<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER 0-8043
SOUTHERN MINERAL CORPORATION
(Exact name of Registrant as specified in its charter.)
Nevada 36-2068676
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 Dallas, Suite 2800
Houston, Texas 77002-4708
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 658-9444
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION> Name of each exchange
Title of each class on which registered
- ------------------- ---------------------
<S> <C>
None None
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01
(TITLE OF CLASS)
Check 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
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB/A. [X]
Revenues for the year ended December 31, 1996 are approximately $12,233,000.
As of March 18, 1997, 9,100,832 shares of Common Stock were outstanding and the
aggregate market value of these shares at such date (based upon the last
reported sales price in the NASDAQ SmallCap Market of $4.75) held by
non-affiliates of the Registrant was approximately $34,133,847. Determination
of Common Stock ownership by affiliates was made solely for the purpose of
responding to this requirement and the Registrant is not bound by this
determination for any other purpose.
Portions of the Registrant's definitive proxy statement for the 1996 Annual
Meeting of Stockholders are incorporated herein by reference in Part III, Items
9, 10, 11 and 12
Transitional Small Business Disclosure Format (check one): Yes No X .
--- ---
================================================================================
<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Southern Mineral Corporation, a Nevada corporation, with its subsidiaries (the
"Company"), is an independent oil and gas company headquartered in Houston,
Texas. The Company is engaged in the acquisition, exploitation, exploration and
operation of oil and gas properties, primarily along the Gulf Coast, the
Mid-continent and in Canada, with a primary focus on the Gulf Coast Basin, both
onshore and offshore. The Company owns interests in more than 1,900 oil and gas
properties in those three regions. The Company's business strategy is to
increase reserves and shareholder value through a balanced program of
acquisitions, exploitation and controlled risk exploration. In addition to oil
and gas leasehold interests, the Company owns fee interests in the oil and gas
under some 665,148 gross surface acres (comprising some 346,760 net mineral
acres) in Mississippi, Texas and New Mexico. The Company has no current
development or other plans with respect to these fee interests other than
leasing them to third parties for exploration and development.
BACKGROUND
The Company was incorporated in 1937 as a vehicle to consolidate mineral tracts
retained as it lumbered large tracts of southern Mississippi forest lands. For
the next fifty years, the Company was largely a passive participant in the oil
and gas business, merely granting leases on its spread of mineral interests in
Mississippi. In the mid-1980's, the Company became a more active participant in
the oil and gas business, redeploying its significant cash flow from revenues
derived from the Poplarville Field into exploration activities. For the next
ten years, the Company pursued the sole strategy of exploration for oil and
gas. As a result of generally poor results, the Company changed its focus
beginning in 1995 to one of a more balanced approach to the oil and gas
business. The Company currently pursues acquisitions, exploitation and
controlled risk exploration.
ACQUISITION ACTIVITIES
Beginning in 1995, the Company began to seek out and evaluate potential oil and
gas property acquisitions as well as the acquisition of oil and gas companies.
The Company intends to finance such acquisitions from multiple funding sources.
Such funding sources may include internally generated funds, issuance of the
Company's capital stock, public or private borrowings or a combination of such
sources. The Company's recent acquisition activity is generally described
below.
SMC DEVELOPMENT, L. P.
The Company acquired the limited partner interest in SMC Development, L. P., a
Texas limited partnership, for $3,000,000 cash on August 30, 1996. Upon the
acquisition of the limited partner's interest, the partnership was dissolved,
resulting in the Company obtaining a direct working interest in sixteen oil and
gas properties with proved reserves estimated to be 4.2 billion cubic feet of
gas and 149,000 barrels of liquids located primarily in south Louisiana. The
limited partnership was co-managed by the Company and Diasu Oil & Gas Co.,
Inc., a Texas corporation ("Diasu") principally engaged in the exploration and
production of oil and gas in south Louisiana. In January 1996, Diasu sold for
$1,200,000 cash certain oil and gas properties to the limited partnership. The
sole limited partner of the limited partnership was Torch Energy Finance Fund
Limited Partnership I, whose general partner was Torch Energy Finance Company
(collectively, "Torch"). On August 30, 1996, the Company purchased from Torch
100% of the limited partnership interest in the limited partnership for
$3,000,000 cash, the limited partnership was dissolved and its oil and gas
properties distributed to the Company and Diasu as follows: the Company and
Diasu acquired an undivided 93% and 7% interest in the properties,
respectively, except that the Company's interest in certain of the properties
will decrease to 81.5% after the Company has recovered its costs of acquiring
Torch's limited partnership interest.
Page 2
<PAGE> 3
STONE & WEBSTER ACQUISITION
On December 20, 1995, the Company completed the acquisition of certain oil and
gas assets and outstanding capital stock of three subsidiaries of Stone &
Webster, Inc. ("S&W"). The oil and gas assets acquired include interests in
more than 1,400 wells, including 14 wells operated by Company personnel in two
Wilcox formation fields in DeWitt and Lavaca Counties, Texas. One of the
acquired subsidiaries is Spruce Hills Production Company, Inc., a Delaware
corporation that owns interests in approximately 1,200 wells located in Canada.
Another acquired subsidiary, San Salvador Development Company, Inc., a Texas
corporation, was merged into the Company during 1996. As a result of the
merger, the Company became the direct owner of San Salvador's interests in
approximately 270,000 gross mineral acres in the Texas panhandle and New Mexico
together with associated producing royalties. The third acquired S&W
subsidiary, Venture Resources, Inc., was sold by the Company in March 1996 for
$1,143,000 in cash. Venture held interests in 10 pipeline and gathering systems
in Oklahoma, Texas and Louisiana, which were not a part of the Company's core
businesses. The purchase price for the S&W assets and three subsidiaries
acquired in the transaction was approximately $16,400,000, including
adjustments and related transaction costs.
The Company financed the S&W acquisition with working capital and two loans
aggregating $15,215,000 from Compass Bank - Houston. The Company borrowed
$3,500,000 pursuant to a term loan arrangement due July 1, 1996, which was
subsequently refinanced by the Company. The Company borrowed $11,715,000
pursuant to a reducing revolving credit arrangement with an initial borrowing
base of $12,500,000.
EXPLOITATION AND EXPLORATION ACTIVITIES
In line with the Company's current strategy of pursuing controlled risk
exploration, the Company has entered into two separate joint ventures. These
joint ventures are described below.
SOUTHERN LINKS GROUP JOINT VENTURE
In September, 1995, the Company entered into a joint venture with The Links
Group, Inc., called Southern Links Group Joint Venture ("Southern Links").
Southern Links was formed to jointly develop exploration prospects in the
shallow offshore Texas state waters. The application of new technologies,
including 3-D seismic surveys, makes the area more appealing to a growing
market of potential participants. Southern Links defines prospects in the area
and packages and markets the prospects to industry participants. The joint
venture intends to continue to redeploy proceeds from the sale of its prospects
into new tracts at subsequent lease auctions.
DIASU JOINT VENTURE
The Company also entered into a joint venture with Diasu in January, 1996. The
Company has the option to pay leasehold, seismic and other third party costs in
the development of exploration prospects located primarily in south Louisiana
with Diasu for a two year period. Under the arrangement, as funded prospects
are sold the Company will recoup its prospect costs plus one-third of any
potential promote or carried interest received by Diasu after the sale of the
prospect. The Company has an option to receive this carried interest or to take
a one-third interest in each prospect and drill the property without further
burden or profit by Diasu. This arrangement provides the Company with
considerable flexibility in structuring its risk profile on a prospect by
prospect basis.
In addition to the two joint ventures, the Company has either initiated or
agreed to participate in various exploration opportunities. The Company intends
that its exploration effort is primarily composed of internally generated
projects. However, a portion of the Company's budget is earmarked for
exploratory opportunities brought to the Company by individuals and other
companies. The Company will limit its exploration exposure to any given
prospect to no more than a few hundred thousand dollars of risk capital.
Page 3
<PAGE> 4
Brazos Block 480, Offshore, Gulf of Mexico. To date, one prospect, Brazos Block
480, has been developed, defined and marketed from the Southern Links joint
venture. It is expected that the initial test well will begin drilling in the
first quarter, with test results expected in sixty to ninety days from
commencement of drilling operations. The joint venture has marketed 100% of the
prospect to larger oil and gas companies and has retained a carried interest
through the testing of the first well.
Southern Eagle, Offshore, Gulf of Mexico. The Company has initiated a project
called Southern Eagle along the shallow state waters offshore Matagorda Island,
Texas. In January, 1997, the Company licensed and took delivery of over 320
square miles of 3-D seismic data. Company personnel are working the data to
define prospects on which it is expected that acreage will be leased by the
Company during 1997. If the leasing of acreage on prospects is successful in
1997, it is anticipated that one or more initial test wells will be drilled
prior to year end 1997. It is expected that the Southern Eagle project will
continue for one or two years beyond 1997.
Matthews Project, Texas. The Company initiated a project with another
independent that is named the Matthews Project. Farmout acreage or seismic
options have been taken on approximately 6,500 acres along the DeWitt and
Lavaca County lines, Texas. It is anticipated that a nineteen square mile 3-D
seismic survey will be shot during the first half of 1997, and that drillable
prospects will be available for commencement prior to year end. The Company
owns rights to 25% of this prospect and will receive a promoted interest on any
of the remaining 75% placed by the co-ventures with third party investors.
Alta Loma Project, Texas. The Company has also leased acreage on a project
called Alta Loma in Galveston County, Texas. Discussions are underway with a
3-D seismic company regarding a joint effort to combine acreage and conduct a
twenty square mile 3-D seismic survey in 1997. It is currently anticipated that
drilling would not commence on this project until the beginning of 1998.
Maple Gap Project, Texas. The Company has agreed to participate for a
12.5%working interest in a project called Maple Gap, Orange County, Texas. The
initial test well is expected to be drilled during the first half of 1997.
Following evaluation of the initial well, it is expected that the working
interest parties will shoot a 3-D seismic survey over the project to delineate
the exploitation and development of the field.
BUSINESS RISKS
The Company's operations are subject to numerous federal, state and local laws,
rules and regulations relating to the protection of the environment, health and
safety, including but without limitation, laws concerning the release and
containment and disposal of pollutants and wastes that can be produced by
operations in which the Company owns interests. In addition, the Company's
operations are affected by numerous federal, state and local laws, rules and
regulations relating to the exploration, production, transportation, marketing
and sales of oil and natural gas. In the past, the Company's compliance with
such laws, rules and regulations has not had a material adverse effect on its
capital expenditures, earnings or competitive position. However, the Company
cannot predict whether its future compliance with, or the effect of, such laws,
rules and regulations would have a material adverse effect on its capital
expenditures, earnings or competitive position.
The Company anticipates that in the near term it will rely on various sources
to fund its principal business activity of acquiring oil and gas producing
reserves. Such funding sources may include, but not be limited to, use of
working capital, the issuance of the Company's capital stock, public and
private equity and debt markets and lending institutions such as banks and
energy investment firms. The Company's ability to access any or all of these
sources of funds may be impacted by a wide variety of factors that may include
its own financial condition as well as specific or general economic conditions
that each capital or debt market may experience at the time the Company
requires funding. There can be no assurances that the Company will be
successful in utilizing any of these sources to fund its acquisitions.
Page 4
<PAGE> 5
The Company is not dependent on any patents, trademarks, licenses, franchises,
or concessions.
Approximately 30% of the Company's revenues during the year ended December 31,
1996 were derived from Canadian properties acquired in December 1995. The costs
and revenues associated with the Company's Canadian operations are denominated
in Canadian dollars. The Company records its transactions and prepares its
financial statements in U.S. dollars. Fluctuations in the value of the two
currencies may cause currency translations losses for the Company or reduced
revenues and earnings, or both, with respect to its Canadian operations. The
Company cannot predict the effect of exchange rate fluctuations upon future
operating results.
COMPETITION
There is a high degree of competition in the acquisition of producing oil and
gas properties and the oil and gas exploration industry. Consequently, the
Company competes with many other entities for desirable potential acquisitions
and exploration and development prospects. The Company's competitors include
the major integrated oil companies as well as numerous independent oil and gas
companies and other producers of energy sources and fuels. Many of these
competitors have capital resources and other competitive advantages much
greater than that of the Company, and may therefore be better able than the
Company to withstand and compete during adverse market conditions. The
Company's ability to generate revenues and reserves in the future will be
dependent upon, among other things, its success in competing with these
competitors, as to which there can be no assurances. With respect to the oil
and gas mineral rights owned by the Company, the Company considers proposals to
lease its mineral rights on the basis of the best offer from prospective
lessees.
REGULATIONS
Domestic Environmental Regulation. Operations of the Company are subject to
numerous federal, state, and local laws and regulations governing the discharge
of materials into the environment or otherwise relating to environmental
protection. These laws and regulations may require the acquisition of a permit
before drilling commences; restrict or prohibit the types, quantities and
concentration of substances that can be released into the environment in
connection with drilling and production activities; prohibit drilling
activities on certain lands lying within wetlands or other protected areas; and
impose substantial liabilities for pollution resulting from drilling and
production operations. Moreover, state and federal environmental laws and
regulations may become more stringent. These environmental laws and regulations
may affect the Company's operations and costs as a result of their effect on
oil and gas development, exploration, and production operations. For instance,
legislation has been proposed in Congress from time to time that would amend
the federal Resource Conservation and Recovery Act of 1976 ("RCRA") to
reclassify oil and gas production wastes as "hazardous waste". If such
legislation were enacted, it could have a significant impact on the Company's
operating costs, as well as on the oil and gas industry in general. It is not
anticipated that the Company will be required in the near future to expend
amounts that are material in relation to its total capital expenditure program
by reason of environmental laws and regulations, but inasmuch as such laws and
regulations are frequently changed, the Company is unable to predict the
ultimate cost of compliance. In addition, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA" or "Superfund") and
certain state laws and regulations impose liability for cleanup of waste sites.
The Oil Pollution Act ("OPA") currently requires persons responsible for
"offshore facilities" to establish $150,000,000 in financial responsibility to
cover environmental cleanup and restoration costs likely to be incurred in
connection with an oil spill in the waters of the United States. On September
30, 1996 Congress passed legislation that would lower the financial
responsibility requirement under OPA to $35,000,000, subject to increase to
$150,000,000 if a formal risk assessment indicates the increase is warranted.
The Company cannot predict whether the President will sign this legislation.
The impact of any legislation is not expected to be any more burdensome to the
Company than it will be to other similarly situated companies involved in oil
and gas exploration and production.
Page 5
<PAGE> 6
OPA imposes a variety of additional requirements on "responsible parties" for
vessels or oil and gas facilities related to the prevention of oil spills and
liability for damages resulting from such spills in waters of the United
States. The "responsible party" includes the owner or operator of an onshore
facility, pipeline, or vessel or the lessee or permittee of the area in which
an offshore facility is located. OPA assigns liability to each responsible
party for oil spill removal costs and a variety of public and private damages
from oil spills. While liability limits apply in some circumstances, a party
cannot take advantage of liability limits if the spill is caused by gross
negligence or willful misconduct or resulted from violation of a federal
safety, construction or operating regulation. If a party fails to report a
spill or to cooperate fully in the cleanup, liability limits likewise do not
apply. OPA establishes a liability limit for offshore facilities (including
pipelines) of all removal costs plus $75,000,000. Few defenses exist to the
liability for oil spills imposed by OPA. OPA also imposes other requirements on
facility operators, such as the preparation of an oil spill contingency plan.
Failure to comply with ongoing requirements or inadequate cooperation in a
spill event may subject a responsible party to civil or criminal enforcement
actions.
The Federal Water Pollution Control Act ("FWPCA") imposes restrictions and
strict controls regarding the discharge of produced waters and other oil and
gas wastes into navigable waters. Permits must be obtained to discharge
pollutants to state and federal waters. The FWPCA and analogous state laws
provide for civil, criminal and administrative penalties for any unauthorized
discharges of oil and other hazardous substances in reportable quantities and,
along with the OPA, may impose substantial potential liability for the costs of
removal, remediation and damages. State water discharge regulations and the
federal ("NPDES") permits prohibit or are expected to prohibit within the next
year the discharge of produced water and sand, and some other substances
related to the oil and gas industry, to coastal waters. Although the costs to
comply with zero discharge mandates under federal or state law may be
significant, the entire industry will experience similar costs and the Company
believes that these costs will not have a material adverse impact on the
Company's financial conditions and operations. Some oil and gas exploration and
production facilities are required to obtain permits for their storm water
discharges. Costs may be incurred in connection with treatment of wastewater or
developing storm water pollution prevention plans.
Canadian Environmental Regulation. Operations of the Company are subject to
numerous federal, provincial and local laws and regulations. Environmental
legislation provides for restrictions and prohibitions on releases or emissions
of various substances produced in association with certain oil and gas industry
operations and can affect the location and operation of wells and other
facilities and the extent to which exploration and development is permitted.
Legislation also requires that well and facility sites be abandoned and
reclaimed to the satisfaction of provincial authorities and local landowners. A
breach of such legislation may result in the suspension or revocation of
licences and authorizations, and the suspension of operations, as well as the
imposition of clean-up orders, fines and penalties. In addition, certain types
of operations may require environmental assessment and reviews to be completed
before approvals are obtained and before exploration or development projects
are begun. The Company does not anticipate that it will be required to make
capital or other expenditures by reason of environmental laws and regulations
that are material in relation to the Company's total capital expenditure
program or that would have a material adverse effect on the Company's earnings,
but inasmuch as such laws and regulation are frequently changed, the Company is
unable to predict the ultimate cost of compliance.
Domestic Oil and Gas Regulation. Complex regulations concerning all phases of
energy development at the local, state and federal levels apply to the
Company's operations and often require interpretation by the Company's
professional staff or outside advisors. The federal government and various
state governments have adopted numerous laws and regulations respecting the
production, transportation, marketing and sale of oil and natural gas.
Regulation by state and local governments usually covers matters such as the
spacing of wells, allowable production rates, environmental protection,
pollution control, taxation and other related matters. Moreover, future changes
in local, state or federal laws and regulations could adversely affect the
operations of the Company.
Domestic exploration for, and production and sale of, oil and gas are
extensively regulated at both the federal and state levels. Legislation
affecting the oil and gas industry is under constant review for amendment or
expansion, frequently increasing the regulatory burden. Numerous departments
and agencies, both federal and state, are also authorized by statute to issue,
and have issued, rules and regulations binding on the oil and gas industry that
often are costly to
Page 6
<PAGE> 7
comply with and that carry substantial penalties for non-compliance. In
addition, production operations are affected by changing tax and other laws
relating to the petroleum industry, by constantly changing administrative
regulations, and possible interruption or termination by government
authorities.
Effective January 1, 1993, all price controls on natural gas were eliminated,
ending decades of federal pricing control of natural gas. The impact of price
decontrol on the Company is uncertain at present, but would appear not to cause
a material adverse effect on the business of the Company.
In the late 1980's, the Federal Energy Regulatory Commission ("FERC"), through
a series of orders, made major changes in certain of its regulations that have
since significantly affected the transportation and marketing of gas. These
regulations require gas pipelines to transport gas on a non-discriminatory
basis. As a result, many pipelines have become transporters of gas owned by
others and have greatly reduced their purchases of gas for resale.
Commencing in April, 1992, the FERC issued Order Nos. 636, 636-A, and
636-B ("Order No. 636"), which require interstate pipelines to provide
transportation separate, or "unbundled", from the pipelines' sales of gas.
Also, Order No. 636 requires pipelines to provide open-access transportation on
a basis that is equal for all gas shippers. Although Order No. 636 does not
directly regulate the Company's activities, the FERC has stated that it intends
for Order No. 636 to foster increased competition within all phases of the
natural gas industry. It is unclear what impact, if any, increased competition
within the natural gas industry under Order No. 636 will have on the Company's
activities. Although Order No. 636, assuming it is upheld in its entirety,
could provide the Company with additional market access and more fairly applied
transportation service rates, Order No. 636 could also subject the Company to
more restrictive pipeline imbalance tolerances and greater penalties for
violation of those tolerances. In July 1996, the United States Court of Appeals
for the District of Columbia Circuit largely upheld Order No. 636. The FERC has
issued final orders of virtually all Order No. 636 pipeline restructuring
proceedings. Appeals of Order No. 636, as well as orders in the individual
pipeline restructuring proceedings, are currently pending, and the Company
cannot predict the ultimate outcome of court review. This review may result in
the reversal, in whole or in part, of Order No. 636.
In December 1992, the FERC issued Order No. 547, governing the issuance of
blanket marketer sales certificates to all natural gas sellers other than
interstate pipelines. Order No. 547 applies to non-first sales that remain
subject to the FERC's NGA jurisdiction. The FERC intends Order No. 547, in
tandem with Order No. 636, to foster a competitive market for natural gas by
giving natural gas purchasers access to multiple supply sources at
market-driven prices. Order No. 547 may increase competition in markets in
which the Company's natural gas is sold which may negatively affect revenues in
the future.
Commencing in May 1994, the FERC has issued a series of orders in individual
cases that delineate its gathering policy as a result of the comments received.
Among other matters, the FERC slightly narrowed its statutory tests for
establishing gathering status and reaffirmed that it does not have jurisdiction
over natural gas gathering facilities and services and that such facilities and
services are properly regulated by state authorities. As a result, natural gas
gathering may receive greater regulatory scrutiny by state agencies. In
addition, the FERC has approved several transfers by interstate pipelines of
gathering facilities to unregulate gathering companies, including affiliates.
This could allow such companies to compete more effectively with independent
gatherers. The FERC's orders delineating its new gathering policy are subject
to possible court appeals.
The FERC has announced its intention to reexamine certain of its
transportation-related policies, including the appropriate manner for setting
rates for new interstate pipeline construction and the manner in which
interstate pipelines release transportation capacity under Order No. 636. While
any resulting FERC action would affect the Company only indirectly, these
inquiries are intended to further enhance competition in natural gas markets.
Canadian Oil and Gas Regulation. The oil and natural gas industry is subject to
extensive legislation and regulation governing its operations including land
tenure, exploration, development, production, refining, transportation,
marketing, environmental protection, exports, taxes, labor standards and health
and safety standards imposed by legislation enacted by various levels of
government. In addition, extensive legislation and regulation exists with
respect to pricing and taxation of oil and natural gas and related products.
Page 7
<PAGE> 8
CUSTOMERS
Oil and gas hydrocarbons are the principal products produced by the Company and
sales of such products are usually made in the spot market or on such other
bases that may be impacted by the effect of changes in current market prices.
Future oil and natural gas prices may be affected by a variety of factors
including, but not limited to, supply and demand, world and regional market
conditions, political conditions and seasonal factors, all of which the Company
is unable to control or accurately predict. In the past, there have not been,
and management does not expect there to be in the near term, any material
adverse effects on the Company's business due to seasonal aspects. Backlog is
not a factor in the Company's operations. The Company is principally engaged in
a single industry segment, the acquisition, exploration, development, and
production of oil and gas reserves, all in the United States and Canada. Sales
of oil and gas to customers accounting for 10% or more of revenues were as
follows:
<TABLE>
<CAPTION>
CUSTOMER 1996 1995 1994
-------- ------ ------ ------
(in thousands)
<S> <C> <C> <C>
G C Marketing Company $3,212 $ -- $ --
Mike Rogers Drilling Company 591 746 651
Ashtola Exploration Company -- 208 283
</TABLE>
OPERATIONAL HAZARDS AND INSURANCE
The Company's operations are subject to all of the risks normally incident to
the production of oil and gas, including blowouts, cratering, pipe failure,
casing collapse, oil spills and fires, each of which could result in severe
damage to or destruction of oil and gas wells, production facilities or other
property, or injury to persons. The energy business also is subject to
environmental hazards, such as oil spills, gas leaks, and ruptures and
discharge of toxic substances or gases that could expose the Company to
substantial liability due to pollution and other environmental damage. Although
the Company maintains insurance coverage considered to be customary in the
industry, it is not fully insured against certain of these risks, either
because such insurance is not available or because of high premium costs. The
occurrence of a significant event that is not fully insured against could have
a material adverse effect on the Company's financial position.
EMPLOYEES
At March 18, 1997, the Company employed sixteen full-time persons including one
engineer, two geologists, one landman and thirteen administrative, technical
and accounting personnel. In addition, the Company employed three consultants
including one geologist, one engineer and one engineering technical assistant.
Page 8
<PAGE> 9
SELECTED FINANCIAL DATA (in thousands)
COMPARATIVE CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------------------------
ASSETS 1996 1995 1994 1993 1992
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Current assets $ 2,918 $ 2,071 $ 1,973 $ 2,865 $ 2,343
Property and equipment 20,599 18,042 1,347 4,106 5,384
Oil and gas properties held for sale and other 869 1,554 50 350 376
----------- ----------- ----------- ----------- -----------
$ 24,386 $ 21,667 $ 3,370 $ 7,321 $ 8,103
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 683 $ 5,960 $ 290 $ 561 $ 421
Deferred income taxes 1,169 606 --- 547 730
Long term debt 3,900 9,920 --- --- ---
Stockholders' equity 18,634 5,181 3,080 6,213 6,952
----------- ----------- ----------- ----------- -----------
$ 24,386 $ 21,667 $ 3,370 $ 7,321 $ 8,103
=========== =========== =========== =========== ===========
WORKING CAPITAL $ 2,235 $ (3,889) $ 1,683 $ 2,304 $ 1,922
=========== =========== ========== =========== ===========
COMPARATIVE STATEMENTS OF OPERATIONS
REVENUES
Oil and gas $ 11,780 $ 2,044 $ 1,747 $ 2,891 $ 2,465
Gains (losses) on sales of properties 453 170 66 146 (26)
----------- ----------- ----------- ----------- ------------
12,233 2,214 1,813 3,037 2,439
EXPENSES 8,164 2,488 5,580 3,959 4,048
----------- ----------- ----------- ----------- -----------
Income (loss) from operations 4,069 (274) (3,767) (922) (1,609)
Other income, expenses and deductions
Interest and other income 286 146 76 41 78
Interest and debt expense (1,242) --- --- --- ---
----------- ----------- ------------ ------------ -----------
Income (loss) before income taxes and the cumulative
effect of a change in accounting for income taxes 3,113 (128) (3,691) (881) (1,531)
Provision (benefit) for income taxes 679 9 (558) (279) (487)
----------- ----------- ----------- ----------- -----------
Income (loss) before the cumulative effect of a change
in accounting for income taxes 2,434 (137) (3,133) (602) (1,044)
Cumulative effect of a change in accounting for
income taxes --- --- --- 65 ---
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 2,434 $ (137) $ (3,133) $ (537) $ (1,044)
=========== =========== ============ ============ ============
PER PRIMARY SHARE OF STOCK:
Net income (loss) before the cumulative effect of a
change in accounting for income taxes $ .34 $ (0.02) $ (0.78) $ (0.15) $ (0.26)
Cumulative effect of a change in accounting for
income taxes --- --- --- 0.02 ---
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) $ .34 $ (0.02) $ (0.78) $ (0.13) $ (0.26)
=========== =========== =========== =========== ===========
Primary weighted average number of shares 7,215 5,701 4,162 4,131 4,016
=========== ============ =========== ============ ============
Fully diluted weighted average number of shares 7,336 5,701 4,162 4,131 4,016
=========== ============ ============ ============ ============
</TABLE>
Note A Pursuant to the provisions of Financial Accounting Standards Board
Statement No. 109, "Accounting for Income Taxes", the Company changed
its method of accounting for income taxes and recorded an adjustment
of $65 benefitting 1993.
Note B In 1994, Company recognized a Valuation Reduction of $1,724 in
connection with the write-down of its investment in certain producing
oil and gas properties.
Page 9
<PAGE> 10
ITEM 2. DESCRIPTION OF PROPERTIES
GENERAL
At December 31, 1996, the Company held interests in excess of 700 gross wells
in the continental United States and in excess of 1,200 gross wells in Canada
consisting of working interests, royalty interests and overriding royalty
interests. Approximately 23% of the Company's proved oil and gas reserves are
oil and approximately 77% are gas, measured in energy equivalent barrels of oil
basis (natural gas is converted at the rate of six thousand cubic feet of gas
for each barrel of oil).
OIL AND GAS RESERVE INFORMATION
The following two tables reflect the estimated proved reserves of the Company.
The oil and gas reserves are principally located onshore in the continental
United States and Canada. The Company's reserve information has been based on
estimates prepared by an independent consulting petroleum engineer. The
independent consultant who prepared the reserve estimate information as of
December 31, 1994, was Hedrick and Associates. Hedrick and Associates is no
longer in business as of December 31, 1995. Netherland, Sewell & Associates,
Inc. has prepared the domestic reserve estimates as of December 31, 1995 and
audited the December 31, 1996 domestic reserve estimates which were prepared by
the Company. McDaniel & Associates Consultants LTD. prepared the Canadian
reserve estimates as of December 31, 1995 and 1996. Since the beginning of the
last fiscal year, the Company has not filed any estimates of its reserves with
any Federal authority or agency.
<TABLE>
<CAPTION>
U.S. CANADA TOTAL
--------------------------- --------------------------- ---------------------------
OIL GAS OIL GAS OIL GAS
PROVED RESERVES (BBLS) (MCF) (BBLS) (MCF) (BBLS) (MCF)
- --------------- ----------- ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 474,486 1,238,857 -- -- 474,486 1,238,857
Extensions, discoveries and additions 45,834 245,190 -- -- 45,834 245,190
Revisions of previous estimates (213,258) (397,443) -- -- (213,258) (397,443)
Production (78,866) (300,544) -- -- (78,866) (300,544)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1994 228,196 786,060 -- -- 228,196 786,060
Extensions, discoveries and additions 66 8,449 -- -- 66 8,449
Revisions of previous estimates (24,715) (145,903) -- -- (24,715) (145,903)
Purchase of minerals in place 568,702 20,400,151 868,495 5,786,239 1,437,197 26,186,390
Production (84,848) (404,319) -- -- (84,848) (404,319)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 687,401 20,644,438 868,495 5,786,239 1,555,896 26,430,677
Extensions, discoveries and additions 6,081 479,336 31,351 1,506,458 37,432 1,985,794
Revisions of previous estimates 33,975 (519,051) (35,593) 528,330 (1,618) 9,279
Purchase of minerals in place 109,252 4,590,014 -- -- 109,252 4,590,014
Production (120,855) (2,396,379) (112,563) (961,527) (233,418) (3,357,906)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 715,854 22,798,358 751,690 6,859,500 1,467,544 29,657,858
=========== =========== =========== =========== =========== ===========
PROVED DEVELOPED RESERVES
Balance, December 31, 1994 228,196 786,060 -- -- 228,196 786,060
Balance, December 31, 1995 661,852 20,446,505 868,495 5,786,239 1,530,347 26,232,744
Balance, December 31, 1996 608,705 19,361,667 751,690 6,859,500 1,360,395 26,221,167
</TABLE>
Page 10
<PAGE> 11
PRODUCTION AND PRICE HISTORY
The following table sets forth certain information concerning the Company's
annual net oil and gas production and average price information for the year
ended December 31:
<TABLE>
<CAPTION>
Production: 1996 1995 1994
------------ ----------- ----------
<S> <C> <C> <C>
Oil (Bbls)
U.S. 120,855 84,848 78,866
Canada 112,563 --- ---
----------- ---------- -----------
Total 233,418 84,848 78,866
Gas (Mcf)
U.S. 2,396,379 404,319 300,544
Canada 961,527 --- ---
----------- ---------- -----------
Total 3,357,906 404,319 300,544
Average sales price:
Oil ($ per Bbl)
U.S. 19.69 16.23 15.31
Canada 18.09 --- ---
----------- ---------- -----------
Average 18.92 16.23 15.31
Gas ($ per Mcf)
U.S. 2.29 1.65 1.80
Canada 1.17 --- ---
----------- ---------- -----------
Average 1.97 1.65 1.80
Average lifting costs ($ per Mcfe)
Operating expenses and pr 0.58 0.72 0.71
Depreciation, depletion a 0.60 0.87 0.91
</TABLE>
PRODUCTIVE WELLS STATISTICS
The following table sets forth information concerning productive wells
in which the Company has an interest as of December 31, 1996:
<TABLE>
<CAPTION>
OIL GAS TOTAL
-------------- ----------- ---------------
GROSS NET GROSS NET GROSS NET
-------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Canada 699 15.1 510 6.5 1,209 21.6
U. S.(1) 224 15.4 487 52.8 711 68.2
</TABLE>
(1) Includes producing units that contain numerous wells. Each unit is counted
as one gross well and the unit working interest is included in the net wells.
DEVELOPMENT AND EXPLORATORY WELLS DRILLED
The following table includes the drilling results of wells in which the Company
has a working interest for the year ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- --------------- -------------
EXPLORATORY: GROSS NET GROSS NET GROSS NET
------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Oil 0 .000 0 .000 0 .000
Gas 1 .150 0 .000 3 .307
Dry hole 3 .335 0 .000 3 .430
DEVELOPMENT:
Oil 21 .246 0 .000 1 .250
Gas 15 .257 2 .020 0 .000
Dry hole 6 .174 1 .150 2 .068
TOTAL
Productive 37 .653 2 .020 4 .557
Dry hole 9 .509 1 .150 5 .498
</TABLE>
Page 11
<PAGE> 12
DEVELOPED AND UNDEVELOPED LEASEHOLD ACREAGE:
The following table shows the Company's leasehold interest in developed and
undeveloped oil and gas acreage as of December 31, 1996. This table does not
reflect certain mineral acreage owned by the Company. In the following data
"Gross" refers to the total acres in which the Company has a working interest
and "Net" refers to gross acres multiplied by the percentage of the working
interest owned by the Company.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
ACREAGE ACREAGE
----------------------------- -------------------------------
UNITED STATES GROSS NET GROSS NET
- ------------- ----------- ------------ ----------- ------
<S> <C> <C> <C> <C>
Alabama 651 26 188 7
Arkansas 1,040 247 1,799 450
Colorado 288 21 0 0
Kansas 204 53 0 0
Louisiana 4,895 765 486 452
Michigan 96 2 0 0
Mississippi 972 115 1,207 132
Montana 24 2 0 0
New Mexico 3,012 213 0 0
North Dakota 400 177 0 0
Oklahoma 2,360 379 0 0
Texas 19,577 3,555 2,426 1,083
Texas - Offshore 5,760 105 1,440 1,440
Wyoming 10,384 500 0 0
Utah 672 148 0 0
----------- ------------ ----------- ------------
Total-Domestic 50,335 6,308 7,546 3,564
=========== ============ =========== ============
CANADA
Alberta 85,280 3,057 209,176 12,957
Saskatchewan 2,160 1 960 1
British Columbia 2,086 260 28,715 1,737
----------- ------------ ----------- ------------
Total-Canadian 89,526 3,318 238,851 14,695
=========== ============ =========== ============
Total Leasehold Acreage 139,861 9,626 246,397 18,259
=========== ============ =========== ============
</TABLE>
"Developed acreage" consists of lease acres spaced or assignable to production
on which wells have been drilled or completed to a point that would permit
production of commercial quantities of oil or gas.
The Company's ownership of mineral rights is set forth below:
<TABLE>
<CAPTION>
GROSS NET
STATE MINERAL ACRES MINERAL ACRES
- ----- ------------- -------------
<S> <C> <C>
Mississippi 262,000 118,000
Wisconsin 121,000 110,000
Texas 212,514 84,183
New Mexico 67,634 32,577
Other 2,000 2,000
------- -------
Total 665,148 346,760
======= =======
</TABLE>
The Company is not aware of any valuable minerals appurtenant to the mineral
rights in Wisconsin, and therefore has no plans to develop minerals on such
properties. Currently, the Company has 2,885 net mineral acres in southern
Mississippi, 18,194 net mineral acres in Texas and 3,177 net mineral acres in
New Mexico under lease to others.
Page 12
<PAGE> 13
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings are pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the fourth
quarter of the Company's last fiscal year.
Page 13
<PAGE> 14
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMPANY'S COMMON STOCK
Prices are based on trades made while the Company was listed on the NASDAQ
National Market System through March 9, 1995. Since March 10, 1995, the
Company's Common Stock has been traded on the NASDAQ SmallCap Market with the
trading symbol SMIN.
The following table sets forth the high and low sales prices on the market
systems noted above for the Company's Common Stock for the periods indicated:
<TABLE>
<CAPTION>
1996 1995 1994
------------------- ----------------- ------------------
HIGH LOW HIGH LOW HIGH LOW
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 2.13 $ 1.25 $ 1.25 $ .63 $ 2.13 $ 1.63
Second Quarter 3.38 1.81 1.25 .94 2.00 .69
Third Quarter 5.00 2.88 1.06 .75 1.38 .94
Fourth Quarter 6.00 4.25 1.63 .75 1.13 .44
-------- ------- ------- ------- ------- -------
For the Year $ 6.00 $ 1.25 $ 1.63 $ .63 $ 2.13 $ .44
======== ======= ======= ======= ======= =======
</TABLE>
The Company did not declare any dividends in fiscal 1996, 1995 or 1994. The
payment of future dividends on Common Stock, if any, will be reviewed
periodically by the Company's Board of Directors, and will depend upon, among
other things, Company's financial condition, funds available from operations,
the amount of anticipated capital and other expenditures, and the Company's
future business prospects. It is likely that for the foreseeable future, funds
available for dividends on Common Stock, if any, will be retained by the
Company to finance the growth of its business. Payment of dividends is
currently restricted by the terms of the Company's bank loan agreement.
There were 669 stockholders of record on March 18, 1997.
RECENT SALES OF UNREGISTERED SECURITIES
The following information is given with respect to securities issued by the
Company during 1996 in transactions which were not registered under the
Securities Act of 1933, as amended (the "1933 Act"). A claim of exemption under
Section 4(2) of the 1933 Act is claimed with respect these transactions. The
subject securities are either nontransferable or each issuee thereof
represented that it understood that the securities acquired could not be sold
or otherwise transferred without registration under the 1933 Act or the
availability of an exemption therefrom, and each certificate representing such
securities bears (or upon issuance will bear) a restrictive legend to that
effect.
December 1996 Private Placement. On December 23, 1996, the Company sold
2,500,000 shares of its Common Stock at a price of $4.50 per share or an
aggregate $11,250,000 in a private placement to institutional and accredited
investors for which Morgan Keegan & Company, Inc. ("MKC") was the placement
agent (the "Private Placement"). Net proceeds to the Company were $10,687,500
after payment to the placement agent of a 5% fee of $562,500. As part of MKC's
compensation for acting as placement agent, the Company issued to MKC a warrant
exercisable for 120,000 shares of Common Stock at $4.50 per share until
December 23, 2001, subject to certain anti-dilution adjustments. The Company
currently has pending a Form S-3 registration statement to register under the
1933 Act the resale of the shares of Common Stock sold in the private placement
and underlying MKC's warrant (the "Pending Form S-3").
Page 14
<PAGE> 15
EnCap Investments, L.C. In November 1996, the Company issued to EnCap
Investments, L.C. 20,000 shares of Common Stock under a November 5, 1996
agreement between EnCap and the Company as a retainer for EnCap's efforts to
target acquisition candidates for the Company. If and when the consideration
paid by the Company for such acquisitions exceeds $5,000,000, the Company
agreed to issue EnCap warrants exercisable for three years for 80,000 shares of
Common Stock at an exercise price equal to the Common Stock's market price at
the time the $5,000,000 threshold is exceeded. The resale of the 20,000 shares
issued to EnCap is covered by the Pending Form S-3.
Diasu and its Principals. In January 1996, the Company issued 87,500 shares of
Common Stock to to each of Gary L. Chitty and Thomas J. McMinn pursuant to a
Subscription Agreement and Assumption of Obligations between the Company and
Messrs. Chitty and McMinn, dated January 5, 1996 ("Subscription Agreement").
The resale of these aggregate 175,000 shares is covered by the Pending Form
S-3. Each of Messrs. Chitty and McMinn is a director, executive officer and
beneficial owner of 50% of the outstanding equity securities of Diasu Oil & Gas
Co., Inc., a Texas corporation ("Diasu") principally engaged in the exploration
and production of oil and gas. On January 5, 1996, Diasu and the Company
entered into an Option Agreement granting the Company an option to participate
as an investor in any oil and gas exploration and development projects proposed
by Diasu or its affiliates during the following 24-month period (the "Option
Agreement"). Pursuant to the Subscription Agreement, each of Messrs. Chitty and
McMinn agreed to cause Diasu to honor its obligations under the Option
Agreement and to make the Option Agreement applicable to any oil and gas
prospects that either of Messrs. Chitty or McMinn and certain of their
affiliates might pursue. In consideration for the Company's rights under the
Subscription Agreement, the Company issued each of Messrs. Chitty and McMinn
87,500 shares of Common Stock and a presently exercisable warrant for 200,000
shares of Common Stock (collectively, the "First Warrants"). Pursuant to the
Option Agreement, the Company issued Diasu warrants exercisable for 200,000
shares of Common Stock (the "Second Warrants"). Diasu subsequently transferred
a Second Warrant exercisable for 100,000 shares to each of Messrs. Chitty and
McMinn. Each of the First Warrants and Second Warrants may be exercised until
January 5, 2001 at $2.00 per share and are subject to certain anti-dilution
adjustments. The Company negotiated the $2.00 per share exercise price of these
warrants to be at a premium of the average last sale price for the Common Stock
on the NASDAQ SmallCap Market on January 2, 3 and 4, 1996 of $1.5625 per share.
The Company agreed to register the resale of shares of Common Stock actually
issued to Messrs. Chitty and McMinn under the Subscription Agreement and upon
exercise of the First Warrants and Second Warrants.
1996 Stock Option Plan. During 1996, the Company granted options exercisable
for 130,000 shares of Common Stock under the Company's 1996 Stock Option Plan
(the "SOP"). Pursuant to the SOP, the Company may grant options to purchase up
to 300,000 shares (subject to customary anti-dilution adjustments) of its
Common Stock to key employees of the Company. The SOP is administered by the
Compensation Committee of the Company's Board of Directors which generally has
authority to establish who receives options and the terms and conditions
thereof, including vesting and exercise price. The exercise price of each
option granted in 1996 is the market price for the Common Stock on the date of
grant, determined by reference to the most recent closing price therefor
reported on the NASDAQ SmallCap Market.
1996 Employee Stock Purchase Plan. Subsequent to 1996, the Company granted
options exercisable for 5,313 shares of Common Stock under the Company's
1996 Employee Stock Purchase Plan (the "SPP"). The SPP is intended to
constitute an "employee stock purchase plan" within the meaning of Section 423
of the Internal Revenue Code of 1986, as amended. Pursuant to the SPP, the
Company may grant options to purchase up to 300,000 shares (subject to
customary anti-dilution adjustments) of its Common Stock to employees of the
Company. Options may be granted on January 1 and July 1 of each year to
eligible employees who elect to participate in the SPP. The term of each option
is six months from the date of grant. The number of options granted to each
participant equals the quotient of (i) the total payroll deductions authorized
by the participant as extended during the full applicable option period,
divided by (ii) 85% of the fair market value of the Common Stock as of the date
of grant of such option. The exercise price of options under SPP is 85% of the
fair market value of the Common Stock as of the date of grant or the date of
exercise of such option, whichever is less, determined by reference to the most
recent closing price therefor reported on the NASDAQ SmallCap Market.
Page 15
<PAGE> 16
The Company's Form S-8 Registration Statement No. 333-12375 generally covers
the issuance and resale (subject, in the case of affiliates, to Rule 144 under
the 1933 Act) of Common Stock issuable upon exercise of options under the SOP
and SPP.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1996
AS COMPARED TO THE PERIOD ENDED DECEMBER 31, 1995
Oil and gas revenues for 1996 were $11,780,000, up 476% compared to oil and gas
revenues for 1995 of $2,044,000. The increase in revenues reflects higher
production volumes of both natural gas and crude oil and higher commodity
prices for both natural gas and oil. Higher production volumes were primarily
due to the acquisitions of certain assets and companies of Stone & Webster,
Inc. ("Stone & Webster"), acquired in December 1995, and the acquisition of the
limited partnership interest in SMC Development, L.P. ("SMD") in August 1996.
Natural gas production in 1996 was 3,358 Mmcf, a 731% increase compared to 1995
production of 404 Mmcf. The Company's crude oil production in 1996 increased
175% to 233,418 barrels compared to 84,848 barrels in 1995.
The average natural gas price in 1996 increased 19% to $1.97 per Mcf compared
to $1.65 per Mcf in 1995. Crude oil prices increased 17% in 1996 to $18.92,
compared to $16.23 per barrel in 1995.
As part of the Company's on-going operations, the Company may sell
non-strategic assets or oil and gas properties. The proceeds would be used to
pay down debt or redeploy capital to opportunities that may have a higher rate
of return. These activities resulted in gains on sale of assets of $453,000 in
1996 and $170,000 in 1995. The gain on sale in 1996 was primarily the result of
the sale of Venture Resources, Inc. for $1,143,000, which was a non-core asset
acquired as part of the Stone & Webster acquisition. The gain on sale in 1995
was primarily the result of the sale of non-strategic oil and gas interests in
the Bandera and Equipo prospects located in Maverick County, Texas.
Production costs, including production and ad valorem taxes, increased in 1996
to $2,742,000, up 318% from $656,000 in 1995, primarily due to the above
mentioned acquisitions. However, on a cost per Mcfe basis, production costs for
1996 declined to $0.58 per Mcfe, or 19% from $0.72 per Mcfe in 1995.
General and administrative expenses increased as a result of the above
mentioned acquisitions to $1,682,000 in 1996, up 105% from $819,000 in 1995.
However, on a cost per Mcfe basis, general and administrative expenses declined
to $0.35 per Mcfe, or 61% from $0.90 Mcfe in 1995.
Exploration, dry hole and lease impairment expenses increased in 1996 to
$865,000, up 291% compared to $221,000 in 1995, which was primarily due to
lease impairment expenses of approximately $600,000 in the fourth quarter of
1996. Since the Company uses successful efforts method of accounting,
exploration expenses may vary greatly from year to year based upon the level of
exploration activity during the year.
Depreciation, depletion and amortization ("DD&A") expense for 1996 increased to
$2,875,000, up 263% from $792,000 in 1995, which was due primarily to the above
mentioned acquisitions and downward revisions to reserve estimates in the
Company's oil and gas property located in Yoakum, Texas. The Company computes
depreciation and depletion on each producing property on a unit-of-production
method. Since this method employs estimates of remaining reserves, depreciation
and depletion expenses may vary from year to year because of revisions to
reserve estimates, production rates and other factors. DD&A expenses declined
per Mcfe in 1996 to $0.60 per Mcfe, down 31% from $0.87 per Mcfe in 1995.
Interest and debt expense in 1996 was $1,242,000, which was a result of the
bank debt incurred to consummate the above mentioned acquisitions. The Company
had no interest expense in 1995.
Page 16
<PAGE> 17
The Company had a net operating loss carryforward of approximately $2,293,000
at the end of 1995, which was fully utilized in 1996. Tax expense in 1996 and
1995 was $679,000 and $9,000, respectively, with the increase related to higher
1996 net income before taxes.
The Company reported earnings in 1996 of $2,434,000 or $0.34 per share compared
to a loss of $137,000 or $0.02 per share in 1995.
FOR THE PERIOD ENDED DECEMBER 31, 1995
AS COMPARED TO THE PERIOD ENDED DECEMBER 31, 1994
The Company reported a net loss in 1995 of $137,000 or $.02 per share compared
to a loss of $3,133,000 or $.78 per share in 1994. Revenues, including interest
and other income, for 1995 were $2,360,000, up 25% compared to revenues for
1994 of $1,889,000. Expenses for 1995 were $2,488,000, down 55% compared to
expenses of $5,580,000 for 1994.
The increase in revenues reflects higher production volumes of both natural gas
and crude oil and higher prices for crude oil. Natural gas production in 1995
was 404 Mmcf, a 34% increase compared to 1994 production of 301 Mmcf. The
Company's crude oil production in 1995 increased 8% to 84,848 barrels compared
to 78,866 barrels in 1994. The Company's average gas price in 1995 decreased 8%
to $1.65 per Mcf compared to $1.80 per Mcf in 1994. Offsetting lower gas
prices, crude oil prices in 1995 increased 6% to $16.23 per barrel as compared
to $15.31 per barrel in 1994. Higher production volumes were primarily due to
the acquisition of an interest in Diverse GP III, which was acquired in April
of 1995. Revenues also increased as a result of an increase in the gain on the
sale of assets to $170,000 in 1995 from $66,000 in 1994. The gain in 1995 was
primarily a result of the Company's sale of its interest in the Bandera and
Equipo prospects located in Maverick County, Texas.
The reduction in expenses in 1995 was primarily the result of special charges
of $1,724,000 related to write-downs in valuation of three producing properties
in 1994, which were non-recurring in 1995. Substantial exploration losses in
early 1994 caused the Company to reexamine its exploration and production
strategy. The Company decided that non-core properties should be sold, and
accordingly wrote-down the assets to the estimated sales price. Production
expenses increased 20% to $656,000 in 1995 from $548,000 in 1994. The increase
in production expenses was primarily due to the inclusion of Diverse GP III in
1995. Exploration expenses declined 86% to $221,000 in 1995 from $1,566,000 in
1994. Since the Company uses the successful efforts method of accounting,
exploration expenses may generally vary greatly from year to year based upon
the level of exploration activity during the year. The decline in exploration
expenses in 1995 was primarily the result of decreased exploration activity due
to a change in the Company's focus away from higher risk exploration and
towards the acquisition of existing reserves, exploitation and controlled risk
exploration. The Company participated in the drilling of three gross wells
drilled in 1995 compared to nine gross wells in 1994. Drilling results in 1995
included one dry hole drilled in Refugio County, Texas and two development
wells drilled in Roger Mills County, Oklahoma and Lavaca County, Texas,
respectfully. Depreciation and depletion increased 13% to $792,000 in 1995 from
$704,000 in 1994, due to the inclusion of Diverse GP III in 1995 and
adjustments in reserve estimates for certain properties owned by the Company.
The Company computes depreciation and depletion expenses on each producing
property on a unit-of-production method. Since this method employs estimates of
remaining reserves, depreciation and depletion expenses may vary from year to
year because of revisions to reserve estimates, production rates and other
factors. General and administrative costs were $819,000 in 1995, down 21% from
$1,038,000 in 1994. The decline in general and administrative expenses was a
result of the Company's ongoing cost cutting plans implemented in 1994 and
carried out in 1995.
The revisions in the Company's estimated reserves in 1994 were primarily the
results of downward adjustments to the Company's oil and gas properties in
Bandera, Stateline and Cascade Deep fields. Production from these fields was
substantially below those projected by the Company's independent petroleum
engineering firm due primarily to water encroachment and lack of production
facilities in the Stateline field and lower than projected production in the
Bandera and Cascade Deep fields, resulting in the downward adjustments.
Page 17
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
FOR THE PERIOD ENDED DECEMBER 31, 1996
The Company has historically funded its operations, acquisitions, exploration
and development expenditures from cash flows from operating activities, bank
borrowings, issuance of common stock and sales of non-strategic assets and oil
and gas properties.
The Company's cash flows provided by operating activities for the years ended
December 31, 1996, 1995, and 1994 were $5,098,000, $823,000, and $779,000,
respectively. Additional cash in the amounts of $1,401,000, $608,000 and
$136,000 was realized in 1996, 1995 and 1994, respectively from property sales
of non-strategic assets.
Effective December 17, 1996, the Company amended its bank credit facility that
consists of a secured reducing revolving line of credit. As of December 31,
1996, the borrowing base under the credit facility was $18,000,000, and the
Company had outstanding borrowings thereunder of $3,900,000, leaving
$14,100,000 available to borrow.
The credit facility borrowing base reduces $300,000 per month commencing
January 1, 1997, and is reviewed by the bank semi-annually until maturity on
June 1, 1998. The obligations under the credit facility are secured by
substantially all of the assets of the Company and its subsidiaries. The credit
facility contains certain covenants relating to the financial condition of the
Company. The credit facility bears interest at the Company's option, of either
prime rate floating or at the LIBOR rate plus two and one-quarter percent. On
December 23, 1996, the Company sold in a private placement, 2,500,000 shares of
common stock at $4.50 per share for proceeds of $10,600,000 after related cash
expenses. The proceeds of the offering were used to retire bank debt under the
Company's credit facility.
Capital spending in 1996 for acquisitions, exploration, and development totaled
$6,036,000, and was primarily funded from cash flows from operating activities.
The Company's capital spending budget for 1997 is expected to be approximately
$6,000,000 to $8,000,000, consisting of both exploration and development
drilling, with primary emphasis being the U.S. Gulf Coast region. The Company
will evaluate its level of capital spending throughout the year based upon
drilling results, commodity prices, cash flows from operations and property
acquisitions. Actual capital spending may vary from the initial capital
expenditure budget.
The Company believes that it will have sufficient capital available from the
credit facility described above, together with cash flows from operating
activities, to fund its 1997 capital expenditure program, and to meet the
Company's other obligations. The Company also believes that the funds available
from such sources will enable the Company to continue to selectively pursue
strategic corporate and property acquisitions.
The Company's debt to total capitalization ratio was 17.3% at December 31,
1996, compared to 65.7% at December 31, 1995. The Company's interest coverage
ratio (calculated as income from operations plus depreciation, depletion and
amortization, and exploration expenses divided by cash expenditures for
interest) was 6.45 to 1 for 1996.
The Company did not declare dividends in fiscal 1996, 1995 and 1994. It is
likely that for the foreseeable future, funds available for dividends on common
stock, if any, will be retained by the Company to finance future growth.
ITEM 7. FINANCIAL STATEMENTS
Financial Statements are filed as a part of this report. See page 19, Index to
Financial Statements. The Financial Statement Schedules are not applicable and
have been omitted.
Page 18
<PAGE> 19
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Description Number
----------- ------
<S> <C>
Independent Auditor's Report 20
Report of Independent Certified Public Accountants 21
Financial Statements:
Consolidated Balance Sheets at December 31, 1996 and 1995 22
Statements of Consolidated Operations
for the Years Ended December 31, 1996, 1995 and 1994 23
Statements of Consolidated Stockholders' Equity
for the Years Ended December 31, 1994, 1995 and 1996 24
Statements of Consolidated Cash Flows
for the Years Ended December 31, 1996, 1995 and 1994 25
Notes to Consolidated Financial Statements
for the Years Ended December 31, 1996, 1995 and 1994 26
</TABLE>
Page 19
<PAGE> 20
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Southern Mineral Corporation:
We have audited the accompanying consolidated balance sheet of Southern
Mineral Corporation and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit 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 misstatements. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Southern
Mineral Corporation and subsidiaries as of December 31, 1996, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
August 28, 1997
Page 20
<PAGE> 21
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
Southern Mineral Corporation:
We have audited the accompanying consolidated balance sheets of Southern Mineral
Corporation (a Nevada corporation) and subsidiaries as of December 31, 1995, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the two years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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 financial statements referred to above present fairly, in
all material respects, the financial position of Southern Mineral Corporation
and subsidiaries as of December 31, 1995, and the consolidated results of their
operations and their consolidated cash flows for each of the two years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
Grant Thornton LLP
Houston, Texas
February 21, 1996
Page 21
<PAGE> 22
SOUTHERN MINERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1996 1995
---------- -----------
(in thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 471 $ 562
Receivables 2,292 1,122
Other 155 387
---------- ----------
Total current assets 2,918 2,071
PROPERTY AND EQUIPMENT, AT COST USING SUCCESSFUL
EFFORTS METHOD FOR OIL AND GAS ACTIVITIES
Oil and gas producing properties 24,888 20,530
Mineral rights 167 167
Unproven properties 525 15
Office equipment 251 178
Accumulated depreciation, depletion and amortization (5,232) (2,848)
---------- ----------
20,599 18,042
PROPERTIES HELD FOR SALE AND OTHER 869 1,554
---------- ----------
Total assets $ 24,386 $ 21,667
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 683 $ 665
Note payable bank --- 3,500
Current maturities of long term debt --- 1,795
---------- ----------
Total current liabilities 683 5,960
LONG TERM DEBT 3,900 9,920
DEFERRED INCOME TAXES 1,169 606
STOCKHOLDERS' EQUITY
Common stock - par value $.01 per share; authorized 20,000,000 and
10,000,000 shares at December 31, 1996 and 1995;
issued 9,088,519 and 6,369,519 at December 31, 1996 and 1995 91 64
Additional paid-in capital 14,030 3,038
Retained earnings 4,565 2,131
---------- ----------
18,686 5,233
Less: Treasury stock (52) (52)
---------- ----------
Total stockholders' equity 18,634 5,181
---------- ----------
Total liabilities and stockholders' equity $ 24,386 $ 21,667
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements of
Southern Mineral Corporation and subsidiaries are an
integral part of these statements.
Page 22
<PAGE> 23
SOUTHERN MINERAL CORPORATION
STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
---------------------------------------------
1996 1995 1994
---------- ---------- ----------
(in thousands, except per share amounts)
<S> <C> <C> <C>
REVENUES
Oil and gas $ 11,780 $ 2,044 $ 1,747
Gains on sales of properties and other assets 453 170 66
---------- ---------- ---------
12,233 2,214 1,813
EXPENSES
Production 2,742 656 548
Exploration 865 221 1,566
Depreciation, depletion and amortization 2,875 792 704
General and administrative 1,682 702 903
Valuation reduction --- --- 1,724
Severance benefit --- 117 135
--------- --------- ---------
8,164 2,488 5,580
--------- --------- ---------
Income (loss) from operations 4,069 (274) (3,767)
Other income, expenses and deductions
Interest and other income 286 146 76
Interest and debt expense (1,242) --- ---
--------- --------- ---------
Income (loss) before income taxes 3,113 (128) (3,691)
Provision (benefit) for federal and state income taxes
Current provision (benefit) 400 9 (11)
Deferred provision (benefit) 279 --- (547)
--------- ---------- ---------
679 9 (558)
--------- ---------- ---------
Net income (loss) $ 2,434 $ (137) $ (3,133)
========== ========= =========
Primary net income (loss) per share $ .34 $ (0.02) $ (0.78)
========= ========= =========
Fully diluted net income (loss) per share $ .33 $ (0.02) $ (0.78)
--------- ========= =========
Primary weighted average number of shares outstanding 7,215 5,701 4,162
========= ========= =========
Fully diluted weighted average number of shares outstanding 7,336 5,701 4,162
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements of
Southern Mineral Corporation and subsidiaries are an
integral part of these statements.
Page 23
<PAGE> 24
SOUTHERN MINERAL CORPORATION
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
For the Year Ended December 31,
(in Thousands)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
--------------------- PAID-IN RETAINED ----------------------
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT
-------------------- ---------- ----------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 4,162 $ 42 $ 843 $ 5,401 137 $ 73
Net loss --- --- --- (3,133) --- ---
------- ------- -------- --------- -------- --------
BALANCE AT DECEMBER 31, 1994 4,162 42 843 2,268 137 73
Stock issued for directors' fees 14 --- 12 --- --- ---
Odd lot tender offer --- --- --- --- 4 6
Sale of treasury stock --- --- 11 --- (50) (27)
Issuance of common stock for acquisition of
Diverse Production Co. 2,194 22 2,172 --- --- ---
Net loss --- --- --- (137) --- ---
------- ------- -------- --------- -------- --------
BALANCE AT DECEMBER 31, 1995 6,370 64 3,038 2,131 91 52
Stock issued for directors' fees 24 --- 72 --- --- ---
Issuance of common stock for private
placement of 2,500,000 shares of stock, net 2,500 25 10,596 --- --- ---
Issuance of common stock for property
acquisitions and acquisition services 195 2 324 --- --- ---
Net income --- --- --- 2,434 --- ---
------- ------- -------- --------- -------- --------
BALANCE AT DECEMBER 31, 1996 9,089 $ 91 $ 14,030 $ 4,565 91 $ 52
======= ======= ======== ========= ======== ========
</TABLE>
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and subsidiaries are an integral part of these statements.
Page 24
<PAGE> 25
SOUTHERN MINERAL CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 1996 1995 1994
-------- -------- ----------
<S> <C> <C> <C>
Net income (loss) $ 2,434 $ (137) $ (3,133)
Adjustments to reconcile net income (loss) to cash provided by operating
activities:
Depreciation, depletion and amortization 2,875 792 704
Gains on sales of properties and other assets (453) (170) (66)
Valuation reduction -- -- 1,724
Exploration expenses 865 221 1,566
Increase (decrease) in deferred taxes 279 -- (547)
Common stock issued as compensation 72 12 --
Change in assets and liabilities, net of effects of acquisition and
disposition in 1996 and acquisitions in 1995:
(Increase) decrease in receivables (1,224) 214 216
Decrease (increase) in other current assets 231 (39) 259
Increase in other assets (115) -- --
Increase (decrease) in payables 134 (70) 56
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,098 823 779
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of:
Producing properties 258 511 42
Properties held for sale and unproven properties -- 97 94
Decrease (increase) in marketable securities:
Purchases -- (1,914) (3,810)
Maturities and sales -- 3,483 4,201
Capital expenditures:
Acquisition, exploration and development (2,836) (651) (1,107)
Properties held for sale (470) (684) --
Cash paid for partnership interest, net of cash received (2,590) -- --
Cash paid for acquisition of Stone & Webster properties, net of cash received -- (16,215) --
Cash received for sale of Venture Resources, Inc., net of cash transferred 1,143
Other -- (63) (8)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (4,495) (15,436) (588)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long term debt and note payable 4,300 15,215 --
Payments on long term debt and note payable (15,615) -- --
Loan acquisition costs -- (127) --
Proceeds from sale of treasury stock -- 38 --
Purchase of treasury stock -- (6) --
Proceeds from equity offering, net 10,621 -- --
Dividends paid -- -- (202)
-------- -------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (694) 15,120 (202)
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (91) 507 (11)
Cash and cash equivalents at beginning of year 562 55 66
-------- -------- --------
Cash and cash equivalents at end of year $ 471 $ 562 $ 55
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Taxes $ 363 $ (5) $ (271)
Interest $ 1,210 $ -- $ --
NON CASH TRANSACTIONS
Issuance of common stock for property acquisitions
and acquisition services $ 326 $ -- $ --
Change in deferred tax liability on property acquisitions $ 284 $ -- $ --
</TABLE>
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and subsidiaries are an integral part of these statements.
Page 25
<PAGE> 26
SOUTHERN MINERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GENERAL BUSINESS - Southern Mineral Corporation, a Nevada corporation, with its
subsidiaries (the "Company"), is an independent oil and gas company
headquartered in Houston, Texas. The Company is engaged in the acquisition,
exploitation, exploration and operation of oil and gas properties, primarily
along the Gulf Coast, the Mid-continent and in Canada, with a primary focus on
the Gulf Coast Basin, both onshore and offshore. The Company owns interests in
more than 1,900 oil and gas properties in those three regions. The Company's
business strategy is to increase reserves and shareholder value through a
balanced program of acquisitions, exploitation and controlled risk exploration.
In addition to oil and gas leasehold interests, the Company owns fee interests
in the oil and gas under some 665,148 gross surface acres (comprising some
346,760 net mineral acres) in Mississippi, Texas and New Mexico. The Company
has no current development or other plans with respect to these fee interests
other than leasing them to third parties for exploration and development.
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of Southern Mineral Corporation and its wholly-owned subsidiaries. All
significant intercompany transactions have been eliminated. The Company accounts
for its investment in oil and gas partnerships and joint ventures using the
proportional consolidation method.
REVENUES - Natural gas revenues generally are recorded using the sales method,
whereby the Company recognizes natural gas revenues based on the amount of gas
sold to purchasers on its behalf. All other revenues also are recorded using
the sales method. The Company believes that imbalances related to the sales of
natural gas are insignificant.
PROPERTY AND EQUIPMENT - The Company uses the successful efforts method of
accounting for its oil and gas properties. Under this method of accounting, the
tangible and intangible development costs of productive wells and development
dry holes are capitalized, and dry hole costs on exploratory wells are charged
against income when the well is determined to be non-productive. Other
exploratory expenditures, including geological and geophysical costs and delay
rentals, are expensed as incurred. The cost of unevaluated leasehold
acquisitions and wells in progress are included in unproven properties pending
evaluation.
Depreciation and depletion of producing oil and gas properties are computed
separately on each individual property on the unit-of-production method based
on estimated proved reserves. Depreciation of other property and equipment is
computed on the straight-line method over the estimated useful lives of the
assets ranging from 3 to 7 years.
The Company currently has only onshore producing properties and estimates that
residual salvage values of equipment would approximate any future dismantlement,
restoration or abandonment costs.
Maintenance and repairs are charged to expense as incurred.
OIL AND GAS PROPERTIES HELD FOR SALE - The costs of non-producing exploratory
properties held for sale, including lease bonuses and other acquisition costs,
are capitalized. Geological, geophysical, and other exploration costs of
non-producing properties are capitalized to the extent such costs are
reimbursed upon sale of the property, determined by management based on the
attributes of each property. Otherwise, such costs, if any, are expensed. For
those properties in which the Company sells a portion of its interest, the cost
of such properties, net of reimbursements, are removed from this account and
are included in property and equipment.
Producing oil and gas properties, which have been identified for sale, are
carried at the lower of cost or estimated market. The 1994 valuation reduction
is primarily the result of write downs of producing properties that management
identified for sale.
Page 26
<PAGE> 27
SOUTHERN MINERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Properties held for sale and other assets at December 31, 1995, include ten
non-contiguous pipeline and gathering systems, which are not part of the
Company's core business operations. The carrying value of these assets was
$675,000.
INCOME TAXES - The Company accounts for income taxes using the asset and
liability method. The asset and liability method requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between tax bases and financial reporting bases of other
assets and liabilities. (See Note 4.) The effect on deferred taxes of a change
in tax rates is recognized in income in the period the change occurs. The
Company deducts intangible development costs as incurred and deducts statutory
depletion (percentage depletion) when it exceeds cost depletion for federal
income tax purposes.
CASH EQUIVALENTS - Management considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - 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 reporting period. Actual results
could differ from those estimates.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NOS. 121 AND 123 -
Effective January 1, 1996, the Company adopted SFAS No. 121 Accounting for
Impairment of Long-Lived Assets to be Disposed Of. This standard requires that
long-lived assets that are held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When it is determined that
an asset's estimated future net cash flows will not be sufficient to recover
its carrying amount, an impairment charge must be recorded to reduce the
carrying amount for the asset to its estimated fair value. The effect of the
adoption of SFAS 121 was not material to the Company.
During 1996, the Company chose to continue the use of APB No. 25 and related
Interpretations in accounting for stock-based compensation. As required by SFAS
No. 123 Accounting for Stock-Based Compensation, the Company has disclosed in
pro-forma presentation the effects on earnings of calculating the fair value of
a stock option using the method prescribed in SFAS No. 123.
EARNINGS (LOSS) PER SHARE - Earnings (loss) per share is based on the weighted
average number of common shares outstanding during the year. Outstanding
options and warrants are included where they have a dilutive effect. The share
amounts used to compute earnings (loss) per share were 7,214,585, 5,701,400 and
4,161,600 for the years 1996, 1995 and 1994, respectively. The weighted average
number of common shares outstanding on a fully diluted basis were 7,336,480,
5,701,400 and 4,161,600 for the years 1996, 1995 and 1994 respectively.
RECLASSIFICATIONS - Certain amounts in prior financial statements have been
reclassified to conform to the 1996 financial statement presentation.
Page 27
<PAGE> 28
SOUTHERN MINERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 2 ACQUISITIONS
On August 30, 1996, the Company acquired the limited partner interest in SMC
Development, L.P., a Texas limited partnership, for $3,000,000. Upon the
acquisition of the limited partner's interest, the partnership was dissolved,
resulting in the Company obtaining a direct working interest in sixteen oil and
gas properties with proved reserves estimated to be 4.2 billion cubic feet of
gas and 149,000 barrels of liquids. The acquisition was financed from proceeds
under the Company's bank revolving line of credit. The acquisition was accounted
for as a purchase.
On December 20, 1995, the Company completed the acquisition of certain oil and
gas assets of Stone & Webster Oil Company, Inc., and the outstanding capital
stock of Spruce Hills Production Company, Inc., San Salvador Development
Company, Inc., and Venture Resources, Inc., which are engaged primarily in oil
and gas exploration and production. The total cost of the acquisition was
approximately $16,400,000. The acquisition was financed by bank borrowings of
$15,215,000 and internally generated working capital of $1,209,000. The
acquisition was accounted for as a purchase.
On April 6, 1995, the Company completed the acquisition of Diverse Production
Co. (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 total cost of the acquisition was approximately
$2,300,000. The Company issued 2,193,919 shares of common stock and 325,000
share options at an exercise price of $1.25 per share for a term of five years.
The acquisition was accounted for as a purchase.
The following summarized pro forma (unaudited) information assumes the
acquisitions had occurred on January 1, 1995.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------
1996 1995
------- -------
(In thousands, except per share data)
<S> <C> <C>
Revenues $12,000 $ 9,139
Net income (loss) 2,305 (1,088)
Net income (loss) per share $ .32 $ (.17)
</TABLE>
These pro forma results are not necessarily indicative of those that would have
occurred had the acquisitions taken place at the beginning of 1995 or 1996,
respectively. The above amounts reflect adjustments for interest on notes
payable issued as part of the purchase price and depreciation on revalued
property, plant and equipment.
NOTE 3 LONG TERM DEBT AND NOTE PAYABLE BANK
On December 17, 1996, the Company entered into a revised credit facility
consisting of a secured reducing revolving line of credit with an initial
borrowing base of $18,000,000 ("Revolver Note"). Proceeds advanced under the
Revolver Note were used to retire an existing Term Note of $4,000,000, which was
increased from $3,500,000, on December 17, 1996. The borrowing base of the
Revolver Note reduces by $300,000 per month commencing August 1, 1997, and is
reviewed by the bank semi-annually until maturity on June 1, 2000. Under the
terms of the Revolver Note, the borrowing base is redetermined semi-annually by
the lending bank based upon its calculation of changes in the underlying reserve
values securing the credit facility. As of December 31, 1996, the Company had
borrowed $3,900,000 under the Revolver Note leaving an unfunded commitment of
$14,100,000. The Revolver Note bears interest at the Company's option, of either
prime rate or at the LIBOR rate plus two and one-quarter percent. The credit
facility contains certain covenants relating to the Company's financial
condition and is secured by substantially all the assets of the Company. The
Revolver Note has no payments due in 1997.
Page 28
<PAGE> 29
SOUTHERN MINERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Long-term debt consisted of the following at December 31, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1996 1995
------------------------
<S> <C> <C>
Revolving Note $ 3,900 $ 11,715
Less: current maturities --- 1,795
---------- ----------
Long-term debt $ 3,900 $ 9,920
========== ==========
</TABLE>
NOTE 4 FEDERAL AND STATE INCOME TAXES
Differences between the effective tax rate and the statutory federal rate are
as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Statutory rate for expense (benefit) 34.0% (34.0%) (34.0%)
Valuation allowance (13.1) 33.6 18.7
Foreign taxes, net of federal benefit 7.6 ------- ------
State taxes, net of federal benefit 0.7 4.5 .1
Percentage depletion (8.1) --- ------
Other .7 2.9 .1
------- ------- ------
Effective tax rate 21.8% 7.0% (15.1%)
======= ======= ======
</TABLE>
The tax effects of temporary differences that result in significant portions of
deferred income tax assets and liabilities and a description of the financial
statement items creating these differences are as follows:
<TABLE>
<CAPTION>
At December 31,
-----------------------------
Deferred tax assets: 1996 1995
----------- ------------
<S> <C> <C>
Net operating loss carry forward $ --- $ 779,000
Alternative minimum tax credits 92,000 96,000
Other 10,000 ---
Statutory depletion carry forward 159,000 110,000
----------- -----------
261,000 985,000
Valuation allowance --- (405,000)
----------- -----------
261,000 580,000
Deferred tax liabilities:
Oil and gas properties 572,000 580,000
Oil and gas properties - Canadian taxes 858,000 606,000
----------- -----------
1,430,000 1,186,000
----------- -----------
$(1,169,000) $ (606,000)
=========== ===========
</TABLE>
For the year ended December 31, 1995, the income tax benefit was limited by the
Company's inability to recognize all of the tax benefits of its net operating
loss and future deductible temporary differences in the calculation of its tax
expense. The Company had a net operating loss carryforward of approximately
$2,293,000 at December 31, 1995, which was utilized in 1996. The Company has an
alternative minimum tax credit carryforward of approximately $92,000 and
statutory depletion carry forward of $468,000 at December 31, 1996. The
valuation allowance was eliminated during 1996, due to the current earnings of
the Company. Management believes it is more likely than not that the deferred
income tax assets will be realized in future years through the reversal of
taxable temporary differences.
Page 29
<PAGE> 30
SOUTHERN MINERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 5 RELATED PARTY TRANSACTIONS
In September, 1995, the Company entered into a joint venture, Southern Links
Group Joint Venture ("Southern Links"), to acquire, develop and market
exploration prospects. The Company's joint venture partner is The Links Group,
Inc. ("Links"), a company that is controlled by Robert Hillery, a director of
the Company. The Company has agreed to fund third party costs of Southern
Links. Any proceeds from the sale of prospects or oil and gas from such
prospects is distributed 100% to the Company until it receives an amount equal
to the return of its invested capital, after which time all such proceeds and
property interests, if any, are to be distributed 75% to the Company and 25% to
Links. At December 31, 1996 the Company has funded $552,000 of third party
costs of Southern Links, recording such amounts in properties held for sale.
NOTE 6 MAJOR CUSTOMERS
The Company is principally engaged in a single industry segment, the
exploration, development, and production of oil and gas reserves in the United
States and Canada. Sales of oil and gas to customers accounting for 10% or more
of revenues were as follows:
<TABLE>
<CAPTION>
CUSTOMER 1996 1995 1994
- -------- -------- --------- ---------
(in thousands)
<S> <C> <C> <C>
G C Marketing Company $ 3,212 $ --- $ ---
Mike Rogers Drilling Company 591 746 651
Ashtola Exploration Company --- 208 283
</TABLE>
NOTE 7 COMMON STOCK
During 1996, the Company adopted the 1996 Stock Option Plan ("1996 Plan") in
which certain key employees of the Company may receive stock options, in
addition to any other compensation they may receive from the Company. An
aggregate of 300,000 shares of the Company's common stock is reserved for
issuance upon the exercise of options granted under the 1996 Plan. Under the
1996 Plan, the exercise price of the option equals the market price of the
Company's stock on the date of grant and an option's maximum term is up to ten
years with varying vesting periods. During 1996, the Company granted 130,000
options under this plan.
During 1996, the Company established the 1996 Stock Purchase Plan, which covers
substantially all employees. An aggregate of 300,000 shares of the Company's
common stock are reserved for issuance upon the exercise of options granted
under the Employee Stock Purchase Plan. Subsequent to 1996, 5,313 options were
granted under the Employee Stock Purchase Plan.
During 1995, the Company established the "1995 NonEmployee Director
Compensation Plan" in order to compensate nonemployee Directors with shares of
the Company's common stock in lieu of cash fees. The plan authorizes a total of
100,000 shares of common stock for issuance and provides that for attending a
regular or special meeting of the Board of Directors each nonemployee Director
will be issued 1,000 shares of common stock.
The Company applies APB 25 and related Interpretations in accounting for
stock-based compensation. Had compensation costs been determined based on the
fair value at the grant dates for awards consistent with the method of FASB
Statement 123, the Company's net income (loss) and earnings (loss) per share
would have been as follows:
Page 30
<PAGE> 31
SOUTHERN MINERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
<TABLE>
<CAPTION>
1996 1995
----------- --------
<S> <C> <C>
Net income (loss) As reported $ 2,434 $ (137)
Pro Forma 2,401 (137)
Primary earnings per share As reported .34 (0.02)
Pro Forma .34 (0.02)
Fully diluted earnings per share As reported .33 0.02)
Pro Forma $ .33 $ (0.02)
</TABLE>
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for the grants issued in 1996:
<TABLE>
<S> <C>
Expected volatility 52% to 74%
Risk free rate 5.86% to 6.23%
Expected life of options 3 to 7.5 years
Expected dividend yield 0%
</TABLE>
During 1996, the Company entered into an exploration arrangement with Diasu Oil
& Gas Co., Inc. ("Diasu") and Diasu's two principal shareholders. Pursuant to
the arrangement, the Company issued the Diasu shareholders 175,000 shares of
common stock and warrants to purchase up to 600,000 shares at $2.00 a share for
a term of five years.
In connection with the acquisition of Diverse Production Company ("DPC") in
1995, the Company granted options exercisable for 325,000 shares of its common
stock at $1.25 a share through April 2000. Each of the individuals that
received the options became directors of the Company in connection with the
acquisition of DPC.
In consideration for initiating the transactions pursuant to which the Company
acquired DPC, the Company granted a director of the Company an option to
acquire 43,878 shares of the Company's common stock at $1.00 per share
exercisable through April 2000.
In 1994, in connection with the offer and acceptance of employment, the
Company's President was granted a non-qualified option to purchase 450,000
shares of the Company's common stock at a price of $1.00 per share. The option
is non-assignable, and is exercisable until December, 2004. Payment for the
option can be made in cash, common stock of the Company, or a combination
thereof.
In consideration for services as financial advisor and placement agent for the
private placement in December, 1996, the Company granted Morgan Keegan &
Company, Inc. 120,000 warrants of the Company's common stock at $4.50 per share
exercisable through December, 2001.
A summary of the Company's stock options and warrants of December 31, 1996,
1995 and 1994, and changes during the years ending on those dates is presented
below:
<TABLE>
<CAPTION>
1996 1995 1994
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 818,878 $ 1.09 450,000 $ 1.00 --- $ ---
Granted 850,000 2.49 368,878 1.22 450,000 1.00
Exercised --- --- ---
Forfeited --- --- ---
--------- ------- -------
Outstanding at
end of year 1,668,878 $ 1.71 818,878 $ 1.09 450,000 $ 1.00
========= ======= =======
Options exercisable
at end of year 1,548,878 818,878 450,000
========= ======= =======
</TABLE>
Page 31
<PAGE> 32
SOUTHERN MINERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The weighted-average fair value of compensatory options granted
during 1996 was $1.54 per option.
On December 23, 1996 the Company issued 2,500,000 shares of
common stock at $4.50 per share for net proceeds of $10,621,000. All of the
proceeds from the Offering were used to retire outstanding debt. Supplemental
pro forma earnings per share data for the year ended December 31, 1996
disclosing the effect of the issuance of the shares and retirement of the debt
as if they had occurred at January 1, 1996 are as follows:
<TABLE>
<S> <C>
Primary net income per share .................... $0.31
Fully diluted net income per share .............. $0.31
</TABLE>
The following table summarizes information about options and
warrants outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS AND WARRANTS OUTSTANDING OPTIONS AND WARRANTS EXERCISABLE
-------------------------------- --------------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.00 to 1.50 828,878 5.91 years $ 1.10 828,878 $ 1.10
2.00 to 3.00 720,000 4.08 years 2.17 600,000 2.00
3.50 to 4.50 120,000 4.98 years 4.50 120,000 4.50
--------- ---------
1,668,878 1,548,878
========= =========
</TABLE>
NOTE 8 COMMITMENTS AND CONTINGENCIES
The Company leases office space under a noncancellable operating lease expiring
December 31, 1998. Lease commitments at December 31, 1996, are payable $136,192
in 1997 and $134,184 in 1998. Lease payments in 1996, 1995 and 1994 were
$133,755, $66,212 and $84,747, respectively.
No material legal proceedings are pending.
The Company is unaware of any possible exposure from actual or potential claims
or lawsuits involving environmental matters. As such, no liability has been
accrued as of December 31, 1996 and 1995.
NOTE 9 SUBSEQUENT EVENTS (UNAUDITED)
On May 20, 1997, the Company purchased all of the outstanding capital stock
of BEC. The purchase price was approximately $10,640,000. BEC's assets consist
of working interests in fourteen oil and gas wells located in the Big Escambia
Creek Field in Escambia County, Alabama. The acquisition was financed with a
$10,600,000 advance under the Revolver Note. In addition, the Company acquired
other interests in oil and gas properties, including a 10% interest in a
concession in the Santa Elena Peninsula in Ecuador for approximately $2,500,000
and 22.68% working interest in the Albert Philyaw Unit 8-1 #1 well located in
the Big Excambia Creek Field in Escambia County, Alabama, for approximately
$3,300,000. The acquisition of the interests were financed through a
combination of cash flow from operations and advances under the Revolver Note.
These transactions will be accounted for under the purchase method of
accounting.
NOTE 10 QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data of the Company are presented below for the
years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
FULLY
INCOME PRIMARY DILUTED
(LOSS) NET INCOME INCOME
1996 FROM INCOME (LOSS) (LOSS)
QUARTER REVENUES OPERATIONS (LOSS) PER SHARE PER SHARE
- ------- -------------- ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
March 31 $ 3,010,000 $ 1,006,000 $ 825,000 $ .13 $ .12
June 30 2,819,000 1,386,000 620,000 .09 .09
September 30 3,031,000 1,051,000 627,000 .09 .08
December 31 3,373,000 626,000 362,000 .05 .05
-------------- ------------- ------------- ------------ ----------
$ 12,233,000 $ 4,069,000 $ 2,434,000 $ .34 $ .33
============== ============= ============= ============ ==========
1995
QUARTER
March 31 $ 441,000 $ (132,000) $ (101,000) $ (.02) $ (.02)
June 30 656,000 (40,000) (9,000) (.00) (.00)
September 30 590,000 61,000 92,000 .01 .01
December 31 527,000 (163,000) (119,000) (.02) (.02)
-------------- ------------- ------------- ------------ ----------
$ 2,214,000 $ (274,000) $ (137,000) $ (.02) $ (.02)
============== ============= ============= ============ ==========
</TABLE>
Page 32
<PAGE> 33
SOUTHERN MINERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 11 RETIREMENT BENEFITS
The Company terminated its 401(k) Retirement Plan in 1995, and adopted a
Simplified Employee Pension Plan ("SEP"). The SEP allows employees to defer
part of their salary. Employer contributions are optional, and the Company will
determine annually whether it will contribute and at what level. The maximum
amount that can be contributed annually per SEP plan participant from a
combination of salary deferrals plus Company optional contributions is $22,500.
In 1996, the Company's contribution, totaling $22,554, was 50% of the amount
contributed by each of the participants in the plan.
Prior to October 1, 1995, the Company had a 401(k) retirement plan covering
all of its eligible employees. Under the 401(k) plan, subject to certain plan
limitations and certain provisions of the Internal Revenue Code, plan
participants could contribute up to 15% of their pre-tax compensation. For the
years ended December 31, 1994 and 1995, the Company contributed a matching
contribution limited to 5% of each plan participant's compensation, except an
additional qualified non-elective contribution of 3% of participant's
compensation was made for non-key employees. The Company's contributions
amounted to $5,000 and $16,000 in 1995 and 1994, respectively.
NOTE 12 GEOGRAPHIC DATA
The Company is an independent oil and gas company engaged in the acquisition,
development and exploration of oil and natural gas properties. All earnings
before January 1, 1996 were domestic earnings. Information about the Company's
operations by geographic area for the year ended December 31, 1996 is as
follows (in thousands):
<TABLE>
<CAPTION>
U. S. CANADA TOTAL
------------- ------------ --------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Oil & Gas Sales $ 8,136 $ 3,644 $ 11,780
Gains on sales of properties and other assets 424 29 453
------------- ------------- --------------
Total Revenue 8,560 3,673 12,233
Expense:
Production 1,880 862 2,742
Exploration 821 44 865
Depreciation, depletion and amortization 1,896 979 2,875
General & administrative 802 880 1,682
------------- ------------- --------------
5,399 2,765 8,164
------------- ------------- --------------
Interest & other income 99 187 286
Interest expense (1,242) 0 (1,242)
-------------- ------------- ---------------
Income before income taxes 2,018 1,095 3,113
Income taxes 319 360 679
------------- ------------- --------------
Net income $ 1,699 $ 735 $ 2,434
============= ============= ==============
IDENTIFIABLE ASSETS AS OF DECEMBER 31, 1996 $ 17,646 $ 6,269 $ 23,915
Corporate assets-cash and cash equivalents 471
--------------
Total assets $ 24,386
==============
IDENTIFIABLE ASSETS AS OF DECEMBER 31, 1995 $ 14,878 $ 6,227 $ 21,105
Corporate assets-cash and cash equivalents 562
--------------
Total assets $ 21,667
==============
</TABLE>
Page 33
<PAGE> 34
SOUTHERN MINERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 13 OIL AND GAS PRODUCING ACTIVITIES
The Company's capitalized costs of all oil and gas properties and related
allowances for depreciation and depletion are as follows at December 31: (in
thousands)
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Proved properties $ 24,888 $ 20,530
Unproven properties 525 15
Less accumulated depreciation,
depletion and amortization (5,072) (2,758)
----------- ----------
Total $ 20,341 $ 17,787
=========== ==========
</TABLE>
The Company's share of oil and gas revenues produced from its royalty interests
was $979,000, $169,000 and $170,000 for the years ended December 31, 1996,
1995, and 1994, respectively.
Costs incurred in oil and gas property acquisition, exploration and development
activities were as follows (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 UNITED STATES CANADA TOTAL
------------- ------ -----
<S> <C> <C> <C>
Property acquisition costs
Proved $ 4,595 $ --- $ 4,595
Unproved --- --- ---
Exploration costs 373 --- 373
Development cost 426 642 1,068
------------ ------------ -----------
Total costs incurred 5,394 642 6,036
============ ============ ===========
AS OF DECEMBER 31, 1995
Property acquisition costs
Proved 17,785 --- 17,785
Unproved 876 --- 876
Exploration costs 214 --- 214
Development cost 248 --- 248
------------ ------------ -----------
Total costs incurred 19,123 --- 19,123
============ ============ ===========
AS OF DECEMBER 31, 1994
Property acquisition costs
Proved --- --- ---
Unproved 225 --- 225
Exploration costs 657 --- 657
Development cost 225 --- 225
------------ ------------ -----------
Total costs incurred $ 1,107 $ --- $ 1,107
============ ============ ===========
</TABLE>
RESERVE QUANTITY INFORMATION (unaudited) -
The following two tables reflect the estimated proved reserves of the Company.
The oil and gas reserves are principally located onshore in the continental
United States and Canada. The information is provided by the Company and
audited by independent petroleum engineering firms Netherland, Sewell and
McDaniel & Associates for the United States and Canadian reserves, respectively.
Page 34
<PAGE> 35
SOUTHERN MINERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
<TABLE>
<CAPTION>
U. S. CANADA TOTAL
---------------------------- --------------------------- -------------------------
OIL GAS OIL GAS OIL GAS
PROVED RESERVES (BBLS) (MCF) (BBLS) (MCF) (BBLS) (MCF)
--------------- ------------- ------------ ------------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 474,486 1,238,857 --- --- 474,486 1,238,857
Extensions, discoveries and additions 45,834 245,190 --- --- 45,834 245,190
Revisions of previous estimates (213,258) (397,443) --- --- (213,258) (397,443)
Production (78,866) (300,544) --- --- (78,866) (300,544)
------------ ----------- ----------- ------------ ---------- -----------
BALANCE, DECEMBER 31, 1994 228,196 786,060 --- --- 228,196 786,060
Extensions, discoveries and additions 66 8,449 --- --- 66 8,449
Revisions of previous estimates (24,715) (145,903) --- --- (24,715) (145,903)
Purchases of minerals in place 568,702 20,400,151 868,495 5,786,239 1,437,197 26,186,390
Production (84,848) (404,319) --- --- (84,848) (404,319)
------------ ----------- ----------- ----------- ---------- -----------
BALANCE, DECEMBER 31, 1995 687,401 20,644,438 868,495 5,786,239 1,555,896 26,430,677
Extensions, discoveries and additions 6,081 479,336 31,351 1,506,458 37,432 1,985,794
Revisions of previous estimates 33,975 (519,051) (35,593) 528,330 (1,618) 9,279
Purchase of minerals in place 109,252 4,590,014 --- --- 109,252 4,590,014
Production (120,855) (2,396,379) (112,563) (961,527) (233,418) (3,357,906)
------------ ----------- ---------- ----------- ---------- -----------
BALANCE, DECEMBER 31, 1996 715,854 22,798,358 751,690 6,859,500 1,467,544 29,657,858
============ =========== =========== =========== ========= ===========
PROVED DEVELOPED RESERVES
Balance, December 31, 1994 228,196 786,060 --- --- 228,196 786,060
Balance, December 31, 1995 661,852 20,446,505 868,495 5,786,239 1,530,347 26,232,744
Balance, December 31, 1996 608,705 19,361,667 751,690 6,859,500 1,360,395 26,221,167
</TABLE>
The revisions in the Company's estimated reserves in 1994 were primarily the
result of downward adjustments to the Company's oil and gas properties in the
Hub, Bandera, Stateline and Cascade Deep fields. Production from these fields
was substantially below those projected by an independent petroleum engineering
firm, resulting in subsequent downward adjustments.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)-
The information that follows has been developed by the Company pursuant to
procedures prescribed by Statement No. 69 of the Financial Accounting Standards
Board and utilizes reserve data estimated by Netherland, Sewell and McDaniel &
Associates, independent petroleum engineering firms and by the Company. The
information may be useful for certain comparison purposes, but should not be
solely relied upon in evaluating the Company or its performance. Moreover, the
projections should not be construed as realistic estimates of future cash flows,
nor should the standardized measure be viewed as representing current value.
The future cash flows are based on sales prices, costs, and statutory income
tax rates in existence at the dates of the projections. Since future
projections are inherently imprecise, material revisions to reserve estimates
may occur in the future. Further, production of the oil and gas reserves may
not occur in the periods assumed, and actual prices realized and actual costs
incurred are expected to vary from those used. Management does not rely upon
the information that follows in making investment and operating decisions;
rather, those decisions are based upon a wide range of factors, including
estimates of probable reserves, proved reserves, and price and cost assumptions
different from those reflected herein.
The following table sets forth the standardized measure of discounted future
net cash flows from projected production of the Company's proved oil and gas
reserves as of December 31 (all Company reserves were located in the United
States prior to 1995): (in thousands)
Page 35
<PAGE> 36
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 U.S. CANADA TOTAL
--------- ---------- -------
<S> <C> <C> <C>
Future cash inflows $ 109,510 $ 29,283 $ 138,793
Future production and development costs (22,340) (10,569) (32,909)
Future income taxes (22,719) (4,869) (27,588)
--------- --------- ---------
Future net cash flows 64,451 13,845 78,296
10% Annual discount (24,842) (4,119) (28,961)
--------- --------- ---------
Standardized measure of discounted
future net cash flows 39,609 9,726 49,335
========= ========= =========
AT DECEMBER 31, 1995
Future cash inflows 53,075 21,063 74,138
Future production and development costs (12,827) (9,520) (22,347)
Future income taxes (9,165) (1,938) (11,103)
--------- --------- ---------
Future net cash flows 31,083 9,605 40,688
10% Annual discount (13,793) (2,295) (16,088)
--------- --------- ---------
Standardized measure of discounted
future net cash flows 17,290 7,310 24,600
========= ========= =========
AT DECEMBER 31, 1994
Future cash inflows 4,891 --- 4,891
Future production and development costs (1,412) --- (1,412)
Future income taxes (697) --- (697)
--------- --------- ---------
Future net cash flows 2,782 --- 2,782
10% Annual discount (448) --- (448)
--------- --------- ---------
Standardized measure of discounted
future net cash flows $ 2,334 $ --- $ 2,334
========= ========= =========
</TABLE>
The following are the principal sources of change in the standardized measure
of discounted future net cash flows: (in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Standardized measure -- Beginning of year $ 24,600 $ 2,334 $ 4,035
Oil and gas sales, net of production costs (9,038) (1,388) (1,199)
Sales of reserves in place (166) --- ---
Purchases of reserves in place 13,001 25,346 ---
Net changes in prices, net of production costs 21,735 (73) (78)
Extensions and discoveries 6,259 14 810
Revisions to previous quantity estimates (1,528) (390) (1,835)
Net change in income taxes (11,930) (2,311) ---
Accretion of discount 2,725 284 454
Changes in estimated future development costs (786) 230 27
Developmental costs incurred during the period
that reduced future development costs 480 --- ---
Changes in production rates and other 3,983 554 120
--------- --------- ---------
Standardized measure -- end of year $ 49,335 $ 24,600 $ 2,334
========= ========= =========
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Described in the Company's Form 8-K dated April 10, 1997.
Page 36
<PAGE> 37
PART III
ITEMS 9 THROUGH 12 of this Part III are omitted since the Company filed with the
Securities and Exchange Commission within 120 days after the close of its fiscal
year ended December 31, 1996 a definitive proxy statement pursuant to Regulation
14A under the Securities Exchange Act of 1934 which involves the election of
directors. Items 9 through 12 are hereby incorporated by reference herein from
such proxy statement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
2.1 Exchange Agreement by and among Diverse Production
Co., The Shareholders of Diverse Production Co., and
Southern Mineral Corporation dated March 2, 1995
(incorporated by reference to Exhibit (I) to the
Company's annual report on Form 10-K for year ended
December 31, 1994).
2.2 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
Exhibit 2.1 to Form 8-K of Registrant dated
October 31, 1995).
2.3 Purchase and Sale Agreement and Assignment of
Partnership Interest, dated August 30, 1996 by and
between Torch Energy Finance Fund Limited Partnership
I and Southern Mineral Corporation (incorporated by
reference to Exhibit 2.1 to Form 8-K of the Company
dated August 30, 1996).
2.4 Agreement Regarding Dissolution of Partnerships,
dated August 30, 1996, between Southern Mineral
Corporation and Diasu Oil & Gas Co., (incorporated by
reference to Exhibit 2.2 to Form 8-K of the Company
dated August 30, 1996).
3.1 Amended and Restated Articles of Incorporation of the
Company, as amended.(incorporated herein by reference
to Exhibit 3.1 to Form 8-K of the Company dated May
17, 1996)
3.2 Amended and Restated Bylaws of the Company, as
amended (incorporated herein by reference to Exhibit
(a)(3)(b) of Item 14, Part IV of the Company's Annual
Report on Form 10-K filed for the year ended December
31, 1989).
10.1 Stock Option Agreement made as of December 31, 1994
between Southern Mineral Corporation and Steven H.
Mikel (incorporated by reference to Exhibit (h) to
the Company's annual report on Form 10-K for year
ended December 31, 1994).
10.2 Southern Mineral Corporation 1995 Non-Employee
Director Compensation Plan (incorporated by reference
to Exhibit (k) to annual report on Form 10-K dated
December 31, 1994).
10.3 Credit Agreement, dated December 20, 1995, between
Southern Mineral Corporation, SMC Production Co., San
Salvador Development Company, Inc., Venture
Resources, Inc., Venture Pipeline Company, VenGas
Pipeline Company, Spruce Hills Production Company,
Inc., and Compass Bank-Houston for Reducing Revolver
Line of Credit of up to $25,000,000 (incorporated by
reference to Exhibit 10.1 to Form 8-K of Registrant
dated December 20, 1995).
Page 37
<PAGE> 38
10.4 Promissory Note, dated December 20, 1995, in the
original principal amount of $25,000,000 made by
Southern Mineral Corporation, SMC Production Co., San
Salvador Development Company, Inc., Venture Resources,
Inc., Venture Pipeline Company, VenGas Pipeline
Company, Spruce Hills Production Company, Inc. in
favor of Compass Bank-Houston (incorporated by
reference to Exhibit 10.2 to Form 8-K of Registrant
dated December 20, 1995).
10.5 Credit Agreement, dated December 20, 1995, between
Southern Mineral Corporation, SMC Production Co., San
Salvador Development Company, Inc., Venture Resources,
Inc., Venture Pipeline Company, VenGas Pipeline
Company, Spruce Hills Production Company, Inc. and
Compass Bank-Houston for Term Loan of $3,500,000
(incorporated by reference to Exhibit 10.3 to Form 8-K
of Registrant dated December 20, 1995).
10.6 Promissory Note, dated December 20, 1995, in the
original principal amount of $3,500,000 made by
Southern Mineral Corporation, SMC Production Co., San
Salvador Development Company, Inc., Venture
Resources, Inc., Venture Pipeline Company, VenGas
Pipeline Company, Spruce Hills Production Company,
Inc. in favor of Compass Bank-Houston (incorporated
by reference to Exhibit 10.4 to Form 8-K of
Registrant dated December 20, 1995).
10.7 1996 Stock Option Plan (incorporated by reference to
to Exhibit 10.10 to Form 10KSB dated December 31,
1995).
10.8 1996 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.11 to Form 10KSB dated
December 31, 1995).
10.9 Joint Venture Agreement, dated October 1, 1995,
between Southern Mineral Corporation and The
Links Group, Inc. (incorporated by reference to
Exhibit 10.12 to Form 10KSB dated December 31, 1995).
10.10 Option Agreement, dated January 5, 1996, between
Southern Mineral Corporation and Diasu Oil & Gas
Company, Inc. covering the exploration joint venture
(incorporated by reference to Exhibit 10.13 to Form
10KSB dated December 31, 1995).
10.11 Stock Option Agreement dated April 6, 1995, between
Southern Mineral Corporation and Robert R. Hillery
(incorporated by reference to Exhibit 10.14 to Form
10KSB dated December 31, 1995).
10.12 Subscription Agreement and Assumption of
Obligations, dated January 5, 1995, between Southern
Mineral Corporation and Gary L. Chitty, and Thomas J
McMinn (incorporated by reference to Exhibit 10.15
to Form 10KSB/A-1 dated December 31, 1995).
10.13 Amendment to Credit Agreement between Southern
Mineral Corporation et al and Compass Bank-Houston
dated August 30, 1996 (incorporated by reference to
Exhibit 10.1 to Form 8-K of the Company dated August
30, 1996).
10.14 Second Amendment to Credit Agreements between the
Company and Compass Bank dated December 17, 1996
(incorporated by reference to Exhibit 10.14 to Form
10-KSB dated December 31, 1996).
11.1 Computation of earnings per common and equivalent
share (filed herewith).
21.1 Subsidiaries of the Company
<TABLE>
<CAPTION>
Other Name Under Which Jurisdiction of
Name of Subsidiary Subsidiary Conducts Business Incorporation
- ------------------ ---------------------------- -------------------
<S> <C> <C>
SMC Production Co. None Texas
Spruce Hills Production Company, Inc. None Delaware
</TABLE>
Page 38
<PAGE> 39
23.1 Consent of KPMG Peat Marwick LLP (filed herewith).
23.2 Consent of Grant Thornton LLP (filed herewith).
23.3 Consent of Netherland, Sewell & Associates, Inc.
(filed herewith)
23.4 Consent of McDaniel & Associates Consultants, Ltd.
(filed herewith)
27.1 Financial Data Schedule (filed herewith).
99.1 Application and Affidavit Pursuant to Rule 437 under
the Securities Act of 1933 regarding
impracticability of obtaining written consent of
Hedrick and Associates (filed herewith).
(b) Report on Form 8-K
Form 8-K of the Company dated December 23, 1996 reporting the
issuance and sale of 2,500,000 shares of common stock of the
Company.
Page 39
<PAGE> 40
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
SOUTHERN MINERAL CORPORATION
BY: /s/ STEVEN H. MIKEL
---------------------------------------
Steven H. Mikel
President and Chief Executive Officer
Date: December 5, 1997
In accordance with the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Director
- --------------------------------------------
B. Travis Basham
/s/ THOMAS R. FULLER Director December 5, 1997
- --------------------------------------------
Thomas R. Fuller
Director
- --------------------------------------------
Robert R. Hillery
/s/ E. RALPH HINES, JR. Director December 5, 1997
- --------------------------------------------
E. Ralph Hines, Jr.
/s/ HOWELL H. HOWARD Director and Chairman December 5, 1997
- -------------------------------------------- of the Board of Directors
Howell H. Howard of the Board of Directors
/s/ STEVEN H. MIKEL Director, President and Chief December 5, 1997
- -------------------------------------------- Executive Officer
Steven H. Mikel
/s/ JAMES E. NIELSON Director December 5, 1997
- --------------------------------------------
James E. Nielson
/s/ DONALD H. WIESE, JR. Director December 5, 1997
- --------------------------------------------
Donald H. Wiese, Jr.
Director
- --------------------------------------------
Spencer L. Youngblood
/s/ JAMES H. PRICE Vice President-Finance December 5, 1997
- -------------------------------------------- (principal financial and
accounting officer)
James H. Price
</TABLE>
Page 39
<PAGE> 41
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------
<S> <C>
2.1 Exchange Agreement by and among Diverse Production Co., The
Shareholders of Diverse Production Co., and Southern Mineral
Corporation dated March 2, 1995 (incorporated by reference to Exhibit
(I) to the Company's annual report on Form 10-K for year ended
December 31, 1994).
2.2 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 Exhibit
2.1 to Form 8-K of Registrant dated October 31, 1995).
2.3 Purchase and Sale Agreement and Assignment of Partnership Interest,
dated August 30, 1996 by and between Torch Energy Finance Fund Limited
Partnership I and Southern Mineral Corporation (incorporated by
reference to Exhibit 2.1 to Form 8-K of the Company dated August 30,
1996).
2.4 Agreement Regarding Dissolution of Partnerships, dated August 30,
1996, between Southern Mineral Corporation and Diasu Oil & Gas Co.,
(incorporated by reference to Exhibit 2.2 to Form 8-K of the Company
dated August 30, 1996).
3.1 Amended and Restated Articles of Incorporation of the Company, as
amended.(incorporated herein by reference to Exhibit 3.1 to Form 8-K
of the Company dated May 17, 1996)
3.2 Amended and Restated Bylaws of the Company, as amended (incorporated
herein by reference to Exhibit (a)(3)(b) of Item 14, Part IV of the
Company's Annual Report on Form 10-K filed for the year ended December
31, 1989).
10.1 Stock Option Agreement made as of December 31, 1994 between Southern
Mineral Corporation and Steven H. Mikel (incorporated by reference to
Exhibit (h) to the Company's annual report on Form 10-K for year ended
December 31, 1994).
10.2 Southern Mineral Corporation 1995 Non-Employee Director Compensation
Plan (incorporated by reference to Exhibit (k) to annual report on
Form 10-K dated December 31, 1994).
10.3 Credit Agreement, dated December 20, 1995, between Southern Mineral
Corporation, SMC Production Co., San Salvador Development Company,
Inc., Venture Resources, Inc., Venture Pipeline Company, VenGas
Pipeline Company, Spruce Hills Production Company, Inc., and Compass
Bank-Houston for Reducing Revolver Line of Credit of up to $25,000,000
(incorporated by reference to Exhibit 10.1 to Form 8-K of Registrant
dated December 20, 1995).
</TABLE>
Page 41
<PAGE> 42
<TABLE>
<S> <C>
10.4 Promissory Note, dated December 20, 1995, in the original principal
amount of $25,000,000 made by Southern Mineral Corporation, SMC
Production Co., San Salvador Development Company, Inc., Venture
Resources, Inc., Venture Pipeline Company, VenGas Pipeline Company,
Spruce Hills Production Company, Inc. in favor of Compass
Bank-Houston (incorporated by reference to Exhibit 10.2 to Form 8-K
of Registrant dated December 20, 1995).
10.5 Credit Agreement, dated December 20, 1995, between Southern Mineral
Corporation, SMC Production Co., San Salvador Development Company,
Inc., Venture Resources, Inc., Venture Pipeline Company, VenGas
Pipeline Company, Spruce Hills Production Company, Inc. and Compass
Bank-Houston for Term Loan of $3,500,000 (incorporated by reference
to Exhibit 10.3 to Form 8-K of Registrant dated December 20, 1995).
10.6 Promissory Note, dated December 20, 1995, in the original principal
amount of $3,500,000 made by Southern Mineral Corporation, SMC
Production Co., San Salvador Development Company, Inc., Venture
Resources, Inc., Venture Pipeline Company, VenGas Pipeline Company,
Spruce Hills Production Company, Inc. in favor of Compass
Bank-Houston (incorporated by reference to Exhibit 10.4 to Form 8-K
of Registrant dated December 20, 1995).
10.7 1996 Stock Option Plan (incorporated by reference to Exhibit 10.10 to
Form 10KSB dated December 31, 1995).
10.8 1996 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.11 to Form 10KSB dated December 31, 1995).
10.9 Joint Venture Agreement, dated October 1, 1995, between Southern
Mineral Corporation and The Links Group, Inc. (incorporated by
reference to Exhibit 10.12 to Form 10KSB dated December 31, 1995).
10.10 Option Agreement, dated January 5, 1996, between Southern Mineral
Corporation and Diasu Oil & Gas Company, Inc. covering the
exploration joint venture (incorporated by reference to Exhibit 10.13
to Form 10KSB dated December 31, 1995).
10.11 Stock Option Agreement dated April 6, 1995, between Southern Mineral
Corporation and Robert R. Hillery (incorporated by reference to
Exhibit 10.14 to Form 10KSB dated December 31, 1995).
10.12 Subscription Agreement and Assumption of Obligations, dated January
5, 1995, between Southern Mineral Corporation and Gary L. Chitty, and
Thomas J McMinn (incorporated by reference to Exhibit 10.15 to Form
10KSB/A-1 dated December 31, 1995).
10.13 Amendment to Credit Agreement between Southern Mineral Corporation et
al and Compass Bank-Houston dated August 30, 1996 (incorporated by
reference to Exhibit 10.1 to Form 8-K of the Company dated August 30,
1996).
10.14 Second Amendment to Credit Agreements between the Company and Compass
Bank dated December 17, 1996 (incorporated by reference to Exhibit
10.14 to Form 10-KSB dated December 31, 1996).
11.1 Computation of earnings per common and equivalent share (filed
herewith).
21.1 Subsidiaries of the Company
Name of Subsidiary Subsidiary Conducts Business Incorporation
- ------------------ ---------------------------- -------------------
SMC Production Co. None Texas
Spruce Hills Production
Company, Inc. None Delaware
</TABLE>
Page 42
<PAGE> 43
<TABLE>
<S> <C>
23.1 Consent of KPMG Peat Marwick LLP (filed herewith).
23.2 Consent of Grant Thornton LLP (filed herewith).
23.3 Consent of Netherland, Sewell & Associates, Inc. (filed herewith)
23.4 Consent of McDaniel & Associates Consultants, Ltd. (filed herewith)
27.1 Financial Data Schedule (filed herewith).
99.1 Application and Affidavit Pursuant to Rule 437 under the Securities
Act of 1933 regarding impracticability of obtaining written consent of
Hedrick and Associates (filed herewith).
</TABLE>
Page 43
<PAGE> 1
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
Fully Fully Fully
Primary Diluted Primary Diluted Primary Diluted
------------------- ------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income (loss) $2,434 $2,434 $ (137) $ (137) $(3,133) $(3,133)
================== ================== ====================
Weighted average number of common
shares outstanding 6,529 6,529 5,701 5,701 4,162 4,162
Excess of shares issuable upon exercise
of stock options over shares deemed
retired under the "modified treasury
stock" method 686 807 0 0 0 0
------------------ ------------------- --------------------
Weighted average number of common
and dilutive common equivalent shares
outstanding 7,215 7,336 5,701 5,701 4,162 4,162
================== ================== ===================
Earnings (loss) per common and
common equivalent share $0.34 $0.33 $(0.02) $(0.02) $ (0.78) $(0.78)
================== ================== ===================
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Southern Mineral Corporation:
We consent to incorporation by reference in the registration statements on
Form S-8 (No. 33-6051 and No. 333-12375) of Southern Mineral Corporation of our
report dated August 28, 1997 relating to the consolidated balance sheet of
Southern Mineral Corporation and subsidiaries as of December 31, 1996 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended, which report appears in the December 31, 1996
annual report on Form 10-KSB/A of Southern Mineral Corporation.
KPMG PEAT MARWICK LLP
Houston, Texas
December 4, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 21, 1996 accompanying the
consolidated financial statements of Southern Mineral Corporation (the
"Company") and Subsidiaries appearing in this Annual Report on Form 10-KSB/A for
the year ended December 31, 1996. We consent to the incorporation by reference
of the aforementioned report in the Company's Form S-8 Registration Statement
No. 33-60571, Form S-3 Registration Statement No. 33-60583, and Form S-8
Registration Statement No. 333-12375.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Houston, Texas
December 5, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF NETHERLAND, SEWELL & ASSOCIATES, INC.
We consent to the incorporation by reference into Form S-8
Registration Statement No. 33-60571, Form S-3 Registration Statement No.
33-60583, and Form S-8 Registration Statement No. 333-12375 of Southern Mineral
Corporation, a Nevada corporation (the "Company") of the references to this
firm and to our audit on the Company's estimated domestic proved reserves as of
December 31, 1996 contained in this Annual Report on Form 10-KSB/A for the year
ended December 31, 1996.
1. Report of domestic proved reserves estimates as of January 1, 1996
dated March 1, 1996.
2. Audit of domestic proved reserves estimates as of January 1, 1997
dated February 25, 1997.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ Danny D. Simmons
----------------------------------
Danny D. Simmons
Senior Vice President
Houston, Texas
December 4, 1997
<PAGE> 1
EXHIBIT 23.4
CONSENT OF MCDANIEL & ASSOCIATES CONSULTANTS LTD.
December 5, 1997
Southern Mineral Corporation
500 Dallas, Suite 2800
Houston, Texas
77002-4508
Attention: Mr. James H. Price
Dear Sir:
We consent to the incorporation by reference into Form S-8 Registration
Statement No. 33-60571, Form S-3 Registration Statement No. 33-60583, and Form
S-8 Registration Statement No. 333-12375 of Southern Mineral Corporation, a
Nevada corporation (the "Company") of the references to this firm and to our
report on the Company's estimated Canadian proved reserves as of December 31,
1996 contained in this Annual Report on Form 10-KSB/A for the year ended
December 31, 1996.
Sincerely,
McDANIEL & ASSOCIATES CONSULTANTS LTD.
/s/ B. H. Emslie [Seal]
- --------------------------------------
B. H. Emslie, P. Eng.
Vice President
Calgary, Alberta
Dated: December 5, 1997
<PAGE> 1
EXHIBIT 99.1
Southern Mineral Corporation
500 DALLAS, SUITE 2800
HOUSTON, TEXAS 77002
_____________________
TELEPHONE (713) 658-9444
FAX (713) 658-9447
December 5, 1997
By Federal Express
United States Securities and
Exchange Commission
450 Fifth Street N.W., Mail Stop 3-7
Washington, D.C. 20549
Attention: Mr. Sean J. Klein
Re: Southern Mineral Corporation, a Nevada corporation (the
"Company") Form 10-KSB/A for year ended December 31, 1996
("Form 10-KSB/A")
Dear Mr. Klein:
Enclosed please find my Affidavit concerning the impracticality of
obtaining the consent of the engineering firm of Hedrick and Associates to file
as an exhibit to the Form 10-KSB/A. Hedrick and Associates is out of business.
This letter constitutes the Company's application to the Commission under Rule
437 of the Securities Act of 1933, as amended, to dispense with the requirement
that the written consent of Hedrick and Associates be obtained and filed as an
exhibit to the Form 10-KSB/A. We respectfully request the Commission's consent
to this application.
Very truly yours,
Southern Mineral Corporation
By: /s/ Steven H. Mikel
-----------------------------------
Steven H. Mikel,
President and Chief Executive Officer
<PAGE> 2
AFFIDAVIT
PURSUANT TO RULE 437 UNDER THE
SECURITIES ACT OF 1933
STATE OF TEXAS )
)
COUNTY OF HARRIS )
BEFORE ME, the undersigned authority, on this day personally appeared
Steven H. Mikel, President and Chief Executive Officer of Southern Mineral
Corporation, a Nevada corporation, and being by me duly sworn did depose and
say:
1. My name is Steven H. Mikel. I am the President and Chief Executive
Officer of Southern Mineral Corporation, a Nevada corporation (the
"Company"), and have actual authority to make the statements contained
in this Affidavit on behalf of the Company in connection with the
Company's Form 10-KSB/A for the year ended December 31, 1996 (the "Form
10-KSB/A").
2. This Affidavit is submitted to the Securities and Exchange Commission
pursuant to Rule 437 promulgated under Section 7 of the Securities Act
of 1933, as amended.
3. The Form 10-KSB/A refers to engineering firms and their reports, and is
incorporated by reference in Form S-8 Registration Statement No.
33-60571, Form S-3 Registration Statement No. 33-60583, and Form S-8
Registration Statement No. 333-12375. Consents of such engineering
firms must be filed as exhibits to the Form 10-KSB/A.
4. One of the engineering firms covered by item 3 above is Hedrick and
Associates which prepared the Company's reserve estimate information
as of December 31, 1993 and 1994. Since Hedrick and Associates is out
of business, it is impracticable to obtain its consent to file as an
exhibit to the Form 10-KSB/A.
/s/ Steven H. Mikel
-------------------------------------------
Steven H. Mikel,
President and Chief Executive Officer,
Southern Mineral Corporation
SWORN TO BEFORE ME on this 5th day of December 1997.
/s/ Margie Ewald
-------------------------------------------
Notary Public in and for the State of Texas
Margie Ewald
-------------------------------------------
Printed Name of Notary
[Seal]
My Commission Expires: 12-10-98
-------------------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANNUAL
REPORT ON FORM 10-KSB/A FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 471
<SECURITIES> 0
<RECEIVABLES> 2,292
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,918
<PP&E> 25,831
<DEPRECIATION> (5,232)
<TOTAL-ASSETS> 24,386
<CURRENT-LIABILITIES> 683
<BONDS> 0
0
0
<COMMON> 91
<OTHER-SE> 18,543
<TOTAL-LIABILITY-AND-EQUITY> 24,386
<SALES> 12,233
<TOTAL-REVENUES> 12,519
<CGS> 0
<TOTAL-COSTS> 2,742
<OTHER-EXPENSES> 5,422
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,242
<INCOME-PRETAX> 3,113
<INCOME-TAX> 679
<INCOME-CONTINUING> 2,434
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,434
<EPS-PRIMARY> .34
<EPS-DILUTED> .33
</TABLE>
