<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A-1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 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:
Name of each exchange
Title of each class on which registered
- ------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ -------
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not 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. [X]
Revenues for the year ended December 31, 1995 were approximately $2,360,000.
As of March 5, 1996, 6,552,919 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) held by non-affiliates of
the Registrant was approximately $7,239,165. 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 1995 Annual
Meeting of Stockholders are incorporated herein by reference in Part III, Items
9, 10, 11 and 12.
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PART I
ITEM 1. BUSINESS
GENERAL
Southern Mineral Corporation and its subsidiaries (the "Company") is an oil and
gas exploration and production company headquartered in Houston, Texas. The
Company owns interests in over 1,800 oil and gas properties located along the
Texas Gulf Coast, in the Mid-continent and in Canada. Operations are currently
conducted in south central Texas where the Company operates two fields
producing from the Wilcox formation. 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. The Company currently has 23,071 net mineral
acres in Mississippi, New Mexico and in the Texas panhandle under lease to
others.
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 in
late 1994 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. 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 acquisitions the Company
effected in 1995 are generally described below.
DIVERSE GP III ACQUISITION:
The Company acquired Diverse Production Co., subsequently named SMC Production
Co., Inc., whose primary asset is a 15% general partnership interest in Diverse
GP III ("DGP III") on April 6, 1995. DGP III is a Texas based general
partnership that owns interests in over four hundred oil and gas properties
located in eleven states. DGP III is generally involved in the acquisition,
exploitation and production of oil and gas properties. As a result of the
acquisition of the DGP III interest, the Company's proven reserves more than
doubled from its January 1, 1995, reported reserves. 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) in consideration for the DGP
III interest.
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 a Delaware corporation that owns interests in
approximately 1,200 wells located in Canada. Another acquired subsidiary holds
interests in ten pipeline and gathering systems located in Oklahoma, Texas and
Louisiana. The third acquired subsidiary owns interests in
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approximately 270,000 gross mineral acres in the Texas panhandle and New Mexico
together with associated producing royalties. The purchase price for the assets
and capital stock of the three subsidiaries acquired in the transaction was
approximately $16,400,000, including adjustments and related transaction costs.
The acquisitions of DGP III and S&W increased the Company's proven oil reserves
from 228 thousand barrels of oil to approximately 1.5 million barrels, and
increased the Company's proven gas reserves from 786 Mmcf of natural gas to
26.4 Bcf as of January 1, 1996.
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. The Company
borrowed $11,715,000 pursuant to a reducing revolving credit arrangement with
an initial borrowing base of $12,500,000.
EXPLORATION ACTIVITIES
The Company made a substantial change in its business strategy in late 1994.
Prior to this time, the Company had pursued exploration as the sole focus of
its business. Beginning in 1995, the Company hired a new management team, and
began a strategy that encompasses the acquisition and exploitation of oil and
gas properties together with a more controlled risk exploration program. To
that end, the Company effected the acquisitions noted above. In addition, the
Company has decided to refocus its exploration activities in the Gulf Coast
region. Thus, in 1995 the Company divested itself of exploration acreage in
Upton County, Texas, sold its interest in an exploration prospect in Union
County, Arkansas, and sold its interest in the Bandera and Equipo Field
production and exploration activity in Maverick County, Texas.
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 will define prospects in the
area and package and market the prospects to industry participants. At a lease
auction held by the Texas General Land Office in October, Southern Links was
successful in acquiring seven tracts at a consideration of just over $600,000.
The joint venture is currently marketing its first prospect, which includes two
of the seven tracts that it acquired at the auction. The joint venture intends
to continue to redeploy proceeds from the sale of its prospects into new tracts
at subsequent lease auctions.
DIASU OIL & GAS COMPANY, INC. JOINT VENTURE
In a separate arrangement with Diasu Oil & Gas Co., Inc. ("Diasu"), the Company
has the option to pay leasehold, seismic and other third party costs in the
development of exploration prospects with Diasu for a two year period beginning
in 1996. 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.
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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 have 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 own capital stock, public and
private equity 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.
The Company is not dependent on any patents, trademarks, licenses, franchises,
or concessions.
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.
The Company, as an owner of oil and gas mineral rights, does not compete in the
conventional sense with the owners of other oil, gas and mineral rights to
lease such right. Rather the Company considers proposals to lease its mineral
rights on the basis of the best offer from prospective lessees.
REGULATIONS
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
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the Company will be required in the near future to expend amounts that are
material in relation to its total capital expenditures 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.
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 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. 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.
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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.
CUSTOMERS
Oil and gas hydrocarbons are the principal products produced by the Company and
sales of such products are usually made in 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 1995 1994 1993
-------- ------- ------- ------
(in thousands)
<S> <C> <C> <C>
Moon-Hines-Tigrett Operating Co., Inc. $ 21 $ 76 $ 529
Mike Rogers Drilling Company 746 651 965
Ashtola Exploration Company 208 283 144
</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 1, 1996, the Company employed fifteen full-time persons including one
engineer, one geologist and thirteen administrative, technical and accounting
personnel.
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SELECTED FINANCIAL DATA (in thousands)
COMPARATIVE CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------------
ASSETS 1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Current assets $ 2,071 $ 1,973 $ 2,865 $ 2,343 $ 5,157
Property and equipment 18,042 1,347 4,106 5,384 4,511
Oil and gas properties held for sale and other 1,554 50 350 376 --
-------- -------- -------- -------- --------
$ 21,667 $ 3,370 $ 7,321 $ 8,103 $ 9,668
-------- -------- -------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 5,960 $ 290 $ 561 $ 421 $ 853
Deferred income taxes 606 -- 547 730 617
Long term debt 9,920 -- -- -- --
Stockholders' equity 5,181 3,080 6,213 6,952 8,198
-------- -------- -------- -------- --------
$ 21,667 $ 3,370 $ 7,321 $ 8,103 $ 9,668
-------- -------- -------- -------- --------
WORKING CAPITAL $ (3,889) $ 1,683 $ 2,304 $ 1,922 $ 4,304
COMPARATIVE STATEMENTS OF OPERATIONS
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
REVENUES
Oil and gas $ 2,044 $ 1,747 $ 2,891 $ 2,465 $ 2,195
Gains (losses) on sales of properties 170 66 146 (26) (15)
Interest 85 56 41 78 390
Other income 61 20 -- -- 8
-------- -------- -------- -------- --------
2,360 1,889 3,078 2,517 2,578
EXPENSES 2,488 5,580 3,959 4,048 3,890
-------- -------- -------- -------- --------
Loss before income taxes and the cumulative
effect of a change in accounting for income taxes (128) (3,691) (881) (1,531) (1,312)
Provision (benefit) for income taxes 9 (558) (279) (487) (418)
-------- -------- -------- -------- --------
Loss before the cumulative effect of a change
in accounting for income taxes (137) (3,133) (602) (1,044) (894)
Cumulative effect of a change in accounting for
income taxes -- -- 65 -- --
-------- -------- -------- -------- --------
Net Loss $ (137) $ (3,133) $ (537) $ (1,044) $ (894)
-------- -------- -------- -------- --------
PER SHARE OF STOCK:
Net loss before the cumulative effect of a change
in accounting for income taxes $ (.02) $ (0.78) $ (0.15) $ (0.26) $ (0.22)
Cumulative effect of a change in accounting for
income taxes -- -- $ 0.02 -- --
-------- -------- -------- -------- --------
Net loss $ (.02) $ (0.78) $ (0.13) $ (0.26) $ (0.22)
======== ======== ======== ======== ========
Dividends $ -- $ -- $ 0.05 $ 0.05 $ 0.10
======== ======== ======== ======== ========
</TABLE>
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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. For further information, please see the
Management's Discussion and Analysis For the Period Ended December 31,
1994 as Compared to the Period Ended December 31, 1993.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 for 1995 were
$2,360,000, up 24% compared to revenues for 1994 of $1,899,000. 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 404.3 Mmcf, a 35% increase compared to 1994 production of 300.5 Mmcf. The
Company's crude oil production in 1995 increased 4% to 82,311 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 is 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 is 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 had a working interest in three gross wells drilled in
1995 compared to nine gross wells in 1994. 1995 drilling results include 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 $702,000 in 1995, down 22% from $903,000
in 1994. The decline in general and administrative expenses is 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
result of downward adjustment to the Company's oil and gas properties in
Bandera, Stateline and Cascade Deep. 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.
For the Period Ended December 31, 1994
As Compared to the Period Ended December 31, 1993
The Company recorded a loss of $3,133,000, or $.78 per share, in 1994 compared
to a loss of $537,000, or $.13 per share, in 1993. The increase in the loss
from 1993 to 1994 is principally due to a $1,621,000 increase in expenses and a
$1,189,000 drop in revenues. Most of the increase to expenses is due to
$1,724,000 in write downs recorded as a valuation reduction to three producing
properties. The Company had no comparable write down in 1993. Two of these
three properties are the Company's interests in the Redwater Field, an oil
field located in Bowie County, Texas and the Cascade Deep Field, an oil field
located in Los Angeles County, California. The Company classified the original
cost of these properties less the accumulated depreciation and depletion and
the related valuation
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allowance, amounting to $1,494,000, as oil and gas producing properties held
for sale. The Company has identified these properties for sale as a result of a
revaluation of its exploration and production activities resulting from
unsuccessful 1994 exploration activities. During the 1994 third quarter, the
Company recorded a gain of $37,000 as a result of its sale of its interests in
the Redwater Field. However, it is unknown whether proceeds, if any, from the
sale of its interests in the Cascade Deep Field will exceed the current
carrying value amounting to about $50,000 or when such property may be sold or
disposed. In addition, the Company recorded a valuation reduction of $230,000
to the net carrying value of its investment in the Hub Field, a producing gas
field located in Marion County, Mississippi. The original cost less
depreciation and depletion and the valuation allowance are included in
producing oil and gas properties. The Company does not currently anticipate
that other oil and gas producing properties in which it has a material
investment either will become candidates for sale or disposal or otherwise
require a significant write down.
Exploration expenses increased $399,000 from $1,167,000 in 1993 to $1,566,000
in 1994. Approximately $948,000 of the current year's exploration expense is
the Company's cost in the leasehold and an unsuccessful exploratory well of the
Pheasant Prospect, located in Lawrence County, Mississippi. In addition,
$478,000 of 1994's exploration expense is for the writeoff of all unproven
leasehold costs in the Sendero Program, a multiple prospect program located in
an area approximately 70 miles southwest of Midland, Texas. Due to current year
writeoffs of unproven property costs, the remaining balance in unproven
properties amounts to $22,000. Because the Company utilizes the successful
efforts method of accounting, exploration expenses typically vary materially
from period to period based upon the number of wells drilled, spending levels
for individual wells and other exploration program activities, the Company's
working interest participation, success rates and other factors. The Company
anticipates that spending levels in connection with its exploration program
activities will be significantly lower overall compared to $997,000, which was
expended for such activities in 1994.
Partly offsetting the increases to exploration expenses and the valuation
reduction, depreciation and depletion expenses and general and administrative
expenses decreased $504,000 and $127,000, respectively. The Company computes
the depreciation and depletion expenses of each producing property separately
on the unit-of-production method. Because this method employs estimates of
remaining reserves, depreciation and depletion expense may vary materially from
period to period because of revisions to reserve estimates, production rates,
and other factors. Most of the decrease in general and administrative expenses
is attributable to cost cutting measures implemented by the Company during the
1994 first quarter. These measures have included, but are not limited to, a
reduction in the number of employees from seven employed during most of 1993 to
a level of four employees. As a result of the retirement of the former
President and CEO effective December 31, 1994 the Company recorded a severance
benefit liability of $135,000 to such officer. The Company had no comparable
1993 expense for severance benefits.
The decline in revenues is mostly due to a decrease in oil and gas revenues.
While oil revenues dropped 34% from $1,838,000 in 1993 to $1,207,000 in 1994,
gas revenues declined 49% from $1,053,000 to $540,000 in those respective
periods. Both of these revenue declines are due to lower sales volumes and
lower average prices. While oil sales volumes declined 28% from 110,108 barrels
in 1993 to 78,866 barrels in 1994, gas sales volumes dropped 45% from 545,942
thousand cubic feet of gas ("Mcf") in 1993 to 300,544 Mcf in 1994. Average oil
prices decreased 8%, or $1.38 per barrel of oil, and average gas prices
declined 7%, or $.13 per Mcf, from 1993 to 1994. The decline in oil and gas
sales volumes from 1993 to 1994 is mostly attributable to the Company's lack of
success in its exploration program during 1993 and 1994 to obtain new
comparable sources of production in order to offset natural production declines
of existing fields in which it has an interest. However, although the Company
will continue to explore for oil and gas reserves, it has recently commenced a
new direction whereby it will emphasize the acquisition of interests in
producing oil and gas reserves and de- emphasize its exploration activities.
During 1994, the two primary sources of the Company's oil and gas revenues were
its working interest in the State Line Field, an oil field located in Union
County, Arkansas, and its working interest in two oil wells and five gas wells
situated in the Bandera Prospect, located in Maverick County, Texas. The
Company's average working interest of about 26% in the State Line Field's six
producing wells amounted to about 42% of its 1994 oil and gas revenues while
its average working interest of about 24% in the Bandera Prospect wells totaled
about 17% of such revenues.
The Company's sales of crude oil and natural gas are made on spot sales or
other basis which is affected by the changes in current market prices. Future
crude oil and natural gas prices may be affected by a variety of factors
including, but not limited to, supply and demand, world and/or regional market
conditions, political conditions, and seasonal factors all of which the Company
is unable to control or accurately predict.
Page 9
<PAGE> 10
The income tax benefit increased from $279,000 in 1993 to $558,000 in 1994.
However, the income tax benefit for 1994 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 under
Statement of Financial Accounting Standards No. 109 (SFAS 109). These amounts
will be available to reduce future tax liabilities in years in which the
Company has taxable earnings. In addition, pursuant to the provisions of SFAS
No. 109, the Company changed its method of accounting for income taxes. As a
result of the adoption of such method during 1993, the Company recorded an
adjustment of $65,000 benefitting the 1993 results. The Company had no similar
adjustment in 1994.
The revisions in the Company's estimated reserves in 1993 and 1994 were
primarily the result of downward adjustment to the Company's oil and gas
properties in HUB, Bandera, Stateline and Cascade Deep. Production from these
fields was substantially below those projected by the Company's independent
petroleum engineering firm, resulting in the downward adjustments.
LIQUIDITY AND CAPITAL RESOURCES
For the Period Ended December 31, 1995
On December 20, 1995, the Company entered into credit facilities with a bank
that consists of a secured reducing revolving line of credit of $12,500,000
("Revolver Note") and a note payable of $3,500,000 ("Term Note"),
(collectively, the "Credit Facility"). The proceeds of the Credit Facility were
used to finance the acquisition of certain oil and gas assets of Stone &
Webster, Inc. ("S&W"). The Revolver Note at December 31, 1995, had a balance of
$11,715,000 and available commitments to borrow $785,000. The Revolver Note
borrowing base reduces $215,000 per month beginning January 1, 1996, and is
reviewed by the bank semi-annually until maturity on June 1, 1998. The Term
Note is due on July 1, 1996, and is expected to be refinanced prior to July 1,
1996 by the Company. 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 Company's financial
condition. The Term Note bears an interest rate of the lending bank's prime
rate plus two percent, floating. The Revolver Note bears interest at the
Company's option, of either prime rate floating or at the LIBOR rate plus two
and one-half percent. Upon payment of the Term Note, the LIBOR rate on the
Revolver Note is reduced to LIBOR plus two and one-quarter percent. The
Revolver Note is payable $1,795,000 in 1996, $2,580,000 in 1997, and $7,340,000
in 1998.
The acquisition of S&W was consummated through bank borrowings of $15,215,000
and cash of $1,209,000. The Company's working capital decreased to a deficit
$3,889,000 at December 31, 1995 from a positive $1,683,000 at December 31,
1994. The decrease in working capital is primarily due to the expenditure of
working capital to consummate the S&W acquisition and due to the inclusion of
current liabilities of $1,795,000 under the Revolver Note and $3,500,000 under
the Term Note at December 31, 1995, with no comparable debt at December 31,
1994.
Cash flow from operating activities was $823,000 in 1995 up 6% from $779,000 in
1994. Cash and cash equivalents and marketable securities declined to $562,000
at December 31, 1995, from $1,624,000 at December 31, 1994. Unadvanced bank
commitments to borrow under the Revolver Note at December 31, 1995, were
$785,000.
The Company anticipates that 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, working capital, the
issuance of the Company's capital stock, public and private equity markets and
lending institutions such as banks and energy investment firms.
The Company did not pay dividends in fiscal 1995 or 1994. In addition, the
Company's Credit Facility currently restricts the declaration or payment of
dividends. 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 17, Index to
Financial Statements. The Financial Statement Schedules are not applicable and
have been omitted.
Page 10
<PAGE> 11
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Description Page Number
----------- -----------
<S> <C>
Report of Independent Certified Public Accountants:
Grant Thornton LLP 12
Financial Statements:
Consolidated Balance Sheets at December 31, 1995 and 1994 13
Statements of Consolidated Operations for the Years Ended
December 31, 1995, 1994 and 1993 14
Statements of Consolidated Stockholders' Equity
for the Years Ended December 31, 1995,
1994 and 1993 15
Statements of Consolidated Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993 16
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1995, 1994 and 1993 17
</TABLE>
Page 11
<PAGE> 12
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 1994, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three 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 1994, and the consolidated results
of their operations and their consolidated cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
Grant Thornton LLP
Houston, Texas
February 21, 1996
Page 12
<PAGE> 13
SOUTHERN MINERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1994
-------- --------
(in thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 562 $ 55
Marketable securities -- 1,569
Receivables 1,122 277
Other 387 72
-------- --------
Total current assets 2,071 1,973
PROPERTY AND EQUIPMENT, AT COST USING SUCCESSFUL
EFFORTS METHOD FOR OIL AND GAS ACTIVITIES
Oil and gas producing properties 20,530 3,544
Mineral rights 167 102
Unproven properties 15 22
Office equipment 178 160
Accumulated depreciation and depletion (2,848) (2,481)
-------- --------
18,042 1,347
PROPERTIES HELD FOR SALE AND OTHER 1,554 50
-------- --------
Total assets $ 21,667 $ 3,370
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 665 $ 290
Note payable bank 3,500 --
Current maturities of long term debt 1,795 --
-------- --------
Total current liabilities 5,960 290
LONG TERM DEBT 9,920 --
DEFERRED INCOME TAXES 606 --
STOCKHOLDERS' EQUITY
Common stock - par value $.01 per share; authorized
10,000,000 shares at
December 31, 1995 and 1994, issued
6,369,519 and 4,161,600 at December 31, 1995 and 1994 64 42
Additional paid-in capital 3,038 843
Retained earnings 2,131 2,268
-------- --------
5,233 3,153
Less: Treasury stock (52) (73)
-------- --------
Total stockholders' equity 5,181 3,080
-------- --------
Total liabilities and stockholders' equity $ 21,667 $ 3,370
======== ========
</TABLE>
The accompanying notes to financial statements of Southern Mineral Corporation
and subsidiaries are an integral part of these statements.
Page 13
<PAGE> 14
SOUTHERN MINERAL CORPORATION
STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
--------------------------------------
1995 1994 1993
---------- ---------- ----------
(in thousands, except per share amounts)
<S> <C> <C> <C>
REVENUES
Oil and gas $ 2,044 $ 1,747 $ 2,891
Interest 85 56 41
Gains on sales of properties 170 66 146
Other income 61 20 --
---------- ---------- ----------
2,360 1,889 3,078
EXPENSES
Production 656 548 554
Exploration 221 1,566 1,167
Depreciation and depletion 792 704 1,208
General and administrative 702 903 1,030
Valuation reduction -- 1,724 --
Severance benefit 117 135 --
---------- ---------- ----------
2,488 5,580 3,959
Loss before income taxes and the cumulative effect of a
change in accounting for income taxes (128) (3,691) (881)
Provision (benefit) for federal and state income taxes
Current provision (benefit) 9 (11) (161)
Deferred Benefit -- (547) (118)
---------- ---------- ----------
9 (558) (279)
---------- ---------- ----------
Loss before the cumulative effect of a change in accounting
for income tax (137) (3,133) (602)
Cumulative effect of a change in accounting for income taxes -- -- 65
---------- ---------- ----------
Net loss $ (137) $ (3,133) $ (537)
========== ========== ==========
Loss per share before the cumulative effect of a change in
accounting for income taxes $ (0.02) $ (0.78) $ (0.15)
Cumulative effect per share of a change in accounting
for income taxes -- -- 0.02
---------- ---------- ----------
Net loss per share $ (0.02) $ (0.78) $ (0.13)
========== ========== ==========
</TABLE>
The accompanying notes to financial statements of Southern Mineral Corporation
and subsidiaries are an integral part of these statements.
Page 14
<PAGE> 15
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 DECEMBER 31, 1992 4,162 $ 42 $ 843 $ 6,140 137 $ 73
Net loss -- -- -- (537) -- --
Cash dividend of $.05 per share -- -- -- (202) -- --
--------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1993 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 director's 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
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes to financial statements of Southern Mineral Corporation
and subsidiaries are an integral part of these statements.
Page 15
<PAGE> 16
SOUTHERN MINERAL CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------- -------- --------
1995 1994 1993
-------- -------- --------
(in Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (137) $ (3,133) $ (537)
Adjustments to reconcile net loss to cash provided by
(used in) operating activities:
Depreciation and depletion 792 704 1,208
Gains on sales of assets (170) (66) (146)
Valuation reduction -- 1,724 --
Exploration expenses 221 1,566 1,167
Decrease in deferred taxes -- (547) (118)
Common stock issued as compensation 12 -- --
Decrease in deferred taxes due to the cumulative effect
of a change in
accounting for income taxes -- -- (65)
Change in assets and liabilities, net of effects of
acquisitions in 1995
(Decrease) increase in receivables 214 216 (104)
(Increase) decrease in other current assets (39) 259 342
Other (70) 56 57
-------- -------- --------
Total adjustments 960 3,912 2,341
-------- -------- --------
Net cash provided by operating activities 823 779 1,804
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of:
Producing properties 511 42 13
Properties held for sale and unproven properties 97 94 649
Decrease (increase) in marketable securities:
Purchases (1,914) (3,810) (3,960)
Maturities and sales 3,483 4,201 2,000
Capital expenditures:
Acquisition, exploration and development (651) (1,107) (1,412)
Properties held for sale (684) -- (107)
Cash paid for acquisition of Stone & Webster
properties, net of cash received (16,215) -- --
Other (63) (8) (26)
-------- -------- --------
Net cash used in investing activities (15,436) (588) (2,843)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long term debt and note payable 15,215 -- --
Loan acquisition costs (127) -- --
Proceeds from sale of treasury stock 38 -- --
Purchase of treasury stock (6) -- --
Dividends paid -- (202) (202)
-------- -------- --------
Net cash provided (used) in financing activities 15,120 (202) (202)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 507 (11) (1,241)
Cash and cash equivalents at beginning of year 55 66 1,307
-------- -------- --------
Cash and cash equivalents at end of year $ 562 $ 55 $ 66
======== ======== ========
</TABLE>
The accompanying notes to financial statements of Southern Mineral Corporation
and subsidiaries are an integral part of these statements.
Page 16
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SOUTHERN MINERAL CORPORATION, FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND
1993
- ------------------------------------------------------------------------------
NOTE 1
GENERAL BUSINESS - The Company is an oil and gas exploration and production
company headquartered in Houston, Texas. The Company owns interests in over
1,800 oil and gas properties located along the Texas Gulf Coast, in the
Mid-continent and in Canada. Operations are currently conducted in south
central Texas where the Company operates two fields producing from the Wilcox
formation. In addition to interests in oil and gas wells, the Company currently
owns approximately 346,760 net mineral acres underlying some 665,148 gross
surface acres. The Company currently has 23,071 net mineral acres in
Mississippi, New Mexico and in the Texas panhandle under lease to others.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of Southern Mineral Corporation and its subsidiaries, all
wholly-owned. In consolidation, all significant intercompany transactions have
been eliminated. The Company accounts for its investments in oil and gas
partnerships, joint ventures and other less than wholly-owned working interests
using the proportional consolidation method.
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.
The Company currently has only onshore producing properties and currently
estimates that residual salvage values of equipment would equal 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 expected
to be 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 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 which management
has identified for sale.
Assets held for sale at December 31, 1995 include Venture Resources, Inc. and
subsidiaries which has a carrying cost of $675,000 (see Note 2). The assets of
Venture Resources, Inc. and its subsidiaries consist of ten non-contiguous
pipeline and gathering systems which are not part of the Company's core
business operations.
Page 17
<PAGE> 18
INCOME TAXES - The Company adopted prospectively the Statement of Financial
Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes," in 1993. The
adoption of SFAS No. 109 changes the Company's method of accounting for income
taxes from the deferred method of accounting for income tax items to the asset
and liability method. Previously, under the deferred method, the Company
deferred the past tax effects of timing differences between financial reporting
and taxable income. 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 3.)
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 AND MARKETABLE SECURITIES - Management considers all highly
liquid investments with a maturity of three months or less when purchased to be
cash equivalents. Cash equivalents and marketable securities are U.S. Treasury
Bill investments and are carried at cost plus accrued interest, which
approximates market.
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.
NEW PRONOUNCEMENTS - In 1995, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 121 Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of (SFAS No. 121). SFAS No. 121
established guidance for the recognition and measurement of impairment losses
for long-lived assets and certain intangibles and valuation of long-lived
assets to be disposed. This statement is effective for years beginning after
December 15, 1995. The Company does not believe the effect of SFAS No. 121
would be material to the financial statements taken as a whole.
In 1995, the FASB also issued SFAS No. 123 Accounting for Stock-Based
Compensation (SFAS No. 123). The SFAS allows entities to compute compensation
cost related to employee stock options by either using a fair-value-based
method or by continuing to use the method prescribed in APB No. 25 Accounting
for Stock Issued to Employees (APB No. 25). Even if entities plan to continue
to apply APB No. 25, they will be required to adopt the new disclosure
requirements of SFAS No. 123. The effective date of this Statement is for years
beginning after December 15, 1995. The Company plans to continue to apply APB
No. 25.
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 5,701,400, 4,161,600,
and 4,161,600 for the years 1995, 1994 and 1993, respectively.
RECLASSIFICATIONS - Certain amounts in prior financial statements have been
reclassified to conform to the 1995 financial statement presentation.
NOTE 2 ACQUISITIONS
On April 6, 1995, the Company completed the acquisition of Diverse Production
Co. (Diverse) (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 $2,345,144 and
is accounted for under the purchase method. 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 operating results of this acquisition are
included in the Company's consolidated results of operations from April 1,
1995.
Page 18
<PAGE> 19
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 three wholly-owned subsidiaries of Stone & Webster, Inc., Spruce Hills
Production Company, Inc., San Salvador Development Company, Inc., and Venture
Resources, Inc. (collectively Stone & Webster), which are engaged in oil and
gas related business, including exploration and production and pipelines. The
total cost of the acquisition was approximately $16,400,000 and is accounted
for using the purchase method. The operating results of this acquisition will
be included in the Company's consolidated results beginning in 1996. As a
result of the acquisition, the Company has identifiable assets located in
Canada of approximately $6,400,000 at December 31, 1995.
The acquisition was financed by bank borrowings of $15,215,000 and internally
generated working capital of $1,209,000.
A summary of the assets and liabilities acquired in these transactions are as
follows:
<TABLE>
<CAPTION>
Stone & Webster Diverse Total
--------------------------------------
(000's omitted)
<S> <C> <C> <C>
Cash $ 208 $ -- $ 208
Accounts Receivable 836 223 1,059
Other current assets 284 -- 284
Oil and gas properties 15,303 2,293 17,596
Other non-current assets 731 4 735
Accounts payable (333) (175) (508)
Deferred income taxes (606) -- (606)
-------- -------- --------
$ 16,423 $ 2,345 $ 18,768
======== ======== ========
</TABLE>
The following summarized pro forma (unaudited) information and assumes the
acquisitions had occurred on January 1, 1994.
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
---------------------------------------
1995 1994
---------- ------------
(000's omitted, except per share data)
<S> <C> <C>
Revenues $ 8,826 $ 11,416
Net loss (954) (3,414)
Net loss per share $ (.17) $ (.55)
</TABLE>
These pro forma results are not necessarily indicative of those that would have
occurred had the acquisition taken place at the beginning of 1994 or 1995,
respectively. 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.
Subsequent to December 31, 1995, the Company entered into an exploration
arrangement with Diasu Oil & Gas Co., Inc. ("Diasu") and Diasu's two principal
shareholders. Under the agreement, the Company has the option to pay leasehold,
seismic and other third party costs in the development of exploration prospects
with Diasu for a two year period beginning in 1996. 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. Pursuant to the arrangement, on January 5, 1996, the
Company issued the Diasu shareholders 175,000 shares of common stock and
warrants to purchase up to 600,000 shares at $2.00 per share for a term of five
years. The stock will be valued at the last reported sale price for the
Company's common stock on January 5, 1996 on the NASDAQ SmallCap Market which
was $1.375 per share. No material value will be placed on the warrants.
Page 19
<PAGE> 20
NOTE 3 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,
-------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Statutory rate for benefit (34.0%) (34.0%) (34.0%)
Valuation allowance 33.6 18.7 --
State taxes, net of federal benefit 4.5 .1 .9
Other 2.9 .1 1.4
--------- --------- ---------
Effective tax rate 7.0% (15.1%) (31.7%)
========= ========= =========
</TABLE>
Deferred taxes at December 31, consist of the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 779,000 $ 676,000
Alternative minimum tax credits 96,000 83,000
Statutory depletion carryforwards 110,000 96,000
----------- -----------
985,000 855,000
Valuation allowance (405,000) (812,000)
----------- -----------
580,000 43,000
Deferred tax liabilities:
Oil and gas properties 580,000 43,000
Oil and gas properties - Canadian taxes 606,000 --
----------- -----------
1,186,000 43,000
----------- -----------
$ (606,000) $ --
=========== ===========
</TABLE>
Effective January 1, 1993, the Company adopted the provisions of Statement of
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"),
which superseded both Accounting Principles Board Opinion No. 11 and Statement
of Accounting Standards No. 96, "Accounting for Income Taxes." As permitted
under this new standard, the Company elected to apply these provisions
prospectively rather than restating prior year financial statements. The
financial statement effect under the new standard resulted in a deferred tax
benefit of approximately $65,000, or $.02 per share. This amount is reflected
in 1993 as a cumulative effect of a change in accounting principle.
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 under SFAS No. 109. For federal tax purposes, the Company has net
operating loss carryforwards of approximately $1,987,000 and $2,293,000 for the
years ended 1995 and 1994 respectively, which are available to offset future
federal taxable income through 2011. The Company also has an alternative
minimum tax credit carryforward of approximately $96,000 and statutory
depletion carryforwards of $324,000 at December 31, 1995.
Cash payments of approximately $9,000, $11,000 and $125,000 were made for
federal and state income taxes during 1995, 1994 and 1993, respectively. The
Company received approximately $14,000, $282,000 and $628,000 in refunds for
federal and state income taxes during 1995, 1994 and 1993, respectively.
Page 20
<PAGE> 21
NOTE 4 RELATED PARTY TRANSACTIONS
From time to time, certain directors and employees of the Company have
participated as working interest owners in properties in which the Company
holds a working interest. The total of such individuals' share of costs was not
material in 1995. The Company does not anticipate that such individuals' share
of future costs for such participations will be material.
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 all third party costs of Southern
Links. Any proceeds from the sale of prospects or oil and gas from such
prospects is distributed 100% to the Company until it receives an amount equal
to the return of its invested capital, after which time all such proceeds and
property interests, if any, are to be distributed 75% to the Company and 25% to
Links.
In connection with the Company's acquisition of DPC discussed in Note 2 above,
the Company granted options exercisable for the following indicated number of
shares of its common stock at $1.25 per share through April 6, 2000 to the
indicated individual or entity controlled by him as partial consideration for
DPC's stock: B. Travis Basham - 77,500, Thomas R. Fuller - 77,500, Donald H.
Wiese, Jr. - 77,500 and Spencer L. Youngblood - 77,500. Each of these
individuals became directors of the Company in connection with Company's
acquisition of DPC. Entities controlled by these individuals are also general
partners of Diverse GP III, each having an approximate 20% general partner
interest.
In consideration for initiating the transactions pursuant to which the Company
acquired DPC, the Company granted Robert R. Hillery, 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 6, 2000.
NOTE 5 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 1995 1994 1993
- -------- ---- ---- ----
(in thousands)
<S> <C> <C> <C>
Moon-Hines-Tigrett Operating Co., Inc. $ 21 $ 76 $529
Mike Rogers Drilling Company 746 651 965
Ashtola Exploration Company 208 283 144
</TABLE>
NOTE 6 COMMON STOCK
In connection with the offer and acceptance of employment, the new President
and CEO was granted a non-qualified stock option on December 28, 1994, 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 ten years after
the date of grant. Payment for the option can be made in cash, common stock of
the Company, or a combination thereof. The average of the high and low price of
a share of the Company's common stock on the date of grant was $.594. In
addition, the Company sold 50,000 shares of the Company's treasury stock to the
new President and CEO at a price per share of $.75, the high price of such
stock on January 3, 1995.
The Company has established the "1995 Non-Employee Director Compensation Plan"
(the "1995 Plan") in order to compensate non-employee Directors with shares of
the Company's common stock in lieu of cash fees. The 1995 Plan
Page 21
<PAGE> 22
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
non-employee Director will be issued 1,000 shares of common stock.
Subsequent to year end, the Board of Directors adopted the Company's 1996 Stock
Option Plan ("Stock Option Plan"), subject to shareholder approval, pursuant to
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 Stock Option Plan. The
Company's President, Steven H. Mikel, has been granted an option exercisable
for 10,000 shares of the Company's common stock at $1.50 per share, the last
reported sales price of the common stock on the NASDAQ SmallCap Market on
February 22, 1996, the date of grant. No other options have been granted under
the Stock Option Plan.
Subsequent to year end, concurrent with the adoption of the Stock Option Plan,
the Board of Directors adopted the Company's 1996 Employee Stock Purchase Plan
(the "Employee Stock Purchase Plan"), subject to shareholder approval, 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. No options have been granted
under the Employee Stock Purchase Plan.
The following table reflects the activity under the Company's various plans
during the three-year period ended December 31, 1995:
<TABLE>
<CAPTION>
Exercise Price
Number of Shares Per Share
---------------- ---------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1992 40,000 $ 3.38
Granted --- ---
Cancelled --- ---
Exercised --- ---
----------
Outstanding at December 31, 1993 40,000 $ 3.38
Granted 450,000 1.00
Cancelled --- ---
Exercised --- ---
----------
Outstanding at December 31, 1994 490,000 $ 1.00 - $3.38
Granted 368,878 1.00 - $1.25
Cancelled (40,000) 3.38
Exercised --- ---
----------
Outstanding at December 31, 1995 818,878 $ 1.00 - $1.25
==========
</TABLE>
NOTE 7 COMMITMENTS AND CONTINGENCIES
The Company leases office space under a noncancellable operating lease expiring
July 1, 1997. Lease commitments at December 31, 1995, are payable $137,328 in
1996 and $68,664 in 1997.
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, 1995 and 1994.
Page 22
<PAGE> 23
NOTE 8 QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data of the Company are presented below for the
years ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
Income Net Income
1995 from Income (Loss)
Quarter Revenues Operations (Loss) Per Share
- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
March 31 $ 472,000 $ 113,000 $ (101,000) $ (.02)
June 30 687,000 180,000 (9,000) (.00)
September 30 620,000 247,000 92,000 .01
December 31 581,000 34,000 (119,000) (.02)
----------- ----------- ----------- -----------
$ 2,360,000 $ 574,000 $ (137,000) $ (.02)
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Income Net Income
1994 from Income (Loss)
Quarter Revenues Operations (Loss) Per Share
- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
March 31 $ 461,000 $(2,342,000) $(2,075,000) $ (.52)
June 30 480,000 191,000 (110,000) (.02)
September 30 505,000 257,000 99,000 .02
December 31 443,000 (894,000) (1,047,000) (.26)
----------- ----------- ----------- -----------
$ 1,889,000 $(2,788,000) $(3,133,000) $ (.78)
=========== =========== =========== ===========
</TABLE>
NOTE 9 RETIREMENT BENEFITS
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 may contribute up to 15% of their pre-tax compensation. The
Company's matching contributions were generally limited to 10% of each plan
participant's compensation for the year ended December 31, 1993. 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, $16,000 and $25,000 in 1995, 1994 and 1993, respectively.
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.
NOTE 10 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:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(in thousands)
<S> <C> <C>
Proved properties $ 20,530 $ 3,544
Unproven properties 15 22
Less accumulated depreciation
and depletion (2,848) (2,377)
---------- ----------
Total $ 17,697 $ 1,189
---------- ----------
</TABLE>
The Company's share of oil and gas revenues produced from its royalty interests
was $169,000, $170,000 and $240,000 for the years ended December 31, 1995,
1994, and 1993, respectively.
Page 23
<PAGE> 24
The Company incurred the following costs in oil and gas activities for the
year ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Property acquisition costs
Proved $18,009 $ -- $ --
Unproved 873 115 258
Exploration costs 214 657 962
Development cost 248 225 192
------- ------- -------
Total costs incurred $19,334 $ 997 $ 1,412
------- ------- -------
</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 independent petroleum
engineering firms.
<TABLE>
<CAPTION>
Domestic Canadian Total
-------------------------- ------------------------- --------------------------
Oil Gas Oil Gas Oil Gas
Proved Reserves (Barrels) (MCF) (Barrels) (MCF) (Barrels) (MCF)
- --------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 852,879 1,870,656 -- -- 852,879 1,870,656
Extensions, discoveries and other additions 500 131,019 -- -- 500 131,019
Revisions of previous estimates (268,785) (216,876) -- -- (268,785) (216,876)
Production (110,108) (545,942) -- -- (110,108) (545,942)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1993 474,486 1,238,857 -- -- 474,486 1,238,857
Extensions, discoveries and other 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 other 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
=========== =========== =========== =========== =========== ===========
Proved Developed Reserves
Balance, December 31, 1993 474,486 1,238,857 0 0 474,486 1,238,857
Balance, December 31, 1994 228,196 786,060 0 0 228,196 786,060
Balance, December 31, 1995 687,401 20,644,438 868,495 5,786,239 1,555,896 26,430,677
</TABLE>
The revisions in the Company's estimated reserves in 1993 and 1994 were
primarily the result of downward adjustment to the Company's oil and gas
properties in HUB, Bandera, Stateline and Cascade Deep. Production from these
fields was substantially below those projected by the Company's independent
petroleum engineering firm, resulting in the downward adjustments.
Page 24
<PAGE> 25
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 independent petroleum engineering
firms. 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)
<TABLE>
<CAPTION>
1995
--------------------------------
U.S. Canada Total 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Future cash inflows $ 53,075 $ 21,063 $ 74,138 $ 4,891 $ 9,113
Future production and development costs (12,827) (9,520) (22,347) (1,412) (2,705)
Future income taxes (9,165) (1,938) (11,103) (697) (1,058)
-------- -------- -------- -------- --------
Future net cash flows 31,083 9,605 40,688 2,782 5,350
10% Annual discount (13,793) (2,295) (16,088) (448) (1,315)
-------- -------- -------- -------- --------
Standardized measure of discounted
future net cash flows $ 17,290 $ 7,310 $ 24,600 $ 2,334 $ 4,035
======== ======== ======== ======== ========
<CAPTION>
1995
--------------------------------
U.S. Canada Total 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Standardized measure -- Beginning of year $ 2,334 $ -- $ 2,334 $ 4,035 $ 6,036
Oil and gas sales, net of production costs (1,388) -- (1,388) (1,199) (2,338)
Sales of reserves in place -- -- -- -- --
Purchases of reserves in place 17,281 8,065 25,346 -- --
Net changes in prices, net of production costs (73) -- (73) (78) (374)
Extensions and discoveries 14 -- 14 810 169
Revisions to previous quantity estimates (390) -- (390) (1,835) (1,783)
Net change in income taxes 1,556 (755) 801 -- 1,008
Accretion of discount 284 -- 284 454 755
Changes in estimated future development costs 230 -- 230 27 542
Changes in production rates and other (2,558) -- (2,558) 120 20
-------- -------- -------- -------- --------
Standardized measure -- end of year $ 17,290 $ 7,310 $ 24,600 $ 2,334 $ 4,035
======== ======== ======== ======== ========
</TABLE>
Page 25
<PAGE> 26
NOTE 11 LONG TERM DEBT AND NOTE PAYABLE BANK
On December 20, 1995, the Company entered into a credit facility consisting of
a secured reducing revolving line of credit with an initial borrowing base of
$12,500,000 ("Revolver Note") and a term note for $3,500,000 ("Term Note"). The
Term Note matures on July 1, 1996. The borrowing base of the Revolver Note
reduces by $215,000 per month commencing January 1, 1996, and is reviewed by
the bank semi-annually until maturity on June 1, 1998. 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, 1995, the Company has borrowed
$11,715,000 under the Revolver Note leaving an unfunded commitment of $785,000.
The Term Note bears an interest rate of the lending banks prime rate plus two
percent, floating. The Revolver Note bears interest at the Company's option, of
either prime rate floating or at the LIBOR rate plus two and one-half percent.
Upon payment of the Term Note, the LIBOR rate on the Revolver Note is reduced
to LIBOR plus two and one-quarter percent. The Revolver Note is payable
$1,795,000 in 1996, $2,580,000 in 1997, and $7,340,000 in 1998.
The loans are cross-collateralized by substantially all of the assets of the
Company and its subsidiaries. The credit facility contains certain covenants
relating to the Company's financial condition.
Page 26
<PAGE> 27
PART III
ITEMS 9 THROUGH 12 of this Part III are omitted since the Company expects to
file with the Securities and Exchange Commission within 120 days after the
close of its fiscal year ended December 31, 1995 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. If, for any reason, such proxy
statement is not filed within such period, this Form 10-KSB will be
appropriately amended.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.1 Amended and Restated Articles of Incorporation of
the Company (incorporated herein by reference to
Exhibit (a) (3) (a) of Item 14, Part IV of the
Company's Annual Report on Form 10-K filed for the
year ended December 31, 1989).
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
annual report on Form 10-K for year ended December
31, 1994).
10.2 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 annual
report on Form 10-K for year ended December 31,
1994).
10.3 Severance Agreement between Phinn W. Townsend and
Southern Mineral Corporation dated December 28, 1994
(incorporated by reference to Exhibit (j) to annual
report on Form 10-K for year ended December 31,
1994).
10.4 Southern Mineral Corporation 1995 Non-employee
Director Compensation Plan (incorporated by
reference to Exhibit (k) to a current report on Form
10-K filed on March 23, 1995.)
10.5 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).
10.6 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).
10.7 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,
Page 27
<PAGE> 28
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).
10.8 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).
10.9 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).
10.10 1996 Stock Option Plan.
10.11 1996 Employee Stock Purchase Plan.
10.12 Joint Venture Agreement, dated October 1, 1995, between
Southern Mineral Corporation and The Links Group, Inc.
10.13 Option Agreement, dated January 5, 1996, between Southern
Mineral Corporation and Diasu Oil & Gas Company, Inc.
covering the exploration joint venture.
10.14 Stock Option Agreement dated April 6, 1995, between
Southern Mineral Corporation and Robert R. Hillery.
10.15 Subscription Agreement and Assumption of Obligations,
dated January 5, 1995, between the Southern Mineral
Corporation and Gary L. Chitty, and Thomas J McMinn (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 Company None Texas
Venture Resources, Inc. None Texas
Venture Pipeline Company None Texas
Venture Processing Company None Texas
Vengas Marketing Company None Texas
Venture Distribution Company None Texas
Vengas Pipeline Company None Texas
Spruce Hills Production Co. None Delaware
San Salvador Development Company, Inc. None Texas
</TABLE>
23.1 Consent of Independent Certified Public Accountants.
27.1 Financial Data Schedule.
(b) Report on Form 8-K
None.
Page 28
<PAGE> 29
SIGNATURES
Pursuant to Requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SOUTHERN MINERAL CORPORATION
BY: /s/ Steven H. Mikel
----------------------------------------
Steven H. Mikel
President and Chief Executive Officer
February 10, 1997
Page 35
<PAGE> 30
INDEX TO EXHIBITS
3.1 Amended and Restated Articles of Incorporation of
the Company (incorporated herein by reference to
Exhibit (a) (3) (a) of Item 14, Part IV of the
Company's Annual Report on Form 10-K filed for the
year ended December 31, 1989).
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
annual report on Form 10-K for year ended December
31, 1994).
10.2 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 annual
report on Form 10-K for year ended December 31,
1994).
10.3 Severance Agreement between Phinn W. Townsend and
Southern Mineral Corporation dated December 28, 1994
(incorporated by reference to Exhibit (j) to annual
report on Form 10-K for year ended December 31,
1994).
10.4 Southern Mineral Corporation 1995 Non-employee
Director Compensation Plan (incorporated by
reference to Exhibit (k) to a current report on Form
10-K filed on March 23, 1995.)
10.5 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).
10.6 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).
10.7 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,
<PAGE> 31
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).
10.8 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).
10.9 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).
10.10 1996 Stock Option Plan.
10.11 1996 Employee Stock Purchase Plan.
10.12 Joint Venture Agreement, dated October 1, 1995, between
Southern Mineral Corporation and The Links Group, Inc.
10.13 Option Agreement, dated January 5, 1996, between Southern
Mineral Corporation and Diasu Oil & Gas Company, Inc.
covering the exploration joint venture.
10.14 Stock Option Agreement dated April 6, 1995, between
Southern Mineral Corporation and Robert R. Hillery.
10.15 Subscription Agreement and Assumption of Obligations,
dated January 5, 1995, between the Southern Mineral
Corporation and Gary L. Chitty, and Thomas J McMinn (filed
herewith).
21.1 Subsidiaries of the Company
<PAGE> 32
SUBSCRIPTION AGREEMENT AND ASSUMPTION OF OBLIGATIONS
THIS SUBSCRIPTION AGREEMENT AND ASSUMPTION OF OBLIGATIONS (the
"Subscription Agreement") made as of January ___, 1996, is by and among
SOUTHERN MINERAL CORPORATION, a Texas corporation ("Southern"), Gary L. Chitty,
an individual ("Chitty") and Thomas J. McMinn, an individual ("McMinn", Chitty
and McMinn shall hereinafter be collectively referred to as "Investors").
PRELIMINARY MATTERS
1. Southern and Diasu have entered that certain Option Agreement
(the "Option Agreement"), executed contemporaneously with this Subscription
Agreement, which provides Southern with certain rights to participate in the
acquisition, development and marketing of certain properties acquired by Diasu
or its affiliates in the future.
2. Southern intends to issue and deliver certain shares of common
stock and warrants for common stock to Investors as consideration for Investors
providing certain covenants to Southern with respect to the performance by
Investors and Diasu pursuant to the Option Agreement.
3. In reliance on exemptions from the registration requirements of
the Securities Act of 1933, as amended (the "Securities Act"), and from
applicable state securities laws (the "Blue Sky Laws"), the Common Shares and
the First Warrant Shares (as each of these terms are hereinafter defined) will
be issued to Investors without registration under the Securities Act or
applicable Blue Sky Laws.
AGREEMENT
NOW THEREFORE, in consideration of the above recitals and the
benefits to be derived by each party under this Agreement, it is agreed as
follows:
ARTICLE I
SUBSCRIPTION
1.1 In consideration for the undertakings by McMinn and Chitty
hereunder, Southern agrees to issue and deliver the following each to McMinn
and Chitty respectively:
(a) 87,500 shares of common stock of Southern subject to the
restrictions and other attributes contained in the Registration Rights
Agreement attached hereto as Exhibit A (the "Common Shares"), such
shares to be issued and delivered to McMinn and Chitty on January 5,
1996; and
(b) a warrant, in a form substantially similar to that
attached hereto as Exhibit B, exercisable as provided below beginning on
or after January 5, 1996, for a period ending on the date five years
after the date hereof, to acquire 200,000 shares of common stock of
Southern at an exercise price of $2.00 per share, subject to the
restrictions and other attributes contained in the
<PAGE> 33
Registration Rights Agreement attached hereto as Exhibit A (the "First
Warrant Shares").
The Common Shares and First Warrant Shares shall sometimes be collectively
referred to as the "Shares."
ARTICLE II
COVENANTS
2.1 OBLIGATIONS PURSUANT TO THE OPTION AGREEMENT. McMinn and Chitty
each covenant:
(a) that the provisions of the Option Agreement shall also
bind each of McMinn and Chitty respectively and any business entity in
which McMinn or Chitty, directly or indirectly, (i) have an ownership
interest in or are entitled to receive an economic benefit from, and
(ii) are under either McMinn's or Chitty's control; and
(b) to cause Diasu to honor its obligations under the Option
Agreement.
2.2 REMEDIES FOR BREACH OF COVENANT. Southern agrees that the
damages resulting from a breach by either McMinn or Chitty of the covenants set
forth in this Article shall be limited to an amount of actual damages which
does not exceed the value of the Common Stock, First Warrant Shares and Second
Warrant Shares (as "SECOND WARRANT SHARES" are defined in the Option Agreement)
on the date of the breach.
ARTICLE III
REPRESENTATIONS OF INVESTORS
3.1 REPRESENTATIONS OF INVESTORS. Investors each hereby represent,
jointly and severally, to Southern that:
(a) INVESTMENT REPRESENTATION. Each Investor possesses such
knowledge and experience in financial matters that it is capable of
evaluating the merits and risks of its investment hereunder. Each
Investor is acquiring the Common Shares and the First Warrant Shares for
its own accounts, for investment purposes only and not with a view to
the distribution thereof.
(b) ADEQUATE INFORMATION. Southern has made available and
Investors have reviewed Southern's (i) annual report on Form 10-K for
the fiscal year ended December 31, 1994, (ii) quarterly report on Form
10-Q for the fiscal
2
<PAGE> 34
quarter ended March 31, 1995, (iii) quarterly report on Form 10-Q for
the fiscal quarter ended June 30, 1995, and (iv) such information which
Investors consider necessary or appropriate to evaluate the risks and
merits of an investment in the Shares (collectively, the "Investment
Information").
(c) OPPORTUNITY TO QUESTION.
(i) Investors have had the opportunity to question, and
have questioned, to the extent deemed necessary or appropriate,
representatives of Southern so as to receive answers and verify
information obtained in Investor's examination of Southern,
including the Investment Information and any other documents or
information that Investors have reviewed in relation to
Investor's investment in the Shares.
(ii) No oral or written representations have been made or
oral or written information furnished to Investors in connection
with Investors' acquisition of the Shares which were in any way
inconsistent with the Investment Information. Without limiting
the generality of the foregoing, Investors acknowledge and agree
that Southern makes no representations or warranties as to (1)
the amount of oil, gas, petroleum, condensate, or other reserves
attributable to any properties owned by Southern as of the date
of this Subscription Agreement (the "Southern Properties") or (2)
any geological, geophysical, engineering, economic, or other
interpretations, forecasts, or evaluations.
(iii) In determining to acquire the Common Shares and the
First Warrant Shares, Investors have made their own
investigation, analysis, and evaluation of the properties owned
by Southern (including, without limitation, limited visual
on-site, inspection of the surface of the Southern Properties,
and based thereon and on the representations, warranties,
covenants and agreements made by Southern in this Subscription
Agreement, Investors have formed an independent judgement
concerning Southern, its business assets (including its own
estimate and appraisal of the extent and value of its oil and gas
reserves), liabilities, financial condition, results of
operations, and prospects and the inherent risks associated
therewith.
(d) FINANCIAL CONDITION. Investors' financial condition and
income are such that: (i) Investors are under no present need to dispose
of any portion of the Shares to satisfy any existing or contemplated
undertaking or debt, and (ii) Investors are able to bear the economic
risk of investment in the Shares,
3
<PAGE> 35
including the risk of losing its entire investment and the risk of not
being able to sell or transfer any of the Shares for an indefinite
period of time.
(e) RESTRICTED SECURITIES.
(i) Investors understand that they may be required to
bear the economic risk of investment in the Shares for an
indefinite period of time because the Shares may not, without
full compliance with the registration and prospectus delivery
requirements of the Securities Act, be offered, sold or delivered
except in a transaction exempt from, or not subject to, the
registration and prospectus delivery requirements of the
Securities Act.
(ii) Investors will not transfer or pledge any or all of
the Shares in violation of the Securities Act or any applicable
Blue Sky Laws and if Investors pledge any of the Shares,
Investors will advise the pledgee of the transfer restrictions
imposed on the Shares by this Agreement and will use their best
efforts to obtain an undertaking from such pledgee not to
transfer such Shares in violation of the Securities Act or
applicable Blue Sky Laws.
(iii) The certificates from time to time evidencing the
Shares may, at Southern's option, bear a legend which provides
that the Shares may not be transferred unless Southern is
delivered a legal opinion, satisfactory to Southern in its sole
discretion, to the effect that such transfer may be made without
compliance with the registration and prospectus delivery
requirements of the Securities Act and applicable Blue Sky Laws.
Such legal opinion shall be given by counsel satisfactory to
Southern, at Investors' expense.
ARTICLE IV
MISCELLANEOUS
4.1 EXHIBITS. All Exhibits attached hereto are hereby incorporated
and made a part hereof as if set forth herein in full.
4.2 COUNTERPARTS. This Subscription Agreement may be executed in two
or more counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument.
4.3 ENFORCEABILITY. In the event any one or more provisions
contained in this Subscription Agreement, the Exhibits attached hereto, or the
documents to be executed
4
<PAGE> 36
hereunder shall, for any reason be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provision.
4.4 GOVERNING LAW. THIS SUBSCRIPTION AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED, CONSTRUED, AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCEPT FOR ANY LAWS CALLING FOR
APPLICATION OF THE LAWS OF ANOTHER STATE. ANYTHING HEREIN TO THE CONTRARY
NOTWITHSTANDING, NO PARTY SHALL BE LIABLE TO THE OTHER FOR INDIRECT,
CONSEQUENTIAL OR EXEMPLARY OR PUNITIVE DAMAGES. THE PARTIES AGREE THAT ANY
LITIGATION RELATING DIRECTLY OR INDIRECTLY TO THIS AGREEMENT MUST BE BROUGHT
BEFORE AND DETERMINED BY A COURT OF COMPETENT JURISDICTION WITHIN THE STATE OF
TEXAS.
4.5 THIRD PARTIES. Nothing in this Subscription Agreement shall
entitle any party other than Buyer and Seller to any claim, cause of action,
remedy or right of any kind.
4.6 PUBLICITY. All announcements and publicity relating to the
transactions described herein shall be subject to the approval of both parties.
4.7 NOTICES. All communications required or permitted under this
Agreement shall be in writing, and any communications hereunder shall be deemed
to have been duly made if delivered by hand, overnight delivery services or
telecopies, or when placed in first class certified mail, postage prepaid, with
return receipt requested to the following addresses:
If to Investors:
Gary L. Chitty and Thomas J. McMinn
c/o Diasu Oil & Gas Co., Inc.
4420 F.M. 1960 W., Suite 400
Houston, Texas 77068
Fax: 713/537-9153
Attention: Gary L. Chitty or Thomas J. McMinn
If to Southern:
Southern Mineral Corporation
500 Dallas Avenue, Suite 2800
Houston, Texas 77002
Fax: 713/658-9447
Attention: Steven H. Mikel
5
<PAGE> 37
Either party may, by written notice so delivered to the other, change the
address to which delivery shall thereafter be made.
[NEXT PAGE IS SIGNATURE PAGE]
6
<PAGE> 38
EXECUTED by each party as of the date first above written but
effective for all purposes an of the Effective Time (as defined in the Purchase
Agreement).
SOUTHERN MINERAL CORPORATION
Attest:
By:
- ----------------------------------- ---------------------------------
Name: Steven H. Mikel, President
-----------------------
- -----------------------------------
Name:
-----------------------
INVESTORS:
THOMAS J. MCMINN
Attest:
By:
- ----------------------------------- ---------------------------------
Name:
-----------------------
- -----------------------------------
Name:
-----------------------
GARY L. CHITTY
Attest:
By:
- ----------------------------------- ---------------------------------
Name:
-----------------------
- -----------------------------------
Name:
-----------------------
<PAGE> 39
EXHIBIT A
Attached to and made a part of that certain Subscription Agreement and
Assumption of Obligations by and between Southern Mineral Corporation
and Diasu Oil & Gas Co., Inc. dated January ___, 1996.
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this Agreement) dated as of January
6, 1996, is by and among Southern Mineral Corporation, a Texas corporation (the
Company), Diasu Oil & Gas Co., Inc., a Texas corporation (Diasu), Thomas J.
McMinn and Gary L. Chitty (Diasu and Messrs. Chitty and McMinn collectively,
the Stockholders).
W I T N E S S E T H
A. On the date hereof, the Company and one or more of the
Stockholders have entered into that certain Subscription
Agreement and Assumption of Obligations and that Option
Agreement, both of even date herewith.
B. Pursuant to the agreements in paragraph A above, one of more of
the Stockholders shall own: (1) 175,000 shares (the First
Tranche Shares) of the Company's Common Stock (the First Tranche
Shares), par value [_______] (the Common Stock); (2) immediately
exercisable warrants to purchase 400,000 shares (the Second
Tranche Shares) of Common Stock at an exercise price of $2.00
exercisable for five years from the date hereof; and (3) warrants
to purchase 200,000 shares (the Third Tranche Shares) of Common
Stock at an exercise price of $2.00 exercisable for five years
from the date hereof, but not prior to the date on which Payout
No. 2 occurs under that certain SMC Development L.P. partnership
agreement of even date herewith.
C. In connection with the acquisition of the above Common Stock and
Warrants by the Stockholders, the Company has agreed to grant to
each Stockholder certain registration rights set forth below.
NOW, THEREFORE, in consideration of these premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by each Stockholder and the Company, the parties hereto agree as
follows:
SECTION 1
DEFINITIONS
1.1 SPECIFIC DEFINITIONS. The following terms are defined as
follows:
Affiliate - defined in Rule 12b-2 under the Exchange Act.
Exchange Act - the Securities Exchange Act of 1934, as amended.
Indemnified Party - defined in Section 5.3.
Indemnifying Party - defined in Section 5.3.
<PAGE> 40
Inspectors - defined in Section 3.1(l).
Loss or Losses - defined in Section 5.1.
person - any business entity (including, without limitation, a
corporation, partnership (limited or general), limited liability company or
business trust) or a natural person.
Prospectus - defined in Section 5.1.
register, registered and registration and words of similar import refer
to a registration effected by preparing and filing with the SEC a registration
statement in compliance with the Securities Act, and the declaration and
ordering by the SEC of effectiveness of such registration statement or
document.
Registerable Common Stock - any of the Restricted Common Stock issued to
the Stockholders (or their permitted assigns), and any securities issued or
issuable in respect of any Registerable Common Stock by way of any stock split
or stock dividend or in connection with any combination of shares,
recapitalization, merger, consolidation, reorganization or otherwise.
Registerable Common Stock shall not include Restricted Common Stock a
Stockholder has held for more than three years.
Restricted Common Stock - the: (i) First Tranche Shares, (ii) Second
Tranche Shares once such shares have been issued to the applicable Stockholder
pursuant to the exercise of the applicable overlying stock warrants, and (iii)
Third Tranche Shares once such shares have been issued to the applicable
Stockholder pursuant to the exercise of the applicable overlying stock
warrants.
SEC - the United States Securities and Exchange Commission.
Securities Act - the Securities Act of 1933, as amended.
SECTION 2
REGISTRATION RIGHTS
2.1 PIGGYBACK REGISTRATION RIGHTS. If at any time or from time to
time the Company shall propose to register any Common Stock for public sale
under the Securities Act, the Company shall give each Stockholder prompt
written notice of the proposed registration and shall include in such
registration on the same terms and conditions as the other securities included
in such registration such number of shares of Registerable Common Stock as any
Stockholder shall request within 15 business days after the giving of such
notice; provided, however, that the Company may at any time prior to the
effectiveness of any such registration statement, in its sole discretion and
without the consent of Stockholders, abandon the proposed offering in which a
Stockholder had requested to participate; and provided further that any
Stockholder shall be entitled to withdraw any or all of its shares of
Registerable Common Stock to be included in a registration statement under this
Section 2.1 at any time prior to the date on which the registration statement
with respect to such shares of Registerable Common Stock is declared effective
by the SEC. The Company shall be entitled to select the investment bankers
and/or managers, if any, to be retained in connection with any registration
referred to in this Section 2.1.
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<PAGE> 41
2.2 RESTRICTIONS ON PIGGYBACK REGISTRATION RIGHTS. Notwithstanding
anything to the contrary contained elsewhere herein, the registration rights
granted to Stockholders in Section 2.1 are expressly subject to the following
terms and conditions:
(a) The Company shall not be obligated to include the number of
shares of Registerable Common Stock in an offering as contemplated by Section
2.1 if the Company is advised in writing by the managing underwriter or
underwriters of such offering (with a copy to each Stockholder), that the
success of such offering would in its or their good faith judgment be
jeopardized by the inclusion of such number (or a portion of such number) of
shares (after consideration of all relevant factors, including without
limitation, the impact of any delay caused by including such shares).
(b) The Company shall not be obligated to include any shares of
Registerable Common Stock in any registration by the Company of any Common
Stock in connection with any merger, acquisition, exchange offer, or any other
business combination, including any transaction within the scope of Rule 145
promulgated pursuant to the Securities Act, subscription offer, dividend
reinvestment plan or stock option or other director or employee incentive or
benefit plan.
(c) The Company shall use all commercially reasonable efforts to
cause the managing underwriter or underwriters of a proposed underwritten
offering to permit the Registerable Common Stock requested to be included in a
registration of Company Common Stock pursuant to this Section 2 to be included
on the same terms and conditions as any similar securities included therein.
Notwithstanding the foregoing, the Company shall not be required to include any
Stockholder's Registerable Common Stock in such offering unless such
Stockholder accepts the terms of the underwriting agreement between the Company
and the managing underwriter or underwriters and otherwise complies with the
provisions of Section 5. If the managing underwriter or underwriters of a
proposed underwritten offering advise the Company in writing that in its or
their good faith judgment the total amount of securities, including securities
requested to be included in a registration of Company Common Stock pursuant to
this Section 2 and other similar securities, to be included in such offering is
sufficiently large to jeopardize the success of such offering, then in such
event the securities to be included in such offering shall be allocated first
to the Company and then, to the extent that any additional securities can, in
the good faith judgment of such managing Underwriter or Underwriters, be sold
without creating any such jeopardy to the success of such offering, pro rata
among each Person participating in the offering based upon the number of shares
of Common Stock requested to be included in such registration by each such
holder.
(d) If some but less than all of a Stockholder's shares of Restricted
Common Stock are included in an offering contemplated by a registration
statement pursuant to Section 2, such Stockholder shall execute one or more
"lockup" letters, in customary form, setting forth an agreement by such
Stockholder not to offer for sale, sell, grant any option for the sale of, or
otherwise dispose of, directly or indirectly, any shares of Common Stock, or
any securities convertible into or exchangeable into or exercisable for any
shares of Common Stock, for a period of not longer than that which any
investment banker or manager engaged in connection with such offering may
reasonably request from the date such offering commences.
2.3 SHELF REGISTRATION RIGHTS. Upon receipt of a written request
from the Stockholders to register under the Securities Act (whether for
purposes of a public offering, an exchange offer or otherwise) all or part of
the Registerable Common Stock held by the Stockholders, the Company shall as
expeditiously as reasonably possible (but in any event not later than 60 days
after receipt of such request) prepare and file, and use its best efforts to
cause to become effective as soon thereafter as practicable, a registration
statement under the Securities Act on Form S-3 with respect to the shares of
Registerable
- 3 -
<PAGE> 42
Common Stock; provided that the Company shall have no obligation to file a
registration statement if Form S-3 is unavailable to the Company. The Company
shall use its commercially reasonable efforts to have such registration
statement remain continuously effective until the first anniversary of the date
such registration statement is effective. During the period that such
registration statement is effective, it shall be available for use by the
Stockholders only for a period of 30 days following a filing of the Company of
(i) a quarterly report on Form 10-Q or (ii) an annual report on Form 10-K.
Notwithstanding the foregoing, the Company may suspend effectiveness of such
registration statement from time to time at any time upon the good faith
determination of the Company's board of directors, or the executive committee
thereof, that such action is desirable in connection with any proposed
acquisition, transaction, offering of the Company's securities, or other
matters; provided that if the Company suspends such effectiveness, then the
Company shall use its commercially reasonable efforts to keep such registration
statement effective starting one year from the date of initial effectiveness of
such registration statement for the amount of days such registration
statement's effectiveness was suspended by the Company.
2.4 RESTRICTIONS ON SHELF REGISTRATION RIGHTS. Notwithstanding
anything to the contrary contained elsewhere herein, the registration rights
granted to the Stockholders in Section 2.3 are expressly subject to the
following terms and conditions:
(a) The Stockholders, collectively, shall only be entitled to one
request to register Registerable Common Stock under Section 2.3. A "request"
as it is used in this Section 2.4(a) shall be deemed to have occurred only upon
completion of a requested registration and the maintenance of the registration
statement's effectiveness for an aggregate of one year.
(c) The Company shall be entitled to defer for a reasonable period of
time, but not in excess of 90 days, the filing of any registration statement
otherwise required to be prepared and filed by it under Section 2.3 if the
Company notifies the Stockholders within 10 business days after they requested
registration under Section 2.3 that the Company (i) is at such time conducting
or about to conduct an underwritten public offering of its securities for its
own account and the Board of Directors determines in good faith that such
offering would be materially adversely affected by such registration requested
by the Stockholders or (ii) would, in the opinion of its counsel, be required
to disclose in such registration statement information not otherwise then
required by law to be publicly disclosed and, in the good faith judgment of the
Board of Directors, such disclosure might adversely affect any material
business transaction or negotiation in which the Company is then engaged.
(d) The Stockholders shall not exercise their rights pursuant to
Section 2.3 during the 180-day period immediately following the effective date
of any registration statement filed by the Company under the Securities Act
(other than on Form S-8 or another similar form) in respect of an offering or
sale of securities of the Company by or on behalf of the Company or any other
stockholder of the Company.
SECTION 3
COVENANTS
3.1 COVENANTS OF THE COMPANY. In connection with any offering of
shares of Registerable Common Stock pursuant to this Agreement, the Company
shall:
(a) Prepare and file with the Commission such amendments and
post-effective amendments to the registration statement as may be necessary to
keep the registration statement effective for a period of not less than 120
days, or such shorter period which will terminate when all Registrable Common
Stock covered by such registration statement have been sold or withdrawn at the
request of participating holders
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<PAGE> 43
of Common Stock; and cause the prospectus to be supplemented by any required
prospectus supplement, and as so supplemented to be filed pursuant to Rule 424
under the Securities Act;
(b) Furnish to each Stockholder and to each managing underwriter, if
any, (i) at least two business days prior to filing with the SEC, a
substantially complete draft of a registration statement covering shares of
Registerable Common Stock, any amendment or supplement thereto, and any
prospectus used in connection therewith, which documents will be subject to the
reasonable review of such Stockholders and such underwriter; and (ii) if
requested, a copy of any and all transmittal letters or other correspondence
with the SEC or any other body having jurisdiction (including any domestic or
foreign securities exchange) relating to such offering of shares of
Registerable Common Stock;
(c) Furnish to each Stockholder and each managing underwriter, if
any, such number of copies of such registration statement, each amendment and
supplement thereto (in each case including all exhibits thereto and documents
incorporated by reference therein) and the prospectus included in such
registration statement (including each preliminary prospectus and prospectus
supplement) as such Stockholder or such underwriter may reasonably request to
facilitate the sale of the shares of Registerable Common Stock;
(d) After the filing of such registration statement, promptly notify
each Stockholder of any stop order issued or, to the knowledge of the Company,
threatened to be issued by the SEC and promptly take all reasonable actions to
prevent the entry of such stop order or to obtain its withdrawal if entered;
(e) Use its commercially reasonable efforts to qualify such shares of
Registerable Common Stock for offer and sale under the securities, "blue sky"
or similar laws of such jurisdictions (including any foreign country or any
political subdivision thereof in which shares of Common Stock are then listed)
as any Stockholder or any underwriter shall reasonably request and use its
commercially reasonable efforts to obtain all appropriate registrations,
permits and consents required in connection therewith, except that the Company
shall not for any such purpose be required to qualify generally to do business
as a foreign corporation in any jurisdiction wherein it is not so qualified, or
to subject itself to taxation or to file a general consent to service of
process in any such jurisdiction;
(f) Furnish to each managing underwriter, if any, an opinion of
counsel for the Company addressed to each of them, dated as of the date of the
closing of the offering of shares of Registerable Common Stock, and a "comfort"
letter or letters signed by the Company's independent public accountants, each
in reasonable and customary form and covering such matters of the type
customarily covered by opinions or comfort letters delivered by such parties in
underwritten public offerings;
(g) Furnish unlegended certificates representing ownership of the
shares of Registerable Common Stock being sold in such denominations as shall
be requested by a Stockholder or the managing underwriter, if any, provided
such request is made at least two business days prior to the closing of the
sale of such shares;
(h) Promptly inform each Stockholder (i) in the case of any offering
of shares of Registerable Common Stock in respect of which a registration
statement is filed under the Securities Act, of the date on which such
registration statement or any post-effective amendment thereto becomes
effective and, if applicable, of the date of filing a Rule 430A prospectus
(and, in the case of an offering abroad of shares of Registerable Common Stock,
of the date when any required filing under the securities and other laws of
such foreign jurisdictions shall have been made and when the offering may be
commenced in accordance with such laws) and (ii) of any request by the SEC, any
securities exchange, government agency, self-regulatory body or other body
having jurisdiction for any amendment of or supplement to any registration
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<PAGE> 44
statement or preliminary prospectus or prospectus included therein or any
offering memorandum or other offering document relating to such offering;
(i) Subject to subparagraph (k) below, until the earlier of (i) such
time as all of the shares of Registerable Common Stock being offered have been
disposed of in accordance with the intended method of disposition by such
Stockholder set forth in the registration statement or other offering document
(and the expiration of any prospectus delivery requirements in connection
therewith) or (ii) the expiration of four months after such registration
statement or other offering document becomes effective (unless the offering is
a continuous offering of securities under Rule 415, in which case until the
earliest of the date the offering is completed and the 12-month anniversary of
such effective date), keep effective and maintain any registration,
qualification or approval obtained in connection with the offering of the
shares of Registerable Common Stock, and amend or supplement the registration
statement or prospectus or other offering document used in connection therewith
to the extent necessary to comply with applicable securities laws;
(j) Use its commercially reasonable efforts to have the shares of
Registerable Common Stock listed on any domestic and foreign securities
exchanges on which the Common Stock is then listed;
(k) As promptly as practicable, notify each Stockholder at any time
when a prospectus relating to the sale of the shares of Registerable Common
Stock is required by law to be delivered in connection with sales by an
underwriter or dealer, of the occurrence of an event requiring the preparation
of a supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such shares, such prospectus will not contain an
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statement therein, in light of
the circumstances under which they were made, not misleading, and as promptly
as practicable make available to each Stockholder and to each managing
underwriter, if any, any such supplement or amendment; if the Company shall
give such notice, the Company shall extend the period during which such
registration statement shall be maintained effective as provided in Section
3.1(i) by the number of days during the period from and including the date of
the giving of such notice to the date when the Company shall make available to
each Stockholder such supplemented or amended prospectus;
(l) Make available for inspection during the normal business hours of
the Company by any Stockholder, any underwriter participating in such offering,
and any attorney, accountant or other agent retained by any such Stockholder or
any such underwriter in connection with the sale of shares of Registerable
Common Stock (collectively, the "Inspectors), all relevant financial and other
records, pertinent corporate documents and properties of the Company as shall
be reasonably necessary to enable them to exercise their due diligence
responsibility, and cause the officers, directors and employees of the Company
to supply all information reasonably requested by any such Inspector in
connection with such registration statement; provided, however, that (i) in
connection with any such inspection, any such Inspectors shall cooperate to the
extent reasonably practicable to minimize any disruption to the operation by
the Company of its business and (ii) any records, information or documents
shall be kept confidential by such Inspectors, unless (1) such records,
information or documents are in the public domain or otherwise publicly
available or (2) disclosure of such records, information or documents is
required by a court or administrative order or by applicable law (including,
without limitation, the Securities Act);
(m) Enter into usual and customary agreements (including an
underwriting agreement in usual and customary form) and take such other actions
as are reasonably required to expedite or facilitate the sale of the
Registerable Common Stock.
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<PAGE> 45
(n) Make "generally available to its security holders" (within the
meaning of Rule 158 of the Securities Act) an earnings statement satisfying the
provisions of Section 11(a) of the Securities Act and Rule 158 thereunder no
later than 45 days after the end of the 12-month period beginning with the
first day of the Company's first fiscal quarter commencing after the effective
date of the registration statement, which earnings statement shall cover said
12-month period;
(o) If requested by the managing underwriter or underwriters or the
Stockholder, promptly incorporate in a prospectus supplement or post-effective
amendment such information as the managing underwriter or underwriters or any
participating Holder, as the case may be, reasonably requests to be included
therein, including, without limitation, information with respect to the number
of shares of Registerable Common Stock being sold by the Stockholder to any
underwriter or underwriters, the purchase price being paid therefor by such
underwriter or underwriters and with respect to any other terms of an
underwritten offering of the Registerable Common Stock to be sold in such
offering, and promptly make all required filings of such prospectus by
supplement or post-effective amendment;
(p) As promptly as practicable after filing with the SEC of any
document which is incorporated by reference in a prospectus contained in a
registration statement, deliver a copy of such document to each Stockholder;
and
(q) Take all other steps necessary to effect the registration of the
Registerable Common Stock contemplated hereby.
3.2 COVENANT OF STOCKHOLDERS. Each Stockholder agrees and covenants
that, upon receipt of any notice from the Company of the happening of any event
of the kind described in Section 3.1(k), such Stockholder will forthwith
discontinue disposition of Registerable Common Stock pursuant to the
registration statement covering such Registerable Common Stock until such
Stockholder's receipt of the copies of the supplemented or amended prospectus
contemplated by Section 3.1(k), and, if so directed by the Company, such
Stockholder will deliver to the Company all copies, other than permanent file
copies, then in such Stockholder's possession of the most recent prospectus
covering such Registerable Securities at the time of receipt of such notice.
SECTION 4
EXPENSES
All expenses incurred in connection with the registration of
Registerable Common Stock, including, without limitation, all filing fees,
escrow fees, fees and expenses of compliance with securities or blue sky laws
(including fees and disbursements of the Company's counsel in connection with
blue sky qualifications of the Registerable Common Stock), rating agency fees,
printing expenses, messenger and delivery expenses, internal expenses
(including, without limitation, all salaries and expenses of the Company's
officers and employees performing legal or accounting duties), the fees and
expenses incurred in connection with the listing of the securities to be
registered on each securities exchange on which similar securities issued by
the Company are then listed, and fees and disbursements of counsel for the
Company and the Company's independent certified public accountants (including
the expenses of any special audit or "cold comfort" letters required by or
incident to such performance) directly attributable to the registration of
securities, Securities Act liability insurance (if the Company elects to obtain
such insurance), and the fees and expenses of any special experts or other
persons retained by the Company will be borne by the Company in connection with
registrations under Section 2.1 and by the Stockholders in connection with
registrations under Section 2.3. The Company shall have no obligation to pay
and shall not pay any underwriting fees, discounts or commissions in connection
with any Registerable Common Stock registered
- 7 -
<PAGE> 46
pursuant to this Agreement or any out-of-pocket expenses of the Stockholders,
including, without limitation, legal fees, in connection therewith.
SECTION 5
INDEMNIFICATION
5.1 INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify
and hold harmless each Stockholder, its officers, directors and agents, and
will agree to indemnify and hold harmless any underwriter of Registerable
Common stock, and each person, if any, who controls any of the foregoing
persons within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act, from and against any and all losses, claims,
damages and liabilities (individually, a Loss; collectively, Losses) arising
from or caused by (x) any untrue statement or alleged untrue statement of a
material fact contained in any registration statement or prospectus relating to
the Registerable Common Stock (as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto) or any preliminary
prospectus, or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and (y) any violation or alleged violation by the
Company of the Securities Act, any blue sky laws, securities laws or other
applicable laws of any state in which shares of Registerable Common Stock are
offered and relating to action or inaction required of the Company in
connection with such offering; and will reimburse each such person for any
legal or other out-of-pocket expenses reasonably incurred in connection with
investigating, or defending against, any such Loss (or any proceeding in
respect thereof), subject to Section 5.3, except that the indemnification
provided for in this Section 5.1 shall not apply to Losses that are caused by
any such untrue statement or omission or alleged untrue statement or omission
based upon and in conformity with information furnished in writing to the
Company by or on behalf of any Stockholder expressly for use therein.
Notwithstanding the foregoing, the Company shall not be liable in any such case
to the extent that any such Loss arises out of, or is based upon, an untrue
statement or alleged untrue statement or omission or alleged omission made in
any preliminary prospectus if (i) a Stockholder failed to send or deliver a
copy of the prospectus included in the relevant registration statement at the
time it became effective (the Prospectus) with or prior to the delivery of
written confirmation of the sale of Registerable Common Stock to the person
asserting such Loss or who purchased such Registerable Common Stock which are
the subject thereof if, in either case, such delivery is required by the
Securities Act and (ii) the Prospectus would have corrected such untrue
statement or omission or alleged untrue statement or alleged omission; and the
Company shall not be liable in any such case to the extent that any such Loss
arises out of, or is based upon, an untrue statement or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact in the Prospectus, if such untrue statement or alleged untrue
statement or omission or alleged omission is corrected in any amendment or
supplement to the Prospectus and if, having previously been furnished by or on
behalf of the Company with copies of the Prospectus as so amended or
supplemented, a Stockholder thereafter fails to deliver such Prospectus as so
amended or supplemented prior to or concurrently with the sale of Registerable
Common Stock if such delivery is required by the Securities Act.
5.2 INDEMNIFICATION BY STOCKHOLDERS. Each Stockholder agrees to
indemnify and hold harmless the Company, its officers and directors, and each
person, if any, who controls the Company within the meaning of either Section
15 of the Securities Act or Section 20 of the Exchange Act to the same extent
as the indemnity made pursuant to clause (x) of Section 5.1 from the Company to
such Stockholder, but only with reference to information furnished in writing
by or on behalf of such Stockholder expressly for use in any registration
statement or prospectus relating to shares of Registerable Common Stock, or any
amendment or supplement thereto, or any preliminary prospectus.
- 8 -
<PAGE> 47
5.3 CONDUCT OF INDEMNIFICATION PROCEEDINGS. In case any proceeding
(including any governmental investigation) shall be instituted involving any
person in respect of which indemnity may be sought pursuant to Section 5.1 or
5.2, such person (the Indemnified Party) shall promptly notify the person
against whom such indemnity may be sought (the Indemnifying Party) in writing,
provided that the omission to so notify the Indemnifying Party will not relieve
the Indemnifying Party of any liability it may have under this Agreement or
otherwise except to the extent of any loss, damage, liability or expense
arising from such omission. The Indemnifying Party, upon the request of the
Indemnified Party, shall retain counsel reasonably satisfactory to such
Indemnified Party to represent such Indemnified Party and any others the
Indemnifying Party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any Indemnified Party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Party unless (i) the Indemnifying Party and the Indemnified
Party shall have mutually agreed to the retention (ii) the Indemnifying Party
shall have failed to comply with its obligations under the preceding sentence
or (iii) the Indemnified Party shall have been advised by its counsel in
writing that actual or potential differing interests exist between the
Indemnifying Party and the Indemnified Party. The Indemnifying Party shall not
be liable for any settlement of any proceeding effected without its written
consent, which consent shall not be unreasonably withheld. The Indemnifying
Party shall not agree to any settlement as the result of which any remedy or
relief, other than monetary damages for which the Indemnifying Party shall be
fully responsible, shall be applied to or against an Indemnified Party without
the prior written consent of such Indemnified Party.
5.4 CONTRIBUTION. If the indemnification provided for in this
Section 5 from the Indemnifying Party is unavailable to an Indemnified Party
hereunder in respect of any Losses referred to therein, then the Indemnifying
Party, in lieu of indemnifying such Indemnified Party, shall contribute to the
amount paid or payable by such Indemnified Party as a result of such Losses in
such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party and Indemnified Party in connection with the actions which
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations. The relative fault of such
Indemnifying Party and Indemnified Party shall be determined by reference to,
among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact, has been made by, or relates to information supplied by,
such Indemnifying Party or Indemnified Party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 5.3, any legal or
other fees or expenses reasonably incurred by such party in connection with any
investigation or proceeding. No party shall be liable for contribution with
respect to any action or claim settled without its written consent, which
consent shall not be unreasonably withheld.
Notwithstanding the provisions of this Section 5.4, no Stockholder shall
be required to contribute any amount in excess of the amount by which the total
price at which the Registerable Common Stock of such Stockholder was sold to
the public exceeds the amount of any damages which such Stockholder has
otherwise been required to pay due to such untrue or alleged untrue statement
or omission of alleged omission.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5.4 were determined by pro rata
allocation or by any other method of allocation which does not take into
account the equitable considerations referred to in the immediately preceding
paragraph. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
- 9 -
<PAGE> 48
SECTION 6
TERMINATION
This Agreement will terminate with respect to a specific Stockholder,
and it will terminate separately with respect to each Tranche of shares, such
that it terminates with respect to each Tranche at the first instance as such
Stockholder ceases to own any shares of Registerable Common Stock within such
Tranche. For this Section 6, a Stockholder shall be deemed to own any and all
Common Stock owned by (i) such Stockholder and (ii) its Affiliates.
Notwithstanding the foregoing, the Company and Stockholders' rights, duties and
obligations under Section 4 and Section 5 shall survive the termination of this
Agreement.
SECTION 7
AVAILABLE INFORMATION
The Company shall take such reasonable actions and file such
information, documents and reports as shall be required by the SEC as a
condition to the availability of Rule 144 and Rule 144A, or any successor
provisions.
SECTION 8
MISCELLANEOUS
8.1 PROVISION OF INFORMATION. Each Stockholder shall, and shall
cause it officers, directors, employees and agents to complete and execute all
such questionnaires as the Company shall reasonably request in connection with
any registration pursuant to this Agreement.
8.2 INJUNCTIONS. Irreparable damage would occur if any of the
provisions of this Agreement were not performed in accordance with its
specified terms or were otherwise breached. Therefore, the parties hereto
shall be entitled to an injunction or injunctions to prevent breaches of the
provisions of this Agreement and to enforce specifically the terms of
provisions hereof in any court having jurisdiction, such remedy being in
addition to any other remedy to which they may be entitled at law or in equity.
8.3 SEVERABILITY. If any term or provision of this Agreement is held
by a court of competent jurisdiction to be unenforceable, the remainder of the
terms and provisions set forth herein shall remain in full force and effect and
shall in no way be affected, impaired or invalidated, and the parties hereto
shall use their best efforts to, and request that a court of competent
jurisdiction, if involved, find and employ an alternative means to achieve the
same or substantially the same result as that contemplated by such term or
provision.
8.4 FURTHER ASSURANCES. Subject to the specific terms of this
Agreement, each Stockholder and the Company shall make, execute, acknowledge
and deliver such other instruments and documents, and take all such other
actions, as may be reasonably required to effectuate the purposes of this
Agreement and to consummate the transactions contemplated hereby.
8.5 ENTIRE AGREEMENT; MODIFICATION. This Agreement contains the
entire understanding of the parties with respect to the transactions
contemplated hereby and supersedes all agreements and understandings entered
into prior to the execution hereof. This Agreement may be modified only by a
written instrument duly executed by or on behalf of the parties hereto. No
breach of any covenant, agreement, warranty or representation shall be deemed
waived unless expressly waived in writing by or on behalf of the party who
might assert such breach.
- 10 -
<PAGE> 49
8.6 COUNTERPARTS. Any number of counterparts of this Agreement may
be executed by the parties hereto, but all such counterparts shall be deemed
one and the same instrument.
8.7 NOTICES. All notices, consents, requests, demands, and other
communications hereunder shall be in writing and shall be given by hand or by
mail (return receipt requested) or sent by overnight delivery service, cable,
telegram, or facsimile transmission to the parties at the address specified
beside each party's name on the signature pages hereto or at such other address
as shall be specified by the parties by like notice.
Notice so given shall, in the case of notice so given by mail, be deemed
to be given and received on the fourth business day after posting, in the case
of notice so given by overnight delivery service, on the day after notice is
deposited with such service, and in the case of notice so given by cable,
telegram, fax transmission or, as the case may be, personal delivery, on the
date of actual delivery.
8.8 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD
TO ANY CHOICE OF LAW PRINCIPLES.
8.9 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of and be enforceable by and against the successors
and permitted assigns of the parties hereto. The parties may not assign their
rights under this Agreement and the Company may not delegate its obligations
under this Agreement unless agreed to by all parties in writing. Any attempted
assignment or delegation prohibited hereby shall be void.
8.10 PARTIES IN INTEREST. Except as otherwise specifically provided
herein, nothing in this Agreement expressed or implied is intended or shall be
construed to confer any right or benefit upon any person, firm or corporation
other than Stockholder and the Company and their respective successors and
permitted assigns.
[NEXT PAGE IS SIGNATURE PAGE]
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<PAGE> 50
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the date first above written.
SOUTHERN MINERAL CORPORATION
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
THOMAS J. MCMINN
By:
-------------------------------------
Name: Thomas J. McMinn, individually
GARY L. CHITTY
By:
-------------------------------------
Name: Gary L. Chitty, individually
DIASU OIL & GAS CO., INC.
By:
-------------------------------------
Name: Thomas J. McMinn, President
<PAGE> 51
EXHIBIT B
Attached to and made a part of that certain Subscription Agreement and
Assumption of Obligations by and between Southern Mineral Corporation
and Diasu Oil & Gas Co., Inc. dated January ___, 1996.
WARRANT
For the Purchase of [_______] shares of
Common Stock, $[_______] Par Value,
of
SOUTHERN MINERAL CORPORATION
THIS CERTIFIES THAT, for value received, [_______] and its assigns
("Holder"), is entitled to purchase from Southern Mineral Corporation, a Nevada
corporation (the "Company"), up to the number of shares of the Company's common
stock, .01 par value per share (the "Common Stock"), specified above (such
number of shares as adjusted in accordance with this Agreement, the "Underlying
Shares") at a purchase price of $2.00 per share (the "Warrant Price") as
hereinafter provided. This Warrant shall be exercisable only during the period
(the "Exercise Period") commencing January 5, 1996 and ending January 5, 2001
(the "Expiration Date").
1. This Warrant may be exercised in whole or in part as herein
provided during the Exercise Period but not after the Expiration Date, by
presentation and surrender of this certificate at the Company's office with an
executed Exercise Notice (in the attached form) evidencing Holder's election to
purchase shares pursuant to the Warrant and accompanied by payment of the
Warrant Price for the number of shares for which exercise is made. If
exercised in part, a new Warrant Certificate in the same form as this
certificate shall be issued for the remaining unexercised portion of this
Warrant.
2. To the extent this Warrant is not exercised in whole prior to the
Expiration Date, the Warrant or such portion not exercised shall expire and
Holder's rights shall become null and void and of no effect.
3. The Company covenants and agrees that all shares which may be
delivered upon the exercise of this Warrant will, upon delivery, be fully paid
and nonassessable shares of stock, and free from all taxes, liens, and charges
with respect to the purchase thereof (other than transfer taxes or other
governmental charges imposed upon any transfer occurring contemporaneously with
such issue). Without limiting the generality of the foregoing, the Company
covenants and agrees that it will from time to time take all such action as may
be required to assure that the par value per share of the Common Stock is at
all times equal to or less than the then-current Warrant Price per share of the
Common Stock issuable pursuant to this Warrant. The Company further covenants
and agrees at all times to have authorized and reserved a sufficient number of
shares of Common Stock to cover the number of shares issuable upon the exercise
of the rights represented by this Warrant.
4. The purchase rights represented by this Warrant are exercisable
at Holder's option as provided herein; provided, however, that such purchase
rights shall not be exercisable with respect to a fraction of a share of Common
Stock. In lieu of issuing any fraction of a share remaining after exercise of
this Warrant as to all full shares covered hereby, the Company will make a
payment therefor in cash equal to the same fraction of the difference between
the then-current Warrant Price per share and the fair market value per share.
<PAGE> 52
5. The number of Underlying Shares and the Warrant Price per share
shall be subject to adjustment from time to time, prior to the expiration of
this Warrant by exercise or by its terms, as follows:
(a) If the Company shall subdivide the number of outstanding
shares of Common Stock into a greater number of shares, the Warrant
Price per Underlying Share in effect at the time of such action shall be
proportionately reduced and the number of Underlying Shares shall be
proportionately increased; and conversely, if the Company shall reduce
the number of outstanding shares of Common Stock by combining such
shares into a smaller number of shares, then, in such case, the Warrant
Price per Underlying Share in effect at the time of such action shall be
proportionately increased and the number of Underlying Shares shall be
proportionately decreased.
(b) If the Company shall pay a dividend or make a distribution
upon its Common Stock in shares of Common Stock, then in such case from
and after the record date for such action the Warrant Price per
Underlying Share shall be proportionately reduced, and the number of
Underlying Shares shall be proportionately increased. Any dividend paid
or distributed upon the Common Stock in stock of any other class or
securities convertible into shares of Common Stock shall be treated as a
dividend paid in Common Stock to the extent that shares of Common Stock
are or were issuable upon the conversion thereof.
(c) If the Company shall effect a capital reorganization or
reclassification of its outstanding Common Stock, or shall consolidate
or merge with or convey all or substantially all of its property and
assets to any other corporation or corporations, Holder shall be given
not less than ten (10) days prior written notice of the record date and
planned effective date of such event and of the terms and conditions of
such event as would enable a reasonable investor to determine whether or
not to exercise any part of this Warrant. Upon the occurrence of such
event, to the extent this Warrant is not exercised, Holder shall have
the right to purchase, upon the basis and on the terms and conditions
specified in this Warrant and in lieu of the Underlying Shares, such
share of stock, securities or assets as may be issued or payable with
respect to, or in exchange for, the number of shares of Common Stock
theretofore purchasable upon the exercise of this Warrant had such
reorganization, recapitalization, consolidation, merger or conveyance
not taken place, and in any such event appropriate provision shall be
made with respect to Holder's rights to the end that the provisions
hereof (including, without limitation, provisions for adjustment of the
Warrant Price and of the number of Underlying Shares) shall thereafter
be applicable, as nearly as reasonably may be, in relation to any stock,
securities, or assets thereafter deliverable upon the exercise hereof.
(d) Whenever the Warrant Price is adjusted, the number of
Underlying Shares shall be increased or decreased, as the case may be,
to reflect such adjustment in the Warrant Price so that the adjusted
exercise price times the adjusted number of shares of Common Stock
purchasable hereunder will equal the initial Warrant Price times the
initial number of shares of Common Stock purchasable hereunder.
(e) Upon the occurrence of any event requiring an adjustment
of the Warrant Price hereunder, the Company shall forthwith give written
notice thereof to the registered Holder stating the adjusted Warrant
Price and the adjusted number of Underlying Shares resulting from such
event and setting forth in reasonable detail the method of calculation
and the facts upon which such calculation is based.
2
<PAGE> 53
6. Except as otherwise herein provided, neither this Warrant nor any
of the rights granted hereunder shall be transferable after the date hereof.
Holder may sell, assign or transfer the Warrant, in whole or in part, so long
as the Company shall have first received an opinion of counsel satisfactory to
it that such sale, assignment or other transfer will not result in a violation
of any applicable law or regulation, state or federal. Upon such sale,
assignment or transfer, the Company shall issue new Warrant certificates in
such denominations and tenor as Holder shall request, in substitution for this
Warrant. The Company may deem and treat the registered holder of this Warrant
at any time as the absolute owner hereof for all purposes and shall not be
affected by any notice to the contrary. The Warrant represented by this
certificate and any shares of Common Stock issuable upon exercise hereof have
not been registered under the Securities Act or any state or foreign securities
laws. Holder, by acceptance hereof, agrees that this Warrant has been acquired
for investment and not with a view to distribution or resale, and may not be
mortgaged, pledged, hypothecated or otherwise transferred without an effective
registration statement for such Warrant under the Securities Act or an opinion
of counsel satisfactory to the Company that registration is not required under
the Securities Act. Any shares issued upon the exercise of this Warrant shall
bear the following legend:
The shares this certificate represents have not been registered
under the Securities Act of 1933, as amended (the "Act"), or
under any state securities laws. The shares may not be offered
for sale, sold, assigned, transferred or pledged without
registration under the Act and any applicable state securities
laws or without an opinion of counsel satisfactory to the Company
that registration is not required.
7. This Warrant shall not entitle Holder to any voting rights or
other rights as a stockholder of the Company, or to any other rights whatsoever
except the rights herein expressed, and no dividends shall be payable or accrue
in respect of this Warrant or the interest represented hereby or the shares
purchasable hereunder until or unless, and except to the extent that, this
Warrant shall be exercised.
8. If this Warrant is lost, stolen, mutilated or destroyed, the
Company shall, upon receipt of indemnification in form and substance
satisfactory to the Company in its sole discretion and in the case of a
mutilated Warrant, the surrender thereof, issue a new Warrant of like
denomination and tenor as, and in substitution for, this Warrant.
3
<PAGE> 54
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its duly authorized officer effective as of the date first set forth above.
SOUTHERN MINERAL CORPORATION
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
THE WARRANTS EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), AND SAID WARRANTS
MAY NOT BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED UNLESS THE SHARES ARE
REGISTERED UNDER THE ACT OR NATIONWIDE INTERACTIVE SERVICES, INC. SHALL
HAVE RECEIVED A WRITTEN OPINION OF COUNSEL SATISFACTORY TO IT THAT SUCH
SALE, ASSIGNMENT OR OTHER TRANSFER WILL NOT RESULT IN A VIOLATION OF ANY
APPLICABLE LAW OR REGULATION, STATE OR FEDERAL. TRANSFER OF THE
WARRANTS AND THE SHARES OF COMMON STOCK TO BE ISSUED UPON EXERCISE OF
THE WARRANTS IS PROHIBITED OTHER THAN IN ACCORDANCE WITH REGULATIONS
PROMULGATED UNDER THE ACT.
4
<PAGE> 55
The undersigned Holder of this Warrant hereby irrevocably exercises the
option to acquire the shares of Common Stock of Southern Mineral Corporation
covered by this Warrant, below designated, in accordance with the terms of this
Warrant, directs that the shares issuable and deliverable upon such exercise,
together with any check in payment for fractional shares be issued and
delivered to the Holder hereof.
-----------------------------
Name of Holder
- --------------------
Date
Number of shares as to
which Warrant Exercised:
-----
If shares of Common Stock are to be issued to any other person or in any
name other than the Holder hereof, then the Holder should indicate such person
and the number of shares of Common Stock to be received by such person in the
space below provided and provide to the Company an opinion of counsel
satisfactory to the Company that (i) such sale, assignment or other transfer to
such person shall not result in a violation of any applicable law or
regulation, state or federal, and (ii) no transfer or other taxes are or will
be due and payable to any governmental authority by reason of such sale,
assignment or other transfer, or issuance of shares of Common Stock to such
person as requested by Holder.
Name:
----------------------------------
Address:
-------------------------------
---------------------------------------
Shares of Common Stock:
---------------------------------------
