<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
<TABLE>
<C> <S>
[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
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
</TABLE>
COMMISSION FILE NUMBER 1-8715
CRYSTAL OIL COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
LOUISIANA 72-0163810
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
229 MILAM STREET, SHREVEPORT, LOUISIANA 71101
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code:
(318) 222-7791
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
COMMON STOCK $.01 PAR VALUE AMERICAN STOCK EXCHANGE, INC.
PACIFIC STOCK EXCHANGE, INCORPORATED
$.06 SENIOR CONVERTIBLE PACIFIC STOCK EXCHANGE, INCORPORATED
VOTING PREFERRED STOCK
(NON-CUMULATIVE), $.01 PAR VALUE
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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 16, 1999, 2,668,122 shares of Common Stock of the registrant
were outstanding. The aggregate market value of the voting stock of the
registrant (based upon the latest closing price prior to March 16, 1999, of such
shares on the American Stock Exchange, Inc. and the Pacific Stock Exchange,
Incorporated) held by non-affiliates of the registrant was approximately $35.8
million.
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
DOCUMENTS REFERENCE TO THIS REPORT
--------- ------------------------
<S> <C>
Proxy Statement for Annual Meeting Part III
of Shareholders to be held in 1999
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Business.................................................... 3
The Company............................................... 3
Business.................................................. 3
Natural Gas Storage and Transportation.................... 3
Sales, Customers and Contracts......................... 4
Competition............................................ 5
Exploration and Production................................ 5
Drilling Activities.................................... 6
Sale of Natural Gas Production......................... 6
Foreign Operations..................................... 7
Competition............................................ 7
Other Business Information................................ 7
Employees.............................................. 7
Regulation................................................ 7
Gas Storage and Transportation......................... 7
Exploration and Production............................. 8
Environmental Matters.................................. 8
Item 2. Properties.................................................. 8
Other Properties....................................... 8
Item 3. Legal Proceedings........................................... 8
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 9
Price Range of Common Stock............................ 9
Dividends.............................................. 9
Item 6. Selected Financial Data..................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
General................................................ 11
Results of Operations.................................. 12
General.............................................. 12
Natural Gas Storage.................................. 12
Exploration and Production........................... 13
Interest and Investment Income......................... 13
Depreciation, Depletion and Amortization Expense....... 13
General and Administrative Expense..................... 14
Interest and Debt Expense.............................. 14
Amortization of Discount on Sale of Future Contract
Receivables
and Forward Sales.................................... 14
Provision for Income Taxes............................. 14
Liquidity and Capital Resources........................ 15
Other Matters.......................................... 16
Forward Looking Statements.................................. 17
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 18
Item 8. Consolidated Financial Statements and Supplementary Data.... 18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 45
Item 11. Executive Compensation...................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 45
Item 13. Certain Relationships and Related Transactions.............. 45
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 46
Signatures ............................................................ 49
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
THE COMPANY
Crystal Oil Company, a Louisiana corporation (the "Company"), owns and
operates through wholly-owned subsidiaries two natural gas storage facilities
located near Hattiesburg, Mississippi. The Company also holds various interests
in natural gas properties primarily in Louisiana.
The Company's corporate strategy has consisted of the expansion of its
revenue generating asset base through the acquisition of income producing assets
and properties that would benefit from the Company's existing tax position and
present potential for capital appreciation. The Company has concentrated its
acquisitions in the energy industry with a focus in natural gas storage and
transportation and natural gas exploration and production. During 1998, the
Company utilized $29 million for the acquisition of its second gas storage
facility near Hattiesburg, Mississippi. Currently, the Company is focusing on
the expansion of its natural gas storage facilities and the continued
development of its natural gas interests with the objective of enhancing the
value of these properties. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General".
The Company was incorporated in 1926 under the laws of the State of
Maryland and reincorporated in the State of Louisiana in 1984. The Company's
executive offices are located at 229 Milam Street, Shreveport, Louisiana 71101,
and its telephone number is (318) 222-7791. Except as otherwise indicated by the
context, the terms "Company" and "Crystal", as used herein, mean Crystal Oil
Company and its consolidated subsidiaries.
BUSINESS
The Company's operations currently consist of two business segments: (i)
natural gas storage and transportation and (ii) exploration and production
primarily of natural gas. Note Q to the Company's consolidated financial
statements contained elsewhere herein sets forth certain financial information
for each of the Company's segments for the years ended December 31, 1998, 1997
and 1996.
NATURAL GAS STORAGE AND TRANSPORTATION
The Company's natural gas storage and transportation operations consist of
the ownership and operation of two natural gas storage facilities and related
assets. The first facility, acquired by the Company in 1995, is comprised of 73
acres outside of Hattiesburg, Mississippi, and consists of three salt caverns
with storage capacity of 5.5 Bcf of natural gas (the "Hattiesburg Facility").
The Hattiesburg Facility is designed to handle 3.5 Bcf of working gas capacity
(that capacity available to customers) and 2.0 Bcf of base gas (that capacity
necessary to be in the facility to maintain the deliverability pressure). The
second facility, acquired in March 1998, is comprised of 16.5 acres less than
one mile from the Hattiesburg Facility and consists of a single high-
deliverability natural gas storage cavern with a working gas capacity of
approximately 3.2 Bcf (the "Petal Facility" and together with the Hattiesburg
Facility, the "Facilities").
The Facilities provide customers with critical natural gas supply security
through a combination of strategic geographic location, pipeline access and
operating flexibility. The Company believes that the location of the facilities
in southeastern Mississippi is favorable due to the proximity to various natural
gas pipeline systems, natural gas supplies and markets.
The Hattiesburg Facility has a maximum injection capacity in excess of 175
million cubic feet ("MMcf") of natural gas per day and a maximum withdrawal
capacity in excess of 350 MMcf of natural gas per day. The Petal Facility is
designed to provide up to 320 MMcf per day of ten-day storage services with
capability of being refilled in twenty days. The ability of the Facilities to
handle these high levels of injections and withdrawals of natural gas makes the
Facilities well suited for customers who desire the ability to meet short
duration load swings and to cover major supply interruption events, such as
hurricanes and temporary
3
<PAGE> 4
losses of production. The high injection and withdrawal rates also allow
customers to take advantage of price savings in natural gas by allowing for
quick delivery. The characteristics of the salt domes at the Facilities permit
sustained periods of high delivery, the ability to quickly switch from full
injection to full withdrawal and provide an impermeable storage medium.
The Facilities are strategically located near various major pipelines
serving the Northeastern and Southeastern natural gas markets. The Company
through its subsidiaries owns 33 miles of intrastate and interstate pipelines
connecting the Company's gas storage facilities to major pipelines in the
surrounding area. At the Facilities, customers can cost effectively transport
significant volumes of natural gas through direct interconnects with
Transcontinental Gas Pipe Line, Tennessee Gas Pipeline, Koch Gateway Pipeline
and the Associated Natural Gas systems and indirect interconnects to the Texas
Eastern Transmission, Southern Natural Gas and Florida Gas Transmission systems.
Natural gas from the facilities also enters the connected pipelines downstream
of the capacity constrained segments of these systems thereby providing ready
access to major natural gas markets.
SALES, CUSTOMERS AND CONTRACTS
The Company provides storage and related transportation services that
permit customers to contract for storage space, injection and withdrawal
capacities and transportation. These services are currently provided on a firm
and interruptible basis to local distribution companies, pipelines, marketers
and producers. In a firm basis contract, the user pays a charge for the
availability of the storage space and for injection and withdrawal rights
regardless of whether the space or injection and withdrawal capacity is actually
used. In an interruptible arrangement, the user customarily pays a per diem fee
because the facility may be unable to make the storage, injection or withdrawal
capacities available if the facility or a customer with a firm contract requires
the space or the use of the facilities. The number of contracts and their terms
for a given storage cavern will depend upon the physical limitations of
available space and injection and withdrawal capacity.
The rates charged by the Company at the Hattiesburg Facility for its
services are negotiated rates subject to regulation by the Mississippi Public
Service Commission (the "MPSC"). Such rates are based on various factors,
including cost of capital and rates of return. The Petal Facility is subject to
regulation by the Federal Energy Regulatory Commission ("FERC") and has been
approved to use market based rates for its storage services. See "Regulation".
At the Hattiesburg Facility, the entire working gas capacity is currently
fully subscribed to eleven customers on a firm basis under long-term contracts
expiring in 2005. The rates under these contracts have been approved by the
MPSC. The Company and the customers have each agreed not to seek any rate
adjustment prior to the year 2000. The customers under these contracts consist
of eight local natural gas distribution companies, one major natural gas
producer and two natural gas marketers. At the Petal Facility, the working gas
capacity is 50% subscribed to a single customer, a natural gas marketer, on a
firm basis under a contract expiring in 2000. The Company is actively marketing
its natural gas storage services at the Petal Facility to maintain its
utilization of capacity beyond the year 2000.
The Company realized $14.2 million, $12.3 million and $12.6 million in
revenues from gas storage services during the years 1998, 1997 and 1996,
respectively. Revenues from gas storage services represented 53%, 62%, and 73%
of total revenues in 1998, 1997 and 1996, respectively.
The Company continues to actively market interruptible storage services at
the Facilities to utilize the unused storage capacity. During 1998, the unused
storage capacity ranged from zero to 55% of total working gas capacity and
averaged 22% over the year. The acquisition of the Petal Facility during the
first quarter of 1998 and a proposed expansion of such facility are expected to
provide additional revenues from gas storage services in future periods.
Currently, the Company is planning an expansion of the Petal Facility through
the addition of a second natural gas storage cavern with approximately the same
capacity as the first cavern and pipeline facilities with interconnects to
multiple interstate pipelines. In conjunction with the proposed expansion, Petal
Gas has held an "open season" to obtain bids from potential customers for the
utilization of the additional storage capacity. The Company is also reviewing
other potential pipeline connections at the
4
<PAGE> 5
Facilities that could be used to enhance the value of these facilities and their
desirability to current and future customers.
COMPETITION
The Company's gas storage facilities compete with other forms of natural
gas storage including other salt dome storage facilities, depleted reservoir
facilities and pipelines. Competition is primarily based on location, the
ability to deliver gas in a timely and reliable manner and cost. Many of the
Company's competitors are significantly larger and have greater capital
resources than the Company.
The Company believes that the existence of the long-term contracts for
storage at the Facilities, the proposed expansion of the Petal Facility and the
location of its gas storage facilities should allow the Company to compete
effectively with other companies for natural gas storage services. Once the
Company's firm storage contracts have expired, the Company will have greater
competition for providing storage services. Such competition will be dependent
upon the nature of the natural gas storage market existing at that time.
EXPLORATION AND PRODUCTION
During the second quarter of 1997, the Company acquired proved producing
and undeveloped properties in the Bethany-Longstreet and Holly Fields in DeSoto
Parish, Louisiana (the "DeSoto Properties") for approximately $11.9 million. The
acquisition of the DeSoto Properties added over 29 Bcf of proved natural gas and
85 thousand barrels of condensate to the Company's reserves. The Company is
conducting a development program at the DeSoto Properties to supplement the 16
producing wells existing at the time of the acquisition. During 1998 and 1997,
the Company's development activities included the drilling of ten and three
gross development wells, respectively, in the DeSoto Properties. The Company
plans to drill additional wells to enhance the existing production from the
DeSoto Properties. The scope and nature of any future acquisitions or other
activities will be dependent upon existing market conditions as well as
available opportunities and resources.
During 1996, the Company's exploration and development activities were
limited to being a non-operator participant in a prospect development and
participating in an exploration program with two industry partners. The
Company's investment in this program is limited in amount and scope.
The Company's net volumes of crude oil (including condensate and liquefied
petroleum gases) and natural gas produced and sold from working interests and
the average prices received by the Company for the years ended December 31,
1998, 1997 and 1996 are shown below.
<TABLE>
<CAPTION>
AVERAGE PRICE
VOLUME PER UNIT
------------------- -------------------
BARRELS OF BARRELS OF
YEAR ENDED OIL AND MCF OIL AND MCF
DECEMBER 31 CONDENSATE OF GAS CONDENSATE OF GAS
- ----------- ---------- ------ ---------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1998.................................................. 27 3,736 $13.26 $2.01
1997.................................................. 11 934 19.09 2.48
1996.................................................. 12 155 21.50 2.79
</TABLE>
In 1998, the natural gas production increased as a result of the effect of
the acquisition of the DeSoto Properties for an entire year and the development
program of this property as described above. The Company's natural gas
production reflects the acquisition of the DeSoto Properties during the second
quarter of 1997.
The average production cost (including severance tax) per equivalent Mcf
(barrels converted to natural gas on a 1 barrel to 6 Mcf basis) from producing
activities during 1998, 1997 and 1996 was approximately $.41, $.69, and $.35,
respectively.
5
<PAGE> 6
DRILLING ACTIVITIES
During 1998, the Company's capital expenditures for exploration and
development activities were $11.7 million compared to $4.6 million and $.6
million during 1997 and 1996, respectively. In addition, the expenditures for
1998 and 1996 reflected approximately $1.3 million and $356 thousand in
unsuccessful exploration costs, respectively. Expenditures for exploration and
development activities for 1999 are currently budgeted at approximately $6.2
million and relate primarily to the development program for the DeSoto
Properties.
The following table sets forth the Company's interest in both development
and exploratory wells and the working interest completions for each of the
following years:
EXPLORATORY WELLS
<TABLE>
<CAPTION>
NUMBER OF
WELLS
PARTICIPATED IN
NET
WORKING INTEREST COMPLETIONS
BY THE ------------------------------------------------------
COMPANY OIL GAS DRY WELL
YEAR ENDED ---------------- -------------- -------------- -------------- SUCCESS
DECEMBER 31 GROSS NET GROSS NET GROSS NET GROSS NET RATE
- ----------- ----- --- ----- --- ----- --- ----- --- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998...................... 2 .15 1 .05 -- -- 1 .10 33%
1997...................... -- -- -- -- -- -- -- -- --%
1996...................... 1 .17 -- -- -- -- 1 .17 --%
</TABLE>
DEVELOPMENT WELLS
<TABLE>
<CAPTION>
NUMBER OF WELLS
NET
WORKING INTEREST COMPLETIONS
PARTICIPATED IN --------------------------------------------------------
BY THE COMPANY OIL GAS DRY WELL
YEAR ENDED ---------------- -------------- ---------------- -------------- SUCCESS
DECEMBER 31 GROSS NET GROSS NET GROSS NET GROSS NET RATE
- ----------- ----- --- ----- --- ----- --- ----- --- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998.................. 15 10.17 1 .07 13 10.01 1 .09 99%
1997.................. 3 2.93 -- -- 3 2.93 -- -- 100%
1996.................. 3 .15 -- -- 1 .05 2 .10 33%
</TABLE>
TOTAL EXPLORATORY AND DEVELOPMENT WELLS
<TABLE>
<CAPTION>
NUMBER OF WELLS
NET
WORKING INTEREST COMPLETIONS
PARTICIPATED IN --------------------------------------------------------
BY THE COMPANY OIL GAS DRY WELL
YEAR ENDED ---------------- -------------- ---------------- -------------- SUCCESS
DECEMBER 31 GROSS NET GROSS NET GROSS NET GROSS NET RATE
- ----------- ----- --- ----- --- ----- --- ----- --- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998.................. 17 10.32 2 .12 13 10.01 2 .19 98%
1997.................. 3 2.93 -- -- 3 2.93 -- -- 100%
1996.................. 4 .32 -- -- 1 .05 3 .27 16%
</TABLE>
At December 31, 1998, the Company had proved reserves of 133 thousand
barrels of crude oil and 27.2 Bcf of natural gas with a present value of future
net revenues of approximately $20.3 million. As of December 31, 1998, the
Company owned an aggregate of 29.1 net (34 gross) natural gas wells and .12 (2
gross) crude oil wells and had .08 net (1 gross) well in the process of drilling
and completion.
SALE OF NATURAL GAS PRODUCTION
During 1997, the Company entered into two forward sale arrangements for an
aggregate of 32.7 Bcf of natural gas and 1.6 million barrels of crude oil to be
delivered through December 2002. The aggregate discounted cash price for the
forward sales was approximately $97 million. Current deliveries required under
the forward sales are 4.2 Bcf of natural gas in 1999 and 7.8 Bcf of natural gas
thereafter. During 1998,
6
<PAGE> 7
approximately 28% of the Company's revenues were impacted by the natural gas
forward sales under a long-term agreement.
The forward sales were entered in connection with the Company's ongoing
acquisition program and to permit the Company to take advantage of crude oil and
natural gas trading opportunities. The Company had entered into commodity
hedging arrangements for the purpose of limiting the risk of price volatility
with respect to crude oil and natural gas purchased to satisfy its delivery
obligations under the forward sale arrangements. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources".
FOREIGN OPERATIONS
The Company has a joint venture for the purpose of acquiring an interest
and enhancing the production of crude oil and natural gas from two fields with
existing producing crude oil and natural gas deposits located in the eastern
region of Ecuador. After an evaluation of the prospects of this joint venture,
the Company recorded a charge of $552 thousand during the fourth quarter of 1998
to reflect the estimated recoverable amount of such investment. The Company's
carrying amount of the investment in this joint venture is approximately $326
thousand as of December 31, 1998.
COMPETITION
The natural gas industry is highly competitive in exploration, production
and sale of natural gas reserves. Competitors include the major producing
companies, independent producing companies, individual producers, brokers and
operators and major pipeline companies. In addition, natural gas is subject to
significant competition from numerous other sources including coal and nuclear
power. The Company competes with many other companies having far greater
financial resources than the Company; however, management believes that the
financial resources currently available to the Company are sufficient to permit
the Company to be in a position to compete effectively.
OTHER BUSINESS INFORMATION
EMPLOYEES
At December 31, 1998, the Company employed 25 persons, including officers.
None of the Company's employees are represented by a labor union.
REGULATION
GAS STORAGE AND TRANSPORTATION
Hattiesburg Industrial Gas Sales Company ("HIGS"), a subsidiary of the
Company that serves as operator of the Hattiesburg Facility, is a regulated
utility under the jurisdiction of the MPSC. Accordingly, the rates charged for
natural gas storage services are subject to approval from the MPSC. The present
rates of the firm long-term contracts for gas storage in the Hattiesburg
Facility were approved in 1990. The Company has the right, upon its election, or
shall be obligated upon request of the customers, to submit cost of service
information to the MPSC for a review of the rates charged and to request a
determination by the MPSC of a rate for the remaining term of the firm
contracts.
A portion of the Company's natural gas storage business is also subject to
a limited jurisdiction certificate issued by FERC under Section 7(c) of the
Natural Gas Act of 1938, as amended (the "NGA"). The FERC certificate authorizes
the Company to provide storage services on behalf of interstate pipelines and
local distribution companies for natural gas that may be ultimately consumed
outside of the State of Mississippi. The Company has been authorized by FERC to
charge for storage services provided under the certificate at the rates approved
by the MPSC.
7
<PAGE> 8
Petal Gas Storage Company, the Company's subsidiary that owns the Petal
Facility ("Petal Gas"), is subject to regulation under the NGA and to the
jurisdiction of FERC. FERC regulates the transportation and sale for resale of
natural gas in interstate commerce. Petal Gas currently holds certificates of
public convenience and necessity and is permitted to charge market based rates.
Petal Gas's tariff is on file at FERC and includes general terms and conditions
of storage services. Petal Gas provides firm and interruptible storage and
transportation services on an open and non-discriminatory access basis under
Part 284 of FERC's regulations. The interstate natural gas industry historically
has been heavily regulated by federal and state government and the Company
cannot predict what further actions FERC, state regulators or federal and state
legislators may take in the future.
EXPLORATION AND PRODUCTION
Regulation of exploration and production activities is pervasive. All
jurisdictions (including the federal government in certain instances) in which
the Company owns hydrocarbon properties impose certain restrictions on the
production and sale of crude oil and natural gas, which often include
requirements with respect to spacing of wells, prevention of waste of crude oil
and natural gas resources, limiting days and rates of production, prevention and
remediation of pollution and other environmental requirements and prohibitions,
obtaining drilling permits and similar matters. In addition, various of such
jurisdictions impose safety regulations of other kinds on crude oil and natural
gas operators.
ENVIRONMENTAL MATTERS
The Company's activities in connection with the operation of the Facilities
are subject to environmental and safety regulation of federal and state
authorities including the State of Mississippi Department of Environmental
Quality. In most instances, the regulatory requirements relate to the discharge
of substances into the environment and include measures to control water and air
pollution. Management believes that the Company has obtained and is in current
compliance with the applicable environmental regulations in respect of its
natural gas storage operations.
The Company has been named as a potentially responsible party for
environmental remediation in a claim by an agency of the State of Louisiana.
Under such claim, the State of Louisiana is seeking $4.5 million from all
potentially responsible parties. The State of Louisiana filed a motion with the
First Judicial District Court, Caddo Parish, Louisiana, that included the
Company as a defendant in the state court proceedings. Based on information
known to the Company, the Company does not believe that its ultimate payment
obligations with respect to this matter will have a material adverse impact on
the Company's financial position, results of operations or liquidity.
ITEM 2. PROPERTIES
For information with respect to the Facilities and the natural gas
properties see "Item 1. Business -- Natural Gas Storage and Transportation and
Exploration and Production".
OTHER PROPERTIES
The general office of the Company in Shreveport, Louisiana, occupies
approximately 55,000 square feet in the Crystal Building, which is owned by the
Company through a wholly-owned subsidiary. The Company also owns various
personal property, including computer equipment, transportation equipment and
furniture and fixtures.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently a party to various lawsuits which, in management's
opinion, will not have a significant adverse impact on the Company's financial
position, results of operations or liquidity.
For information with respect to environmental matters see "Item 1. Business
- -- Regulation -- Environmental Matters".
8
<PAGE> 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Common Stock is listed on the American Stock Exchange, Inc. (the
"AMEX") and the Pacific Stock Exchange, Incorporated. The following table sets
forth, for the periods indicated, the reported high and low sales prices per
share of the Common Stock. Prices are based upon the closing sale prices
reported by the AMEX.
<TABLE>
<CAPTION>
1998
--------------------------------------------------
QUARTER ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
High........................... $44 $ 42 1/4 $43 $40
Low............................ 38 38 3/4 38 1/8 36
</TABLE>
<TABLE>
<CAPTION>
1997
--------------------------------------------------
QUARTER ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
High........................... $38 1/4 $ 36 1/2 $39 $43 3/4
Low............................ 34 3/4 33 1/4 33 1/2 38 1/2
</TABLE>
On March 16, 1999, the last reported sales price of the Common Stock on the
AMEX was $35 15/16 per share. The number of holders of record of the Common
Stock as of March 16, 1999, was 353.
DIVIDENDS
The Company has not paid any dividends on the Common Stock since the third
quarter of 1984. Under the terms of the Company's Articles of Incorporation, the
Company may not pay dividends on the Common Stock or its $.06 Senior Convertible
Voting Senior Preferred Stock (non-cumulative), $.01 par value ("Senior
Preferred Stock"), unless (i) there does not exist any superior indebtedness
(which includes the Company's existing obligations under various letters of
credit issued on behalf of the Company that do not expire until the year 2001
and certain indebtedness relating to the securing of such obligations), (ii)
after giving effect to the payment of such dividends, the Company would have at
least $1 in consolidated retained earnings, and (iii) the declaration or payment
of such dividends would not violate any applicable law or provision of any
material contract to which the Company is a party. As a result of this
provision, unless such terms are otherwise modified or amended, the above
restrictions on the Company's ability to pay dividends on its Common Stock will
apply until January 1, 2001. The Company does not anticipate the payment of any
dividends with respect to its capital stock in the foreseeable future.
In conjunction with the agreements entered into regarding the issuance by
Hattiesburg Gas Storage Company, a subsidiary of the Company, in November 1995
of its 8.12% Senior Guaranteed Notes due 2005, certain of the Company's
subsidiaries are subject to various restrictions regarding the distribution of
assets to the Company. However, such restrictions do not restrict the ability of
the Company to pay dividends to its shareholders from available cash and
accumulated earnings, exclusive of the operating cash flows of the subsidiaries
with obligations under such agreements.
9
<PAGE> 10
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------
1998(1) 1997(2) 1996 (3) 1995(3) 1994 (4)
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Revenues.............................. $ 26,848 $ 19,753 $ 17,206 $ 11,518 $43,523
Income from operations before
extraordinary item................. 914 2,080 2,473 1,404 4,426
Income per share from operations
before extraordinary item.......... 1.18 .78 .93 .53 1.74
Income per share from operations
before extraordinary item --
assuming dilution.................. 1.15 .76 .91 .52 1.68
Cash dividends per common share....... -- -- -- -- --
At year-end:
Total assets.......................... 212,783 293,562 169,593 173,445 91,940
Long-term obligations................. 37,784 38,528 36,879 37,860 181
Deferred revenue from sale of future
contract receivables and forward
sales.............................. 29,131 110,931 17,861 22,160 --
Working capital....................... 26,673 67,358 62,028 63,444 75,723
Stockholders' equity.................. 135,962 140,220 113,276 110,549 86,287
</TABLE>
- -------------------------
(1) In 1998, the Company's financial statements reflected the acquisition of
Petal Gas for a total cash purchase price of approximately $29 million, the
utilization of $68 million to satisfy its obligations under the forward sale
transactions entered into during 1997 and the purchase of approximately 7.4
million shares of the Company's Senior Preferred Stock for approximately
$5.2 million in a negotiated transaction. Revenues and results reflected the
effects of the acquisition of Petal Gas in March 1998 and the operations of
the DeSoto Properties for an entire year as such properties were acquired
during the second quarter of 1997. In addition, the results for 1998
included dry hole costs of approximately $1.3 million relating to the
drilling of an unsuccessful exploratory well and a charge of $1.4 million
for the impairment in the carrying values of certain non-operated crude oil
and natural gas properties and an investment in the development of an
enhanced recovery project in Ecuador. Net income per common share for 1998
includes an increase of $2.2 million to net income available to common
shareholders associated with the purchase of the Company's Senior Preferred
Stock for an aggregate consideration that was less than the carrying value
of the shares on the Company's balance sheet.
(2) In 1997, the Company's financial statements reflected the acquisition of the
DeSoto Properties for approximately $11.9 million and the proceeds of
approximately $97 million from the forward sale of crude oil and natural gas
through an increase in fixed assets and marketable securities as well as
deferred revenue from forward sales. In addition, the Company utilized a
portion of its net operating loss carryforwards against the taxable income
generated from the forward sales as well as revised the valuation allowance
for deferred tax assets based upon the projections of future taxable income.
As a result, the Company recorded an increase in stockholders' equity and
net deferred tax assets of approximately $27.6 million in accordance with
the accounting under quasi-reorganization.
(3) In 1996, revenues and results reflected the effect of natural gas storage
operations for an entire year as the Hattiesburg Facility was acquired
during the second quarter of 1995. In 1995, the Company's financial
statements reflected the financing of this acquisition with existing cash,
the sale of five years of future storage contract receivables and borrowings
under a long-term obligation. In addition, the acquisition resulted in an
increase of approximately $24 million to total assets, net of accruals, and
stockholders' equity as a result of the recognition and accounting treatment
for the actual and expected utilization of certain operating loss and tax
credit carryforwards generated prior to the Company's quasi-reorganization.
10
<PAGE> 11
(4) In 1994, the Company disposed of substantially all of its crude oil and
natural gas properties and related assets for approximately $98 million, net
of expenses. This disposition resulted in a $12.5 million net gain on sale
of assets, which is included in revenues, and an increase in working
capital. In addition, the Company reviewed the carrying value of its
remaining assets and liabilities and recorded additional net expense of
approximately $854 thousand. The Company also reduced the carrying value of
a project in the Russian Federation by approximately $2.0 million in the
fourth quarter of 1994 in light of the continuing difficulties existing in
the foreign country. In connection with the Company's 1994 disposition of
crude oil and natural gas properties, the Company prepaid substantially all
of its indebtedness and recorded an extraordinary charge for the early
extinguishment of debt in the amount of approximately $3.8 million ($2.3
million net of taxes).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should assist in the understanding of the
Company's financial condition as of December 31, 1998, as compared to the prior
fiscal year, as well as the Company's operating results for the three years
ended December 31, 1998. Certain material events affecting the business of the
Company are discussed in Items 1 and 3 of this report. The Notes to Consolidated
Financial Statements contain detailed information that should be read in
conjunction with this discussion.
GENERAL
During the last three years, the Company's corporate objective has
consisted of the expansion of its revenue generating asset base through the
acquisition of income producing assets and properties that would benefit from
the Company's existing tax position and present potential for capital
appreciation. The Company has concentrated its acquisitions in the energy
industry with a focus in the natural gas storage and transportation segment
through the acquisition of the Hattiesburg Facility in 1995 and the Petal
Facility in 1998 (as described below) and the exploration and production segment
through the acquisition of the DeSoto Properties in 1997. The Company has
assimilated such acquisitions without the addition of substantial corporate
overhead and administrative expenses. Currently, the Company is focusing on the
expansion of its natural gas storage facilities and the continued development of
its DeSoto Properties with the objective of enhancing the value of these
properties.
On March 12, 1998, the Company consummated the acquisition of Petal Gas
from CMS Energy Corp. for approximately $29 million, net of certain adjustments
and inclusive of acquisition costs of approximately $400 thousand. Petal Gas's
principal asset is the Petal Facility. The Petal Facility has a working natural
gas capacity of 3.2 Bcf and is connected directly to two interstate pipelines,
Tennessee Gas Pipeline and Koch Gateway Pipeline, as well as being connected
indirectly to Transcontinental Gas Pipe Line and Associated Intrastate of
Mississippi through a pipeline owned by another subsidiary of the Company. The
Company is currently planning an expansion of the Petal Facility through the
addition of a second natural gas storage cavern with approximately the same
capacity as the first cavern and pipeline facilities with interconnects to
multiple interstate pipelines. In conjunction with the proposed expansion, Petal
Gas has held an "open season" to obtain bids from potential customers for the
utilization of the additional storage capacity.
During 1998, the Company's exploration and development activities included
the drilling or the participation in the drilling of 14 gross (10.08 net)
successful development wells, one gross (.09 net) unsuccessful development well,
one gross (.05 net) successful exploratory well, and one gross (.10 net)
unsuccessful exploratory well. As of December 31, 1998, the Company had one
gross (.08 net) development well in progress. In addition, the Company is
continuing to review additional acquisition opportunities primarily in the
energy related sector with a focus on acquisitions that will maximize the return
on the Company's existing capital resources and benefit from the availability of
the Company's large net operating loss carryforwards and other tax benefits. As
of December 31, 1998, the Company's financial resources included $34.5 million
in cash, cash equivalents and marketable securities that could be utilized for
the expansion of its natural gas storage facilities, the development program of
the DeSoto Properties and future acquisitions.
11
<PAGE> 12
The Company's only material debt consists of the indebtedness directly
associated with the financing for the acquisition of the Hattiesburg Facility in
1995, with the recourse primarily limited to certain subsidiaries of the Company
and the assets and operations of the Hattiesburg Facility. In management's
opinion, the Company's existing financial resources and expected net cash flow
from operating activities will provide sufficient funds to finance its
anticipated capital expenditures, future debt service obligations and other
liquidity needs. However, additional financing could be required in connection
with future acquisitions and projects depending upon the nature and size of such
capital expenditures. The Company may also seek to finance future acquisitions
with additional equity, if desirable.
The comparability of the Company's financial statements for the periods
presented is affected by the impact of acquisitions on operations.
RESULTS OF OPERATIONS
General
The Company had net income of $914 thousand, $1.18 per share, in 1998
compared to net income of $2.1 million, $.78 per share, and $2.5 million, $.93
per share, in 1997 and 1996, respectively. In comparison to 1997, the Company's
1998 operations included additional revenues of approximately $7.1 million
primarily as a result of additional natural gas storage revenues from the
acquisition of the Petal Facility and an increase in natural gas revenues from
the operation for an entire year of the DeSoto Properties, acquired during the
second quarter of 1997, as well as the effect of a development drilling program
at such properties. These increases were offset by additional expenses of $8.9
million during 1998 resulting from the acquisition of natural gas storage
operations, expansion of natural gas activities and the effect of the
amortization of discount from forward sales of crude oil and natural gas. The
expenses for 1998 also reflected a dry hole charge of $1.3 million relating to
the drilling of an unsuccessful exploratory well and a charge of $1.4 million
for the impairment in the carrying values of certain non-operated crude oil and
natural gas properties and an investment in the development of an enhanced
recovery project in Ecuador. In addition, net income per common share for 1998
reflects includes an increase of $2.2 million to net income available to common
shareholders associated with the purchase of the Company's Senior Preferred
Stock in an unsolicited privately negotiated transaction for an aggregate
consideration that was less than the carrying value of the shares on the
Company's balance sheet. General and administrative expenses for 1997 included
non-recurring expenses of $710 thousand relating to an unsuccessful acquisition
bid for certain crude oil and natural gas properties.
In comparison to 1996, the Company's 1997 operations reflected additional
revenues of $2.5 million primarily as a result of an increase in natural gas
revenues following the acquisition of the DeSoto Properties during the second
quarter of 1997 and an increase in interest and investment income from the
investment of proceeds from the forward sales. These increases were offset by
additional expenses of $3.1 million resulting from the expansion in natural gas
activities, the effect of the amortization of discount from forward sales and
the non-recurring charge for the unsuccessful acquisition bid for certain crude
oil and natural gas properties.
Natural Gas Storage
The Company's natural gas storage activities provided revenues of $14.2
million, $12.3 million and $12.6 million and operating income of $8.7 million,
$8.3 million and $8.5 million in 1998, 1997 and 1996, respectively. The natural
gas storage revenues were primarily derived from firm long-term contracts
totaling $11.7 million in 1998 and $11.0 million in each of 1997 and 1996. The
remaining natural gas storage revenues of approximately $2.5 million, $1.3
million, and $1.6 million for 1998, 1997 and 1996, respectively, were derived
from interruptible storage services, injection and withdrawal charges and other
fees relating to services provided in connection with the storage and delivery
of natural gas at the Facilities. Revenues for 1998 reflected approximately $2.5
million in revenues from the Petal Facility which was partially offset by a
lower demand at the Hattiesburg Facility for interruptible and other storage
services due to weather conditions. The Company is actively marketing its
interruptible storage services as well as pursuing joint venture and other
arrangements with third parties to increase the utilization of its facilities
beyond the use for firm storage services. In addition, the Company is currently
planning an expansion of the Petal Facility through the
12
<PAGE> 13
addition of a second natural gas storage cavern with approximately the same
capacity as the first cavern and pipeline facilities with interconnects to
multiple interstate pipelines. In comparison to 1996, the storage revenues in
1997 reflected a lower demand for interruptible and winter storage due to milder
weather conditions.
The Company's results from natural gas storage activities reflected
operational expenses (including property taxes) of $1.9 million, $1.2 million
and $1.3 million in 1998, 1997 and 1996, respectively, and depreciation and
amortization of $3.6 million in 1998 and $2.8 million in each of 1997 and 1996.
Such increases reflect the effect of the acquisition of the Petal Facility
during the first quarter of 1998.
Exploration and Production
The Company's exploration and production segment contributed revenues of
$7.9 million, $2.5 million and $848 thousand and operating income of $284
thousand, $1.0 million and $86 thousand in 1998, 1997 and 1996, respectively.
During 1998 and 1997, the Company's operating income from production activities
reflected the effect of increased revenues from additional natural gas
production and increased operating expense and depletion expense primarily from
the effect of the acquisition of the DeSoto Properties during the second quarter
of 1997. The expenses for 1998 also reflected a dry hole charge of $1.3 million
relating to the drilling of an unsuccessful exploratory well and a charge of
$1.4 million for the impairment in the carrying values of certain non-operated
crude oil and natural gas properties and an investment in the development of an
enhanced recovery project in Ecuador. In 1996, production revenues reflected the
Company's limited drilling activities prior to the Company's acquisition of the
DeSoto Properties. Exploration cost was $356 thousand in 1996 and reflected the
drilling of an unsuccessful exploratory well. During 1997, the Company did not
incur any unsuccessful exploration costs.
The Company produced 3.7 Bcf, 934 thousand Mcf and 155 thousand Mcf of
natural gas in 1998, 1997 and 1996, respectively. The Company produced 27
thousand, eleven thousand and twelve thousand barrels of crude oil in 1998, 1997
and 1996, respectively. The Company's production of natural gas in 1998 and 1997
was primarily derived from the acquisition and development program for the
DeSoto Properties. The Company's limited production in 1996 resulted from being
a non-operator participant in a prospect development and exploration program.
The average prices received by the Company during 1998 and 1997 were $13.26
per barrel and $19.09 per barrel of crude oil, respectively, and $2.01 per Mcf
and $2.48 per Mcf of natural gas, respectively. The average sale price for
natural gas reflected the effects of the sales under forward contracts and
commodity swap contracts. The Company's limited production of crude oil and
natural gas was sold in 1996 at average prices of $21.50 per barrel of crude oil
and $2.79 per Mcf of natural gas.
INTEREST AND INVESTMENT INCOME
The Company's interest and investment income was approximately $4.7 million
in 1998 compared to approximately $4.9 million and $3.5 million in 1997 and 1996
respectively. The levels of investment income in 1998, 1997 and 1996 reflect the
average investment in debt securities of approximately $86 million, $85 million
and $66 million, respectively, and the effects of the proceeds derived from the
forward sales. In addition, the average interest rate received by the Company on
its investments was 5.47% in 1998, 5.76% in 1997 and 5.30% in 1996. The
Company's liquid assets are primarily invested in investment grade corporate and
government obligations that are for terms of less than two years.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE
The Company recorded depreciation, depletion and amortization expense of
$8.3 million, $3.9 million and $3.3 million in 1998, 1997 and 1996,
respectively. The increase in depreciation, depletion and amortization expense
in 1998 was primarily attributable to the acquisition of the Petal Facility in
the first quarter of 1998 and an increase in natural gas production from the
operation of the DeSoto Properties for an entire year, acquired during the
second quarter of 1997, as well as the effect of a development drilling program
at such properties. In 1998, depreciation, depletion and amortization expense
included an expense of $1.4 million for
13
<PAGE> 14
the impairment in the carrying values of certain non-operated crude oil and
natural gas properties and an investment in the development of an enhanced
recovery project in Ecuador. In comparison to 1996, the increase of
depreciation, depletion and amortization expense in 1997 was primarily
attributable to increases in the volumes of natural gas production and the
depletion rate per net equivalent barrel of production.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense was approximately $2.8 million, $3.4
million and $2.9 million in 1998, 1997 and 1996, respectively. The general and
administrative expense for 1997 included non-recurring expenses totaling $710
thousand relating to an unsuccessful bid for certain crude oil and natural gas
properties. The acquisitions of the DeSoto Properties and the Petal Facility did
not add any significant corporate overhead and administrative expense due to the
consolidation of the acquired operations with the Company's ongoing activities.
INTEREST AND DEBT EXPENSE
The Company's interest and debt expense was $3.3 million in each of 1998,
1997 and 1996. The Company's interest and debt expense reflected the incurrence
of $36.5 million of long-term debt in 1995 for the financing of the acquisition
of the Hattiesburg Facility. The terms of such indebtedness provide for the
payment of interest only through June 30, 2000, at which time principal is to be
amortized through 2005.
AMORTIZATION OF DISCOUNT ON SALE OF FUTURE CONTRACT RECEIVABLES AND FORWARD
SALES
Amortization of discount on sale of future contract receivables and forward
sales was approximately $5.5 million, $3.4 million and $1.5 million in 1998,
1997 and 1996, respectively. Such levels of expense reflected the amortization
of discount on the Company's sale in November 1995 of the contract receivables
from firm gas storage services and the amortization of discount on the two
forward sale transactions entered into in the second and third quarters of 1997.
This expense reflects the amortization of the discount of such contract
receivables through June 30, 2000, the date through which the receivables were
sold, and the amortization under the interest method of discount on the natural
gas forward sales of one contract expiring in 1998 and a second contract
expiring in 2002. The amortization of discount on forward sales is expected to
decrease primarily as a result of the expiration of a forward sale transaction
in 1998.
PROVISION FOR INCOME TAXES
Net income for 1998, 1997 and 1996 included provisions for income taxes of
$742 thousand, $1.4 million and $1.6 million, respectively. As a result of the
Company's quasi-reorganization accounting treatment, the current and future
benefit from utilization of the income tax credits and net operating loss
carryforwards accumulated prior to the Company's quasi-reorganization in 1986
are recorded as an adjustment to additional paid-in capital.
As a result of forward sale arrangements, the Company recognized
approximately $97 million in taxable income in 1997. The Company, however, was
able to apply a portion of its net operating loss tax carryforwards against the
tax that would otherwise have been paid. Because the net operating loss tax
carryforwards related to periods prior to the Company's quasi-reorganization in
1986, the Company recognized no income as a result of its use of its net
operating loss carryforwards. The valuation allowance for deferred tax assets
was reduced by approximately $26.8 million based upon projections for future
taxable income over the periods which the deferred tax assets can be realized as
management believes it is more likely than not that the Company will realize the
benefit of these deductible differences. In 1998, the Company recorded a
deferred tax liability of $4.3 million in conjunction with the acquisition of
Petal Gas, resulting from the difference between the book and tax losses of the
net assets acquired.
In assessing the 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. Based upon projections for future
taxable income over the periods which the
14
<PAGE> 15
deferred tax assets are deductible, management believes it is more likely than
not the Company will realize the benefits of these deductible differences, net
of the existing valuation allowance at December 31, 1998. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had marketable securities of
approximately $20.6 million and cash and cash equivalents of approximately $13.9
million compared to marketable securities of $134.8 million and cash and cash
equivalents of $11.6 million at December 31, 1997. During 1998, the Company
utilized approximately $29 million for the acquisition of Petal Gas,
approximately $68 million to satisfy its obligations under the forward sale
transactions entered into during 1997, approximately $10 million for development
drilling activities at the DeSoto Properties and approximately $5.2 million to
purchase 7.4 million shares of the Company's Senior Preferred Stock. The Company
had no material debt at December 31, 1998, other than the debt directly
associated with the acquisition of the Hattiesburg Facility. Recourse on such a
debt is primarily limited to the assets of certain subsidiaries of the Company
with obligations under the agreements associated with such debt.
During 1997, the Company sold in a forward sale 32.7 Bcf of natural gas and
1.6 million barrels of crude oil for a total amount of approximately $97
million. The proceeds from these sales are reflected for financial accounting
purposes as "Deferred Revenues from Forward Sales" and are recognized as
deliveries are made by the Company based on an undiscounted reference price for
the crude oil and natural gas sold. The imputed charge used in establishing the
sales price of the crude oil and natural gas sold is amortized over the life of
the forward sale contract as the volumes of crude oil and natural gas are
delivered and such charge is recorded as amortization of discount on forward
sales. Current deliveries required under the forward sales are 4.2 Bcf of
natural gas during 1999 and thereafter 7.8 Bcf of natural gas through December
2002. The balance of deferred revenues from forward sales was reduced from
approximately $97 million as of December 31, 1997, to approximately $20.9
million as of December 31, 1998.
The Company entered into hedging arrangements for the purpose of hedging
against the volatility in prices of crude oil and natural gas in the event that
the Company was required to purchase such volumes to satisfy its obligations
with respect to the forward sales. These hedges are designed to limit any
potential losses that the Company could incur on the purchase of crude oil and
natural gas at prices higher than the prices used in the forward sales to the
extent its available production at the scheduled delivery date is less than the
amounts required to be delivered. Under these hedging arrangements, the Company
was either entitled to receive or required to pay an amount of cash equal to the
difference between a scheduled price stated in the hedging contracts and a
reference price per barrel of crude oil or per MMbtu of natural gas multiplied
by the schedule of volumes hedged. These hedge contracts are derivative
financial instruments and do not require deliveries of the commodity hedged.
The Company's derivative financial instruments are held for purposes other
than trading, and accordingly, the gains or losses on the Company hedge
contracts are recognized as deliveries are made by the Company. The cash flows
from future contracts are accounted for as hedges for sales of production and
are classified as operating activities in the consolidated statements of cash
flows.
During the quarter ended June 30, 1998, and as a result of increased
natural gas production from the DeSoto Properties, the Company amended its
commodity swap contract to reduce the volumes hedged during the remainder of
1998 for consideration to the Company of approximately $501 thousand. On
February 5, 1999, the Company also agreed to terminate its commodity swap
contract covering the volumes hedged during the remaining period of 1999 through
2002 for consideration to the Company of approximately $250 thousand. Such gains
are recognized over the scheduled delivery date of the original volumes hedged
under the commodity swap contract.
As a part of the acquisition of the Hattiesburg Facility in 1995, the
Company sold to a trust the right to receive payment from the accounts
receivable generated by the Hattiesburg Facility's long-term contracts. The
receivables were sold without recourse to the Company or its subsidiaries, but
certain subsidiaries of the
15
<PAGE> 16
Company have agreed to be responsible in limited circumstances for failure to
collect on the accounts receivable and for certain force majeure events. The
obligations of such subsidiaries are secured by substantially all of their
assets, including the Hattiesburg Facility. The net proceeds from the sale of
future contract receivables are recognized over the period during which the
receivables are generated and the balance of deferred revenue from such
receivables was approximately $8.2 million and $13.2 million as of December 31,
1998 and 1997, respectively.
Simultaneously with the sale of the Hattiesburg receivables, a subsidiary
of the Company issued approximately $36.5 million in 8.12% Secured Guaranteed
Notes Due 2005 (the "Notes"). The terms of the Notes provide for the payment of
interest only through June 30, 2000, at which time principal is to be amortized
over the remaining life of the Notes. The Notes, which are without recourse to
the Company, are secured by substantially all the assets of certain subsidiaries
of the Company. In addition, the Company currently has outstanding a $1.5
million irrevocable letter of credit to support certain obligations with respect
to the Notes.
In conjunction with the sale of the receivables and the Notes, certain
subsidiaries of the Company agreed to various covenants and agreements relating
to the Hattiesburg Facility. Among such covenants and agreements were covenants
(i) not to take certain actions that would materially adversely affect the
receivables, (ii) with respect to the manner of operation of the Hattiesburg
Facility and the other assets of certain subsidiaries, (iii) restricting the
business of certain subsidiaries to the operation of the Hattiesburg Facility
and restricting the expansion of the Hattiesburg Facility prior to the year
2000, (iv) requiring the continued ownership by certain subsidiaries of the
Hattiesburg Facility and (v) restricting certain affiliated transactions.
Under the Indenture relating to the Notes, certain of the Company's
subsidiaries are subject to various restrictions regarding the distribution of
assets to the Company. However, such restrictions do not restrict the ability of
the Company to pay dividends to its shareholders from available cash and
accumulated earnings, exclusive of the operating cash flows of the subsidiaries
with obligations under the agreements related to such Indenture.
The Company's working capital position decreased by approximately $40.7
million to $26.7 million at December 31, 1998, compared to $67.4 million at
December 31, 1997, primarily as a result of the utilization of existing funds
for the acquisition of Petal Gas and the purchase of the Company's Senior
Preferred Stock during 1998. The Company generated net cash from operating
activities of approximately $12.1 million, $6.5 million and $6.0 million during
1998, 1997 and 1996, respectively. During 1998, the net cash from operating
activities benefitted primarily from the effect of the acquisition of Petal Gas
and the expansion of crude oil and natural gas activities through the
development drilling program of the DeSoto Properties.
Pending the redeployment of the Company's available funds, the Company is
investing its cash primarily in United States government and other investment
grade securities. The Company believes that these securities do not present any
material risks to the Company's liquidity, operations or financial position.
OTHER MATTERS
The Company is addressing the issue of computer programs and embedded
computer chips being unable to distinguish between the year 1900 and the year
2000 and beyond ("Year 2000"). The Year 2000 issues are the result of computer
programs and other automated processes using two digits to identify a year,
rather than four digits. This issue impacts both Information Technology ("IT")
systems and also non-IT systems, including systems incorporating "embedded
processors". The Company has identified and assessed the Year 2000 compliance of
items determined to be critical to its operations. Critical systems are those
applications and systems, including embedded processor technology, which, if not
appropriately remediated, may have a significant impact on natural gas delivery,
revenue collection or the safety of personnel or facilities. After the
assessment of systems, the Year 2000 implementation includes replacing or
upgrading items that are determined not to be Year 2000 compliant, testing such
items and designing and implementing contingency and business continuation
plans. In addition, the Year 2000 compliance includes identifying and
prioritizing critical suppliers and customers and communicating with them about
their plans and progress in addressing
16
<PAGE> 17
the Year 2000 problem. Currently, the Company is obtaining upgrades of
application software from its vendors and the testing phase is ongoing as
hardware or system software is remediated, upgraded or replaced. In addition,
the Company is currently communicating with third parties with which it has
significant relationship to assess third party risks. The Company anticipates
the completion of the remediation and testing phases during the second quarter
of 1999. The total cost associated with required modifications to become Year
2000 compliant is not expected to be material to the Company's financial
position.
The Company's readiness and development of contingency plans are subject to
change depending upon the remediation and testing phases of the Company's
compliance effort and upon developments that may arise as the Company continues
to assess its computer-based systems and operations. The Company anticipates the
completion of the assessment of third party risk and the development of the
contingency plan during the third quarter of 1999. The failure to correct a
critical Year 2000 problem could result in an interruption in, or a failure of,
certain normal business activities or operations and could adversely affect the
Company's results of operations, liquidity and financial condition. Due to the
general uncertainty inherent in the Year 2000 problem, resulting in part from
the uncertainty of the Year 2000 readiness of third-party suppliers and
customers, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the Company's
results of operations, liquidity or financial condition.
The Company is currently subject to various claims regarding environmental
matters, which will require the expenditure of funds for legal costs and could
require additional expenditure of funds for remediation if it is determined that
the Company is responsible for such remediation or otherwise agrees to
contribute to such remediation cost. It is the Company's policy to accrue for
environmental remediation costs if it is probable that a liability has been
incurred and an amount is reasonably estimable. The resolution of the known
environmental matters affecting the Company will be subject to various factors,
including the discovery of additional information with respect to the nature of
contamination at the known sites, the legal responsibility of various parties
for any cleanup obligations, the financial capability of responsible parties and
other actions by governmental agencies and private parties. As of December 31,
1998, the Company has an accrued liability of approximately $1.8 million for
defense and related costs resulting from such environmental claims against the
Company.
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities." This statement established
accounting and reporting standards for derivative instruments and hedging
activities. Effective January 1, 2000, it will require the Company to recognize
all derivatives as either assets or liabilities and to measure those instruments
at fair value in its Consolidated Balance Sheet. A derivative meeting certain
conditions may be designated as a hedge of a specific exposure. Accounting for
changes in a derivative's fair value will depend on the intended use of the
derivative and the resulting designation. Any transition adjustments resulting
from adopting this statement will be reported in net income or other
comprehensive income, as appropriate, as the cumulative effect of a change in
accounting principle. The Company has not yet determined the effects that SFAS
133 will have on its future consolidated financial statements or the amount of
the cumulative adjustment that will be made upon adopting this new standard.
While the Company continues to be affected by fluctuations in the
purchasing power of the dollar, inflation has not had a significant affect on
the Company's earnings or financial condition in recent years.
FORWARD LOOKING STATEMENTS
Statements in this Report other than historical facts are forward-looking
statements made in reliance upon the safe harbor of the Private Securities
Litigation Reform Act of 1995. As such, the involved risks and uncertainties are
subject to change at any time. The Company derives its forward-looking
statements from its operating budgets which are based on various assumptions,
including matters regarding crude oil and natural gas prices, demand and supply
for crude oil and natural gas, changes in the market for natural gas storage and
transportation, the ultimate recovery and realization of the estimated reserves
from the proved producing and undeveloped reserves in the DeSoto Properties,
success of the Company's ability to market interruptible service at the
Hattiesburg Facility and the Petal Facility, the use of the Company's existing
net operating tax loss
17
<PAGE> 18
carryforwards, the ability to become Year 2000 compliant, the Company's
successful execution of its acquisition strategy and internal operating plans
including the expansion of its natural gas storage facilities, labor relations,
regulatory uncertainties and legal proceedings, including in particular its
pending litigation with the State of Louisiana regarding environmental matters.
Although the Company believes its assumptions are reasonable, it is impossible
to predict the impact of certain factors that could cause actual results to
differ materially from those currently anticipated.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of the Company's participation in the acquisition of energy
related assets, the Company has entered into certain acquisition financial
transactions that currently limit its level of exposure to market risks
associated with interest rates and prices of natural gas. In respect to the
market risk associated with natural gas prices, the Company has entered into
forward sale contracts and commodity swap contracts for hedging purposes,
effectively reducing its exposure to price volatility in the physical markets.
Accordingly, the Company's current and expected natural gas production from the
DeSoto Properties is primarily committed for delivery through the year 2002
under a forward sale contract at a weighted average price of $2.01. At December
31, 1998, the Company was also a party to a commodity swap contract that served
as a hedge to the forward sale of natural gas. This commodity swap contract was
designed to convert purchases of natural gas in the open market from variable
prices to scheduled prices stated in the hedging contract. The swap contract had
a notional amount totaling $8.5 million and a fair value of approximately $250
thousand (favorable) based on the proceeds received by the Company during the
first quarter of 1999 to terminate such contract. The Company has limited
sensitivity to fluctuations in natural gas prices as its entire production is
scheduled for delivery under such forward sale contract through the year 2002
and a commodity swap contract entered during 1999 provides a hedge against
potential losses on the purchases of natural gas at prices higher than the
prices used in the forward sales.
The Company is subject to interest rate risk from the utilization of
financial instruments such as term debt for acquisition funding. The fair market
value of long-term debt with fixed-interest rate is subject to interest rate
risk. Generally, the fair value of fixed-interest rate debt will increase as
interest rates fall and will decrease as interest rates rise. At December 31,
1998, the estimated fair values of the Company's long-term debt, including
current maturities, was $39 million. A one percentage-point increase in
prevailing interest rates would result in a decrease in the estimated fair value
of long-term debt of $1.4 million. Initial fair values were determined using the
current rates at which the Company could enter into comparable financial
instruments with similar remaining maturities. The earnings and cash flows
impact for 1999 resulting from an increase in interest rates would be limited as
the Company's debt carries a fixed rate through the year 2005.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
18
<PAGE> 19
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Crystal Oil Company:
We have audited the consolidated balance sheets of Crystal Oil Company and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1998. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the Index at Item 14(a)(2). These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule 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 Crystal Oil
Company and subsidiaries at December 31, 1998 and 1997, and the 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. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG LLP
Shreveport, Louisiana
March 8, 1999
19
<PAGE> 20
CRYSTAL OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 13,855 $ 11,550
Marketable securities..................................... 20,643 58,162
Accounts receivable, net
Gas storage............................................. 946 562
Crude oil and natural gas............................... 952 790
Other receivables....................................... 54 54
Prepaid expenses and other................................ 129 123
-------- --------
TOTAL CURRENT ASSETS.................................. 36,579 71,241
MARKETABLE SECURITIES....................................... -- 76,648
PROPERTY, PLANT AND EQUIPMENT
Gas storage facilities.................................. 127,033 93,436
Producing and non-producing crude oil and natural gas
properties............................................. 28,859 20,096
Land and building....................................... 2,691 2,242
Furniture, office equipment and other................... 969 915
-------- --------
159,552 116,689
Less allowances for depreciation and depletion............ (16,524) (9,343)
-------- --------
NET PROPERTY, PLANT AND EQUIPMENT..................... 143,028 107,346
OTHER ASSETS
Deferred tax assets..................................... 29,947 34,649
Restricted cash and marketable securities............... 1,863 1,901
Others.................................................. 1,366 1,777
-------- --------
33,176 38,327
-------- --------
$212,783 $293,562
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term obligations.................. $ 516 $ 517
Accounts payable.......................................... 8,740 2,904
Other accrued expenses.................................... 650 462
-------- --------
TOTAL CURRENT LIABILITIES............................. 9,906 3,883
LONG-TERM OBLIGATIONS, NET OF CURRENT PORTION............... 37,784 38,528
DEFERRED REVENUE FROM SALE OF FUTURE CONTRACT RECEIVABLES
AND FORWARD SALES......................................... 29,131 110,931
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
$.06 Senior convertible voting preferred stock
(non-cumulative), $.01 par value; $1.00 liquidation
preference; authorized 51,200,773 shares; issued and
outstanding 7,360,753 and 14,788,328, shares,
respectively............................................ 74 148
Common stock, $.01 par value; authorized 20,000,000 and
4,000,000 shares, respectively; issued and outstanding
2,668,122 shares........................................ 27 27
Additional paid-in capital................................ 116,922 122,020
Retained earnings......................................... 18,939 18,025
-------- --------
TOTAL STOCKHOLDERS' EQUITY............................ 135,962 140,220
-------- --------
$212,783 $293,562
======== ========
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 21
CRYSTAL OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES
Gas storage fees.......................................... $14,202 $12,296 $12,568
Crude oil sales........................................... 358 210 258
Natural gas sales......................................... 7,524 2,320 432
Interest, investment and other income..................... 4,764 4,927 3,948
------- ------- -------
26,848 19,753 17,206
COSTS AND EXPENSES
Gas storage operating expenses............................ 1,534 1,011 1,082
Crude oil and natural gas lease operating expense......... 1,193 567 45
Taxes other than income tax............................... 1,298 780 665
General and administrative expense........................ 2,818 3,387 2,935
Interest and debt expense................................. 3,270 3,265 3,259
Amortization of discount on sale of future contract
receivables and forward sales.......................... 5,461 3,358 1,520
Exploration cost.......................................... 1,333 -- 356
Depreciation, depletion and amortization.................. 8,285 3,896 3,281
------- ------- -------
25,192 16,264 13,143
------- ------- -------
INCOME BEFORE INCOME TAXES.................................. 1,656 3,489 4,063
INCOME TAXES................................................ 742 1,409 1,590
------- ------- -------
NET INCOME.................................................. $ 914 $ 2,080 $ 2,473
======= ======= =======
NET INCOME PER COMMON SHARE................................. $ 1.18 $ .78 $ .93
======= ======= =======
NET INCOME PER COMMON SHARE --
ASSUMING DILUTION......................................... $ 1.15 $ .76 $ .91
======= ======= =======
CASH DIVIDENDS PER SHARE OF COMMON STOCK.................... $ -- $ -- $ --
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 22
CRYSTAL OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SENIOR ADDITIONAL
PREFERRED COMMON PAID-IN RETAINED
STOCK STOCK CAPITAL EARNINGS
--------- ------ ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at January 1, 1996........................... $148 $27 $ 96,902 $13,472
Net income......................................... -- -- -- 2,473
Issuance of common stock........................... -- -- 254 --
---- --- -------- -------
Balance at December 31, 1996......................... $148 $27 $ 97,156 $15,945
Net income......................................... -- -- -- 2,080
Issuance of common stock........................... -- -- 44 --
Utilization of net operating loss carryforward and
recognition of deferred tax assets.............. -- -- 26,800 --
Recognition of environmental remediation liability,
net of tax...................................... -- -- (1,980) --
---- --- -------- -------
Balance at December 31, 1997......................... $148 $27 $122,020 $18,025
Net income......................................... -- -- -- 914
Purchase of senior preferred stock................. (74) -- (5,098) --
---- --- -------- -------
Balance at December 31, 1998......................... $ 74 $27 $116,922 $18,939
==== === ======== =======
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 23
CRYSTAL OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 914 $ 2,080 $ 2,473
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of deferred financing cost............... 306 302 276
Depreciation, depletion and amortization.............. 8,285 3,896 3,281
Exploration expenses.................................. 1,333 -- 356
Deferred income tax provision (benefit)............... 438 (407) 1,387
Net loss (gain) on sale of property, plant and
equipment........................................... 83 -- (51)
Net change in accrued interest income................. 1,438 (712) (625)
Increase in accounts receivable....................... (148) (364) (195)
Decrease (increase) in prepaid expenses and other
current assets...................................... 2 (21) 255
Decrease (increase) in other assets................... (15) (311) 140
Increase (decrease) in accounts payable and accrued
expenses............................................ (510) 2,060 (1,276)
--------- --------- ---------
Net cash provided by operating activities............... 12,126 6,523 6,021
--------- --------- ---------
Cash flows from investing activities:
Acquisition of Petal Gas Storage Company, net of cash
received................................................ (29,141) -- --
Acquisition of DeSoto Properties.......................... -- (13,514) --
Proceeds from sale of property, plant and equipment....... 669 -- 66
Capital expenditures...................................... (12,701) (4,643) (860)
Purchase of marketable securities......................... (134,968) (169,989) (117,736)
Maturity of marketable securities......................... 247,697 89,775 118,924
Investment of restricted funds............................ (4,477) -- (1,807)
Reduction of restricted funds............................. 4,515 62 1,320
Other..................................................... -- -- (26)
--------- --------- ---------
Net cash provided by (used in) investing activities..... 71,594 (98,309) (119)
--------- --------- ---------
Cash flows from financing activities:
Reduction in long-term obligations........................ (745) (1,105) (1,004)
Proceeds from issuance of common stock.................... -- 44 254
Reduction of deferred revenue from sale of future contract
receivables
and forward sales....................................... (75,498) (4,786) (4,299)
Payment of costs for financing and sale of future
contracts receivables................................... -- -- (89)
Proceeds from forward sales............................... -- 97,856 --
Payment of costs for forward sale contracts............... -- (249) --
Purchase of senior preferred stock........................ (5,172) -- --
--------- --------- ---------
Net cash provided by (used in) financing activities..... (81,415) 91,760 (5,138)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ 2,305 (26) 764
Cash and cash equivalents at beginning of year.............. 11,550 11,576 10,812
--------- --------- ---------
Cash and cash equivalents at end of year.................... $ 13,855 $ 11,550 $ 11,576
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.................................................. $ 2,963 $ 2,963 $ 3,089
========= ========= =========
Amortization of discount on sale of future contract
receivables and forward sales........................... $ 5,461 $ 3,358 $ 1,520
========= ========= =========
Income taxes.............................................. $ 335 $ 1,985 $ 207
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 24
CRYSTAL OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
Consolidation -- The consolidated financial statements include the accounts
of Crystal Oil Company and subsidiaries (the "Company"), all of which are
wholly-owned. All material intercompany accounts and transactions have been
eliminated.
Business -- The Company's principal business activity consists of the
ownership and operation of two natural gas storage facilities located near
Hattiesburg, Mississippi. The Company also holds various interests in natural
gas properties located primarily in Louisiana. The Company engages in natural
gas storage operations through its acquisition of facilities in June 1995 (the
"Hattiesburg Facility") and March 1998 (the "Petal Facility") (See Note C). The
Hattiesburg Facility is operated as a state law regulated utility under the
jurisdiction of the Mississippi Public Service Commission and the Petal Facility
is subject to federal regulation by the Federal Energy Regulatory Commission.
The Company's natural gas interests are primarily composed of proved producing
and undeveloped reserves in the Bethany-Longstreet and Holly Fields in DeSoto
Parish, Louisiana (the "DeSoto Properties"), which were acquired in 1997 (See
Note C). The comparability of the Company's financial statements for the periods
presented is affected by the impact of acquisitions on operations.
Accounting Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported periods. The actual results could differ from those
estimates.
Cash and Cash Equivalents -- The Company considers all highly liquid debt
instruments with a remaining maturity at date of purchase of three months or
less to be cash equivalents.
Crude Oil and Natural Gas Properties -- The successful efforts accounting
method is followed under which intangible development costs and certain
non-recoverable tangible costs are capitalized with respect to producing wells
and nonproducing development wells and are charged to operations with respect to
nonproducing exploratory wells. Costs to acquire interests in undeveloped leases
are capitalized and either transferred to producing properties when the
properties become productive or charged against the impairment allowance when
surrendered. An impairment allowance for undeveloped leases is determined on a
property-by-property basis for significant properties and in the aggregate for
other properties. Geological and geophysical costs and lease rentals are
expensed as incurred.
The carrying amounts of assets sold or otherwise disposed of, except for
certain development wells, and the related allowances for depreciation and
depletion are eliminated from the accounts, and any resulting gain or loss is
included in operations. Individual development wells in a producing field, which
are retired or otherwise disposed of, are deemed to be fully amortized, and the
related cost is charged to accumulated depreciation and depletion for that
field. The carrying amounts of producing crude oil and natural gas properties
sold from a depletable field is apportioned to the interest sold and the
interest retained on the basis of the fair values of those interests.
Depreciation, Depletion and Amortization -- Depreciation of gas storage
facilities and equipment is provided using the straight-line method over the
estimated useful lives of the assets, which range from 20 to 40 years.
Approximately $8.0 million associated with certain gas storage contracts
providing for firm capacity to various customers is included under the
classification gas storage facilities and is amortized using the straight-line
method over the term of such contracts.
Depletion of intangible drilling and leasehold costs relating to producing
crude oil and natural gas properties is computed by the unit of production
method on a field basis using only proved developed reserves.
24
<PAGE> 25
CRYSTAL OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depletion of leasehold acquisition costs relating to properties acquired is
computed using total proved reserves. The provision for depreciation of other
tangible assets has been computed on a straight-line basis over the estimated
useful lives of the assets.
Long-Lived Assets -- Crude oil and natural gas properties are evaluated by
field for potential impairment; other long-lived assets are evaluated on a
specific asset basis or in groups of similar assets, as applicable.
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. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets based on discounted cash flows. Assets to
be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.
During the year ended December 31, 1998, a valuation adjustment of
approximately $817 thousand was recorded for the impairment of an investment in
certain non-operated crude oil and natural gas properties to the extent that the
carrying amount of producing crude oil and natural gas properties for financial
reporting purposes exceeded the discounted future net cash flow from proved
crude oil and natural gas reserves. In addition, the Company recorded a charge
of approximately $552 thousand to reflect the estimated recoverable amount of an
investment in a joint venture that is expected to engage in workover and
enhanced recovery activities in two fields with existing producing crude oil and
natural gas deposits located in the eastern region of Ecuador. These charges
were reflected in depreciation, depletion and amortization in the consolidated
statement of operations. The Company did not have an impairment in the carrying
value of long-lived assets for the years ended December 31, 1997 and 1996.
Income Taxes -- Net operating loss carryforwards and other tax benefits are
available to offset future federal and state income taxes. The future benefits
from recognition of these benefits accumulated prior to the Company's 1986
reorganization are recorded as an adjustment to additional paid-in capital as a
result of the quasi-reorganization accounting treatment (See Note H).
Deferred Revenue and Amortization of Discount on Sale of Future Contract
Receivables and Forward Sales -- The proceeds derived from the sale of future
contract receivables in 1995 and forward sales in 1997 and their corresponding
discount from scheduled payments and sales of crude oil and natural gas
thereunder are recognized and amortized, based on the discount rate applied in
determining the sales, over the period in which such revenues are generated and
deliveries of crude oil and natural gas are made.
Deferred Costs of Financing, Sale of Future Contract Receivables and
Forward Sales -- The interest method is used to amortize deferred costs relating
to long-term debt, sale of future contracts receivables and forward sales of
crude oil and natural gas.
Reclassifications -- Certain reclassifications have been made in the 1997
and 1996 financial statements to conform to the classifications used in the 1998
financial statements.
Natural Gas Imbalances -- The Company utilizes the "entitlement method" to
account for over and under deliveries of natural gas (gas imbalances) resulting
from the sale by one or more lease owners of volumes in excess of their gross
revenue working interest in total natural gas production from a particular
lease. Under the entitlement method, natural gas revenue is based on the
Company's ownership of the production of natural gas reserves.
The Company also maintains operating balancing agreements with pipeline
companies transporting natural gas into the Company's storage facilities in
order to account for over and under deliveries of natural gas resulting from the
difference between the volumes injected into or withdrawn from the storage
facility through the pipelines and the volumes nominated for the customers
utilizing the storage facility. The Company records an account payable or
receivable to or from the pipeline companies for the over or under delivery of
natural gas
25
<PAGE> 26
CRYSTAL OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and adjusts the level of the Company's base natural gas in the storage facility.
The Company settles the natural gas imbalances with the pipelines through the
exchange of volumes in-kind or cash.
Commodity Swap Contracts -- The Company's derivative financial instruments
are held for purposes other than trading, and accordingly, the gains or losses
on the Company's commodity swap contracts are recognized when the volumes of
crude oil and natural gas being hedged are sold. The cash flows from futures
contracts are accounted for as hedges for sales of crude oil and natural gas and
are classified as operating activities in the consolidated statements of cash
flows. Gains or losses from the termination of hedging contracts will be
recognized over the original periods of such contracts. In the event that the
Company enters into derivative financial instruments for trading purpose or a
commodity swap contract cases to quality as a hedge, the Company will recognize
gains or losses in earnings from the commodity swap contracts based on current
fair values.
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive
Income, in June 1997. SFAS 130 is effective for periods beginning after December
15, 1997. SFAS 130 establishes standards for reporting and displaying
comprehensive income and its components as part of a full set of financial
statements. This statement requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. The adoption of SFAS 130 does not have an
effect on the Company's financial statements as the components of comprehensive
income are not significant.
In June 1998, FASB issued Statement of Financial Accounting Standards No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." This statement established accounting and reporting standards for
derivative instruments and hedging activities. Effective January 1, 2000, it
will require the Company to recognize all derivatives as either assets or
liabilities and to measure those instruments at fair value in its Consolidated
Balance Sheet. A derivative meeting certain conditions may be designated as a
hedge of a specific exposure. Accounting for changes in a derivative's fair
value will depend on the intended use of the derivative and the resulting
designation. Any transition adjustments resulting from adopting this statement
will be reported in net income or other comprehensive income, as appropriate, as
the cumulative effect of a change in accounting principle. The Company has not
yet determined the effects that SFAS 133 will have on its future consolidated
financial statements or the amount of the cumulative adjustment, if any, that
will be made upon adopting this new standard. The Company does not anticipate
the early adoption of SFAS 133.
NOTE B -- INVESTMENTS IN DEBT SECURITIES
Management determines the appropriate classification of its investments in
marketable debt securities at the time of the purchase and reevaluates such
determination at each balance sheet date. At December 31, 1998 and 1997,
marketable debt securities have been categorized as available for sale and as a
result are stated at fair value. Unrealized gains and losses are reported as an
adjustment to other comprehensive income.
The Company's investments in debt securities are classified in the
Company's balance sheet as cash equivalents, marketable securities and
restricted funds. These investments are all highly liquid debt instruments with
a remaining maturity at the time of purchase of less than three months for
investments classified as cash equivalents and greater than three months for
investments classified as marketable securities and restricted funds (See Note
F).
26
<PAGE> 27
CRYSTAL OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the estimated fair value of securities
available for sale by balance sheet classification:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Cash equivalents
U.S. Government Agency Securities..................... $ -- $ 497
Corporate debt securities............................. 9,324 2,495
------- -------
$ 9,324 $ 2,992
======= =======
Current marketable securities
U.S. Treasury bills................................... $ -- $ 4,790
U.S. Treasury notes................................... 5,083 6,022
U.S. Government Agency Securities..................... 1,121 24,773
Corporate debt securities............................. 14,439 22,577
------- -------
$20,643 $58,162
======= =======
Non-current marketable securities
U.S. Treasury notes................................... $ -- $ 4,583
U.S. Government Agency Securities..................... -- 39,625
Corporate debt securities............................. -- 32,440
------- -------
$ -- $76,648
======= =======
Restricted funds
U.S. Treasury bills................................... $ 56 $ 94
======= =======
</TABLE>
The estimated fair value of each investment approximates the amortized
cost, and therefore, the unrealized gains or losses as of December 31, 1998 and
1997, are not significant.
NOTE C -- ACQUISITIONS
On March 12, 1998, the Company consummated the acquisition of Petal Gas
Storage Company ("Petal Gas"), an indirect wholly-owned subsidiary of CMS Energy
Corp., for approximately $29 million, net of certain adjustments and inclusive
of acquisition costs of approximately $400 thousand. Petal Gas owns and operates
a high-deliverability natural gas storage facility near Hattiesburg,
Mississippi, with a working natural gas capacity of 3.2 billion cubic feet
("Bcf"). The facility is connected directly to two interstate pipelines,
Tennessee Gas Pipeline and Koch Gateway Pipeline, and indirectly to
Transcontinental Gas Pipe Line and Associated Intrastate of Mississippi through
a pipeline owned by Hattiesburg Gas Storage Company, a subsidiary of the
Company. The carrying cost of the gas storage facility includes an additional
$4.3 million in costs associated with the deferred tax liability resulting from
the difference between the book and tax bases of the net assets acquired.
The acquisition has been accounted for in accordance with the "purchase
method" of accounting, and accordingly, the results of operations of Petal Gas
are included in the Company's consolidated condensed statements of operations
from the acquisition date.
On May 30, 1997, the Company consummated the acquisition of the DeSoto
Properties for a total cash purchase price of approximately $11.9 million, net
of adjustments and related acquisition costs of approximately $256 thousand. The
acquisition was effective on March 1, 1997, and in accordance with the "purchase
method" of accounting, the results of operations of the acquired properties are
included in the Company's
27
<PAGE> 28
CRYSTAL OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consolidated statements of operations for the period commencing on May 30, 1997.
In addition, the Company acquired the working interest of various owners in the
DeSoto Properties effective on July 1, 1997, for approximately $1.5 million.
During 1997, the Company incurred approximately $.8 million in
non-recurring expenses relating to an unsuccessful bid for certain crude oil and
natural gas properties. These expenses have been included in general and
administrative expense for the year ended December 31, 1997.
NOTE D -- ASSET DISPOSITIONS
During the first quarter of 1998, the Company sold its interest in certain
non-strategic undeveloped crude oil and natural gas properties for cash
consideration of approximately $651 thousand and recognized a net loss on such
disposition of approximately $83 thousand.
NOTE E -- DEFERRED REVENUE FROM SALE OF FUTURE CONTRACT RECEIVABLES AND FORWARD
SALES
On June 6, 1997, the Company entered into a natural gas forward sale of
approximately 16.3 billion cubic feet ("Bcf") of natural gas to be delivered
during the period of September 1997 through December 2002 at a discounted
current cash price of approximately $27 million (the "June 1997 Forward Sale").
Under the June 1997 Forward Sale, the Company has a current obligation to
deliver approximately 4.2 Bcf of natural gas in 1999 and 7.8 Bcf of natural gas
thereafter through 2002. The proceeds from the June 1997 Forward Sale reflected
an 8.1% discount rate and a reference price for the natural gas sold that ranged
between $1.89 and $2.25 per MMbtu for the years 1999 through 2002. The natural
gas sold can be delivered from the production of the DeSoto Properties or other
properties and from other natural gas owned, developed or purchased in the
future.
On September 30, 1997, the Company effected a forward sale of approximately
16.4 Bcf of natural gas and 1.6 million barrels of crude oil to be delivered
during 1998 at a discounted current cash price of approximately $70 million (the
"September 1997 Forward Sale"). The September 1997 Forward Sale was entered in
connection with the Company's ongoing acquisition program, in particular a
significant crude oil and natural gas property acquisition that the Company was
bidding for but was unsuccessful in acquiring during the third quarter of 1997,
as well as to position to the Company to take advantage of crude oil and natural
gas trading opportunities.
The Company satisfied its obligations under the September 1997 Forward Sale
through the purchase of crude oil and natural gas in the open market. To limit
the risk of price volatility with respect to crude oil and natural gas purchased
to satisfy the Company's delivery obligations under the September 1997 Forward
Sale, the Company entered into various commodity hedging arrangements covering
the volumes delivered in 1998 (See Note N). During 1998, the Company recognized
a loss of approximately $150 thousand with respect to its obligation to deliver
crude oil and natural gas under the September 1997 Forward Sale net of the
effect of the corresponding commodity hedging arrangements.
The proceeds from the forward sales are reflected for financial accounting
purposes as "Deferred Revenues from Forward Sales" and are recognized as
deliveries are made by the Company based on an undiscounted reference price for
the crude oil and natural gas sold. The imputed charge used in establishing the
sales price of the crude oil and natural gas sold is being amortized over the
life of the forward sale contract as the crude oil and natural gas are delivered
and recorded as amortization of discount on forward sales. The balance of
deferred revenues from forward sales was reduced from approximately $98 million
as of December 31, 1997, to approximately $20.9 million as of December 31, 1998,
and, the Company recognized a charge of approximately $4.6 million for the
amortization of the discount on forward sales during 1998.
28
<PAGE> 29
CRYSTAL OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1995, indirect wholly-owned subsidiaries of the Company sold the right
to receive payments on the firm storage contract receivables to be generated
through June 30, 2000, from the operation of the Hattiesburg Facility (the
"Hattiesburg Sold Receivables") for a total cash consideration of approximately
$42.7 million, representing $50.6 million at 7.52% annualized discount on the
receivables. Even though the Hattiesburg Sold Receivables were sold without
recourse to the Company, certain obligations under the sales agreement are
secured by substantially all of the assets of certain subsidiaries of the
Company, including the Hattiesburg Facility and its storage contracts, but
excluding the receivables to be generated from the operation of this facility
after June 30, 2000. In addition, the Company has agreed to be responsible for
the payment of up to $4 million during the remaining period through June 30,
2000, for certain limited obligations in the event of bankruptcy of those
subsidiaries of the Company with obligations under the sales agreement. As of
December 31, 1998, restricted funds of approximately $1.8 million also secured
the obligations with respect to the Hattiesburg Sold Receivables.
Immediately prior to the sale of the Hattiesburg Sold Receivables, an
indirect wholly-owned subsidiary of the Company purchased approximately 47.3% of
such receivables for approximately $20.2 million. The net proceeds of $22.5
million from the Hattiesburg Sold Receivables in conjunction with funds of $36.5
million derived from long-term borrowings and existing cash were used by the
Company for acquiring the Hattiesburg Facility in 1995. The net proceeds from
the Hattiesburg Sold Receivables have been classified for accounting purposes as
"Deferred Revenue from Sale of Future Contract Receivables" and will be
recognized over the period during which such receivables are to be generated.
The balance of deferred revenue from the sale of future contract receivables was
approximately $8.2 million and $13.2 million as of December 31, 1998 and 1997,
respectively. The discount between the funds received on the sale of the
Hattiesburg Sold Receivables and the scheduled payments thereunder is being
amortized over the life of the Hattiesburg Sold Receivables based on the
discount rate applied in determining the sale price of the Hattiesburg Sold
Receivables and recorded as "Amortization of Discount on Sale of Future Contract
Receivables." The Company recorded an expense of approximately $825 thousand,
$1.2 million and $1.5 million for the amortization of discount on sale of future
contract receivables in 1998, 1997 and 1996, respectively.
The balance of Deferred Revenue from Sale of Future Contract Receivables
and Forward Sales will be amortized over the next four years as follows:
approximately $12.2 million in 1999, $8.1 million in 2000, $4.6 million in 2001
and $4.2 million in 2002.
NOTE F -- LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
8.12% Secured guaranteed notes, due in monthly amounts
from July 2000 through July 2005...................... $36,474 $36,474
Mortgage note to a bank at prime plus 1/4 of 1%......... 10 10
Other................................................... 1,816 2,561
------- -------
38,300 39,045
Less current portion.................................... (516) (517)
------- -------
Amount classified as long-term.......................... $37,784 $38,528
======= =======
</TABLE>
In 1995, an indirect wholly-owned subsidiary of the Company issued
approximately $36.5 million in 8.12% Secured Guaranteed Notes Due 2005 (the
"Notes"). The terms of the Notes provide for the payment of interest only
through June 30, 2000, at which time principal is to be amortized over the
remaining life of the Notes. The Notes, which are without recourse to Crystal
Oil Company, are secured by substantially all the
29
<PAGE> 30
CRYSTAL OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets of certain subsidiaries of the Company, including the Hattiesburg
Facility and its storage contracts as well as certain accounts receivable to be
generated from the operation of this facility. As of December 31, 1998,
restricted funds of approximately $1.8 million had been pledged to secure the
obligations with respect to the Hattiesburg Sold Receivables. In addition, the
Company currently has outstanding $1.5 million in an irrevocable letter of
credit to support certain obligations with respect to the Notes.
Under the Indenture relating to the Notes, certain of the Company's
subsidiaries are subject to various restrictions regarding the distribution of
assets to the Company. However, such restrictions do not restrict the ability of
the Company to pay dividends to its shareholders from available cash and
accumulated earnings, exclusive of the operating cash flows of the subsidiaries
with obligations under the agreements related to the Indenture.
The Company's amended credit facility with its banks relating to certain
standby letters of credit (the "Credit Agreement") prohibits the declaration and
payment of any dividends on the Company's stock as long as there are outstanding
letters of credit under the Credit Agreement. The latest letter of credit under
the Credit Agreement will terminate on January 1, 2001.
Maturities of debt obligations for each of the next five years are $516
thousand in 1999; $3.5 million in 2000; $6.8 million in 2001; $7.1 million in
2002; and $7.4 million in 2003.
NOTE G -- STOCKHOLDERS' EQUITY
In June 1998, the shareholders of the Company approved an amendment to the
Company's Articles of Incorporation that increased the number of authorized
shares of the Company's Common Stock from four million shares to 20 million
shares. A summary of the Company's capital stock, as of December 31, 1998, is as
follows:
<TABLE>
<CAPTION>
SHARES
SHARES ISSUED AND
AUTHORIZED OUTSTANDING
---------- -----------
<S> <C> <C>
$.06 Senior Convertible Voting Preferred Stock
(Non-Cumulative), $.01 par value ("Senior Preferred
Stock"); $1.00 liquidation preference..................... 51,200,773 7,360,753
Common Stock, $.01 par value ("Common Stock")............... 20,000,000 2,668,122
</TABLE>
The Company's Senior Preferred Stock is entitled to a non-cumulative, $.06
per share annual dividend. However, no dividends may be paid until the following
conditions are met: (a) certain liabilities to the bank, including the standby
letters of credit, the last of which does not expire until January 1, 2001, are
no longer outstanding, (b) after giving effect to such dividends, the Company
has positive retained earnings and (c) the declaration and payment of such
dividends will not violate any applicable law or provision of any material
contract to which the Company is a party. The shares of the Senior Preferred
Stock are convertible at the option of the holder into shares of Common Stock at
any time at the conversion rate of 444.44 shares of Senior Preferred Stock per
share of Common Stock (.00225 of a share of Common Stock per share).
On November 12, 1998, the Company purchased approximately 7.4 million
shares of its Senior Preferred Stock for approximately $5.2 million pursuant to
an unsolicited privately negotiated transaction. The Senior Preferred Stock has
a liquidation preference and a recorded carrying value of $1 for each share
outstanding (See Note J). As a result, if the Company were to have been
liquidated and its assets sold and its liabilities settled at the carrying
values thereof at December 31, 1998, $7.4 million of the equity of the Company
would have been attributed entirely to the Senior Preferred Stock.
Holders of the Senior Preferred Stock are entitled to vote with the holders
of the Common Stock, as a single class, for the election of directors and on all
matters submitted to a vote of stockholders of the Company. Each share of Senior
Preferred Stock is entitled to .001 of a vote.
30
<PAGE> 31
CRYSTAL OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company issued 2,500 shares and 11,500 shares of Common Stock during
1997 and 1996, respectively, for an aggregate consideration of approximately $44
thousand and $254 thousand, respectively, pursuant to the Crystal Oil Company
1992 Employee Stock Option Plan (the "Option Plan") (See Note I). During 1998,
the Company did not issue shares of Common Stock.
The table below shows the total number of shares of Common Stock which, at
December 31, 1998, were reserved for future issuance upon conversion or exercise
of the following securities:
<TABLE>
<CAPTION>
SHARES RESERVED
---------------
<S> <C>
Senior Preferred Stock...................................... 16,562
Shares reserved for issuance pursuant to the Employee Stock
Option Plan (See Note I).................................. 192,875
Warrants issued and outstanding............................. 449,308
-------
658,745
=======
</TABLE>
The Company has reserved for future issuance 192,875 shares of Common Stock
that are issuable pursuant to an Employee Stock Option Plan. Of such shares
reserved, options have been granted and are outstanding to purchase 165,250
shares of Common Stock (See Note I).
As of December 31, 1998, the Company's outstanding warrants allowed its
holders to purchase an aggregate of 449,308 shares of the Company's Common Stock
at per share prices ranging from $97.78 to $325.93. As the outstanding warrants
expired on January 30, 1999, the Company currently has 209,437 shares of Common
Stock reserved for future issuance pursuant to its Senior Preferred Stock and
Employee Stock Option Plan.
NOTE H -- PROVISION FOR INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and net operating
loss carryforwards and other tax benefits. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
The components of the provision for income taxes are:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1998 1997 1996
---- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current-Alternative Minimum Tax........................... $ -- $1,628 $ --
Deferred tax expense (benefit)............................ 473 (615) 1,387
State:
Current................................................... 304 188 203
Deferred tax expense (benefit)............................ (35) 208 --
---- ------ ------
$742 $1,409 $1,590
==== ====== ======
</TABLE>
31
<PAGE> 32
CRYSTAL OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes vary from the amounts computed by applying
the statutory rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1998 1997 1996
----- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Amounts computed by applying statutory rate................. $ 563 $1,186 $1,381
Benefit of state income taxes............................... (103) (64) (69)
Other....................................................... (22) 99 75
----- ------ ------
438 1,221 1,387
State income taxes.......................................... 304 188 203
----- ------ ------
$ 742 $1,409 $1,590
===== ====== ======
</TABLE>
As a result of the Company's quasi-reorganization accounting treatment, the
benefits of utilizing the net operating loss carryforwards and income tax
credits accumulated prior to the Company's reorganization are credited to
additional paid-in-capital and are reported as a provision in lieu of income
taxes in the statement of operations for financial reporting purposes.
The significant components of deferred tax expense attributable to income
from continuing operations for the years ended December 31, 1998, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax expense (exclusive of the effects of other
components below)......................................... $ 438 $1,454 $3,143
Net operating loss and tax benefit carryforwards............ -- (1,861) (1,731)
Decrease in beginning of the year balance of valuation
allowance for deferred tax assets......................... -- -- (25)
----- ------ ------
$ 438 $ (407) $1,387
===== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 1998 and
1997, are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Crude oil and natural gas forward sale contracts.......... $ 8,160 $ 34,549
Sale of future contract receivables....................... 5,328 8,535
Net operating loss carryforwards.......................... 58,753 32,316
Investment tax credit carryforward........................ 1,550 2,555
Percentage depletion carryforward......................... 2,695 2,661
Alternative minimum tax credit carryforward............... 4,220 4,220
State net operating loss carryforward..................... 782 581
Other..................................................... 858 991
-------- --------
Total gross deferred tax assets........................ 82,346 86,408
Less valuation allowance............................... (32,412) (35,075)
-------- --------
Gross deferred tax assets net of valuation
allowance........................................... 49,934 51,333
Total gross deferred tax liability
Property, plant and equipment -- valuation and
depreciation........................................... (19,987) (16,684)
-------- --------
Net deferred tax assets.............................. $ 29,947 $ 34,649
======== ========
</TABLE>
32
<PAGE> 33
CRYSTAL OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The valuation allowance
for deferred tax assets as of January 1, 1998 and 1997, was $32.4 million and
$35.1 million, respectively. The net change in the total valuation allowance for
the years ended December 31, 1998 and 1997, were decreases of $2.7 million and
$27.6 million, respectively. The June 1997 Forward Sale and September 1997
Forward Sale resulted in the Company recognizing approximately $97 million in
taxable income. The Company, however, was able to utilize a portion of its net
operating loss carryforwards against a substantial portion of such taxable
income. Because the net operating loss tax carryforwards related to periods
prior to the Company's quasi-reorganization in 1986, the Company recognized no
income as a result of its use of its net operating loss tax carryforwards. The
valuation allowance for deferred tax assets was reduced by approximately $26.8
million based upon projections for future taxable income over the periods which
the deferred tax assets can be realized as management believes it is more likely
than not that the Company will realize the benefit of these deductible
differences. The change in 1998 relates primarily to the expiration of net
operating loss carryforwards and investment tax credit carryforwards.
In assessing the 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 projected future
taxable income and tax planning strategies in making this assessment. In order
to fully realize the deferred tax asset at December 31, 1998, the Company will
need to generate future taxable income of approximately $87 million in addition
to the reversal of temporary taxable differences prior to the expiration of
current and projected net operating loss carryforwards in 2019. The taxable loss
for 1998 totaled approximately $82.0 million while taxable income of $92.3
million was generated in 1997. The Company generated a taxable loss of $5.1
million in 1996. The taxable income for 1997 differed from income before taxes
due primarily to the recognition of taxable income on forward sales. The taxable
loss for 1998 and 1996 differed from income before taxes due primarily to the
recognition of taxable income on forward sales and storage contracts previously
recognized for tax purposes. Based upon 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 realize the benefits of
these deductible differences, net of the existing valuation allowance at
December 31, 1998. The amount of the deferred tax asset considered realizable,
however, could be reduced if estimates of future taxable income during the
carryforward period are reduced.
Investment tax credits and regular tax net operating loss carryforwards of
$1.5 million and $172.9 million, respectively, are available for federal income
tax purposes with $70 million expiring from 1999 to 2002. In addition, statutory
depletion carryforwards and Alternative Minimum Tax credit carryforwards of $7.9
million and $4.2 million, respectively, are available for federal income tax
purposes and have no expiration date. As a result of the Company's
quasi-reorganization accounting treatment, the future benefit from utilization
of any additional net operating loss carryforwards accumulated prior to the
Company's reorganization, and not previously recognized, will be recorded as an
adjustment to additional paid-in capital.
NOTE I -- EMPLOYEE INCENTIVE AND BENEFIT PLANS
The Company measures compensation cost for employee stock compensation
using the method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". Accordingly, no compensation cost
has been recognized for the Company's Option Plan.
The Company has an Option Plan intended to provide a means whereby certain
key employees of the Company may obtain a proprietary interest in the continued
development and financial success of the Company. The Option Plan provides for
the granting of stock options in the aggregate amount of 300,000 shares of
Common Stock and for a four-year vesting period on the basis of one-fourth
vesting on each anniversary date of the date of grant and subject to earlier
vesting upon the occurrence of certain events such
33
<PAGE> 34
CRYSTAL OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as the substantial disposition of assets. The determination of the individuals
eligible to participate in the Option Plan and the allocation of stock options
to the participants are administered by a committee of the Board of Directors.
Under the program, options have been granted to employees at a price equal to
the then-current market price and all of the options expire ten years after the
date of grant.
During 1998, 1997 and 1996, the Company granted 50,000, 20,000 and 24,000
options, respectively, at market price. The weighted-average fair value of each
of the options was estimated as of the date of grant to be $16.26 for the 1998
options, $14.43 for the 1997 options and $14.32 for the 1996 options using an
option-pricing model with the following assumptions: expected volatility --
22.5%, risk-free interest rate -- 5.65% for 1998 option and 6.25% for 1997 and
1996 options, dividend rate -- zero, and expected option life -- 7 years.
Stock option transactions during 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year.......................... 115,250 $26.86 97,750 $25.06 85,250 $22.50
Granted......................... 50,000 $42.00 20,000 $34.50 24,000 $32.75
Exercised....................... -- (2,500) $17.50 (11,500) $22.08
Forfeited....................... -- -- --
-------- -------- --------
Outstanding at end of year...... 165,250 $31.44 115,250 $26.86 97,750 $25.06
======== ======== ========
Options exercisable at
year-end...................... 83,875 68,500 60,625
======== ======== ========
Weighted-average fair value of
options granted during the
year............................ $ 16.26 $ 14.43 $ 14.32
======== ======== ========
</TABLE>
The following table summarizes certain information about stock options at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$17.50 to $22.13........................ 53,750 4.07 years $20.01 53,750 $20.01
$31.13 to $34.50........................ 61,500 7.29 $32.86 30,125 $32.33
$42.00.................................. 50,000 9.25 $42.00 -- $42.00
------- ------
$17.50 to $42.00........................ 165,250 6.84 $31.44 83,875 $24.44
======= ======
</TABLE>
34
<PAGE> 35
CRYSTAL OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In accordance with SFAS 123, the Company's net income and net income per
share would have been reduced to the pro forma amounts shown in the following
table.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1998 1997 1996
----- ------ ------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net Income
As reported....................................... $ 914 $2,080 $2,473
===== ====== ======
Pro forma......................................... $ 685 $1,958 $2,395
===== ====== ======
Net Income per Common Share
As reported....................................... $1.18 $ .78 $ .93
===== ====== ======
Pro forma......................................... $1.10 $ .73 $ .90
===== ====== ======
Net Income per Common Share, Assuming Dilution
As reported....................................... $1.15 $ .76 $ .91
===== ====== ======
Pro forma......................................... $1.08 $ .72 $ .88
===== ====== ======
</TABLE>
The Company provides a Retirement Savings Plan ("Savings Plan") for its
eligible employees. The Savings Plan allows participants to defer a portion of
their income through contributions to the Savings Plan pursuant to section
401(K) of the Internal Revenue Code. The Savings Plan currently provides for a
matching contribution by the Company equivalent to 50% of each participant's
contribution not exceeding 6% of annual employee compensation with amounts being
vested at a rate of 20% for each year of employment. The Company bears the
administrative costs of the Savings Plan.
The Company provides to its eligible employees the Crystal Oil Company
Employee Stock Ownership Plan (the "ESOP"). Under the ESOP, the Company may
contribute annually an amount, if any, determined by the Board of Directors in a
specified percentage of total employee compensation, not to exceed 10%. All
contributions are made to a trust for the benefit of the employees and are
invested in shares of Common Stock to be purchased by an independent trustee in
the open market. The Company may elect to make its contribution in the form of
shares of Common Stock. The Board of Directors approved a contribution to the
ESOP of $55 thousand in 1998 and $50 thousand in each of 1997 and 1996 or
approximately 5% of total annual employee compensation in each year, which
amounts were recorded as general and administrative expense. At December 31,
1998, 8,897 shares of the Company's Common Stock, purchased in the open market,
are held in trust for the ESOP. The Company's contributions are subject to
vesting based on the number of years that the employee is employed with the
Company at a rate of 20% for each year of employment after the annual
contribution, subject to earlier vesting upon the occurrence of certain events
such as the substantial disposition of assets. In 1994, the participants in the
ESOP became fully vested with respect to previous and future contributions of
the Company as a result of the disposition of substantially all of the Company's
crude oil and natural gas properties. Employees are entitled to receive a single
distribution of the number of vested shares in the employee's account following
retirement, disability, death or termination of employment but may, in
accordance with rules under the ESOP, elect to receive the entire distribution
in cash based on the existing value of the Common Stock.
35
<PAGE> 36
CRYSTAL OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- NET INCOME PER SHARE
A reconciliation of the weighted-average shares outstanding for computation
of basic and diluted income per share for the three years ended December 31,
1998, follows. No difference existed between net income used in computing basic
and diluted income per share for these years.
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(WEIGHTED-AVERAGE SHARES
OUTSTANDING)
<S> <C> <C> <C>
Basic method............................................ 2,668,122 2,666,135 2,661,863
Dilutive preferred stock................................ 16,562 33,274 33,274
Dilutive stock options.................................. 38,636 38,392 32,373
--------- --------- ---------
Assuming dilution....................................... 2,723,320 2,737,801 2,727,510
========= ========= =========
</TABLE>
Warrants representing the rights to acquire 449,308 shares in each of 1998,
1997 and 1996, respectively, were not considered in the computation of diluted
earnings per share because any effects of the warrants would have been
antidilutive.
During the year ended December 31,1998, the Company purchased approximately
7.4 million shares of its Senior Preferred Stock with a recorded carrying value
of $1.00 per share for approximately $5.2 million, $.70 per share. Accordingly,
the excess of the carrying value of the Senior Preferred Stock over the cash
consideration paid to the holders of the Senior Preferred Stock of $2.2 million
was added to net income for the calculation of net income per share available to
common shareholders.
NOTE K -- COMMITMENTS AND CONTINGENCIES
The Company has been named as a potentially responsible party for
environmental remediation in a claim by an agency of the State of Louisiana.
Under such claim, the State of Louisiana is seeking $4.5 million from all
potentially responsible parties. The State of Louisiana filed a motion with the
First Judicial District Court, Caddo Parish, Louisiana, that included the
Company as a defendant in the state court proceedings. Based on information
known to the Company, the Company does not believe that its ultimate payment
obligations with respect to this matter will have a material adverse impact on
the Company's financial position, results of operations or liquidity.
The Company's policy is to accrue environmental remediation costs if it is
probable that a liability has been incurred and an amount is reasonably
estimable. In light of the claim by the State of Louisiana, the Company has an
accrued liability of $1.8 million as of December 31, 1998, for defense and
related costs of such matters. Because the foregoing matters relate to matters
existing prior to the Company's quasi-reorganization in 1986, this accrual was
originally recorded net of related tax impact as an offset to additional paid-in
capital.
The Company is currently a party to various lawsuits which, in management's
opinion, will not have a significant adverse impact on the Company's financial
position, results of operations or liquidity.
On June 18, 1998, the Company entered into various severance agreements
with its officers. These agreements are for a term through June 18, 2000, but
renew annually thereafter if not previously terminated by the officer of the
Company. The agreements provide for a cash payment to the officer equal to a
multiple of one-and-a-half to three times the most recent base salary and
extension of certain employee benefits for a period of time in the event of
termination of employment under certain circumstances and without cause.
The Company currently has outstanding $1.5 million in an irrevocable letter
of credit to support certain obligations with respect to the outstanding $36.5
million Notes. Such letter of credit expires on November 21, 2000. The future
minimum rental payments for all non-cancelable operating leases as of December
31, 1998, are immaterial. Rental expense on operating leases was not significant
in 1998, 1997 and 1996.
36
<PAGE> 37
CRYSTAL OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE L -- EXPLORATION AND PRODUCTION COST DATA AND RESULTS OF OPERATIONS
The following tables set forth certain data with respect to acquisition,
exploration, development and production activities of primarily natural gas.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Acquisition of properties:
Unproved.................................................. $ -- $ -- $ --
Proved.................................................... 96 13,514 --
Exploration costs........................................... 1,208 908 148
Development costs........................................... 10,460 3,644 454
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Aggregate capitalized costs (including work in progress):
Crude oil and natural gas properties...................... $25,339 $11,797
Undeveloped leases and mineral interests.................. 3,520 8,299
Less accumulated depreciation and depletion............... (4,652) (1,151)
------- -------
Costs relating to crude oil and natural gas activities,
net.................................................... $24,207 $18,945
======= =======
</TABLE>
The following are the results of operations from exploration and production
activities:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Sales to unaffiliated customers........................... $7,882 $2,530 $ 690
Other income.............................................. -- -- 158
------ ------ ------
Total revenues......................................... 7,882 2,530 848
Production costs (lease operating expense and taxes)........ 1,592 686 80
Exploration costs........................................... 1,333 -- 356
Depreciation, depletion and impairment(2)................... 4,526 812 326
------ ------ ------
Total costs............................................ 7,451 1,498 762
------ ------ ------
Results of operations before income tax..................... 431 1,032 86
Income tax(1)............................................... 147 351 29
------ ------ ------
Results of operations....................................... $ 284 $ 681 $ 57
====== ====== ======
</TABLE>
- ---------------
(1) Results of operations from exploration and production activities reflect
income taxes for comparative purposes. However, taxable income from
operations is offset by the utilization of the Company's net operating loss
carryforward.
(2) Reflects a charge of $1.4 million for the impairment in the carrying values
of certain non-operated crude oil and natural gas properties and an
investment in the development of an enhanced recovery project in Ecuador.
37
<PAGE> 38
CRYSTAL OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
-------- ------- ------------ ----------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1998
Revenues................................ $6,682 $6,865 $6,556 $6,745 $26,848
====== ====== ====== ====== =======
Gross profit............................ $4,113 $4,569 $4,656 $5,198 $18,536
====== ====== ====== ====== =======
Net income (loss)....................... $ 595 $ (224) $ 510 $ 33 $ 914
====== ====== ====== ====== =======
Net income (loss) per common share...... $ .22 $ (.08) $ .19 $ .85 $ 1.18
====== ====== ====== ====== =======
Net income (loss) per common share,
assuming dilution..................... $ .22 $ (.08) $ .19 $ .83 $ 1.15
====== ====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
-------- ------- ------------ ----------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1997
Revenues................................ $4,464 $4,193 $4,660 $6,436 $19,753
====== ====== ====== ====== =======
Gross profit............................ $3,215 $2,849 $3,082 $3,754 $12,900
====== ====== ====== ====== =======
Net income.............................. $ 814 $ 495 $ 163 $ 608 $ 2,080
====== ====== ====== ====== =======
Net income per common share............. $ .31 $ .19 $ .06 $ .23 $ .78
====== ====== ====== ====== =======
Net income per common share, assuming
dilution.............................. $ .30 $ .18 $ .06 $ .22 $ .76
====== ====== ====== ====== =======
</TABLE>
For the quarter ended June 30, 1998, the results of operations include a
charge to exploration cost of $1.3 million based on the assessment of a well in
progress of being drilled as uneconomical to complete. For the quarter ended
December 31, 1998, the results of operations also include a charge of $1.4
million for the impairment in the carrying values of certain non-operated crude
oil and natural gas properties and an investment in the development of an
enhanced recovery project in Ecuador. In addition, net income per common share
for the quarter ended December 31, 1998, includes an increase of $2.2 million to
net income available to common shareholders associated with the purchase of the
Company's Senior Preferred Stock in an unsolicited privately negotiated
transaction for an aggregate consideration that was less than the carrying value
of the shares on the Company's balance sheet.
NOTE N -- COMMODITY SWAP CONTRACTS
The Company entered into hedging arrangements for the purpose of hedging
against the volatility in prices of crude oil and natural gas in the event that
the Company was required to purchase such volumes to satisfy its obligations
with respect to the June 1997 Forward Sale and September 1997 Forward Sale (the
"Forward Sales"). These hedges are designated to limit any potential losses that
the Company could incur on the purchase of crude oil and natural gas at prices
higher than the prices used in the Forward Sales to the extent its available
production at the scheduled delivery date is less than the amounts required to
be delivered. Under these hedging arrangements, the Company was either entitled
to receive or required to pay an amount
38
<PAGE> 39
CRYSTAL OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of cash equal to the difference between a scheduled price stated in the hedging
contracts and a reference price per barrel of crude oil or per MMbtu of natural
gas multiplied by the schedule of volumes hedged. These hedge contracts are
derivative financial instruments and do not require deliveries of the commodity
hedged.
The Company's derivative financial instruments are held for purposes other
than trading, and accordingly, the gains or losses on the Company hedge
contracts are recognized as deliveries are made by the Company. The cash flows
from future contracts are accounted for as hedges for sales of production and
are classified as operating activities in the consolidated statements of cash
flows.
In connection with the June 1997 Forward Sale, the Company entered into a
hedge contract for the purchase of approximately 40% of the Company's commitment
for delivery of natural gas at monthly prices ranging from $1.89 to $2.35 per
MMbtu during the period of September 1, 1997, through December 31, 2002. During
the quarter ended June 30, 1998, and as result of increased natural gas
production from the DeSoto Properties, the Company amended its commodity swap
contract to reduce the volumes hedged during the remainder of 1998 for
consideration to the Company of approximately $501 thousand. On February 5,
1999, the Company also agreed to terminate its commodity swap contract covering
the volumes hedged during the remaining period of 1999 through 2002 for
consideration to the Company of approximately $250 thousand. Such gains are
recognized over the scheduled delivery date of the original volumes hedged under
the commodity swap contract.
In connection with the September 1997 Forward Sale, the Company entered
into a hedge contract covering 16.4 Bcf of natural gas and 1.6 million barrels
of crude oil during the year 1998 at prices ranging from $2.27 to $3.12 per
MMbtu of natural gas and from $20.26 to $21.21 per barrel of crude oil. The
hedged volumes under this contract covered all the Company's commitment for
delivery under the September 1997 Forward Sale.
Unless otherwise noted, all transactions identified in the financial
statements as hedging transactions are identified and accounted for as hedging
transactions for income tax purposes pursuant to Treasury Regulations Section
1.1221-2T(c).
NOTE O -- CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash and cash equivalents, marketable
securities and trade accounts receivables. The Company consistently invests its
idle funds in debt securities through major banks. At December 31, 1998, the
outstanding balance of these securities included approximately $9.3 million
classified as cash equivalents and $20.6 million classified as marketable
securities, $56 thousand of which are restricted funds, in the accompanying
financial statements. Such investments consist of investment grade corporate and
government obligations with a remaining maturity at the time of purchase of less
than two years.
The Company's revenues from gas storage operations are primarily generated
from providing firm gas storage capacity to eleven customers under 15-year
contracts expiring in 2005 and another customer under a seven year contract
expiring in 2000. These customers consist of eight local natural gas
distribution companies, one major natural gas producer and three natural gas
marketers. The concentration of credit risk in a relatively small number of
customers in the natural gas industry affects the Company's overall exposure to
credit risk because customers may be similarly affected by changes in economic
and other conditions. The Company monitors its outstanding receivables to
ascertain the timely collection of payment from its customers.
39
<PAGE> 40
CRYSTAL OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE P -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values
of certain of the Company's financial instruments at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents............................. $13,855 $13,855 $11,550 $11,550
Current marketable securities......................... 20,643 20,643 58,162 58,162
Non-current marketable securities..................... -- -- 76,648 76,648
Restricted cash and marketable securities............. 1,863 1,863 1,901 1,901
Long-term obligations, including current maturities... 36,556 39,010 36,573 37,914
Deferred revenue from sale of future contract
receivables......................................... 8,231 8,322 13,226 13,291
</TABLE>
The following methods and assumptions were used by the Company in
determining its fair value disclosure for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet approximates fair value due to the short maturity of the cash equivalents.
Marketable securities: Marketable securities consist of debt securities.
Fair values are based on quoted market prices.
Current and Long-Term Obligations: The fair value of the Company's secured
guaranteed notes, note to bank and others is estimated using the discounted cash
flow method based on the Company's borrowing rates for similar types of
financing arrangements.
Deferred Revenue from Sale of Future Contract Receivables: The carrying
amount of the Company's deferred revenue from sale of future contract
receivables reflects the net proceeds from the Hattiesburg Sold Receivables. The
fair value of the Hattiesburg Sold Receivables is estimated using the discounted
cash flow method based on the discount rate for similar types of arrangements.
Off-balance-sheet instruments: Fair values for the Company's letter of
credit contracts are based on costs which would be incurred to terminate
existing agreements and enter into new agreements for similar amounts,
expiration dates and counterparties' credit standing. Such estimated fair value
approximates the carrying amount of the obligation for fees related to the
letters of credit.
The Company's commodity swap contracts serve as hedges to the forward sales
of crude oil and natural gas and have no carrying value. Based on the proceeds
received by the Company during the first quarter of 1999 to terminate such
contracts, the fair value of the swap contracts was a favorable amount of
approximately $250 thousand.
The carrying amounts of account receivable, accounts payable and accrued
expenses approximate their fair value due to the short maturity of these
instruments.
NOTE Q -- SEGMENT INFORMATION AND OTHER
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), "Disclosure about Segments of an Enterprise and Related
Information". SFAS 131 established standards for the disclosure of information
about operating segments beginning with the results for the year ending December
31, 1998, and for each period thereafter, with restated comparative disclosures
for earlier periods. SFAS 131 requires disclosures about an enterprise's
components for which separate financial information is
40
<PAGE> 41
CRYSTAL OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
available and regularly used by the chief operating decision maker in allocating
resources and assessing performance.
The Company has two reportable segments: the natural gas storage and
transportation segment and the exploration and production segment. The Company's
natural gas storage and transportation operations consist of the ownership and
operation of the Hattiesburg Facility and the Petal Facility and their related
assets. The Company's natural gas storage and related transportation services
provide customers with firm availability or daily utilization of storage space,
injection and withdrawal capacities and transportation. The Company's
exploration and production operations primarily consist of proved producing and
undeveloped natural gas reserves from the DeSoto Properties.
The accounting policies of the segments are the same as those described in
the summary of accounting policies. The Company evaluates performance based on
profit from operations before income taxes. The Company's reportable segments
consist of strategic operations that offer different products and services and
require different facilities, technology and marketing strategies.
41
<PAGE> 42
CRYSTAL OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
NATURAL GAS EXPLORATION
STORAGE AND AND
SEGMENT INFORMATION TRANSPORTATION PRODUCTION CORPORATE CONSOLIDATED
- ------------------- -------------- ----------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Segment income (loss) before income taxes.... $ 4,846 $ (1,186) $ (2,004) $ 1,656
Revenues from external customers............. 14,202 7,882 -- 22,084
Intersegment revenues........................ -- -- -- --
Interest, investment and other income........ 297 3,019 1,448 4,764
Interest and debt expense.................... 3,270 -- -- 3,270
Amortization of discount on sale of future
contract receivables and forward sales..... 825 4,636 -- 5,461
Depreciation, depletion and amortization
(1)........................................ 3,567 4,526 192 8,285
Capital expenditures......................... 30,039 11,764 39 41,842
Total assets at year-end..................... 128,302 68,296 16,185 212,783
YEAR ENDED DECEMBER 31, 1997
Segment income (loss) before income taxes.... $ 3,985 $ 215 $ (711) $ 3,489
Revenues from external customers............. 12,296 2,530 -- 14,826
Intersegment revenues........................ -- -- -- --
Interest, investment and other income........ 156 1,355 3,416 4,927
Interest and debt expense.................... 3,265 -- -- 3,265
Amortization of discount on sale of future
contract receivables and forward sales..... 1,186 2,172 -- 3,358
Depreciation, depletion and amortization..... 2,776 812 308 3,896
Capital expenditures......................... 24 18,066 67 18,157
Total assets at year-end..................... 97,571 141,649 54,342 293,562
YEAR ENDED DECEMBER 31, 1996
Segment income before income taxes........... $ 3,774 $ 86 $ 203 $ 4,063
Revenues from external customers............. 12,568 690 -- 13,258
Intersegment revenues........................ -- -- -- --
Interest, investment and other income........ 63 158 3,727 3,948
Interest and debt expense.................... 3,259 -- -- 3,259
Amortization of discount on sale of future
contract receivables and forward sales..... 1,520 -- -- 1,520
Depreciation, depletion and amortization..... 2,759 326 196 3,281
Capital expenditures......................... 176 602 108 886
Total assets at year-end..................... 100,323 2,381 66,889 169,593
</TABLE>
- -------------------------
(1) Includes a charge of $1.4 million for the impairment in the carrying values
of certain non-operated crude oil and natural gas properties and an
investment in the development of an enhanced recovery project in Ecuador.
The Company's revenues from gas storage operations are primarily generated
from providing firm gas storage capacity to eleven customers under 15-year
contracts expiring in 2005 and another customer under a seven year contract
expiring in 2000. During 1997, the Company had two customers that accounted for
$2.1 million (11%) and $1.9 million (10%), respectively, of total revenues.
During 1998, there were no customers to whom sales represented more than 10% of
total revenues.
42
<PAGE> 43
SUPPLEMENTAL INFORMATION
(UNAUDITED)
Supplemental information includes crude oil and natural gas reserve
information pertaining to the Company's crude oil and natural gas exploration
and production operations required by Statement No. 69 of the Financial
Accounting Standards Board entitled "Disclosures About Oil and Gas Producing
Activities".
RESERVE INFORMATION
The following tables present certain information regarding the Company's
proved reserves, all of which are located in the United States. The Company
engaged the independent engineering firm of Coutret and Associates, Inc. to
report on the crude oil and natural gas reserves at December 31, 1998. An
independent review of the reserves was not obtained at December 31, 1997 and
1996. At December 31, 1998 and 1997, the Company's reserves primarily reflected
the acquisition of the DeSoto Properties on May 30, 1997. Prior to the
acquisition in 1997, the Company's reserves were derived from the participation
in drilling activities during 1996 under a prospect development program. The
proved crude oil and natural gas reserves were estimated in all periods
generally utilizing prices and costs then in effect. Actual future net cash
flows will be affected by actual production, supply and demand for crude oil and
natural gas, curtailments or increases in consumption by natural gas purchasers
and changes in governmental regulations or taxation. As required, the prices
used in preparing the following tables are those in effect at the respective
year ends presented, which may vary from prices subsequently received due to
seasonal fluctuations or changes in the industry, except to extent prices are
fixed and determinable from existing forward sale contracts or hedging
arrangements. The timing of future cash flows from proved reserves, and thus
their present value, is affected by the timing of the incurrence of expenses in
connection with their development. In estimating future net cash flows and their
present values, estimates were made about the Company's development drilling
activities.
Net Proved Crude Oil and Natural Gas Reserves -- The proved developed and
undeveloped crude oil and natural gas reserves, all of which are located in the
United States, are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- -------------------
OIL GAS OIL GAS OIL GAS
------- ---------- ------- ---------- ------- ---------
(BARRELS) (MCF) (BARRELS) (MCF) (BARRELS) (MCF)
<S> <C> <C> <C> <C> <C> <C>
Proved developed and undeveloped
reserves:
Beginning of period............. 113,036 28,759,687 26,055 633,319 119,943 1,057,483
Revisions of previous
estimates.................... 43,360 1,208,889 916 (258,619) (85,009) (510,544)
Purchases of minerals in
place........................ 3,521 909,407 84,695 29,208,856 -- --
Extensions, discoveries, and
other additions.............. -- 57,080 11,879 110,402 3,247 241,075
Production...................... (27,352) (3,736,026) (10,509) (934,271) (12,126) (154,695)
------- ---------- ------- ---------- ------- ---------
End of period................... 132,565 27,199,037 113,036 28,759,687 26,055 633,319
======= ========== ======= ========== ======= =========
Proved developed reserves:
Beginning of period............. 76,701 13,490,798 22,808 392,244 77,292 632,570
======= ========== ======= ========== ======= =========
End of period................... 125,217 19,851,172 76,701 13,490,798 22,808 392,244
======= ========== ======= ========== ======= =========
</TABLE>
43
<PAGE> 44
Estimated Standardized Measure of Discounted Future Net Cash Flows -- The
estimated standardized measure of discounted future net cash flows and changes
therein relating to proved crude oil and natural gas reserves are summarized
below:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1998 1997 1996
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows......................................... $56,149 $60,120 $3,206
Future production costs..................................... (16,688) (14,129) (186)
Future development costs.................................... (5,694) (9,142) (82)
------- ------- ------
Future net cash flow, before income tax expense(1)(2)....... 33,767 36,849 2,938
Annual discount of estimated future net cash flow(3)........ (13,516) (15,868) (358)
------- ------- ------
Present value of future net cash flow before income
taxes(4).................................................. 20,251 20,981 2,580
Future income tax expense discounted at 10%(5).............. -- -- --
------- ------- ------
Standardized measure of discounted future net cash
flow(3)................................................... $20,251 $20,981 $2,580
======= ======= ======
Costs relating to crude oil and natural gas activities,
net(6).................................................... $24,207 $18,945 $1,715
======= ======= ======
</TABLE>
- -------------------------
(1) In computing future net cash flow, crude oil and natural gas prices were
based on year-end prices except to the extent that prices are fixed and
determinable from existing forward sale contracts or hedging arrangements.
No deductions have been made for general corporate overhead or any other
indirect costs.
(2) Includes future net cash flow attributable to proved developed non-producing
properties of $378 thousand and $1.7 million in 1998 and 1997, respectively.
The future development costs are not significant in 1998 and 1997. In 1996,
the proved developed reserves do not include non-producing properties.
(3) The annual discount of estimated future net cash flow is defined for use
herein as future net cash flow, before income tax expense, discounted at 10%
per year over the expected period of realization. Standardized measure of
discounted future net cash flows, as used herein, should not be construed as
fair market value, since no consideration has been given to many factors
which influence the prices at which petroleum products are traded, such as
allowance for return on the investment and normal risks incident to the
crude oil and natural gas business.
(4) Includes the present value of future net cash flow before income taxes
attributable to proved developed non-producing properties of $342 thousand
and $1.1 million in 1998 and 1997, respectively. In 1996, the proved
developed reserves do not include non-producing properties.
(5) The future income tax expense varies primarily from the amount computed by
applying statutory rates because of the benefits derived from the
utilization of net operating loss carryforwards and other tax benefits
available for tax purposes. Undiscounted future income taxes were none in
1998, 1997 and 1996.
(6) At December 31, 1998 and 1997, includes approximately $24 million and $16.5
million, respectively, relating to the acquisition and the development of
the DeSoto properties.
44
<PAGE> 45
The following are the principal sources of change in the standardized
measure of discounted future net cash flows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year................................ $20,981 $ 2,580 $ 3,795
Sales and transfers of crude oil and natural gas produced,
net of production costs................................... (6,290) (1,845) (610)
Revisions for net change in price and production costs...... (2,605) (320) 599
Revisions of previous quantity estimates.................... 1,503 (827) (2,179)
Estimated future development costs and other................ 3,998 (481) (143)
Sales of minerals in place.................................. -- -- --
Extensions, discoveries and improved recovery, less related
costs..................................................... 47 348 739
Purchases of minerals in place.............................. 519 21,268 --
Net change in income taxes, net of discount................. -- -- --
Accretion of discount....................................... 2,098 258 379
------- ------- -------
Balance at end of year...................................... $20,251 $20,981 $ 2,580
======= ======= =======
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under Item 10 is incorporated by reference to
information contained in the definitive Proxy Statement with respect to the
Company's Annual Meeting of Shareholders to be held in 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required under Item 11 is incorporated by reference to
information contained in the definitive Proxy Statement with respect to the
Company's Annual Meeting of Shareholders to be held in 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under Item 12 is incorporated by reference to
information contained in the definitive Proxy Statement with respect to the
Company's Annual Meeting of Shareholders to be held in 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under Item 13 is incorporated by reference to
information contained in the definitive Proxy Statement with respect to the
Company's Annual Meeting of Shareholders to be held in 1999.
45
<PAGE> 46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
(a) 1. Financial Statements
Crystal Oil Company and Subsidiaries:
Report of Independent Certified Public Accountants for 19
each year of the three years in the period ended
December 31, 1998......................................
Consolidated Balance Sheets as of December 31, 1998 and 20
1997...................................................
Consolidated Statements of Operations for each of the 21
three years in the period ended December 31, 1998......
Consolidated Statements of Stockholders' Equity for 22
each of the three years in the period ended December
31, 1998...............................................
Consolidated Statements of Cash Flows for each of the 23
three years in the period ended December 31, 1998......
Notes to Consolidated Financial Statements for each of 24
the three years in the period ended December 31,
1998...................................................
Supplemental Information (Unaudited)................... 43
2. Financial Statement Schedules for each of the three years in
the period ended December 31, 1998
Schedule II -- Valuation and qualifying accounts and 48
reserves....................................................
(All other schedules are omitted as the required information
is inappropriate or presented in the Consolidated Financial
Statements or related footnotes.)
3. Exhibits
3.1 Amended and Restated Articles of Incorporation of the
Company, as amended. (Reference is made to Report on Form
10-K filed by the Company for the period ended December 31,
1993).
3.2 By-laws of the Company, as amended through January 29, 1988
(Reference is made to Report on Form 10-K filed by the
Company for the period ended December 31, 1987).
4.1 Credit Agreement dated March 31, 1995, (the "Credit
Agreement"), between the Company and Bankers Trust Company,
Morgan Guaranty Trust Company of New York and Texas Commerce
Bank, National Association (Reference is made to Report on
Form 10-Q filed by the Company for the period ended March
31, 1995).
4.2 Trust Agreement dated November 21, 1995, between Hattiesburg
Gas Storage Company as Seller, Hattiesburg Industrial Gas
Sales Company as Seller and Servicer and Wilmington Trust
Company as Owner Trustee (Reference is made to Report on
Form 10-K filed by the Company for the period ended December
31, 1995).
4.3 Indenture dated November 21, 1995, between Hattiesburg Gas
Storage Company and Chemical Bank as Indenture Trustee
(Reference is made to Report on Form 10-K filed by the
Company for the period ended December 31, 1995).
4.4 Article IV of the Amended and Restated Articles of
Incorporation of the Company (Reference is made to Exhibit
3.1 contained herein).
10.1 Stock Purchase Agreement dated May 2, 1995, between the
Company as Purchaser and First Reserve Energy Assets Fund,
Limited Partnership and First Reserve Fund V, Limited
Partnership as Sellers. (Reference is made to Report of Form
10-Q filed by the Company for the period ended March 31,
1995).
</TABLE>
46
<PAGE> 47
<TABLE>
10.2 Sale and Servicing Agreement dated November 21, 1995, between Hattiesburg Gas
Storage Company as Seller, Hattiesburg Industrial Gas Sales Company as Seller and
Servicer and Wilmington Trust Company as Owner Trustee (Reference is made to
Report on Form 10-K filed by the Company for the period ended December 31,
1995).
<S> <C> <C> <C>
10.3 First Amendment to the Sale and Servicing Agreement dated as of January 31, 1996,
between Hattiesburg Gas Storage Company as Seller, Hattiesburg Industrial Gas
Sales Company as Seller and Servicer and Wilmington Trust Company as Owner
Trustee (Reference is made to Report on Form 10-K filed by the Company for the
period ended December 31, 1995).
10.4 Form of Indemnity Agreement between the Company and each of its directors and
executive officers (Reference is made to Report on Form 10-K filed by the Company
for the period ended December 31, 1989).
(a) 10.5 Employment Agreement dated August 22, 1989, as amended between the Company and J.
N. Averett, Jr. (Reference is made to Report on Form 10-K filed by the Company
for the period ended December 31, 1989).
(a) 10.6 Crystal Oil Company Employee Stock Option Plan and Form of Option Agreement dated
March 23, 1992, as amended through May 27, 1993, between the Company and its
executives. (Reference is made to Report of Form 10-K filed by the Company for
the period ended December 31, 1993).
(a) 10.7 Crystal Oil Company Employee Stock Ownership Plan dated January 1, 1993, between
the Company and its employees (Reference is made to Report on Form 10-K filed by
the Company for the period ended December 31, 1992).
(a) 10.8 First Amendment to the Crystal Oil Company Employee Stock Ownership Plan dated
July 21, 1993. (Reference is made to Report on Form 10-K filed by the Company for
the period ended December 31, 1993).
*(a) 10.9 Form of Executive Compensation and Severance Agreement dated June 18, 1998,
between the Company and the Executives.
10.10 Natural Gas Inventory Forward Sale Contract dated June 6, 1997, between Crystal
Gas L.L.C. and the Chase Manhattan Bank (Reference is made to Report on Form 10-Q
filed by the Company for the period ended June 30, 1997).
*22 Subsidiaries of the Company.
*23 Consent of Independent Auditors dated March 17, 1999.
*27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
None
- -------------------------
(a) Management Incentive Compensation Plans
* Filed herein
47
<PAGE> 48
SCHEDULE II
CRYSTAL OIL COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
ALLOWANCE FOR DOUBTFUL TRADE BEGINNING COSTS AND OTHER END OF
ACCOUNTS RECEIVABLE OF PERIOD EXPENSES ACCOUNTS(B) DEDUCTIONS(A) PERIOD
- ---------------------------- ---------- ---------- ----------- ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1998............................. $ 51 $-- $ 9 $ -- $42
==== === === ==== ===
1997............................. $ 44 $ 7 $-- $ -- $51
==== === === ==== ===
1996............................. $279 $36 $-- $271 $44
==== === === ==== ===
</TABLE>
- -------------------------
(A) Includes uncollectible trade accounts receivable charged-off during the year
against the allowance.
48
<PAGE> 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 17th day of
March 1999.
CRYSTAL OIL COMPANY
By: /s/ J. N. AVERETT, JR.
------------------------------------
J. N. Averett, Jr.
President, Chief Operating
Officer and Director
(Principal Executive Officer)
By: /s/ J. A. BALLEW
------------------------------------
J. A. Ballew
Executive Vice President, Treasurer
and Secretary
(Chief Financial Officer)
By: /s/ PAUL E. HOLMES
------------------------------------
Paul E. Holmes
Vice President/Controller
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ J. N. AVERETT, JR. Director March 17, 1999
- --------------------------------------------------------
J. N. Averett, Jr.
/s/ GEORGE P. GIARD, JR. Director March 17, 1999
- --------------------------------------------------------
George P. Giard, Jr.
/s/ GARY S. GLADSTEIN Director March 17, 1999
- --------------------------------------------------------
Gary S. Gladstein
/s/ ROBERT HODES Director March 17, 1999
- --------------------------------------------------------
Robert Hodes
/s/ DONALD G. HOUSLEY Director March 17, 1999
- --------------------------------------------------------
Donald G. Housley
/s/ LIEF ROSENBLATT Director March 17, 1999
- --------------------------------------------------------
Lief Rosenblatt
</TABLE>
49
<PAGE> 1
Exhibit 10.9
FIRST AMENDED AND RESTATED
EXECUTIVE COMPENSATION AND SEVERANCE AGREEMENT
FIRST AMENDED AND RESTATED EXECUTIVE COMPENSATION AND
SEVERANCE AGREEMENT, dated as of June 18, 1998, between Crystal Oil Company, a
Louisiana corporation (the "Company"), and __________ ("Executive").
WHEREAS, the Company and the Executive have previously entered into an
Executive Compensation and Severance Agreement dated as of November 10, 1994
(the "Original Agreement");
WHEREAS, the Board of Directors of the Company (the "Board") has
authorized the Company to enter into new severance arrangements with the
Executive in the form hereof;
WHEREAS, it is possible that at some time in the future the Company may
enter into a transaction which would involve a Change in Control (as hereinafter
defined) or may become subject to a proposed or threatened Change in Control;
and
WHEREAS, in connection with the foregoing, Executive may, in addition
to Executive's regular duties, be called upon to assist in the assessment of any
such proposals, advise management and the Board as to whether such proposals
would be in the best interests of the Company and its shareholders, and to take
such other actions as the Board might determine to be appropriate;
NOW, THEREFORE, to assure the Company that it will have the continued
dedication of Executive and the availability of Executive's advice and counsel
notwithstanding the possibility, threat or occurrence of a change of control,
and to induce Executive to remain in the employ of the Company, and for other
good and valuable consideration, the Company and Executive agree as follows:
SECTION 1. Original Agreement Terminated. The Original Agreement is
hereby terminated and of no further force or effect.
SECTION 2. Definitions. For purposes of this Agreement, the following
terms shall have the meanings ascribed to them below:
(a) "Beneficial Ownership" shall have the meaning set forth in Rules
13d-3 and 13d-5 under the Securities Exchange Act of 1934, as in effect on the
date hereof, except that a Person will not be deemed to beneficially own any
shares of capital stock (i) that are tendered pursuant to a tender or exchange
offer made by that Person or an affiliate or associate (as such terms are
defined in Rule 12b-2 under the Securities Exchange Act of 1934, as in effect on
the date hereof) of that Person until the tendered shares are accepted for
purchase or exchange or (ii) that are subject to an agreement, arrangement or
understanding relating to the purchase of such shares as long as such Person has
no direct or indirect rights of ownership or voting with respect to such shares.
<PAGE> 2
(b) "Cause" shall mean the termination of the employment of the
Executive by the Company for (i) dishonesty, (ii) conviction of a felony or
(iii) the continued failure by Executive to perform the material duties assigned
to Executive that are consistent with the position of Executive with the Company
and that would not permit Executive to terminate employment for Good Reason
after notice of such failure has been given by the Company and a reasonable
opportunity to cure is provided to Executive.
(c) "Change in Control" shall be deemed to have occurred if (i) any
Person other than a Designated Person, has Beneficial Ownership of securities of
the Company representing 40% or more of the Voting Power, (ii) there shall occur
a change in the composition of a majority of the Board within any period of four
consecutive years which change shall not have been approved by a majority of the
Board as constituted immediately prior to the commencement of such period, (iii)
at any meeting of the shareholders of the Company called for the purpose of
electing directors, more than one of the persons nominated by the Board for
election as directors shall fail to be elected or (iv) a reorganization, merger
or consolidation or sale or other disposition of all or substantially all of the
assets of the Company is consummated, unless immediately following any such
transaction (A) holders who were the beneficial owners of capital stock of the
Company immediately prior to any such transaction have Beneficial Ownership of
more than 60% of the then outstanding shares of capital stock and Voting Power,
respectively, following such transaction in substantially the same proportions
as their ownership immediately prior to such transaction, (B) no Person has
Beneficial Ownership of 40% or more of the then outstanding shares of capital
stock and Voting Power, respectively, following such transaction, except to the
extent such ownership existed prior to such transaction, and (C) at least a
majority of the members of the Board resulting from such transaction were
members of the Board at the time of the execution of the initial agreement or
the initial action of the Board providing for such transaction.
(d) "Designated Person" shall mean any one or more of (i) Quantum Fund
NV, Quantum Partners LDC or any of their affiliates, (ii) any Person whose
Beneficial Ownership of securities representing 40% or more of the Voting Power
is a result of such Person acquiring securities as an underwriter in an
underwritten public offering of such securities, (iii) any Person who has
Beneficial Ownership of securities representing 40% or more of the Voting Power,
who is eligible, under Rule 13d-1(b)(1) of the General Rules and Regulations of
the Securities and Exchange Commission under the Securities Exchange Act of
1934, to file (and has timely filed) a short-form statement on Schedule 13G (or
any substantially similar schedule which may supersede such Schedule) with
respect to such person's Beneficial Ownership and as to whom all conditions of
such eligibility are continuously met to the extent provided in such Rule
13d-1(b)(1) and in all other applicable provisions of Rule 13d-1, provided that
if such person ever ceases to be so eligible or if any such condition shall
cease to have been met, such Person shall no longer be deemed to be a
"Designated Person", and (iv) Executive or any Person that includes Executive.
(e) "Disability" shall mean a disability involving the Executive that
prevents the Executive from performing his duties with the Company for more than
a period of six consecutive months.
(f) "Good Reason" shall mean the termination of the Executive's
employment with the Company due to (i) the assignment of Executive to any duties
or responsibilities that are materially
2
<PAGE> 3
inconsistent with Executive's position and status with the Company immediately
prior to the Change in Control or (ii) a reduction of Executive's annual salary
(including any deferred portions thereof) or benefits.
(g) "Person" shall have the meaning set forth in Sections 3(a)(9) and
13(d)(3) of the Securities Exchange Act of 1934, as in effect on the date
hereof.
(h) "Voting Power" shall mean the voting power of the outstanding
securities of the Company having the right under ordinary circumstances to vote
at an election of the Board.
SECTION 3. Change in Control Bonus. If during the term of this
Agreement, there shall occur a Change in Control, the Company will provide or
cause to be provided to Executive immediately following the occurrence of the
Change in Control a lump-sum payment in an amount equal to _____________ times
the Executive's most recent annual base salary, without giving effect to any
reduction thereof that may have been made without Executive's consent. The
payments provided for pursuant to this Section 3 shall not be payable in the
event the employment of the Executive is terminated by the Company for Cause or
Disability, by reason of the death of the Executive or by the Executive for any
reason other than Good Reason.
SECTION 4. Rights and Benefits upon Termination. In addition to any
payments that may be made pursuant to Section 3, if during the term of this
Agreement and within one year following the occurrence of a Change in Control
the employment of the Executive is terminated by the Company for any reason
other than Cause or Disability, by reason of death or by the Executive for Good
Reason, the Company agrees to provide or cause to be provided to Executive the
following rights and benefits:
(i) Insurance and Other Special Benefits. To the extent
Executive is eligible thereunder, for a period of ___ months following
termination or until Executive's retirement upon reaching age 65,
whichever is sooner, Executive shall continue to be covered by the life
insurance, medical and dental plans, and accident and disability plans
of the Company and its subsidiaries or any successor plan or program in
effect at Termination for employees in the same class or category as
Executive, subject to the terms of such plans and to Executive's making
any required contributions thereto. In the event Executive is
ineligible to continue to be so covered under the terms of any such
benefit plan or program, or, in the event Executive is eligible but the
benefits applicable to Executive are not substantially equivalent to
the benefits applicable to Executive immediately prior to Termination,
then, for a period of ___ months following Termination (or until
Executive's retirement upon reaching age 65, whichever is sooner), the
Company shall provide to Executive through other sources such benefits,
including such additional benefits, as may be necessary to make the
benefits applicable to Executive substantially equivalent to those in
effect before Termination; provided, however, that if during such
period Executive should enter into the employ of another company or
firm which provides health benefits to its executives in general and
for which Executive is eligible, the Company's obligations to provide
such benefits shall cease. Nothing contained in this paragraph shall be
deemed to require or permit termination or restriction of any of
Executive's coverage under any plan or program of the Company or any
3
<PAGE> 4
of its subsidiaries or any successor plan or program thereto to which
Executive is entitled under the terms of such plan or program, whether
at the end of the aforementioned ___-month period or at any other time.
(ii) Other Benefit Plans. The specific arrangements referred to
in this Section 4 are not intended to exclude Executive's participation
in other benefit plans in which Executive currently participates or
which are available to executive personnel generally in the class or
category of Executive or to preclude other compensation or benefits as
may be authorized by the Board from time to time.
(iii) Duty to Mitigate. Executive's entitlement to benefits
hereunder shall not be governed by any duty to mitigate Executive's
damages by seeking further employment nor offset by any compensation
which Executive may receive from future employment.
SECTION 5. Confidentiality; Remedies. (a) Confidentiality. Executive
agrees that at all times following Termination, Executive will not, without the
prior written consent of the Company, disclose to any person, firm or
corporation any confidential information of the Company or its subsidiaries
which is now known to Executive or which hereafter may become known to Executive
as a result of his employment or association with the Company and which could be
helpful to a competitor, unless such disclosure is required under the terms of a
valid and effective subpoena or order issued by a court or governmental body;
provided, however, that the foregoing shall not apply to confidential
information which becomes publicly disseminated by means other than a breach of
this Agreement.
(b) Remedies for Breach. It is recognized that damages in the event of
breach of this Section 5 by Executive would be difficult, if not impossible, to
ascertain, and it is therefore agreed that the Company, in addition to and
without limiting any other remedy or right it may have, shall have the right to
an injunction or other equitable relief in any court of competent jurisdiction
enjoining any such breach, and Executive hereby waives any and all defenses
Executive may have on the ground of lack of jurisdiction or competence of the
court to grant such an injunction or other equitable relief. The existence of
this right shall not preclude the Company from pursuing any other rights and
remedies at law or in equity which the Company may have.
SECTION 6. Reduction in Payments. (a) For purposes of this section, (i)
"Payment" shall mean any payment or distribution in the nature of compensation
to or for the benefit of Executive, whether paid or payable pursuant to this
Agreement or otherwise; (ii) "Agreement Payment" shall mean a Payment paid or
payable pursuant to this Agreement (disregarding this Section); (iii) "Net After
Tax Receipt" shall mean the Present Value of a Payment net of all taxes imposed
on Executive with respect thereto under Sections 1 and 4999 of the Internal
Revenue Code of 1986, as amended (the "Code), determined by applying the highest
marginal rate under Section 1 of the Code which applied to the Executive's
taxable income for the immediately preceding taxable year; (iv) "Present Value"
shall mean such value determined in accordance with Section 280G (d)(4) of the
Code; and (v) "Safe Harbor" shall mean the sum of $1.00 less than three times
the Executive's "base amount" within the meaning of that term in Section 280G of
the Code.
4
<PAGE> 5
(b) Anything in this Agreement to the contrary notwithstanding, in the
event KPMG Peat Marwick or such other accounting firm that may be agreed upon by
the Company and Executive (the "Accounting Firm") shall determine that receipt
of all Payments would subject Executive to tax under Section 4999 of the Code,
it shall determine whether the receipt of the Safe Harbor would result in
greater Net After Tax Receipts to the Executive than receipt of all the
Agreement Payments. If such firm determines that the receipt of the Safe Harbor
would so result, the aggregate Payments shall be reduced to the Safe Harbor as
provided below.
If the Accounting Firm determines that aggregate Payments should be
reduced to the Safe Harbor, the Company shall promptly give Executive notice to
that effect and a copy of the detailed calculation thereof, and the Executive
may elect, in his sole discretion, which and how much of the Agreement Payments
or any other Payments shall be eliminated or reduced (as long as after such
election the present value of the aggregate Payments equals the Safe Harbor),
and shall advise the Company in writing of his election within ten days of his
receipt of notice. If no such election is made by the Executive within such 10
day period, the Company may elect which of the Agreement Payments shall be
eliminated or reduced (as long as after such election the present value of the
aggregate Payments equals the Safe Harbor) and shall notify the Executive
promptly of such election. All determinations made by the Accounting Firm under
this Section shall be binding upon the Company and Executive and shall be made
within 60 days of a termination of employment of the Executive. As promptly as
practicable following such determination, the Company shall pay or distribute
for the benefit of Executive such Agreement Payments as are then due to
Executive under this Agreement and shall promptly pay to or distribute for the
benefit of Executive in the future such Agreement Payments as become due to
Executive under this Agreement.
(c) While it is the intention of the Company and the Executive to
reduce the amounts payable or distributable to Executive hereunder only if the
aggregate Net After Tax Receipts to Executive would thereby be increased, as a
result of the uncertainty in the application of Section 4999 of the Code at the
time of the initial determination by the Accounting Firm hereunder, it is
possible that amounts will have been paid or distributed by the Company to or
for the benefit of Executive pursuant to this Agreement which should not have
been so paid or distributed ("Overpayment") or that additional amounts which
will have not been paid or distributed by the Company to or for the benefit of
Executive pursuant to this Agreement could have been so paid or distributed
("Underpayment"), in each case, consistent with the calculation of the Reduced
Amount hereunder. In the event that the Accounting Firm, based either upon the
assertion of a deficiency by the Internal Revenue Service against the Company or
Executive which the Accounting Firm believes has a high probability of success
determines that an Overpayment has been made, any such Overpayment paid or
distributed by the Company to or for the benefit of the Executive shall be
treated for all purposes as a loan to Executive which Executive, shall repay to
the Company together with interest at the applicable federal rate provided for
in Section 7872 (f)(2) of the Code; provided, however, that no such loan shall
be deemed to have been made and no amount shall be payable by Executive to the
Company if and to the extent such deemed loan and payment would not either
reduce the amount on which the Executive is subject to tax under Section 1 and
Section 4999 of the Code or generate a refund of such taxes. In the event that
the Accounting Firm, based upon controlling precedent or substantial authority,
determines that an Underpayment has occurred, any such Underpayment shall
5
<PAGE> 6
be promptly paid by the Company to or for the benefit of the Executive together
with interest at the applicable federal rate provided for in Section 7872 of the
Code.
SECTION 7. Term of Agreement. This Agreement shall terminate two years
from the date hereof; provided, however, that the term of this Agreement shall
automatically be extended on the anniversary date hereof for successive one-year
periods unless either the Executive or the Company gives notice to the other
party prior to such anniversary date of such party's desire that the term of
this Agreement not be so extended.
SECTION 8. Miscellaneous. (a) Assignment. No right, benefit or interest
hereunder shall be subject to assignment, anticipation, alienation, sale,
encumbrance, charge, pledge, hypothecation or set-off in respect of any claim,
debt or obligation, or to execution, attachment, levy or similar process;
provided, however, that Executive may assign any right, benefit or interest
hereunder if such assignment is permitted under the terms of any plan or policy
of insurance or annuity contract governing such right, benefit or interest.
(b) Construction of Agreement. Except as expressly provided herein,
nothing in this Agreement shall be construed to amend any provision of any plan
or policy of the Company. This Agreement is not, and nothing herein shall be
deemed to create, a commitment of continued employment of Executive by the
Company or any of its subsidiaries. The benefits provided under this Agreement
shall be in addition to any other compensation agreement or arrangement that the
Company may have with Executive.
(c) Amendment. This Agreement may not be amended, modified or canceled
except by written agreement of the parties.
(d) Waiver. No provision of this Agreement may be waived except by a
writing signed by the party to be bound thereby.
(e) Severability. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions of this Agreement shall remain in full force and effect to
the fullest extent permitted by law.
(f) Successors. This Agreement shall be binding upon and inure to the
benefit of Executive and Executive's personal representative and heirs, and the
Company and any successor organization or organizations. For purposes of Section
3 and 4 of this Agreement, the term "Company" shall include Crystal Oil Company
and any successor organization or organizations thereto or any company that
acquires all or substantially all of its assets.
(g) Taxes. Any payment or delivery required under this Agreement shall
be subject to all requirements of the law with regard to withholding of taxes,
filing, making of reports and the like, and the Company shall use its best
efforts to satisfy promptly all such requirements.
6
<PAGE> 7
(h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF LOUISIANA, WITHOUT GIVING EFFECT TO ITS
CONFLICTS OF LAWS PRINCIPLES.
(i) Entire Agreement. This Agreement sets forth the entire agreement
and understanding of the parties hereto with respect to the matters covered
hereby.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
CRYSTAL OIL COMPANY
--------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
EXECUTIVE:
--------------------------------------------
Name:
---------------------------------------
7
<PAGE> 1
Exhibit 22
CRYSTAL OIL COMPANY
Significant Subsidiaries of the Registrant
December 31, 1998
<TABLE>
<CAPTION>
STATE OF
SUBSIDIARY INCORPORATION
- -------------------------------------------------- -------------
<S> <C>
Hattiesburg Holding Company Delaware
First Reserve Gas Company Delaware
Hattiesburg Industrial Gas Sales Company Delaware
Hattiesburg Gas Storage Company (General Partnership) Delaware
Crystal Program Limited Texas
Crystal Exploration and Production Company (CEPCO) Florida
Vermilion Bay Land Company Delaware
Crystal Capital, Inc. Delaware
Crystal Eurasia Oil Company Delaware
Crystal Gas L.L.C. Louisiana
Crystal Gas and Storage Company Delaware
Petal Gas Storage Company Delaware
Crystal Properties and Trading Company Nevada
</TABLE>
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Crystal Oil Company:
We consent to incorporation by reference in the Registration Statements (No.
33-61114 and 33-66628) on Form S-8 of Crystal Oil Company of our report dated
March 8, 1999, relating to the consolidated balance sheets of Crystal Oil
Company and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows and
related financial statement schedule for each of the years in the three-year
period ended December 31, 1998, which report appears in the December 31, 1998,
annual report on Form 10K of Crystal Oil Company.
KPMG LLP
Shreveport, Louisiana
March 17, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet at December 31, 1998 and the consolidated statement
of income for the year ended December 31, 1998 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 13,855
<SECURITIES> 20,643
<RECEIVABLES> 1,994
<ALLOWANCES> 42
<INVENTORY> 0
<CURRENT-ASSETS> 36,579
<PP&E> 159,552
<DEPRECIATION> 16,524
<TOTAL-ASSETS> 212,783
<CURRENT-LIABILITIES> 9,906
<BONDS> 66,915
<COMMON> 27
0
74
<OTHER-SE> 135,861
<TOTAL-LIABILITY-AND-EQUITY> 212,783
<SALES> 22,084
<TOTAL-REVENUES> 26,848
<CGS> 0
<TOTAL-COSTS> 13,643
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,731
<INCOME-PRETAX> 1,656
<INCOME-TAX> 742
<INCOME-CONTINUING> 914
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 914
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.15
</TABLE>
