<PAGE>
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _______________________
Commission file number 0-22691
SHERIDAN ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0507664
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 Pennbright, Suite 200
Houston, Texas 77090
(Address of principal executive offices) (Zip Code)
(281) 872-0500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
As of August 11, 1997 there were 4,281,471 outstanding shares of Sheridan
Energy, Inc. Common Stock, $.01 par value.
================================================================================
<PAGE>
SHERIDAN ENERGY, INC.
Report on Form 10-QSB For The Quarter Ended June 30, 1997
Index
Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited) 1
Consolidated Balance Sheet -
June 30, 1997 and December 31, 1996 2
Consolidated Statement of Operations -
Three and Six Month Periods Ended June 30, 1997 and 1996 3
Consolidated Statement of Cash Flows -
Six Month Periods Ended June 30, 1997 and 1996 4
Notes to Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information 16
Forward-Looking Statements
Stockholders are cautioned that all forward-looking statements involve
risks and uncertainties, including without limitation, statements about the
costs of exploring and developing new oil and natural gas reserves, the price
for which such reserves can be sold, environmental concerns affecting the
drilling of oil and natural gas wells, pending litigation, and general market
conditions, competition and pricing. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and there can therefore
be no assurance that the forward-looking statements included in this Form 10-QSB
will prove accurate. Because of the significant uncertainties inherent in the
forward-looking statements contained in this Form 10-QSB, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
<PAGE>
Sheridan Energy, Inc.
Report on Form 10-QSB For the Quarter Ended June 30, 1997
Part I. Financial Information
Item 1. FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of
Sheridan Energy, Inc., ("Sheridan"), and Sheridan's subsidiary (collectively
Sheridan and its subsidiary herein called the "Company"), have been prepared in
accordance with Rule 310 of Regulation S-B, "Interim Financial Statements", and
accordingly do not include all information and notes required under generally
accepted accounting principles for complete financial statements. Sheridan is
the surviving entity resulting from the merger effective June 12,1997 (the
"Merger") with its former parent company, TGX Corporation ("TGX"). The financial
statements have been prepared in conformity with the accounting principles and
practices as disclosed in TGX's Annual Report on Form 10-KSB for the year ended
December 31, 1996. These interim financial statements reflect all adjustments
(which were normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the Company's financial
position as of June 30, 1997 and the results of its operations and cash flows
for the six month period ended June 30, 1997. Results of operations for the six
month period ended June 30, 1997 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997. It is recommended
that these unaudited consolidated financial statements be read in conjunction
with the consolidated financial statements and notes thereto included in the
TGX's Annual Report on Form 10-KSB for the year ended December 31, 1996.
Page 1
<PAGE>
SHERIDAN ENERGY, INC.
CONSOLIDATED BALANCE SHEET
(In thousands except for share data)
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
------ 1997 1996
----------- ------------
(Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents...................................................... $ 575 $ 1,924
Accounts receivable, net of allowance for doubtful accounts of $120 and $200,.. 1,314 1,291
respectively
Deferred tax asset............................................................. 340 680
Other current assets........................................................... 317 117
---------- ------------
Total current assets....................................................... 2,546 4,012
---------- -----------
Property and equipment:
Oil and natural gas properties.................................................. 18,823 15,535
Other property and equipment.................................................... 204 204
Accumulated depletion, depreciation and amortization............................ (5,903) (5,103)
---------- -----------
Property and equipment, net................................................... 13,124 10,636
----------- -----------
Investment in Comites Field Plant Venture......................................... 532 596
Deferred tax asset................................................................ 340 250
Other assets...................................................................... 62 53
Total other assets.......................................................... 934 899
TOTAL ASSETS...................................................................... $ 16,604 $ 15,547
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Accounts payable and accrued liabilities -Note 4................................ $ 3,525 $ 2,997
Note payable - Note 2........................................................... 112 -
----------- -----------
Total current liabilities................................................... 3,637 2,997
----------- -----------
Long-term debt - Note 2........................................................... 1,500 1,500
----------- -----------
Total liabilities........................................................... 5,137 4,497
----------- -----------
Commitments and contingencies - Note 3
Redeemable Senior Preferred Stock, 8,788,571 shares outstanding; redemption
$87,886 - Note 5................................................................. - 80,726
Stockholders' equity (deficit) - Note 5:
9% Cumulative Convertible Preferred stock, 300,000 shares issued plus
185,000 shares to be issued for dividends................................... - 485
Common stock, 4,281,471 and 24,955,807, respectively, shares outstanding....... 43 290
Additional paid-in capital...................................................... 15,780 1,665
Accumulated deficit............................................................. (4,356) (72,116)
----------- -----------
Total stockholders' equity (deficit)........................................ 11,467 (69,676)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT).............................. $ 16,604 $ 15,547
============ ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
Page 2
<PAGE>
SHERIDAN ENERGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
(In thousands, except per share data) 1997 1996 1997 1996
- ------------------------------------------------- -------- -------- ------- -------
REVENUES
<S> <C> <C> <C> <C>
Oil and natural gas sales........................ $ 1,409 $ 1,139 $ 3,198 $ 2,327
Natural gas gathering............................ 51 50 108 108
Equity earnings in Comite Field Plant Venture.... 112 112 202 309
Gain on property sales........................... 46 137 46 145
-------- --------- --------- ---------
1,618 1,446 3,554 2,889
-------- --------- --------- ---------
COSTS AND EXPENSES
Operating expenses............................... 408 329 798 655
Treating and transportation expense.............. 134 190 281 428
Depletion, depreciation and amortization......... 445 233 791 461
General and administrative expenses.............. 399 593 1,029 1,253
Exploration costs................................ - - 13 -
-------- --------- --------- ---------
1,386 1,345 2,912 2,797
-------- --------- --------- ---------
OPERATING INCOME (LOSS) 232 101 642 92
-------- --------- --------- ---------
OTHER INCOME (EXPENSE)
Litigation settlement gain, net - Note 2........ - 7,100 - 7,100
Other income..................................... 49 34 125 57
Interest expense................................. (30) (34) (74) (187)
-------- ---------- --------- ---------
19 7,100 51 6,720
-------- ---------- --------- ---------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY GAIN 251 7,201 693 7,062
-------- ---------- --------- ---------
Income tax expense - Note 6:
Current.......................................... - 127 10 127
Deferred......................................... 250 - 250 -
-------- ---------- --------- ---------
250 127 260 127
-------- ---------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN 1 7,074 433 6,935
-------- ---------- --------- ---------
Extraordinary gain, net of income taxes of $37 - - 1,831 - 1,831
Note 2..........................................
-------- ---------- --------- ---------
NET INCOME (LOSS)................................ 1 8,905 433 8,766
Preferred stock dividends - Note -5.............. (2,596) (3,255) (5,841) (6,527)
Accretion of Senior Preferred redemption value -
Note - 5........................................ (1,452) (1,449) (3,205) (2,865)
-------- ---------- --------- ---------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK..... $ (4,047) $ 4,201 $ (8,613) $ (626)
======== ========== ========= =========
NET INCOME (LOSS) PER SHARE OF COMMON STOCK
(Note 7):
Before extraordinary........................... $ (0.94) $ 0.54 $ (2.01) $ (0.56)
Extraordinary gain............................. - 0.41 - 0.41
-------- ---------- --------- ---------
NET INCOME (LOSS) PER SHARE...................... $ (0.94) $ 0.95 $ (2.01) $ (0.15)
======== ========== ========= =========
AVERAGE COMMON SHARES OUTSTANDING................ 4,281 4,419 4,291 4,394
======== ========== ========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
Page 3
<PAGE>
SHERIDAN ENERGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(In thousands) 1997 1996
- ------------------------------------------------------ ------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 433 $ 8,766
Adjustments to reconcile net income to cash
provided by.........................................
operating activities:
Depletion, depreciation and amortization.......... 791 461
Amortization of debt transaction costs and stock (6) 31
compensation.....................................
Distribution in excess of equity earnings......... 64 34
Gain on property sales............................ (46) (145)
Recovery of accounts receivable loss provisions... 80 -
Interest to be paid through issuance of - 133
additional notes.................................
Extraordinary gain................................ - (1,868 )
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable...... (103) 118
Decrease in accounts receivable from - 6
affiliates.....................................
Decrease in deferred tax asset.................. 340 -
Increase in other current assets................ (200) (91)
Decrease (increase) in accounts payable and 528 (951)
accrued liabilities............................
Deferred tax asset................................ (90) -
------- --------
Net cash provided by operating activities......... 1,791 6,494
------- --------
Cash flows from investing activities:
Capital expenditures............................... (3,288) (420)
Proceeds from disposal of assets................... 46 145
Decrease (increase) in other assets............... 9 (6)
------- --------
Net cash used by investing activities.............. (3,233) (281)
------- --------
Cash flows from financing activities:
Principal payments on long-term debt and note (1,850) (4,500 )
payable..........................................
Advances pursuant to revolving credit facility 1,962 400
and note payable.................................
Debt transaction costs and other.................. (19) -
------- --------
Net cash (used) provided by financing activities 93 (4,100 )
------- --------
Net increase (decrease) in cash and cash equivalents (1,349) 2,113
Cash and cash equivalents at beginning of period...... 1,924 384
------- --------
Cash and cash equivalents at end of period............ $ 575 $ 2,497
======= ========
Supplemental Disclosure of Non-Cash Financing
Activities:
Forgiveness of long term debt and notes payable,
net of taxes of $37................................ $ - $ 1,831
Interest to be paid through the issuance of
additional notes................................... - 133
</TABLE>
See accompanying notes to unaudited consolidated financial statements
Page 4
<PAGE>
SHERIDAN ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Sheridan Energy, Inc. ("Sheridan"), is the surviving entity resulting from
the merger (the "Merger") effective June 12, 1997 ("Effective Date") with its
former parent company, TGX Corporation ("TGX"). Sheridan and its subsidiary
(collectively Sheridan and its subsidiary are herein called the "Company") is a
domestic independent energy company engaged in the production of oil and natural
gas. The Company is also engaged in intrastate natural gas gathering and
treating.
Pursuant to the Merger, holders' of TGX's Series A Redeemable Senior
Preferred Stock ("Senior Preferred Stock") received .5 shares of Sheridan common
stock ("Sheridan Common Stock") for each share of Senior Preferred Stock
resulting in the issuance of 4,281,471 shares of Sheridan Common Stock. The TGX
9% Cumulative Convertible Preferred Stock ("Old Preferred Stock') and TGX Common
Stock ("TGX Common Stock") (collectively "TGX Stock") were eliminated pursuant
to the Merger. Pursuant to the Merger, certain adjustments were made to
stockholders' equity on an historic cost basis to reflect the cancellation of
the TGX Stock and Senior Preferred Stock and issuance of Sheridan Common Stock.
All Senior Preferred Stock and Old Preferred Stock and associated dividends and
accretion were eliminated as of the Effective Date of the Merger; however, all
pre-Effective Date dividend and accretion charges are reflected in the
historical results applicable to common shares. The Sheridan asset and
liability accounts continue to reflect TGX's historic values at the time of the
Merger, including any impact related to TGX's October 2, 1992 fresh start
reporting reorganization values. All pre-Effective Date income statement
activity is also reflected on an historic basis as Sheridan activity.
2. LONG-TERM DEBT AND NOTE PAYABLE
As of June 30, 1997 and December 31, 1996, the components of long-term debt
were:
<TABLE>
<CAPTION>
June 30, December 31,
(Thousands of dollars) 1997 1996
---------------------------- ---------- -----------
<S> <C> <C>
Bank borrowings:
Revolving credit (secured).. $1,500 $1,500
Less current maturities..... - -
------ ------
Long-term debt.............. $1,500 $1,500
====== ======
</TABLE>
On July 13, 1994, the Company entered into a series of agreements with Bank
One, Texas N.A. ("Bank One") whereby the Company's then outstanding secured debt
with the Bank of Montreal ("BMO") was restructured and all existing BMO events
of default were resolved. The Bank One facility bears interest at Bank One's
stated rate plus 1.5% and is secured by substantially all of the Company's oil
and gas properties. The Bank One facility at June 30, 1997 had a borrowing base
of $4,100,000 and is redetermined every six months or at Bank One's discretion.
Under the current facility, the borrowing base is reduced through monthly
reductions of $100,000 and the loan matures on June 30, 1999.
The Company has outstanding an unsecured note payable of $112,000 to a third
party related to financing of certain insurance premiums. The note bears
interest at 8.31% and is payable in nine equal monthly installments, plus
interest, commencing July 1, 1997.
Page 5
<PAGE>
On April 12, 1996, TGX entered into a Settlement Agreement with NFG and the
Public Service Commission of the State of New York. Pursuant to the Settlement
Agreement, TGX received $7,200,000 from NFG and all parties to the Settlement
Agreement dismissed all claims and counterclaims against each other. As a result
of the NFG gross settlement proceeds and payment of $100,000 to another party
entitled to participate in the proceeds, TGX recorded a net litigation
settlement gain of $7,100,000. Pursuant to amended credit agreements with BMOF,
50% of the gross settlement proceeds were paid to BMOF in cancellation and full
payment of the non-recourse secured note totaling $5,468,000, including accrued
interest of $816,000. TGX recorded an extraordinary gain for debt forgiveness of
$1,831,000, net of income taxes of $37,000, in conjunction with the $3,600,000
BMOF final payment.
Cash paid for interest during the first six months of 1997 and 1996 totaled
approximately $64,000 and $36,000, respectively.
3. COMMITMENTS AND CONTINGENCIES
Litigation
- ----------
In August 1992, certain unleased mineral interest owners commenced a legal
action against TGX, as operator of certain wells, in the 19th Judicial District
Court for East Baton Rouge Parish, Louisiana (Case Number 383844, Division
"A"). The complaint alleges that revenues in excess of the reasonable costs of
drilling, completing, and operating certain wells have not been credited for the
interests of the unleased mineral interest owners. In July 1995, certain
royalty owners in the same wells commenced a separate legal action alleging that
TGX and other working interest owners improperly profited under the terms of a
Gas Gathering and Transportation Agreement dated December 12, 1983. Both cases
are in the discovery stage and if settlement negotiations are not successful,
Sheridan will vigorously defend itself in the litigation. Sheridan does not
believe that the ultimate resolution of these matters will have a material
adverse effect on the financial condition or results of the operation of
Sheridan.
From time to time, in the normal course of business, the Company is party to
various other litigation matters the outcome of which, to the extent not
otherwise provided for, should not have a material adverse effect on the
Company.
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
As of June 30, 1997 and December 31, 1996, the primary components of accounts
payable and accrued liabilities were:
(In thousands) 1997 1996
-------------- ----- -----
Accounts payable $ 556 $ 360
Undistributed net oil and natural gas 1,278 1,281
revenue
Accrued capital, operating and tax expenses 1,329 354
Accrued professional fees 79 347
Income tax liability 7 180
Operation advances 14 115
Miscellaneous accruals 262 360
------ ------
$3,525 $2,997
====== ======
Page 6
<PAGE>
5. SENIOR PREFERRED AND STOCKHOLDERS' EQUITY (DEFICIT)
Pursuant to the Merger, holders' of Senior Preferred Stock received .5
shares of Sheridan Common Stock for each share of Senior Preferred Stock
resulting in the issuance of 4,281,471 shares of Sheridan Common Stock. The Old
Preferred Stock and TGX Common Stock were eliminated pursuant to the Merger.
Pursuant to the Merger, certain adjustments were made to stockholders' equity,
on an historic cost basis, to reflect the cancellation of the TGX Stock and
Senior Preferred Stock and issuance of Sheridan Common Stock. All Senior
Preferred Stock and Old Preferred Stock and associated dividends and accretion
were eliminated as of the Effective Date of the Merger.
Since December 31, 1996 the components of the number of Senior Preferred and
changes in associated values are as follows (in thousands):
Number Recorded
of shares Value
--------- ----------
Balance, December 31, 1996..................... 8,788 $ 80,726
Shares canceled pursuant to management option (110) (15)
agreements.................................... (110) (15)
Shares canceled................................ (116) -
Accrued and unpaid dividends................... - 5,721
Accretion of redemption value and dividends.... - 3,205
Cancellation of stock due to Merger............ (8,562) (89,637)
------ --------
Balance, June 30, 1997....................... - $ -
====== ========
The following table reflects the components and changes since December 31,
1996 to the number of shares of stock outstanding (in thousands):
Old TGX Sheridan
Preferred Common Common
Stock Stock Stock
--------- ------ -------
Balance, December 31, 1996............ 485 24,956 -
Dividends on Old Preferred Stock........ 12 - -
Cancellation of stocks due to Merger.... (497) (24,956) -
Issuance of common stock due to Merger.. - - 4,281
---- ------- -----
Balance, June 30, 1997.................. - - 4,281
==== ======= =====
The following table reflects the components and changes since December 31,
1996 to the Company's equity (deficit) and associated values (in thousands):
<TABLE>
<CAPTION>
Old TGX Sheridan Additional
Preferred Common Common Paid-In Accumulated
Stock Stock Stock Capital Deficit
---------- ------ -------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996................................... $ 485 $ 290 $ - $ 1,665 $(72,116)
Preferred dividends payable with additional shares of Old
Preferred Stock............................................. 12 - - 108 (120)
Dividends on Senior Preferred Stock.......................... - - - - (5,721)
Accretion of Senior Preferred redemption value............... - - - - (3,205)
Net income................................................... - - - - 433
Cancellation of stocks due to Merger......................... (497) (290) - 14,050 76,373
Issuance of Sheridan Common Stock............................ - - 43 (43) -
----- ----- ---- ------- --------
Balance, June 30, 1997....................................... $ - $ - $43 $15,780 $ (4,356)
===== ===== === ======= ========
</TABLE>
Page 7
<PAGE>
6. INCOME TAXES
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("Statement 109"), which requires recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax returns.
Under this method, deferred tax liabilities and assets are determined based on
the difference, if any, between the financial reporting and tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse.
The Company's current income tax expense for 1997 and 1996 of $10,000 and
$127,000, respectively, consists solely of alternative minimum tax. In 1996,
the Company recognized a deferred tax asset of $930,000 based on income
projections for 1997 and 1998 and the Company's expected statutory tax rate of
34%. As a result of changes in oil and gas prices and the results of actual
operations, the Company's income tax expense for the six months ending June 30,
1997 of $250,000 represents deferred income tax expense, based on the statutory
rate of 34%, of $236,000 attributable to current operations, plus $14,000
attributable to an increase in the valuation allowance ascribed to the deferred
tax asset. The valuation adjustment is based on the Company's continuing
reassessment of the value of the deferred tax asset determined, in part, on
expected income for the prospective two year period. Further, as part of its
reassessment process, the Company reclassified a portion ($90,000) of the
deferred tax asset from current to long-term.
7. EARNINGS PER SHARE
All prior period per share data and amounts have been restated to reflect
issuance of Sheridan Common Stock on a retroactive basis. All preferred stock
dividends and accretion were eliminated as of the Effective Date of the Merger;
however, all pre-Effective Date dividend and accretion charges are reflected in
the historical earnings results applicable to common shares.
The following table reflects pro forma earnings per share of common stock as
if the Merger had been effective as of January 1, 1996 and all dividends and
accretion charges had been eliminated as of such date:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Before extraordinary gain....... $ - $1.60 $0.10 $1.57
Extraordinary gain.............. - .41 - .41
----- ------ ----- -----
Pro forma net income per share $ - $2.01 $0.10 $1.98
===== ====== ===== =====
</TABLE>
Page 8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
- -------
The following discussion provides information which management believes is
relevant to an understanding and assessment of the Company's results of
operations and financial condition, and those presently known events, trends or
uncertainties that are reasonably likely to have a material impact on the
Company's future results of operations or financial condition or that are
reasonably likely to cause the historical financial statements not to be
necessarily indicative of future operating results or financial condition. It
should be read in conjunction with the unaudited consolidated financial
statements and related notes appearing elsewhere herein. As a result of the
Merger, the results of operations and financial condition discussions below
includes pre- Effective Date historical results of TGX as Sheridan activity.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1997 ("1997") and June 30, 1996 ("1996")
Revenues
- ---------
Revenues from oil and natural gas sales for the current quarter of 1997
increased $270,000 over 1996 comparable revenues. The increase in quarterly
revenues was due to an increase in oil and natural gas volumes sold. On an
equivalent unit basis (one barrel of oil equals six Mcf of natural gas on a
heating value basis ("Mcfe"), sales volumes increased 35% primarily due to the
Company's acquisition and drilling program activity. The increase in volumes
sold resulted in $349,000 of additional revenues which was partly offset by a
decline in unit prices as compared to the 1996 quarter. A summary of oil and
natural gas sales revenues and volumes for the respective three month periods
follows with natural gas prices being reflected on a thousand cubic feet ("Mcf")
and volumes on a thousand Mcf ("Mmcf") basis.
Summary of Volumes Sold and Revenues
Three Months
Ended June 30,
1997 1996 Change
------- ------ -------
Oil revenues (in thousands)......... $ 401 $ 407 (2)%
Oil sales volume (barrels).......... 21,100 19,600 7%
Oil average sales price per barrel.. $ 19.01 $ 20.78 (8)%
Natural gas revenues (in thousands)...... $ 1,008 $ 732 38%
Natural gas sales volume (Mmcf).......... 506 352 44%
Natural gas average sales price per Mcf.. $ 1.99 $ 2.08 (4)%
Page 9
<PAGE>
Gain on property sales for the quarter ended June 30, 1997 of $46,000 consists
primarily of the sale of non-producing acreage while the 1996 comparable gain
resulted from the sale of the Company's interest in 54 marginal producing wells.
Costs and Expenses
- ------------------
For the second quarter of 1997, operating expenses, which is comprised of
workover costs, severance taxes and through wellhead production costs (lifting
costs), increased $79,000 or 24%. Excluding workover costs and severance taxes,
1997 and 1996 quarterly operating expenses totaled $320,000 and $222,000,
respectively, for production costs through the wellhead. Operating expenses for
the current quarter, increased due to higher production volumes and
approximately $50,000 of costs related to flood damage incurred in April 1997 at
the Company's Dorcheat field. Production costs per Mcfe for the 1997 three
month period were $0.51 as compared to $0.47 for 1996.
Treating and transportation quarterly expenses decreased by $56,000 or 29% in
1997. These costs represent post wellhead expenditures primarily associated to
the Company's Comite field production and are incurred to treat Company gas to
comply with pipeline specifications or to transport the gas to market. The
decrease is primarily due to the 1996 quarter including previously deferred
treating fees pursuant to an agreement and a decline in volumes requiring
treating. Treating and transportation expenses per Mcfe for the three month
periods of 1997 and 1996 were $0.27 and $0.54, respectively.
Depletion, depreciation, and amortization ("DD&A") expense in 1997 increased
$212,000 or 91% due to an increase in the weighted average DD&A rate per Mcfe
and higher sales volumes. The weighted average quarterly DD&A rate for the
current quarter of 1997 increased 56% to $0.78 per Mcfe as compared to 1996's
comparable rate of $0.50. The remaining increase in quarterly DD&A expense for
1997 is the result of an increase in Mcfe sold of approximately 35%.
General and administrative expenses for the current quarter decreased by
$194,000 or 33% from the comparable 1996 period. The decrease in expense is the
result of lower staff costs resulting from the resignation of the chief
executive officer in the first quarter on 1997, lower professional fees and the
collection of $80,000 of previously allowed for doubtful accounts receivable
during the current quarter. In late June 1997, the Company hired a new chief
executive officer and thus a portion of the staff cost savings realized in the
second quarter of 1997 will not be recurring.
Other Income (Expense)
- ----------------------
On April 12, 1996, TGX entered into a Settlement Agreement with NFG and the
Public Service Commission of the State of New York. Pursuant to the Settlement
Agreement, TGX received $7,200,000 from NFG and all parties to the Settlement
Agreement dismissed all claims and counterclaims against each other. As a result
of the NFG gross settlement proceeds and payment of $100,000 to another party
entitled to participate in the proceeds, TGX recorded a net litigation
settlement gain in the second quarter of 1996 of $7,100,000. Pursuant to amended
credit agreements with BMOF, 50% of the gross settlement proceeds were paid to
BMOF in cancellation and full payment of the non-recourse secured note totaling
$5,468,000, including accrued interest of $816,000. TGX recorded an
extraordinary gain for debt forgiveness of $1,831,000, net of income taxes of
$37,000, in conjunction with the $3,600,000 BMOF final payment during the second
quarter of 1996.
Page 10
<PAGE>
Income Tax Expense
- ------------------
Due to tax loss carryforwards, the Company currently pays only federal
alternative minimum income taxes. In 1996, the Company recognized a deferred
tax asset of $930,000 based on then income projections for 1997 and 1998. As a
result of changes in oil and gas prices and actual operations, the Company
recognized in the current quarter of 1997 $250,000 of deferred income tax
expense of which $236,000 was attributed to current year to date operations and
$14,000 to an increase in the deferred tax valuation allowance. It is not
anticipated that the recently enacted tax legislation will have any significant
impact on the future results of operations of the Company.
Dividends and Accretion on Preferred Stock
- ------------------------------------------
Pursuant to the terms of the TGX bankruptcy plan, dividends for the Senior
Preferred stock were calculated at 10%, compounded annually and resulted in
accrued, but unpaid, dividends expense for the quarters of 1997 and 1996 of
$2,543,000 and $3,138,000, respectively. Dividends on the Old Preferred Stock
for the 1997 and 1996 quarters were $53,000 and $67,000 respectively. The
accretion of the Senior Preferred redemption value, also a non-cash item, is
calculated based on the interest method. Effective with the Merger, all
dividend and accretion obligations were eliminated; however, all pre- Effective
Date dividend and accretion charges continue to be reflected in the historical
results.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 ("1997") and June 30, 1996 ("1996")
Revenues
- --------
Revenues from oil and natural gas sales for the first six months of 1997
increased $871,000 or 37% over 1996 comparable revenues. Of the increase in 1997
revenues, $500,000 or 57% was due to an increase in Mcfe of 23%. A summary of
oil and natural gas sales revenues and volumes for the respective six month
periods follows with natural gas prices being reflected on an Mcf basis and
volumes on an Mmcf basis.
Summary of Volumes Sold and Revenues
Six Months Ended
June 30,
1997 1996 Change
--------- -------- ------
Oil revenues (in thousands)............... $ 787 $ 726 8%
Oil sales volume (barrels)................ 38,800 36,300 7%
Oil average sales price per barrel........ $ 20.30 $ 20.01 1%
Natural gas revenues (in thousands)....... $ 2,411 $ 1,601 51%
Natural gas sales volume (Mmcf)........... 994 776 28%
Natural gas average sales price per Mcf... $ 2.43 $ 2.06 18%
Page 11
<PAGE>
Natural gas represented 81% of the Company's 1997 Mcfe sales volumes and 75%
of oil and natural gas revenues. Due to the Company's production being heavily
weighted toward gas, its revenues and cash flow are significantly influenced by
changes in gas prices. During 1997, average gas prices increased to $2.43 or
$0.37 per Mcf from the 1996 average price of $2.06. Higher oil and natural gas
prices contributed to an increase in 1997 revenues of $371,000 or 43% of the
current period revenue increase. Both oil and gas prices have declined further
from the current year six month average prices as a result of weather conditions
and other market factors. The NYMEX natural gas contract price, based on a Mcf
basis, was $2.16 for August 1997, while, the per barrel posted price for West
Texas Intermediate was $18.00 as of July 31, 1997.
Natural gas gathering revenues were flat as compared to 1996, while equity
earnings in the Comite Field Plant Venture treating plant decreased by $107,000
or 35%. The decrease in treating plant earnings is attributed to continued
Comite field production declines and 1996 benefiting from the recoupment of
approximately $78,000 of previously deferred treating fees pursuant to an
agreement. As a result of recent third party exploration activity in close
proximity to both the treating plant and gathering system, an additional well
was connected, in December 1996, to this facility with prospects of one
additional well being added later in 1997. Though the new well's treating and
gathering rates per Mcf are lower than current well agreements, the addition of
the new well should partially offset the continued decrease in revenues
resulting from production decline on the two older existing contracted wells.
Gain on property sales for 1997 of $46,000 consists primarily of the sale of
non-producing acreage while the 1996 gain of $145,000 resulted from the sale of
the Company's interest in 54 marginal producing wells.
Costs and Expenses
- ------------------
For 1997, operating expenses, which is comprised of workover costs, severance
taxes and through wellhead production costs (lifting costs), increased $143,000
or 22%. Workover costs for 1997 and 1996 totaled $92,000 and $133,000,
respectively, and primarily represent discretionary well production activities
that are implemented to enhance or increase production. Severance taxes for
1997 and 1996 were $138,000 and $120,000, respectively. The increase in
severance taxes is related to increased oil and natural gas revenues due to
higher prices and increased sales volumes.
Excluding workover costs and severance taxes, 1997 and 1996 operating expenses
totaled $569,000 and $402,000, respectively, for production costs through the
wellhead. Operating expenses for 1997, increased due to higher production
volumes and approximately $50,000 of costs related to flood damage incurred in
April 1997 at the Company's Dorcheat field. Production costs per Mcfe for 1997
were $0.46 as compared to $0.40 for 1996.
Treating and transportation expenses decreased by $147,000 or 34% in 1997.
These costs represent post wellhead expenditures primarily associated to the
Company's Comite field production and are incurred to treat Company gas to
comply with pipeline specifications or to transport the gas to market. The 1997
decrease is primarily due to 1996 including approximately $78,000 of previously
deferred treating fees pursuant to an agreement and field production declines.
Treating and transportation expenses for 1997 and 1996, excluding 1996 deferred
fees, per Mcfe were $0.25 and $0.31, respectively.
Page 12
<PAGE>
Depletion, depreciation, and amortization ("DD&A") expense in 1997 increased
$330,000 or 72% due to an increase in the weighted average DD&A rate per Mcfe
and higher sales volumes. The weighted average quarterly DD&A rate for 1997
increased 41% to $0.65 per Mcfe as compared to 1996's rate of $0.46. The
remaining increase in DD&A expense for 1997 is the result of an increase in Mcfe
sold of approximately 23%.
Pursuant to successful efforts accounting, unsuccessful exploration costs are
expensed as opposed to capitalized. Exploration costs for 1997 totaled $13,000
and represent additional costs incurred related to previously reported
unsuccessful 1996 exploration activities.
General and administrative expenses in 1997 decreased by $224,000 or 18% from
1996. General and administrative expenses for 1997 include a net charge of
$186,000 resulting from a settlement payment, pursuant to an agreement, to the
former chief executive officer and $95,000 of professional and other fees, in
excess of 1996 costs, incurred related to the Merger. General and
administrative expenses for 1997 benefitted from collection of $80,000 of
previously allowed for doubtful accounts receivable. Excluding the net officer
settlement expense, additional Merger costs and doubtful accounts collection,
1997 general and administrative expenses, as compared to 1996, decreased
$239,000 due primarily to lower personnel and legal costs.
Other Income (Expense)
- ----------------------
On April 12, 1996, TGX entered into a Settlement Agreement with NFG and the
Public Service Commission of the State of New York. Pursuant to the Settlement
Agreement, TGX received $7,200,000 from NFG and all parties to the Settlement
Agreement dismissed all claims and counterclaims against each other. As a
result of the NFG gross settlement proceeds and payment of $100,000 to another
party entitled to participate in the proceeds, TGX recorded a net litigation
settlement gain of $7,100,000. Pursuant to amended credit agreements with BMOF,
50% of the gross settlement proceeds were paid to BMOF in cancellation and full
payment of the non-recourse secured note totaling $5,468,000, including accrued
interest of $816,000. TGX recorded an extraordinary gain for debt forgiveness
of $1,831,000, net of income taxes of $37,000, in conjunction with the
$3,600,000 BMOF final payment.
Other income for 1997 of $125,000 consists of interest income of $25,000, the
sale of the Company's option to purchase a pipeline in Arkansas to a third party
for $50,000 and other miscellaneous revenues. Other revenues for 1996 consisted
primarily of interest income.
Interest expense for 1997 decreased $113,000 or 60% due to 1996 including
accrued interest of $133,000 pursuant to the nonrecourse BMOF note. The accrued
BMOF note interest was payable in kind through issuance of additional notes. In
conjunction with the April 1996 NFG Litigation settlement, BMOF was paid 50% of
the settlement proceeds, pursuant to the amended credit agreement, in
cancellation and full payment of the non-recourse secured note. In conjunction
with the BMOF note settlement, the Company recognized an extraordinary gain from
debt forgiveness, including accrued interest.
Income Tax Expense
- ------------------
Due to tax loss carryforwards, the Company currently pays only federal
alternative minimum income taxes and recognized current tax expense in 1997 and
1996, of $10,000 and $127,000, respectively. In 1996, the Company recognized
a deferred tax asset of $930,000 based on then income projections for 1997 and
1998. As a result of changes in oil and gas prices and actual operations, the
Company recognized in 1997 $250,000 of deferred income tax expense of which
$236,000 was attributed to current operations and $14,000 to an increase in the
deferred tax valuation allowance.
Page 13
<PAGE>
Dividends and Accretion Preferred Stock
- ---------------------------------------
Pursuant to the terms of the TGX bankruptcy plan, dividends for the Senior
Preferred stock were calculated at 10%, compounded annually and resulted in
accrued, but unpaid, dividends expense for 1997 and 1996 of $3,178,000 and
$3,205,000, respectively. Dividends on the Old Preferred Stock were $67,000 for
1997 and 1996. The accretion of the Senior Preferred redemption value, also a
non-cash item, is calculated based on the interest method. Effective with the
Merger, all dividend and accretion obligations were eliminated; however, all
pre- Effective Date dividend and accretion charges continue to be reflected in
the historical results.
FINANCIAL CONDITION
For the first half of 1997, the Company's capital expenditures totaled
$3,228,000, an increase of $2,868,000 from 1996 activity. Of the 1997
expenditures, $2,045,000 or 62% was related to producing well acquisition
activity. The Company also incurred 1997 workover costs of $92,000. The
positive results of these expenditures should result in additional increases in
sales volumes during the second half of 1997.
At June 30, 1997, the Company had negative working capital of $1,091,000
resulting primarily from an increase in accrued capital and operating costs of
$975,000 from year end 1996. Of the accrual increase, $680,000 is related to
the acquisition of additional producing property interest in the Dorcheat Field
area. This acquisition, which was effective May 1, 1997, was closed on July
31, 1997 and financed through long-term debt borrowings under the existing Bank
One credit facility. The Bank One credit facility matures on June 30, 1999 and
the interest rate is the bank's stated rate plus 1.5%. The borrowing base under
the current credit facility at June 30, 1997 was $4,100,000 and is reduced
monthly by $100,000. The borrowing base is redetermined on a semi-annual basis
or at any time at Bank One's election and is anticipated to increase
significantly as a result of 1997 acquisition and drilling activity. The credit
facility is secured by substantially all of the Company's assets and includes
certain financial ratio and default covenants.
The Company, prior to the Merger, had certain dividend and redemption
obligations related to the Senior Preferred shares. For financial reporting
purposes, the Senior Preferred shares had both debt and equity characteristics
and, accordingly, was not classified as a component of stockholders' equity.
Effective with the Merger, all preferred Stock dividend and accretion accruals
and associated amounts were eliminated and the associated adjustments to reflect
the Merger resulted in a stockholders' equity balance of $11,467,000 as of June
30, 1997 as compared to a deficit of $69,676,000 as of December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
For the first half of 1997, the Company's cash provided by operating
activities was $1,791,000 which was used primarily to fund the Company's
acquisition and drilling activities. Cash provided by operating activities for
1997 was reduced by the net settlement cost incurred of $186,000 related to the
resignation of the former chief executive officer. Also, included in cash
provided by operating activities is approximately $373,000 of proceeds received
from the Company's 35% equity investment in the Comite Field Plant Venture.
At the end of the second quarter of 1997, the Company had outstanding debt of
$1,500,000 and letters of credit commitments outstanding of $92,000 resulting in
available borrowing capacity of $2,508,000 under its bank credit facility. As a
result of the closing of an acquisition of additional producing property
interest in the Dorcheat Field on July 31, 1997 for $680,000, the outstanding
bank debt increased to $2,000,000. The borrowing base of the bank facility is
scheduled to be redetermined in September.
Page 14
<PAGE>
The Company anticipates that continued development drilling and workovers will
maintain or increase current production volumes. In addition, the Company is
continually evaluating opportunities for acquisition of producing properties and
currently intends to pursue future production volume and reserve base growth
through acquisitions. Additional acquisitions, depending on size, may be
financed through a combination of working capital, bank borrowings, mezzanine
financing, production payments and equity. Effective implementation of the
Company's development and acquisition plans is expected to meet the Company's
long-term operation and liquidity requirements. However, there can be no
assurance that the Company will be successful in such endeavors.
Inflation and Changes in Prices. The Company's revenues have been and will
continue to be affected by changes in oil and natural gas prices which have been
unstable. For management purposes, the Company assumes that oil and natural
gas prices will escalate at 5% per annum and that costs and expenses will
escalate at 4% per annum. The principal effects of inflation on the Company
relate to the costs required to drill, complete and operate oil and natural gas
properties. Drilling costs, which had been on a general downward trend since
the early 1980's have recently been increasing due primarily to an industry wide
increase in drilling activity. The increases in drilling costs are not
anticipated to significantly impact Company current operations.
Page 15
<PAGE>
Part II. Other Information
Item 1. LEGAL PROCEEDINGS
Except as set forth in Note 3 of the Notes to Consolidated Financial
Statements Unaudited included in Part I hereof, since the filing date of the
Annual Report on Form 10-KSB, there have been no substantial developments
related to the legal proceedings described therein.
Item 2. DEFAULTS UPON SENIOR SECURITIES
Prior to the Merger, dividends for the Senior Preferred Stock began
accruing on the effective date of the TGX bankruptcy plan, however, as
of the Effective Date of the Merger, no dividends had been declared.
The Senior Preferred Stock was to receive a 10% annual compounded cash
dividend, payable quarterly, provided however, that the payment of such
dividends did not violate (i) Delaware Law which prohibits the payment
of dividends when such payment would impair the capital of the Company
or (ii) certain covenants in the Company's Credit Agreement with Bank
One, Texas N.A. Effective with the Merger, all Senior Preferred Stock
was exchanged for Sheridan Common Stock and all dividends eliminated.
Item 3. Submission of Matters to a Vote of Security Holders
On June 12, 1997, the Company held a Special Meeting of Shareholders. At
such time the following items were submitted to a vote of security holders.
Such matters were submitted to the security holders through the
solicitation of proxies.
(a) ELECTION OF DIRECTORS
The following persons were elected to serve on the Board of Directors until
the 1998 Annual Meeting of Shareholders or until their successor have been
duly elected and qualified. The Directors received the votes set forth
opposite their respective names:
<TABLE>
<CAPTION>
Withheld
---------
Name For Against Authority
- --------------------- --------- ------- ---------
<S> <C> <C> <C>
Jonathan P. Carroll 3,579,282 0 78,102
Michael A. Gerlich 3,594,326 0 63,058
David H. Scheiber 3,594,326 0 63,058
Jeffrey E. Susskind 3,594,326 0 63,058
</TABLE>
(b) PROPOSALS.
The Shareholders of the Company were requested to vote on the 1997 Flexible
Incentive Plan. Such proposal was approved by the Shareholders. Such proposal
received 2,077,021 votes in favor, 43,272 votes against, and 63,020 abstained or
withheld authority.
Page 16
<PAGE>
Item 4. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 10.29 - Executive Employment Agreement between the Company and B.A.
Berilgen dated as of June 5, 1997. Filed herewith.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
Dated June 12, 1997 reporting under Item 5 the Merger, effective June 12,
1997, of TGX Corporation with and into the Company and recapitalization of
existing security holders.
Page 17
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHERIDAN ENERGY, INC.
(Registrant)
Date: August 14, 1997 By: /S/ Michael A. Gerlich
--------------------------------
Michael A. Gerlich
Vice President and
Chief Financial officer
Page 18
<PAGE>
EXHIBIT 10.29
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement is entered into effective June 5,
1997, ("Effective Date") by and between Sheridan Energy, Inc. ("Employer" or
"the Company"), a Delaware corporation, and B.A. Berilgen ("Executive").
WHEREAS, in conjunction with TGX Corporation's merger into its wholly-
owned subsidiary, Sheridan Energy, Inc., Executive has agreed to serve as
President, Chief Executive Officer, and a member of the Board of Directors ("the
Board") of the Company; and
WHEREAS, in order to effect the foregoing, Employer and Executive desire
to enter into this Employment Agreement (the "Agreement");
NOW, THEREFORE, in consideration of Executive's employment by Employer and
the mutual promises and covenants contained herein, the receipt and sufficiency
of which consideration is hereby acknowledged, Employer and Executive intend by
this Agreement to specify both the terms and conditions of Executive's
employment relationship with Employer and the post-employment obligations of
Executive and Employer.
1. EMPLOYMENT. Employer agrees to employ Executive and Executive agrees to
accept employment and to serve Employer upon the terms and conditions set forth
herein. Such employment is conditioned upon the merger between TGX Corporation
and the Company being approved.
2. TERM. The term (the "Term") of employment of Executive by the Employer
pursuant to this Agreement will commence on July 1, 1997, unless the parties
hereto mutually agree to a different date and end on December 31, 1999, unless
sooner terminated by Employer or Executive as provided for herein, or further
extended upon the mutual agreement of Employer and Executive, each as
hereinafter provided.
<PAGE>
3. POSITION AND DUTIES. Executive shall serve as President and Chief
Executive Officer of the Company and shall have such responsibilities and
authority as may from time to time be assigned to him by the Board. For the
period commencing on the Effective Date and ending on the date that Employer's
successor is duly elected and has qualified, the Company shall expand its
current Board of Directors and shall elect Employee to fill such new position.
Thereafter for so long as Executive is President of the Company, he shall be
nominated by the Nominating Committee of the Company to serve as a member of the
Board of Directors of the Company. Executive shall report directly to the Board.
Executive shall obey all lawful directions of the Board and shall devote his
full-time and best efforts to promote the interests of Employer and to attend to
the business and affairs of the Company in order that he shall faithfully
perform his fiduciary duties and obligations hereunder as may be assigned to, or
vested in him, by the Board.
4. COMPENSATIONS AND RELATED MATTERS.
(a) Salary. During the period of Executive's employment hereunder,
Employer shall pay Executive a base salary at a rate of One
Hundred Ninety Thousand and No/100 ($190,000) per annum in equal
installments payable in accordance with Employer's established
payroll periods.
(b) Bonus. Employer shall pay Executive an annual discretionary bonus
("Annual Bonus") as determined in the sole and exclusive
discretion by the Board or the Compensation Committee of the
Board in an amount not to exceed $50,000 provided that Executive
meets the performance criteria agreed upon between Executive and
the Board's Compensation Committee. The Annual Bonus, if any,
shall be paid to Executive no later than sixty (60) days after
the end of the Company's fiscal year, provided, however,
2
<PAGE>
Executive must be employed on December 31 of each year in order to be
eligible to receive the Annual Bonus for such year.
(c) Reimbursement of Business Expenses. During the term of the Executive's
employment hereunder, Executive shall be entitled to reimbursement for
all reasonable business expenses incurred by Executive in performing
services hereunder; provided that such expenses are incurred and accounted
for in accordance with the policies and procedures established by
Employer.
(d) Club Membership. Employer shall pay the initiation fee which shall not
exceed in the aggregate $3,000, and monthly dues of $500, and any
reasonable charges related to business entertainment in accordance with the
policies and procedures set forth in subsection (c) above at any one
country club and one lunch club. Employer shall not be required to pay
for the initiation fee or monthly or annual dues at more than one country
club and one lunch club.
(e) Vacation. For 1997, Executive shall be entitled to two weeks vacation.
Thereafter, Executive shall be entitled to four weeks paid vacation
annually which shall be taken in each calendar year and shall not be
cumulative. Vacation shall be taken in accordance with the Employer's
vacation policies. Executive shall also be entitled to all paid holidays
given by Employer to its executives.
(f) Benefits. Executive shall be entitled to participate in all of the employee
benefit plans and arrangements in which the executives of the Company are
entitled to participate subject to any requirements for participation in
3
<PAGE>
any such plan or arrangement. The Company shall not make any changes in any
such plans or arrangements which would adversely affect the Executive's
rights or benefits thereunder, unless such change occurs pursuant to a
program applicable to all executives of the Company and does not result in
a proportionately greater reduction in the rights of, or benefits to, the
Executive as compared with any other executive of the Company. The
Executive shall be entitled to participate in or receive benefits under any
employee benefit plan or arrangement made available by the Company in the
future to its executives, subject to, and on a basis consistent with, the
terms, conditions and overall administration of such plan or arrangement.
Nothing paid to the Executive under any plan or arrangement presently in
effect or made available in the future shall be deemed to be in lieu of the
salary or bonus payable to the Executive pursuant to paragraphs (a) and (b)
of this Section.
(g) Stock Options.
(i) Grant of Option. In further consideration of the obligations of the
Executive hereunder, the Company hereby grants to the Executive an
option (the "Option") to purchase a total of 175,000 shares of common
stock of the Company (hereinafter called the "Stock"), under the
Company's 1997 Flexible Incentive Plan (if approved by the Company's
stockholders) (the "Flex Plan") subject to the terms and conditions
hereinafter set forth. Such option shall be proportionately increased
(and the yearly vesting shall similarly be
4
<PAGE>
proportionately increased) if, on the date of grant, the
option price is in excess of the book value of the Company.
(ii) Purchase Price. The purchase price of the Stock covered by
the Option shall be determined in accordance with the terms
of the Flex Plan.
(iii) Exercise of Option. The Option may be exercised, subject to
the limitations contained in this Agreement, by the
Executive during the Executive's employment by the Company
(i) as to not more than 58,333 shares, at any time or from
time to time after one year after the Effective Date, (ii)
as to not more than 116,666 shares, at any time or from
time to time after two years after the Effective Date, and
(iii) as to not more than 175,000 shares, at any time or
from time to time after three years after the Effective
Date, provided, however, if Executive is terminated without
cause after the Termination of this Agreement but before
the final installment of the Option has vested, then and in
that event, such final installment shall vest on the date
of Termination. Except as set forth in the Flex Plan, the
Option shall expire on the day preceding the tenth
anniversary of the Effective Date. The terms and provisions
of the Option shall be set forth in an Option Agreement to
be entered into by the Company and Executive in accordance
with the provisions of the Flex Plan.
5. TERMINATION. The Executive's employment hereunder may be terminated
without any breach of this Agreement only under the following circumstances:
5
<PAGE>
(a) Death. The Executive's employment hereunder shall terminate upon his
death.
(b) Disability. If, as a result of the Executive's incapacity due to physical
or mental illness, the Executive shall have been absent from his duties
hereunder on a full-time basis for the entire period of three (3)
consecutive months or for an aggregate of ninety (90) days within any
twelve (12) month period, and within thirty (30) days after written notice
of termination is given (which may occur before or after the end of such
three-month period) shall not have returned to the performance of his
duties hereunder on a full-time basis, the Employer may terminate the
Executive's employment hereunder.
(c) Cause. The Employer may terminate the Executive's employment hereunder with
or without "Cause." For purposes of this Agreement, the Employer shall have
"Cause" to terminate the Executive's employment hereunder upon: (A) the
continued failure by the Executive to substantially perform his duties
hereunder, after demand for substantial performance is delivered by the
Employer that specifically identifies the manner in which the Employer
believes the Executive has not substantially performed his duties, or (B)
the engaging by the Executive in conduct which is materially injurious to
the Employer; (C) the indictment of Executive on felony criminal charges or
conviction of any crime involving moral turpitude; (D) the commission of
fraud by Executive against any person; or (E) Executive's misappropriation
of funds or property of the Company. Notwithstanding the foregoing, the
Executive shall not be
6
<PAGE>
deemed to have been terminated for "Cause" without: (i) reasonable notice
to the Executive setting forth the reasons for the Employer's intention to
terminate for Cause, (ii) an opportunity for the Executive, together with
his counsel, to be heard before the Board, and (iii) delivery to the
Executive of a Notice of Termination as defined in subsection (f) hereof
from the Board finding that in the good faith opinion of such Board, the
Executive was guilty of conduct set forth above in clause (A) through (E)
of the preceding sentence, and specifying the particulars thereof in
detail.
(d) Other than for "Cause". The Executive may be terminated without Cause at
any time, upon five days notice, at the discretion of the Board.
(e) Termination by the Executive. The Executive may terminate his employment
hereunder: (i) for "Good Reason," as defined herein, or (ii) voluntarily.
For purposes of this Agreement, termination of the Executive's employment
for "Good Reason" shall be deemed to occur if such termination occurs: (i) after
a failure by the Employer to comply with any material provision of this
Agreement which has not been cured within thirty (30) days after notice of such
noncompliance has been given by the Executive to the Employer (ii) within twelve
(12) months after a "change in control," as hereinafter defined, which results
in a significant diminishment in the nature or scope of the authority, power,
function or duty attached to the position which Executive previously maintained
if such diminishment does not have the express written consent of Executive. For
purposes of this Agreement, a "change in control" shall be deemed to have
occurred if one of the following events occurs:
(i) a merger, reorganization or consolidation (a "Merger") of the Company
with any other entity in which the Company is not the
7
<PAGE>
survivor and the stockholders of the Company before the Merger do not
own more than 50% of the stock after the Merger;
(ii) a sale, distribution, or transfer of all or substantially all of the
assets of the Company;
(iii) the acquisition by any one party, or by one or more "affiliated"
parties as defined in Rule 12b-2 under the Securities Exchange Act of
1934, of more than fifty percent (50%) of the outstanding stock of
the Company provided such parties or affiliated parties on the
Effective Date of this Agreement do not own more than 5% of the
Company;
(iv) any event determined by a court to be similar in purpose or effect to
those set forth in subparagraphs (i) through (iii) immediately above,
and therefore properly includable under this paragraph (iv).
(f) Any termination of the Executive's employment by the Employer or by the
Executive (other than as a result of death) shall be communicated by
written Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a notice which shall
indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment
under the provision so indicated. Any termination of Executive as an
employee of the Company whether, without limitation, with or without Cause,
voluntarily, or for Good Reason, shall also constitute a resignation by
Executive from the Board, even if Executive was elected to the Board by
stockholders' vote.
(g) The "Date of Termination" shall mean: (i) if the Executive's employment is
terminated by his death, the date of his death, (ii) if the Executive's
employment is terminated pursuant to subsection (b) above, thirty (30)
8
<PAGE>
days after Notice of Termination is given (provided that the Executive
shall not have returned to the performance of his duties on a full-
time basis during such thirty (30) day period), (iii) if the
Executive's employment is terminated pursuant to subsection (e) above,
the date specified in the Notice of Termination, and (iv) if the
Executive's employment is terminated for any other reason, the date on
which a Notice of Termination is given; provided if within thirty (30)
days after any Notice of Termination the party notified notifies the
other party that a dispute exists concerning the termination, and if
the resolution of such dispute specifically provides for a later Date
of Termination than the foregoing, the Date of Termination shall be
the date specified in the resolution of the dispute, but not later
than the earlier of (I) the expiration of the term of this Agreement,
or (II) the date on which the dispute is finally determined, either by
mutual written agreement of the parties, by binding and final
arbitration award or by a final judgment, order or decree of a court
of competent jurisdiction (the time for appeal therefrom having
expired and no appeal having been perfected).
6. COMPENSATION UPON TERMINATION OR DURING DISABILITY.
(a) In the event of the death of the Executive during the term of this
Agreement, the legal representative of the Executive shall be entitled
to the compensation provided for in Section 4(a) above for the month
in which Executive's death shall have taken place and for a period of
six (6) months thereafter at the rate being paid at the time of death.
9
<PAGE>
(b) In the event of the Disability of the Executive during the Period of
Employment, in addition to any compensation provided for under any
other disability plan provided by the Employer, the Executive shall be
entitled to the compensation provided for in Section 4(a) above, at the
rate being paid at the time of the commencement of the Disability, for
the period of such Disability but not in excess of six (6) months.
(c) If the Executive's employment shall be terminated for "Cause" or
voluntarily by the Executive, the Employer shall pay the Executive his
full salary through the Date of Termination at the rate in effect at
the time Notice of Termination is given and the Employer shall have no
further obligations to the Executive under this Agreement.
(d) If Employer shall terminate Executive's employment other than for
"Cause," as defined herein, then Employer shall pay Executive his
salary through the Term of this Agreement, on Employer's regularly
scheduled payroll dates. If Executive shall terminate his employment
for "Good Reason," as defined in this Agreement, then the Employer
shall pay the Executive his salary through the Term of this Agreement
at the rate in effect at the time Notice of Termination is given;
provided, however, that Executive shall for a twelve (12) month period
subsequent to such Termination be obligated, at Employer's reasonable
request, to consult with Employer for not to exceed 100 hours, and
Employer shall be obligated to pay Executive $125 per hour for any such
consultation.
7. CONFIDENTIALLY AND NON-DISCLOSURE AGREEMENT. Executive acknowledges that
by virtue of Executive's employment with Employer, Executive will be provided
access to certain
10
<PAGE>
confidential and proprietary information and knowledge relating to the
operation, products and services of Employer. This information and knowledge
includes, but is not limited to, Employer's marketing and business plans,
methods of operation, financial information, and other methods of doing
business, customer lists, customer information, sources of supply,
specifications and formulas, know-how, cost and pricing data, processes and
other compilations of information relating to the operation of Employer, maps,
reserve reports, technical information, seismic and other data, as well as any
and all information or material proprietary to Employer or designated as
confidential by Employer and not generally known by persons who are not
employees of Employer, which Executive develops or of which Executive may obtain
knowledge or access through or as a result of the Executive's employment with
Employer (including information and materials conceived, originated, discovered
or developed in whole or in part by Executive at the request or for the benefit
of Employer) (collectively, "CONFIDENTIAL INFORMATION AND TRADE SECRETS").
To assure the continued secrecy and protection of all Confidential
Information and Trade Secrets and in consideration of Employer providing
Executive access to Confidential Information and Trade Secrets, Executive hereby
agrees as follows:
(a) Non-Disclosure of Confidential Information and Trade Secrets. For
so long as the Confidential Information and Trade Secrets remain
confidential, secret or otherwise wholly or partially protectable
by Employer or its assignees, during and after the term of this
Agreement, Executive agrees not to use, reveal, report, publish,
disseminate, duplicate, convey, transfer or otherwise disclose or
permit the disclosure or dissemination of any such information
without the express written consent of Employer. Executive
expressly agrees not to use, directly or indirectly, for
Executive's own
11
<PAGE>
benefit or for the benefit of any other person or entity (except Employer)
any Confidential Information or Trade Secrets. Executive acknowledges that
the Confidential Information and Trade Secrets shall be utilized
exclusively for the benefit of Employer and shall not be used for any
purpose except in the course of Executive's work for Employer. Executive
further agrees not to furnish, duplicate or provide access to any part of
the Confidential Information and Trade Secrets to any person not employed
by Employer, without Employer's written consent.
(b) Protection of Confidential Information and Trade Secrets. Executive
agrees to take any and all precautions necessary to preclude the
dissemination of Employer's Confidential Information and Trade Secrets
and to restrict their use so that such information will not be disclosed or
made accessible to any other person or entity not employed by or affiliated
with Employer. Executive agrees to become familiar with and abide by
all of Employer's rules, guidelines, policies and procedures relating to
Confidential Information and Trade Secrets.
(c) Non-Removal of Employer Property. During the term of this Agreement,
Executive will be provided access to or use of property of Employer,
including, but not limited to such things as computers, beepers, pagers,
office equipment, tools, cellular telephones, contracts, correspondence,
memoranda, files and other business records and documents, training
manuals, operations manuals, guides, drawings, specifications, procedures,
policies, price lists, directories, electronic files, maps, reserve
reports, technical information, seismic and other data and other items
relating to
12
<PAGE>
the business of Employer whether produced or prepared by Employer or
Executive, and whether contained on hard copies or computer disks, drives,
tapes or other forms, and other Writings or recordings which relate to the
business or operation of Employer or contain Confidential Information or
Trade Secrets and all copies thereof (collectively, "COMPANY PROPERTY").
Any and all items of Company Property shall remain the exclusive property
of Employer and shall not be removed from the premises of Employer without
the prior written consent of Employer. All electronic files, recordings and
documents acquired, prepared or created by Executive relating to the (i)
business or operations of Employer; (ii) customers or prospective customers
of Employer; or (iii) sales activities, marketing efforts or business
development, shall be considered Company Property and shall remain the
exclusive property of Employer after termination of this Agreement.
(d) Return of Company Property. Upon the direction of Employer for any
reason and at any time before or after termination of this Agreement,
Executive shall promptly deliver to Employer (at Employer's office to
which the Executive is primarily assigned) all Company Property in the
Executive's possession, custody or control. At any time Employer requests
Executive to return any or all Company Property, whether before or after
termination of this Agreement, Executive agrees to conduct a prompt and
thorough search of Executive's offices, homes, vehicles, personal
computers and any other place Executive has reason to believe Company
Property may be located to ensure that all Company Property is promptly
13
<PAGE>
identified and returned to Employer. Executive expressly agrees not to
duplicate or otherwise make copies of any Confidential Information and
Trade Secrets or other Company Property in anticipation of termination of
this Agreement, and agrees to return to Employer any and all copies and
duplications in the Executive's possession, custody or control should any
such items be located or discovered after termination of this Agreement.
(e) Remedies Upon Executive's Breach or Threatened Breach. In the event that
Executive violates or breaches, or threatens or attempts to violate or
breach this Agreement, Executive acknowledges and agrees that
(i) Employer shall be entitled to all available legal remedies (including
damages) as well as equitable remedies, including the right to obtain
immediate injunctive relief prohibiting the violation or attempt or
threat to violate any obligation contained herein, and enforcing full
compliance with this Agreement;
(ii) Employer has the right to seek and obtain a temporary restraining
order and temporary and permanent injunctions restraining Executive
from disclosing, in whole or in part, the Confidential Information and
Trade Secrets and enforcing Executive's agreement to surrender all or
any portion of Company Property in Executive's possession, custody or
control.
Notwithstanding the rights of Employer to pursue any available legal
remedies, Executive agrees that any violation or attempted violation of this
Agreement would cause immediate and irreparable harm and damage to Employer and
that any legal remedy would be inadequate. Executive specifically acknowledges
the unique nature of the Confidential Information and Trade Secrets, the
necessity to preserve them in order to protect Employer's property rights, and
that any actual or threatened breach of Executive's covenants would cause
Employer irreparable harm and that money damages would not provide an adequate
remedy to Employer. Executive further acknowledges that this Agreement is
independent of and exclusive to any other provision related
14
<PAGE>
to Executive's employment by Employer. The existence of any claim or cause of
action of Executive against Employer, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement of this Agreement.
(f) Survival of Obligations After Termination of Employment
Agreement. Executive acknowledges and agrees that the obligations
of strict confidentiality and non-disclosure set forth herein
shall survive termination of this Agreement and shall continue in
full force and effect notwithstanding the termination of this
Agreement.
8. NON-SOLICITATION. During Executive's employment with Employer, and for
a period of two years after Executive's employment with Employer terminates
whether before or after the termination of this Agreement, Executive agrees that
he shall not:
(a) request, induce or attempt to induce anywhere where Employer does
or has done business, any customer, distributor, broker, agent or
supplier of Employer or any other person or entity doing business
with Employer, to limit, curtail or cancel its business with
Employer or to not do business with Employer; or
(b) request, induce, or attempt to induce anywhere any employee,
consultant, advisor or agent of Employer to terminate or limit
his or her relationship with Employer or not enter into any such
relationship; or
(c) make any statement (orally or in writing) about Employer or any
service or product of Employer which statement may reasonably be
expected to be detrimental to Employer.
For purposes of this provision, "Employer" shall include all affiliated
and related companies.
9. GENERAL PROVISION.
(a) Notices. Any notice or communication required or permitted
hereunder shall be in writing and shall be deemed to have been
duly given upon delivery, if delivered in person, or by any
expedited delivery service which
15
<PAGE>
provides proof of delivery, upon telecopy, facsimile, or similar
telecommunication or on the third business day After mailing, if mailed by
certified or registered mail, postage prepaid, return receipt requested,
addressed as follows, or in such other manner or to such other address as
any party shall hereafter designate by notice in writing to the other
parties hereto:
if to the Company:
Sheridan Energy, Inc.
222 Pennbright, Suite 200
Houston, Texas 77090
Attention: Secretary
if to Executive:
Mr. B.A. Berilgen
6215 Redwood Bridge
Kingwood, Texas 77345
(b) Invalidity. Whenever possible, each provision of this Agreement will be
interpreted in such a manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal,
or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality, or unenforceability will not
affect any other provision, this Agreement will be reformed, construed, and
enforced in any such jurisdiction as if such invalid, illegal, or
unenforceable provisions had never been contained herein, and a new,
enforceable provision shall be substituted which accomplishes the intent of
the invalid, illegal, or unenforceable provision as nearly as practicable.
16
<PAGE>
(c) Entirety of Agreement. This document supercedes all prior agreements
between the parties, written or oral, and embodies the complete agreement
and understanding among the parties, written or oral, which may have
related to the subject matter hereof in any way, and shall not be amended
orally, but only by the mutual agreement of the parties hereto in writing,
specifically referring to this Agreement.
(d) Separability. If any one or more of the provisions contained in this
Agreement shall be held illegal or unenforceable by a court, no other
provision shall be affected by this holding.
(e) Counterparts. This Agreement may be executed in separate counterparts,
any one of which need not contain signatures of more than one party, but
all of which taken together shall constitute the same agreement.
(f) Assignability. Except as expressly indicated herein, this Agreement is
intended to bind and inure to the benefit of, and be enforceable by,
Employer and Executive and their respective heirs, legal representatives,
successors, and permitted assigns. Neither this Agreement nor any of the
duties or obligations hereunder shall be assignable by Executive without
the prior written consent of the Board of Directors of Employer. Employer
may assign this Agreement.
(g) Arbitration/Governing Law. This Agreement and the legal relations created
between the parties hereto shall be governed by and construed under and in
accordance with the laws of the State of Texas, excluding the conflict of
laws provision thereof. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by
17
<PAGE>
arbitration, conducted before a panel of three arbitrator, in Houston,
Texas, in accordance with the rules of the American Arbitration Association
then in effect. Judgment may be entered on the arbitrator's award in any
court having jurisdiction; provided, however, that the Employer shall be
entitled to seek a restraining order or injunction in any court of
competent jurisdiction to prevent any continuation of any violation of this
Agreement and the Executive hereby consents that such restraining order or
injunction may be granted without the necessity of the Company posting any
bond. The expense of such arbitration shall be borne by the Company.
(h) Executive represents and warrants that the execution of this Agreement and
the agreement to be employed by the Employer does not violate the terms
or provisions of Executive's current employment or any other agreement
of Executive.
18
<PAGE>
IN WITNESS WHEREOF, Employer and Executive have executed this
Agreement as of the date and year first above written.
SHERIDAN ENERGY, INC.
By: /s/ Jeffrey Susskind
-----------------------------------
Name: Jeffrey Susskind
Title: Chairman
EXECUTIVE
/s/ B. A. Berilgen
-----------------------------------
B. A. Berilgen
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 575
<SECURITIES> 0
<RECEIVABLES> 1,434
<ALLOWANCES> 120
<INVENTORY> 0
<CURRENT-ASSETS> 2,546
<PP&E> 19,027
<DEPRECIATION> 5,903
<TOTAL-ASSETS> 16,604
<CURRENT-LIABILITIES> 3,637
<BONDS> 0
0
0
<COMMON> 43
<OTHER-SE> 11,424
<TOTAL-LIABILITY-AND-EQUITY> 16,604
<SALES> 3,198
<TOTAL-REVENUES> 3,554
<CGS> 1,079
<TOTAL-COSTS> 1,079
<OTHER-EXPENSES> 1,833
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74
<INCOME-PRETAX> 693
<INCOME-TAX> 260
<INCOME-CONTINUING> 433
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,613)
<EPS-PRIMARY> (2.01)
<EPS-DILUTED> 0
</TABLE>
