EXHIBIT 13.1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
Amendment No. 1
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission File Number 0-8043
SOUTHERN MINERAL CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 00-0000000
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
0000 XXXXXXXXX, XXXXX 0000
XXXXXXX, XXXXX 00000-0000
(Address of principal executive (Zip Code)
offices)
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Registrant's telephone number, including area code: (000) 000-0000
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each Class on which Registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01
6.875% Convertible Subordinated Debentures Due 2007
(Title of Class)
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Indicate by check xxxx 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 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 xxxx 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 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. [ ]
As of March 15, 1999, 12,803,449 shares of Common Stock were outstanding and
the aggregate market value of these shares at such date (based upon the last
reported sales price in the Nasdaq National Market of $0.625 per share) held by
non-affiliates of the Registrant was approximately $8.0 million. Determination
of Common Stock ownership by affiliates was made solely for the purpose of
responding to this requirement and the Registrant is not bound by this
determination for any other purpose.
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In filing the Annual Report on Form 10-K of Southern Mineral Corporation
(the "Company" or the "Registrant"), the Company incorporated certain
information required by Part III by reference to the Company's Proxy Statement
for the 1999 Annual Meeting of Stockholders. The Company's Proxy Statement for
the 1999 Annual Meeting of Stockholders will not be filed within the 120-day
period following the end of the Company's fiscal year ended December 31, 1998.
Accordingly, the Registrant hereby amends Part III of its Annual Report on Form
10-K as set forth below to include such information:
PART I
ITEM 1. Description of Business
General
Southern Mineral Corporation, a Nevada corporation, with its subsidiaries
("Southern Mineral" or the "Company"), is an independent oil and gas company
headquartered in Houston, Texas. The Company is engaged in the acquisition,
exploitation, exploration and operation of oil and gas properties, primarily
along the Gulf Coast of the United States, in Canada and in Ecuador. The
Company conducts its operations in Canada exclusively through its subsidiary,
Neutrino Resources Inc. ("Neutrino"). The Company's business strategy is to
increase reserves and shareholder value through a balanced program of
acquisitions, exploitation and exploration.
In February 1999, the Board of Directors of the Company retained CIBC
Xxxxxxxxxxx Corp. as independent advisors to assist in studying strategic
alternatives for maximizing shareholder value. The Company expects to evaluate
a number of alternatives including, but not limited to, asset divestiture,
joint ventures or alliances, a sale or merger of the Company, and other
restructuring and recapitalization opportunities. The Company can give no
assurances as to its success in pursuing any of the strategic alternatives or
as to the terms of any transaction.
Background
The Company was incorporated in 1937 as a vehicle to consolidate mineral
tracts retained as its parent company lumbered large tracts of southern
Mississippi forestlands. For the next fifty years, the Company was largely a
passive participant in the oil and gas business, merely granting leases on its
spread of mineral interests in Mississippi. In the mid-1980s, the Company
became a more active participant in the oil and gas business, redeploying its
significant cash flow from revenues derived from the Poplarville Field into
exploration activities. For the next ten years, the Company pursued the sole
strategy of exploration for oil and gas. As a result of generally poor results,
the Company changed its focus beginning in 1995 to one of a more balanced
approach to the oil and gas business. The Company currently pursues
acquisitions, exploitation and exploration.
Acquisition Activities
Neutrino Resources Inc. In July 1998, the Company acquired, for cash, all of
the outstanding shares of Neutrino, an independent oil and gas company located
in Calgary, Canada. Following the acquisition, the Company consolidated its
other Canadian assets into Neutrino and began to operate in Canada exclusively
through Neutrino.
Neutrino's principal assets include three core areas in central and southern
Alberta, Canada: (i) the Pine Creek Field, (ii) the Inverness/Swan Hills Field
and (iii) the Medicine River/Sylvan Lake Field. In late 1998, an oil discovery
was made at Gift Lake in north central Alberta. At year-end 1998, Neutrino's
proved reserves totaled 4.0 million barrels of liquids (oil, condensate and
natural gas liquids) and 27.3 billion cubic feet (Bcf ) of natural gas. In the
second half of 1998, the Company's Canadian production was 284,532 barrels of
liquids and 1,918 million cubic feet (MMcf) of natural gas.
The total purchase price of Neutrino was $57,198,000, including assumption
of debt and working capital deficit. Additionally, approximately 324,000 shares
of Southern Mineral Common Stock were issued to key Neutrino management
personnel in consideration for retention and other obligations.
Amerac Energy Corporation. In January 1998, the Company issued 3,333,333
shares of its Common Stock for all the outstanding shares of Amerac Energy
Corporation ("Amerac") in a merger effective January 28, 1998. At January 1,
1998, Amerac had proved reserves of 32.7 billion cubic feet of gas equivalent
(Bcfe) according to a report prepared by a major independent engineering firm.
Subsequent to the acquisition, a number of non-strategic Amerac properties were
sold and the remainder became a part of the Company's U.S. oil and gas asset
base.
Big Escambia Creek, Alabama. During 1997 and 1998, the Company acquired
working interests in the Big Escambia Creek Field and the surrounding area in a
series of six transactions. The largest acquisition was the purchase of BEC
Energy, Inc. in May 1997, for $10.6 million. Thereafter, the Company acquired
additional working interests in the area for $12.1 million.
The Big Escambia Creek area represents the Company's largest asset in terms
of reserves with approximately 2.6 million barrels of oil equivalent (MMboe)
proved reserves as of December 31, 1998. In addition to sales of oil and gas,
the Company earned $700,000 in revenues during 1998 from the sale of sulfur
from the area.
Lake Raccourci Field, Lafourche Parish, Louisiana. In November 1997, the
Company acquired a 22.5% working interest in two producing xxxxx in the Lake
Raccourci Field for $5.4 million and subsequently drilled a successful third
well there. In addition, the Company has recently received a 10,000 acre farm-
out from Exxon, providing further development potential to the project. Proved
reserves at year-end 1998 were 684,000 barrels of oil equivalent (boe).
Santa Xxxxx Project, Ecuador. In June 1997, the Company acquired a 10%
interest in the Santa Xxxxx Project for approximately $2.8 million. The Ancon
Field, in the Santa Xxxxx concession, was originally discovered in 1921 and has
produced over 128 million barrels of oil, with peak production rates of 10,000
barrels per day in 1955. In July 1996, Compania General de Combustibles S.A.
("CGC") acquired a 20 year concession for the Santa Xxxxx Project. CGC
implemented a redevelopment plan consisting primarily of mechanical remediation
and improvements in field delineation. The remediation and delineation efforts
to improve and sustain higher production rates have generally been
disappointing.
A key consideration in acquiring the Santa Xxxxx interest was the
significant exploration potential contained on the concession. Over 400
kilometers of new 2-D seismic has been acquired with the expectation that
exploratory drilling will commence in mid-1999. However, given the significant
decline in world oil prices during 1998 and other factors, the project
participants may request a restructuring of the concession agreement. Such a
request may affect the timing and cost of the exploratory drilling program.
Exploitation and Exploration Activities
The Company has either initiated or agreed to participate in various
exploration opportunities in addition to those described herein. The Company
intends that its exploration effort be composed primarily of internally
generated projects. However, a portion of the Company's exploration programs
may be brought to the Company by outside individuals and other companies.
Brushy Creek Field, Texas. Discovered in late 0000, Xxxxxx Xxxxx Xxxxx
(Xxxxxxxx Prospect) is located within the prolific Xxxxxx producing trend of
the Texas Gulf Coast. The field straddles the XxXxxx and Lavaca County line.
Production has been established from several Xxxxxx sand reservoirs, including
the 13,900-Foot Sand and the 11,700-Foot Sand, but the majority of the current
production and future upside potential is from the Xxxxxxx Sand at
approximately 11,100 feet in depth. Since its discovery, the field has produced
more than 3.5 Bcf of gas (gross). Southern Mineral, in a joint effort with the
operator, generated and marketed the
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prospect to industry partners, and has retained non-operated working interests
ranging from 25% to 30% in the drilling of seven xxxxx to date. The Company
believes that significant additional exploration and exploitation opportunities
exist in the field and surrounding area.
Gift Lake, Alberta, Canada. In late 1998, the Company discovered oil in its
first well at Gift Lake. Additional acreage was subsequently acquired in the
area to expand the Company's position. A second well was drilled on a separate
feature at Gift Lake, but was unsuccessful. The Company operates and holds
working interests ranging from 50% to 55% in 6,720 gross acres at Gift Lake,
and has identified a number of leads and prospects on this acreage.
Alta Loma Prospect, Texas. The Company operates and owns a 50% working
interest in the Alta Loma Prospect in Galveston County, Texas. The prospect is
a redevelopment project of an abandoned field previously discovered and
delineated by a major integrated oil company. Application of modern 3-D seismic
technology has identified significant potential in undrilled fault blocks. The
Company is currently seeking additional partners to participate in funding the
capital expenditures necessary to evaluate the prospect.
Osprey Prospect, Offshore, Texas. The Osprey Prospect is located in shallow
waters offshore Texas near Matagorda Island. The Company has leased 1,360 acres
and obtained a farm-in on an additional 640 acres to complete the prospective
lease block. The Company operates and owns a 100% interest in the prospect and
is currently seeking industry partners to participate in an exploratory test.
Xxxxx Xxxx Xxxxxxxx, Xxxxxxxx, Xxxxx. The Company operates and owns a 100%
interest in North Cove, a prospect adjacent to a large offshore gas field. In a
State of Texas lease sale during the fourth quarter of 1998, the Company was
successful in acquiring 720 acres comprising the prospect. The Company is
currently seeking industry partners to participate in testing the potential of
the prospect.
Risk Factors
Forward-Looking Statements. All statements other than statements of
historical fact contained in this report, including statements in Item 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations, are forward-looking statements. When used herein, the words
"budget", "expressions", "anticipate", "expects", "believes", "seeks", "goals",
"plans", "strategy", "intends", or "projects" and similar expressions are
intended to identify forward-looking statements. It is important to note that
the Company's actual results could differ materially from those projected by
such forward-looking statements and no assurance can be given that the
expectations will prove correct. In reliance upon the Private Securities
Litigation Reform Act of 1995, factors identified by the Company that could
cause the Company's future results to differ materially from the results
discussed in such forward-looking statements include the following risks
described under "Risk Factors." All forward-looking statements in this report
are expressly qualified in their entirety by the cautionary statements in this
paragraph and shall be deemed in the future to be modified in their entirety by
the Company's public pronouncements, including those contained in all future
reports and other documents filed by the Company with the Securities and
Exchange Commission.
High Financial Leverage and Liquidity. As of March 15, 1999, the Company's
total outstanding indebtedness was approximately $97.1 million, which is
secured by substantially all of the assets of the Company and its subsidiaries.
Cash on hand at March 15, 1999 was approximately $5.4 million as a result of
the sale of certain assets. See Note 14 to the Consolidated Financial
Statements. This substantial leverage poses certain risks, including the risk
that the Company may not generate sufficient cash flow to service its
indebtedness or that the Company may be unable to obtain additional financing
in the future and, as a result, may not have the necessary resources to respond
to market conditions and opportunities. At March 15, 1999, the Company had no
borrowing availability under its domestic credit facility and estimates that
very little is available under its Canadian credit facility after considering
the minimum working capital requirement. See Note 3 to the Consolidated
Financial Statements. The Company's high level of indebtedness, covenant
requirements and working capital deficit subjects it to risks of default, which
may significantly impair its ability
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to meet its liquidity needs. The Company's domestic bank credit agreement
contains provisions whereby a default under the Company's Canadian credit
facility or pursuant to the 6.875% Convertible Subordinated Debentures
indenture would create a default condition under the domestic credit facility.
In such a default condition, the banks may declare amounts under the domestic
credit facility to become immediately due and payable. The holders of
convertible subordinated debentures have acceleration rights if the Company is
in payment default under either its domestic or Canadian credit facilities. The
Canadian credit facility is a revolving demand loan. See Note 3 to the
Consolidated Financial Statements. The Company's ability to meet its
obligations is dependent upon a number of factors, many of which are outside of
the Company's control. See Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company believes that it will be necessary to sell significant oil and
gas assets to raise the substantial additional funds necessary to meet the
September 1, 1999 maturity of $12,500,000 of principal that will be due under
its domestic credit facility. See Note 3 to the Consolidated Financial
Statements. No assurance can be given that such transactions can be consummated
on terms acceptable to the Company or its lenders, whose approval may be
required. If the Company is unable to raise the necessary funds, further
restructuring of its domestic credit facility will be required or the Company
could become in default on the full amount of its indebtedness, as discussed
above. The Company has retained CIBC Xxxxxxxxxxx Corp. to assist in evaluating
various strategic alternatives, which may include asset divestitures, joint
ventures or alliances, a sale or merger of the Company or other restructuring
or recapitalization opportunities. There can be no assurance that the Company
will be successful in pursuing any of such strategic alternatives or as to the
terms of any transaction that may be pursued. See Note 14 to the Consolidated
Financial Statements.
The Company has been advised that it is not in compliance with Nasdaq Stock
Market listing requirements due to the recent low price per share of its Common
Stock. If such requirements are not satisfied prior to April 19, 1999, the
Company's Common Stock may be subject to delisting from the Nasdaq National
Market. Such delisting would impair the liquidity of the Common Stock and
capital raising flexibility of the Company. The Company intends to pursue a
remedy and is considering steps to come into compliance with the listing
requirements. The Company cannot assure that it will be successful in
maintaining its Nasdaq listing. See Item 5 "Market for the Company's Common
Equity and Related Stockholder Matters."
Volatility of Prices and Availability of Markets. The Company's revenues,
profitability and future rate of growth are highly dependent upon the prices of
and demand for oil and gas, which can be extremely volatile. The volatile
energy market makes it difficult to estimate future prices and sales volumes of
natural gas, crude oil and natural gas liquids ("NGLs"), which are affected by
a number of factors beyond the control of the Company, including worldwide
supplies of and demand for oil and gas, changing international economic and
political conditions, contract enforceability, negotiations with other parties,
availability of capital, insolvency of other parties, domestic and foreign
energy legislation, weather, environmental conditions, regulations and events,
and actions by major petroleum producers including members of the Organization
of Petroleum Exporting Countries. The Company's financial condition, operating
results and liquidity may be materially affected by any significant
fluctuations in the sales prices of natural gas, crude oil and NGLs. The
Company's ability to service its long-term obligations and to generate funds
internally for capital expenditures will be similarly affected.
Uncertainties in Reserve Estimation, Production Success and Reserve
Replacement. There are numerous uncertainties inherent in estimating quantities
of reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond the control of the
producer. The reserve data set forth herein represents only estimates.
Underground accumulations of oil and gas cannot be measured in an exact way.
The accuracy of any reserve estimate is a function of the quality and quantity
of available data and of engineering and geological interpretation and
judgment. As a result, estimates by engineers often vary. In addition, results
of drilling, testing and production subsequent to the date of an estimate may
justify revision of such estimates. Accordingly, reserve estimates at a
specific point in time are often different from the quantities of oil and gas
that are ultimately recovered, which differences may be significant.
Additionally, the
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estimates of future net revenues are based upon certain assumptions about
future production levels, prices and costs that may not prove correct over
time. The meaningfulness of such estimates is highly dependent upon the
assumptions upon which they were based.
In general, the Company's volume of production from oil and gas properties
declines with the passage of time. Except to the extent the Company acquires
additional properties containing proved reserves or conducts successful
exploration or development activities, or both, the proved reserves of the
Company, and the revenues generated from production thereof (assuming no price
increases), will decline as reserves are produced. Drilling activities are
expensive and subject to numerous risks, including the risk that no
commercially productive oil or gas production will be obtained. The decision to
purchase a property interest or explore or develop a property will depend in
part on geophysical and geological analysis and engineering studies, the
results of which may be inconclusive or subject to varying interpretations. The
cost of drilling, completing and operating xxxxx is often uncertain. Drilling
may be curtailed, delayed or canceled as a result of many factors, including
title problems, project approvals by joint venture partners, weather
conditions, compliance with government regulation, shortages or delays in
obtaining equipment, or limitations in the transportation, storage or market
for products. No assurance can be given that xxxxx will be able to sustain
production rates commensurate with the drill stem tests. Increases or decreases
in prices of oil and gas and in cost levels, along with the timing of
development projects, will also affect revenues generated by the Company and
the present value of estimated future net cash flows from its properties.
Revenues generated from future activities of the Company are highly dependent
upon the level of success in finding, developing or acquiring additional
reserves.
Business Risks
The Company's activities are subject to the risks normally associated with
oil and gas operations. The nature of the oil and gas business involves a
variety of risks usually associated with exploration for, and development and
production and transportation of, oil and gas, including blowouts, cratering,
oil spills, fires, geologic uncertainties and adverse or seasonal weather
conditions. Offshore operations are also subject to marine perils and extensive
governmental regulations, as well as interruption or termination by
governmental authorities based on environmental or other considerations. The
occurrence of any of these events could cause injury to life or property,
interruptions in operations, failure to produce oil or gas in commercial
quantities, inability to fully produce discovered reserves, loss of revenues or
increases in the costs of operations.
The Company's operations are subject to numerous foreign, federal, state and
local laws, rules and regulations relating to the protection of the
environment, health and safety, including without limitation, laws concerning
the release and containment and disposal of pollutants and wastes that can be
produced by operations in which the Company owns interests. In addition, the
Company's operations are affected by numerous federal, state and local laws,
rules and regulations relating to the exploration, production, transportation,
marketing and sales of oil and natural gas. In the past, the Company's
compliance with such laws, rules and regulations has not had a material adverse
effect on its capital expenditures, earnings or competitive position. However,
the Company cannot predict whether its future compliance with, or the effect
of, such laws, rules and regulations or those that may be enacted in the
future, would have a material adverse effect on its capital expenditures,
earnings or competitive position.
The Company's international operations are subject to certain risks,
including expropriation of assets, governmental reinterpretation of applicable
laws and contract terms, increases in or assessments of taxes and government
royalties, renegotiations of contracts with governments or customers,
government approvals of lease, permit or similar applications and of
exploration and development plans, political and economic instability, guerilla
activity, disputes between governments, payment delays, export and import
restrictions, limits on allowable levels of exploration and production, and
currency shortages, currency rate fluctuations, exchange losses and
repatriation restrictions, as well as changes in laws and policies governing
operations of companies with overseas operations, including more strict
environmental regulation. In addition, in the event of a dispute arising from
foreign operations, the Company may be subject to the exclusive jurisdiction of
foreign courts or may not be successful in subjecting foreign persons to the
jurisdiction of courts in the U. S. The
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Company may also be hindered or prevented from enforcing its rights with
respect to a governmental instrumentality because of the doctrine of sovereign
immunity. Foreign operations and investments may also be subject to laws and
policies of the U. S. affecting foreign trade, investment and taxation,
including but not limited to creditability of foreign taxes, that could affect
the conduct and profitability of those operations.
Approximately 31% of the Company's revenues during the year ended December
31, 1998 were derived from Canadian properties. The costs and revenues
associated with the Company's Canadian operations are denominated in Canadian
dollars. The Company prepares its consolidated financial statements in U.S.
dollars. Fluctuations in the value of the two currencies may cause currency
translations losses for the Company or reduced revenues and earnings, or both,
with respect to its Canadian operations. The Company cannot predict the effect
of exchange rate fluctuations upon future operating results.
Competition
There is a high degree of competition in the oil and gas exploration and
production industry. Consequently, the Company competes with many other
entities for capital and desirable potential acquisitions and exploration and
development prospects. The Company's competitors include the major integrated
oil companies as well as numerous independent oil and gas companies and other
producers of energy sources and fuels. Many of these competitors have capital
resources and other competitive advantages much greater than that of the
Company, and may therefore be better able than the Company to withstand and
compete during adverse market conditions. The Company's ability to generate
revenues and reserves in the future will be dependent upon, among other things,
its success in competing with these competitors, as to which there can be no
assurances.
Regulations
Domestic Environmental Regulation. Operations of the Company are subject to
numerous federal, state, and local 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 or prohibit the types, quantities and
concentration of substances that can be released into the environment in
connection with drilling and production activities; prohibit drilling
activities on certain lands lying within wetlands or other protected areas,
impose restrictions on the injection of liquid into subsurface formations,
require remedial measures to mitigate pollution from former operations (such as
pit closure and plugging abandoned xxxxx), and impose substantial liabilities
for pollution resulting from drilling and production operations. Moreover,
state and federal environmental laws and regulations may become more stringent,
and public interest in the protection of the environment has increased
dramatically in recent years. These environmental laws and regulations may
affect the Company's operations and costs as a result of their effect on oil
and gas development, exploration, and production operations. It is not
anticipated that the Company will be required in the near future to expend
amounts that are material in relation to its total capital expenditure program
by reason of environmental laws and regulations, but inasmuch as such laws and
regulations are frequently changed, the Company is unable to predict the
ultimate cost of compliance.
The Company generates wastes that may be subject to the federal Resource
Conservation and Recovery Act of 1976, as amended ("RCRA") and comparable state
statutes. The U.S. Environmental Protection Agency ("EPA") and various state
agencies have limited the approved methods of disposal for certain hazardous
and non-hazardous wastes. Moreover, legislation has been proposed in Congress
from time to time that would amend RCRA to reclassify oil and gas production
wastes as "hazardous waste." If such legislation were enacted, it could have a
significant impact on the Company's operating costs, as well as on the oil and
gas industry in general.
The Company currently owns or leases numerous properties that for many years
have been used for the exploration and production of oil and gas. Although the
Company believes that it has used good operating and
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waste disposal practices, prior owners and operators of these properties may
not have used similar practices, and hydrocarbons or other wastes may have been
disposed of or released on or under the properties owned or leased by the
Company or on or under locations where such wastes have been taken for
disposal. In addition, many of these properties have been operated by third
parties whose treatment and disposal or release of hydrocarbons or other wastes
was not under the Company's control. These properties and the wastes disposed
thereon may be subject to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA" or "Superfund"),
RCRA and analogous state laws as well as state laws governing the management of
oil and gas wastes. Under such laws, the Company could be required to remove or
remediate previously disposed wastes (including wastes disposed of or released
by prior owners or operators) or property contamination (including groundwater
contamination) or to perform remedial plugging operations to prevent future
contamination.
The Oil Pollution Act ("OPA") contains numerous requirements relating to the
prevention of and response to oil spills into waters of the United States. The
OPA subjects persons responsible for "offshore facilities" to strict joint and
several liability for all containment and cleanup costs and certain other
damages arising from a spill, including, but not limited to, the costs of
responding to a release of oil to surface waters. The OPA also requires owners
and operators of offshore facilities that could be the source of an oil spill
into federal or state waters, including wetlands, to post a bond, letter of
credit or other form of financial assurance in amounts ranging from $10 million
in specified state waters to $35 million in federal outer continental shelf
waters to covers costs that could be incurred by governmental authorities in
responding to an oil spill. Such financial assurances may be increased by as
much as $150 million if a formal risk assessment indicates that the increase is
warranted. Noncompliance with OPA may result in varying civil and criminal
penalties and liabilities.
OPA imposes a variety of additional requirements on "responsible parties"
for vessels or oil and gas facilities related to the prevention of oil spills
and liability for damages resulting from such spills in waters of the United
States. The "responsible party" includes the owner or operator of an onshore
facility, pipeline, or vessel or the lessee or permittee of the area in which
an offshore facility is located. OPA assigns liability to each responsible
party for oil spill removal costs and a variety of public and private damages
from oil spills. While liability limits apply in some circumstances, a party
cannot take advantage of liability limits if the spill is caused by gross
negligence or willful misconduct or resulted from violation of a federal
safety, construction or operating regulation. If a party fails to report a
spill or to cooperate fully in the cleanup, liability limits likewise do not
apply. OPA establishes a liability limit for offshore facilities (including
pipelines) of all removal costs plus $75,000,000. Few defenses exist to the
liability for oil spills imposed by OPA. OPA also imposes other requirements on
facility operators, such as the preparation of an oil spill contingency plan.
Failure to comply with ongoing requirements or inadequate cooperation in a
spill event may subject a responsible party to civil or criminal enforcement
actions.
The Federal Water Pollution Control Act, as amended, commonly known as the
Clean Water Act ("CWA"), and comparable state laws and regulations require
certain owners or operators of facilities that store or otherwise handle oil,
such as the Company, to prepare and implement spill prevention, control,
countermeasure and response plans relating to the possible discharge of oil
into the surface waters. The CWA also imposes restrictions and strict controls
regarding the discharge of produced waters and other oil and gas wastes into
navigable waters. Permits must be obtained to discharge pollutants to state and
federal waters. The CWA and analogous state laws provide for civil, criminal
and administrative penalties for any unauthorized discharges of oil and other
hazardous substances in reportable quantities and, along with the OPA, may
impose substantial potential liability for the costs of removal, remediation
and damages. State water discharge regulations and the federal ("NPDES")
permits prohibit, or severely restrict the discharge of produced water and
sand, and some other substances related to the oil and gas industry, to coastal
waters. Although the costs to comply with zero discharge mandates under federal
or state law may be significant, the entire industry has experienced or is
experiencing similar costs and the Company believes that these costs will not
have a material adverse impact on the Company's financial condition and results
of operations. Some oil and gas exploration
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and production facilities are required to obtain permits for their storm water
discharges. Costs may be incurred in connection with treatment of wastewater or
developing storm water pollution prevention plans.
The Company's operations may be subject to the Clean Air Act ("CAA") and
comparable state and local requirements. Amendments to the CAA were adopted in
1990 and contain provisions that may result in the gradual imposition of
certain pollution control requirements with respect to air emissions from the
operations of the Company. The EPA and various states have been developing
regulations to implement these requirements. The Company may be required to
incur certain capital expenditures in the next several years for air pollution
control equipment in connection with maintaining or obtaining operating permits
and approvals addressing other air emission-related issues. However, the
Company does not believe its operations will be materially adversely affected
by any such requirements.
International Environmental Regulation. Operations of the Company in Canada
and Ecuador are subject to numerous federal, provincial and local laws and
regulations. Environmental legislation provides for restrictions and
prohibitions on releases or emissions of various substances produced in
association with certain oil and gas industry operations and can affect the
location and operation of xxxxx and other facilities and the extent to which
exploration and development is permitted. In Canada, legislation also requires
that well and facility sites be abandoned and reclaimed to the satisfaction of
provincial authorities and local landowners. A breach of such legislation may
result in the suspension or revocation of licenses and authorizations, and the
suspension of operations, as well as the imposition of clean-up orders, fines
and penalties. In addition, certain types of operations may require
environmental assessment and reviews to be completed before approvals are
obtained and before exploration or development projects are begun. The Company
does not anticipate that it will be required to make capital or other
expenditures by reason of international environmental laws and regulations that
are material in relation to the Company's total capital expenditure program or
that would have a material adverse effect on the Company's earnings, but
inasmuch as such laws and regulations, are frequently changed, the Company is
unable to predict the ultimate cost of compliance.
Domestic Oil and Gas Regulation. Complex regulations concerning all phases
of energy development at the local, state and federal levels apply to the
Company's operations and often require interpretation by the Company's
professional staff or outside advisors. The federal government and various
state governments have adopted numerous laws and regulations respecting the
production, transportation, marketing and sale of oil and natural gas.
Regulation by state and local governments usually covers matters such as the
spacing of xxxxx, allowable production rates, environmental protection,
pollution control, taxation and other related matters. Moreover, future changes
in local, state or federal laws and regulations could adversely affect the
operations of the Company.
Domestic exploration for, and production of, oil and gas are extensively
regulated at both the federal and state levels. Legislation affecting the oil
and gas industry is under constant review for amendment or expansion,
frequently increasing the regulatory burden. Numerous departments and agencies,
both federal and state, are also authorized by statute to issue, and have
issued, rules and regulations binding on the oil and gas industry that often
are costly to comply with and that carry substantial penalties for non-
compliance. In addition, production operations are affected by changing tax and
other laws relating to the petroleum industry, by constantly changing
administrative regulations, and possible interruption or termination by
government authorities.
As a producer and seller of natural gas, the Company depends on
transportation and storage services offered by various interstate and
intrastate pipeline companies for the delivery and sale of its gas supplies.
Transportation and storage services rendered by interstate natural gas
pipelines are subject to the jurisdiction of the Federal Energy Regulatory
Commission ("FERC") under the Natural Gas Act of 1938 and the Natural Gas
Policy Act of 1978. Competition across the natural gas industry has intensified
in recent years as a result of certain major rulemakings promulgated by FERC
requiring interstate natural gas pipelines to unbundle transportation and sales
services and to render open-access transportation service on a
nondiscriminatory basis for third-party gas supplies. These FERC initiatives
have resulted in interstate pipelines abandoning their
9
traditional merchant function and offering various types and levels of services
to their customers, which, in turn, has greatly enhanced the ability of
producers and others to market natural gas supplies to local distribution
companies and large commercial and industrial end users.
The rates charged for interstate natural gas pipeline services are often
subject to negotiation between customers and the pipeline within certain FERC-
approved parameters. These rates are subject to change depending upon
individual system usage and other variables. Additionally, the availability of
interstate transportation and storage service necessary for the Company to make
sales or deliveries of gas can at times be preempted by other users of a
particular pipeline system in accordance with FERC-approved methods for
allocating open-access pipeline capacity.
The regulations affecting interstate pipeline services are subject to
ongoing review and amendment. Within the past year, FERC has issued several
notices of proposed rulemakings and inquiry through which it has indicated that
it is considering modifying certain existing regulations and policies in an
effort to (i) maximize competition in short-term transportation markets, (ii)
provide interstate pipelines with additional flexibility in order to better
tailor rates and terms and conditions of service to individual customer needs,
and (iii) better fashion regulatory policies that provide the correct
incentives and price signals for all segments of the industry while continuing
to guard against the exercise of market power. While these and other potential
FERC-initiatives may further facilitate market access for natural gas
producers, they will also likely result in increased competition in markets in
which the Company's natural gas is sold which could negatively affect revenues
in the future.
As a producer and seller of oil, the Company depends on services offered by
various interstate and intrastate oil pipelines. Services provided by
intrastate oil pipelines are subject to the jurisdiction of individual state
regulatory commissions, and the rules and regulations of these individual
commissions are subject to ongoing review and possible amendment. The rates,
terms and conditions of service and certain other aspects of interstate oil
pipeline service are subject to regulation under the Interstate Commerce Act,
which jurisdiction is administered by the FERC.
Canadian Oil and Gas Regulation. The oil and natural gas industry is subject
to extensive legislation and regulation governing its operations including land
tenure, exploration, development, production, refining, transportation,
marketing, environmental protection, exports, taxes, labor standards and health
and safety standards imposed by legislation enacted by various levels of
government. In addition, extensive legislation and regulation exists with
respect to pricing and taxation of oil and natural gas and related products.
Customers
Oil and gas hydrocarbons are the principal products produced by the Company
and sales of such products are usually made in the spot market or on such other
bases that may be impacted by the effect of changes in current market prices.
Future oil and natural gas prices may be affected by a variety of factors
including, but not limited to, supply and demand, world and regional market
conditions, political conditions and seasonal factors, all of which the Company
is unable to control or accurately predict. In the past, there have not been,
and management does not expect there to be in the near term, any material
adverse effects on the Company's business due to seasonal aspects. Backlog is
not a factor in the Company's operations. The Company is engaged in a single
industry segment: the acquisition, exploration, development, and production of
oil and gas reserves, all in the United States, Ecuador and Canada. Sales of
oil and gas to customers accounting for 10% or more of revenues were as follows
(in thousands):
Customer 1998 1997 1996
-------- ------ ------ ------
G C Marketing Company............................... $ -- $2,267 $3,212
Damsco Distribution................................. 3,747 1,656 --
Diasu Oil & Gas Co., Inc............................ -- 1,631 --
10
Operational Hazards and Insurance
The Company's operations are subject to all of the risks normally incident
to the production of oil and gas, including blowouts, cratering, pipe failure,
casing collapse, oil spills and fires, each of which could result in severe
damage to or destruction of oil and gas xxxxx, production facilities or other
property, or injury to persons. The energy business also is subject to
environmental hazards, such as oil spills, gas leaks, and ruptures and
discharge of toxic substances or gases that could expose the Company to
substantial liability due to pollution and other environmental damage. Although
the Company maintains insurance coverage considered to be customary in the
industry, it is not fully insured against certain of these risks, either
because such insurance is not available or because of high premium costs. There
can be no assurance that such coverage will continue to be available or as to
the cost of such coverage. The occurrence of a significant event that is not
fully insured against could have a material adverse effect on the Company's
financial condition or results of operations.
Employees
At March 15, 1999, the Company employed 38 full-time persons and 13
consultants. The Company believes that its relations with its employees and
consultants are good.
ITEM 2. Description of Properties
General
At December 31, 1998, the Company held working interests in 444 gross xxxxx
in the continental United States, 862 in Ecuador and 1,471 in Canada.
Approximately 36% of the Company's proved reserves are oil and liquids, and
approximately 64% are gas, measured in energy equivalent barrels of oil
(natural gas is converted at the rate of six thousand cubic feet of gas for
each barrel of oil).
11
Oil and Gas Reserve Information
The following table reflects the estimated proved reserves of the Company.
The Company's estimates of reserves filed with federal agencies, including the
Securities Exchange Commission, agree with the information set forth below. The
oil and gas reserves are principally onshore in the continental United States,
Canada and Ecuador. The Company's reserve information has been based on
estimates prepared by or audited by independent petroleum engineers.
Netherland, Xxxxxx & Associates, Inc. ("NSA") prepared the domestic reserve
estimates as of December 31, 1995 and 1997 and audited the December 31, 1996
domestic reserve estimates prepared by the Company. NSA prepared most of the
domestic reserve estimates as of December 31, 1998. The Company prepared the
remaining reserve estimates, and Xxxxx Xxxxx Company ("RSC") audited those
results. XxXxxxxx & Associates Consultants Ltd. prepared the Canadian reserve
estimates as of December 31, 1995, 1996 and 1997. Xxxxxxx Petroleum Engineering
Ltd. prepared most of the Canadian reserve estimates as of December 31, 1998,
while Xxxxxxx Xxxxxxxx Jung Associates Ltd. prepared the remaining Canadian
reserve estimates as of such date. The Ecuador reserves were prepared by RSC as
of December 31, 1997. As a result of the decline in world oil prices, the
Company's reserves in Ecuador are not economic as of December 31, 1998. The
Company's U.S. oil reserves (including, oil, condensate and natural gas
liquids) have been prepared using average prices of $9.67, $16.91 and $24.41
per barrel and gas reserves were prepared using average natural gas prices of
$2.17, $2.20 and $3.91 per Mcf, as of December 31, 1998, 1997 and 1996,
respectively. The Canadian reserves have been prepared using average oil prices
of $8.71, $15.30 and $23.66 per barrel and average natural gas prices of $1.72,
$1.34 and $1.62 per Mcf, as of December 31, 1998, 1997 and 1996, respectively.
Ecuador reserves were prepared using an average oil price of $18.00 per barrel
as of December 31, 1997. See Item 1 "Risk Factors" and "Business Risks" and
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Notes to the Consolidated Financial Statements".
U.S. Ecuador Canada Total
--------------------- --------------- --------------------- ---------------------
Oil Gas Oil Gas Oil Gas Oil Gas
Proved Reserves (Bbls) (Mcf) (Bbls) (Mcf) (Bbls) (Mcf) (Bbls) (Mcf)
--------------- --------- ---------- -------- ----- --------- ---------- --------- ----------
Balance, December 31,
1995................... 687,401 20,644,438 -- -- 729,135 4,716,121 1,416,536 25,360,559
Extensions, discoveries
and additions.......... 6,081 479,336 -- -- 31,351 1,506,458 37,432 1,985,794
Revisions of previous
estimates.............. 33,975 (519,051) -- -- (12,623) 79,948 21,352 (439,103)
Purchase and sale of
minerals in place
(net).................. 109,252 4,590,014 -- -- -- -- 109,252 4,590,014
Production.............. (120,855) (2,396,379) -- -- (112,563) (961,527) (233,418) (3,357,906)
--------- ---------- -------- ---- --------- ---------- --------- ----------
Balance, December 31,
1996................... 715,854 22,798,358 -- -- 635,300 5,341,000 1,351,154 28,139,358
Extensions, discoveries
and additions.......... 20,480 2,869,630 26,395 -- 15,774 95,139 62,649 2,964,769
Revisions of previous
estimates.............. 53,743 (814,731) (26,395) -- (30,595) 384,760 (3,247) (429,971)
Purchase and sale of
minerals in place
(net).................. 1,746,890 7,702,198 489,971 -- (1,793) (295,974) 2,235,068 7,406,224
Production.............. (186,759) (2,554,072) (23,966) -- (93,486) (942,625) (304,211) (3,496,697)
--------- ---------- -------- ---- --------- ---------- --------- ----------
Balance, December 31,
1997................... 2,350,208 30,001,383 466,005 -- 525,200 4,582,300 3,341,413 34,583,683
Extensions, discoveries
and additions.......... 237,189 12,903,760 -- -- 170,912 -- 408,101 12,903,760
Revisions of previous
estimates.............. (192,935) (2,362,293) (437,413) -- -- -- (630,348) (2,362,293)
Purchase and sale of
minerals in place
(net).................. 1,004,373 12,066,855 -- -- 3,656,928 24,914,483 4,661,301 36,981,338
Production.............. (406,920) (4,219,528) (28,592) -- (321,040) (2,212,983) (756,552) (6,432,511)
--------- ---------- -------- ---- --------- ---------- --------- ----------
Balance, December 31,
1998................... 2,991,915 48,390,177 -- -- 4,032,000 27,283,800 7,023,915 75,673,977
========= ========== ======== ==== ========= ========== ========= ==========
Proved Developed
Reserves
----------------
Balance, December 31,
1996................... 608,705 19,361,667 -- -- 635,300 5,341,000 1,244,005 24,702,667
Balance, December 31,
1997................... 2,334,122 29,156,068 466,005 -- 525,200 4,582,300 3,325,327 33,738,368
Balance, December 31,
1998................... 2,731,986 40,605,557 -- -- 3,899,100 26,773,600 6,631,086 67,379,157
12
Production and Price History
The following table sets forth certain information concerning the Company's
annual net oil and gas production and average price information for the year
ended December 31:
1998 1997 1996
---------- ---------- ----------
Production:
Oil and NGLs (Bbls)
U.S..................................... 406,920 186,759 120,855
Ecuador................................. 28,592 23,966 --
Canada.................................. 321,040 93,486 112,563
---------- ---------- ----------
Total................................. 756,552 304,211 233,418
========== ========== ==========
Gas (Mcf)
U.S..................................... 4,219,528 2,554,072 2,396,379
Ecuador................................. -- -- --
Canada.................................. 2,212,983 942,625 961,527
---------- ---------- ----------
Total................................. 6,432,511 3,496,697 3,357,906
========== ========== ==========
Average sales prices:
Oil and NGLs ($ per Bbl)
U.S..................................... $ 12.11 $ 17.73 $ 19.69
Ecuador................................. 10.15 16.10 --
Canada.................................. 10.51 17.58 18.09
---------- ---------- ----------
Average................................. $ 11.36 $ 17.55 $ 18.92
========== ========== ==========
Gas ($ per Mcf)
U.S..................................... $ 2.13 $ 2.49 $ 2.29
Canada.................................. 1.42 1.45 1.17
---------- ---------- ----------
Average................................. $ 1.89 $ 2.21 $ 1.97
========== ========== ==========
Average costs ($ per Mcfe)
Operating expenses and production taxes.. $ 0.78 $ 0.69 $ 0.58
Depreciation, depletion and
amortization............................ 0.96 0.79 0.60
Productive Xxxxx Statistics
The following table sets forth information concerning productive xxxxx in
which the Company has an interest as of December 31, 1998. In the following
data "Gross" refers to the total xxxxx in which the Company has a working
interest and "Net" refers to gross xxxxx multiplied by the percentage of the
working interest owned by the Company.
Oil Gas Total
----------- ---------- -----------
Gross Net Gross Net Gross Net
----- ----- ----- ---- ----- -----
Canada.................................... 1,199 87.6 272 11.8 1,471 99.4
Ecuador................................... 862 86.2 -- -- 862 86.2
U. S. .................................... 188 42.2 256 35.3 444 77.5
----- ----- --- ---- ----- -----
Total..................................... 2,249 216.0 528 47.1 2,777 263.1
===== ===== === ==== ===== =====
13
Development and Exploratory Xxxxx Drilled
The following table sets forth the drilling results of xxxxx in which the
Company has a working interest for the year ended December 31:
1998 1997 1996
----------- ----------- ----------
Gross Net Gross Net Gross Net
----- ----- ----- ----- ----- ----
Exploratory:
Oil..................................... 2 1.002 0 .000 0 .000
Gas..................................... 1 .250 2 .489 1 .150
Dry..................................... 6 2.586 3 .495 3 .335
Development:
Oil..................................... 11 .970 34 1.282 21 .246
Gas..................................... 26 2.588 4 .116 15 .257
Dry..................................... 5 2.135 8 2.246 6 .174
Total:
Productive.............................. 40 4.810 40 1.887 37 .653
Dry..................................... 11 4.721 11 2.741 9 .509
Developed and Undeveloped Leasehold Acreage
The following table shows the Company's leasehold interest in developed and
undeveloped oil and gas acreage as of December 31, 1998. This table does not
reflect certain mineral acreage owned by the Company at December 31, 1998, but
subsequently sold, as described below. In the following data "Gross" refers to
the total acres in which the Company has a working interest and "Net" refers to
gross acres multiplied by the percentage of the working interest owned by the
Company.
Developed Undeveloped
Acreage Acreage
-------------- ---------------
United States Gross Net Gross Net
------------- ------- ------ ------- -------
Alabama....................................... 7,350 1,478 188 7
Arkansas...................................... 0 0 1,799 450
Colorado...................................... 288 21 0 0
Kansas........................................ 204 53 0 0
Louisiana..................................... 4,959 1,391 625 486
Louisiana-Offshore............................ 5,000 1,150 392 131
Michigan...................................... 96 2 0 0
Mississippi................................... 908 112 1,207 132
Montana....................................... 24 2 0 0
New Mexico.................................... 3,012 213 0 0
Oklahoma...................................... 2,800 592 0 0
Texas......................................... 25,588 7,901 23,024 17,354
Texas-Offshore................................ 5,760 105 5,120 5,120
Wyoming....................................... 10,384 500 0 0
Utah.......................................... 672 148 12,460 4,850
------- ------ ------- -------
Total-United States......................... 67,045 13,668 44,815 28,530
======= ====== ======= =======
Canada
------
Alberta....................................... 154,855 39,218 296,468 46,018
Saskatchewan.................................. 3,363 323 10,470 6,483
British Columbia.............................. 2,085 259 13,914 600
Manitoba...................................... 2,220 2,060 1,033 472
------- ------ ------- -------
Total-Canada................................ 162,523 41,860 321,885 53,573
======= ====== ======= =======
Ecuador....................................... 15,400 1,540 279,819 27,982
======= ====== ======= =======
Total Leasehold Acreage..................... 244,968 57,068 646,519 110,085
======= ====== ======= =======
14
Developed acreage consists of lease acres spaced or assignable to production
on which xxxxx have been drilled or completed to a point that would permit
production of commercial quantities of oil or gas.
The Company's ownership of mineral rights as of December 31, 1998, is set
forth below:
Gross Net
State Mineral Acres Mineral Acres
----- ------------- -------------
Mississippi................................... 262,000 118,000
Wisconsin..................................... 121,000 110,000
Texas......................................... 212,514 84,183
New Mexico.................................... 67,634 32,577
Other......................................... 2,000 2,000
------- -------
Total....................................... 665,148 346,760
======= =======
On March 11, 1999, the Company sold its mineral interests and substantially
all of its royalty interests in Texas, New Mexico and Mississippi for $6.0
million, subject to certain adjustments. The sale encompassed 235,000 net
mineral acres and proved reserves of 4.4 Bcfe as of December 31, 1998. Of the
$6.0 million sales price, $5.4 million was closed and funded on March 11, 1999.
The remainder of the transaction is expected to close before May 11, 1999,
following the satisfaction of certain conditions.
The Company is not aware of any valuable minerals appurtenant to the mineral
rights in Wisconsin, and therefore has no plans to develop minerals on such
properties.
ITEM 3. Legal Proceedings
The Company is involved in several lawsuits arising in the ordinary course
of business, only one of which presents the possibility of a material loss. The
Company's Canadian subsidiary, Neutrino Resources Inc., has been sued alleging
damages resulting from the calculation of third party facility and processing
fees at its Pine Creek Field, Alberta, Canada. The suit was filed on January
27, 1999 in the Court of Queen's Bench of Alberta in the Judicial District of
Calgary by EnerMark Inc. The amount of alleged damages approximates US
$870,000. Although the outcome of litigation cannot be predicted with
certainty, management believes (based on discussions with its legal counsel)
that the outcome of these legal actions will not have a material adverse effect
on the Company's consolidated financial condition or results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders during the
fourth quarter of the Company's last fiscal year.
15
PART II
ITEM 5. Market for the Company's Common Equity and Related Stockholder Matters
Market for the Company's Common Stock
The Common Stock is quoted on the Nasdaq National Market under the symbol
"SMIN". From March 10, 1995 until July 22, 1997, the Common Stock was quoted on
the Nasdaq SmallCap Market under the same symbol. Prior to March 10, 1995, the
Common Stock was quoted on the Nasdaq National Market under the same symbol.
The Nasdaq Stock Market rules require issuers listed on the Nasdaq National
Market and SmallCap Market to maintain a minimum closing bid price equal to or
greater than $1.00 per share and meet certain other maintenance requirements.
On January 19, 1999, the Company was advised that its Common Stock was not in
compliance with Nasdaq Stock Market minimum bid requirement.
Unless the Company's Common Stock satisfies the Nasdaq minimum bid
requirement before April 19, 1999, or unless the Company is granted an
extension, the Company's Common Stock will be scheduled for delisting. The
Company believes that continued listing on the Nasdaq is important to
maintaining the liquidity of its Common Stock and the ability of the Company to
raise capital. The Company intends to pursue a remedy and is considering steps
to come into compliance with the listing requirements. The Company cannot
assure that it will be successful in maintaining its Nasdaq listing.
The following table sets forth the high and low sales prices on the market
systems noted above for the Company's Common Stock for the periods indicated:
1998 1997
----------- -----------
High Low High Low
----- ----- ----- -----
First Quarter..................................... $5.06 $3.19 $7.75 $4.00
Second Quarter.................................... 4.00 3.31 5.50 3.50
Third Quarter..................................... 3.38 2.00 5.13 4.13
Fourth Quarter.................................... 2.19 .44 8.13 5.13
----- ----- ----- -----
For the Year...................................... $5.06 $ .44 $8.13 3.50
===== ===== ===== =====
On March 15, 1999, the closing sale price of the Company's Common Stock, as
reported by the Nasdaq National Market System was $0.625 per share.
The Company did not declare any dividends in fiscal 1998, 1997 or 1996. The
payment of future dividends on the Common Stock, if any, will be reviewed
periodically by the Company's Board of Directors, and will depend upon, among
other things, the Company's financial condition, funds available from
operations, the amount of anticipated capital and other expenditures, and the
Company's future business prospects. The Company does not expect, under its
existing capital structure, to be able to pay dividends for the foreseeable
future. Payment of dividends is currently prohibited by the terms of the
Company's domestic bank credit agreement. See Item 7 "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
There were 1,011 stockholders of record on March 15, 1999.
Recent Sales of Unregistered Securities
1996 Stock Option Plan. During 1997 and 1996, the Company granted options
exercisable for 170,000 and 130,000 shares of Common Stock, respectively, under
the Company's 1996 Stock Option Plan ("1996 SOP"). Pursuant to the 1996 SOP,
the Company may grant options to purchase up to 300,000 shares (subject to
16
customary anti-dilution adjustments) of its Common Stock to key employees of
the Company. The 1996 SOP is administered by the Compensation Committee of the
Company's Board of Directors, which generally has authority to establish who
receives options and the terms and conditions thereof, including vesting and
exercise price. The exercise price of each option granted in 1996 is the market
price for the Common Stock on the date of grant, determined by reference to the
most recent closing price thereof reported on the Nasdaq Systems.
1997 Stock Option Plan. During 1998 and 1997, the Company granted options
exercisable for 359,200 and 135,000 shares of Common Stock, respectively, under
the Company's 1997 Stock Option Plan ("1997 SOP"). Pursuant to the 1997 SOP,
the Company may grant options to purchase up to 700,000 shares (subject to
customary anti-dilution adjustments) of its Common Stock to key employees of
the Company. The 1997 SOP is administered by the Compensation Committee of the
Company's Board of Directors, which generally has authority to establish who
receives options and the terms and conditions thereof, including vesting and
exercise price. The exercise price of each option granted in 1997 is the market
price for the Common Stock on the date of grant, determined by reference to the
most recent closing price reported on the Nasdaq Systems.
Repricing of Options. The 1996 and 1997 Stock Option Plans were amended on
December 21, 1998 to provide for the exchange and repricing of all the
outstanding options held by current Company employees, except the President and
CEO, for new options exercisable at a price lower than that of the cancelled
options, bearing the same exercise term. The exercise price for the repriced
options equaled $1.00, which was higher than the $0.625 per share closing price
of the Company's Common Stock on the date of grant.
Non-Qualified Stock Options. During 1998, and in conjunction with the
acquisition of Neutrino, the Company granted Non-Qualified Stock Options
exercisable for 550,000 shares of Common Stock under individual agreements with
key members of Neutrino management. The issuance of these Non-Qualified Stock
Options was administered by the Compensation Committee of the Company's Board
of Directors, which generally has authority to establish who receives options
and the terms and conditions thereof, including vesting and exercise price. The
exercise price of each non-qualified option granted in 1998 was at the market
price for the Company's Common Stock on the date of the grant. However, in
conjunction with repricing of options pursuant to the 1996 and 1997 SOPs, as
described above, the option price of Non-Qualified options issued in 1998 were
also repriced, to $1.00, on December 21, 1998.
1996 Employee Stock Purchase Plan. During 1998 and 1997, the Company granted
options exercisable for 5,211 and 6,297 shares of Common Stock, respectively,
under the Company's 1996 Employee Stock Purchase Plan (the "SPP"). The SPP is
intended to constitute an "employee stock purchase plan" within the meaning of
Section 423 of the Internal Revenue Code of 1986, as amended. Pursuant to the
SPP, the Company may grant options to purchase up to 300,000 shares (subject to
customary anti-dilution adjustments) of its Common Stock to employees of the
Company. Options may be granted on January 1 and July 1 of each year to
eligible employees who elect to participate in the SPP. The term of each option
is six months from the date of grant. The number of options granted to each
participant equals the quotient of (i) the total payroll deductions authorized
by the participant during the applicable option period, divided by (ii) 85% of
the fair market value of the Common Stock as of the date of grant of such
option. The exercise price of options under SPP is 85% of the fair market value
of the Common Stock as of the date of grant or the date of exercise of such
option, whichever is less, determined by reference to the most recent closing
price reported on the Nasdaq Systems.
The Company's Form S-8 Registration Statement generally covers the issuance
and resale (subject, in the case of affiliates, to Rule 144 under the
Securities Act of 1933) of Common Stock issuable upon exercise of options under
the 1996 and 1997 SOPs and SPP.
17
ITEM 6. Selected Financial Data
The following table sets forth certain selected financial data of the
Company for each of the last five years derived from the audited Consolidated
Financial Statements of the Company and should be read in connection with the
financial statements and the related notes included elsewhere herein.
COMPARATIVE CONSOLIDATED BALANCE SHEETS
(in thousands)
As of December 31,
-----------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- ------
ASSETS
------
Current assets...................... $ 7,776 13,455 $ 2,918 $ 2,071 $1,973
Property and equipment-net.......... 114,187 42,293 20,599 18,042 1,347
Oil and gas properties held for sale
and other.......................... 6,327 6,127 869 1,554 50
-------- ------- ------- ------- ------
$128,290 $61,875 $24,386 $21,667 $3,370
======== ======= ======= ======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities................. $ 41,914 2,956 $ 683 $ 5,960 $ 290
Deferred income taxes............... 7,279 1,039 1,169 606 --
Long-term debt...................... 64,370 41,400 3,900 9,920 --
Stockholders' equity................ 14,727 16,480 18,634 5,181 3,080
-------- ------- ------- ------- ------
$128,290 $61,875 $24,386 $21,667 $3,370
======== ======= ======= ======= ======
WORKING CAPITAL..................... $(34,138) $10,499 $ 2,235 $(3,889) $1,683
======== ======= ======= ======= ======
COMPARATIVE CONSOLIDATED OPERATING DATA
(in thousands, except per share amounts)
Year Ended December 31,
-------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------ -------
Revenues
Oil and gas...................... $ 21,722 $13,790 $11,780 $2,044 $ 1,747
Gains (losses) on sales of
properties...................... (250) 413 453 170 66
-------- ------- ------- ------ -------
21,472 14,203 12,233 2,214 1,813
Expenses......................... 35,624 14,815 8,164 2,488 5,580
-------- ------- ------- ------ -------
Income (loss) from operations.... (14,152) (612) 4,069 (274) (3,767)
Other income, expenses and
deductions
Interest and other income...... 330 328 286 146 76
Interest and debt expense...... (5,362) (1,591) (1,242) -- --
-------- ------- ------- ------ -------
Income (loss) before income
taxes........................... (19,184) (1,875) 3,113 (128) (3,691)
Provision (benefit) for income
taxes........................... (2,775) 174 679 9 (558)
-------- ------- ------- ------ -------
Net income (loss)................ $(16,409) $(2,049) $ 2,434 $ (137) $(3,133)
======== ======= ======= ====== =======
Earnings (Loss) per share of
Common Stock:
Basic.......................... $ (1.32) $ (.22) $ .37 $(0.02) $ (0.75)
======== ======= ======= ====== =======
Diluted........................ $ (1.32) $ (.22) $ .34 $(0.02) $ (0.75)
======== ======= ======= ====== =======
Weighted average number of
shares-basic.................... 12,422 9,109 6,621 5,701 4,162
======== ======= ======= ====== =======
Weighted average number of
shares-diluted.................. 12,422 9,109 7,114 5,701 4,162
======== ======= ======= ====== =======
--------
Note: In 1998, 1997, 1996 and 1994, the Company recognized a pre-tax non-cash
expense of $9,344, $2,838, $603 and $1,724, respectively, in connection
with the writedown of its investment in certain oil and gas producing
properties.
18
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations For the Year Ended December 31, 1998 As Compared to the
Year Ended December 31, 1997
Oil and gas revenues for the year ended December 31, 1998 were $21,722,000,
up 58% compared to oil and gas revenues for 1997 of $13,790,000. The increase
in revenues reflects higher production volumes of both natural gas and crude
oil, partially offset by lower commodity prices. Higher production volumes were
primarily the result of two significant acquisitions made by the Company during
1998 and new production from a natural gas discovery at Brushy Creek Field in
Texas. The Company purchased Neutrino Resources Inc. as of June 30, 1998 and
Amerac Energy Corporation in January 1998.
Natural gas production in 1998 was 6,433 million cubic feet ("MMcf"), an 84%
increase compared to 1997 production of 3,497 MMcf. The Company's crude and
natural gas liquids production in 1998 increased 149% to 756,552 barrels
compared to 304,211 barrels in 1997.
The average natural gas price in 1998 decreased 14% to $1.89 per Mcf
compared to an average price of $2.21 per Mcf in 1997. Crude oil prices
decreased 34% in 1998 to $11.74 per barrel compared to $17.85 per barrel in
1997.
As part of the Company's ongoing operations, the Company may sell non-
strategic assets or oil and gas properties. The proceeds may be used to pay
down debt or redeploy capital to opportunities that may have a higher rate of
return. These activities resulted in losses on the sale of assets of $250,000
in 1998 and gains of $413,000 in 1997. The loss on the sale of assets in 1998
was primarily the result of the sale of numerous marginal properties
principally in the United States. The gain on sale of assets during 1997 was
primarily the result of the sale of non-strategic oil and gas properties in
both Canada and the United States.
Production costs, including production and ad valorem taxes, increased in
1998 to $8,518,000, up 131% from $3,682,000 in 1997, primarily due to the above
mentioned acquisitions. On an average cost per Mcfe basis, production costs for
1998 increased to $0.78 per Mcfe, or 13%, from $0.69 per Mcfe in 1997.
General and administrative expenses increased to $3,622,000 in 1998, up 57%
from $2,308,000 in 1997. On an average cost per Mcfe basis, general and
administrative expenses decreased to $0.33 per Mcfe, or 23%, from $0.43 per
Mcfe in 1997.
Exploration expenses increased in 1998 to $3,635,000, up 105% compared to
$1,776,000 in 1997. This is primarily due to a dry hole drilled in Lafourche
Parish, Louisiana in 1998, for which the Company incurred expenses of
$1,639,000. Since the Company uses the successful efforts method of accounting,
exploration expenses may vary greatly from year to year based upon the success
and level of exploration activity during the year.
Depreciation, depletion and amortization ("DD&A") expense for 1998 increased
to $10,505,000, up 149% from $4,211,000 in 1997, due primarily to the
acquisitions described above. The Company computes depreciation and depletion
on each producing property using the unit-of-production method. Since this
method employs estimates of remaining reserves, depreciation and depletion
expenses may vary from year to year because of revisions to reserve estimates,
production rates and other factors. DD&A expenses increased per Mcfe in 1998 to
$0.96 up 22% from $0.79 per Mcfe in 1997.
Proved property impairment expenses increased to $9,344,000, up 229%
compared to $2,838,000 in 1997. Significant declines in world oil prices during
1998 resulted in a writedown in the book value of a significant number of
proved oil and gas properties during the fourth quarter of 1998.
Interest and debt expense for 1998 increased to $5,362,000, up 237% from
$1,591,000 in 1997, primarily due to the increased debt used to fund
acquisition activity.
19
A tax benefit of $2,775,000 was recognized in 1998, compared to a tax
expense of $174,000 in 1997. The year to year change is due primarily to the
tax effects of the Canadian portion of the 1998 impairment of proved properties
recorded during the fourth quarter of 1998.
The Company reported a loss in 1998 of $16,409,000 or $1.32 per basic share,
compared to a loss of $2,049,000, or $0.22 per basic share in 1997.
For the Year Ended December 31, 1997 As Compared to the Year Ended December 31,
1996
Oil and gas revenues for 1997 were $13,790,000, up 17% compared to oil and
gas revenues for 1996 of $11,780,000. The increase in revenues reflects higher
production volumes of both natural gas and crude oil, partially offset by lower
commodity prices. Higher production volumes were primarily due to the
acquisition of certain oil and gas interests, in four transactions in 1997, in
the Big Escambia Creek Field in Escambia County, Alabama, for $16.9 million,
and the acquisition of an interest in the Santa Xxxxx Project in Ecuador, in
June 1997 for $2.8 million.
Natural gas production in 1997 was 3,497 million cubic feet ("MMcf"), a 4%
increase compared to 1996 production of 3,358 MMcf. The Company's crude oil and
natural gas liquids production in 1997 increased 30% to 304,211 barrels,
compared to 233,418 barrels in 1996.
The average natural gas price in 1997 increased 12% to $2.21 per Mcf
compared to $1.97 per Mcf in 1996. Crude oil prices decreased 6% in 1997 to
$17.85 per barrel, compared to $18.92 per barrel in 1996.
As part of the Company's ongoing operations, the Company may sell non-
strategic assets or oil and gas properties. The proceeds may be used to pay
down debt or redeploy capital to opportunities that may have a higher rate of
return. These activities resulted in gains on the sale of assets of $413,000 in
1997 and $453,000 in 1996. The gain on sale of assets in 1996 was primarily the
result of the sale of Venture Resources, Inc. for $1,143,000, which was a non-
core asset acquired as part of the Stone & Xxxxxxx acquisition. The gain on
sale of assets in 1997 was primarily the result of the sale of non-strategic
oil and gas properties in Canada and the United States.
Production costs, including production and ad valorem taxes, increased in
1997 to $3,682,000, up 34% from $2,742,000 in 1996, primarily due to the above
mentioned acquisitions. Additionally, on a cost per Mcfe basis, production
costs for 1997 increased to $0.69 per Mcfe or 19%, from $0.58 per Mcfe in 1996.
General and administrative expenses increased to $2,308,000 in 1997, up 37%
from $1,682,000 in 1996. Additionally, on a cost per Mcfe basis, general and
administrative expenses increased to $0.43 per Mcfe, or 23% from $0.35 Mcfe in
1996.
Exploration expenses increased in 1997 to $1,776,000, up 578% compared to
$262,000 in 1996. The increase is due primarily to four dry holes drilled in
1997, and higher geological and geophysical expense associated with seismic
acquisition for the Xxxxxxxx Project. Since the Company uses the successful
efforts method of accounting, exploration expenses may vary greatly from year
to year based upon the success and level of exploration activity during the
year.
Depreciation, depletion and amortization ("DD&A") expense for 1997 increased
to $4,211,000, up 46% from $2,875,000 in 1996, due primarily to downward
revisions to reserve estimates in the Xxxxxx Heirs #1, the Xxxxx Trust #1 and
the Stateline Field. The Company computes depreciation and depletion on each
producing property using the unit-of-production method. Since this method
employs estimates of remaining reserves, depreciation and depletion expenses
may vary from year to year because of revisions to reserve estimates,
production rates and other factors. DD&A expenses increased in 1997 to $0.79
per Mcfe, up 32% from $0.60 per Mcfe in 1996.
Proved property impairment expenses increased 371% to $2,838,000 in 1997
compared to $603,000 in 1996. The increase resulted primarily from the 1997
impairment of a well in Lafourche Parish, Louisiana, which encountered a
mechanical failure and was abandoned.
20
Interest and debt expense in 1997 increased to $1,591,000, up 28% from
$1,242,000 in 1996, primarily due to increased bank debt used to fund
acquisition activity and the issuance of $41,400,000 of 6.875% convertible
subordinated debentures in October 1997. A portion of the debenture proceeds
were used to retire $20,700,000 of existing bank debt incurred to make the
above mentioned acquisitions.
Tax expense in 1997 declined to $174,000 from $679,000 in 1996. Taxes in
1997 resulted from alternative minimum taxes in the United States and foreign
tax in Canada.
The Company reported a loss in 1997 of $2,049,000, or $0.22 per basic share,
compared to earnings of $2,434,000, or $0.37 per basic share in 1996.
Liquidity and Capital Resources
The Company has historically funded its operations, acquisitions,
exploration and development expenditures from cash flows from operating
activities, bank borrowing, issuance of common stock and debt securities, and
the sale of non-strategic assets.
The Company's cash flow provided by operating activities for the years ended
December 31, 1998, 1997 and 1996 was $6,670,000, $6,808,000 and $5,098,000,
respectively. Additional cash in the amounts of $199,000, $1,063,000 and
$258,000 were received in 1998, 1997 and 1996, respectively, from the sale of
assets.
Effective May 29, 1998, the Company amended its domestic bank credit
facility from $38,400,000 to $45,000,000. Subsequently, the credit facility has
been reduced and restructured as a result of lower oil and natural gas price
assumptions, the sale of certain domestic assets and the scheduled reduction
discussed below. A restructured and amended credit facility ("Amended Credit
Facility") was closed on March 29, 1999. The Amended Credit Facility provides
for a borrowing base of $19,353,000, plus a principal tranche of $12,500,000
("Tranche A") that matures on September 1, 1999. The borrowing base reflects
the $5,400,000 received in March 1999 for the sale of the Company's mineral
interests in Texas, Mississippi and New Mexico. Upon closing of the remaining
$600,000 in proceeds from the sale, the borrowing base will be reduced to
$18,820,000. In addition to reductions which result from the sale of assets,
the borrowing base under the Amended Credit Facility reduces $40,000 per month
and is subject to semi-annual borrowing base redeterminations until maturity on
June 1, 2001. The next borrowing base review is July 1, 1999. As of December
31, 1998, Tranche A principal was classified as current portion of long-term
debt in the Company's Consolidated Balance Sheet.
The Amended Credit Facility requires the Company, among other provisions,
to: (i) apply the majority of proceeds from asset sales to reduction in the
outstanding principal under the credit facility (to the extent the assets are
not otherwise encumbered), (ii) obtain lender's approval of the Company's
domestic general and administrative expense budget and (iii) pay a $187,500
restructuring fee upon completion of a transaction that allows the Company to
repay Tranche A principal. The Amended Credit Facility also reduces the
Company's tangible net worth requirement at December 31, 1998, thereby allowing
the Company to be in compliance with the terms of its domestic credit agreement
as of such date.
The obligations under the Amended Credit Facility are secured by
substantially all of the assets of the Company and its subsidiaries other than
Neutrino. The Amended Credit Facility prohibits the payment of dividends and
contains certain covenants relating to the financial condition of the Company.
Outstanding borrowings under the domestic bank credit facility were $35,910,000
at December 31, 1998. On March 29, 1999, outstanding borrowings under the
Amended Credit Facility were $31,853,000 with no further borrowing
availability. Outstanding principal under the Amended Credit Facility will bear
interest at the Bank Index Rate (8.0% at December 31, 1998) to the extent of
the borrowing base and at Bank Index Rate plus 1% on Tranche A principal.
The Company believes that it will be necessary to sell significant oil and
gas assets to raise the substantial additional funds necessary to meet the
September 1, 1999 maturity of Tranche A principal. No assurance can
21
be given that such transactions can be consummated on terms acceptable to the
Company or its lenders, whose approval may be required. If the Company is
unable to raise the necessary funds, further restructuring of its Amended
Credit Facility will be required or the Company could become in default on the
full amount of its indebtedness, as discussed below. In February, 1999, the
Board of Directors of the Company retained CIBC Xxxxxxxxxxx Corp. as
independent advisors to assist in evaluating various strategic alternatives,
which may include asset divestitures, joint ventures or alliances, a sale or
merger of the Company or other restructuring or recapitalization opportunities.
There can be no assurance that the Company will be successful in pursuing any
of such strategic alternatives or as to the terms of any transaction that may
be pursued. See Note 14 to the Consolidated Financial Statements.
Effective June 25, 1998, Neutrino entered into a new Cdn $40,000,000 (US
$25,838,000) revolving demand loan facility (the "Canadian Credit Facility")
under which it could borrow at bank prime or Bankers Acceptance Rates plus a 1%
stamping fee. At December 31, 1998, the Canadian Bank prime rate was 6.75% and
the Bankers Acceptance Rate for 30-day maturities was 5.15%. Effective February
26, 1999 the borrowing base under the Canadian Credit Facility was reduced to
Cdn $33,000,000 (US $21,316,000) and the interest rate was increased to prime
plus 1/4% and the stamping fee on Bankers Acceptance was increased to 1 1/4%
per annum. These changes were a result of a lender review giving effect to
lower world oil prices, the sale of certain non-strategic oil and gas
properties, and the Company's financial condition. At December 31, 1998,
outstanding borrowings under the Canadian Credit Facility were Cdn $28,625,000
(US$18,490,000). At March 15, 1999, outstanding borrowings under the Canadian
Credit Facility were Cdn $29,530,000 (US$19,730,000). However, after giving
consideration to the minimum working capital requirement contained in the
Canadian Credit Facility, the Company estimates that at March 15, 1999, there
is very little remaining borrowing availability under the facility. The
Canadian Credit Facility contains certain covenants relating to the financial
condition of Neutrino, including, at each quarter's end, maintenance of a
working capital ratio of 1:1. In calculation of this ratio, any undrawn portion
of the credit facility may be treated as if advanced and held in cash. The
obligations under the Canadian Credit Facility are secured by substantially all
of the assets of Neutrino. As of December 31, 1998, Neutrino was in compliance
with the terms of the Canadian Credit Facility. The outstanding balance under
the Canadian Credit Facility is classified as a current liability because of
the demand feature of the loan. However, it is Management's intention that the
facility be utilized to provide long-term financing for the Company.
The Company's financial condition and liquidity are impacted by prices the
Company receives for its oil and natural gas. In the first quarter of 1999, oil
and natural gas prices continued to be weak. Judgments by both domestic and
Canadian lenders regarding the level of future oil and natural gas prices will
impact their borrowing base determinations for the Company's credit facilities.
On October 2, 1997, the Company issued $41,400,000 of 6.875% convertible
subordinated debentures due on October 1, 2007. The debentures are convertible
into Common Stock of the Company at any time prior to maturity, at a conversion
price of $8.26 per share. Proceeds of the offering were used to reduce bank
debt and fund subsequent acquisitions. Pursuant to the debenture indenture, in
the event of a change of control of the Company, debenture holders have the
right to require the Company to repurchase the security at face value plus
accrued interest.
The Company's substantial leverage poses certain risks, including the risk
that the Company may not generate sufficient cash flow to service its
indebtedness or that the Company may be unable to obtain additional financing
in the future and, as a result, may not have the necessary resources to respond
to market conditions and opportunities. The Company's high level of
indebtedness, covenant requirements and working capital deficit subjects it to
risks of default, which may significantly impair its ability to meet its
liquidity needs. The Company's domestic bank credit agreement contains
provisions whereby a default under the Company's Canadian Credit Facility or
pursuant to the 6.875% Convertible Subordinated Debentures indenture, would
create a default condition under the domestic credit facility. In such a
default condition, the banks may declare amounts under the domestic Amended
Credit Facility to become immediately due and payable. The holders of
convertible subordinated debentures have acceleration rights if the Company is
in payment default under either its domestic or Canadian credit facilities.
22
The Company's ability to meet its obligations is dependent upon a number of
factors, many of which are outside of the Company's control. See Item 1 "Risk
Factors". The Company has retained CIBC Xxxxxxxxxxx Corp. to assist in
evaluating various strategic alternatives, which may include asset
divestitures, joint ventures or alliances, a sale or merger of the Company or
other restructuring or recapitalization opportunities. There can be no
assurance that the Company will be successful in pursuing any of such strategic
alternatives or as to the terms of any transaction that may be pursued. See
Note 14 to the Consolidated Financial Statements.
The Company has been advised that it is not in compliance with Nasdaq Stock
Market listing requirements due to the recent low price per share of its Common
Stock. If such requirements are not satisfied prior to April 19, 1999, the
Company's Common Stock may be subject to delisting from the Nasdaq National
Market. Such delisting would impair the liquidity of the Common Stock and
capital raising flexibility of the Company. The Company intends to pursue a
remedy and is considering steps to come into compliance with the listing
requirements. The Company cannot assure that it will be successful in
maintaining its Nasdaq listing. See Item 5 "Market for the Company's Common
Equity and Related Stockholder Matters."
Capital spending in 1998 for acquisitions, development and exploration
totaled $89,877,000, and was funded from cash flows from operating activities,
bank debt and common stock issuance. The Company's capital spending during 1999
is expected to be reduced significantly from 1998, and will be greatly
influenced by the level of oil and gas prices, and the availability of excess
funds beyond repayment of the September 1, 1999 Tranch A maturity. Capital
availability from outside sources, including debt and equity markets, is
expected to be limited.
The Company's ratio of debt to total capitalization was 87% at December 31,
1998, compared to 72% at December 31, 1997. The Company's interest coverage
ratio (calculated as income from operations plus depreciation, depletion,
impairments and amortization and exploration expenses divided by interest
expense) was 1.74 to 1 in 1998 compared to 5.16 to 1 in 1997.
The Company did not declare dividends in fiscal 1998, 1997 and 1996. The
Company does not expect, under its existing capital structure, to be able to
pay dividends for the foreseeable future. Payment of dividends is currently
prohibited by the terms of the Company's domestic bank credit agreement.
Year 2000 Compliance
The Company's State of Readiness
The "Year 2000" problem concerns the ability of technology to properly
recognize and process date sensitive information beyond December 31, 1999. The
Company is in the process of evaluating its information technology (IT) and
non-information technology. Year 2000 Committees have been formed at the
Company's office in Houston and at the Company's Canadian subsidiary
headquarters in Calgary. The Committees include members of senior management
and key employees from major business units. The Committee assesses Year 2000
issues; directs remedial actions necessary to minimize systems disruptions and
other risks; contacts significant third party purchasers, suppliers, vendors
and operators with whom there are material transactions and data exchange;
tests internal hardware and software; and makes appropriate contingency plans.
Neutrino has engaged a consulting firm, which has prepared a report on the
status of Neutrino, including a detailed inventory of hardware and software
priorities for action and an implementation plan. Additionally, the Company, on
behalf of itself and its other subsidiaries, has contacted principal software
vendors. Thus far, the Company has received a letter of compliance for its
accounting and payroll systems and product conformity assurance for its
reservoir engineering system. Additionally, the land lease record systems
vendor has informed the Company that the system is Year 2000 compatible. The
Company has no proprietary software. Purchased software and hardware systems
have been installed and assembled by third party vendors that provide network
and software IT services to the Company. Vendors have been engaged to evaluate
the systems for Year 2000 compliance.
23
Costs to Address the Company's Year 2000 Issues
It has been estimated that the costs of compliance will not exceed $120,000,
which includes the evaluation, planning, replacement of the land and lease
records systems at Neutrino and the replacement of several desktop computers
and other hardware. Approximately $9,000 was expended in 1998, with the balance
to be incurred in 1999.
Risks of the Company's Year 2000 Issues
Risks associated with the Year 2000 problem are potentially significant.
Failure to remedy a critical system problem could have a material affect on the
results of operations and financial condition. The Company has interests in
operated and non-operated properties in the United States, Canada and Ecuador.
The Company will continue to review and monitor software and equipment within
its control. The Company will continue to contact operators of its non-operated
properties and other third parties to determine their Year 2000 compliance
procedures, but cannot warrant the readiness of those systems. As the Company
is in the process of collecting this information from third parties, the
Company cannot currently state whether its operations will be materially
affected by third party compliance. However, the Company is not currently aware
of any third party that could cause a significant business disruption. The
Company believes that it will be able to achieve Year 2000 compliance by the
end of 1999 with respect to the Company's internal systems, and does not
currently anticipate any disruption in its operations or any materially adverse
effects to its financial condition, results of operations or cash flows as the
result of any failure by the Company to be in compliance.
In a recent Securities and Exchange Commission ("SEC") release regarding
Year 2000 disclosures, the SEC required public companies to disclose the most
likely worst case Year 2000 scenario. Situations which must be included in any
worst case scenario include: the possibility of widespread failure of oil and
gas transportation systems, the inability of Company personnel to gain access
to offices and other facilities, and the inability of customers to make payment
for purchases. The effects of such occurrences would have a cumulative material
adverse impact on the Company, although not quantifiable at this time.
The Company's Contingency Plan
Contingency plans are being developed at this time, and will be monitored
and modified after the initial evaluation by the Year 2000 Committees is
complete. The Company intends to have such plans in place by June 30, 1999.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), was issued by the
Financial Accounting Standards Board in June 1998. SFAS 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts. Under the standard, entities are required to carry
all derivative instruments in the statement of financial position at fair
value. The Company will adopt SFAS 133 beginning in fiscal 2000. The Company
has not yet determined the impact that SFAS 133 will have on its financial
statements.
ITEM 7a. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to a variety of market risks including the potential
for adverse changes in oil and gas natural gas prices, foreign currency
exchange rates and interest rates.
The Company's revenue stream is significantly affected by the level of oil
and natural gas prices, which can be volatile and over which the Company has no
control or influence. The Company has utilized natural gas price swaps on a
limited basis to hedge a portion of its exposure to commodity price
fluctuations. The effect of price swaps is to fix the price for a specific
quantity of gas for a specific time. The Company uses the deferral method of
accounting for its natural gas price swaps and therefore offsets any gain or
loss on the swap
24
contracts with the realized prices for its production. At December 31, 1998,
the Company had fixed natural gas prices on approximately 420 MMcf of natural
gas for the period of April through October 1999 at an average price of $2.135
per Mcf. The estimated gain from liquidating the Company's swap position at
December 31, 1998 was approximately $86,000. The volume of fixed price natural
gas is equivalent to about 6% of the Company's 1998 natural gas production.
Based on the Company's 1998 production, a 10% change in commodity price
realizations would impact the Company's oil and liquids revenues by $860,000,
and its natural gas revenues by $1,200,000.
The Company operates in Canada and Ecuador as well as the United States and,
as a result, is exposed to some foreign exchange rate risk. Natural gas prices
in Canada and oil prices in Canada and Ecuador tend to respond to changes in
the value of the local currencies versus the U.S. dollar. Therefore, the
Company believes the economic exposure to it from fluctuations in currency
exchange rates is not material to its financial condition, results of
operations or cash flows.
The Company has three primary sources of debt financing: (i) its domestic
bank credit facility, (ii) its Canadian bank credit facility, and (iii)
$41,400,000 in 6.875% convertible subordinated debentures due in 2007 (the
"6.875% Convertible Debentures"). In Canada, the Company has utilized interest
rate swaps as a means of fixing the interest rate on a large portion of its
indebtedness. The following table presents the Company's indebtedness at
December 31, 1998 as it relates to interest rate type and maturity. Given the
amount of the Company's variable rate indebtedness at December 31, 1998, and
taking into account the interest rate hedge arrangements currently in place, a
10% change in interest rates would imply an annualized change in pre-tax
interest expense of approximately $314,000.
1999 2000 2001 Thereafter Total Fair Value
----------- ---------- ----------- ----------- ----------- -----------
Variable Rate
Domestic Bank Debt..... $12,940,000 $ 480,000 $22,490,000 $35,910,000 $35,910,000
Canadian Bank Debt..... 2,340,000 2,340,000 2,340,000
----------- ---------- ----------- ----------- -----------
38,250,000 480,000 22,490,000 38,250,000 38,250,000
Average Rate.......... 8.545% 8.000% 8.000% 8.218%
Fixed Rate
6.875% Convertible
Debentures............ $41,400,000 $41,400,000 $10,350,000
Canadian Bank Debt..... $ 3,230,000 $9,690,000 $ 3,230,000 16,150,000 16,085,000
Other.................. 184,000 184,000 184,000
----------- ---------- ----------- ----------- ----------- -----------
3,414,000 9,690,000 3,230,000 41,400,000 57,734,000 26,619,000
Average Rate.......... 6.208% 6.340% 6.000% 6.875% 6.697%
The Company's 6.875% Convertible Debentures trade on the Nasdaq SmallCap
Market under the symbol "SMING". At December 31,1998 the closing price of the
debentures was 25% of face value. The interest rate on the Company's Canadian
fixed rate swaps at December 31, 1998 was approximately equivalent to the
Canadian floating rate. The estimated cost to liquidate the Company's Canadian
fixed rate swap position at December 31, 1998 was approximately $65,000.
ITEM 8. Financial Statements and Supplementary Data
Financial Statements are filed as a part of this report. See page 24, Index
to Financial Statements. The Financial Statements Schedules are not applicable
and have been omitted.
25
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Description Number
----------- ------
Financial Statements:
Independent Auditors' Report.......................................... 27
Consolidated Balance Sheets at December 31, 1998 and 1997............. 28
Statements of Consolidated Operations for the Years Ended December 31,
1998, 1997
and 1996............................................................. 29
Statements of Consolidated Stockholders' Equity and Comprehensive
Income (Loss) for the Years Ended December 31, 1996, 1997 and 1998... 30
Statements of Consolidated Cash Flows for the Years Ended December 31,
1998, 1997
and 1996............................................................. 31
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1998, 1997
and 1996............................................................. 33
26
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Southern Mineral Corporation:
We have audited the accompanying consolidated balance sheets of Southern
Mineral Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income (loss), and cash flows for each of the years in the three-
year period ended December 31, 1998. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Southern
Mineral Corporation and subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
years in the three- year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 3 to the consolidated financial statements, the Company's substantial
indebtedness, covenant requirements and working capital deficit raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
KPMG LLP
Houston, Texas
March 9, 1999, except as to Notes 3 and 14
which are dated March, 29, 1999
27
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31,
-----------------
1998 1997
-------- -------
ASSETS
Current Assets
Cash and cash equivalents................................. $ 1,541 $10,011
Receivables............................................... 5,602 3,280
Other..................................................... 633 164
-------- -------
Total current assets.................................... 7,776 13,455
Property and equipment, at cost using successful efforts
method for oil and gas activities
Oil and gas producing properties.......................... 136,833 53,437
Mineral rights............................................ 167 167
Unproven properties....................................... 5,454 494
Office equipment.......................................... 580 363
Accumulated depreciation, depletion and amortization...... (28,847) (12,168)
-------- -------
114,187 42,293
Properties held for sale and other.......................... 6,327 6,127
-------- -------
Total assets.............................................. $128,290 $61,875
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.......................................... $ 10,300 $ 2,749
Note payable.............................................. -- 207
Canadian bank loan........................................ 18,490
Current portion of long-term debt......................... 13,124 --
-------- -------
Total current liabilities............................... 41,914 2,956
Long-Term Debt (less current portion)....................... 64,370 41,400
Deferred Income Taxes....................................... 7,279 1,039
Stockholders' Equity
Preferred stock, par value $.01 per share; authorized
5,000,000 shares at December 31, 1998; none issued Common
stock, par value $.01 per share; authorized 50,000,000
shares at December 31, 1998; issued 12,884,672 and
9,133,033 at December 31, 1998 and 1997, respectively;
outstanding 12,793,449 and 9,041,849 shares at December
31, 1998 and 1997, respectively.......................... 128 91
Additional paid-in capital................................ 30,848 14,152
Accumulated other comprehensive loss-foreign currency
translation adjustment................................... (2,304) (227)
Retained earnings (deficit)............................... (13,893) 2,516
Less: treasury stock...................................... (52) (52)
-------- -------
Total stockholders' equity.............................. 14,727 16,480
-------- -------
Total liabilities and stockholders' equity.............. $128,290 $61,875
======== =======
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and
subsidiaries are an integral part of these statements.
28
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(in thousands, except per share amounts)
For the Year Ended December 31,
-----------------------------------
1998 1997 1996
----------- ---------- ----------
Revenues
Oil and gas............................ $ 21,722 $ 13,790 $ 11,780
Gains (loss) on sales of properties and
other assets.......................... (250) 413 453
----------- ---------- ----------
21,472 14,203 12,233
Expenses
Production............................. 8,518 3,682 2,742
Exploration............................ 3,635 1,776 262
Depreciation, depletion and
amortization.......................... 10,505 4,211 2,875
General and administrative............. 3,622 2,308 1,682
Impairment of proved oil and gas
properties............................ 9,344 2,838 603
----------- ---------- ----------
35,624 14,815 8,164
----------- ---------- ----------
Income (loss) from operations............ (14,152) (612) 4,069
Other income, expenses and deductions
Interest and other income.............. 330 328 286
Interest and debt expense.............. (5,362) (1,591) (1,242)
----------- ---------- ----------
Income (loss) before income taxes........ (19,184) (1,875) 3,113
Provision (benefit) for foreign, federal
and state income taxes
Current provision...................... 6 304 400
Deferred provision (benefit)............. (2,781) (130) 279
----------- ---------- ----------
(2,775) 174 679
----------- ---------- ----------
Net income (loss)........................ $ (16,409) $ (2,049) $ 2,434
=========== ========== ==========
Net income (loss) per share-basic........ $ (1.32) $ (.22) $ .37
=========== ========== ==========
Net income (loss) per share-diluted...... $ (1.32) $ (.22) $ .34
=========== ========== ==========
Weighted average number of shares
outstanding-basic....................... 12,422 9,109 6,621
=========== ========== ==========
Weighted average number of shares
outstanding-diluted..................... 12,422 9,109 7,114
=========== ========== ==========
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and
subsidiaries are an integral part of these statements.
29
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS'
EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
Accumulated
Common Stock Additional Other Treasury Stock Total
------------- Paid-in Retained Comprehensive ----------------- Stockholder's
Shares Amount Capital Earning Income (Loss) Shares Amount Equity
------ ------ ---------- -------- ------------- ------- ------- -------------
Balance at
January 1, 1996........ 6,370 $ 64 $ 3,038 $ 2,131 $ -- 91 $ 52 $ 5,181
Stock issued for
directors' fees........ 24 -- 72 -- -- -- -- 72
Issuance of common stock
for private placement.. 2,500 25 10,596 -- -- -- -- 10,621
Issuance of common stock
for property
acquisitions and
acquisition services... 195 2 324 -- -- -- -- 326
Comprehensive income:
Net income............ -- -- -- 2,434 -- -- -- 2,434
-------
Total comprehensive
income................. 2,434
------ ---- ------- -------- ------- ------- ------- -------
Balance at
December 31, 1996...... 9,089 91 14,030 4,565 -- 91 52 18,634
Stock issued for
directors' fees........ 31 -- 181 -- -- -- -- 181
Stock issued for stock
purchase plan.......... 9 -- 29 -- -- -- -- 29
Stock issued for stock
option plan, net....... 4 -- -- -- -- -- -- --
Issuance costs for
private placement...... -- -- (88) -- -- -- -- (88)
Comprehensive loss:
Net loss................ -- -- -- (2,049) -- -- -- (2,049)
Foreign currency
translation
adjustment........... -- -- -- -- (227) -- -- (227)
-------
Total comprehensive
loss................... (2,276)
------ ---- ------- -------- ------- ------- ------- -------
Balance at
December 31, 1997...... 9,133 91 14,152 2,516 (227) 91 52 16,480
Stock issued for
directors' fees........ 43 -- 139 -- -- -- -- 139
Stock issued for stock
purchase plan.......... 8 -- 22 -- -- -- -- 22
Issuance of common stock
for property
acquisition............ 8 -- 50 -- -- -- -- 50
Issuance of common stock
in corporate
acquisitions........... 3,693 37 16,485 -- -- -- -- 16,522
Comprehensive loss:
Net loss.............. -- -- -- (16,409) -- -- -- (16,409)
Foreign currency
translation
adjustment........... -- -- -- -- (2,077) -- -- (2,077)
-------
Total comprehensive
loss................... (18,486)
------ ---- ------- -------- ------- ------- ------- -------
Balance at
December 31, 1998...... 12,885 $128 $30,848 $(13,893) $(2,304) 91 $ 52 $14,727
====== ==== ======= ======== ======= ======= ======= =======
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and
subsidiaries are an integral part of these statements.
30
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(in thousands)
For the Year Ended December 31,
-----------------------------------
1998 1997 1996
----------- ---------- ----------
Cash Flows from Operating Activities
Net (loss) income....................... $ (16,409) $ (2,049) $ 2,434
Adjustments to reconcile net income
(loss) to cash provided by operating
activities:
Depreciation, depletion and
amortization.......................... 10,505 4,211 2,875
Loss/(gains) on sales of properties
and other assets...................... 250 (413) (453)
Impairment of proved oil and gas
properties............................ 9,344 2,838 603
Dry hole costs......................... 2,470 930 262
(Decrease) increase in deferred
taxes................................. (2,781) (130) 279
Other.................................. 418 351 72
Change in assets and liabilities, net
of effects of acquisitions and
dispositions:
Decrease (Increase) in receivables... 2,205 (987) (1,224)
(Increase) decrease in other current
assets.............................. (136) (9) 231
(Increase) in other assets........... -- -- (115)
Increase in payables................. 804 2,066 134
----------- ---------- ----------
Net cash provided by operating
activities ....................... 6,670 6,808 5,098
Cash Flows from Operating Activities
Proceeds from sales of:
Proved properties...................... 11,425 26 258
Properties held for sale and unproved
properties............................ 83 1,037 --
Capital expenditures:
Acquisition, exploration and
development........................... (17,103) (16,168) (2,836)
Properties held for sale............... (1,083) (2,203) (470)
Acquisition of Amerac, net of cash..... (9,387) -- --
Acquisition of Neutrino, net of cash... (35,926) -- --
Acquisition of partnership interest,
net of cash........................... -- -- (2,590)
Acquisition of BEC Energy, Inc., net
of cash............................... -- (10,683) --
Acquisition of SMC Ecuador, Inc., net
of cash............................... -- (2,816) --
Cash received for sale of Venture
Resources, Inc., net of cash
transferred............................ -- -- 1,143
Other................................... -- (24) --
----------- ---------- ----------
Net cash used in investing
activities........................ (51,991) (30,831) (4,495)
Cash Flows from Financing Activities
Proceeds from debenture offering, net... (7) 41,400 --
Debenture offering costs................ (12) (2,536) --
Proceeds from revolving loan............ 50,813 19,200 4,300
Payments on revolving loan.............. (10,280) (23,100) (15,615)
Payments on note payable................ (208) (1,262) ----
Loan acquisition costs.................. (259) (45) ----
Proceeds from equity offering, net...... -- (88) 10,621
Payment on Canadian subordinated
debentures............................... (3,270) -- --
----------- ---------- ----------
Net cash provided by (used in)
financing activities.............. 36,777 33,569 (694)
Effect of Exchange Valuation on Cash...... 74 (6) --
----------- ---------- ----------
Net (decrease) increase in cash and
cash equivalents.................. (8,470) 9,540 (91)
Cash and cash equivalents at beginning
of year................................ 10,011 471 562
----------- ---------- ----------
Cash and cash equivalents at end of
year................................... $ 1,541 $ 10,011 $ 471
=========== ========== ==========
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and
subsidiaries are an integral part of these statements.
31
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS--(Continued)
(in thousands)
For the Year Ended December 31,
---------------------------------
1998 1997 1996
----------- ---------- ----------
Supplemental disclosure of cash flow
information:
Cash paid for taxes......................... $ 159 $ 984 $ 363
Cash paid for interest...................... 3,753 916 1,210
Non Cash Transactions
Issuance of common stock for Amerac common
stock...................................... 15,433 -- --
Issuance of common stock to key Neutrino
employees.................................. 1,095 -- --
Issuance of common stock for property
acquisition services....................... 50 -- 326
Change in deferred tax liability on property
acquisitions............................... 9,562 -- 284
Directors' fees paid in stock............... 139 181 72
Note payable for property acquisition....... -- 1,394 --
Accretion of discount....................... -- 75 --
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and
subsidiaries are an integral part of these statements.
32
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
General Business--Southern Mineral Corporation, a Nevada corporation, with
its subsidiaries ("Southern Mineral" or the "Company"), is an independent oil
and gas company headquartered in Houston, Texas. The Company is engaged in the
acquisition, exploitation, exploration and operation of oil and gas properties,
primarily along the Gulf Coast of the United States, in Canada and in Ecuador.
The Company conducts its operations in Canada exclusively through its
subsidiary, Neutrino Resources Inc. ("Neutrino"). The Company's business
strategy is to increase reserves and shareholder value through a balanced
program of acquisitions, exploitation and exploration.
In February 1999, the Board of Directors of the Company retained CIBC
Xxxxxxxxxxx Corp. as independent advisors to assist in studying strategic
alternatives for maximizing shareholder value. The Company expects to evaluate
a number of alternatives including, but not limited to, asset divestiture,
joint ventures or alliances, a sale or merger of the Company, and other
restructuring and recapitalization opportunities. The Company can give no
assurances as to its success in pursuing any of the strategic alternatives or
as to the terms of any transaction.
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation--The consolidated financial statements include
the accounts of Southern Mineral Corporation and its wholly-owned subsidiaries.
In consolidation, all significant intercompany transactions have been
eliminated. The Company accounts for its investment in oil and gas partnerships
and joint ventures using the proportional consolidation method.
Revenues--Natural gas revenues generally are recorded using the sales
method, whereby the Company recognizes natural gas revenue based on the amount
of gas sold to purchasers on its behalf. All other revenue is also recorded
using the sales method. The Company believes that imbalances related to the
sales of natural gas are insignificant.
Foreign Currency Translation--Translation adjustments results from the
process of translating foreign subsidiaries' financial statements into U.S.
dollars in circumstances where the subsidiaries functional currency is not the
U.S. dollar. The Canadian dollar is the functional currency for the Company's
Canadian subsidiaries as substantially all transactions are conducted in the
local currency. Balance sheet accounts are translated at exchange rates in
effect at the balance sheet date. Income statement accounts are translated at
average exchange rates during the year. Resulting translation adjustments are
reported as a component of other comprehensive income in stockholders' equity.
Comprehensive Income--In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (" SFAS 130"). SFAS 130 establishes standards for the
reporting and display of comprehensive income and its components in a full set
of financial statements. Comprehensive income is defined as the change in
equity during a period from transactions and other events and circumstances
from non-owner sources. The Company adopted SFAS 130, and has reported and
displayed comprehensive income, which includes foreign currency translation
adjustments. Adoption of this statement did not have an impact on the Company's
financial condition or results of operations as it only relates to changes in,
or additions to, the financial statement disclosures.
Property and Equipment--The Company uses the successful efforts method of
accounting for its oil and gas properties. Under this method of accounting, the
tangible and intangible development costs of productive xxxxx and development
dry holes are capitalized, and dry hole costs on exploratory xxxxx are charged
against income when the well is determined to be non-productive. Other
exploratory expenditures, including geological and geophysical costs and delay
rentals, are expensed as incurred. The cost of unevaluated leasehold
acquisitions and xxxxx in progress are included in unproven properties pending
evaluation.
33
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Depreciation and depletion of producing oil and gas properties are computed
separately on each individual property on the unit-of-production method based
on estimated proved reserves. Depreciation of other property and equipment is
computed on the straight-line method over the estimated useful lives of the
assets ranging from 3 to 7 years.
For U. S. onshore properties, the Company estimates that residual salvage
values of equipment approximate any future dismantlement, restoration and
abandonment costs. For Canadian onshore properties, the Company provides for
estimated dismantlement, restoration and abandonment on a unit of production
basis. For offshore properties, the Company has fully provided for estimated
dismantlement, restoration and abandonment costs.
Maintenance and repairs are charged to expense as incurred.
Long-Lived Assets--Long-lived assets to be held and used are reviewed for
impairment whenever events or changes in circumstances indicate that the
related carrying amount may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset based on Company's
engineering estimates of recoverable reserves and the Company's estimates of
future oil and natural gas prices. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
carrying amount of the assets exceed the fair value of the assets.
Fair Value is estimated to be the net present value of the future cash flows
based on the reserves and price estimates described above. During 1998, the
Company recorded pre-tax impairment charges of $9,344,000 as a result of its
determination of future cash flows based on lower oil price assumptions than
previously applied. In 1997, an impairment of $2,838,000 was recognized
primarily as a result of mechanical problems encountered in a well in Lafourche
Parish, Louisiana that resulted in its abandonment. An impairment of $603,000
was recognized in 1996.
Oil and Gas Properties Held for Sale--The costs of non-producing exploratory
properties held for sale, including lease bonuses and other acquisition costs,
are capitalized and carried at the lower of cost or estimated net realizable
value. Geological, geophysical, and other exploration costs of non-producing
properties are capitalized to the extent such costs are reimbursed upon sale of
the property, determined by management based on the attributes of each
property. Otherwise, such costs, if any, are expensed. For those properties in
which the Company sells a portion of its interest, the cost of such properties,
net of reimbursements, are removed from this account and are included in
property and equipment if proved reserves are found. Producing oil and gas
properties, which have been identified for sale, are carried at the lower of
cost or estimated fair value.
Environmental Liabilities--Environmental related costs, if any, are
capitalized or expensed as appropriate. Environmental costs, if any, that
relate to past events and are not associated with future production are
expensed when incurred.
Income Taxes--The Company accounts for income taxes using the asset and
liability method. The asset and liability method requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized as part of the provision for income taxes in the period that
includes the enactment date.
Cash Equivalents--Management considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
34
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Use of Estimates in the Preparation of Financial Statements--The preparation
of financial statements in conformity with generally accepted accounting
principles require 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.
Stock-Based Compensation--The Company accounts for stock-based compensation
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and
related Interpretation, and has provided pro forma disclosures of net earnings
and earnings per share in accordance with the provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the exercise price of the option.
Derivative Financial Instruments--The Company uses swap contracts to hedge
the effects of fluctuations in the prices of natural gas and interest rates.
These transactions meet the requirements for hedge accounting, including
designation and correlation. The resulting gains or losses, measured by quoted
market prices, termination values or other methods, are accounted for as part
of the transactions being hedged.
Statement of Financial Accounting Standards No. 133--The Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") in June 1998. SFAS 133 standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts. Under SFAS 133, entities are required to carry all derivative
instruments in the consolidated balance sheet at fair value. The Company will
adopt SFAS 133 beginning in fiscal year 2000. The Company has not determined
the impact that SFAS 133 will have on its financial statements.
Earnings (loss) per Share--Basic earnings per share is based on the weighted
average shares outstanding without any dilutive effects considered. Diluted
earnings per share reflects dilution from all potential common shares,
including options and convertible debt.
Common stock equivalents of 493,000 shares are reflected in the calculation
of diluted earnings per share for the year ended December 31, 1996. Common
stock equivalents of 693,000 and 717,000 are not considered in the calculation
of diluted earnings per share in 1998 and 1997, respectively, as the amounts
are antidilutive. No adjustment to net income (loss) was made in calculating
diluted per share earnings for 1998, 1997 and 1996. A reconciliation of the
1996 basic and diluted earnings per share is as follows (in thousands, except
per share amounts):
Net income Per Share
(loss) Shares Amounts
---------- ------ ---------
Year ended December 31, 1996
Basic earnings per share.................... $2,434 6,621 $.37
Effect of dilutive warrants................. -- 290 --
Effect of dilutive stock options............ -- 203 --
------ ----- ----
Diluted earnings per share.................. $2,434 7,114 $.34
====== ===== ====
Reclassifications--Certain amounts in prior financial statements have been
reclassified to conform to the 1998 financial statement presentation.
35
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2. Acquisitions
Neutrino
On June 23, 1998, the Company agreed to acquire 92.3% of the outstanding
common shares of Neutrino, which was effective as of June 30, 1998 and funded
on July 2, 1998. On July 3, 1998, the Company initiated a compulsory
acquisition of the remaining shares outstanding, which was effective as of June
30, 1998 and funded on July 21, 1998. The Company acquired Neutrino through a
cash tender offer for the common shares outstanding, and assumed Neutrino's
bank debt and working capital deficit. Neutrino is an independent oil and gas
company located in Calgary, Canada. The merger was accounted for as a purchase.
The total purchase price of approximately $57,198,000, consisted of the
following:
Cash consideration for common stock......................... $ 34,091,000
Fair value of 324,430 shares of common stock................ 1,095,000
Debt assumed and working capital deficit.................... 20,307,000
Legal, accounting and transaction costs..................... 1,705,000
------------
$ 57,198,000
============
The allocation of the purchase price is summarized as follows:
Oil and gas properties and other assets (net)............... $ 66,760,000
Deferred income taxes....................................... (9,562,000)
------------
$ 57,198,000
============
Following the acquisition of Neutrino, the purchase price was reduced to
reflect the proceeds from the sale of non-strategic assets in the amount of
$3,390,000.
Amerac
On January 28, 1998, the shareholders of both the Company and Amerac Energy
Corporation ("Amerac") approved the merger of Amerac into a subsidiary of the
Company. Pursuant to the merger agreement, the Company issued 3,333,333 shares
of its Common Stock to acquire the common stock of Amerac and assumed Amerac's
outstanding debt, which was approximately $8,700,000. The debt was retired upon
consummation of the acquisition. The merger was effective on January 28, 1998,
and was accounted for as a purchase. The total purchase price was approximately
$24,820,000:
Issuance of Common Stock................................... $ 15,433,000
Debt assumed and working capital........................... 8,714,000
Legal, accounting and transaction costs.................... 673,000
------------
$ 24,820,000
============
Subsequent to the acquisition of Amerac, the purchase price was reduced by
$7,919,000 for the sale of non-strategic assets, including Amerac's Golden
Trend properties for $6,969,000 on June 30, 1998 and the Xxxxx Field for
$510,000 on July 1, 1998.
36
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Big Escambia Creek
During 1997 and 1998, the Company acquired interests in the Big Escambia
Creek Field and surrounding area in a series of six transactions. The largest
acquisition was the purchase of the outstanding capital stock of BEC Energy,
Inc. on May 10, 1997, for $10,640,000. BEC's assets consisted of working
interests in fourteen oil and gas xxxxx located in the Big Escambia Creek
Field, Escambia County, Alabama. Thereafter, the Company acquired additional
working interests in the area for $12.1 million. Each acquisition was accounted
for as a purchase.
Pro forma
The following summarized pro forma (unaudited) information assumes the
acquisitions had occurred on January 1, 1997:
Year Ended December 31,
-------------------------
1998 1997
------------ -----------
(in thousands, except
per share data)
Revenues...................................... $ 27,160 $ 37,124
Net loss...................................... (19,333) (6,841)
Net loss per share-basic...................... $ (1.50) $ (.54)
Net loss per share-diluted.................... (1.50) (.54)
The above pro forma results are not necessarily indicative of those that
would have occurred had the acquisitions taken place at the beginning of 1998
or 1997, respectively. The above amounts reflect adjustments for interest on
indebtedness incurred as part of the transaction and DD&A on revalued property,
plant and equipment. During 1997 the Company made additional acquisitions, none
of which would have had a material effect on the historical results of
operations of the Company.
Note 3. Long-Term Debt
Effective May 29, 1998, the Company amended its domestic bank credit
facility from $38,400,000 to $45,000,000. Subsequently, the credit facility has
been reduced and restructured as a result of lower oil and natural gas price
assumptions, the sale of certain domestic assets and the scheduled reduction
discussed below. A restructured and amended credit facility ("Amended Credit
Facility") was closed on March 29, 1999. The Amended Credit Facility provides
for a borrowing base of $19,353,000, plus a principal tranche of $12,500,000
("Tranche A") that matures on September 1, 1999. The borrowing base reflects
the $5,400,000 received in March 1999 for the sale of the Company's mineral
interests in Texas, Mississippi and New Mexico. Upon closing of the remaining
$600,000 in proceeds from the sale, the borrowing base will be reduced to
$18,820,000. In addition to reductions which result from the sale of assets,
the borrowing base under the Amended Credit Facility reduces $40,000 per month
and is subject to semi-annual borrowing base redeterminations until maturity on
June 1, 2001. The next borrowing base review is July 1, 1999. As of December
31, 1998, Tranche A principal was classified as current portion of long-term
debt in the Company's Consolidated Balance Sheet.
The Amended Credit Facility requires the Company, among other provisions,
to: (i) apply the majority of proceeds from asset sales to reduction in the
outstanding principal under the credit facility (to the extent the assets are
not otherwise encumbered), (ii) obtain lender's approval of the Company's
domestic general and administrative expense budget and (iii) pay a $187,500
restructuring fee upon completion of a transaction that allows the Company to
repay Tranche A principal. The Amended Credit Facility also reduces the
Company's tangible net worth requirement at December 31, 1998, thereby allowing
the Company to be in compliance with the terms of its domestic credit agreement
as of such date.
37
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The obligations under the Amended Credit Facility are secured by
substantially all of the assets of the Company and its subsidiaries other than
Neutrino. The Amended Credit Facility prohibits the payment of dividends and
contains certain covenants relating to the financial condition of the Company.
Outstanding borrowings under the domestic bank credit facility were $35,910,000
at December 31, 1998. On March 29, 1999, outstanding borrowings under the
Amended Credit Facility were $31,853,000 with no further borrowing
availability. Outstanding principal under the Amended Credit Facility will bear
interest at the Bank Index Rate (8.0% at December 31, 1998) to the extent of
the borrowing base and at Bank Index Rate plus 1% on Tranche A principal.
The Company believes that it will be necessary to sell significant oil and
gas assets to raise the substantial additional funds necessary to meet the
September 1, 1999 maturity of Tranche A principal. No assurance can be given
that such transactions can be consummated on terms acceptable to the Company or
its lenders, whose approval may be required. If the Company is unable to raise
the necessary funds, further restructuring of its Amended Credit Facility will
be required or the Company could become in default on the full amount of its
indebtedness, as discussed below. In February, 1999, the Board of Directors of
the Company retained CIBC Xxxxxxxxxxx Corp. as independent advisors to assist
in evaluating various strategic alternatives, which may include asset
divestitures, joint ventures or alliances, a sale or merger of the Company or
other restructuring or recapitalization opportunities. There can be no
assurance that the Company will be successful in pursuing any of such strategic
alternatives or as to the terms of any transaction that may be pursued. See
Note 14 to the Consolidated Financial Statements.
Effective June 25, 1998, Neutrino entered into a new Cdn $40,000,000 (US
$25,838,000) revolving demand loan facility (the "Canadian Credit Facility")
under which it could borrow at bank prime or Bankers Acceptance Rates plus a 1%
stamping fee. At December 31, 1998, the Canadian Bank prime rate was 6.75% and
the Bankers Acceptance Rate for 30-day maturities was 5.15%. Effective February
26, 1999 the borrowing base under the Canadian Credit Facility was reduced to
Cdn $33,000,000 (US $21,316,000) and the interest rate was increased to prime
plus 1/4% and the stamping fee on Bankers Acceptance was increased to 1 1/4%
per annum. These changes were a result of a lender review giving effect to
lower world oil prices, the sale of certain non-strategic oil and gas
properties, and the Company's financial condition. At December 31, 1998,
outstanding borrowings under the Canadian Credit Facility were Cdn $28,625,000
(US $18,490,000). At March 15, 1999, outstanding borrowings under the Canadian
Credit Facility were Cdn $29,530,000 (US $19,730,000). However, after giving
consideration to the minimum working capital requirement contained in the
Canadian Credit Facility, the Company estimates that at March 15, 1999, there
is very little remaining borrowing availability under the facility. The
Canadian Credit Facility contains certain covenants relating to the financial
condition of Neutrino, including, at each quarter's end, maintenance of a
working capital ratio of 1:1. In calculation of this ratio, any undrawn portion
of the credit facility may be treated as if advanced and held in cash. The
obligations under the Canadian Credit Facility are secured by substantially all
of the assets of Neutrino. As of December 31, 1998, Neutrino was in compliance
with the terms of the credit facility. The outstanding balance under the
Canadian Credit Facility is classified as a current liability because of the
demand feature of the loan. However, it is Management's intention that the
facility be utilized to provide long-term financing for the Company.
The Company's financial condition and liquidity are impacted by prices the
Company receives for its oil and natural gas. In the first quarter of 1999, oil
and natural gas prices continued to be weak. Judgments by both domestic and
Canadian lenders regarding the level of future oil and natural gas prices will
impact their borrowing base determinations for the Company's credit facilities.
On October 2, 1997, the Company issued $41,400,000 of 6.875% convertible
subordinated debentures due on October 1, 2007. The debentures are convertible
into Common Stock of the Company at any time prior to
38
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
maturity, at a conversion price of $8.26 per share. Proceeds of the offering
were used to reduce bank debt and fund subsequent acquisitions. Pursuant to the
debenture indenture, in the event of a change of control of the Company,
debenture holders have the right to require the Company to repurchase the
security at face value plus accrued interest.
The Company's substantial leverage poses certain risks, including the risk
that the Company may not generate sufficient cash flow to service its
indebtedness or that the Company may be unable to obtain additional financing
in the future and, as a result, may not have the necessary resources to respond
to market conditions and opportunities. The Company's high level of
indebtedness, covenant requirements and working capital deficit subjects it to
risks of default, which may significantly impair its ability to meet its
liquidity needs. The Company's domestic bank credit agreement contains
provisions whereby a default under the Company's Canadian Credit Facility or
pursuant to the 6.875% Convertible Subordinated Debentures indenture, would
create a default condition under the domestic Amended Credit Facility. In such
a default condition, the banks may declare amounts under the domestic credit
facility to become immediately due and payable. The holders of convertible
subordinated debentures have acceleration rights if the Company is in payment
default under either its domestic or Canadian credit facilities.
The Company's ability to meet its obligations is dependent upon a number of
factors, many of which are outside of the Company's control. The Company has
retained CIBC Xxxxxxxxxxx Corp. to assist in evaluating various strategic
alternatives, which may include asset divestitures, joint ventures or
alliances, a sale or merger of the Company or other restructuring or
reorganization alternatives. There can be no assurance that the Company will be
successful in pursuing any of such strategic alternatives or as to the terms of
any transaction that may be pursued.
Long-term debt consisted of the following at December 31, 1998 and 1997 (in
thousands):
1998 1997
------- -------
Domestic bank credit facility............................ $35,910 $ --
Canadian bank credit facility (U.S.Dollars).............. 18,490 --
Convertible subordinated debentures...................... 41,400 41,400
Other.................................................... 184 --
------- -------
Total indebtedness................................... 95,984 41,400
Less: Current maturities of long-term debt............... 13,124 --
Canadian bank credit facility (U.S.Dollars)............ 18,490 --
------- -------
64,370 $41,400
======= =======
Maturities of long-term debt over the next five years are as follows (in
thousands):
1999 2000 2001 2002 2003 & beyond Total
---- ---- ------- ---- ------------- -------
$13,124 $480 $22,490 -- $41,400 $77,494
39
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4. Fair Value of Financial Instruments
The Company has estimated the fair value of financial instruments based on
arms length transactions or quoted market values. The estimated fair values are
summarized below (in thousands):
Year Ended December 31,
-----------------------------
1998 1997
------------- ---------------
Book Fair Book Fair
Value Value Value Value
------ ------ ------- -------
Assets
Cash and equivalents........................ $1,541 $1,541 $10,011 $10,011
Liabilities
Debt (including current portion)............ 95,984 64,869 41,400 37,881
Commodity price swaps-Receivable position... -- 86 -- --
The estimated fair value of cash and equivalents approximates book value
because the amounts primarily represent cash on hand and overnight investments.
The fair value of the Company's indebtedness is estimated based on market
interest rates and quoted prices for the Company's 6.875% convertible
subordinated debentures. During 1998, the Company fixed the rate of interest on
the majority of its outstanding bank borrowings under its Canadian bank credit
facility through interest rate swaps. At December 31, 1998, 87% of the
Company's Canadian bank debt had been fixed at rates approximately equivalent
to the variable rates available to the Company at year-end 1998. The estimated
cost to liquidate the swap position at December 31, 1998 was $65,000.
During 1997, the Company issued $41,400,000 of 6.875% convertible
subordinated debentures. The debentures are publicly traded on the Nasdaq
SmallCap Market under the symbol "SMING". The fair value was estimated based on
the closing market price of the security. The closing prices on December 31,
1998 and 1997 were 25% and 92% of face value, respectively.
During 1998, the Company entered into natural gas price swaps with third
parties to hedge a portion of its production from the effects of fluctuations
in the market price of natural gas. The Company uses the deferral method of
accounting for its natural gas price swaps and, therefore, offsets any gain or
loss on the swap contract with the realized prices for its production. While
the swaps reduce the Company's exposure to declines in the market price of
natural gas, this also limits the Company's gains from increases in market
price. At December 31, 1998, the Company had swap contracts on approximately
420 MMcf of natural gas for the period April through October 1999 at an average
price of $2.135. The Company estimates the gain from unwinding the position to
be approximately $86,000 at December 31, 1998.
Note 5. Federal and State Income Taxes
United States and foreign income (loss) before income taxes are as follows
(in thousands):
Year Ended December 31,
-------------------------
1998 1997 1996
-------- ------- ------
United States................................... $ (8,504) $(2,697) $2,018
Foreign......................................... (10,680) 822 1,095
-------- ------- ------
Total........................................... $(19,184) $(1,875) $3,113
======== ======= ======
40
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income tax expense (benefit) attributable to income from continuing
operations consists of (in thousands):
Current Deferred Total
------- -------- -------
Year ended December 31, 1998:
U.S. Federal................................... $ -- $ -- $ --
State and local................................ (5) -- (5)
Foreign........................................ 11 (2,781) (2,770)
==== ======= =======
$ 6 $(2,781) $(2,775)
==== ======= =======
Year ended December 31, 1997:
U.S. Federal................................... $(96) $ (311) $ (407)
State and local................................ 112 -- 112
Foreign........................................ 288 181 469
---- ------- -------
$304 $ (130) $ 174
==== ======= =======
Year ended December 31, 1996:
U.S. Federal................................... $ 8 $ 306 $ 314
State and local................................ 5 -- 5
Foreign........................................ 387 (27) 360
---- ------- -------
$400 $ 279 $ 679
==== ======= =======
The Company allocated state taxes of approximately $250,000 to the purchase
price of Amerac as a result of the gain on sale of the Golden Trend properties
in the second quarter of 1998.
Differences between the effective tax rate and the statutory federal rate
are as follows:
For the Year Ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
Expected statutory rate........... (34.0)% (34.0)% 34.0%
Changes in valuation allowance.... 23.7 38.9 (13.1)
Foreign taxes, net of federal
benefit.......................... (4.2) 9.7 7.6
State taxes, net of federal
benefit.......................... -- 4.0 0.7
Percentage depletion.............. -- (12.1) (8.1)
Other............................. -- 2.8 0.7
---------- ---------- ----------
Effective tax rate................ (14.5)% 9.3% 21.8%
========== ========== ==========
41
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred taxes consist of the following (in thousands):
For the Year Ended
December 31,
---------------------
1998 1997
---------- ---------
Deferred tax assets:
Oil and gas properties............................... $ -- $ 56
Net operating loss carryforward...................... 49,689 276
Accounts receivable.................................. 34 --
Accrued liabilities not currently deductible......... 99 --
Foreign tax credits.................................. 187 --
Minimum tax credits.................................. 11 11
Statutory depletion carryforward..................... 4,950 386
---------- --------
54,970 729
Valuation allowance.................................... (53,238) (729)
---------- --------
Deferred tax asset................................. 1,732 --
Deferred tax liabilities:
Oil and gas properties--U. S. and other.............. 1,732 --
Oil and gas properties--Canadian taxes............... 7,279 1,039
---------- --------
Deferred tax liability............................. 9,011 1,039
---------- --------
Net deferred tax liability........................... $ 7,279 $ 1,039
========== ========
In 1998, the Company acquired Amerac, which has net operating loss
carryforwards of approximately $139,827,000 and alternative minimum net
operating loss carryforwards of $112,687,000. These loss carryforwards expire
in years 2000 through 2018 and their utilization is subject to stringent
limitations under the Internal Revenue Code. The Company maintains a valuation
allowance to reduce certain deferred tax assets to amounts that are more likely
than not be realized. This allowance primarily relates to the deferred tax
assets established for the loss carryforwards.
The valuation allowance for deferred tax assets as of December 31, 1998,
1997 and 1996 was $53,238,000, $729,000 and $ 0 respectively. The net change in
the total valuation allowance for the year ended December 31, 1998, 1997 and
1996 was an increase of $52,509,000, $729,000 and $ 0, respectively. In
assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. In order to
fully realize the deferred tax asset, the Company will need to generate
sufficient future taxable income prior to the expiration of the net operating
loss carryforwards in 2012. Based upon the level of historical taxable income
and projections for future taxable income over the periods which the deferred
tax assets are deductible, management believes it is more likely than not the
Company will be unable to fully utilize the benefits of these deductible
differences and has therefore established the valuation allowance set forth
above.
For federal tax purposes, the Company had a net operating loss carryforward
("NOL") of approximately $146,144,000, $812,000 and $271,000 for the years
ended December 31, 1998, 1997 and 1996. These NOLs must be utilized prior to
their expiration, which is between 1999 and 2018. The Company also has
statutory depletion carryforwards of $14,558,000, $1,136,000 and $468,000 at
December 31, 1998, 1997 and 1996, respectively.
42
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6. Related Party Transactions
On January 1, 1998 the Company acquired certain U. S. onshore oil and gas
properties from Petroleum Resource Management Company in exchange for 8,333
shares of Southern Mineral Common Stock. Petroleum Resource Management Company
is owned and controlled by Xxxxxxx X. Xxxxxx. Concurrent with this transaction,
Xx. Xxxxxx became an officer of Southern Mineral Corporation in the capacity of
Vice President-Operations.
In conjunction with the acquisition of Neutrino in July, 1998, 324,430
shares of Southern Mineral Common Stock were issued to key Neutrino management
personnel in consideration for retention and other obligations.
In September 1995, the Company entered into the Southern Links Group Joint
Venture ("Southern Links"), to acquire, develop and market exploration
prospects. The Company's joint venture partner is The Links Group, Inc.
("Links"), a company that is controlled by Xxxxxx Xxxxxxx, a director of the
Company. The Company agreed to fund the third party costs of Southern Links.
Any proceeds from the sale of prospects or oil and gas from such prospects is
distributed 100% to the Company until it receives an amount equal to the return
of its invested capital, after which time all such proceeds and property
interests, if any, are to be distributed 75% to the Company and 25% to Links.
In December 1998, the Company made the determination to discontinue further
evaluation of certain non-producing State of Texas offshore leases which were
held within the Southern Links Venture. Such leases were scheduled to expire in
January 1999 unless additional rental payments were made. Pursuant to the Joint
Venture agreement, the Company assigned six State of Texas leases to Links for
nominal cash consideration and retention of an overriding royalty interest of
1% of 8/8th in and to the leases.
Note 7. Major Customers
The Company is engaged in a single industry segment: the exploration,
development and production of oil and gas reserves. Sales of oil and gas to
customers accounting for 10% or more of revenues were as follows (in
thousands):
Customer 1998 1998 1996
-------- ------ ------ ------
G C Marketing Company............................... $ -- $2,267 $3,212
Damsco Distribution................................. 3,747 1,656 --
Diasu Oil & Gas Co., Inc............................ -- 1,631 --
Note 8. Stock Options and Common Stock
During 1997 and 1996, the Company granted options exercisable for 170,000
and 130,000 shares of Common Stock, respectively, under the Company's 1996
Stock Option Plan ("1996 SOP"). Pursuant to the 1996 SOP, the Company may grant
options to purchase up to 300,000 shares (subject to customary anti-dilution
adjustments) of its Common Stock to key employees of the Company. The 1996 SOP
is administered by the Compensation Committee of the Company's Board of
Directors, which generally has authority to establish who receives options and
the terms and conditions thereof, including vesting and exercise price. The
exercise price of each option granted in 1996 is the market price for the
Common Stock on the date of grant, determined by reference to the most recent
closing price thereof reported on the Nasdaq.
During 1998 and 1997, the Company granted options exercisable for 359,200
and 135,000 shares of Common Stock, respectively, under the Company's 1997
Stock Option Plan ("1997 SOP"). Pursuant to the 1997 SOP, the Company may grant
options to purchase up to 700,000 shares (subject to customary anti-
43
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
dilution adjustments) of its Common Stock to key employees of the Company. The
1997 SOP is administered by the Compensation Committee of the Company's Board
of Directors, which generally has authority to establish who receives options
and the terms and conditions thereof, including vesting and exercise price. The
exercise price of each option granted in 1997 is the market price for the
Common Stock on the date of grant, determined by reference to the most recent
closing price reported on the Nasdaq Systems.
The 1996 and 1997 Stock Option Plans were amended on December 21, 1998 to
provide for the exchange and repricing of all the outstanding options held by
current Company employees, except the President and CEO, for new options
exercisable at a price lower than that of the cancelled options, bearing the
same exercise term. The exercise price for the repriced options equaled $1.00,
which was higher than the $0.625 per share closing price of the Company's
Common Stock on the date of grant.
During 1998, and in conjunction with the acquisition of Neutrino, the
Company granted Non-Qualified Stock Options exercisable for 550,000 shares of
Common Stock under individual agreements with key members of Neutrino
management. The issuance of these Non-Qualified Stock options was administered
by the Compensation Committee of the Company's Board of Directors which
generally has authority to establish who receives options and the terms and
conditions thereof, including vesting and exercise price. The exercise price of
each non-qualified option granted in 1998 was at the market price for the
Company's Common Stock on the date of the grant. However, in conjunction with
repricing of options pursuant to the 1996 and 1997 SOP, as described above, the
option price of Non-Qualified options issued in 1998 were also repriced, to
$1.00, on December 21, 1998.
In January 1999, the FASB issued an Exposure Draft of an Interpretation
regarding APB 25 that would require the cancellation of an option and new
option grant with a lower exercise price to be considered in substance a
modified option. Variable-plan accounting would be required to be applied to
the modified option from the date of the modification until the date of
exercise. Consequently, the final measurement of compensation expense would
occur at the date of exercise. The FASB determined that the proposed effective
date would be the issuance date of the final interpretation that would be
applied prospectively but would cover events that occur after December 15,
1998. As the option repricings described above, occurred after December 15,
1998, the new option grants will qualify for variable-plan accounting at each
quarterly reporting date, beginning September 30,1999 and continuing until the
options are exercised or cancelled, if the exposure draft becomes effective in
its present form. The amount of compensation expense, if any, will be
determined by the closing price of the Company's Common Stock at December 31,
1999.
During 1998 and 1997, the Company granted options exercisable for 5,211 and
6,297 shares of Common Stock, respectively, under the Company's 1996 Employee
Stock Purchase Plan (the "SPP"). The SPP is intended to constitute an "employee
stock purchase plan" within the meaning of Section 423 of the Internal Revenue
Code of 1986, as amended. Pursuant to the SPP, the Company may grant options to
purchase up to 300,000 shares (subject to customary anti-dilution adjustments)
of its Common Stock to employees of the Company. Options may be granted on
January 1 and July 1 of each year to eligible employees who elect to
participate in the SPP. The term of each option is six months from the date of
grant. The number of options granted to each participant equals the quotient of
(i) the total payroll deductions authorized by the participant during the
applicable option period, divided by (ii) 85% of the fair market value of the
Common Stock as of the date of grant of such option. The exercise price of
options under SPP is 85% of the fair market value of the Common Stock as of the
date of grant or the date of exercise of such option, whichever is less,
determined by reference to the most recent closing price reported on the Nasdaq
Systems.
The Company applies APB 25 and related Interpretations in accounting for
stock-based compensation. Had compensation costs been determined based on the
fair value at the grant dates for awards, consistent with
44
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the method of prescribed in SFAS 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below (in
thousands, except per share amounts):
1998 1997 1996
-------- ------- ------
Net income (loss).................. As reported $(16,409) $(2,049) $2,434
Pro forma (16,951) (2,127) 1,938
Basic earnings per share........... As reported $ (1.32) $ (0.22) $ .37
Pro forma (1.36) (0.23) .29
Fully diluted earnings per share... As reported (1.32) (0.22) .34
Pro forma (1.36) (0.23) .27
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following assumptions
used for the grants issued in 1998, 1997 and 1996:
1998 1997 1996
------------- ------------- -------------
Expected volatility............. 65.63% 54.52% 52.52%
Risk free interest rate 4.48 to 5.47% 4.48 to 5.47% 5.64 to 6.27%
Expected life of options 3 years 3 years 3 to 7 years
Expected dividend yield......... 0% 0% 0%
In 1994, in connection with the offer and acceptance of employment, the
Company's President was granted a non-qualified option to purchase 450,000
shares of the Company's common stock at a price of $1.00 per share. The option
is non-assignable, and is exercisable until December, 2004. Payment for the
option can be made in cash, common stock of the Company, or a combination
thereof.
In consideration for initiating the transactions pursuant to which the
Company acquired Diverse Production Company ("DPC"), the Company granted a
director of the Company an option to acquire 43,878 shares of the Company's
common stock at $1.00 per share exercisable through April 2000.
In connection with the acquisition of DPC in 1995, the Company granted
options exercisable for 325,000 shares of its common stock at $1.25 a share
through April 2000. Each of the individuals that received the options became
directors of the Company in connection with the acquisition of DPC.
In 1996, the Company entered into an exploration arrangement with Diasu Oil
& Gas Co., Inc. ("Diasu") and Diasu's two principal shareholders. Pursuant to
the arrangement, the Company issued the Diasu shareholders 175,000 shares of
Common Stock and warrants to purchase up to 600,000 shares at $2.00 a share for
a term of five years.
In consideration for services as financial advisor and placement agent for
the private placement in December 1996, the Company granted Xxxxxx Xxxxxx &
Company, Inc. 120,000 warrants of the Company's common stock at $4.50 per share
exercisable through December, 2001.
In conjunction with the acquisition of Amerac in 1998, outstanding warrants
to purchase 477,357 shares of Amerac Common Stock were exchanged for warrants
to purchase 406,218 shares of Southern Mineral Common Stock at an average price
of $6.773 per share. The warrants expire November 18, 1999. Additionally,
options to purchase 201,619 shares of Amerac Common Stock at an average price
of $5.88 per share were exchanged for options to purchase 171,574 shares of
Southern Mineral Common Stock at an average price of $6.91 per share. Options
on 35,955 Southern Mineral shares expired during 1998 and the remaining options
expired on January 28, 1999.
45
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the Company's stock options and warrants as of December 31,
1998, 1997 and 1996, and changes during the years ending on those dates is
presented below:
1998 1997 1996
------------------------- ------------------------ -----------------------
Weighted Avg. Weighted Avg. Weighted Avg.
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ------------- --------- ------------- --------- -------------
Outstanding at beginning
of year................ 1,965,788 $2.37 1,668,878 $1.71 818,878 $1.09
Granted................. 2,590,399 3.18 305,000 5.97 850,000 2.49
Exercised............... -- -- (8,090) 3.00 -- --
Forfeited............... (1,132,661) 4.00 -- -- -- --
---------- --------- ---------
Outstanding at end of
year................... 3,423,526 2.71 1,965,788 2.37 1,668,878 $1.71
========== ========= =========
Options exercisable at
end of year............ 2,593,036 1,548,878 1,548,878
========== ========= =========
Options granted during 1998 include the grant of repriced options; options
forfeited during 1998 include the cancellation of higher priced options. The
weighted-average fair value of compensatory options granted during 1998, 1997
and 1996 were $0.84, $2.51 and $1.04, respectively, per option. The following
table summarizes information about options and warrants outstanding at December
31, 1998:
Options Outstanding Options Exercisable
------------------------------------------- ----------------------------
Weighted Avg. Weighted-
Number Remaining Average Number Weighted Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Outstanding Exercise Price
------------------------ ----------- ---------------- -------------- ----------- ----------------
$1.00 to 1.50........... 1,951,715 4.05 years $ 1.04 1,121,225 $ 1.08
2.00 to 3.50........... 704,333 1.80 years 2.14 704,333 2.14
4.00 to 5.50........... 241,203 1.85 years 4.81 241,203 4.18
6.00 to 7.50........... 518,386 0.80 years 6.78 518,386 6.78
8.00 and over.......... 7,889 0.08 years 31.66 7,889 31.66
--------- ---------
3,423,526 2,593,036
========= =========
Note 9. Commitments and Contingencies
The Company leases its headquarters office space and its Calgary, Canada
office space under a noncancellable operating leases expiring April 14, 2003
and August 31, 2000, respectively. Lease commitments at December 31, 1998 are:
1999 2000 2001 2002 2003 Total
---- -------- -------- -------- ------- ----------
$309,139 $279,623 $225,581 $225,581 $65,408 $1,105,332
Lease expenses in 1998, 1997 and 1996 were $336,461, $136,192 and $133,755
respectively.
The Company is involved in several lawsuits arising in the ordinary course
of business, only one of which presents the possibility of a material loss. The
Company's Canadian subsidiary, Neutrino Resources Inc., has been sued alleging
damages resulting from the calculation of third party facility and processing
fees at its Pine Creek Field, Alberta, Canada. The suit was filed on January
27, 1999 in the Court of Queen's Bench of Alberta in the Judicial District of
Calgary by EnerMark Inc. The amount of alleged damages approximates US
$870,000. Although the outcome of litigation cannot be predicted with
certainty, management believes (based on discussions with its legal counsel)
that the outcome of these legal actions will not have a material adverse affect
on the Company's consolidated financial condition or results of operations.
46
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company is unaware of any possible exposure from actual or potential
claims or lawsuits involving environmental matters. As such, no liability has
been accrued as of December 31, 1998 and 1997.
Note 10. Quarterly Financial Data (Unaudited)
Selected quarterly financial data of the Company are presented below for
the years ended December 31, 1998 and 1997 (in thousands, except per share
amounts):
Fully
Income Basic Diluted
(Loss) Net Income Income
from Income (Loss) (Loss)
1998 Quarter Revenues Operations (Loss) Per Share Per Share
------------ -------- ---------- -------- --------- ---------
March 31................ $ 4,414 $ 442 $ (295) $ (.03) $ (.03)
June 30................. 4,360 (1,651) (2,537) (.20) (.20)
September 30............ 6,740 (528) (1,992) (.16) (.16)
December 31............. 5,958 (12,415) (11,585) (.90) (.90)
------- -------- -------- ------ ------
$21,472 $(14,152) $(16,409) $(1.32) $(1.32)
======= ======== ======== ====== ======
1997 Quarter
------------
March 31................ $ 4,017 $ 1,620 $ 1,111 $ .12 $ .12
June 30................. 3,247 1,124 551 .06 .06
September 30............ 3,492 (212) (269) (.03) (.03)
December 31............. 3,447 (3,144) (3,442) (.38) (.38)
------- -------- -------- ------ ------
$14,203 $ (612) $ (2,049) $ (.22) $ (.22)
======= ======== ======== ====== ======
Note 11. Retirement Benefits
The Company terminated its 401(k) Retirement Plan in 1995, and adopted a
Simplified Employee Pension Plan ("SEP"). The SEP allows employees to defer
part of their salary. Employer contributions are optional, and the Company will
determine annually whether it will contribute and at what level. The maximum
amount that can be contributed annually per SEP plan participant, particularly
from a combination of salary deferrals plus Company optional contributions, is
$22,500. The Company's contributions amounted to $0, $33,784 and $22,554 in
1998, 1997 and 1996, respectively, and was 50% of the amount contributed by
each of the participants in the plan during 1997 and 1996.
47
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12. Geographic Segment Financial Data
The Company is an independent oil and gas Company engaged in the
acquisition, development and exploration of oil and natural gas properties.
Information about the Company's operations by geographic area for the year
ended December 31, 1998, 1997 and 1996 is as follows (in thousands):
U.S. Ecuador Canada Total
------- ------- ------- --------
Year ended December 31, 1998
Oil and gas sales (1)..................... $14,647 $ 290 $ 6,785 $ 21,722
Loss on sales of properties............... (234) -- (16) (250)
------- ------- ------- --------
14,413 290 6,769 21,472
------- ------- ------- --------
Expenses:
Production.............................. 5,348 371 2,799 8,518
Exploration............................. 2,910 -- 725 3,635
Impairment of proved oil and gas
properties............................. 2,047 2,703 4,594 9,344
Depreciation, depletion and
amortization........................... 6,221 244 4,040 10,505
General & administrative................ 2,004 11 1,607 3,622
------- ------- ------- --------
18,530 3,329 13,765 35,624
------- ------- ------- --------
Interest & other income, net.............. 262 25 43 330
Interest expense.......................... (4,649) -- (713) (5,362)
------- ------- ------- --------
Net loss before income taxes.............. (8,504) (3,014) (7,666) (19,184)
Income tax benefit........................ (5) -- (2,770) (2,775)
------- ------- ------- --------
Net loss.................................. $(8,499) $(3,014) $(4,896) $(16,409)
======= ======= ======= ========
Identifiable assets as of December 31,
1998..................................... $63,440 $ 1,482 $61,827 $126,749
Corporate assets--cash and cash
equivalents.............................. 1,541
--------
Total assets.............................. $128,290
========
Year ended December 31, 1997
Oil and gas sales (1)..................... $10,002 $ 386 $ 3,402 $ 13,790
Gains on sales of properties.............. 114 -- 299 413
------- ------- ------- --------
10,116 386 3,701 14,203
------- ------- ------- --------
Expenses:
Production.............................. 2,785 278 619 3,682
Exploration............................. 1,672 76 28 1,776
Impairment of proved oil and gas
properties............................. 2,838 ---- ---- 2,838
Depreciation, depletion and
amortization........................... 3,187 177 847 4,211
General & administrative................ 1,044 28 1,236 2,308
------- ------- ------- --------
11,526 559 2,730 14,815
------- ------- ------- --------
Interest & other income, net.............. 304 19 5 328
Interest expense.......................... (1,591) -- -- (1,591)
------- ------- ------- --------
Net income (loss) before income taxes..... (2,697) (154) 976 (1,875)
Income taxes.............................. (295) -- 469 174
------- ------- ------- --------
Net income (loss)......................... $(2,402) $ (154) $ 507 $ (2,049)
======= ======= ======= ========
Identifiable assets as of December 31,
1997..................................... $42,561 $ 3,465 $ 5,838 $ 51,864
Corporate assets-cash and cash
equivalents.............................. 10,011
--------
Total assets.............................. $ 61,875
========
48
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
U.S. Ecuador Canada Total
------- ------- ------ -------
Year ended December 31,
1996
Oil and gas sales (1)..... $ 8,136 $-- $3,644 $11,780
Gains on sales of
properties............... 424 -- 29 453
------- --- ------ -------
8,560 -- 3,673 12,233
------- --- ------ -------
Expenses:
Production.............. 1,880 -- 862 2,742
Exploration............. 218 -- 44 262
Impairment of proved oil
and gas properties..... 603 -- -- 603
Depreciation, depletion
and amortization....... 1,896 -- 979 2,875
General &
administrative......... 802 -- 880 1,682
------- --- ------ -------
5,399 -- 2,765 8,164
------- --- ------ -------
Interest & other income,
net...................... 99 -- 187 286
Interest expense.......... (1,242) -- -- (1,242)
------- --- ------ -------
Net income before income
taxes.................... 2,018 -- 1,095 3,113
Income taxes.............. 319 -- 360 679
------- --- ------ -------
Net income................ $ 1,699 $-- $ 735 $ 2,434
======= === ====== =======
Identifiable assets as of
December 31, 1996........ $17,646 $-- $6,269 $23,915
Corporate assets--cash and
cash equivalents......... 471
-------
Total assets.............. $24,386
=======
--------
(1) Includes sulfur revenues of $700,000, $250,100 and $0 in 1998, 1997 and
1996, respectively.
Note 13. Oil and Gas Producing Activities
The Company's capitalized costs of all oil and gas properties and related
allowances for depreciation and depletion are as follows at December 31 (in
thousands):
1998 1997 1996
-------- -------- -------
Proved properties.......................... $136,833 $ 53,437 $24,888
Unproved properties........................ 5,454 494 525
Less accumulated depreciation, depletion
and amortization.......................... (28,546) (11,905) (5,072)
-------- -------- -------
Total...................................... $113,741 $ 42,026 $20,341
======== ======== =======
The Company's depreciation, depletion and amortization costs per Mcfe in
1998, 1997 and 1996 were $0.94, $0.78 and $0.60, respectively. The Company's
share of oil and gas revenues produced from its royalty interests was $966,000,
$1,053,000 and $979,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
49
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Costs incurred in oil and gas property acquisition, exploration and
development activities were as follows (in thousands):
United
States Ecuador Canada Total
------- ------- ------- -------
As of December 31, 1998
Property acquisition costs
Proved..................................... $22,885 $ -- $50,452 $73,337
Unproved................................... 1,979 -- 3,812 5,791
Exploration costs............................ 4,150 -- 923 5,073
Development cost............................. 3,838 505 1,410 5,753
------- ------ ------- -------
Total costs incurred..................... $32,852 $ 505 $56,597 $89,954
======= ====== ======= =======
As of December 31, 1997
Property acquisition costs
Proved..................................... $22,492 $2,582 $ -- $25,074
Unproved................................... -- -- -- --
Exploration costs............................ 5,606 76 -- 5,682
Development cost............................. 2,209 1,023 402 3,634
------- ------ ------- -------
Total costs incurred..................... $30,307 $3,681 $ 402 $34,390
======= ====== ======= =======
As of December 31, 1996
Property acquisition costs
Proved..................................... $ 4,595 $ -- $ -- $ 4,595
Unproved................................... -- -- -- --
Exploration costs............................ 373 -- -- 373
Development cost............................. 426 -- 642 1,068
------- ------ ------- -------
Total costs incurred..................... $ 5,394 $ -- $ 642 $ 6,036
======= ====== ======= =======
50
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reserve Quantity Information (unaudited)
The following three tables reflect the estimated proved reserves of the
Company. The oil and gas reserves are principally onshore in the continental
United States, Canada and Ecuador. The Company's reserve information has been
based on estimates prepared by or audited by independent petroleum engineers.
Netherland, Xxxxxx & Associates, Inc. ("NSA") prepared the domestic reserve
estimates as of December 31, 1995 and 1997 and audited the December 31, 1996
domestic reserve estimates prepared by the Company. NSA prepared most of the
domestic reserve estimates as of December 31, 1998. The Company prepared the
remaining reserve estimates, and Xxxxx Xxxxx Company ("RSC") audited those
results. XxXxxxxx & Associates Consultants Ltd. prepared the Canadian reserve
estimates as of December 31, 1995, 1996 and 1997. Xxxxxxx Petroleum Engineering
Ltd. prepared most of the Canadian reserve estimates as of December 31, 1998,
while Xxxxxxx Xxxxxxxx Xxxx Associates Ltd. prepared the remaining reserve
estimates as of such date. The Ecuador reserves were prepared by RSC as of
December 31, 1997. As a result of the decline in world oil prices, the
Company's reserves in Ecuador are not economic as of December 31, 1998. The
Company's U.S. oil reserves (including, oil, condensate and natural gas
liquids) have been prepared using average prices of $9.67, $16.91 and $24.41
per barrel and average natural gas prices of $2.17, $2.20 and $3.91 per Mcf, as
of December 31, 1998, 1997 and 1996, respectively. The Canadian reserves have
been prepared using average oil prices of $8.71, $15.30 and $23.66 per barrel
and average gas prices of $1.72, $1.34 and $1.62 per Mcf, as of December 31,
1998, 1997 and 1996, respectively. Ecuador reserves were prepared using an
average oil price of $18.00 per barrel as of December 31, 1997.
U.S. Ecuador Canada Total
--------------------- --------------- --------------------- ---------------------
Oil Gas Oil Gas Oil Gas Oil Gas
(Bbls) (Mcf) (Bbls) (Mcf) (Bbls) (Mcf) (Bbls) (Mcf)
--------- ---------- -------- ----- --------- ---------- --------- ----------
Proved Reserves
Balance,
December 31, 1995..... 687,401 20,644,438 -- -- 729,135 4,716,121 1,416,536 25,360,559
Extensions, discoveries
and additions......... 6,081 479,336 -- -- 31,351 1,506,458 37,432 1,985,794
Revisions of previous
estimates............. 33,975 (519,051) -- -- (12,623) 79,948 21,352 (439,103)
Purchase and sale of
minerals in place
(net)................. 109,252 4,590,014 -- -- -- -- 109,252 4,590,014
Production............. (120,855) (2,396,379) -- -- (112,563) (961,527) (233,418) (3,357,906)
--------- ---------- -------- --- --------- ---------- --------- ----------
Balance,
December 31, 1996..... 715,854 22,798,358 -- -- 635,300 5,341,000 1,351,154 28,139,358
Extensions, discoveries
and additions......... 20,480 2,869,630 26,395 -- 15,774 95,139 62,649 2,964,769
Revisions of previous
estimates............. 53,743 (814,731) (26,395) -- (30,595) 384,760 (3,247) (429,971)
Purchase and sale of
minerals in place
(net)................. 1,746,890 7,702,198 489,971 -- (1,793) (295,974) 2,235,068 7,406,224
Production............. (186,759) (2,554,072) (23,966) -- (93,486) (942,625) (304,211) (3,496,697)
--------- ---------- -------- --- --------- ---------- --------- ----------
Balance,
December 31, 1997..... 2,350,208 30,001,383 466,005 -- 525,200 4,582,300 3,341,413 34,583,683
Extensions, discoveries
and additions......... 237,189 12,903,760 -- -- 170,912 -- 408,101 12,903,760
Revisions of previous
estimates............. (192,935) (2,362,293) (437,413) -- -- -- (630,348) (2,362,293)
Purchase and sale of
minerals in place
net................... 1,004,373 12,066,855 -- -- 3,656,928 24,914,483 4,661,301 36,981,338
Production............. (406,920) (4,219,528) (28,592) -- (321,040) (2,212,983) (756,552) (6,432,511)
--------- ---------- -------- --- --------- ---------- --------- ----------
Balance,
December 31, 1998..... 2,991,915 48,390,177 -- -- 4,032,000 27,283,800 7,023,915 75,673,977
========= ========== ======== === ========= ========== ========= ==========
51
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
U.S. Ecuador Canada Total
-------------------- ------------- -------------------- --------------------
Oil Gas Oil Gas Oil Gas Oil Gas
(Bbls) (Mcf) (Bbls) (Mcf) (Bbls) (Mcf) (Bbls) (Mcf)
--------- ---------- ------- ----- --------- ---------- --------- ----------
Proved Developed
Reserves
Balance,
December 31, 1996..... 608,705 19,361,667 -- -- 635,300 5,341,000 1,244,005 24,702,667
Balance,
December 31, 1997..... 2,334,122 29,156,068 466,005 -- 525,200 4,582,300 3,325,327 33,738,368
Balance,
December 31, 1998..... 2,731,986 40,605,557 -- -- 3,899,100 26,773,600 6,631,086 67,379,157
Standardized measure of discounted future net cash flows (unaudited)
The information that follows has been developed by the Company pursuant to
procedures prescribed by Statement of Financial Accounting Standards No. 69 of
the Financial Accounting Standards Board and utilizes reserve data estimated by
independent petroleum engineering firms and by the Company. The information may
be useful for certain comparison purposes, but should not be solely relied upon
in evaluating the Company or its performance. Moreover, the projections should
not be construed as realistic estimates of future cash flows, nor should the
standardized measure be viewed as representing current value.
The future cash flows are based on sales prices, costs and statutory income
tax rates in existence at the dates of the projections. Since future
projections are inherently imprecise, material revisions to reserve estimates
may occur in the future. Further, production of the oil and gas reserves may
not occur in the periods assumed, and actual prices realized and actual costs
incurred are expected to vary from those used. Management does not rely upon
the information that follows in making investment and operating decisions;
rather, those decisions are based upon a wide range of factors, including
estimates of proved and probable reserves, and price and cost assumptions
different from those reflected herein.
The following table sets forth the standardized measure of discounted future
net cash flows from projected production of the Company's proved oil and gas
reserves as of December 31 (in thousands):
U.S. Ecuador Canada Total
-------- ------- ------- --------
At December 31, 1998
Future cash inflows..................... $142,303 $ -- $91,260 $233,563
Future production and development
costs.................................. (50,542) -- (36,274) (86,816)
Future income taxes..................... (13,061) -- (9,423) (22,484)
-------- ------- ------- --------
Future net cash flows............... 78,700 -- 45,563 124,263
10% Annual discount..................... (35,241) -- (18,312) (53,553)
-------- ------- ------- --------
Standardized measure of discounted
future net cash flows.................. $ 43,459 $ -- $27,251 $ 70,710
======== ======= ======= ========
At December 31, 1997
Future cash inflows..................... $106,515 $ 8,388 $16,240 $131,143
Future production and development
costs.................................. (32,626) (4,829) (6,847) (44,302)
Future income taxes..................... (12,368) (40) (1,287) (13,695)
-------- ------- ------- --------
Future net cash flows............... 61,521 3,519 8,106 73,146
10% Annual discount..................... (22,211) (1,138) (1,825) (25,174)
-------- ------- ------- --------
Standardized measure of discounted
future net cash flows.................. $ 39,310 $ 2,381 $ 6,281 $ 47,972
======== ======= ======= ========
52
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
U.S. Ecuador Canada Total
-------- ------- ------- --------
At December 31, 1996
Future cash inflows...................... $109,510 $-- $26,814 $136,324
Future production and development costs.. (22,340) -- (8,101) (30,441)
Future income taxes...................... (22,719) -- (4,869) (27,588)
-------- --- ------- --------
Future net cash flows................ 64,451 -- 13,844 78,295
10% Annual discount...................... (24,842) -- (4,119) (28,961)
-------- --- ------- --------
Standardized measure of discounted future
net cash flows.......................... $ 39,609 $-- $ 9,725 $ 49,334
======== === ======= ========
The following are the principal sources of change in the standardized
measure of discounted future net cash flows (in thousands):
Total
Company
--------
At December 31, 1998
Standardized measure--beginning of year............................... $ 47,972
Oil and gas sales, net of production costs............................ (12,685)
Purchases and sales of reserves in place (net)........................ 34,630
Net changes in prices, net of production costs........................ (12,578)
Extensions and discoveries............................................ 14,576
Revisions to previous quantity estimates.............................. (2,681)
Net change in income taxes............................................ (8,926)
Accretion of discount................................................. 4,870
Changes in estimated future development costs......................... (2,345)
Development costs incurred during the period.......................... 5,686
Other................................................................. 2,191
--------
Standardized measure--end of year..................................... $ 70,710
========
At December 31, 1997
Standardized measure--beginning of year............................... $ 49,334
Oil and gas sales, net of production costs............................ (10,108)
Purchases and sales of reserves in place (net)........................ 21,950
Net changes in prices, net of production costs........................ (29,801)
Extensions and discoveries............................................ 3,282
Revisions to previous quantity estimates.............................. (225)
Net change in income taxes............................................ 12,117
Accretion of discount................................................. 6,408
Changes in estimated future development costs......................... (129)
Changes in production rates and other................................. (4,856)
--------
Standardized measure--end of year..................................... $ 47,972
========
53
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Total
Company
--------
At December 31, 1996
Standardized measure--beginning of year............................... $ 24,600
Oil and gas sales, net of production costs............................ (9,038)
Purchases and sales of reserves in place (net)........................ 12,835
Net changes in prices, net of production costs........................ 21,735
Extensions and discoveries............................................ 6,259
Revisions to previous quantity estimates.............................. (1,528)
Net change in income taxes............................................ (11,930)
Accretion of discount................................................. 2,725
Changes in estimated future development costs......................... (786)
Changes in production rates and other................................. 4,463
--------
Standardized measure--end of year..................................... $ 49,335
========
The Company's foreign reserves per Mcfe in 1998, 1997 and 1996 were 44%, 19%
and 25% of total reserves, respectively.
Note 14. Subsequent Events
On March 29, 1999, the Company executed amendments to its domestic bank
credit agreement. See Note 3 to the Consolidated Financial Statements.
On March 11, 1999, the Company sold its mineral interests and substantially
all of its royalty interests in Texas, New Mexico and Mississippi for $6.0
million, subject to certain adjustments. The sale encompassed 235,000 net
mineral acres and proved reserves of 4.4 Bcfe as of December 31, 1998. Of the
$6.0 million sales price, $5.4 million was closed and funded on March 11, 1999.
The remainder of the transaction is expected to close before May 11, 1999,
following the satisfaction of certain conditions. Proceeds will be used to
reduce indebtedness and for other corporate purposes.
In February 1999, the Board of Directors of the Company retained CIBC
Xxxxxxxxxxx Corp. as independent advisors to assist in studying strategic
alternatives for maximizing shareholder value. The Company expects to evaluate
a number of alternatives, including but not limited to, asset divestiture,
joint ventures or alliances, a sale or merger of the Company, and other
restructuring and recapitalization opportunities. The Company can give no
assurances to its success in pursuing any of the strategic alternatives or as
to the terms of any transactions.
On January 19, 1999, the Company was advised that its Common Stock was not
in compliance with Nasdaq Stock Market listing qualifications. A key
requirement for Nasdaq listing is maintenance of a minimum closing bid price
equal to or greater than $1.00 per share of common stock.
Unless the Company's Common Stock satisfies the Nasdaq minimum bid
requirement before April 19, 1999, or unless the Company is granted an
extension, the Company's Common Stock will be scheduled for delisting. The
Company believes that continued listing on the Nasdaq is important to
maintaining the liquidity of its common stock and is considering steps to come
into compliance with the listing requirements. The Company cannot assure that
it will be successful in maintaining its Nasdaq listing.
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
54
In filing the Annual Report on Form 10-K of Southern Mineral Corporation
(the "Company" or the "Registrant"), the Company incorporated certain
information required by Part III by reference to the Company's Proxy Statement
for the 1999 Annual Meeting of Stockholders. The Company's Proxy Statement for
the 1999 Annual Meeting of Stockholders will not be filed within the 120-day
period following the end of the Company's fiscal year ended December 31, 1998.
Accordingly, the Registrant hereby amends Part III of its Annual Report on Form
10-K as set forth below to include such information:
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The Company's directors and executive officers and their ages as of April
30, 1999 are as follows:
Director Since Age Position
-------------- --- --------
Xxxxxxx X.X. Xxxxxxxx... 1998 41 Director and Chief Executive Officer of Neutrino
B. Xxxxxx Xxxxxx........ 1995 60 Director
Xxxxx X. Xxxxxxxxxxx.... 1998 41 Director and President of Neutrino
Xxxxxxx X. Xxxxxx....... N/A 45 Vice President-Finance and Chief Financial Officer
Xxxxxx X. Xxxxxx........ 1995 51 Director
Xxxxxx X. Xxxxxxx....... 1993 70 Director
E. Xxxxx Xxxxx, Xx...... 1985 70 Director
Xxxxxx X. Xxxxxx........ 1960 71 Chairman of the Board of Directors
Xxxxx X. Xxx............ N/A 53 Vice President-Engineering
Xxxxxx X. Xxxxx......... 1995 47 Director, President, Chief Executive Officer and Secretary
Xxxxx X. Xxxxxxx........ 1993 68 Director
Xxxxxxx X. Xxxxxxxx..... 1998 54 Director
Xxxx X. Xxxxxx.......... N/A 49 Vice President-Exploration
Xxxxxxx X. Xxxxxxx...... 1998 45 Director
Xxxxxxx X. Xxxxxx....... N/A 52 Vice President-Operations
Xxxxxx X. Xxxxx, Xx..... 1995 57 Director
Xxxxxxx X. Xxxxxxxxxx... 1995 53 Director
Xxxxxxx X.X. Xxxxxxxx is the Chairman and Chief Executive Officer of
Neutrino Resources Inc., a Canadian subsidiary of the Company ("Neutrino"), and
has served as the Chief Executive Officer of Neutrino since its inception in
1993. From 1990 to 1993, Xx. Xxxxxxxx was Senior Coordinator of Business
Development with Saskatchewan Oil and Gas Corporation (now Wascana Energy,
Inc.). Prior to 1990, Xx. Xxxxxxxx was Manager of Exploration Ventures and
subsequently Manager of Corporate Development with Triton Canada Resources,
Ltd. (now Transwest Energy Ltd.). Xx. Xxxxxxxx is a founder of Neutrino. Xx.
Xxxxxxxx holds a B.A. from the University of Xxxxxx and an M.B.A. from the
University of Western Ontario.
B. Xxxxxx Xxxxxx has served, since 1988, as a Manager of four Texas general
partnerships operating under the Diverse name and headquartered in San Antonio,
Texas, all of which are engaged in the oil and gas exploitation and production
business (collectively, the "Diverse Partnerships"). Xx. Xxxxxx also has served
as President of Venucot, Inc., an oil and gas production and management
company, since 1987. Xx. Xxxxxx is a certified public accountant with prior
administrative and financial positions with New London, Inc. (1985-1986), Gulf
Energy and Development Corp. (1976-1983), and Enserch (1959-1976). Xx. Xxxxxx
received a B.B.A. in accounting from Southern Methodist University.
Xxxxx X. Xxxxxxxxxxx is the President of Neutrino. Xx. Xxxxxxxxxxx has over
15 years of entrepreneurial business experience in various businesses. In 1983,
he joined a Canadian chartered bank's regional office in Saskatoon as a
management officer, later advancing to Program Review Analyst for the Treasury
Board Division of the Saskatchewan Department of Finance. Xx. Xxxxxxxxxxx
subsequently served
55
as Manager-Capital Financing and Forecasting and as a Director in the Technical
Services Division of SPMC. In 1992 he became Director of Policy and Legislation
for the Saskatchewan Department of Environment and Resource Management. Xx.
Xxxxxxxxxxx is one of the founders of Neutrino where he has held various
management positions in the past five years. He graduated from Lakehead
University with degrees in Business Administration and Forestry.
Xxxxxxx X. Xxxxxx joined the Company in October 1998 and is Vice President-
Finance. Xx. Xxxxxx has in excess of twenty years of experience in the oil and
gas finance industry, beginning his career at Shell Oil Company in Houston,
Texas and New Orleans, Louisiana. Xx. Xxxxxx served most recently at Union
Texas Petroleum Holdings, Inc. of Houston, Texas as Director of Acquisitions
and Portfolio Management. Xx. Xxxxxx received his B.B.A. from the University of
Iowa in 1975 and his CPA certification from the State of Texas.
Xxxxxx X. Xxxxxx has been a Manager of the Diverse Partnerships since 1988.
Since 1983, he has served as President of Wyogram Oil Company, which is engaged
in the oil and gas production business. In addition, he has served as President
of Michmatt, Inc. since 1992. He has also served as a vice president of Xxxxxx
Oil Company (1980-1986) and First City National Bank (1974-1980), and a
drilling and reservoir engineer with Exxon Company, U.S.A. (1970-1974). He
holds a B.S. in petroleum engineering from the University of Wyoming, and
attended Louisiana State University's Graduate School of Banking.
Xxxxxx X. Xxxxxxx has served as President and Chief Executive Officer of The
Links Group, Inc. ("LGI") since 1984. From 1984 until 1992, Xx. Xxxxxxx was
Director and President of Gulf Exploration Consultants, Inc. ("GEC"). Both LGI
and GEC are engaged in oil and gas exploration. He also has been a member of
the Board of Trustees of Xxxxxxxx University since 1982. Xx. Xxxxxxx graduated
from Xxxxxxxx University with a B.A. in geology, mathematics and physics.
E. Xxxxx Xxxxx, Xx. has been a partner of Moon & Xxxxx Oil Exploration, an
oil and gas exploration partnership, since 1994. Since 1994, he also has been
Vice President of Moon-Xxxxx-Xxxxxxx Operating Co., Inc., an oil and gas
operating company.
Xxxxxx X. Xxxxxx has been Trustee of the Ehlco Liquidating Trust since 1986
and was Chairman of the Board of Xxxxxx Xxxxx Lumber Company from 1981 until
its liquidation in January 1989. Xx. Xxxxxx is a director of Xxxxxx Bank. Xx.
Xxxxxx has been Chairman of the Board of the Company since July 1981.
Xxxxx X. Xxx has been Vice President-Engineering of the Company since June
1997. He served as President of an independent oil and gas company from 1984
through June 1997. He earned a B.S. in petroleum engineering and an M.B.A. from
Texas A&M University. Xx. Xxx has worked with Tenneco and XX Xxxxxxxxxx Company
in Houston.
Xxxxxx X. Xxxxx has been the Company's President, Chief Executive Officer
and a director since January 1995. He has also been the Company's Secretary
since April 1999. From May 1993 to December 1994, he was an independent
consultant in the oil and gas industry, acting as a financial advisor to small
and medium-sized independent oil and gas companies in their capital formation
activities. Xx. Xxxxx was a co-founder and served as the Managing Director of
Resource Investors Management Company (RIMCO), an oil and gas investment
management company, from October 1985 to April 1993. He began his career as a
corporate finance attorney in Hartford, Connecticut, and then worked in finance
with Aetna Life and Casualty, where he specialized in natural resource
industries. Xx. Xxxxx received his B.A. and X.X. degrees from Syracuse
University and his M.B.A. from the University of Connecticut.
Xxxxx X. Xxxxxxx has held the position of President and Chief Executive
Officer of Xxxxxxx & Associates, Inc. since 1992. From 1979 through 1992, he
was President and Chief Executive Officer of JN Oil and Gas Company, an oil and
gas exploration company. He has served as Director of the American Petroleum
Institute, Rocky Mountain Oil and Gas Association and Shoshone First Bank since
1974, 1989 and 1992, respectively.
56
Xx. Xxxxxxx was President of Rocky Mountain Oil and Gas Association from 1993
to 1995. Xx. Xxxxxxx received a B.S. in business administration from the
University of Wyoming.
Xxxxxxx X. Xxxxxxxx has served as the President and Chief Executive Officer
of Fremont Exploration, Inc. since April 1999, an Oklahoma-based international
oil and gas company. He was the former President and Chief Executive Officer of
Centas Technical Services, L.L.C. from February 1998 through March 1999 and was
President and Chief Executive Officer of Amerac Energy Corporation from July
1994 through January 1998. He was previously with Amax Oil and Gas Inc. Xx.
Xxxxxxxx joined the Company's Board of Directors in January of 1998 following
the merger of Amerac with and into the Company. Xx. Xxxxxxxx received a B.S. in
petroleum engineering from Marietta College in Marietta, Ohio.
Xxxx X. Xxxxxx has been Vice President-Exploration of the Company since May
1996. He has twenty-one years of petroleum exploration and production
experience with major and independent companies, most recently as Exploration
Manager of Stone & Xxxxxxx Oil Company, Inc. from January 1994 to January 1996,
and as an independent geological/geophysical consultant from March 1987 to
December 1993. Xx. Xxxxxx received a B.S. in geology (1972) and an M.S. in
geology (1975) from Ohio University. Xx. Xxxxxx is an AAPG Certified Petroleum
Geologist, No. 4378.
Xxxxxxx X. Xxxxxxx has served as Chairman and Chief Executive Officer of
Ultra Petroleum since January 1999. He was President, Chief Operating Officer
and Chief Executive Officer of Nuevo Energy Company from 1994 through September
1997. He was President of Torch Energy Marketing, Inc. from 1990 until 1993.
Xx. Xxxxxxx began his career in 1975 with Shell Oil Company where he held
various positions in exploration and production, refining, chemicals, and
mining. He later held a number of positions of increasing responsibility at
Superior Oil Company and Meridian Oil, Inc. Xx. Xxxxxxx has a B.S. in finance
from the University of Florida and an M.B.A. from the University of New
Orleans.
Xxxxxxx X. Xxxxxx Vice President-Operations of the Company since January 1,
1998, has twenty-seven years of petroleum engineering and management
experience. Xx. Xxxxxx joined the Company in 1998. Xx. Xxxxxx held various
engineering and supervisory positions with Exxon Corporation domestically and
overseas, onshore and offshore. He managed the operations of a domestic
exploration company for fourteen years and was President and owner of Petroleum
Resource Management Co., an oil and gas operating company from 1993 through
1997. Xx. Xxxxxx is a Registered Professional Engineer in Texas. He graduated
with honors from the University of Texas at Austin with a B.S. in chemical
engineering.
Xxxxxx X. Xxxxx, Xx. has been, since 1986, a Manager of the Diverse
Partnerships, and since 1981, has been President of Heathery Resources, Inc.,
an oil and gas consulting company. He has served as President of BHW Energy,
Inc. since 1994. He was retained by Primary Fuels, Inc. to establish and manage
its oil and gas acquisition program and was responsible for $240,000,000 in
producing property acquisitions from 1981 to 1987. Xx. Xxxxx was President of
Nord Petroleum Corporation from 1979 to 1981 and Vice-President of American
Express' international oil and gas project financing group from 1976 to 1979.
His technical training includes evaluation and appraisal experience as Vice
President of XxXxxxxx and XxxXxxxxxxx (1973-1976), and oil and gas operations
with Texaco, Inc. (1965-1973). Xx. Xxxxx is a graduate of New Mexico State
University and a Registered Professional Engineer.
Xxxxxxx X. Xxxxxxxxxx has been an independent oil and gas investor and
President of Kona, Inc., an oil and gas production company, since 1990. From
1984 to 1990, he was Senior Vice President with Geodyne Resources, Inc., where
he directed more than $200,000,000 in acquisitions. Xx. Xxxxxxxxxx began his
career at Aminoil in 1975 and worked with Gulf Energy and Development Corp.
from 1981 to 1984. He earned a B.S. in petroleum engineering from Louisiana
State University and an M.B.A. from Florida Technological University.
Terms of Office
Each of the Company's directors will hold office until the Company's Annual
Meeting of Stockholders or until his successor is duly elected and qualified.
All executive officers of the Company serve at the discretion of the Board of
Directors.
57
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, officers and persons holding more than ten percent of a registered
class of the Company's equity securities to file with the Securities and
Exchange Commission and any stock exchange or automated quotation system on
which the Common Stock may then be listed or quoted (i) initial reports of
ownership, (ii) reports of changes in ownership and (iii) annual reports of
ownership of Common Stock and other equity securities of the Company. Such
directors, officers and ten percent stockholders are also required to furnish
the Company with copies of all such filed reports.
Based solely upon review of the copies of such reports furnished to the
Company and written representations that no other reports were required during
1998, the Company believes that all of the Company's executive officers and
directors complied with Section 16(a) reporting requirements during 1998 except
as follows: each of Xxxxxxx X.X. Xxxxxxxx, Xxxxx X. eckwermert, Xxxxxxx X.
Xxxxxx, Xxxxx X. Xxx, Xxxx X. Xxxxxx and Xxxxxxx X. Xxxxxx failed to file a
Form 5 on a timely basis with respect to the repricing of options to purchase
the Company's Common Stock.
ITEM 11. Executive Compensation.
Director Compensation
The Company reimburses each director for his actual and necessary expenses
reasonably incurred in connection with attending meetings of the Board of
Directors and its committees. In April 1997, the Board of Directors adopted the
1997 Non-Employee Director Compensation Plan ("1997 Plan") which is effective
through May 2002. Under the 1997 Plan, non-employee directors are entitled to
receive 1,000 shares of Common Stock for each Board of Directors meeting
attended, excluding telephonic meetings. No retainer or other compensation for
serving as a director of the Company was paid during 1998.
58
Executive Officer Compensation
The following table reflects all forms of compensation for Xxxxxx X. Xxxxx,
Xxxx X. Xxxxxx, Xxxxx X. Xxx, Xxxxxxx X. Xxxxxx and Xxxxx X. Xxxxx'x services
to the Company during the applicable years ended December 31, 1998, December
31, 1997 and December 31, 1996 by the Company:
SUMMARY COMPENSATION TABLE
Long-Term Compensation
----------------------------------
Annual Compensation Awards Payouts
-------------------------------------- --------------------- -------
Securities
Restricted Underlying
Other Annual Stock Options/ LTIP All Other
Name and Principal Bonus Compensation Awards SARs Payouts Compensation
Position Year Salary ($) ($) ($) ($) (#) ($) ($)
------------------ ---- ---------- ------- ------------ ---------- ---------- ------- ------------
Xxxxxx X. Xxxxx......... 1998 $175,000 -- -- -- -- -- $ 515(1)
President, Chief 1997 $150,000 $60,000 -- -- -- -- $ 5,265(1)(2)
Executive Officer and 1996 $125,750 $50,000 -- -- 10,000 -- $ 5,265(1)(2)
Secretary
Xxxx X. Xxxxxx.......... 1998 $125,000 -- -- -- 120,000(3)(4) -- $ 477(5)
Vice President-- 1997 $ 90,000 $24,000 -- -- -- -- $ 5,227(2)(5)
Exploration 1996 $ 73,125 $20,000 -- -- -- -- $ 2,887(5)(6)
Xxxxx X. Xxx............ 1998 $125,000 -- -- -- 100,000(4)(7) -- $ 985(8)
Vice President
Engineering 1997 $ 45,243 $24,000 -- -- -- -- $ 187(9)
Xxxxxxx X. Xxxxxx....... 1998 $110,000 -- -- -- -- --
Vice President
Operations -- -- -- -- 50,000(4)(10)
Xxxxx X. Xxxxx(11)...... 1998 $ 78,750 -- -- -- -- -- $89,644(5)(12)
Vice President-Finance 1997 $ 90,000 $20,000 -- -- 70,000 -- $ 5,227(2)(5)
1996 $ 73,125 -- -- -- 50,000 -- $ 5,227(2)(5)
--------
(1) Includes $515 per year computed in accordance with Internal Revenue Service
guidelines for premiums paid on term life insurance exceeding $50,000 in
coverage. Substantially all employees of the Company are covered by term
life insurance policies.
(2) Includes $4,750 contributed by the Company to each officer's account in the
Company's Simplified Employee Pension Plan in which substantially all of
the Company's employees are eligible to participate.
(3) Comprised of an option originally granted on May 15, 1996 to purchase
50,000 shares, an option originally granted on March 4, 1997 to purchase
20,000 shares and an option originally granted on November 14, 1997 to
purchase 50,000 shares, with exercise prices ranging from $3.00 to $6.75
per share. All of such options were repriced to $1.00 per share by the
Compensation Committee effective December 21, 1998.
(4) See "Option/SAR Grants in Last Fiscal Year" table below.
(5) Includes $477 for each year computed in accordance with Internal Revenue
Service guidelines for premiums paid on term life insurance exceeding
$50,000 in coverages. Substantially all employees of the Company are
covered by term life income policies.
(6) Includes $2,410 contributed by the Company for Xx. Xxxxxx'x account in the
Company's Simplified Employee Pension Plan in which substantially all of
the Company's employees are eligible to participate.
(7) Comprised of an option originally granted in July 1, 1997 to purchase
50,000 shares at $5.00 per share and an option originally granted on
November 14, 1997 to purchase 50,000 shares at $6.75 share. All of such
options were repriced to $1.00 per share by the Compensation Committee
effective December 21, 1998.
(8) Includes $985 for 1998 computed in accordance with Internal Revenue Service
guidelines for premiums paid on term life insurance exceeding $50,000 in
coverage.
(9) Includes $187 contributed by the Company for Xx. Xxx'x account in the
Company's Simplified Employee Pension Plan in which substantially all of
the Company's employees are eligible to participate.
(10) Comprised of an option originally granted on January 1, 1995 to purchase
50,000 shares at $5.50 per share. This option was repriced to $1.00 per
share by the Compensation Committee effective December 21, 1998.
(11) Mr. Price was no longer employed by the Company effective September 1998.
(12) Includes compensation of $89,167 pursuant to a Severance Agreement by and
between the Company and Xxxxx X. Xxxxx as of September 30, 1998, $26,250
of which was paid in 1998 and $62,917 of which is to be paid in 1999.
59
OPTION/SAR GRANTS GRANTS IN LAST FISCAL YEAR
Percent of Total
Number of Securities Options/SARs
Underlying Granted to Exercise or Grant Date
Options/SARs Granted Employees in Base Price Expiration Present
Name(1) (#)(2) 1998 ($/Share) Date(3) Value ($)(4)
------- -------------------- ---------------- ----------- ---------- ------------
Xxxxx X. Xxx............ 50,000 4.3% $1.00 07/01/02 $5,648
50,000 4.3% $1.00 11/14/02 $5,545
Xxxx X. Xxxxxx.......... 50,000 4.3% $1.00 05/15/01 $5,923
20,000 1.7% $1.00 03/04/02 $2,292
50,000 4.3% $1.00 11/14/02 $5,545
Xxxxxxx X. Xxxxxx....... 50,000 4.3% $1.00(5) 01/01/03 $5,525
--------
(1) Except for Xx. Xxxxxx, neither Xx. Xxxxx nor any of the other named
executive officers was granted any options or SARs during 1998.
(2) The options become exercisable as to one-third of the shares after the
expiration of one year from the date of grant, as to two-thirds after the
expiration of two years and in full after the expiration of three years
from the date of grant. Options are granted for a term of five years,
subject to termination 90 days following termination of employment. Each
option vests in full upon death, disability, normal retirement or a change
of control of the Company.
(3) Reflects the original expiration date of the original grant of options
which was not affected by repricing of the options.
(4) The dollar amounts represent the value calculated using the Black-Scholes
option pricing model and using December 21, 1998, the date on which such
options were repriced, as the applicable grant date. The actual value, if
any, realized will depend on the excess of the stock price over the
exercise price at the date the option is exercised. The estimated values
under that model are based on assumptions that include (i) a stock price
volatility of 65.63%, (ii) a discount rate of 4.48% and (iii) a dividend
yield of 0%. The Company's use of the Black-Scholes model to indicate the
present value of each grant is not an endorsement of this valuation.
(5) Reflects the repricing of options by the Compensation Committee of the
Board of Directors effective December 21, 1998. The last sales price for
the Common Stock on December 21, 1998, as reported in the consolidated
reporting system for Nasdaq National Market issues, was $0.625.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND OPTION/SAR VALUE AT DECEMBER 31, 1998
Number of Securities Underlying Value of Unexercised In-the-
Unexercised Options/SARs Money Options/SARs at
Shares at December 31, 1998 December 31, 1998(1)
Acquired Value ----------------------------------- -----------------------------
Name On Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ---------------- ---------------- -----------------------------
Xxxxxx X. Xxxxx......... 0 $ 0 460,000 0 $ 0 $ 0
Xxxxx X. Xxx............ 0 $ 0 33,332 66,668 $ 0 $ 0
Xxxx X. Xxxxxx.......... 0 $ 0 56,665 63,335 $ 0 $ 0
Xxxxx X. Xxxxx.......... 0 $ 0 27,446 667 $ 0 $ 0
Xxxxxxx X. Xxxxxx....... 0 $ 0 -- 50,000 $ 0 $ 0
--------
(1) Based upon the last sales price of $0.719 per share on December 31, 1998,
as reported in the consolidated reporting system for Nasdaq National Market
issues.
Simplified Employee Pension Plan
The Company terminated its 401(k) Retirement Plan in 1995, and adopted a
Simplified Employee Pension Plan ("SEP"). The SEP allows employees to defer
part of their salary. Employer contributions are optional, and the Company will
determine annually whether it will contribute and at what level. The maximum
amount that can be contributed annually per SEP plan participant, particularly
from a combination of salary deferrals plus Company optional contributions, is
$22,500. The Company's contributions amounted to $0, $33,784 and $22,554 in
1998, 1997 and 1996, respectively, and was 50% of the amount contributed by
each of the participants in the plan during 1997 and 1996.
60
Compensation Committee
The following persons served on the compensation committee of the Company's
Board of Directors during the fiscal year ended December 31, 1998: Xxxxxx X.
Xxxxxx, E. Xxxxx Xxxxx, Xx. and Xxxxx X. Xxxxxxx.
Employment Contracts and Change in Control Arrangements
Effective July 1, 1998, the Company entered into an employment agreement
with each of Messrs. Arsenych and Beckwermert in connection with the Neutrino
acquisition. The agreement with Xx. Xxxxxxxx provides for a one-year initial
term of employment at Cdn.$170,000 per year, plus a grant of options to
purchase 200,000 shares of the Company's Common Stock at a price of $3.75 per
share (which options were repriced to $1.00 per share effective December 21,
1998) and a grant of certain additional shares of the Company's Common Stock to
be held in escrow pending completion of certain term of service requirements or
a change of control of the Company. The agreement with Xx. Xxxxxxxxxxx provides
for a one-year initial term of employment at Cdn.$160,000 per year, plus a
grant of options to purchase 200,000 shares of the Company's Common Stock at a
price of $3.75 per share (which options were repriced to $1.00 per share
effective December 21, 1998) and a grant of certain additional shares of the
Company's Common Stock to be held in escrow pending completion of certain term
of service requirements or a change of control of the Company. See "Item 13.
Certain Relationships and Related Transactions." These agreements will
terminate effective June 30, 1999.
In addition, pursuant to a retention plan established by resolution of the
Board effective January 7, 1999, each officer is entitled to one year's salary,
payable in a lump sum, upon termination resulting from a change of control.
Pursuant to this retention plan, in the event of termination in connection with
a change of control, Messrs. Mikel, Lee, Xxxxxx and Xxxxxx would be entitled to
receive payments of $175,000, $125,000, $125,000 and $110,000, respectively.
In September 1998, the Company entered into a severance agreement with Xxxxx
X. Xxxxx, formerly Vice President--Finance of the Company. In connection with
the termination of his employment pursuant to such severance agreement, he is
entitled to salary continuation and benefits through June 30, 1999. The total
amount of such salary is $89,167, $26,250 of which was paid in 1998 and $62,917
of which is to be paid in 1999.
61
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of March 31, 1999, the number of shares
of the Company's Common Stock owned by each director and director nominee of
the Company, executive officer named in the Summary Compensation Table above,
and all of the Company's directors and executive officers as a group. Based on
publicly-available filings with the Securities and Exchange Commission, the
Company knows of no person or entity, other than those listed below, who is the
holder of more than five percent of its voting securities. Unless otherwise
indicated, each holder has sole voting and investment power with respect to the
shares of Common Stock owned by such holder, and is a United States citizen,
except that Messrs. Arsenych and Beckwermert are Canadian citizens.
Amount and
Nature of Percent
Beneficial of
Name and Address of Beneficial Owner Ownership Class
------------------------------------ ---------- -------
Centennial Associates, L.P. and affiliates ...... 762,009(1) 6.0%
000 Xxxxx Xxxxxx
Xxx Xxxx, XX 00000
Xxxxxxx X.X. Xxxxxxxx............................ 163,758 1.3%
B. Xxxxxx Xxxxxx................................. 522,807(2) 4.1%
Xxxxx X. Xxxxxxxxxxx............................. 94,192 *
Xxxxxxx X. Xxxxxx................................ 10,000 *
Xxxxxx X. Xxxxxx................................. 522,807(3) 4.1%
Xxxxxx X. Xxxxxxx................................ 72,828(4) *
E. Xxxxx Xxxxx, Xx............................... 59,108(5) *
Xxxxxx X. Xxxxxx................................. 570,417(6) 4.5%
Xxxxx X. Xxx..................................... 34,332(7) *
Xxxxxx X. Xxxxx.................................. 547,421(8) 4.3%
Xxxxx X. Xxxxxxx................................. 33,147(9) *
Xxxxxxx X. Xxxxxxxx.............................. 86,497(10) *
Xxxx X. Xxxxxx................................... 86,959(11) *
Xxxxxxx X. Xxxxxxx............................... 4,000 *
Xxxxxxx X. Xxxxxx................................ 25,974(12) *
Xxxxxx X. Xxxxx, Xx. ............................ 516,307(13) 4.0%
Xxxxxxx X. Xxxxxxxxxx............................ 516,807(14) 4.0%
All Directors and Officers as a group (17
persons)........................................ 3,867,361 30.2%
--------
* Less than one percent of outstanding Common Stock.
(1) As reported in the Schedule 13G filed by Centennial Energy Partners, L.P.
("Centennial") on March 25, 1999, consists of 350,399 shares of Common
Stock, 373,479 shares of Common Stock, 38,131 shares of Common Stock,
723,878 shares of Common Stock, 762,009 shares of Common Stock, 762,009
shares of Common Stock owned by Centennial, Tercentennial Energy Partners,
L.P. ("Tercentennial"), Xxxxxx X. Xxxxx & Co., Inc. ("JHR & Co."),
Centennial Energy Partners, L.L.C. ("Energy"), Xxxxxx X. Xxxxx and Xxxxx X.
Xxxxxx, respectively. All of the foregoing parties share voting and
dispositive powers over such shares. JHR & Co. has the power to dispose of
the shares of Common Stock held by it in the Managed Account, which power
may be exercised by the employees of JHR & Co. who have investment
authority. Energy, the general partner of Centennial and Tercentennial, has
the power to dispose of and the power to vote the shares of Common Stock
beneficially owned by each of the foregoing. Xxxxxx X. Xxxxx, as the
Managing Member of Energy, has the power to vote and dispose of the Common
Stock beneficially held by Energy and as President of JHR & Co., has the
power to dispose of the shares of the Managed Account. Xxxxx X. Xxxxxx is a
non-managing member of Energy who has been delegated the authority to vote
and dispose of the shares of Energy and as Vice President of JHR & Co. has
the power to dispose of the shares of Common Stock held by it in the
Managed Account.
62
(2) Includes 376,985 shares held by Venucot, Inc., a corporation controlled by
Xx. Xxxxxx, and 7,924 and 69,576 shares issuable upon exercise of presently
exercisable options held by Xx. Xxxxxx and Venucot, Inc., respectively.
(3) Includes 376,985 shares held by Michmatt, Inc., a corporation controlled by
Xx. Xxxxxx, and 7,924 and 69,576 shares issuable upon exercise of presently
exercisable options held by Xx. Xxxxxx and Michmatt, Inc., respectively.
(4) Includes 43,878 shares issuable upon exercise of a presently exercisable
option, and 6,054 shares issuable upon conversion of $50,000 of the
Company's 6.875% Convertible Subordinated Debentures ("Convertible
Debentures") at a conversion rate of 121.07 shares of Common Stock per
$1,000 of Convertible Debentures (the "Convertible Rate").
(5) Includes 41,750 shares owned by Xx. Xxxxx' wife and 4,358 shares issuable
upon conversion of $36,000 of Convertible Debentures at the Conversion
Rate.
(6) Includes 363,633 shares held in trusts of which Xx. Xxxxxx or his wife
serves as a co-trustee and shares voting and dispositive power, and 26,488
shares owned directly by Xx. Xxxxxx'x wife.
(7) Includes 33,332 shares issuable upon exercise of presently exercisable
options.
(8) Includes 460,000 shares issuable upon exercise of presently exercisable
options, and 2,421 shares issuable upon conversion of $20,000 of
Convertible Debentures at the Conversion Rate, which Convertible Debentures
are held in trusts of which Xx. Xxxxx is trustee and possesses voting and
dispositive power.
(9) Includes 4,000 shares held by Xxxxxxx & Associates, Inc., a corporation
controlled by Xx. Xxxxxxx, and 847 issuable upon conversion of $7,000 of
Convertible Debentures at the Conversion Rate.
(10) Includes 1,276 shares indirectly held by Xx. Xxxxxxxx'x children.
(11) Includes 79,999 shares issuable upon exercise of presently exercisable
options and 484 shares issuable upon conversion of $4,000 of Convertible
Debentures at the Conversion Rate.
(12) Includes 8,133 shares held by Petroleum Resource Management Company, a
company controlled by Xx. Xxxxxx, and 16,666 shares issuable upon exercise
of presently exercisable options.
(13) Includes 369,485 shares held by DHW Energy, Inc., a corporation controlled
by Xx. Xxxxx, and 7,924 and 69,576 shares issuable upon exercise of
presently exercisable options held by Xx. Xxxxx and DHW Energy, Inc.,
respectively.
(14) Includes 376,985 shares held by Kona, Inc., a corporation controlled by
Xx. Xxxxxxxxxx, and 7,924 and 69,576 shares issuable upon exercise of
presently exercisable options held by Xx. Xxxxxxxxxx and Kona, Inc.,
respectively.
ITEM 13. Certain Relationships and Related Transactions.
On January 1, 1998, the Company acquired certain U.S. onshore oil and gas
properties from Petroleum Resource Management Company in exchange for 8,333
shares of the Company's Common Stock. Petroleum Resource Management Company is
owned and controlled by Xxxxxxx X. Xxxxxx. Concurrent with this transaction,
Xx. Xxxxxx became an officer of Southern Mineral Corporation in the capacity of
Vice President-Operations.
In conjunction with the acquisition of Neutrino in July 1998, 324,430 shares
of the Company's Common Stock were issued to key Neutrino management personnel
(including 144,407 shares to Xx. Xxxxxxxx and 86,333 shares to Xx. Xxxxxxxxxxx)
in consideration for retention and other obligations. The total purchase price
for the Neutrino shares was $57,198,000, including assumption of debt and
working capital deficit.
In September 1995, the Company entered into the Southern Links Group Joint
Venture ("Southern Links") to acquire, develop and market exploration
prospects. The Company's joint venture partner is LGI, a company that is
controlled by Xxxxxx Xxxxxxx, a director of the Company. The Company agreed to
fund the third party costs of Southern Links. Any proceeds from the sale of
prospects or oil and gas from such prospects is distributed 100% to the Company
until it receives an amount equal to the return of its invested capital, after
which time all such proceeds and property interests, if any, are to be
distributed 75% to the Company and 25% to LGI. In December 1998, the Company
made the determination to discontinue further evaluation of certain
63
non-producing State of Texas offshore leases which were held within the
Southern Links Venture. Such leases were scheduled to expire in January 1999
unless additional rental payments were made. Pursuant to the Joint Venture
agreement, the Company assigned six State of Texas leases to LGI for nominal
cash consideration and retention of an overriding royalty interest of 1% of
8/8th in and to the leases.
In January 1998, the Company consummated the transactions contemplated by an
Amended and Restated Agreement and Plan of Merger ("Merger Agreement") executed
November 17, 1997 by and among Amerac Energy Corporation ("Amerac"), SMC
Acquisition Corp., a Delaware Corporation, and the Company. Pursuant to the
Merger Agreement, the Company acquired all of Amerac's outstanding capital
stock in consideration for issuing to Amerac's stockholders (including Xx.
Xxxxxxxx) the right to receive 3,333,333 shares of the Company's Common Stock.
Subsequent to the acquisition, a number of non-strategic Amerac properties were
sold and the remainder became a part of the Company's U.S. oil and gas asset
base. Pursuant to the Merger Agreement, Xx. Xxxxxxxx became a director of the
Company.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) The following documents are filed as a part of this report:
The following consolidated financial statements of the Company are
included in Part II, Item 8. of this report:
Page
----
Consolidated Statements of Income.................................... 29
Consolidated Balance Sheets.......................................... 28
Consolidated Statements of Cash Flows................................ 31
Consolidated Statements of Stockholders' Equity...................... 30
Notes to Consolidated Financial Statements........................... 33
Report of independent accountants.................................... 27
(a)(2) Exhibits
Exhibit
Numbers Description
------- -----------
2.1 Agreement by 779776 Alberta Ltd. to purchase all of the outstanding
Common Shares of Neutrino at a price of $1.80 (Canadian) per Common
Share, dated May 29, 1998. (filed with Form 8-K of Registrant dated
July 2, 1998 (Commission File No. 0-8043 and incorporated herein by
reference).
2.2 Agreement and Plan of Merger, dated as of November 17, 1997, by and
among the Company, AEC Acquisition Corp. and Amerac (filed with
original Form 8-K of Registrant dated
November 17, 1997 (Commission File No. 0-8043 and incorporated
herein by reference)).
3.1 Restated Articles of Incorporation of the Company (filed as Exhibit
3.1 to the Company's
Form 8-K dated January 28, 1998 (Commission File No. 0-8043) and
incorporated herein by reference).
3.2 Amended and Restated Bylaws of the Company, as amended
(incorporated herein by reference to Exhibit (a)(3)(b) of Item 14,
Part IV of the Company's Annual Report on Form 10-K filed for the
year ended December 31, 1989 (Commission File No. 0-8043)).
4.1 Indenture pursuant to which the Company's 6.875% Convertible
Subordinated Debentures due 2007 are issued (incorporated by
reference to Form S-2 Registration 333-35843 dated
September 17, 1997).
64
Exhibit
Numbers Description
------- -----------
*10.1 Stock Option Agreement made as of December 31, 1994 between
Southern Mineral Corporation and Xxxxxx X. Xxxxx (incorporated by
reference to Exhibit (h) to the Company's annual report on Form 10-
K for year ended December 31, 1994 1989 (Commission File No. 0-
8043)).
*10.2 Southern Mineral Corporation 1995 Non-Employee Director
Compensation Plan (incorporated by reference to Exhibit (k) to the
Company's annual report on Form 10-K dated December 31, 1994
(Commission File No. 0-8043)).
10.3 Credit Agreement, dated December 20, 1995, between Southern Mineral
Corporation, SMC Production Co., San Salvador Development Company,
Inc., Venture Resources, Inc., Venture Pipeline Company, VenGas
Pipeline Company, Spruce Hills Production Company, Inc., and
Compass Bank-Houston for Reducing Revolver Line of Credit of up to
$25,000,000 (incorporated by reference to Exhibit 10.1 to Form 8-K
of Registrant dated December 20, 1995 (Commission File No. 0-
8043)).
10.4 Promissory Note, dated December 20, 1995, in the original principal
amount of $25,000,000 made by Southern Mineral Corporation, SMC
Production Co., San Salvador Development Company, Inc., Venture
Resources, Inc., Venture Pipeline Company, VenGas Pipeline Company,
Spruce Hills Production Company, Inc. in favor of Compass Bank-
Houston (incorporated by reference to Exhibit 10.2 to Form 8-K of
Registrant dated December 20, 1995 (Commission File No. 0-8043)).
10.5 Credit Agreement, dated December 20, 1995, between Southern Mineral
Corporation, SMC Production Co., San Salvador Development Company,
Inc., Venture Resources, Inc., Venture Pipeline Company, VenGas
Pipeline Company, Spruce Hills Production Company, Inc. and Compass
Bank-Houston for Term Loan of $3,500,000 (incorporated by reference
to Exhibit 10.3 to Form 8-K of Registrant dated December 20, 1995
(Commission File No. 0-8043)).
10.6 Promissory Note, dated December 20, 1995, in the original principal
amount of $3,500,000 made by Southern Mineral Corporation, SMC
Production Co., San Salvador Development Company, Inc., Venture
Resources, Inc., Venture Pipeline Company, VenGas Pipeline Company,
Spruce Hills Production Company, Inc. in favor of Compass Bank-
Houston (incorporated by reference to Exhibit 10.4 to Form 8-K of
Registrant dated December 20, 1995 (Commission File
No. 0-8043)).
*10.7 1996 Stock Option Plan (incorporated by reference to Exhibit 10.10
to Form 10-KSB dated December 31, 1995 (Commission File No. 0-
8043)).
*10.8 1996 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.11 to
Form 10-KSB dated December 31, 1995 (Commission File No. 0-8043)).
10.9 Joint Venture Agreement, dated October 1, 1995, between Southern
Mineral Corporation and
The Links Group, Inc. (incorporated by reference to Exhibit 10.12
to Form 10-KSB dated December 31, 1995 (Commission File No. 0-
8043)).
*10.10 Option Agreement, dated January 5, 1996, between Southern Mineral
Corporation and Diasu Oil & Gas Company, Inc. covering the
exploration joint venture (incorporated by reference to Exhibit
10.13 to Form 10-KSB dated December 31, 1995 (Commission File No.
0-8043)).
*10.11 Stock Option Agreement dated April 6, 1995, between Southern
Mineral Corporation and Xxxxxx X. Xxxxxxx (incorporated by
reference to Exhibit 10.14 to Form 10-KSB dated December 31, 1995
(Commission File No. 0-8043)).
10.12 Subscription Agreement and Assumption of Obligations, dated January
5, 1995, between Southern Mineral Corporation and Xxxx X. Xxxxxx,
and Xxxxxx X XxXxxx (incorporated by reference to Exhibit 10.15 to
Form 10-KSB/A-1 dated December 31, 1995 (Commission File
No. 0-8043)).
65
Exhibit
Numbers Description
------- -----------
10.13 Amendment to Credit Agreement between Southern Mineral Corporation
et al and Compass Bank-Houston dated August 30, 1996 (incorporated
by reference to Exhibit 10.1 to Form 8-K of the Company dated
August 30, 1996 (Commission File No. 0-8043)).
10.14 Second Amendment to Credit Agreements between the Company and
Compass Bank dated December 17, 1996 (incorporated by reference to
Exhibit 10.14 to Form 10-KSB dated December 31, 1996 (Commission
File No. 0-8043)).
10.15 Third Amendment to Credit Agreement between the Company and Compass
Bank, dated
June 10, 1997 (incorporated by reference to Exhibit 10.15 to Form
S-2 (Commission File
No. 333-35843)).
10.16 Fourth Amendment to Credit Agreement between the Company and
Compass Bank, dated
June 30, 1997 (incorporated by reference to Exhibit 10.1 to Form
10-QSB for the quarterly period ended June 30, 1997 (Commission
File No. 0-8043)).
*10.17 Incentive Stock Option Agreement between the Company and X. X.
Xxxxxx, dated
August 26, 1997 (incorporated by reference to Exhibit 10.17 to Form
S-2 (Commission File
No. 333-35843)).
10.18 Fifth Amendment to Credit Agreement between the Company and Compass
Bank, dated December 31, 1997 (incorporated by reference to Exhibit
10.1 to Form 8-K dated January 28, 1998 (Commission File No. 0-
8043)).
10.19 Sixth Amendment to Credit Agreement between the Company and Compass
Bank, dated
January 28, 1998 (incorporated by reference to Exhibit 10.2 to Form
8-K dated January 28, 1998 (Commission File No. 0-8043 )).
10.20 Letter Agreement between the Company and Amerac, dated November 17,
1997 (incorporated by reference to Exhibit 10.18 to Form S-4
(Commission File No. 333-42045)).
10.21 Letter Agreement between the Company and Amerac, dated November 21,
1997 (incorporated by reference to Exhibit 10.19 to Form S-4
(Commission File No. 333-42045)).
10.22 Amended and Restated Credit Agreement between the Company, Compass
Bank-Houston and First Union National Bank dated June 19, 1998
(incorporated by reference to Exhibit 10.1 to Form 10-QSB for the
quarterly period ended June 30, 1998 (Commission File No. 0-8043)).
10.23 Letter Amendment dated November 4, 1998, to the Amended and
Restated Credit Agreement between the Company, Compass Bank-Houston
and First Union National Bank dated June 19, 1998 (incorporated by
reference to Exhibit 10.1 to the Company's Form 10-QSB for the
quarterly period ended September 30, 1998).
*10.24 1997 Stock Option Plan (incorporated by reference to Form S-8,
filed April 28, 1998, Registration No. 333-51237 (Commission File
No. 333-420450)).
10.25 Neutrino Resources Inc. Credit Facility Agreement with National
Bank of Canada as amended February 26, 1999 (filed herewith).
*10.26 Neutrino Resources Inc. Employee Stock Savings Plan effective July
8, 1998 (filed herewith).
10.27 Second Amendment to Amended and Restated Credit Agreement between
the Company, Compass Bank-Houston and First Union National Bank
dated March 29, 1999 (filed herewith).
*10.28 Amendment to Incentive Stock Option Agreement of the Company (filed
herewith).
*10.29 Board Resolution of the Company establishing a Retention Plan in
the event of a change of control of the Company dated January 7,
1999 (filed herewith).
21.1 Subsidiaries of the Company (filed herewith).
23.1 Consent of KPMG LLP (filed herewith).
23.2 Consent of Netherland, Xxxxxx & Associates, Inc. (filed herewith).
66
Exhibit
Numbers Description
------- -----------
23.3 Consent of XxXxxxxx & Associates Consultants, Ltd. (filed
herewith).
23.4 Consent of Xxxxx Xxxxx Company (filed herewith).
23.5 Consent of Xxxxxxx Petroleum Engineering, Ltd. (filed herewith).
23.6 Consent of Xxxxxxx Xxxxxxxx Xxxx Associates Ltd. (filed herewith).
27.1 Financial Data Schedule (filed herewith).
--------
* Management Contracts, Plans or Arrangements to Item 601(b)(10)(iii)(A) of
regulation S-K.
(a) Reports on Form 8-K
Form 8-K/A filed September 11, 1998, reporting the acquisition of Neutrino
Resources, Inc. financial statements and exhibits and filed as an exhibit to
the Form 8-K filed on July 17, 1998.
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized.
SOUTHERN MINERAL CORPORATION
/s/ Xxxxxx X. Xxxxx
By __________________________________
Xxxxxx X. Xxxxx
President and Chief Executive
Officer
Date: March 29, 1999
Pursuant with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
Date: March 29, 1999
Pursuant with the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Xxxxxxx X.X. Xxxxxxxx Director, Chairman and Chief March 29, 1999
____________________________________ Executive Officer Neutrino
Xxxxxxx X.X. Xxxxxxxx Resources Inc.
/s/ B. Xxxxxx Xxxxxx Director March 29, 1999
____________________________________
B. Xxxxxx Xxxxxx
/s/ Xxxxx X. Xxxxxxxxxxx Director, President & Chief March 29, 1999
____________________________________ Operating Officer--Neutrino
Xxxxx X. Xxxxxxxxxxx Resources, Inc.
/s/ Xxxxxxx X. Xxxxxx Vice President--Finance and March 29, 1999
____________________________________ Chief Financial Officer
Xxxxxxx X. Xxxxxx
/s/ Xxxxxx X. Xxxxxx Director March 29, 1999
____________________________________
Xxxxxx X. Xxxxxx
/s/ Xxxxxx X. Xxxxxxx Director March 29, 1999
____________________________________
Xxxxxx X. Xxxxxxx
/s/ E. Xxxxx Xxxxx, Xx. Director March 29, 1999
____________________________________
E. Xxxxx Xxxxx, Xx.
/s/ Xxxxxx X. Xxxxxx Director and Chairman of the March 29, 1999
____________________________________ Board of Directors
Xxxxxx X. Xxxxxx
68
Signature Title Date
--------- ----- ----
/s/ X. X. Xxxxxx Treasurer March 29, 1999
____________________________________ (principal accounting
X. X. Xxxxxx officer)
/s/ Xxxxxx X. Xxxxx Director, President and March 29, 1999
____________________________________ Chief Executive Officer
Xxxxxx X Xxxxx
/s/ Xxxxx X. Xxxxxxx Director March 29, 1999
____________________________________
Xxxxx X. Xxxxxxx
/s/ Xxxxxxx X. Xxxxxxxx Director March 29, 1999
____________________________________
Xxxxxxx X. Xxxxxxxx
/s/ Xxxxxxx X. Xxxxxxx Director March 29, 1999
____________________________________
Xxxxxxx X. Xxxxxxx
/s/ Xxxxxx X. Xxxxx, Xx. Director March 29, 1999
____________________________________
Xxxxxx X. Xxxxx, Xx.
/s/ Xxxxxxx X. Xxxxxxxxxx Director March 29, 1999
____________________________________
Xxxxxxx X. Xxxxxxxxxx
69
