SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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)
1201 Louisiana, Suite 3350
Houston, Texas 77002-5609
(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)
Check whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
Revenues for the year ended December 31, 1997 are approximately $14,203,000.
As of March 25, 1998, 12,494,100 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 National Market of $4.00) held by
non-affiliates of the Registrant was approximately $39,597,624. 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 1997 Annual
Meeting of Stockholders are incorporated herein by reference
in Part III, Items 9, 10, 11 and 12
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Southern Mineral Corporation, a Nevada corporation, with its subsidiaries (the
"Company"), is an independent oil and gas company headquartered in Houston,
Texas. The Company is engaged in the acquisition, exploitation, exploration and
operation of oil and gas properties, primarily along the Gulf Coast, the
Mid-Continent, Ecuador and in Canada, with a primary focus on the Gulf Coast
Basin, both onshore and offshore. The Company owns interests in more than 2,700
oil and gas properties in those regions. The Company's business strategy is to
increase reserves and shareholder value through a balanced program of
acquisitions, exploitation and controlled risk exploration. In addition to oil
and gas leasehold interests, the Company owns fee interests in the oil and gas
under some 665,148 gross surface acres (comprising some 346,760 net mineral
acres) in Mississippi, Texas and New Mexico.
BACKGROUND
The Company was incorporated in 1937 as a vehicle to consolidate mineral tracts
retained as it lumbered large tracts of southern Mississippi forest lands. For
the next fifty years, the Company was largely a passive participant in the oil
and gas business, merely granting leases on its spread of mineral interests in
Mississippi. In the mid-1980's, the Company became a more active participant in
the oil and gas business, redeploying its significant cash flow from revenues
derived from the Poplarville Field into exploration activities. For the next ten
years, the Company pursued the sole strategy of exploration for oil and gas. As
a result of generally poor results, the Company changed its focus beginning in
1995 to one of a more balanced approach to the oil and gas business. The Company
currently pursues acquisitions, exploitation and controlled risk exploration.
ACQUISITION ACTIVITIES
Beginning in 1995, the Company began to seek out and evaluate potential oil and
gas property acquisitions as well as the acquisition of oil and gas companies.
The Company intends to finance such acquisitions from multiple funding sources.
Such funding sources may include internally generated funds, issuance of the
Company's capital stock, public or private borrowings or a combination of such
sources. The Company's recent acquisition activity is generally described below.
SANTA ELENA PROJECT, ECUADOR. In June 1997, the Company acquired a 10% interest
in the Santa Elena Project for approximately $2.8 million. The Santa Elena
Project was originally discovered in 1921 and has produced over 120 MMBbls, with
peak production rates of 10,000 Bbls per day in 1955. In July 1996, Compania
General de Combustibles S.A.("CGC") acquired the concession for the Santa Elena
Project. CGC has implemented a redevelopment plan consisting primarily of
mechanical remediation and improvements in field delineation. These preliminary
activities have doubled production from 800 Bbls per day in January 1997 to
1,700 Bbls per day in September 1997. Current production is down to 1,000 Bbls
per day due to heavy rains in Ecuador over the winter months. The Company
expects these exploitation activities to be expanded by applying advanced
drilling and production techniques, including horizontal drilling and extensive
2-D seismic surveys. Less than 5% of the Santa Elena Project has been developed,
and the Company believes that, in addition to providing exploitation and
development potential, significant exploration opportunities exist.
BIG ESCAMBIA CREEK FIELD, ALABAMA. In the acquisition of interest in the
Escambia Creek Field, Escambia County, Alabama, the Company acquired various
working interests in a series of four transactions in 1997, averaging
approximately 10%, in 13 oil and gas wells and a 37.7% working interest in the
Albert Philyaw Unit 8-1 #1 well for a total of $16.9 million. The Big Escambia
Creek Field contains long lived oil reserves, with a reserve life index of 9
years.
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LAKE RACCOURCI FIELD, LAFOURCHE PARISH, LOUISIANA. In November, 1997, the
Company acquired a 22.5% working interest in two producing wells in the Lake
Raccourci Field. The Company anticipates the drilling of one to two additional
exploratory wells in 1998. In addition, the Company has recently received a
10,000 acre farmout from Exxon for further development potential of the project.
AMERAC ENERGY CORPORATION. On January 28, 1998, both the shareholders of the
Company and Amerac Energy Corporation ("Amerac") approved the merger of Amerac
into a subsidiary of Southern Mineral Corporation. Pursuant to the merger
agreement, the Company issued 3,333,333 shares of its common stock and assumed
$8.7 million of bank debt to acquire the shares of Amerac common stock. Pursuant
to a reserve report prepared by Ryder Scott, Amerac had 32.7 Bcfe of proved
reserves as of January 1, 1998. The merger was effective on January 28, 1998,
and will be accounted for as a purchase.
EXPLOITATION AND EXPLORATION ACTIVITIES
The Company has either initiated or agreed to participate in various exploration
opportunities. The Company intends that its exploration effort be primarily
composed of internally generated projects. However, a portion of the Company's
budget is earmarked for exploratory opportunities brought to the Company by
individuals and other companies.
MATTHEWS PROJECT, TEXAS. The Company owns a 25% interest in the Matthews Project
and has recently completed and interpreted an 18 square mile 3-D seismic survey
of the project. The objective in the Matthews Project is to explore shallow
formations including the Frio, Miocene and Yegua sands and deeper formations (up
to 14,000 feet) in the Upper, Middle and Lower Wilcox sands. The Company
believes that this project has the potential to add significantly to the
Company's reserves if initial interpretations prove correct. The Company
completed one well in January 1998, which is currently producing in excess of 6
Mmcf per day, and two additional wells are scheduled to commence drilling in the
second quarter of 1998.
ALTA LOMA PROJECT, TEXAS. The Company owns a 50% working interest in and is the
operator of the Alta Loma Project. Permitting for a 12 square mile 3-D seismic
survey is complete, with plans for the acquisition of seismic data in the second
quarter of 1998. In addition to redevelopment and exploitation of previously
developed zones, the Company believes that significant exploration potential
exists in certain Lower Frio formations at depths of up to 15,000 feet. The
Company anticipates commencing drilling in the Alta Loma Project in the third
quarter of 1998.
SOUTHERN EAGLE PROJECT, OFFSHORE, GULF OF MEXICO. In January 1997, the Company
acquired over 320 square miles of 3-D seismic data covering the shallow state
waters off Matagorda Island, Texas. This area has recently been opened for
extensive exploration as a result of recent advancements in 3-D seismic survey
technology. As a result, the Company has identified exploration prospects and is
continuing to analyze the seismic data to identify additional prospects. The
Company participated in the public bid auction conducted by the State of Texas
in October 1997, and acquired an additional 1,360 acres of mineral leases in the
area covering its prospect for a total of 2,960 mineral acres in the Southern
Eagle Project.
DIASU JOINT VENTURE
The Company also entered into a joint venture with Diasu in January 1996 which
expired in January of 1998. The Company had the option to pay leasehold, seismic
and other third party costs in the development of exploration prospects located
primarily in south Louisiana with Diasu for a two year period. Under the
arrangement, as funded prospects are sold, the Company will recoup its prospect
costs plus one-third of any potential promote or carried interest received by
Diasu after the sale of the prospect. The Company had 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 provided
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 has not had a material adverse effect on its
capital expenditures, earnings or competitive position. However, the Company
cannot predict whether its future compliance with, or the effect of, such laws,
rules and regulations would have a material adverse effect on its capital
expenditures, earnings or competitive position.
The Company anticipates that in the near term it will rely on various sources to
fund its principal business activity of acquiring oil and gas producing
reserves. Such funding sources may include, but not be limited to, use of
working capital, the issuance of the Company's capital stock, public and private
equity and debt markets and lending institutions such as banks and energy
investment firms. The Company's ability to access any or all of these sources of
funds may be impacted by a wide variety of factors that may include its own
financial condition as well as specific or general economic conditions that each
capital or debt market may experience at the time the Company requires funding.
There can be no assurances that the Company will be successful in utilizing any
of these sources to fund its acquisitions.
Approximately 26% of the Company's revenues during the year ended December 31,
1997 were derived from Canadian properties acquired in December 1995. The costs
and revenues associated with the Company's Canadian operations are denominated
in Canadian dollars. The Company records its transactions and prepares its
financial statements in U.S. dollars. Fluctuations in the value of the two
currencies may cause currency translations losses for the Company or reduced
revenues and earnings, or both, with respect to its Canadian operations. The
Company cannot predict the effect of exchange rate fluctuations upon future
operating results.
COMPETITION
There is a high degree of competition in the acquisition of producing oil and
gas properties and the oil and gas exploration industry. Consequently, the
Company competes with many other entities for desirable potential acquisitions
and exploration and development prospects. The Company's competitors include the
major integrated oil companies as well as numerous independent oil and gas
companies and other producers of energy sources and fuels. Many of these
competitors have capital resources and other competitive advantages much greater
than that of the Company, and may therefore be better able than the Company to
withstand and compete during adverse market conditions. The Company's ability to
generate revenues and reserves in the future will be dependent upon, among other
things, its success in competing with these competitors, as to which there can
be no assurances. With respect to the oil and gas mineral rights owned by the
Company, the Company considers proposals to lease its mineral rights on the
basis of the best offer from prospective lessees.
REGULATIONS
DOMESTIC ENVIRONMENTAL REGULATION. Operations of the Company are subject to
numerous federal, state, and local laws and regulations governing the discharge
of materials into the environment or otherwise relating to environmental
protection. These laws and regulations may require the acquisition of a permit
before drilling commences; restrict or prohibit the types, quantities and
concentration of substances that can be released into the environment in
connection with drilling and production activities; prohibit drilling activities
on certain lands lying within wetlands or other protected areas; and impose
substantial liabilities for pollution resulting from drilling and production
operations. Moreover, state and federal environmental laws and regulations may
become more stringent. These environmental laws and regulations may affect the
Company's operations and costs as a result of their effect on oil and gas
development, exploration, and production operations. For instance, legislation
has been proposed in Congress from time to time that
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would amend the federal Resource Conservation and Recovery Act of 1976 ("RCRA")
to reclassify oil and gas production wastes as "hazardous waste". If such
legislation were enacted, it could have a significant impact on the Company's
operating costs, as well as on the oil and gas industry in general. It is not
anticipated that the Company will be required in the near future to expend
amounts that are material in relation to its total capital expenditure program
by reason of environmental laws and regulations, but inasmuch as such laws and
regulations are frequently changed, the Company is unable to predict the
ultimate cost of compliance. In addition, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA" or "Superfund") and
certain state laws and regulations impose liability for cleanup of waste sites.
The Oil Pollution Act ("OPA") currently requires persons responsible for
"offshore facilities" to establish $150,000,000 in financial responsibility to
cover environmental cleanup and restoration costs likely to be incurred in
connection with an oil spill in the waters of the United States. On September
30, 1996 Congress passed legislation that would lower the financial
responsibility requirement under OPA to $35,000,000, subject to increase to
$150,000,000 if a formal risk assessment indicates the increase is warranted.
The Company cannot predict whether the President will sign this legislation. The
impact of any legislation is not expected to be any more burdensome to the
Company than it will be to other similarly situated companies involved in oil
and gas exploration and production.
OPA imposes a variety of additional requirements on "responsible parties" for
vessels or oil and gas facilities related to the prevention of oil spills and
liability for damages resulting from such spills in waters of the United States.
The "responsible party" includes the owner or operator of an onshore facility,
pipeline, or vessel or the lessee or permittee of the area in which an offshore
facility is located. OPA assigns liability to each responsible party for oil
spill removal costs and a variety of public and private damages from oil spills.
While liability limits apply in some circumstances, a party cannot take
advantage of liability limits if the spill is caused by gross negligence or
willful misconduct or resulted from violation of a federal safety, construction
or operating regulation. If a party fails to report a spill or to cooperate
fully in the cleanup, liability limits likewise do not apply. OPA establishes a
liability limit for offshore facilities (including pipelines) of all removal
costs plus $75,000,000. Few defenses exist to the liability for oil spills
imposed by OPA. OPA also imposes other requirements on facility operators, such
as the preparation of an oil spill contingency plan. Failure to comply with
ongoing requirements or inadequate cooperation in a spill event may subject a
responsible party to civil or criminal enforcement actions.
The Federal Water Pollution Control Act ("FWPCA") imposes restrictions and
strict controls regarding the discharge of produced waters and other oil and gas
wastes into navigable waters. Permits must be obtained to discharge pollutants
to state and federal waters. The FWPCA and analogous state laws provide for
civil, criminal and administrative penalties for any unauthorized discharges of
oil and other hazardous substances in reportable quantities and, along with the
OPA, may impose substantial potential liability for the costs of removal,
remediation and damages. State water discharge regulations and the federal
("NPDES") permits prohibit, or are expected to prohibit within the next year,
the discharge of produced water and sand, and some other substances related to
the oil and gas industry, to coastal waters. Although the costs to comply with
zero discharge mandates under federal or state law may be significant, the
entire industry will experience similar costs and the Company believes that
these costs will not have a material adverse impact on the Company's financial
conditions and operations. Some oil and gas exploration and production
facilities are required to obtain permits for their storm water discharges.
Costs may be incurred in connection with treatment of wastewater or developing
storm water pollution prevention plans.
CANADIAN ENVIRONMENTAL REGULATION. Operations of the Company are subject to
numerous federal, provincial and local laws and regulations. Environmental
legislation provides for restrictions and prohibitions on releases or emissions
of various substances produced in association with certain oil and gas industry
operations and can affect the location and operation of wells and other
facilities and the extent to which exploration and development is permitted.
Legislation also requires that well and facility sites be abandoned and
reclaimed to the satisfaction of provincial authorities and local landowners. A
breach of such legislation may result in the suspension or revocation of
licences and authorizations, and the suspension of operations, as well as the
imposition of clean-up orders, fines and penalties. In addition, certain types
of operations may require environmental assessment and reviews to be completed
before approvals are obtained and before exploration or development projects are
begun. The Company does not anticipate that it will be required to make
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capital or other expenditures by reason of environmental laws and regulations
that are material in relation to the Company's total capital expenditure program
or that would have a material adverse effect on the Company's earnings, but
inasmuch as such laws and regulation are frequently changed, the Company is
unable to predict the ultimate cost of compliance.
DOMESTIC OIL AND GAS REGULATION. Complex regulations concerning all phases of
energy development at the local, state and federal levels apply to the Company's
operations and often require interpretation by the Company's professional staff
or outside advisors. The federal government and various state governments have
adopted numerous laws and regulations respecting the production, transportation,
marketing and sale of oil and natural gas. Regulation by state and local
governments usually covers matters such as the spacing of wells, allowable
production rates, environmental protection, pollution control, taxation and
other related matters. Moreover, future changes in local, state or federal laws
and regulations could adversely affect the operations of the Company.
Domestic exploration for, and production and sale of, oil and gas are
extensively regulated at both the federal and state levels. Legislation
affecting the oil and gas industry is under constant review for amendment or
expansion, frequently increasing the regulatory burden. Numerous departments and
agencies, both federal and state, are also authorized by statute to issue, and
have issued, rules and regulations binding on the oil and gas industry that
often are costly to 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.
In the late 1980's, the Federal Energy Regulatory Commission ("FERC"), through a
series of orders, made major changes in certain of its regulations that have
since significantly affected the transportation and marketing of gas. These
regulations require gas pipelines to transport gas on a non-discriminatory
basis. As a result, many pipelines have become transporters of gas owned by
others and have greatly reduced their purchases of gas for resale.
Commencing in April, 1992, the FERC issued Order Nos. 636, 636-A, and 636-B
("Order No. 636"), which require interstate pipelines to provide transportation
separate, or "unbundled", from the pipelines' sales of gas. Also, Order No. 636
requires pipelines to provide open-access transportation on a basis that is
equal for all gas shippers. Although Order No. 636 does not directly regulate
the Company's activities, the FERC has stated that it intends for Order No. 636
to foster increased competition within all phases of the natural gas industry.
It is unclear what impact, if any, increased competition within the natural gas
industry under Order No. 636 will have on the Company's activities. Although
Order No. 636, assuming it is upheld in its entirety, could provide the Company
with additional market access and more fairly applied transportation service
rates, Order No. 636 could also subject the Company to more restrictive pipeline
imbalance tolerances and greater penalties for violation of those tolerances. In
July 1996, the United States Court of Appeals for the District of Columbia
Circuit largely upheld Order No. 636. The FERC has issued final orders of
virtually all Order No. 636 pipeline restructuring proceedings. Appeals of Order
No. 636, as well as orders in the individual pipeline restructuring proceedings,
are currently pending, and the Company cannot predict the ultimate outcome of
court review. This review may result in the reversal, in whole or in part, of
Order No. 636.
In December 1992, the FERC issued Order No. 547, governing the issuance of
blanket marketer sales certificates to all natural gas sellers other than
interstate pipelines. Order No. 547 applies to non-first sales that remain
subject to the FERC's NGA jurisdiction. The FERC intends Order No. 547, in
tandem with Order No. 636, to foster a competitive market for natural gas by
giving natural gas purchasers access to multiple supply sources at market-driven
prices. Order No. 547 may increase competition in markets in which the Company's
natural gas is sold which may negatively affect revenues in the future.
Commencing in May 1994, the FERC has issued a series of orders in individual
cases that delineate its gathering policy as a result of the comments received.
Among other matters, the FERC slightly narrowed its statutory tests for
establishing gathering status and reaffirmed that it does not have jurisdiction
over natural gas gathering facilities and services and that such facilities and
services are properly regulated by state authorities. As a result, natural gas
gathering may receive greater regulatory scrutiny by state agencies. In
addition, the FERC has approved several transfers by
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interstate pipelines of gathering facilities to unregulate gathering companies,
including affiliates. This could allow such companies to compete more
effectively with independent gatherers. The FERC's orders delineating its new
gathering policy are subject to possible court appeals.
The FERC has announced its intention to reexamine certain of its
transportation-related policies, including the appropriate manner for setting
rates for new interstate pipeline construction and the manner in which
interstate pipelines release transportation capacity under Order No. 636.
While any resulting FERC action would affect the Company only indirectly,
these inquiries are intended to further enhance competition in natural gas
markets.
CANADIAN OIL AND GAS REGULATION. The oil and natural gas industry is subject
to extensive legislation and regulation governing its operations including
land tenure, exploration, development, production, refining, transportation,
marketing, environmental protection, exports, taxes, labor standards and
health and safety standards imposed by legislation enacted by various levels
of government. In addition, extensive legislation and regulation exists with
respect to pricing and taxation of oil and natural gas and related products.
CUSTOMERS
Oil and gas hydrocarbons are the principal products produced by the Company
and sales of such products are usually made in the spot market or on such
other bases that may be impacted by the effect of changes in current market
prices. Future oil and natural gas prices may be affected by a variety of
factors including, but not limited to, supply and demand, world and regional
market conditions, political conditions and seasonal factors, all of which the
Company is unable to control or accurately predict. In the past, there have
not been, and management does not expect there to be in the near term, any
material adverse effects on the Company's business due to seasonal aspects.
Backlog is not a factor in the Company's operations. The Company is
principally engaged in a single industry segment, the acquisition,
exploration, development, and production of oil and gas reserves, all in the
United States, Ecuador and Canada. Sales of oil and gas to customers
accounting for 10% or more of revenues were as follows (in thousands):
CUSTOMER 1997 1996 1995
------ ------ ------
G C Marketing Company ....................... $2,267 $3,212 $ --
Mike Rogers Drilling Company ................ -- 591 746
Damsco Distribution ......................... 1,656 -- --
Diasu Oil & Gas Co., Inc. ................... 1,631 -- --
Ashtola Exploration Company ................. -- -- 208
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 20, 1998, the Company employed 27 full-time persons including two
engineers, two geologists, three landman and twenty administrative, technical
and accounting personnel. In addition, the Company employed four consultants
including two geologists and one engineering technical assistant.
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SELECTED FINANCIAL DATA (IN THOUSANDS)
COMPARATIVE CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------------
ASSETS 1997 1996 1995 1994 1993
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Current assets ................................................. $ 13,455 $ 2,918 $ 2,071 $ 1,973 $ 2,865
Property and equipment-net ..................................... 42,293 20,599 18,042 1,347 4,106
Oil and gas properties held for sale and other ................. 6,127 869 1,554 50 350
-------- -------- -------- ------- -------
$ 61,875 $ 24,386 $ 21,667 $ 3,370 $ 7,321
======== ======== ======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities ............................................ $ 2,956 $ 683 $ 5,960 $ 290 $ 561
Deferred income taxes .......................................... 1,039 1,169 606 -- 547
Long term debt ................................................. 41,400 3,900 9,920 -- --
Stockholders' equity ........................................... 16,480 18,634 5,181 3,080 6,213
-------- -------- -------- ------- -------
$ 61,875 $ 24,386 $ 21,667 $ 3,370 $ 7,321
======== ======== ======== ======= =======
WORKING CAPITAL ................................................ $ 10,499 $ 2,235 $ (3,889) $ 1,683 $ 2,304
======== ======== ======== ======= =======
COMPARATIVE STATEMENTS OF OPERATIONS
REVENUES
Oil and gas .................................................... $ 13,790 $ 11,780 $ 2,044 $ 1,747 $ 2,891
Gains on sales of properties ................................... 413 453 170 66 146
-------- -------- -------- ------- -------
14,203 12,233 2,214 1,813 3,037
Expenses ....................................................... 14,815 8,164 2,488 5,580 3,959
-------- -------- -------- ------- -------
Income (loss) from operations .................................. (612) 4,069 (274) (3,767) (922)
Other income, expenses and deductions
Interest and other income ................................... 328 286 146 76 41
Interest and debt expense ................................... (1,591) (1,242) -- -- --
-------- -------- -------- ------- -------
Income (loss) before income taxes and the cumulative
effect of a change in accounting for income taxes ............ (1,875) 3,113 (128) (3,691) (881)
Provision (benefit) for income taxes ........................... 174 679 9 (558) (279)
-------- -------- -------- ------- -------
Income (loss) before the cumulative effect of a change
in accounting for income taxes ............................... (2,049) 2,434 (137) (3,133) (602)
Cumulative effect of a change in accounting for
income taxes ................................................. -- -- -- -- 65
-------- -------- -------- ------- -------
NET INCOME (LOSS) .............................................. $ (2,049) $ 2,434 $ (137) $(3,133) $ (537)
======== ======== ======== ======= =======
PER BASIC SHARE OF STOCK:
Net income (loss) before the cumulative effect of a
change in accounting for income taxes ........................ $ (.22) $ .37 $ (0.02) $ (0.78) $ (0.15)
Cumulative effect of a change in accounting for
income taxes ................................................. -- -- -- -- 0.02
-------- -------- -------- ------- -------
NET INCOME (LOSS) .............................................. $ (.22) $ .37 $ (0.02) $ (0.78) $ (0.13)
======== ======== ======== ======= =======
Weighted average number of shares-basic ........................ 9,109 6,621 5,701 4,162 4,131
======== ======== ======== ======= =======
Weighted average number of shares-diluted ...................... 9,109 7,114 5,701 4,162 4,131
======== ======== ======== ======= =======
</TABLE>
Note A Pursuant to the provisions of Financial Accounting Standards Board
Statement No. 109, "Accounting for Income Taxes", the Company changed
its method of accounting for income taxes and recorded an adjustment of
$65 benefitting 1993.
Note B In 1997 and 1994, the Company recognized a Valuation Reduction of $2,838
and $1,724 respectively in connection with the write-down of its
investment in certain producing oil and gas properties.
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ITEM 2. DESCRIPTION OF PROPERTIES
GENERAL
At December 31, 1997, the Company held interests in excess of 619 gross wells
in the continental United States, 859 in Ecuador and in excess of 1,237 gross
wells in Canada consisting of working interests, royalty interests and
overriding royalty interests. Approximately 37% of the Company's proved oil
and gas reserves are oil and approximately 63% are gas, measured in energy
equivalent barrels of oil basis (natural gas is converted at the rate of six
thousand cubic feet of gas for each barrel of oil).
OIL AND GAS RESERVE INFORMATION
The following three tables reflect the estimated proved reserves of the
Company. The oil and gas reserves are principally located onshore in the
continental United States, Ecuador and Canada. The Company's reserve
information has been based on estimates prepared by an independent consulting
petroleum engineer. The independent consultant who prepared the reserve
estimate information as of December 31, 1994, was Hedrick and Associates.
Hedrick and Associates is no longer in business as of December 31, 1995.
Netherland, Sewell & Associates, Inc. prepared the domestic reserve estimates
as of December 31, 1995 and December 31, 1997 and audited the December 31,
1996 domestic reserve estimates which were prepared by the Company. McDaniel
& Associates Consultants LTD prepared the Canadian reserve estimates as of
December 31, 1995, 1996 and 1997. Ryder Scott prepared the Ecuador reserve
estimates as of December 31, 1997. Since the beginning of the last fiscal
year, the Company has not filed any estimates of its reserves with any Federal
authority or agency. The U S. reserves have been prepared using an average
oil price of $16.91, $24.41 and $18.09 per barrel and an average gas price of
$2.20, $3.91 and $2.00 per Mcf, as of January 1, 1998, 1997 and 1996,
respectively. The Canadian reserves have been prepared using an average oil
price of $15.30, $23.66 and $16.29 per barrel and an average gas price of
$1.34, $1.62 and $1.12 per Mcf, as of January 1, 1998, 1997 and 1996,
respectively. The Ecuador reserves where prepared using an average oil price
of $18.00 as of January 1, 1998.
<TABLE>
<CAPTION>
U. S. ECUADOR
------------------------- --------------------
PROVED RESERVES OIL GAS OIL GAS
(Bbls) (Mcf) (Bbls) (Mcf)
---------- ----------- -------- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 .......... 228,196 786,060 -- --
Extensions, discoveries and additions 66 8,449 -- --
Revisions of previous estimates ..... (24,715) (145,903) -- --
Purchase of minerals in place ....... 568,702 20,400,151 -- --
Production .......................... (84,848) (404,319) -- --
---------- ----------- -------- --------
Balance, December 31, 1995 .......... 687,401 20,644,438 -- --
Extensions, discoveries and additions 6,081 479,336 -- --
Revisions of previous estimates ..... 33,975 (519,051) -- --
Purchase of minerals in place ....... 109,252 4,590,014 -- --
Production .......................... (120,855) (2,396,379) -- --
---------- ----------- -------- --------
Balance, December 31, 1996 .......... 715,854 22,798,358 -- --
Extensions, discoveries and additions 20,480 2,869,630 26,395 --
Revisions of previous estimates ..... 70,093 (814,731) (26,395) --
Purchase of minerals in place ....... 1,746,890 7,702,198 489,971 --
Production .......................... (203,109) (2,554,072) (23,966) --
---------- ----------- -------- --------
Balance, December 31, 1997 .......... 2,350,208 30,001,383 466,005 --
========== =========== ======== ========
Proved Developed Reserves
Balance, December 31, 1995 .......... 661,852 20,446,505 -- --
Balance, December 31, 1996 .......... 608,705 19,361,667 -- --
Balance, December 31, 1997 .......... 2,334,122 29,156,068 466,005 --
<CAPTION>
CANADA TOTAL
---------------------- -------------------------
PROVED RESERVES OIL GAS OIL GAS
(Bbls) (Mcf) (Bbls) (Mcf)
-------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 .......... -- -- 228,196 786,060
Extensions, discoveries and additions -- -- 66 8,449
Revisions of previous estimates ..... -- -- (24,715) (145,903)
Purchase of minerals in place ....... 729,135 4,716,121 1,297,837 25,116,272
Production .......................... -- -- (84,848) (404,319)
-------- ---------- ---------- -----------
Balance, December 31, 1995 .......... 729,135 4,716,121 1,416,536 25,360,559
Extensions, discoveries and additions 31,351 1,506,458 37,432 1,985,794
Revisions of previous estimates ..... (12,623) 79,948 21,352 (439,103)
Purchase of minerals in place ....... -- -- 109,252 4,590,014
Production .......................... (112,563) (961,527) (233,418) (3,357,906)
-------- ---------- ---------- -----------
Balance, December 31, 1996 .......... 635,300 5,341,000 1,351,154 28,139,358
Extensions, discoveries and additions 15,774 95,139 62,649 2,964,769
Revisions of previous estimates ..... (30,595) 384,760 13,103 (429,971)
Purchase of minerals in place ....... (1,793) (295,974) 2,235,068 7,406,224
Production .......................... (93,486) (942,625) (320,561) (3,496,697)
-------- ---------- ---------- -----------
Balance, December 31, 1997 .......... 525,200 4,582,300 3,341,413 34,583,683
======== ========== ========== ===========
Proved Developed Reserves
Balance, December 31, 1995 .......... 729,135 4,716,121 1,390,987 25,162,626
Balance, December 31, 1996 .......... 635,300 5,341,000 1,244,005 24,702,667
Balance, December 31, 1997 .......... 525,200 4,582,300 3,325,327 33,738,368
</TABLE>
Page 9
<PAGE>
PRODUCTION AND PRICE HISTORY
The following table sets forth certain information concerning the Company's
annual net oil and gas production and average price information for the year
ended December 31:
<TABLE>
<CAPTION>
Production: 1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Oil (Bbls)
U.S ................................. 203,109 120,855 84,848
Ecuador ............................. 23,966 -- --
Canada .............................. 93,486 112,563 --
------------ ------------ ------------
Total ............................... 320,561 233,418 84,848
============ ============ ============
Gas (Mcf)
U.S ................................. 2,554,072 2,396,379 404,319
Ecuador ............................. -- -- --
Canada .............................. 942,625 961,527 --
------------ ------------ ------------
Total ............................... 3,496,697 3,357,906 404,319
============ ============ ============
Average sales price:
Oil ($ per Bbl)
U.S ................................. 17.87 19.69 16.23
Ecuador ............................. 16.10 -- --
Canada .............................. 17.58 18.09 --
------------ ------------ ------------
Average ............................. 17.65 18.92 16.23
============ ============ ============
Gas ($ per Mcf)
U.S ................................. 2.49 2.29 1.65
Canada .............................. 1.45 1.17 --
------------ ------------ ------------
Average ............................. 2.21 1.97 1.65
============ ============ ============
Average lifting costs ($ per Mcfe)
Operating expenses and production taxes 0.68 0.58 0.72
Depreciation, depletion and amortization 0.78 0.60 0.87
</TABLE>
PRODUCTIVE WELLS STATISTICS
The following table sets forth information concerning productive wells in which
the Company has an interest as of December 31, 1997: In the following data
"Gross" refers to the total wells in which the Company has a working interest
and "Net" refers to gross wells multiplied by the percentage of the working
interest owned by the Company.
OIL GAS TOTAL
------------- ------------- -------------
GROSS NET GROSS NET GROSS NET
----- ----- ----- ----- ----- -----
Canada ................... 722 15.3 515 6.6 1,237 21.9
Ecuador .................. 859 85.9 -- -- 859 85.9
U. S.(1) ................. 141 5.5 478 53.1 619 58.6
Total .................... 1,722 106.7 993 59.7 2,715 166.4
1 Includes producing units that contain numerous wells. Each unit is
counted as one gross well and the unit working interest is included in
the net wells.
Page 10
<PAGE>
DEVELOPMENT AND EXPLORATORY WELLS DRILLED
The following table includes the drilling results of wells in which the Company
has a working interest for the year ended December 31:
1997 1996 1995
------------- ------------ -------------
EXPLORATORY: GROSS NET GROSS NET GROSS NET
----- ----- ----- ----- ----- -----
Oil .......................... 0 .000 0 .000 0 .000
Gas .......................... 2 .489 1 .150 0 .000
Dry hole ..................... 3 .495 3 .335 0 .000
DEVELOPMENT:
Oil .......................... 34 1.282 21 .246 0 .000
Gas .......................... 4 .116 15 .257 2 .020
Dry hole ..................... 8 2.246 6 .174 1 .150
TOTAL
Productive ................... 40 1.887 37 .653 2 .020
Dry hole ..................... 11 2.741 9 .509 1 .150
DEVELOPED AND UNDEVELOPED LEASEHOLD ACREAGE:
The following table shows the Company's leasehold interest in developed and
undeveloped oil and gas acreage as of December 31, 1997. This table does not
reflect certain mineral acreage owned by the Company. In the following data
"Gross" refers to the total acres in which the Company has a working interest
and "Net" refers to gross acres multiplied by the percentage of the working
interest owned by the Company.
DEVELOPED UNDEVELOPED
ACREAGE ACREAGE
----------------- -----------------
UNITED STATES GROSS NET GROSS NET
------- ------ ------- ------
Alabama .............................. 6,389 715 188 7
Arkansas ............................. 1,040 247 1,799 450
Colorado ............................. 288 21 0 0
Kansas ............................... 204 53 0 0
Louisiana ............................ 5,415 879 1,017 850
Michigan ............................. 96 2 0 0
Mississippi .......................... 972 115 1,207 132
Montana .............................. 24 2 0 0
New Mexico ........................... 3,012 213 0 0
North Dakota ......................... 400 177 0 0
Oklahoma ............................. 2,360 379 0 0
Texas ................................ 19,577 3,555 3,641 1,486
Texas - Offshore ..................... 5,760 105 5,840 5,840
Wyoming .............................. 10,384 500 0 0
Utah ................................. 672 148 0 0
------- ------ ------- ------
Total-Domestic ................. 56,593 7,111 13,692 8,765
======= ====== ======= ======
CANADA
Alberta .............................. 82,080 2,966 209,176 12,957
Saskatchewan ......................... 2,160 1 960 1
British Columbia ..................... 2,086 260 28,715 1,737
------- ------ ------- ------
Total-Canadian ................. 86,326 3,227 238,851 14,695
======= ====== ======= ======
ECUADOR .............................. 15,400 1,540 279,819 27,982
======= ====== ======= ======
Total Leasehold Acreage ........ 158,319 11,878 532,362 51,442
======= ====== ======= ======
"Developed acreage" consists of lease acres spaced or assignable to production
on which wells have been drilled or completed to a point that would permit
production of commercial quantities of oil or gas.
Page 11
<PAGE>
The Company's ownership of mineral rights is set forth below:
GROSS NET
STATE MINERAL ACRES MINERAL ACRES
-------------- --------------
Mississippi ................................ 262,000 118,000
Wisconsin .................................. 121,000 110,000
Texas ...................................... 212,514 84,183
New Mexico ................................. 67,634 32,577
Other ...................................... 2,000 2,000
-------------- --------------
Total ................................ 665,148 346,760
============== ==============
The Company is not aware of any valuable minerals appurtenant to the mineral
rights in Wisconsin, and therefore has no plans to develop minerals on such
properties. Currently, the Company has 3,483 net mineral acres in southern
Mississippi, 18,594 net mineral acres in Texas and 3,177 net mineral acres in
New Mexico under lease to others.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings are pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the fourth
quarter of the Company's last fiscal year.
Page 12
<PAGE>
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMPANY'S COMMON STOCK
The Common Stock is quoted on the Nasdaq National Market under the symbol
"SMIN." From March 10, 1995 until July 22, 1997, the Common Stock was quoted on
the Nasdaq Stock Market SmallCap Market under the same symbol. Prior to March
10, 1995, the Common stock was quoted on the Nasdaq National Market under the
same symbol.
The following table sets forth the high and low sales prices on the market
systems noted above for the Company's Common Stock for the periods indicated:
1997 1996 1995
--------------- --------------- ---------------
HIGH LOW HIGH LOW HIGH LOW
------ ------ ------ ------ ------ ------
First Quarter ............ $ 7.75 $ 4.00 $ 2.13 $ 1.25 $ 1.25 $ .63
Second Quarter ........... 5.50 3.50 3.38 1.81 1.25 94
Third Quarter ............ 5.13 4.13 5.00 2.88 1.06 .75
Fourth Quarter ........... 8.13 5.13 6.13 4.00 1.63 .75
------ ------ ------ ------ ------ ------
For the Year ............. $ 8.13 $ 3.50 $ 6.00 $ 1.25 $ 1.63 $ .63
====== ====== ====== ====== ====== ======
The Company did not declare any dividends in fiscal 1997, 1996 or 1995. The
payment of future dividends on Common Stock, if any, will be reviewed
periodically by the Company's Board of Directors, and will depend upon, among
other things, Company's financial condition, funds available from operations,
the amount of anticipated capital and other expenditures, and the Company's
future business prospects. It is likely that for the foreseeable future, funds
available for dividends on Common Stock, if any, will be retained by the Company
to finance the growth of its business. Payment of dividends is currently
restricted by the terms of the Company's bank loan agreement.
There were 4,297 stockholders of record on March 23, 1998.
RECENT SALES OF UNREGISTERED SECURITIES
1996 STOCK OPTION PLAN. During 1997 and 1996, the Company granted options
exercisable for 170,000 and 130,000 shares of Common Stock respectively under
the Company's 1996 Stock Option Plan (the "SOP"). Pursuant to the SOP, the
Company may grant options to purchase up to 300,000 shares (subject to customary
anti-dilution adjustments) of its Common Stock to key employees of the Company.
The SOP is administered by the Compensation Committee of the Company's Board of
Directors, which generally has authority to establish who receives options and
the terms and conditions thereof, including vesting and exercise price. The
exercise price of each option granted in 1996 is the market price for the Common
Stock on the date of grant, determined by reference to the most recent closing
price therefor reported on the Nasdaq National Market System.
1997 STOCK OPTION PLAN. During 1997, the Company granted options exercisable for
135,000 shares of Common Stock under the Company's 1997 Stock Option Plan (the
"SOP"). Pursuant to the SOP, the Company may grant options to purchase up to
700,000 shares (subject to customary anti-dilution adjustments) of its Common
Stock to key employees of the Company. The SOP is administered by the
Compensation Committee of the Company's Board of Directors which generally has
authority to establish who receives options and the terms and conditions
thereof, including vesting and exercise price. The exercise price of each option
granted in 1997 is the market price for the Common Stock on the date of grant,
determined by reference to the most recent closing price reported on the Nasdaq
National Market Systems.
Page 13
<PAGE>
1996 EMPLOYEE STOCK PURCHASE PLAN. During 1997, the Company granted options
exercisable for 6,297 shares of Common Stock under the Company's 1996 Employee
Stock Purchase Plan (the "SPP"). The SPP is intended to constitute an "employee
stock purchase plan" within the meaning of Section 423 of the Internal Revenue
Code of 1986, as amended. Pursuant to the SPP, the Company may grant options to
purchase up to 300,000 shares (subject to customary anti-dilution adjustments)
of its Common Stock to employees of the Company. Options may be granted on
January 1 and July 1 of each year to eligible employees who elect to participate
in the SPP. The term of each option is six months from the date of grant. The
number of options granted to each participant equals the quotient of (I) the
total payroll deductions authorized by the participant as extended during the
full applicable option period, divided by (ii) 85% of the fair market value of
the Common Stock as of the date of grant of such option. The exercise price of
options under SPP is 85% of the fair market value of the Common Stock as of the
date of grant or the date of exercise of such option, whichever is less,
determined by reference to the most recent closing price reported on the NASDAQ
National Market System.
The Company's Form S-8 Registration Statement No. 333-12375 generally covers the
issuance and resale (subject, in the case of affiliates, to Rule 144 under the
1933 Act) of Common Stock issuable upon exercise of options under the SOP's and
SPP.
Page 14
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1997
AS COMPARED TO THE PERIOD ENDED DECEMBER 31, 1996
Oil and gas revenues for 1997 were $13,790,000, up 17% compared to oil and gas
revenues for 1996 of $11,780,000. The increase in revenues reflects higher
production volumes of both natural gas and crude oil and higher commodity prices
for natural gas, which were partially offset by lower crude oil prices. Higher
production volumes were primarily due to the acquisition of certain oil and gas
interests in four transactions in 1997 in the Big Escambia Creek Field in
Escambia County, Alabama, for $16.9 million in cash, and the acquisition of an
interest in the Santa Elena Project in Santa Elena, Ecuador, in June 1997 for
$2.8 million in cash.
Natural gas production in 1997 was 3,497 Million cubic feet ("Mmcf"), a 4%
increase compared to 1996 production of 3,358 Mmcf. The Company's crude oil
production in 1997 increased 37% to 320,561 barrels compared to 233,418 barrels
in 1996.
The average natural gas price in 1997 increased 12% to $2.21 per Mcf compared to
$1.97 per Mcf in 1996. Crude oil prices decreased 7% in 1997 to $17.65, compared
to $18.92 per barrel in 1996.
As part of the Company's on-going operations, the Company may sell non-strategic
assets or oil and gas properties. The proceeds would be used to pay down debt or
redeploy capital to opportunities that may have a higher rate of return. These
activities resulted in gains on sale of assets of $413,000 in 1997 and $453,000
in 1996. The gain on sale in 1996 was primarily the result of the sale of
Venture Resources, Inc. for $1,143,000, which was a non-core asset acquired as
part of the Stone & Webster acquisition. The gain on sale in 1997 was primarily
the result of the sale of non-strategic oil and gas properties in Canada and the
United States.
Production costs, including production and ad valorem taxes, increased in 1997
to $3,682,000, up 34% from $2,742,000 in 1996, primarily due to the above
mentioned acquisitions. Additionally, on a cost per Mcfe basis, production costs
for 1997 increased to $0.68 per Mcfe, or 17% from $0.58 per Mcfe in 1996.
General and administrative expenses increased to $2,308,000 in 1997, up 37% from
$1,682,000 in 1996. Additionally, on a cost per Mcfe basis, general and
administrative expenses increased to $0.43 per Mcfe, or 23% from $0.35 Mcfe in
1996.
Exploration, dry hole and impairment expenses increased in 1997 to $4,614,000,
up 433% compared to $865,000 in 1996. This is primarily due to lease impairment
expenses of $603,000 in the fourth quarter of 1996, compared to the geological
and geophysical expenses associated with the Matthews Project seismic shoot and
the drilling of four dry holes costing, $1,776,000 and $2,838,000 of impairment
expense primarily on a well in Lafourche Parish, Louisiana, which was a result
of a mechanical failure of the well in which the Company owned a 93% working
interest. Since the Company uses successful efforts method of accounting,
exploration expenses may vary greatly from year to year based upon the level of
exploration activity during the year.
Depreciation, depletion and amortization ("DD&A") expense for 1997 increased to
$4,211,000, up 46% from $2,875,000 in 1996, which was due primarily to downward
revisions to reserve estimates in the Dawson Heirs #1, the Ocker Trust #1 and
the Stateline Field.. The Company computes depreciation and depletion on each
producing property using the unit-of-production method. Since this method
employs estimates of remaining reserves, depreciation and depletion expenses may
vary from year to year because of revisions to reserve estimates, production
rates and other factors. DD&A expenses increased per Mcfe in 1997 to $0.78 per
Mcfe, up 30% from $0.60 per Mcfe in 1996.
Interest and debt expense for 1997 increased to $1,591,000, up 28% from
$1,242,000 in 1996, which was primarily due to increased bank debt used to fund
acquisition activity and to the issuance of $41,400,000 of 6.875% convertible
subordinated debentures which were issued in October of 1997. A portion of the
debenture proceeds were used to retire
Page 15
<PAGE>
$20,700,000 of existing bank debt incurred to acquire the above mentioned
acquisitions.
Tax expense in 1997 declined to $174,000 from $679,000 in 1996. Taxes in 1997
resulted from alternative minimum taxes in the United States and foreign taxes
in Canada.
The Company reported a loss in 1997 of $2,049,000 or $0.22 per basic share
compared to earnings of $2,434,000 or $0.37 per basic share in 1996.
FOR THE PERIOD ENDED DECEMBER 31, 1996
AS COMPARED TO THE PERIOD ENDED DECEMBER 31, 1995
Oil and gas revenues for 1996 were $11,780,000, up 476% compared to oil and gas
revenues for 1995 of $2,044,000. The increase in revenues reflects higher
production volumes of both natural gas and crude oil and higher commodity prices
for both natural gas and oil. Higher production volumes were primarily due to
the acquisitions of certain assets and companies of Stone & Webster, Inc.
("Stone & Webster"), acquired in December 1995, and the acquisition of the
limited partnership interest in SMC Development, L.P. in August 1996.
Natural gas production in 1996 was 3,358 Mmcf, a 731% increase compared to 1995
production of 404 Mmcf. The Company's crude oil production in 1996 increased
175% to 233,418 barrels compared to 84,848 barrels in 1995.
The average natural gas price in 1996 increased 19% to $1.97 per Mcf compared to
$1.65 per Mcf in 1995. Crude oil prices increased 17% in 1996 to $18.92,
compared to $16.23 per barrel in 1995.
As part of the Company's on-going operations, the Company may sell non-strategic
assets or oil and gas properties. The proceeds would be used to pay down debt or
redeploy capital to opportunities that may have a higher rate of return. These
activities resulted in gains on sale of assets of $453,000 in 1996 and $170,000
in 1995. The gain on sale in 1996 was primarily the result of the sale of
Venture Resources, Inc. for $1,143,000, which was a non-core asset acquired as
part of the Stone & Webster acquisition. The gain on sale in 1995 was primarily
the result of the sale of non-strategic oil and gas interests in the Bandera and
Equipo prospects located in Maverick County, Texas.
Production costs, including production and ad valorem taxes, increased in 1996
to $2,742,000, up 318% from $656,000 in 1995, primarily due to the above
mentioned acquisitions. However, on a cost per Mcfe basis, production costs for
1996 declined to $0.58 per Mcfe, or 19% from $0.72 per Mcfe in 1995.
General and administrative expenses increased as a result of the above mentioned
acquisitions to $1,682,000 in 1996, up 105% from $819,000 in 1995. However, on a
cost per Mcfe basis, general and administrative expenses declined to $0.35 per
Mcfe, or 61% from $0.90 Mcfe in 1995.
Exploration, dry hole and lease impairment expenses increased in 1996 to
$865,000, up 291% compared to $221,000 in 1995, which was primarily due to lease
impairment expenses of approximately $600,000 in the fourth quarter of 1996.
Since the Company uses successful efforts method of accounting, exploration
expenses may vary greatly from year to year based upon the level of exploration
activity during the year.
Depreciation, depletion and amortization ("DD&A") expense for 1996 increased to
$2,875,000, up 263% from $792,000 in 1995, which was due primarily to the above
mentioned acquisitions and downward revisions to reserve estimates in the
Company's oil and gas property located in Yoakum, Texas. The Company computes
depreciation and depletion on each producing property using the
unit-of-production method. Since this method employs estimates of remaining
reserves, depreciation and depletion expenses may vary from year to year because
of revisions to reserve estimates, production rates and other factors. DD&A
expenses declined per Mcfe in 1996 to $0.60 per Mcfe, down 31% from $0.87 per
Mcfe in 1995.
Page 16
<PAGE>
Interest and debt expense in 1996 was $1,242,000, which was a result of the bank
debt incurred to consummate the above mentioned acquisitions. The Company had no
interest expense in 1995.
The Company had a net operating loss carryforward of approximately $2,293,000 at
the end of 1995, which was fully utilized in 1996. Tax expense in 1996 and 1995
was $679,000 and $9,000, respectively, with the increase related to higher 1996
income before taxes.
The Company reported earnings in 1996 of $2,434,000 or $0.37 per share compared
to a loss of $137,000 or $0.02 per share in 1995.
LIQUIDITY AND CAPITAL RESOURCES
FOR THE PERIOD ENDED DECEMBER 31, 1997
The Company has historically funded its operations, acquisitions, exploration
and development expenditures from cash flows from operating activities, bank
borrowings, issuance of common stock and sales of non-strategic assets and oil
and gas properties. Total available liquidity at December 31, 1997, 1996 and
1995 was $44,011,000, $14,571,000 and $1,347,000, respectively.
The Company's cash flows provided by operating activities for the years ended
December 31, 1997, 1996, and 1995 were $6,808,000, $5,098,000, and $823,000,
respectively. Additional cash in the amounts of $1,063,000, $1,401,000 and
$608,000 was realized in 1997, 1996 and 1995, respectively from property sales
of non-strategic assets.
Effective December 31, 1997, the Company amended its bank credit facility that
consists of a secured reducing revolving line of credit. As of December 31,
1997, the borrowing base under the credit facility was $34,000,000, and the
Company had no outstanding borrowings thereunder, leaving $34,000,000 available
to borrow.
The credit facility borrowing base reduces $400,000 per month commencing
February 1, 1998, and is reviewed by the bank semi-annually until maturity on
June 1, 2000. The obligations under the credit facility are secured by
substantially all of the assets of the Company and its subsidiaries. The credit
facility contains certain covenants relating to the financial condition of the
Company and a prohibition on the payment of dividends. The credit facility bears
interest at the Company's option, of either prime rate floating or at the LIBOR
rate plus one and one-half percent to two percent, depending upon the level of
debt outstanding. On October 2, 1997, the Company issued $41,400,000 of 6.875%
convertible subordinated debentures ("the Notes") due on October 1, 2007. The
debentures are convertible at any time prior to maturity, at a conversion price
of $8.26 per share. The proceeds of the offering were used to retire $20,700,000
of bank debt under the Company's credit facility.
Capital spending in 1997 for acquisitions, exploration, and development totaled
$34,492,000, and was primarily funded from cash flows from operating activities,
bank debt and the Notes. The Company's capital spending budget for 1998,
exclusive of acquisition activity, is expected to be up to $20,000,000,
consisting of both exploration and development drilling, with primary emphasis
being the U.S. Gulf Coast region. The Company will evaluate its level of capital
spending throughout the year based upon drilling results, commodity prices, cash
flows from operations and property acquisitions. Actual capital spending may
vary from the initial capital expenditure budget.
The Company believes that it will have sufficient capital available from the
credit facility described above, together with cash flows from operating
activities, to fund its 1998 capital expenditure program, and to meet the
Company's other obligations. The Company also believes that the funds available
from such sources will enable the Company to continue to selectively pursue
strategic corporate and property acquisitions.
The Company's debt to total capitalization ratio was 72% at December 31, 1997,
compared to 17% at December 31, 1996. The Company's interest coverage ratio
(calculated as income from operations plus depreciation, impairments, depletion
and amortization, and exploration expenses divided by interest expense) was 5.16
to 1 for 1997.
Page 17
<PAGE>
The Company did not declare dividends in fiscal 1997, 1996 and 1995. 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.
YEAR 2000 COMPLIANCE
The Company does not expect that the cost of converting its computer system to
year 2000 compliance will be material to its financial condition. The Company
believes that it will be able to achieve year 2000 compliance by end of 1999,
and it does not currently anticipate any disruption in its operations as the
result of any failure by the Company to be in compliance. The Company does not
currently have any information concerning the year 2000 compliance status of its
customers and vendors.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income("SFAS 130"), which establishes standards for
reporting and display of comprehensive income and its components. The components
of comprehensive income refer to revenues, expenses, gains and losses that are
excluded from net income under current accounting standards, including foreign
currency translation items, minimum pension liability adjustments and unrealized
gains and losses on certain investments in debt and equity securities. SFAS 130
requires that all items that are recognized under accounting standards as
components of comprehensive income be reported in a financial statement
displayed in equal prominence with other financial statements; the total or
other comprehensive income for a period is required to be transferred to a
component of equity that is separately displayed in a statement of financial
position at the end of an accounting period. SFAS 130 is effective for both
interim and annual periods beginning after December 15, 1997. The Company plans
to adopt SFAS 130 in the first quarter of 1998.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131. Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"). SFAS 131 establishes standards for the way public enterprises are to
report information about operating segments in annual financial statements and
requires the reporting of selected information about operating segments in
interim financial reports issued to stockholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS 131 is effective for periods beginning after December 15, 1997.
The Company plans to adopt SFAS 131 in the first quarter of 1998.
ITEM 7. FINANCIAL STATEMENTS
Financial Statements are filed as a part of this report. See page 19, Index to
Financial Statements. The Financial Statement Schedules are not applicable and
have been omitted.
Page 18
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
DESCRIPTION NUMBER
Reports of Independent Certified Public Accountants: 20-21
Financial Statements:
Consolidated Balance Sheets at December 31, 1997 and 1996 22
Statements of Consolidated Operations
for the Years Ended December 31, 1997, 1996 and 1995 23
Statements of Consolidated Stockholders' Equity
for the Years Ended December 31, 1995, 1996 and 1997 24
Statements of Consolidated Cash Flows
for the Years Ended December 31, 1997, 1996 and 1995 25
Notes to Consolidated Financial Statements
for the Years Ended December 31, 1997, 1996 and 1995 27
Page 19
<PAGE>
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 and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the two year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Southern Mineral
Corporation and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
years in the two year period ended December 31, 1997 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
March 13, 1998
Page 20
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
Southern Mineral Corporation:
We have audited the accompanying statements of consolidated operations,
stockholders' equity and cash flows of Southern Mineral Corporation (a Nevada
corporation) and subsidiaries as of 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 consolidated results of operations and cash flows of
Southern Mineral Corporation and subsidiaries for the year ended December 31,
1995, in conformity with generally accepted accounting principles.
Grant Thornton LLP
Houston, Texas
February 21, 1996
Page 21
<PAGE>
SOUTHERN MINERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
--------------------
1997 1996
-------- --------
(in thousands, except
share amounts)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............................ $ 10,011 $ 471
Receivables .......................................... 3,280 2,292
Other ................................................ 164 155
-------- --------
Total current assets .............................. 13,455 2,918
PROPERTY AND EQUIPMENT, AT COST USING SUCCESSFUL
EFFORTS METHOD FOR OIL AND GAS ACTIVITIES
Oil and gas producing properties ................... 53,437 24,888
Mineral rights ..................................... 167 167
Unproven properties ................................ 494 525
Office equipment ................................... 363 251
Accumulated depreciation, depletion and amortization (12,168) (5,232)
-------- --------
42,293 20,599
PROPERTIES HELD FOR SALE AND OTHER ...................... 6,127 869
-------- --------
Total assets ...................................... $ 61,875 $ 24,386
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ..................................... $ 2,749 $ 683
Note payable ......................................... 207 --
-------- --------
Total current liabilities ......................... 2,956 683
LONG TERM DEBT .......................................... 41,400 3,900
DEFERRED INCOME TAXES ................................... 1,039 1,169
STOCKHOLDERS' EQUITY
Common stock - par value $.01 per share;
authorized 20,000,000 shares at
December 31, 1997 and 1996; issued and
outstanding 9,133,033 and 9,088,519 at
December 31, 1997 and 1996 .......................... 91 91
Additional paid-in capital ........................... 14,152 14,030
Cumulative translation adjustment .................... (227) --
Retained earnings .................................... 2,516 4,565
-------- --------
16,532 18,686
Less: Treasury stock ................................. (52) (52)
-------- --------
Total stockholders' equity ........................ 16,480 18,634
-------- --------
Total liabilities and stockholders' equity ........ $ 61,875 $ 24,386
======== ========
The accompanying notes to consolidated financial statements of Southern
Mineral Corporation and subsidiaries are an integral part of these statements.
Page 22
<PAGE>
SOUTHERN MINERAL CORPORATION
STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
--------------------------------
1997 1996 1995
-------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C>
REVENUES
Oil and gas ...................................... $ 13,790 $ 11,780 $ 2,044
Gains on sales of properties and
other assets ................................... 413 453 170
-------- -------- --------
14,203 12,233 2,214
EXPENSES
Production ....................................... 3,682 2,742 656
Exploration ...................................... 1,776 262 221
Depreciation, depletion and amortization ......... 4,211 2,875 792
General and administrative ....................... 2,308 1,682 702
Impairment of oil and gas properties ............. 2,838 603 --
Severance benefit ................................ -- -- 117
-------- -------- --------
14,815 8,164 2,488
-------- -------- --------
Income (loss) from operations ....................... (612) 4,069 (274)
Other income, expenses and deductions
Interest and other income ....................... 328 286 146
Interest and debt expense ....................... (1,591) (1,242) --
-------- -------- --------
Income (loss) before income taxes ................... (1,875) 3,113 (128)
Provision for foreign, federal and
state income taxes
Current provision ................................ 304 400 9
Deferred provision (benefit) ..................... (130) 279 --
-------- -------- --------
174 679 9
-------- -------- --------
Net income (loss) ................................... $ (2,049) $ 2,434 $ (137)
======== ======== ========
Net income (loss) per share-basic ................... $ (.22) $ .37 $ (0.02)
======== ======== ========
Net income (loss) per share-diluted ................. $ (.22) $ .34 $ (0.02)
======== ======== ========
Weighted average number of shares outstanding-basic . 9,109 6,621 5,701
======== ======== ========
Weighted average number of shares outstanding-diluted 9,109 7,114 5,701
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements of Southern
Mineral Corporation and subsidiaries are an integral part of these statements.
Page 23
<PAGE>
SOUTHERN MINERAL CORPORATION
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
For the Year Ended December 31,
(in Thousands)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TREASURY STOCK
------------------- PAID-IN TRANSLATION RETAINED --------------------
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS SHARES AMOUNT
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 ....................... 4,162 $ 42 $ 843 $ -- $ 2,268 137 $ 73
Stock issued for directors' fees ................. 14 -- 12 -- -- -- --
Odd lot tender offer ............................. -- -- -- -- -- 4 6
Sale of treasury stock ........................... -- -- 11 -- -- (50) (27)
Issuance of common stock for
acquisition of Diverse
Production Co. ................................. 2,194 22 2,172 -- -- -- --
Net loss ......................................... -- -- -- -- (137) -- --
-------- -------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1995 ..................... 6,370 64 3,038 -- 2,131 91 52
Stock issued for directors' fees ................. 24 -- 72 -- -- -- --
Issuance of common stock for private
placement of 2,500 shares of common
stock, net .................................... 2,500 25 10,596 -- -- -- --
Issuance of common stock for property
acquisitions and acquisition services ......... 195 2 324 -- -- -- --
Net income ....................................... -- -- -- -- 2,434 -- --
-------- -------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1996 ..................... 9,089 91 14,030 -- 4,565 91 52
Stock issued for directors' fees ................. 31 -- 181 -- -- -- --
Stock issued for stock purchase plan ............. 9 -- 29 -- -- -- --
Stock issued for stock option plan, net .......... 4 -- -- -- -- -- --
Issuance costs for private placement
of 2,500 shares of common stock ................ -- -- (88) -- -- -- --
Translation adjustment ........................... -- -- -- (227) -- -- --
Net loss ......................................... -- -- -- -- (2,049) -- --
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1997 ..................... 9,133 $ 91 $ 14,152 $ (227) $ 2,516 91 $ 52
======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements of Southern
Mineral Corporation and subsidiaries are an integral part of these statements.
Page 24
<PAGE>
SOUTHERN MINERAL CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net (loss) income ...................................... $ (2,049) $ 2,434 $ (137)
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation, depletion and amortization ............ 4,211 2,875 792
Gains on sales of properties and other assets ....... (413) (453) (170)
Impairment of oil and gas properties ................ 2,838 603 --
Exploration expenses ................................ 930 262 221
(Decrease) increase in deferred taxes ............... (130) 279 --
Common stock issued as compensation ................. 210 72 12
Amortization of note issuance costs ................. 66 -- --
Imputed interest .................................... 75 -- --
Change in assets and liabilities, net of
effects of acquisitions and dispositions:
(Increase) decrease in receivables ............... (987) (1,224) 214
(Increase) decrease in other current assets ...... (9) 231 (39)
Increase in other assets ......................... -- (115) --
Increase (decrease) in payables .................. 2,066 134 (70)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES .......... 6,808 5,098 823
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of:
Producing properties ................................ 26 258 511
Properties held for sale and unproven properties .... 1,037 -- 97
Decrease (increase) in marketable securities:
Purchases ........................................... -- -- (1,914)
Maturities and sales ................................ -- -- 3,483
Capital expenditures:
Acquisition, exploration and development ............ (16,168) (2,836) (651)
Properties held for sale ............................ (2,203) (470) (684)
Cash paid for partnership interest, net of cash received -- (2,590) --
Cash paid for acquisition of Stone & Webster properties,
net of cash received ................................. -- -- (16,215)
Cash received for sale of Venture Resources, Inc., net
of cash transferred .................................. -- 1,143 --
Cash paid for BEC Energy, Inc. ......................... (10,683) -- --
Cash paid for SMC Ecuador, Inc. ........................ (2,816) -- --
Other .................................................. (24) -- (63)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES .............. (30,831) (4,495) (15,436)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debenture offering ....................... 41,400 -- --
Debenture offering costs ............................... (2,536) -- --
Proceeds from revolving loan ........................... 19,200 4,300 15,215
Payments on revolving loan ............................. (23,100) (15,615) --
Payments on note payable ............................... (1,262) -- --
Loan acquisition costs ................................. (45) -- (127)
Proceeds from sale of treasury stock ................... -- -- 38
Purchase of treasury stock ............................. -- -- (6)
Proceeds from equity offering, net ..................... (88) 10,621 --
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 33,569 (694) 15,120
-------- -------- --------
EFFECT OF EXCHANGE VALUATION ON CASH ..................... (6) -- --
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,540 (91) 507
Cash and cash equivalents at beginning of year ......... 471 562 55
-------- -------- --------
Cash and cash equivalents at end of year ............... $ 10,011 $ 471 $ 562
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and subsidiaries are an integral part of these statements.
Page 25
<PAGE>
SOUTHERN MINERAL CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS-CONTINUED
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Taxes ................................................. $ 984 $ 363 $ (5)
Interest .............................................. 916 1,210 --
NON CASH TRANSACTIONS
Issuance of common stock for property acquisition services -- 326 --
Change in deferred tax liability on property acquisitions -- 284 --
Directors' fees and employee compensation for stock ...... 210 72 12
Note payable for property acquisition .................... 1,394 -- --
Accretion of discount .................................... $ 75 $ -- $ --
</TABLE>
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and subsidiaries are an integral part of these statements.
Page 26
<PAGE>
SOUTHERN MINERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GENERAL BUSINESS - Southern Mineral Corporation, a Nevada corporation, with its
subsidiaries (the "Company"), is an independent oil and gas company
headquartered in Houston, Texas. The Company is engaged in the acquisition,
exploitation, exploration and operation of oil and gas properties, primarily
along the Gulf Coast, the Mid-continent, Ecuador and in Canada, with a primary
focus on the Gulf Coast Basin, both onshore and offshore. The Company owns
interests in more than 2,700 oil and gas properties in those four regions. The
Company's business strategy is to increase reserves and shareholder value
through a balanced program of acquisitions, exploitation and controlled risk
exploration. In addition to oil and gas leasehold interests, the Company owns
fee interests in the oil and gas under some 665,148 gross surface acres
(comprising some 346,760 net mineral acres) in Mississippi, Texas and New
Mexico. The Company has no current development or other plans with respect to
these fee interests other than leasing them to third parties for exploration and
development.
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of Southern Mineral Corporation and its wholly-owned subsidiaries. In
consolidation, all significant intercompany transactions have been eliminated.
The Company accounts for its investment in oil and gas partnerships and joint
ventures using the proportional consolidation method.
REVENUES - Natural gas revenues generally are recorded using the sales method,
whereby the Company recognizes natural gas revenue based on the amount of gas
sold to purchasers on its behalf. All other revenue also are recorded using the
sales method. The Company believes that imbalances related to the sales of
natural gas are insignificant.
PROPERTY AND EQUIPMENT - The Company uses the successful efforts method of
accounting for its oil and gas properties. Under this method of accounting, the
tangible and intangible development costs of productive wells and development
dry holes are capitalized, and dry hole costs on exploratory wells are charged
against income when the well is determined to be non-productive. Other
exploratory expenditures, including geological and geophysical costs and delay
rentals, are expensed as incurred. The cost of unevaluated leasehold
acquisitions and wells in progress are included in unproven properties pending
evaluation.
Depreciation and depletion of producing oil and gas properties are computed
separately on each individual property on the unit-of-production method based on
estimated proved reserves. Depreciation of other property and equipment is
computed on the straight-line method over the estimated useful lives of the
assets ranging from 3 to 7 years.
The Company estimates that residual salvage values of equipment would
approximate any future dismantlement, restoration or abandonment costs.
Maintenance and repairs are charged to expense as incurred.
OIL AND GAS PROPERTIES HELD FOR SALE - The costs of non-producing exploratory
properties held for sale, including lease bonuses and other acquisition costs,
are capitalized and carried at the lower of cost or estimated net realizable
value. Geological, geophysical, and other exploration costs of non-producing
properties are capitalized to the extent such costs are reimbursed upon sale of
the property, determined by management based on the attributes of each property.
Otherwise, such costs, if any, are expensed. For those properties in which the
Company sells a portion of its interest, the cost of such properties, net of
reimbursements, are removed from this account and are included in property and
equipment if proved reserves are found.
Producing oil and gas properties, which have been identified for sale, are
carried at the lower of cost or estimated market.
Properties held for sale and other assets at December 31, 1995, include ten
non-contiguous pipeline and gathering systems, which are not part of the
Company's core business operations. The carrying value of these assets was
$675,000.
Page 27
<PAGE>
SOUTHERN MINERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
INCOME TAXES - The Company accounts for income taxes using the asset and
liability method. The asset and liability method requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between tax bases and financial reporting bases of other
assets and liabilities. (See Note 4.) The Company deducts intangible development
costs as incurred and deducts statutory depletion (percentage depletion) when it
exceeds cost depletion for federal income tax purposes.
CASH EQUIVALENTS - Management considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NOS. 121 AND 123 - Effective
January 1, 1996, the Company adopted SFAS No. 121 ACCOUNTING FOR IMPAIRMENT OF
LONG-LIVED ASSETS TO BE DISPOSED OF. This standard requires that long-lived
assets that are held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. When it is determined that an asset's estimated future
net cash flows will not be sufficient to recover its carrying amount, an
impairment charge must be recorded to reduce the carrying amount for the asset
to its estimated fair value. The effect of the adoption of SFAS 121 was not
material to the Company.
During 1996, the Company chose to continue the use of APB No. 25 and related
Interpretations in accounting for stock-based compensation. As required by SFAS
No. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company has disclosed in
pro-forma presentation the effects on earnings of calculating the fair value of
a stock option using the method prescribed in SFAS No. 123.
EARNINGS (LOSS) PER SHARE - Statements of Financial Accounting Standards No.
128, "Earnings per Share", specifies new measurement, presentation and
disclosure requirements for earnings per share and is required to be applied
retroactively upon initial adoption. The Company has adopted SFAS No. 128
effective with the release of December 31, 1997 earnings data, and accordingly,
has restated all previously reported earnings per share data. Basic earnings per
share is based on the weighted average shares outstanding without any dilutive
effects considered. Diluted earnings per share reflects dilution from all
potential common shares, including options and convertible debt. A
reconciliation of such earnings per share data is as follows (stated in
thousands except per share data):
NET INCOME PER SHARE
YEAR ENDED DECEMBER 31, 1997 (LOSS) SHARES AMOUNTS
------- ------- ------
Basic earnings per share ............... $(2,049) 9,109 $ (.22)
Effect of dilutive warrants ............ -- 440 --
Effect of dilutive stock options ....... -- 277 --
------- ------- ------
Diluted earnings per share ............. $(2,049) 9,826 $ (.22)
======= ======= ======
YEAR ENDED DECEMBER 31, 1996
Basic earnings per share ............... $ 2,434 6,621 $ .37
Effect of dilutive warrants ............ -- 290 --
Effect of dilutive stock options ....... -- 203 --
------- ------- ------
Diluted earnings per share ............. $ 2,434 7,114 $ .34
======= ======= ======
YEAR ENDED DECEMBER 31, 1995
Basic earnings per share ............... $ (137) 5,701 $ (.02)
Effect of dilutive stock options ....... -- -- --
------- ------- ------
Diluted earnings per share ............. $ (137) 5,701 $ (.02)
======= ======= ======
Page 28
<PAGE>
SOUTHERN MINERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Common stock equivalents with a weighted average of 493,000 are reflected in the
calculation of diluted earnings per share for the year ended December 31, 1996.
Common stock equivalents with a weighted average of 719,000 common stock
equivalents are not considered in the 1997 calculation of diluted earnings per
share due to the net loss recorded during the year. No adjustment to net income
(loss) was made in calculating diluted per share for 1997, 1996 and 1995.
RECLASSIFICATIONS - Certain amounts in prior financial statements have been
reclassified to conform to the 1997 financial statement presentation.
NOTE 2 ACQUISITIONS
On December 20, 1995, the Company completed the acquisition of certain oil and
gas assets of Stone & Webster Oil Company, Inc., and the outstanding capital
stock of Spruce Hills Production Company, Inc., San Salvador Development
Company, Inc., and Venture Resources, Inc., which are engaged primarily in oil
and gas exploration and production. The total cost of the acquisition was
approximately $16,400,000. The acquisition was financed by bank borrowings of
$15,215,000 and internally generated working capital of $1,209,000.
On May 20, 1997, the Company purchased from Mario Garcia and Dolores E. Garcia,
the outstanding capital stock of BEC Energy, Inc. ("BEC"). The purchase price
was $10,640,000. BEC's assets consist of working interest in fourteen oil and
gas wells located in the Big Escambia Creek Field, Escambia County, Alabama. The
acquisition was financed from proceeds under the Company's bank revolving line
of credit. The acquisition was accounted for as a purchase. The Company has
since acquired additional interest in the field in three transactions totaling
$6,300,000.
On August 30, 1996, the Company acquired the limited partner interest in SMC
Development, L.P., a Texas limited partnership, for $3,000,000. Upon the
acquisition of the limited partner's interest, the partnership was dissolved,
resulting in the Company obtaining a direct working interest in sixteen oil and
gas properties with proved reserves estimated to be 4.2 billion cubic feet of
gas and 149,000 barrels of liquids. The acquisition was financed from proceeds
under the Company's bank revolving line of credit. The acquisition was accounted
for as a purchase.
In addition, during 1997 the Company has acquired other interests, including a
10% interest in a concession in the Santa Elena Peninsula in Ecuador for
approximately $2,800,000, none of which would have had a material effect on the
historical results of the Company.
The following summarized pro forma (unaudited) information assumes the
acquisitions had occurred on January 1, 1996:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31,
-----------------------------
1997 1996
---------- -----------
(000's omitted, except per share data)
<S> <C> <C>
Revenues .................................... $ 15,254 $ 15,449
Net income (loss) ........................... (2,832) 2,015
Net income (loss) per share-basic ........... $ (.31) $ .30
Net income (loss) per share-diluted ......... $ (.31) $ .28
</TABLE>
These pro forma results are not necessarily indicative of those that would have
occurred had the acquisitions taken place at the beginning of 1996 or 1997,
respectively. The above amounts reflect adjustments for interest on notes
payable issued as part of the purchase price and depreciation on revalued
property, plant and equipment.
NOTE 3 LONG TERM DEBT AND NOTE PAYABLE BANK
On December 31, 1997, the Company entered into a revised credit facility
consisting of a secured reducing revolving line of credit with an initial
borrowing base of $34,000,000 ("Revolver Note"). The borrowing base of the
Revolver Note reduces by $400,000 per month commencing February 1, 1998, and is
reviewed by the bank semi-annually until
Page 29
<PAGE>
SOUTHERN MINERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
maturity on June 1, 2000. Under the terms of the Revolver Note, the borrowing
base is redetermined semi-annually by the lending bank based upon its
calculation of changes in the underlying reserve values securing the credit
facility. As of December 31, 1997, the Company had no borrowings under the
Revolver Note leaving an unfunded commitment of $34,000,000. The Revolver Note
bears interest at the Company's option, of either prime rate floating or at the
LIBOR rate plus one and one half percent to two percent depending upon the level
of debt outstanding. The credit facility prohibits the payment of dividends,
contains certain covenants relating to the Company's financial condition and is
secured by substantially all the assets of the Company. The Revolver Note has no
payments due in 1998 and the outstanding balance is due in 2000. On October 2,
1997, the Company issued $41,400,000 of 6.875% convertible subordinated
debentures due on October 1, 2007. The Revolving Note was paid from proceeds of
the convertible debentures. The debentures are convertible at any time prior to
maturity, at a conversion price of $8.26 per share. Long-term debt consisted of
the following at December 31, 1997 and 1996 (in thousands):
1997 1996
------- -------
Revolving Note ................................... $ -- $ 3,900
Convertible subordinated debentures .............. 41,400 --
------- -------
Long-term debt ................................... $41,400 $ 3,900
======= =======
NOTE 4 FEDERAL AND STATE INCOME TAXES
Income tax expense attributable to income from continuing operations consists of
(in thousands):
CURRENT DEFERRED TOTAL
----- ----- -----
YEAR ENDED DECEMBER 31, 1997:
U.S. Federal .......................... $ (96) $(311) $(407)
State and local ....................... 112 -- 112
Foreign ............................... 288 181 469
----- ----- -----
$ 304 $(130) $ 174
===== ===== =====
YEAR ENDED DECEMBER 31, 1996:
U.S. Federal .......................... $ 8 $ 306 $ 314
State and local ....................... 5 -- 5
Foreign ............................... 387 (27) 360
----- ----- -----
$ 400 $ 279 $ 679
===== ===== =====
YEAR ENDED DECEMBER 31, 1995:
U.S. Federal .......................... $ -- $ -- $ --
State and local ....................... 9 -- 9
Foreign ............................... -- -- --
----- ----- -----
$ 9 $ -- $ 9
===== ===== =====
Differences between the effective tax rate and the statutory federal rate are as
follows:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
------ ------ ------
Statutory rate for benefit ............... (34.0%) (34.0%) (34.0%)
Valuation allowance ...................... 38.9 (13.1) 33.6
Foreign taxes, net of federal benefit .... 9.7 7.6 --
State taxes, net of federal benefit ...... 4.0 0.7 4.5
Percentage depletion ..................... (12.1) (8.1) --
Other .................................... 2.8 0.7 2.9
------ ------ ------
Effective tax rate ....................... 9.3% 21.8% 7.0%
====== ====== ======
Deferred taxes at December 31, consist of the following (in thousands):
Page 30
<PAGE>
SOUTHERN MINERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Deferred tax assets: 1997 1996
------- -------
Oil and gas properties ........................... $ 56 $ --
Net operating loss carryforward .................. 276 92
Other ............................................ 11 10
Statutory depletion carryforward ................. 386 159
------- -------
729 261
Valuation allowance ................................ (729) --
------- -------
-- 261
Deferred tax liabilities:
Oil and gas properties ........................... -- 572
Oil and gas properties - Canadian taxes .......... 1,039 858
------- -------
1,039 1,430
------- -------
$(1,039) $(1,169)
======= =======
The valuation allowance for deferred tax assets as of January 1, 1997 and 1996
was $729,000 and $0, respectively. The net change in the total valuation
allowance for the year ended December 31, 1997 was an increase of $729,000. In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. In order to fully realize
the deferred tax asset, the Company will need to generate sufficient future
taxable income prior to the expiration of the net operating loss carryforwards
in 2012. Based upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences, net of the existing
valuation allowances at December 31, 1997. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.
For federal tax purposes, the Company had a net operating loss carryforward of
approximately $812,000 for the year ended 1997. The Company also has an
alternative minimum tax credit carryforward of approximately $11,000 and
statutory depletion carry forward of $1,136,000 at December 31, 1997.
NOTE 5 RELATED PARTY TRANSACTIONS
In September, 1995, the Company entered into a joint venture, Southern Links
Group Joint Venture ("Southern Links"), to acquire, develop and market
exploration prospects. The Company's joint venture partner is The Links Group,
Inc. ("Links"), a company that is controlled by Robert Hillery, a director of
the Company. The Company has agreed to fund third party costs of Southern Links.
Any proceeds from the sale of prospects or oil and gas from such prospects is
distributed 100% to the Company until it receives an amount equal to the return
of its invested capital, after which time all such proceeds and property
interests, if any, are to be distributed 75% to the Company and 25% to Links.
NOTE 6 MAJOR CUSTOMERS
The Company is principally engaged in a single industry segment, the
exploration, development, and production of oil and gas reserves in the United
States, Ecuador and Canada. Sales of oil and gas to customers accounting for 10%
or more of revenues were as follows (in thousands):
Page 31
<PAGE>
CUSTOMER 1997 1996 1995
------ ------ ------
G C Marketing Company ................... $2,267 $3,212 $ --
Mike Rogers Drilling Company ............ -- 591 746
Damsco Distribution ..................... 1,656 -- --
Diasu Oil & Gas Co., Inc. ............... 1,631 -- --
Ashtola Exploration Company ............. -- -- 208
NOTE 7 COMMON STOCK
During 1997 and 1996, the Company granted options exercisable for 170,000 and
130,000 shares of Common Stock respectively under the Company's 1996 Stock
Option Plan (the "SOP"). Pursuant to the SOP, the Company may grant options to
purchase up to 300,000 shares (subject to customary anti-dilution adjustments)
of its Common Stock to key employees of the Company. The SOP is administered by
the Compensation Committee of the Company's Board of Directors, which generally
has authority to establish who receives options and the terms and conditions
thereof, including vesting and exercise price. The exercise price of each option
granted in 1997 and 1996 is the market price for the Common Stock on the date of
grant, determined by reference to the most recent closing price therefor
reported on the Nasdaq National Market System.
During 1997, the Company granted options exercisable for 135,000 shares of
Common Stock under the Company's 1997 Stock Option Plan (the "SOP"). Pursuant to
the SOP, the Company may grant options to purchase up to 700,000 shares (subject
to customary anti-dilution adjustments) of its Common Stock to key employees of
the Company. The SOP is administered by the Compensation Committee of the
Company's Board of Directors which generally has authority to establish who
receives options and the terms and conditions thereof, including vesting and
exercise price. The exercise price of each option granted in 1997 is the market
price for the Common Stock on the date of grant, determined by reference to the
most recent closing price reported on the Nasdaq National Market Systems.
During 1996, the Company established the 1996 Employee Stock Purchase Plan,
which covers substantially all employees. An aggregate of 300,000 shares of the
Company's common stock are reserved for issuance upon the exercise of options
granted under the Employee Stock Purchase Plan. During 1997, 6,297 options were
granted under the Employee Stock Purchase Plan.
During 1995, the Company established the "1995 Non-Employee Director
Compensation Plan" in order to compensate non-employee Directors with shares of
the Company's common stock in lieu of cash fees. The plan authorizes a total of
100,000 shares of common stock for issuance and provides that for attending a
regular or special meeting of the Board of Directors each non-employee Director
will be issued 1,000 shares of registered common stock.
The Company applies APB 25 and related Interpretations in accounting for
stock-based compensation. Had compensation costs been determined based on the
fair value at the grant dates for awards consistent with the method of SFAS No.
123, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below (in thousands except per share amounts):
1997 1996
-------- ------
Net income (loss) As reported $(2,049) $2,434
Pro forma (2,127) 1,938
Basic earnings per share As reported (0.22) .37
Pro forma (0.23) .29
Fully diluted earnings per share As reported (0.22) .34
Pro forma $ (0.23) $ .27
Page 32
<PAGE>
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for the grants issued in 1997 and 1996:
Expected volatility 52.52%
Risk free rate 5.20% to 7.80%
Expected life of options 3 to 7 years
Expected dividend yield 0%
In 1996, the Company entered into an exploration arrangement with Diasu Oil &
Gas Co., Inc. ("Diasu") and Diasu's two principal shareholders. Pursuant to the
arrangement, the Company issued the Diasu shareholders 175,000 shares of common
stock and warrants to purchase up to 600,000 shares at $2.00 a share for a term
of five years.
In connection with the acquisition of Diverse Production Company ("DPC") in
1995, the Company granted options exercisable for 325,000 shares of its common
stock at $1.25 a share through April 2000. Each of the individuals that received
the options became directors of the Company in connection with the acquisition
of DPC.
In consideration for initiating the transactions pursuant to which the Company
acquired DPC, the Company granted a director of the Company an option to acquire
43,878 shares of the Company's common stock at $1.00 per share exercisable
through April 2000.
In 1994, in connection with the offer and acceptance of employment, the
Company's President was granted a non-qualified option to purchase 450,000
shares of the Company's common stock at a price of $1.00 per share. The option
is non-assignable, and is exercisable until December, 2004. Payment for the
option can be made in cash, common stock of the Company, or a combination
thereof.
In consideration for services as financial advisor and placement agent for the
private placement in December, 1996, the Company granted Morgan Keegan &
Company, Inc. 120,000 warrants of the Company's common stock at $4.50 per share
exercisable through December, 2001.
A summary of the Company's stock options and warrants of December 31, 1997, 1996
and 1995, and changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- --------------- ---------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year ..... 1,668,87 $ 1.71 818,878 $ 1.09 450,000 $ 1.00
Granted .................. 305,000 5.97 850,000 2.49 368,878 1.22
Exercised ................ (8,090) 3.00 -- --
Forfeited ................ -- -- --
---------- ---------- ----------
Outstanding at
end of year 1,965,788 $ 2.37 1,668,878 $ 1.71 818,878 $ 1.09
========== ========== ==========
Options exercisable
at end of year ...... 1,548,878 1,548,878 818,878
========== ========== ==========
</TABLE>
The weighted-average fair value of compensatory options granted during 1997 ,
1996 and 1995 were $5.97, $2.49 and $1.22, respectively, per option.
Page 33
<PAGE>
The following table summarizes information about options and warrants
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- -----------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
- ---------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.00 to 1.50 828,878 4.91 years $ 1.10 828,878 $ 1.10
2.00 to 3.00 711,910 3.08 years 2.16 600,000 2.00
3.50 to 5.00 255,000 4.19 years 4.76 120,000 4.50
5.50 to 6.75 170,000 4.87 years 6.75 -- --
----------- ----------
1,965,788 1,548,878
=========== ==========
</TABLE>
NOTE 8 COMMITMENTS AND CONTINGENCIES
The Company leases office space under a noncancellable operating lease expiring
December 31, 1998. Lease commitments at December 31, 1997, are payable $134,184
in 1998. Lease expense in 1997, 1996 and 1995 were $136,192, $133,755 and
$66,212, respectively.
No material legal proceedings are pending.
The Company is unaware of any possible exposure from actual or potential claims
or lawsuits involving environmental matters. As such, no liability has been
accrued as of December 31, 1997 and 1996.
NOTE 9 QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data of the Company are presented below for the
years ended December 31, 1997 and 1996 (in thousands, except per share amounts):
FULLY
INCOME BASIC DILUTED
(LOSS) NET INCOME INCOME
1997 FROM INCOME (LOSS) (LOSS)
QUARTER REVENUES OPERATIONS (LOSS) PER SHARE PER SHARE
-------- -------- -------- -------- --------
March 31 ........... $ 4,017 $ 1,620 $ 1,111 $ .12 $ .12
June 30 ............ 3,247 1,124 551 .06 .06
September 30 ....... 3,492 (212) (269) (0.03) (0.03)
December 31 ........ 3,447 (3,144) (3,442) (0.38) (0.38)
-------- -------- -------- -------- --------
14,203 (612) (2,049) (0.22) (0.22)
======== ======== ======== ======== ========
1996
QUARTER
March 31 ........... 3,010 1,006 825 .13 .12
June 30 ............ 2,819 1,386 620 .09 .09
September 30 ....... 3,031 1,051 627 .10 .09
December 31 ........ 3,373 626 362 .05 .05
-------- -------- -------- -------- --------
$ 12,233 $ 4,069 $ 2,434 $ .37 $ .34
======== ======== ======== ======== ========
Page 34
<PAGE>
NOTE 10 RETIREMENT BENEFITS
The Company terminated its 401(k) Retirement Plan in 1995, and adopted a
Simplified Employee Pension Plan ("SEP"). The SEP allows employees to defer part
of their salary. Employer contributions are optional, and the Company will
determine annually whether it will contribute and at what level. The maximum
amount that can be contributed annually per SEP plan participant from a
combination of salary deferrals plus Company optional contributions is $22,500.
The Company's contributions amounted to $33,784 and $22,554 in 1997 and 1996,
respectively, and was 50% of the amount contributed by each of the participants
in the plan for both years.
Prior to October 1, 1995, the Company had a 401(k) retirement plan covering all
of its eligible employees. Under the 401(k) plan, subject to certain plan
limitations and certain provisions of the Internal Revenue Code, plan
participants could contribute up to 15% of their pre-tax compensation. For the
year ended December 31, 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 in 1995.
NOTE 11 GEOGRAPHIC DATA
The Company is an independent oil and gas company engaged in the acquisition,
development and exploration of oil and natural gas properties. All earnings
before January 1, 1996 were domestic earnings. Information about the Company's
operations by geographic area for the years ended December 31, 1996 and 1997 is
as follows (in thousands):
<TABLE>
<CAPTION>
U. S. ECUADOR CANADA TOTAL
-------- -------- -------- --------
YEAR ENDED DECEMBER 31, 1997
<S> <C> <C> <C> <C>
Oil & gas sales ................................. $ 10,116 $ 386 $ 3,701 $ 14,203
Expense:
Production ................................. 2,785 278 619 3,682
Exploration ................................ 1,672 76 28 1,776
Impairment of oil and
gas properties ........................... 2,838 -- -- 2,838
Depreciation, depletion and
amortization ............................. 3,187 177 847 4,211
General & administrative ................... 1,044 28 1,236 2,308
-------- -------- -------- --------
11,526 559 2,730 14,815
-------- -------- -------- --------
Interest & other income, net .................... 304 19 5 328
Interest expense ................................ (1,591) -- -- (1,591)
-------- -------- -------- --------
Net (loss) income before income taxes ........... (2,697) (154) 976 (1,875)
Income tax provision (benefit) .................. (295) -- 469 174
-------- -------- -------- --------
Net (loss) income ............................... $ (2,402) $ (154) $ 507 $ (2,049)
======== ======== ======== ========
IDENTIFIABLE ASSETS AS OF DECEMBER 31, 1997 ..... $ 42,561 3,465 $ 5,838 $ 51,864
Corporate assets-cash and cash equivalents ...... 10,011
--------
Total assets .................................... $ 61,875
========
Page 36
<PAGE>
YEAR ENDED DECEMBER 31, 1996
Oil and gas sales ............................... $ 8,136 $ -- $ 3,644 $ 11,780
Gains on sales of properties .................... 424 -- 29 453
-------- -------- -------- --------
8,560 -- 3,673 12,233
Expense:
Production ................................. 1,880 -- 862 2,742
Exploration ................................ 218 -- 44 262
Impairment of oil and gas properties ....... 603 -- -- 603
Depreciation, depletion and amortization ... 1,896 -- 979 2,875
General & administrative ................... 802 -- 880 1,682
-------- -------- -------- --------
5,399 -- 2,765 8,164
-------- -------- -------- --------
Interest & other income, net .................... 99 -- 187 286
Interest expense ................................ (1,242) -- 0 (1,242)
-------- -------- -------- --------
Net income before income taxes .................. 2,018 -- 1,095 3,113
Income taxes .................................... 319 -- 360 679
-------- -------- -------- --------
Net income ...................................... $ 1,699 $ -- $ 735 $ 2,434
-------- ======== -------- --------
IDENTIFIABLE ASSETS AS OF DECEMBER 31, 1996 ..... $ 17,646 $ -- $ 6,269 $ 23,915
Corporate assets-cash and cash equivalents ...... 471
--------
Total assets .................................... $ 24,386
========
</TABLE>
NOTE 12 OIL AND GAS PRODUCING ACTIVITIES
The Company's capitalized costs of all oil and gas properties and related
allowances for depreciation and depletion are as follows at December 31 (in
thousands):
1997 1996
-------- --------
Proved properties .......................... $ 53,437 $ 24,888
Unproven properties ........................ 494 525
Less accumulated depreciation
and depletion ............................. (11,905) (5,072)
-------- --------
Total ...................................... $ 42,026 $ 20,341
-------- --------
The Company's depreciation, depletion and amortization costs per Mcfe in 1997,
1996 and 1995 were $0.78, $0.60 and $0.87, respectively.
The Company's share of oil and gas revenues produced from its royalty interests
was $1,053,000, $979,000 and $169,000 for the years ended December 31, 1997,
1996, and 1995, respectively.
Costs incurred in oil and gas property acquisition, exploration and development
activities were as follows (in thousands):
AS OF DECEMBER 31, 1997 UNITED STATES ECUADOR CANADA TOTAL
------- ------- ------- -------
Property acquisition costs
Proved ........................... $22,492 $ 2,582 $ -- $25,074
Unproved ......................... -- -- -- --
Exploration costs .................. 5,606 76 -- 5,682
Development cost ................... 2,209 1,023 402 3,634
------- ------- ------- -------
Total costs incurred ............... 30,307 3,681 402 34,390
======= ======= ======= =======
AS OF DECEMBER 31, 1996
Property acquisition costs
Proved ........................... 4,595 -- -- 4,595
Unproved ......................... -- -- -- --
Page 37
<PAGE>
Exploration costs .................. 373 -- -- 373
Development cost ................... 426 -- 642 1,068
------- ------- ------- -------
Total costs incurred ............... 5,394 -- 642 6,036
======= ======= ======= =======
AS OF DECEMBER 31, 1995
Property acquisition costs
Proved ........................... 17,785 -- -- 17,785
Unproved ......................... 876 -- -- 876
Exploration costs .................. 214 -- -- 214
Development cost ................... 248 -- -- 248
------- ------- ------- -------
Total costs incurred ............... $19,123 $ -- $ -- $19,123
======= ======= ======= =======
RESERVE QUANTITY INFORMATION (unaudited)
The following three tables reflect the estimated proved reserves of the Company.
The oil and gas reserves are principally located onshore in the continental
United States, Ecuador and Canada. The Company's reserve information has been
based on estimates prepared by an independent consulting petroleum engineer. The
independent consultant who prepared the reserve estimate information as of
December 31, 1994, was Hedrick and Associates. Hedrick and Associates is no
longer in business as of December 31, 1995. Netherland, Sewell & Associates,
Inc. has prepared the domestic reserve estimates as of December 31, 1995 and
December 31, 1997 and audited the December 31, 1996 domestic reserve estimates
which were prepared by the Company. McDaniel & Associates Consultants LTD
prepared the Canadian reserve estimates as of December 31, 1995, 1996 and 1997.
Ryder Scott prepared the Ecuador reserve estimates as of December 31, 1997. The
U S. reserves have been prepared using an average oil price of $16.91, $24.41
and $18.09 per barrel and an average gas price of $2.20, $3.91 and $2.00 per
Mcf, as of January 1, 1998, 1997 and 1996, respectively. The Canadian reserves
have been prepared using an average oil price of $15.30, $23.66 and $16.29 per
barrel and an average gas price of $1.34, $1.62 and $1.12 per Mcf, as of January
1, 1998, 1997 and 1996, respectively. The Ecuador reserves where prepared using
an average oil price of $18.00 as of January 1, 1998.
<TABLE>
<CAPTION>
U. S. Ecuador
-------------------------- --------------------------
Proved Reserves Oil Gas Oil Gas
(Bbls) (Mcf) (Bbls) (Mcf)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 .......... 228,196 786,060 -- --
Extensions, discoveries and additions 66 8,449 -- --
Revisions of previous estimates ..... (24,715) (145,903) -- --
Purchase of minerals in place ....... 568,702 20,400,151 -- --
Production .......................... (84,848) (404,319) -- --
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1995 .......... 687,401 20,644,438 -- --
Extensions, discoveries and additions 6,081 479,336 -- --
Revisions of previous estimates ..... 33,975 (519,051) -- --
Purchase of minerals in place ....... 109,252 4,590,014 -- --
Production .......................... (120,855) (2,396,379) -- --
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 .......... 715,854 22,798,358 -- --
Extensions, discoveries and additions 20,480 2,869,630 26,395 --
Revisions of previous estimates ..... 70,093 (814,731) (26,395) --
Purchase of minerals in place ....... 1,746,890 7,702,198 489,971 --
Production .......................... (203,109) (2,554,072) (23,966) --
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 .......... 2,350,208 30,001,383 466,005 --
=========== =========== =========== ===========
PROVED DEVELOPED RESERVES
BALANCE, DECEMBER 31, 1995 .......... 661,852 20,446,505 -- --
BALANCE, DECEMBER 31, 1996 .......... 608,705 19,361,667 -- --
BALANCE, DECEMBER 31, 1997 .......... 2,334,122 29,156,068 466,005 --
<CAPTION>
Canada Total
-------------------------- --------------------------
Proved Reserves Oil Gas Oil Gas
(Bbls) (Mcf) (Bbls) (Mcf)
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1994 .......... -- -- 228,196 786,060
Extensions, discoveries and additions -- -- 66 8,449
Revisions of previous estimates ..... -- -- (24,715) (145,903)
Purchase of minerals in place ....... 729,135 4,716,121 1,297,837 25,116,272
Production .......................... -- -- (84,848) (404,319)
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1995 .......... 729,135 4,716,121 1,416,536 25,360,559
Extensions, discoveries and additions 31,351 1,506,458 37,432 1,985,794
Revisions of previous estimates ..... (12,623) 79,948 21,352 (439,103)
Purchase of minerals in place ....... -- -- 109,252 4,590,014
Production .......................... (112,563) (961,527) (233,418) (3,357,906)
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 .......... 635,300 5,341,000 1,351,154 28,139,358
Extensions, discoveries and additions 15,774 95,139 62,649 2,964,769
Revisions of previous estimates ..... (30,595) 384,760 13,103 (429,971)
Purchase of minerals in place ....... (1,793) (295,974) 2,235,068 7,406,224
Production .......................... (93,486) (942,625) (320,561) (3,496,697)
----------- ----------- ----------- -----------
Page 37
<PAGE>
BALANCE, DECEMBER 31, 1997 .......... 525,200 4,582,300 3,341,413 34,583,683
=========== =========== =========== ===========
PROVED DEVELOPED RESERVES
BALANCE, DECEMBER 31, 1995 .......... 729,135 4,716,121 1,390,987 25,162,626
BALANCE, DECEMBER 31, 1996 .......... 635,300 5,341,000 1,244,005 24,702,667
BALANCE, DECEMBER 31, 1997 .......... 525,200 4,582,300 3,325,327 33,738,368
</TABLE>
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 and by the Company. The information may be useful for certain comparison
purposes, but should not be solely relied upon in evaluating the Company or its
performance. Moreover, the projections should not be construed as realistic
estimates of future cash flows, nor should the standardized measure be viewed as
representing current value.
The future cash flows are based on sales prices, costs and statutory income tax
rates in existence at the dates of the projections. Since future projections are
inherently imprecise, material revisions to reserve estimates may occur in the
future. Further, production of the oil and gas reserves may not occur in the
periods assumed, and actual prices realized and actual costs incurred are
expected to vary from those used. Management does not rely upon the information
that follows in making investment and operating decisions; rather, those
decisions are based upon a wide range of factors, including estimates of proved
and probable 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>
At December 31, 1997 U.S. ECUADOR CANADA TOTAL
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Future cash inflows ................... $ 106,515 $ 8,388 $ 16,240 $ 131,143
Future production and development
costs ............................... (32,626) (4,829) (6,847) (44,302)
Future income taxes ................... (12,368) (40) (1,287) (13,695)
--------- --------- --------- ---------
Future net cash flows ......... 61,521 3,519 8,106 73,146
10% Annual discount ................... (22,211) (1,138) (1,825) (25,174)
--------- --------- --------- ---------
Standardized measure of discounted
future net cash flows ............... 39,310 2,381 6,281 47,972
========= ========= ========= =========
AT DECEMBER 31, 1996
Future cash inflows ................... 109,510 -- 26,814 136,324
Future production and development costs (22,340) -- (8,101) (30,441)
Future income taxes ................... (22,719) -- (4,869) (27,588)
--------- --------- --------- ---------
Future net cash flows ......... 64,451 -- 13,844 78,295
10% Annual discount ................... (24,842) -- (4,119) (28,961)
--------- --------- --------- ---------
Standardized measure of discounted
future net cash flows ............... 39,609 -- 9,725 49,334
========= ========= ========= =========
AT DECEMBER 31, 1995
Future cash inflows ................... 53,075 -- 20,171 73,246
Future production and development costs (12,827) -- (8,628) (21,455)
Future income taxes ................... (9,165) -- (1,938) (11,103)
--------- --------- --------- ---------
Future net cash flows ......... 31,083 -- 9,605 40,688
Page 38
<PAGE>
10% Annual discount ................... (13,793) -- (2,295) (16,088)
--------- --------- --------- ---------
Standardized measure of discounted
future net cash flows ............... $ 17,290 $ -- $ 7,310 $ 24,600
========= ========= ========= =========
</TABLE>
The following are the principal sources of change in the standardized measure of
discounted future net cash flows (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 U.S. ECUADOR CANADA TOTAL
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Standardized measure -- beginning of year .... $ 39,609 $ -- $ 9,725 $ 49,334
Oil and gas sales, net of production costs ... (7,217) (108) (2,783) (10,108)
Sales of reserves in place ................... (6) -- (138) (144)
Purchases of reserves in place ............... 19,980 2,114 -- 22,094
Net changes in prices, net of production costs (25,178) -- (4,623) (29,801)
Extensions and discoveries ................... 2,877 104 301 3,282
Revisions to previous quantity estimates ..... (388) -- 163 (225)
Net change in income taxes ................... 10,045 547 1,525 12,117
Accretion of discount ........................ 5,136 -- 1,272 6,408
Changes in estimated future development costs (93) -- (36) 129
Developmental costs incurred during the period
that reduced future development costs ... -- -- -- --
-------- -------- -------- --------
Changes in production rates and other ........ (5,455) (276) 874 (4,857)
-------- -------- -------- --------
Standardized measure - end of year ........... 39,310 2,381 6,280 47,971
======== ======== ======== ========
AT DECEMBER 31, 1996
Standardized measure -- beginning of year .... 24,600 -- -- 24,600
Oil and gas sales, net of production costs ... (9,038) -- -- (9,038)
Sales of reserves in place ................... (166) -- -- (166)
Purchases of reserves in place ............... 13,001 -- -- 13,001
Net changes in prices, net of production costs 21,735 -- -- 21,735
Extensions and discoveries ................... 6,259 -- -- 6,259
Revisions to previous quantity estimates ..... (1,528) -- -- (1,528)
Net change in income taxes ................... (11,930) -- -- (11,930)
Accretion of discount ........................ 2,725 -- -- 2,725
Changes in estimated future development costs (786) -- -- (786)
Developmental costs incurred during the period
that reduced future development costs ... 480 -- -- 480
-------- -------- -------- --------
Changes in production rates and other ........ 3,983 -- -- 3,983
-------- -------- -------- --------
Standardized measure - end of year ........... 49,335 -- -- 49,335
======== ======== ======== ========
AT DECEMBER 31, 1995
Standardized measure -- beginning of year .... 2,334 -- -- 2,334
Oil and gas sales, net of production costs ... (1,388) -- -- (1,388)
Sales of reserves in place ................... -- -- -- --
Purchases of reserves in place ............... 25,346 -- -- 25,346
Net changes in prices, net of production costs (73) -- -- (73)
Extensions and discoveries ................... 14 -- -- 14
Revisions to previous quantity estimates ..... (390) -- -- (390)
Net change in income taxes ................... (2,311) -- -- (2,311)
Accretion of discount ........................ 284 -- -- 284
Changes in estimated future development costs 230 -- -- 230
Developmental costs incurred during the period
that reduced future development costs ... -- -- -- --
-------- -------- -------- --------
Changes in production rates and other ........ 554 -- -- 554
-------- -------- -------- --------
Page 39
<PAGE>
Standardized measure - end of year ........... $ 24,600 $ -- $ -- $ 24,600
======== ======== ======== ========
</TABLE>
The Company's foreign reserves per Mcfe in 1996 and 1995 were 25% and 27% of
total reserves, respectively.
NOTE 13. SUBSEQUENT EVENTS
On January 28, 1998, the shareholders of both the Company and Amerac Energy
Corporation ("Amerac") approved the merger of Amerac into a subsidiary of
Southern Mineral Corporation. Pursuant to the merger agreement, the Company
issued 3,333,333 shares of its common stock to acquire the shares of Amerac
common stock. The merger was effective on January 28, 1998, and will be
accounted for as a purchase.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Described in the Company's Form 8-K dated April 10, 1997. The Company changed to
KPMG Peat Marwick LLP from Grant Thorton LLP. There were no disagreements with
current or previous accountants.
Page 40
<PAGE>
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, 1997 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 Restated Articles of Incorporation of the Company,
(incorporated by reference to Exhibit 3.1 to Form 8-K
dated January 28, 1998).
3.2 Amended and Restated Bylaws of the Company, as amended
(incorporated herein by reference to Exhibit (a)(3)(b) of
Item 14, Part IV of the Company's Annual Report on Form
10-K filed for the year ended December 31, 1989).
10.1 Stock Option Agreement made as of December 31, 1994
between Southern Mineral Corporation and Steven H. Mikel
(incorporated by reference to Exhibit (h) to the Company's
annual report on Form 10-K for year ended December 31,
1994).
10.2 Southern Mineral Corporation 1995 Non-Employee Director
Compensation Plan (incorporated by reference to Exhibit
(k) to annual report on Form 10-K dated December 31,
1994).
10.3 Credit Agreement, dated December 20, 1995, between
Southern Mineral Corporation, SMC Production Co., San
Salvador Development Company, Inc., Venture Resources,
Inc., Venture Pipeline Company, VenGas Pipeline Company,
Spruce Hills Production Company, Inc., and Compass
Bank-Houston for Reducing Revolver Line of Credit of up to
$25,000,000 (incorporated by reference to Exhibit 10.1 to
Form 8-K of Registrant dated December 20, 1995).
10.4 Promissory Note, dated December 20, 1995, in the original
principal amount of $25,000,000 made by Southern Mineral
Corporation, SMC Production Co., San Salvador Development
Company, Inc., Venture Resources, Inc., Venture Pipeline
Company, VenGas Pipeline Company, Spruce Hills Production
Company, Inc. in favor of Compass Bank-Houston
(incorporated by reference to Exhibit 10.2 to Form 8-K of
Registrant dated December 20, 1995).
10.5 Credit Agreement, dated December 20, 1995, between
Southern Mineral Corporation, SMC Production Co., San
Salvador Development Company, Inc., Venture Resources,
Inc., Venture Pipeline Company, VenGas Pipeline Company,
Spruce Hills Production Company, Inc. and Compass
Bank-Houston for Term Loan of $3,500,000 (incorporated by
reference to Exhibit 10.3 to Form 8-K of Registrant dated
December 20, 1995).
10.6 Promissory Note, dated December 20, 1995, in the original
principal amount of $3,500,000 made by Southern Mineral
Corporation, SMC Production Co., San Salvador Development
Company, Inc., Venture Resources, Inc., Venture Pipeline
Company, VenGas Pipeline Company, Spruce Hills Production
Company, Inc. in favor of Compass Bank-Houston
(incorporated by reference to Exhibit 10.4 to Form 8-K of
Registrant dated December 20, 1995).
Page 41
<PAGE>
10.7 1996 Stock Option Plan (incorporated by reference to
Exhibit 10.10 to Form 10KSB dated December 31, 1995).
10.8 1996 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.11 to Form 10KSB dated December
31, 1995).
10.9 Joint Venture Agreement, dated October 1, 1995, between
Southern Mineral Corporation and The Links Group, Inc.
(incorporated by reference to Exhibit 10.12 to Form 10KSB
dated December 31, 1995).
10.10 Option Agreement, dated January 5, 1996, between Southern
Mineral Corporation and Diasu Oil & Gas Company, Inc.
covering the exploration joint venture (incorporated by
reference to Exhibit 10.13 to Form 10KSB dated December
31, 1995).
10.11 Stock Option Agreement dated April 6, 1995, between
Southern Mineral Corporation and Robert R. Hillery
(incorporated by reference to Exhibit 10.14 to Form 10KSB
dated December 31, 1995).
10.12 Subscription Agreement and Assumption of Obligations,
dated January 5, 1995, between Southern Mineral
Corporation and Gary L. Chitty, and Thomas J McMinn
(incorporated by reference to Exhibit 10.15 to Form
10KSB/A-1 dated December 31, 1995).
10.13 Amendment to Credit Agreement between Southern Mineral
Corporation et al and Compass Bank-Houston dated August
30, 1996 (incorporated by reference to Exhibit 10.1 to
Form 8-K of the Company dated August 30, 1996).
10.14 Second Amendment to Credit Agreements between the Company
and Compass Bank dated December 17, 1996 (incorporated by
reference to Exhibit 10.14 to Form 10KSB dated December
31, 1996).
10.15 Third Amendment to Credit Agreement between the Company
and Compass Bank, dated June 10, 1997 (incorporated by
reference to Exhibit 10.15 to Form S-2 (Commission File
No. 333-35843)).
10.16 Fourth Amendment to Credit Agreement between the Company
and Compass Bank, dated June 30, 1997 (incorporated by
reference to Exhibit 10.1 to Form 10-QSB for the quarterly
period ended June 30, 1997).
10.17 Incentive Stock Option Agreement between the Company and
M.M. Jensen, Dated August 26, 1997 (incorporated by
reference to Exhibit 10.17 to Form S-2 (Commission File
No. 333-35843)).
10.18 Fifth Amendment to Credit Agreement between the Company
and Compass Bank, dated December 31, 1997 (incorporated by
reference to Exhibit 10.1 to Form 8-K dated January 28,
1998).
10.19 Sixth Amendment to Credit Agreement between the Company
and Compass Bank, dated January 28, 1998 (incorporated by
reference to Exhibit 10.2 to Form 8-K dated January. 28,
1998).
10.20 Letter Agreement between the Company an Amerac, dated
November 17, 1997 (incorporated by reference to Exhibit
10.18 to Form S-4 (Commission File No. 333-42045)).
Page 42
<PAGE>
10.21 Letter Agreement between the Company an Amerac, dated
November 21, 1997 (incorporated by reference to Exhibit
10.19 to Form S-4 (Commission File No. 333-42045)).
21.1 Subsidiaries of the Company
<TABLE>
<CAPTION>
OTHER NAME UNDER WHICH JURISDICTION OF
NAME OF SUBSIDIARY SUBSIDIARY CONDUCTS BUSINESS INCORPORATION
------------------ ---------------------------- ----------------
<S> <C> <C>
SMC Production Co. None Texas
Spruce Hills Production Company, Inc. None Delaware
BEC Energy, Inc. None Texas
SMC Ecuador, Inc. None Delaware
</TABLE>
23.1 Consent of KPMG Peat Marwick LLP (filed herewith).
23.2 Consent of Grant Thorton LLP (filed herewith).
23.3 Consent of Netherland, Sewell & Associates, Inc.
(filed herewith)
23.4 Consent of McDaniel & Associates Consultants, Ltd.
(filed herewith)
23.5 Consent of Ryder Scott (filed herewith)
27.1 Financial Data Schedule (filed herewith).
99.1 Application and Affidavit Pursuant to Rule 437 under the
Securities Act of 1933 regarding impracticability of
obtaining written consent of Hedrick and Associates (filed
herewith).
(b) Reports on Form 8-K
Form 8-K of the Company dated November 17, 1997 reporting the
definitive agreement for the merger of Amerac Energy Corporation
with a subsidiary of the Company.
Form 8-K of the Company dated November 23, 1997 reporting the
purchase of an interest in the Lake Raccourci Field for
$5,400,000.
Form 8-K of the Company dated January 28, 1998 reporting the
consummation of the merger of Amerac Energy Corporation with a
Subsidiary of the Company and approval of the Restated Articles
of Incorporation by the shareholders of the Company.
Page 43
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
SOUTHERN MINERAL CORPORATION
BY:_____________________________
Steven H. Mikel
President and Chief Executive
Officer
Date: March 25, 1998
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/_________________________ Director March , 1998
B. Travis Basham
/s/_________________________ Director March , 1998
Thomas R. Fuller
/s/_________________________ Director March , 1998
Robert R. Hillery
/s/_________________________ Director March , 1998
E. Ralph Hines, Jr.
/s/_________________________ Director and Chairman March , 1998
Howell H. Howard of the Board of Directors
/s/_________________________ Director, President and Chief March , 1998
Steven H. Mikel Executive Officer
/s/_________________________ Director March , 1998
James E. Nielson
/s/_________________________ Director March , 1998
Donald H. Wiese, Jr.
/s/_________________________ Director March , 1998
Spencer L. Youngblood
/s/_________________________ Director March , 1998
Jeffrey B. Robinson
/s/_________________________ Vice President-Finance March , 1998
James H. Price (principal financial officer)
/s/_________________________ Treasurer March , 1998
M. M. Jenson (principal accounting officer)
</TABLE>
Page 44
EXHIBIT 23.1
CONSENT TO INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Southern Mineral Corporation:
We consent to the incorporation by reference in the registration statements on
Forms S-8 (No. 33-60571 and No.333-12375) of Southern Mineral Corporation of our
report dated March 13, 1998 relating to the consolidated balance sheet of
Southern Mineral Corporation and subsidiaries as of December 31, 1997 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended, which report appears in the December 31, 1997
annual report on Form 10-KSB of Southern Mineral Corporation.
Houston, Texas
March 26, 1998
EXHIBIT 23.2
We have issued our report dated February 21, 1996 accompanying the consolidated
financial statements of Southern Mineral Corporation (the "Company") and
Subsidiaries appearing in this Annual Report on Form 10-KSB for the year ended
December 31, 1997. We consent to the incorporation by reference of the
aforementioned report in the Company's Form S-8 Registration Statement
No.33-60571, Form S-3 Registration Statement No.33-60583 and Form S-8
Registration Statement No.333-12375.
GRANT THORNTON LLP
Houston, Texas
March 26, 1998
EXHIBIT 23.3
[NETHERLAND, SEWELL & ASSOCIATES, INC LETTHERHEAD]
CONSENT OF NETHERLAND, SEWELL & ASSOCIATES, INC.
We consent to the incorporation by reference into Form S-8 Registration
Statement 33-60571, Form S-3 Registration Statement No. 33-60583, and Form S-8
Registration Statement No. 333-12375 of Southern Mineral Corporation, a Nevada
corporation (the "Company") of references to this firm and its reports listed
below for the Company's estimated domestic proved reserves contained in this
Annual Report on Form 10-KSB for the year ended December 31, 1997.
1. Report of domestic proved reserves estimates as of January 1,
1996 dated March 1, 1996.
2. Audit of domestic proved reserves estimates as of January 1,
1997 dated February 25, 1997.
3. Report of domestic proved reserves estimates as of January 1,
1998 dated February 16, 1998.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: DANNY D.SIMMONS
Danny D.Simmons
Senior Vice President
Houston, Texas
March 25, 1998
EXHIBIT 23.4
McDANIEL & ASSOCIATES
CONSULTANTS LTD.
OIL AND GAS RESERVOIR EVALUATIONS
Reference: SOUTHERN MINERAL CORPORATION
ANNUAL REPORT ON FORM 1O-KSB
We consent to the incorporation by reference into Form S-8 Registration
Statement No. 33-60571, Form S-3 Registration Statement No. 33-60583, and Form
S-8 Registration Statement No. 333-12375 of Southern Mineral Corporation, a
Nevada Corporation (the "Company") of the references to this firm and to our
report on the Company's estimated Canadian proved reserves as of December 31,
1997 contained in this Annual Report on Form 10-KSB for the year ended December
31, 1997.
McDANIEL & ASSOCIATES CONSULTANTS LTD.
B. H. EMSLIE,
B. H. Emslie, P. Eng.
Vice President
Calgary, Alberta
Dated: March 25, 1998
EXHIBIT 23.5
INDEPENDENT RESERVOIR ENGINEER'S CONSENT
We consent to the incorporation by reference into Form S-8 Registration
No. 33-60571 and Form S-8 Registration Statement No. 333-12375 of Southern
Mineral corporation a Nevada Corporation (the "Company") of the references to
this firm and to our report on the Company estimated Ecuadorian proved reserves
as of December 31, 1997 contained in this Annual Report on Form 10-KSB for the
year ended December 31, 1997.
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED 12/31/97 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 10,011
<SECURITIES> 0
<RECEIVABLES> 3,279
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,455
<PP&E> 54,461
<DEPRECIATION> 12,168
<TOTAL-ASSETS> 61,875
<CURRENT-LIABILITIES> 2,956
<BONDS> 41,400
91
0
<COMMON> 0
<OTHER-SE> 16,388
<TOTAL-LIABILITY-AND-EQUITY> 61,875
<SALES> 13,790
<TOTAL-REVENUES> 14,203
<CGS> 0
<TOTAL-COSTS> 3,682
<OTHER-EXPENSES> 11,133
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,591
<INCOME-PRETAX> (1,875)
<INCOME-TAX> (174)
<INCOME-CONTINUING> (2,049)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,049)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> (.22)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 471
<SECURITIES> 0
<RECEIVABLES> 2,292
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,918
<PP&E> 25,831
<DEPRECIATION> (5,232)
<TOTAL-ASSETS> 24,386
<CURRENT-LIABILITIES> 683
<BONDS> 0
91
0
<COMMON> 0
<OTHER-SE> 18,543
<TOTAL-LIABILITY-AND-EQUITY> 24,386
<SALES> 12,233
<TOTAL-REVENUES> 12,519
<CGS> 0
<TOTAL-COSTS> 2,742
<OTHER-EXPENSES> 5,422
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,242
<INCOME-PRETAX> 3,113
<INCOME-TAX> 679
<INCOME-CONTINUING> 2,434
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,434
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.34
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 562
<SECURITIES> 0
<RECEIVABLES> 1,122
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,071
<PP&E> 20,890
<DEPRECIATION> (2,848)
<TOTAL-ASSETS> 21,667
<CURRENT-LIABILITIES> 5,960
<BONDS> 9,920
64
0
<COMMON> 0
<OTHER-SE> 5,117
<TOTAL-LIABILITY-AND-EQUITY> 21,667
<SALES> 2,044
<TOTAL-REVENUES> 2,360
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 656
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (137)
<INCOME-TAX> 0
<INCOME-CONTINUING> (137)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (137)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
EXHIBIT 99.1
March 24, 1998
United States Securities and
Exchange Commission
450 Fifth Street N.W., Mail Stop 3-7
Washington, D.C. 20549
Re: Southern Mineral Corporation, a Nevada corporation (the "Company")
Form 10-KSB for year ended December 31, 1997 ("Form 10-KSB")
Ladies and Gentlemen:
Enclosed please find my Affidavit concerning the impracticality of
obtaining the consent of the engineering firm of Hedrick and Associates to file
as an exhibit to the Form 10-KSB . Hedrick and Associates is out of business.
This letter constitutes the Company's application to the Commission under Rule
437 of the Securities Act of 1933, as amended, to dispense with the requirement
that the written consent of Hedrick and Associates be obtained and filed as an
exhibit to the Form 10-KSB. We respectfully request the Commission's consent to
this application.
Very truly yours,
Southern Mineral Corporation
By:/s/Steven H. Mikel
-------------------------------------------
Steven H. Mikel,
President and Chief Executive Officer
<PAGE>
AFFIDAVIT
PURSUANT TO RULE 437 UNDER THE
SECURITIES ACT OF 1933, AS AMENDED
STATE OF TEXAS )
)
COUNTY OF HARRIS )
BEFORE ME, the undersigned authority, on this day personally appeared
Steven H. Mikel, President and Chief Executive Officer of Southern Mineral
Corporation, a Nevada corporation, and being by me duly sworn did depose and
say:
1. My name is appeared Steven H. Mikel. I am President and Chief Executive
Officer of Southern Mineral Corporation, a Nevada corporation (the
"Company"), and have actual authority to make the statements contained in
this Affidavit on behalf of the Company in connection with the Company's
Form 10-KSB for the year ended December 31, 1997 (the
"Form 10-KSB").
2. This Affidavit is submitted to the Securities and Exchange Commission
pursuant to Rule 437 promulgated under Section 7 of the Securities Act of
1933, as amended.
3. The Form 10-KSB refers to engineering firms and their reports, and is
incorporated by reference in Form S-8 Registration Statement No. 33-60571,
Form S-3 Registration Statement No. 33-60583, and Form S-8 Registration
Statement No. 333-12375. Consent of such engineering firms must be filed
as exhibits to the Form 10-KSB.
4. One of the engineering firms covered by item 3 above is Hedrick and
Associates which prepared the Company's reserve estimate information as of
December 31, 1993 and 1994. Since Hedrick and Associates is out of
business, it is impracticable to obtain its consent to file as an exhibit
to the Form 10-KSB.
/s/ Steven H. Mikel
----------------------------------
Steven H. Mikel
President and Chief Executive
Officer
Southern Mineral Corporation
SWORN TO BEFORE ME on this 24th day of March 1998.
/s/ Margie Ewald
----------------------------------
Notary Public in and for the State
of Texas
Margie Ewald
----------------------------------
Printed Name of Notary
[Seal]
My Commission Expires: 12-10-98
----------------------------------------------------
