10-Q filed May 15, 2001). 10.4 Revolving Note dated May 11, 2001 in the principal amount of $25,000,000.00 payable to Union Bank of California, N.A. (incorporated herein by reference to Exhibit 10.5 to Form 10-Q filed May 15, 2001). 10.5 Revolving Note dated May 11, 2001 in the principal amount of $25,000,000.00 payable to Royal Bank of Canada (incorporated herein by reference to Exhibit 10.6 to Form 10-Q filed May 15, 2001). 10.6 Commercial Guaranty made as of May 11, 2001, by PetroQuest Energy, Inc., a Delaware corporation, in favor of Hibernia National Bank (incorporated herein by reference to Exhibit 10.7 to Form 10-Q filed May 15, 2001). 10.7 Subordination Agreement effective as of May 11, 2001, by and among Hibernia National Bank, EnCap Energy Capital Fund III, L.P., PetroQuest Energy, L.L.C., a Louisiana limited liability company, and PetroQuest Energy, Inc., a Delaware corporation (incorporated herein by reference to Exhibit 10.8 to Form 10-Q filed May 15, 2001). 10.8 First Amendment to Amended and Restated Credit Agreement dated and effective as of July 20, 2001, among PetroQuest Energy, L.L.C., PetroQuest Energy, Inc., Royal Bank of Canada, Union Bank of California, N.A., and Hibernia National Bank, a national banking association, individually as a lender and as Administrative Agent (incorporated herein by reference to Exhibit 10.1 to Form 8-K filed February 15, 2002). 10.9 Second Amendment to Amended and Restated Credit Agreement dated as of December 24, 2001, among PetroQuest Energy, L.L.C., PetroQuest Energy, Inc., Royal Bank of Canada, Union Bank of California, N.A., and Hibernia National Bank, a national banking association, individually as a lender and as Administrative Agent (incorporated herein by reference to Exhibit 10.2 to Form 8-K filed February 15, 2002). *10.10 Third Amendment to Amended and Restated Credit Agreement dated as of March 1, 2002, among PetroQuest Energy, L.L.C., PetroQuest Energy, Inc., Royal Bank of Canada, Union Bank of California, N.A., and Hibernia National Bank, a national banking association, individually as a lender and as Administrative Agent. 10.11 Employment Agreement dated September 1, 1998, between PetroQuest Energy, Inc. and Alfred J. Thomas, II (incorporated herein by reference to Exhibit 10.3 to Form 8-K dated September 16, 1998). 10.12 Employment Agreement dated September 1, 1998, between PetroQuest Energy, Inc. and Charles T. Goodson (incorporated herein by reference to Exhibit 10.2 to Form 8-K dated September 16, 1998). 10.13 Employment Agreement dated September 1, 1998, between PetroQuest Energy, Inc. and Ralph J. Daigle (incorporated herein by reference to Exhibit 10.4 to Form 8-K dated September 16, 1998). 10.14 First Amendment to Employment agreement dated September 1, 1998 between PetroQuest Energy, Inc. and Charles T. Goodson dated July 30, 1999 (incorporated herein by reference to Exhibit 10.1 to For 8-K dated August 9, 1999) 10.15 First Amendment to Employment Agreement dated September 1, 1998 between PetroQuest Energy, Inc. and Alfred J. Thomas, II dated July 30, 1999 (incorporated herein by reference to Exhibit 10.2 to Form 8-K dated August 9, 1999). 25 10.16 First Amendment to Employment Agreement dated September 1, 1998 between PetroQuest Energy, Inc. and Ralph J. Daigle dated July 30, 1999 (incorporated herein by reference to Exhibit 10.3 to Form 8-K dated August 9, 1999). 10.17 Employment Agreement dated May 8, 2000 between PetroQuest Energy, Inc. and Michael O. Aldridge (incorporated by reference to Exhibit 10.1 to the Form 10-Q filed August 14, 2000). 10.18 Employment Agreement dated December 15, 2000 between PetroQuest Energy, Inc. and Arthur M. Mixon, III. (incorporated herein by reference to Exhibit 10.12 to Form 10-K filed March 30, 2001). 10.19 Employment Agreement dated April 20, 2001 between PetroQuest Energy, Inc. and Daniel G. Fournerat (incorporated herein by reference to Exhibit 10.1 to Form 10-Q filed May 15, 2001). * 10.20 Form of Termination Agreement Between PetroQuest Energy, Inc. and each of its executive officers, including Charles T. Goodson, Alfred J. Thomas, II, Ralph J. Daigle, Michael O. Aldridge, Arthur M. Mixon, III and Daniel G. Fournerat. * 10.21 Form of Indemnification Agreement between PetroQuest Energy, Inc. and each of its directors and executive officers, including Charles T. Goodson, Alfred J. Thomas, II, Ralph J. Daigle, Daniel G. Fournerat, E. Wayne Nordberg, Jay B. Langner, William W. Rucks, IV, Michael O. Aldridge and Arthur M. Mixon, III. 21.1 Subsidiaries of the Company (incorporated herein by reference to Exhibit 21.1 to Form 10-K filed March 30, 2001). * 23.1 Consent of Independent Public Accountant. - ---------- * Filed herewith. 26 REPORTS ON FORM 8-K The Company filed a report on Form 8-K on October 3, 2001 relating to the Company's change in transfer agent and registrar. The Company filed a report on form 8-K on October 16, 2001 relating to the resignation of certain of its directors. The Company filed a report on Form 8-K on November 8, 2001 relating to third quarter 2001 results. The Company filed a report on Form 8-K on November 9, 2001 relating to the adoption of a shareholder rights plan. The Company filed a report on Form 8-K on December 14, 2001 relating to the drilling of a well. 27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on March 13, 2002. PETROQUEST ENERGY, INC. By: /s/ Charles T. Goodson ------------------------------------ CHARLES T. GOODSON Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 13, 2002. By: /S/ Charles T. Goodson Chairman of the Board, Chief Executive ------------------------------- Officer and Director (Principal CHARLES T. GOODSON Executive Officer) By: /S/ Alfred J. Thomas, II President, Chief Operating Officer ------------------------------- and Director ALFRED J. THOMAS, II By: /S/ Ralph J. Daigle Executive Vice President and Director ------------------------------- RALPH J. DAIGLE By: /S/ Michael O. Aldridge Senior Vice President, Chief Financial ------------------------------- Officer, Treasurer and Director MICHAEL O. ALDRIDGE (Principal Financial and Accounting Officer) By: /S/ Jay B. Langner Director ------------------------------- JAY B. LANGNER By: Director ------------------------------- E. WAYNE NORDBERG By: /S/ William W. Rucks, IV Director ------------------------------- WILLIAM W. RUCKS, IV 28 INDEX TO FINANCIAL STATEMENTS Report of Independent Public Accountants .................................. F-2 Consolidated Balance Sheets of PetroQuest Energy, Inc. as of December 31, 2001 and 2000 .............................................. F-3 Consolidated Statements of Operations of PetroQuest Energy, Inc. for the years ended December 31, 2001, 2000 and 1999 .................... F-4 Consolidated Statements of Stockholders' Equity of PetroQuest Energy, Inc. for the years ended December 31, 2001, 2000 and 1999 ............... F-5 Consolidated Statements of Cash Flows of PetroQuest Energy, Inc. for the years ended December 31, 2001, 2000 and 1999 ........................ F-6 Notes to Consolidated Financial Statements ................................ F-7 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of PetroQuest Energy, Inc.: We have audited the accompanying consolidated balance sheets of PetroQuest Energy, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PetroQuest Energy, Inc. and subsidiaries as of December 31, 2001 and 2000, and the consolidated results of their operations and their cash flow for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. As discussed in Note 2 to the consolidated financial statements effective January 1, 2001, the Company adopted SFAS 133, "Accounting for Derivatives Instruments and Hedging Activities." ARTHUR ANDERSEN LLP New Orleans, Louisiana March 7, 2002 F-2 PETROQUEST ENERGY, INC. Consolidated Balance Sheets (Amounts in Thousands)
December 31, December 31, 2001 2000 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 1,063 $ 7,549 Oil and gas revenue receivable 5,582 5,148 Joint interest billing receivable 4,609 10,151 Other current assets 135 1,432 ------------ ------------ Total current assets 11,389 24,280 ------------ ------------ Oil and gas properties: Oil and gas properties, full cost method 150,726 85,443 Unevaluated oil and gas properties 14,682 12,431 Accumulated depreciation, depletion and amortization (64,379) (41,530) ------------ ------------ Oil and gas properties, net 101,029 56,344 ------------ ------------ Plugging and abandonment escrow 1,034 495 Other assets, net of accumulated depreciation and amortization 1,187 1,953 of $2,144 and $558, respectively ------------ ------------ Total Assets $ 114,639 $ 83,072 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 19,749 $ 18,893 Advances from co-owners 2,044 7,297 Current portion of long-term debt 329 7,873 ------------ ------------ Total current liabilities 22,122 34,063 Long-term debt 19,000 6,804 Debt subsequently refinanced 14,000 -- Deferred income taxes 4,690 -- Other liabilities 612 749 Commitments and contingencies -- -- Stockholders' equity: Common stock, $.001 par value; authorized 75,000 shares; issued and outstanding 32,530 and 30,256 shares, respectively 33 30 Paid-in capital 64,083 62,290 Unearned deferred compensation (682) -- Accumulated deficit (9,219) (20,864) ------------ ------------ Total stockholders' equity 54,215 41,456 ------------ ------------ Total liabilities and stockholders' equity $ 114,639 $ 83,072 ============ ============
See accompanying Notes to Consolidated Financial Statements. F-3 PETROQUEST ENERGY, INC. Consolidated Statements of Operations (Amounts in Thousands, Except Per Share Data)
Year Ended December 31, ----------------------- 2001 2000 1999 ---- ---- ---- Revenues: Oil and gas sales $54,967 $ 22,267 $ 8,516 Interest and other income 314 294 170 ------- -------- -------- 55,281 22,561 8,686 ------- -------- -------- Expenses: Lease operating expenses 7,172 2,831 2,638 Production taxes 1,096 944 406 Depreciation, depletion and amortization 23,094 6,386 4,472 General and administrative 4,752 3,248 1,625 Interest expense 2,111 78 -- Other -- -- (145) ------- -------- -------- 38,225 13,487 8,996 ------- -------- -------- Income (loss) from operations 17,056 9,074 (310) Income tax expense (benefit) 5,411 (850) -- ------- -------- -------- Net income (loss) $11,645 $ 9,924 $ (310) ======= ======== ======== Earnings (loss) per common share: Basic $ 0.37 $ 0.37 $ (0.01) ======= ======== ======== Diluted $ 0.34 $ 0.35 $ (0.01) ======= ======== ======== Weighted average number of common shares: Basic 31,818 26,919 21,528 Diluted 34,271 28,249 21,528
See accompanying Notes to Consolidated Financial Statements. F-4 PETROQUEST ENERGY, INC. Consolidated Statements of Stockholders' Equity (Amounts in Thousands, Except Share Data)
Unearned Other Total Common Paid-In Deferred Comprehensive Retained Stockholders' Stock Capital Compensation Income Deficit Equity ----- ------- ------------ ------ ------- ------ December 31, 1998 $ 19 $ 43,795 $ -- $ -- $(30,478) $ 13,336 Options Exercised -- 76 -- -- -- 76 Stock based employee compensation -- 118 -- -- -- 118 (78,375 shares) Stock issued for oil and gas properties -- 413 -- -- -- 413 Sale of common stock and warrants 5 4,467 -- -- -- 4,472 Net loss -- -- -- -- (310) (310) ------ -------- ------------ ------------ -------- ------------- December 31, 1999 $ 24 $ 48,869 $ -- $ -- $(30,788) $ 18,105 ------ -------- ------------ ------------ -------- ------------- Options and warrants exercised 1 1,586 -- -- -- 1,587 Stock based employee compensation -- 555 -- -- -- 555 (221,500 shares) Sale of common stock 5 11,280 -- -- -- 11,285 Net income -- -- -- $ -- 9,924 9,924 ------ -------- ------------ ------------ -------- ------------- December 31, 2000 $ 30 $ 62,290 -- -- $(20,864) $ 41,456 ------ -------- ------------ ------------ -------- ------------- Options and warrants exercised 3 1,510 (1,034) -- -- 479 Amortization of deferred compensation -- 413 352 -- -- 765 Tax effect of deferred compensation -- (130) -- -- -- (130) Cumulative effect of change in accounting principle, net of taxes -- -- -- (383) -- (383) Amortization of derivative fair value adjustment -- -- -- 383 -- 383 Net income -- -- -- -- 11,645 11,645 ------ -------- ------------ ------------ -------- ------------- December 31, 2001 $ 33 $ 64,083 $ (682) $ -- $ (9,219) $ 54,215 ------ -------- ------------ ------------ -------- -------------
See accompanying Notes to Consolidated Financial Statements. F-5 PETROQUEST ENERGY, INC. Consolidated Statements of Cash Flows (Amounts in Thousands)
Year Ended December 31, ----------------------- 2001 2000 1999 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ 11,645 $ 9,924 $ (310) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Deferred tax expense (benefit) 5,411 (850) -- Amortization of debt issuance costs 1,369 -- -- Compensation expense 765 555 118 Depreciation, depletion and amortization 23,094 6,386 4,472 Other 61 -- -- Plugging and abandonment costs (28) (89) -- Changes in working capital accounts: Accounts receivable (434) (2,811) (1,321) Joint interest billing receivable 5,542 (7,961) (2,190) Accounts payable and accrued liabilities (61) 15,870 885 Other assets (1,011) (1,744) -- Advances from co-owners (5,253) 4,140 3,157 Provision for revenue dispute -- -- (145) Plugging and abandonment escrow (539) (240) 34 Other 308 (345) (299) -------- -------- -------- Net cash provided by operating activities 40,869 22,835 4,401 -------- -------- -------- Cash flows from investing activities: Investment in oil and gas properties (66,678) (40,972) (10,062) Sale of Canadian properties -- -- 1,868 Net cash used in investing activities (66,678) (40,972) (8,194) -------- -------- -------- Cash flows from financing activities: Exercise of options and warrants 671 1,587 76 Proceeds from borrowing 28,000 22,620 8,220 Repayment of debt (9,348) (12,812) (7,050) Issuance of common stock -- 11,285 4,472 -------- -------- -------- Net cash provided by financing activities 19,323 22,680 5,718 -------- -------- -------- Net increase (decrease) in cash and cash equivalents (6,486) 4,543 1,925 Cash and cash equivalents balance beginning of period 7,549 3,006 1,081 -------- -------- -------- Cash and cash equivalents balance end of period $ 1,063 $ 7,549 $ 3,006 ======== ======== ======== Supplentmental disclosure of cash flow information Cash paid during the period from: Interest $ 1,464 $ 409 $ 233 ======== ======== ======== Income taxes $ -- $ -- $ -- ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. F-6 PETROQUEST ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION PetroQuest Energy, Inc. (a Delaware Corporation) ("PetroQuest" or the "Company") is an independent oil and gas company headquartered in Lafayette, Louisiana with an exploration office in Houston, Texas. It is engaged in the exploration, development, acquisition and operation of oil and gas properties onshore and offshore in the Gulf Coast Region. PetroQuest and its predecessors have been active in this area since 1986. On December 31, 2000, the Company underwent a corporate reorganization. The Company's subsidiary, PetroQuest Energy, Inc., a Louisiana corporation, was merged into PetroQuest Energy One, L.L.C., a Louisiana limited liability company. In addition, PetroQuest Energy One, L.L.C. changed its name to PetroQuest Energy, L.L.C., a single-member Louisiana limited liability company, and PetroQuest Energy, Inc., a Delaware corporation, continues to be its sole member. A new single-member Louisiana limited liability company called PetroQuest Oil & Gas, L.L.C. was created on December 31, 2000. PetroQuest Energy, Inc. (a Delaware corporation) is the sole member of PetroQuest Oil & Gas, L.L.C. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The Consolidated Financial Statements include the accounts of the Company and its subsidiaries, PetroQuest Energy, L.L.C. and PetroQuest Oil & Gas, L.L.C. All intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. Actual results could differ from those estimates. Oil and Gas Properties The Company utilizes the full cost method of accounting, which involves capitalizing all acquisition, exploration and development costs incurred for the purpose of finding oil and gas reserves including the costs of drilling and equipping productive wells, dry hole costs, lease acquisition costs and delay rentals. The Company also capitalizes the portion of general and administrative costs, which can be directly identified with acquisition, exploration or development of oil and gas properties. Unevaluated property costs are transferred to evaluated property costs at such time as wells are completed on the properties, the properties are sold, or management determines these costs to have been impaired. Interest is capitalized on unevaluated property costs. Depreciation, depletion and amortization of oil and gas properties is computed using the unit-of-production method based on estimated proved reserves. All costs associated with evaluated oil and gas properties, including an estimate of future development, restoration, dismantlement and abandonment costs associated therewith, are included in the computation base. The costs of investments in unproved properties are excluded from this calculation until the project is evaluated and proved reserves established or impaired. Oil and gas reserves are estimated annually by independent petroleum engineers. Additionally, the capitalized costs of proved oil and gas properties cannot exceed the present value of the estimated net cash flow from its proved reserves (the full cost ceiling). Transactions involving sales of reserves in place, unless significant, are recorded as adjustments to accumulated depreciation, depletion and amortization. F-7 Upon the acquisition or discovery of oil and gas properties, management estimates the future net costs to be incurred to dismantle, abandon and restore the property using geological, engineering and regulatory data available. Such cost estimates are periodically updated for changes in conditions and requirements. Such estimated amounts are considered as part of the full cost pool for purposes of amortization upon acquisition or discovery. Such costs are capitalized as oil and gas properties as the actual restoration, dismantlement and abandonment activities take place. Other Assets Other Assets consist primarily of furniture and fixtures (net of accumulated depreciation) which are depreciated over their useful lives ranging from 3-7 years and loan costs which are amortized over the life of the related loan. Cash and Cash Equivalents The Company considers all highly liquid investments in overnight securities made through its commercial bank accounts, which result in available funds the next business day, to be cash and cash equivalents. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109. Provisions for income taxes include deferred taxes resulting primarily from temporary differences due to different reporting methods for oil and gas properties for financial reporting purposes and income tax purposes. For financial reporting purposes, all exploratory and development expenditures are capitalized and depreciated, depleted and amortized on the unit-of-production method. For income tax purposes, only the equipment and leasehold costs relative to successful wells are capitalized and recovered through depreciation or depletion. Generally, most other exploratory and development costs are charged to expense as incurred; however, the Company may use certain provisions of the Internal Revenue Code which allow capitalization of intangible drilling costs where management deems appropriate. Other financial and income tax reporting differences occur as a result of statutory depletion. Revenue Recognition The Company records natural gas and oil revenue under the sales method of accounting. Under the sales method, the Company recognizes revenues based on the amount of natural gas or oil sold to purchasers, which may differ from the amounts to which the Company is entitled based on its interest in the properties. Gas balancing obligations as of December 31, 2001, 2000 and 1999 were not significant. Certain Concentrations During 2001, 66% of the Company's oil and gas production was sold to four customers. During 2000 and 1999, 84% and 44%, respectively, of the Company's oil and gas production was sold to three customers. Based on the current demand for oil and gas, the Company does not believe the loss of any of these customers would have a significant financially disruptive effect on its business or financial condition. Fair Value of Financial Instruments The fair value of accounts receivable and accounts payable approximate book value at December 31, 2001 and 2000 due to the short-term nature of these accounts. The fair value of the note payable and non-recourse financing approximates book value due to the variable rate of interest charged. Derivative Instruments On January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, as amended (SFAS 133) pertaining to the accounting for derivative instruments and hedging activities. SFAS 133 requires an entity to recognize all of its derivatives as either assets or liabilities on its balance sheet and measure those instruments at fair value. If the conditions specified in SFAS 133 are met, those instruments may be designated as hedges. Changes in the value of hedge instruments would not impact earnings, except to the extent that the instrument is not perfectly effective as a hedge. At January 1, 2001, the F-8 Company recognized a liability of $609,295 related to costless collars; the cumulative catch-up adjustment was recorded as a charge to other comprehensive income. These collars were designated as cash flow hedges. We recognized $1,630,000 in oil and gas revenues during the year ended December 31, 2001 as a result of the settlement of costless collars. We had no open commodity hedging contracts at December 31, 2001. During the fourth quarter, we entered into three $5 million interest rate swaps covering our floating rate debt. The swaps which are for one, two and three year periods have fixed interest rates of 2.78%, 2.78%-4.56% and 3.05%-5.665%, respectively. The swaps are stated at their fair value and are marked-to-market through other income in the Company's income statement. As of December 31, 2001, the fair value of the open interest rate swaps was a liability of $61,000. New Accounting Standards In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations," which requires recording the fair value of a liability for an asset retirement obligation in the period incurred. The standard is effective for fiscal years beginning after June 15, 2002, with earlier application permitted. The Company expects to adopt this standard effective January 1, 2003. We have not completed an evaluation of the impact of this new standard. Earnings per Common Share Amounts Basic earnings or loss per common share was computed by dividing net income or loss by the weighted average number of shares of common stock outstanding during the year. Diluted earnings or loss per common share is determined on a weighted average basis using common shares issued and outstanding adjusted for the effect of stock options considered common stock equivalents computed using the treasury stock method. For purposes of computing earnings per share in a loss year, common stock equivalents have been excluded from the computation of weighted average common shares outstanding because their effect is antidilutive. Options to purchase 180,000 shares of common stock at $5.89 to $7.65 per share were outstanding during 2001 but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares. Options to purchase 682,500 shares of common stock at $3.13 to $3.44 per share were outstanding during 2000 but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares. For 1999, none of the Company's options and warrants were included in the computation of diluted loss per share because the effect of the assumed exercise of these stock options as of the beginning of the year would have an antidilutive effect. The contingent stock rights assigned in connection with a Company merger (see Note 3) were also excluded from the calculation of diluted earnings per share prior to their issuance. NOTE 3 - EQUITY Common Stock Issue Rights Pursuant to a Company merger, the Company issued to the original owners of American Explorer L.L.C. and their respective affiliates, certain of whom currently serve as officers and directors of the Company, 7,335,001 shares of the Company's common stock, par value $.001 per share (the "Common Stock"), and 1,667,001 Contingent Stock Issue Rights (the "CSIRs"). The CSIRs entitled the holders to receive an additional 1,667,001 shares of Common Stock at such time within three years of the anniversary date of the issuance of the CSIRs if the trading price for the Common Stock closed at $5.00 or higher for 20 consecutive trading days. On May 3, 2001 the Common Stock closed higher than $5.00 for the twentieth consecutive trading day, and 1,667,001 shares of Common Stock were issued under the terms of the CSIRs. Unearned Deferred Compensation In April 2001, the Original Owners of American Explorer L.L.C. entered into an agreement with an officer of the Company whereby the Original Owners granted to the officer an option to acquire, at a fixed price, certain of the original shares the Original Owners were issued in the Merger. As the fixed price of the April grant was below the market price as of the date of grant, the Company is recognizing non-cash compensation expense over the three-year vesting period of the option. In addition, F-9 the Original Owners granted to the officer an interest in a portion of the Common Stock issuable pursuant to the CSIRs, if any, that might be issued. This agreement is similar to agreements previously entered into with two other officers of the Company. Non-cash compensation expense is being recognized for the Common Stock issuable pursuant to the CSIRs granted to the three officers over the three-year vesting period based on the fair value of the Common Stock issuable pursuant to the CSIRs in May 2001, when the Common Stock issuable pursuant to the CSIRs was issued to the Original Owners. The Company has recorded the effects of the transactions as deferred compensation until fully amortized. We also recognized $352,000 of non-cash compensation expense related to the amortization of unearned deferred compensation. In addition, as a result of extending the life of two directions' options, we recognized $413,000 of non-cash compensation expense during the fourth quarter During February and March 2002, the Company completed the offering of 5,193,600 shares of its common stock. The shares were sold to the public for $4.40 per share. After underwriting discounts, the Company realized proceeds of approximately $21.9 million. NOTE 4 - DEBT PetroQuest and our subsidiary PetroQuest Energy, L.L.C. (the "Borrower") have a $100 million revolving credit facility with Hibernia National Bank, Royal Bank of Canada and Union Bank of California, N.A. which permits us to borrow amounts from time to time based on our available borrowing base as determined in the credit facility. The credit facility is secured by a mortgage on substantially all of the Borrower's oil and gas properties, a pledge of the membership interest of the Borrower and PetroQuest's corporate guarantee of the indebtedness of the Borrower. The borrowing base under this credit facility is based upon the valuation on March 31 and September 30 of the Borrower's mortgaged properties, projected oil and gas prices, and any other factors deemed relevant by the lenders. We or the lenders may also request additional borrowing base redeterminations. On March 1, 2002, the borrowing base under the credit facility was adjusted to $28 million and is subject to quarterly reductions of $3 million commencing on April 30, 2002. As of December 31, 2001, $19 million outstanding under the credit facility is classified as long term reflecting the remaining borrowing base at December 31, 2002. Based upon this determination, the remaining balance outstanding under the credit facility of $14 million has been classified as debt subsequently refinanced as a result of the public offering in February 2002. Outstanding balances on the revolving credit facility bear interest at either the prime rate (plus 0.375% per year whenever the borrowing base usage under the credit facility is greater than or equal to 90%) or the Eurodollar rate plus a margin (based on a sliding scale of 1.625% to 2.375% depending on borrowing base usage). The credit facility also allows us to use up to $10 million of the borrowing base for letters of credit for fees of 2% per annum. At March 7, 2002, we had $5 million of borrowings and a $2.6 million letter of credit issued pursuant to the credit facility. The credit facility contains covenants and restrictions common to borrowings of this type, including maintenance of certain financial ratios. We were in compliance with all of our covenants at March 7, 2002. The credit facility matures on June 30, 2004. On April 21, 1999, the Company entered into a loan agreement for non-recourse financing to fund completion, flow line and facility costs of its High Island Block 494 property. The property is security for the loan. Interest is payable at 12% and the lender receives a 2 1/2% overriding royalty interest in the property. The loan agreement requires 85% of the net cash flow from the property (assuming production levels of 12.5 MMcf/day) to be dedicated to debt service. At December 31, 2001, $329,000 remained outstanding under this loan, and the Company estimates the loan will be paid in 2002. NOTE 5 - RELATED PARTY TRANSACTIONS Certain officers and directors and their affiliates are working interest owners in properties operated by the Company and are billed for and pay their proportionate share of drilling and operating costs in the normal course of business. During 2000 and 1999, the Company was charged consulting expenses of $10,000 and $143,462, respectively, by companies owned by former directors. Office expense includes $1,662 and $18,500 for 2000 and 1999, respectively, paid to a company owned by a former director. F-10 During 2001, 2000 and 1999 the Company paid fees and reimbursable expenses of $526,000, $208,789 and $139,001, respectively to Onebane, Bernard, Torian, Diaz, McNamara & Abell to perform various legal services for the Company. A senior officer of the Company was of counsel with Onebane, Bernard, Torian, Diaz, McNamara & Abell prior to joining the Company during 2001. NOTE 6 - COMMON STOCK AND WARRANTS On July 20, 2000, the Company completed a private placement of 4.89 million shares of common stock to accredited investors at a purchase price of $2.50 per share for a total consideration of $12,225,000 before fees and expenses. After fees and expenses, including $644,168 in commissions, proceeds to the Company were $11,294,000. The Company subsequently registered the resale of the common stock with the Securities and Exchange Commission on Form S-3. In a private placement during the fourth quarter of 1999, the Company issued 238,500 shares of common stock (with a fair market value $413,000) in exchange for additional working interests in producing properties. The effective date of these acquisitions was June 1, 1999. The net operating income of $89,000 attributable to these interests during the period from the effective date to the closing date was recorded as an adjustment to the purchase price of the properties. In August 1999, the Company received the funding of a private placement of 5 million units at a purchase price of $1.00 per unit for a total consideration of $5,000,000 before fees and expenses. Net proceeds of $4,508,000 from sale of the units were allocated between the stock and warrants based on their relative fair market value on the date of the transaction. Each unit sold in the private placement consisted of one share of the Company's common stock and one warrant exercisable to purchase one-half a share of the Company's common stock. Each warrant is exercisable at any time through the fourth year after issuance to purchase one-half of a share of the Company's common stock at a per share purchase price of $1.25. In addition, the Company issued to the placement agents of the units, warrants to purchase 500,000 shares of the Company's common stock. The warrants received by the placement agents are exercisable at any time for a period of five years to purchase one share of the Company's common stock at a per share purchase price of $1.25 per share. At December 31, 2001, there were 1,690,000 warrants outstanding. NOTE 7 - INVESTMENT IN OIL AND GAS PROPERTIES The following table discloses certain financial data relative to the Company's evaluated oil and gas producing activities, which are located onshore and offshore the continental United States: Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities (amounts in thousands)
For the Year-Ended December 31, ------------------------------- 2001 2000 1999 ------- ------- ------- Acquisition costs: Proved $11,928 $ 6,154 $ 546 Unproved 1,250 4,670 954 Exploration costs 7,280 9,625 8,477 Development costs 43,424 18,000 1,170 Other costs 3,652 2,523 1,795 ------- ------- ------- Total costs incurred $67,534 $40,972 $12,942 ======= ======= =======
Other costs for the year ended December 31, 2001 include $2,651,000 and $1,001,000 of capitalized general and administrative costs and interest costs respectively. Other costs for the year ended December 31, 2000 include $2,084,000 and $439,000 of capitalized general and administrative costs and interest costs respectively. Other costs for the year ended December 31, 1999 include $1,361,000 and $434,000 of capitalized general and administrative costs and interest costs respectively. At December 31, 2001 and 2000, unevaluated oil and gas properties with capitalized costs of $14,682,000 and $12,431,000 respectively, were not subject to depletion. Of the $14,682,000 of unevaluated oil and gas property costs at F-11 December 31, 2001, not subject to depletion, $6,485,000 was incurred in 2001 and $8,197,000 was incurred in prior years. Management expects that these properties will be evaluated over the next one to three years. NOTE 8 - INCOME TAXES The Company follows the provisions of SFAS No. 109, "Accounting For Income Taxes," which provides for recognition of a deferred tax asset for deductible temporary timing differences, operating loss carryforwards, statutory depletion carryforwards and tax credit carryforwards net of a "valuation allowance." An analysis of the Company's deferred taxes follows (amounts in thousands):
December 31, ------------ 2001 2000 ---- ---- Net operating loss carryforwards $ 12,205 $ 9,284 Percentage depletion carryforward 1,161 441 Alternative minimum tax credit 16 29 Deferred Compensation (130) -- Temporary differences: Oil and gas properties - full cost (18,096) (8,904) Compensation expense 153 -- -------- ------- $ (4,691) $ 850 ======== =======
For tax reporting purposes, the Company had operating loss carryforwards of $32,986,000 and $26,525,000 at December 31, 2001 and 2000 respectively. If not utilized, such carryforwards would begin expiring in 2009 and would completely expire by the year 2021. The Company had available for tax reporting purposes $3,318,000 in statutory depletion deductions that may be carried forward indefinitely. Income tax expense (benefit) for each of the years ended December 31, 2001, 2000 and 1999 (amounts in thousands) was different than the amount computed using the Federal statutory rate (35%) for the following reasons:
For the Year-Ended December 31, ------------------------------- 2001 2000 1999 ---- ---- ---- Amount computed using the statutory rate $ 5,970 $ 3,176 $(109) Increase (reduction) in taxes resulting from: State & local taxes 341 120 (5) Percentage depletion carryforward (720) -- -- Other (180) -- -- Increase (decrease) in deferred tax asset valuation allowance -- (4,146) 114 ------- ------- ----- Income tax expense (benefit) $ 5,411 $ (850) $ -- ======= ======= =====
NOTE 9 - COMMITMENTS AND CONTINGENCIES PetroQuest Energy, Inc. f/k/a Optima Energy (U.S.) Corp. v. The Meridian Resource & Exploration Company f/k/a Texas Meridian Resources Exploration, Inc., bearing Civil Action No. 99-2394 of the United States District Court for the Western District of Louisiana was filed on February 24, 2000. The Company asserts a claim for damages against Meridian resulting from Meridian's activities as operator of the Southwest Holmwood property, Calcasieu Parish, Louisiana. Meridian's activities as operator resulted in a final judgment of the United States District Court for the Western District of Louisiana ordering cancellation of the Company's rights to a productive oil and gas lease and the associated joint exploration agreement , forfeiture to two producing wells on the lease and substantial damages against Meridian causing the Company the loss of its investment and profits. The Company is unable to predict with certainty the outcome of the lawsuit at this time. F-12 The Meridian Resource & Exploration Company v. PetroQuest Energy, Inc., bearing Docket No. 996192A of the 15th Judicial District Court in and for the Parish of Lafayette, Louisiana was filed on December 17, 1999. Meridian asserts that the Company is responsible as an investor under its participation agreement with Meridian for $530,004 of the losses, costs, expense and liability of Meridian resulting from the final judgment that was rendered in favor of Amoco and against Meridian in legal proceedings relative to the Southwest Holmwood Field, Calcasieu Parish, Louisiana in the matter "Amoco Production Company v. Texas Meridian Resource & Exploration Company," bearing Civil Action No. 96-1639 in the United States District Court for the Western District of Louisiana (Civil Action No. 98-30724 in the United States Court of Appeals for the Fifth Circuit). Although the Company accrued $555,000 when the district court decision was rendered against Meridian in December 1997, the Company denies liability to Meridian for losses sustained by Meridian as operator as a result of the Amoco litigation and is vigorously defending the lawsuit. Meridian initially withheld $737,620 from production revenues due the Company from other properties. On January 9, 2002 Meridian released to the Company $211,476 of the withheld revenues. The Company is pursuing recovery of the balance of the withheld revenues from Meridian as discussed in PetroQuest Energy, Inc. f/k/a Optima Energy (U.S.) Corp. v. The Meridian Resource & Exploration Company f/k/a Texas Meridian Resources Exploration, Inc. The Company is unable to predict with certainty the outcome of the lawsuit at this time. PetroQuest Energy, Inc. and PetroQuest Energy One, L.L.C. v. Schlumberger Technology Corporation, et al, bearing Civil Action No. 00-2823 of the United States District Court, Western District of Louisiana was filed on December 29, 2000. This matter is a lawsuit filed by the Company's subsidiaries, PetroQuest Energy, Inc., a Louisiana corporation, and PetroQuest Energy One, L.L.C. (now PetroQuest Energy, L.L.C.) seeking to recover cost overruns in the amount of approximately $2,850,000 which were incurred in the completion of theOCSG-15243 #2 Well located at Eugene Island Block 147. The Company asserts that cost overruns were incurred due to the negligence of Schlumberger Technology Corporation. On May 17, 2001, Schlumberger Technology Corporation filed a counter-claim for $437,200, plus interest, attorney's fees and costs for goods and services allegedly provided in connection with the OCSG-15243 #2 Well. The Company is unable to predict with certainty the outcome of the lawsuit at this time. The Company is a party to other ongoing litigation in the normal course of business. While the outcome of lawsuits or other proceedings against the Company cannot be predicted with certainty, management believes that the effect on its financial condition, results of operations and cash flows, if any, will not be material. ABANDONMENT The Company has made, and will continue to make, expenditures for the protection of the environment. Present and future environmental laws and regulations applicable to the Company's operation could require substantial capital expenditures or could adversely affect its operations in other ways that cannot be predicted at this time. The Company maintains abandonment escrows that have been established for future abandonment obligations of certain oil and gas properties of the Company. The management of the Company believes the escrows will be sufficient to offset those future abandonment liabilities; however, the Company is responsible for any abandonment expenses in excess of the escrow balances. As of December 31, 2001 and 2000, total estimated site restoration, dismantlement and abandonment costs were approximately $14,056,000 and $12,439,000 respectively, net of expected salvage value. F-13 LEASE COMMITMENTS The Company has operating leases for office space, which expire on various dates through 2010. Future minimum lease commitments as of December 31, 2001 under these operating leases are as follows (in thousands): 2002 ................................................. $ 569 2003 ................................................. 644 2004 ................................................. 650 2005 ................................................. 667 2006 ................................................. 599 Thereafter ................................................. 1,898 ------ $5,027 ======
Total rent expense under operating leases was approximately $411,000, $345,000 and $193,000 in 2001, 2000 and 1999, respectively. NOTE 10 - EMPLOYEE BENEFIT PLANS The Company currently has one stock option plan. The stock options generally become exercisable over a three-year period, must be exercised within 10 years of the grant date and may be granted only to employees, directors and consultants. The exercise price of each option may not be less than 100% of the fair market value of a share of Common Stock on the date of grant. Upon a change in control of the Company, all outstanding options become immediately exercisable. A summary of the Company's stock options as of December 31, 2001, 2000 and 1999 and changes during the years ended on those dates is presented below:
Year Ended December 31, ----------------------- 2001 2000 1999 ---- ---- ---- Number of Wgtd. Avg. Number of Wgtd. Avg. Number of Wgtd. Avg. --------- ---------- --------- ---------- --------- ---------- Options Price Options Price Options Price ------- ----- ------- ----- ------- ----- Outstanding at beginning of year 1,861,900 $ 1.92 1,126,200 $ 0.95 1,052,700 $ 0.85 Granted 622,500 5.32 1,027,500 2.67 188,000 1.42 Expired/cancelled/forfeitures (14,500) 6.17 (24,866) 1.04 (25,500) 0.85 Exercised (231,134) 0.89 (266,934) 0.85 (89,000) 0.85 ---------- ---------- ---------- ---------- ---------- ---------- Outstanding at end of year 2,238,766 2.94 1,861,900 1.92 1,126,200 0.95 Options exercisable at year-end 1,030,608 1.64 800,733 0.97 897,433 0.93 Options available for future grant 268,081 182,166 584,800 Weighted average fair value of options granted during the year $ 3.18 $ 1.99 $ 0.47
The fair value of each option granted during the periods presented is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (a) divided yield of 0% (b) expected volatility ranges of 65.14% - 67.87%, 56.99% - 59.88%, and 55.02% - 61.23% in 2001, 2000 and 1999, respectively (c) risk-free interest rate ranges of 4.03% - 5.10%, 5.39% - 6.96% and 5.31% - 6.33% in 2001, 2000 and 1999, respectively, and (d) expected life of 5 years for all 2001 grants and 10 years for all 2000 and 1999 grants. F-14 The following table summarizes information regarding stock options outstanding at December 31, 2001:
Range of Options Wgtd. Avg. Wgtd. Avg. Options Wgtd. Avg. Exercise Outstanding Remaining Exercise Exercisable Exercise Price At 12/31/01 Contractual Life Price At 12/31/01 Price ----- ----------- ---------------- ----- ----------- ----- $0.85 - $0.94 458,600 7 years $0.89 458,600 $0.89 $1.44 - $1.88 491,333 8.68 years $1.67 347,333 $1.66 $3.13 - $3.75 740,833 9.08 years $3.20 224,675 $3.15 $4.25 - $7.65 548,000 10 years $5.47 -- -- ----------- ----------- 2,238,766 8.79 years $2.94 1,030,608 $1.64
If the compensation cost for the Company's 2001, 2000 and 1999 grants for stock-based compensation plans had been determined consistent with the expense recognition provisions of SFAS No. 123, the Company's 2001, 2000 and 1999 net income and basic and diluted earnings per common share would have approximated the pro forma amounts below (in thousands, except per share amounts):
Year Ended December 31, ----------------------- 2001 2000 1999 ---- ---- ---- As Pro As Pro As Pro Reported Forma Reported Forma Reported Forma -------- ----- -------- ----- -------- ----- Net income (loss) $ 11,645 $ 10,882 $ 9,924 $ 9,112 $ (310) $ (978) Earnings (loss) per common share Basic $ 0.37 $ 0.34 $ 0.37 $ 0.34 $ (0.01) $ (0.05) Diluted $ 0.34 $ 0.32 $ 0.35 $ 0.32 $ (0.01) $ (0.05)
NOTE 11 - SUBSEQUENT EVENT On March 1, 2002, the Company closed the sale of its interest in Valentine Field for $18.6 million. The transaction had an effective date of January 1, 2002. At December 31, 2001, the Company's independent reservoir engineering firm attributed 7.3 Bcfe of proved reserves net to the Company's interest in this field. NOTE 12 - OIL AND GAS RESERVE INFORMATION - UNAUDITED A majority of the Company's net proved oil and gas reserves at December 31, 2001 have been estimated by independent petroleum consultants in accordance with guidelines established by the Securities and Exchange Commission ("SEC"). Accordingly, the following reserve estimates are based upon existing economic and operating conditions at the respective dates. There are numerous uncertainties inherent in estimating quantities of proved reserves and in providing the future rates of production and timing of development expenditures. The following reserve data represents estimates only and should not be construed as being exact. In addition, the present values should not be construed as the current market value of the Company's oil and gas properties or the cost that would be incurred to obtain equivalent reserves. F-15 The following table (amounts in thousands) sets forth an analysis of the Company's estimated quantities of net proved and proved developed oil (including condensate) and gas reserves, all located onshore and offshore the continental United States:
Oil Natural In Gas in MBbls MMcf ----- ---- Proved reserves as of December 31, 1998 504 10,561 Revisions of previous estimates 199 128 Extensions, discoveries and other additions 1,596 7,257 Purchase of producing properties -- 13 Production (105) (2,831) ------ ------- Proved reserves as of December 31, 1999 2,194 15,128 Revisions of previous estimates (760) 6,638 Extensions, discoveries and other additions 110 3,476 Purchase of producing properties 1,732 8,865 Production (161) (3,972) ------ ------- Proved reserves as of December 31, 2000 3,115 30,135 Revisions of previous estimates (522) (2,631) Extensions, discoveries and other additions 3,805 14,409 Purchase of producing properties 606 12,170 Sale of producing properties -- (114) Production (791) (9,025) ------ ------- Proved reserves as of December 31, 2001 6,213 44,944 ------ ------- Proved developed reserves As of December 31, 1999 400 6,456 ====== ======= As of December 31, 2000 2,355 18,679 ====== ======= As of December 31, 2001 3,104 26,847 ====== =======
F-16 The following tables (amounts in thousands) present the standardized measure of future net cash flows related to proved oil and gas reserves together with changes therein, as defined by the FASB. Future production and development costs are based on current costs with no escalations. No future income taxes were included in the computation of standardized measure in 1999 and 1998 because the Company's tax basis in oil and gas properties, along with its other tax preference attributes, net, exceeded pretax estimated discounted future net cash flows. Estimated future cash flows have been discounted to their present values based on a 10% annual discount rate.
STANDARD MEASURE December 31, ------------ 2001 2000 1999 ---- ---- ---- Future cash flows $ 234,736 $ 391,078 $ 92,788 Future production and development costs (118,700) (66,095) (33,732) Future income taxes (18,226) (98,190) -- --------- --------- -------- Future net cash flows 97,810 226,793 59,056 10% annual discount (22,763) (48,470) (15,987) --------- --------- -------- Standardized measure of discounted future net cash flows $ 75,047 $ 178,323 $ 43,069 ========= ========= ========
CHANGES IN STANDARDIZED MEASURE Year Ended December 31, ----------------------- 2001 2000 1999 ---- ---- ---- Standarized measure at beginning of year $ 178,323 $ 43,069 $ 11,676 Sales and transfers of oil and gas produced, net of production costs (45,068) (18,492) (5,472) Changes in price, net of future production costs (188,513) 104,695 7,691 Extensions and discoveries, net of future production and development costs 33,067 27,575 25,974 Changes in estimated future development costs, net of development costs incurred during this period 16,333 2,801 1,013 Revisions of quantity estimates (7,742) 12,818 2,547 Accretion of discount 25,687 4,307 1,168 Net change in income taxes 65,361 (78,544) -- Purchase of reserves in place 12,730 67,052 179 Sale of reserves in place (864) -- -- Changes in production rates (timing) and other (14,267) 13,042 (1,707) --------- --------- -------- Standardized measure at end of year $ 75,047 $ 178,323 $ 43,069 ========= ========= ========
The weighted average prices of oil and gas used with the above tables at December 31, 2001, 2000 and 1999 were $18.49, $25.29 and $25.21 respectively, per barrel and $2.69, $10.35 and $2.48, respectively, per Mcf. F-17 NOTE 13 - SUMMARIZED QUARTERLY FINANCIAL INFORMATION - UNAUDITED Summarized quarterly financial information is as follows (amounts in thousands except per share data):
Quarter Ended ------------- March-31 June-30 September-30 December-31 -------- ------- ------------ ----------- 2001: Revenues $ 12,553 $ 14,888 $ 15,468 $ 12,372 Expenses 8,412 11,034 12,960 11,230 ------------ ------------ ------------ ------------ Net income (1) 4,141 3,854 2,508 1,142 ============ ============ ============ ============ Earnings per share: (2) Basic $ 0.14 $ 0.12 $ 0.08 $ 0.04 Diluted $ 0.13 $ 0.11 $ 0.07 $ 0.03 2000: Revenues $ 3,151 $ 3,859 $ 6,132 $ 9,419 Expenses 2,521 2,823 3,113 4,180 ------------ ------------ ------------ ------------ Net income 630 1,036 3,019 5,239 ============ ============ ============ ============ Earnings per share: (2) Basic $ 0.03 $ 0.04 $ 0.10 $ 0.17 Diluted $ 0.02 $ 0.04 $ 0.10 $ 0.17
- ---------- (1) Included in net income for the quarter ended December 31, 2001 is a tax benefit of $759,000 primarily attributable to a revision in the Company's estimated effective income tax rate. (2) The above quarterly earnings per share may not total to the full year per share amount, as the weighted average number of shares outstanding for each quarter fluctuated as a result of the assumed exercise of stock options. F-18 INDEX TO EXHIBITS 2.1 Plan and Agreement of Merger by and among Optima Petroleum Corporation, Optima Energy (U.S.) Corporation, its wholly-owned subsidiary, and Goodson Exploration Company, NAB Financial L.L.C., Dexco Energy, Inc., American Explorer, L.L.C. (incorporated herein by reference to Appendix G of the Proxy Statement on Schedule 14A filed July 22, 1998). 3.1 Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 4.1 to Form 8-K dated September 16, 1998) 3.2 Bylaws of the Company (incorporated herein by reference to Exhibit 4.2 to Form 8-K dated September 16, 1998). 3.3 Certificate of Domestication of Optima Petroleum Corporation (incorporated herein by reference to 4.4 to Form 8-K dated September 16, 1998). 3.4 Certificate of Designations, Preferences, Limitations And Relative Rights of The Series a Junior Participating Preferred Stock of PetroQuest Energy, Inc. (incorporated herein by reference to Exhibit A of the Rights Agreement attached as Exhibit 1 to Form 8-A filed July 27, 2001). 4.1 Registration Rights Agreement dated as of September 1, 1998 among Optima Petroleum Corporation, Charles T. Goodson, Alfred J. Thomas, II, Ralph J. Daigle, Janell B. Thomas, Alfred J. Thomas, III, Blaine A. Thomas, and Natalie A. Thomas (incorporated herein by reference to Exhibit 99.1 to Form 8-K dated September 16, 1998). 4.2 Form of Certificate of Contingent Stock Issue Right (incorporated herein by reference to Exhibit 4.3 to Form 8-K dated September 16, 1998). 4.3 Form of Warrant to Purchase Shares of Common Stock of PetroQuest Energy, Inc. (incorporated herein by reference to Exhibit 4.1 to Form 8-K dated August 9, 1999) 4.4 Form of Placement Agent Warrant to Purchase Shares of Common Stock of PetroQuest Energy, Inc. (incorporated herein by reference to Exhibit 4.2 to Form 8-K dated August 9, 1999) 4.5 Rights Agreement dated as of November 7, 2001 between PetroQuest Energy, Inc. and American Stock Transfer & Trust Company, as Rights Agent, including exhibits thereto (incorporated herein by reference to Exhibit 1 to Form 8-A filed July 27, 2001). 4.6 Form of Rights Certificate (incorporated herein by reference to Exhibit C of the Rights Agreement attached as Exhibit 1 to Form 8-A filed July 27, 2001). 10.1 PetroQuest Energy, Inc. 1998 Incentive Plan, as amended and restated effective December 1, 2000 (incorporated herein by reference to Appendix A to Proxy Statement on Schedule 14A filed April 20, 2001). 10.2 Amended and Restated Credit Agreement dated as of May 11, 2001, by and among PetroQuest Energy, L.L.C., a Louisiana limited liability company, PetroQuest Energy, Inc., a Delaware corporation, and Hibernia National Bank, and the Financial Institutions named therein as Lenders, and Hibernia National Bank as Administrative Agent (incorporated herein by reference to Exhibit 10.3 to Form 10-Q filed May 15, 2001). 10.3 Revolving Note dated May 11, 2001 in the principal amount of $50,000,000.00 payable to Hibernia National Bank (incorporated herein by reference to Exhibit 10.4 to Form 10-Q filed May 15, 2001). 10.4 Revolving Note dated May 11, 2001 in the principal amount of $25,000,000.00 payable to Union Bank of California, N.A. (incorporated herein by reference to Exhibit 10.5 to Form 10-Q filed May 15, 2001). 10.5 Revolving Note dated May 11, 2001 in the principal amount of $25,000,000.00 payable to Royal Bank of Canada (incorporated herein by reference to Exhibit 10.6 to Form 10-Q filed May 15, 2001). 10.6 Commercial Guaranty made as of May 11, 2001, by PetroQuest Energy, Inc., a Delaware corporation, in favor of Hibernia National Bank (incorporated herein by reference to Exhibit 10.7 to Form 10-Q filed May 15, 2001). 10.7 Subordination Agreement effective as of May 11, 2001, by and among Hibernia National Bank, EnCap Energy Capital Fund III, L.P., PetroQuest Energy, L.L.C., a Louisiana limited liability company, and PetroQuest Energy, Inc., a Delaware corporation (incorporated herein by reference to Exhibit 10.8 to Form 10-Q filed May 15, 2001). 10.8 First Amendment to Amended and Restated Credit Agreement dated and effective as of July 20, 2001, among PetroQuest Energy, L.L.C., PetroQuest Energy, Inc., Royal Bank of Canada, Union Bank of California, N.A., and Hibernia National Bank, a national banking association, individually as a lender and as Administrative Agent (incorporated herein by reference to Exhibit 10.1 to Form 8-K filed February 15, 2002). 10.9 Second Amendment to Amended and Restated Credit Agreement dated as of December 24, 2001, among PetroQuest Energy, L.L.C., PetroQuest Energy, Inc., Royal Bank of Canada, Union Bank of California, N.A., and Hibernia National Bank, a national banking association, individually as a lender and as Administrative Agent (incorporated herein by reference to Exhibit 10.2 to Form 8-K filed February 15, 2002). * 10.10 Third Amendment to Amended and Restated Credit Agreement dated as of March 1, 2002, among PetroQuest Energy, L.L.C., PetroQuest Energy, Inc., Royal Bank of Canada, Union Bank of California, N.A., and Hibernia National Bank, a national banking association, individually as a lender and as Administrative Agent. 10.11 Employment Agreement dated September 1, 1998, between PetroQuest Energy, Inc. and Alfred J. Thomas, II (incorporated herein by reference to Exhibit 10.3 to Form 8-K dated September 16, 1998). 10.12 Employment Agreement dated September 1, 1998, between PetroQuest Energy, Inc. and Charles T. Goodson (incorporated herein by reference to Exhibit 10.2 to Form 8-K dated September 16, 1998). 10.13 Employment Agreement dated September 1, 1998, between PetroQuest Energy, Inc. and Ralph J. Daigle (incorporated herein by reference to Exhibit 10.4 to Form 8-K dated September 16, 1998). 10.14 First Amendment to Employment agreement dated September 1, 1998 between PetroQuest Energy, Inc. and Charles T. Goodson dated July 30, 1999 (incorporated herein by reference to Exhibit 10.1 to For 8-K dated August 9, 1999) 10.15 First Amendment to Employment Agreement dated September 1, 1998 between PetroQuest Energy, Inc. and Alfred J. Thomas, II dated July 30, 1999 (incorporated herein by reference to Exhibit 10.2 to Form 8-K dated August 9, 1999). 10.16 First Amendment to Employment Agreement dated September 1, 1998 between PetroQuest Energy, Inc. and Ralph J. Daigle dated July 30, 1999 (incorporated herein by reference to Exhibit 10.3 to Form 8-K dated August 9, 1999). 10.17 Employment Agreement dated May 8, 2000 between PetroQuest Energy, Inc. and Michael O. Aldridge (incorporated by reference to Exhibit 10.1 to the Form 10-Q filed August 14, 2000). 10.18 Employment Agreement dated December 15, 2000 between PetroQuest Energy, Inc. and Arthur M. Mixon, III. (incorporated herein by reference to Exhibit 10.12 to Form 10-K filed March 30, 2001). 10.19 Employment Agreement dated April 20, 2001 between PetroQuest Energy, Inc. and Daniel G. Fournerat (incorporated herein by reference to Exhibit 10.1 to Form 10-Q filed May 15, 2001). * 10.20 Form of Termination Agreement Between PetroQuest Energy, Inc. and each of its executive officers, including Charles T. Goodson, Alfred J. Thomas, II, Ralph J. Daigle, Michael O. Aldridge, Arthur M. Mixon, III and Daniel G. Fournerat. * 10.21 Form of Indemnification Agreement between PetroQuest Energy, Inc. and each of its directors and executive officers, including Charles T. Goodson, Alfred J. Thomas, II, Ralph J. Daigle, Daniel G. Fournerat, E. Wayne Nordberg, Jay B. Langner, William W. Rucks, IV, Michael O. Aldridge and Arthur M. Mixon, III. 21.1 Subsidiaries of the Company (incorporated herein by reference to Exhibit 21.1 to Form 10-K filed March 30, 2001). * 23.1 Consent of Independent Public Accountant. - ---------- * Filed herewith. EX-10.10 3 d94918ex10-10.txt 3RD AMENDMENT TO AMENDED/RESTATED CREDIT AGREEMENT EXHIBIT 10.10 THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT THIS THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT is dated as of March 1, 2002 (the "Third Amendment"), among PETROQUEST ENERGY, L.L.C., a Louisiana limited liability company (the "Borrower"), PETROQUEST ENERGY, INC., a Delaware corporation (the "Guarantor"), the LENDERS, and HIBERNIA NATIONAL BANK, a national banking association, individually as a Lender and as Administrative Agent. R E C I T A L S: 1. The parties hereto are the parties to that certain Amended and Restated Credit Agreement dated as of May 11, 2001, as amended by First Amendment thereto dated as of July 20, 2001, and as amended by Second Amendment thereto dated as of December 24, 2001 (as so amended, the "Agreement"), pursuant to which the Lenders established in favor of the Borrower a revolving line of credit. 2. The purposes of this Third Amendment are (i) to evidence that the Borrowing Base Amount is $28,000,000.00 as of March 1, 2002, and (ii) to evidence certain other changes to the Agreement. 3. Capitalized terms used herein which are defined or used in the Agreement are used herein with such meanings, except as may be otherwise expressly provided in this Third Amendment. NOW, THEREFORE, THE PARTIES HERETO, IN CONSIDERATION OF THE MUTUAL COVENANTS HEREINAFTER SET FORTH AND INTENDING TO BE LEGALLY BOUND HEREBY, AGREE AS FOLLOWS: A. AMENDMENT TO DEFINITIONS. 1. The definition of the term "Borrowing Base Amount" in the Agreement is hereby deleted and restated as follows: "BORROWING BASE AMOUNT" shall mean at any time the valuation of the Borrower's Mortgaged Properties, projected oil and gas prices, underwriting factors, and any other factors deemed relevant by the Required Lenders in their sole discretion, all as evaluated and determined by the Required Lenders in their sole discretion on a semi-annual basis on September 30 and March 31. In addition, the Required Lenders, in their sole discretion, may conduct one unscheduled Borrowing Base Amount redetermination subsequent to each semi-annual redetermination, and the Borrower, at its option, may request one (1) unscheduled Borrowing Base Amount Third Amendment to Amended and Restated Credit Agreement -- Page 1 of 6 redetermination after each scheduled semi-annual redetermination by the Required Lenders. The Borrowing Base Amount also is subject to mandatory Quarterly Reductions. The Required Lenders are not obligated under any circumstances to establish the Borrowing Base Amount based solely on oil and gas valuation data for the Mortgaged Properties. The Borrowing Base Amount shall never exceed $100,000,000.00. 2. The definition of the term "Eurodollar Margin" in the Agreement is hereby deleted and restated as follows: "EURODOLLAR MARGIN" shall mean, with respect to each Eurodollar Loan: (i) 2.375% per annum whenever the Borrowing Base Usage under the Revolving Line of Credit is greater than or equal to 90%; (ii) 2.000% per annum whenever the Borrowing Base Usage under the Revolving Line of Credit is greater than or equal to 50% but less than 90%; or (iii) 1.625% per annum whenever the Borrowing Base Usage under the Revolving Line of Credit is less than 50%. 3. The definition of the term "Quarterly Reduction" in the Agreement is hereby deleted and restated as follows: "QUARTERLY REDUCTION" shall mean each reduction to the Borrowing Base Amount established by the Required Lenders based on each scheduled and unscheduled redetermination of the Borrowing Base Amount. The Quarterly Reduction will be made on January 31, April 30, July 31, and October 31 of each year. The Quarterly Reduction will be $3,000,000.00 on each of April 30, 2002 and July 31, 2002, unless redetermined by the Required Lenders. The Administrative Agent will promptly notify the Borrower of any change in the Quarterly Reduction as determined from time to time by the Required Lenders. 4. The following new definitions are hereby added to the Agreement: "BASE RATE MARGIN" shall mean, with respect to each Base Rate Loan: (i) 0.375% per annum whenever the Borrowing Base Usage under the Revolving Line of Credit is greater than or equal to 90%; or Third Amendment to Amended and Restated Credit Agreement -- Page 2 of 6 (ii) 0.000% per annum whenever the Borrowing Base Usage under the Revolving Line of Credit is less than 90%. "THIRD AMENDMENT" shall mean that certain Third Amendment to Amended and Restated Credit Agreement dated as of March 1, 2002, among the Borrower, the Guarantor, the Lenders, and the Administrative Agent. B. BORROWING BASE AMOUNT REDETERMINATION. The Agreement is hereby amended to reflect that the Borrowing Base Amount as of March 1, 2002, is $28,000,000.00. The parties also acknowledge that the next regularly scheduled semi-annual determination of the Borrowing Base Amount will take effect on March 31, 2002. C. REVISION TO SECTION 6.2. Section 6.2 of the Agreement is hereby deleted and restated as follows: SECTION 6.2. UNUSED FEE. The Borrower shall pay the Administrative Agent for the Pro Rata benefit of the Lenders an unused fee calculated as follows: (i) if the Borrowing Base Usage is greater than or equal to 90%, the unused fee is 0.50%; (ii) if the Borrowing Base Usage is greater than or equal to 50% but less than 90%, the unused fee is 0.50%; (iii) if the Borrowing Base Usage is less than 50%, the unused fee is 0.375%. The unused fee will be payable quarterly in arrears, commencing June 30, 2001. The unused portion of the Borrowing Base Amount shall be determined on a daily basis by subtracting from the Borrowing Base Amount the amount of all Revolving Loans outstanding, and by averaging said daily amounts for the period for which the fee is to be determined. The Borrower hereby authorizes the Administrative Agent to debit its account maintained with the Administrative Agent for collection of the unused fee. D. REVISION TO AFFIRMATIVE COVENANTS. 1. Section 12.17 of the Agreement is hereby deleted and restated as follows: SECTION 12.17 CAPITAL BUDGET. Upon the Lenders' request, the Guarantor agrees to provide the Lenders with a detailed capital budget, in such detail as the Lenders may reasonably request. 2. Section 12.18 of the Agreement is hereby deleted and restated as follows: SECTION 12.18 FINANCIAL PROJECTIONS. Upon the Lenders' request, the Guarantor agrees to provide the Lenders with detailed consolidated financial projections, including a projected income statement, balance sheet and statement of cash flow. The said financial projections shall reflect all required reductions to the Third Amendment to Amended and Restated Credit Agreement -- Page 3 of 6 Borrowing Base Amount pursuant to this Agreement and the projected payment of all capital expenditures (as detailed in the capital budgets submitted pursuant to Section 12.17 above). E. REVISION TO NEGATIVE COVENANTS. Section 13.12 (General and Administrative Expenses) of the Agreement is hereby deleted in its entirety. F. PARTIAL RELEASE OF THE MORTGAGED PROPERTIES. The Lenders hereby consent to the Borrower's sale of its interests in the Valentine Field, Lafourche Parish, Louisiana, which sale is to occur on March 1, 2002. The Administrative Agent is instructed by the Lenders to execute a partial release of the Mortgage whereby the Borrower's interests in the Valentine Field are released from the Mortgage. To the extent Section 13.2 of the Agreement prohibits the sale of Borrower's interests in the Valentine Field, the prohibition is waived by the Lenders. G. CONFIRMATION OF COLLATERAL DOCUMENTS. It is the intention of the parties that all of the liens, privileges, priorities, and equities existing and to exist under and in accordance with the terms of the Loan Documents are hereby renewed, extended, and carried forward as security for the Loans. Further, the parties agree and acknowledge that the Guaranty shall continue to secure the payment of the Indebtedness of the Borrower to the Lenders, including the indebtedness of the Borrower under the Revolving Notes. H. NO DEFAULT REPRESENTATION. On and as of the date hereof, and after giving effect to this Third Amendment, the Borrower and the Guarantor reaffirm and restate the representations and warranties set forth in the Agreement and the Loan Documents. Further, the Borrower and the Guarantor also represent and warrant that as the date hereof and after giving effect to this Third Amendment, no uncured or unwaived Default has occurred and is continuing under the Agreement, as amended by this Third Amendment. I. CONDITIONS PRECEDENT. The obligation of the Lenders to make the Loans remains subject to the conditions precedent set forth in the Agreement and the following conditions precedent: The Bank's receipt of (i) this Third Amendment executed by the Borrower and the Guarantor; (ii) certified resolutions by the Guarantor (on behalf of itself and as the sole member of the Borrower), in form and substance satisfactory to the Administrative Agent; and (iii) all amendments, supplements, and/or restatements pertaining to the Collateral Documents that may be required by the Administrative Agent or its counsel. J. WAIVER OF DEFENSES. In consideration of the Lenders' execution of this Third Amendment, the Borrower and the Guarantor do hereby irrevocably waive any and all claims and/or defenses to payment on any Indebtedness owed by any of them to the Lenders and/or the Administrative Agent that may exist as of the date of execution of this Third Amendment. K. AMENDMENTS. THE AGREEMENT AND THIS THIRD AMENDMENT ARE CREDIT OR LOAN AGREEMENTS AS DESCRIBED IN LA. R.S. 6:SS.1121, ET SEQ. THERE ARE NO ORAL AGREEMENTS BETWEEN PARTIES TO THIS THIRD AMENDMENT. THE AGREEMENT, AS AMENDED BY THIS THIRD AMENDMENT, SETS FORTH THE ENTIRE AGREEMENT OF THE PARTIES WITH RESPECT TO Third Amendment to Amended and Restated Credit Agreement -- Page 4 of 6 THE SUBJECT MATTER HEREOF AND SUPERSEDES ALL PRIOR WRITTEN AND ORAL UNDERSTANDINGS BETWEEN THE ADMINISTRATIVE AGENT, THE LENDERS, THE BORROWER, AND THE GUARANTOR WITH RESPECT TO THE MATTERS HEREIN SET FORTH. THE AGREEMENT, AS AMENDED BY THIS THIRD AMENDMENT, MAY NOT BE MODIFIED OR AMENDED EXCEPT BY A WRITING SIGNED AND DELIVERED BY THE BORROWER, THE GUARANTOR, THE LENDERS, AND THE ADMINISTRATIVE AGENT. L. GOVERNING LAW: COUNTERPARTS. This Third Amendment shall be governed by and construed in accordance with the laws of the State of Louisiana. This Third Amendment may be executed in any number of counterparts, all of which counterparts, when taken together, shall constitute one and the same document. M. CONTINUED EFFECT. Except as expressly modified herein, the Agreement as amended by this Third Amendment, shall continue in full force and effect. The Agreement, as amended by this Third Amendment, is hereby ratified and confirmed by the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to be executed and delivered as of the date hereinabove provided by the authorized officers each hereunto duly authorized. BORROWER: PETROQUEST ENERGY, L.L.C. A LOUISIANA LIMITED LIABILITY COMPANY BY PETROQUEST ENERGY, INC., A DELAWARE CORPORATION, AS SOLE MEMBER BY: /s/ MICHAEL O. ALDRIDGE ------------------------------------ NAME: MICHAEL O. ALDRIDGE ---------------------------------- TITLE: SR. V.P. & CFO --------------------------------- Third Amendment to Amended and Restated Credit Agreement -- Page 5 of 6 GUARANTOR: PETROQUEST ENERGY, INC. A DELAWARE CORPORATION BY: /s/ MICHAEL O. ALDRIDGE ------------------------------------ NAME: MICHAEL O. ALDRIDGE ---------------------------------- TITLE: SR. V.P. & CFO --------------------------------- AGENT: HIBERNIA NATIONAL BANK, AS ADMINISTRATIVE AGENT BY: /s/ DAVID R. REID ------------------------------------ NAME: DAVID R. REID TITLE: SENIOR VICE PRESIDENT LENDERS: ROYAL BANK OF CANADA BY: /s/ TOM J. OBERAIGNER ------------------------------------ NAME: TOM J. OBERAIGNER ---------------------------------- TITLE: SENIOR MANAGER --------------------------------- UNION BANK OF CALIFORNIA, N.A. BY: /s/ GARY SHEKERJIAN ------------------------------------ NAME: GARY SHEKERJIAN ---------------------------------- TITLE: VICE PRESIDENT --------------------------------- HIBERNIA NATIONAL BANK BY: /S/ DAVID R. REID ------------------------------------ NAME: DAVID R. REID TITLE: SENIOR VICE PRESIDENT Third Amendment to Amended and Restated Credit Agreement -- Page 6 of 6 EX-10.20 4 d94918ex10-20.txt FORM OF TERMINATION AGREEMENT-EXECUTIVE OFFICERS EXHIBIT 10.20 TERMINATION AGREEMENT THIS TERMINATION AGREEMENT, dated as of _______________ is made and entered into by and between PetroQuest Energy, Inc., a Delaware corporation with its principal office at 400 E. Kaliste Saloom Road, Suite 3000, Lafayette, Louisiana 70508 (the "Company"), and _______________ ("Executive"). R E C I T A L S A. Company desires to enter into an agreement with Executive whereby severance benefits will be paid to Executive on a change in control of the Company and consequent actual or constructive termination of Executive's employment. B. This Agreement sets forth the severance benefits which the Company agrees that it will pay to the Executive if Executive's employment with the Company terminates under one of the circumstances described herein following a Change in Control of the Company. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants contained herein, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall be effective immediately on the date hereof and shall continue in effect through December 31, [3rd December after date of execution]; provided, however, that commencing on January 1, [3rd January after date of execution] and each January 1 thereafter, the term of this Agreement shall automatically be extended for one additional year unless not later than September 30 of the preceding year, the Company shall have given notice that it does not wish to extend this Agreement; provided, further, that notwithstanding any such notice by the Company not to extend, this Agreement shall automatically be extended for 24 months beyond the term provided herein if a Change in Control, as defined in Section 3 of this Agreement, has occurred during the term of this Agreement. 2. Effect on Employment Rights. This Agreement is not part of any employment agreement that the Company and Executive may have entered. Nothing in this Agreement shall confer upon Executive any right to continue in the employ of the Company or interfere with or restrict in any way the rights of the Company, which are hereby expressly reserved, to terminate for any reason, with or without cause. Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a potential change in control of the Company (as defined below), Executive will remain in the employ of the Company during the pendency of any such potential change in control and for a period of one year after the occurrence of an actual Change in Control. For this purpose, a "potential change in control of the Company" shall be deemed to have occurred if (a) the Company enters into an agreement the consummation of which would result in the occurrence of a Change in Control, (b) any person (including the Company) publicly announces an intention to take or consider taking action which if consummated would constitute a Change in Control or (c) the Board of Directors of the Company (the "Board") adopts a resolution to the effect that a potential change in control of the Company has occurred. 3. Change in Control. For purposes of this Agreement, a "Change in Control" of the Company shall be deemed to have occurred if any of the events set forth in any one of the following paragraphs shall occur: (a) any "person" (as defined in section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as such term is modified in sections 13(d) and 14(d) of the Exchange Act), excluding the Company or any of its subsidiaries, a trustee or any fiduciary holding securities under an employee benefit plan of the Company of any of its subsidiaries, an underwriter temporarily holding securities pursuant to an offering of such securities or a corporation owned, directly or indirectly, by stockholders of the Company in substantially the same proportions as their ownership of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; or (b) during any period of not more than two consecutive years, individuals who at the beginning of much period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in clause (a), (c) or (d) of this paragraph) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (c) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holder of securities under an employee benefit plan of the Company, at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a 2 recapitalization of the Company (or similar transaction) in which no person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (d) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. Notwithstanding the foregoing, if any transaction described under paragraphs (a), (c) and (d) of this Section 3 results in consideration to the Company or the shareholders of the Company, as the case may be, from such transaction with a value (as determined in good faith by the Compensation Committee of the Board) of less than $1.00 per share (subject to adjustment for stock splits and combination and stock dividends after the date hereof), no Change in Control will be deemed to occur unless such transaction is approved by persons holding not less than two-thirds of the combined voting power of the Company's voting securities entitled to vote on such transaction. In addition, no Change in Control shall be deemed to occur if there is consummated any transaction or series of integrated transactions immediately following which, in the judgment of the Compensation Committee of the Board, the holders of the Company's Common Stock immediately prior to such transaction or series of transactions continue to have the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately prior to such transaction or series of transactions. 4. Termination of Employment Following a Change in Control. Executive shall be entitled to the benefits provided in Section 5 hereof upon the subsequent termination of Executive's employment by the Company within two years after a Change in Control which occurs during the term of this Agreement, provided such termination is (a) by the Company other than for cause, as defined below, or (b) by Executive for Good Reason, as defined below. Executive shall not be entitled to the benefits of Section 5, any other provision hereof to the contrary notwithstanding, if Executive's employment terminates: (i) pursuant to Executive retiring at age 65, (ii) by reason of Executive's total and permanent disability, or (iii) by reason or Executive's death. As used herein, "total and permanent disability" means a condition which prevents Executive from performing to a significant degree the essential duties of his or her position and is expected to be of long-term duration or result in death. A determination of total and permanent disability must be based on competent medical evidence. (a) Cause. (i) Definition. Termination by the Company of Executive's employment for Cause shall mean termination upon Executive's willful engaging in misconduct which is demonstrably and materially injurious to the Company and its subsidiaries taken as a whole. No act, or failure to act, on Executive's part shall be considered "willful" unless done, or omitted to be done, by Executive not in good faith and without reasonable belief 3 that Executive's action or omission was in the best interest of the Company or its subsidiaries. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than three quarters of the entire membership of the Board at a meeting of the Board called and held for the purpose of making a determination of whether Cause for termination exists (after reasonable notice to Executive and an opportunity for Executive to be heard before the Board), finding that in the good faith opinion of the Board Executive was guilty of misconduct as set forth above in this subsection 4(a)(i) and specifying the particulars thereof in detail. (ii) Remedy by Executive. If the Company gives Executive a Notice of Termination which states that the basis for terminating Executive's employment is Cause, Executive shall have ten days after receipt of such Notice to remedy the facts and circumstances which provided Cause. The Board (or any duly authorized Committee thereof) shall make a good faith reasonable determination immediately after such ten-day period whether such facts and circumstances have been remedied and shall communicate such determination in writing to Executive. If the Board determines that an adequate remedy has not occurred, then the initial Notice of Termination shall remain in effect. (b) Good Reason. After a Change in Control, Executive may terminate employment with the Company at any time during the term of this Agreement if Executive has made a good faith reasonable determination that Good Reason exists for this termination. (i) Definition. For purposes of this Agreement, "Good Reason" shall mean any of the following actions, if taken without the express written consent of Executive: A. any material change by the Company in Executive's functions, duties, or responsibilities which change would cause Executive's position with the Company to become of less dignity, responsibility, importance, or scope from the position and attributes that applied to Executive immediately prior to the Change in Control; B. any significant reduction in Executive's base salary, other than a reduction effected as part of an across-the-board reduction affecting all executive employees of the Company; C. any material failure by the Company to comply with any of the provisions of this Agreement (or of any employment agreement between the parties); 4 D. the Company's requiring Executive to be based at any office or location more than 45 miles from the home at which the Executive resides on the date immediately preceding the Change in Control, except for travel reasonably required in the performance of Executive's responsibilities and commensurate with the amount of travel required of Executive prior to the Change in Control; or E. any failure by the Company to obtain the express assumption of this Agreement by any successor or assign of the Company. Executive's right to terminate employment for Good Reason pursuant to this subsection 4(b)(i) shall not be affected by Executive's incapacity due to physical or mental illness. (ii) Remedy by Company. If Executive gives the Company a Notice of Termination which states that the basis for Executive's termination of employment is Good Reason, the Company shall have ten days after receipt of such Notice to remedy the facts and circumstances which provided Good Reason. Executive shall make a good faith reasonable determination immediately after such ten-day period whether such facts and circumstances have been remedied and shall communicate such determination in writing to the Company. If Executive determines that adequate remedy has not occurred, then the initial Notice of Termination shall remain in effect. (iii) Determination by Executive Presumed Correct. Any determination by Executive pursuant to this Section 4(b) that Good Reason exists for Executive's termination of employment and that adequate remedy has not occurred shall be presumed correct and shall govern unless the party contesting the determination shows by a clear preponderance of the evidence that it was not a good faith reasonable determination. (iv) Severance Payment Made Notwithstanding Dispute. Notwithstanding any dispute concerning whether Good Reason exists for termination of employment or whether adequate remedy has occurred, the Company shall immediately pay to Executive, as specified in Section 5, any amounts otherwise due under this Agreement. Executive may be required to repay such amounts to the Company if any such dispute is finally determined adversely to Executive. (c) Notice of Termination. Any termination of Executive's employment by the Company or by Executive hereunder shall be communicated by a Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provisions in this Agreement relied upon any which sets forth (i) in reasonable detail the facts and circumstances claimed to provide a basis for 5 termination of Executive's employment under the provision so indicated and (ii) the date of Executive's termination of employment, which shall be no earlier than 10 days after such Notice is received by the other party. Any purported termination of the Executive's employment by the Company which is not effected pursuant to a Notice of Termination satisfying the requirements of this Agreement shall not be effective. In the case of a termination for Cause, the Notice of Termination shall also satisfy the requirements set forth in Section 4(a)(i). 5. Severance Payment Upon Termination of Employment. If Executive's employment with the Company is terminated during the term of this Agreement and after a Change in Control (a) by the Company other than for Cause, or (b) by Executive for Good Reason, then Executive shall be entitled to the following: (a) Lump-Sum Severance Payment. In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to two (2) (or, if less, the number of years, including fractions, from the date of Termination until the Executive would have reached age sixty-five (65)) times the sum of (a) the Executive's Annual Base Salary in effect on date of termination and (b) the Executive's most recent Annual Bonus. if the most recent Annual Bonus was a stock option or a stock grant, the value of the bonus will be deemed to be the number of option shares times the closing price of the Company's Common Stock for the 20 trading days prior to Termination. (b) Continued Benefits. For a twenty-four (24) month period (or, if less, the number of months from the Date of Termination until the Executive would have reached age sixty-five (65)) after the Date of Termination, the Company shall provide the Executive with life insurance, health, disability and other welfare benefits ("Welfare Benefits") substantially similar in all respects to those which the Executive is receiving immediately prior to the Notice of Termination (without giving effect to any reduction in such benefits subsequent to the Potential Change in Control preceding the Change in Control or the Change in Control which reduction constitutes or may constitute God Reason). Benefits otherwise receivable by an Executive pursuant to this Section shall be reduced to the extent substantially similar benefits are actually received by or made available to the Executive by any other employer during the same time period for which such benefits would be provided pursuant to this Section at a cost to the Executive that is commensurate with the cost incurred by the Executive immediately prior to the Executive's Date of Termination (without giving effect to any increase in costs paid by the Executive after the Potential Change in Control preceding the Change in Control or the Change in Control which constitutes or may constitute Good Reason); provided, however, that if the Executive becomes employed by a new employer which maintains a medical plan that either (i) does not cover the Executive or a family member or dependent with respect to a preexisting condition which was covered under the applicable Company medical plan, or (ii) does not cover the Executive or a family member or dependent for a designated waiting 6 period, the Executive's coverage under the applicable Company medical plan shall continue (but shall be limited in the event of noncoverage due to a preexisting condition, to such preexisting condition) until the earlier of the end of the applicable period of noncoverage under the new employer's plan or the second anniversary of the Executive's Date of Termination. The Executive agrees to report to the Company any coverage and benefits actually received by the Executive or made available to the Executive from such other employer(s). The Executive shall be entitled to elect to change his level of coverage and/or his choice of coverage options (such as Executive only or family medical coverage) with respect to the Welfare Benefits to be provided by the Company to the Executive to the same extent that actively employed senior executives of the Company are permitted to make such changes; provided, however, that in the event of any such changes the Executive shall pay the amount of any cost increase that would actually be paid by an actively employed executive of the Company by reason of making the same change in his level of coverage or coverage options. (c) Gross-Up Payment. In the event that the Executive becomes entitled to the Severance Benefits or any other benefits or payments under this Agreement (other than pursuant to this Section) by reason of the accelerated vesting of stock options thereunder (together, the "Total Benefits"), and in the event that any of the Total Benefits will be subject to the Excise Tax, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Benefits and any federal, state and local income tax, Excise Tax and FICA and Medicare withholding taxes upon the payment provided for by this Section, shall be equal to the Total Benefits. For purposes of determining whether any of the Total Benefits will be subject to the Excise Tax and the amount of such Excise Tax, (i) any other payments or benefits received or to be received by the Executive in connection with a Change in Control or the Executive's termination of employment (whether pursuant to the terms of this Agreement or any other agreement, plan or arrangement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning the Section 280G(b)(1) shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel ("Tax Counsel") selected by the Company's independent auditors and acceptable to the Executive, such other payments or benefits (in whole or in part) do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code in excess of the Base Amount, or are otherwise not subject to the Excise Tax, (ii) the amount of the Total Benefits which shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Total Benefits reduced by the amount of such Total Benefits that in the opinion of Tax Counsel are not parachute payments, or (B) the amount of excess parachute payments within the meaning of Section 280G(b)(1) (after applying clause (i), above), and (iii) the 7 value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination, net of the reduction in federal income taxes which could be obtained from deduction of such state and local taxes (calculated by assuming that any reduction under Section 68 of the Code in the amount of itemized deductions allowable to the Executive applies first to reduce the amount of such state and local income taxes that would otherwise be deductible by the Executive). In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of the Executive's employment, the Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax, federal, state and local income taxes and FICA and Medicare withholding taxes imposed on the portion of the Gross-Up Payment being repaid by the Executive to the extent that such repayment results in a reduction in Excise Tax, FICA and Medicare withholding taxes and/or federal, state or local income taxes) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of the Executive's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment, determined as previously described, to the Executive in respect to such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) at the time that the amount of such excess is finally determined. (d) Timing of Payments. The payments provided for in Sections 5(a) and 5(c) shall be made not later than the fifth (5th) day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code from the firth (5th) day following the Date of Termination to the payment of such remainder) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code from the fifth (5th) day following the Date of Termination to the repayment of such excess). 8 6. Reimbursement of Legal Costs. The Company shall pay to the Executive all legal fees and expenses incurred by the Executive as a result of a termination which entitles the Executive to any payments under this Agreement including all such fees and expenses, if any, incurred in contesting or disputing any Notice of Intent to Terminate under Section 4(a) hereof or in seeking to obtain or enforce any right or benefit provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Code to any payment or benefit provide hereunder. Such payments shall be made within five (5) business days after delivery of the Executive's respective written requests for payment accompanied by such evidence of fees and expenses incurred as the Company reasonably may require. 7. Damages. Executive shall not be required to mitigate damages with respect to the amount of any payment provided under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided under this Agreement be reduced by retirement benefits, deferred compensation or any compensation earned by Executive as a result of employment by another employer. 8. Successor to Company. The Company shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. A used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor or assign to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. 9. Heirs of Executive. This Agreement shall inure to the benefit of and be enforceable by Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while any amounts are still payable to Executive hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee, or other designee or, if there be so much designee, to Executive's estate. 10. Arbitration. Any dispute, controversy or claim arising under or in connection with this Agreement, or the breach thereof, shall be settled exclusively by arbitration in accordance with the Rules of the American Arbitration Association then in effect. Judgment upon the award rendered by the arbitrator(s) may be entered in any court of competent jurisdiction. Any arbitration held pursuant to this Section in connection with Executive's termination of employment shall take place in Houston, Texas at the earliest possible date. If any proceeding is necessary to enforce or interpret the terms of this Agreement, or to recover damages for breach thereof, the prevailing party shall be entitled to reasonable attorneys' fees 9 and necessary costs and disbursements, not to exceed in the aggregate one percent (1%) of the net worth of the other party, in addition to any other relief to which he or it may be entitled. 11. Notice. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered by messenger or in person, or when mailed by United States registered mail, return receipt requested, postage prepaid, as follows: If to the Company: 400 E. Kaliste Saloom Road Suite 3000 Lafayette, Louisiana 70508 Attention: President If to the Executive _______________ 400 E. Kaliste Saloom Road Suite 3000 Lafayette, Louisiana 70508 or such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 12. General Provisions. (a) Executive's rights and obligations under this Agreement shall not be transferable by assignment or otherwise, nor shall Executive's rights be subject to encumbrance or subject to the claims of the Company's creditors. Nothing in this Agreement shall prevent the consolidation of the Company with, or its merger into, any other corporation, or the sale by the Company of all or substantially all of its properties or assets; and this Agreement shall inure to the benefit of, be binding upon and be enforceable by, any successor surviving or resulting corporation, or other entity to which such assets shall be transferred. This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company. (b) This Agreement and any Employment Agreement with Executive plus terms of any stock option plans or grants constitutes the entire agreement between the parties hereto in respect to the rights and obligations of the parties following a Change in Control. This Agreement supersedes and replaces all prior oral and written agreements, understandings, commitments, and practices between the parties (whether or not fully performed by Executive prior to the date hereof), which shall be of no further force or effect. 10 (c) The provisions of this Agreement shall be regarded as divisible, and if any of said provisions or any part thereof are declared invalid or unenforceable by a court of competent jurisdiction, the validity and enforceability of the remainder of such provisions or parts thereof and the applicability thereof shall not be affected thereby. (d) This Agreement may not be amended or modified except by a written instrument executed by the Company and Executive. (e) This Agreement and the rights and obligations hereunder shall be governed by and construed in accordance with the laws of the State of Texas. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. PetroQuest Energy, Inc., a Delaware Corporation By: ____________________________________ Name: __________________________________ Title: _________________________________ ________________________________________ Executive 11 EX-10.21 5 d94918ex10-21.txt FORM OF INDEMNIFICATION AGREEMENT EXHIBIT 10.21 INDEMNIFICATION AGREEMENT This Indemnification Agreement is entered into this ___ day of __________, 2001 ("Agreement"), by and between PetroQuest Energy, Inc., a Delaware corporation ("Company"), and _______________ ("Indemnitee"): WHEREAS, highly competent persons have become more reluctant to serve corporations as directors, executive officers or in other capacities unless they are provided, with adequate protection through insurance or adequate indemnification against inordinate risks of claims and actions against them arising out of their service to, and activities on behalf of, the corporation; WHEREAS, the Board of Directors of the Company (the "Board") has determined that, in order to attract and retain qualified individuals, the Company will attempt to maintain on an ongoing basis, at its sole expense, liability insurance to protect persons' serving the Company and its subsidiaries from certain liabilities. Although the furnishing of such insurance has been a customary and widespread practice among United States-based corporations and other business enterprises, the Company believes that, given current market conditions and trends, such insurance may be available to it in the future only at higher premiums and with more exclusions. At the same time, directors, officers and other persons in service to corporations or business enterprises are being increasingly subjected to expensive and time-consuming litigation relating to, among other things, matters that traditionally would have been brought only against the corporation or business enterprise itself; WHEREAS, the uncertainties relating to such insurance and to indemnification have increased the difficulty of attracting and retaining such persons; WHEREAS, the Board has determined that the increased difficulty in attracting and retaining such persons is detrimental to the best interests of the Company's stockholders and that the Company should act to assure such persons that there will be increased certainty of such protection in the future; WHEREAS, it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify such persons to the fullest extent permitted by applicable law so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified; and WHEREAS, Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that he be so indemnified; NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows: SECTION 1. Services by Indemnitee. Indemnitee agrees to serve as a [director/executive officer] of the Company and, as mutually agreed by Indemnitee and the Company, as a director, officer, employee, agent or fiduciary of other corporations, partnerships, joint ventures, trusts or other enterprises (including, without limitation, employee benefit plans). Indemnitee may at any time and for any reason resign from any such position (subject to any other contractual obligation or any obligation imposed by operation of law), in which event the Company shall have no obligation under this Agreement to continue Indemnitee in that position. This Agreement shall not be deemed an employment contract between the Company (or any of its subsidiaries) and Indemnitee. Indemnitee specifically acknowledges that Indemnitee's employment with the Company (or any of its subsidiaries), if any, is at will, and the Indemnitee may be discharged at any time for any reason, with or without cause, except as may be otherwise provided in any written employment contract between Indemnitee and the Company (or any of its subsidiaries), other applicable formal severance policies duly adopted by the Board or, with respect to service as a director of the Company, by the Company's Certificate of incorporation, Bylaws and the General Corporation Law of the State of Delaware. Notwithstanding, the foregoing, this Agreement shall continue in force after Indemnitee has ceased to serve as an officer or director of the Company and no longer serves at the request of the Company as a director, officer, employee or agent of the Company or any subsidiary of the Company. SECTION 2. Indemnification--General. The Company shall indemnify, and advance Expenses (as hereinafter defined) to, Indemnitee (a) as provided in this Agreement and (b) to the fullest extent permitted by applicable law in effect on the date hereof and as amended from time to time. The rights of Indemnitee provided under the preceding sentence shall include, but shall not be limited to, the rights set forth in the other Sections of this Agreement. SECTION 3. Proceedings Other than Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in Section 2 and this Section 3 if, by reason of his Corporate Status (as hereinafter defined), he is, or is threatened to be made, a party to or a participant in any threatened, pending, or completed Proceeding (as hereinafter defined), other than a Proceeding by or in the right of the Company. Pursuant to this Section 3, the Company shall indemnify Indemnitee against, and shall hold Indemnitee harmless from and in respect of, all Expenses, judgments, penalties, fines (including excise taxes) and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses, judgments, fines, penalties or amounts paid in settlement) actually and reasonably incurred by him or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful. SECTION 4. Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in Section 2 and this Section 4 if, by reason of his Corporate Status, he is, or is threatened to be made, a party to or a participant in any threatened, pending or completed Proceeding brought by or in the right of the Company to procure a judgment in its favor. 2 Pursuant to this Section 4, the Company shall indemnify Indemnitee against, and shall hold Indemnitee harmless from and in respect of, all Expenses actually and reasonably incurred by him or on his behalf in connection with, and any amounts paid in settlement of, such Proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company. Notwithstanding the foregoing, no indemnification against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which Indemnitee shall have been adjudged to be liable to the Company if applicable law prohibits such indemnification; provided, however, if applicable law so permits, indemnification against such Expenses shall nevertheless be made by the Company in such event if and only to the extent that the Court of Chancery of the State of Delaware, or the court in which such Proceeding shall have been brought or is pending, shall determine. SECTION 5. Indemnification for Expenses of a Party Who Is Wholly or Partly Successful. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a party to (or a participant in) and is successful, on the merits or otherwise, in defense of any Proceeding, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in defense of such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter. SECTION 6. Indemnification for Expenses as a Witness. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. SECTION 7. Advancement of Expenses. The Company shall advance all reasonable Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding within ten (10) days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it ultimately shall be determined, in accordance with this Agreement, that Indemnitee is not entitled to be indemnified against such Expenses. SECTION 8. Procedure for Determination of Entitlement to Indemnification. (a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee 3 is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that Indemnitee has requested indemnification. (b) On written request by Indemnitee for indemnification pursuant to the first sentence of Section 8(a), a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in the specific case: (i) if a Change in Control (as hereinafter defined) shall have occurred within two (2) years prior to the date of such written request, by Independent Counsel (as hereinafter defined) in a written opinion to the Board, a copy of which shall be delivered to Indemnitee; or (ii) if a Change of Control shall not have occurred within two (2) years prior to the date of such written request, (A) by a majority vote of the Disinterested Directors (as hereinafter defined), even though less than a quorum of the Board, or (B) if there are no such Disinterested Directors, or if such Disinterested Directors so direct, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to Indemnitee; and, if it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (10) days after such determination. Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee's entitlement to indemnification, including providing to such person, persons or entity on reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or expenses (including attorneys' fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee's entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom. (c) In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 8(b), the Independent Counsel shall be selected as provided in this Section 8(c). If a Change of Control shall not have occurred within two (2) years prior to the date of Indemnitee's written request for indemnification pursuant to Section 8(a), the Independent Counsel shall be selected by the Board, and the Company shall give written notice to Indemnitee advising him of the identity of the Independent Counsel so selected. If a Change of Control shall have occurred within two (2) years prior to the date of Indemnitee's written request for indemnification pursuant to Section 8(a), the Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board, in which event the preceding sentence shall apply), and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected in either event, Indemnitee or the Company, as the case may be, may, within ten (10) days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection. Such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of "Independent Counsel" as defined in Section 17, and the objection shall set forth with particularity the factual basis of such assertion. If such written objection is so made and substantiated, the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within twenty (20) days after submission by Indemnitee of a written request for indemnification pursuant to Section 8(a), no Independent Counsel shall have been selected and not 4 objected to, either the Company or Indemnitee may petition the Court of Chancery or other court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the petitioned court or by such other person as the petitioned court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 8(b). The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 8(b), and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 8(c), regardless of the manner in which such Independent Counsel was selected and appointed. If (i) Independent Counsel does not make any determination respecting Indemnitee's entitlement to indemnification hereunder within ninety (90) days after receipt by the Company of a written request therefor and (ii) any judicial proceeding or arbitration pursuant to Section 10(a)(iii) hereof is then commenced, Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing). SECTION 9. Presumptions and Effect of Certain Proceedings. (a) In making a determination with respect to entitlement to indemnification hereunder, the Person, Persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 8(a), and the Company shall have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption. (b) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or on a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful. (c) Any action taken by Indemnitee in connection with any employee benefit plan shall, if taken in good faith by Indemnitee and in a manner Indemnitee reasonably believed to be in the interest of the participants in or beneficiaries of that plan, be deemed to have been taken in a manner "not opposed to the best interests of the Company" for all purposes of this Agreement. SECTION 10. Remedies of Indemnitee. (a) In the event that (i) a determination is made pursuant to Section 8 that Indemnitee is not entitled to indemnification hereunder, (ii) advancement of Expenses is not timely made pursuant to Section 7, (iii) Independent Counsel is to determine Indemnitee's entitlement to indemnification hereunder, but does not make that determination within ninety (90) days after receipt by the Company of the request for that 5 indemnification, (iv) payment of indemnification is not made pursuant to Section 5 or 6 within ten (10) days after receipt by the Company of a written request therefor or (v) payment of indemnification is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification, Indemnitee shall be entitled to an adjudication from the Court of Chancery of his entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Indemnitee shall commence such Proceeding seeking an adjudication or an award in arbitration within one hundred eighty (180) days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 10(a); provided, however, that the foregoing clause shall not apply in respect of a proceeding brought by Indemnitee to enforce his rights under Section 5. (b) In the event that a determination shall have been made pursuant to Section 8(b) that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 10 shall be conducted in all respects as a de novo trial, or arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. In any judicial proceeding or arbitration commenced pursuant to this Section 10, the Company shall have the burden of proving that Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be. (c) If a determination shall have been made pursuant to Section 8(b) that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 10, absent (i) a misstatement by Indemnitee of a material fact, or an omission by Indemnitee of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law. (d) In the event that Indemnitee, pursuant to this Section 10, seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company against, any and all expenses (of the types described in the definition of Expenses in Section 17) actually and reasonably incurred by him in such judicial adjudication or arbitration, but only if he prevails therein. If it shall be determined in said judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses sought, the expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated. SECTION 11. Non-Exclusivity; Survival of Rights; Insurance; Subrogation. (a) The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Certificate of Incorporation, the Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement 6 in respect of any action taken or omitted by such Indemnitee in his Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in Delaware law (whether by statute or judicial decision) permits greater indemnification by agreement than would be afforded currently under this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. (b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, Officer, employee or agent under such policy or policies. (c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights. (d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. (e) The Company's obligation to indemnify or advance Expenses hereunder to Indemnitee with respect to Indemnitee's service at the request of the Company as a director, officer, employee or agent of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise shall be reduced by any amount Indemnitee has actually received as indemnification or advancement of Expenses from such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise. SECTION 12. Duration of Agreement. This Agreement shall continue until and terminate upon the later of: (a) ten (10) years after the date that Indemnitee shall have ceased to serve as a director or officer of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which Indemnitee served on behalf of the Company; or (b) the final termination of any Proceeding then pending in respect of which Indemnitee is granted rights of indemnification or advancement of expenses hereunder and of any Proceeding commenced by Indemnitee pursuant to Section 10 relating thereto. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Indemnitee and his spouse (if Indemnitee resides in Texas or another community property state), heirs, executors and administrators, and this Agreement does not, and shall not be construed to confer any rights on any person that is not a party to this Agreement, other than Indemnitee's spouse, and his heirs, executors and assigns. SECTION 13. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the 7 remaining provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable which is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; (b) such provision or provisions shall be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the fullest extent possible, the provisions of this Agreement (including. without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable which is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby. SECTION 14. Exception to Right of Indemnification or Advancement of Expenses. Notwithstanding any other provision hereof, Indemnitee shall not be entitled to indemnification or advancement of Expenses under this Agreement with respect to any Proceeding brought by Indemnitee or any claim therein prior to a Change in Control, unless the bringing of such Proceeding or making of such claim shall have been approved by the Board of Directors. SECTION 15. Identical Counterparts. This Agreement may be executed in one or more counterparts by means of original or facsimile signatures, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement. SECTION 16. Headings. The headings of the Sections hereof are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. SECTION 17. Definitions. For purposes of this Agreement: (a) "Acquiring Person" means any Person who or which, together with all Affiliates and Associates of such Person, is or are the Beneficial Owner of twenty-five percent (25%) or more of the shares of Common Stock then outstanding, but does not include any Exempt Person; provided, however, that a Person shall not be or become an Acquiring Person if such Person, together with its Affiliates and Associates, shall become the Beneficial Owner of twenty-five percent (25%) or more of the shares of Common Stock then outstanding solely as a result of a reduction in the number of shares of Common Stock outstanding due to the repurchase of Common Stock by the Company, unless and until such time as such Person or any Affiliate or Associate of such Person shall purchase or otherwise become the Beneficial Owner of additional shares of Common Stock constituting one percent (1%) or more of the then outstanding shares of Common Stock or any other Person (or Persons) who is (or collectively are) the Beneficial Owner of shares of Common Stock constituting one percent (1%) or more of the then outstanding shares of Common Stock shall become an Affiliate or Associate of such Person, unless, in either such case, such Person, together with all Affiliates and Associates of such Person, 8 is not then the Beneficial Owner of twenty-five percent (25%) or more of the shares of Common Stock then outstanding. (b) "Affiliate" has the meaning ascribed to that term in Exchange Act Rule 12b-2. (c) "Associate" means, with reference to any Person, (i) any corporation, firm, partnership, association, unincorporated organization or other entity (other than the Company or a subsidiary of the Company) of which that Person is an officer or general partner (or officer or general partner of a general partner) or is, directly or indirectly, the Beneficial owner of 10% or more of any class of its equity securities, (ii) any trust or other estate in which that Person has a substantial beneficial interest or for or of which that Person serves as trustee or in a similar fiduciary capacity and (iii) any relative or spouse of that Person, or any relative of that spouse, who has the same home as that Person. (d) A specified Person is deemed the "Beneficial Owner" of, and is deemed to "beneficially own," any securities: (i) of which that Person or any of that Person's Affiliates or Associates, directly or indirectly, is the "beneficial owner" (as determined pursuant to Exchange Act Rule 13d-3) or otherwise has the right to vote or dispose of, including pursuant to any agreement, arrangement or understanding (whether or not in writing); provided, however, that a Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own," any security under this subparagraph as a result of an agreement, arrangement or understanding to vote that security if that agreement, arrangement or understanding: (A) arises solely from a revocable proxy or consent given in response to a public (that is, not including a solicitation exempted by Exchange Act Rule 14a-2(b)(2)) proxy or consent solicitation made pursuant to, and in accordance with, the applicable provisions of the Exchange Act; and (B) is not then reportable by such Person on Exchange Act Schedule 13D (or any comparable or successor report); (ii) which that Person or any of that Person's Affiliates or Associates, directly or indirectly, has the right or obligation to acquire (whether that right or obligation is exercisable or effective immediately or only after the passage of time or the occurrence of an event) pursuant to any agreement, arrangement or understanding (whether or not in writing) or on the exercise of conversion rights, exchange rights, other rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own," securities tendered pursuant to a tender or exchange offer made by that Person or any of that Person's Affiliates or Associates until those tendered securities are accepted for purchase or exchange; or 9 (iii) which are beneficially owned, directly or indirectly, by (A) any other Person (or any Affiliate or Associate thereof) with which the specified Person or any of the specified Person's Affiliates or Associates has any agreement, arrangement or understanding (whether or not in writing) for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy or consent as described in the proviso to subparagraph (i) of this definition) or disposing of any voting securities of the Company or (B) any group (as that term is used in Exchange Act Rule 13d-5(b)) of which that specified Person is a member; PROVIDED, HOWEVER, that nothing in this definition shall cause a Person engaged in business as an underwriter of securities to be the "Beneficial Owner" of, or to "beneficially own," any securities acquired through such Person's participation in good faith in a firm commitment underwriting until the expiration of forty (40) days after the date of that acquisition. For purposes of this Agreement, "voting" a security shall include voting, granting a proxy, acting by consent, making a request or demand relating to corporate action (including, without limitation, calling a stockholder meeting) or otherwise giving an authorization (within the meaning of Section 14(a) of the Exchange Act) in respect of such security. (e) "Change of Control" means the occurrence of any of the following events that occurs after the effective date of this Agreement: (i) any Person becomes an Acquiring Person; (ii) at any time the then Continuing Directors cease to constitute a majority of the members of the Board; (iii) a merger of the Company with or into, or a sale by the Company of its properties and assets substantially as an entirety to, another Person occurs and, immediately after that occurrence, any Person, other than an Exempt Person, together with all Affiliates and Associates of such Person, shall be the Beneficial Owner of twenty-five percent (25%) or more of the total voting power of the then outstanding Voting Shares of the Person surviving that transaction (in the case or a merger or consolidation) or the Person acquiring those properties and assets substantially as an entirety. (f) "Common Stock" means the common stock, par value $.001 per share, of the Company. (g) "Continuing Director" means at any time any individual who then (i) is a member of the Board and was a member of the Board as of the effective date of this Agreement or whose nomination for his first election, or that first election, to the Board following that date was recommended or approved by a majority of the then Continuing Directors (acting separately or as a part of any action taken by the Board or any committee thereof) and (ii) is not an Acquiring Person, an Affiliate or Associate of an Acquiring Person or a nominee or representative of an Acquiring Person or of any such Affiliate or Associate. 10 (h) "Corporate Status" describes the status of a Person who is or was a director, officer, employee or agent of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the request of the Company. For purposes of this Agreement, "serving at the request of the Company" includes any service by Indemnitee which imposes duties on, or involves services by, Indemnitee with respect to any employee benefit plan or its participants or beneficiaries. (i) "Court of Chancery" means the Court of Chancery of the State of Delaware. (j) "Disinterested Director" means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee hereunder. (k) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (l) "Exempt Person" means (i), (A) the Company, any subsidiary of the Company, any employee benefit plan of the Company or of any subsidiary of the Company and (B) any Person organized, appointed or established by the Company for or pursuant to the terms of any such plan or for the purpose of funding any such plan or funding other employee benefits for employees of the Company or any subsidiary of the Company and (ii) Indemnitee, any Affiliate or Associate of Indemnitee or any group (as that term is used in Exchange Act Rule 13d-5(b)) of which Indemnitee or any Affiliate or Associate of Indemnitee is a member. (m) "Expenses" include all attorneys' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, or otherwise participating in, a Proceeding and all interest or finance charges attributable to any thereof. Should any payments by the Company under this Agreement be determined to be subject to any federal, state or local income or excise tax, "Expenses" also shall include such amounts as are necessary to place Indemnitee in the same after-tax position (after giving effect to all applicable taxes) he would have been in had no such tax been determined to apply to such payments. (n) "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five (5) years has been, retained to represent: (i) the Company, its Affiliates or Indemnitee in any matter material to either such party; or (ii) any other Party to the Proceeding giving rise to 11 a claim for indemnification hereunder. Notwithstanding the foregoing. the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. (o) "Person" means any natural person, sole proprietorship, corporation, partnership of any kind having a separate legal status, limited liability company, business trust, unincorporated organization or association, mutual company, joint stock company, joint venture, estate, trust, union or employee organization or governmental authority. (p) "Proceeding" includes any action, suit, alternate dispute resolution mechanism, hearing or any other proceeding, whether civil, criminal, administrative, arbitrative, investigative or mediative, any appeal in any such action, suit, alternate dispute resolution mechanism, hearing or other proceeding and any inquiry or investigation that could lead to any such action, suit, alternate dispute resolution mechanism, hearing or other proceeding, except one (i) initiated by an Indemnitee pursuant to Section 10 to enforce his rights hereunder or (ii) pending on or before the date of this Agreement. (q) "Voting Shares" means: (i) in the case of any corporation, stock of that corporation of the class or classes having general voting power under ordinary circumstances to elect a majority of that corporation's board of directors; and (ii) in the case of any other entity, equity interests of the class or classes having general voting power under ordinary circumstances equivalent to the Voting Shares of a corporation. SECTION 18. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. SECTION 19. Notice by Indemnitee. Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification or advancement of Expenses covered hereunder; provided, however, failure to give such notice shall not deprive Indemnitee of his rights to indemnification and advancement of Expenses under this Agreement unless the Company is actually and materially prejudiced thereby. SECTION 20. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (a) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed or (b) mailed by certified or registered mail with postage prepaid, on the third (3rd) business day after the date on which it is so mailed: 12 (a) If to Indemnitee, to: _______________ 400 E. Kaliste Saloom Rd., Suite 3000 Lafayette, Louisiana 70508 13 (b) If to the Company, to: PetroQuest Energy, Inc. 400 E. Kaliste Saloom Rd., Suite 3000 Lafayette, Louisiana 70508 Attention: Corporate Secretary or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case way be. SECTION 21. Contribution. To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred by Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all the circumstances of such Proceeding in order to reflect: (a) the relative benefits received by the Company and Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such Proceeding; and/or (b) the relative fault of the Company (and its directors, officers, employees and agents) and Indemnitee in connection with such event(s) and/or transaction(s). SECTION 22. Governing Law; Submission to Jurisdiction. This Agreement and the legal relations among the parties shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules. Except with respect to any arbitration commenced by Indemnitee pursuant to Section 10(a), the Company and Indemnitee hereby irrevocably and unconditionally (a) agree that any action or proceeding arising out of or in connection with this Agreement shall be brought only in the Court of Chancery and not in any other state or federal court in the United States of America or any court in any other country, (b) consent to submit to the exclusive jurisdiction of the Court of Chancery for purposes of any action or proceeding arising out of or in connection with this Agreement, (c) waive any objection to the laying of venue of any such action or proceeding in the Court of Chancery, and (d) waive, and agree not to plead or to make, any claim that any such action or proceeding brought in the Court of Chancery has been brought in an improper or otherwise inconvenient forum. SECTION 23. Miscellaneous. Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate. When used in this Agreement, the words "herein," "hereof" and words of similar import shall refer to this Agreement as a whole and not to any provision of this Agreement, and the word "Section" refers to a Section of this Agreement, unless otherwise specified. 14 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. PETROQUEST ENERGY, INC. ________________________________________ [Name], [Title] INDEMNITEE ________________________________________ [Name] 15 EX-23.1 6 d94918ex23-1.txt CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report in this Form 10-K into PetroQuest Energy, Inc.'s previously filed Registration Statements (File Nos. 333-67578, 333-63920, 333-52700, 333-42520, 333-65401 and 333-89961). /s/ ARTHUR ANDERSEN, LLP New Orleans, Louisiana March 13, 2002 -----END PRIVACY-ENHANCED MESSAGE-----