<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission file number O-8043
SOUTHERN MINERAL CORPORATION
(Exact name of Small Business Issuer as specified on its charter)
STATE OF NEVADA 36-2068676
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
17001 NORTHCHASE DR., SUITE 690, HOUSTON, TX 77060-2138
(Address of principal executive offices) (Zip Code)
Registrant telephone number, including area code 713/872-7621
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
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 and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
--- ---
As of October 31, 1995 there were 6,279,858 shares of the issuer's common stock
outstanding.
Traditional Small Business Disclosure Format (check one):
Yes x No
--- ---
<PAGE> 2
ITEM 1. FINANCIAL STATEMENTS.
PART 1
SOUTHERN MINERAL CORPORATION
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- ----------------
1995 1994 1995 1994
----- ----- ----- -----
(000'S OMITTED)
(EXCEPT FOR PER SHARE)
<S> <C> <C> <C> <C>
REVENUES
OIL AND GAS $572 $429 $1,611 $1,320
INTEREST 22 14 67 37
OTHER 26 62 101 89
----- ----- ----- -----
620 505 1,779 1,446
----- ----- ----- -----
EXPENSES
PRODUCTION 190 118 466 417
EXPLORATION 5 13 198 1,210
DEPRECIATION AND DEPLETION 178 117 458 379
VALUATION REDUCTION - ASSETS
HELD FOR DISPOSAL 0 0 0 1,334
GENERAL AND ADMINISTRATIVE 155 158 558 737
SEVERANCE BENEFIT 0 0 117 0
----- ----- ----- -----
528 406 1,797 4,077
----- ----- ----- -----
NET INCOME (LOSS) BEFORE INCOME TAXES 92 99 (18) (2,631)
BENEFIT FROM INCOME TAXES 0 0 0 (545)
----- ----- ----- -----
NET INCOME (LOSS) $92 $99 ($18) ($2,086)
===== ===== ===== =====
NET INCOME (LOSS) PER SHARE $0.01 $0.02 ($0.00) ($0.52)
===== ===== ===== =====
WEIGHTED AVERAGE SHARES OF
COMMON STOCK OUTSTANDING 6,275 4,024 5,507 4,024
===== ===== ===== =====
</TABLE>
2
<PAGE> 3
SOUTHERN MINERAL CORPORATION
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------ ------
(000'S OMITTED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
CASH $548 $55
MARKETABLE SECURITIES 1,249 1,569
RECEIVABLES 278 277
REFUNDABLE INCOME TAXES 16 10
OTHER 29 62
------ ------
TOTAL CURRENT ASSETS 2,120 1,973
------ ------
PROPERTY AND EQUIPMENT, AT COST
USING THE SUCCESSFUL EFFORTS METHOD
FOR OIL AND GAS ACTIVITIES
MINERAL RIGHTS 102 102
OIL & GAS PRODUCING PROPERTIES 5,988 3,544
UNPROVEN PROPERTIES 70 22
OFFICE EQUIPMENT & FURNITURE 159 160
ACCUMULATED DEPRECIATION AND DEPLETION (2,923) (2,481)
------ ------
TOTAL PROPERTY AND EQUIPMENT 3,396 1,347
------ ------
OTHER ASSETS
OIL AND GAS PRODUCING PROPERTIES HELD FOR SALE 0 50
------ ------
TOTAL ASSETS $5,516 $3,370
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
ACCOUNTS PAYABLE $217 $290
------ ------
TOTAL CURRENT LIABILITIES 217 290
------ ------
DEFERRED INCOME TAXES 0 0
------ ------
STOCKHOLDERS' EQUITY
COMMON STOCK, PAR VALUE $.01 PER SHARE
AUTHORIZED 10,000,000 SHARES AT
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994,
ISSUED 6,369,519 AND 4,161,600 SHARES AT
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994,
RESPECTIVELY 64 42
ADDITIONAL PAID-IN CAPITAL 3,038 843
RETAINED EARNINGS 2,250 2,268
------ ------
5,352 3,153
LESS COST OF 91,120 AND 137,179 SHARES OF
COMMON STOCK IN TREASURY AT SEPTEMBER 30, 1995
AND DECEMBER 31, 1994, RESPECTIVELY (53) (73)
------ ------
TOTAL STOCKHOLDERS' EQUITY 5,299 3,080
------ ------
$5,516 $3,370
====== ======
</TABLE>
3
<PAGE> 4
SOUTHERN MINERAL CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
------------------------------
1995 1994
---- ----
(000'S OMITTED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS ($18) ($2,086)
ADJUSTMENTS TO NET LOSS 640 2,711
---- ------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 622 625
---- ------
CASH FLOWS FROM INVESTING ACTIVITIES
PROCEEDS FROM SALES OF PROPERTIES 77 139
DECREASE IN MARKETABLE
SECURITIES 320 413
CAPITAL EXPENDITURES (555) (924)
OTHER (2) (8)
---- ------
NET CASH USED IN
INVESTING ACTIVITIES (160) (380)
---- ------
CASH FLOWS FROM FINANCING ACTIVITIES
PROCEEDS FROM ISSUANCE OF COMMON STOCK 31 0
DIVIDENDS PAID 0 (202)
---- ------
NET CASH PROVIDED BY/(USED IN)
FINANCING ACTIVITIES 31 (202)
---- ------
NET INCREASE IN CASH 493 43
CASH AT BEGINNING OF PERIOD 55 66
---- ------
CASH AT END OF PERIOD $548 $109
==== ======
</TABLE>
4
<PAGE> 5
SOUTHERN MINERAL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note A - Basis of Presentation
The unaudited condensed financial statements included herein have been prepared
by the Registrant, pursuant to the rules and regulations of the Securities and
Exchange Commission. These condensed financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Registrant's latest Annual Report to shareholders and the Annual Report to the
Securities and Exchange Commission on Form 10-K for the year ended December 31,
1994. In the opinion of the Registrant, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial
position as of September 30, 1995 and December 31, 1994, the results of
operations for the three months and nine months ended September 30, 1995 and
1994, and statements of cash flows for the nine months then ended have been
included.
Note B - Acquisition
On April 6, 1995, the Registrant completed the acquisition of Diverse
Production Co. ("DPC", subsequently renamed SMC Production Co.), a Texas
corporation, whose primary asset is its 15% general partner interest in Diverse
GP III, a Texas general partnership. The operating results of this acquisition
are included in the Registrant's consolidated results of operations from April
1, 1995. The unaudited consolidated results of operations on a pro forma basis
as though DPC had been acquired as of the beginning of the Registrant's fiscal
years 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1995 1994
(000's omitted, except per share data)
<S> <C> <C>
Revenues $ 2,029 $ 2,089
Net Income (Loss) 43 (1,882)
----------- ---------
Net Income (Loss) Per Share $ .01 $ (.30)
=========== =========
</TABLE>
These pro forma results are not necessarily indicative of those that would have
occurred had the acquisition taken place at the beginning of 1994 or 1995,
respectively.
5
<PAGE> 6
ITEM 2.
SOUTHERN MINERAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
The Registrant recorded income of $92,000, or $.01 per share, for the three
months ended September 30, 1995, compared to income of $99,000, or $.02 per
share, in the comparable 1994 period. Registrant's 1995 third quarter results
include $29,000 of income attributable to its interest acquired in Diverse GP
III, a Texas general partnership ("DGP III").
On April 6, 1995, Registrant acquired SMC Production Co. (formerly named
Diverse Production Co.), a Texas corporation ("SMPC"), whose primary asset is
its 15% general partner interest in DGP III. Registrant's acquisition of SMPC
is consolidated for reporting purposes as of April 1, 1995. Registrant
acquired all of SMPC's outstanding capital stock in consideration for issuing
SMPC's shareholders an aggregate of 2,193,919 shares of Registrant's common
stock and options to acquire an additional 325,000 shares of common stock at
any time before April 7, 2000, at an exercise price of $1.25 per share.
In the 1995 third quarter, oil sales volumes increased 27% from 17,688 barrels
to 22,486 barrels and gas sales volumes increased 89% from 68.6 Mmcf to 130.0
Mmcf, compared to the 1994 quarter. Although the Registrant's properties
continue to decline in oil and gas sales volumes year to year, the addition of
the 15% DGP III interest incrementally added 7,011 barrels and 68.6 Mmcf to the
Registrant's production volumes in the 1995 quarter.
For the quarter, average oil prices decreased 3%, from $16.96 per barrel in the
comparable 1994 period to $16.37 per barrel in 1995. Gas prices decreased 19%,
from an average price of $1.89 per Mcf in the 1994 quarter to $1.53 per Mcf in
1995's third quarter.
The increase in oil and gas sales volumes contributed greatly to increasing the
1995 quarter revenues to $620,000 from $505,000 in the 1994 period.
Depreciation and depletion increased to $178,000 in the 1995 quarter versus
only $117,000 in the 1994 quarter, which is attributable to the increased
depletion expense from the 15% DGP III interest.
6
<PAGE> 7
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
The Registrant recorded a loss of $18,000 for the nine months ended September
30, 1995, compared to a loss of $2,086,000, or $.52 per share, in the
comparable 1994 period. The current period loss is due to severance benefits
paid in the second quarter, and to limited exploration expenses of $198,000
that are a result of commitments made in 1994. The 1994 period losses are due
to the combination of valuation reductions and exploration expenses.
Production volumes increased during the year to year period comparisons. Oil
production for the first nine months of 1995 totalled 65,356 barrels compared
to 59,612 barrels in the 1994 period, reflecting a 10% increase. Gas volumes
increased more than 46% in the period to period comparison, from 222.1 Mmcf in
the 1994 period to 324.1 Mmcf in the 1995 period. Oil prices averaged $16.85
per barrel in the first nine months of 1995, reflecting a 12% increase in the
period to period comparison. Gas prices declined 19% from the 1994 to the 1995
nine month period, from $1.89 per Mcf to $1.54 per Mcf, respectively.
Revenues increased to $1,779,000 during the nine month period in 1995, 19%
higher than the 1994 nine month period total of $1,446,000. Expenses decreased
considerably as a result of limited exploration expenses and no valuation
writedowns. General and administrative expenses declined 24% from $737,000 in
the 1994 period to $558,000 in the 1995 period, which is a result of staff
reductions and other expense containment in the year to year comparisons.
Charges for severance benefits totalled $117,000 for the current nine month
period for which there are no comparable charges in the 1994 period.
Results for the first nine months are impacted by the acquisition of interests
from DGP III, which was closed on April 6, 1995, but consolidated for reporting
purposes as of April 1, 1995. Without the consolidation of the DGP III
results, Registrant's reported loss would have been over $137,000.
LIQUIDITY AND CAPITAL RESOURCES
The Registrant's working capital increased to $1,903,000 at September 30, 1995,
from $1,683,000 at December 31, 1994. Cash flows from operating activities
decreased from $625,000 in the nine month period in 1994 to $622,000 for the
comparable 1995 period. Cash and marketable securities increased from
$1,624,000 at December 31, 1994, to $1,797,000 at September 30, 1995.
Cash payments of $9,000 and $11,000 were made for Federal and state income
taxes for the nine months ending September 30, 1995 and 1994, respectively.
The Registrant received $3,000 and $282,000 in refunds for Federal and state
income taxes for the nine months ending September 30, 1995 and 1994,
respectively.
7
<PAGE> 8
As discussed in the Management's Discussion and Analysis of the Results of
Operations on April 6, 1995, the Registrant consummated the transactions
contemplated by an Exchange Agreement between the Registrant and certain
sellers. Of the $2,329,000 total cost of this transaction, $2,194,000 was
recorded as a non-cash portion of this transaction.
During October of the current year, the Registrant has entered into a joint
venture with The Links Group, Inc., a private exploration group, which is
controlled by Robert R. Hillery, a director of the Registrant. The Southern
Links Group joint venture is structured to develop and market exploration
prospects in the shallow offshore Texas state waters. The joint venture will
create salable prospects in the highly productive Gulf Coast Region. Future
efforts to acquire leases and 3-D seismic surveys will result in the
expenditures of capital from time to time, which will be recouped upon sale of
the prospects.
The Registrant is unaware of any material exposure from actual or potential
claims or lawsuits, including those involving environmental matters. As such,
no liability is accrued at September 30, 1995 or December 31, 1994.
The Registrant currently has no bank debt or lines of credit. However, the
Registrant has executed a commitment with International Bank of Commerce, San
Antonio, Texas, and is currently in the final stages of documenting a line of
credit. However, as a result of the purchase discussed in "Subsequent Events"
below, Registrant is working with International Bank of Commerce and several
other financial providers to structure a mutually satisfactory financing.
Registrant continues to pursue various acquisition opportunities, and intends
to utilize its cash and marketable securities together with third party
financing to accomplish the purchase of oil and gas property acquisitions. As
a result, balances on the Registrant's marketable securities and cash may
fluctuate in future periods.
SUBSEQUENT EVENTS
BANDERA AND EQUIPO SALE.
Effective October 1, 1995, the Registrant has sold its interests in the Bandera
and Equipo Prospects located in Maverick County, Texas. This sale includes
working interests in nine productive and shut-in wells, a gas plant and
pipeline, and two 3-D seismic survey projects.
STONE & WEBSTER PURCHASE.
On October 31, 1995, the Registrant entered into a Purchase and Sale Agreement
with Stone & Webster, Incorporated ("S&W") and Stone & Webster Oil Company,
Inc.
8
<PAGE> 9
("SWOC" and together with S&W, "Sellers"). Subject to the terms and conditions
of the Purchase and Sale Agreement, the Registrant will purchase certain of
SWOC's oil and gas assets, and the outstanding capital stock of three
wholly-owned subsidiaries of S&W and SWOC engaged in oil and gas related
businesses, including production, marketing and pipelines. Consummation of
these transactions (the "Closing") is scheduled for December 22, 1995.
The aggregate cash purchase price is $16,500,000, subject to adjustment for
production since September 1, 1995 and certain title defects in oil and gas
properties. The Registrant has escrowed $1,000,000 which generally either will
be credited to the purchase price upon Closing, paid to Sellers as liquidated
damages if Registrant fails to close and Sellers are not in material default,
or repaid to Registrant if Closing does not occur because Sellers are in
default (excluding title defects that do not exceed $500,000 in the aggregate).
This acquisition includes oil and gas interests in 1,200 wells located in
Canada, ten pipeline and gathering systems located in Oklahoma, Texas and
Louisiana, and 270,000 gross mineral acres along with the associated producing
royalties. This acquisition will add approximately one million barrels of oil
and 14.5 billion cubic feet of natural gas reserves along with the pipeline and
gathering systems.
9
<PAGE> 10
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits as follows:
(27) (2) Financial Data Schedule for the nine months ended
September 30, 1995 (filed herewith).
(b) The Registrant filed reports on Form 8-K during the most recently
completed fiscal quarter as follows:
(1) None
2.1 Purchase and Sale Agreement, dated as of October 31, 1995, by and
among Stone & Webster, Incorporated, Stone & Webster Oil Company, Inc.
and Southern Mineral Corporation (incorporated by reference to
Registrant's Form 8-K dated October 31, 1995).
2.2 Escrow Agreement, dated as of October 31, 1995, by and among Southern
Mineral Corporation, Stone & Webster, Incorporated, Stone & Webster
Oil Company, Inc. and Texas Commerce Bank National Association
(incorporated by reference to Registrant's Form 8-K dated October 31,
1995).
2.3 Southern Links Group Joint Venture Agreement, dated October 1, 1995,
between Southern Mineral Corporation and The Links Group, Inc. (filed
herewith).
99 News Release of Southern Mineral Corporation dated November 1, 1995
(incorporated by reference to Registrants Form 8-K dated October 31,
1995).
10
<PAGE> 11
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SOUTHERN MINERAL CORPORATION
Date: By /s/ Steven H. Mikel
---------------------- -------------------------------------------
Steven H. Mikel
President, Chief Executive Officer,
and Acting Principal Financial
Officer
11
<PAGE> 12
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.3 Southern Links Group Joint Venture Agreement
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 2.3
SOUTHERN LINKS GROUP
JOINT VENTURE AGREEMENT
THIS JOINT VENTURE AGREEMENT (the "AGREEMENT"), effective as
of October 1, 1995, is by and between SOUTHERN MINERAL CORPORATION ("SMC"), a
Nevada corporation, and THE LINKS GROUP, INC. ("LINKS"), a Texas corporation,
and will constitute a binding agreement with respect to the rights and
obligations of SMC and Links in and to prospects generated within the AMI Area,
as hereinafter defined. SMC and Links may sometimes individually be referred
to as "PARTY" and collectively as the "PARTIES."
PRELIMINARY STATEMENTS
1. Links has assembled thousands of miles of regional and
detailed 2-D seismic data in the offshore Texas state waters encompassing the
Brazos and Matagorda areas as delineated in the attached Exhibit B (such area
shall hereinafter be referred to as the "AMI AREA") and together with
supporting geological and paleontological data has identified more than ten
prospect areas within such AMI Area. (All seismic studies and other data are
hereinafter referred to as the "DATA".)
2. Links desires to furnish the Data to the Joint Venture of SMC
and Links, and SMC desires to provide to the Joint Venture the financial
assistance in the acquisition of and farm-in of any prospects that are
generated within the AMI Area and the subsequent sale of or farm-out of such
prospects.
NOW THEREFORE, in consideration of the mutual promises
contained herein, the benefits to be derived by each Party hereunder, and
intending to be legally bound, the Parties hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS AND REFERENCES
1.1 As used in this Agreement, the words and terms which are
capitalized herein and the references used herein shall have the meaning
ascribed to them in this Agreement where defined.
ARTICLE II
FORMATION OF THE JOINT VENTURE
2.1 FORMATION OF THE JOINT VENTURE.
(a) The Parties hereby join in and form a joint venture
(hereinafter referred to as the "VENTURE" or "JOINT VENTURE") for the
limited purposes and scope hereinafter set forth.
1
<PAGE> 2
(b) Except as expressly provided for herein to the
contrary, the rights and obligations of the Parties and the
administration and termination of the Joint Venture shall be governed
by the Texas Uniform Partnership Act (the "ACT"). Each Party's
interest in the Joint Venture shall be personal property for all
purposes. All real and other property owned by the Joint Venture
shall be deemed owned by the Joint Venture as an entity, and no Party,
individually, shall have any ownership of such property.
2.2 NAME OF THE JOINT VENTURE. The business of the Joint Venture
shall be conducted solely under the name Southern Links Group and such name
shall be used at all times in connection with the Joint Venture affairs. The
Parties shall execute and file all assumed or fictitious name certificates
required by law to be filed in connection with the formation of the Joint
Venture.
2.3 PURPOSES AND SCOPE OF JOINT VENTURE. The purposes of the
Joint Venture are, and the sole and exclusive business of the Joint Venture
shall be, to acquire and own, operate, develop, lease, sell, exchange, promote
or otherwise dispose of oil and gas properties located within the AMI Areas.
2.4 POWERS. To accomplish the purposes of the Joint Venture, the
Joint Venture shall have the power to take any lawful action which is permitted
by the Act, and which is reasonably related to the purposes of the Joint
Venture.
2.5 PRINCIPAL PLACE OF BUSINESS. The principal place of business
of the Joint Venture shall be the offices of SMC, at 17001 Northchase, Suite
690, Houston, Texas 77060-2138, or any future address of SMC.
ARTICLE III
MANAGEMENT OF THE JOINT VENTURE
3.1 MANAGEMENT OF THE JOINT VENTURE.
(a) The overall management and control of the business
and affairs of the Joint Venture shall be vested solely in SMC.
Effective September, 1995, SMC is hereby designated as the manager
(hereinafter sometimes referred to as the "MANAGER") with duties
prescribed in this Agreement. The Manager shall be responsible for
the implementation of the decisions of the Parties and for conducting
the ordinary and usual business and affairs of the Joint Venture.
(b) No act shall be taken, sum expended, or obligation
incurred by the Joint Venture, Manager, or any Party with respect to a
matter within the scope of any of the major decisions ("MAJOR
DECISIONS") affecting the Joint
2
<PAGE> 3
Venture, as enumerated below, unless such of the Major Decisions have
been approved by all of the Parties. The Major Decisions shall
include:
(1) Purchase and acquisition of any Prospect;
(2) Financing of the Joint Venture, including but
not limited to interim and permanent financing of acquiring
any Prospect;
(3) Sale, lease or other transfer, or mortgaging
or other encumbrance of any Prospect;
(4) Making any expenditure or incurring any
obligation by or of the Joint Venture involving a sum in
excess of $5000; provided, however, that expenditures made and
obligations incurred in excess of the dollar limits set forth
above in the event of an emergency or other situation
requiring an immediate decision that could not reasonably be
delayed until approval by all of the Parties has been secured,
but as promptly as practicable, the Parties shall be informed
of such emergency or other situation necessitating the
immediate decision and, if known, the approximate total amount
of the expenditure or obligations so made or incurred; and
(5) Any other decision or action which by any
provision of this Agreement is required to be approved by the
Parties and shall not be subject to receiving its approval
outside the terms of this Agreement.
3.2 DUTIES OF MANAGER.
(a) The Manager, at the expense of and on behalf of the
Joint Venture, shall implement or cause to be implemented all Major
Decisions of the Joint Venture and shall conduct or cause to be
conducted the ordinary and usual business and affairs of the Joint
Venture, all in accordance with the provisions of this Agreement.
(b) Any provision of this Agreement to the contrary
notwithstanding, the Manager shall not have any authority to make any
expenditure or incur any obligation on behalf of the Joint Venture
involving in the aggregate for each such transaction or group of
similar transactions in excess of the sums specified pursuant to
Section 3.1(b)(4) hereof, unless approved by all of the Parties.
3
<PAGE> 4
ARTICLE IV
PROSPECTS
4.1 INITIAL PROSPECTS. Exhibit B, attached hereto and made a part
hereof, describes the initial prospects that are subject to this Agreement
("INITIAL PROSPECTS"). Links continues to work on the Initial Prospects and
concurrently herewith, agrees to make available to the Joint Venture, with
respect to each Initial Prospect, the geological and geophysical data and other
information that Links has acquired with respect thereto (exclusive of data and
information that Links is by prior agreement prohibited from disclosing), along
with the maps, evaluations and studies made by Links. Such information shall
also contain, where available, a specification of the location of the initial
well to be drilled on the prospect, the specified objective depth to which the
initial well is to be drilled, and an estimate of the costs and expenses to be
incurred in drilling, testing, completing and equipping, or in plugging and
abandoning, the initial well (which is an estimate only and not a
representation).
4.2 PROPOSED ADDITIONAL PROSPECT ACQUISITIONS. As Links
identifies additional opportunities to acquire any acreage, or the rights
thereto, within the AMI Area then Links shall give written notice of the
proposed acquisition to SMC, specifying the location of the proposed
acquisition, the estimated number of acres to be acquired, the identity of the
party owning the right to produce oil and gas from such acreage if such
acquisition is a farm-in and the estimated cost to acquire such acreage or
rights. SMC shall have thirty (30) days after receipt of the notice within
which to notify Links whether it elects to participate in the cost of such
acquisition. If both Parties agree to the acquisition of the proposed acreage,
then such acquisition shall be deemed to be a Prospect for purposes of this
Agreement. Failure of SMC to reply within the period above fixed shall
constitute an election by SMC not to participate in the cost of the
acquisition, and Links shall be free to acquire leases for the lands covering
said acreage for its own benefit and SMC shall have no rights with respect to
such leases or lands.
ARTICLE V
SMC CONTRIBUTIONS
5.1 INITIAL CONTRIBUTION. In consideration for the exclusive use
of the Data by the Joint Venture, Links' personnel and Links' best efforts to
pursue the objectives of this Agreement, SMC agrees to pay to Links upon
execution of the Agreement by both Parties an amount equal to SEVENTY FIVE
THOUSAND AND NO/DOLLARS ($75,000.00) (the "INITIAL CONTRIBUTION").
5.2 PROSPECT ACQUISITIONS. SMC agrees to pay for any and all
Investment Amounts, which are deemed necessary or advisable in SMC's sole
discretion, related to the acquisition of a Prospect.
4
<PAGE> 5
ARTICLE VI
OWNERSHIP INTERESTS
6.1 INTENT AND PURPOSE OF THE PARTIES. Notwithstanding any other
term, condition or covenant of this Agreement, it is the expressed intention of
the Parties, and the Parties agree that Links shall provide the Data and
technical expertise necessary to acquire, develop and market Prospects in the
AMI and SMC shall provide the financing for the Joint Venture and handle the
administrative and operational needs for the Joint Venture.
6.2 RECOUPMENT OF CONTRIBUTIONS. Notwithstanding the Ownership
Interests set forth in Section 6.4, SMC shall be entitled to receive 100% of
the Joint Venture's share of proceeds from any Prospect until such time
(hereinafter referred to as "PAYOUT") that the proceeds of the sale of such
share, (after deducting any and all costs of production, applicable ad valorem,
production, severance, and excise taxes, royalty, overriding royalty and other
interests payable out of or measured by the production from such well accruing
with respect to such interest until it reverts), shall equal an amount that is
the sum of (a) any Initial Contributions that have not been recouped by SMC and
(b) any unrecouped INVESTMENT AMOUNTS, as herein defined, contributed by SMC
whether such amounts are attributed to said Prospect or are unrecouped amounts
from any prior Prospect that was acquired by the Parties pursuant to this
Agreement.
6.3 INVESTMENT AMOUNTS. Investment Amounts shall mean; the sum of
(1) the actual amount paid by or on behalf of the Joint Venture for the
acquisition of the Prospects; (2) all expenses for maintaining the Prospects
and any and all leases, farm-ins, farm-outs and any other interests related
thereto (including but not limited to lease rentals; excise and property
taxes); (3) examination costs, brokers commissions, attorneys fees, due
diligence fees, filing fees, recording costs, and transfer and sales taxes; if
any, and other similar costs incurred with respect to such Prospects in
connection with their acquisition or attempted acquisition by the Joint
Venture; (4) any and all costs and expenses related to the promotion of the
AMI, or Prospects therein, including but not limited to, travel, sales
brochures, promotional material, third party brokers fees or commissions and
any administration or overhead expenses associated therewith whether incurred
by SMC, Links, their personnel or consultants for the Joint Venture.
6.4 OWNERSHIP INTERESTS. Upon acquisition of any lease for lands
covering a Prospect acquired pursuant to this Agreement, all revenues and
expenses attributable to such Prospect shall be allocated after payout on the
basis of seventy-five percent (75%) interest to SMC and twenty-five percent
(25%) interest to Links. In addition, after Payout, any property interest or
income received therefrom that is retained, backed in or farmed out in
connection with a Prospect by the Parties hereto shall be allocated
seventy-five percent (75%) to SMC and twenty-five percent (25%) to Links.
5
<PAGE> 6
ARTICLE VII
COVENANTS
7.1 EXCLUSIVE DEALINGS. Links shall make the Data available and
furnish any technical support that is required in connection therewith to the
Joint Venture and shall undertake to lease, develop and promote exploratory
prospects on an exclusive basis with the Joint Venture in the AMI Area. Links
will provide management and technical support necessary to identify, lease,
package and sell the Prospects with the expenses thereof to be borne by the
Joint Venture.
7.2 OPERATIONS. Prospects that are developed by the Joint Venture
or in which the Parties hereto retain an interest in accordance with this
Agreement, shall be operated in accordance with a joint operating agreement
that is mutually agreed to by the Parties and any other party holding an
interest in such Prospect upon development.
ARTICLE VIII
CONFIDENTIALITY
8.1 CONFIDENTIALITY. During the period that a Prospect is covered
by this Agreement or an operating agreement agreed to by the Parties, the
Parties shall be prohibited from disclosing to any third party any geological,
geophysical or reservoir information with respect to any Prospect, or any logs
or other information pertaining to the progress, tests or results of any well
drilled thereon, unless agreed to by all Parties; except that a Party may make
confidential information available to:
(a) courts or governmental agencies as required by
statute, regulation or order; provided that the disclosing Party shall
use its best efforts to require the court or governmental agency be
bound by the confidentiality provisions hereof and submit same under
Seal to any such Court or governmental agency;
(b) officers, directors, employees, agents and other
representatives of the Parties; provided that such officers,
directors, employees, agents and other representatives agree to be
bound by the confidentiality provisions hereof;
(c) prospective assignees under a purchase or farmout
agreement; provided that such prospective assignee agrees to be bound
by the confidentiality provisions hereof.
8.2 PUBLICITY. It is agreed that all Parties shall mutually
approve the timing and content of all news releases concerning a Prospect,
except that, without the approval of Links, SMC shall be allowed to disclose to
regulatory authorities, its shareholders and the
6
<PAGE> 7
general public any information concerning the Joint Venture or its activities
that SMC reasonably believes is necessary to fulfill its responsibilities as a
public company.
ARTICLE IX
TERM AND TERMINATION
9.1 TERM. This Agreement shall be in effect for a term beginning
on the date hereof and shall continue through December 31, 1997, unless
otherwise terminated in accordance with this Agreement. Thereafter the
Agreement shall continue in full force and effect from year to year unless
terminated by either Party upon written notice delivered to the other Party on
or before sixty (60) days prior to the end of the calendar year.
Notwithstanding any other provision of this Agreement to the contrary, SMC
shall maintain all leases in force on December 31, 1997, for the full base term
and be responsible for all Investment Amounts related thereto or offer to
assign such leases to Links on terms that the Parties will mutually agree upon.
9.2 AUTOMATIC TERMINATION.
(a) If any Party shall file a voluntary petition under
any bankruptcy or insolvency law or under the arrangement or
reorganization provisions of the United States Bankruptcy Code or
under the provisions of any law of like import, or makes an assignment
of its property for the benefit of creditors, or if an involuntary
petition is filed against any Party under any bankruptcy, insolvency,
or reorganization provision of any law or if a receiver of any Party
or for the property of any Party shall be appointed and if such
proceedings are not stayed or terminated within the sixty (60) day
period following such occurrence, the Joint Venture shall terminate
automatically, such Party shall be deemed to be the "WITHDRAWING
PARTY."
(b) The Joint Venture shall terminate automatically upon
the dissolution or termination of any corporation, partnership, or
trust that is or shall hereafter become a Party. The corporation,
partnership, or trust that is a Party that so dissolves shall be the
Withdrawing Party.
9.3 TERMINATION FOR DEFAULT.
(a) Except where expressly provided for herein to the
contrary, if any Party fails to perform any of its respective
obligations hereunder, the other party ("NON-DEFAULTING PARTY") shall
have the right to give such party ("DEFAULTING PARTY") a notice of
default ("NOTICE OF DEFAULT"). The notice of Default shall set forth
the nature of the obligation that the Defaulting Party has not
performed.
7
<PAGE> 8
(b) If, within the thirty (30) day period following
receipt of the Notice of Default, the Defaulting Party in good faith
commences to perform such obligation and cure such default and
thereafter prosecutes to completion with diligence and continuity the
curing thereof and cures such default within a reasonable time, it
shall be deemed that the Notice of Default was not given and the
Defaulting Party shall lose no rights hereunder. If within such
thirty (30) day period, the Defaulting Party does not commence in good
faith the curing of such default or does not thereafter prosecute to
completion with diligence and continuity the curing thereof, the Non-
Defaulting Party shall have the right to terminate this Joint Venture
by giving the Defaulting Party written notice thereof. If the Joint
Venture is so terminated, the Defaulting Party shall be deemed to be
the Withdrawing Party and the Non-Defaulting Party shall be referred
to as the Non-Withdrawing Party.
9.4 REMEDIES OF THE NON-WITHDRAWING PARTY. In the case of a
termination of the Joint Venture under Sections 9.2 and 9.3 hereof, the
Non-Defaulting Party shall have all the remedies available at law or in equity
in connection therewith, and, further, shall have the right to purchase from
the proceeds of any prospects developed or with cash the Ownership Interest and
all of the right, title and interest of the Withdrawing Party in and to the
Joint Venture for an amount equal to 50% of the value of the Withdrawing
Party's interest in the Venture before Payout and for the Parties respective
ownership percentages set forth in Section 6.4 after Payout. The Withdrawing
Party and Non-Withdrawing Party shall meet within ten days of the occurrence of
the event causing the withdrawal pursuant to Section 9.2 or 9.3 and agree on
the value of the Withdrawing Party's Interest. In the event the Parties are
unable to reach agreement on such value, the value of the Withdrawing Party's
interest in the Joint Venture shall be deemed to be the Withdrawing Party's
Ownership Interest multiplied by an amount equal to the sum of all investment
amounts paid by the Joint Venture for all Prospects minus all revenues received
by both Parties from the Joint Venture. In the event the Non-Withdrawing Party
shall elect to purchase such Ownership Interest and all of the right, title and
interest of the Withdrawing Party under this Section 9.4, the Non-Withdrawing
Party is hereby appointed as the agent and attorney-in-fact of the Withdrawing
Party to execute such assignments and bills of sale as shall be necessary to
effect such transfer.
9.5 TERMINATION UPON DISPOSITION OF JOINT VENTURE PROPERTY. Upon
sale (not including an exchange) or condemnation of all or substantially all of
the Joint Venture assets the Joint Venture shall terminate. In such case, the
Manager shall immediately commence to wind up the Joint Venture's affairs and
shall liquidate the assets of the Joint Venture as promptly as possible, but in
an orderly and businesslike manner, so as not to involve undue sacrifice. The
proceeds of such liquidations (or the non-cash assets as the case may be) shall
be applied and distributed in the order of priority provided in Article 6.4
hereof.
8
<PAGE> 9
ARTICLE X
MISCELLANEOUS
10.1 NOTICES. All notices, elections, demands or other
communications required or permitted to be made or given pursuant to this
Agreement shall be in writing and shall be considered as properly given or made
if given by (a) personal delivery, (b) expedited delivery service with proof of
delivery, (c) first class mail postage prepaid, or (i) prepaid telegram, telex
or facsimile (provided that such telegram, telex or facsimile is confirmed by
expedited delivery service in the manner previously described). Each Party's
address for notices and other communications hereunder shall be that set forth
below. Any Party may change its address by giving notice in writing to the
other Party of its new address.
SMC:
Southern Mineral Corporation
17001 Northchase, Suite 690
Houston, Texas 77060-2138
Telecopy: (713) 872-5232
Attention: Mr. Steven H. Mikel
LINKS:
The Links Group, Inc.
13131 Champions Drive, Suite 206
Houston, Texas 77069
Telecopy: (713) 893-9783
Attention: Mr. Robert R. Hillery
10.2 OTHER BUSINESS ACTIVITIES. Each Party reserves the right to
generate and formulate prospects other than those generated within the AMI Area
and to carry on exploratory, drilling and production operations with respect
thereto, either alone or with other parties.
10.3 KNOWLEDGEABLE INVESTOR. Each Party hereby acknowledges that
it is sophisticated, knowledgeable and active in the business of oil and gas
investments, operations and exploration, that such business involves
substantial risks, and that there is no guarantee or representation whatsoever
that any of the Prospects covered by this Agreement will be productive of oil,
gas or other minerals.
10.4 BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of the successors and assigns of the parties.
9
<PAGE> 10
10.5 ENTIRE AGREEMENT. This Agreement constitutes the entire
Agreement and understanding between the Parties and supersedes any and all
prior agreements, understandings and negotiations, written or oral, relating to
the subject matter hereof, unless referenced and incorporated herein. This
Agreement may be modified and amended only by written instrument executed by
the Parties.
10.6 ASSIGNMENT. The Parties agree that they shall not have the
right to transfer, sell, pledge or assign their shares in the Joint Venture, or
any of their obligations or duties under this Agreement, without the prior
written consent of the other Party, such consent is not be unreasonably
withheld.
10.7 GOVERNING LAW. Any dispute between the Parties concerning the
interpretation, performance or breach of this Agreement shall be governed by
the laws of the State of Texas shall be enforceable in the District Courts of
Harris County, Texas.
10.8 NO WAIVER OF RIGHTS. Failure to exercise any right or power
by any Party under this Agreement does not constitute a waiver of such power or
right, unless expressly agreed in writing.
10.9 REFERENCES. Titles appearing at the beginning of any such
articles, sections, subsections and other subdivisions are for convenience only
and shall not constitute part of such subdivisions and shall be disregarded in
construing the language contained in such subdivisions. The words "this
Agreement," "herein," "hereof," "hereby," "hereunder," and words of similar
import refer to this Agreement as a whole and not to any particular subdivision
unless expressly so limited. Words in the singular form shall be construed to
include the plural and vice versa, unless the context otherwise required.
10.10 SEVERABILITY. Each of the provisions of this Agreement is
severable from every other provision of this Agreement and the invalidity or
unenforceability of any one or more provisions
(SIGNATURES ON THE NEXT PAGE)
10
<PAGE> 11
IN WITNESS WHEREOF, the undersigned has executed this
Agreement effective as of the day first written above.
SOUTHERN MINERAL CORPORATION
By: /s/ Steven H. Mikel
--------------------------------
Name: Steven H. Mikel
Title: President
THE LINKS GROUP, INC.
By: /s/ Robert R. Hillery
--------------------------------
Name: Robert R. Hillery
Title: President
EXECUTION COPY
11
<PAGE> 12
EXHIBIT A
Attached to that certain Joint Venture Agreement
by and between Southern Mineral Corporation
and The Links Group, Inc. dated
October 1, 1995
DESIGNATION OF AMI AREA
Matagorda and Brazos Texas State Waters
A-1
<PAGE> 13
EXHIBIT B
Attached to that certain Joint Venture Agreement
by and between Southern Mineral Corporation
and The Links Group, Inc. dated
October 1, 1995
DESIGNATION OF INITIAL PROSPECTS
M-1
M-2
C-1
C-2
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 548
<SECURITIES> 1,249
<RECEIVABLES> 278
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,120
<PP&E> 6,319
<DEPRECIATION> (2,923)
<TOTAL-ASSETS> 5,516
<CURRENT-LIABILITIES> 217
<BONDS> 0
<COMMON> 64
0
0
<OTHER-SE> 5,235
<TOTAL-LIABILITY-AND-EQUITY> 5,516
<SALES> 1,611
<TOTAL-REVENUES> 1,779
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 466
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (18)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18)
<EPS-PRIMARY> .00
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