SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JULY 2, 1998
SOUTHERN MINERAL CORPORATION
(Exact name of registrant as specified in charter)
NEVADA
(STATE OR OTHER JURISDICTION OF INCORPORATION)
0-8043 36-2068676
(COMMISSION FILE NUMBER) (IRS EMPLOYER IDENTIFICATION NO.)
1201 Louisiana Street, Suite 3350, Houston, Texas 77002-5609
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (713) 658-9444
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT.)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On July 2, 1998, 779776 Alberta Ltd., a Canadian private corporation
incorporated under the Business Corporations Act (Alberta) and wholly owned
subsidiary of Southern Mineral Corporation, a Nevada corporation ("SMC"),
completed the cash tender offer (the "Acquisition") for all of the outstanding
common shares (the "Shares") of Neutrino Resources, Inc., a Canadian public oil
and gas corporation incorporated under the Business Corporations Act
("Neutrino"), pursuant to that certain Cash Offer by Alberta. Neutrino was
principally engaged in the business of acquiring petroleum and natural gas
rights and the exploration, development and production of petroleum and natural
gas in western Canada. The Shares were listed and posted for trading on the
Toronto Stock Exchange.
The terms and conditions of the Acquisition are more fully described
in the Cash Offer by Alberta, a copy of which is included as Exhibit 2.1 to this
Current Report on Form 8-K and is incorporated herein by reference.
The Company financed the acquisition with an advance under the
Company's credit facility with Compass Bank-Houston and First Union National
Bank.
This summary is qualified in its entirety by the May 29, 1998
Purchase and Sale Agreement between the Company and Sellers as filed as an
exhibit to the Form 8-K filed on July 17, 1998.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired.
(b) Pro Forma Financial Information.
(c) Exhibits.
2.1 Cash Offer by Alberta to purchase all
of the outstanding Common Shares of
Neutrino at a price of $1.80
(Canadian) per Common Share, dated May
29, 1998. (filed with original Form
8-K of Registrant dated July 2, 1998).
2.2 Consent of Arthur Andersen LLP (filed
herewith)
99.1 Joint Press Release, dated June 23,
1998, issued by SMC and Neutrino.
(filed with original Form 8-K of
Registrant dated July 2, 1998).
2
<PAGE>
INDEX TO FINANCIAL STATEMENTS
DESCRIPTION PAGE NUMBER
Report of Independent Public Accountants:
Arthur Andersen LLP 4
Financial Statements:
Consolidated Balance Sheets at June 30, 1998
(unaudited), December 31, 1997 and 1996 5
Consolidated Statements of Income and Retained
Earnings for the Six Months Ended June 30, 1998
and 1997 (unaudited) and the Year Ended December
31, 1997 and 1996 6
Consolidated Statements of Changes in Financial
Position for the Six Months Ended June 30, 1998
and 1997 (unaudited), and the Year Ended December
31, 1997 and 1996 7-8
Notes to the Consolidated Financial Statements
for the Six Months Ended June 30, 1998 and 1997
(unaudited), and the Year Ended December 31, 1997
and 1996 9-18
INDEX TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Selected Pro Forma Combined Financial Data 19
Unaudited Pro Forma Condensed Consolidated Statement
of Operations for the Year Ended December 31, 1997 20
Unaudited Pro Forma Condensed Consolidated Statement
of Operations for the Six Months Ended June 30, 1998 21
Unaudited Notes to Pro Forma Condensed Consolidated
Financial Statements 22
3
<PAGE>
ARTHUR ANDERSEN LLP
A U D I T O R S ' R E P O R T
TO THE BOARD OF DIRECTORS OF NEUTRINO RESOURCES INC.:
We have audited the consolidated balance sheets of Neutrino Resources Inc. as at
December 31, 1997 and 1996 and the consolidated statements of income and
retained earnings and changes in financial position for the years then ended.
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 an audit to obtain
reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31, 1997
and 1996 and the results of its operations and the changes in its financial
position for the years then ended in accordance with generally accepted
accounting principles in Canada.
Calgary, Alberta
March 6, 1998, except as to
Note 14 which is as of
July 3, 1998. Chartered Accountants
4
<PAGE>
Neutrino Resources Inc.
Consolidated Balance Sheets
ASSETS
<TABLE>
<CAPTION>
June 30, December 31, December 31,
1998 1997 1996
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Current Assets:
Cash ........................................................ $ -- $ -- $ 4,179,294
Accounts receivable ......................................... 4,916,365 8,605,638 2,972,755
Inventory ................................................... 77,599 36,793 54,583
Prepaid expenses ............................................ 532,972 335,028 167,302
----------- ----------- -----------
5,526,936 8,977,459 7,373,934
Investment in Bridgetown Energy Corporation (Note 3) ........... -- -- 116,000
Deferred charges (Notes 6 and 14) .............................. -- 209,829 269,738
Property, plant and equipment (Note 4) ......................... 61,342,261 57,988,567 21,541,495
----------- ----------- -----------
$66,869,197 $67,175,855 $29,301,167
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................................ $ 7,878,780 $11,160,688 $ 5,042,972
Current portion of long-term debt (Note 5) .................. -- -- 600,000
----------- ----------- -----------
7,878,780 11,160,688 5,642,972
----------- ----------- -----------
Long-term debt (Note 5) ........................................ 21,555,928 16,400,009 --
----------- ----------- -----------
Subordinate debentures (Notes 6 and 14) ........................ 5,285,000 5,285,000 5,000,000
----------- ----------- -----------
Site restoration ............................................... 1,233,680 1,003,904 670,590
----------- ----------- -----------
Shareholders' Equity:
Share capital (Note 7) ...................................... 28,520,085 28,520,085 15,666,330
Special warrants (Note 7) ................................... -- -- 420,000
Share exchange rights (Note 7) .............................. -- -- 200,000
Retained earnings ........................................... 2,395,724 4,806,169 1,701,275
----------- ----------- -----------
30,915,809 33,326,254 17,987,605
----------- ----------- -----------
$66,869,197 $67,175,855 $29,301,167
=========== =========== ===========
</TABLE>
Approved By The Board:
/s/ JAMES H. PRICE Director /s/ STEPHEN H. MICHAEL Director
The accompanying notes are an integral part of these
consolidated balance sheets.
5
<PAGE>
NEUTRINO RESOURCES INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Six months Six months
ended ended Year ended Year ended
June 30, June 30, December 31, December 31,
1998 1997 1997 1996
----------- ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Petroleum and natural gas .............. $ 8,818,808 $ 9,356,934 $ 21,073,036 $ 13,538,484
Royalties .............................. (1,341,397) (1,753,765) (3,730,907) (2,751,975)
Other .................................. 8,243 21,647 63,759 96,105
----------- ------------ ------------ ------------
7,485,654 7,624,816 17,405,888 10,882,614
----------- ------------ ------------ ------------
Expenses:
Operating .............................. 2,786,100 2,199,783 5,033,395 4,170,450
Depletion and depreciation ............. 3,086,383 2,041,954 5,372,119 2,650,054
General and administrative ............. 2,814,983 1,241,429 2,470,550 1,303,404
Provision for future site restoration .. 229,776 262,850 448,000 384,490
Interest on long-term debt (Note 5) .... 921,326 460,934 1,166,252 353,975
----------- ------------ ------------ ------------
9,838,568 6,206,950 14,490,316 8,862,373
----------- ------------ ------------ ------------
Income (loss) from operations ............. (2,352,914) 1,417,866 2,915,572 2,020,241
Equity income from investments ............ -- 18,000 23,000 15,653
Gain (loss) on sale of investments (Note 3) -- -- 228,000 (69,805)
----------- ------------ ------------ ------------
Income (loss) before provision for taxes .. (2,352,914) 1,435,866 3,166,572 1,966,089
Provision for taxes (Note 10) ............. 57,531 18,787 61,678 91,491
----------- ------------ ------------ ------------
Net income (loss) (Note 9) ................ (2,410,445) 1,417,079 3,104,894 1,874,598
Retained earnings (deficit),
beginning of period ....................... 4,806,169 1,701,275 1,701,275 (173,323)
----------- ------------ ------------ ------------
Retained earnings, end of period .......... $ 2,395,724 $ 3,118,354 $ 4,806,169 $ 1,701,275
=========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
NEUTRINO RESOURCES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
<TABLE>
<CAPTION>
Six months Six months Year Year
ended ended ended ended
June 30, June 30, December 31, December 31,
1998 1997 1997 1996
------------ ------------ ------------ -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash Provided By (Used In)
Operating Activities:
Net income (loss) .......................... $ (2,410,445) $ 1,417,079 $ 3,104,894 $ 1,874,598
Add (deduct) items not involving a
current cash outlay:
Depletion and depreciation .......... 3,086,383 2,041,954 5,372,119 2,650,054
Provision for future site restoration 229,776 262,850 448,000 384,490
Deferred charges .................... 209,829 31,828 59,909 --
Equity income from investments ..... -- (18,000) (23,000) (15,653)
(Gain) loss on sale of investments .. -- -- (228,000) 69,805
------------ ------------ ------------ -----------
Cash flow before net change in
working capital ......................... 1,115,543 3,735,711 8,733,922 4,963,294
Net change in working capital,
excluding cash .......................... 168,615 500,146 (318,291) 879,404
------------ ------------ ------------ -----------
Cash provided by operations ................ 1,284,158 4,235,857 8,415,631 5,842,698
------------ ------------ ------------ -----------
Financing Activities:
Proceeds on (repayment of) long-term
debt, net ........................... 5,155,919 17,795,381 12,150,009 (2,800,000)
Proceeds on (repayment of) subordinate
debentures .......................... -- (2,425,000) (2,425,000) 5,000,000
Shares issued for business acquisitions . -- 9,427,883 9,427,883 3,291,582
Shares, options and warrants issued
for cash ............................ -- 171,985 2,805,872 446,378
Share exchange rights ................... -- -- -- 200,000
Deferred charges ........................ -- -- -- (269,738)
Reduction to share capital for tax
benefits renounced .................. -- -- -- (171,475)
Share issue costs ....................... -- -- -- (21,547)
------------ ------------ ------------ -----------
5,155,919 24,970,249 21,958,764 5,675,200
------------ ------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE>
NEUTRINO RESOURCES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION (CONTINUED)
<TABLE>
<CAPTION>
Six months Six months Year Year
ended ended ended ended
June 30, June 30, December 31, December 31,
1998 1997 1997 1996
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Investing Activities:
Business acquisitions (Note 1) ......... $ -- $(20,000,000) $(20,000,000) $ (3,400,000)
Purchase of property, plant
and equipment ...................... (6,440,077) (13,385,317) (14,806,003) (13,961,334)
Proceeds on sale of property, plant
and equipment ...................... -- -- -- 7,559,362
Cash distributions from equity
investments ........................ -- -- -- 1,153
Site restoration expenditures .......... -- (83) (114,686) (57,745)
Reduction of property, plant and
equipment for tax benefits renounced -- -- -- 171,475
Proceeds on sale of investments ........ -- -- 367,000 500,000
------------ ------------ ------------ ------------
(6,440,077) (33,385,400) (34,553,689) (9,187,089)
------------ ------------ ------------ ------------
(Decrease) Increase in cash ............... -- (4,179,294) (4,179,294) 2,330,809
Cash, beginning of period ................. -- 4,179,294 4,179,294 1,848,485
------------ ------------ ------------ ------------
Cash, end of period ....................... $ -- $ -- $ -- $ 4,179,294
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
8
<PAGE>
NEUTRINO RESOURCES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND BUSINESS ACQUISITIONS
(A) BASIS OF PRESENTATION
On February 28, 1997, Neutrino Resources Inc. ("Neutrino" or "the
Company") acquired Dominion Explorers Inc. (Dominion). The
consolidated financial statements include the results of Dominion
from the acquisition date.
On November 26, 1996, 9038-2110 Quebec Inc. (a wholly-owned
subsidiary) acquired Avatar Energy Inc. ("Avatar"). The consolidated
financial statements include the results of 9038-2110 Quebec Inc.,
Avatar and Avatar's wholly-owned subsidiary Rico Resources Inc.
("Rico") from the date of acquisition to December 31, 1996 at which
time they were amalgamated into Neutrino.
The assets and liabilities of Dominion and Avatar were recorded using
the purchase method at their fair values as follows:
Dominion Avatar
Acquisition Acquisition
February 28, November 26,
1997 1996
------------ -----------
Current assets .......................... $ 2,723,052 $ 618,643
Property, plant and equipment ........... 27,013,188 4,371,745
Current liabilities ..................... (3,376,240) (890,388)
Revolving demand loan ................... (3,650,000) (500,000)
Debenture payable ....................... (2,710,000) --
Share exchange rights ................... -- (200,000)
------------ -----------
Total consideration ..................... $ 20,000,000 $ 3,400,000
============ ===========
Funded by:
Cash ............................... $ 3,572,117 $ 108,418
Long-term debt ..................... 7,000,000 --
Share capital (Note 7) ............. 9,427,883 3,291,582
------------ -----------
$ 20,000,000 $ 3,400,000
============ ===========
9
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PROPERTY, PLANT AND EQUIPMENT
The Company follows the full cost method of accounting for petroleum
and natural gas properties whereby all costs associated with the
acquisition of, exploration for and the development of oil and gas
reserves are capitalized. Costs capitalized include lease acquisition
costs, geological and geophysical expenditures, drilling productive
and non-productive wells and related plant and production equipment
costs. General and administrative expenses are not capitalized other
than to the extent of the Company's interest in Company operated
capital expenditure programs to which operator's fees have been
charged in accordance with standard industry operating agreements.
Proceeds from the sale of petroleum and natural gas properties reduce
capitalized costs without recognition of a gain or loss unless such a
sale would significantly alter the rate of depletion and
depreciation.
Petroleum and natural gas costs capitalized plus estimated future
development costs of proven undeveloped reserves are depleted and
depreciated using the unit of production method based upon proven
developed and undeveloped oil and gas reserves before royalties as
determined by independent engineers. For purposes of the calculation,
oil and gas reserves are converted to a common unit of measure on the
basis of six thousand cubic feet of gas to one barrel of oil.
Depreciation of office furniture and equipment is provided on a
declining balance basis at 20%.
In applying the full cost method, the Company performs a ceiling test
which restricts the net capitalized costs from exceeding an amount
equal to the estimated undiscounted value of future net revenues from
proven oil and gas reserves, based on current prices and costs, after
deducting estimated future general and administrative expenses,
financing costs, income taxes and site restoration costs.
Estimated future site restoration costs are provided using the unit
of production method over the life of proven reserves. Costs are
estimated by the Company based on current regulations, costs,
technology and industry standards. Site restoration expenditures
incurred are recorded as a reduction of the accumulated accrual.
(B) JOINT VENTURE ACCOUNTING
Substantially all of the Company's exploration and production
activities are conducted jointly with others and accordingly the
accounts reflect only the Company's proportionate interest in such
activities.
(C) USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the reporting of assets,
liabilities and contingencies at the date of the consolidated
financial statements, and revenues and expenses during the reporting
period. Actual results could differ from those estimated.
(D) INCOME TAXES
The deferral method is used in accounting for income taxes whereby
timing differences between income reported in the financial
statements and taxable income result in deferred income taxes.
(E) DERIVATIVE FINANCIAL INSTRUMENTS
Neutrino may utilize derivative financial instruments in its
management of exposures to fluctuations in commodity prices, foreign
currency exchange rates and interest rates as described in Note 11.
10
<PAGE>
3. INVESTMENTS
The Company had a 29% interest in Bridgetown Energy Corporation
("Bridgetown") and a 25% interest in certain oil and gas limited
partnerships. The investments were accounted for using the equity method
of accounting whereby the cost of the investment was adjusted for
distributions and dividends and the Company's proportionate share of the
investees' net income. The Company sold its interest in Bridgetown and the
limited partnerships in 1997 and 1996 respectively.
4. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------- ------------------------
Accumulated Accumulated
Depletion and Depletion and
COST DEPRECIATION COST DEPRECIATION
----------- ----------- ----------- ----------
Petroleum and natural
gas properties ..... $67,277,680 $ 9,531,315 $25,581,944 $4,204,313
Office furniture
and equipment ...... 328,078 85,876 204,623 40,759
----------- ----------- ----------- ----------
$67,605,758 $ 9,617,191 $25,786,567 $4,245,072
=========== =========== =========== ==========
Net book value ..... $57,988,567 $21,541,495
=========== ===========
No interest charges relating to property acquisitions or general and
administrative expenses were capitalized in 1997 and 1996.
The cost of unproved properties excluded from the depletion calculation is
$5,860,000 in 1997 (1996 - $nil).
5. LONG-TERM DEBT
December 31, December 31,
1997 1996
----------- --------
Revolving demand loan ............................... $16,400,009 $ --
Revolving demand loan (assumed on the
Avatar acquisition) with interest payable at
bank prime plus one and one quarter percent .........
Principal is payable in equal monthly installments
of $50,000 ......................................... -- 600,000
----------- --------
16,400,009 600,000
Less: current portion .............................. -- 600,000
----------- --------
$16,400,009 $ --
=========== ========
On June 26, 1997, the Company entered into new credit facilities and has an
available $32,500,000 revolving demand loan facility under which it can borrow
at bank prime or at Bankers Acceptance Rates plus a 1% stamping fee. The
revolving credit facility is renewable annually, however, no principal payments
are scheduled providing certain conditions of the bank agreement continue to be
satisfied. All loans are secured by a $2,500,000 first fixed charge and an
additional $20,000,000 charge on certain oil and gas properties, a floating
charge on all assets and a general assignment of accounts receivable.
11
<PAGE>
At December 31, 1997, the Company had drawn $15,000,000 at Bankers Acceptance
Rates (at a weighted average rate of 5.41%) and $1,400,009 at bank prime (6%).
The Company has classified all of this debt as long term in these financial
statements as there is no requirement to repay any portion in 1998.
In May 1997, the Company entered into interest rate swap agreements which
effectively fix the interest rate at 6.02% on $5,000,000 of debt until May, 1999
and at 6.52% for an additional $5,000,000 of debt until May, 2000.
6. SUBORDINATE DEBENTURES
December 31, December 31,
1997 1996
Subordinate debentures $ 5,285,000 $ 5,000,000
================ ================
The Company assumed, on the acquisition of Dominion, $2,710,000 of 9.5%
convertible subordinated debentures and subsequently repaid $2,425,000 of these
debentures leaving a balance at December 31, 1997 of $285,000. These debentures
are repayable on June 30, 1999 and are convertible at the option of the holder
into common shares of the Company at a conversion price of $3.85 until June 30,
1999 and may be redeemed by the Company after June 30, 1997 provided certain
conditions are met.
On August 22, 1996, the Company issued a $5,000,000, 5.5% subordinated debenture
with 3,571,429 detachable warrants. The debenture is repayable on June 30, 2001.
The warrants are exercisable at the option of the holder into common shares of
the Company at a price of $1.40 per share until June 30, 2001 and the proceeds
are to be used to pay down the debenture. The Company has the right to serve
notice requiring the exercise of the warrants after June 30, 1998 if certain
conditions are met. The debenture is secured by a floating charge on all the
assets and is subordinate to long-term debt. All of the detachable warrants are
outstanding at December 31, 1997. The costs related to the issue of this
debenture are deferred and amortized over the term of the debenture.
7. SHARE CAPITAL
(A) AUTHORIZED
The Company is authorized to issue an unlimited number of common
shares without par value, and an unlimited number of preferred
shares, issuable in series.
12
<PAGE>
(B) ISSUED
Common
SHARES AMOUNT
---------- ------------
Balance, December 31, 1995 ......................... 15,490,103 $ 12,541,392
Shares issued to acquire Avatar Energy Inc. .... 2,616,435 3,291,582
Share warrants exercised ....................... 21,400 21,400
Options exercised .............................. 9,050 4,978
Reduction for tax benefits renounced ........... -- (171,475)
Share issue costs .............................. -- (21,547)
---------- ------------
Balance, December 31, 1996 ......................... 18,136,988 15,666,330
Shares issued to acquire Dominion Explorers Inc. 6,144,375 9,427,883
Share warrants exercised ....................... 2,429,982 2,431,976
Options exercised .............................. 476,300 373,896
Special warrants exercised ..................... 400,000 420,000
Share exchange rights exercised ................ 168,889 200,000
---------- ------------
Balance, December 31, 1997 ......................... 27,756,534 $ 28,520,085
========== ============
(C) FLOW-THROUGH SHARES
The Company may fund a portion of exploration expenditures with flow-through
share issues. Under this type of financing arrangement, shares are issued at a
fixed price and the resultant proceeds are used to fund exploration work within
a defined time period. The tax deductions arising from such exploration
activities are available to the investors, not the Company. The proceeds of the
1995 flow-through share issue had not been expended at December 31, 1995. The
paid up amount for flow-through shares and the cost of oil and gas properties
was reduced in 1996 by the estimated amount of the tax benefits renounced to the
purchaser of the shares. All amounts have been expended at December 31, 1996.
(D) OPTIONS
At December 31, 1997, certain employees, officers and directors hold 2,013,020
options to purchase common shares at prices from $1.10 to $1.83 provided the
Company's share price exceeds a certain amount for 10 consecutive trading days.
These options expire at various dates to November 20, 2002.
(E) WARRANTS
During 1997, 2,429,982 warrants were exercised and all remaining warrants
expired.
(F) SPECIAL WARRANTS
During 1997, all special warrants were exercised. Each special warrant entitled
the holder to acquire one common share at no additional cost.
(G) SHARE EXCHANGE RIGHTS
During 1997, all exchange rights were exercised. Each share exchange right
entitled the holder to acquire one common share of the Company at no additional
cost.
13
<PAGE>
8. RELATED PARTY TRANSACTIONS
At December 31, 1997, accounts receivable include $70,000 in loans bearing
interest at 4.00%. These loans were made to officers of the Company for
the acquisition of Company shares.
During 1996, the Company sold an interest in a gas property to Bridgetown
for $763,000. The sale was on the same terms as the original purchase
agreement entered into by the Company.
9. EARNINGS AND CASH FLOW PER SHARE
1997 1996
---- ----
Earnings per share:
Basic ................................................... $0.13 $0.12
===== =====
Fully diluted ........................................... $0.12 $0.10
===== =====
Cash flow per share from operations, before changes
in working capital:
Basic ................................................... $0.35 $0.32
===== =====
Fully diluted ........................................... $0.30 $0.24
===== =====
At December 31, 1997, the basic weighted average number of common shares is
24,614,203 (1996 - 15,743,973) and the fully diluted weighted average number of
common shares is 30,272,677 (1996 - 21,174,162). Fully diluted amounts include
imputed interest of $445,000 (1996 - $166,000) calculated at an effective rate
of 5% (1996 - 5.5%) on the possible proceeds from the exercise of stock options,
warrants, rights and the conversion of the subordinate debentures.
14
<PAGE>
10. TAXES
The provision for income taxes in the statement of income reflects an
effective income tax rate which differs from combined federal and
provincial statutory tax rates. The differences are summarized as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
----------- -----------
<S> <C> <C>
Net income before provision for income taxes ........ $ 3,166,572 $ 1,966,089
Statutory corporate income tax rate ................. 44.7% 44.7%
----------- -----------
Income tax provision assuming statutory rates ....... 1,415,458 878,842
Increase (decrease) resulting from:
Non-deductible Crown payments, net ............... 1,055,123 694,001
Non-deductible depletion and depreciation ........ 555,000 165,001
Utilization of unrecognized losses carried forward (2,022,000) (1,099,616)
Resource allowance ............................... (1,011,000) (733,148)
Other ............................................ 7,419 94,920
----------- -----------
Provision for income taxes .......................... -- --
Recovery of prior year's taxes ...................... (70,504) --
Capital taxes ....................................... 132,182 91,491
----------- -----------
Provision for taxes ................................. $ 61,678 $ 91,491
=========== ===========
</TABLE>
At December 31, 1997, the Company had tax losses available for carry
forward to reduce future taxable income. The potential benefit of $647,000
of these tax losses have not been recognized in the accompanying financial
statements. The losses carried forward expire as follows:
YEAR OF EXPIRY
1998 $ 877,000
1999 448,000
2000 888,000
2001 103,000
2002 6,000
2003 100,000
--------------
$ 2,422,000
==============
11. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
The nature of Neutrino's operations and the issuance of debt expose
the Company to fluctuations in commodity prices, foreign currency
exchange rates and interest rates. Neutrino manages these risks by
operating in a manner that minimizes its exposure to the extent
practical, and through the periodic use of derivative contracts. The
Board of Directors periodically reviews the results of all derivative
activities and all outstanding positions.
15
<PAGE>
Derivative contracts may be used to manage the price risk associated
with crude oil and natural gas sales. Foreign exchange contracts may
also be used to effectively fix the exchange rate on future United
States dollar denominated sales. Gains and losses are recognized in
revenues when the related transactions occur. Interest rate swap
agreements are used to effectively fix interest rates on floating
rate debt. Net differences between amounts receivable and payable are
reflected in interest expense on an accrual basis.
Except as described below, Neutrino does not have any significant
concentrations of credit risk nor does it hold any financial
instruments with significant off-balance sheet risk of accounting
losses.
INTEREST RATE RISK MANAGEMENT
Neutrino manages its exposure to interest rate risk through a
combination of fixed and floating rate borrowings, and the periodic
use of derivative financial instruments.
At December 31, 1997, Neutrino had fixed the interest rates on 70 per
cent of its debt at a weighted average rate of 6.07 per cent through
fixed rate borrowing and the following derivative financial
instruments:
Principal Effective
AMOUNT RATE MATURITY DATE
Interest rate swap agreement $ 5,000,000 6.02% May 1999
Interest rate swap agreement $ 5,000,000 6.52% May 2000
The interest rate swap agreements provide for the receipt or payment of
the difference between floating and fixed rates of interest based on a
notional principal amount.
FAIR VALUE OF FINANCIAL INSTRUMENTS, INCLUDING DERIVATIVE FINANCIAL
INSTRUMENTS
The fair value of recognized financial instruments at December 31, 1997
and 1996 approximate their carrying value. The fair value of unrecognized
derivative financial instruments at December 31, 1997 was $11,000 (1996 -
$nil). The carrying amounts of cash, accounts receivable and current
payable obligations approximate their fair value because of the near-term
maturity of those instruments. The estimated fair value of long-term debt
and derivative financial instruments is based on year-end interest rates,
public trading values where available, or where not available, on values
for similarly traded instruments with similar features.
12. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in litigation and claims associated with normal
operations. Management is of the opinion that any resulting settlements
would not materially affect the financial position or results of
operations of the Company.
The Company has entered into an agreement with a drilling contractor in
which it has guaranteed that it will drill 75 days per year for two years
ending January 28, 2000. The yearly drilling commitment is approximately
$800,000.
16
<PAGE>
13. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in Canada. The significant
differences from United States principles are as follows:
In accordance with United States principles, deferred income taxes are
recognized, at enacted rates, to reflect the future effects of tax
carry forwards and temporary differences between the tax bases of
assets and liabilities and their financial reporting amounts. In
addition, assets and liabilities related to purchased businesses are
restated to eliminate the use of net of tax accounting for such
assets and liabilities, resulting in higher carrying values for
assets, liabilities and deferred income taxes.
a) In accordance with United States principles, long-lived assets are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset or group of assets may
not be recoverable based on expected future cash flows. When an
impairment has occurred, a loss is recognized using a fair value
based model. Application of this method of assessing impairment of
long-lived assets has not resulted in the recognition of any
impairment losses on long-lived assets for the years ended December
31, 1997 and 1996.
b) In accordance with United States principles, revolving demand loans
are classified as a current liability, notwithstanding that there is
no requirement to repay any portion in 1998.
The impact of these differences on the consolidated financial statements is
as follows:
Consolidated statement of income
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net income as reported in accordance with Canadian principles .. $ 3,104,894 $ 1,874,598
Accounting for income taxes - depletion and depreciation expense (479,329) (57,541)
Accounting for income taxes - deferred income taxes ............ 479,329 57,541
----------- -----------
Net income in accordance with U.S. principles .................. $ 3,104,894 $ 1,874,598
=========== ===========
Net income per common share in accordance with U.S. principles . $ 0.13 $ 0.12
=========== ===========
Consolidated balance sheet
</TABLE>
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
Canadian United States Canadian United States
PRINCIPLES PRINCIPLES PRINCIPLES PRINCIPLES
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Property, plant and equipment, net $57,988,567 $63,439,350 $21,541,495 $23,439,823
Current portion of long-term debt ..... $ -- $16,400,009 $ -- $ --
Long-term debt ........................ $16,400,009 $ -- $ -- $ --
Deferred income tax liabilities ....... $ -- $ 5,450,783 $ -- $ 1,898,328
Consolidated statement of cash flows
</TABLE>
17
<PAGE>
In accordance with U.S. principles, the following additional information would
be provided in the consolidated statement of changes in financial position:
1997 1996
----------- -----------
Net change in working capital, excluding cash:
Accounts receivable ......................... $(5,632,883) $ (873,836)
Inventory ................................... 17,790 15,561
Prepaid expenses ............................ (167,726) (77,672)
Accounts payable ............................ 6,117,716 2,087,046
Working capital acquired .................... (653,188) (271,695)
----------- -----------
$ (318,291) $ 879,404
=========== ===========
1997 1996
----------- -----------
Interest paid .................................... $ 1,106,343 $ 353,975
Taxes paid ....................................... $ 61,678 $ 91,491
14. EVENTS SUBSEQUENT TO DECEMBER 31, 1997
On July 3, 1998, Southern Mineral Corporation of Houston, Texas, through a
wholly-owned subsidiary, acquired approximately 92.3% of the issued and
outstanding common shares of Neutrino. Southern Mineral Corporation,
through its wholly-owned subsidiary, intends to acquire the remaining
common shares of Neutrino, and accordingly, has commenced proceedings
which are anticipated to result in the acquisition of the remaining issued
and outstanding shares of Neutrino. In connection with the acquisition,
Neutrino expensed costs of approximately $1,343,000.
3,571,429 detachable warrants were exercised related to the $5,000,000,
5.5% subordinate debenture. The subordinate debenture was repaid from the
proceeds of the warrants exercised, and the deferred charges were expensed
at June 30, 1998.
18
<PAGE>
SELECTED PRO FORMA COMBINED FINANCIAL DATA
In April 1997, SMC acquired a 22.68% working interest in the Albert
Philyaw Unit 8-1#1 and the Turner 6-1 wells for $3,300,000. In May 1997, SMC
acquired the oil and gas assets and outstanding capital stock of BEC Energy,
Inc. ("BEC") for $10,640,000. The acquisitions included interests in 14 wells
located in the Big Escambia Creek Field in Escambia County, Alabama and were
recorded using the purchase price method of accounting. In January, 1998, Amerac
Energy Corporation ("Amerac") was acquired, and merged into a wholly owned
subsidiary of SMC, with Amerac, as a wholly owned subsidiary of SMC, being the
surviving corporation. Pursuant to the Merger Agreement, each share of Amerac
Common Stock outstanding as of the effective time was converted into the right
to receive shares of SMC Common Stock plus cash in lieu of fractional shares.
The purchase price was approximately $22,500,000 which was recorded using the
purchase price method of accounting. In October 1997, SMC issued $36,000,000 of
its 6.875% Convertible Debentures due 2007 (the "Debentures"). Each Debenture is
convertible into 121.07 shares of SMC Common Stock at a conversion price of
$8.26 per share. The final subscription amounted to $41,400,000, which (I) was
used to pay off existing debt of $20,700,000, (ii) was used to pay the costs
associated with the issuance of the Debentures, (iii) will be used to retire
Amerac's debt and (iv) will be used to fund acquisitions and capital
expenditures. On June 23, 1998, the Company agreed to acquire 92.3% of the
outstanding common shares of Neutrino, which was effective as of June 30, 1998
and funded on July 2, 1998. On July 3, 1998, the Company initiated a compulsory
acquisition of the remaining shares outstanding, which was effective as of June
30, 1998. The Company acquired Neutrino through a cash tender offer for the
common shares outstanding, and assumed Neutrino's bank debt and working capital
deficiency. Neutrino, located in Calgary, Canada is a oil and gas company
principally engaged in the business of acquiring petroleum and natural gas
rights and the exploration, development and production of petroleum and natural
gas in western Canada. The total purchase price is approximately $56,582,000.
This acquisition will be recorded using the purchase price method of accounting.
For pro forma purposes, the statement of operations data for Neutrino has been
translated from Canadian dollars into U. S. dollars using the average exchange
rates prevailing during the respective periods.
The unaudited pro forma statement of operations for the twelve months
ended December 31, 1997 and the six months ended June 30, 1998, present the
following transactions as if they had occurred at January 1, 1997. The pro forma
statements of operations for the twelve months ended December 31, 1997, includes
the results of BEC Energy, Inc. and the purchase of the A. Philyaw Unit 8-1 #1
for the period prior to their acquisition by SMC on April 8, 1997 and May 20,
1997, respectively. The unaudited pro forma statements of operations for the
twelve months ended December 31, 1997 and the six months ended June 30, 1998,
include the acquisition of Neutrino and the merger between Amerac and SMC for
the period prior to it acquisition by SMC on June 30, 1998 and January 28, 1998,
respectively.
The following pro forma financial statements should be read in
conjunction with the separate financial statements and notes thereto of SMC's
previously filed statements. The pro forma statement of operations is not
necessarily indicative of the results of operations of the Company as it may be
in the future or as if it might have been had the acquisitions been effective at
January 1, 1997.
19
<PAGE>
SOUTHERN MINERAL CORPORATION
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(In thousands, except for Per Share Amounts)
Unaudited
<TABLE>
<CAPTION>
SOUTHERN BEC Amerac NEUTRINO Total
Mineral Energy, A. ENERGY RESOURCES PRO FORMA PRO FORMA
CORPORATION INC. UNIT 8-1 CORPORATION INC. ADJUSTMENTS NOTE CONSOLIDATED
----------- -------- -------- ----------- -------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Oil and Gas ....................... $ 13,790 $ 539 $ 289 $ 9,095 $ 12,609 $ 223 (1) $ 36,545
Gain on sale ...................... 413 0 0 0 166 0 579
-------- -------- -------- -------- -------- -------- --------
14,203 539 289 9,095 12,775 223 37,124
EXPENSES
Production ........................ 3,682 189 46 3,158 3,660 (93) (1) 10,642
Exploration ....................... 1,776 0 0 2,633 0 707 (2) 5,116
Impairment of oil and gas
proper
properties
esties
properties ...................... 2,838 0 0 0 0 0 2,838
Depreciation, depletion and
amortization ..................... 4,211 159 0 3,279 4,231 2,113 (3) 13,993
General and administrative ........ 2,308 15 0 3,457 1,796 (3,457) (4) 4,119
-------- -------- -------- -------- -------- -------- --------
14,815 363 46 12,527 9,687 (730) 36,708
-------- -------- -------- -------- -------- -------- --------
Income (loss) from operations ....... (612) 176 243 (3,432) 3,088 953 416
Other income, expenses & deductions
Interest and other income ......... 328 0 0 20 63 0 411
Interest and debt expense ......... (1,591) (66) 0 (692) (848) (4,067) (5) (7,264)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes ...................... (1,875) 110 243 (4,104) 2,303 (3,114) (6,437)
Income tax expense (benefit) ........ 174 0 0 30 45 (781) (6) (532)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) ................... ($ 2,049) $ 110 $ 243 ($ 4,134) $ 2,258 (2,333) ($5,905)
======== ======== ======== ======== ======== ======== ========
Net income (loss) per share-basic ... ($ 0.22) ($ 0.46)
======== ========
Net income (loss) per share-diluted . ($ 0.22) ($ 0.46)
======== ========
Weighted basic average shares
outstanding ....................... 9,109 3,658 (7) 12,766
======== ======= ========
Weighted diluted average shares
outstanding ....................... 9,109 3,658 (7) 12,766
======== ======= ========
</TABLE>
20
<PAGE>
SOUTHERN MINERAL CORPORATION
PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(In thousands, except for Per Share Amount)
Unaudited
<TABLE>
<CAPTION>
SOUTHERN AMERAC NEUTRINO TOTAL
MINERAL ENERGY RESOURCES PRO FORMA PRO FORMA
CORPORATION CORPORATION INC. ADJUSTMENTS NOTE CONSOLIDATED
------------ ----------- --------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Oil and Gas ............................. $ 8,777 $ 498 $ 5,190 0 $ 14,465
Gain on Sale ............................ (3) 0 0 0 (3)
-------- ------- ------- -------- --------
8,774 498 5,190 0 14,462
EXPENSES
Production .............................. 3,186 338 1,934 (17) (1) 5,441
Exploration ............................. 1,666 38 0 678 (2) 2,382
Depletion, depreciation and
amortization .......................... 3,229 220 2,302 1,655 (3) 7,406
General and administrative .............. 1,902 422 1,954 (1,354) (4,8) 2,924
-------- ------- ------- -------- --------
9,983 1,018 6,190 962 18,153
-------- ------- ------- -------- --------
Loss from operations ...................... (1,209) (520) (1,000) (962) (3,691)
Other income, expenses and
Interest and other income ............... 140 2 0 0 142
Interest and debt expense ............... (1,786) (105) (634) (1,130) (5) (3,655)
-------- ------- ------- -------- --------
Net loss before
income taxes ............................ (2,855) (623) (1,634) (2,092) (7,204)
Income tax expense (benefit) .............. (23) 0 40 (1,392) (6) (1,375)
-------- ------- ------- -------- --------
Net loss .................................. ($ 2,832) (623) ($1,674) ($ 700) ($ 5,829)
======== ======= ======= ======== ========
Net income (loss) per share-basic ......... ($ 0.24) ($ 045)
======== ========
Net income (loss) per share-diluted ....... ($ 0.24) ($ 045)
======== ========
Weighted basic average shares
outstanding ............................. 11,997 819 (7) 12,817
======== ======== ========
Weighted diluted average shares
outstanding ............................. 11,997 819 (7) 12,817
======== ======== ========
</TABLE>
21
<PAGE>
SOUTHERN MINERAL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: Reflects subsequent acquisition of BEC of additional property interests
in Albert Philyaw 8-1 #1 and the Turner 6-1 wells in April 1997 and the
reduction in operating costs of the Amerac properties due to the
elimination of third party operating costs which will be absorbed by
SMC's personnel.
NOTE 2: Record exploration expense for Neutrino's conversion to the successful
efforts method of accounting. Historical Neutrino depreciation,
depletion and amortization expense has not been adjusted. The pro forma
combined statement of operations has been adjusted to reflect successful
efforts accounting for depreciation, depletion and amortization on
Neutrino's allocated basis in oil and gas properties following the
Acquisition (See note 3 below).
NOTE 3: Reflects additional depreciation, depletion and amortization related to
oil and gas properties step-up in basis for the effect of the
acquisitions.
NOTE 4: Reflects elimination of Amerac's general and administrative expenses as
those expenses will not be incurred by SMC subsequent to the merger.
NOTE 5: Reflects effects of additional interest expense for the net borrowings
required to complete the acquisitions. Sources of funds are the
$41,400,000 of Debentures and the Company's credit facilities at an
interest expense of 6.875% and 8.13%, respectively.
NOTE 6: Tax adjustment to reflect taxes computed as if the combining entities
were a single tax paying entity.
NOTE 7: Reflects the issuance of 3,333,333 shares of SMC Common Stock in
exchange for all of the outstanding shares of Amerac Common Stock and
the issuance of 324,430 shares of SMC Common Stock to Neutrino key
employees as a part of the acquisition of Neutrino.
NOTE 8: Reflects elimination of non-reoccurring acquisition costs of $932,000
incurred by Neutrino.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SEPTEMBER 11, 1998 SOUTHERN MINERAL CORPORATION
BY: /s/ JAMES H PRICE
--------------------------------
JAMES H. PRICE
VICE PRESIDENT-FINANCE
23
EXHIBIT 2.2
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
As independent Chartered Public Accountants, we hereby consent to the
incorporation of our report dated March 6, 1998, with respect to the
consolidated financial statements of Neutrino Resources Inc. for the year ended
December 31, 1997 included in the Material Change Report of Southern Mineral
Corporation dated September 14, 1998.
ARTHUR ANDERSEN LLP
Calgary, Alberta, Chartered Accountants
September 14, 1998.
