<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
SCHEDULE 13E-4
ISSUER TENDER OFFER STATEMENT
PURSUANT TO SECTION 13(e)(1) OF THE SECURITIES EXCHANGE ACT OF 1934
Southern Mineral Corporation
(Name of Issuer)
Southern Mineral Corporation
(Name of Person(s) Filing Statement)
6.875% Convertible Subordinated Debentures
(Title of Class of Securities)
843367 AA 1
(CUSIP Number of Class of Securities)
STEVEN H. MIKEL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
1201 LOUISIANA STREET, SUITE 3350
HOUSTON, TEXAS 77002-5609
(713) 658-9444
(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications on Behalf of the Person(s) Filing Statement)
Copies To:
L. Todd Gremillion
Mark S. Croft
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1900 Pennzoil Place -- South Tower
711 Louisiana Street
Houston, Texas 77002
(713) 220-5800
JULY 21, 1999
(Date Tender Offer First Published, Sent or Given to Security Holders)
CALCULATION OF FILING FEE
Transaction Valuation(*) Amount of Filing Fee
$15,808,590 None
- -------------------------------------------------------------------------------
(*) Estimated solely for purposes of calculating the filing fee in accordance
with Rule 0-11(a)(4). The proposed transaction value is the aggregate
market value of (1) the Issuer's 6.875% Convertible Subordinated Debentures
due 2007 (the "Debentures") based on the average high and low reported
prices of the Debentures on the Nasdaq SmallCap Market on July 19, 1999,
less $9,998,100 in cash to be paid by the Issuer in connection with the
Restructuring (as defined herein) and (2) the shares of the Issuer's common
stock, par value $.01 per share, that are issuable upon the exercise of the
warrants to be issued in the Restructuring at an exercise price of $1.50.
[x] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the form
or schedule and the date of its filing.
Amount previously paid: $4,395 Filing party: Southern Mineral Corporation
Form or registration no.: 333-83345 Date filed: July 21, 1999
<PAGE>
INTRODUCTORY STATEMENT
This Issuer Tender Offer Statement is being filed with the Securities and
Exchange Commission (the "Commission") by Southern Mineral Corporation, a Nevada
corporation ("Southern Mineral"), in connection with a financial restructuring
of Southern Mineral (the "Restructuring") on the terms and subject to the
conditions set forth in the preliminary Proxy Statement/Prospectus/Disclosure
Statement, as filed with the Securities and Exchange Commission July 21, 1999,
including any amendments thereto (the "Proxy Statement/Prospectus/Disclosure
Statement") and related Letter of Transmittal (the "Letter of Transmittal") by
(i) an offer to exchange (the "Exchange Offer") at least 98% of the aggregate
principal amount of Southern Mineral's 6.875% Convertible Subordinated Debenture
due 2007 (the "Debentures") or (ii) the elimination of all of the Debentures by
filing a petition for a prepackaged plan of reorganization (the "Prepackaged
Plan") under Chapter 11 of the United States Bankruptcy Code of 1978, as amended
(the "Bankruptcy Code").
1
<PAGE>
Item 1. SECURITY AND ISSUER.
(a) The issuer of the Debentures is Southern Mineral. The address of
Southern Mineral is 1201 Louisiana, Suite 3350, Houston, Texas 77002-5609.
(b) The securities which are subject to the Restructuring are the
Debentures. As of July 19, 1999, there were $41,400,000 aggregate principal
amount of Debentures outstanding. The Restructuring involves the exchange or
elimination of at least 98% of the aggregate principal amount of the Debentures,
in denominations of $1,000 principal amount or integral multiples thereof, for
(i) 377.8 shares of common stock, par value $.01 per share, of Southern Mineral
(the "Common Stock"), (ii) warrant to purchase 188.9 shares of Common Stock for
a period of three years at an exercise price of $1.50 per share and (iii)
$241.50 in cash. The information set forth in the Proxy Statement/Prospectus/
Disclosure Statement under the captions "Summary -- The Restructuring,"
"Summary -- Exchange Offer," "Summary -- Prepackaged Plan," "The Restructuring
- -- Exchange Offer," "Restructuring -- Prepackaged Plan," and "Disclosure
Statement -- Summary of the Plan" is incorporated herein by reference.
(c) The information set forth in the Proxy Statement/Prospectus/
Disclosure Statement under the captions "Price Range of Debentures" is
incorporated herein by reference.
(d) Not applicable.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) The information set forth in the Proxy Statement/Prospectus/
Disclosure Statement under the captions "Summary -- The Restructuring," "Summary
- -- Exchange Offer," "Summary -- Prepackaged Plan," "Restructuring -- EnCap
Investment," "Restructuring -- Exchange Offer" and "Restructuring -- Prepackaged
Plan" is incorporated herein by reference.
(b) Not applicable.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR
AFFILIATE.
The information set forth in the Proxy Statement/Prospectus/Disclosure
Statement under the captions "Summary -- Our Present Financial Condition,"
"Summary -- The Restructuring," "Restructuring -- Reasons for the Restructuring"
and "Restructuring -- Restructuring Overview" is incorporated herein by
reference.
(a) The information set forth in the Proxy Statement/Prospectus/
Disclosure Statement under the captions "Summary -- The Restructuring," "Summary
- -- Exchange Offer," "Summary -- Prepackaged Plan," "Restructuring -- EnCap
Investment," "Restructuring -- Exchange Offer" and "Restructuring -- Prepackaged
Plan" is incorporated herein by reference.
(b) The information set forth in the Proxy Statement/Prospectus/
Disclosure Statement under the captions "Summary -- The Restructuring," "Summary
- -- Prepackaged Plan," "Restructuring -- Prepackaged Plan" and "Disclosure
Statement" is incorporated herein by reference.
2
<PAGE>
(c) The information set forth in the Proxy Statement/Prospectus/
Disclosure Statement under the caption "Summary -- Our Present Financial
Condition" is incorporated herein by reference.
(d) The information set forth in the Proxy Statement/Prospectus/
Disclosure Statement under the captions "Restructuring -- EnCap Investment --
Control of Board by EnCap" is incorporated herein by reference.
(e) The information set forth in the Proxy Statement/Prospectus/
Disclosure Statement under the captions ""Summary," "Restructuring," "Summary --
Capitalization" and "Disclosure Statement" is incorporated herein by reference.
(f) The information set forth in the Proxy Statement/Prospectus/
Disclosure Statement under the caption "Summary -- Our Present Financial
Condition" is incorporated herein by reference.
(g) The information set forth in the Proxy Statement/Prospectus/
Disclosure Statement under the captions "Summary -- Restructuring Conditions,"
"Summary -- Debentureholder and Stockholder Action," "Restructuring -- EnCap
Investment" and "Special Meeting of Stockholders" is incorporated herein by
reference.
(h) If the Restructuring is consummated, the Debentures will no longer
be quoted on the Nasdaq SmallCap Market.
(i) If the Restructuring is consummated, the Debentures will be eligible
for termination of registration pursuant to Section 12(g)(4) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
(j) Not applicable.
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER.
Not applicable.
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT
TO THE ISSUER'S SECURITIES.
The information set forth in the Proxy Statement/Prospectus/Disclosure
Statement under the captions "Restructuring -- EnCap Investment" is incorporated
herein by reference.
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
(a) Southern Mineral intends to engage an exchange agent in connection
with the Restructuring and will pay the exchange agent a customary fee. Southern
Mineral intends to engage an information agent in connection with the
Restructuring and will pay the information agent a customary fee. The
information set forth in the Proxy Statement/Prospectus/Disclosure Statement
under caption "Debentureholder and Stockholder Actions" and "Special Meeting of
Stockholders" is incorporated herein by reference.
3
<PAGE>
ITEM 7. FINANCIAL INFORMATION.
(a) The following documents, which have been filed by Southern Mineral
with the Commission under the Exchange Act or the Securities Act of 1933, as
amended (the "Securities Act"), are incorporated herein by reference:
(i) Southern Mineral's Annual Report in Form 10-K/A for the fiscal year
ended December 31, 1998;
(ii) Southern Mineral's Quarterly Report or Form 10-Q for the quarterly
period ended March 31, 1999; and
(iii) Southern Mineral's Registration Statement or Form S-4, as filed
with the Commission on July 21, 1999 (Registration No. 333-83345)
All documents filed with Commission by Southern Mineral pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act or subsequent to the date hereof
will be deemed to be incorporated by reference herein and made a part hereof
from the date any said document is filed with the Commission.
Any statement contained in a document incorporated, or deemed to be
incorporated, herein by reference will be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document that also is incorporated, or is deemed to be
incorporated, by reference herein) modifies or supersedes such statement. Any
statement so modified or superseded will not be deemed, except as so modified or
superseded, to constitute a part hereof.
(b) The information set forth in the Proxy Statement/Prospectus/
Disclosure Statement under the captions "Summary -- Summary Unaudited Pro Forma
Condensed Consolidated Financial Data," "Restructuring -- Exchange Offering" and
"Restructing -- Prepackaged Plan" is incorporated herein by reference.
ITEM 8. ADDITIONAL INFORMATION.
(a) Not applicable.
(b) There are no applicable regulatory requirements that must be
complied with or approvals that must be obtained in connection with the
Restructuring other than compliance with the Bankruptcy Code (only in the event
of a Chapter 11 proceeding), Exchange Act, the Securities Act and the rules and
regulations promulgated thereunder, including, without limitation, Rule 13e-4.
(c) Not applicable.
(d) The information set forth in the Proxy Statement/Prospectus/
Disclosure Statement under the captions "Certain Federal Income Tax
Consequences" and "Disclosure Statement -- Certain Federal Income Tax
Consequences of the Plan" is incorporated herein by reference.
4
<PAGE>
(e) Reference is hereby made to the exhibits hereto that are
incorporated in their entirety herein by this reference.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
Exhibit DESCRIPTION
------- -----------
(a) Exhibit 99.1 Preliminary Proxy Statement/Prospectus/Disclosure
Statement as filed with the Securities and Exchange
Commission on July 21, 1999.
Exhibit 99.2 Letter of Transmittal (included as Exhibit 99.1 to
Exhibit 99.1 above).
(b) Not applicable
(c) Not applicable
(d) Exhibit 99.3 Tax Opinion of Akin, Gump, Strauss, Hauer & Feld,
L.L.P. (included as Exhibit 8.1. to Exhibit 99.1
above).
(e) See Exhibit 99.1 above Preliminary Proxy Statement/Prospectus/Disclosure
Statement as filed with the Securities and Exchange
Commission on July 21, 1999.
(f) Not applicable
5
<PAGE>
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
Date: July 21, 1999 /s/ Steven H. Mikel
-----------------------------
Steven H. Mikel
President and Chief Executive Officer
6
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
99.1 Preliminary Proxy Statement/Prospectus/Disclosure Statement.
99.2 Letter of Transmittal (included as Exhibit 99.1 to
Exhibit 99.1).
99.3 Tax Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
(included as Exhibit 8.1 to Exhibit 99.1).
<PAGE>
As Filed With The Securities and Exchange Commission On July 21, 1999
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------
Southern Mineral Corporation
(Exact Name of Registrant as Specified in Its Charter)
Nevada 1311 36-2068676
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification Number)
Incorporation or Classification Code
Organization) Number)
1201 Louisiana Street, Suite 3350
Houston, Texas 77002-5609
(713) 658-9444
(Address Including Zip Code, and Telephone Number,
Including Area Code of the Registrant's Principal Executive Offices)
---------------
Steven H. Mikel
President and Chief Executive Officer
1201 Louisiana Street, Suite 3350
Houston, Texas 77002-5609
(713) 658-9444
(Name, Address, Including Zip Code and Telephone Number,
Including Area Code of Agent for Service)
---------------
With copies to:
L. Todd Gremillion
Mark S. Croft
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1900 Pennzoil Place--South Tower
711 Louisiana Street
Houston, Texas 77002
(713) 220-5800
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable following the effectiveness of this registration statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
---------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title Of Each Class Of Proposed Maximum Proposed Maximum Amount of
Securities Offering Price Aggregate Registration
To Be Registered Amount To Be Registered Per Share Offering Price Fee
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share......... 15,640,920 shares(1)(2) (2) $4,077,900(3) $1,134
- ------------------------------------------------------------------------------------------------
Warrants to purchase
common stock, par value
$.01 per share......... 7,820,460 warrants(2) (2) (4) (4)
- ------------------------------------------------------------------------------------------------
Common Stock, par value
$.01 per share......... 7,820,460 shares(5) $1.50 $11,730,690 $3,261
- ------------------------------------------------------------------------------------------------
Total.................. -- -- $15,808,590 $4,395
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Maximum number of shares of common stock, par value $.01 per share, of
the Registrant to be issued in the exchange offer described in (2) below.
(2) Each $1,000 principal amount of 6.875% Convertible Subordinated
Debentures Due 2007 (the "Debentures") will be exchanged for (i) 377.8
shares of common stock, representing an aggregate of 15,640,920 shares,
(ii) a warrant to purchase 188.9 shares of common stock at an exercise
price of $1.50 per share, representing an aggregate of 7,820,460 shares
of common stock that are issuable upon the exercise of the warrants,
subject to certain adjustments and (iii) $241.50 in cash, representing an
aggregate of $9,998,100 in cash.
(3) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f). The proposed maximum aggregate offering
price of the common stock and warrants being offered in the exchange
offer is the aggregate market value of the Debentures determined in
accordance with Rule 457(c) based on the average of the high and low
reported prices of the Debentures on the Nasdaq SmallCap Market on July
19, 1999, less $9,998,100 in cash to be paid by the Registrant in
connection with the restructuring.
(4) The registration fee for the warrants is included in the registration fee
for the common stock to be issued in the exchange offer as determined
pursuant to note (3) above.
(5) Maximum number of shares of common stock, par value $.01 per share, of
the Registrant to be issued upon exercise of the warrants being offered
in the exchange offer.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this proxy statement/prospectus/disclosure statement is +
+not complete and may be amended. We may not sell these securities until we +
+deliver a final proxy statement/prospectus/disclosure statement. This proxy +
+statement/prospectus/disclosure statement is neither an offer to sell nor is +
+it seeking an offer to buy these securities in any state where the offer or +
+sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Proxy Statement/Prospectus/Disclosure Statement SUBJECT TO COMPLETION JULY 21,
1999
[LOGO]
SOUTHERN MINERAL CORPORATION
Our substantial indebtedness, financial covenant requirements and working
capital deficit raise substantial doubt about our ability to continue as a
going concern. Consequently, we propose two financial restructuring
alternatives: an exchange offer with our debentureholders and a prepackaged
plan of reorganization proposal under Chapter 11 of the United States
Bankruptcy Code. The financial restructuring would (1) reduce our debt by
eliminating at least 98% of our 6.875% Convertible Subordinated Debentures due
2007, (2) significantly adjust our capitalization and (3) modify the terms of
our secured debt.
EXCHANGE OFFER
Our exchange offer involves:
. the exchange of each $1,000 principal amount of debentures (including all
accrued but unpaid interest) for:
. 377.8 shares of our common stock;
. a warrant to purchase 188.9 shares of our common stock for a period of
three years at an exercise price of $1.50 per share; and
. $241.50 in cash;
. the sale of common stock to an investor; and
. the modification of the terms of our secured debt.
This exchange offer expires on , 1999.
PREPACKAGED PLAN
Our prepackaged plan proposal involves:
. the elimination of all of the debentures on terms similar to the exchange
offer by filing a petition for a prepackaged plan of reorganization under
Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court;
. the sale of common stock to an investor; and
. the modification of the terms of our secured debt.
This prepackaged plan proposal expires on , 1999.
The goal of the restructuring is to enhance our long-term viability by
reducing our debt to levels we believe are able to be supported by our
projected cash flow. We need your cooperation to successfully implement either
of the restructuring alternatives. We reserve the right, however, not to
complete the restructuring and pursue other alternatives.
To accomplish the exchange offer, our stockholders must approve (1) an
amendment to our articles of incorporation to increase the number of shares of
common stock we are authorized to issue and (2) the issuance of the common
stock and warrants. We are soliciting proxies for a special meeting of
stockholders to vote on these matters which has been set for , 1999 at
10:00 a.m., Houston time, at the Doubletree Hotel at Allen Center, 400 Dallas
Street, Houston, Texas.
We are also asking our stockholders and debentureholders to vote on the
prepackaged plan proposal.
Our common stock is quoted on the Nasdaq National Market under the symbol
"SMIN." The last reported sale price of our common stock on the Nasdaq National
Market on July 19, 1999 was $0.4375. Our debentures are quoted on the Nasdaq
SmallCap Market under the symbol "SMING." The last reported sale price of our
debentures on the Nasdaq SmallCap Market on July 19, 1999 was $34.00.
Investing in our securities involves certain risks. See "Risk Factors"
beginning on page 16.
Neither the SEC nor any state securities commission has approved or
disapproved these securities or determined if this proxy
statement/prospectus/disclosure statement is truthful or complete. Any
representation to the contrary is a criminal offense.
We have not commenced a case under Chapter 11 of the Bankruptcy Code as of
the date of this proxy statement/prospectus/disclosure statement. This proxy
statement/prospectus/disclosure statement has not been approved by any
bankruptcy court as containing adequate information within the meaning of
Section 1125(a) of the Bankruptcy Code.
The date of this proxy statement/prospectus/disclosure statement is
, 1999.
<PAGE>
You should rely only on the information contained in or incorporated by
reference in this proxy statement/prospectus/disclosure statement. We have not
authorized anyone to provide you with different information. We are not making
an offer of these securities where the offer is not permitted. You should not
assume that the information provided by this proxy
statement/prospectus/disclosure statement is accurate as of any date other than
the date on the front of this proxy statement/prospectus/disclosure statement.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Where You Can Find More Information....................................... 3
Summary................................................................... 4
Southern Mineral......................................................... 4
Our Present Financial Condition.......................................... 4
The Restructuring........................................................ 5
Restructuring Conditions................................................. 6
Exchange Offer........................................................... 7
Prepackaged Plan......................................................... 9
Special Stockholder Meeting.............................................. 11
Summary Unaudited Pro Forma Condensed Consolidated Financial Data........ 12
Capitalization........................................................... 13
Debentureholder and Stockholder Actions.................................. 14
Cautionary Statements Regarding Forward-Looking Statements................ 16
Risk Factors.............................................................. 16
Restructuring............................................................. 25
Reasons for the Restructuring............................................ 25
Restructuring Overview................................................... 26
EnCap Investment......................................................... 26
Exchange Offer........................................................... 29
Prepackaged Plan......................................................... 43
Fairness Opinion with Respect to the EnCap Investment.................... 55
Board Recommendations.................................................... 60
Selected Consolidated Historical Financial Data........................... 61
Price Range of Common Stock............................................... 63
Price Range of Debentures................................................. 63
Dividend Policy........................................................... 64
Description of Capital Stock.............................................. 64
Description of Warrants................................................... 65
General.................................................................. 65
Adjustments.............................................................. 65
Reservation of Common Stock.............................................. 66
Amendments............................................................... 66
Stockholder Rights........................................................ 66
General.................................................................. 66
Size and Classification of the Board..................................... 66
Removal of Directors; Filing Vacancies on the Board...................... 67
Stockholder Action by Written Consent.................................... 67
Meetings of Stockholders................................................. 67
Required Vote for Authorization of Certain Actions....................... 67
Amendment of Articles of Incorporation and Bylaws........................ 67
Appraisal and Dissenters' Rights......................................... 68
Nevada Anti-Takeover Statute............................................. 68
Limitation on Director and Officer Liability............................. 69
Indemnification of Officers and Directors................................ 69
No Cumulative Voting..................................................... 69
Conflict-of-Interest Transactions........................................ 69
Dividends and Other Distributions........................................ 69
Duties of Directors...................................................... 70
Relationship with Independent Accountants................................. 70
Legal Matters............................................................. 70
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Experts................................................................... 70
Certain Federal Income Tax Consequences................................... 70
Consequences to Southern Mineral......................................... 71
Consequences to Debentureholders......................................... 73
Special Meeting of Stockholders........................................... 75
Date, Time and Place of Special Meeting.................................. 75
Solicitation of Proxies.................................................. 75
Stockholders Entitled to Vote............................................ 75
Purpose of Special Meeting............................................... 75
Voting................................................................... 76
Item 1 on Proxy Card--Amendment to Articles of Incorporation............. 76
Item 2 of Proxy Card--Common Stock and Warrant Issuances................. 78
Notice of Special Meeting of Stockholders................................. 79
Disclosure Statement...................................................... 80
Introduction............................................................. 80
Summary.................................................................. 85
General Information...................................................... 96
Business Plan for the Reorganized Company................................ 99
Corporate Structure and Management of Southern Mineral................... 99
Reasons for the Solicitation; Recommendations............................ 101
Summary of Voting Procedures............................................. 101
Anticipated Events During the Chapter 11 Case............................ 102
Summary of the Plan...................................................... 104
Treatment of Trade Creditors and Employees During the Chapter 11 Case.... 122
Financing During and After the Chapter 11 Case........................... 122
Factors to be Considered................................................. 123
Securities to be Issued in Connection with the Plan...................... 134
Certain Federal Income Tax Consequences of the Plan...................... 137
Feasibility of the Plan and Best Interest of Creditors Test.............. 144
Alternatives to Confirmation and Consummation of the Plan................ 155
Solicitation; Voting Procedures..........................................
Financial Advisors; Voting Agent; Fees and Expenses......................
Recommendation and Conclusion............................................ 157
</TABLE>
<TABLE>
<S> <C>
Annexes
Prepackaged Plan...................................................... Annex A
Liquidation Analysis.................................................. Annex B
CIBC World Markets Corp. Fairness Opinion............................. Annex C
Stock Purchase Agreement with EnCap................................... Annex D
Registration Rights Agreement with EnCap.............................. Annex E
Warrant Agreement..................................................... Annex F
Purchase and Sale Agreement with ANR.................................. Annex G
Our Annual Report on Form 10-K/A for the Fiscal Year Ended December
31, 1998............................................................. Annex H
Our Quarterly Report on Form 10-Q for the Quarterly Period Ended March
31, 1999............................................................. Annex I
</TABLE>
2
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and
copy any document we file at the SEC's public reference facilities in
Washington, D.C., New York, New York and Chicago, Illinois at the following
addresses:
.450 Fifth Street, N.W., Washington, D.C. 20549;
.Seven World Trade Center, 13th Floor, New York, New York 10048; and
.Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference facilities.
We filed a registration statement on Form S-4 with the SEC to register the
securities being offered. This proxy statement/prospectus/disclosure statement
is a part of that registration statement. As allowed by SEC rules, this proxy
statement/prospectus/disclosure statement does not contain all the information
you can find in the registration statement or the exhibits to the registration
statement.
Reports, proxy statements and other information concerning Southern Mineral
can also be inspected and copied at the offices of the Nasdaq Stock Market
Regulatory Filings at 1735 K Street, N.W., Washington, D.C. 20006.
The SEC allows us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this proxy statement/prospectus/disclosure statement, and
information that we file later with the SEC will automatically update and
supercede this information. We incorporate by reference the documents listed
below and any future filings made with the SEC under Sections 13(a), 13(c), 14,
or 15(d) of the Securities Exchange Act of 1934 until the offering of
securities by this proxy statement/prospectus/disclosure statement is complete:
.Annual Report on Form 10-K/A for the fiscal year ended December 31, 1998;
and
.Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
You may request a copy of these filings, in most cases without exhibits,
at no cost by writing or contacting us by telephone at the following:
Corporate Secretary
Southern Mineral Corporation
1201 Louisiana Street, Suite 3350
Houston, Texas 77002-5609
(713) 658-9444
3
<PAGE>
SUMMARY
This brief summary highlights selected information and may not contain all
of the information that is important to you. To understand the exchange offer
and the prepackaged plan fully, you should read carefully this document and the
other documents that we are sending to you or refer you to on page 3.
Generally, references to "we," "us," or "our company" are to Southern Mineral
Corporation and its consolidated subsidiaries; however, since the prepackaged
plan applies only to Southern Mineral Corporation, such references in the
context of the prepackaged plan do not include any subsidiaries of Southern
Mineral Corporation.
The Company
We are an independent oil and gas company engaged in the acquisition,
exploitation, exploration and operation of oil and gas properties, primarily
along the Gulf Coast of the United States, in Canada and in Ecuador. Our
business strategy is to pursue a balanced program of acquisitions, exploitation
and exploration.
Our principal executive offices are located at 1201 Louisiana Street, Suite
3350, Houston, Texas 77002-5609, and our telephone number is (713) 658-9444.
Our Present Financial Condition
Our reduced cash flow from operations has prohibited us from pursuing
acquisitions and exploiting and exploring our oil and gas properties. Unless we
are able to conduct successful exploration or development activities or acquire
additional properties containing reserves, our reserves will decline as they
are produced.
Our recent operating results have been seriously hurt by a number of
factors, including low commodity prices for oil and natural gas. Although we
are currently paying our bills, we face a serious financial dilemma as we look
forward.
To address our immediate liquidity crisis, we are selling our Brushy Creek
Field and Texan Gardens Field interests to ANR Production Company for
approximately $16.3 million. The completion of the sale of our Brushy Creek
Field and Texan Gardens Field interests is subject to a number of conditions,
including the absence of litigation that would prevent the sale and obtaining
necessary consents and approvals of federal authorities. The sale of our Brushy
Creek Field and Texan Gardens Field interests is described in more detail in
our purchase and sale agreement with ANR that accompanies this proxy
statement/prospectus/disclosure statement as Annex G. The sale of our Brushy
Creek Field and Texan Gardens Field interests is only a temporary solution to
our financial problems and does not alleviate the need for the restructuring.
Proceeds from the sale of our Brushy Creek Field and Texan Gardens Field
interests should be sufficient to satisfy our debt payment obligations in the
near-term. We do not believe, however, that we will be able to generate
sufficient cash flow to fund operations, pursue our business strategy and
service our debt over the long-term, unless we successfully implement a
financial restructuring.
As of July 1, 1999, our outstanding debt consists of approximately $41.4
million in principal amount of debentures, approximately $31.2 million in
borrowings outstanding under our domestic credit facility and approximately
$19.8 million in borrowings outstanding under our Canadian credit facility.
We are required to make significant payments on our indebtedness within the
next few months. On September 1, 1999, we are required to repay approximately
$12.5 million under our domestic credit facility. If we do not complete the
sale of our Brushy Creek Field and Texan Gardens Field interests, we will not
have sufficient cash to make this payment. Failure to make the September 1,
1999 payment would be a default under our domestic credit facility, and the
lenders would have the right to demand payment in full of the debt
4
<PAGE>
outstanding under this facility. Our obligations under the domestic credit
facility are secured by substantially all of our assets other than the assets
of our subsidiary, Neutrino Resources Inc. A cash interest payment on our
debentures of approximately $1.4 million is due on October 1, 1999. We will
most likely not have sufficient cash to make this interest payment. Failure to
make the October 1, 1999 interest payment would be a default under the
indenture governing the debentures and most likely would result in a demand for
full payment of the debentures. In addition, failure to make the October 1st
interest payment would be an event of default under our domestic credit
facility and would give the lenders the right to accelerate the debt
outstanding under this facility.
Our Canadian credit facility is payable on demand by the lender. If we
default on the payments due under our domestic credit facility or the
debentures, the lender will most likely demand payment in full of the amount
outstanding under the Canadian credit facility. Our obligations under the
Canadian credit facility are secured by substantially all of the assets of
Neutrino.
The Restructuring
We believe that a financial restructuring is essential to our viability. Our
restructuring plan consists of three principal elements:
. Unsecured Debt Reduction. We propose to reduce our unsecured debt by
approximately $42.8 million by exchanging the debentures for common
stock, warrants and cash.
. Sale of Equity Securities. We have agreed to sell to EnCap Energy Capital
Fund III., L.P. and certain of its affiliates an aggregate of 43,829,787
shares of common stock for $20.6 million. In connection with the sale to
EnCap, we have agreed to pay a fee of $600,000 and 2,127,660 shares of
common stock to EnCap Investments L.L.C., an affiliate of EnCap. The sale
to EnCap is subject to certain conditions, including consummation of the
exchange offer or prepackaged plan. We will use approximately $10.0
million of the net proceeds from the EnCap sale to fund the cash portion
of the consideration to be paid to debentureholders in exchange for their
debentures, and we will use the balance of the proceeds to reduce our
secured debt and for general corporate purposes.
. Domestic Credit Facility. After we pay down our secured debt with the
proceeds from the sale of our Brushy Creek Field and Texan Gardens Field
interests and the EnCap investment, we anticipate that our outstanding
secured debt will be approximately $25.5 million. It is a condition to
completion of the restructuring that we enter into a new or amended
domestic credit facility on terms and conditions acceptable to us. We
have asked the lenders under our domestic credit facility to consider and
approve certain modifications to our domestic credit facility to (1)
increase our borrowing base from $14.0 to at least $20.0 million, (2)
reduce the interest rate from 8.0% to the lender's prime or index rate
and (3) extend the maturity of the facility from June 1, 2001 to at least
June 1, 2002. We believe our requested modifications are reasonable if a
restructuring is completed. The lenders have not agreed to our requested
modifications. If we are unable to enter into an amended facility with
our lenders on terms and conditions satisfactory to us, we intend to
explore other potential lending sources for a new facility. We can give
no assurances that we will be able to enter into an amended facility or
secure a new facility of terms satisfactory to us. If we are unable to do
so, we may proceed with our prepackaged plan and seek confirmation of our
restructuring, under the "cram down" provisions of Section 1129(b) of the
Bankruptcy Code.
To accomplish the restructuring, we are asking:
. our debentureholders to exchange each $1,000 principal amount of
debentures for 337.8 shares of our common stock, a warrant to purchase
188.9 shares of our common stock for a period of three years at an
exercise price of $1.50 per share and $241.50 in cash; and
5
<PAGE>
. our stockholders to approve an amendment to our articles of incorporation
increasing the number of shares we are authorized to issue and approve
the common stock issuances to debentureholders and EnCap and the warrant
issuances to the debentureholders.
We are also asking debentureholders and stockholders to approve a
prepackaged plan of reorganization that involves the same basic economic
consideration as the exchange offer. This is an alternative way to achieve the
same results as our exchange offer by means of a Chapter 11 bankruptcy
proceeding.
We believe that if the restructuring takes place:
. our projected cash flow will support our reduced level of debt service;
. we will be able to pursue acquisitions and exploit and explore our oil
and gas properties;
. our improved financial condition will provide additional assurances to
our suppliers, customers and employees of our long-term viability; and
. we will avoid the negative publicity and other adverse effects associated
with a non-prepackaged plan bankruptcy proceeding which could otherwise
impair the value of our business.
If we are not able to complete the restructuring, we will consider all
financial alternatives available to us at that time. These alternatives may
include the sale of all or part of our business, pursuing a different
restructuring arrangement or commencing a bankruptcy proceeding under
applicable provisions of the Bankruptcy Code. A bankruptcy proceeding brought
under these circumstances could be lengthy and contested and could disrupt our
business operations and shrink or eliminate our remaining value. We believe
that (1) our stockholders would most likely suffer a total loss of their
investments and (2) our debentureholders would likely recover no more, and
potentially could recover substantially less, than the value of the exchange
offer consideration. If Southern Mineral is liquidated, the recovery could be
as little as $0.36 on each $1.00 (including accrued interest) due under the
debentures. A Chapter 7 liquidation analysis accompanies this proxy
statement/prospectus/disclosure statement as Annex B.
Restructuring Conditions
For the exchange offer to take place, we need all of the following
conditions to be met:
. holders of 98% of the outstanding principal amount of the debentures must
accept the exchange offer;
. stockholders must approve (1) an amendment to our articles of
incorporation increasing the number of authorized shares of common stock
from 50 million to 150 million and (2) the common stock and warrant
issuances;
. the EnCap investment must be completed; and
. the new or amended domestic credit facility must be signed.
For the prepackaged plan to become effective, we need all of the following
conditions to be met:
. the prepackaged plan must be accepted by:
. debentureholders that hold at least two-thirds of aggregate principal
amount of the debentures actually voting to accept or reject the
prepackaged plan; and
. more than one-half of the number of debentureholders actually voting
to accept or reject the prepackaged plan;
. the prepackaged plan must be accepted by holders of two-thirds of the
shares of common stock actually voting to accept or reject the
prepackaged plan or confirmed under the "cram-down" provisions of the
Bankruptcy Code;
. the EnCap investment must be completed;
. a new or amended domestic credit facility must be signed; and
. the bankruptcy court must enter a confirmation order for the prepackaged
plan.
6
<PAGE>
Exchange Offer
The Exchange Offer........ We are offering to exchange for each $1,000
principal amount of debentures:
. 377.8 shares of common stock;
. a warrant to purchase 188.9 shares of common
stock; and
. $241.50 in cash.
See "Restructuring--Exchange Offer." Each warrant
will entitle the holder to purchase 188.9 shares of
common stock at an exercise price of $1.50 per
share. The warrants will be exercisable at any time
during the three year period beginning on the date
of issuance. The exercise price and number of
shares of common stock issuable upon exercise of
the warrants will be subject to adjustments in
certain events to prevent dilution. See
"Description of Warrants."
Secured Debt.............. It is a condition to the exchange offer that we
modify our current domestic credit facility or
enter into a new domestic credit facility on terms
such that:
. the initial borrowing base will be at least
$20.0 million;
. it will bear interest at the lender's prime
or index rate; and
. it will not mature before June 1, 2002.
The lenders under our domestic credit facility have
not agreed to our requested modifications. See
"Summary--The Restructuring--Domestic Credit
Facility."
Equity Infusion........... We will sell 43,829,787 shares of common stock to
EnCap for $20.6 million. The EnCap investment is
subject to certain conditions, including a
condition that the aggregate availability under the
new or amended domestic credit facility and our
Canadian facility equal or exceed $36 million at
the closing of the EnCap investment. In connection
with the EnCap investment, we will pay EnCap
Investments L.L.C. a commitment fee of $600,000 and
2,127,660 shares of our common stock. See
"Restructuring--EnCap Investment."
Expiration Date........... 5:00 p.m., Houston time, on , 1999,
unless extended. See "Restructuring--Exchange
Offer--Expiration."
Withdrawal Rights......... You may withdraw your tendered debentures at any
time prior to 5:00 p.m., Houston time, on the
expiration date by following the procedures
described under "Restructuring--Exchange Offer --
Withdrawal Rights."
Accrued Interest on the All accrued but unpaid interest has been taken into
Debentures............... account in determining the consideration to be paid
in exchange for the debentures, and no other
payment will be made with respect to accrued
interest on tendered and accepted debentures.
7
<PAGE>
Procedures for Tendering
Debentures............... If you wish to accept the exchange offer, you must
complete, sign and date the accompanying letter of
transmittal, or a facsimile thereof, in accordance
with its instructions, and mail or otherwise
deliver the letter of transmittal, or such
facsimile, together with the debentures and any
other required documentation, to the exchange agent
at the address set forth in the letter of
transmittal. If you hold debentures through the
Depositary Trust Company and wish to accept the
exchange offer, you must do so pursuant to the
Depositary Trust Company's Automated Tender Offer
Program, by which you will agree to be bound by the
letter of transmittal "Restructuring--Exchange
Offer--Instructions for Accepting Exchange Offer."
Special Procedures for
Beneficial Owners........ If you are a beneficial owner whose debentures are
registered in the name of a broker-dealer,
commercial bank, trust company or other nominee and
you wish to tender debentures, you should contact
the registered holder promptly and instruct the
registered holder to tender on your behalf. If you
wish to tender debentures on your own behalf, you
must, prior to completing and executing the letter
of transmittal and delivering the debentures,
either make appropriate arrangements to register
ownership of the debentures in your name or obtain
a properly completed bond power from the registered
holder. A transfer of record ownership may take
considerable time. See "Restructuring--Exchange
Offer--Instructions for Accepting Exchange Offer."
Acceptance of Debentures
and Delivery of Exchange
Consideration............ Subject to certain conditions, we will accept for
exchange any and all debentures that are properly
tendered in the exchange offer prior to 5:00 p.m.,
Houston time, on the expiration date. The common
stock, warrants and cash to be paid in exchange for
debentures will be delivered promptly after the
expiration date. See "Restructuring -- Exchange
Offer -- Acceptance of Debentures; Delivery of
Exchange Consideration."
Federal Income Tax
Consequences to U.S.
Debentureholders ........ In general, U.S. debentureholders will recognize
taxable gain (but not loss) from the exchange of
debentures for common stock, warrants and cash in
the exchange offer only to the extent of cash
received. The tax basis of debentures will be
allocated to the common stock and warrants
received. Common stock and warrants issued to pay
interest will be taxable income to the U.S.
debentureholder in the amount the fair market value
of the common stock and warrants so issued, if the
debentureholder has not previously recognized the
interest as taxable income. Common stock and
warrants will be issued to U.S. debentureholders in
payment of interest in the same proportion as
common stock and warrants are issued in payment of
principal under
8
<PAGE>
the debentures, i.e., based on the same ratio of
377.8 shares of common stock and a warrant to
purchase 188.9 shares of common stock in exchange
for $1,000 of indebtedness of principal and accrued
interest. You should consult your own advisors with
respect to the federal, state, local and foreign
tax consequences (if any) of the restructuring and
of the ownership and disposition of our common
stock and warrants. See "Certain Federal Income Tax
Consequences."
Conditions................ The exchange offer is subject to certain
conditions. See "Summary--The Restructuring--
Restructuring Conditions" and "Restructuring--
Exchange Offer--Conditions to Exchange Offer."
Accepting the Exchange
Offer and Voting on the
Prepackaged Plan......... Even if you accept the exchange offer you should
vote on the prepackaged plan so that if the
exchange offer does not occur, we can proceed with
the prepackaged plan. See "Restructuring--Exchange
Offer--Accepting the Exchange Offer and Voting on
Prepackaged Plan."
Prepackaged Plan
Elimination of
Debentures............... Our prepackaged plan will result in the elimination
of the debentures for the same consideration that
the debentureholders are being offered in the
exchange offer. We are asking both our stockholders
and our debentureholders to approve the prepackaged
plan. If all conditions to both the exchange offer
and the prepackaged plan are satisfied, we intend
to proceed with the exchange offer. See
"Restructuring--Prepackaged Plan."
Secured Debt.............. It is a condition to the prepackaged plan that we
modify our current domestic credit facility or
enter into a new domestic credit facility on terms
such that:
. the initial borrowing base will be at least
$20.0 million;
. it will bear interest at the lender's prime
or index rate; and
. it will not mature before June 1, 2002.
The lenders under our domestic credit facility have
not agreed to our requested modifications. See
"Summary-- The Restructuring -- Domestic Credit
Facility."
It is also a condition to the prepackaged plan that
we obtain a debtor-in-possession financing facility
(the "DIP Facility") of up to $1.5 million to
insure operating liquidity during the pendency of
the Chapter 11 proceeding. We cannot assure you
that we will be able to obtain the DIP Facility.
Equity Infusion........... We will sell 43,829,787 shares of common stock to
EnCap for $20.6 million. The EnCap investment is
subject to certain conditions,
9
<PAGE>
including a condition that the aggregate
availability under the new or amended domestic
credit facility and our Canadian Facility equal or
exceed $36 million at the closing of the EnCap
investment. In connection with the EnCap
investment, we will pay EnCap Investments L.L.C. a
commitment fee of $600,000 and 2,127,660 shares of
common stock. See "Restructuring -- EnCap
Investment."
Expiration Date........... 5:00 p.m., Houston time, on , 1999,
unless extended. See "Restructuring--Prepackaged
Plan--Expiration."
No Tendering of Tendering of debentures is not required to accept
Debentures............... the prepackaged plan proposal. Tendering of
debentures is only required to accept the exchange
offer.
Revocation Rights......... Your vote to accept or reject the prepackaged plan
may be revoked at any time before the earlier of
(1) the filing of the prepackaged plan with the
bankruptcy court or (2) the expiration date. If the
prepackaged plan is filed with the bankruptcy
court, your vote can be revoked only with the
approval of the bankruptcy court. See
"Restructuring--Prepackaged Plan--Revocation
Rights."
Federal Income Tax
Consequences to U.S.
Debentureholders......... In general, U.S. debentureholders will recognize
taxable gain (but not loss) from the exchange of
debentures for common stock, warrants and cash in
the plan only to the extent of cash received. The
tax basis of the debentures will be allocated to
the common stock and warrants received. Common
stock and warrants issued to pay interest will be
taxable income to the U.S. debentureholder in the
amount the fair market value of the common stock
and warrants so issued, if the debentureholder has
not previously recognized the interest as taxable
income. Common stock and warrants will be issued to
U.S. debentureholders in payment of interest in the
same proportion as common stock and warrants are
issued in payment of principal under the
debentures, i.e., based on the same ratio of 377.8
shares of common stock and a warrant to purchase
188.9 shares of common stock in exchange for $1,000
of indebtedness of principal and accrued interest.
You should consult your own advisors with respect
to the federal, state, local and foreign tax
consequences (if any) of the restructuring and of
the ownership and disposition of our common stock
and warrants. See "Certain Federal Income Tax
Consequences."
Conditions................ The prepackaged plan is subject to certain
conditions. See "Summary--The Restructuring--
"Restructuring Conditions" and "Restructuring--
Prepackaged Plan--Conditions to the Prepackaged
Plan."
10
<PAGE>
Special Stockholder Meeting
Time and Date............. 10:00 a.m., Houston time, on ,
, 1999.
Location.................. Doubletree Hotel at Allen Center, 400 Dallas
Street, Houston, Texas.
Purposes.................. At the special meeting, our stockholders will be
asked to approve:
. an amendment to our articles of incorporation
increasing the number of authorized shares of
common stock from 50 million to 150 million;
and
. the common stock and warrant issuances in the
exchange offer and the EnCap investment. See
"Special Meeting of Stockholders--Purpose of
Special Meeting."
Vote Required for
Approval................. Holders of a majority of our outstanding common
stock must approve the amendment to our articles of
incorporation. A majority of votes cast, in person
or by proxy, at the special meeting is required to
approve the common stock and warrant issuances. See
"Special Meeting of Stockholders--Voting."
Record Date............... , 1999 is the record date for determining
stockholders entitled to notice of and to vote at
the special meeting.
Proxies................... To vote at the special meeting, please complete,
sign and return the enclosed proxy card.
Revocation of Proxies..... You may revoke your proxy at any time before it is
voted or by voting in person the shares to which
the proxy relates. See "Special Meeting of
Stockholders--Voting."
11
<PAGE>
Summary Unaudited Pro Forma Condensed Consolidated Financial Data
The following summary unaudited pro forma condensed consolidated financial
data as of March 31, 1999 and for the three-month period ended March 31, 1999
and the year ended December 31, 1998, are derived from, and should be read in
conjunction with, the unaudited pro forma condensed consolidated financial
information appearing elsewhere herein under "Pro Forma Unaudited Financial
Information Giving Effect to the Exchange Offer" and "Pro Forma Unaudited
Financial Information Giving Effect to the Prepackaged Plan." The unaudited pro
forma condensed consolidated financial data are not necessarily indicative of
the results of operations which we would have obtained, or may obtain in the
future, had the transactions contemplated by the pro forma information
occurred.
The unaudited pro forma consolidated financial information has been prepared
in accordance with published guidelines of the SEC regarding pro forma
financial information. Neither KPMG LLP, our independent auditors, nor any
other independent accountant or financial advisor, examined or performed any
procedures with respect to the unaudited pro forma consolidated financial
information, and they (1) express no opinion or any other form of assurances
with respect to such information and (2) assume no responsibility for, and
disclaim any association with, the unaudited pro forma consolidated financial
information.
The pro forma ratio of earnings to fixed charges is expressed as the ratio
of: (1) fixed charges plus income from operations, to (2) fixed charges. Fixed
charges consist of interest expense and amortization of deferred financing
fees. Pro forma earnings were insufficient to cover fixed charges for the year
ended December 31, 1998, by the amount of $14.9 million under the exchange
offer or prepackaged plan. The pro forma ratio of earnings to fixed charges for
the three-months ended March 31, 1999 was 7.9x under the exchange offer and
8.1x under the prepackaged plan.
<TABLE>
<CAPTION>
Exchange Offer Prepackaged Plan
------------------------------- -------------------------------
Three-months ended Year ended Three-months ended Year ended
March 31, December 31, March 31, December 31,
1999 1998 1999 1998
------------------ ------------ ------------------ ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues
Oil and gas............. $ 5,154 $ 19,855 $ 5,154 $ 19,855
Gains (losses) on sales
of property............ 5,073 (250) 5,073 (250)
--------- --------- --------- ---------
10,227 19,605 10,227 19,605
Expenses................ 5,994 34,824 5,994 34,824
--------- --------- --------- ---------
Income (loss) from oper-
ations................. 4,233 (15,219) 4,233 (15,219)
Other income, expenses
and deductions
Interest and other in-
come................... 27 330 27 330
Interest and debt ex-
pense................. (539) (324) (527) (278)
--------- --------- --------- ---------
Income (loss) before in-
come taxes............. 3,721 (15,213) 3,733 (15,167)
Provision (benefit) for
income taxes........... (230) (2,775) (230) (2,775)
--------- --------- --------- ---------
Net income (loss)....... $ 3,951 $ (12,438) $ 3,963 $ (12,392)
========= ========= ========= =========
Earnings (loss) per
share of common stock:
Basic................. $ 0.05 $ (0.17) $ 0.05 $ (0.17)
========= ========= ========= =========
Diluted............... $ 0.05 $ (0.17) $ 0.05 $ (0.17)
========= ========= ========= =========
Weighted average number
of shares--basic....... 74,086 73,708 74,398 74,020
========= ========= ========= =========
Weighted average number
of shares--diluted..... 79,098 73,708 79,410 74,020
========= ========= ========= =========
EBITDA(1)............... $ 7,165 $ (5,107) $ 7,165 $ (5,107)
BALANCE SHEET DATA
Working capital......... $ (19,441) $ (19,617)
Total assets............ 114,880 114,837
Long-term debt.......... 27,590 26,962
Stockholders' equity.... 73,980 74,589
</TABLE>
- -------
(1) EBITDA is the sum of income (loss) before income taxes and interest,
depreciation, depletion and amortization expense. EBITDA should not be
considered as an alternative to income (loss) from operations or to cash
flows from operating activities (as determined in accordance with generally
accepted accounting principles) and should not be construed as an
indication of a company's operating performance of as a measure of
liquidity. However, EBITDA is presented because it is a widely used
financial indicator of a company's ability to service indebtedness and
other factors.
12
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated current maturities of our
debt and our capitalization as of March 31, 1999, and as adjusted to give
effect to the restructuring. You should read this information in conjunction
with our Consolidated Financial Statements and accompanying notes included in
our Annual Report on Form 10-K/A for the fiscal year ended December 31, 1998
that accompanies this proxy statement/prospectus/disclosure statement as Annex
H and our Quarterly Report on Form 10-Q for the quarterly period ended March
31, 1999 that accompanies this proxy statement/prospectus/disclosure statement
as Annex I, "Summary--Historical Consolidated Financial Statements," "Summary--
Unaudited Pro Forma Condensed Consolidated Financial Data" and "Selected
Consolidated Historical Financial Statements."
<TABLE>
<CAPTION>
March 31, 1999
----------------------------------
Consolidated Exchange Prepackaged
Historical Offer(1) Plan(2)
------------ -------- -----------
(Unaudited pro
forma)
(in thousands, except share data)
<S> <C> <C> <C>
Current portion of debt..................... $ 31,759 $ 19,502 $ 19,702
Long-term debt (less current portion)....... 60,273 8,088 7,260
-------- -------- --------
Total debt.............................. 92,032 27,590 26,962
Preferred Stock, par value $.01 (historical)
per share; 5,000,000 shares authorized;
none issued (historical, exchange offer or
prepackaged plan).......................... -- -- --
Common Stock, par value $.01 per share;
50,000,000 shares authorized (historical),
150,000,000 shares authorized (exchange
offer and prepackaged plan); 12,894,711
shares issued (historical), 74,180,260
shares issued (exchange offer), 74,493,078
shares issued (prepackaged plan);
12,803,488 shares outstanding (historical),
74,089,037 shares outstanding (exchange
offer), 74,401,855 shares outstanding
(prepackaged plan)......................... 129 741 744
Additional paid-in capital.................. 30,852 59,159 59,305
Accumulated other comprehensive loss--
foreign currency translation adjustment.... (1,535) (1,535) (1,535)
Retained (deficit) earnings................. (10,965) 15,667 16,127
Less: treasury stock........................ (52) (52) (52)
-------- -------- --------
Total stockholders' equity.............. 18,429 73,980 74,589
-------- -------- --------
Total capitalization.................... $110,461 $101,570 $101,551
======== ======== ========
</TABLE>
- --------
(1) Assumes 98% level of participation by the holders of the debentures in the
exchange offer and:
(1) the sale of our Brushy Creek Field and Texan Gardens Field interests
to ANR for $16.3 million;
(2) the sale of 43,829,787 shares of common stock to EnCap for $20.6
million;
(3) the payment of a commitment fee of $600,000 in cash and 2,127,660
shares of common stock to EnCap Investments L.L.C.;
(4) the exchange of 98% ($40.6 million) of the debentures for 337 shares
of common stock, a warrant to purchase 188.9 shares of common stock
for three years at an exercise price of $1.50 and $241.50 cash for
each $1,000 principal amount of debenture; and
(5) the use of proceeds from the sale of Brushy Creek Field and Texan
Gardens Field interests and the EnCap investment.
(2) Assumes the statutory level of required approval (more than two-thirds of
the face value of the debentures and more than one-half of the holders of
the debentures) for the prepackaged plan and:
(1) the sale of our Brushy Creek Field and Texan Gardens Field interests
to ANR for $16.3 million;
(2) the sale of 43,829,787 shares of common stock to EnCap for $20.6
million;
(3) the payment of a commitment fee of $600,000 in cash and 2,127,660
shares of common stock to EnCap Investments L.L.C.;
(4) the forced conversion of 100% ($41.4 million) of the debentures for
337.8 shares of our common stock, a warrant to purchase 188.9 shares
of our common stock for three years at an exercise price of $1.50 and
$241.50 cash for each $1,000 principal amount of debenture; and
(5) the use of proceeds from the sale of Brushy Creek Field and Texan
Gardens Field interests and the EnCap investment.
13
<PAGE>
Debentureholder and Stockholder Actions
Debentureholders
To accept the exchange offer:
. follow the procedures for book-entry transfer as set forth under
"Restructuring--Exchange Offer--Instructions Accepting For Exchange
Offer;" or
. complete and sign the enclosed letter of transmittal;
. obtain signature guarantees if required by the enclosed letter of
transmittal;
. either:
. enclose your debenture; or
. complete the guarantee of delivery; and
. return your letter of transmittal and debenture or guarantee of delivery
in the BLUE ENVELOPE to:
[Identify Agent]
To accept or reject the prepackaged plan proposal:
. beneficial owners:
. complete and sign the BLUE Ballot;
. beneficial owners who are also record holders should forward their BLUE
Ballots directly to in the YELLOW ENVELOPE; and
. beneficial owners who are not record holders should forward their BLUE
Ballot to their record holder which is the broker, bank, dealer, trust
company or other nominee in whose name the beneficial owner's debenture
is held of record in the envelope provided by the record holder.
. record owners:
. complete and sign the GREY Master Ballot; and
. return your Master Ballot in the YELLOW ENVELOPE to:
[Identify Agent]
Stockholders
To vote at the special meeting:
. complete and sign the enclosed proxy card; and
. return your proxy card in the WHITE ENVELOPE to:
[Identify Agent]
14
<PAGE>
To accept or reject the prepackaged plan proposal:
. beneficial owners:
. complete and sign the GREEN Ballot;
. beneficial owners who are also record holders should forward their
GREEN Ballots directly to in the YELLOW ENVELOPE; and
. beneficial owners who are not record holders should forward their GREEN
Ballot to their record holder which is the broker, bank, dealer, trust
company or other nominee in whose name the beneficial owner's debenture
is held of record in the envelope provided by the record holder.
. record owners:
. complete and sign the WHITE Master Ballot; and
. return your Ballot or Master Ballot in the YELLOW ENVELOPE to:
[Identify Agent]
15
<PAGE>
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
We make "forward-looking statements" within the "safe harbor" provision of
the Private Securities Litigation Reform Act of 1995 throughout this proxy
statement/prospectus/disclosure statement and in the documents we incorporate
by reference in this proxy statement/prospectus/disclosure statement. You can
identify these statements by forward-looking words such as "may," "intend,"
"will," "expect," "anticipate," "believe," "estimate," "should," "strategy,"
"position," "plan" and "continue," or the negatives of those words or other
variations on them or by comparable terminology. We have based these statements
on our current expectations about future events. Although we believe that our
expectations reflected in or suggested by our forward-looking statements are
reasonable, we cannot assure you that these expectations will be achieved. Our
actual results may differ materially from what we currently expect. Important
factors which could cause our actual results to differ materially from the
forward-looking statements in this proxy statement/prospectus/disclosure
statement or in the documents that we incorporate by reference in this
prospectus include, without limitation, those factors discussed below under the
caption "Risk Factors."
You should read this and the documents that we incorporate by reference in
this proxy statement/prospectus/ disclosure statement completely and with the
understanding that our actual future results may be materially different from
what we expect. We may not update these forward-looking statements, even though
our situation will change in the future. All forward-looking statements
attributable to us are expressly qualified by these cautionary statements.
RISK FACTORS
Debentureholders and stockholders should carefully consider the risks
described below and the other information included or incorporated by reference
in this proxy statement/prospectus/disclosure statement.
We may not be able to complete the restructuring.
It is possible that neither the exchange offer nor the prepackaged plan will
be completed. If neither restructuring occurs, the following undesirable events
may happen:
. if we do not complete the sale of our Brushy Creek Field and Texan
Gardens Field interests, we will not be able to make the September 1,
1999 payment under our domestic credit facility, resulting in a default
being declared by the lenders and a demand for repayment of the entire
outstanding debt in the amount of approximately $31.1 million;
. we will most likely not be able to make the October 1, 1999 interest
payment on our debentures, which would result in a default under the
indenture governing the debentures and give debentureholders the right to
demand full payment of the debentures in the amount of approximately
$42.8 million;
. an involuntary bankruptcy petition could be filed against us by our
creditors;
. we may need to file a petition with the bankruptcy court to reorganize
under applicable provisions of the Bankruptcy Code;
. we will not be able to pursue acquisitions or exploit or explore our oil
and gas properties;
. we could lose business if others doubt our ability to satisfy our
obligations on a timely or long-term basis;
. we will be unable to realize the maximum value of our assets;
. we will be unable to invest adequate capital in our business; and
. the lenders under our domestic and Canadian credit facilities may demand
repayment of our outstanding debt.
16
<PAGE>
If a restructuring is not completed, we will most likely need to reorganize
and restructure under the protection of the Bankruptcy Code without approval of
the prepackaged plan. We can give you no assurances that a bankruptcy case,
other than pursuant to the prepackaged plan, will result in a reorganization
rather than a liquidation, or that any reorganization would be on terms as
favorable to the debentureholders and stockholders as the terms of the
restructuring. If a liquidation or lengthy and non-consensual reorganization
were to occur, there is a substantial risk that there would be little or no
value available for distribution to the stockholders, and that the
debentureholders would receive substantially less than the recovery anticipated
in the restructuring.
For purposes of comparing the distributions under the prepackaged plan
versus a liquidation, we have prepared an analysis of estimated recoveries in a
liquidation of Southern Mineral under applicable provisions of the Bankruptcy
Code. The liquidation analysis is attached as Annex B to this proxy
statement/prospectus/disclosure statement. The procedures followed and the
assumptions and qualifications used in this analysis are presented in the notes
following the analysis.
Even if all impaired classes accept the prepackaged plan, the prepackaged
plan restructuring might not be confirmed by a bankruptcy court. The Bankruptcy
Code requires various findings such as:
. the confirmation of the prepackaged plan will not be followed by a need
for further financial reorganization;
. the value of distributions to non-accepting debentureholders and
stockholders not be less than the value of distributions they would
receive if Southern Mineral were liquidated under Chapter 7 of the
Bankruptcy Code; and
. both the prepackaged plan and Southern Mineral otherwise comply with the
applicable provisions of the Bankruptcy Code.
See "Disclosure Statement--Summary of the Plan of Reorganization--
Confirmation of the Prepackaged Plan." Although we believe that the prepackaged
plan will meet all applicable tests, there can be no assurance that a
bankruptcy court will reach the same conclusion.
Even if the required acceptances are received, a bankruptcy court could find
that the accepting debentureholders and stockholders have not validly accepted
the prepackaged plan. If this happens, we may seek to re-solicit acceptances,
but confirmation of the prepackaged plan could be substantially delayed and
possibly jeopardized. We believe that:
. the prepackaged plan solicitation complies with the requirements of the
Bankruptcy Code and applicable securities laws;
. signed and returned Ballots and Master Ballots will be in compliance with
the applicable provisions of the Bankruptcy Code and the bankruptcy
rules; and
. if sufficient acceptances are received, the prepackaged plan should be
confirmed by a bankruptcy court.
We, however, expressly reserve the right not to file the prepackaged plan
and to pursue other alternatives. See "The Restructuring" and "Disclosure
Statement--Alternatives to Confirmation and Consummation".
We may seek confirmation of the prepackaged plan under the "cram-down"
provisions of the Bankruptcy Code.
Section 1129(b) of the Bankruptcy Code (generally referred to as the "cram-
down" provisions) permits the confirmation of a prepackaged plan of
reorganization even if it is not accepted by all impaired classes. We reserve
the right to seek confirmation of our prepackaged plan under the cram-down
provisions if our stockholders do not accept our prepackaged plan. In such
event, it is possible that the prepackaged plan may be modified in a manner
that will materially and adversely affect the treatment provided to any
impaired class that
17
<PAGE>
rejected the prepackaged plan. We also reserve the right to seek the protection
of the bankruptcy law other than under the prepackaged plan, which could result
in less favorable treatment to our debentureholders and stockholders than the
treatment currently provided in the prepackaged plan.
We may fail as an operating company.
Currently, there is substantial doubt about our ability to continue as a
going concern. Our auditors have included a "going concern" exception on their
most recent report on our financial statements. Our Annual Report on Form 10-
K/A for the fiscal year ended December 31, 1998 accompanies this proxy
statement/prospectus/disclosure statement as Annex H.
Our financial projections are based on many assumptions about the future that
are subject to uncertainty.
We have prepared the projections set forth in "Financial Projections and
Assumptions" based upon a number of estimates and assumptions. While we believe
these estimates and assumptions are reasonable when taken as a whole, they are
inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control. The
accuracy of the projections is dependent upon the timing and probability of
occurrence of a complex series of future events, and it can be expected that
one or more of the assumptions upon which the projections are based will not
materialize or will vary significantly from actual results.
We do not guarantee that the projections will be achieved. In addition, we
did not prepare the projections with a view toward compliance with published
guidelines of the SEC, the American Institute of Certified Public Accountants
or generally accepted accounting principles. KPMG LLP, our independent auditors
did not prepare or compile the projections, and they express no opinion on and
assume no responsibility for the projections. You should not rely on the
projections. We do not intend to update or revise the projections.
There may be a limited market for unexchanged debentures if the exchange offer
occurs.
If the exchange offer is completed, the trading market for unexchanged
debentures will be significantly more limited, which might adversely affect the
liquidity and market value of the remaining debentures.
You will subordinate your creditor status if you accept the exchange offer.
Debentureholders are senior to the equity position of stockholders. If you
accept the exchange offer and become a stockholder, you will subordinate your
creditor status to debentureholders that do no accept the exchange offer. If
the prepackaged plan is completed, all debentureholders will become
stockholders.
We will be limited in the use of our net operating loss carryforwards if the
restructuring occurs.
The exchange offer and the prepackaged plan may result in taxable income to
us and may reduce or limit the use of our net operating loss carryovers. In
either the exchange offer or the prepackaged plan, we will realize income from
the discharge of indebtedness. In the exchange offer restructuring, this income
will not be taxed to the extent that we are insolvent at the time of the
exchange offer. Any debt discharge income over the amount by which we are
insolvent will be taxed. In the prepackaged plan, we will not be taxed on any
of the debt discharge income. In either case, however, the amount of untaxed
debt discharge income must be used to reduce our net operating loss carryovers
and other tax attributes.
The exchange offer will limit the future use of our remaining net operating
loss carryovers. After the exchange offer, our net operating losses may be used
in any year only to the extent of the product of the "tax-exempt long-term
interest rate" in effect at the time of the exchange offer multiplied by the
value of our stock at the time of the exchange offer. In the case of the
prepackaged plan restructuring, the limitation described above will apply, but
will be somewhat higher.
18
<PAGE>
Existing stockholders will be substantially diluted by the restructuring.
The equity interests of existing stockholders will be substantially diluted
by the restructuring. Upon the issuance of common stock to debentureholders and
EnCap, the equity interests of existing stockholders will be reduced to
approximately 17.3% (assuming the exchange of all debentures). If (1) all of
the warrants issued to the debentureholders are exercised in full, and (2) all
other outstanding options and warrants are exercised in full, the equity
interests of existing stockholders will be further reduced to approximately
15.0%.
The following table shows the change in ownership of our company if the
restructuring occurs (assuming all debentures are exchanged).
<TABLE>
<CAPTION>
After Restructuring
Before After on
Restructuring(1) Restructuring(1) a Diluted Basis(2)
---------------- ----------------- -------------------
Shares % Shares % Shares %
---------------- ----------------- -------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
EnCap(3)................ 45 -- 46,002 61.7% 46,002 53.6%
Debentureholders........ -- -- 15,651 21.0% 23,461 27.4%
Existing stockholders... 12,796 100% 12,796 17.3% 12,796 15.0%
Other optionholders and
warrantholders......... -- -- -- -- 3,445 4.0%
</TABLE>
- --------
(1) Based on shares outstanding as of July 15, 1999.
(2) Assumes exercise of the warrants to acquire an aggregate of 7,820,460
shares of common stock to be issued to the debentureholders and exercise
of all other outstanding options and warrants to acquire 3,445,199 shares
of common stock.
(3) Includes shares to be acquired by EnCap Energy Capital Fund III, L.P.,
EnCap Energy Capital Fund III-B, L.P., Energy Capital Investment Company
PLC, BOCP Energy Partners, L.P. and EnCap Investments L.L.C.
EnCap will have the ability to control our board of directors after the
restructuring.
After the restructuring, EnCap will have the ability to elect a majority of
the board of directors and control our affairs and management. EnCap also would
have the power to approve actions requiring stockholder approval. This high
level of ownership might delay, defer or prevent a future change in control of
Southern Mineral.
We may not be able to successfully implement our business plan.
Our ability to meet our financial projections and our financial obligations
depends on our ability to achieve our business plan. Accomplishing our business
plan may be affected by general economic conditions, commodity prices, industry
trends and other factors beyond our control. Many of our competitors have
greater financial resources and may have more operating flexibility. We may be
unable to implement certain elements of our operating plan following completion
of the restructuring due to continuing pressures on our operating cash flow.
It is possible that announcing the restructuring or filing of a bankruptcy
case could adversely affect our operations and relationships with employees,
customers, operations and suppliers. Due to uncertainty about our future, many
risks exist, including the following:
. employees may be distracted from performance of their duties or more
easily attracted to other career opportunities; and
. suppliers, operators and trade creditors may suspend or terminate their
relationship with us, exercise rights of set-off or similar remedies,
further restrict ordinary credit terms or require guarantees of payment.
The filing of a bankruptcy case or a delay in completing the prepackaged
plan may cause our domestic credit facility lenders to further reduce our
borrowing base or exercise creditor remedies.
19
<PAGE>
Our securities may be delisted by Nasdaq.
Our common stock is currently listed on the Nasdaq National Market, and our
debentures are currently listed on the Nasdaq SmallCap Market. We are not in
compliance with the Marketplace Rule 4310 of the Nasdaq Stock Market, Inc.
governing qualitative and quantitative standards for continued listing of our
common stock. On January 19, 1999, we received a letter from Nasdaq, in which
we were notified that we failed to comply with the continued listing
requirement with respect to the minimum bid requirement and net tangible asset
test of Nasdaq Marketplace Rule 4310.
We have been unable to comply with the continued listing requirements since
receiving the January 19, 1999 letter from Nasdaq. At a hearing before Nasdaq
on May 27, 1999, we described our efforts to raise additional equity capital,
and we requested an extension of the deadline to comply with the continued
listing requirements. We can give you no assurances, however, that we will be
successful in complying with the continued listing requirements, and the
failure to do so may result in the immediate delisting of our securities. Such
delisting will have an adverse impact on the liquidity of our securities. The
possible consequences of such delisting could include litigation. Such
delisting could make it more difficult for us to raise additional capital in
the manner in which we have done so in the past.
If our securities are delisted from Nasdaq, trading therein, if any, may
then be conducted on the OTC Bulletin Board or the over-the-counter market.
Because spreads between the "bid" and "asked" prices of the securities quoted
by market makers on the OTC Bulletin Board and the over-the-counter market will
likely be greater than they are at present, you will likely experience a
greater degree of difficulty in trading our securities. In addition, there are
significant restrictions imposed by most brokerage houses on the ability of
their brokers to solicit orders or recommend the purchase of securities that
trade on the OTC Bulletin Board. In the majority of cases, the purchase of
securities is limited to unsolicited offers from private investors, who have to
comply with policies and practices involving the completion of time-consuming
forms that can make the handling of lower-priced securities economically
unattractive. Moreover, most brokerage houses do not permit lower-priced
securities to be used as collateral for margin accounts or to be purchased on
margin. We believe that the current market price of our securities may limit
the effective marketability because of the reluctance of many brokerage firms
and institutional investors to recommend lower-priced securities to their
clients or to hold them in their own portfolios. The brokerage commission on
the purchase or sale of a lower-priced securities may also represent a higher
percentage of the price than the brokerage commission on a higher-priced issue.
We anticipate that a restructuring will have the effect of increasing the
minimum bid price of our common stock sufficient to satisfy Nasdaq's minimum
bid price criteria and result in our having sufficient tangible assets to
satisfy the Nasdaq net tangible asset test. However, we can give you no
assurances that the minimum bid price will increase, or if it increases, that
it will be maintained for any period of time, that we will have sufficient net
tangible assets or that we will be successful in maintaining the listing of our
common stock on the Nasdaq National Market.
The market value of our securities may fluctuate.
The market value of the common stock and warrants issued in connection with
the restructuring will depend on our future performance and factors generally
affecting securities markets, which are influenced by conditions beyond our
control.
A trading market for our warrants may not develop, and the value of our
warrants is uncertain.
We can give you no assurances that an active market for our warrants will
develop or, if a market does develop, that it will continue to exist. The value
of our warrants, by their nature, will be linked to the value of our common
stock. Consequently, the risks associated with ownership of our common stock
are also attributable to our warrants. We can give you no assurances as to the
liquidity of our common stock or warrants or the prices at which our common
stock or warrants can be sold.
20
<PAGE>
We do not expect to pay dividends in the foreseeable future.
We do not currently pay cash dividends on our common stock, and we do not
anticipate paying dividends in the foreseeable future. Our domestic credit
facility restricts the payment of dividends and other distributions. See
"Dividend Policy."
We have a history of operating losses.
The following are our net income (losses) from operations (in thousands)
for the last seven fiscal years:
<TABLE>
<CAPTION>
Net Income
Year (Loss)
---- ----------
<S> <C>
1998........................................................... $(16,409)
1997........................................................... (2,049)
1996........................................................... 2,434
1995........................................................... (137)
1994........................................................... (3,133)
1993........................................................... (537)
1992........................................................... (1,044)
</TABLE>
For the three months ended March 31, 1999, we reported net income of
approximately $2.9 million, including a gain of $5.1 million due to the sale
of certain non-core oil and gas properties. We can give you no assurances that
we will operate profitably in the future. The likelihood of our future
profitability must be considered in light of the financial, business and
operating risks, expenses, difficulties and delays frequently encountered in
connection with the oil and gas acquisition, exploitation, exploration,
development and production business in which we are engaged.
Estimates of our reserves and future net cash flows are subject to
uncertainty.
Estimated proved reserves of oil and natural gas are estimated quantities
that geological and engineering data demonstrate with reasonable certainty to
be economically producible under existing conditions. There are numerous
uncertainties inherent in estimating quantities and values of proved reserves
and in projecting future rates of production and the timing of development
expenditures, including factors involving reservoir engineering, pricing and
operating and regulatory constraints. Reserve assessment is a subjective
process of estimating the recovery from underground accumulations of
hydrocarbons that cannot be measured in an exact way. All reserve estimates
are to some degree speculative and various classifications of reserves only
constitute attempts to define the degree of speculation involved. The accuracy
of any reserve estimate is a function of available data, engineering and
geological interpretations and judgments based on the data and assumptions
regarding oil and gas prices and costs to operate such wells. Accordingly, as
further information is acquired relating to our oil and gas properties,
reserve estimates are likely to differ from the quantities of hydrocarbons
that are ultimately recovered. Results of drilling, testing and production
history from the properties in which we have an interest and changes in oil
and gas prices and cost estimates subsequent to the date of our reserve
estimates could require substantial adjustments, either upward or downward, to
such estimates. Any downward adjustment could adversely affect our financial
condition and future prospects and the market value of the our securities.
The estimated discounted pre-tax cash flows attributable to our estimated
net proved reserves, at an annual rate of 10%, should not be construed as the
current market value of our reserves. In accordance with applicable
requirements of the SEC, the future net cash flows attributable to estimated
net proved reserves are generally based on prices and costs as of the date of
the estimate, whereas actual future prices and costs may be materially higher
or lower. Actual future net cash flows also will be affected by the amount and
timing of both the production and the lifting and development costs. The 10%
discount rate, which is the rate required by the SEC, is not necessarily the
most appropriate discount rate based on interest rates in effect from time to
time and risks associated with our business or the oil and gas industry in
general.
21
<PAGE>
Oil and gas prices are very volatile.
Our revenues, profitability, future growth and value of our oil and gas
properties are highly dependent upon the prices of oil and gas. In addition,
borrowings under our domestic and Canadian credit facilities are limited by a
borrowing base, which is determined in part by the prices for oil and gas.
Market conditions make it difficult to estimate future prices of oil and
natural gas. In the past, our average annual sales price for oil and natural
gas has been volatile, and it is likely that oil and gas prices will continue
to fluctuate in the future. Various factors beyond our control affect prices of
oil and natural gas, including worldwide and domestic supplies of oil and
natural gas, the ability of the members of the Organization of Petroleum
Exporting Countries to agree to and maintain oil price and production controls,
political instability or armed conflict in oil-producing regions, the price of
foreign imports, the level of consumer demand, the price and availability of
alternative fuels, the availability of pipeline capacity and changes in
existing federal regulation and price controls. A material or extended decline
in the price of oil or gas may render the development of our oil and gas
properties commercially unattractive, have a material adverse effect on our
financial condition and results of operations, and limit our ability to incur
indebtedness or otherwise finance our operations and future capital
expenditures.
We may not be able to find and acquire additional reserves.
Our future success depends upon our ability to find, develop and acquire
additional oil and gas reserves that are economically recoverable. Unless we
conduct successful exploration or development activities or acquire properties
containing reserves, our reserves will generally decline as they are produced.
There can be no assurance that our acquisition, development or exploration
activities will result in additional reserves. If prevailing oil and gas prices
were to increase significantly, our finding costs (calculated by dividing the
capitalized costs of oil and gas properties as of a particular date by the
amount of net proved reserves shown on a reserve report at the same date) to
add new reserves could increase due to higher acquisition costs and third party
exploration and development costs. The business of purchasing oil and gas
properties involves a high degree of business and financial risk, especially
the risk that prices may subsequently decline or that the reserves actually
recovered may be less than those anticipated by us at the time of purchase. The
cost of drilling, completing and operating wells is uncertain, and our drilling
or production may be curtailed or delayed as a result of many factors.
Our acquisition program involves certain risks.
After we address our present financial crisis, we intend to resume the
acquisition of oil and gas properties. Generally, it is not feasible to review
in detail every individual property involved in an acquisition. Ordinarily,
review efforts are focused on the higher-valued properties. A detailed review
of all potential properties and records may not adequately reveal existing or
potential problems or permit us to become sufficiently familiar with the
properties to assess fully their deficiencies and capabilities. Inspections are
not always performed on every well and environmental problems, such as
groundwater contamination, are not necessarily revealed when an inspection is
undertaken. Property acquisition decisions generally are based on various
assumptions and subjective judgments that are speculative. If we overestimate
the potential oil and gas reserves of a property to be acquired or if
subsequent operations on the property are unsuccessful, then acquisition of the
property could result in substantial losses to us.
We can give you no assurances that we will make any acquisitions.
Additionally, larger acquisitions may involve substantially higher costs and
may pose additional operating issues regarding the integration of operations.
The rate at which we are able to sustain any future growth may be limited to
the extent that we require, but we are unable to obtain, suitable financing or
to timely expand our existing staff and operating capabilities.
We face many operating hazards and uninsured risks.
The oil and gas business involves a variety of operating risks, including
unexpected formations or pressures, uncontrollable flows of oil, gas, brine or
well fluids into the environment (including groundwater
22
<PAGE>
contamination), blowouts, cratering, fires, explosions, pollution and other
risks, any of which could result in personal injuries, loss of life, damage to
properties and substantial losses. Although we carry insurance that we believe
is reasonable, we are not fully insured against all risks. Losses and
liabilities arising from uninsured or under-insured events could have a
material adverse effect on our financial condition and results of operations.
We may suffer production curtailments.
Due to contract terms, pipeline interruptions, weather conditions or other
factors, the producing wells that we own an interest in may, from time to time,
be subject to production curtailments. Curtailments may range from production
being partially restricted to wells being completely shut-in. The duration of
curtailments may vary from a few days to several months.
We depend on certain key personnel.
We depend, and we will continue to depend for the foreseeable future, on the
services of our officers and key employees with extensive experience in the oil
and gas business. Our ability to retain such officers and key employees is
important to our continued success and growth. The loss of key personnel could
have a material adverse effect on us. We do not maintain key person life
insurance on any of our officers or employees.
We will need additional capital for acquisition.
The oil and gas industry is capital intensive. Our ability to expand our
reserve base is dependent upon the availability of internally generated cash
flows and financing alternatives. Such financing may consist of bank or other
commercial debt, forward sales of production, the issuance of equity or debt
securities or any combination thereof. We can give you no assurances that we
will be successful in obtaining additional financing if and when required. Any
substantial increase in our level of indebtedness through borrowings or the
issuance of debt securities may significantly decrease our financial
flexibility. If we are unable to obtain such financing if and when needed, we
may be forced to (1) curtail property acquisition and development activities
and (2) forgo continued participation in our current exploitation, exploration
and development projects operated by third parties.
Our exploratory drilling activities involve many risks.
Exploratory drilling involves a high degree of financial and operating risk,
including the risk that no commercially productive natural gas or oil
reservoirs will be encountered. The cost of drilling and completing exploratory
and development wells may vary materially from initial estimates. Drilling
operations may be curtailed, delayed or canceled as a result of many factors,
including, but not limited to, formations and drilling conditions, pressure or
mechanical irregularities in formations, equipment failures or accidents, as
well as title problems, weather conditions, compliance with governmental
requirements, shortages or delays in the delivery of equipment, and financial
instability of well operators, major working interest owners and well servicing
companies. With respect to the properties we do not operate, we are dependent
upon the operator of the wells to properly conduct leasing, drilling and
completion activities and ongoing operations of the well. The operator's
failure to properly perform their services could adversely affect us. Our
decisions to participate in the drilling of exploratory wells and, ultimately,
the success of our participation depends largely on the results of seismic
survey data and other geological and geophysical data. The acquisition and
interpretation of such data involves subjective professional judgment. Reliance
upon such data and the interpretations thereof poses the risk that a decision
to participate in the drilling of an exploratory well may be founded on
incorrect, insufficient data, erroneous interpretations of the data, or both.
The market for oil and gas production is volatile.
The availability of a ready market for our oil and gas production depends on
numerous factors beyond our control, including the demand for and supply of oil
and gas, the proximity of our natural gas reserves to pipelines, the capacity
of such pipelines, fluctuations in production and seasonal demand, the effects
of inclement weather and governmental regulation. New gas wells may be shut-in
for lack of a market until a gas pipeline or gathering system with available
capacity is extended into the area. Successful exploration wells, especially
offshore wells, may have production delayed until production facilities and
pipelines are constructed.
23
<PAGE>
We may have losses due to exchange rate fluctuations with respect to our
Canadian operations.
Approximately 45% of our revenues are derived from our Canadian properties.
The revenues and expenses of our Canadian operations are denominated in
Canadian dollars. We record transactions and prepare our financial statements
in U.S. dollars. Fluctuations in the value of the two currencies may cause
currency translation losses or reduced revenues and earnings, or both, with
respect to our Canadian operations. We cannot predict the effect of exchange
rate fluctuations upon future operating results.
Our industry is subject to governmental and environmental regulation.
Exploring for, producing and selling oil and gas are subject to a variety of
federal, state, local and international governmental regulations, including
regulation concerning the prevention of waste, the discharge of materials into
the environment, the conservation of natural gas and oil production, permits
for drilling operations, drilling bonds, reports concerning operations, the
spacing of wells, the unitization and pooling of properties, the clean-up of
well sites and various other matters, including taxes. Laws and regulations
protecting the environment are stringent and may in certain circumstances
impose strict liability, rendering a person liable for environmental damage
without regard to negligence or fault on the part of such person. Such laws and
regulations may expose us to liability for the conduct of operations or
conditions caused by others or for our acts that were in compliance with all
applicable laws at the time such acts were performed. An increase in federal,
state or local production or property taxes, the modification of existing laws
or regulations or the adoption of new laws or regulations relating to
environmental matters could have a material adverse effect on our results of
operations.
The Federal Water Pollution Control Act 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
into state and federal waters. The Federal Water Pollution Control Act 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 may impose substantial potential liability for the
costs of removal, remediation and damages. State water discharge regulations
and the federal permits prohibit or are expected to prohibit within the next
year the discharge of water, sand and, certain other substances related to the
oil and gas industry into coastal waters. Although the costs to comply with
zero discharge under federal or state law may be significant, the entire
industry will experience similar costs and we believe that these costs will not
have a material adverse effect on our financial condition and results of
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.
We are smaller and not as well capitalized than many of our competitors.
The oil and gas industry is highly competitive in many respects, including
identification of attractive oil and gas properties and personnel to conduct
operations and activities. In seeking suitable opportunities, we compete with a
number of other companies, including large oil and gas companies, numerous
independent operators, individual proprietors and others with greater financial
resources and, in some cases, with more experience. Many other oil and gas
companies in the industry have financial resources, personnel and facilities
substantially greater than ours, and we can give you no assurances that we can
compete effectively with these competitors.
We may experience Year 2000 problems.
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000. We
are actively taking steps to ensure that our information technology
infrastructure and business system applications, manufacturing equipment and
systems will be Year 2000 compliant, and we are seeking assurances of Year 2000
compliance from our suppliers, customers and other third parties with whom we
conduct business. However, we cannot be certain that our efforts will be
appropriate, adequate or complete.
24
<PAGE>
The Nevada anti-takeover statute may delay or prevent a takeover.
Provisions of the Nevada General Corporation Law requiring disinterested
director or stockholder approval of certain business combinations between
Southern Mineral and holders of 10% or more of the voting securities of
Southern Mineral could have the effect of delaying, deterring or preventing a
change in control of Southern Mineral. See "Stockholder Rights--Nevada Anti-
Takeover Statute."
RESTRUCTURING
Reasons for the Restructuring
Our recent operating results have been seriously hurt by a number of
factors, including low commodity prices for oil and natural gas. During the
third quarter of 1998, we borrowed approximately $34.2 million under our
domestic credit facility in connection with our acquisition of Neutrino. As a
result of the additional Neutrino acquisition debt, we had an aggregate of
approximately $96.0 of debt outstanding as of December 31, 1998. Due to lower
commodity prices for oil and gas in late 1998 and early 1999, the lenders under
both our domestic and Canadian credit facilities reduced our borrowing bases.
The reduced borrowing bases coupled with our level of debt has materially and
adversely impacted our liquidity and capital resources. Consequently, we began
developing during the first quarter of 1999 a comprehensive financial and
operating plan to return us to profitability. We downsized staff, cut
administrative expenses and improved our working capital through the sale of
non-core assets. Although our operating cash flow improved, we still are not
generating sufficient cash flow to fund our operations and service our debt. As
a result, we hired CIBC WM in February 1999 to explore strategic alternatives.
In the coming months, we are required to make a significant payment on our
indebtedness. We are required to repay $12.5 million under our domestic credit
facility on September 1, 1999. If we do not complete the sale of our Brushy
Creek Field and Texan Gardens Field interests, we do not expect to have
sufficient available cash to make this payment. Failure to make the September
1, 1999 payment would be default under our domestic credit facility, and the
lenders would have the right to demand payment in full of the debt outstanding
under this facility. On October 1, 1999, a cash interest payment of
approximately $1.4 million is due on the debentures. We will most likely not
have sufficient available cash to make this interest payment. Failure to make
the October 1, 1999 payment would be a default under the indenture governing
the debentures, and most likely would result in a demand for full payment of
the debentures. Our failure to timely pay the September 1, 1999 payment to the
lenders under our domestic credit facility or the October 1, 1999 interest
payment on the debentures would be a default under our Canadian credit
facility, and would most likely result in a demand for payment in full of the
debt outstanding under this facility.
If we do not complete the sale of the Brushy Creek Field and Texan Gardens
Field interests and the restructuring:
. the debentures will most likely be declared payable in full if the
October 1st interest payment is not made by October 30th;
. our domestic credit facility will most likely be declared in default by
the lenders if the September 1st payment is not made;
. the lender under our Canadian credit facility may demand immediate
repayment;
. an involuntary bankruptcy petition could be filed against us;
. we may need to file a petition with the bankruptcy court to reorganize or
liquidate Southern Mineral under applicable provisions of the Bankruptcy
Code;
. we may lose business if others begin to doubt our ability to timely
satisfy our obligations;
. we will be unable to invest adequate capital in our business or make
appropriate capital expenditures; and
. the lenders under our domestic and Canadian credit facilities may not
extend or renew the credit arrangements.
25
<PAGE>
A bankruptcy proceeding initiated in such circumstances, in our opinion,
would be lengthy and perhaps contested and, therefore, could be expected to
result in substantial disruption of business operations and a material
reduction of our value. We believe that in such circumstances our stockholders
would most likely suffer a total loss of their investments, and our
debentureholders would likely recover no more, and potentially could recover
substantially less than the recovery available through the restructuring. Based
upon our analysis, in the event of a liquidation, such recovery could be only
$0.36, or less in value for each $1.00 of indebtedness under the debentures.
See "Disclosure Statement--Alternatives to Confirmation and Consummation of the
Plan."
Restructuring Overview
We are proposing the exchange offer to eliminate at least 98% of our
debentures from our debt structure. We believe this is necessary to best ensure
our long-term viability. We are asking debentureholders to exchange their
debentures for common stock, warrants and cash. We are asking our stockholders
to approve the actions necessary to issue the common stock and the warrants.
We are simultaneously proposing the prepackaged plan as a way to obtain the
same results in a Chapter 11 bankruptcy proceeding. The prepackaged plan
involves the same basic economic considerations as the exchange offer.
The prepackaged plan has the added benefits to the debentureholders and
stockholders of discharging us from all liabilities that we do not specifically
assume and assuring us that all of the debentures will be exchanged into common
stock, warrants and cash.
The exchange offer provides us the advantage of time. If all of the
conditions are met, the exchange can be done in a matter of days after the
exchange offer closes. Proceeding with the prepackaged plan will be more costly
than the exchange offer in time, money and reputation. As in the prepackaged
plan, the stockholders will benefit from the elimination of 98% of the
debentures that are senior to their equity position. The debentureholders that
become stockholders will be subordinating their creditor position to the
debentureholders who do not accept the exchange offer.
Because of the high percentage of debentures that must be exchanged in the
exchange offer and the required stockholder approvals, we realize that it may
be difficult to complete the exchange offer. We believe it is more likely that
we will receive the requisite acceptances necessary for filing the prepackaged
plan. If all conditions to both the exchange offer and the prepackaged plan are
satisfied, we intend to proceed with the exchange offer.
We have retained CIBC WM as our financial advisor in connection with
pursuing strategic alternatives. CIBC WM has been paid an engagement fee of
$50,000 and $350,000 for rendering the fairness opinion discussed below. In
addition, we will pay CIBC WM $244,200 upon consummation of the sale of our
Brushy Creek Field and Texan Gardens Field interests to ANR, which will be
credited against an $800,000 fee we will pay to CIBC WM upon the consummation
of the EnCap investment. See "Restructuring--Fairness Opinion."
EnCap Investment
Upon completion of either the exchange offer or prepackaged plan
restructuring, we intend to sell 43,829,787 shares of common stock to EnCap for
$20.6 million and pay a fee with 2,127,660 common shares EnCap Investments
L.L.C. EnCap will own approximately 61.7% of our common stock if their
investment is completed. The following is a summary of certain material
provisions of the terms and conditions of the EnCap investment. A copy of our
stock purchase agreement with EnCap accompanies this proxy
statement/prospectus/disclosure statement as Annex D. The following summary
does not purport to be complete and is qualified in its entirety by reference
to the stock purchase agreement.
26
<PAGE>
Conduct of Our Business Pending the EnCap Investment
Prior to completing the EnCap investment, we have agreed to generally
conduct our business in the ordinary course taking into account our financial
condition; however, unless expressly permitted by the stock purchase agreement,
we will not, without the prior approval of EnCap,:
. declare, set aside or pay any dividends on, or make any other
distributions in respect of, our capital stock;
. issue, deliver, sell, pledge or otherwise encumber any shares of our
capital stock;
. amend our articles of incorporation or bylaws;
. enter into any business combination with a third party;
. sell, lease, mortgage, grant a lien on or otherwise encumber or dispose
of any of our material properties or assets;
. incur or guarantee any new debt or make any material loans, advances,
capital contributions or investments;
. make or incur any new material capital expenditures other than in
accordance with our 1999 capital expenditure budget;
. pay, discharge or satisfy any claims, liabilities or obligations subject
to certain exceptions; or
. adopt a plan of liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or reorganization other than the exchange
offer and the prepackaged plan.
We have also agreed not to alter or amend our compensation arrangements with
our employees or grant, alter or amend any severance arrangements with our
employees.
Conditions to the EnCap Investment
The completion of the EnCap investment is subject to our complying with a
number of conditions and requirements, including (1) our representation and
warranties being true and correct as of the closing date, (2) the performance
of our covenants and agreements in all material respects, (3) the delivery of
certain legal opinions, (4) the delivery of certain certificates from the
Secretary of State of the State of Nevada and our corporate secretary, (5)
successful completion of the exchange offer or the prepackaged plan, (6) the
absence of litigation that would prohibit the EnCap investment, (7) the receipt
of all necessary consents and approvals, (8) the absence of any material
adverse change in our financial condition, business or results of operations,
subject to certain exceptions and (9) our aggregate availability under our
credit facilities must be at least $36.0 million. In addition, our obligation
to complete the EnCap investment is subject to a number of conditions and
requirements; the most important of which is the delivery of a written "bring-
down" opinion of our financial advisor, CIBC WM, as to the fairness of the
EnCap investment to us from a financial point of view.
Control of Board by EnCap
At least five business days prior to completing the EnCap investment, we,
upon EnCap's request, will increase the size of our board or secure the
resignations of such number of directors as is necessary to enable three
nominees designated by EnCap to be appointed to our then five member board or
such other number so as to ensure that a majority of the directors are nominees
designated by EnCap. The newly appointed directors will serve until the next
annual meeting of our stockholders or their earlier resignation or removal.
Registration Rights
Pursuant to a separate registration rights agreement contemplated by the
stock purchase agreement, we have granted EnCap unlimited demand and
"piggyback" registration rights to facilitate resales of restricted
27
<PAGE>
shares of our common stock by EnCap. For a more detailed description of EnCap's
registration rights, see our registration rights agreement with EnCap that
accompanies this proxy statement/prospectus/disclosure statement as Annex E.
Contingent Warrants Issuance to EnCap
If for any reason the sale of our Brushy Creek and Texan Garden Field
interests is not completed substantially on the terms described in our purchase
and sale agreement with ANR, a copy of which accompanies this proxy
statement/prospectus/disclosure statement as Annex F, we will issue to EnCap a
warrant to purchase three million shares of our common stock on substantially
the same terms and conditions as the warrants to be issued to the
debentureholders in the restructuring, namely, the warrant will have an
exercise price of $1.50 and will expire three years after the date of its
issuance. See "Description of Warrants." The warrant will not be issued if the
EnCap investment is not completed.
Indemnification; Director and Officer Insurance
The stock purchase agreement with EnCap does not in any way affect the
limitations on the liability of our directors and officers or the
indemnification of our directors and officers set forth in our articles of
incorporation or as permitted by the Nevada General Corporation Law. See
"Stockholder Rights -- Limitation on Director and Officer Liability" and
"Stockholder Rights -- Indemnification of Directors and Officer." Furthermore,
EnCap has agreed, subject to certain cost limitations, we will maintain
director and officer liability coverage for current directors and officers for
acts or omissions prior to the restructuring for a period of six years after
the EnCap investment.
Commitment Fee
Upon the completion of the EnCap investment, we will pay a commitment fee of
$1.6 million to EnCap Investments L.L.C. The fee will be paid by the delivery
of $600,000 in cash and 2,127,660 shares of our common stock. If the EnCap
investment is not completed, the commitment fee will not be paid.
Other Proposals
Unless permitted by the stock purchase agreement, we will not:
. solicit, initiate or encourage any proposals concerning (1) any tender
offer, exchange offer, merger or other business combination, (2) the
acquisition of any of our securities or principal assets, (3) any
recapitalization, restructuring, liquidation, dissolution or other
extraordinary transaction or (4) the solicitation of proxies or consents
to vote any of our voting securities;
. enter into any agreement with respect to any such proposal; or
. participate in any discussions or negotiations regarding, furnish to any
person any information with respect to or take any other action to
facilitate any inquiries or the making of any such proposal.
Due to the fiduciary duties of our board to our security holders, we can
respond to unsolicited inquiries, requests for information or any proposal that
our board determines in good faith to be more favorable than the EnCap
investment. If we receive a proposal that our board determines in good faith to
be more favorable than the EnCap investment, we are required to give EnCap
written notice of such superior proposal. Upon receipt of such notice, EnCap
will have the right to match the superior proposal for a period of five
business days.
Termination and Fees
The stock purchase agreement may be terminated at anytime prior to
completion of the EnCap investment as follows:
. by mutual consent;
. by us or EnCap if the EnCap investment is not completed by February 29,
2000 (unless the party seeking to terminate has breached the stock
purchase agreement) or a permanent injunction or other court order
prevents the EnCap investment or the restructuring;
28
<PAGE>
. by us if certain conditions relating to EnCap have not been satisfied or
waived;
. by EnCap if certain conditions relating to us have not been satisfied or
waived;
. by us if we receive a superior proposal as described above under the
caption "Other Proposals" and EnCap fails to match the superior proposal;
and
. by us in order to respond to any involuntary bankruptcy proceeding.
If we terminate the stock purchase agreement to pursue a superior proposal,
we must pay EnCap a fee of $1.5 million. If the stock purchase agreement is
terminated due to our failure to complete the exchange offer or the prepackaged
plan, we must pay EnCap a fee of $500,000 by the delivery of either cash or
shares of our common stock. In addition, we will pay the reasonable expenses of
EnCap Investments L.L.C., up to $282,000, whether or not the EnCap investment
is completed.
Exchange Offer
We are asking debentureholders to exchange each $1,000 principal amount of
debentures for 337.8 shares of our common stock, a warrant to purchase 188.9
shares of our common stock for a period of three years at an exercise price of
$1.50 per share and $241.50 in cash.
If all of the debentures are exchanged, the debentureholders will receive an
aggregate of 15,640,920 shares of common stock and warrants to purchase an
aggregate of 7,820,460 shares of common stock. As a result of the exchange
offer and the EnCap transaction, current stockholders will suffer dilution of
their ownership interest from 100% at present to 17.3%. If the debentureholders
fully exercise their warrants and all other options and warrants are exercised,
current stockholders will suffer further dilution of their ownership interest
from 17.3% to 15.0%.
Conditions to the Exchange Offer
The exchange offer is conditioned upon, among other things:
. holders of at least 98% of the outstanding principal amount of the
debentures must accept the exchange offer;
. stockholders must approve (1) the common stock and warrant issuances and
(2) the amendment to our articles of incorporation to increase the number
of authorized shares of common stock from 50 million to 150 million;
. the EnCap investment must be completed; and
. the new or amended domestic credit facility must be signed.
On or prior to the Expiration Date, we may waive or amend any of the
conditions if we promptly disclose such waiver or amendment to the
debentureholders. We do not presently intend to waive any conditions or make
any amendments. We may extend the period of time that the exchange offer is
open, and we may amend any of the terms of the exchange offer if, and to the
extent that we decide amendments are needed to complete the exchange offer. We
will give stockholders and debentureholders notice of any amendments and the
opportunity to withdraw tendered debentures and votes as may be required by
applicable law.
If we (1) increase the percentage of debentures we want to receive in the
exchange, (2) reduce the percentage of debentures we want to receive in the
exchange offer or (3) change the consideration for the debentures, the exchange
offer will remain open for at least 10 business days from the day we give
debentureholders notice of the change. Also, if we decide to waive or change
other material items of the exchange offer, we will keep it open for at least
five additional business days from the day we give the debentureholders notice
of the change. Notice of an extension of the exchange offer shall be given no
later than 9:00 a.m., New York City time, on the next business day after the
scheduled expiration date.
29
<PAGE>
If the exchange offer is to occur, it would be at a closing scheduled as
soon as possible after satisfaction or waiver of all conditions. At the
exchange offer closing:
. we would accept all valid debentures submitted for exchange and issue the
common stock and warrants and make the cash payment for the debentures;
. an amendment to our articles of incorporation would be filed;
. the EnCap investment would be completed; and
. the new or amended domestic credit facility would be signed.
All conditions to the exchange offer must be satisfied or waived prior to
the expiration date, or in the case of an extension of the exchange offer,
prior to the revised expiration date. If the exchange offer closing does not
occur, all of the debentures submitted for exchange will be promptly returned
to their owners. If all of the conditions of the exchange offer are satisfied
or waived on or prior to the expiration date, we will proceed with the exchange
offer.
Acceptance of Debentures; Delivery of Exchange Consideration
If we accept debentures for exchange, the exchange agent will deliver the
common stock, warrants and cash as soon as practicable after the expiration
date. No certificates or scrip representing fractional shares of common stock
will be issued in the restructuring. Instead, fractions will be rounded up to
the nearest whole number of shares.
The consideration to be paid in the exchange offer will be paid in respect
of each $1,000 principal amount of debentures plus all accrued and unpaid
interest up to the date of completion of the exchange offer. By tendering
debentures a debentureholder surrenders all rights to receive any payments of
accrued and unpaid interest on such debentures through and including the
exchange offer closing.
Instructions for Accepting the Exchange Offer
Only a holder of debentures may tender debentures in the exchange offer.
Except for book entry transfers discussed below, to tender in the exchange
offer a holder must complete, sign, and date the letter of transmittal, or a
copy thereof, have the signatures thereon guaranteed if required by the letter
of transmittal, and mail or otherwise deliver the letter of transmittal or copy
to the exchange agent prior to the expiration date. In addition, (1)
certificates for such debentures must be received by the exchange agent along
with the letter of transmittal prior to the expiration date, (2) a timely
confirmation of a book-entry transfer of such debentures, if that procedure is
available, into the exchange agent's account at the Depository Trust Company
("DTC") pursuant to the procedure for book-entry transfer, must be received by
the exchange agent prior to the expiration date or (3) the holder must comply
with the guaranteed delivery procedures described below. To be tendered
effectively, the letter of transmittal and other required documents must be
received by the exchange agent prior to the expiration date.
The tender by a holder that is not withdrawn before the expiration date will
constitute an agreement with us in accordance with the terms and subject to the
conditions set forth herein and in the letter of transmittal.
The method of delivery of debentures and the letter of transmittal and all
other required documents to the exchange agent is at the election and risk of
the holder. Instead of delivery by mail, it is recommended that holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure
30
<PAGE>
delivery to the exchange agent before the expiration date. No letter of
transmittal or debentures should be sent to us. Holders may request their
respective brokers, dealers, commercial banks, trust companies or nominees to
effect these transactions for such holders.
Any beneficial owner whose debentures are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder to tender on the beneficial owner's behalf. If the beneficial
owner wishes to tender on the owner's own behalf, the owner must, prior to
completing and executing the letter of transmittal and delivering the owner's
debentures, either make appropriate arrangements to register ownership of the
debentures in the beneficial owner's name or obtain a properly completed bond
power from the registered holder. A transfer of registered ownership may take
considerable time.
Signatures on a letter of transmittal or a notice of withdrawal, as the case
may be, must be guaranteed, unless debentures tendered pursuant thereto are
tendered (1) by a registered holder who has not completed the box entitled
"Special Registration Instructions" or "Special Delivery Instructions" on the
letter of transmittal or (2) for the account of an eligible guarantor
institution as defined below. If signatures on a letter of transmittal or a
notice of withdrawal, as the case may be, are required to be guaranteed, the
guarantee must be by an eligible guarantor institution that is a member of or
participant in the Securities Transfer Agents Medallion Program, the New York
Stock Exchange Medallion Signature Program or an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Securities Exchange
Act of 1934.
If the letter of transmittal is signed by a person other than the registered
holder, the debentures must be endorsed or accompanied by a properly completed
bond power, signed by the registered holder as that registered holder's name
appears on the debentures.
If the letter of transmittal or any debentures or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to us of
their authority to so act must be submitted with the letter of transmittal,
unless waived by us.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered debentures will be determined
by us in our sole discretion, which determination is final and binding. We
reserve the absolute right to reject any and all debentures not properly
tendered or any debentures our acceptance of which would, in the opinion of our
counsel, be unlawful. We also reserve the right to waive any defects,
irregularities or conditions of tender as to particular debentures. Our
interpretation of the terms and conditions of the exchange offer (including the
instructions in the letter of transmittal) is final and binding. Unless waived,
any defects or irregularities in connection with tenders of debentures must be
cured within such time as we shall determine. Although we intend to notify
holders of defects or irregularities with respect to tenders of debentures,
neither Southern Mineral, the exchange agent, nor any other person will incur
any liability for failure to give such notification. Tenders of debentures will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any debentures received by the exchange agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the exchange agent to the tendering
holders, unless otherwise provided in the letter of transmittal, as soon as
practicable following the expiration date, unless extended.
In addition, we reserve the right in our sole discretion to purchase or make
offers for any debentures that remain outstanding after the expiration date, to
terminate the exchange offer and, to the extent permitted by applicable law,
purchase debentures in the open market, in privately negotiated transactions,
or otherwise. The terms of any such purchases or offers could differ from the
terms of the exchange offer.
In all cases, we will issue the exchange consideration for debentures that
are accepted for exchange pursuant to the exchange offer only after timely
receipt by the exchange agent of certificates for such
31
<PAGE>
debentures or a timely book-entry confirmation of such debentures into the
exchange agent's account at DTC, a properly completed and duly executed letter
of transmittal (or, with respect to the DTC and its participants, electronic
instructions in which the tendering holder acknowledges its receipt of and
agreement to be bound by the letter of transmittal), and all other required
documents. If any tendered debentures are not accepted for any reason set forth
in the terms and conditions of the exchange offer or if debentures are
submitted for a greater principal amount than the holder desires to exchange,
such unaccepted or non-exchanged debentures will be returned without expense to
the tendering holder (or, in the case of debentures tendered by book-entry
transfer into the exchange agent's account at DTC pursuant to the book-entry
transfer procedures described below, such nonexchanged debentures will be
credited to an account maintained with DTC) as promptly as practicable after
the expiration or termination of the exchange offer.
The exchange agent will make a request to establish an account with respect
to the debentures at DTC for purposes of the exchange offer within two business
days after the date of this proxy statement/prospectus/disclosure statement,
and any financial institution that is a participant in DTC's systems may make
book-entry delivery of debentures being tendered by causing DTC to transfer
such debentures into the exchange agent's account at DTC in accordance with
DTC's procedures for transfer. However, although delivery of debentures may be
effected through book-entry transfer at the book-entry transfer facility, the
letter of transmittal or copy thereof, with any required signature guarantees
and any other required documents, must, in any case other than as set forth in
the following paragraph, be transmitted to and received by the exchange agent
on or prior to the expiration date or the guaranteed delivery procedures
described below must be complied with.
DTC's Automated Tender Offer Program ("ATOP") is the only method of
processing exchange offers through DTC. To accept the exchange offer through
ATOP, participants in DTC must send electronic instructions to DTC through
DTC's communication system in lieu of sending a signed copy of the letter of
transmittal. DTC is obligated to communicate those electronic instructions to
the exchange agent. To tender debentures through ATOP, the electronic
instructions sent to DTC and transmitted by DTC to the exchange agent must
contain the character by which the participant acknowledges its receipt of and
agrees to be bound by the letter of transmittal.
If a registered holder of the debentures desires to tender such debentures
and the debentures are not immediately available, or time will not permit such
holder's debentures or other required documents to reach the exchange agent
before the expiration date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (1) the tender is made
through an eligible institution, (2) prior to the expiration date, the exchange
agent receives from such eligible institution a properly completed and duly
executed letter of transmittal (or a facsimile thereof) and notice of
guaranteed delivery, substantially in the form provided by us (by telegram,
telex, facsimile transmission, mail or hand delivery), setting forth the name
and address of the holder of debentures and the amount of debentures tendered,
stating that the tender is being made thereby and guaranteeing that within
three Nasdaq trading days after the date of execution of the notice of
guaranteed delivery, the certificates for all physically tendered debentures,
in proper form for transfer, or a book-entry confirmation, as the case may be,
will be deposited by the eligible institution with the exchange agent and (3)
the certificates for all physically tendered debentures, in proper form for
transfer, or a book-entry confirmation, as the case may be, are received by the
exchange agent within three Nasdaq trading days after the date of execution of
the notice of guaranteed delivery.
Notwithstanding any other provision of the exchange offer, we will not be
required to accept for exchange, or issue any exchange consideration for, any
debentures and may terminate or amend the exchange offer if at any time before
the acceptance of such debentures for exchange if we determine that the
exchange offer violates applicable law, any applicable interpretation of the
staff of the SEC or any order of any governmental agency or court of competent
jurisdiction.
The foregoing conditions are for our sole benefit and may be asserted by us
regardless of the circumstances giving rise to any such condition or may be
waived by us in whole or in part at any time and
32
<PAGE>
from time to time in our sole discretion. Our failure to exercise any of the
foregoing rights, at any time, is not a waiver of any such right and each such
right shall be deemed an ongoing right which may be asserted by us at any time
and from time to time.
Expiration
The exchange offer will remain open for at least 20 business days. The
exchange offer will expire at 5:00 p.m., Houston time, on the expiration date,
unless extended.
Withdrawal Rights
Tenders of debentures may be withdrawn at any time prior to 5:00 p.m.,
Houston time, on the expiration date. For a withdrawal of a tender of
debentures to be effective, a written or (for DTC participants) electronic ATOP
transmission notice of withdrawal must be received by the exchange agent at its
address set forth in the letter of transmittal prior to the expiration date.
Any such notice of withdrawal must (1) specify the name of the person having
deposited the debentures to be withdrawn, (2) identify the debentures to be
withdrawn (including the certificate number or numbers and principal amount of
such debentures), (3) be signed by the holder in the same manner as the
original signature on the letter of transmittal by which such debentures were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the transfer of such debentures into
the name of the person withdrawing the tender and (4) specify the name in which
any such debentures are to be registered, if different from that of the person
that deposited the debentures. All questions as to the validity, form, and
eligibility (including time of receipt) of such notices will be determined by
us, which determination is final and binding. Any debentures so withdrawn will
be deemed not to have been validly tendered for exchange for purposes of the
exchange offer. Any debentures that have been tendered for exchange but which
are not exchanged for any reason will be returned to the holder thereof without
cost to such holder as soon as practicable after withdrawal, rejection of
tender or termination of the exchange offer. Properly withdrawn debentures may
be retendered by following one of the tendering procedures at any time on or
prior to the expiration date.
Accepting the Exchange Offer and Voting on Prepackaged Plan
Even if you accept the exchange offer, you should vote on the prepackaged
plan so that if the exchange offer does not occur, we can proceed with the
prepackaged plan.
Debentureholders may vote to accept or reject the prepackaged plan by
Ballot. The letter of transmittal and notice of guaranty of delivery are NOT
Ballots. There are 2 Ballots -- GREY for record debentureholders and BLUE for
beneficial owners of debentures. Debentureholders -- both beneficial owners and
record owners -- should complete, sign and return their Ballots to the exchange
agent. If you are not sure which Ballot to use, please call the information
agent.
Accounting Treatment
The exchange offer will be accounted for in conformity with generally
accepted accounting principles. Unlike the prepackaged plan, the exchange offer
is not subject to any special accounting treatment.
No Fractional Shares
No certificates or scrip representing fractional shares of common stock will
be issued. The exchange agent will round up to the next highest whole number of
shares.
Outstanding Options and Warrants
Options to purchase 1,950,103 shares of common stock at prices ranging from
$0.29 to $6.75 per share are outstanding as of July 20, 1999, and warrants to
purchase 1,495,096 shares of common stock at prices ranging
33
<PAGE>
from $1.25 to $6.77 per share are outstanding as of July 20, 1999. Holders of
certain outstanding employee options and warrants have agreed to waive the
change of control provisions of their options and warrants that would enable
them to elect to receive a cash payment upon the consummation of the EnCap
investment. None of these options or warrants will be repriced or cancelled in
the restructuring. Upon completion of the restructuring and the issuance of
the warrants to the debentureholders, options and warrants to purchase
11,131,499 shares of common stock will be outstanding.
Exchange Agent; Information Agent
is our exchange agent and is our
information agent.
All tenders of debentures should be directed to the exchange agent.
Requests for additional copies of the letter of transmittal should be directed
to the exchange agent at the following address:
Questions, requests for assistance and requests for additional copies of
this proxy statement/prospectus/disclosure statement should be directed to the
information agent at the following address:
Fees and Expenses
The principal solicitation of the exchange offer is being made by our
information agent; however, additional solicitations may be made in person or
by telephone by our officers and employees.
The estimated cash expenses to be incurred in connection with the exchange
offer will be paid by us and are estimated in the aggregate to be
approximately $2.2 million, which includes fees and expenses of the exchange
agent, information agent, financial advisor, accounting, legal, printing, and
related fees and expenses.
Transfer Taxes
Holders who tender their debentures for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that holders who
instruct us to register common stock or warrants in the name of, or request
that debentures not tendered or not accepted in the exchange offer be returned
to, a person other than the registered tendering holder will be responsible
for the payment of any applicable transfer tax thereon.
Stockholder Vote on Amendment to Articles of Incorporation and on Stock and
Warrant Issuances
The Nevada General Corporation Law requires stockholder approval to amend
our articles of incorporation. Holders of a majority of our outstanding common
stock must approve the amendment to our articles of incorporation. Rule 4460
of the Nasdaq Marketplace Rules requires shareholder approval to issue the
common stock and warrants in restructuring. A majority of votes cast, in
person or by proxy, at the special meeting is required to approve the common
stock and warrant issuances. Shareholder approval to amend our articles of
incorporation and to issue the common stock and warrants is not required under
the prepackaged plan.
All of our directors and officers that own common stock intend to vote for
the amendment to our articles of incorporation and the common stock and
warrant issuances.
34
<PAGE>
Unaudited Pro Forma Financial Data Giving Effect to the Exchange Offer
The following unaudited pro forma consolidated financial information
presents the impact of the exchange offer as of March 31, 1999 and for the
three-month period ended March 31, 1999 and the year ended December 31, 1998 by
providing effect for:
(1) the sale of our Brushy Creek Field and Texan Gardens Field interests
to ANR for $16.3 million;
(2) the sale of 43,829,787 shares of common stock to EnCap for $20.6
million;
(3) the payment of a commitment fee of $600,000 in cash and 2,127,660
shares of common stock to EnCap Investments L.L.C.;
(4) the exchange of 98% ($40.6 million) of the debentures for 337.8
shares of common stock, a warrant to purchase 188.9 shares of common
stock for three years at an exercise price of $1.50 and $241.50 cash
for each $1,000 principal amount of debenture; and
(5) the use of proceeds from the sale of Brushy Creek Field and Texan
Gardens Field interests and the EnCap investment
The unaudited pro forma consolidated financial information gives effect to
the transactions as if they had occurred at January 1, 1998. The unaudited pro
forma consolidated financial information is not necessarily indicative of the
results which would have been obtained had all the transactions referred to
above occurred on such date. The unaudited pro forma consolidated financial
information should be read in conjunction with the consolidated financial
statements and related notes contained in our Quarterly Report on Form 10-Q for
the period ended March 31, 1999, a copy of which accompanies the proxy
statement/prospectus/disclosure statement as Annex I, and our Annual Report on
Form 10-K/A for the fiscal year ended December 31, 1998, a copy of which
accompanies this proxy statement/prospectus/disclosure statement as Annex H.
The unaudited pro forma consolidated financial information has been prepared
in accordance with published guidelines of the SEC regarding pro forma
financial information. Neither KPMG LLP, our independent auditors, nor any
other independent accountant or financial advisor, examined or performed any
procedures with respect to the unaudited pro forma consolidated financial
information, and they (1) express no opinion or any other form of assurances
with respect to such information and (2) assume no responsibility for, and
disclaim any association with, the unaudited pro forma consolidated financial
information.
The pro forma ratio of earnings to fixed charges is expressed as the ratio
of: (1) fixed charges plus income from operations, to (2) fixed charges. Fixed
charges consist of interest expense and amortization of deferred financing
fees. Pro forma earnings for the exchange offer were insufficient to cover
fixed charges for the year ended December 31, 1998, by the amount of $14.9
million. The pro forma ratio of earnings to fixed charges for the exchange
offer was 7.9x for the three-months ended March 31, 1999.
35
<PAGE>
Southern Mineral Corporation
Giving Effect to the Exchange Offer
Unaudited Pro Forma Consolidated Balance Sheet
March 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Sale of Exchange
Consolidated Property Offer Pro Forma
ASSETS Historical Adjustments Subtotal Adjustments Consolidated
------ ------------ ----------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Current Assets
Cash and cash
equivalents.......... $ 677 $ -- (a) $ 677 $ -- (b) $ 677
Receivables........... 4,810 -- 4,810 -- 4,810
Other................. 680 -- 680 -- 680
-------- ------- -------- -------- --------
Total current
assets............. 6,167 -- 6,167 -- 6,167
Property and equipment,
at cost using
successful efforts
method for oil and gas
activities
Oil and gas producing
properties........... 138,339 (8,659)(a) 129,680 -- 129,680
Unproven properties... 3,673 -- 3,673 -- 3,673
Office equipment...... 547 -- 547 -- 547
Accum. depreciation,
depletion and
amortization......... (30,149) 541 (a) (29,608) -- (29,608)
-------- ------- -------- -------- --------
112,410 (8,118) 104,292 -- 104,292
Properties held for sale
and other.............. 6,543 -- 6,543 (2,122)(c) 4,421
-------- ------- -------- -------- --------
Total assets........ $125,120 $(8,118) $117,002 $ (2,122) $114,880
======== ======= ======== ======== ========
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
<S> <C> <C> <C> <C> <C>
Current Liabilities
Accounts payable...... $ 7,455 $ (188)(a) $ 7,267 $ (1,161)(e) $ 6,106
Canadian bank loan.... 18,590 -- 18,590 -- 18,590
Current portion of
long-term debt....... 13,169 (4,235)(a) 8,934 (8,022)(d) 912
-------- ------- -------- -------- --------
Total current
liabilities........ 39,214 (4,423) 34,791 (9,183) 25,608
Long-Term Debt
(less current
portion)............... 60,273 (11,613)(a) 48,660 (40,572)(e) 8,088
Deferred Income Taxes... 7,204 -- 7,204 -- 7,204
Stockholders' Equity
Preferred stock....... -- -- -- -- --
Common stock.......... 129 -- 129 612 (f) 741
Additional paid-in
capital.............. 30,852 -- 30,852 28,307 (g) 59,159
Accumulated other
comprehensive loss... (1,535) -- (1,535) -- (1,535)
Retained (deficit)
earnings............. (10,965) 7,918 (a) (3,047) 18,714 (h) 15,667
Less: treasury stock.. (52) -- (52) -- (52)
-------- ------- -------- -------- --------
Total stockholders'
equity............. 18,429 7,918 26,347 47,633 73,980
-------- ------- -------- -------- --------
Total liabilities
and
stockholders'
equity............. $125,120 $(8,118) $117,002 $ (2,122) $114,880
======== ======= ======== ======== ========
</TABLE>
See accompanying notes to the unaudited pro forma consolidated financial
statements.
36
<PAGE>
Southern Mineral Corporation
Giving Effect to the Exchange Offer
Unaudited Pro Forma Consolidated Statement of Operations
December 31, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Sale of Exchange
Consolidated Property Offer Pro Forma
Historical Adjustments Subtotal Adjustments Consolidated
------------ ----------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues
Oil and gas........... $ 21,722 $(1,867)(a) $ 19,855 $ -- $ 19,855
Gains on sales of
properties and other
assets............... (250) -- (250) -- (250)
-------- ------- -------- ------ --------
21,472 (1,867) 19,605 -- 19,605
Expenses
Production............ 8,518 (407)(a) 8,111 -- 8,111
Exploration........... 3,635 -- 3,635 -- 3,635
Depreciation,
depletion and
amortization......... 10,505 (393)(a) 10,112 -- 10,112
General and
administrative....... 3,622 -- 3,622 -- 3,622
Impairment of proved
oil and gas
properties........... 9,344 -- 9,344 -- 9,344
-------- ------- -------- ------ --------
35,624 (800) 34,824 -- 34,824
-------- ------- -------- ------ --------
Loss from operations.... (14,152) (1,067) (15,219) -- (15,219)
Other income, expenses
and deductions
Interest and other
income............... 330 -- 330 -- 330
Interest and debt
expense.............. (5,362) 1,288 (a) (4,074) 3,750(i) (324)
-------- ------- -------- ------ --------
Loss before income
taxes.................. (19,184) 221 (18,963) 3,750 (15,213)
Provision for income tax
benefit................ (2,775) -- (2,775) -- (k) (2,775)
-------- ------- -------- ------ --------
Net loss................ $(16,409) $ 221 $(16,188) $3,750 $(12,438)
======== ======= ======== ====== ========
Net loss per share--
basic and diluted...... $ (1.32) $ (1.30) $ (0.17)
======== ======== ========
Weighted average number
of shares outstanding--
basic and diluted...... 12,422 12,422 73,708
======== ======== ========
</TABLE>
See accompanying notes to the unaudited pro forma consolidated financial
statements.
37
<PAGE>
Southern Mineral Corporation
Giving Effect to the Exchange Offer
Unaudited Pro Forma Consolidated Statement of Operations
March 31, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Sale of Exchange
Consolidated Property Offer Pro Forma
Historical Adjustments Subtotal Adjustments Consolidated
------------ ----------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues
Oil and gas........... $ 5,621 $(467)(a) $ 5,154 $-- $ 5,154
Gains on sales of
properties and other
assets............... 5,073 -- 5,073 -- 5,073
------- ----- ------- ---- -------
10,694 (467) 10,227 -- 10,227
Expenses
Production............ 2,081 (106)(a) 1,975 -- 1,975
Exploration........... 47 -- 47 -- 47
Depreciation,
depletion and
amortization......... 3,081 (149)(a) 2,932 -- 2,932
General and
administrative....... 1,040 -- 1,040 -- 1,040
Impairment of proved
oil and gas
properties........... -- -- -- -- --
------- ----- ------- ---- -------
6,249 (255) 5,994 -- 5,994
------- ----- ------- ---- -------
Income from operations.. 4,445 (212) 4,233 -- 4,233
Other income, expenses
and deductions
Interest and other
income............... 27 -- 27 -- 27
Interest and debt
expense.............. (1,774) 307 (a) (1,467) 928 (j) (539)
------- ----- ------- ---- -------
Income before income
taxes.................. 2,698 95 2,793 928 3,721
Provision for income tax
benefit................ (230) -- (230) -- (k) (230)
------- ----- ------- ---- -------
Net income.............. $ 2,928 $ 95 $ 3,023 $928 $ 3,951
======= ===== ======= ==== =======
Net income per share--
basic.................. $ 0.23 $ 0.24 $ 0.05
======= ======= =======
Net income per share--
diluted................ $ 0.16 $ 0.17 $ 0.05
======= ======= =======
Weighted average number
of shares
outstanding--basic..... 12,800 12,800 74,086
======= ======= =======
Weighted average number
of shares
outstanding--diluted... 17,812 17,812 79,098
======= ======= =======
</TABLE>
See accompanying notes to the unaudited pro forma consolidated financial
statements.
38
<PAGE>
Southern Mineral Corporation
Giving Effect to the Exchange Offer
Unaudited Pro Forma Consolidated Financial Statements
(dollars in thousands, except share data)
Note 1 -- Basis of Presentation
The unaudited pro forma consolidated financial statements give effect to:
(1) the sale of our Brushy Creek Field and Texan Gardens Field interests
to ANR for $15,848 net of $432 in transaction and debt restructuring
fees;
(2) the sale of 43,829,787 shares of common stock to EnCap for $20,600;
(3) the payment of a commitment fee of $600 in cash and 2,127,660 shares
of common stock to EnCap Investments L.L.C.;
(4) the issuance of 15,328,102 shares of common stock and 7,664,051
warrants, exercisable at $1.50 per warrant, and $9,798 in cash, in
exchange for 98% ($40,572 principal amount) of the debentures in the
exchange offer;
(5) the use of proceeds from the sale of Brushy Creek Field and Texan
Gardens Field interests and the EnCap investment.
These unaudited pro forma consolidated financial statements are not
necessarily indicative of the results which would have actually been obtained
had all the transactions referred to above occurred on such dates. They should
be read in conjunction with our consolidated financial statements and related
notes contained in our Quarterly Report on Form 10-Q for the period ended March
31, 1999, a copy of which accompanies this proxy
statement/prospectus/disclosure statement as Annex I, and our Annual Report on
Form 10-K/A for the fiscal year ended December 31, 1998, a copy of which
accompanies this proxy statement/prospectus/disclosure statement as Annex H.
The unaudited pro forma consolidated financial information has been prepared
in accordance with published guidelines of the SEC regarding pro forma
financial information. Neither KPMG LLP, our independent auditors, nor any
other independent accountant or financial advisor, examined or performed any
procedures with respect to the unaudited pro forma consolidated financial
information, and they (1) express no opinion or any other form of assurances
with respect to such information and (2) assume no responsibility for, and
disclaim any association with, the unaudited pro forma consolidated financial
information.
Note 2 -- Adjustments
The unaudited pro forma consolidated balance sheet presents the consolidated
balance sheet of Southern Mineral as if all of the above transactions were
consummated on March 31, 1999. The unaudited pro forma consolidated statements
of operations present the consolidated statements of operations of Southern
Mineral for the three-months ended March 31, 1999 and the year ended December
31, 1998, as if all of the above transactions had occurred on January 1, 1998.
The unaudited pro forma consolidated statements of operations disclose the
elimination of revenues and costs related to sale and disposal of the Brushy
Creek Field and Texan Gardens Field interests and the reduction in interest
expense attributable to the sale of the Brushy Creek Field and Texan Gardens
Field interests and the exchange offer. The unaudited pro forma consolidated
statements of operations exclude estimated exchange offer expenses of
approximately $2,180 and a commitment fee of $1,600, which both will be
expensed as incurred and reported as reorganization expenses, and a gain on
exchange of the debentures of approximately $24,616, which will be reported as
an extraordinary item. These amounts will be included in our results of
operations subsequent to the reorganization proceedings.
39
<PAGE>
Southern Mineral Corporation
Giving Effect to the Exchange Offer
Unaudited Pro Forma Consolidated Financial Statements
(dollars in thousands, except share data)
<TABLE>
<C> <S> <C>
(a) Cash consideration received from ANR for the sale of Brushy
Creek Field and Texan Gardens Field interests.............. $ 16,280
Transaction fees paid in cash to CIBC WM.................... (244)
Restructuring fee paid in cash to bank...................... (188)
Payment of debt............................................. (15,848)
---------
$ --
=========
Book value of properties sold............................... $ (8,659)
---------
Accumulated depreciation, depletion and amortization of
properties sold............................................ $ 541
---------
Restructuring fee paid in cash to bank...................... $ (188)
---------
Payment of current portion of long-term debt................ $ (4,235)
---------
Payment of long-term debt................................... $(11,613)
---------
Gain on sale of Brushy Creek Field and Texan Gardens Field
interests, as follows:
Cash consideration received from the ANR.................... $ 16,280
Book value of properties sold............................... (8,659)
Transaction fees paid in cash to CIBC WM.................... (244)
Accumulated depreciation, depletion and amortization of
properties sold............................................ 541
---------
Gain on sale of properties.................................. $ 7,918
=========
Elimination of revenues related to properties sold for the
year ended December 31, 1998............................... $ (1,867)
---------
Elimination of production expenses related to properties
sold for the year ended
December 31, 1998.......................................... $ (407)
---------
Elimination of depreciation, depletion and amortization
related to properties sold for the year ended December 31,
1998....................................................... $ (393)
---------
Reduction in historical interest expense relating to the
payment of debt for the year ended December 31, 1998....... $ 1,288
---------
Elimination of revenues related to properties sold for the
three-months ended
March 31, 1999............................................. $ (467)
---------
Elimination of production expenses related to properties
sold for the three-months ended March 31, 1999............. $ (106)
---------
Elimination of depreciation, depletion and amortization
related to properties sold for the three-months ended March
31, 1999................................................... $ (149)
---------
Reduction in historical interest expense relating to the
payment of debt for three-months ended March 31, 1999...... $ 307
---------
(b) Effect on cash as a result of exchange offer, as follows:
Consideration received from EnCap........................... $ 20,600
Additional debt borrowings for transaction costs............ 1,500
Payment of debt............................................. (9,522)
Payments relating to 98% of debentureholders................ (9,798)
Commitment fee paid in cash to EnCap Investments L.L.C...... (600)
Professional and bank fees.................................. (2,180)
---------
$ --
=========
</TABLE>
40
<PAGE>
Southern Mineral Corporation
Giving Effect to the Exchange Offer
Unaudited Pro Forma Consolidated Financial Statements
(dollars in thousands, except share data)
<TABLE>
<C> <S> <C>
(c) Reduction of unamortized debentures' issue costs related to
98% of the debentures...................................... $ (2,122)
---------
(d) Payment of debt............................................. $ (9,522)
Increase in bank debt from cash consideration for new debt.. 1,500
---------
$ (8,022)
=========
(e) Elimination of debentures which will be converted by the
exchange offer:
98% of the debentures are assumed to have been exchanged.... $(40,572)
Elimination of accrued interest payable on 98% of the
debentures exchanged....................................... (1,161)
---------
(f) Record par value common stock issued to complete the
exchange offer:
Par value of common shares issued to Debentureholders (377.8
common shares for each $1,000 of 98% debenture principal).. $ 153
Additional 43,829,787 shares for cash contribution by
EnCap...................................................... 438
Additional 2,127,660 shares as commitment fee to for EnCap
Investments L.L.C.......................................... 21
---------
$ 612
=========
(g) Additional paid-in capital on common stock issued to
debentureholders (15,328,102 shares X $.46)................ $ 7,051
Value of warrants issued to debentureholders (7,664,051
warrants X $.015).......................................... 115
Additional paid-in capital on 43,829,787 shares of common
stock issued to EnCap...................................... 20,162
Additional paid-in capital on common stock issued to as a
commitment fee EnCap Investments L.L.C..................... 979
---------
$ 28,307
=========
<CAPTION>
(h) Record gain on exchange of debentures and other exchange
offer adjustments to accumulated deficit, as follows:
<C> <S> <C>
Conversion of debentures exchanged.......................... $ 24,616
Professional and bank fees.................................. (2,180)
Commitment fee for EnCap Investments L.L.C.................. (1,600)
Reduction of unamortized debentures issue costs related to
98% of the debentures...................................... (2,122)
---------
$ 18,714
=========
(i) Reduction in interest expense for the year ended December
31, 1998 as a result of the exchange offer, as follows:
Reduction of historical interest expense, including
amortization of debentures issue costs, relating to 98% of
debentures................................................. $ 3,037
Reduction in historical interest expense relating to the
payment of debt............................................ 829
Addition of estimated interest expense on borrowings to pay
issuance costs and estimated restructuring expenses........ (116)
---------
$ 3,750
=========
</TABLE>
41
<PAGE>
Southern Mineral Corporation
Giving Effect to the Exchange Offer
Unaudited Pro Forma Consolidated Financial Statements
(dollars in thousands, except share data)
<TABLE>
<C> <S> <C>
(j) Reduction in interest expense for the three months ended March
31, 1999 as a result of the exchange offer, as follows:
Reduction of historical interest expense, including amortization
of debentures issue costs, relating to 98% of debentures........ $759
Reduction in historical interest expense relating to the payment
of debt......................................................... 198
Addition of estimated interest expense on borrowings to pay
issuance costs and estimated restructuring expenses............. (29)
-----
$928
=====
(k) No adjustments for provision for income tax effects, as any
current tax effect is offset by the change in the deferred tax
asset valuation allowance recorded by Southern Mineral.
</TABLE>
42
<PAGE>
Prepackaged Plan
We are asking that our stockholders and debentureholders approve the
prepackaged plan. The votes required to approve the prepackaged plan and the
voting procedures differ significantly from the exchange offer.
Approval Requirements
The determination of approval of the prepackaged plan is based only on those
debentureholders and stockholders that send in Ballots. Approval of the
prepackaged plan needs "for" votes, two-thirds in dollar amount and from more
than one-half in number of the debentureholders that send in their Ballots and
more than two-thirds of the stockholders that send in their Ballots. We believe
that certain provisions of the Bankruptcy Code will allow us to complete the
prepackaged plan if we obtain the approval of our debentureholders but fail to
obtain the approval of our stockholders.
It is important that debentureholders and stockholders vote because only
actual votes received will be counted to determine if the prepackaged plan is
approved. See "Summary--Debentureholder and Stockholder Actions," "Disclosure
Statement--Summary of the Plan," and Disclosure Statement--Summary of Voting
Procedures." Failure to send in a signed Ballot by the expiration date will
constitute an abstention. An abstention will not be counted as a vote "for" or
"against" the prepackaged plan. See Disclosure Statement-- "Feasibility of the
Plan and the Best Interests of Creditors Test" for a discussion of the
requirements for confirmation of the prepackaged plan.
If acceptances are received from the debentureholders and the stockholders
in sufficient amounts and numbers to effect the prepackaged plan restructuring,
we expect to (but expressly reserve the right not to) file under Chapter 11 of
the Bankruptcy Code and use those acceptances to confirm the prepackaged plan.
If the conditions to the exchange offer are satisfied and the prepackaged plan
is accepted, we intend to (but expressly reserve the right not to) complete the
exchange offer.
If we do not receive the needed approvals, we will review our options at
that time. Our choices would include (1) filing the prepackaged plan without
the approval of the debentureholders and/or the stockholders, (2) simply filing
for protection under the Bankruptcy Code without an approved prepackaged plan,
or (3) pursue other options such as liquidation. We reserve the right to pursue
alternatives other than the exchange offer and the prepackaged plan, even if
all necessary acceptances and approvals are obtained.
Even if the debentureholders and stockholders approve the prepackaged plan,
the prepackaged plan may not be confirmed by a bankruptcy court. Although we
believe that the prepackaged plan will meet the legal tests for court approval,
there can be no assurance that a bankruptcy court will agree. For example, the
Bankruptcy Code requires that the prepackaged plan be feasible and be in the
best interests of creditors. These matters are discussed in detail under
"Feasibility of the Plan and the Best Interests of Creditors Test" in the
Disclosure Statement.
The prepackaged plan does not include a bankruptcy filing by Neutrino or any
other subsidiary of Southern Mineral. Consequently, creditors of our
subsidiaries are not directly affected by the prepackaged plan.
The prepackaged plan involves substantially the same economic considerations
and transactions as the exchange offer, except that in the prepackaged plan
100% of the debentures will be retired and the indenture pursuant to which the
debentures were issued will cease to be effective.
We have not at this time approved a bankruptcy filing. To the extent we deem
it to be appropriate, we may choose to pursue other alternatives, including the
implementation of a new restructuring plan outside of bankruptcy or the filing
of Chapter 11 proceedings to implement a plan of reorganization other than the
prepackaged plan. Our most viable option would be to seek protection from
creditors under Chapter 11 of the Bankruptcy Code. We believe that a bankruptcy
proceeding initiated in such a manner would be more
43
<PAGE>
expensive, lengthy and perhaps contested. This could substantially disrupt our
operations and materially diminish our value. If, before the prepackaged plan
is confirmed by the bankruptcy court, we modify the plan in a way that
materially adversely affects debentureholders and which has not been described
as possibly happening, we will resolicit the votes from the debentureholders.
Voting
Only the beneficial owners of debentures and common stock at the close of
business on , 1999 are entitled to vote to accept or reject the
prepackaged plan. For purposes of voting on the prepackaged plan, both Ballots
and Master Ballots are furnished for the voting classes. The BLUE Ballots are
for voting by the beneficial owners of debentures, GREEN Ballots are for voting
by beneficial owners of common stock, whether or not they are also the holder
of record of such securities. For example, if debentures or common stock are
held in the name of a broker, dealer, bank, trust company or other nominee, the
true or beneficial owner must vote. If a record owner of debentures or common
stock holds such debentures and common stock for the account of one or more
beneficial owners, the record owner combines the votes of the beneficial owners
into a Master Ballot.
Holders should complete the appropriate Ballot or Master Ballot carefully
following these instructions and the instructions on the Ballot forms.
If a person is both a debentureholder and a stockholder, he or she should
vote separately and complete a separate Ballot or Master Ballot for each
security.
Persons who acquire debentures or common stock after , 1999 must
arrange with the sellers to receive a proxy, Ballot or letter of transmittal,
as the case may be, from the holder of record of such securities on ,
1999.
Debentureholders tendering using the procedures for guaranteed delivery who
desire to vote on the prepackaged plan must deliver to the exchange agent a
GRAY Ballot voting on the prepackaged plan (see "Summary--Debentureholder and
Stockholder Actions"). Timely delivery to the exchange agent of a notice of
guaranty of delivery is not a vote on the prepackaged plan.
Debentureholders may vote on the prepackaged plan whether or not they act on
the exchange offer. Stockholders may vote on the prepackaged plan whether or
not they vote on the proposals to be considered at the special meeting and
regardless of how they so vote at the special meeting.
Trade Suppliers, Employees and Certain Contracts
We intend to continue to pay all trade creditors and employees in full in
the ordinary course of business during the restructuring.
We intend to pay, on time, all salaries, wages, accrued vacations, health-
related benefits, severance benefits and similar benefits to all of our current
officers and employees. We will not reject any outstanding warrants and stock
options, but we may reject some executory contracts in the bankruptcy
proceeding pursuant to the prepackaged plan.
DIP Facility
We are seeking to obtain a DIP Facility of up to $1.5 million to assure our
operating liquidity during the pendency of the Chapter 11 proceeding. There can
be no assurance that we will be able to obtain the DIP Facility.
44
<PAGE>
Classification and Treatment of Debentureholders and Stockholders under the
Prepackaged Plan
The following is a summary of the treatment of claims and equity interests
that are classified in the prepackaged plan:
<TABLE>
<S> <C>
CLASS DESCRIPTION TREATMENT UNDER THE PREPACKAGED PLAN
</TABLE>
<TABLE>
<S> <C>
. CLASS 1. Allowed Priority Claims. . UNIMPAIRED (non-voting)
These are certain claims given
priority under the Bankruptcy . Paid in full on the effective date
Code, other than administrative of the prepackaged plan or, if
expenses or those of a kind later, after being finally allowed
specified in Section 507(a)(2) of by the bankruptcy court, or as the
the Bankruptcy Code, to the extent parties otherwise agree.
allowed. We currently believe that
there are no allowed priority
claims.
</TABLE>
<TABLE>
<S> <C>
. CLASS 2. Allowed Secured Claims. . IMPAIRED (voting)
This class includes Compass Bank
and First Union National Bank, as . Cash payment to be made to reduce
secured creditors. the principal balance of the
credit facility to $7.8 million.
The credit facility will be
amended or a new facility will be
entered into providing for an
availability of up to $20.0
million, an interest rate equal to
the lender's prime or index rate
and a maturity of at least June 1,
2002.
</TABLE>
<TABLE>
<S> <C>
. CLASS 3. Allowed Unsecured Claims . IMPAIRED (voting)
(other than Class 5 claims). This
class consists of debentures. The . Debentureholders will receive as
aggregate claims in Class 3 are of the effective date of the
approximately $42.6 million. There prepackaged plan or, if later,
is one holder of record of Class 3 after being finally allowed by the
claims. bankruptcy court, a distribution
of (1) 337.8 shares of common
stock, (2) a warrant to purchase
188.9 shares of common stock for a
period of three years at an
exercise price of $1.50 per share
and (3) $241.50 in cash for each
$1,000 principal amount of
debentures.
</TABLE>
<TABLE>
<S> <C>
. CLASS 4. All unsecured claims . UNIMPAIRED (non-voting)
other than Class 3. We currently
estimate that about $109,000 would . Either paid in full on the
be paid to about 45 creditors in effective date of the prepackaged
this class. plan or, if later, after being
finally allowed by the bankruptcy
court, or unaltered as to original
legal, equitable and contractual
rights.
</TABLE>
<TABLE>
<S> <C>
. CLASS 5. Stockholders. There are . IMPAIRED (voting)
approximately 12,819,488 issued
and outstanding shares of common . The ownership interest in Southern
stock. There are approximately Mineral represented by the common
1,014 record holders of stock outstanding prior to the
Class 5 Interests. effective date will be
substantially diluted from 100% to
17.3%.
</TABLE>
45
<PAGE>
Conditions to the Prepackaged Plan
The Bankruptcy Code requires that a bankruptcy court determine that the
prepackaged plan complies with the requirements of Section 1129 of the
Bankruptcy Code. The prepackaged plan is conditioned upon, among other things:
. acceptance of the prepackaged plan by the debentureholders as a class;
. acceptance of the prepackaged plan by the stockholders or confirmation of
the prepackaged plan by a bankruptcy court without stockholder approval;
. the EnCap investment must be completed;
. the new or amended domestic credit facility must be signed;
. entry by the bankruptcy court of an order confirming the prepackaged
plan, which confirmation order shall not be stayed and, unless waived by
us with the written consent of the debentureholders, shall be final and
non-appealable; and
. all agreements, instruments and documents necessary in connection with
consummation of the prepackaged plan being in form and substance
satisfactory to the bankruptcy court.
We would expect that the closing of the prepackaged plan restructuring would
occur within 15 days following entry of a final order by a bankruptcy court
confirming the prepackaged plan.
Amendments to the Prepackaged Plan
We reserve the right to amend or modify the prepackaged plan, if and to the
extent that we decide that amendments or modifications are needed to complete
the prepackaged plan restructuring. If we amend or modify the prepackaged plan
without the consent of the debentureholders, we will provide such disclosure
and opportunity to change votes as may be required by law. If we decide that a
modification to the prepackaged plan is material to a particular class, we will
resolicit the approval of that class. We do not presently intend to waive any
bankruptcy conditions or make any amendments or modifications; we just reserve
the right to do so.
Confirmation without Acceptance
The prepackaged plan creates three impaired classes. Under the Bankruptcy
Code, the prepackaged plan may be confirmed even if the prepackaged plan is not
accepted by all impaired classes. Section 1129(b) of the Bankruptcy Code sets
forth the conditions to a confirmation of a prepackaged plan of reorganization
without the acceptance of all impaired classes (or "cram-down," as it is
generally called). Generally, if at least one impaired class of claims has
accepted the prepackaged plan, the prepackaged plan may be confirmed over the
dissent of other impaired classes of claims and interests. This can be done if
(1) the bankruptcy court finds that the prepackaged plan does not discriminate
unfairly (generally meaning respecting the relative priorities among creditors
and stockholders), and (2) if any dissenting class does not receive or retain
property at least equal to the allowed amount of its claim or interest, no
class junior to any such dissenting class receives or retains any property
under the prepackaged plan.
If one of the impaired classes accepts the prepackaged plan, we reserve the
right to seek confirmation of the prepackaged plan even if the other impaired
classes, including the stockholders, do not accept the prepackaged plan. We
also reserve the right to proceed other than under the prepackaged plan, which
could result in less favorable treatment to our debentureholders and
stockholders than the treatment currently provided in the prepackaged plan. See
"Disclosure Statement--Confirmation of the Plan."
Non-Acceptance by Debentureholders
We do not intend to seek confirmation of the prepackaged plan if the
impaired class of debentureholders does not accept the prepackaged plan. We may
choose instead to seek an alternative means of restructuring,
46
<PAGE>
including the filing of a Chapter 11 proceeding without an approved prepackaged
plan. We believe that if this happens, the debentureholder claimants may
receive substantially less than the recovery provided in the prepackaged plan.
See "Disclosure Statement--Alternatives to Confirmation Consumption of the
Prepackaged Plan."
Expiration
The prepackaged plan proposal will remain open for at least 20 business
days. The prepackaged plan proposal will expire at 5:00 p.m., Houston time, on
the expiration date, unless extended.
Revocation Rights
Your vote to accept or reject the prepackaged plan may be revoked at any
time before the earlier of (1) the filing of a bankruptcy petition in
connection with the prepackaged plan restructuring or (2) the expiration date.
Once the prepackaged plan is filed with the bankruptcy court, your vote may be
revoked only with the approval of the bankruptcy court.
Accounting Treatment
The restructuring will be accounted for in accordance with principles
required by the provisions of the American Institute of Certified Public
Accountants Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code." We believe that our reorganization
values on the effective date of the restructuring will exceed the amount of
impaired claims and anticipated post-petition liabilities. If our
reorganization value is greater than the sum of the impaired claims and post-
petition liabilities, fresh start accounting will not be applied to the
restructuring under Statement of Position 90-7.
Amendments to Articles of Incorporation
The prepackaged plan provides that our articles of incorporation will be
amended to give effect on the effective date to the increase in the number of
authorized shares of common stock from 50 million to 150 million. The amendment
can be accomplished by an order of the bankruptcy court without stockholder
approval.
Unaudited Pro Forma Financial Data Giving Effect to the Prepackaged Plan
The following unaudited pro forma consolidated financial information
presents the impact of the prepackaged plan as of March 31, 1999 and for the
three-month period ended March 31, 1999 and the year ended December 31, 1998 by
providing effect for:
(1) the sale of our Brushy Creek Field and Texan Gardens Field interests
to ANR for $16.3 million;
(2) the sale of 43,829,787 shares of common stock to EnCap for $20.6
million;
(3) the payment of a commitment fee of $600,000 in cash and 2,127,660
shares of common stock to EnCap Investments L.L.C.;
(4) the forced conversion of 100% ($41.4 million) of the debentures for
337.8 shares of common stock, a warrant to purchase 188.9 shares of
common stock for three years at an exercise price of $1.50 and
$241.50 cash for each $1,000 principal amount of debenture; and
(5) the use of proceeds from the sale of Brushy Creek Field and Texan
Gardens Field interests and the EnCap investment.
The unaudited pro forma consolidated financial information gives effect to
the transactions as if they had occurred at January 1, 1998. The unaudited pro
forma consolidated financial information is not necessarily indicative of the
results which would have been obtained had all the transactions referenced to
above occurred on such date. The unaudited pro forma consolidated financial
information should be read in conjunction with the consolidated financial
statements and related notes contained in our Quarterly Report on Form 10-Q for
the
47
<PAGE>
period ended March 31, 1999, a copy of which accompanies this proxy
statement/prospectus/disclosure statement as Annex I, and our Annual Report on
Form 10-K/A for the fiscal year ended December 31, 1998, a copy of which
accompanies this proxy statement/prospectus/disclosure statement as Annex H.
The unaudited pro forma consolidated financial information has been prepared
in accordance with published guidelines of the SEC regarding pro forma
financial information. Neither KPMG LLP, our independent auditors, nor any
other independent accountant or financial advisor, examined or performed any
procedures with respect to the unaudited pro forma consolidated financial
information, and they (1) express no opinion or any other form of assurances
with respect to such information and (2) assume no responsibility for, and
disclaim any association with, the unaudited pro forma consolidated financial
information.
The pro forma ratio of earnings to fixed charges is expressed as the ratio
of: (1) fixed charges plus income from operations, to (2) fixed charges. Fixed
charges consist of interest expense and amortization of deferred financing
fees. Pro forma earnings for the prepackaged plan were insufficient to cover
fixed charges for the year ended December 31, 1998, by the amount of $14.9
million. The pro forma ratio of earnings to fixed charges for the prepackaged
plan was 8.1x for the three-months ended March 31, 1999.
48
<PAGE>
Southern Mineral Corporation
Giving Effect to the Prepackaged Plan
Unaudited Pro Forma Consolidated Balance Sheet
March 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Sale of Prepackaged
Consolidated Property Plan Pro Forma
ASSETS Historical Adjustments Subtotal Adjustments Consolidated
------ ------------ ----------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Current Assets
Cash and cash
equivalents.......... $ 677 $ -- (a) $ 677 $ -- (b) $ 677
Receivables........... 4,810 -- 4,810 -- 4,810
Other................. 680 -- 680 -- 680
-------- ------- -------- ------- --------
Total current
assets............. 6,167 -- 6,167 -- 6,167
Property and equipment,
at cost using
successful efforts
method for oil and gas
activities
Oil and gas producing
properties........... 138,339 (8,659)(a) 129,680 -- 129,680
Unproven properties... 3,673 -- 3,673 -- 3,673
Office equipment...... 547 -- 547 -- 547
Accum. depreciation,
depletion and
amortization......... (30,149) 541 (a) (29,608) -- (29,608)
-------- ------- -------- ------- --------
112,410 (8,118) 104,292 -- 104,292
Properties held for sale
and other.............. 6,543 -- 6,543 (2,165)(c) 4,378
-------- ------- -------- ------- --------
Total assets........ $125,120 $(8,118) $117,002 $(2,165) $114,837
======== ======= ======== ======= ========
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
<S> <C> <C> <C> <C> <C>
Current Liabilities
Accounts payable...... $ 7,455 $ (188)(a) $ 7,267 $(1,185)(e) $ 6,082
Canadian bank loan.... 18,590 -- 18,590 -- 18,590
Current portion of
long-term debt....... 13,169 (4,235)(a) 8,934 (7,822)(d) 1,112
-------- ------- -------- ------- --------
Total current
liabilities........ 39,214 (4,423) 34,791 (9,007) 25,784
Long-Term Debt
(less current por-
tion).................. 60,273 (11,613)(a) 48,660 (41,400)(e) 7,260
Deferred Income Taxes... 7,204 -- 7,204 -- 7,204
Stockholders' Equity
Preferred stock....... -- -- -- -- --
Common stock.......... 129 -- 129 615 (f) 744
Additional paid-in
capital.............. 30,852 -- 30,852 28,453 (g) 59,305
Accumulated other
comprehensive loss... (1,535) -- (1,535) -- (1,535)
Retained (deficit)
earnings............. (10,965) 7,918 (a) (3,047) 19,174 (h) 16,127
Less: treasury stock.. (52) -- (52) -- (52)
-------- ------- -------- ------- --------
Total stockholders'
equity............. 18,429 7,918 26,347 48,242 74,589
-------- ------- -------- ------- --------
Total liabilities
and stockholders'
equity............. $125,120 $(8,118) $117,002 $(2,165) $114,837
======== ======= ======== ======= ========
</TABLE>
See accompanying notes to the unaudited pro forma consolidated financial
statements.
49
<PAGE>
Southern Mineral Corporation
Giving Effect to the Prepackaged Plan
Unaudited Pro Forma Consolidated Statement of Operations
December 31, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Sale of Prepackaged
Consolidated Property Plan Pro Forma
Historical Adjustments Subtotal Adjustments Consolidated
------------ ----------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues
Oil and gas........... $ 21,722 $(1,867)(a) $ 19,855 $ -- $ 19,855
Gains on sales of
properties and other
assets............... (250) -- (250) -- (250)
-------- ------- -------- ------ --------
21,472 (1,867) 19,605 -- 19,605
Expenses
Production............ 8,518 (407)(a) 8,111 -- 8,111
Exploration........... 3,635 -- 3,635 -- 3,635
Depreciation,
depletion and
amortization......... 10,505 (393)(a) 10,112 -- 10,112
General and
administrative....... 3,622 -- 3,622 -- 3,622
Impairment of proved
oil and gas
properties........... 9,344 -- 9,344 -- 9,344
-------- ------- -------- ------ --------
35,624 (800) 34,824 -- 34,824
-------- ------- -------- ------ --------
Loss from operations.... (14,152) (1,067) (15,219) -- (15,219)
Other income, expenses
and deductions
Interest and other
income............... 330 -- 330 -- 330
Interest and debt
expense.............. (5,362) 1,288 (a) (4,074) 3,796(i) (278)
-------- ------- -------- ------ --------
Loss before income
taxes.................. (19,184) 221 (18,963) 3,796 (15,167)
Provision for income tax
benefit................ (2,775) -- (2,775) -- (k) (2,775)
-------- ------- -------- ------ --------
Net loss................ $(16,409) $ 221 $(16,188) $3,796 $(12,392)
======== ======= ======== ====== ========
Net loss per share...... $ (1.32) $ (1.30) $ (0.17)
======== ======== ========
Weighted average number
of shares
outstanding............ 12,422 12,422 74,020
======== ======== ========
</TABLE>
See accompanying notes to the unaudited pro forma consolidated financial
statements.
50
<PAGE>
Southern Mineral Corporation
Giving Effect to the Prepackaged Plan
Unaudited Pro Forma Consolidated Statement of Operations
March 31, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Sale of Prepackaged
Consolidated Property Plan Pro Forma
Historical Adjustments Subtotal Adjustments Consolidated
------------ ----------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues
Oil and gas........... $5,621 $(467)(a) $5,154 $-- $5,154
Gains on sales of
properties and other
assets............... 5,073 -- 5,073 -- 5,073
------ ----- ------ ---- ------
10,694 (467) 10,227 -- 10,227
Expenses
Production............ 2,081 (106)(a) 1,975 -- 1,975
Exploration........... 47 -- 47 -- 47
Depreciation,
depletion and
amortization......... 3,081 (149)(a) 2,932 -- 2,932
General and
administrative....... 1,040 -- 1,040 -- 1,040
Impairment of proved
oil and gas
properties........... -- -- -- -- --
------ ----- ------ ---- ------
6,249 (255) 5,994 -- 5,994
------ ----- ------ ---- ------
Income from operations.. 4,445 (212) 4,233 -- 4,233
Other income, expenses
and deductions
Interest and other
income............... 27 -- 27 -- 27
Interest and debt
expense.............. (1,774) 307 (a) (1,467) 940(j) (527)
------ ----- ------ ---- ------
Income before income
taxes.................. 2,698 95 2,793 940 3,733
Provision for income tax
benefit................ (230) -- (230) -- (k) (230)
------ ----- ------ ---- ------
Net income.............. $2,928 $ 95 $3,023 $940 $3,963
====== ===== ====== ==== ======
Net income per share--
basic.................. $ 0.23 $ 0.24 $ 0.05
====== ====== ======
Net income per share--
diluted $ 0.16 $ 0.17 $ 0.05
====== ====== ======
Weighted average number
of shares
outstanding--basic..... 12,800 12,800 74,398
====== ====== ======
Weighted average number
of shares
outstanding--diluted... 17,812 17,812 79,410
====== ====== ======
</TABLE>
See accompanying notes to the unaudited pro forma consolidated financial
statements.
51
<PAGE>
Southern Mineral Corporation
Giving Effect to the Prepackaged Plan
Unaudited Pro Forma Consolidated Financial Statements
(dollars in thousands, except share data)
Note 1 -- Basis of Presentation
The unaudited pro forma consolidated financial statements give effect to:
(1) the sale of our Brushy Creek Field and Texan Gardens Fields interest
to ANR for $15,848 net of $432 in transaction and debt restructuring
fees;
(2) the sale of 43,829,787 shares of common stock to EnCap for $20,600;
(3) the payment of a commitment fee of $600 in cash and 2,127,660 shares
of common stock to EnCap Investments L.L.C.;
(4) the issuance of 15,640,920 shares of common stock and 7,820,460
warrants, exercisable at $1.50 per warrant, and $9,998 in cash, in
exchange for 100% ($41,400 principal amount) of the debentures in
the prepackaged plan; and
(5) the use of proceeds from the sale of Brushy Creek Field and Texan
Gardens Field interests and the EnCap investment.
Pursuant to Statement of Position 90-7, we estimate that our reorganization
value on the effective date of the plan will exceed the amount of affected
claims and expected post-petition liabilities. Under Statement of Position 90-
7, if our reorganization value is greater than the sum of the affected claims
and post-petition liabilities, fresh start accounting would not apply. As such,
we presently assume that fresh start accounting will not be implemented.
These unaudited pro forma consolidated financial statements are not
necessarily indicative of the results which would have actually been obtained
had all the transactions referred to above occurred on such dates. They should
be read in conjunction with the our consolidated financial statements and
related notes contained in our Quarterly Report on Form 10-Q for the period
ended March 31, 1999, a copy of which accompanies this proxy
statement/prospectus/disclosure statement as Annex I, and its Annual Report on
Form 10-K for the fiscal year ended December 31, 1998, a copy of which
accompanies this proxy statement/prospectus/disclosure statement as Annex H.
The unaudited pro forma consolidated financial information has been prepared
in accordance with published guidelines of the SEC regarding pro forma
financial information. Neither KPMG LLP, our independent auditors, nor any
other independent accountant or financial advisor, examined or performed any
procedures with respect to the unaudited pro forma consolidated financial
information, and they (1) express no opinion or any other form of assurances
with respect to such information and (2) assume no responsibility for, and
disclaim any association with, the unaudited pro forma consolidated financial
information.
Note 2 -- Adjustments
The unaudited pro forma consolidated balance sheet presents the consolidated
balance sheet of Southern Mineral as if all of the above transactions were
consummated on March 31, 1999. The unaudited pro forma consolidated statements
of operations present the consolidated statements of operations of Southern
Mineral for the three months ended March 31, 1999 and the year ended December
31, 1998 as if all of the above transactions had occurred January 1, 1998. The
unaudited pro forma consolidated statements of operations disclose the
elimination of revenues and costs related to sale and disposal of the Brushy
Creek Field and Texan Garden Field interests and the reduction in interest
expense attributable to the sale of the Brushy Creek Field and Texan Garden
Field interests and the prepackaged plan. The unaudited pro forma consolidated
statements of operations exclude estimated expenses of approximately $2,180 and
commitment of fees of $1,600, which both will be expensed as incurred and
reported as reorganization expenses, and a gain on exchange of the debentures
of approximately $25,119, which will be reported as an extraordinary item.
These amounts will be included in our results of operations subsequent to the
reorganization proceedings.
52
<PAGE>
Southern Mineral Corporation
Giving Effect to the Prepackaged Plan
Unaudited Pro Forma Consolidated Financial Statements
(dollars in thousands, except share data)
<TABLE>
<C> <S> <C>
(a) Cash consideration received from ANR for the sale of Brushy
Creek Field and Texan Gardens Fields interests.............. $ 16,280
Transaction fees paid in cash to CIBC WM.................... (244)
Restructuring fee paid in cash to bank...................... (188)
Payment of debt............................................. (15,848)
---------
$ --
=========
Book value of properties sold............................... $ (8,659)
---------
Accumulated depreciation, depletion and amortization of
properties sold............................................ $ 541
---------
Restructuring fee paid in cash to bank...................... $ (188)
---------
Payment of current portion of long-term debt................ $ (4,235)
---------
Payment of long-term debt................................... $(11,613)
---------
Gain on sale of Brushy Creek Field and Texan Gardens Field
interests, as follows:
Cash consideration received from ANR........................ $ 16,280
Book value of properties sold............................... (8,659)
Transaction fees paid in cash to CIBC WM.................... (244)
Accumulated depreciation, depletion and amortization of
properties sold............................................ 541
---------
Gain on sale of properties.................................. $ 7,918
=========
Elimination of revenues related to properties sold for the
year ended December 31, 1998............................... $ (1,867)
---------
Elimination of production expenses related to properties
sold for the year ended
December 31, 1998.......................................... $ (407)
---------
Elimination of depreciation, depletion and amortization
related to properties sold for the year ended December 31,
1998....................................................... $ (393)
---------
Reduction in historical interest expense relating to the
payment of debt for the year ended December 31, 1998....... $ 1,288
---------
Elimination of revenues related to properties sold for the
three-months ended
March 31, 1999............................................. $ (467)
---------
Elimination of production expenses related to properties
sold for the three-months ended March 31, 1999............. $ (106)
---------
Elimination of depreciation, depletion and amortization
related to properties sold for the three-months ended March
31, 1999................................................... $ (149)
---------
Reduction in historical interest expense relating to the
payment of debt for
three-months ended March 31, 1999.......................... $ 307
---------
(b) Effect on cash as a result of prepackaged plan, as follows:
Consideration received from EnCap........................... $ 20,600
Additional debt borrowings for transaction costs............ 1,500
Payment of debt............................................. (9,322)
Payments relating to 100% of debentureholders............... (9,998)
Commitment fee paid in cash to EnCap Investments L.L.C...... (600)
Professional and bank fees.................................. (2,180)
---------
$ --
=========
</TABLE>
53
<PAGE>
Southern Mineral Corporation
Giving Effect to the Prepackaged Plan
Unaudited Pro Forma Consolidated Financial Statements
(dollars in thousands, except share data)
<TABLE>
<C> <S> <C>
(c) Reduction of unamortized debentures' issue costs related to
100% of the Debentures..................................... $ (2,165)
---------
(d) Payment of debt............................................. $ (9,322)
Increase in bank debt from cash consideration for new debt.. 1,500
---------
$ (7,822)
=========
(e) Elimination of debentures which will be converted by the
prepackaged plan:
100% of the debentures are assumed to have been exchanged... $(41,400)
---------
Elimination of accrued interest payable on 100% of the
debentures exchange......................................... (1,185)
---------
(f) Record par value of common stock issued to complete the
prepackaged plan:
Par value of common shares issued to debentureholders (377.8
common shares for each $1,000 debenture principal)......... $ 156
Additional 43,829,787 shares for cash contribution by
EnCap...................................................... 438
Additional 2,127,660 shares as commitment fee to EnCap
Investments L.L.C.......................................... 21
---------
$ 615
=========
(g) Additional paid-in capital on common stock issued to
debentureholders (15,640,920 shares X $.46)................ $ 7,195
Value of warrants issued to debentureholders (7,820,460
warrants X $.015).......................................... 117
Additional paid-in capital on 43,829,787 shares of common
stock issued to EnCap...................................... 20,162
Additional paid-in capital on common stock issued as a
commitment fee to EnCap Investments L.L.C.................. 979
---------
$ 28,453
=========
<CAPTION>
(h) Record gain on exchange of debentures and other prepackaged
plan adjustments to accumulated deficit, as follows:
<C> <S> <C>
Conversion of debentures exchanged.......................... $ 25,119
Professional and bank fees.................................. (2,180)
Commitment fee to EnCap Investments L.L.C................... (1,600)
Reduction of unamortized debentures issue costs related to
100% of the debentures..................................... (2,165)
---------
$ 19,174
=========
(i) Reduction in interest expense for the year ended December
31, 1998 as a result of the prepackaged plan, as follows:
Elimination of historical interest expense, including
amortization of debentures issue costs, relating to 100% of
debentures................................................. $ 3,099
Reduction in historical interest expense relating to the
payment of debt............................................ 813
Addition of estimated interest expense on borrowings to pay
issuance costs and estimated restructuring expenses........ (116)
---------
$ 3,796
=========
</TABLE>
54
<PAGE>
Southern Mineral Corporation
Giving Effect to the Prepackaged Plan
Unaudited Pro Forma Consolidated Financial Statements
(dollars in thousands, except share data)
<TABLE>
<C> <S> <C>
(j) Reduction in interest expense for the three-months ended March
31, 1999 as a result of the prepackaged plan, as follows:
Elimination of historical interest expense, including
amortization of debentures issue costs, relating to 100% of
Debentures...................................................... $775
Reduction in historical interest expense relating to the payment
of debt......................................................... 194
Addition of estimated interest expense on borrowings to pay
issuance costs and estimated restructuring expenses............. (29)
-----
$940
=====
(k) No adjustments for provision for income tax effects, as any
current tax effect is offset by the change in the deferred tax
asset valuation allowance recorded by Southern Mineral.
</TABLE>
Fairness Opinion with Respect to the EnCap Investment
We retained CIBC WM as our financial advisor in connection with the EnCap
investment. In connection with this engagement, we requested CIBC WM to render
an opinion (the "Opinion") to our board as to the fairness to us, from a
financial point of view, of the $20.6 million in consideration to be paid
pursuant to the stock purchase agreement with EnCap for the issuance of
43,829,787 shares of our common stock (the "Transaction Consideration"). In
connection with the $20.6 million consideration, EnCap Investments L.L.C. will
receive $600,000 and 2,127,660 additional shares of our common stock as a
commitment fee.
CIBC WM delivered the Opinion on July 13, 1999 to our board to the effect
that, as of the date of the Opinion, and subject to certain factors,
assumptions and limitations in the Opinion, the Transaction Consideration was
fair, from a financial point of view, to us.
The full text of the Opinion accompanies this proxy
statement/prospectus/disclosure statement as Annex C and is incorporated herein
by reference. We urge you to read the Opinion carefully and in its entirety.
The Opinion describes the procedures followed, the factors considered, the
assumptions and limitations made by CIBC WM in rendering the Opinion and other
factors relating to CIBC WM's engagement by us. The summary of the Opinion in
this proxy statement/prospectus/disclosure statement is qualified in its
entirety by reference to the full text of the Opinion.
CIBC WM prepared the Opinion at the request of and for the use and benefit
of our board in connection with its consideration of the EnCap investment and
relates only to the fairness, from a financial point of view, of the
consideration being paid to us by EnCap. The Opinion does not address any other
aspect of the EnCap investment or related transactions, nor does it address the
relative merits of the EnCap investment and any other transactions or business
strategies discussed by our board as alternatives to the EnCap investment, or
the decision of our board to proceed with the EnCap investment. The Opinion
does not constitute a recommendation to any of our securityholders as to how
such securityholder should vote.
The Opinion was only one of many factors considered by our board of
directors in its evaluation of the Transaction Consideration and the EnCap
investment and should not be viewed as determinative of the views of our board
of directors or our management with respect to the Transaction Consideration or
the EnCap investment. CIBC WM was not requested to and did not make any
recommendation to our board as to the form or amount of the Transaction
Consideration to us reflected in the stock purchase agreement with EnCap, which
we and EnCap determined through arm's-length negotiations. In arriving at its
Opinion, CIBC WM did not
55
<PAGE>
ascribe a specific range of values to us, but made its determination as to
fairness of the Transaction Consideration, from a financial point of view, to
us on the basis of financial and comparative analyses summarized below.
In arriving at the Opinion, CIBC WM has, among other things:
. reviewed a draft of our registration statement on Form S-4, including
this proxy statement/prospectus/disclosure statement as a part thereof;
. reviewed our stock purchase agreement with EnCap;
. reviewed our audited financial statements for the fiscal years ended
December 31, 1996, 1997 and 1998;
. reviewed our unaudited financial statements for the three-month period
ended March 31, 1999;
. reviewed financial and operational projections prepared by our
management;
. reviewed the historical trading performance of our common stock and our
debentures;
. prepared a model that analyzed our financial prospects based upon various
assumptions as to asset dispositions and capital infusions, such analyses
including a status quo scenario that excluded the EnCap investment;
. modeled a status quo scenario using certain assumptions of future
performance provided to CIBC WM by our management to determine our
financial prospects without the EnCap investment;
. reviewed and analyzed certain financial, stock market and other publicly
available information relating to the business of certain other companies
whose operations CIBC WM considered reasonably comparable to us; and
. reviewed and analyzed certain publicly available information for certain
transactions that CIBC WM deemed reasonably comparable to the EnCap
investment.
In addition, CIBC WM has held discussions with members of our management and
the management of EnCap in regard to selected aspects of our financial and
operating prospects and the EnCap investment and has interviewed our counsel as
to certain legal matters relevant to the EnCap investment.
In rendering the Opinion, CIBC WM relied upon and assumed, without
independent verification or investigation, the accuracy and completeness of the
financial and other information provided to or discussed with CIBC WM by our
employees, representatives and affiliates or otherwise reviewed by CIBC WM, and
CIBC WM has not assumed any responsibility or liability therefor. With respect
to forecasts of our future financial condition and operating results provided
to or discussed with CIBC WM, CIBC WM assumed, at the direction of our
management and without independent verification or investigation, that such
forecasts were reasonably prepared in a manner that reflects the best available
information, estimates and judgments of our management. CIBC WM has also
assumed that all material governmental, regulatory and other consents and
approvals necessary under the stock purchase agreement with EnCap will be
obtained without any meaningful adverse effect on us.
Other than the reserve reports prepared by Ryder Scott Company, Netherland,
Sewell & Associates, Inc., Chapman Petroleum Engineering, Ltd. and Gilbert
Laustsen Jung Associates, Ltd. as of January 1, 1999, CIBC WM neither made nor
obtained any independent evaluations or appraisals of our assets or liabilities
or those of any of our affiliated entities. CIBC WM expresses no opinion as to
our underlying valuation, future performance or long-term prospects, or the
price at which our common stock will trade after announcement of
56
<PAGE>
the restructuring. CIBC WM has necessarily based the Opinion on the information
available to it and general economic, financial and stock market conditions and
circumstances as they exist and can be evaluated by it as of July 13, 1999.
Subsequent developments may affect the Opinion, and CIBC WM does not have any
obligation to update, revise or reaffirm the Opinion.
A fairness opinion relies on selected financial analyses as applied to
particular facts and, therefore, such an opinion does not readily allow partial
analysis or summary description. Accordingly, CIBC WM believes that you should
consider all of the analysis and that considering less than all of the analysis
and factors considered could give you a misleading or incomplete view of the
Opinion. The Opinion reflects the securities markets, economic and general
business and financial conditions prevailing as of its date and our condition
and prospects, financial and otherwise, as they were reflected in the
information reviewed by CIBC WM and as they were represented to CIBC WM in its
discussions with our management. In its analyses and in preparing the Opinion,
CIBC WM made many assumptions with respect to industry performance, general
business, market and economic conditions and other matters, many of which are
beyond our control or that of CIBC WM or EnCap. Any estimates contained in
these analyses do not necessarily indicate actual values or predict future
results or values, which may be significantly more or less favorable than as
set forth therein. In addition, analyses relating to the value of businesses do
not purport to reflect the prices at which businesses may actually be sold.
Some of the summaries of financial analyses include information presented in
tabular format. In order to fully understand the financial analyses performed
by CIBC WM, you must read the tables, together with the text of each summary.
The tables alone do not completely describe the financial analyses. Considering
the data in the tables without considering the full description of the
financial analyses, including the underlying methodologies and assumptions,
could give you a misleading or incomplete view of the financial analyses
performed by CIBC WM The following paragraphs summarize the significant
analyses performed by CIBC WM in arriving at the Opinion.
Each analytical method has been reviewed on a pre-transaction ("Pre-
Transaction") and post-transaction ("Post-Transaction") basis. Pre-Transaction
equity values are based on our balance sheet as of May 31, 1999, which was
provided to CIBC WM by us, and has been adjusted for the sale of assets to ANR.
In addition to the sale of assets to ANR, the Post-Transaction basis further
adjusts the Pre-Transaction basis for the sale of common stock to EnCap and
assumes the restructuring will be completed.
Net Asset Value Summary
CIBC WM determined a net asset value on a SEC reserve value ("SEC NAV"), bid
reserve value ("Bids Received NAV") and our reserve value ("Company NAV") by
calculating a net asset value net of various obligations relating to the EnCap
investment, and total debt and other noncurrent liabilities outstanding as
estimated at the time of the EnCap investment.
The SEC NAV was computed based on the following:
. PV-10 value of our proved reserves based on our SEC PV-10 Value which was
estimated by our independent reserve engineers as of January 1, 1999;
. our net working capital as of May 31, 1999, which was provided by us; and
. book value of our total debt as of May 31, 1999, which was provided by
us.
The Bids Received NAV was computed based on the following:
. estimated value of oil and gas reserves based on a compilation of bids
received during CIBC WM's engagement and a PV-10 value of our proved
reserves assets estimated by our management for those properties for
which no bids were received;
. our net working capital as of May 31, 1999, which was provided by us; and
57
<PAGE>
. book value of our total debt as of May 31, 1999, which was provided by
us.
Company NAV was computed based on the following:
. PV-10 value of our proved reserves assets estimated by our management as
of January 1, 1999;
. our net working capital as of May 31, 1999, which was provided by us; and
. book value of our total debt as of May 31, 1999, which was provided by
us.
As a result, CIBC WM calculated the following net asset values on a per
share basis:
<TABLE>
<CAPTION>
Pre-Transaction Post-Transaction
--------------- ----------------
<S> <C> <C>
SEC NAV........................................ $(0.99) $0.50
Bids Received NAV.............................. (1.35) 0.44
Company NAV.................................... 0.71 0.79
</TABLE>
CIBC WM complied our bids received as a benchmark in its NAV analysis. Four
important limitations apply to the calculation of the Bids Received NAV:
. we did not actively market or auction individual properties;
. we generally did not seek higher bids from these parties unless the
initial bids were in an acceptable range;
. oil and gas prices improved significantly between the time when the bids
were received and the Opinion; and
. the conditions associated with the timing and extent of the dispositions
by us (such as the bundling of properties) could have resulted in lower
cash bids.
Certain Selected Comparative Public Company Analysis
Using publicly available information, CIBC WM compared our selected
projected financial and operating data to the corresponding data of selected
publicly traded independent exploration and production companies based in the
United States and Canada. The selection of companies differed for the Pre-
Transaction and Post-Transaction analysis, with the former group containing
more highly leveraged companies. Two comparable groups for U.S. companies were
used because the EnCap investment would provide for a significant deleveraging
of our capital structure. The same group of Canadian companies was used for
both the Pre-Transaction and Post-Transaction analysis. The selected groups
included the following:
<TABLE>
<S> <C>
U.S. Selected Pre-Transaction Peers: Canadian Selected Company Peers:
. Beau Canada Exploration Ltd.
. Abraxas Petroleum Corp. . Bonavista Petroleum Ltd.
. Comstock Resources Inc. . Calahoo Petroleum Ltd.
. Costilla Energy Inc. . Edge Energy Inc.
. Gothic Energy Corporation . Elk Point Resources Inc.
. Swift Energy Company . Genesis Exploration Ltd.
. Petrobank Energy and Resources
U.S. Selected Post-Transaction Ltd.
Peers: . Renata Resources, Inc.
. Richland Petroleum Corp.
. Belco Oil & Gas Corporation
. Bellwether Exploration Co.
. HS Resources Inc.
. Unit Corporation
</TABLE>
There are no directly comparable companies to our business. Accordingly,
analysis of the results of the foregoing was not simply mathematical nor
necessarily precise. Rather, the analysis required complex judgments concerning
differences in financial and operating characteristics of companies and other
factors that could affect public trading values.
58
<PAGE>
CIBC WM determined the following adjusted average multiples for the U.S. and
Canadian comparables, which are presented below. CIBC WM compiled estimated
1999 and 2000 EBITDA and cash flow per share ("CFPS") as estimated by
independent research analysts.
<TABLE>
<CAPTION>
U.S. Peers U.S. Peers Canadian
Pre-Transaction Post-Transaction Peers
--------------- ---------------- --------
<S> <C> <C> <C>
Enterprise Value (Equity Market
Capitalization + Preferred Stock +
Total Debt - cash) to:
.1999E EBITDA..................... 7.3x 7.0x 5.2x
.2000E EBITDA..................... 6.5x 5.8x 3.5x
Proved Reserves (per Mcfe).......... $1.17 $1.05 $0.78
Price per Share to:
.1999E CFPS....................... 1.2x 3.5x 4.8x
.2000E CFPS....................... 1.8x 3.0x 3.1x
</TABLE>
By applying the corresponding multiples presented above to our estimated
EBITDA and CFPS and reserves, CIBC WM determined the range of Pre-Transaction
equity values to be $(2.96) to $3.04 per share and the Post-Transaction equity
values to be $0.40 to $1.03 per share.
Selected Comparative Transaction Analysis
CIBC WM reviewed publicly available financial information for mergers and
acquisitions involving exploration and production companies that CIBC WM
believed to be reasonably comparable to the EnCap investment. CIBC WM reviewed
11 U.S. transactions and 14 Canadian transactions in its analysis that occurred
or were announced between July 1, 1998 to present with total aggregate purchase
prices between $50 and $250 million. CIBC WM noted that there are no directly
comparable transactions to the EnCap investment.
For the selected transactions, CIBC WM calculated the following adjusted
average multiples for the mergers and acquisitions above:
<TABLE>
<CAPTION>
U.S. Canadian
Transactions Transactions
------------ ------------
<S> <C> <C>
Aggregate Purchase Price to Proved Reserves (Mcfe)... $0.72 $0.66
</TABLE>
By applying the corresponding multiples of the selected transactions
presented above to our reserve data, CIBC WM determined the Pre-Transaction
equity value to be $(0.67) per share and the Post-Transaction equity value to
be $0.56 per share.
Selected Property Acquisition Analysis
CIBC WM reviewed selected acquisitions of oil and gas reserves from July 1,
1998 to present with aggregate purchase prices between $50 and $250 million.
The selected transactions were obtained from John S. Herold, Inc. and were not
intended to represent the complete list of oil and natural gas transactions
which have occurred or been announced during that period. CIBC WM noted that
there are no property acquisitions directly comparable to the EnCap investment.
For the selected property acquisition analysis, CIBC WM calculated the
following adjusted average multiples for the acquisitions above:
<TABLE>
<CAPTION>
U.S. Canadian
Transactions Transactions
------------ ------------
<S> <C> <C>
Aggregate Purchase Price to Proved Reserves (Mcfe)... $0.74 $0.67
</TABLE>
By applying the corresponding multiples of the selected property
acquisitions presented above to our reserve data, CIBC WM determined the Pre-
Transaction equity value to be $(0.56) and the Post-Transaction equity value to
be $0.57 per share.
As part of our investment banking business, CIBC WM regularly engages in
valuations of businesses and securities in connection with acquisitions and
mergers, underwritings, secondary distributions of securities and private
placements and valuations for other purposes.
59
<PAGE>
CIBC WM has acted as financial advisor to us in connection with the EnCap
investment and to our board of directors in rendering the Opinion and will
receive a fee for its services based upon the greater of 1.15% of the
Transaction Value (as defined in the Letter Agreement with Southern Mineral
dated February 3, 1999) or $1,150,000 payable upon consummation of the EnCap
investment. CIBC WM received an opinion fee of $350,000. The Opinion fee will
be credited against any transaction fee which becomes payable by Southern
Mineral to CIBC WM upon consummation of the EnCap investment. CIBC WM has also
acted as financial advisor to us in connection with a sale of assets to ANR and
will receive a fee of $244,200 which shall be credited against any transaction
fee which becomes payable by us to CIBC WM upon consummation of the EnCap
investment. CIBC WM also received fees of $25,000 for each three-month period
of the engagement term (as specified in the Letter Agreement with Southern
Mineral dated February 3, 1999). In the ordinary course of business, CIBC WM
and its affiliates may actively trade our securities for their own account and
for the accounts of customers and, accordingly, may at any time hold a long or
short position in our securities.
Board Recommendations
The Board recommends that all debentureholders:
. accept the exchange offer and tender their debentures; and
. accept the prepackaged plan proposal.
The Board recommends that all stockholders:
. vote for:
.the amendment to our articles of incorporation;
.the common stock and warrant issuances; and
. accept the prepackaged plan proposal.
60
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The selected financial information presented in the table below should be
read in conjunction with the consolidated financial statements and related
notes contained in our Quarterly Report on Form 10-Q for the period ended March
31, 1999, a copy of which accompanies this proxy
statement/prospectus/disclosure statement as Annex I, and our Annual Report on
Form 10-K/A for the fiscal year ended December 31, 1998, a copy of which
accompanies this proxy statement/prospectus/disclosure statement of Annex H.
The selected financial information for the three-month periods ended March 31,
1999 and 1998 have been derived form unaudited financial statements. In our
opinion, the financial information for the three-month periods ended March 31,
1999 and 1998 include all adjustments, consisting of only normal recurring
adjustments, necessary to present fairly the information set forth therein and
are not necessarily indicative of results for the entire year. The selected
financial information for each of the five years in the period ended December
31, 1998 have been derived from audited financial statements.
The ratio of earnings to fixed charges is expressed as the ratio: (1) fixed
charges plus income from operations, to (2) fixed charges. Fixed charges
consist of interest expense and amortization of deferred financing fees.
Earnings were insufficient to cover fixed charges for the periods ended March
31, 1998 and the years ended December 31, 1998 and 1997, by the amount of
$534,000, $13,822,000, and $284,000, respectively. The ratio of earnings to
fixed charges for the period ended March 31, 1999 was 2.5x and December 31,
1996 was 3.5x. Southern Mineral had no fixed charges for the periods ended
December 31, 1995 and 1994.
Comparative Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
Three-months ended
March 31, December 31,
--------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- ----------------- ------- ------- -------- ------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
------
Current Assets.......... $ 6,167 $ 5,007 $ 7,776 $13,455 $ 2,918 $ 2,071 $1,973
Property and equipment--
net.................... 112,410 71,853 114,187 42,293 20,599 18,042 1,347
Oil and gas properties
held for sale and
other.................. 6,543 6,419 6,327 6,127 869 1,554 50
--------- -------- -------- ------- ------- -------- ------
$ 125,120 $ 83,279 $128,290 $61,875 $24,386 $ 21,667 $3,370
========= ======== ======== ======= ======= ======== ======
LIABILITIES AND STOCK
HOLDERS' EQUITY
- ------------------------
Current Liabilities..... $ 39,214 $ 1,719 $ 41,914 $ 2,956 $ 683 $ 5,960 $ 290
Deferred income taxes... 7,204 1,016 7,279 1,039 1,169 606 --
Long-term debt.......... 60,273 49,200 64,370 41,400 3,900 9,920 --
Stockholders' equity.... 18,429 31,344 14,727 16,480 18,634 5,181 3,080
--------- -------- -------- ------- ------- -------- ------
$ 125,120 $ 83,279 $128,290 $61,875 $24,386 $ 21,667 $3,370
========= ======== ======== ======= ======= ======== ======
WORKING CAPITAL
(deficit).............. $ (33,047) $ 3,288 $(34,138) $10,499 $ 2,235 $ (3,889) $1,683
========= ======== ======== ======= ======= ======== ======
</TABLE>
61
<PAGE>
Comparative Consolidated Operating Data
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three-months ended
March 31, Year ended December 31,
-------------------- --------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- -------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Oil and gas............. $ 5,621 $ 4,410 $ 21,722 $13,790 $11,780 $ 2,044 $ 1,747
Gains (losses) on sales
of property............ 5,073 4 (250) 413 453 170 66
--------- -------- -------- ------- ------- ------- -------
10,694 4,414 21,472 14,203 12,233 2,214 1,813
Expenses................ 6,249 3,972 35,624 14,815 8,164 2,488 5,580
--------- -------- -------- ------- ------- ------- -------
Income (loss) from
operations............. 4,445 442 (14,152) (612) 4,069 (274) (3,767)
Other income, expenses
and deductions
Interest and other
income................. 27 92 330 328 286 146 76
Interest and debt
expense............... (1,774) (834) (5,362) (1,591) (1,242) -- --
--------- -------- -------- ------- ------- ------- -------
Income (loss) before
income taxes........... 2,698 (300) (19,184) (1,875) 3,113 (128) (3,691)
Provision (benefit) for
income taxes........... (230) (5) (2,775) 174 679 9 (558)
--------- -------- -------- ------- ------- ------- -------
Net income (loss)....... $ 2,928 $ (295) $(16,409) $(2,049) $ 2,434 $ (137) $(3,133)
========= ======== ======== ======= ======= ======= =======
Earnings (Loss) per
share of Common Stock:
Basic.................. $ 0.23 $ (0.03) $ (1.32) $ (0.22) $ 0.37 $ (0.02) $ (0.75)
========= ======== ======== ======= ======= ======= =======
Diluted................ $ 0.16 $ (0.03) $ (1.32) $ (0.22) $ 0.34 $ (0.02) $ (0.75)
========= ======== ======== ======= ======= ======= =======
Weighted average number
of shares--basic....... 12,800 11,486 12,422 9,109 6,621 5,701 4,162
========= ======== ======== ======= ======= ======= =======
Weighted average number
of shares--diluted..... 17,812 11,486 12,422 9,109 7,114 5,701 4,162
========= ======== ======== ======= ======= ======= =======
</TABLE>
62
<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock is quoted on the Nasdaq National Market under the symbol
"SMIN." Until July 22, 1997, our common stock was quoted on the Nasdaq SmallCap
Market under the same symbol. The following table sets forth the range of high
and low bid prices of our common stock as reported by the Nasdaq SmallCap
Market for each of the quarters indicated through July 22, 1997 and the high
and low bid prices of our common stock on the Nasdaq National Market from July
23, 1997 for the periods indicated.
<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
1996
First Quarter................................................. $ 2.13 $ 1.25
Second Quarter................................................ 3.38 1.81
Third Quarter................................................. 5.00 2.88
Fourth Quarter................................................ 6.13 4.00
1997
First Quarter................................................. $ 7.75 $ 4.00
Second Quarter................................................ 5.50 3.50
Third Quarter................................................. 5.13 4.13
Fourth Quarter................................................ 8.13 5.13
1998
First Quarter................................................. $ 5.06 $ 3.19
Second........................................................ 4.00 3.31
Third Quarter................................................. 3.38 2.00
Fourth Quarter................................................ 2.19 0.44
1999
First Quarter................................................. $ 0.81 $ 0.25
Second Quarter ............................................... .50 .31
Third Quarter (through July 19, 1999)......................... .50 .39
On July 19, 1999, the closing sale price for our common stock as quoted on
the Nasdaq National Market was $.4375 per share. As of July 19, 1999, there
were approximately 1,014 holders of record of our common stock.
PRICE RANGE OF DEBENTURES
Our debentures are quoted on the Nasdaq SmallCap Market under the symbol
"SMING." The following table sets forth the range of high and low bid prices of
our debentures (per $100 of principal amount) as reported by the Nasdaq
SmallCap market for the periods indicated.
<CAPTION>
High Low
------- ------
<S> <C> <C>
1997
Fourth Quarter (beginning on October 2, 1997)................. $103.50 $91.50
1998
First Quarter................................................. $ 96.50 $83.50
Second........................................................ 89.50 81.50
Third Quarter................................................. 88.50 50.00
Fourth Quarter................................................ 60.00 23.50
1999
First Quarter................................................. $ 31.00 $14.50
Second Quarter................................................ 38.50 21.00
Third Quarter (through July 19, 1999) ........................ 34.00 28.00
</TABLE>
On July 19, 1999, the closing sale price of our debentures as quoted on the
Nasdaq SmallCap Market was $34.00 (per $100 of principal amount). The
Depository Trust Company, the holder of our global debenture, is the sole
holder of record of our debentures.
63
<PAGE>
DIVIDEND POLICY
We have not declared or paid a cash dividend on our common stock since 1994
and it is anticipated that to the extent we have earnings we will reinvest the
earnings in our business and will not pay cash dividends. Declaration of
dividends is within the discretion of the our Board. In addition, declaration
of dividends is subject to certain restrictive covenants contained in our
credit facilities.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock currently consists of 50,000,000 shares of
common stock, par value $0.01 per share, of which as of July 15, 1999,
12,932,397 shares were issued and 12,841,174 shares were outstanding, 91,223
shares are held in treasury and 3,445,199 shares were reserved for issuance
upon exercise of outstanding options and warrants and for issuance under our
various stock option and compensation plans. All outstanding shares of our
common stock are fully paid and nonassessable.
Holders of our common stock are entitled to received dividends, if, as and
when declared by the our Board out of funds legally available therefor, and
are entitled on liquidation to share ratably in all assets of Southern Mineral
remaining after the payment of liabilities. Since 1994, we have reinvested all
earnings in our business and, accordingly, have not paid any dividends on our
common stock. Although we intend to continue to reinvest any future earnings,
we may determine to pay dividends in the future. Our ability to declare and
pay any such dividends will depend upon, among other things, our earnings and
financial condition and restrictive provisions contained in our credit
facilities and any other financing arrangements to which we may be subject
from time to time.
Each share of our common stock has one vote on all matters presented to the
stockholders. A majority of issued and outstanding shares of our common stock
entitled to vote and represented at a stockholders meeting in person or by
proxy constitutes a quorum for the transaction of business. The affirmative
vote of a majority of shares present and entitled to vote at a meeting at
which a quorum is present generally will constitute stockholder action.
Certain fundamental corporate changes such as amending the articles of
incorporation, a merger or a disposition of all of Southern Mineral's assets
require the approval of a majority of outstanding shares entitled to vote
thereon. Directors are elected by a plurality of votes cast by stockholders
entitled to vote therefor. Since our common stock does not have cumulative
voting rights, holders of more than one-half of the shares present and
entitled to vote for directors at a meeting at which a quorum is present may,
if they choose to do so, elect all of the directors and, in that event, the
holders of the remaining shares will not be able to elect any directors. Our
articles of incorporation deny preemptive rights to our stockholders.
Our articles of incorporation authorize us to issue 5 million shares of
preferred stock, par value $0.01 per share. We have neither established nor
designated a series of our preferred stock. None of this preferred stock has
been issued, and we have no plans to issue any preferred stock. The Board has
the authority, without stockholder approval, to cause the issuance of
preferred stock in one or more series, with such designations, preferences and
relative participating, optional or other special rights and qualifications,
limitations or restrictions as the Board may determine. If we do issue any
preferred stock, it may include, among others, extraordinary voting, dividend,
redemption, conversion or exchange rights.
American Stock Transfer & Trust Company, New York, New York, is our
transfer agent and registrar.
For additional information concerning provisions of our articles of
incorporation and bylaws that could delay, defer or prevent a change in
control of Southern Mineral, see "Stockholder Rights--Appraisal and
Dissenters' Rights," "--Nevada Anti-Takeover Statutes," "--Limitation on
Director and Officer Liability" and "--Indemnification of Officers and
Directors."
64
<PAGE>
DESCRIPTION OF WARRANTS
General
In connection with the restructuring, we will issue warrants to purchase an
aggregate of 7,820,460 shares of common stock to our debentureholders. The
warrants will be issued pursuant to a warrant agreement with American Stock
Transfer & Trust Company, as warrant agent. The following summary of the
material provisions of the warrant agreement does not purport to be complete
and is qualified in its entirety by reference to the form of warrant agreement
which accompanies this proxy statement/prospectus/disclosure statement as Annex
F.
Each warrant, when exercised, will entitle the holder thereof to purchase
one fully paid and non-assessable shares of common stock ("warrant shares"), at
an exercise price of $1.50 per share. The exercise price and the number of
warrant shares are both subject to adjustment in certain cases referred to
below. The holders of the warrants would be entitled, in the aggregate, to
purchase shares of common stock currently representing approximately 6.3% of
the outstanding common stock on a diluted basis if exercised on the date of
original issuance of the warrants. The warrants will be exercisable at any time
on or after the date of issuance. Unless exercised, the warrants will
automatically expire three years after the date of their issuance.
The warrants may be exercised by surrendering to us the warrant certificate
evidencing the warrants to be exercised with the accompanying form of election
to purchase properly completed and executed, together with payment of the
exercise price. Payment of the exercise price may be made at the holder's
election in cash in U.S. dollars by wire transfer or by certified or official
bank check to the order of "Southern Mineral Corporation."
Upon surrender of the warrant certificate and payment of the exercise price,
we will deliver or cause to be delivered, to or upon the written order of such
holder, stock certificates representing the number of whole warrant shares to
which the holder is entitled. If less than all of the warrants evidenced by a
warrant certificate are to be exercised, a new warrant certificate will be
issued for the remaining number of warrants. All warrant shares or other
securities issuable by us upon the exercise of the warrant shall be validly
issued, fully paid and non-assessable.
We are not required to issue fractional warrant shares. Instead, we can
either (1) pay cash in lieu of fractional warrant shares or (2) round up to the
next whole warrant share.
We intend to have the warrants listed for quotation on the Nasdaq SmallCap
market.
The holders of the warrants will have no right to vote on matters submitted
to the stockholders and will have no right to receive dividends. The holders of
the warrants will not be entitled to share in our assets in the event we
liquidate, dissolve or wind up. In the event a bankruptcy or reorganization is
commenced by or against us, a bankruptcy court may hold that unexercised
warrants are executory contracts which may be subject to rejection by us with
approval of the bankruptcy court and the holders of the warrants may, even if
sufficient funds are available, receive nothing or a lesser amount as a result
of any such bankruptcy case than they would be entitled to if they had
exercised their warrants prior to the commencement of any such case.
In the event of a taxable distribution to holders of common stock that
results in an adjustment to the number of warrant shares or other consideration
for which a warrant may be exercised, the holders of the warrants may, in
certain circumstances, be deemed to have received a distribution subject to
federal income tax as a dividend.
Adjustments
The number of warrant shares purchasable upon exercise of warrants and the
exercise price will be subject to adjustment, subject to certain exceptions, if
we:
. pay a dividend or make a distribution on our common stock in the form of
shares of our common stock;
65
<PAGE>
. subdivide our outstanding common stock into a greater number of shares;
. combine our outstanding common stock into a smaller number of shares; or
. issue by reclassification of our common stock any other shares of our
capital stock.
No adjustment in the exercise price will be required unless such adjustment
would require an increase or decrease of at least one percent (1.0%) in the
exercise price; provided however, that any adjustment that is not made will be
carried forward and taken into account in any subsequent adjustment.
If we complete any merger, consolidation or other business combination in
which we are not the surviving entity or a sale, transfer, lease or other
conveyance of all or substantially all of our assets to another person (in one
transaction or in two or more related transactions), and with respect to which
cash and/or non-cash consideration will be distributed to our stockholders
(including any such merger, consolidation, sale, transfer, lease or other
conveyance of assets or other business combination in which we are the
surviving entity but our stockholders receive cash or non-cash consideration in
exchange for our common stock), the warrants are automatically exercisable for
the kind and amount of securities, cash or other assets which a holder of a
warrant would have owned immediately before the effective date of such
transaction.
Reservation of Common Stock
We will at all times reserve and keep available such number of shares of
common stock as will be issuable upon the exercise of all outstanding warrants.
Such shares of common stock when paid for and issued, will be duly and validly
issued, fully paid and non-assessable, free of preemptive rights and free from
all taxes, liens, charges and security interests with respect to the issuance
thereof.
Amendment
From time to time, without the consent of the holders of the warrant, we may
amend or supplement the warrant agreement for certain purposes, including
curing defects or inconsistencies or making any change that does not materially
adversely affect the legal rights of any holder. Any other amendment or
supplement to the warrant agreement may be made by an instrument in writing
signed by us and the holders of a majority of the warrants outstanding at such
time.
STOCKHOLDER RIGHTS
General
The following summary does not purport to be a complete statement of the
general rights of our stockholders. This summary is qualified in its entirety
by reference to the full text of each of such documents and the Nevada General
Corporation Law. For information as to how such documents may be obtained, see
"Where You Can Find More Information."
Size and Classification of the Board
Nevada law provides that a corporation's board of directors shall consist of
at least one member and the authorized number of directors may be fixed or
variable within a fixed minimum or maximum as provided in either the
corporation's articles of incorporation or in the bylaws as our bylaws provide.
Our articles of incorporation and bylaws provide that the maximum number of
directors is 13 and the minimum number is three, except in the case where all
the shares of our common stock are owned beneficially and of record by either
one or two stockholders, and then our Board cannot be less than the number of
stockholders. Pursuant to our bylaws, at least one director must be a U.S.
citizen. Currently, our Board has fixed the number of directors at 11. Although
Nevada law allows directors to be divided into three separate classes with
staggered tenures of office, neither our articles of incorporation nor our
bylaws provide for classification of directors.
66
<PAGE>
Removal of Directors; Filling Vacancies on the Board
Pursuant to Section 78.335 of the Nevada General Corporation Law, a director
may be removed by the vote of the holders of not less than two-thirds of the
voting power of the voting stock, subject to certain restrictions concerning
cumulative voting. However, a Nevada corporation may include in its articles of
incorporation a provision requiring the approval of a larger percentage of the
voting power to remove a director. This section also provides that any vacancy
in the board of directors may be filled by a majority of the remaining
directors, even if the remaining directors do not constitute a quorum. Our
bylaws provide that our Board will fill all vacancies created by reason of
resignation, an increase in the number of directors or otherwise, by the
affirmative vote of a majority of the remaining directors, with the director so
elected to serve for the remainder of the term of the departed director, in the
case of a resignation, or otherwise until the next annual meeting of
stockholders where such newly appointed director would stand for election. All
directors will continue in office until the election and qualification of their
respective successors in office.
Stockholder Action by Written Consent
Under the Nevada General Corporation Law, unless otherwise provided in the
articles of incorporation or the bylaws, stockholders may take action without a
meeting upon the written consent of stockholders holding at least a majority of
the voting power, except that if a different proportion of voting power is
required for such an action at a meeting, then that proportion of written
consent is required. Our bylaws provide for this use of written consent except
with respect to the election of directors or the alteration, amendment or
repeal of our bylaws, if stockholder approval is sought.
Meetings of Stockholders
Under our bylaws, special meetings of stockholders may be called by the
president and shall be called by the president or secretary at the request in
writing of a majority of the (1) our Board or (2) stockholders owning a
majority of the voting stock issued and outstanding.
Under the Nevada General Corporation Law, unless the articles of
incorporation or the bylaws provide otherwise, stockholders holding at least a
majority of the voting power are necessary to constitute a quorum for the
transaction of business. Our bylaws provide that the presence in person or by
proxy of a majority of the voting stock entitled to vote at a meeting
constitutes a quorum for the transaction of business at that meeting.
Required Vote for Authorization of Certain Actions
Nevada law requires that the board of directors of a corporation that is a
merging or surviving entity to recommend a plan of merger to its stockholders
and that the stockholders approve the plan. The approval of the stockholders of
an entity surviving the merger is not required if (1) the articles of
incorporation of the surviving corporation will not differ from its articles
before the merger, (2) each stockholder of the surviving corporation whose
shares were outstanding immediately before the merger will hold the same number
of shares, with identical designations. preferences, limitations, and relative
rights immediately after the merger and (3) the number of shares of common
stock (voting or participating) to be issued in the merger (or to be issuable
upon conversion of any convertible instruments to be issued in the merger) will
not exceed 20% of the shares of common stock outstanding immediately before the
merger.
Amendment of Articles of Incorporation and Bylaws
Under Nevada law, articles of incorporation may be amended by the
affirmative vote of a majority of the outstanding stock, unless a greater
proportion of the voting power is required in the articles of incorporation.
While the Nevada General Corporation Law provides that the board of
directors may amend the bylaws if the bylaws so provide, the stockholders also
have the power to amend the bylaws. Our bylaws provide that the
67
<PAGE>
our Board shall have the power to alter or repeal any of the bylaws at any
regular meeting of the Board or at any special meeting of the our Board by a
majority of the our Board. Our bylaws also allow for stockholder alteration or
repeal of the bylaws by a majority of the holders of the voting stock, at a
special or regular meeting of stockholders.
Appraisal and Dissenters' Rights
Under Nevada law, a stockholder is entitled to dissent from, and receive the
fair value of shares owned in the event of, a plan of merger or exchange, if
the stockholder is entitled to vote on the transaction. However, there is no
right to dissent to a plan of merger or exchange in favor of the holders of
shares of any class or series which were either listed on a national securities
exchange, designated as a national market security of an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held by at
least 2,000 stockholders of record, unless either (1) the articles of
incorporation provide otherwise or (2) the holders are required to receive
anything other than, cash, shares of the surviving or acquiring corporation or
a combination thereof.
Nevada Anti-Takeover Statutes
Under Nevada law, once a person has acquired or offers to acquire twenty or
more percent of the shares of the stock of a corporation that has 200 or more
stockholders, at least 100 of whom are stockholders of record in the State of
Nevada and the corporation does business in the State of Nevada, (deemed the
"Control Shares") and requests and undertakes to pay for the expense of a
special stockholders meeting, one must be held so that the stockholders can
vote on whether the Control Shares may exercise voting rights. Except as
otherwise provided in the articles of incorporation, the approval of the
holders of a majority of the outstanding stock not held by the acquiror is
required for the stock held by the acquiror to receive voting rights. If the
Control Shares represent a majority or greater interest and are accorded full
voting rights by a majority of the other shares, then, unless the articles of
incorporation or bylaws of the corporation in effect on the tenth day following
the acquisition of a controlling interest by an acquiror provide otherwise, any
stockholder who did not vote in favor of full voting rights for the Control
Shares may require the corporation to repurchase any or all of such
stockholder's shares for the fair value thereof. The provisions of the Nevada
General Corporation Law regarding the acquisition of Control Shares (the
"Control Share Acquisition Provisions") are applicable to any acquisition of
Control Shares, unless the articles of incorporation or bylaws of the
corporation in effect on the tenth day following the acquisition of a
controlling interest by an acquiring person provide that the Control Share
Acquisition Provisions do not apply. Although a corporation may exclude itself
from application of the foregoing Control Share Acquisition Provisions, we have
not done so.
Nevada law provides that a resident domestic corporation may not engage in
any "combination" (broadly defined to include a wide range of transactions with
an interested stockholder or an affiliate or associate of an interested
stockholder) with an interested stockholder (defined as the beneficial owner of
ten percent or more of the outstanding voting power) for three years after the
interested stockholder's date of acquiring shares, unless the combination or
the purchase of shares made by the interested stockholder on the interested
stockholder's date of acquiring shares is approved by the board of directors
before that date. Nevada law also places certain limits on combinations between
resident domestic corporations and interested stockholders after the expiration
of three years after the interested stockholder's date of acquiring shares.
Under Nevada law, the selection of a period for the achievement of corporate
goals is the responsibility of the directors. In addition, the directors and
officers, in exercising their respective powers with a view to the interests of
the corporation, may consider (1) the interests of the corporation's employees,
suppliers, creditors and customers, (2) the economy of the state and nation,
(3) the interests of the community and of society and (4) the long-term as well
as short-term interests of the (corporation and its stockholders, including the
possibility that these interests may be best served by the continued
independence of the corporation. The directors also may resist a change or
potential change in control of the corporation if the directors by a majority
68
<PAGE>
vote of a quorum determine that the change or potential change is opposed to or
not in the best interests of the corporation "upon consideration of the
interests of the corporation's stockholders" or for one of the other reasons
described above. Finally, the directors may take action to protect the
interests of the corporation and its stockholders by adopting or executing
plans that deny rights, privileges, power or authority to a holder of a
specified number of shares or percentage of share ownership or voting power.
Our Board has taken such action as is necessary to exclude (1) the EnCap
investment from the Control Shares Acquisition Provisions and (2) EnCap from
being deemed an interested stockholder.
Limitation on Directors and Officer Liability
As permitted under Nevada law, our articles of incorporation provide that a
director or officer shall not be personally liable to Southern Mineral or its
stockholders for damages for breach of fiduciary duty as a director or officer,
except for liability for acts or omissions which involve intentional
misconduct, fraud or a knowing violation of the law or for the unlawful payment
of dividends.
Indemnification of Officers and Directors
Under Nevada law, a corporation may, and in certain circumstances must,
indemnify its officers, directors, employees or agents for expenses, judgments
or settlements, actually and reasonably incurred by them in connection with
suits and other legal proceedings, if they acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to criminal proceedings, had no reasonable cause
to believe that their conduct was unlawful. A corporation may adopt procedures
for advancing expenses to directors and officers prior to final adjudication,
as long as they undertake to repay the amounts advanced if it is ultimately
determined that they were not entitled to be indemnified. Our bylaws allow for
indemnification and, pursuant to certain procedures, advancement of expenses.
No Cumulative Voting
Although permitted by the Nevada General Corporation Law, our restated
articles of incorporation do not provide for cumulative voting for directors.
Conflict-of-Interest Transactions
The Nevada General Corporation Law generally permits transactions involving
a Nevada corporation and an interested director or officer of that corporation
if (1) the fact of the common directorship, office or financial interest is
known or disclosed to the board of directors and a majority of disinterested
directors consents, (2) the fact of the common directorship, office or
financial interest is known or disclosed to the stockholders and a majority of
shares entitled to vote thereon consents, (3) the fact of the common
directorship, office or financial interest is not disclosed or known to the
director or officer at the time the transaction is brought before the board of
directors for action or (4) the contract or transaction is fair to the
corporation at the time it is authorized or approved.
Dividends and Other Distributions
Under the Nevada General Corporation Law, a corporation may pay dividends or
make other distributions with respect to its stock unless, after giving effect
to the dividend or distribution, either the corporation would not be able to
pay its debts as they become due in the usual course of business or, except as
otherwise specifically allowed by its articles of incorporation, the
corporation's total assets would be less than the sum of its total liabilities
plus the amount that would be needed, if the corporation were to be dissolved
at that time, to satisfy the preferential rights of stockholders whose rights
are superior to those stockholders receiving the dividend or distribution.
69
<PAGE>
Duties of Directors
The Nevada General Corporation Law permits a board of directors to consider,
including in connection with a change or potential change in control of the
corporation, (1) the interests of the corporation's employees, suppliers,
creditors and customers, (2) the economy of the state and nation, (3) the
interests of the community and of society and (4) the long-term as well as
short-term interests of the corporation and its stockholders, including the
possibility that these interests may be best served by the continued
independence of the corporation.
RELATIONSHIPS WITH INDEPENDENT ACCOUNTANTS
KPMG LLP has acted as independent certified public accountants for Southern
Mineral since April 10, 1997. It is expected that representatives of KPMG will
be present at the special meeting to respond to appropriate questions of
stockholders and to make a statement if they so desire.
LEGAL MATTERS
Certain legal matters with respect to the securities offered hereby will be
passed upon for us by Akin, Gump, Strauss, Hauer & Feld, L.L.P., Houston,
Texas. Mr. Todd L. Gremillion, a partner of Akin, Gump, Strauss, Hauer & Feld,
L.L.P., beneficially owns 83,000 shares of our common stock.
EXPERTS
The financial statements of Southern Mineral as of December 31, 1998 and for
the year then ended have been incorporated by reference in this proxy
statement/prospectus/disclosure statement and in the registration statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere in this proxy statement/prospectus/disclosure statement,
and upon the authority of said firm as experts in auditing and accounting.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain of the expected U.S.
federal income tax consequences applicable to us and U.S. debentureholders who
will receive common stock, warrants and cash in exchange for their debentures
pursuant to the terms of the exchange offer, and who hold such debentures as
capital assets. It is intended only as a descriptive summary and does not
purport to be a complete technical analysis or listing of all potential tax
effects to the U.S. debentureholders. The discussion is based on the current
provisions of the Internal Revenue Code of 1986, the applicable treasury
regulations promulgated thereunder and public administrative and judicial
interpretations of the Internal Revenue Code and treasury regulations, all of
which are subject to change, which could be retroactive. This discussion is
also based on the information included in this proxy
statement/prospectus/disclosure statement and the related documents, and on
certain representations from us as to factual matters. This discussion does not
cover all aspects of federal taxation that may be relevant to, or the actual
tax effect that any of the matters described herein will have on, particular
U.S. debentureholders and does not address state, local and foreign tax
consequences.
The tax consequences to a U.S. debentureholder may vary depending on the
U.S. debentureholder's particular situation or status. Those U.S.
debentureholders subject to special rules under the Internal Revenue Code
(including corporations, insurance companies, tax-exempt organizations, mutual
funds, retirement plans, financial institutions, dealers in securities or
foreign currency, persons that hold common stock and warrants as part of a
"straddle" or as a "hedge" against currency risk or in connection with a
conversion transaction, persons that have a functional currency other than the
U.S. dollar, investors in pass-through entities and foreign entities and
individuals) may be subject to special rules not discussed below.
70
<PAGE>
As used in this discussion, the term "U.S. debentureholder" means a holder
that, for U.S. federal income tax purposes, is (i) a citizen or resident of the
United States, (ii) a corporation, partnership, or other entity created or
organized in or under the laws of the United States or of any state, (iii) an
estate the income of which is subject to U.S. federal income tax, regardless of
its source or (iv) a trust if (a) a court within the U.S. is able to exercise
primary supervision over the administration of the trust and (b) one or more
U.S. persons have the authority to control all substantial decisions of the
trust.
We have not sought and will not seek any rulings from the Internal Revenue
Service with respect to the tax consequences of the exchange and the ownership
or disposition of common stock or warrants. There can be no assurance that the
IRS will not take a different position concerning the tax consequences of the
exchange, ownership or disposition of the common stock and warrants or that the
IRS's position would not be sustained by a court.
THIS DISCUSSION IS FOR GENERAL INFORMATION ONLY. EACH U.S. DEBENTUREHOLDER
IS EXPECTED AND URGED TO CONSULT ITS TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES TO SUCH U.S. DEBENTUREHOLDER OF EXCHANGING, HOLDING AND DISPOSING
OF COMMON STOCK AND WARRANTS, INCLUDING THE APPLICABILITY AND EFFECT OF ALL
STATE, LOCAL OR FOREIGN TAX LAWS, AND POSSIBLE CHANGES IN FEDERAL INCOME TAX
LAW SUBSEQUENT TO THE DATE OF THIS PROXY STATEMENT/PROSPECTUS/DISCLOSURE
STATEMENT.
Consequences to Southern Mineral
The federal income tax consequences to us will vary depending upon whether
the exchange offer or the prepackaged plan is put into effect. According to our
attorneys, Akin, Gump, Strauss, Hauer & Feld, L.L.P., there are three tax
issues: first, whether we will be required to recognize taxable income by
reason of the discharge of indebtedness; second, whether our net operating loss
carryovers or other tax attributes will be reduced by our not recognizing debt
discharge income; and third, whether the restructuring is a "change of
ownership" that will limit the use of our net operating loss carryovers.
As of December 31, 1998, we had a consolidated net operating loss
carryforward of approximately $7.7 million. In addition, Amerac Energy
Corporation, our wholly-owned subsidiary, had net operating loss carryforwards
of approximately $140.7 million. Amerac's net operating loss carryforwards are
subject to limitations on their future use under Section 382 of Internal
Revenue Code. As a result of certain asset sales during 1999, including the
Brushy Creek Field and Texan Gardens Field interest sale to ANR, our
consolidated net operating loss carryforward is expected to be fully utilized
in 1999 and up to $9.1 million of Amerac's net operating loss carryforward may
also be utilized in 1999.
If the exchange offer is completed, we will realize income from the
cancellation of indebtedness to the extent the amount of the debentures
(including any accrued interest) cancelled is more than the sum of (i) the
amount of cash and (ii) the fair market value of the common stock and warrants
issued in exchange for the debentures. However, our debt discharge income will
not be taxable to the extent that we are insolvent immediately before the
discharge, that is, to the extent our liabilities exceed the fair market value
of our assets immediately before the discharge. That excess will not be subject
to current federal income tax. But, if the debt discharge income is more than
the excess liabilities, this excess amount will be taxable income.
The untaxed debt discharge income will be charged against our other tax
attributes in the following priority:
(1) net operating losses and net operating loss carryovers;
(2) general business credits (one-third reduction);
(3) minimum tax credits;
(4) net capital loss and any net capital loss carryovers;
71
<PAGE>
(5) the basis of property;
(6) passive activity loss or credit carryovers; and
(7) foreign tax credit carryovers (one-third reduction).
Instead of following this order of priority to reduce tax attributes, we may
elect to instead first reduce the basis of our depreciable property. We can
reduce our depreciable asset basis down to zero and then charge the
unrecognized income against our other tax attributes. In either case, any basis
reductions are treated as accelerated depreciation and subject to recapture as
ordinary income upon disposition of the assets. This recapture effect lessens
over time.
In addition, our ability to use net operating loss carryforwards after the
exchange offer will be limited. If a corporation with net operating loss
carryforwards experiences a "change of ownership," the use of the net operating
loss carryforwards is subject to an annual limitation. A change of ownership
occurs if there is a more than one-half change in the stock ownership. The
exchange offer will result in a change of ownership of Southern Mineral.
If the prepackaged plan occurs, we will realize debt discharge income as in
the exchange offer. This debt discharge income will not be taxable since it
will arise as part of a Chapter 11 bankruptcy case. Unlike the exclusion
described with respect to the exchange offer, the exclusion from tax of debt
discharge income arising in bankruptcy is not limited by the amount of the
insolvency of the debtor. Accordingly, we would not be taxed on any of the debt
discharge income arising in the prepackaged plan. Our tax attributes, however,
would be reduced by the excluded debt discharge income, in the same manner as
in the exchange offer.
The limits on the use of net operating loss carryforwards after an ownership
change do not apply if the change occurs in a bankruptcy case and the
shareholders and certain creditors of the corporation immediately before the
ownership change own at least one-half of the stock after the ownership change
(the "Bankruptcy Exception"). For purposes of this test, only "qualified
creditors" that become shareholders are counted. A qualified creditor is a
creditor that has been owed the same money for at least 18 months before the
bankruptcy filing who receives stock in full or partial satisfaction of that
indebtedness pursuant to a plan approved by the bankruptcy court. To our
knowledge, if the prepackaged plan takes effect, the debentures will constitute
qualified indebtedness and the debentureholders will constitute qualified
creditors for this purpose.
One other condition to this special rule provides that if another ownership
change occurs during the two years immediately following the prepackaged plan,
we will not be allowed to use any net operating loss carryforwards arising
before the second ownership change.
It is anticipated that the contemplated sale of equity securities to EnCap
would result in such an ownership change. Consequently, notwithstanding our
belief that if we meet the requirements to have the Bankruptcy Exception apply,
we currently contemplate electing not to have the bankruptcy section apply and,
instead, to apply a different special rule available to companies in Title 11
or similar cases. This rule (the "Special Valuation Rule") provides that our
equity value for purposes of computing our annual limitation on the use of our
net operating loss carryforwards will reflect the increase in value, if any,
resulting from any debt reduction recurring in the prepackaged bankruptcy. The
election to have the Special Valuation Rule apply instead of the Bankruptcy
Exception will not only increase the annual limitation on our ability to use
net operating loss carryforward, but will also avoid the reduction of any
remaining net operating loss carried forward as required by the Bankruptcy
Exception and any possible elimination of our ability to use these net
operating loss carryforwards resulting from a subsequent ownership change
within two years of the consummation of the prepackaged bankruptcy plan.
The application to our subsidiaries, including Neutrino of the special rule
pertaining to bankruptcies is not clear. This rule applies only to corporations
in bankruptcy. Since our subsidiaries will not be in bankruptcy, the general
limitation on the use of losses after an ownership change may limit the use of
net operating loss carryovers attributable to our subsidiaries.
72
<PAGE>
Consequences to U.S. Debentureholders
We believe that the exchange offer will be treated as a reorganization
within the meaning of Section 368(A)(1)(E) of the Internal Revenue Code. As a
consequence, (1) U.S. debentureholders generally should not recognize gain or
loss on the exchange of the debentures for common stock or warrants, except to
the extent that common stock or warrants are issued for accrued but unpaid
interest or market discount not yet recognized by the U.S. debentureholder; (2)
U.S. debentureholders will recognize the realized capital gain to the extent of
the cash received in the transaction. We believe that the U.S. debentureholders
will recognize capital gain with respect to the cash received which will be
treated as long term capital gain to the extent such U.S. debentureholder held
its debenture for more than 12 months; (3) to the extent a U.S. debentureholder
receives any stock or warrants for accrued but not yet recognized interest such
U.S. debentureholder will have ordinary income equal to the amount of accrued
but unrecognized interest; (4) a U.S. debentureholder's aggregate tax basis
will be such U.S. debentureholder's tax basis in its debentures plus any gain
recognized from the exchange (including receipt of accrued but previously
unrecognized interest) less the amount of cash received in the exchange, which
aggregate basis will be allocated pro rata between the stock and warrants based
on relative fair market value of each. We believe that as a percentage, the
fair market value of the stock received will be 42% of the total consideration,
and that the fair market value of the warrants will be 1% of the total
consideration; (5) an exchanging U.S. debentureholder will have a holding
period in his common stock and warrants that includes the holding period during
which the U.S. debentureholder held the debentures.
U.S. debentureholders who receive taxable income from the exchange may be
subject to backup withholding by us (see "Backup Withholding" below).
Consequences to U.S. Debentureholder of Sale, Retirement or other Disposition
of Common Stock or Warrants
In general, a U.S. debentureholder will recognize capital gain or loss upon
the sale, retirement or other taxable disposition of the common stock or
warrants measured by the difference between the amount of cash and/or the fair
market value of the property received in exchange therefor and the U.S.
debentureholder's adjusted tax basis for such common stock and warrants. Such
capital gain should be long term if the U.S. debentureholder's holding period
exceeds 12 months. Please consult your tax advisor regarding the applicability
of such modifications.
Conversion of Warrants; Adjustment of Exercise Price
A U.S. debentureholder will not recognize gain or loss when the warrants are
exercised for common stock. The U.S. debentureholder's tax basis in the common
stock received upon exercise will be equal to the U.S. debentureholder's basis
in the warrants. In addition, the U.S. debentureholder's holding period in the
common stock received upon exercise begins on the day after such conversion.
Certain adjustments to the exercise price of the warrants, such as the
adjustments that reflect taxable distribution of cash or property on common
stock, will be treated as a constructive distribution of stock and will be
treated as a dividend to the holders of warrants to the extent of our current
or cumulated earnings and profits. Adjustments to reflect non-taxable stock
splits or distributions to the holders of common stock of stock, stock
warrants, or stock rights will, however, generally not be treated as a taxable
distribution to the holder of a warrant. The failure to adjust fully the
exercise price of the warrants to reflect the distributions of stock, stock
warrants or stock rights with respect to the common stock may result in a
taxable dividend of the holders of common stock.
Market Discount
U.S. debentureholders who purchased the debentures at a "market discount"
(i.e., at a price below the adjusted issue price), must generally treat gain
recognized on the disposition of such debentures as ordinary income to the
extent market discount accrued while the debenture was held by the U.S.
debentureholder, unless the U.S. debentureholder made an election to include
such market discount in income as it accrued. The
73
<PAGE>
Internal Revenue Code provides that under regulations, which regulations have
not yet been issued, accrued market discount on a market discount debenture is
not recognized as ordinary income at the time of the debenture's disposition if
the disposition occurs in a "nonrecognition transaction," including a
recapitalization. Instead, accrued market discount on a market discount bond
disposed of in a nonrecognition transaction is converted into accrued market
discount on property received in the transaction if that property is a market
discount bond. If the property received is not a market discount bond, accrued
market discount on the old market discount bond is treated as ordinary income
on the disposition of the property received in exchange therefor, limited to
the extent of the gain thereon.
The U.S. debentureholders that have accrued market discount should not be
required to recognize that accrued market discount as ordinary income when the
U.S. debentureholder exchanges those instruments for the common stock and
warrants; rather, the accrued market discount should be allocated to the common
stock and warrants received in the exchange. Although no regulations or rules
have been provided to determine how such accrued market discount should be
allocated, the accrued market discount should be allocated in the same manner
as tax basis is allocated. The portion of the accrued market discount allocated
to the common stock and warrants will be treated as ordinary income at the
disposition of such common stock and warrants, but not in excess of the total
gain recognized.
Under the market discount rules, U.S. debentureholders with accrued market
discount may be required to defer the deduction of a portion of the interest on
any indebtedness incurred or maintained to purchase or carry the debentures.
Any interest expense which has been deferred by U.S. debentureholders who
participate in the exchange will continue to be deferred and will be deductible
only on disposition of the common stock and warrants received in the exchange.
U.S. debentureholders should consult their own tax advisors regarding the
amount of any market discount, if any, accrued with respect to their common
stock and warrants that may be treated as carried over from their debentures
and the limitation on interest deductions attributable to the common stock and
warrants.
Dividends
Dividends paid on the common stock will be taxable to the U.S.
debentureholder as ordinary income to the extent of our current or accumulated
earnings and profits. To the extent any dividends exceed our current or
accumulated earnings and profits, the U.S. debentureholder's basis in the
common stock will be reduced by such amount and such amount will be treated as
capital gain for federal income tax purposes.
Backup Withholding
The backup withholding rules require a payor to deduct and withhold a tax
amount if (1) the payee fails to furnish a taxpayer identification number
("TIN") to the payor, (2) the IRS notifies the payor that the TIN furnished by
the payee is incorrect, (3) the payee has failed to report properly the receipt
of a "reportable payment," and the IRS has notified the payor that withholding
is required, or (4) there has been a failure of the payee to certify under the
penalty of perjury that a payee is not subject to withholding under Section
3406 of the Internal Revenue Code. If any one of the events discussed above
occurs, we or our withholding agent will be required to withhold a tax equal to
31% of any "reportable payment," which includes any common stock or warrants
issued to U.S. debentureholders in payment of interests, dividends or gross
proceeds from the sale of the common stock or warrants. Any amount withheld
from a payment to a U.S. debentureholder under the backup withholding rules
will be allowed as a refund or credit against such U.S. debentureholder's U.S.
federal income tax, provided that the required information is furnished to the
IRS. Certain U.S. debentureholders (including, among others, corporations and
certain tax-exempt organizations) are not subject to the backup withholding
information reporting requirements.
74
<PAGE>
SPECIAL MEETING OF STOCKHOLDERS
Date, Time and Place of Special Meeting
A special meeting of our stockholders will be held at the Doubletree Hotel
at Allen Center, 400 Dallas Street, Houston, Texas at 10:00 a.m., Houston time,
on , , 1999.
Solicitation of Proxies
We are providing this proxy statement /prospectus/disclosure statement to
solicit proxies from our stockholders. The proxies will be voted at the
meeting.
WHETHER OR NOT YOU ARE ABLE TO ATTEND THE MEETING, YOUR VOTE BY PROXY IS
VERY IMPORTANT. PLEASE MARK, SIGN AND DATE THE ENCLOSED PROXY FORM AND MAIL IT
PROMPTLY IN THE ENCLOSED ENVELOPE.
We are paying the costs of this proxy solicitation. The solicitation will
generally be by mail. Also, our directors, officers and employees may solicit
proxies. They may solicit in person or by telephone, telegram, cablegram or
other form of electronic transmission. They will not receive any additional
compensation for such solicitation. In addition, we have hired ,
the information agent, to assist in the proxy solicitation for a fee estimated
at $ .
Arrangements have been made with brokers and other custodians, nominees and
fiduciaries to send copies of this proxy statement, proxy card and other proxy
solicitation materials to their principals, and we will reimburse them for
their reasonable out-of-pocket and clerical expenses for doing this.
This proxy statement/prospectus/disclosure statement is first being mailed
to stockholders on or about , 1999.
Stockholders Entitled to Vote
We have fixed the close of business on , 1999 as the record date for our
meeting. Only holders of record of common stock at the close of business on the
record date are entitled to notice of and to vote at the meeting. For a quorum
to be present, the holders of more than one-half of the shares entitled to vote
at the meeting must be present in person or represented by proxy.
Purpose of Special Meeting
We believe that the future viability of Southern Mineral depends upon a
restructuring of our debt and equity. To do this, we (1) have offered each of
the holders of our debentures the opportunity to exchange their debentures for
common stock, a warrant to purchase common stock and cash, (2) intend to sell
common stock to an investor and (3) requested certain modification to the terms
of our debt. These items are referred to throughout this proxy statement and
the accompanying prospectus/disclosure statement as the exchange offer
restructuring.
The purpose of the meeting is to approve (1) an amendment to our articles of
incorporation to increase the number of authorized shares of common stock from
50 million to 150 million and (2) the issuance of 61,598,367 shares of common
stock and warrants to purchase 7,820,460 shares of common stock in connection
with the restructuring. Approval of an amendment to our articles of
incorporation and the common stock and warrant issuances are conditions to the
exchange offer restructuring.
The amendment to our restated articles of incorporation will be effective
upon the filing of an amendment to our restated articles of incorporation with
the Secretary of State of Nevada successfully completing the exchange offer
restructuring.
75
<PAGE>
If sufficient votes in favor of any of the proposals are not received by the
time scheduled for the meeting, persons entitled to vote at the meeting may
adjourn the meeting to permit further solicitation of proxies for any one or
all of the proposals. Any adjournment will require the affirmative vote of a
majority of the votes present or represented at the meeting. If an adjournment
is proposed, the persons named as proxies will vote for adjournment those
proxies which they are entitled to vote in favor of the proposals and against
adjournment those proxies required to be voted against the proposals.
Voting
In voting on the proposals that may be properly brought before the meeting,
you have one vote for each share of common stock that you own. Votes that are
withheld will be excluded entirely from the vote and will have no effect,
except for quorum purposes. Abstentions may be specified on the other proposals
and will be counted as present for purposes of determining the existence of a
quorum regarding the proposal on which the abstention is noted. An abstention
on any proposal will have the same effect as a no vote.
An amendment to our articles of incorporation and the stock and warrant
issuances need to be approved by an absolute majority of all of the shares
issued and outstanding before they can go into effect. Stockholders have no
appraisal or dissenter's rights with respect to the proposals.
Brokers who hold shares in street name may have the authority to vote on
certain items when they have not received instructions from beneficial owners.
If a broker indicates on the proxy card that it does not have discretionary
authority as to certain shares to vote on a particular proposal, the shares
will be counted for purposes of determining a quorum, but those shares will not
be considered as present or entitled to vote with respect to that proposal.
Your signed and dated proxy will be voted as marked by you. If you do not
mark an item to be voted on, the proxy holder will vote your proxy for that
proposal. You may revoke your proxy by written notice delivered to our
Secretary, Steven H. Mikel, at any time before your proxy is voted.
We will have a list of our stockholders at our office for 10 days before the
meeting. You can examine the stockholders list for any purpose related to the
meeting.
Because of the conditions that must be met to complete the exchange offer,
including, among other things, the exchange of at least 98% of the debentures,
it is very possible that the exchange offer will not be effected as proposed.
As an alternative plan, we are also soliciting Ballots from stockholders and
debentureholders to approve a prepackaged bankruptcy plan.
The prepackaged plan is described in this proxy
statement/prospectus/disclosure statement. This proxy
statement/prospectus/disclosure statement also compares the exchange offer to
the prepackaged plan. An even more detailed description of the prepackaged plan
and the plan that would be filed with the bankruptcy court are also being given
to you.
You may vote on either or both of the meeting proposals whether or not you
vote on the prepackaged plan restructuring. Likewise, you may vote on the
prepackaged plan whether or not you vote on any of the meeting proposals. In
other words, you are being asked to vote separately on two different but
related matters. Step by step voting instructions are presented in this proxy
statement/ prospectus/disclosure statement. We urge you to vote for both of the
proposals and for the prepackaged plan.
Item 1 on Proxy Card--Amendment to Articles of Incorporation
Our board has approved an amendment to our restated articles of
incorporation to increase the number of authorized shares of 50 million to 150
million. The market value of our common stock is so low that payment on
fractional shares would be meaningless. Thus, fractional shares will be rounded
up to the next whole
76
<PAGE>
number of shares. The exchange offer restructuring will not occur unless the
amendment to our articles of incorporation is adopted and has become
effective. An amendment to the articles of incorporation will not be filed
with the Secretary of State of Nevada until the exchange offer restructuring
closing. The amendment to our restated articles of incorporation will become
effective upon such filing. Adoption of the amendment to our articles of
incorporation requires the affirmative vote of the holders of a majority of
the issued and outstanding shares of our common stock.
The full text of an amendment to our restated articles of incorporation is
substantially as follows:
CERTIFICATE OF AMENDMENT
OF
RESTATED ARTICLES OF INCORPORATION
OF
SOUTHERN MINERAL CORPORATION
The undersigned, being the Vice President--Finance and Secretary,
respectively, of Southern Mineral Corporation, a Nevada corporation (the
"Corporation"), do hereby certify as follows:
1. That on , 1999, the Corporation's Board Of Directors (the
"Directors"), acting by unanimous written consent, adopted and consented to
the adoption of and recommended adoption to the Corporation's stockholders of
an amendment to the Corporation's restated articles of incorporation. The
amendment recommended by the Directors was to Article V, after which such
Article would read in its entirety as follows:
The total number of shares of all classes of stock that the Corporation
shall have authority to issue is 155,000,000 shares, consisting of
150,000,000 shares of Common Stock, par value $.01 per share (the "Common
Stock"), and 5,000,000 shares of Preferred Stock, par value $.01 per share
(the "Preferred Stock").
2. That at a special meeting of the Corporation's stockholders held on
, 1999, stockholders holding shares of the Corporation's
voting stock entitled to vote on an amendment to the Corporation's articles of
incorporation, adopted and consented to the adoption of the foregoing
amendment ("Approving Shares").
3. That the number of shares of the Corporation's outstanding voting stock
entitled to vote on an amendment to the Corporation's restated articles of
incorporation, present in person or by proxy at such meeting, was
("Quorum Shares"), which number constituted a majority of the total number of
outstanding shares of the Corporation's voting stock entitled to vote on an
amendment to the Corporation's restated articles of incorporation.
4. That the number of Approving Shares constituted a majority of the Quorum
Shares.
In witness whereof, the undersigned have executed this Certificate of
Amendment of Restated Articles of Incorporation of Southern Mineral
Corporation, as of this day of 1999.
<TABLE>
<S> <C>
/s/ Michael E. Luttrell /s/ Steven H. Mikel
- ------------------------------------ ------------------------------------
Michael E. Luttrell Steven H. Mikel,
Vice President--Finance Secretary
</TABLE>
WE RECOMMEND A VOTE FOR THE AMENDMENT TO OUR ARTICLES OF INCORPORATION.
77
<PAGE>
Item 2 On Proxy Card--Common Stock and Warrant Issuances
We have unanimously adopted a resolution to issue 61,598,367 shares of
common stock and warrants to purchase 7,820,460 shares of common stock as part
of the restructuring. The common stock is to be issued as follows:
. 15,640,920 shares to the debentureholders;
. 45,957,447 shares to EnCap and its affiliates
The warrants to purchase 7,820,460 shares of common stock are to be issued
to the debentureholders.
The common stock and warrant issuances will occur only if approved, the
amendment to our restated articles of incorporation has been filed with the
Secretary of State of Nevada and the exchange offer is completed.
The approval of the common stock and warrant issuances requires the
affirmative vote of a majority of the votes cast, in person or by proxy, at the
Special Meeting.
WE RECOMMEND A VOTE FOR THE COMMON STOCK AND THE WARRANT ISSUANCES.
78
<PAGE>
SOUTHERN MINERAL CORPORATION
1201 Louisiana Street, Suite 3350
Houston, Texas 77002-5609
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1999
----------------
To the Stockholders of Southern Mineral Corporation:
A special meeting of our stockholders will be held at 10:00 a.m., Houston
time, on , , 1999 at the Doubletree Hotel at the Allen Center,
400 Dallas Street, Houston, Texas. At the meeting, stockholders will be asked
to vote on the following proposals that relate to a restructuring of our
company:
. to approve an amendment to our restated articles of incorporation to
increase the number of authorized shares of common stock from 50 million
to 150 million;
. to approve the issuance of 61,598,367 shares of common stock and warrants
to purchase 7,820,460 shares of common stock; and
. to transact such other business as may properly come before the meeting
or any adjournments thereof.
Only stockholders of record at the close of business on , 1999, the
record date, will be entitled to notice of and to vote at the meeting or any
adjournments thereof.
You may attend the meeting in person. Even if you plan to attend the
meeting, please indicate your vote on each matter to be voted upon, sign and
date the enclosed proxy card, and return it promptly in the enclosed white
envelope. You can revoke your proxy at any time by delivering a new proxy card
or other written and signed revocation to our secretary, Steven H. Mikel, at or
before the meeting. If you attend the meeting, you may, if you wish, revoke
your proxy by voting in person.
We recommend that you vote in favor of all of the proposals.
By Order of the Board of Directors
Steven H. Mikel
President and Chief Executive
Officer
79
<PAGE>
DISCLOSURE STATEMENT
Introduction
We have not filed any petition under the Bankruptcy Code at this time.
However, it may be necessary for us to file a case under chapter 11 of the
Bankruptcy Code to restructure our financial obligations. This proxy
statement/prospectus/disclosure statement solicits your advance acceptance of
the attached prepackaged plan of reorganization and contains information
relevant to your decision. Please read this disclosure statement and the
prepackaged plan, together with the accompanying proxy/statement prospectus
completely and carefully. We believe that acceptance of this prepackaged plan
is in the best interests of our creditors, debentureholders and stockholders,
and accordingly, we recommend that the impaired classes vote to accept the
prepackaged plan.
During the solicitation period and the bankruptcy proceedings, we intend to
operate our business as usual and pay in full its trade creditors and
employees. We intend that none of our subsidiaries including Neutrino will file
under Chapter 11 of the Bankruptcy Code. Accordingly, our subsidiaries are not
part of the prepackaged plan and their creditors are not affected by the
prepackaged plan (except to the extent they may hold claims against Southern
Mineral).
The information in this proxy statement/prospectus/disclosure statement is
made as of , 1999 and neither the delivery of this proxy
statement/prospectus/disclosure statement nor any exchange of debentures made
under the prepackaged plan implies that the information is correct after the
date of this proxy statement/prospectus/disclosure statement.
Each creditor, debentureholder and stockholder should review with his, her
or its legal, business, financial and tax advisors how they may be affected by
the prepackaged plan.
The proxy statement/prospectus/disclosure statement is not an offer to sell
or the solicitation of an offer to buy securities. No sale of our securities
will be made in any state in which an offer, solicitation or sale would be
unlawful prior to registration or qualification under the state's securities
laws.
The voting deadline to accept or reject the prepackaged plan is , 1999,
unless extended.
The information in this disclosure statement portion of this proxy
statement/prospectus/disclosure statement is written in a style and uses
defined terms preferred by bankruptcy counsel to best assure compliance with
the disclosure requirements of the Bankruptcy Code. The disclosure statement
portion of this proxy statement/prospectus/disclosure statement is only part of
the total disclosure package of information we are providing to you. You should
read the entire proxy statement/prospectus/disclosure statement.
80
<PAGE>
DISCLOSURE STATEMENT
DATED , 1999
Pre-Petition Solicitation of Votes
With Respect to Reorganization Plan
of
SOUTHERN MINERAL CORPORATION
from the Holders of Southern Mineral Corporation's Outstanding
6.875% Convertible Subordinated Debentures Due 2007,
Common Stock, Par Value $.01 Per Share,
and
Certain Other Impaired Creditors
Southern Mineral Corporation has not commenced a case under Chapter 11 of
the Bankruptcy Code at this time. However, pursuant to the provisions of
Section 1126 of the Bankruptcy Code, Southern Mineral Corporation is soliciting
acceptances of a prepackaged plan of reorganization prior to the commencement
of a Chapter 11 case. Southern Mineral is under no obligation to file a Chapter
11 case, and will do so in its sole discretion. This disclosure statement
solicits acceptances of the Plan and contains information relevant to a
decision to accept or reject the Plan.
This disclosure statement has not been approved by any bankruptcy court as
containing adequate information within the meaning of Section 1125(a) of the
Bankruptcy Code. If Southern Mineral files a Chapter 11 case, Southern Mineral
expects to seek as promptly as the circumstances permit an order of the
Bankruptcy Court (i) approving (a) this disclosure statement as containing
adequate information and (b) the solicitation of votes as having been in
compliance with Section 1126(b) of the Bankruptcy Code and (ii) confirming the
reorganization Plan described herein. This solicitation is being conducted to
obtain sufficient acceptances of a reorganization plan prior to the filing of
voluntary reorganization cases under Chapter 11 of the United States Bankruptcy
Code.
THE VOTING DEADLINE TO ACCEPT OR REJECT THE PREPACKAGED REORGANIZATION PLAN
IS 5:OO P.M. (HOUSTON TIME) ON , 1999, UNLESS EXTENDED BY
SOUTHERN MINERAL (THE "VOTING DEADLINE"). IN ORDER TO BE COUNTED, BALLOTS
MUST BE RECEIVED BY THE VOTING AGENT BY THE VOTING DEADLINE.
81
<PAGE>
Southern Mineral Corporation is furnishing this disclosure statement (the
"Disclosure Statement") and the exhibits, appendicies or schedules hereto, the
accompanying Ballots and Master Ballots and the related materials delivered
herewith pursuant to Section 1126(b) of the United States Bankruptcy Code, in
connection with its solicitation of acceptances of the proposed prepackaged
reorganization Plan described herein. Southern Mineral is soliciting such
acceptances from the holders of its (i) outstanding 6.875% Convertible
Subordinated Debentures Due 2007, (ii) Common Stock, Par Value $.01 Per Share,
and (iii) certain impaired Creditors entitled to vote under the Plan and
Section 1126 of the Bankruptcy Code.
The Plan is attached as Exhibit I to this Disclosure Statement. All
capitalized, defined terms used in the Plan and Disclosure Statement are set
forth on Appendix I-A attached to the Plan and incorporated in the Plan and in
this Disclosure Statement for all purposes. For purposes of the Plan and this
Disclosure Statement, except as expressly provided or unless the context
otherwise requires, all capitalized terms not otherwise defined by the document
shall have the meanings ascribed to them in Appendix I-A. Any term used in the
Plan or the Disclosure Statement that is not defined herein, but is defined in
the Bankruptcy Code or the Bankruptcy Rules, shall have the meaning ascribed to
that term in the Bankruptcy Code or Bankruptcy Rules. Whenever the context
requires, such terms shall include the plural as well as the singular number.
Southern Mineral is furnishing the Disclosure Statement to certain Impaired
Creditors and Interest holders entitled to vote to accept or reject the Plan.
The Disclosure Statement is to be used by each such Creditor or Interest holder
solely in connection with its evaluation of the Plan. Use of the Disclosure
Statement for any other purpose is not authorized.
Southern Mineral has not commenced a reorganization case under Chapter 11 of
the Bankruptcy Code as of the date of the Disclosure Statement. If, however,
Southern Mineral receives properly completed Ballots and Master Ballots (that
are not subsequently revoked) indicating acceptance of the Plan in sufficient
number and amount to meet the voting requirements prescribed by Section 1126 of
the Bankruptcy Code (the "Requisite Acceptances"), it intends to file (but
hereby expressly reserve the right not to file) with a United States Bankruptcy
Court a voluntary petition for relief under Chapter 11 of the Bankruptcy Code,
and to seek, as promptly thereafter as practicable, confirmation of the Plan.
The date on which the Plan is consummated (the "Consummation Date") is expected
to occur shortly following the Bankruptcy Court's entry of an order confirming
the Plan (the "Confirmation Order").
In the event that the Requisite Acceptances are not received, or, if
received, are subsequently revoked, in either case, prior to the termination of
the Solicitation, Southern Mineral hereby reserves the absolute right to use
any and all Ballots and Master Ballots accepting the Plan that were received
pursuant to the Solicitation, and not subsequently revoked, to seek
confirmation of the Plan (or of any modification thereof that does not
materially and adversely affect the treatment of the class(es) of Claims and
Interests with respect to which such Ballots or Master Ballots were cast)
pursuant to Section 1129(b) of the Bankruptcy Code. See Section VIII.E.3--
"Summary of the Plan--Confirmation of the Plan--Confirmation Without Acceptance
of All Impaired Classes" below.
The Plan provides for, among other things, (i) certain distributions of
Cash, and (ii) the issuance by Reorganized Southern Mineral of (a) the New
Securities for distribution to certain holders of Claims against Southern
Mineral, and (b) Warrants to purchase Common Stock for distribution to certain
holders of Claims against Southern Mineral. Because acceptance of the Plan will
constitute acceptance of all the provisions thereof, Creditors and Interest
holders are urged to consider carefully the information regarding treatment of
their Claims and Interests contained in this Disclosure Statement.
Southern Mineral intends to continue operating its business in Chapter 11 in
the ordinary course and to seek to obtain the necessary relief from the
Bankruptcy Court to pay its employees, trade, and certain other Creditors in
full and on time. The claims of employees and trade Creditors are not impaired
under the Plan.
82
<PAGE>
The confirmation and effectiveness of the Plan are subject to material
conditions precedent. See Section VIII.E.4 -- "Summary of the Plan--
Confirmation of the Plan--Conditions to Confirmation and Consummation." There
can be no assurance that those conditions will be satisfied.
Southern Mineral presently intends to consummate the Plan and to cause the
Consummation Date to occur promptly after entry of the Confirmation Order.
There can be no assurance, however, as to when and whether confirmation of the
Plan and the Consummation Date actually will occur. Procedures for
distributions under the Plan, including matters that are expected to affect the
timing of the receipt of distributions by holders of Allowed Claims in certain
classes and that could affect the amount of distributions ultimately received
by such holders, are described in Section VIII.D.5 -- "Summary of the Plan--
Summary of Other Provisions of the Plan--Distributions under the Plan."
The board of directors of Southern Mineral has approved the Plan and
recommends that the holders of Claims and Interests entitled to vote on the
Plan vote to accept the Plan.
If the Plan is not confirmed and consummated, Southern Mineral believes that
there is substantial doubt about its ability to continue as a going concern.
Southern Mineral intends to arrange for financing under a DIP facility (as
defined herein) in connection with the Plan and believes that such financing is
necessary to consummate the Plan. While a DIP Facility is primarily intended as
a safeguard against possible liquidity problems during the time a case is
pending, without the additional financing, there can be no assurance that
Southern Mineral will be able to emerge from a case under Chapter 11 of the
Bankruptcy Code, and therefore may be forced into a liquidation under Chapter 7
of the Bankruptcy Code. Southern Mineral believes that if it is liquidated
under Chapter 7, the value of the assets available for payment of Creditors
would be significantly lower than the value of the distributions contemplated
by and under the Plan. See Section XIV.c -- "Feasibility of the Plan and the
Best Interests of Creditors Test-- Liquidation Analysis" below.
Southern Mineral believes that the Plan is in the best interests of its
Creditors and Interest holders. Accordingly, Creditors and Interest holders
entitled to vote on the Plan are urged to vote in favor of the Plan. (voting
instructions are set forth in Section I, paragraph I of this Disclosure
Statement.) To be counted, your Ballot must be duly completed, executed, and
actually received no later than 5:00 p.m., Houston Time, on [ ],
1999. Creditors and Interest holders are encouraged to read and consider
carefully this entire Disclosure Statement, including the Plan annexed hereto
as Exhibit I and the matters described in this Disclosure Statement under "Risk
Factors Related to Southern Mineral's Business Plan," prior to voting.
In making an investment decision, Creditors and Interest holders must rely
on their own examination of Southern Mineral and the terms of the Plan,
including the merits and risks involved. Creditors and Interest holders should
not construe the contents of this Disclosure Statement as providing any legal,
business, financial or tax advice. Each Creditor and Interest holder should
consult with its own legal, business, financial and tax advisors with respect
to any such matters contemplated thereby. See Section XI -- "Risk Factors to be
Considered" for a discussion of various factors that should be considered in
connection with an investment decision.
The Disclosure Statement has not been filed with or reviewed by, and the New
Securities and Warrants to be issued on the Consummation Date will not have
been the subject of a registration statement filed with any securities
regulatory authority of any state under any state securities or "blue sky"
laws. The Plan has not been approved or disapproved by the SEC or any state
securities commission, and neither the SEC nor any state securities commission
has passed upon the accuracy or adequacy of the information contained herein.
Any representation to the contrary is a criminal offense. The disclosure
statement does not constitute an offer or solicitation in any state or other
jurisdiction in which such offer or solicitation is not authorized.
83
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
Certain statements in the Disclosure Statement including, but not limited
to, statements contained under the caption entitled "Risk Factors to Southern
Mineral's Business Plan" and "Certain Factors to be Considered" (and including
documents incorporated herein by reference), constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties, and other factors which may cause the actual
results, performance or achievements of Southern Mineral, to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. KPMG LLP ("KPMG"), Southern
Mineral's independent public accountants, in connection with its report on
Southern Mineral's 1998 financial statements, included a qualification which
states there exists substantial doubt about Southern Mineral's ability to
continue as a going concern. Such factors include, among others, the following:
high financial leverage and illiquidity, volatility of prices and availability
of markets, uncertainty in reserve estimation, production success and reserve
replacement, other business risks and other factors referenced in the
disclosure statement and in Southern Mineral's filings with the SEC. The
cautionary statements made pursuant to the reform act herein and elsewhere by
Southern Mineral should not be construed as exhaustive or as an admission
regarding the adequacy of disclosures made by Southern Mineral prior to the
effective date of the reform act. Southern Mineral cannot always predict or
determine after the fact what factors would cause actual results to differ
materially from those indicated by the forward-looking statements or other
statements. In addition, readers are urged to consider statements that include
the terms "believes," "belief," "expects," "plans," "objectives,"
"anticipates," "intends," or the like to be uncertain and forward-looking. All
cautionary statements made herein should be read as being applicable to all
forward-looking statements wherever they appear.
All statements made concerning expected financial performance (including
future revenue and earnings growth), ongoing business strategies and plans and
possible future actions which Southern Mineral intends to pursue constitute
forward-looking statements. The implementation of these strategies and of such
future actions and the achievement of such financial performance are each
subject to numerous conditions, uncertainties and risk factors. Accordingly, no
assurance can be given that Southern Mineral will be able to successfully
accomplish its strategic objectives or achieve such financial performance.
Except as set forth below, no person has been authorized by Southern Mineral
in connection with the Plan or the Solicitation to give any information or to
make any representation other than as contained in the Disclosure Statement and
the Exhibits, appendices or schedules annexed hereto or incorporated by
reference or referred to herein, and, if given or made, such information or
representation may not be relied upon as having been authorized by Southern
Mineral. The Disclosure Statement does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than those to which it
relates, or an offer to sell or a solicitation of an offer to buy any
securities in any jurisdiction in which, or to any person to whom, it is
unlawful to make such offer or solicitation.
The statements contained in the Disclosure Statement are made as of the date
hereof, and neither the delivery of the Disclosure Statement nor any exchange
of Debentures made pursuant to the Plan will, under any circumstance, create
any implication that the information contained herein is correct at any time
subsequent to the date hereof. Any estimates of Claims and Interests set forth
in the Disclosure Statement may vary from the amounts of Claims or Interests
ultimately allowed by the Bankruptcy Court.
The summaries of the Plan and other documents contained in the Disclosure
Statement are qualified in their entirety by reference to the Plan itself, the
exhibits, appendices or schedules thereto and all documents described therein.
The information contained in the Disclosure Statement, including, but not
limited to, the information regarding the history, business, and operations of
Southern Mineral, the historical and projected
84
<PAGE>
financial information of Southern Mineral (including the projected results of
operations of Reorganized Southern Mineral) and the liquidation analysis
relating to Southern Mineral is included herein for purposes of soliciting
acceptances of the Plan. As to contested matters, however, such information is
not to be construed as admissions or stipulations but rather as statements made
in settlement negotiations.
I.
SUMMARY
Southern Mineral hereby transmits this Disclosure Statement pursuant to
Section 1126(b) of Bankruptcy Code for use in the solicitation of votes (the
"Solicitation") to accept its prepackaged reorganization Plan dated ,
1999, (a copy of which is attached as Exhibit I). The Solicitation is being
conducted at this time in order to obtain, prior to the commencement of a
Chapter 11 case, sufficient acceptances to enable the Plan to be confirmed by
the Bankruptcy Court pursuant to the provisions of the Bankruptcy Code.
Southern Mineral believes that this pre-petition Solicitation will
significantly simplify, shorten, and reduce the cost of the administration of,
and minimize disputes during, its Chapter 11 case. Southern Mineral does not
intend to commence Chapter 11 cases for any of its affiliates. Southern Mineral
believes that this will minimize the disruption of the its business that could
result from a traditional bankruptcy case, which would likely be contested and
protracted. Further, in a lengthy bankruptcy case, Southern Mineral believes
that there is a substantial risk that recoveries by Southern Mineral's
Creditors would be significantly less than the proposed recoveries under the
Plan.
A. Background
Southern Mineral is an independent oil and gas company engaged in the
acquisition, exploitation, exploration and operation of oil and gas properties,
primarily along the Gulf Coast of the United States, in Canada and in Ecuador.
In late 1998 and during the first half of 1999 Southern Mineral experienced
reduced cash flow from operations primarily due to low commodity pricing for
crude oil and natural gas. This financial condition prohibited the company from
pursuing acquisitions and exploiting and exploring its oil and gas properties.
Unless Southern Mineral is able to conduct successful exploration or
development activities or acquire additional properties containing reserves,
reserves will decline as they are produced.
In addition to the reduced cash flow, low commodity prices significantly and
negatively impacted the borrowing base calculations associated with Southern
Mineral's secured debt obligation to Compass Bank-Houston and First Union
National Bank. Consequently, during the month of March 1999, certain mineral
interests were sold, the proceeds were used to reduce the secured bank debt,
and the terms and conditions of the credit agreement with the banks were
modified.
Further, in February 1999, the Board of Directors of Southern Mineral
retained CIBC WM as its independent advisors to assist in studying strategic
alternatives. Southern Mineral and CIBC WM evaluated a number of alternatives
including, but not limited to, asset divestiture, joint ventures or alliances,
a sale or merger of Southern Mineral, and other restructuring and
recapitalization opportunities. Following these efforts, the Board of Directors
of Southern Mineral decided to accept the terms of the EnCap Transaction as the
most favorable long-term solution to existing financial problems.
Finally, in order to address the liquidity crisis attributable to required
secured debt payments occurring September 1, 1999, Southern Mineral has agreed
to sell its Brushy Creek Field and Texan Gardens Field interests to ANR
Production Company for approximately $16.3 million. The completion of the sale
of our Brushy Creek Field and Texan Gardens Field interests is subject to a
number of conditions, including the
85
<PAGE>
absence of litigation that would prevent the sale and obtaining necessary
consents and approvals of federal authorities. The sale of the Brushy Creek
Field and Texan Gardens Field interests is only a temporary solution to the
existing financial problems and does not alleviate the need for a comprehensive
restructuring. Proceeds from the sale of the Brushy Creek Field and Texan
Gardens Field interests should be sufficient to satisfy debt payment obligation
in the near-term. Southern Mineral does not believe, however, that it will be
able to generate sufficient cash flow to fund operations, pursue its business
strategy and service its debt over the long-term, unless a long-term financial
restructuring is successfully implemented.
B. Restructuring of Debt as Contemplated by the Plan
Southern Mineral believes that the restructuring of the debt as proposed by
the Plan is essential to Southern Mineral's viability. If the Plan is
consummated, Southern Mineral believes that:
(i) Southern Mineral's debt service will be reduced to levels which
Southern Mineral believes can be supported by its projected cash flow;
(ii) Southern Mineral's aggregate amount of indebtedness will be reduced
by approximately $49 million, and it will have a new credit facility to
fund its working capital needs;
(iii) Southern Mineral's improved financial condition will provide
additional assurances to its suppliers, customers and employees of its
long-term viability; and
(iv) Southern Mineral will avoid the negative publicity, the additional
cost and other adverse effects associated with a contentious bankruptcy
proceeding which could otherwise potentially impair the value of the
enterprise.
If the Plan is consummated, holders of Debentures will become holders of
21.0% of the all of the issued Common Stock of Reorganized Southern Mineral and
EnCap will acquire New Securities and will become a holder of 61.7% of all of
the issued Common Stock of Reorganized Southern Mineral representing
substantial value on a reorganized basis. Southern Mineral believes that the
Common Stock provides a realistic potential for significant appreciation and
will provide holders of Debentures with a liquid and tradable security.
Southern Mineral intends to maintain quotation of its Common Stock listed on
the Nasdaq National Market.
If Southern Mineral is unable to consummate the Plan, Southern Mineral will
consider all financial alternatives available to it at such time, which may
include the sale of all or part of Southern Mineral's business, the
implementation of an alternative restructuring arrangement outside of
bankruptcy, or the commencement of a Chapter 11 case with or without a pre-
approved plan of reorganization. There can be no assurance, however, that any
alternative would result in a reorganization of Southern Mineral rather than a
liquidation, or that any such reorganization would be on terms as favorable to
holders of Debentures and others as the terms of the Plan. See Section XV --
"Alternatives to Confirmation and Consummation of the Plan."
C. Disclosure Statement, Generally
This Disclosure Statement sets forth certain detailed information regarding
Southern Mineral's history, projections for the future, and significant events
expected to occur during the Chapter 11 Case. This Disclosure Statement also
describes the Plan, alternatives to the Plan, effects of confirmation of the
Plan, and the manner in which distributions will be made under the Plan. In
addition, this Disclosure Statement discusses the confirmation process and the
voting procedures that holders of Claims and Interests in impaired Classes must
follow for their votes to be counted.
FOR A DESCRIPTION OF THE PLAN AS IT RELATES TO HOLDERS OF CLAIMS AGAINST AND
INTERESTS IN SOUTHERN MINERAL, PLEASE SEE SECTION VIII -- "SUMMARY OF THE
PLAN."
86
<PAGE>
THIS DISCLOSURE STATEMENT CONTAINS SUMMARIES OF CERTAIN PROVISIONS OF THE
PLAN, STATUTORY PROVISIONS, DOCUMENTS RELATED TO THE PLAN, ANTICIPATED EVENTS
IN SOUTHERN MINERAL'S CHAPTER 11 CASE, AND FINANCIAL INFORMATION. ALTHOUGH
SOUTHERN MINERAL BELIEVES THAT THE PLAN AND RELATED DOCUMENT SUMMARIES ARE FAIR
AND ACCURATE, SUCH SUMMARIES ARE QUALIFIED TO THE EXTENT THAT THEY DO NOT SET
FORTH THE ENTIRE TEXT OF SUCH DOCUMENTS OR STATUTORY PROVISIONS. FACTUAL
INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT HAS BEEN PROVIDED BY
MANAGEMENT, EXCEPT WHERE OTHERWISE SPECIFICALLY NOTED, SOUTHERN MINERAL IS
UNABLE TO WARRANT OR REPRESENT THAT THE INFORMATION CONTAINED HEREIN, INCLUDING
THE FINANCIAL INFORMATION, IS WITHOUT ANY INACCURACY OR OMISSION.
NOTHING CONTAINED HEREIN SHALL CONSTITUTE AN ADMISSION OF ANY FACT OR
LIABILITY BY ANY PARTY, BE ADMISSIBLE IN ANY NONBANKRUPTCY PROCEEDING INVOLVING
SOUTHERN MINERAL, OR BE DEEMED CONCLUSIVE ADVICE ON THE TAX OR OTHER LEGAL
EFFECTS OF THE PLAN AS TO HOLDERS OF CLAIMS OR INTERESTS. YOU SHOULD CONSULT
YOUR PERSONAL COUNSEL OR TAX ADVISOR ON ANY QUESTIONS OR CONCERNS REGARDING TAX
OR OTHER LEGAL CONSEQUENCES OF THE PLAN.
SOUTHERN MINERAL INTENDS TO CONTINUE OPERATING ITS BUSINESS IN CHAPTER 11 IN
THE ORDINARY COURSE AND TO SEEK TO OBTAIN THE NECESSARY RELIEF FROM THE
BANKRUPTCY COURT TO PAY ITS EMPLOYEES, TRADE, AND CERTAIN OTHER CREDITORS IN
FULL AND ON TIME. THE CLAIMS OF SOUTHERN MINERAL'S EMPLOYEES AND TRADE
CREDITORS ARE NOT IMPAIRED UNDER THE PLAN.
D. Definitions
All definitions used in the Plan and Disclosure Statement are set forth on
Appendix I-A attached to the Plan and incorporated in the Plan and Disclosure
Statement for all purposes. For purposes of the Plan and this Disclosure
Statment, except as expressly provided or unless the context otherwise
requires, all capitalized terms not otherwise defined shall have the meanings
ascribed to them in Appendix I-A. Any term used in the Plan or this Disclosure
Statement that is not defined herein, but is defined in the Bankruptcy Code or
the Bankruptcy Rules, shall have the meaning ascribed to that term in the
Bankruptcy Code or Bankruptcy Rules. Whenever the context requires, such terms
shall include the plural as well as the singular number.
E. The Solicitation
At this time, Southern Mineral has not commenced a case under Chapter 11 of
the Bankruptcy Code but is soliciting acceptances of the Plan from the
following holders of Impaired Claims against and Interests in Southern Mineral:
(i) holders of Claims in Southern Mineral Classes 2 and 3, and (ii) holders of
Interests in Class 5. If sufficient votes for acceptance of the Plan are
received, Southern Mineral expects to commence the Chapter 11 Case and to
promptly seek Confirmation of the Plan. If Southern Mineral does not receive
the Requisite Acceptances by the Voting Deadline, it will be forced to evaluate
other available options, including filing one or more traditional, non-
prepackaged Chapter 11 cases. See Section XV -- "Alternatives to Confirmation
and Consummation of the Plan."
SOUTHERN MINERAL BELIEVES THAT THE PLAN IS IN THE BEST INTERESTS OF ALL
CREDITORS. ALL CREDITORS AND INTEREST HOLDERS ENTITLED TO VOTE ARE URGED TO
VOTE IN FAVOR OF THE PLAN NOT LATER THAN THE VOTING DEADLINE.
F. The Plan
If Southern Mineral receives the Requisite Acceptances and the Plan is
confirmed by the Bankruptcy Court and consummated by Southern Mineral, the
following, among other things, will occur: (i) Southern
87
<PAGE>
Mineral will be authorized to issue 150 million shares of Common Stock, (ii)
Southern Mineral will issue to holders of Allowed Debenture Claims 15,640,920
shares of New Securities and Warrants to purchase 7,820,460 shares of New
Securities, (iii) Southern Mineral will sell 43,829,787 shares of New
Securities to EnCap, (iv) Southern Mineral will pay to EnCap a fee of $600,000
and 2,127,660 shares of New Securities, (v) holders of Allowed Interests will
retain their shares of Common Stock which, in the aggregate, will represent
17.3% of all of the issued Common Stock of Reorganized Southern Mineral and
(vi) Southern Mineral will emerge from Chapter 11 with a significantly improved
capital structure and balance sheet and significantly reduced debt service
obligations.
G. Summary of Classification and Treatment of Claims and Equity Interests
Under the Plan, all Claims against and Interests in Southern Mineral that
exist on the date Southern Mineral files its voluntary petition for
reorganization relief under Chapter 11 of the Bankruptcy Code are divided into
five (5) classes. These classes do not include certain Claims, including DIP
Facility Claims, Administrative Claims, and Priority Tax Claims, which,
pursuant to Section 1123(a)(1) of the Bankruptcy Code, are not required to be
classified. Holders of Allowed Claims in Southern Mineral Classes 2 and 3 and
all holders of Common Stock Interests in Southern Mineral Class 5 are Impaired.
All other Claims against Southern Mineral will be Unimpaired under the Plan.
The following table summarizes the classification and treatment under the
Plan of the Impaired Claims against and Interests in Southern Mineral. The
summary contained therein is qualified in its entirety by reference to the
provisions of the Plan, and the balance of this Disclosure Statement. The
classification and treatment for all Classes of Claims and Interests are
described in more detail elsewhere in this Disclosure Statement. See Section
VIII.C -- "Summary of the Plan--Certain Matters Regarding Classification and
Treatment of Claims and Interests."
The amounts listed in this summary under the heading "Estimated Allowed
Amount" are based on Southern Mineral's books and records as of the date of
this Disclosure Statement. There can be no assurance that these estimates are
correct, and actual Allowed Amounts may be significantly different from the
estimates below. The amounts listed under the heading "Estimated Recovery" are
based on valuation analyses prepared by Southern Mineral. These amounts are not
precise and the actual recoveries of Southern Mineral's Creditors, particularly
Creditors holding Debentures and holders of Interests in Southern Mineral, may
vary materially from the estimates below, depending on a variety of factors
including, but not limited to the trading value of Common Stock and Warrants as
well as various other factors related to the ultimate disposition of the
disputed, contingent, and unliquidated claims that have been or may be asserted
against Southern Mineral.
88
<PAGE>
SUMMARY OF TREATMENT OF CLAIMS AGAINST
AND INTERESTS IN SOUTHERN MINERAL [AND
ITS AFFILIATES UNDER THE PLAN
<TABLE>
<CAPTION>
Description of Claims or Interests Treatment Under the Plan
---------------------------------- ------------------------
<C> <S>
1. Classes of Claims and Interests Against Southern Mineral:
DIP Facility Claims--Unclassified . The holder of an Allowed DIP Facility
Estimated Amount: $500,000 plus Claim will receive (i) Cash equal to the
interest and fees unpaid portion of such Allowed DIP
Facility Claim or (ii) such other
treatment as to which Southern Mineral
and such holder shall have agreed upon
in writing.
. Estimated Recovery: 100%
Administrative Claims-- . Subject to the requirements of Article
Unclassified Estimated Amount: XIV.A.2 of the Plan, the holder of an
$50,000 Allowed Administrative Claim will
receive (i) Cash equal to the unpaid
portion of such Allowed Administrative
Claim or (ii) such other treatment as to
which Southern Mineral and such holder
will have agreed upon in writing;
provided, however, that Allowed
Administrative Claims with respect to
liabilities incurred by Southern Mineral
in the ordinary course of business
during the Chapter 11 Case will be paid
in the ordinary course of business in
accordance with the terms and conditions
of any agreements relating thereto.
. Estimated Recovery: 100%
Priority Tax Claims--Unclassified . The holder of an Allowed Priority Tax
Estimated Amount: $320,000 Claim will receive (i) Cash equal to the
unpaid portion of such Allowed Priority
Tax Claim, (i) such other treatment as
to which Southern Mineral and such
holder will have agreed upon in writing,
or (iii) at Reorganized Southern
Mineral's sole discretion, deferred Cash
payments having a value, as of the
Consummation Date, equal to such Allowed
Priority Tax Claim, over a period not
exceeding six years after the date of
assessment of such Allowed Priority Tax
Claim.
. Estimated Recovery: 100%
Southern Mineral Class 1--Other . Unimpaired--The holder of an Allowed
Priority Claims Other Priority Claim against Southern
Estimated Amount: $-0- Mineral will receive (i) Cash equal to
the amount of such Allowed Other
Priority Claim or (ii) such other
treatment as to which Southern Mineral
and such holder will have agreed upon in
writing.
. Estimated Recovery: 100%
Southern Mineral Class 2--the . Impaired--The holders of Allowed Secured
Secured Claims of Compass Bank Class 2 Claims will receive a reduction
and First Union National Bank in the principal amount of the Borrowing
Estimated amount: $16,000,000 Base Secured Claim. Repayment of the
Borrowing Base Secured Claim will be
restructured and the credit agreement
will be amended to provide for an
availability based on a borrowing base
of $20,000,000.
. Estimated Recovery: 100%
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
Description of Claims or Interests Treatment Under the Plan
---------------------------------- ------------------------
<C> <S>
Southern Mineral Class 3--the . Impaired--each holder of an Allowed
Unsecured Claims of the owners Debenture Claim shall receive New
and holders of the Debentures in Securities, Warrants and Cash as follows:
the Estimated Amount: for each One Thousand Dollars ($1,000.00)
$41,400,000, together with in principal amount of Allowed Debenture
accrued and unpaid interest to Claims, the owner and holder on the
the Petition Date. Record Date shall receive (a) $241.50 in
Cash, (b) 377.8 shares of New Securities,
and (c) Warrants to purchase an
additional 188.9 shares of New
Securities.
. Estimated Recovery: 47%
Southern Mineral Class 4--The . Unimpaired--each holder of an Allowed
Unsecured Claims of all Creditors Other Unsecured Claim shall, at the sole
not included in Southern Mineral election of Southern Mineral, receive in
Classes 1 or 3 full satisfaction, settlement, release,
Estimated amount: $109,000 and discharge of and in exchange for such
Allowed Other Unsecured Claim either (a)
Cash equal to the unpaid portion of such
Allowed Other Unsecured Claim, or (b)
payment consistent with the credit terms
extended by the holder of any such
Allowed Other Unsecured Claim prior to
the Confirmation Date
. Estimated Recovery: 100%
Southern Mineral Class 5--the . Impaired--each owner and holder of Common
Interests of the owners and Stock on the Record Date will retain such
holders of the Common Stock. Common Stock. However, on the
Distribution Date Southern Mineral will
issue a total of 45,957,447 new shares of
New Securities to EnCap and 15,640,920
shares of New Securities and all of the
Warrants to purchase 7,820,460 shares of
Common Stock will be issued to holders of
Allowed Unsecured Debenture Claims.
. Estimated Recovery: 17.3% (15.0% as
diluted by the Warrants)
</TABLE>
H. The Confirmation Hearing
If Southern Mineral receives the Requisite Acceptances with respect to the
Plan, Southern Mineral intends to file a voluntary petition to commence the
Chapter 11 Case and request that the Bankruptcy Court schedule a hearing to
consider confirmation of the Plan (the "Confirmation Hearing") as soon as
possible, at the United States Bankruptcy Court for the District of Nevada.
Southern Mineral will request confirmation of the Plan, as it may be modified
from time to time under Section 1129(b) of the Bankruptcy Code, and it has
reserved the right to (i) modify the Plan to the extent, if any, that
confirmation pursuant to Section 1129(b) of the Bankruptcy Code requires
modification and (ii) use any and all Ballots and Master Ballots accepting the
Plan that were received pursuant to the Solicitation, and not subsequently
revoked, to seek confirmation of the Plan (or of any modification thereof that
does not materially and adversely affect the treatment of the class(es) of
Claims and Interests with respect to which such Ballots or Master Ballots were
cast).
I. Solicitation; Voting Procedures
1. Voting Deadline
The period during which Ballots and Master Ballots with respect to the Plan
will be accepted by Southern Mineral (and may be withdrawn or revoked unless
the Bankruptcy Court issues an order to the contrary) will terminate at 5:00
p.m. (Houston Time) on , 1999, unless and until Southern Mineral, in its
sole discretion, extends the date until which Ballots and Master Ballots will
be accepted, in which case the Solicitation Period will terminate at 5:00 p.m.
(Houston Time) on such extended date. Except to the extent Southern Mineral so
determines or as permitted by the Bankruptcy Court, Ballots or Master Ballots
that are
90
<PAGE>
received after the Voting Deadline will not be counted or otherwise used by
Southern Mineral in connection with Southern Mineral's request for confirmation
of the Plan (or any permitted modification thereof).
Southern Mineral reserves the absolute right, at any time or from time to
time, to extend, by oral or written notice to the Voting Agent, the period of
time (on a daily basis, if necessary) during which Ballots will be accepted for
any reason including, but not limited to, determining whether or not the
Requisite Acceptances have been received by making a public announcement of
such extension no later than 9:00 a.m. (Eastern Time) on the first Business Day
next succeeding the previously announced Voting Deadline. Without limiting the
manner in which Southern Mineral may choose to make any public announcement,
Southern Mineral will not have any obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by issuing a
news release through the Dow Jones News Service. There can be no assurance that
Southern Mineral will exercise its right to extend the Solicitation Period for
the receipt of Ballots and Master Ballots.
2. Voting Procedures
Under the Bankruptcy Code, for purposes of determining whether the Requisite
Acceptances have been received, only holders of Claims in Impaired Classes 2
and 3 and holders of Interests in Impaired Class 5 who actually vote will be
counted. The failure of a holder to deliver a duly executed Ballot will be
deemed to constitute an abstention by such holder with respect to voting on the
Plan and such abstentions will not be counted as votes for or against the Plan.
Southern Mineral is providing copies of this Disclosure Statement (including
all Exhibits, appendicies or schedules) and related materials and, where
appropriate, Ballots or Master Ballots (in either case, a "Solicitation
Package"), to registered holders of Southern Mineral's Debentures, to holders
of Interests and to the Class 2 Creditors. Registered holders may include
brokerage firms, commercial banks, trust company, or other Nominees. If such
entities do not hold for their own account, they should provide copies of the
Solicitation Package (including, in the case of the Debentures and Common
Stock, the appropriate Ballot) to their customers and to beneficial owners of
Debentures or Common Stock, as the case may be. Any beneficial owner of
Debentures and Common Stock who has not received a Ballot should contact
his/her or its Nominee, or the Voting Agent.
You should provide all of the information requested by the Ballots you
receive. You should complete and return all Ballots that you receive in the
return envelope provided with each such Ballot.
3. Special Note for Holders of Debentures or Common Stock
The Voting Record Date for determining which holders of Debentures and
Common Stock are entitled to vote on the Plan is , 1999. The Indenture
Trustee for the Debentures will not vote on behalf of the holders of such
Debentures. Holders must submit their own Ballots.
(a) Beneficial Owners
(i) A beneficial owner holding Debentures or Common Stock as record
holder in its own name should vote on the Plan by completing and
signing the enclosed Ballot and returning it directly to the Voting
Agent on or before the Voting Deadline using the enclosed self-
addressed, postage-paid envelope.
(ii) A beneficial owner holding Debentures or Common Stock in
"street name" through a Nominee may vote on the Plan by one of the
following two methods (as selected by such beneficial owner's Nominee).
. Complete and sign the enclosed beneficial owner Ballot. Return the
Ballot to your Nominee as promptly as possible and in sufficient time
to allow such Nominee to process the Ballot and return it to the
Voting Agent by the Voting Deadline. If no self-addressed, postage-
paid envelope was enclosed for this purpose, contact the Voting Agent
for instructions; or
91
<PAGE>
. Complete and sign the pre-validated Ballot (as described below)
provided to you by your Nominee. Return the pre-validated Ballot to
the Voting Agent by the Voting Deadline using the return envelope
provided in the Solicitation Package.
Any Ballot returned to a Nominee by a beneficial owner will not be counted
for purposes of acceptance or rejection of the Plan until such Nominee properly
completes and delivers to the Voting Agent that Ballot or a Master Ballot that
reflects the vote of such beneficial owner.
If any beneficial owner owns Debentures or Common Stock through more than
one Nominee, such beneficial owner may receive multiple mailings containing the
Ballots. The beneficial owner should execute a separate Ballot for each block
of Debentures or Common Stock that it holds through any particular Nominee and
return each Ballot to the respective Nominee in the return envelope provided
therewith. Beneficial owners who execute multiple Ballots with respect to
Debentures or Common Stock held through more than one Nominee must indicate on
each Ballot the names of ALL such other Nominees and the additional amounts of
such Debentures or Common Stock so held and voted. If a beneficial owner holds
a portion of the Debentures or Common Stock through a Nominee and another
portion as a record holder, the beneficial owner should follow the procedures
described in subparagraph (1) (a) above to vote the portion held of record and
the procedures described in subparagraph (1) (b) above to vote the portion held
through a Nominee or Nominees.
(b) Nominees
A Nominee that on the Voting Record Date is the registered holder of
Debentures or Common Stock for a beneficial owner can obtain the votes of
the beneficial owners of such Debentures or Common Stock, consistent with
customary practices for obtaining the votes of securities held in "street
name," in one of the following two ways:
(i) Pre-Validated Ballots
The Nominee may "pre-validate" a Ballot by (i) signing the Ballot;
(ii) indicating on the Ballot the name of the registered holder, the
amount of Debentures or Common Stock held by the Nominee for the
beneficial owner, and the account numbers for the accounts in which
such Debentures or Common Stock are held by the Nominee; and (iii)
forwarding such Ballot, together with the Disclosure Statement return
envelope and other materials requested to be forwarded to the
beneficial owner for voting. The beneficial owner must then complete
the information requested in the Ballot; review the certifications
contained in the Ballot and return the Ballot directly to the Voting
Agent in the pre-addressed, postage-paid envelope so that it is
RECEIVED by the Voting Agent before the Voting Deadline. A list of the
beneficial owners to whom "pre-validated" Ballots were delivered should
be maintained by Nominees for inspection for at least one year from the
Voting Deadline; or
(ii) Master Ballots
If the Nominee elects not to prevalidate Ballots, the Nominee may
obtain the votes of beneficial owners by forwarding to the beneficial
owners the unsigned Ballots, together with the Disclosure Statement, a
return envelope provided by, and addressed to, the Nominee, and other
materials requested to be forwarded. Each such beneficial owner must
then indicate his/her or its vote on the Ballot, complete the
information requested in the Ballot, review the certifications
contained in the Ballot, execute the Ballot, and return the Ballot to
the Nominee. After collecting the Ballots, the Nominee should, in turn,
complete a Master Ballot compiling the votes and other information from
the Ballots, execute the Master Ballot and deliver the Master Ballot to
the Voting Agent so that it is RECEIVED by the Voting Agent before the
Voting Deadline. All Ballots returned by beneficial owners should
either be forwarded to the Voting Agent (along with the Master Ballot)
or retained by Nominees for inspection for at least one year from the
Voting Deadline.
EACH NOMINEE SHOULD ADVISE ITS BENEFICIAL OWNERS TO RETURN THEIR
BALLOTS TO THE NOMINEE BY A DATE CALCULATED BY THE NOMINEE
92
<PAGE>
TO ALLOW IT TO PREPARE AND RETURN THE MASTER BALLOT TO THE VOTING AGENT
SO THAT IT IS RECEIVED BY THE VOTING AGENT BEFORE THE VOTING DEADLINE.
(c) Securities Clearing Agencies
Southern Mineral expects that the Depository Trust Company, as a nominee
holder of Debentures, will arrange for its participants to vote by
executing an omnibus proxy in favor of such participants. As a result of
the omnibus proxy, such participant will be authorized to vote its Voting
Record Date positions held in the name of such entity.
(d) Miscellaneous
For purposes of voting to accept or reject the Plan, the beneficial
owners of Debentures will be deemed to be the "holders" of the Claims
represented by such Debentures and the beneficial owners of Common Stock
will be deemed to be the "holders" of the Interests represented by such
Common Stock. Unless otherwise ordered by the Bankruptcy Court, Ballots or
Master Ballots that are signed, dated and timely received, but on which a
vote to accept or reject the Plan has not been indicated, will not be
counted. Southern Mineral, in its sole discretion, may request that the
Voting Agent attempt to contact such voters to cure any such defects in the
Ballots or Master Ballots.
Except as provided below, unless the Ballot or Master Ballot is timely
submitted to the Voting Agent before the Voting Deadline together with any
other documents required by such Ballot or Master Ballot, Southern Mineral
may, in its sole discretion, reject such Ballot or Master Ballot as
invalid, and therefore decline to utilize it in connection with seeking
confirmation of the Plan.
In the event of a dispute with respect to any Debenture Claim or
Interest, any vote to accept or reject the Plan cast with respect to such
disputed Claim or Interest will not be counted for purposes of determining
whether the Plan has been accepted or rejected, unless the Bankruptcy Court
orders otherwise.
(e) Delivery of Debentures
Southern Mineral is not at this time requesting the delivery of, and
neither Southern Mineral nor the Voting Agent will accept, certificates
representing any Debentures or any Common Stock. In connection with the
Consummation Date, Southern Mineral will furnish all holders of Debentures
with appropriate letters of transmittal to be used to remit their
Debentures in exchange for the distribution under the Plan. Information
regarding such remittance procedure (together with all appropriate
materials) will be distributed by Southern Mineral after the Confirmation
Date.
4. Fiduciaries and Other Representatives
If a Ballot is signed by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation, or another acting in a fiduciary or
representative capacity, such person should indicate such capacity when signing
and, unless otherwise determined by Southern Mineral, must submit proper
evidence satisfactory to Southern Mineral of authority to so act. Authorized
signatories should submit the separate Ballot of each beneficial owner for whom
they are voting.
UNLESS THE BALLOT OR MASTER BALLOT BEING FURNISHED IS TIMELY SUBMITTED TO
THE VOTING AGENT ON OR PRIOR TO THE VOTING DEADLINE, SUCH BALLOT WILL BE
REJECTED AS INVALID AND WILL NOT BE COUNTED AS AN ACCEPTANCE OR REJECTION OF
THE PLAN; PROVIDED, HOWEVER, SOUTHERN MINERAL RESERVE THE RIGHT, IN ITS SOLE
DISCRETION, TO REQUEST OF THE BANKRUPTCY COURT THAT ANY SUCH BALLOT OR MASTER
BALLOT BE COUNTED. IN NO CASE SHOULD A BALLOT OR MASTER BALLOT BE DELIVERED TO
ANY ENTITY OTHER THAN THE VOTING AGENT, AND IN NO CASE SHOULD ANY DEBENTURES BE
DELIVERED TO SOUTHERN MINERAL OR ANY OF ITS ADVISORS, INCLUDING THE VOTING
AGENT.
93
<PAGE>
5. Parties in Interest Entitled to Vote
Under Section 1124 of the Bankruptcy Code, a class of claims or interests is
deemed to be "impaired" under a plan unless (i) the plan leaves unaltered the
legal, equitable, and contractual rights to which such claim or interest
entitles the holder thereof, or (ii) notwithstanding any legal right to an
accelerated payment of such claim or interest, the plan cures all existing
defaults (other than defaults resulting from the occurrence of events of
bankruptcy) and reinstates the maturity of such claim or interest as it existed
before the default.
In general, a holder of a claim or interest may vote to accept or to reject
a plan if (i) the claim or interest is "allowed", which means generally that no
party in interest has objected to such claim or interest, and (ii) the claim or
interest is impaired by the plan. If, however, the holder of an impaired claim
or interest will not receive or retain any distribution under the plan on
account of such claim or interest, the Bankruptcy Code deems such holder to
have rejected the plan, and, accordingly, holders of such claims and interests
do not actually vote on the plan. If a claim or interest is not impaired by the
plan, the Bankruptcy Code deems the holder of such claim or interest to have
accepted the plan and, accordingly, holders of such claims and interests are
not entitled to vote on the plan.
A vote may be disregarded if the Bankruptcy Court determines, pursuant to
Section 1126(e) of the Bankruptcy Code, that it was not solicited or procured
in good faith or in accordance with the provisions of the Bankruptcy Code.
6. Classes Impaired Under the Plan
The following Classes of Claims are Impaired under the Plan and are entitled
to vote on the Plan: Southern Mineral Class 2 and Class 3. In addition, the
holders of Interests in Southern Mineral Class 5 are Impaired and entitled to
vote on the Plan.
All other Classes of Claims and Interests are Unimpaired under the Plan, are
deemed, under Section 1126(f) of the Bankruptcy Code, to have accepted the
Plan, and accordingly are not entitled to vote to accept or reject the Plan.
Acceptances of the Plan must be solicited only from those who hold Claims in an
Impaired Class whose members will (or may) receive a distribution under the
Plan.
7. Agreements Upon Furnishing Ballots
The delivery of an accepting Ballot (or Master Ballot) to the Voting Agent
by a holder of Common Stock or Debentures pursuant to one of the procedures set
forth above will constitute the agreement of such holder to accept (i) all of
the terms of, and conditions to this Solicitation, and (ii) the terms of the
Plan; provided, however, all parties in interest retain their right to object
to confirmation of the Plan pursuant to Section 1128 of the Bankruptcy Code.
8. Waivers of Defect, Irregularities, etc.
Unless otherwise directed by the Bankruptcy Court, all questions as to the
validity, form eligibility (including time of receipt), acceptance, and
revocation or withdrawal of Ballots will be determined by the Voting Agent and
Southern Mineral in their sole discretion, which determination will be final
and binding. As indicated below under "Withdrawal of Ballots; Revocation,"
effective withdrawals of Ballots must be delivered to the Voting Agent prior to
the Voting Deadline. Southern Mineral reserves the absolute right to contest
the validity of any such withdrawal. Southern Mineral also reserves the right
to reject any and all Ballots not in proper form, the acceptance of which
would, in the opinion of Southern Mineral or their counsel be unlawful.
Southern Mineral further reserves the right to waive any defects or
irregularities of conditions of delivery as to any particular Ballot. The
interpretation (including the Ballot and the respective instructions thereto)
by Southern Mineral, unless otherwise directed by the Bankruptcy Court, will be
final and binding on
94
<PAGE>
all parties. Unless waived, any defects or irregularities in connection with
deliveries of Ballots must be cured within such time as Southern Mineral (or
the Bankruptcy Court) determine. Neither Southern Mineral nor any other person
will be under any duty to provide notification of defects or irregularities
with respect to deliveries of Ballots nor will any of them incur any
liabilities for failure to provide such notification. Unless otherwise directed
by the Bankruptcy Court, delivery of such Ballots will not be deemed to have
been made until such irregularities have been cured or waived. Ballots
previously furnished (and as to which any irregularities have not theretofore
been cured or waived) will be invalidated.
9. Withdrawal of Ballots: Revocation
Any party who has delivered a valid Ballot for the acceptance or rejection
of the Plan may withdraw such acceptance or rejection by delivering a written
notice of withdrawal to the Voting Agent at any time prior to the Voting
Deadline. A notice of withdrawal, to be valid, must (i) contain the description
of the Claim(s) or Interest(s) to which it relates and the aggregate principal
amount represented by such Claim(s) or number of shares represented by such
Interest(s), (ii) be signed by the withdrawing party in the same manner as the
Ballot being withdrawn, (iii) contain a certification that the withdrawing
party owns the Claim(s) or Interest(s) and possesses the right to withdraw the
vote sought to be withdrawn and (iv) be received by the Voting Agent in a
timely manner at the address set forth in paragraph 10 immediately following.
Prior to the filing of the Plan, Southern Mineral intends to consult with the
Voting Agent to determine whether any withdrawals of Ballots were received and
whether the Requisite Acceptances of the Plan have been received. As stated
above, Southern Mineral expressly reserves the absolute right to contest the
validity of such withdrawals of Ballots.
Unless otherwise directed by the Bankruptcy Court, purported notice of
withdrawal of Ballots which is not received in a timely manner by the Voting
Agent will not be effective to withdraw a previously cast Ballot.
Any party who has previously submitted to the Voting Agent prior to the
Voting Deadline a properly completed Ballot may revoke such Ballot and change
his or its vote by submitting to the Voting Agent prior to the Voting Deadline
a subsequent properly completed Ballot for acceptance or rejection of the Plan.
In the case where more than one timely, properly completed Ballot is received,
only the Ballot which bears the latest date will be counted for purposes of
determining whether the Requisite Acceptances have been received.
Southern Mineral will pay all costs, fees and expenses relating to the
Solicitation, including, without limitation, customary mailing and handling
costs of Nominees.
10. Further Information; Additional Copies
If you have any questions or require further information about the voting
procedure for voting your Claim or Interest or about the packet of material
received, or if you wish to obtain an additional copy of the Plan, the
Disclosure Statement or any exhibits, appendicies or schedules to such
documents (at your own expense, unless otherwise specifically required by Fed.
R. Bankr. P. 3017(d)), please contact the Voting Agent:
Southern Mineral Corporation
c/o Steven H. Mikel
1201 Louisiana St.
Suite 3350
Houston, Texas 77002
(713) 658-9444
95
<PAGE>
II.
GENERAL INFORMATION
A. Introduction
The primary purpose of the Plan is to effectuate a restructuring of Southern
Mineral's capital structure (the "Restructuring") in order to align its capital
structure with its present and future operating prospects.
At present, the cash flow generated by Southern Mineral is insufficient to
fund operations and service its debts. The Restructuring would reduce
significantly the principal amount of Southern Mineral's outstanding
indebtedness by converting a substantial portion of Southern Mineral's
indebtedness into New Securities and Warrants. By offering the holders of
Debentures twenty-one percent (21%) of the equity of Southern Mineral, Southern
Mineral intends that such holders will participate in the long-term
appreciation of Southern Mineral's business which Southern Mineral expects will
be enhanced by the reduction of its debt service and the implementation of the
new business plan described in more detail below. See Section III.A --
"Business Plans for Reorganized Southern Mineral--Business and Operating
Strategies of Southern Mineral." The restructuring contemplates a new senior
secured credit facility of at least $20 million, thereby significantly
enhancing the liquidity and the opportunity for success of Reorganized Southern
Mineral. During the pendency of the restructuring and thereafter, Southern
Mineral expects to make payment in full on all Allowed Claims of trade
Creditors and to continue to operate its business in the ordinary course.
Management has begun the implementation of a business plan which seeks to
improve the operating profitability of the Southern Mineral system through a
variety of measures. The fact that the Plan has been pre-negotiated with
certain impaired parties will not only minimize the cost of the Chapter 11
proceeding, but will provide the best opportunity for the success of
management's turnaround efforts.
B. Southern Mineral
1. Description of Business
See Item 1 of Southern Mineral's Form 10-K/A accompanying this Disclosure
Statement which is incorporated herein and is deemed a part hereof by this
reference.
2. Description of Properties
See Item 2 of Southern Mineral's Form 10-K/A accompanying this Disclosure
Statement which is incorporated herein and is deemed a part hereof by this
reference.
3. Legal Proceedings
See Item 3 of Southern Mineral's Form 10-K/A accompanying this Disclosure
Statement which is incorporated herein and deemed a part hereof by this
reference.
4. Submission of Matters to a Vote of Security Holders
See Item 4 of Southern Mineral's Form 10-K/A accompanying this Disclosure
Statement which is incorporated herein and deemed a part hereof by this
reference.
5. Market for Southern Mineral's Common Equity and Related Stockholder Matters
See Item 5 of Southern Mineral's Form 10-K/A accompanying this Disclosure
Statement which is incorporated herein and deemed a part hereof by this
reference.
6. Selected Financial Data
See Item 6 of Southern Mineral's Form 10-K/A accompanying this Disclosure
Statement which is incorporated herein and deemed a part hereof by this
reference.
96
<PAGE>
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations
See Item 7 of Southern Mineral's Form 10-KA and Item 2 of Southern Mineral's
10-Q accompanying this Disclosure Statement which are incorporated herein and
deemed a part hereof by the reference.
8. Quantitative and Qualitative Disclosures About Market Risk
See Item 7a of Southern Mineral's Form 10-KA and Item 3 of Southern
Mineral's Form 10-Q which are incorporated herein and deemed part hereof by
this reference.
9. Financial Statements and Supplemental Data for the Fiscal Year Ended
December 31, 1998
See Item 8 of Southern Mineral's Form 10-K/A which are incorporated herein
and deemed part hereof by this reference.
10. Unaudited Consolidated Financial Statements for the Quarterly Period Ended
March 31, 1999
See Item 1 of Southern Mineral's Form 10-Q which is incorporated herein and
deemed part hereof by this reference.
11. Changes In and Disagreements with Accountants on Accounting of Financial
Disclosure
See Item 9 of Southern Mineral's Form 10-K/A which are incorporated herein
and deemed part hereof by this reference.
12. Directors and Executive Officers of Southern Mineral
See Item 10 of Southern Mineral's Form 10-K/A which is incorporated herein
and deemed part hereof by this reference.
13. Executive Compensation
See Item 11 of Southern Mineral's Form 10-K/A which is incorporated herein
and deemed part hereof by this reference.
14. Security Ownership of Certain Beneficial Owners and Management
See Item 12 of Southern Mineral's Form 10-K/A which is incorporated herein
and deemed part hereof by this reference.
15. Certain Relationships and Related Transactions
See Item 13 of Southern Mineral's Form 10-K/A which is incorporated herein
and deemed part hereof by this reference.
C. Recent Developments
1. The EnCap Transaction
Southern Mineral signed an agreement to sell to EnCap Energy Capital Fund
III, L.P. and certain of its affiliates an aggregate of 43,829,787 shares of
New Securities for $20.6 million. In connection with the sale, the Reorganized
Southern Mineral will be obligated to pay a fee of $600,000 and 2,127,660
shares of New Securities to EnCap Investments L.L.C., an affiliate of EnCap.
The fee is payable when the EnCap Transaction is consummated. The sale to EnCap
is subject to certain conditions, including consummation of the exchange offer
or the prepackaged Plan. Reorganized Southern Mineral will use approximately
$10.0 million of the
97
<PAGE>
proceeds from the EnCap sale to fund the cash portion of the consideration to
be paid to holders of Debentures under the Plan. The balance of the cash will
be used to reduce the Secured Claims of the Class 2 Creditors and for general
corporate purposes.
2. The ANR Sale
In order to deal with liquidity problems anticipated to arise during July
and August of 1999, Southern Mineral determined that it was in the company's
best interest to sell its interests in the Brushy Creek and Texan Gardens
fields to ANR Production for approximately $16.3. The completion of the sale is
scheduled to occur on July 29, 1999, but is subject to a number of conditions.
The sale of Brushy Creek Field and Texan Gardens Field is described in more
detail in the purchase and sale agreement with ANR that is attached to the
proxy statement/prospectus/disclosure documents as Annex G. The contemplated
sale is only a temporary solution to the company's financial problems and does
not alleviate the need for restructuring. Proceeds of the sale will be used
almost entirely to reduce the outstanding obligations of the Class 2 Secured
Creditors, and will satisfy the near-term debt obligations to those Creditors.
3. Potential De-listing by Nasdaq of Common Stock
Southern Mineral has been advised that it is not in compliance with Nasdaq
Marketplace Rule 4310 governing qualitative and quantitative standards for
continued listing. If such standards are not satisfied in a timely manner,
Southern Mineral's Common Stock may be subject to delisting from the Nasdaq
National Market. Such delisting would impair the liquidity of Southern
Mineral's securities and capital raising flexibility of Southern Mineral.
Southern Mineral intends to pursue a remedy and is considering steps to come
into compliance with the continued listing standards. Southern Mineral cannot
assure that it will be successful in maintaining its Nasdaq listing.
D. Purposes and Effects of the Plan
The primary purposes of the Plan are to reduce Southern Mineral's debt
service requirements and overall level of indebtedness, including the principal
amount thereof, to realign its capital structure, and to provide Southern
Mineral with greater liquidity and thereby increase the likelihood that it will
continue as a viable economic entity. If consummated, the Plan would reduce the
principal amount of Southern Mineral's Secured and Unsecured Claims,
significantly lessen Southern Mineral's debt service requirements, provide for
operating liquidity and transfer substantial ownership of Southern Mineral from
its present stockholders to EnCap and the holders of Debentures.
The Plan will strengthen Southern Mineral's balance sheet primarily by
substantially reducing Southern Mineral's overall level of indebtedness. As of
March 31, 1999, Southern Mineral had a stockholders' equity of approximately
$18.4. On a pro forma basis, as of March 31, 1999, after giving effect to the
Plan, Southern Mineral's stockholders' equity is estimated to be approximately
$73.4 million.
TRADE CREDITORS ARE INTENDED TO BE UNAFFECTED BY THE PLAN, AND SOUTHERN
MINERAL EXPECTS TO BE ABLE TO CONTINUE TO PAY ALL TRADE CREDITORS WHO CONTINUE
TO PROVIDE NORMAL TRADE CREDIT TERMS IN THE ORDINARY COURSE OF BUSINESS,
SUBJECT TO ANY REQUIRED BANKRUPTCY COURT APPROVAL.
98
<PAGE>
III.
BUSINESS PLAN FOR THE
REORGANIZED COMPANY
A. Business and Operating Strategies of Southern Mineral
Southern Mineral initiated a balanced strategy beginning in 1995 and pursued
that strategy through 1998. The strategy encompassed the acquisition,
exploitation and exploration for oil and gas reserves. Southern Mineral built a
foundation through acquisitions and expanded upon that foundation through the
development of an exploitation/exploration program as its capital and personnel
resources increased. The acquisition of Neutrino and its fully-staffed office
in Calgary was designed to push Southern Mineral into the $100 million market
cap level and provide the foundation that was a goal since 1995.
B. Business Plan for Operating Turnaround
1. General. The post-Plan confirmation business strategy will remain a
balanced one -- to acquire, exploit and explore. The strategy will be further
defined in its scope as follows.
(a) Strategic acquisitions with operations will be targeted.
Concentrated asset packages in selected areas will be sought.
(b) Southern Mineral will be used as a catalyst for consolidation,
meaning that it will identify and pursue corporate consolidations that are
accretive to shareholder value.
(c) Capital will be identified for development of new
exploitation/exploration projects, which will be "matured" and then
marketed with the express goal of replenishing the capital pool and
exposing Southern Mineral to significant reserve potential with a minimum
of ultimate capital exposure.
2. Implementation
(a) After almost one year of experience with our Canadian team, and with
the decline in the oil patch during that time, it is apparent that Southern
Mineral should be reorganized to realize economies. The plan will be to
sever redundancies that exist by having two fully staffed offices. This
process has begun with the severing of the two executive officers of
Neutrino, and will continue through attrition or layoffs. After severance
obligations it is anticipated that the savings will be $600,000 to $700,000
per year.
(b) Domestic Acquisitions: In the past year Southern Mineral's financial
and operational management has been strengthened with the additions of key
financial and operational managers. This provides Southern Mineral with a
better ability to implement a strategy of strategic acquisitions with
operational control and corporate consolidations.
(c) Domestic Exploration: With a financially stronger company, the
opportunity to leverage into additional attractive projects is anticipated.
The Company will seek to accumulate additional projects with minimal
capitalization and position itself to promote those projects to the
industry as the markets improve.
IV.
CORPORATE STRUCTURE AND
MANAGEMENT OF SOUTHERN MINERAL
A. Board of Directors of Southern Mineral
See Item 10 of Southern Mineral's Form 10-K/A accompanying this Disclosure
Statement which is incorporated herein and deemed a part hereof by this
reference.
99
<PAGE>
B. Management of Southern Mineral
See Item 10 of Southern Mineral's Form 10-K/A accompanying this Disclosure
Statement which is incorporated herein and deemed a part hereof by this
reference.
C. Employment Agreements
None
D. Executive Severance Plan/Retention Plan
See Item 11 of Southern Mineral's Form 10-K/A accompanying this Disclosure
Statement which is incorporated herein and deemed a part hereof by this
reference.
E. Securities Ownership of Management
See Item 12 of Southern Mineral's Form 10-K/A accompanying this Disclosure
Statement which is incorporated herein and deemed a part hereof by this
reference.
F. Transactions with Certain Affiliates
Certain officers and directors are involved in other material relationships
and transactions with Southern Mineral, including interests in certain
affiliated Companies.
See Item 13 of Southern Mineral's Form 10-K/A accompanying this Disclosure
Statement which is incorporated herein and deemed a part hereof by this
reference.
G. Directors and Officers of Reorganized Southern Mineral
It is anticipated that the board of directors of Reorganized Southern
Mineral will include members of current management of Southern Mineral as well
as outside directors. The composition of the remainder of the board of
Reorganized Southern Mineral will be determined by Southern Mineral, subject to
the requirements of Section 1129(a)(5) of the Bankruptcy Code. Southern Mineral
intends to announce prior to the Confirmation Date the identities of any
individuals proposed to serve as directors or officers of Reorganized Southern
Mineral. If and to the extent possible, the identities of such individuals will
be announced by inclusion of a list of proposed directors and/or officers in
the Plan Supplement, which will be filed with the Bankruptcy Court at least
five (5) Business Days prior to the commencement of the Confirmation Hearing.
H. Management Options
See Item 11 of Southern Mineral's Form 10-K/A accompanying this Disclosure
Statement which is incorporated herein and deemed a part hereof by this
reference.
I. Warrants
1. Under the Plan, Southern Mineral will issue, to holders of Debentures,
three year Warrants to purchase an additional 188.9 shares of Common Stock at a
price of $1.50 per share, for each $1,000 in principal amount of Debentures
owned by such holder.
2. Third parties holding warrant rights in existence prior to the Petition
Date will retain those rights. See Item 8, note 8 of Southern Mineral's Form
10-K/A accompanying this Disclosure Statement which is incorporated herein and
deemed a part hereof by this reference.
THIS SOLICITATION OF THE HOLDERS OF DEBENTURES WHO, IN THE AGGREGATE, WILL
RECEIVE 21% OF THE COMMON STOCK, WILL BE DEEMED A SOLICITATION FOR APPROVAL OF
THE WARRANTS. SOUTHERN MINERAL BELIEVES THAT THE CONFIRMATION ORDER SHOULD
CONSTITUTE APPROVAL OF THE WARRANTS FOR
100
<PAGE>
PURPOSES OF SECTIONS 422 AND 162(m) OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED (THE "TAX CODE"). THERE CAN BE NO ASSURANCE, HOWEVER, THAT THE INTERNAL
REVENUE SERVICE WILL AGREE WITH SUCH POSITION.
V.
REASONS FOR THE SOLICITATION: RECOMMENDATION
Chapter 11 of the Bankruptcy Code provides that, in order for the Bankruptcy
Court to confirm the Plan as a consensual plan, (i) the holders of Allowed
Claims in each Impaired Class who cast votes in favor of the Plan must (a) hold
at least two-thirds in amount of the Allowed Claims of the holders in such
Class who actually cast votes with respect to the Plan and (b) comprise more
than one-half in number of the holders of Allowed Claims in such Class who
actually cast votes with respect to the Plan, and (ii) the holders of Allowed
Interests who cast votes in favor of the Plan must hold at least two-thirds in
amount of the Allowed Interests of the holders in such Class who actually cast
votes with respect to the Plan (together, the "Requisite Acceptances").
The Solicitation is being conducted at this time in order to obtain (prior
to the filing of a voluntary petition for reorganization of Southern Mineral
under Chapter 11 of the Bankruptcy Code) the Requisite Acceptances. Southern
Mineral anticipates that by conducting the Solicitation in advance of
commencing the Chapter 11 Case, the duration of the Chapter 11 Case will be
significantly shortened and the administration of the case, which otherwise can
be lengthy, complex and extremely expensive, will be significantly shortened,
greatly simplified and much less costly.
In light of the significant benefits to be attained by Southern Mineral's
Impaired Creditors and Interest holders pursuant to consummation of the
transactions contemplated by the Plan, Southern Mineral's Board of Directors
recommends that such Creditors vote to accept the Plan. The Board has reached
this decision after considering the alternatives to the Plan that are available
to Southern Mineral and their likely effect on Southern Mineral's business
operations, Creditors, and shareholders. These alternatives include liquidation
of Southern Mineral under Chapter 7 of the Bankruptcy Code or a reorganization
under Chapter 11 of the Bankruptcy Code without pre-petition solicitation. The
Board determined, after consulting with financial and legal advisors, that the
Plan would result in a larger distribution to Creditors than would any other
Chapter 11 reorganization or a liquidation under Chapter 7. For a comparison of
estimated distributions under Chapter 7 of the Bankruptcy Code and under the
Plan, see Section XIV.C -- "Feasibility of the Plan and the Best Interests of
Creditors Test--Liquidation Analysis." For all of these reasons, the Board
supports the Plan and urge all Impaired Creditors and Interest holders to
accept and support the Plan.
VI.
SUMMARY OF VOTING PROCEDURES
This Disclosure Statement, including all Exhibits, appendicies or schedules
hereto, together with the related materials included herewith, are being
furnished to certain holders of Impaired Claims against and Impaired Interests
in Southern Mineral: (i) holders of Debentures whose names (or the names of
whose nominees) appear as of the Voting Record Date (as defined in the next
paragraph) on the security holder lists maintained by the Indenture Trustee
pursuant to the Indenture or, if applicable, who are listed as participants in
a clearing agency's security position listing, (ii) holders of Secured Notes,
and (iii) the holders of the Common Stock whose names (or the names of whose
nominess) appear as of the Voting Record Date. IF SUCH ENTITIES DO NOT HOLD FOR
THEIR OWN ACCOUNT, THEY SHOULD PROVIDE COPIES OF THIS DISCLOSURE STATEMENT, THE
PLAN AND, IF APPLICABLE, APPROPRIATE BALLOTS TO THE BENEFICIAL OWNERS.
All votes to accept or reject the Plan must be cast by using the ballot (the
"Ballot") enclosed with this Disclosure Statement or, in the case of a bank,
brokerage firm or other nominee holding Debentures in its own name on behalf of
a beneficial owner, or any agent thereof (each, a "Nominee"), the master ballot
(the
101
<PAGE>
"Master Ballot") provided to such Nominee under separate cover (or manually
executed facsimiles thereof). No other votes will be counted. Consistent with
the provisions of Fed. R. Bankr. P. 3018, Southern Mineral has fixed , 1999
(the "Voting Record Date") as the date for the determination of holders of
record of Impaired Claims and Impaired Interests entitled to receive a copy of
this Disclosure Statement and the related materials and to vote to accept or
reject the Plan. Ballots and Master Ballots must be RECEIVED by the Voting
Agent no later than 5:00 p.m. (Houston Time) on [ ], 1999, unless Southern
Mineral, in its sole discretion, and from time-to-time, extend, by oral or
written notice to the Voting Agent, such date, in which event the period during
which Ballots and Master Ballots will be accepted will terminate at 5:00 p.m.
(Houston Time) on such extended date (in either case, the "Voting Deadline").
Except to the extent requested by Southern Mineral or as permitted by the
Bankruptcy Court pursuant to Fed. R. Bankr. P. 3018, Ballots and Master Ballots
received after the Voting Deadline will not be counted or otherwise used in
connection with Southern Mineral's request for confirmation of the Plan (or any
permitted modification thereof). In addition, Southern Mineral reserves the
right to use acceptances of the Plan received in this Solicitation to seek
confirmation of the Plan under any other circumstances, including, without
limitation, the filing of an involuntary bankruptcy petition against Southern
Mineral or the voluntary commencement of a non-prepackaged Chapter 11 case by
Southern Mineral.
After the Consummation Date, Southern Mineral (or its agent) will furnish to
each holder of Debentures a letter of transmittal for remittance to Southern
Mineral (or its agent) of the certificates which represent such holder's
Debentures. Holders whose Debentures are not remitted in proper form for
transfer together with a properly completed letter of transmittal will not
receive their Pro Rata share of Cash, Common Stock and Warrants. See Section
VIII.D.7 -- "Summary of the Plan--Summary of Other Provisions of the Plan--
Surrender and Cancellation of Securities or Instruments."
Southern Mineral reserves the absolute right to amend the Plan either before
or after the Petition Date. Amendments to the Plan that do not materially and
adversely affect the treatment of Claims and Interests may be approved by the
Bankruptcy Court at the Confirmation hearing without the necessity of
resoliciting votes. In the event resolicitation is required, Southern Mineral
will furnish new Ballots and/or Master Ballots to be used to vote to accept or
reject the Plan as amended.
Although the Solicitation relates to voluntary petition for reorganization
of Southern Mineral under Chapter 11 of the Bankruptcy Code, no such filing has
yet been made. Southern Mineral intends to file its Chapter 11 petition when
the Requisite Acceptances have been received or when Southern Mineral otherwise
determines that such filing is necessary or appropriate to protect its property
and interests. In addition, Southern Mineral expressly reserves the right to
extend, by oral or written notice to the Voting Agent, the Voting Deadline and
the Voting Record Date until the Requisite Acceptances have been received.
VII.
ANTICIPATED EVENTS DURING THE CHAPTER 11 CASE
A. Commencement of the Chapter 11 Case
If Southern Mineral receives the Requisite Acceptances, Southern Mineral
intends to commence promptly the Chapter 11 Case. From and after the Petition
Date, Southern Mineral will continue to operate its business and manage its
properties as debtor-in-possession pursuant to Sections 1107 and 1108 of the
Bankruptcy Code.
Southern Mineral does not expect the Chapter 11 Case to be protracted. To
expedite its emergence from Chapter 11, Southern Mineral intends to seek, among
other things, the relief detailed below from the Bankruptcy Court on the
Petition Date. If granted, this relief will facilitate the administration of
the Chapter 11 Case; there can be no assurance, however, that the Bankruptcy
Court will grant the requested relief.
102
<PAGE>
1. Applications for Retention of Southern Mineral's Professionals; Ordinary
Course Professionals
Southern Mineral intends to seek Bankruptcy Court authority to retain and
employ certain professionals to represent it and assist it in connection with
the Chapter 11 Case. Some of these professionals were intimately involved with
the negotiation and development of the Plan and include, among others: (i)
Akin, Gump, Strauss, Hauer & Feld, LLP, as counsel for Southern Mineral; (ii)
CIBC World Markets Corp., as financial advisor to Southern Mineral; (iii) KPMG
LLP, as accountants to Southern Mineral; and (iv) [ ], as solicitation and
noticing agents for Southern Mineral. Southern Mineral also intends to seek
authority to retain certain professionals to assist with the operation of its
business in the ordinary course; these so-called "ordinary course
professionals" will not be involved in the administration of the Chapter 11
Case.
2. Motion to Mail Notices and Provide Publication Notice of Section 341
Meeting to Unimpaired Creditors
Pursuant to the Bankruptcy Rules, the Clerk of the Bankruptcy Court, or
another party that the Bankruptcy Court may direct, must provide notice of the
commencement of the Chapter 11 Case and of the first meeting of Creditors held
pursuant to Section 341 of the Bankruptcy Code (the "Section 341 Meeting") to
all Creditors. In addition, at least two other notices, notice of the hearing
to approve the Disclosure Statement and consider confirmation of the Plan and
notice of the entry of an order confirming the Plan must be given to all
Creditors and equity security holders. Due to the size of the Chapter 11 Case
and the large number of Creditors and Interest holders, Southern Mineral will
request that Southern Mineral, or its authorized noticing agent, be authorized
to mail all required notices in the Chapter 11 Case. In addition, because all
classes of Claims and Interests other than Classes 2, 3 and 5 are not Impaired
under the Plan and will pass through the Chapter 11 Case unaffected, Southern
Mineral will request that it be authorized to provide only publication notice
of the events set forth above, in several newspapers of national circulation
to holders of Unimpaired Claims.
3. Motion to Approve Pre-Petition Solicitation and to Schedule Confirmation
Hearing
To facilitate the prompt confirmation and consummation of the Plan,
Southern Mineral intends to immediately seek an order scheduling the hearing
on (i) approval of the pre-petition solicitation procedures, including this
Disclosure Statement, (ii) approval of a short form disclosure statement and
summary of the Plan (the "Short Form Disclosure Statement") to holders of
unclassified and Unimpaired Claims, as well as Claims and Interests that are
not entitled to receive or retain any property or interest in property under
the Plan, and (iii) confirmation of the Plan, for a date immediately following
the end of the notice period therefor, or as soon thereafter as the Bankruptcy
Court's calendar permits.
4. Motion to Continue Using Existing Cash Management System
Because Southern Mineral expects the entire Chapter 11 Case to last for
less than six months, and because of the administrative hardship that any
operating changes would impose on Southern Mineral, Southern Mineral intends
to seek Bankruptcy Court authority to continue using its existing cash
management system, bank accounts (which are subject to the security interests
and liens of Compass Bank-Houston and First Union National Bank) and business
forms and to follow their current internal investment and deposit guidelines.
Absent the Bankruptcy Court's authorization of the continued use of the cash
management system, cash flow among Southern Mineral would be severely impeded,
to the detriment of Southern Mineral's estate and Creditors.
Continued use of the existing cash management system will facilitate
Southern Mineral's smooth and orderly transition into Chapter 11, minimize the
disruption to its business while in Chapter 11, and expedite its emergence
from Chapter 11. Requiring Southern Mineral to adopt and implement a new cash
management system would likely increase the costs of the Chapter 11 Case,
primarily as a result of the significant time and expense associated with the
transition to a new cash management system. For the same reasons, requiring
Southern Mineral to cancel its existing bank accounts and establish new
accounts or requiring it to create new business forms would only frustrate
Southern Mineral's efforts to reorganize expeditiously.
103
<PAGE>
5. Motion for Authority to Pay Pre-Petition Employee Wages and Benefits
Southern Mineral believes that any delay in paying pre-petition compensation
or benefits would destroy its relationships with employees and irreparably harm
employee morale at a time when the dedication, confidence and cooperation of
Southern Mineral's employees is most critical. Accordingly, Southern Mineral
will seek authority to pay compensation and benefits that had accrued but
remained unpaid as of the Petition Date.
6. Motion for Authority to Incur Post-Petition Indebtedness and Use Cash
Collateral
If Southern Mineral elects to commence the Chapter 11 Case, Southern Mineral
expects to obtain immediate short-term working capital financing in the form of
a debtor-in-possession facility (the "DIP Facility") from , as well as
Bankruptcy Court authorization to use Compass Bank-Houston and First Union
National Bank's cash collateral (the "Cash Collateral"). Prompt Bankruptcy
Court approval of the DIP Facility and the use of the Cash Collateral will
facilitate the normal operations of Southern Mineral and the maintenance of
strong relationships with Southern Mineral's vendors and suppliers during the
Chapter 11 Case. Southern Mineral believes that the DIP Facility likely will be
conditioned upon Southern Mineral's granting , with Bankruptcy Court
approval, a priority over virtually all other claims in the Chapter 11 Case,
including Administrative Claims, and security interests in or liens on
substantially all of the assets of Southern Mineral. Based on currently
projected operating expenditures, and in order to be able to overcome any
liquidity problems that may arise solely from the filing of the Chapter 11
case, Southern Mineral expects to seek and obtain Bankruptcy Court approval of
a DIP Facility in the aggregate amount of $1.5 million. Southern Mineral does
not anticipate a need to draw on the full amount of the DIP Facility. Under the
Bankruptcy Rules, this facility likely will be approved by interim order on or
about the Petition Date, and by Final Order approximately two to three weeks
later. There can be no assurance, however, that the Bankruptcy Court will
approve, either by interim or Final Order, the DIP Facility or the use of the
Cash Collateral.
7. Motion to Set Bar Date for Certain Claims
Southern Mineral intends to ask the Bankruptcy Court to set a Bar Date for
filing proofs of Claims for Holders of Claims, if any, in Classes 1, 2, 3 and
4. Southern Mineral will request that such date be set for the same date on
which objections to Confirmation of the Plan are due.
B. Anticipated Timetable for the Chapter 11 Case
Following the Petition Date, Southern Mineral expects the Chapter 11 Case to
proceed on the following estimated timetable. There can be no assurance,
however, that the Bankruptcy Court's orders to be entered on the Petition Date
will permit the Chapter 11 Case to proceed as expeditiously as anticipated.
Southern Mineral anticipates that the hearing to consider the adequacy of
the Disclosure Statement and confirmation of the Plan would occur within 30-60
days after the Petition Date. Assuming that the Plan is confirmed at that
hearing, the Plan provides that the Consummation Date will be the Business Day
on which all conditions to the consummation of the Plan (as set forth in
Article X.B of the Plan) have been satisfied or waived (as provided in Article
X.C of the Plan). See Section VIII.E.4 -- "Summary of the Plan--Conditions to
Confirmation and Consummation." Based upon information currently available to
them, Southern Mineral believes that the Consummation Date could occur as early
as ten days following the Confirmation Date. Under this timetable, Southern
Mineral would emerge from Chapter 11 within 60 to 90 days after the Petition
Date. There can be no assurance, however, that this projected timetable can be
achieved.
VIII.
SUMMARY OF THE PLAN
A. Introduction
Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code. Under Chapter 11, a debtor is authorized to reorganize its
business for the benefit of itself and its Creditors and shareholders. In
104
<PAGE>
addition to permitting rehabilitation of the debtor, another goal of Chapter 11
is to promote equality of treatment of Creditors and equity security holders,
respectively, who hold substantially similar claims against or interests in the
debtor and its assets. In furtherance of these two goals, upon the filing of a
petition for relief under Chapter 11, Section 362 of the Bankruptcy Code
provides for an automatic stay of substantially all acts and proceedings
against the debtor and its property, including all attempts to collect claims
or enforce liens that arose prior to the commencement of the Chapter 11 case.
The consummation of a plan of reorganization is the principal objective of a
Chapter 11 case. A plan of reorganization sets forth the means for satisfying
claims against and interests in a debtor. Confirmation of a plan of
reorganization by the Bankruptcy Court makes the plan binding upon the debtor,
any issuer of securities under the plan, any person or entity acquiring
property under the plan, and any creditor of or equity security holder in the
debtor, whether or not such creditor or equity security holder (i) is impaired
under or has accepted the plan or (ii) receives or retains any property under
the plan. Subject to certain limited exceptions and other than as provided in
the plan itself or the confirmation order, the confirmation order discharges
the debtor from any debt that arose prior to the date of confirmation of the
plan and substitutes therefor the obligations specified under the confirmed
plan, and terminates all rights and interests of equity security holders.
THE REMAINDER OF THIS SECTION PROVIDES A SUMMARY OF THE STRUCTURE AND MEANS
FOR IMPLEMENTATION OF SOUTHERN MINERAL'S PLAN, AND OF THE CLASSIFICATION AND
TREATMENT OF CLAIMS AND INTERESTS UNDER THE PLAN, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE PLAN (AS WELL AS THE EXHIBITS, APPENDICIES OR
SCHEDULES THERETO AND DEFINITIONS THEREIN). THE PLAN IS ATTACHED HERETO AS
EXHIBIT I.
THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT INCLUDE SUMMARIES OF
THE PROVISIONS CONTAINED IN THE PLAN AND IN DOCUMENTS REFERRED TO THEREIN. THE
STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT DO NOT PURPORT TO BE PRECISE
OR COMPLETE STATEMENTS OF ALL THE TERMS AND PROVISIONS OF THE PLAN OR DOCUMENTS
REFERRED TO THEREIN, AND REFERENCE IS MADE TO THE PLAN AND TO SUCH DOCUMENTS
FOR THE FULL AND COMPLETE STATEMENTS OF SUCH TERMS AND PROVISIONS.
THE PLAN ITSELF AND THE DOCUMENTS REFERRED TO THEREIN CONTROL THE ACTUAL
TREATMENT OF CLAIMS AGAINST AND INTERESTS IN SOUTHERN MINERAL UNDER THE PLAN
AND WILL, UPON OCCURRENCE OF THE CONSUMMATION DATE, BE BINDING UPON ALL HOLDERS
OF CLAIMS AGAINST AND INTERESTS IN SOUTHERN MINERAL, ITS ESTATE, REORGANIZED
SOUTHERN MINERAL, ALL PARTIES RECEIVING PROPERTY UNDER THE PLAN, AND OTHER
PARTIES IN INTEREST. IN THE EVENT OF ANY CONFLICT BETWEEN THIS DISCLOSURE
STATEMENT, ON THE ONE HAND, AND THE PLAN OR ANY OTHER OPERATIVE DOCUMENT, ON
THE OTHER HAND, THE TERMS OF THE PLAN AND/OR SUCH OTHER OPERATIVE DOCUMENT WILL
CONTROL.
B. Voting on the Plan
1. Voting Deadline
A copy of this Disclosure Statement with the annexed Plan (including all
Exhibits, appendicies or schedules to the Plan and this Disclosure Statement)
is being distributed to certain Impaired Creditors and Impaired Interest
holders. In addition, a Ballot, together with a postage-paid return envelope,
is enclosed with each copy of this Disclosure Statement being delivered to
those Impaired Creditors and Impaired Interest holders who are entitled to vote
to accept or reject the Plan. Master Ballots will be provided under separate
cover to Nominees. In order to be counted, all Ballots and Master Ballots
indicating acceptance or rejection of the Plan MUST BE RECEIVED by the Voting
Agent at its address set forth in Section XVI.J--The Solicitation; Voting
Procedures--Further Information; Additional Copies no later than 5:00 p.m.
(Houston Time) on [ ], 1999 (the "Voting Deadline"), unless the Voting
Deadline is extended by Southern Mineral.
105
<PAGE>
2. Creditors Entitled to Vote on the Plan
As more fully described below, the Plan designates 5 separate classes of
Claims against and Interests in Southern Mineral (other than DIP Facility
Claims, Administrative Claims, and Priority Tax Claims). See Section VIII.C--
"Summary of the Plan--Certain Matters Regarding Classification And Treatment Of
Claims And Interests." Only the holders of Impaired Claims or Interests in
Southern Mineral Classes 2, 3 and 5 are being solicited and are entitled to
vote to accept or reject the Plan. In addition to holders of DIP Facility
Claims, Administrative Claims and Priority Tax Claims (which are not classified
under the Plan), pursuant to Section 1126(f) of the Bankruptcy Code, holders of
Claims in Southern Mineral Classes 1 and 4 are not entitled to vote to accept
or reject the Plan, and are deemed to have accepted the Plan, because such
Classes are Unimpaired Claims under the Plan.
3. Vote Required for Class Acceptance
The Bankruptcy Court will determine whether sufficient acceptances have been
received to confirm the Plan. An Impaired Class of Claims will have accepted
the Plan if the holders of Claims in that Class voting in favor of the Plan (i)
hold at least two-thirds ( 2/3) in aggregate amount of the Allowed Claims of
the holders in such Class who actually cast votes with respect to the Plan and
(ii) comprise more than one-half ( 1/2) in number of the holders in such Class
who actually cast votes with respect to the Plan. An Impaired class of
Interests will have accepted the Plan if the holders of Interests in that class
voting in favor of the Plan hold at least two-thirds in amount of the Allowed
Interests actually casting votes with respect to the Plan.
4. Counting of Ballots and Master Ballots for Determining Acceptance of the
Plan
Southern Mineral intends to count all Ballots and Master Ballots received
prior to the Voting Deadline for purposes of determining whether each Impaired
Class entitled to vote has accepted or rejected the Plan. Fed. R. Bankr. P.
3018(b) prescribes the conditions that must be satisfied in order to count the
ballots solicited with respect to a plan of reorganization prior to the
commencement of a Chapter 11 case. Rule 3018(b) requires that (i) the Chapter
11 plan must have been disseminated to substantially all impaired creditors and
interest holders in the class(es) entitled to vote, (ii) the time prescribed
for voting on the plan must not have been unreasonably short, and (iii) the
solicitation must have been conducted in accordance with Section 1126(b) of the
Bankruptcy Code, which requires that the solicitation be conducted in
compliance with all applicable non-bankruptcy laws, rules, or regulations or,
if there are no such applicable laws, rules or regulations, that the disclosure
statement with respect to the plan contains "adequate information," as defined
in Section 1125(a) of the Bankruptcy Code. Section 1125(a) defines "adequate
information" as information of a kind and in sufficient detail as far as is
reasonably practicable in light of the nature and history of a company and the
condition of such company's books and records, that would enable a hypothetical
reasonable investor typical of holders of claims or equity interests of the
relevant class to make an informed judgment about the plan of reorganization.
Southern Mineral believes that the requirements of Bankruptcy Rule 3018(b)
will be satisfied. This Disclosure Statement and the Plan, together with all of
the accompanying materials, are being transmitted to two classes of Impaired
Creditors and one class of Impaired Interests. The solicitation period
determined by the Board for voting on the Plan is approximately 20 Business
Days, which is approximately the time normally prescribed by the SEC for an
exchange offer pursuant to Rule 13e-4 under the Exchange Act. Southern Mineral
believes that this Disclosure Statement contains adequate information (within
the meaning of Section 1125(a)(1) of the Bankruptcy Code) for Impaired
Creditors and Impaired Interest holders entitled to vote to accept or reject
the Plan to make an informed judgment about the Plan.
C. Certain Matters Regarding Classification and Treatment of Claims and
Interests
Section 1123 of the Bankruptcy Code provides that a plan of reorganization
must classify the claims and interest of a debtor's creditors and equity
interest holders. In accordance with Section 1123, the Plan divides Claims and
Interests into Classes and sets forth the treatment for each Class (other than
Administrative Claims
106
<PAGE>
and Priority Tax Claims which, pursuant to Section 1123(a)(1), need not be and
have not been classified). Southern Mineral also is required, under Section
1122 of the Bankruptcy Code, to classify Claims against and Interests in
Southern Mineral into Classes that contain Claims and Interests that are
substantially similar to the other Claims and Interests in such Class. Southern
Mineral believes that the Plan has classified all Claims and Interests in
accordance with the provisions of Section 1122, but once the Chapter 11 Case
has been commenced, it is possible that a holder of a Claim or Interest may
challenge Southern Mineral's classification of Claims and Interest and that the
Bankruptcy Court may find that a different classification is required for the
Plan to be confirmed. In that event, Southern Mineral intends, to the extent
permitted by the Bankruptcy Code, the Plan, and the Bankruptcy Court, to make
such reasonable modifications of the classifications under the Plan to permit
confirmation and to use the Plan acceptances received in this Solicitation for
purposes of obtaining the approval of the reconstituted Class or Classes of
which each accepting holder ultimately is deemed to be a member. Any such
reclassification could adversely affect the Class in which such holder
initially was a member or any other Class under the Plan, by changing the
composition of such Class and the vote required of that Class for approval of
the Plan. Furthermore, a reclassification of a Claim or Interest after approval
of the Plan could necessitate a resolicitation of acceptances of the Plan.
The amount of any Impaired Claim that ultimately is allowed by the
Bankruptcy Court may vary from the estimated allowed amount of such Claim and,
accordingly, the total Claims ultimately allowed by the Bankruptcy Court with
respect to each Impaired Class of Claims may also vary from the estimates
contained herein with respect to the aggregate Claims in any Impaired Class.
Thus, the value of the property that ultimately will be received by a
particular holder of an Allowed Claim under the Plan may be adversely or
favorably affected by the aggregate amount of Claims ultimately allowed in the
applicable Class. There can be no assurance that the actual aggregate amounts
of Allowed Claims in Impaired Classes will not materially exceed the aggregate
amounts estimated by Southern Mineral. Thus, no representation can be or is
being made with respect to the accuracy of the expected percentage recovery by
the holder of an Allowed Claim in any particular Class.
The classification of Claims and Interests and the nature of distributions
to members of each Class are summarized below. Southern Mineral believes that
the consideration, if any, provided under the Plan to holders of Claims and
Interests reflects an appropriate resolution of its Claims and Interests,
taking into account the differing nature and priority (including applicable
contractual subordination) of such Claims and Interests. The Bankruptcy Court
must find, however, that a number of statutory tests are met before it may
confirm the Plan. Many of these tests are designed to protect the interests of
holders of Claims or Interests who are not entitled to vote on the Plan, or do
not vote to accept the Plan, but who will be bound by the provisions of the
Plan if it is confirmed by the Bankruptcy Court. The "cramdown" provisions of
Section 1129(b) of the Bankruptcy Code, for example, permit confirmation of a
Chapter 11 plan in certain circumstances even if the plan has not been accepted
by all impaired classes of claims and interests. See Section VIII.E--"Summary
of the Plan--Confirmation of the Plan." Although Southern Mineral believes that
the Plan could be confirmed under Section 1129(b), there can be no assurance
that the requirements of such section would be satisfied.
1. Unclassified Claims
(a) DIP Facility Claims (Unimpaired)
DIP Facility Claims consist of the Claims of arising under the DIP
Facility. Southern Mineral estimates that the amount of the DIP Facility on
the Consummation Date will be approximately $500,000.
DIP Facility Claims consists of the priority Secured Claims arising
under the DIP Facility. The DIP Facility is anticipated to be in the amount
of $1.5 million. Southern Mineral's obligations under the DIP Facility and
are entitled to priority over all other expenses of administration in the
Chapter 11 Case, subject only to a carve-out (the "Carve-Out") in an
aggregate amount not to exceed $150,000 for (i) the payment of Allowed
Professional Fees incurred by Southern Mineral and any statutory committee
appointed in the Chapter 11 Case (in addition to compensation previously
awarded, whether or not paid),
107
<PAGE>
(ii) fees payable pursuant to 28 U.S.C. (S) 1930, and (iii) fees payable to
the Clerk of the Bankruptcy Court. Under the Plan, the holder of an Allowed
DIP Facility Claim will receive cash equal to the unpaid portion of such
Allowed DIP Facility Claim or such other treatment as to which Southern
Mineral and such holder have agreed upon in writing. As of the date of this
Disclosure Statement, Southern Mineral has not finalized the terms of a
proposed DIP Facility. Accordingly, Southern Mineral cannot, and does not,
make any representations with respect to the estimated amount of DIP
Facility Claims that will be Allowed in the Chapter 11 Case, if commenced.
(b) Administrative Claims (Unimpaired)
The Plan provides that Administrative Claims are Unimpaired.
Administrative Claims consist of the actual and necessary costs and
expenses of the Chapter 11 Case that are allowed under Sections 503(b) and
507(a)(1) of the Bankruptcy Code. They include, among other things, the
cost of operating Southern Mineral's businesses following the Petition Date
(e.g., the post-petition salaries and other benefits for Southern Mineral's
employees, post-petition rent, amounts owed to vendors providing goods and
services to Southern Mineral during the Chapter 11 Case, tax obligations
incurred after the Petition Date, certain statutory fees and charges
assessed under 28 U.S.C. (S) 1930 and the actual, reasonable fees and
expenses of the professionals retained by Southern Mineral and the
Creditors' Committee, if one is appointed, in the Chapter 11 Case. All
payments to professionals in connection with the Chapter 11 Case for
compensation and reimbursement of expenses and all payments to reimburse
expenses of members of the Creditor's Committee (if one were to be
appointed) would be made in accordance with the procedures established by
the Bankruptcy Code and the Bankruptcy Rules and would be subject to
approval of the Bankruptcy Court as being reasonable.
Under the Plan, each holder of an Allowed Administrative Claim will
receive in full satisfaction, settlement, release, and discharge of and in
exchange for such Allowed Administrative Claim (a) Cash equal to the unpaid
portion of such Allowed Administrative Claim, or (b) such other treatment
as to which Southern Mineral and such holder have agreed upon in writing;
provided however, that Allowed Administrative Claims with respect to
liabilities incurred by Southern Mineral in the ordinary course of business
during the Chapter 11 Case may be paid in the ordinary course of business
in accordance with the terms and conditions of any agreement relating
thereto.
Southern Mineral anticipates that most of the Administrative Claims
against Southern Mineral will be paid as they come due during the Chapter
11 Case and that the Administrative Claims to be paid on the Consummation
Date will, for the most part, consist of the allowed but unpaid fees and
expenses incurred by professionals retained in the Chapter 11 Case. As of
the date of this Disclosure Statement, Southern Mineral has not commenced
the Chapter 11 Case. Accordingly, Southern Mineral cannot, and does not,
make any representations with respect to the estimated amount of
Administrative Claims that will be Allowed in the Chapter 11 Case, if
commenced.
(c) Priority Tax Claims (Unimpaired)
Priority Tax Claims are Unsecured Claims asserted by federal and state
governmental authorities for taxes specified in Section 507(a)(8) of the
Bankruptcy Code, such as certain income taxes, property taxes, excise
taxes, and employment and withholding taxes. These Unsecured Claims are
given a statutory priority in right of payment. The Plan provides that
Priority Tax Claims, if any, are Unimpaired.
Under the Plan, on, or as soon as reasonably practicable after, the
later of (i) the Distribution Date or (ii) the date such Priority Tax Claim
becomes an Allowed Priority Tax Claim, each holder of an Allowed Priority
Tax Claim shall receive in full satisfaction, settlement, release, and
discharge of and in exchange for such Allowed Priority Tax Claim (a) Cash
equal to the unpaid portion of such Allowed Priority Tax Claim, or (b) such
other treatment as to which Southern Mineral and such holder shall have
agreed upon in writing. Southern Mineral estimates that the aggregate
amount of Allowed Priority Tax Claims will be approximately $320,000.
108
<PAGE>
2. Classified Classes of Claims Against Southern Mineral
(a) Southern Mineral Class 1--Other Priority Claims
On, or as soon as reasonably practicable after, the later of (i) the
Distribution Date or (ii) the date such Other Priority Claim becomes an
Allowed Other Priority Claim, each holder of an Allowed Other Priority
Claim shall receive in full satisfaction, settlement, release, and
discharge of and in exchange for such Allowed Other Priority Claim (a) Cash
equal to the unpaid portion of such Allowed Priority Tax Claim, or (b) such
other treatment as to Southern Mineral, and such holder shall have agreed
upon in writing.
(b) Southern Mineral Class 2 Secured Claims
The Allowed Secured Claims of the Class 2 Creditors shall be fully
satisfied in the following manner:
(iii) Borrowing Base Obligation. On, or as soon as reasonable
practicable after the Consummation Date, the Agent will receive a single
cash payment sufficient to reduce the principal balance of the Borrowing
Base Obligation to the Remaining Loan Balance. Reorganized Southern
Mineral will, on the Consummation Date, execute a promissory note in the
amount of the Remaining Loan Balance and a loan and credit agreement in
substantially the same form and substance as Appendix 2-a. attached
hereto, together with such mortgages, deeds of trust and security
agreements as are appropriate to continue the interests in Collateral
that were held by the Class 2 Creditors on the Petition Date. The new
loan and credit agreement will provide for at least the following terms:
(A) A maximum loan availability based on a borrowing base of
$20,000,000;
(B) Borrowing base to reduce at $225,000 per month;
(C) A maturity date of June 1, 2002;
(D) Interest rate at prime or bank index rate with LIBOR option;
and
(E) Semi-annual borrowing base redetermination starting six months
after the Consummation Date.
(iv) Tranche A Obligation. To the extent of any Allowed Secured
Tranche A Obligation, on, or as soon as reasonably practicable after the
Consummation Date each holder of an Allowed Tranche A Obligation shall
receive in full satisfaction, settlement, release, and discharge of and
in exchange for such Allowed Secured Tranche A Obligation (a) Cash equal
to the unpaid portion of such Allowed Secured Tranche A Obligation, or
(b) such other treatment as to Southern Mineral, and such holder shall
have agreed upon in writing.
(c) Southern Mineral Class 3--Unsecured Claims of Debenture Holders
On, or as soon as reasonably practicable after, the later of (i) the
Distribution Date or (ii) the date a Debenture Claim becomes an Allowed
Debenture Claim, each holder of an Allowed Debenture Claim shall receive in
full satisfaction, settlement, release, and discharge of and in exchange
for such Allowed Debenture Claim New Securities and Cash as follows: for
each One Thousand Dollars ($1,000.00) in principal amount of Allowed
Debenture Claims, the owner and holder on the Record Date shall receive (a)
Two Hundred Forty-One and 50/100 Dollars ($241.50) in Cash, (b) Three
Hundred Seventy-Seven and Eight-Tenths (377.8) shares of New Securities,
and (c) Warrants to purchase an additional One Hundred Eighty-Eight and
Nine-Tenths (188.9) shares of New Securities at $1.50 per share for three
years.
(d) Southern Mineral Class 4--Other Unsecured Claims
On, or as soon as reasonably practicable after, the later of (i) the
Distribution Date or (ii) the date such Other Unsecured Claim becomes an
Allowed Other Unsecured Claim, each holder of an Allowed Other Unsecured
Claim shall, at the sole election of Southern Mineral, receive in full
satisfaction, settlement, release, and discharge of and in exchange for
such Allowed Other Unsecured Claim either (a)
109
<PAGE>
Cash equal to the unpaid portion of such Allowed Other Unsecured Claim, or
(b) payment consistent with the credit terms extended by the holder of any
such Allowed Other Unsecured Claim prior to the Confirmation Date, and
leaving unaltered the legal, equitable and contractual rights to which the
holder of any such Allowed Other Unsecured Claim is entitled as of the
Confirmation Date.
(e) Southern Mineral Class 5--Holders of Common Stock
A Person that is the owner and holder of Common Stock on the Record Date
will retain such Common Stock. However, as provided below and in the Stock
Purchase Agreement on the Distribution Date Southern Mineral will issue a
total of 45,957,447 new shares of New Securities to EnCap and 15,640,920
shares of New Securities and the Warrants to purchase 7,820,460 shares of
Common Stock will be issued to holders of Allowed Unsecured Debenture
Claims. The Bylaws and Restated Articles of Incorporation of Southern
Mineral will be amended to provide the requisite authority to issue such
New Securities.
D. Summary of Other Provisions of the Plan
1. Exit Financing
Southern Mineral anticipates that it will finalize the material terms of a
new senior secured facility prior to the Confirmation Date, pursuant to which
Southern Mineral would have access to sufficient working capital to maintain
its operations. Southern Mineral has commenced discussions with various
potential lenders. However, no definitive agreement has been reached with any
entity at this time.
Southern Mineral anticipates that the new senior secured facility, which
would be used to (a) refinance amounts outstanding on the Consummation Date
under the DIP Facility and (b) provide additional borrowing capacity to
Reorganized Southern Mineral and the Affiliates following the Consummation
Date.
2. Releases and Satisfaction of Subordination Rights
All Claims against Southern Mineral and all rights and claims between or
among such holders relating in any manner whatsoever to any claimed
subordination rights (if any), will be deemed satisfied by the distributions
under, described in, contemplated by, and/or implemented by the Plan to holders
of Claims having such subordination rights, and such subordination rights will
be deemed waived, released, discharged, and terminated as of the Consummation
Date, and all actions related to the enforcement of such subordination rights
will be permanently enjoined. Distributions under, described in, contemplated
by, and/or implemented by the Plan to the various Classes of Claims thereunder
will not be subject to levy, garnishment, attachment, or like legal process by
any holder of a Claim by reason of any claimed subordination rights or
otherwise so that each holder of a Claim will have and receive the benefit of
the distribution in the manner set forth in the Plan.
3. Continued Corporate Existence
Following confirmation and consummation of the Plan, Southern Mineral will
continue to exist as a separate entity in accordance with the laws of the State
of Nevada and pursuant to its respective certificates of incorporation and
Bylaws, then, in effect prior to Consummation, except to the extent such
documents are amended under the Plan. The Restated Certificate of Incorporation
of Southern Mineral will be amended as necessary to satisfy the provisions of
the Plan and the Bankruptcy Code and will include, among other things, pursuant
to Section 1123(a)(6) of the Bankruptcy Code, (a) a provision prohibiting the
issuance of non-voting equity securities, and if applicable, (b) a provision as
to the classes of securities issued pursuant to the Plan. The Restated
Certificate of Incorporation of Southern Mineral also will include, among other
things, a provision authorizing a capital stock of 150 million shares of Common
Stock, $.01 par value per share.
4. Revesting of Assets
Pursuant to Section 1141(b) of the Bankruptcy Code, all property of Southern
Mineral's Estate, together with any property of any of them that is not
property of its Estate and that is not specifically disposed of pursuant to the
Plan, shall revest in Southern Mineral on the Confirmation Date. Thereafter,
Southern Mineral
110
<PAGE>
may operate its business and may use, acquire, and dispose of property free of
any restrictions of the Bankruptcy Code, the Bankruptcy Rules, and the
Bankruptcy Court. As of the Confirmation Date, all property of Southern Mineral
shall be free and clear of all Claims and Interests, except as specifically
provided in the Plan or the Confirmation Order. Without limiting the generality
of the foregoing, Southern Mineral may, without application to or approval by
the Bankruptcy Court, pay fees that it incurs after the Confirmation Date for
professional fees and expenses.
5. Distributions Under the Plan
(a) General
On or as soon as is practicable after the Consummation Date, to the
extent that the Plan provides for distributions on account of Allowed
Claims in the applicable Class, each holder of an Allowed Claim will
receive the full amount of the distributions that the Plan provides for
such Allowed Claims in the applicable Class. Beginning on the Distribution
Date and every 180 days thereafter, distributions will also be made,
pursuant to Articles III, VII, and IX of the Plan, respectively, to (a)
holders of Claims to whom a distribution has become deliverable during the
period since the immediately preceding distribution date and (b) to holders
of Disputed Claims whose Claims were Allowed during the period since the
immediately preceding distribution date. Such interim distributions will
also be in the full amount that the Plan provides for Allowed Claims in the
applicable Class.
Except as otherwise provided in the Plan or the Confirmation Order, all
Cash necessary for Reorganized Southern Mineral to make payments pursuant
to the Plan will be obtained from Reorganized Southern Mineral's existing
Cash balances, Reorganized Southern Mineral's ongoing operations, the
proceeds from the EnCap Transaction or the new senior secured facility.
Southern Mineral or such third party Disbursing Agent(s) as it may employ
in its sole discretion will initially make all distributions of Cash, New
Securities, Warrants and other property required to be distributed under
the applicable provisions of the Plan. Any Disbursing Agent (including, if
applicable, Reorganized Southern Mineral in its capacity as such) may
employ or contract with other entities to assist in or make the
distributions required by the Plan. Each Disbursing Agent will serve
without bond, and each third party Disbursing Agent will receive, without
further Bankruptcy Court approval, reasonable compensation for distribution
services rendered pursuant to the Plan and reimbursement of reasonable out-
of-pocket expenses incurred in connection with such services from
Reorganized Southern Mineral on terms acceptable to Reorganized Southern
Mineral.
Cash payments made pursuant to this Plan shall be in U.S. funds by the
means agreed to by the payor and the payee, including by check or wire
transfer, or, in the absence of an agreement, such commercially reasonable
manner as the payor shall determine in its sole discretion; provided,
however, that any cash payment in excess of $1,000,000 shall
notwithstanding the foregoing, be effected by wire transfer.
(b) Distributions for Claims Allowed as of the Consummation Date
Except as otherwise provided in the Plan or as ordered by the Bankruptcy
Court, distributions to be made on account of Claims that are Allowed
Claims as of the Consummation Date will be made on the Distribution Date,
or as soon thereafter as practicable. The New Securities to be issued will
be deemed issued as of the Distribution Date regardless of the date on
which they are actually distributed. Distributions on account of Claims
that first became Allowed Claims after the Consummation Date shall be made
pursuant to Articles III, VII, and IX of the Plan.
(c) Record Date for Distributions to Holders of Debentures
The record date for distributions to holders of Debentures will be the
seventh (7th) Business Day following entry of the Confirmation Order (the
"Distribution Record Date"). At the close of business on the Distribution
Record Date, the transfer ledgers for the Debentures including, but not
limited to the transfer ledgers of the Indenture Trustee, will be closed,
and there will be no further changes in the record holders of the
Debentures. Reorganized Southern Mineral, the Indenture Trustee, and the
Disbursing
111
<PAGE>
Agent, if any, will have no obligation to recognize any transfer of such
Debentures occurring after the Distribution Record Date and will be
entitled instead to recognize and deal for all purposes with only those
record holders stated on the transfer ledgers as of the close of business
on the Distribution Record Date.
(d) Calculation of Distribution Amounts of Common Stock
No fractional shares or units of New Securities will be issued or
distributed under the Plan or by Reorganized Southern Mineral or any
Disbursing Agent, indenture trustee, agent, or servicer. Each Person
entitled to receive New Securities will receive the total number of whole
shares of New Securities to which such Person is entitled. Whenever any
distribution to a particular Person would otherwise call for distribution
of a fraction of a share of Common Stock, the Disbursing Agent will round
up to the next whole share in lieu of fractional shares. Upon the
allocation of all of the whole shares authorized under the Plan, all
remaining fractional portions of the entitlements will be cancelled and
will be of no further force and effect.
(e) Delivery of Distributions
Distributions to holders of Allowed Claims will be made by the
Disbursing Agent or the appropriate indenture trustee, agent, or servicer,
as the case may be, (a) at the addresses set forth on the proofs of Claim
filed by such holders (or at the last known addresses of such holders if no
proof of Claim is filed or if Southern Mineral has been notified of a
change of address, (b) at the addresses set forth in any written notices of
address changes delivered to the Disbursing Agent after the date of any
related proof of Claim, (c) at the addresses reflected in the Schedules if
no proof of Claim has been filed and the Disbursing Agent has not received
a written notice of a change of address, (d) in the case of the holder of a
Claim that is governed by an indenture or other agreement and is
administered by an indenture trustee, agent, or servicer, at the addresses
contained in the official records of such indenture trustee, agent, or
servicer, or (e) at the addresses set forth in a properly completed letter
of transmittal accompanying securities properly remitted to Southern
Mineral. If any holder's distribution is returned as undeliverable, no
further distributions to such holder will be made unless and until the
Disbursing Agent or the appropriate indenture trustee, agent, or servicer
is notified of such holder's then current address, at which time all missed
distributions will be made to such holder without interest. Amounts in
respect of undeliverable distributions made through the Disbursing Agent or
the indenture trustee, agent, or servicer shall be returned to Reorganized
Southern Mineral until such distributions are claimed. All claims for
undeliverable distributions must be made on or before the second (2nd)
anniversary of the Consummation Date, after which date, all unclaimed
property will revert to Reorganized Southern Mineral free of any
restrictions thereon and the claim of any holder or successor to such
holder with respect to such property will be discharged and forever barred,
notwithstanding any federal or state escheat laws to the contrary.
(f) Fractional Dollars: De Minimis Distributions
Any other provision of the Plan notwithstanding, no payments of
fractions of dollars will be made. Whenever any payment of a fraction of a
dollar under the Plan would otherwise be called for, the actual payment
made will reflect a rounding of such fraction to the nearest whole dollar
(up or down), with half dollars being rounded down. The Disbursing Agent,
or any indenture trustee, agent, or servicer, as the case may be, will not
make any payment of less than twenty-five dollars ($25.00) with respect to
any Claim unless a request therefor is made in writing to such Disbursing
Agent, indenture trustee, agent, or servicer, as the case may be.
6. Resolution and Treatment of Disputed, Contingent, and Unliquidated Claims
(a) Objection Deadline: Prosecution of Objections
Southern Mineral or Reorganized Southern Mineral, as the case may be,
will be allowed up to 120 days after the Consummation Date (unless extended
by an order of the Bankruptcy Court) to file objections to Claims with the
Bankruptcy Court and serve such objections upon the holders of each of the
112
<PAGE>
Claims to which objections are made. Notwithstanding the foregoing, nothing
contained in the Plan will limit Reorganized Southern Mineral's right to
object to Claims, if any, filed or amended more than 120 days after the
Consummation Date.
(b) No Distributions Pending Allowance
No payments or distributions will be made with respect to all or any
portion of a Disputed Claim unless and until all objections to such
Disputed Claim have been settled or withdrawn or have been determined by
Final Order, and the Disputed Claim, or some portion thereof, has become an
Allowed Claim. Disputed Claims are Claims, or portions of Claims, that are
neither Allowed Claims not Disallowed Claims and include, but are not
limited to, Claims that have not been scheduled by Southern Mineral; Claims
that have been scheduled at zero or as contingent, unliquidated or
disputed; Claims that are the subject of a proof of Claim that differs in
nature, amount, or priority from Southern Mineral's Schedules; and Claims
that have not yet been allowed or disallowed by a Final Order.
(c) Distribution Reserve
Reorganized Southern Mineral or the Disbursing Agent, as the case may
be, will, on the Consummation Date or as soon thereafter as practicable,
establish and fund (from the Cash, Common Stock, or other property to be
distributed under the Plan) the Distribution Reserve. In general, the
purpose of the Distribution Reserve is to ensure that sufficient Cash or
other property is set aside to distribute to holders of Disputed Claims the
amounts to which they are entitled under the Plan if, as, and when their
Disputed Claims become Allowed Claims. The amount of Cash or other property
to be withheld by the Disbursing Agent on account of each Disputed Claim
will be determined in accordance with the provisions of Article IX.C.1 of
the Plan.
Neither the Disbursing Agent, nor any other party, shall be entitled to
vote any shares of the Common Stock held in the Distribution Reserve. In
the event that any matter requires approval by the shareholders of
Reorganized Southern Mineral prior to the distribution or cancellation of
all shares of Common Stock from the Distribution Reserve, the shares of
Common Stock held by the Disbursing Agent shall be deemed not to have been
issued, for voting purposes only.
(d) Distributions After Allowance
Reorganized Southern Mineral or the Disbursing Agent, as the case may
be, will make payments and distributions from the Distribution Reserve to
each holder of a Disputed Claim that has become an Allowed Claim in
accordance with the provisions of the Plan governing the Class of Claims to
which such holder belongs. On the next succeeding interim distribution date
after the date that the order or judgment of the Bankruptcy Court allowing
all or part of such Claim becomes a Final Order, the Disbursing Agent will
distribute to the holder of such Claim any Cash, New Securities, or other
property in the Distribution Reserve that would have been distributed on
the Distribution Date had such Allowed Claim been Allowed on the
Distribution Date. After a Final Order has been entered, or other final
resolution has been reached, with respect to each Disputed Claim (i) New
Securities held in the Distribution Reserve will be distributed Pro Rata to
holders of Allowed Claims entitled thereto under the terms of the Plan and
(ii) any Cash or other property remaining in the Distribution Reserve will
become property of Reorganized Southern Mineral. All distributions made
under Article IX.D of the Plan on account of an Allowed Claim will be made
together with any dividends, payments, or other distributions made on
account of, as well as any obligations arising from, the distributed
property, as if such Allowed Claim had been an Allowed Claim on the
Distribution Date. In no event, however, will the Disbursing Agent be
required to make distributions under Article IX.D of the Plan more
frequently than once every 180 days or to make any individual payments in
an amount less than $25.00.
7. Surrender and Cancellation of Securities or Instruments
On or before the Distribution Date, or as soon as practicable thereafter,
each holder of an instrument evidencing a Claim on account of Debentures (a
"Certificate") must surrender such Certificate to the Disbursing Agent, or,
with respect to indebtedness that is governed by an indenture or other
agreement, the
113
<PAGE>
respective indenture trustee, agent, or servicer, as the case may be, and such
Certificate will be cancelled. No distribution of property under the Plan will
be made to or on behalf of any such holder unless and until the Certificate is
received by the Disbursing Agent or the respective indenture trustee, agent, or
servicer, as the case may be, or the unavailability of such Certificate is
reasonably established to the satisfaction of the Disbursing Agent or the
respective indenture trustee, agent, or servicer, as the case may be. Any such
owner and holder who fails to surrender or cause to be surrendered such
Certificate or fails to execute and deliver an affidavit of loss and indemnity
reasonably satisfactory to the Disbursing Agent or the respective indenture
trustee, agent, or servicer, as the case may be, prior to the second (2nd)
anniversary of the Consummation Date, will be deemed to have forfeited all
rights and Claims in respect of such Certificate and will not participate in
any distribution hereunder, and all property in respect of such forfeited
distribution, including interest accrued thereon, will revert to Reorganized
Southern Mineral notwithstanding any federal or state escheat laws to the
contrary.
8. Treatment of Executory Contracts and Unexpired Leases
Under Section 365 of the Bankruptcy Code, Southern Mineral has the right,
subject to Bankruptcy Court approval, to assume or reject any executory
contracts or unexpired leases. If Southern Mineral rejects an executory
contract or unexpired lease that was entered into before the Petition Date, it
will be treated as if it had been breached on the date immediately preceding
the Petition Date, and the other party to the agreement may assert a General
Unsecured Claim for damages incurred as a result of the rejection. In the case
of rejection of employment agreements and real property leases, damages are
subject to certain limitations imposed by Sections 365 and 502 of the
Bankruptcy Code.
(a) Assumed Contracts and Leases; Related Payments
Except as otherwise provided in the Plan, or in any contract,
instrument, release, indenture or other agreement or document entered into
in connection with the Plan, as of the Consummation Date, Southern Mineral
will be deemed to have assumed each executory contract and unexpired lease
to which it is a party, unless such contract or lease (i) was previously
assumed or rejected by Southern Mineral, (ii) previously expired or
terminated pursuant to its own terms, (iii) is set forth on [Schedule VIII-
A] to the Plan, or (iv) is the subject of a motion to reject filed on or
before the Confirmation Date. The Confirmation Order will constitute an
order of the Bankruptcy Court under Section 365 of the Bankruptcy Code
approving the contract and lease assumptions described above, as of the
Consummation Date. The Confirmation Order will also provide for the
rejection of those unexpired leases and executory contracts specified on
Schedule VIII-A to the Plan.
Each executory contract and unexpired lease that is assumed and relates
to the use, acquisition, or occupancy of real property will include (a) all
modifications, amendments, supplements, restatements, or other agreements
made directly or indirectly by any agreement, instrument, or other document
that in any manner affect such executory contract or unexpired lease and
(b) all executory contracts or unexpired leases appurtenant to the
premises, including all easements, licenses, permits, rights, privileges,
immunities, options, rights of first refusal, powers, uses, usufructs,
reciprocal easement agreements, vaults, tunnel or bridge agreements or
franchises, and any other interests in real estate or rights in rem related
to such premises, unless any of the foregoing agreements has been rejected
pursuant to an order of the Bankruptcy Court that may be entered prior to,
at or after Confirmation, including the Confirmation Order, or is the
subject of a motion to reject filed on or before the Confirmation Date.
Any monetary amounts by which each executory contract and unexpired
lease to be assumed pursuant to the Plan is in default will be satisfied,
under Section 365(b)(1) of the Bankruptcy Code, at the option of Southern
Mineral, or the assignee of Southern Mineral assuming such contract or
lease, by cure. If there is a dispute regarding (i) the nature or amount of
any cure, (ii) the ability of a Reorganized Company or any assignee to
provide "adequate assurance of future performance" (within the meaning of
Section 365 of the Bankruptcy Code) under the contract or lease to be
assumed, or (iii) any other matter pertaining to assumption, the dispute
will be brought before the Bankruptcy Court, and cure will occur following
the
114
<PAGE>
entry of a Final Order resolving the dispute and approving the assumption
or assumption and assignment, as the case may be.
(b) Rejected Contracts and Leases: Bar to Rejection Damages
As of the date of this Disclosure Statement, Southern Mineral has not
determined that any of the executory contracts and unexpired leases to
which it is a party will be rejected, provided, however, that pursuant
Section 365(d)(2) of the Bankruptcy Code, Southern Mineral reserves the
right, at any time prior to the Confirmation Date, to seek to reject any
executory contract or unexpired lease to which it is a party.
If the rejection by Southern Mineral, pursuant to the Plan or otherwise,
of an executory contract or unexpired lease results in a Claim that is not
theretofore evidenced by a timely proof of claim or a proof of claim that
is deemed to be filed timely under applicable law, then such Claim will be
forever barred and unenforceable against Southern Mineral, or Reorganized
Southern Mineral, or the properties of any of them, unless a proof of Claim
is filed with the clerk of the Bankruptcy Court and served on counsel for
Southern Mineral within thirty (30) days after service of the earlier of
(i) notice of entry of the Confirmation Order or (ii) other notice that the
executory contract or unexpired lease has been rejected.
(c) Compensation and Benefit Programs
Except and to the extent previously assumed by an order of the
Bankruptcy Court on or before the Confirmation Date and except as set forth
below, all employee compensation and benefit programs of Southern Mineral,
including programs subject to Sections 1114 and 1129(a)(13) of the
Bankruptcy Code, entered into before or after the Petition Date and not
since terminated are revested and will be deemed to be, and will be treated
as though they are, executory contracts that are assumed under Article
VIII.A of the Plan, but only to the extent that rights under such programs
are held by Southern Mineral or Persons who are employees of any of
Southern Mineral as of the Confirmation Date, and Southern Mineral's
obligations under such programs to persons who are employees of Southern
Mineral on the Confirmation Date will survive confirmation of the Plan,
except for (i) executory contracts or unexpired leases specifically
rejected pursuant to prior Final Order or the Plan (to the extent such
rejection does not violate Sections 1114 and 1129(a)(13) of the Bankruptcy
Code) and (ii) executory contracts or unexpired leases as have previously
been rejected, are the subject of a motion to reject, or have been
specifically waived by the beneficiaries of any leases or contracts. In
addition, pursuant to the requirements of Section 1129(a)(13) of the
Bankruptcy Code, the Plan provides for the continuation of payment by
Southern Mineral of all "retiree benefits," as defined in Section 1114(a)
of the Bankruptcy Code, if any, at previously established levels.
9. Retention of Jurisdiction
Pursuant to Sections 105(a) and 1142 of the Bankruptcy Code, and
notwithstanding entry of the Confirmation Order and occurrence of the
Consummation Date, the Bankruptcy Court will, to the fullest extent permitted
by law, retain exclusive jurisdiction over all matters arising out of, and
related to, the Chapter 11 Case and the Plan, as more fully set forth in
Article XII of the Plan.
10. Bar Dates for Certain Claims
(a) Administrative Claims: Substantial Contribution Claims
The Confirmation Order will establish an Administrative Claims Bar Date
for filing Administrative Claims, including Substantial Contribution Claims
(except for Professional Fees and the expenses of the members of the
Creditors' Committee (if one has been appointed)), which date will be 45
days after the Confirmation Date. Holders of asserted Administrative
Claims, except for Professional Fees and the expenses of the members of the
Creditors' Committee (if one has been appointed), not paid prior to the
Confirmation Date must file and serve on Southern Mineral proofs of Claim
on or before such Administrative Claims Bar Date or forever be barred from
doing so. The notice of Confirmation to be
115
<PAGE>
delivered pursuant to Fed. R. Bankr. P. 3020(c) and 2002(f) will set forth
such date and constitute notice of this Administrative Claims Bar Date.
Southern Mineral, or Reorganized Southern Mineral, as the case may be, will
have 45 days (or such longer period as may be allowed by order of the
Bankruptcy Court) following the Administrative Claims Bar Date to review
and object to such Administrative Claims before a hearing for determination
of allowance of such Administrative Claims.
(b) Professional Fee Claims
All final requests for compensation or reimbursement of Professional
Fees pursuant to Sections 327, 328, 330, 331, 503(b) or 1103 of the
Bankruptcy Code for services rendered to Southern Mineral or the Creditors'
Committee (if one has been appointed) prior to the Consummation Date (other
than requests under Section 503(b)(4) of the Bankruptcy Code by any
Professional or other entity for making a substantial contribution in the
Chapter 11 Case), must be filed and served on Reorganized Southern Mineral
and its counsel no later than 45 days after the Consummation Date, unless
otherwise ordered by the Bankruptcy Court. Objections to applications of
such Professionals or other entities for compensation or reimbursement of
expenses must be filed and served on Reorganized Southern Mineral and its
counsel, and the requesting Professional or other entity no later than 45
days (or such longer period as may be allowed by order of the Bankruptcy
Court) after the date on which the applicable application for compensation
or reimbursement was served.
11. Miscellaneous
(a) Interest on Claims
Unless otherwise specifically provided for in the Plan or Confirmation
Order, or required by applicable bankruptcy law, post-petition interest
will neither accrue nor be paid on Unsecured Claims, and no holder of an
Unsecured Claim will be entitled to interest accruing on or after the
Petition Date on any Unsecured Claim. In addition, interest will neither
accrue nor be paid upon any Disputed Claim in respect of the period from
the Petition Date to the date a final distribution is made thereon if and
after such Disputed Claim becomes an Allowed Claim.
(b) Preservation of Rights of Action; Settlement of Litigation Claims
Except as otherwise provided in the Plan, the Confirmation Order, or in
any contract, instrument, release, indenture or other agreement entered
into in connection with the Plan, in accordance with Section 1123(b) of the
Bankruptcy Code, Reorganized Southern Mineral will retain all claims,
rights or causes of action, suits, and proceedings, whether in law or in
equity, whether known or unknown, that Southern Mineral or its Estate may
hold against any Person or entity (collectively, "Litigation Claims"), and
may enforce, sue on, settle, or compromise (or decline to do any of the
foregoing) any or all of such Litigation Claims. The failure of Southern
Mineral to specifically list any claim, right of action, suit, or
proceeding herein or in the Plan does not, and will not be deemed to
constitute a waiver or release by Southern Mineral of such claim, right of
action, suit, or proceeding, and Reorganized Southern Mineral will retain
the right to pursue additional Claims, rights of action, suits or
proceedings. In addition, at any time after the Petition Date and before
the Consummation Date, notwithstanding anything in the Plan to the
contrary, Southern Mineral or Reorganized Southern Mineral may settle some
or all of the Litigation Claims with the approval of the Bankruptcy Court
pursuant to Fed. R. Bankr. P. 9019.
(c) Withholding and Reporting Requirements
In connection with the Plan and all distributions thereunder,
Reorganized Southern Mineral shall comply with all withholding and
reporting requirements imposed by any federal, state, local, or foreign
taxing authority, and all distributions hereunder shall be subject to any
such withholding and reporting requirements. The Disbursing Agent shall be
authorized to take any and all action that may be necessary or appropriate
to comply with such withholding and reporting requirements.
116
<PAGE>
E. Confirmation of the Plan
Described below are certain important considerations under the Bankruptcy
Code in connection with confirmation of the Plan.
1. Confirmation Hearing
Section 1128(a) of the Bankruptcy Code requires the Bankruptcy Court, after
notice, to hold a hearing on confirmation of the Plan (the "Confirmation
Hearing"). Section 1128(b) of the Bankruptcy Code provides that any party in
interest may object to confirmation of the Plan.
If Southern Mineral files a petition for relief under Chapter 11 of the
Bankruptcy Code and seeks confirmation of the Plan, the Bankruptcy Court will
schedule a Confirmation Hearing. Southern Mineral will provide notice of the
Confirmation Hearing to all known Creditors and Interest holders or their
representatives (the "Confirmation Notice"). The Confirmation Hearing may be
adjourned from time to time by the Bankruptcy Court without further notice
except for an announcement of the adjourned date made at the Confirmation
Hearing or any adjournment thereof. Objections to confirmation must be filed
and served in the manner and within the time set forth in the Confirmation
Notice and must (a) be in writing, (b) comply with the Bankruptcy Rules and the
local bankruptcy rules, (c) set forth the name of the objector, and the nature
and amount of any Claim or Interest asserted by the objector against or in
Southern Mineral, the applicable Estate or its property, and (d) state with
particularity the legal and factual bases for the objection. OBJECTIONS TO
CONFIRMATION THAT ARE NOT TIMELY FILED AND SERVED WILL NOT BE CONSIDERED BY THE
BANKRUPTCY COURT AND WILL BE OVERRULED.
2. Requirements for Confirmation of the Plan
(a) The Plan complies with the applicable provisions of the Bankruptcy
Code.
(b) Southern Mineral has complied with the applicable provisions of the
Bankruptcy Code.
(c) The Plan has been proposed in good faith and not by any means
forbidden by law.
(d) Any payment made or promised by Southern Mineral or by a person
issuing securities or acquiring property under the Plan for services or for
costs and expenses in, or in connection with, the Chapter 11 Case, or in
connection with the Plan and incident to the Chapter 11 Case, has been
disclosed to the Bankruptcy Court, and any such payment made before
confirmation of the Plan is reasonable, or if such payment is to be fixed
after confirmation of the Plan, such payment is subject to the approval of
the Bankruptcy Court as reasonable.
(e) Southern Mineral has disclosed (i) the identity and affiliations of
(x) any individual proposed to serve, after confirmation of the Plan, as a
director, officer, or voting trustee of Reorganized Southern Mineral, (y)
any affiliate of Southern Mineral participating in a plan with Southern
Mineral, or (z) any successor to Southern Mineral under the Plan (and the
appointment to, or continuance in, such office of such individual(s) is
consistent with the interests of Creditors and Interest holders and with
public policy), and (ii) the identity of any insider that will be employed
or retained by Southern Mineral and the nature of any compensation for such
insider.
(f) With respect to each Class of Claims or Interests, each Impaired
Creditor and Impaired Interest holder either has accepted the Plan or will
receive or retain under the Plan on account of the Claims or Interests held
by such entity, property of a value, as of the Consummation Date, that is
not less than the amount that such entity would receive or retain if
Southern Mineral was liquidated on such date under Chapter 7 of the
Bankruptcy Code. See Section XIV.B--"Feasibility of the Plan--Best
Interests Test."
(g) The Plan provides that Administrative Claims and Priority Claims
other than Priority Tax Claims will be paid in full on the Consummation
Date and that Priority Tax Claims will receive on account of such Claims
deferred cash payments, over a period not exceeding six years after the
date of assessment of
117
<PAGE>
such Claims, of a value, as of the Consummation Date, equal to the Allowed
Amount of such Claims, except to the extent that the holder of any such
Claim has agreed to a different treatment.
(h) If a Class of Claims is Impaired under the Plan, at least one Class
of Impaired Claims has accepted the Plan, determined without including any
acceptance of the Plan by insiders holding Claims in such Class.
(i) Confirmation of the Plan is not likely to be followed by the
liquidation, or the need for further financial reorganization, of Southern
Mineral or any successor to Southern Mineral under the Plan, unless such
liquidation or reorganization is proposed in the Plan. See Section XIV.A--
"Feasibility of the Plan."
(j) The Plan provides for the continuation after the Consummation Date
of all retiree benefits, if any, at the level established pursuant to
Section 1114(e)(1)(B) or 1114(g) of the Bankruptcy Code, at any time prior
to confirmation of the Plan for the duration of the period Southern Mineral
has obligated itself to provide such benefits.
Southern Mineral believes that, upon receipt of the Requisite
Acceptances, the Plan will satisfy all the statutory requirements of
Chapter 11 of the Bankruptcy Code, that Southern Mineral has complied or
will have complied with all of the requirements of Chapter 11, and that the
Plan is being proposed and will be submitted to the Bankruptcy Court in
good faith.
3. Confirmation Without Acceptance of All Impaired Classes--"Cramdown"
Southern Mineral may request confirmation of the Plan, as it may be modified
from time to time, under Section 1129(b) of the Bankruptcy Code, and has
reserved the right to modify the Plan to the extent, if any, that confirmation
pursuant to Section 1129(b) of the Bankruptcy Code requires modification.
Section 1129(b) of the Bankruptcy Code provides that a plan can be confirmed
even if it is not accepted by all impaired classes of claims and interests, as
long as at least one impaired class of claims (without including any
acceptances of the plan by an insider) has accepted it. Thus, if the Requisite
Acceptances are received, the Bankruptcy Court may confirm the Plan
notwithstanding the rejection, deemed or otherwise, of an Impaired Class of
Claims or Interests if the Plan "does not discriminate unfairly" and is "fair
and equitable" as to each Impaired Class that has rejected, or is deemed to
have rejected, the Plan.
A plan does not discriminate unfairly within the meaning of the Bankruptcy
Code if a rejecting impaired class is treated equally with respect to other
classes of equal rank. A plan is fair and equitable as to a class of secured
claims that rejects the plan if, among other things, the plan provides (a)(i)
that the holders of claims in the rejecting class retain the liens securing
those claims (whether the property subject to those liens is retained by the
debtor or transferred to another entity) to the extent of the allowed amount of
such claims and (ii) that each holder of a claim in the rejecting class
receives on account of its claim deferred cash payments totaling at least the
allowed amount of that claim, of a value, as of the effective date of the plan,
of at least the value of the holder's interest in the estate's interest in such
property; (b) for the sale, subject to Section 363(k) of the Bankruptcy Code,
of any property that is subject to the liens securing the claims included in
the rejecting class, free and clear of the liens, with the liens to attach to
the proceeds of the sale, and the treatment of the liens on proceeds under
clause (a) or (c) of this subparagraph; or (c) for the realization by such
holders of the indubitable equivalent of such claims.
A plan is fair and equitable as to a class of unsecured claims that rejects
the plan, if, among other things, the plan provides (a) that each holder of a
claim in the rejecting class will receive or retain on account of its claim
property that has a value, as of the effective date of the plan, equal to the
allowed amount of the claim; or (b) that no holder of a claim or interest that
is junior to the claims of the rejecting class will receive or retain under the
plan any property on account of such junior claim or interest.
118
<PAGE>
A plan is fair and equitable as to a class of equity interests that rejects
the plan if the plan provides (a) that each holder of an interest included in
the rejecting class receive or retain on account of that interest property
that has a value, as of the effective date of the plan, equal to the greatest
of the allowed amount of any fixed liquidation preference to which such holder
is entitled, any fixed redemption price to which such holder is entitled, or
the value of such interest; or (b) that no holder of an interest that is
junior to the interest of the rejecting class will receive or retain under the
plan any property on account of such junior interest.
Southern Mineral believes that the Plan may be confirmed pursuant to the
above-described "cramdown" provisions, over the dissent of certain Classes of
Claims and Interests, in view of the treatment proposed for such Classes. In
addition, Southern Mineral does not believe that the Plan unfairly
discriminates against any dissenting Class because all dissenting Classes of
equal rank are treated equally under the Plan.
4. Conditions to Confirmation and Consummation
(a) Conditions to Confirmation:
The following are conditions precedent to confirmation of the Plan:
(i) The Plan shall have been accepted by at least one Impaired Class
and
(ii) the Confirmation Order shall be in form and substance
acceptable to Southern Mineral and EnCap.
(b) Conditions to Consummation:
The following are conditions precedent to the occurrence of the
Consummation Date, each of which may be satisfied or waived in accordance with
Article X.C of the Plan:
(i) The Confirmation Order in form and substance reasonably
acceptable to Southern Mineral and EnCap confirming the Plan must have
become a Final Order and must, among other things, provide that:
(A) Southern Mineral and Reorganized Southern Mineral are
authorized and directed to take actions necessary or appropriate to
enter into, implement and consummate the contracts, instruments,
releases, leases and other agreements or documents created in
connection with the Plan and the EnCap Transaction;
(B) the provisions of the Confirmation Order are nonseverable and
mutually dependent;
(C) all executory contracts or unexpired leases assumed or
assumed and assigned by Southern Mineral during the Chapter 11 Case
or under the Plan shall remain in full force and effect for the
benefit of Reorganized Southern Mineral or it assignees
notwithstanding any provision in such contract or lease (including
those described in Sections 365(b)(2) and (f) of the Bankruptcy
Code) that prohibits such assignment or transfer or that enables,
permits or requires termination of such contract or lease;
(D) all property of the Estate will vest in Reorganized Southern
Mineral with title to such property being free and clear of all
liens, charges, Claims, encumbrances, or interest, except as
expressly provided in the Plan or Confirmation Order;
(E) except as expressly provided in the Plan, Southern Mineral
and Reorganized Southern Mineral are discharged effective upon the
Confirmation Date from any "debt" (as that term is defined in
Section 101(12) of the Bankruptcy Code), and all liability in
respect of such debt is extinguished completely, whether reduced to
judgment or not, liquidated or unliquidated, contingent or
noncontingent, asserted or unasserted, fixed or unfixed, matured or
unmatured, disputed or undisputed, legal or equitable, or known or
unknown, or that arose from any agreement of Southern Mineral that
has either been assumed or rejected in the Chapter 11 Case or
pursuant to the Plan, or obligation of Southern Mineral incurred
before the Confirmation Date,
119
<PAGE>
including, without limitation, all interest, if any, on any such
debts, whether such interest accrued before or after the Petition
Date;
(F) the Plan does not provide for the liquidation of all or
substantially all of the property of Southern Mineral and its
confirmation is not likely to be followed by liquidation of the
Reorganized Southern Mineral or the need for further financial
reorganization;
(G) the New Securities and Warrants issued under the Plan to
holders of Debentures are exempt from registration under the
Securities Act of 1933 pursuant to Section 1145 of the Bankruptcy
Code, except to the extent that holders of the New Securities are
"underwriters," as that term is defined in Section 1145 of the
Bankruptcy Code.
(H) the following agreements in form and substance satisfactory
to Southern Mineral and EnCap, shall have been executed and
delivered, and all conditions precedent thereto shall have been
satisfied:
.an amendment to the Restated Articles of Incorporation and of
Southern Mineral;
.the Amended Credit Facility; and
.Stock Purchase Agreement for the EnCap Transaction.
(I) All actions, documents and agreements necessary to implement
the Plan shall have been effected or executed.
(c) Waiver of Conditions.
The conditions set forth in Article X of the Plan, other than those set
forth in Articles X.A and X.B.1, may be waived in whole or in part by Southern
Mineral or Reorganized Southern Mineral without further notice or a hearing.
5. Modifications and Amendments
Southern Mineral may alter, amend, or modify the Plan or any Exhibits,
appendicies or schedules thereto under Section 1127(a) of the Bankruptcy Code
at any time prior to the Confirmation Date. After the Confirmation Date and
prior to "substantial consummation" of the Plan, as defined in Section 1101(2)
of the Bankruptcy Code, Southern Mineral may, under Section 1127(b) of the
Bankruptcy Code, institute proceedings in the Bankruptcy Court to remedy any
defect or omission or reconcile any inconsistencies in the Plan, the
Disclosure Statement approved with respect to the Plan, or the Confirmation
Order, and such matters as may be necessary to carry out the purpose and
effect of the Plan so long as such proceedings do not adversely affect the
treatment of holders of Claims or Interests under the Plan; provided, however,
that prior notice of such proceedings shall be served in accordance with the
Bankruptcy Rules or order of the Bankruptcy Court.
F. Effects of Confirmation
1. Balancing Effect
From and after the Consummation Date, the Plan will be binding upon and
inure to the benefit of Southern Mineral, all present and former holders of
Claims against and Interests in Southern Mineral, whether or not such holders
will receive or retain any property or interest in property under the Plan,
their respective successors and assigns, including, but not limited to
Reorganized Company, and all parties-in-interest in the Chapter 11 Case.
2. Discharge of Southern Mineral
All consideration distributed under the Plan will be in exchange for, and
in complete satisfaction, settlement, discharge, and release of, all Claims of
any nature what so ever against Southern Mineral or any of its assets or
properties, and, except as otherwise provided in the Plan or in the
Confirmation Order, and
120
<PAGE>
regardless of whether any property will have been distributed or retained
pursuant to the Plan on account of such Claims, upon the Consummation Date,
Southern Mineral shall be deemed discharged and released under Section
1141(d)(1)(A) of the Bankruptcy Code from any and all Claims, including, but
not limited to demands and liabilities that arose before the Confirmation Date,
any liability (including withdrawal liability) to the extent such Claims relate
to services performed by employees of Southern Mineral prior to the Petition
Date and that arises from a termination of employment or a termination of any
employee or retiree benefit program regardless of whether such termination
occurred prior to or after the Confirmation Date, and all debts of the kind
specified in Sections 502(g), 502(h) or 502(i) of the Bankruptcy Code, whether
or not (a) a proof of Claim based upon such debt is filed or deemed filed under
Section 501 of the Bankruptcy Code, (b) a Claim based upon such debt is allowed
under Section 502 of the Bankruptcy Code, or (c) the holder of a Claim based
upon such debt accepted the Plan. The Confirmation Order will constitute a
judicial determination of discharge of all liabilities of Southern Mineral,
subject to the Consummation Date occurring.
3. Permanent Injunction
Except as otherwise expressly provided in the Plan or the Confirmation
Order, all entities who have held, hold or may hold Claims against, or Interest
in, Southern Mineral will be permanently enjoined, on and after the
Consummation Date, from (i) commencing or continuing in any manner any action
or other proceeding of any kind with respect to any such Claim or Interest,
(ii) the enforcement, attachment, collection or recovery by any manner or means
of any judgment, award, decree or order against Southern Mineral on account of
any such Claim or Interest, (iii) creating, perfecting or enforcing any
encumbrance of any kind against Southern Mineral or against the property or
interests in property of Southern Mineral on account of any such Claim or
Interest and (iv) asserting any right of setoff, subrogation or recoupment of
any kind against any obligation due from Southern Mineral or against the
property or interests in property of Southern Mineral on account of any such
Claim or Interest. The foregoing injunction will extend to successors of
Southern Mineral (including, without limitation, Reorganized Southern Mineral)
and its respective properties and interests in property.
4. Exculpation and Limitation on Liability
Neither Reorganized Southern Mineral, nor any statutory committee appointed
in the Chapter 11 Case, nor any of their respective present or former members,
officers, directors, employees, advisors, attorneys, or agents, will have or
incur any liability to any holder of a Claim or an Interest, or any other party
in interest, or any of their respective agents, employees, representatives,
financial advisors, attorneys, or affiliates, or any of their successors or
assigns, for any act or omission in connection with, relating to, or arising
out of, the Solicitation, the Chapter 11 Case, the pursuit of confirmation of
the Plan, the consummation of the Plan, or the administration of the Plan or
the property to be distributed under the Plan, except for their willful
misconduct, and in all respects shall be entitled to reasonably rely upon the
advice of counsel with respect to their duties and responsibilities under the
Plan.
Notwithstanding any other provision of the Plan, no holder of a Claim or
Interest, no other party in interest, none of their respective agents,
employees, representatives, financial advisors, attorneys, or affiliates, and
no successors or assigns of the foregoing, will have any right of action
against Reorganized Southern Mineral, or any statutory committee appointed in
the Chapter 11 Case, or any of their respective present or former members,
officers, directors, employees, advisors, attorneys, or agents, for any act or
omission in connection with, relating to, or arising out of the Solicitation,
the Chapter 11 Case, the pursuit of confirmation of the Plan, the consummation
of the Plan, or the administration of the Plan or the property to be
distributed under the Plan, except for their willful misconduct.
The foregoing exemption and limitation on liability will not, however, in
any manner limit, abridge or otherwise affect the rights, if any, of
Reorganized Southern Mineral to enforce, sue on, settle, or compromise the
Litigation Claims retained pursuant to Article IV.F of the Plan.
121
<PAGE>
IX.
TREATMENT OF TRADE CREDITORS AND EMPLOYEES
DURING CHAPTER 11 CASE
A. Trade Creditors
If Southern Mineral commences the Chapter 11 Case and seeks confirmation of
the Plan, all trade claims arising after the Petition Date will be paid in
accordance with normal trade credit terms.
B. Employees
If Southern Mineral commences the Chapter 11 Case and seeks confirmation of
the Plan, Southern Mineral intends that salaries, wages, accrued paid vacation,
health related benefits, (other than the severance benefits of senior
management, see [Section IV.D -- "Corporate Structure and Management of
Southern Mineral--Employment Agreements"]) and similar employee benefits will
be unaffected. Employee benefit claims that accrue pre-petition will be
Unimpaired under the terms of the Plan. To ensure the continuity of Southern
Mineral's work force and to further accommodate the Unimpaired treatment of
employee benefits, Southern Mineral intends to seek the approval of the
Bankruptcy Court (on, or as soon as possible after, the Petition Date) to honor
payroll checks outstanding as of the Petition Date (or to issue replacement
checks), to permit employees to use their accrued vacation time (as long as
they remain employees of Southern Mineral) and to continue paying medical
benefits under Southern Mineral's health plan. There can be no assurance that
the Bankruptcy Court would permit payment of pre-petition claims of employees
at that time or if it does, that it would not impose limitations on such
payments. Employee claims and benefits not paid or honored, as the case may be,
prior to consummation of the Plan will be paid or honored in full upon
consummation of the Plan or as soon thereafter as such payment or other
obligation becomes due or performable.
X.
FINANCING DURING THE CHAPTER 11 CASE
A. The DIP Facility
THE FOLLOWING IS A SUMMARY OF CERTAIN TERMS OF THE PROPOSED DIP FACILITY AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DIP FACILITY AGREEMENT.
CERTAIN TERMS USED HEREIN AND NOT OTHERWISE DEFINED HEREIN HAVE THE MEANINGS
ASSIGNED TO THEM IN THE DIP FACILITY AGREEMENT. A COPY OF THE DIP FACILITY
AGREEMENT WILL BE FILED WITH THE BANKRUPTCY COURT IF SOUTHERN MINERAL SEEKS
AUTHORITY TO ENTER INTO THE DIP FACILITY. AS OF THE DATE OF THIS DISCLOSURE
STATEMENT, SOUTHERN MINERAL INTENDS TO SEEK BANKRUPTCY COURT APPROVAL OF THE
DIP FACILITY IF SOUTHERN MINERAL COMMENCES THE CHAPTER 11 CASE. HOWEVER, NO
BINDING COMMITMENT FOR A DIP FACILITY HAS BEEN RECEIVED AND AGREED TO BY
SOUTHERN MINERAL.
1. General.
In order to insure operating liquidity during the period that Southern
Mineral operator as a debtor in possession, Southern Mineral has requested that
provide a revolving, secured loan of $1.5 million. The DIP facility
will earn interest at the per annum rate of the prime or index rate plus 2% and
will be payable on the Distribution Date.
2. Security
The DIP Facility Claims will be (a) entitled to superpriority claim status
under Section 364(c)(1) of the Bankruptcy Code, subject only to a carve-out
(the "Carve-Out") in an aggregate amount not to exceed
122
<PAGE>
$250,000 for (i) the payment of Allowed Professional Fees incurred by Southern
Mineral and any statutory committee appointed in the Chapter 11 Case (in
addition to compensation preciously awarded, whether or not paid), (ii) fees
payable pursuant to 28 U.S.C. (S) 1930, and (iii) fees payable to the Clerk of
the Bankruptcy Court; and (b) secured by a lien on and security interest in
substantially all present and after acquired property of Southern Mineral.
3. Covenants
The DIP Facility provides for certain informational and other requirements
customary for a debtor-in-possession financing facility, such as (a) the
provision by Southern Mineral of monthly financial statements, budgets, cash
forecasts, and other financial data; (b) the maintenance of certain cash
collateral, lockbox, and other blocked accounts with a bank satisfactory to
; (c) restrictions on the payment of pre-petition Claims (other than those
pre-petition Claims that Southern Mineral are permitted by Bankruptcy Court
order to pay); (d) restrictions on the granting of additional superpriority
Claims to any other party; and (e) certain financial covenants.
4. Events of Default
The occurrence of any of the following is an Event of Default under the DIP
Facility: (a) the Chapter 11 Case is dismissed or converted to a liquidation
under Chapter 7 of the Bankruptcy Code; (b) a trustee or examiner with enlarged
powers is appointed in the Chapter 11 Case; (c) any other superpriority claim
or lien equal or superior in priority to those granted with respect to the DIP
Facility is granted in the Chapter 11 Case; (d) an order granting final
approval of the DIP Facility is not entered by the Bankruptcy Court within 21
days after the Petition Date; (e) any interim order approving the DIP Facility
or the Final Order is stayed, modified, reversed, or vacated; (f) a material
disruption in the senior management of Southern Mineral or in the composition
of the board of directors of Southern Mineral occurs without the prior consent
of ; and (g) the Bankruptcy Court enters an order granting relief from
the automatic stay so as to allow a third party to proceed against any material
asset or assets of Southern Mineral.
B. Use of Cash Collateral
Southern Mineral's obligations under its loan and credit agreements with
Compass Bank-Houston and First Union National Bank are secured by substantially
all of the assets of Southern Mineral. Cash proceeds of such collateral
constitute "cash collateral" as that term is defined in Section 363(a) of the
Bankruptcy Code. The Bankruptcy Code requires court approval of the use of cash
collateral, unless all parties holding an interest in such cash collateral
consent to the use thereof. In order to allow Southern Mineral's continued
normal operation during the Chapter 11 Case, Southern Mineral will seek
permission of the Bankruptcy Court to continue use of cash collateral and
provide the Secured Lenders adequate protection.
XI.
RISK FACTORS TO BE CONSIDERED
A. General
Holders of Impaired Claims who are entitled to vote on the Plan should
carefully consider the following factors before deciding whether to vote to
accept or to reject the Plan.
1. Maintenance of Operations and Post-Petition Financing
Southern Mineral believes that the Plan as agreed to by the Board of
Directors and EnCap and the subsequent commencement of the Chapter 11 Case in
connection with the Plan should not materially adversely affect Southern
Mineral's relationships with customers, employees, and suppliers, provided that
Southern Mineral can demonstrate (i) sufficient liquidity to continue to
operate its business and (ii) a likelihood of
123
<PAGE>
success for the Plan in a reasonably short time frame. Southern Mineral
believes that this process offers the most expeditious means to achieve success
for the Plan.
Southern Mineral is seeking to obtain debtor-in-possession financing
sufficient to operate its business following the commencement of the Chapter 11
Case. In addition, certain non-debtor affiliates of Southern Mineral may
require additional financing during the Chapter 11 Case. Although Southern
Mineral believes that any such financing would be available, no assurances can
be given. Southern Mineral's inability to obtain such financing, in whole or in
part, would pose serious risks to Southern Mineral's viability, and could
preclude consummation of the Plan or any other recapitalization or
reorganization. Finally, it is possible that despite the belief and intent of
Southern Mineral, the Solicitation or the subsequent commencement of the
Chapter 11 Case could materially adversely affect the relationships between
Southern Mineral and their suppliers, customers, employees or lessors. If such
relationships were materially adversely affected, Southern Mineral's working
capital position could materially deteriorate. This deterioration could
adversely affect Southern Mineral's ability to complete the Solicitation or, if
the Solicitation is successfully completed, to obtain confirmation of the Plan.
B. Certain Bankruptcy Considerations
1. General
Although Southern Mineral believes that the successful negotiation of a Plan
with the Southern Mineral Class 2 and Class 3 Creditors will significantly
mitigate any negative impact of a subsequent Chapter 11 filing, the filing of
bankruptcy petitions by or against Southern Mineral and the publicity attendant
thereto nevertheless may adversely affect Southern Mineral's businesses.
Southern Mineral believes that any such adverse effects may worsen during the
pendency of a protracted bankruptcy case.
2. Effect on Non-Filing Subsidiaries or Affiliates
The filing of the Chapter 11 Case by Southern Mineral and the publicity
attendant thereto might also adversely affect the businesses of the non-filing
Affiliates. Because the business of Southern Mineral is closely related to the
businesses of the non-filing Affiliates, any downturn in the businesses of the
non-filing entities could affect Southern Mineral's prospects also. Although
Southern Mineral does not believe that the commencement of the Chapter 11 Case
will adversely affect the businesses of the non-filing Affiliates, if there is
a protracted chapter 11 case, the possibility of adverse effects on such
Affiliates may increase. Further, while Southern Mineral does not believe that
creditors of the Affiliates can assert any legal right to take actions with
respect to any Affiliates due to the commencement of the Chapter 11 Case,
certain of these creditors could try to take such actions nonetheless. If this
were to occur, the affected Affiliates would not have the benefit of the
"automatic stay." Although there can be no assurance, Southern Mineral believes
that such actions, if any, by creditors of the Affiliates would not have a
material adverse effect on the business or financial condition of the
Affiliates, and therefore, on Southern Mineral.
3. Failure to Receive Requisite Acceptances
If the Requisite Acceptances are received, Southern Mineral intends to file
a voluntary petition for relief under Chapter 11 of the Bankruptcy Code and to
seek, as promptly thereafter as practicable, confirmation of the Plan. If the
Requisite Acceptances are not received, Southern Mineral may nevertheless file
a petition for relief under Chapter 11 and seek confirmation of the Plan
notwithstanding the dissent of certain Classes of Claims or Interests. In such
event, it is possible that, to satisfy the Bankruptcy Code's standards for a
"cramdown" confirmation, including the absolute priority rule, the Plan may be
modified in a manner that will materially and adversely affect the treatment
provided to any Class that has rejected the Plan. Alternatively, Southern
Mineral may seek to accomplish an alternative restructuring of its
capitalization and its obligations to security holders and other Creditors and
obtain their consent to any such restructuring plan by means of another out-of-
court solicitation for acceptance of a plan of reorganization for Southern
Mineral, or otherwise. There can be no assurance that the terms of any such
alternative restructuring arrangement or plan would be similar to or as
favorable to Southern Mineral's Creditors as those proposed in the Plan.
124
<PAGE>
4. Failure to Confirm the Plan
Even if the Requisite Acceptances are received and, with respect to those
Classes deemed to have rejected the Plan the requirements for "cramdown" are
met, the Bankruptcy Court, which, as a court of equity may exercise substantial
discretion, may choose not to confirm the Plan. Section 1129 of the Bankruptcy
Code requires, among other things, a showing that confirmation of the Plan will
not be followed by liquidation or the need for further financial reorganization
of Southern Mineral (See Section XIV.A -- "Feasibility of the Plan and the Best
Interests of Creditors Test--Feasibility of the Plan"), and that the value of
distributions to dissenting holders of Claims and Interests may not be less
than the value such holders would receive if Southern Mineral was liquidated
under Chapter 7 of the Bankruptcy Code See Section XIV.B -- "Feasibility of the
Plan and the Best Interests of Creditors Tests--Best Interests Test". Although
Southern Mineral believes that the Plan will meet such tests, there can be no
assurance that the Bankruptcy Court will reach the same conclusion.
Additionally, the Solicitation must comply with the requirements of Section
1126(b) of the Bankruptcy Code and the applicable Bankruptcy Rules with respect
to the length of the solicitation period, compliance with applicable non-
bankruptcy law, if any, and in the absence of applicable non-bankruptcy law,
the adequacy of the information contained in this Disclosure Statement. If the
Bankruptcy Court were to find that the Solicitation did not so comply, all
acceptances received pursuant to the Solicitation could be deemed invalid and
Southern Mineral could be forced to resolicit acceptances under Section 1125(b)
of the Bankruptcy Code, in which case confirmation of the Plan could be delayed
and possibly jeopardized. Southern Mineral believes that the Solicitation
complies with the requirements of Section 1126(b) of the Bankruptcy Code, that
duly executed Ballots will be in compliance with applicable provisions of the
Bankruptcy Code, and that the Plan, if the Requisite Acceptances are received,
should be confirmed by the Bankruptcy Court. There can be no assurance,
however, that the Plan will ever be filed and, if the Plan is filed, there can
be no assurance that modifications thereof will not be required for
confirmation, or that such modifications would not result in a resolicitation
of acceptances.
5. Failure to Consummate the Plan
Consummation of the Plan is conditioned upon, among other things, entry of
the Confirmation Order and an order (which may be the Confirmation Order)
approving the assumption and assignment of all executory contracts and
unexpired leases (other than those specifically rejected by Southern Mineral)
to Reorganized Southern Mineral or its assignees, and the negotiation and
execution of definitive agreement governing the New Senior Secured Facility. As
of the date of this Disclosure Statement, there can be no assurance that any or
all of the foregoing conditions will be met (or waived) or that the other
conditions to consummation, if any, will be satisfied. Accordingly, even if the
Plan is confirmed by the Bankruptcy Court, there can be no assurance that the
Plan will be consummated and the restructuring completed.
C. Risk Factors
Debentureholders and stockholders should carefully consider the risks
described below and the other information included or incorporated by reference
in this proxy statement/prospectus/disclosure statement.
1. Inability to complete the restructuring.
It is possible that neither the exchange offer nor the Plan will be
completed. If neither restructuring occurs, the following undesirable events
may happen:
. if we do not complete the sale of our Brushy Creek Field and Texan
Gardens Field interests, we will not be able to make the September 1,
1999 payment under our domestic credit facility, resulting in a default
being declared by the lenders and a demand for repayment of the entire
outstanding debt in the amount of approximately $31.1 million;
. we will most likely not be able to make the October 1, 1999 interest
payment on our debentures, which would result in a default under the
indenture governing the debentures and give
125
<PAGE>
debentureholders the right to demand full payment of the debentures in
the amount of approximately $42.8 million;
. an involuntary bankruptcy petition could be filed against us by our
Creditors;
. we may need to file a petition with the bankruptcy court to reorganize
under applicable provisions of the Bankruptcy Code;
. we will not be able to pursue acquisitions or exploit or explore our oil
and gas properties;
. we could lose business if others doubt our ability to satisfy our
obligations on a timely or long-term basis;
. we will be unable to realize the maximum value of our assets;
. we will be unable to invest adequate capital in our business; and
. the lenders under our domestic bank debt and Canadian Credit Facility may
not extend or renew our credit arrangements.
If a restructuring is not completed, we will most likely need to reorganize
and restructure under the protection of the Bankruptcy Code without approval
of the Plan. We can give you no assurances that a bankruptcy case, other than
pursuant to the Plan, will result in a reorganization rather than a
liquidation, or that any reorganization would be on terms as favorable to the
debentureholders and stockholders as the terms of the restructuring. If a
liquidation or lengthy and non-consensual reorganization were to occur, there
is a substantial risk that there would be little or no value available for
distribution to the stockholders, and that the debentureholders would receive
substantially less than the recovery anticipated under the Plan.
For purposes of comparing the distributions under the Plan versus a
liquidation, we have prepared an analysis of estimated recoveries in a
liquidation of Southern Mineral under applicable provisions of the Bankruptcy
Code. The liquidation analysis is attached as Schedule XIV,C. The procedures
followed and the assumptions and qualifications used in this analysis are
presented in the notes following the analysis.
Even if all impaired classes accept the Plan, the Plan restructuring might
not be confirmed by the Bankruptcy court.
2. Confirmation of the Prepackaged Plan may be requested under the "cram-
down" provisions of the Bankruptcy Code.
Section 1129(b) of the Bankruptcy Code (generally referred to as the "cram-
down" provisions) permits the confirmation of a prepackaged plan of
reorganization even if it is not accepted by all impaired classes. We reserve
the right to seek confirmation of our Plan under the cram-down provisions if
either one class of Impaired Creditors or our stockholders do not accept our
Plan. In such event, it is possible that the Plan may be modified in a manner
that will materially and adversely affect the treatment provided to any
impaired class that rejected the Plan. We also reserve the right to obtain
Chapter 11 relief other than under the Plan, which could result in less
favorable treatment to our debentureholders and stockholders than the
treatment currently provided in the Plan.
3. Failure as an operating company.
Currently, there is substantial doubt about our ability to continue as a
going concern. KPMG LLP, our independent auditors, have included a "going
concern" exception on their most recent report on our financial statements.
Our Annual Report on Form 10-K/A for the fiscal year ended December 31, 1998
accompanies the proxy statement/prospectus/disclosure statement as Annex H.
4. Financial projections are based on many assumptions about the future that
are subject to uncertainty.
We have prepared the projections set forth in Section XIV.D based upon a
number of estimates and assumptions. While we believe these estimates and
assumptions are reasonable when taken as a whole, they are
126
<PAGE>
inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control. The
accuracy of the projections is dependent upon the timing and probability of
occurrence of a complex series of future events and it can be expected that one
or more of the assumptions upon which the projections are based will not
materialize or will vary significantly from actual results.
We do not guarantee that the projections will be achieved. In addition, we
did not prepare the projections with a view toward compliance with published
guidelines of the SEC, the American Institute of Certified Public Accountants
or generally accepted accounting principles. KPMG LLP, our independent auditors
did not prepare or compile the projections and they express no opinion on and
assume no responsibility for the projections. You should not rely on the
projections. We do not intend to update or revise the projections.
5. Holders of Debentures will subordinate Creditor status if Debentures
exchanged.
Debentureholders are senior to the equity position of stockholders. If you
accept the Plan and become a stockholder, you will subordinate your Creditor
status to future creditors of Reorganized Southern Mineral. If the Plan is
completed, all debentureholders will become stockholders.
6. Net operating loss carryforwards will be limited if the restructuring
occurs.
The exchange offer and the Plan may result in taxable income to us and may
reduce or limit the use of our net operating loss carryovers. In either the
exchange offer or the Plan, we will realize income from the discharge of
indebtedness. In the exchange offer restructuring, this income will not be
taxed to the extent that we are insolvent at the time of the exchange offer.
Any debt discharge income over the amount by which we are insolvent will be
taxed. In the Plan, we will not be taxed on any of the debt discharge income.
In either case, however, the amount of untaxed debt discharge income must be
used to reduce our net operating loss carryovers and other tax attributes.
7. Existing stockholders will be substantially diluted by the restructuring.
The equity Interests of existing stockholders will be substantially diluted
by the restructuring. Upon the issuance of New Securities to debentureholders
and EnCap, the equity interests of existing stockholders will be reduced to
approximately 17.3% (assuming the exchange of all Debentures). If (1) all of
the Warrants issued to the debentureholders are exercised in full and (2) all
other outstanding options and warrants are exercised in full, the equity
interests of existing stockholders will be further reduced to approximately
15.0%.
The following table shows the change in ownership of our company if the
restructuring occurs (assuming all debentures are exchanged).
<TABLE>
<CAPTION>
After Restructuring
Before After on
Restructuring(1) Restructuring(1) a Diluted Basis(2)
---------------- ----------------- -------------------
Shares % Shares % Shares %
---------------- ----------------- -------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
EnCap(3)................ 45 -- 46,002 61.7% 46,002 53.6%
Debentureholders........ -- -- 15,691 21.0% 23,461 27.4%
Existing stockholders... 12,796 100% 12,796 17.3% 12,796 15.0%
Other optionholders and
warrantholders......... -- -- -- -- 3,445 4.0%
</TABLE>
- --------
(1) Based on shares outstanding as of July 15, 1999.
(2) Assumes exercise of the warrants to acquire an aggregate of 7,820,460
shares of common stock to be issued to the debentureholders and exercise of
all other outstanding options and warrants to acquire 3,445,199 shares of
common stock.
(3) Includes shares to be acquired by EnCap Energy Capital Fund III, L.P.,
EnCap Energy Capital Fund III-B, L.P., Energy Capital Investment Company
PLC, BOCP Energy Partners, L.P. and EnCap Investments L.L.C.
127
<PAGE>
8. EnCap will have the ability to control our board of directors after the
restructuring.
After the restructuring, EnCap will have the ability to elect a majority of
the board of directors and control affairs and management of Reorganized
Southern Mineral. EnCap also would have the power to approve actions requiring
stockholder approval. This high level of ownership might delay, defer or
prevent a future change in control of Southern Mineral.
9. Inability to successfully implement our business plan.
Our ability to meet our financial projections and our financial obligations
depends on our ability to achieve our business plan. Accomplishing our business
plan may be affected by general economic conditions, commodity prices, industry
trends and other factors beyond our control. Many of our competitors have
greater financial resources and may have more operating flexibility. We may be
unable to implement certain elements of our operating plan following completion
of the restructuring due to continuing pressures on our operating cash flow.
It is possible that announcing the restructuring or filing of a bankruptcy
case could adversely affect our operations and relationships with employees,
customers, operations and suppliers. Due to uncertainty about our future, many
risks exist, including the following:
. employees may be distracted from performance of their duties or more
easily attracted to other career opportunities; and
. suppliers, operators and trade Creditors may suspend or terminate their
relationship with us, exercise rights of set-off or similar remedies,
further restrict ordinary credit terms or require guarantees of payment.
The filing of a bankruptcy case or a delay in completing the Plan may cause
our domestic credit facility lenders to further reduce our borrowing base or
exercise creditor remedies.
10. Our securities may be delisted by Nasdaq.
Our Common Stock is currently listed on the Nasdaq National Market, and our
Debentures are currently listed on the Nasdaq SmallCap Market. We are not in
compliance with the Marketplace Rule 4310 of the Nasdaq Stock Market, Inc.
governing qualitative and quantitative standards for listing. On January 19,
1999, we received a letter from Nasdaq, in which we were notified that we
failed to comply with the continued listing requirement with respect to the
minimum bid requirement and net tangible asset test of Nasdaq Marketplace Rule
4310.
We have been unable to comply with the continued listing requirements since
receiving the January 19, 1999 letter from Nasdaq. At a hearing before Nasdaq
on May 27, 1999, we described our efforts to raise additional equity capital,
and we requested an extension of the deadline to comply with the continued
listing requirements. We can give you no assurances, however, that we will be
successful in complying with the continued listing requirements and the failure
to do so may result in the immediate delisting of our securities. Such
delisting will have an adverse impact on the liquidity of our securities. The
possible consequences of such delisting could include litigation. Such
delisting could make it more difficult for us to raise additional capital in
the manner in which we have done so in the past.
If our securities are delisted from Nasdaq, trading therein, if any, may
then be conducted on the OTC Bulletin Board or the over-the-counter market.
Because spreads between the "bid" and "asked" prices of the securities quoted
by market makers on the OTC Bulletin Board and the over-the-counter market will
likely be greater than they are at present, you will likely experience a
greater degree of difficulty in trading our securities. In addition, there are
significant restrictions imposed by most brokerage houses on the ability of
their
128
<PAGE>
brokers to solicit orders or recommend the purchase of securities that trade
on the OTC Bulletin Board. In the majority of cases, the purchase of
securities is limited to unsolicited offers from private investors, who have
to comply with policies and practices involving the completion of time-
consuming forms that can make the handling of lower-priced securities
economically unattractive. Moreover, most brokerage houses do not permit
lower-priced securities to be used as collateral for margin accounts or to be
purchased on margin. We believe that the current market price of our
securities may limit the effective marketability because of the reluctance of
many brokerage firms and institutional investors to recommend lower-priced
securities to their clients or to hold them in their own portfolios. The
brokerage commission on the purchase or sale of a lower-priced securities may
also represent a higher percentage of the price than the brokerage commission
on a higher-priced issue.
We anticipate that a restructuring will have the effect of increasing the
minimum bid price of our Common Stock sufficient to satisfy Nasdaq's minimum
bid price criteria and result in our having sufficient tangible assets to
satisfy the Nasdaq net tangible asset test. However, we can give you no
assurances that the minimum bid price will increase, or if it increases, that
it will be maintained for any period of time, that we will have sufficient net
tangible assets or that we will be successful in maintaining the listing of
our common stock on the Nasdaq National Market.
11. The market value of our securities may fluctuate.
The market value of the Common Stock and Warrants issued in connection with
the restructuring will depend on our future performance and factors generally
affecting securities markets, which are influenced by conditions beyond our
control.
12. A trading market for the Warrants may not develop, and the value of the
Warrants is uncertain.
We can give you no assurances that an active market for our Warrants will
develop or, if a market does develop, that it will continue to exist. The
value of our Warrants, by their nature, will be linked to the value of our
Common Stock. Consequently, the risks associated with ownership of our Common
Stock are also attributable to our Warrants. We can give you no assurances as
to the liquidity of our Common Stock or Warrants or the prices at which our
Common Stock or Warrants can be sold.
13. No payment of dividends in the foreseeable future.
We do not currently pay cash dividends on our Common Stock, and we do not
anticipate paying dividends in the foreseeable future. Our domestic credit
facility restricts the payment of dividends and other distributions.
14. Southern Mineral has a history of operating losses.
The following are our net income (losses) from operations (in thousands)
for the last seven fiscal years:
<TABLE>
<CAPTION>
Net Income
Year (Loss)
---- ----------
<S> <C>
1998........................................................... $(16,409)
1997........................................................... (2,049)
1996........................................................... 2,434
1995........................................................... (137)
1994........................................................... (3,133)
1993........................................................... (537)
1992........................................................... (1,044)
</TABLE>
129
<PAGE>
For the three months ended March 31, 1999, we reported a net income of
approximately $2.9 million, including a gain of $5.1 million due to the sale of
certain non-core oil and gas properties. We can give you no assurances that we
will operate profitably in the future. The likelihood of our future
profitability must be considered in light of the financial, business and
operating risks, expenses, difficulties and delays frequently encountered in
connection with the oil and gas acquisition, exploitation, exploration,
development and production business in which we are engaged.
15. Estimates of reserves and future net cash flows are subject to
uncertainty.
Estimated proved reserves of oil and natural gas are estimated quantities
that geological and engineering data demonstrate with reasonable certainty to
be economically producible under existing conditions. There are numerous
uncertainties inherent in estimating quantities and values of proved reserves
and in projecting future rates of production and the timing of development
expenditures, including factors involving reservoir engineering, pricing and
operating and regulatory constraints. Reserve assessment is a subjective
process of estimating the recovery from underground accumulations of
hydrocarbons that cannot be measured in an exact way. All reserve estimates are
to some degree speculative and various classifications of reserves only
constitute attempts to define the degree of speculation involved. The accuracy
of any reserve estimate is a function of available data, engineering and
geological interpretations and judgments based on the data and assumptions
regarding oil and gas prices and costs to operate such wells. Accordingly, as
further information is acquired relating to our oil and gas properties, reserve
estimates are likely to differ from the quantities of hydrocarbons that are
ultimately recovered. Results of drilling, testing and production history from
the properties in which we have an interest and changes in oil and gas prices
and cost estimates subsequent to the date of our reserve estimates could
require substantial adjustments, either upward or downward, to such estimates.
Any downward adjustment could adversely affect our financial condition and
future prospects and the market value of our securities.
The estimated discounted pre-tax cash flows attributable to our estimated
net proved reserves, at an annual rate of 10%, should not be construed as the
current market value of our reserves. In accordance with applicable
requirements of the SEC, the future net cash flows attributable to estimated
net proved reserves are generally based on prices and costs as of the date of
the estimate, whereas actual future prices and costs may be materially higher
or lower. Actual future net cash flows also will be affected by the amount and
timing of both the production and the lifting and development costs. The 10%
discount rate, which is the rate required by the SEC, is not necessarily the
most appropriate discount rate based on interest rates in effect from time to
time and risks associated with our business or the oil and gas industry in
general.
16. Oil and gas prices are very volatile.
Our revenues, profitability, future growth and value of our oil and gas
properties are highly dependent upon the prices of oil and gas. In addition,
borrowings under our domestic and Canadian credit facilities are limited by a
borrowing base, which is determined in part by the prices for oil and gas.
Market conditions make it difficult to estimate future prices of oil and
natural gas. In the past, our average annual sales price for oil and natural
gas has been volatile, and it is likely that oil and gas prices will continue
to fluctuate in the future. Various factors beyond our control affect prices of
oil and natural gas, including worldwide and domestic supplies of oil and
natural gas, the ability of the members of the Organization of Petroleum
Exporting Countries to agree to and maintain oil price and production controls,
political instability or armed conflict in oil-producing regions, the price of
foreign imports, the level of consumer demand, the price and availability of
alternative fuels, the availability of pipeline capacity and changes in
existing federal regulation and price controls. A material or extended decline
in the price of oil or gas may render the development of our oil and gas
properties commercially unattractive, have a material adverse effect on our
financial condition and results of operations, and limit our ability to incur
indebtedness or otherwise finance our operations and future capital
expenditures.
130
<PAGE>
17. Inability to find and acquire additional reserves.
Our future success depends upon our ability to find, develop and acquire
additional oil and gas reserves that are economically recoverable. Unless we
conduct successful exploration or development activities or acquire properties
containing reserves, our reserves will generally decline as they are produced.
There can be no assurance that our development projects and acquisition,
development or exploration activities will result in additional reserves. If
prevailing oil and gas prices were to increase significantly, our finding costs
(calculated by dividing the capitalized costs of oil and gas properties as of a
particular date by the amount of net proved reserves shown on a reserve report
at the same date) to add new reserves could increase. The business of
purchasing oil and gas properties involves a high degree of business and
financial risk, especially the risk that prices may subsequently decline or
that the reserves actually recovered may be less than those anticipated by us
at the time of purchase. The cost of drilling, completing and operating wells
is uncertain, and our drilling or production may be curtailed or delayed as a
result of many factors.
18. Our acquisition program involves certain risks.
After we address our present financial crisis, we intend to resume the
acquisition of oil and gas properties. Generally, it is not feasible to review
in detail every individual property involved in an acquisition. Ordinarily,
review efforts are focused on the higher-valued properties. A detailed review
of all potential properties and records may not adequately reveal existing or
potential problems or permit us to become sufficiently familiar with the
properties to assess fully their deficiencies and capabilities. Inspections are
not always performed on every well and environmental problems, such as
groundwater contamination, are not necessarily revealed when an inspection is
undertaken. Property acquisition decisions generally are based on various
assumptions and subjective judgments that are speculative. If we overestimate
the potential oil and gas reserves of a property to be acquired or if
subsequent operations on the property are unsuccessful, then acquisition of the
property could result in substantial losses to us.
We can give you no assurances that we will make any acquisitions.
Additionally, larger acquisitions may involve substantially higher costs and
may pose additional operating issues regarding the integration of operations.
The rate at which we are able to sustain any future growth may be limited to
the extent that we require, but we are unable to obtain, suitable financing or
to timely expand our existing staff and operating capabilities.
19. Inherent operating hazards and uninsured risks.
The oil and gas business involves a variety of operating risks, including
unexpected formations or pressures, uncontrollable flows of oil, gas, brine or
well fluids into the environment (including groundwater contamination),
blowouts, cratering, fires, explosions, pollution and other risks, any of which
could result in personal injuries, loss of life, damage to properties and
substantial losses. Although we carry insurance that we believe is reasonable,
we are not fully insured against all risks. Losses and liabilities arising from
uninsured or under-insured events could have a material adverse effect on our
financial condition and results of operations.
20. Possibility of production curtailments.
Due to contract terms, pipeline interruptions, weather conditions or other
factors, the producing wells that we own an interest in may, from time to time,
be subject to production curtailments. Curtailments may range from production
being partially restricted to wells being completely shut-in. The duration of
curtailments may vary from a few days to several months.
21. Business plan and operations depend on certain key personnel.
We depend, and we will continue to depend for the foreseeable future, on the
services of our officers and key employees with extensive experience in the oil
and gas business. Our ability to retain such officers and key employees is
important to our continued success and growth. The loss of key personnel could
have a material adverse effect on us. We do not maintain key person life
insurance on any of our officers or employees.
131
<PAGE>
22. Need for additional capital for acquisition.
The oil and gas industry is capital intensive. Our ability to expand our
reserve base is dependent upon the availability of internally generated cash
flows and financing alternatives. Such financing may consist of bank or other
commercial debt, forward sales of production, the issuance of equity or debt
securities or any combination thereof. We can give you no assurances that we
will be successful in obtaining additional financing if and when required. Any
substantial increase in our level of indebtedness through borrowings or the
issuance of debt securities may significantly decrease our financial
flexibility. If we are unable to obtain such financing if and when needed, we
may be forced to (1) curtail property acquisition and development activities
and (2) forgo continued participation in our current exploitation, exploration
and development projects operated by third parties.
23. Exploratory drilling activities involve many risks.
Exploratory drilling involves a high degree of financial and operating risk,
including the risk that no commercially productive natural gas or oil
reservoirs will be encountered. The cost of drilling and completing exploratory
and development wells may vary materially from initial estimates. Drilling
operations may be curtailed, delayed or canceled as a result of many factors,
including, but not limited to, formations and drilling conditions, pressure or
mechanical irregularities in formations, equipment failures or accidents, as
well as title problems, weather conditions, compliance with governmental
requirements, shortages or delays in the delivery of equipment, and financial
instability of well operators, major working interest owners and well servicing
companies. With respect to the properties we do not operate, we are dependent
upon the operator of the wells to properly conduct leasing, drilling and
completion activities and ongoing operations of the well. The operator's
failure to properly perform their services could adversely affect us. Our
decisions to participate in the drilling of exploratory wells and, ultimately,
the success of our participation depends largely on the results of seismic
survey data and other geological and geophysical data. The acquisition and
interpretation of such data involves subjective professional judgment. Reliance
upon such data and the interpretations thereof poses the risk that a decision
to participate in the drilling of an exploratory well may be founded on
incorrect, insufficient data, erroneous interpretations of the data, or both.
24. The market for oil and gas production is volatile.
The availability of a ready market for our oil and gas production depends on
numerous factors beyond our control, including the demand for and supply of oil
and gas, the proximity of our natural gas reserves to pipelines, the capacity
of such pipelines, fluctuations in production and seasonal demand, the effects
of inclement weather and governmental regulation. New gas wells may be shut-in
for lack of a market until a gas pipeline or gathering system with available
capacity is extended into the area. Successful exploration wells, especially
offshore wells, may have production delayed until production facilities and
pipelines are constructed.
25. Potential losses due to exchange rate fluctuations with respect to
Canadian operations.
Approximately 45% of our revenues are derived from our Canadian properties.
The revenues and expenses of our Canadian operations are denominated in
Canadian dollars. We record transactions and prepare our financial statements
in U.S. dollars. Fluctuations in the value of the two currencies may cause
currency translation losses or reduced revenues and earnings, or both, with
respect to our Canadian operations. We cannot predict the effect of exchange
rate fluctuations upon future operating results.
26. Our industry is subject to governmental and environmental regulation.
Exploring for, producing and selling oil and gas are subject to a variety of
federal, state, local and international governmental regulations, including
regulation concerning the prevention of waste, the discharge of materials into
the environment, the conservation of natural gas and oil production, permits
for drilling operations, drilling bonds, reports concerning operations, the
spacing of wells, the unitization and pooling of
132
<PAGE>
properties, the clean-up of well sites and various other matters, including
taxes. Laws and regulations protecting the environment are stringent and may in
certain circumstances impose strict liability, rendering a person liable for
environmental damage without regard to negligence or fault on the part of such
person. Such laws and regulations may expose us to liability for the conduct of
operations or conditions caused by others or for our acts that were in
compliance with all applicable laws at the time such acts were performed. An
increase in federal, state or local production or property taxes, the
modification of existing laws or regulations or the adoption of new laws or
regulations relating to environmental matters could have a material adverse
effect on our results of operations.
The Federal Water Pollution Control Act 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
into state and federal waters. The Federal Water Pollution Control Act 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 may impose substantial potential liability for the
costs of removal, remediation and damages. State water discharge regulations
and the federal permits prohibit or are expected to prohibit within the next
year the discharge of water, sand and, certain other substances related to the
oil and gas industry into coastal waters. Although the costs to comply with
zero discharge under federal or state law may be significant, the entire
industry will experience similar costs and we believe that these costs will not
have a material adverse effect on our financial condition and results of
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.
27. Southern Mineral is smaller and not as well capitalized as many
competitors.
The oil and gas industry is highly competitive in many respects, including
identification of attractive oil and gas properties and personnel to conduct
operations and activities. In seeking suitable opportunities, we compete with a
number of other companies, including large oil and gas companies, numerous
independent operators, individual proprietors and others with greater financial
resources and, in some cases, with more experience. Many other oil and gas
companies in the industry have financial resources, personnel and facilities
substantially greater than ours, and we can give you no assurances that we can
compete effectively with these competitors.
28. Year 2000 problems.
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000. We
are actively taking steps to ensure that our information technology
infrastructure and business system applications, manufacturing equipment and
systems will be Year 200 compliant, and we are seeking assurances of Year 2000
compliance from our suppliers, customers and other third parties with whom we
conduct business. However, we cannot be certain that our efforts will be
appropriate, adequate or complete.
29. The Nevada anti-takeover statute may delay or prevent a takeover.
Provisions of the Nevada General Corporation Law requiring disinterested
director or stockholder approval of certain business combinations between
Southern Mineral and holders of 10% or more of the voting securities of
Southern Mineral could have the effect of delaying, deterring or preventing a
change in control of Southern Mineral. See "Stockholder Rights--Nevada Anti-
Takeover Statute" found in the accompanying proxy statement/solicitation.
D. Certain Tax Considerations
THERE ARE A NUMBER OF MATERIAL INCOME TAX CONSIDERATIONS, RISKS AND
UNCERTAINTIES ASSOCIATED WITH CONSUMMATION OF THE PLAN. INTERESTED
133
<PAGE>
PARTIES SHOULD READ CAREFULLY THE DISCUSSION SET FORTH IN SECTION XIII OF THIS
DISCLOSURE STATEMENT, ENTITLED "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE
PLAN" FOR A DISCUSSION OF THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES AND
RISKS FOR HOLDERS OF CLAIMS AND SOUTHERN MINERAL RESULTING FROM THE
TRANSACTIONS OCCURRING IN CONNECTION WITH THE PLAN.
E. Inherent Uncertainty of Financial Projections
The Projections set forth in Exhibit D hereto cover Southern Mineral's
operations through the period ending 2001. These Projections are based on
numerous assumptions that are an integral part of the Projections, including
confirmation and consummation of the Plan in accordance with its terms; the
anticipated future performance of Reorganized Southern Mineral; the uncertain
ability of Reorganized Southern Mineral to generate sufficient funds or to gain
access to additional capital, if needed, to meet its capital expenditure needs;
the possible effects that the commencement of the Chapter 11 case, even in
connection with the Plan, may have on Southern Mineral's relationship with its
customers, vendors and employees; industry performance; general business and
economic conditions; competition; adequate financing; absence of material
contingent or unliquidated litigation or indemnity claims; and other matters,
many of which are beyond the control of Reorganized Southern Mineral and some
or all of which may not materialize. In addition, unanticipated events and
circumstances occurring subsequent to the date of this Disclosure Statement may
affect the actual financial results of Reorganized Southern Mineral's
operations. These variations may be material and may adversely affect the
ability of Reorganized Southern Mineral to pay the obligations owing to certain
holders of Claims entitled to distributions under the Plan and other post-
Consummation Date indebtedness. Because the actual results achieved throughout
the periods covered by the Projections may vary from the projected results, the
Projections should not be relied upon as a guaranty, representation, or other
assurance of the actual results that will occur.
F. Dividends
Reorganized Southern Mineral does not anticipate that any dividends will be
paid with respect to the New Securities and the Common Stock in the near term.
The Projections contemplate no payment of dividends through at least the end of
the projection period ending 2001.
G. Competition
There is a high degree of competition in the oil and gas exploration and
production industry. Consequently, Southern Mineral competes with many other
entities for capital and desirable potential acquisitions and exploration and
development prospects. Southern Mineral'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
Southern Mineral, and may therefore be better able than Southern Mineral to
withstand and compete during adverse market conditions. Southern Mineral'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.
XII.
SECURITIES TO BE ISSUED IN CONNECTION WITH THE PLAN
As of the Distribution Date, Reorganized Southern Mineral will issue the New
Securities and Warrants. The New Securities and Warrants will be issued for
distribution in accordance with the Plan to or for the benefit of holders of
Allowed Unsecured Debenture Claims on account of their respective Allowed Class
3 Claims.
134
<PAGE>
The following discussion summarizes the material provisions of the New
Securities and Warrants, including references, where applicable, to the Amended
Certificate of Incorporation and Bylaws of Reorganized Southern Mineral. This
summary does not purport to be complete and is qualified in its entirety by
reference to the full text of the Amended Southern Mineral Certificate of
Incorporation and Bylaws.
A. Description of Securities to be Issued
1. Common Stock
The principal terms of the Common Stock including the New Securities to be
issued by Reorganized Southern Mineral under the Plan are as follows:
Authorization: 150,000,000 shares
Initial Issuance: 61,598,367 shares
Par Value: $.01 per share
Voting Rights: One vote per share
Preemptive Rights:None
Dividends: Payable at the discretion of the board of directors of
Reorganized Southern Mineral
2. Warrants
Warrants to purchase 7,820,460 shares of Common Stock will be issued to
holders of Debentures on the Consummation Date. For a more detailed discussion
of the Warrants, see Section IV.I -- "Corporate Structure and Management of
Southern Mineral--Warrants."
B. Resale of Securities of Reorganized Southern Mineral
1. Registration of Securities
Under Section 1145(a) of the Bankruptcy Code, the issuance of the New
Securities and Warrants to be distributed to Creditors who are holders of
Debentures under the Plan in exchange for Allowed Claims against Southern
Mineral and the subsequent resale of such securities by entities that are not
"underwriters" (as defined in Section 1145(b) of the Bankruptcy Code) are not
subject to the registration requirements of Section 5 of the Securities Act of
1933. DUE TO THE COMPLEX, SUBJECTIVE NATURE OF THE QUESTION OF WHETHER A
PARTICULAR HOLDER MAY BE AN UNDERWRITER, SOUTHERN MINERAL MAKES NO
REPRESENTATION CONCERNING THE ABILITY OF ANY PERSON TO DISPOSE OF THE
SECURITIES TO BE DISTRIBUTED UNDER THE PLAN.
Section 1145(b)(1) of the Bankruptcy Code provides:
(b)(1) Except as provided in paragraph (2) of this subsection and except
with respect to ordinary trading transactions of an entity that is not an
issuer, an entity is an underwriter under section 2(11) of the Securities
Act of 1933, if such entity--
(A) purchases a claim against, interest in, or claim for an
administrative expense in the case concerning, the debtor, if such
purchase is with a view to distribution of any security received or to
be received in exchange for such a claim or interest;
(B) offers to sell securities offered or sold under the Plan for the
holders of such securities;
(C) offers to buy securities offered or sold under the Plan from the
holders of such securities, if such offer to buy is (i) with a view to
distribution of such securities; and (ii) under an agreement
135
<PAGE>
made in connection with the Plan, with the consummation of the Plan, or
with the offer or sale of securities under the Plan; or
(D) is an issuer as used in such section 2(11), with respect to such
securities.
- --------
Under Section 2(II) of the Securities Act, an "issuer" includes any "affiliate"
of the issuer, which means any person directly or indirectly through one or
more intermediaries controlling, controlled by or under common control with the
issuer. Any Holder of an Allowed Claim or Interest (or group of Holders of such
Claims and/or Interests who act in concert) who receives a substantial amount
of Common Stock pursuant to the Plan may be deemed to be an "affiliate" of an
issuer and therefore an "issuer" and therefore an "underwriter" under the
foregoing definitions.
(2) An entity is not an underwriter under section 2(11) of the
Securities Act of 1933 or under paragraph (1) of this subsection with
respect to an agreement that provides only for--
(A)(i) the matching or combining of fractional interests in securities
offered or sold under the Plan into whole interests, or
(ii) the purchase or sale of such fractional interests from or to
entities receiving such fractional interests under the Plan; or
(B) the purchase or sale for such entities of such fractional or whole
interests as are necessary to adjust for any remaining fractional interests
after such matching.
(3) An entity other than an entity of the kind specified in paragraph
(1) of this subsection is not an underwriter under section 2(11) of the
Securities Act of 1933 with respect to any securities offered or sold to
such entity in the manner specified in subsection (a)(1) of this section.
(c) An offer or sale of securities of the kind and in the manner
specified under subsection (a)(1) of this section is deemed to be a public
offering.
(d) The Trust Indenture Act of 1939 does not apply to a note issued
under the Plan that matures not later than one year after effective date of
the Plan.
Except as otherwise provided in Section XII.B.2 below, Southern Mineral has
no present intention to register under the Securities Act of 1933 the New
Securities to be (a) distributed to holders of Debentures on account of and in
exchange for such Claims or (b) reserved for future purchase pursuant to the
exercise of the Warrants, but does intend to apply for listing of the Common
Stock on a national securities exchange or quoting in a United States automated
inter-dealer quotation system and to comply with the reporting requirements of
the Exchange Act with respect to the Common Stock.
2. Lack of Established Market for New Securities
There may be certain restrictions on the ability of holders of New
Securities and Warrants to sell, transfer, or otherwise freely dispose of such
New Securities and Warrants received under the Plan if the holders are
"issuers" or "dealers" under Sections 2(11) and 2(12), respectively, of the
Securities Act of 1933, or "underwriters," as defined in Section 1145(b) of the
Bankruptcy Code. Moreover, the New Securities and Warrants will be issued
pursuant to the Plan in large part to holders of Debentures, some of whom may
prefer to liquidate their investment rather than hold such securities on a
long-term basis. Accordingly, the market for the New Securities and Warrants
may be volatile, at least for an initial period after the Distribution Date,
and indeed may be depressed for a period of time immediately following the
Consummation Date until the market has had time to absorb these sales and to
observe the post-Consummation Date performance of Reorganized Southern Mineral.
Other factors, such as the statutory restrictions on transferability and the
likelihood that Reorganized Southern Mineral will not declare dividends for the
foreseeable future, may further depress the market for the New Securities and
Warrants. In addition, although the Plan and the Projections were prepared
based upon an assumed reorganized value range as described below in Section
XIV.D--"Feasibility of the Plan and the Best Interests of Creditors Test--
Valuation Of Reorganized Southern Mineral," such valuation was not an estimate
of the price at which the New Securities and Warrants may trade in the market,
and Southern Mineral has not attempted to make any such estimate in connection
with the development of the Plan. No assurance can be given as to the market
price that will prevail following the Distribution Date.
136
<PAGE>
XIII.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF THE PLAN
THE FOLLOWING DISCUSSION, WHICH WAS PREPARED BY SOUTHERN MINERAL AFTER
CONSULTATION WITH ITS COUNSEL, AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.,
SUMMARIZES CERTAIN ANTICIPATED FEDERAL INCOME TAX CONSEQUENCES OF THE
TRANSACTIONS PROPOSED IN THE PLAN TO SOUTHERN MINERAL AND TO THE HOLDERS OF
CLAIMS AGAINST SOUTHERN MINERAL. THE SUMMARY IS PROVIDED FOR INFORMATIONAL
PURPOSES ONLY AND IS BASED ON THE INTERNAL REVENUE CODE OF 1986, AS AMENDED
(THE "TAX CODE"). THE TREASURY REGULATIONS PROMULGATED THEREUNDER, JUDICIAL
AUTHORITY AND CURRENT ADMINISTRATIVE RULINGS AND PRACTICE, ALL AS IN EFFECT AS
OF THE DATE HEREOF AND ALL OF WHICH ARE SUBJECT TO CHANGE, POSSIBLY WITH
RETROACTIVE EFFECT THAT COULD ADVERSELY AFFECT SOUTHERN MINERAL, THEIR
CREDITORS AND THEIR EQUITY SECURITY HOLDERS.
THE SUMMARY DOES NOT ADDRESS ALL ASPECTS OF FEDERAL INCOME TAXATION THAT MAY
BE RELEVANT TO A PARTICULAR HOLDER OF A CLAIM IN LIGHT OF ITS PARTICULAR FACTS
AND CIRCUMSTANCES OR TO CERTAIN TYPES OF HOLDERS OF CLAIMS SUBJECT TO SPECIAL
TREATMENT UNDER THE TAX CODE (FOR EXAMPLE, FOREIGNERS, FINANCIAL INSTITUTIONS,
BROKER-DEALERS, LIFE INSURANCE COMPANY AND TAX-EXEMPT ORGANIZATIONS) AND ALSO
DOES NOT DISCUSS ANY ASPECTS OF STATE, LOCAL, OR FOREIGN TAXATION.
IN ADDITION, A SUBSTANTIAL AMOUNT OF TIME MAY ELAPSE BETWEEN THE
CONFIRMATION DATE AND THE RECEIPT OF A FINAL DISTRIBUTION UNDER THE PLAN.
EVENTS SUBSEQUENT TO THE DATE OF THIS DISCLOSURE STATEMENT, SUCH AS THE
ENACTMENT OF ADDITIONAL TAX LEGISLATION, COURT DECISIONS OR ADMINISTRATIVE
CHANGES, COULD AFFECT THE FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN AND THE
TRANSACTIONS CONTEMPLATED THEREUNDER. NO RULING WILL BE SOUGHT FROM THE
INTERNAL REVENUE SERVICE (THE "SERVICE") WITH RESPECT TO ANY OF THE TAX ASPECTS
OF THE PLAN AND NO OPINION OF COUNSEL HAS HERETOFORE BEEN OBTAINED BY SOUTHERN
MINERAL WITH RESPECT THERETO. ACCORDINGLY, EACH HOLDER OF A CLAIM IS STRONGLY
URGED TO CONSULT WITH ITS OWN TAX ADVISOR REGARDING THE FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES OF THE PLAN.
A. Federal Income Tax Consequences to Southern Mineral
1. Cancellation of Indebtedness Income
A taxpayer generally must include in gross income the amount of any
discharged indebtedness realized during the taxable year, except to the extent
payment of such indebtedness would have given rise to a deduction. Such
amounts, however, are not included in income where the discharge of
indebtedness that would otherwise have been required to be included in income
will be applied to reduce certain tax attributes of the tax payer in the
following order: net operating loss carryovers ("NOLs"), general business
credit carryovers, capital loss carryovers, the taxpayer's basis in property
and foreign tax credit carryovers.
Under the Plan, satisfaction of the Claims would give rise to discharge of
indebtedness income to Reorganized Southern Mineral in an amount equal to the
difference between (i) the sum of the adjusted issue prices of those Claims
that constitute securities for federal income tax purposes and the amount of
those Claims that do not so constitute securities and (ii) the sum of (a) the
amount of Cash, if any, paid by Reorganized Southern Mineral in partial
satisfaction of such Claims and (b) the issue price of any debt instrument and
the
137
<PAGE>
fair market value of stock and other consideration issued in satisfaction of
such Claims, except to the extent that the discharged Claims would have given
rise to a deduction had they been paid in full and a deduction for such amounts
has not already been claimed.
Southern Mineral estimates that as of July 20, 1999, the amount of its
indebtedness that would be impaired under the Plan is approximately $42,585,000
million, which includes approximately $1,185,000 million of accruals of
interest that have not been deducted in computing taxable income (loss) and
that Southern Mineral believes would have given rise to a deduction if paid,
and that the aggregate amount of consideration to be issued in satisfaction of
such indebtedness is approximately $17,468,000 million as determined for
federal income tax purposes based on the projected recoveries under the Plan
See Section I, G--"Introduction--Summary Of Classification And Treatment Of
Claims And Equity Interests" resulting in discharge of indebtedness of
approximately $25,117,000 million. In addition, the appropriate valuation of
the consideration to be paid, is subject to both legal and factual uncertainty,
and thus the amount of discharge of indebtedness could differ substantially
from the amounts set forth above.
Because the discharge will be accomplished pursuant to a plan approved by a
court in a case under the Bankruptcy Code and affects certain accruals which
have not been deducted in computing taxable income, reorganized Southern
Mineral will not be required to recognize income in respect of such discharge.
Instead, the amount of such discharge (less the amount of discharged accruals
which have not been deducted in computing taxable income) will reduce tax
attributes existing after the determination of Reorganized Southern Mineral's
taxable income for the taxable year in which the discharge occurs.
2. Amount and Utilization of Net Operating Loss Carryforwards
(a) General Limitation on Utilization of NOLs Following an Ownership
Change
Based on its tax returns as filed for its fiscal year ended December 31,
1998, Southern Mineral believes that it had approximately $7.7 million of NOLs
on a consolidated federal income tax basis ("Consolidated NOLs"). Southern
Mineral estimates that following consummation of the Plan (and application of
the discharge of indebtedness rules discussed above and the attribute reduction
rules of the Tax Code Section 382 Bankruptcy Exception discussed below), it
will not have any Consolidated NOLs.
In general, a corporation is permitted to carry forward an unutilized net
operating loss for 15 years (20 years for such losses incurred in taxable years
beginning after August 5, 1997) following the year in which the net operating
loss is incurred and may use such NOLs to offset taxable income recognized in
years prior to expiration of the NOLs. The schedule set forth below shows
Southern Mineral's estimates of the approximate amount of NOLs expiring in each
of the years indicated.
EXPIRATIONS OF PRE-PLAN NOLS
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
Expires Tax
Loss Generated in Tax Year Year Ending Separate
Ending December 31, Consolidated Company Total
- -------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
FYE 12/31/85.............. 1999 $ 0 $ 33,817,659 $ 33,817,659
FYE 12/31/86.............. 2000 0 6,403,343 6,403,343
FYE 12/31/87.............. 2001 0 16,451,870 16,451,870
FYE 12/31/89.............. 2003 0 33,062,835 33,062,835
FYE 12/31/90.............. 2004 0 11,379,408 11,379,408
FYE 12/31/91.............. 2005 0 6,782,773 6,782,773
FYE 12/31/92.............. 2006 0 19,599,867 19,599,867
FYE 12/31/93.............. 2007 0 4,784,289 4,784,289
FYE 12/31/94.............. 2008 0 4,544,784 4,544,784
FYE 12/31/97.............. 2011 937,636 3,000,632 3,938,268
FYE 1/28/98............... 2017 0 831,121 831,121
FYE 12/31/98.............. 2018 6,784,743 0 6,784,743
---------- ------------ ------------
TOTALS.................... $7,722,379 $140,658,581 $148,380,960
========== ============ ============
</TABLE>
138
<PAGE>
As a result of the issuance of Common Stock to holders of Claims pursuant to
the Plan, Southern Mineral and each of its consolidated Subsidiaries will
experience an "ownership change" as defined in Section 382(g) of the Tax Code.
In general, an ownership change for these purposes occurs when the total
percentage of stock (determined on the basis of value) of a corporation owned
by one or more "5% shareholders" of the corporation has increased by more than
50 percentage points of the total amount of stock in the corporation over the
lowest total of the percentage of such stock that was owned by such "5%
shareholders" at any time during the applicable testing period. For these
purposes, certain "public groups" of less-than 5% shareholders are treated as a
single 5% shareholder. The testing period is generally the shorter of (i) three
years of (ii) the period of time since the corporation's most recent prior
ownership change. Southern Mineral's and each of its consolidated Subsidiaries'
ownership change should occur on the Consummation Date (the "Change Date").
Section 382 of the Tax Code generally restricts a corporation's utilization
of its NOLs after the corporation undergoes an ownership change by limiting the
amount of income earned by the corporation after the ownership change that may
be offset by the NOLs that arose prior to the ownership change to an annual
amount equal to the equity value of the corporation on the Change Date
multiplied by the "long term tax-exempt rate," currently 5.02% (the "Section
382 Limitation"). Where the general Section 382 Limitation applies, if the loss
corporation does not continue its pre-ownership change business enterprise for
two years following the Change Date, its Section 382 Limitation will be zero
(the "Continuity of Business Requirement").
(b) The Bankruptcy Exception
Notwithstanding an ownership change under Section 382(g) of the Tax Code,
the Section 382 Limitation does not apply (unless the corporation elects for it
to apply), where (i) immediately before the ownership change the corporation is
under the jurisdiction of a Court pursuant to Chapter 11 of the Bankruptcy
Code, (ii) such ownership change results from the court-approved plan of
reorganization and (iii) the post-organization stock ownership of the
corporation satisfies certain conditions (the "Bankruptcy Exception"). The
stock ownership condition requires that the stockholders and certain Creditors
of the corporation (described below), determined immediately before the
ownership change, own (after such ownership change and as a result of being
stockholders or Creditors immediately before such change) in the aggregate,
stock of the corporation having 50% or more of both the value and voting power
of the total outstanding stock of the reorganized corporation. For purposes of
the Bankruptcy Exception, stock received by Creditors in satisfaction of their
debt claims against the corporation will only be counted to the extent such
Creditors received such stock in satisfaction of (i) indebtedness held by such
Creditors for at least 18 months before the filing of the Chapter 11 petition
with respect to the corporation or (ii) indebtedness which arose in the
ordinary course of the trade or business of the corporation and which at all
times has been held by such Creditors. For purposes of determining whether the
post-reorganization stock ownership requirements are met. Reorganized Southern
Mineral generally must determine whether a Creditor who becomes a 5%
shareholder as a result of the reorganization held the debt for the requisite
18 months prior to the commencement of the Chapter 11 Case, and may rely on a
written statement of the Creditor, signed under penalties of perjury, to that
effect. In general, absent actual knowledge to the contrary, Reorganized
Southern Mineral may presume that a Creditor that is not a 5% shareholder
immediately after the ownership change held the debt for the 18-month period.
Although Reorganized Southern Mineral's NOLs will not be subject to the
Section 382 Limitation if the Bankruptcy Exception applies, its NOLs
nevertheless will be reduced by any interest deductions taken by Southern
Mineral during the taxable year in which the Consummation Date occurs, on or
before such date, and the three preceding taxable years with respect to
indebtedness that was converted into, or exchanged for, stock pursuant to the
Plan.
Even where the Bankruptcy Exception applies, Reorganized Southern Mineral's
ability to utilize the Consolidated NOLs (including its separate NOLs and other
tax attributes) will be effectively eliminated if Reorganized Southern Mineral
undergoes another ownership change within two years of the Consummation
139
<PAGE>
Date. It is anticipated that the contemplated sale of equity securities to
EnCap would result in such an ownership change. In addition, although the
Continuity of Business Requirement discussed above is not applicable to an
ownership change to which the Bankruptcy Exception applies, Reorganized
Southern Mineral's ability to utilize the Consolidated NOLs following
consummation of the Plan may be challenged under Section 269 of the Tax Code,
as discussed below, unless Reorganized Southern Mineral and its Subsidiaries
conduct more than an insignificant amount of an active trade or business
following the ownership change.
Because (i) Southern Mineral will be under the jurisdiction of a court in
case under Chapter 11 of the Bankruptcy Code, (ii) an ownership change with
respect to Southern Mineral is expected to occur as a result of the
confirmation of the Plan by the Bankruptcy Court and (iii) Southern Mineral
believes that the post-Consummation Date stock ownership requirements of the
Bankruptcy Exception should be met and confirmed in accordance with the rules
discussed above.
Notwithstanding Southern Mineral's belief that it meets the requirements to
have Bankruptcy Exception apply, Southern Mineral currently contemplates
electing not to have the Bankruptcy Exception apply and instead to apply a
different special rule available to Company in Title 11 or similar cases. This
rule, found in Section 382(l)(6) of the Tax Code, ("Special Valuation Rule")
and provides that the value of Southern Mineral for the purpose of computing
the Annual Limitation shall reflect the increase in value (if any) resulting
from any debt reduction occurring in the transaction. The election to have the
Special Valuation Rule apply instead of the Bankruptcy Exception will not only
increase the Annual Limitation but will also avoid the reduction of any
remaining NOLs of Southern Mineral as required by the Bankruptcy Exception and
any possible elimination of Southern Mineral's ability to use such NOLs
resulting from a subsequent ownership change within two years of the
confirmation date.
(c) Section 269 of the Tax Code
Section 269 of the Tax Code grants the Service the power to disallow any
deduction, credit or allowance (including the utilization of NOLs) where a
corporation undertakes certain transactions for the principal purpose of
avoiding or evading Federal income taxes. As described in this Disclosure
Statement, Southern Mineral intends that it and each of its Subsidiaries will
continue operating in substantially the same businesses in which they now
operate. Although there can be no certainty due to the factual nature of the
Section 269 inquiry, Southern Mineral believes that the application of Section
269 of the Tax Code should not adversely affect the NOLs that it and its
Subsidiaries will retain after the Consummation Date and that, subject to the
other risks described herein, those NOLs should be available to be utilized
against future operating income. Moreover, Reorganized Southern Mineral would
vigorously contest any challenge brought by the Service under Section 269 of
the Tax Code.
3. Deductions of Accrued Interest and Original Issue Discount by Reorganized
Southern Mineral
To the extent a portion of the consideration issued to Creditors pursuant to
the Plan is attributable to accrued and unpaid interest on their Claims,
Reorganized Southern Mineral would be entitled to interest deductions in the
amount of such accrued interest, to the extent Southern Mineral has not already
deducted such amounts. Although the amount of consideration allocable to
accrued interest where Creditors are receiving less than the full principal
amount of their claims is unclear under present law, Southern Mineral intends
to allocate the full amount of the consideration transferred to Creditors
pursuant to the Plan to the principal amount of such Creditors' Claims and to
take the position that no amount of the consideration to be received by
Creditors pursuant to the Plan is attributable to accrued interest on such
Creditors' Claims.
4. Alternative Minimum Tax
For purposes of computing Reorganized Southern Mineral's regular tax
liability, all of the taxable income recognized in a taxable year generally may
be offset by the carryover of NOLs (to the extent permitted under the Tax
Code). Although all of Reorganized Southern Mineral's regular tax liability for
a given year may be
140
<PAGE>
reduced to zero by virtue of its NOLs, in any given year, Reorganized Southern
Mineral may be subject to the alternative minimum tax ("AMT"). The AMT imposes
a tax equal to the amount by which 20% of a corporation's alternative minimum
taxable income ("AMTI") exceeds the corporation's regular tax liability. AMTI
is calculated pursuant to specific rules in the Tax Code which eliminate or
limit the availability of certain tax deductions and which include as income
certain amounts not generally included in computing regular tax liability. Of
particular importance to Reorganized Southern Mineral is that in calculating
AMTI, only 90% of a corporation's AMTI may be offset by net operating loss
carryovers (as computed for these purposes). Thus, in any year for which
Reorganized Southern Mineral may be subject to the AMT, any AMTI recognized
would be taxable at an effect rate of 2% (i.e., 10% of the 20% AMT tax rate).
B. Federal Income Tax Consequences to Holders of Claims
1. Southern Mineral Classes 1, 2 and 4
On the exchange of its Claim for cash or property, each holder of a Southern
Mineral Class 1 Claim or Class 4 Claim will recognize gain or loss measured by
the difference between the amount realized on the exchange and its tax basis in
such Claim. The amount realized will be equal to the aggregate fair market
value of the cash and/or property received to the extent not allocable to
interest. See Section XIII.A.3--"Federal Income Tax Consequences to Southern
Mineral--Deductions of Accrued Interest and Original Issue Discount by
Reorganized Southern Mineral." The character and taxation of any recognized
gain or loss will depend on the status of the Creditor, the nature of the Claim
in its hands and its holding period. To the extent a Creditor receives property
constituting a new obligation which, under Section 1001 of the Tax Code and the
Treasury Regulations thereunder, does not differ materially in kind or extent
from such Creditor's Claim, such new obligation should be treated as a
continuation of such Claim. As a result, to the extent such new obligation is
treated as a continuation of such Claim, there should be no federal income tax
consequences to such Creditor. Each Creditor should consult with its own tax
advisors regarding the consequences to it of receiving cash or property,
including a new obligation, in exchange in whole or in part for its Claim.
2. Southern Mineral Class 3
(a) General
The federal income tax consequences of the implementation of the Plan to (i)
a Southern Mineral Class 3 U.S. Creditor receiving Cash, New Securities and
Warrants under the Plan will depend primarily on a number of factors, including
whether the exchanged claim is an obligation that constitutes a "security" for
federal income tax purposes (a "Tax Security"). The term "security" is not
defined in the Tax Code or the Treasury Regulations. Whether a Senior Claim
constitutes a Tax Security is based on the facts and circumstances surrounding
the origin and nature of the Senior Claim, and its maturity date. Generally,
stock, and bonds or debentures with an original term of at least ten years,
have been considered to be Tax Security. In contrast, instruments with terms of
five years or less rarely qualify as Tax Securities. Southern Mineral believes
that it is likely, although not entirely free from doubt, that the Debentures
should be treated as Tax Securities for federal income tax purposes.
The exchange of a Debenture for cash, New Securities and Warrants should be
treated as a reorganization within the meaning of Section 368(a)(1) of the Tax
Code. Accordingly, under current law (i) a Class 3 Creditor who is a "U.S.
Creditor" (as "U.S. Class 3 Creditor") generally should not recognize gain or
loss on the exchange of the Debenture for New Securities or Warrants, except to
the extent that New Securities or Warrants are issued for accrued but unpaid
interest or market discount not yet recognized by the U.S. Class 3 Creditor;
(ii) U.S. Class 3 Creditors will recognize the realized capital gain to the
extent of the cash received in the transaction; (iii) and such capital gain
will be treated as long term capital gain to the extent that the U.S. Class 3
Creditor held its Debenture for more than twelve months; (iv) to the extent
that the U.S. Class 3 Creditor receives any New Securities or Warrants for
accrued but previously unrecognized interest, such U.S. Class 3 Creditor will
have ordinary income equal to the amount of accrued but unrecognized interest;
(v) a U.S.
141
<PAGE>
Class 3 Creditor's aggregate tax basis will be such U.S. Class 3 Creditor's tax
basis in its Debentures plus any gain recognized from the exchange (including
receipt of accrued but previously unrecognized interest) less the amount of
cash received in the exchange, which aggregate basis will be allocated on a pro
rata basis between the New Securities and Warrants based on the relative fair
market value of each. An exchanging U.S. Class 3 Creditor will have a holding
period in his New Securities and Warrants that includes the holding period
during which the U.S. Class 3 Creditor held the Debentures.
As used in this discussion, the term U.S. Class 3 Creditor means a creditor
that, for United States federal income tax purposes, is (i) the citizen or
resident of the United States, (ii) a corporation, partnership or other entity
created or organized in or under the laws of the United States or any state,
(iii) an estate the income of which is subject to the United States Federal
income tax, regardless of its source, or (iv) a trust if (a) a court within the
United States is able to exercise primary supervision of the administration of
the trust and (b) one or more United States persons have the authority to
control all substantial decisions of the trust. U.S. Class 3 Creditors who
receive taxable income from the exchange may be subject to backup withholding
by the Debtor.
Market Discount
U.S. Class 3 Creditors who acquired Debentures at a "market discount" (i.e.
at a price below the adjusted interest price of the Debentures) must generally
treat gain recognized on a disposition of such Debenture as ordinary income to
the extent of market discount accrued while the Debenture was held by the U.S.
Class 3 Creditor, unless the U.S. Class 3 Creditor made an election to include
such market discount in income as it accrued. The Tax Code provides that "under
regulations" (which have not yet been issued), accrued market discount, in a
market discount debt instrument is not recognized as ordinary income at the
time of the debt instrument's disposition if the disposition occurs in a
"nonrecognition transaction" including a recapitalization. Instead, accrued
market discount on a market discount debt instrument disposed on in a
nonrecognition transaction is converted into accrued market discount on
property received in the transaction if that property is a market discount debt
instrument. If the property received is not a market discount debt instrument,
accrued market discount on the old market discount debt instrument is treated
as ordinary income on a disposition of the property received in exchange
therefor, limited to the extent of gain thereon.
U.S. Class 3 Creditors that have accrued market discount should not be
required to recognize that accrued market discount as ordinary income when the
U.S. Class 3 Creditor exchanges those instruments for the New Securities,
Warrants and cash; rather the accrued market discount should be allocated to
the New Securities and Warrants received in exchange therefor. Although no
regulations or rules have been provided to determine how such accrued market
discount should be allocated, the accrued market discount should be allocated
in the same manner as tax basis is allocated. The portion of the accrued market
discount allocated to the New Securities and Warrants will be treated as
ordinary income at the disposition of such New Securities and Warrants, but not
in excess of the total gain recognized.
Under the market discount rules, U.S. Class 3 Creditor with accrued market
discount may be required to defer the deduction of a portion of the interest on
any indebtedness incurred or maintained to purchase or carry the Debentures.
Any interest expense which has been deferred by U.S. Class 3 Creditors who
participate in the exchange will continue to be deferred and will be deductible
only on the disposition of the New Securities and warrants received in the
exchange.
U.S. Class 3 Creditors should consult their own tax advisors regarding the
amount of any market discount, if any, accrued with respect to their New
Securities and Warrants that may be treated as carried over from their
Debentures and the limitation on interest deductions attributable to the New
Securities and Warrants.
142
<PAGE>
(b) Accrued Interest on Debentures
As discussed above, the manner in which consideration is to be allocated
between accrued unpaid interest and principal of the Debentures for federal
income tax purposes is unclear under present law. Although there can be no
assurance with respect to the issue. Southern Mineral intends to take the
position that no portion of the consideration distributed to holders of Class 3
Claims pursuant to the Plan is allocable to accrued and unpaid interest on the
Debentures. [See Section XIII.A.3--"Federal Income Tax Consequences to Southern
Mineral--Deduction of Accrued Interest and Original Issue Discount by Southern
Mineral,"] above.
U.S. Class 3 Creditor a holder of that previously included in income accrued
but unpaid interest attributable to its Note Claim a Debenture should recognize
an ordinary loss to the extent that such previously included accrued interest
exceeds the amount of consideration received by the U.S. Class 3 Creditor that
is attributable to accrued interest for federal income tax purposes. To the
extent a U.S. Class 3 Creditor did not previously include in income accrued but
unpaid interest attributable to its Debenture, any portion of the consideration
received that is allocable to accrued but unpaid interest should be recognized
as ordinary income, regardless of whether the U.S. Class 3 Creditor realizes an
overall gain or loss upon the surrender of its Debenture or whether such gain
or loss is recognized. Based on Southern Mineral's position that no portion of
the consideration is allocable to accrued and unpaid interest on the
Debentures, no such income inclusion should be required.
Notwithstanding the general discussion above, the basis of a U.S. Class 3
Creditor in New Securities and Warrants treated as received in satisfaction of
accrued interest on the Debenture, if any, should be equal to the amount of
interest income treated as satisfied by the receipt of such instruments.
Additionally, a U.S. Class 3 Creditor tax holding period in such stock should
begin on the day following the date on which it has a right to receive such New
Securities and Warrants.
(c) Ownership of Warrants
No gain or loss will be recognized upon the exercise of a Warrant. The U.S.
Class 3 Creditor's basis in the stock acquired upon exercise will equal the sum
of his basis in the Warrants exercised and the exercise price. The U.S. Class 3
Creditor's holding period for the stock will begin the day after the exercise
of the warrant. Certain adjustments of the exercise price of the Warrants, such
as adjustments to reflect taxable distributions of cash or property on common
stock, will be treated as a dividend to the holder of the Warrant to the extent
of Southern Minerals current or cumulated earnings and profits. Adjustments to
reflect nontaxable stock splits or distributions to the holders of common stock
of stocks, stock warrants or stock rights will, however, generally not be
treated as a taxable distribution to the holder of a Warrant. Moreover, the
failure to adjust fully the exercise price for the Warrants to reflect
distributions of stock, stock warrants or stock rights with respect to the
common stock may result in a taxable dividend to holders of common stock.
(d) Sale, Exchange or Redemption of New Securities and Warrants
The sale or exchange of New Securities and Warrants generally should result
in capital gain or loss equal to the difference between the amount realized and
the holder's tax basis in such subject to the market discount rules ("Market
Discount" below). Depending upon the circumstances, a redemption by Reorganized
Southern Mineral of New Securities and Warrants may result in capital gain or
loss to the holder of such stock, or may be treated as a dividend, generally
taxable as ordinary income to the holder to the extent of Reorganized Southern
Mineral's earnings and profits at the time of the redemption.
143
<PAGE>
XIV.
FEASIBILITY OF THE PLAN AND THE
BEST INTERESTS OF CREDITORS TEST
A. Feasibility of the Plan
In connection with confirmation of the Plan, Section 1129(a)(11) requires
that the Bankruptcy Court find that confirmation of the Plan is not likely to
be followed by the liquidation or the need for further financial reorganization
of Southern Mineral. This is the so-called "feasibility" test. To support their
belief in the feasibility of the Plan, Southern Mineral has prepared financial
projections (the "Projections") of Southern Mineral's projected financial
results through the fiscal year ending 2001, as set forth in Schedule XIV-A.
The Projections indicate that Reorganized Southern Mineral should have
sufficient cash flow to make the payments required under the Plan on the
Consummation Date and to repay and service debt obligations and to maintain
operations on a going-forward basis. Accordingly, Southern Mineral believes
that the Plan complies with the standard of Section 1129(a)(11) of the
Bankruptcy Code. As noted in the Projections, however, Southern Mineral
cautions that no representations can be made as to the accuracy of the
Projections or as to Reorganized Southern Mineral's ability to achieve the
projected results. Many of the assumptions upon which the Projections are based
are subject to uncertainties outside the control of Southern Mineral. Some
assumptions inevitably will not materialize, and events and circumstances
occurring after the date on which the Projections were prepared may be
different from those assumed or may be unanticipated, and may adversely affect
Southern Mineral's financial results. As discussed elsewhere in this Disclosure
Statement, Southern Mineral has experienced difficulty in (a) maintaining
liquidity, and (b) raising sufficient funds to maintain the level of capital
expenditure necessary to expand their businesses, in large part due to Southern
Mineral's current capital structure. Therefore, the actual results may vary
from the projected results and the variations may be material and adverse. See
Section XI.--"Risk Factors To Be Considered" for a discussion of certain risk
factors that could affect financial feasibility of the Plan.
The projections were not prepared with a view toward compliance with the
guidelines established by the American Institute of Certified Public
Accountants or the rules and regulations of the Securities and Exchange
Commission regarding projections. Furthermore, the projections have not been
audited, reviewed or compiled by KPMG LLP, our independent certified
accountants and they express no opinion or any other form of assurances on such
information. Although presented with numerical specificity, the projections are
based upon a variety of assumptions, some of which have not been achieved to
date and may not be realized in the future, and are subject to significant
business, litigation, economic and competitive uncertainties and contingencies,
many of which are beyond our control. Consequently, the projections should not
be regarded as a representation or warranty by us, or any other person, that
the projections will be realized. Actual results may vary materially from those
presented in the projections.
B. Best Interests Test
Even if the Plan is accepted by each Class of holders of Impaired Claims and
Impaired Interests, the Bankruptcy Code requires that the Bankruptcy Court find
that the Plan is in the best interests of all holders of Claims and Interests
that are Impaired by the Plan and that have not accepted the Plan. The "best
interests" test, set forth in Section 1129(a)(7) of the Bankruptcy Code,
requires the Bankruptcy Court to find either that all members of an impaired
class of claims or interests have accepted the Plan or that the Plan will
provide a member who has not accepted the Plan with a recovery of property of a
value, as of the effective date of the Plan, that is not less than the amount
that such holder would receive or retain if the debtor were liquidated under
Chapter 7 of the Bankruptcy Code on such date.
144
<PAGE>
To calculate the probable distribution to members of each impaired class of
holders of claims or interests if a debtor were liquidated under Chapter 7, the
Bankruptcy Court must first determine the aggregate dollar amount that would be
generated from the debtor's assets if its Chapter 11 case were converted to a
Chapter 7 case under the Bankruptcy Code. This "liquidation value" would
consist of the proceeds from a forced sale of the debtor's assets by a Chapter
7 trustee.
The amount of liquidation value available to holders of Unsecured Claims
against Southern Mineral would be reduced by first, the claims of the DIP
Facility lender and the Secured Creditors (to the extent of the value of their
collateral), and second, by the costs and expenses of liquidation, as well as
by other administrative expenses and costs of both the Chapter 7 case and the
Chapter 11 Case. Costs of a liquidation of Southern Mineral under Chapter 7 of
the Bankruptcy Code would include the compensation of a Chapter 7 trustee, as
well as of counsel and other professionals retained by the trustee, asset
disposition expenses, all unpaid expenses incurred by Southern Mineral in the
Chapter 11 Case (such as compensation of attorneys, financial advisors, and
accountants) that are allowed in the Chapter 7 case, litigation costs, and
claims arising from the operations of Southern Mineral during the pendency of
the Chapter 11 Case. The liquidation itself would trigger certain priority
payments that otherwise would not be due in the ordinary course of business.
Those senior Claims would be paid in full from the liquidation proceeds before
the balance would be made available to pay Unsecured Claims or to make any
distribution in respect of Interests. The liquidation would also prompt the
rejection of executory contracts and unexpired leases and thereby create a
significantly greater amount of Unsecured Claims.
In a Chapter 7 liquidation, no junior class of claims may be paid unless all
classes of claims senior to such junior class are paid in full. Section 510(a)
of the Bankruptcy Code provides that subordination agreements are enforceable
in a bankruptcy case to the same extent that such subordination is enforceable
under applicable non-bankruptcy law. Therefore, no class of Claims that is
contractually subordinated to another class would receive any payment on
account of its Claims, unless and until such senior class were paid in full.
Once the Bankruptcy Court ascertains the recoveries in liquidation of
Southern Mineral's DIP Facility, Secured and Priority Creditors, it would then
determine the probable distribution to Unsecured Creditors from the remaining
available proceeds of the liquidation. If this probable distribution has a
value greater than the distributions to be received by the Unsecured Creditors
under the Plan, then the Plan is not in the best interests of creditors and
cannot be confirmed by the Bankruptcy Court. As shown in the Liquidation
Analysis attached hereto as Schedule XIV.B., Southern Mineral believes that
each member of each Class of Impaired Claims will receive at least as much, if
not more, under the Plan as they would receive if Southern Mineral was
liquidated. Because liquidation would not yield more for such Interest holders,
the Plan meets the requirements of Section 1129(a)(7) as to Interest holders as
well.
C. Liquidation Analysis
As noted above, Southern Mineral believes that under the Plan all holders of
Impaired Claims and Impaired Interests will receive property with a value not
less than the value such holder would receive in a liquidation of Southern
Mineral under Chapter 7 of the Bankruptcy Code. Southern Mineral's belief is
based primarily on (i) extensive consideration of the effects that a Chapter 7
This liquidation analysis presents estimated amounts that would be paid to
claimants and equity interest holders in Impaired Classes 2, 3 and 5 under a
hypothetical Chapter 7 liquidation. The assumptions and estimates utilized in
this liquidation analysis are considered reasonable by us and, with respect to
our oil and gas assets, incorporate the results of the strategic alternatives
evaluation program that Southern Mineral undertook prior to entering into the
EnCap Transaction. This liquidation analysis is also based on assumptions with
regard to management decisions that may be subject to change by a Chapter 7
Trustee in an actual liquidation.
145
<PAGE>
We believe that this liquidation analysis reflects all relevant information
known to management as of the date of this proxy
statement/prospectus/disclosure statement. We are not aware of any events
subsequent to such date that would materially affect this liquidation analysis.
We can give you no assurances that the assumptions underlying this liquidation
analysis would be made or accepted by the Bankruptcy Court. Southern Mineral
believes that any liquidation analysis is speculative, as such an analysis
necessarily is premised on assumptions and estimates which are inherently
subject to significant uncertainties and contingencies, many of which would be
beyond the control of Southern Mineral. Thus, there can be no assurance as to
values that would actually be realized in a Chapter 7 liquidation, nor can
there be any assurance that a Bankruptcy Court would accept Southern Mineral's
conclusions or concur with such assumptions in making its determinations under
Section 1129(a)(7) of the Bankruptcy Code.
1. Basis of Presentation
This liquidation analysis is based on the our projected balance sheet as of
September 30, 1999 with various adjustments thereto, as reflected in the
significant assumption section below and the footnote section following the
liquidation analysis, as well as other amounts we estimated. The liquidation
analysis assumes that our asset and liability values at September 30, 1999, the
hypothetical effective date of the Plan, would be based upon a rollforward of
the May 31, 1999 unaudited financial statements adjusted for our estimates
through September 30, 1999. Actual results through September 30, 1999 and
recoveries in Chapter 7 liquidation may differ materially from the projected
balance sheet and estimate of recoveries included herein.
2. Significant Assumptions
(a) Oil and gas property liquidation value. The liquidation of our oil and
gas assets assumes that (1) the asset disposition process would take place on
an accelerated basis in the event of conversion to Chapter 7, (2) there would
be no extensive solicitation of new offers, and (3) the properties would be
sold in an "as is" condition and purchasers would not receive the normal
contractual representations and warranties typically provided in acquisition of
oil and gas producing properties. The liquidation value was therefore
determined based on numerous assumptions that we believe are reasonable under
such circumstances, but may not necessarily occur if the liquidation were
pursued. The initial value was determined by applying an estimate of future oil
and gas prices and cost escalation to our estimated proved oil and gas reserves
(except Ecuador, which was estimated to have no value) as of October 1, 1999.
The product prices and cost escalation were derived from a current survey of
oil and gas prices used by middle market oil and gas acquisition companies in
determining their acquisition price The product prices were adjusted for
quality, grade and locations specific to our oil and gas properties. The result
was a traditional reserves and economics analysis that discounted future net
revenues by 10%. These discounted values were further adjusted to approximate
the price that we believe oil and gas properties could be sold in an orderly,
non-liquidation sale over a reasonable period of time while providing the
purchaser with normal industry standard representations and warranties. The
adjustments to the present value of future net revenues by category are as
follows:
<TABLE>
<S> <C>
Proved developed producing............................................ 95%
Proved behind pipe.................................................... 50%
Proved undeveloped.................................................... 25%
</TABLE>
The total was then reduced by an additional 25% to reflect the discount
associated with an accelerated Chapter 7 sale.
In addition, we also received proposals to acquire certain of our oil and
gas properties during our strategic alternatives evaluation program which taken
at face value would have resulted in similar results on an over-all basis.
Although these proposals were from independent third parties, for the most part
there were no negotiations to improve the initial proposals nor were there
extensive contacts to obtain other competing proposals for the individual asset
packages. Conversely, the proposals were not submitted under the context of
properties being sold in Chapter 7 and subject to the above referenced negative
assumptions associated with such a sale.
146
<PAGE>
As outlined by CIBC WM in their bids received net asset value summary
included in the prospectus, subject to the assumptions and limitations stated
therein, (which bids were not received in anticipation of a Chapter 7
liquidation), the estimated value of (i) our oil and gas reserves resulting
from their compilation of the bids received and (ii) the present value of our
reserves discounted 10% that we estimated for those properties for which no
bids were received totaled approximately $58.8 million. The value of
properties located in the United States is $36.4 million and is comprised of
several proposals combined with our estimate where no proposals were received
to be paid in cash upon the closings. Two proposals for the Canadian
properties were received totaling $22.4 million to be paid in cash and equity
securities of one of the purchasers. The value of the U.S. properties does not
include the $16.3 million agreement by ANR Production Company for our Brushy
Creek Field and Texan Gardens Field interests. We also assumed that we would
receive only a residual distribution from the various subsidiaries after the
subsidiary had paid all of its debts and claims in full. We assumed that the
prospects held for resale would need to be sold as part of the producing
properties in order to maximize the value of the proceeds. See also notes 8
and 9.
(b) Order of distribution. The hypothetical Chapter 7 liquidation assumes
the following order of distribution in accordance with Section 726 of the
Bankruptcy Code:
. Secured Claims entitled to a superpriority status approved by the
Bankruptcy Court
. Allowed Secured Claims
. Allowed Chapter 7 Administrative Claims
. Allowed Chapter 11 Administrative Claims
. Allowed Priority Claims
. Allowed General Unsecured Claims
. Equity Interests
(c) Other assumptions.
(i) Our operations would immediately cease upon conversion of the case
to a Chapter 7 proceeding, and another operator would assume our oil and
gas business operating functions;
(ii) A Chapter 7 trustee would liquidate the assets on an accelerated
schedule;
(iii) Liquidation would commence on September 30, 1999 and be complete
by December 31, 1999;
(iv) The oil and gas properties are assumed to be sold on October 1,
1999 with another operator commencing operations on October 1, 1999 on
properties operated by us;
(v) No asset value has been attributed to potential preferences,
fraudulent transfers or other possible recoveries through pending lawsuits;
and
(vi) In the liquidation of the subsidiaries, the estimated contingent
liabilities attributable to our subsidiaries are as follows:
.BEC, Inc.--legal and settlement costs of $1 million
.Neutrino--decommissioning and plugging costs of $2.6 million
.Neutrino--Canadian employee severance costs of $500,000
.Amerac/ Southern Mineral Production Co.--state income tax of
$100,000
Based upon the foregoing assumptions, the following liquidation analysis
was prepared, including a comparison of the estimated recoveries in a
hypothetical Chapter 7 liquidation with estimated recoveries under the Plan.
147
<PAGE>
THE ASSUMPTIONS SET FORTH IN THE SCHEDULE XIV.B. ANALYSIS ARE INTEGRAL TO
THE ANALYSIS. ANY VARIANCE IN THE ASSUMPTIONS COULD LEAD TO EITHER A LOWER OR
HIGHER LIQUIDATION VALUATION.
For example, the Liquidation Analysis necessarily contains an estimate of
the amount of Claims which will ultimately become Allowed Claims. This estimate
is based solely upon Southern Mineral's review of its books and records and
Southern Mineral's estimates as to additional Claims that may be filed in the
Chapter 11 Case or that would arise in the event of a conversion of the case
from Chapter 11 to Chapter 7. No order or finding has been entered by the
Bankruptcy Court estimating or otherwise fixing the amount of Claims at the
projected amounts of Allowed Claims set forth in the Liquidation Analysis. In
preparing the Liquidation Analysis, Southern Mineral has projected an amount of
Allowed Claims that is at the lower end of a range of reasonableness such that,
for purposes of the Liquidation Analysis, the largest possible liquidation
dividend to holders of Allowed Claims can be assessed. The estimate of the
amount of Allowed Claims set forth in the Liquidation Analysis should not be
relied on for any other purpose, including, without limitation, any
determination of the value of any distribution to be made on account of Allowed
Claims under the Plan.
To the extent that confirmation of the Plan requires the establishment of
amounts for the Chapter 7 liquidation value of Southern Mineral, funds
available to pay Claims, and the reorganization value of Southern Mineral, the
Bankruptcy Court will determine those amounts at the Confirmation Hearing.
Accordingly, the attached Liquidation Analysis is provided solely to disclose
to holders the effects of a hypothetical Chapter 7 liquidation of Southern
Mineral, subject to the assumptions set forth therein.
D. Financial Analysis of Reorganized Southern Mineral
Financial Analysis Overview
Our projected balance sheets and statements of projected operations as of
and for the quarter ended December 31, 1999 and as of and for each of the years
in the two year period ended December 31, 2001, hereinafter referred to as the
"Financial Analysis". The projected balance sheet and statement of operations
as of and for the three months ended December 31, 1999 include actual unaudited
preliminary financial results for May 1999. Pro forma adjustments were made to
these balances to reflect the sale of our Brushy Creek and Texan Gardens Fields
interest to ANR Production Company that is assumed to close on July 31, 1999.
The Financial Analysis presents, to the best of our belief, the expected
results of operations for the projected periods, utilizing the assumptions
referred to below. Accordingly, the Financial Analysis reflects our judgment,
based on current facts and circumstances, of the expected conditions and our
anticipated course of action upon the Effective Date of the Plan. While we
believe the assumptions set forth below are reasonable, their validity may be
affected by the occurrence of events and the existence of conditions not now
contemplated and by other factors, many of which are beyond the control of
Southern Mineral. The Financial Analysis is, therefore, not intended to be a
representation of our actual future performance. Actual operating results
during the projected periods may vary from the Financial Analysis and such
variations may be material. The projections assume the Plan will be implemented
in accordance with its terms, and present the anticipated effects of the
consummation of the Plan and various other factors on our consolidated
financial condition and results of operations for 1999 through 2001.
We do not generally publish our business plans and strategies or make
external projections of our anticipated financial position or results of
operations. Accordingly, after the expected date of consummation of the Plan,
we do not intend to update or otherwise revise the projections to reflect
circumstances existing since their preparation or to reflect the occurrence of
unanticipated events, even in the event that any or all of the underlying
assumptions are shown to be in error. Furthermore, we do not intend to update
or revise the projections to reflect changes in general economic or industry
conditions.
148
<PAGE>
The Financial Analysis has not been prepared with a view towards compliance
with published guidelines of the Securities and Exchange Commission and the
American Institute of Certified Public Accountants regarding projections or
forecasts. Neither KPMG LLP, our independent auditors, nor any other
independent accountants or financial advisors, examined, or performed any
procedures with respect to the projected consolidated financial information
contained herein, nor have they expressed any opinion or any other form of
assurance on such information or its achievability, and assume no
responsibility for, and disclaim any association with, the projected
consolidated financial information.
Abbreviations are defined more extensively in the Plan, Disclosure Statement
and attached Exhibits. This Financial Analysis should be read in conjunction
with the Plan, Disclosure Statement and related Exhibits.
149
<PAGE>
SOUTHERN MINERAL CORPORATION
UNAUDITED PROJECTED CONSOLIDATED BALANCE
As of December 31,
(In Thousands)
<TABLE>
<CAPTION>
ASSETS 1999 2000 2001
------ -------- -------- --------
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents..................... $ 1,057 $ 1,057 $ 1,057
Receivables................................... 4,829 4,829 4,829
Other......................................... 769 769 769
-------- -------- --------
Total current assets........................ 6,655 6,655 6,655
-------- -------- --------
Property and equipment, at cost using successful
efforts method for oil and gas activities
Oil and gas producing properties.............. 135,291 152,353 172,050
Unproven properties........................... 2,608 2,608 2,608
Office equipment.............................. 547 547 547
Accum. depreciation, depletion and
amortization................................. (38,181) (50,058) (63,200)
-------- -------- --------
100,265 105,450 112,006
Properties held for sale and other.............. 3,749 2,446 1,144
-------- -------- --------
Total assets................................ $110,669 $114,551 $119,804
======== ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current Liabilities
Accounts payable.............................. $ 6,321 $ 6,321 $ 6,321
Current portion of long-tem debt.............. -- -- --
-------- -------- --------
Total current liabilities................... 6,321 6,321 6,321
-------- -------- --------
Long-Term Debt (less current portion)........... 25,471 25,471 25,471
Deferred Income Taxes........................... 7,462 8,432 9,745
Stockholders' Equity
Preferred stock............................... -- -- --
Common stock.................................. 744 744 744
Additional paid-in captital................... 59,250 59,250 59,250
Accumulated other comprehensive loss.......... (835) (835) (835)
Retained earnings............................. 12,308 15,220 19,160
Less: treasury stock.......................... (52) (52) (52)
-------- -------- --------
Total stockholders' equity.................. 71,415 74,327 78,267
-------- -------- --------
Total liabilities and stockholders' equity.. $110,669 $114,551 $119,804
======== ======== ========
</TABLE>
150
<PAGE>
SOUTHERN MINERAL CORPORATION
UNAUDITED PROJECTED CONSOLIDATED STATEMENT OF OPERATIONS
For The Three-Months ended December 31, 1999 and the Years Ended December 31,
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three-
months
ended
1999 2000 2001
------ ------- -------
<S> <C> <C> <C>
Oil and gas revenues................................ $6,578 $29,870 $33,900
Expenses
Production........................................ 1,989 9,048 10,312
Depreciation, depletion and amortization.......... 2,690 11,877 13,143
General and administrative........................ 870 3,603 3,732
------ ------- -------
5,549 24,528 27,187
------ ------- -------
Income from operations.............................. 1,029 5,342 6,713
Other income, expenses and deductions
Interest and other income......................... 42 42 42
Interest and debt expense......................... (375) (1,502) (1,502)
------ ------- -------
Income before income taxes.......................... 696 3,882 5,253
Provision for income tax expense.................... 174 970 1,313
------ ------- -------
Net income.......................................... $ 522 $ 2,912 $ 3,940
====== ======= =======
Net income per share--basic......................... $ 0.01 $ 0.04 $ 0.05
====== ======= =======
Net income per share--diluted....................... $ 0.01 $ 0.04 $ 0.05
====== ======= =======
Weighted average number of shares outstanding--
basic.............................................. 74,398 74,398 74,398
====== ======= =======
Weighted average number of shares outstanding--
diluted............................................ 79,410 79,410 79,410
====== ======= =======
</TABLE>
151
<PAGE>
Accounting Treatment
The restructuring assumes that the transaction will be consummated pursuant
to a prepackaged plan. Since the prepackaged plan is assumed, we would
implement the provisions of SOP 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code". Pursuant to SOP 90-7, we assume that
the reorganization value of Southern Mineral on the effective date of the
prepackaged plan will exceed the amount of affected claims and expected post-
petition liabilities. Under SOP 90-7, if the reorganization value of the
company were greater than the sum of the affected claims and post petition
liabilities, fresh start accounting would not apply. As such, we presently
assumes that fresh start accounting will not be implemented.
Effective Date
The projections assume that the Plan will be confirmed in accordance with
its terms and that all transactions contemplated will be consummated as of
September 30, 1999. Any significant delay in the expected date of consummation
could have an unfavorable impact on financial performance and could result in
additional professional and other fees.
ANR Transaction
The sale of our Brushy Creek and Texan Gardens fields interests to ANR
Production Company has been assumed to occur prior to the Plan and the results
of that transaction have been reflected in the pro forma adjustments during
1999.
New Capital Structure
In accordance with the prepackaged plan, we will issue 61,598,637 new shares
of common stock resulting in 74,401,855 shares issued and outstanding. Total
unsecured debt was eliminated and reduced from $41.4 million. 7,820,460
warrants were issued to the debenture holders with an exercise price of $1.50
for three years. No warrants or stock options have been assumed exercised in
the Financial Analysis.
Foreign Currency Translations
The Financial Analysis assumes that there will be no gains or losses from
foreign currency translations for the projected period.
Income Statement Assumptions
Pricing
The markets for oil and gas have historically been, and will continue to be,
volatile. Prices for oil and gas may fluctuate in response to relatively minor
changes in supply and demand, market uncertainty and a variety of factors
beyond the control of us. For purposes of the Financial Analysis, prices were
obtained from an average of five middle market merger and acquisition oriented
exploration and development companies. Differential adjustments were made to
give effect to grade, quantity and location variations.
The following table shows the assumed realized future prices to be received
by us during the periods indicated:
<TABLE>
<CAPTION>
Three Months Year Ended
Ended December 31,
December 31, -------------
1999 2000 2001
------------ ------ ------
<S> <C> <C> <C>
Oil & NGL price (per Bbl)........................... $14.98 $15.56 $15.82
Gas price (per Mcf)................................. $ 2.21 $ 2.24 $ 2.32
</TABLE>
152
<PAGE>
Our revenues and cash flows are affected by changes in oil and gas prices.
Oil and gas prices are subject to substantial seasonal, political and other
fluctuations that we are unable to control or accurately predict. We
historically have entered into transactions to hedge a portion of its
production against changes in oil and gas prices or interest rates. The
Financial Analysis does not assume that we will hedge a significant portion of
its oil and gas production or interest rates during the projected period.
Production Volumes
The following table shows the projected production volumes during the
periods indicated in thousands.
<TABLE>
<CAPTION>
Three Months Year Ended
Ended December 31,
December 31, -----------------
1999 2000 2001
------------ -------- --------
<S> <C> <C> <C>
Oil & NGL (Mbbls)................................ 226.0 1,010.2 1,116.9
Gas (Mmcf)....................................... 1,448.7 6,320.2 7,005.3
Total Equivalents (Mmcfe)........................ 2,804.5 12,381.2 13,706.7
</TABLE>
The Financial Analysis includes volumes produced for the projected periods
from oil and gas properties in which we own an interest, including all of our
subsidiaries, which are not filing under the Plan.
Exclusive of oil and gas volumes and costs associated with re-invested cash
flow, our reserve reports prepared by our independent engineers were used for
oil and gas production volumes, operating costs and capital expenditures
during the projected periods.
Volumes associated with re-invested cash flow were calculated by applying a
minimum 15% internal rate of return to the re-investment in each period. A 1/2
year production delay was assumed to estimate timing of the resulting
production. Our historical gas to oil ratio of 52%/48% was used to estimate
the gas/liquid production.
Depreciation, Depletion and Amortization
Our average depletion rates per Mcfe for the periods presented is estimated
to be $0.96 per Mcfe.
The rate per Mcfe was projected to remain constant during the projected
period due to increasing production and higher returns on investments.
General and Administrative Expense
The Financial Analysis assumes the beginning general and administrative
expenses subsequent to the Effective Date are projected to be approximately
$700,000 less than historical levels.
Reorganization Expenses
Reorganization expenses of $2.2 million are estimated to be incurred during
the implementation of the Plan.
Income Taxes
The Financial Analysis assumes, prior to the Effective Date, that any
current taxable income will be offset by our net operating loss carryovers
resulting in no income tax expense except for approximately $320,000 in
Alternative Minimum Tax resulting from the ANR Production Company
transactions.
The Financial Analysis further assumes that we will realize $25,117,000
million of debt forgiveness income created by the satisfaction of debentures
with stock, cash and warrants having an estimated fair market value less than
the face amount of the obligations. The debt forgiveness income will offset
our existing net operating loss carryovers, with the balance of the debt
forgiveness income applied to reduce our tax basis of our assets. The
Financial Analysis assumes that the difference in the treatment of depletion
and intangible
153
<PAGE>
drilling costs for tax and financial reporting purposes will be sufficient to
offset current income tax liabilities. Income taxes are assumed to equal 25% of
income for financial reporting purposes.
Interest Expense
Interest expense is projected to decrease approximately $940,000 million for
the three months ended December 1999, from historical level. The projected
interest expense has been estimated giving effect to the following:
. A rate of 8% inclusive of bank fees.
. Exchange of the 6 7/8% debentures for cash, common stock and warrants as
of September 30, 1999.
. Repayment of debt of $65 million at September 30, 1999.
Balance Sheet Assumptions
Cash
The changes in cash represent the net effect of the activities for the
periods represented. Excess cash flow was assumed applied to capital
expenditures and during the projected periods 100% of projected excess cash
flow was used for capital expenditures.
Oil and Gas Producing Properties
We account for our properties at cost utilizing the successful efforts
method. Under the successful efforts method, costs of productive wells,
development dry holes and productive leases are capitalized and amortized on a
unit-of-production basis over the life of the remaining reserves. Our estimates
of future abandonment costs are considered in computing the amortization.
Exploration expenses, including geological, geophysical and costs of carrying
and retaining undeveloped properties are charged to expense as incurred.
Exploratory drilling costs are initially capitalized but are charged to expense
if and when the well is determined to be unsuccessful.
Our projected capital expenditures in thousands are as follows:
<TABLE>
<CAPTION>
Three Months Year Ended
Ended December 31,
December 31, ---------------
1999 2000 2001
------------ ------- -------
<S> <C> <C> <C>
$3,386 $16,736 $19,372
</TABLE>
Capital expenditures used in the Financial Analysis are based upon our
planned expenditures, and included in the independent engineers' reports as of
January 1, 1999 exclusive of properties sold during the period. This Financial
Analysis also assumes that we will make additional capital expenditures of 100%
of excess projected cash flow. These additional capital expenditures are
applied to a program model prepared by Southern Mineral's engineering
department to develop new oil and gas reserves with a target internal rate of
return of 15%. Lease operating expenses, severance taxes and ad valorem taxes
have been increased proportionately for each new volume added as a result of
the program.
154
<PAGE>
Property Held For Sale
Prospects accumulated in Property Held For Sale were assumed to be sold with
us retaining a 25% interest. The following table represents the projected
effect of the transactions in thousands:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------
2000 2001
------- -------
<S> <C> <C>
Cash......................................................... $ 977 $ 977
Property Held for Sale....................................... ($1,303) ($1,302)
Oil & Gas Producing Properties............................... $ 326 $ 326
</TABLE>
Accounts Receivable, Accounts Payable and Other
The Financial Analysis assumes the balances projected at October 1, 1999
will remain constant through the end of 2001.
Bank Debt
Beginning projected balances were adjusted to reflect a reduction to bank
debt of $15.8 million from proceeds of the ANR Production Company transaction
at the anticipated closing date of July 31, 1999 and $7.8 million at the
consummation of the Plan.
The Financial Analysis assumes that we will enter into a revolving credit
facility with our domestic lenders based on our oil and gas reserve base:
. Mature three (3) years after the Effective Date;
. Bear interest at 8% through 2001 inclusive of bank fees; and
. Be secured by a first lien covering substantially all of our assets.
XV.
ALTERNATIVES TO CONFIRMATION AND
CONSUMMATION OF THE PLAN
Southern Mineral believes that the Plan affords holders of Claims and
Interests the potential for the greatest realization on Southern Mineral's
assets and, therefore, is in the best interests of such holders. If, however,
the Requisite Acceptances are not received, or the Requisite Acceptances are
received, the Chapter 11 Case is commenced, and the Plan is not subsequently
confirmed and consummated, the theoretical alternatives include: (a)
commencement of a "non-prepackaged" or "traditional" Chapter 11 case, (b)
formulation of an alternative plan or plans of reorganization, or (c)
liquidation of Southern Mineral under Chapter 7 or 11 of the Bankruptcy Code.
A. Commencement of a "Traditional" Chapter 11 Case
If the Requisite Acceptances are not received, Southern Mineral nevertheless
could commence "traditional" Chapter 11 case for itself and most probably
exclusive of its Affiliates, in which circumstance they could continue to
operate their businesses and manage their properties as debtors-in-possession,
but would become subject to the numerous restrictions imposed on debtors-in-
possession by the Bankruptcy Code. It is not clear whether Southern Mineral
could survive as going concerns in a protracted Chapter 11 case. It could have
difficulty sustaining operations in the face of the high costs, erosion of
customer confidence, and liquidity difficulties that could well result if they
remained Chapter 11 debtors-in-possession for any length of time. Ultimately,
Southern Mineral (or other parties in interest) could propose another plan or
liquidate Southern Mineral under Chapter 7 or Chapter 11 of the Bankruptcy
Code.
155
<PAGE>
B. Alternative Plan(s)
If the Requisite Acceptances are not received or if the Plan is not
confirmed, Southern Mineral (or, if Southern Mineral's exclusive periods in
which to file and solicit acceptances of a reorganization plan have expired,
any other party-in-interest) could attempt to formulate and propose a different
plan or plans of reorganization. Such a plan or plan(s) might involve either a
reorganization and continuation of Southern Mineral's business or an orderly
liquidation of assets.
With respect to an alternative plan, Southern Mineral has explored various
other alternatives in connection with the extensive negotiation process
involved in the formulation and development of the Plan. Southern Mineral
believes that the Plan, as described herein, the result of extensive
negotiations between Southern Mineral and various Creditor constituencies,
enables Creditors to realize the greatest possible value under the
circumstances, and, that as compared to any alternative plan of reorganization,
the Plan has the greatest chance to be confirmed and consummated.
C. Liquidation Under Chapter 7 or Chapter 11
If no plan is confirmed, the Chapter 11 Case may be converted to a case
under Chapter 7 of the Bankruptcy Code, pursuant to which a trustee would be
elected or appointed to liquidate Southern Mineral's assets for distribution to
Creditors in accordance with the priorities set by the Bankruptcy Code. It is
impossible to predict precisely how the proceeds of the liquidation would be
distributed to the respective holders of Claims against or Interests in
Southern Mineral.
Southern Mineral believes that in liquidation under Chapter 7, before
Creditors received any distribution, additional administrative expenses
involved in the appointment of a trustee or trustees and attorneys, accountants
and other professionals to assist such trustees would cause a substantial
diminution in the value of Southern Mineral's Estate. The assets available for
distribution to Creditors would be reduced by such additional expenses and by
Claims, some of which would be entitled to priority, which would arise by
reason of the liquidation and from the rejection of leases and other executory
contracts in connection with the cessation of operations and the failure to
realize the greater going concern value of Southern Mineral's assets.
Southern Mineral could also be liquidated pursuant to the provisions of a
Chapter 11 plan of reorganization. In a liquidation under Chapter 11, Southern
Mineral's assets could be sold in an orderly fashion over a more extended
period of time than in a liquidation under Chapter 7. Thus, a Chapter 11
liquidation might result in larger recoveries than in a Chapter 7 liquidation,
but the delay in distributions could result in lower present values received
and higher administrative costs. Because a trustee is not required in a Chapter
11 case, expenses for professional fees could be lower than in a Chapter 7
case, in which a trustee must be appointed. Any distribution to the holders of
Claims under a Chapter 11 liquidation plan probably would be delayed
substantially.
Although preferable to a Chapter 7 liquidation, Southern Mineral believes
that any alternative liquidation under Chapter 11 is a much less attractive
alternative to Creditors than the Plan because the greater return Southern
Mineral anticipate is provided by the Plan.
SOUTHERN MINERAL BELIEVES THAT THE PLAN AFFORDS SUBSTANTIALLY GREATER
BENEFITS TO CREDITORS AND EMPLOYEES THAN WOULD ANY OTHER REASONABLY CONFIRMABLE
REORGANIZATION PLAN OR LIQUIDATION UNDER ANY CHAPTER OF THE BANKRUPTCY CODE.
Based on Southern Mineral's experience in efforts to restructure business
operations in the several months prior to the Petition Date and its experience
in seeking investors and merger partners, Southern Mineral has not found a
buyer ready, willing, and able to purchase Southern Mineral as a whole or even
to purchase significant portions of Southern Mineral as an ongoing business.
Therefore, the likely form of any liquidation would be the
156
<PAGE>
sale of individual assets. Based on this analysis, it is likely that a
liquidation of Southern Mineral's assets would produce less value for
distribution to Creditors than that recoverable in each instance under the
Plan. In the opinion of Southern Mineral, the recoveries projected to be
available in liquidation are not likely to afford holders of Claims as great a
realization potential as does the Plan.
XVI.
RECOMMENDATION AND CONCLUSION
For all of the reasons set forth in this Disclosure Statement, Southern
Mineral believes that the confirmation and consummation of the Plan is
preferable to all other alternatives. Consequently, Southern Mineral urge all
eligible holders of Impaired Claims and Impaired Interests to vote to ACCEPT
the Plan, and to complete and return their ballots so that they will be
RECEIVED by the Voting Agent on or before 5:00 p.m. New York City Time on
[ ], 1999.
Dated: Houston, Texas
SOUTHERN MINERAL CORPORATION
Steven H. Mikel
President and Chief Executive
Officer
AKIN, GUMP, STRAUSS, HAUER & FELD,
L.L.P.
Attorneys for Southern Mineral
Corporation
By: _________________________________
157
<PAGE>
ANNEX A
UNITED STATES BANKRUPTCY COURT
FOR THE
DISTRICT OF NEVADA
IN RE:
SOUTHERN MINERAL CORPORATION, CASE NO.
DEBTOR.
DEBTOR'S PLAN OF REORGANIZATION
A-1
<PAGE>
INTRODUCTION
Southern Mineral proposes the following Plan for the resolution of its
outstanding Creditor Claims and equity Interests. Reference is made to the
Disclosure Statement (as that term is defined herein) contemporaneously filed
with the Plan, for a discussion of Southern Mineral's history, business,
properties, results of operations, projections for future operations, risk
factors, a summary and analysis of the Plan, and certain related matters.
Southern Mineral is the proponent of the Plan within the meaning of Section
1129 of the Bankruptcy Code (as that term is defined herein).
All holders of Claims and all holders of Interests are encouraged to read
the Plan and the Disclosure Statement in their entirety before voting to accept
or reject the Plan. Subject to certain restrictions and requirements set forth
in Section 1127 of the Bankruptcy Code and Rule 3019, Bankruptcy Rules,
Southern Mineral reserves the right to alter, amend, modify, revoke or withdraw
the Plan prior to its substantial consummation.
I. DEFINITIONS, RULES OF INTERPRETATION, AND COMPUTATION OF TIME
A. Definitions; Rules of Construction
All definitions used in the Plan and Disclosure Statement are set forth on
Appendix I-A attached to the Plan and incorporated in the Plan for all
purposes. For purposes of the Plan, except as expressly provided or unless the
context otherwise requires, all capitalized terms not otherwise defined shall
have the meanings ascribed to them in Appendix I-A. Any term used in the Plan
that is not defined herein, but is defined in the Bankruptcy Code or the
Bankruptcy Rules, shall have the meaning ascribed to that term in the
Bankruptcy Code or Bankruptcy Rules. Whenever the context requires, such terms
shall include the plural as well as the singular number.
B. Rules of Interpretation
For purposes of the Plan (a) any reference in the Plan to a contract,
instrument, release, indenture, or other agreement or document's being in a
particular form or on particular terms and conditions means that such document
shall be substantially in such form or substantially on such terms and
conditions, (b) any reference in the Plan to an existing document or exhibit
filed or to be filed means such document or exhibit as it may have been or may
be amended, modified, or supplemented, (c) unless otherwise specified, all
references in the Plan to Sections, Articles, Appendices, Schedules, and
Exhibits are references to Sections, Articles, Schedules, Appendices and
Exhibits of or to the Plan, (d) the words "herein" and "hereto" refer to the
Plan in its entirety rather than to a particular portion of the Plan, (e)
captions and headings to Articles and Sections are inserted for convenience of
reference only and are not intended to be a part of or to affect the
interpretation of the Plan, and (f) the rules of construction set forth in
Section 102 of the Bankruptcy Code and in the Bankruptcy Rules shall apply.
C. Computation of Time
In computing any period of time prescribed or allowed by the Plan, the
provisions of Rule 9006(a), Bankruptcy Rules shall apply.
II. CLASSIFICATION OF CLAIMS AND INTERESTS
A. Introduction
All Claims and Interests, except DIP Facility Claims, Administrative Claims
and Priority Tax Claims, are placed in the Classes set forth below. In
accordance with Section 1123(a)(1) of the Bankruptcy Code, DIP Facility Claims,
Administrative Claims and Priority Tax Claims, as described below, have not
been classified.
A-2
<PAGE>
A Claim or Interest is placed in a particular Class only to the extent that
the Claim or Interest falls within the description of that Class, and is
classified in other Classes to the extent that any portion of the Claim or
Interest falls within the description of such other classes. A Claim is also
placed in a particular Class for the purpose of receiving distributions
pursuant to the Plan only to the extent that such Claim is an Allowed claim in
that Class and such Claim has not been paid, released, or otherwise settled
prior to the Consummation Date.
B. Unclassified Claims (not entitled to vote on the Plan)
1. DIP Facility Claims. Includes the Claims of the DIP Lenders
pursuant to the terms of the DIP Order. Southern Mineral estimates that
the amount of the DIP Facility Claims on the Distribution Date will be
at most $1,500,000, but more probably $500,000.
2. Administrative Claims. Southern Mineral estimates that
Administrative Claims will total approximately $50,000 on the Effective
Date.
3. Priority Tax Claims. Southern Mineral estimates that Priority Tax
Claims attributable to capital gains taxes are approximately $320,000.
C. Classes of Claims and Interests Against Southern Mineral
1. Southern Mineral Class 1--Other Priority Claims. Estimated
Amount: $ -0-
2. Southern Mineral Class 2--the Secured Claims of Compass Bank and
First Union National Bank in the estimated amount of $31,000,000.
3. Southern Mineral Class 3--the Unsecured Claims of the owners and
holders of the Debentures in the principal amount of $41,400,000,
together with accrued and unpaid interest to the Petition Date.
4. Southern Mineral Class 4--Other Unsecured Claims; The Unsecured
Claims of all Creditors not included in Southern Mineral Classes 1 or 3
in the estimated amount of $650,000.
5. Southern Mineral Class 5--the Interests of the owners and holders
of the Common Stock.
D. Impaired Claims and Interests
Creditors holding Claims or Interests in Southern Mineral Classes 2, 3 and
5 are impaired and entitled to vote on the Plan. Creditors holding Claims in
Southern Mineral Classes 1 and 4 are unimpaired, are deemed to have accepted
the Plan and are not entitled to vote.
III. TREATMENT OF CLAIMS AND INTERESTS
A. Unclassified Claims
1. DIP Facility Claims
On, or one Business Day after, the Consummation Date or the date such
DIP Facility Claim becomes payable pursuant to any agreement between
Southern Mineral and the holder of such DIP Facility Claim, each holder of
an Allowed DIP Facility Claim shall receive in full satisfaction,
settlement, release, and discharge of and in exchange for such Allowed DIP
Facility Claim (a) cash equal to the unpaid portion of such Allowed DIP
Facility Claim or (b) such other treatment as to which Southern Mineral and
such holder shall have agreed upon in writing.
2. Administrative Claims
Except as otherwise provided for herein, and subject to the requirements
of Article XIV.A. hereof, on, or as soon as reasonably practicable after,
the latest of (i) the Distribution Date, (ii) the date such
A-3
<PAGE>
Administrative Claim becomes an Allowed Administrative Claim, or (iii) the
date such Administrative Claim becomes payable pursuant to any agreement
between Southern Mineral and the holder of such Administrative Claim, each
holder of an Allowed Administrative Claim shall receive in full
satisfaction, settlement, release, and discharge of and in exchange for
such Allowed Administrative Claim (a) Cash equal to the unpaid portion of
such Allowed Administrative Claim or (b) such other treatment as to which
Southern Mineral and such holder shall have agreed upon in writing;
provided, however, that Allowed Administrative Claims with respect to
liabilities incurred by Southern Mineral in the ordinary course of business
during the Chapter 11 Case shall be paid in the ordinary course of business
in accordance with the terms and conditions of any agreements relating
thereto.
3. Priority Tax Claims
On, or as soon as reasonably practicable after, the later of (i) the
Distribution Date or (ii) the date such Priority Tax Claim becomes an Allowed
Priority Tax Claim, each holder of an Allowed Priority Tax Claim shall receive
in full satisfaction, settlement, release, and discharge of and in exchange
for such Allowed Priority Tax Claim (a) Cash equal to the unpaid portion of
such Allowed Priority Tax Claim, or (b) such other treatment as to Southern
Mineral and such holder shall have agreed upon in writing.
B. Classified Claims and Interests
1. Southern Mineral Class 1--Other Priority Claims
On, or as soon as reasonably practicable after, the later of (i) the
Distribution Date or (ii) the date such Other Priority Claim becomes an
Allowed Other Priority Claim, each holder of an Allowed Other Priority Claim
shall receive in full satisfaction, settlement, release, and discharge of and
in exchange for such Allowed Other Priority Claim (a) Cash equal to the unpaid
portion of such Allowed Other Priority Claim, or (b) such other treatment as
to Southern Mineral, and such holder shall have agreed upon in writing.
2. Southern Mineral Class 2--Secured Claims
The Allowed Secured Claims of the Class 2 Creditors shall be fully
satisfied in the following manner:
a. Borrowing Base Obligation. On, or as soon as reasonably
practicable after the Consummation Date, the Agent will receive a single
cash payment sufficient to reduce the principal balance of the Borrowing
Base Obligation to the Remaining Loan Balance. Reorganized Southern
Mineral will, on the Consummation Date, execute a promissory note in an
amount in excess of the Remaining Loan Balance and a loan and credit
agreement in substantially the same form and substance as Appendix 2-a.
to be filed with the Bankruptcy Court not later than ten (10) days prior
to the Confirmation Hearing and incorporated in the Plan, together with
such mortgages, deeds of trust and security agreements as are
appropriate to continue the interests in Collateral that were held by
the Class 2 Creditors on the Petition Date. The new loan and credit
agreement will provide for at least the following terms:
(1) A maximum loan availability based on a borrowing base of
$20,000,000;
(2) Borrowing base to reduce at $225,000 per month;
(3) A maturity date of June 1, 2002;
(4) Interest rate at prime or bank index rate with LIBOR option; and
(5) Semi-annual borrowing base redetermination starting six months after
the Consummation Date.
b. Tranche A Obligation. To the extent of any Allowed Secured Tranche
A Obligation, on, or as soon as reasonably practicable after the
Consummation Date each holder of an Allowed Tranche A Obligation shall
receive in full satisfaction, settlement, release, and discharge of and
in exchange for such Allowed Secured Tranche A Obligation (a) Cash equal
to the unpaid portion of such Allowed Secured Tranche A Obligation, or
(b) such other treatment as to Southern Mineral, and such holder shall
have agreed upon in writing.
A-4
<PAGE>
3. Southern Mineral Class 3--Unsecured Claims of Debenture Holders
On, or as soon as reasonably practicable after, the later of (i) the
Distribution Date or (ii) the date a Debenture Claim becomes an Allowed
Debenture Claim, each holder of an Allowed Debenture Claim shall receive in
full satisfaction, settlement, release, and discharge of and in exchange for
such Allowed Debenture Claim New Securities and Cash as follows: for each
$1,000 in principal amount of Allowed Debenture Claims, the owner and holder on
the Record Date shall receive (a) $241.50 in Cash, (b) 377.8 shares of New
Securities, and (c) Warrants to purchase an additional 188.9 shares of New
Securities. In lieu of issuance of fractional shares of New Securities the
number of shares of New Securities will be rounded up to the next whole number.
4. Southern Mineral Class 4--Other Unsecured Claims
On, or as soon as reasonably practicable after, the later of (i) the
Distribution Date or (ii) the date such Other Unsecured Claim becomes an
Allowed Other Unsecured Claim, each holder of an Allowed Other Unsecured Claim
shall, at the sole election of Southern Mineral, receive in full satisfaction,
settlement, release, and discharge of and in exchange for such Allowed Other
Unsecured Claim either (a) Cash equal to the unpaid portion of such Allowed
Other Unsecured Claim, or (b) payment consistent with the credit terms extended
by the holder of any such Allowed Other Unsecured Claim prior to the
Confirmation Date, and leaving unaltered the legal, equitable and contractual
rights to which the holder of any such Allowed Other Unsecured Claim is
entitled as of the Confirmation Date.
5. Southern Mineral Class 5--Holders of Common Stock
A Person that is the owner and holder of Common Stock on the Record Date
will retain such Common Stock. However, as provided below and in the Stock
Purchase Agreement, on the Distribution Date Southern Mineral will issue (a) a
total of 45,957,447 new shares of New Securities to EnCap, (b) 15,640,920
shares of New Securities to holders of Allowed Unsecured Debenture Claims and
(c) Warrants to purchase 7,820,460 shares of New Securities to holders of
Allowed Unsecured Debenture Claims. The Bylaws and Restated Articles of
Incorporation of Southern Mineral will be amended to provide the requisite
authority to issue such New Securities.
C. Special Provision Regarding Unimpaired Claims
Except as otherwise provided in the Plan, nothing shall affect Southern
Mineral's or Reorganized Southern Mineral's rights and defenses, both legal and
equitable, with respect to any Unimpaired Claims, including, but not limited
to, all rights with respect to legal and equitable defenses to setoffs or
recoupments against Unimpaired Claims.
D. Accrual of Post-Petition Interest
Interest on and fees and expenses, if any, with respect to Allowed Southern
Mineral Class 2 Secured Claims, including, but not limited to unpaid
Professional Fee Claims, shall be paid when due under the contractual
agreement, or other rule governing the terms and conditions of the obligation
comprising such Allowed Claims, together with any additional amounts required
to be paid with respect to Unimpaired Claims pursuant to Section 1124 of the
Bankruptcy Code. Except as otherwise provided above, elsewhere in the Plan, or
in an order of the Bankruptcy Court, no holder of an Allowed Unsecured Claim in
Classes 3 and 4 shall be entitled to the accrual of post-petition interest or
the payment by Southern Mineral or Reorganized Southern Mineral of post-
petition interest on account of such Allowed Unsecured Claim for any purpose.
IV. MEANS FOR IMPLEMENTATION OF THE PLAN
A. Continued Corporate Existence
Southern Mineral shall continue to exist after the Consummation Date as a
corporate entity in accordance with the laws of the State of Nevada and
pursuant to its Restated Articles of Incorporation and Bylaws in effect prior
to the Consummation Date, except to the extent such Restated Articles of
Incorporation and Bylaws are amended by this Plan.
A-5
<PAGE>
B. Corporate Action
1. Cancellation Of Existing Securities and Agreements
On the Consummation Date, except as otherwise provided for herein, (i) the
Debentures, shall be canceled, and (ii) the obligations of Southern Minerals
under any agreements, indentures or certificates of designations governing the
Debentures shall be discharged; provided, however, that each indenture or other
agreement that governs the rights of the holder of a Claim and that is
administered by an indenture trustee, an agent, or a servicer shall continue in
effect solely for the purposes of (i) allowing such indenture trustee, agent,
or servicer to make the distributions to be made on account of such Claims
under the Plan as provided in Article III hereof and (ii) permitting such
indenture trustee, agent, or servicer to maintain any rights or liens it may
have for fees, costs and expenses under such indenture or other agreement;
provided, further, that the provisions of clause (ii) of this paragraph shall
not affect the discharge of the Southern Mineral's liabilities under the
Bankruptcy Code and the Confirmation Order or result in any expense or
liability to Reorganized Southern Mineral. Reorganized Southern Mineral shall
not have any obligations to any indenture trustee, agent or servicer (or to any
Disbursing Agent replacing such indenture trustee, agent or servicer) for any
fees, costs or expenses, except as expressly provided in this Article IV.B.1;
provided, however, that nothing herein shall preclude such indenture trustee,
agent or servicer (or any Disbursing Agent replacing such indenture trustee,
agent or servicer) from being paid or reimbursed for pre-petition and post-
petition fees, costs and expenses from the distributions until payment in full
of such fees, costs or expenses that are governed by the respective indenture
or other agreement in accordance with the provisions set forth therein.
Any actions taken by an indenture trustee, an agent, or a servicer that are
not for the purposes authorized in this Article IV.B.1 shall not be binding on
Southern Mineral. Notwithstanding the foregoing, Southern Mineral may terminate
any indenture or other governing agreement and the authority of any indenture
trustee, agent, or servicer to act thereunder at any time, with or without
cause, by giving five (5) days written notice of termination to the indenture
trustee, agent, or servicer. If distributions under the Plan have not been
completed at the time of termination of the indenture or other governing
agreement, Southern Mineral shall designate a Disbursing Agent to act in place
of the indenture trustee, agent, or servicer, and the provisions of this
Article IV.B. 1 shall be deemed to apply to the Disbursing Agent.
2. Restated Articles of Incorporation and Bylaws
The Restated Articles of Incorporation and Bylaws of Southern Mineral shall
be amended as necessary to satisfy and implement the provisions of the EnCap
Transaction, the Plan and the Bankruptcy Code and shall include, among other
things, pursuant to Section 1123(a)(6) of the Bankruptcy Code (a) a provision
prohibiting the issuance of non-voting equity securities, and if applicable (b)
a provision as to the classes of securities issued pursuant to the Plan or
thereafter possessing voting power, for an appropriate distribution of such
power among such classes, including, in the case of any class of equity,
securities having a preference over another class of equity securities with
respect to dividends, adequate provisions for the election of directors
representing such preferred class in the event of default in the payment of
such dividends. Consistent with the EnCap transaction, the amended Southern
Mineral Restated Articles of Incorporation shall also include, among other
things, a provision authorizing a capital stock of 150 million shares of Common
Stock.
C. Southern Mineral's Restructuring Transactions
1. The EnCap Transaction
On the Consummation Date the EnCap Transaction will be closed. At that time
the cash consideration in the amount of $ 20,600,000 shall be paid, and the New
Securities provided for by the EnCap Transaction shall be issued.
2. New Securities
a) Authorization
As of the Consummation Date, the issuance by Reorganized Southern Mineral of
(i) up to 61,598,367 million shares of New Securities, and (ii) Warrants to
purchase 7,820,460 additional shares of New Securities
A-6
<PAGE>
on a fully diluted basis as provided for in Article III. B.3. of this Plan and
pursuant to the terms of the EnCap Transaction, is hereby authorized without
further act or action under applicable law, regulation, order or rule.
b) Issuance
The New Securities and Warrants authorized pursuant to Article IV.C.2.a
hereof shall be issued by Reorganized Southern Mineral pursuant to the Plan
without further act or action under applicable law, regulation, order or rule.
Immediately following the issuance of the New Securities and Warrants,
approximately twenty-one percent (21.0%) of the outstanding Common Stock shall
be held by the holders of the Allowed Unsecured Debenture Claims, (ii) sixty-
one and eight tenth per cent (61.8%) of the outstanding Common Stock shall be
held by EnCap, (iii) seventeen and three tenth per cent (17.3%) of the
outstanding Common Stock shall be held by holders of Class 5 Claims, and (iv)
one hundred per cent (100%) of the Warrants shall be held by holders of the
Allowed Unsecured Debenture Claims.
c) Reserve
Reorganized Southern Minerals shall reserve 7,820,460 million shares of the
New Securities for issuance pursuant to the Warrants without further act or
action under applicable law, regulation, order or rule.
d) Registration Rights
Reorganized Southern Mineral and EnCap, who may be deemed to be
"underwriters" or "affiliates" for purposes of the Securities Act, shall enter
into the Registration Rights Agreement on or prior to the Consummation Date.
Pursuant to the Registration Rights Agreement, Reorganized Southern Mineral
shall agree to file with the SEC, as soon as practicable after receiving a
request from EnCap, a registration statement on Form S-1 or Form S-3, if use of
such a form is then available, to cover resales of Registrable Securities by
the holders thereof who satisfy certain conditions relating to the provision of
information in connection with such registration statement.
D. Directors and Officers
The existing officers of Southern Mineral shall serve initially in their
current capacities after the Consummation Date. On the Consummation Date, the
term of the current board of directors of Southern Mineral shall expire.
Southern Mineral anticipates that the board of directors of the Reorganized
Southern Mineral will include at least two (2) members of current management of
Southern Mineral. The composition of the remainder of the board of the
Reorganized Southern Mineral will be determined by Reorganized Southern
Mineral, subject to the requirements of Section 1129(a)(5) of the Bankruptcy
Code, applicable non-bankruptcy laws and corporate governance documents.
Southern Mineral intends to announce prior to the Confirmation Date the
identities of any individuals proposed to serve as directors or officers of the
Reorganized Southern Mineral. If and to the extent possible, the identities of
such individuals will be announced by inclusion of a list of proposed directors
and/or officers in the Plan Supplement, which will be filed with the Bankruptcy
Court at least five (5) Business Days prior to the commencement of the
Confirmation Hearing. The board of directors of the Reorganized Southern
Mineral shall have the responsibility for the management, control, and
operation of the Reorganized Southern Mineral on and after the Consummation
Date.
E. Revesting of Assets
The property of the Estate, together with any property of Southern Mineral
that is not property of the Estate and that is not specifically disposed of
pursuant to the Plan shall revest in Reorganized Southern Mineral on the
Confirmation Date. Thereafter, Reorganized Southern Mineral may operate its
business and may use, acquire, and dispose of property free of any restrictions
of the Bankruptcy Code, the Bankruptcy Rules, and the Bankruptcy Court. As of
the Confirmation Date, all property of Reorganized Southern Mineral shall be
free and clear of all Claims and Interests, except as specifically provided in
the Plan or the Confirmation Order. Without limiting the generality of the
foregoing, Southern Mineral may, without application to or approval by the
Bankruptcy Court, pay fees that it incurs after the Confirmation Date for
professional fees and expenses.
A-7
<PAGE>
F. Preservation of Rights of Action; Settlement of Litigation Claims
Except as otherwise provided in the Plan or the Confirmation Order, or in
any contract, instrument, release, indenture or other agreement entered into in
connection with the Plan, in accordance with Section 1123(b) of the Bankruptcy
Code, Reorganized Southern Mineral shall retain and may enforce, sue on,
settle, or compromise (or decline to do any of the foregoing) all claims,
rights or causes of actions, suits, and proceedings, whether in law or in
equity, whether known or unknown, that Southern Mineral or the Estate may hold
against any Person or entity. Reorganized Southern Mineral or its successor(s)
may pursue such retained claims, rights or causes of actions, suits, or
proceedings as appropriate, in accordance with the best interests of the
Reorganized Southern Mineral or its successor(s) who hold such rights.
G. Exclusivity Period
Southern Mineral shall retain the exclusive right to amend or modify the
Plan, and to solicit acceptances of any amendments to modifications of the
Plan, through and until the Consummation Date.
H. Effectuating Documents; Further Transactions
The chairman of the board of directors, president, chief financial officer,
or any other appropriate officer of Southern Mineral, shall be authorized to
execute, deliver, file, or record such contracts, instruments, releases,
indentures, and other agreements or documents, and take such actions as may be
necessary or appropriate to effectuate and further evidence the terms and
conditions of the Plan. The secretary or assistant secretary of Southern
Mineral shall be authorized to certify or attest to any of the foregoing
actions.
I. Termination of DIP Facility
To the extent not amended and restated with the express consent of the DIP
Lender as a part of any post-confirmation financing procured by Southern
Mineral, the DIP Facility shall be terminated and of no further force and
effect upon payment in full on or one Business Day after the Consummation Date,
except as necessary to evidence and maintain the liens and security interests
granted pursuant to (i) any Final Order authorizing Southern Mineral's entry
into the DIP Facility and (ii) the various agreements approved thereby;
provided, however, that the liens and security interests securing the DIP
Facility shall remain in full force and effect until the DIP Facility is repaid
in full in cash.
J. Exemption From Certain Transfer Taxes
Pursuant to Section 1146(c) of the Bankruptcy Code, any transfers from
Southern Mineral to Reorganized Southern Mineral or any other Person or entity
pursuant to the Plan shall not be subject to any document recording tax, stamp
tax, conveyance fee, intangibles or similar tax, mortgage tax, stamp act, real
estate transfer tax, mortgage recording tax or other similar tax or
governmental assessment. The Confirmation Order shall direct the appropriate
state or local governmental officials or agents to forego the collection of any
such tax or governmental assessment and to accept for filing and recordation
any of the foregoing instruments or other documents without the payment of any
such tax or governmental assessment.
V. ACCEPTANCE OR REJECTION OF THE PLAN
A. Classes Entitled to Vote
Each Impaired Class of Claims or Interests that will (or may) receive or
retain property or any interest in property under the Plan shall be entitled to
vote to accept or reject the Plan. The Impaired Classes are 2, 3 and 5. By
operation of law, each Unimpaired Class of Claims is deemed to have accepted
the Plan and, therefore, is not entitled to vote to accept or reject the Plan.
B. Acceptance by Impaired Classes
An Impaired Class of Claims shall have accepted the Plan if (i) the holders
(other than any holder designated under Section 1126(e) of the Bankruptcy Code)
of at least two-thirds in amount of the Allowed
A-8
<PAGE>
Claims actually voting in such Class have voted to accept the Plan and (ii) the
holders (other than any holder designated under Section 1126(e) of the
Bankruptcy Code) of more than one-half in number of the Allowed Claims actually
voting in such Class have voted to accept the Plan.
An Impaired Class of Interests shall have accepted the Plan if the holders
(other than any holder designated under Section 1126(e) of the Bankruptcy Code)
of at least two-thirds in amount of the Allowed Interests actually voting in
such Class have voted to accept the Plan.
C. Cramdown
If the Plan is not accepted by all Classes of Impaired Claims and Interests,
Southern Mineral shall request Confirmation of the Plan under Section 1129(b)
of the Bankruptcy Code. Southern Mineral reserves the right to modify the Plan
to the extent, if any, that Confirmation pursuant to Section 1129(b) of the
Bankruptcy Code requires modification.
VI. SECURITIES TO BE ISSUED IN CONNECTION WITH THE PLAN
On or before the Distribution Date, Reorganized Southern Mineral shall issue
for distribution in accordance with the provisions of the Plan all of the New
Securities and Warrants required for distribution pursuant to the provisions of
the Plan. All securities to be issued will be deemed issued as of the
Distribution Date regardless of the date on which they are actually
distributed.
VII. PROVISIONS GOVERNING DISTRIBUTIONS
A. Distributions for Claims Allowed as of the Consummation Date
Except as otherwise provided herein or as ordered by the Bankruptcy Court,
distributions to be made on account of Claims that are Allowed Claims as of the
Consummation Date shall be made on the Distribution Date, or as soon thereafter
as practicable. The New Securities to be issued under the Plan shall be deemed
issued as of the Distribution Date regardless of the date on which they are
actually distributed. Distributions on account of Claims that first become
Allowed Claims after the Consummation Date shall be made pursuant to Articles
III, VII, and IX of the Plan.
B. Interest on Claims
Unless otherwise specifically provided for in the Plan or the Confirmation
Order, or required by applicable bankruptcy law, post-petition interest shall
not accrue or be paid on Unsecured Claims, and no holder of an Unsecured Claim
shall be entitled to interest accruing on or after the Petition Date on any
Unsecured Claim. Interest shall not accrue or be paid upon any Disputed Claim
in respect of the period from the Petition Date to the date a final
distribution is made thereon if and after such Disputed Claim becomes an
Allowed Claim.
C. Disbursing Agent
The Disbursing Agent shall make all distributions required under the Plan
(subject to the provisions of Articles III, VII, and IX hereof) except with
respect to a holder of a Claim whose distribution is governed by an indenture
or other agreement and is administered by an indenture trustee, agent, or
servicer, which distributions shall be deposited with the appropriate indenture
trustee, agent, or servicer, who shall deliver such distributions to the
holders of Claims in accordance with the provisions of the Plan and the terms
of the relevant indenture or other governing agreement.
If the Disbursing Agent is an independent third party designated by
Reorganized Southern Mineral to serve in such capacity, such Disbursing Agent
shall receive, without further Bankruptcy Court approval, reasonable
compensation for distribution services rendered pursuant to the Plan and
reimbursement of reasonable out-of-pocket expenses incurred in connection with
such services from Reorganized Southern Mineral on terms acceptable to
Reorganized Southern Mineral. No Disbursing Agent shall be required to give any
bond or surety or other security for the performance of its duties unless
otherwise ordered by the
A-9
<PAGE>
Bankruptcy Court. If otherwise so ordered all costs and expenses of procuring
any such bond shall be paid by Reorganized Southern Mineral.
D. Surrender of Securities or Instruments
On or before the Distribution Date, or as soon as practicable thereafter,
each holder of an instrument ("Certificate") evidencing a Claim on account of
the Debentures shall surrender such Certificate to the Indenture Trustee(s) of
the Debentures under the Indenture. Upon surrender, and pursuant to the terms
of the Plan, the Debenture shall be cancelled. No distribution of property
hereunder shall be made to or on behalf of any such holder unless and until (i)
the Certificate is received by the Indenture Trustee or the unavailability of
such Certificate is reasonably established to the satisfaction of the Indenture
Trustee, and (ii) the Indenture Trustee has complied with Article VII. E. If a
Certificate is not delivered to the Indenture Trustee prior to the second (2nd)
anniversary of the Consummation Date, the owner and holder of such Certificate
shall be deemed to have forfeited all rights and Claims in respect of such
Certificate and shall not participate in any distribution hereunder, and all
property in respect of such forfeited distribution, including interest accrued
thereon, shall revert to Reorganized Southern Mineral notwithstanding any
federal or state escheat laws to the contrary.
E. Instructions to Disbursing Agent
Prior to any distribution on account of an Southern Mineral Class 3 Allowed
Debenture Claim, the Indenture Trustee(s), agent, or servicer of the Debentures
under the Indenture shall (i) inform the Disbursing Agent as to the amount of
properly surrendered Debentures and (ii) instruct the Disbursing Agent, in a
form and manner that the Disbursing Agent reasonably determines to be
acceptable of the names of the holders of Southern Mineral Class 3 Allowed
Debenture Claims, and the number of shares of New Securities and Warrants to be
issued and, distributed to or on behalf of such holders of Southern Mineral
Class 3 Allowed Debenture Claims in exchange for properly surrendered
Debentures.
F. Services of Indenture Trustees, Agents, and Servicers
The services with respect to consummation of the Plan of indenture trustees,
agents, and servicers under indentures and other agreements that govern the
rights of holders of Claims, are as set forth in Article IV.B.1 and elsewhere
in the Plan.
G. Record Date for Distributions to Holders of Debt Securities
At the close of business on the Distribution Record Date, the transfer
ledgers for the Debentures shall be closed and there shall be no further
changes in the record holders of the Debentures. Reorganized Southern Mineral
and the Disbursing Agent, if any, shall have no obligation to recognize any
transfer of such Debentures occurring after the Distribution Record Date and
shall be entitled instead to recognize and deal for all purposes hereunder with
only those record holders stated on the transfer ledgers as of the close of
business on the Distribution Record Date.
H. Means of Cash Payment
Cash payments made pursuant to the Plan shall be in U.S. funds by the means
agreed to by the payor and the payee, including by check or wire transfer, or,
in the absence of an agreement such commercially reasonable manner as the payor
shall determine in its sole discretion; provided, however, that any cash
payment in excess of $1,000,000 shall, notwithstanding the foregoing, be
effected by wire transfer.
I. Calculation of Distribution Amounts of New Securities
No fractional shares of New Securities shall be issued or distributed under
the Plan or by Reorganized Southern Mineral or any Disbursing Agent, indenture
trustee, agent, or servicer. Each Person entitled to receive New Securities
will receive the total number of whole shares of New Securities to which such
Person is entitled. Whenever any distribution to a particular Person would
otherwise call for distribution of a fraction of a share of New Securities, the
Disbursing Agent shall round up to the next whole number in lieu of fractional
shares.
A-10
<PAGE>
J. Delivery of Distributions
Distribution to holders of Allowed Claims shall be made by the Disbursing
Agent or the appropriate indenture trustee, agent or servicer as the case may
be (a) at the addresses set forth on the proofs of Claim filed by such holders
(or at the last known addresses of such holders if no proof of Claim is filed
or if Southern Mineral have been notified of a change of address), (b) at the
addresses set forth in any written notices of address changes delivered to the
Disbursing Agent after the date of any related proof of Claim, (c) at the
addresses reflected in the Schedules if no proof of Claim has been field and
the Disbursing Agent has not received a written notice of a change of address,
(d) in the case of the holder of a Claim that is governed by an indenture or
other agreement and is administered by an indenture trustee, agent, or
servicer, at the addresses contained in the official records of such indenture
trustee, agent, or servicer, or (e) at the addresses set forth in a properly
completed letter of transmittal accompanying securities properly remitted to
Southern Mineral. If any holder's distribution is returned as undeliverable, no
further distributions to such holder shall be made unless and until the
Disbursing Agent or the appropriate indenture trustee, agent, or servicer is
notified of such holder's then current address, at which time all missed
distributions shall be made to such holder without interest. Amounts in respect
of undeliverable distributions made through the Disbursing Agent or the
indenture trustee, agent, or servicer, shall be returned to Reorganized
Southern Mineral until such distributions are claimed. All claims for
undeliverable distributions must be made on or before the second (2nd)
anniversary of the Consummation Date, after which date, all unclaimed property
shall revert to Reorganized Southern Mineral free of any restrictions thereon
and the claim of any holder or successor to such holder with respect to such
property shall be discharged and forever barred, notwithstanding any federal or
state escheat laws to the contrary.
K. Fractional Dollars; De Minimis Distributions
Any other provision of the Plan notwithstanding, payments of fractions of
dollars shall not be made. Whenever any payment of a fraction of a dollar under
the Plan would otherwise be called for, the actual payment made shall reflect a
rounding of such fraction to the nearest whole dollar (up or down), with half
dollars being rounded down. The Disbursing Agent, or any indenture trustee,
agent or servicer, as the case may be, shall not make any payment of less than
$25.00 with respect to any Claim unless a request therefor is made in writing
to such Disbursing Agent, indenture trustee, agent or servicer, as the case may
be.
L. Withholding and Reporting Requirements
In connection with the Plan and all distributions hereunder, the Disbursing
Agent shall to the extent applicable, comply with all tax withholding and
reporting requirements imposed by any federal, state, local or foreign taxing
authority, and all distributions hereunder shall be subject to any such
withholding and reporting requirements. The Disbursing Agent shall be
authorized to take any and all actions that may be necessary or appropriate to
comply with such withholding and reporting requirements.
M. Setoffs
Reorganized Southern Mineral may, but shall not be required to, set off
against any Claim, and the payments or other distributions to be made pursuant
to the Plan in respect of such Claim, a right to payment of any nature
whatsoever that Southern Mineral or Reorganized Southern Mineral may have
against the holder of such Claim; provided, however, that neither the failure
to do so nor the allowance of any Claim hereunder shall constitute a waiver or
release by Reorganized Southern Mineral of any such right to payment that
Southern Mineral or Reorganized Southern Mineral may have against such Claim.
VIII. TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES
A. Assumed Contracts and Leases
1. Except as otherwise provided in the Plan, or in any contract, instrument,
release, indenture or other agreement or document entered into in connection
with the Plan, as of the Consummation Date Southern Mineral shall be deemed to
have assumed each executory contract and unexpired lease to which it is a
party,
A-11
<PAGE>
unless such contract or lease (i) was previously assumed or rejected by
Southern Mineral, (ii) previously expired or terminated pursuant to its own
terms, (iii) is set forth on Schedule VIII-A attached hereto, or (iv) is the
subject of a motion to reject filed on or before the Confirmation Date. The
Confirmation Order shall constitute an order of the Bankruptcy Court under
Section 365 of the Bankruptcy Code approving the contract and lease assumptions
described above, as of the Consummation Date. The Confirmation Order will also
provide for the rejection of those unexpired leases and executory contracts
specified on Schedule VIII-A. Schedule VIII-A shall be submitted not less than
ten (10) days prior to the Confirmation Hearing to the Bankruptcy Court and any
party in interest requesting in writing such schedule.
2. Each executory contract and unexpired lease that is assumed and relates
to the use, ability to acquire, or occupancy of real property shall include (a)
all modifications, amendments, supplements, restatements, or other agreements
made directly or indirectly by any agreement, instrument, or other document
that in any manner affect such executory contract or unexpired lease and (b)
all executory contracts or unexpired leases appurtenant to the premises,
including all easements, licenses, permits, rights, privileges, immunities,
options, rights of first refusal, powers, uses, usufructs, reciprocal easement
agreements, vaults, tunnel or bridge agreements or franchises, and any other
interests in real estate or rights in rem related to such premises, unless any
of the foregoing agreements has been rejected pursuant to any order of the
Bankruptcy Court that may be entered prior to, at or after Confirmation,
including the Confirmation Order.
B. Rejected Contracts and Leases
Claims arising from Southern Mineral's rejection of an executory contract or
unexpired lease will be classified as a Southern Mineral Class 4 Other
Unsecured Claim.
C. Bar to Rejection Damages
If the rejection by Southern Mineral, pursuant to the Plan or otherwise, of
an executory contract or unexpired leases results in a Claim that is not
theretofore evidenced by a timely filed proof of Claim or a proof of Claim that
is deemed to be timely filed under applicable law, then such Claim shall be
forever barred and shall not be enforceable against Southern Mineral or
Reorganized Southern Mineral, or the properties of either of them unless a
proof of Claim is filed with the clerk of the Bankruptcy Court and served on
counsel for Southern Mineral within thirty (30) days after service of the
earlier of (i) notice of entry of the Confirmation Order or (ii) other notice
that the executory contract or unexpired lease has been rejected.
D. Compensation and Benefit Programs
Except and to the extent previously assumed by an order of the Bankruptcy
Court on or before the Confirmation Date, and except as set forth below, all
employee compensation and benefit programs of Southern Mineral, including
programs subject to Sections 1114 and 1129(a)(13) of the Bankruptcy Code,
entered into before or after the Petition Date (and not subsequently
terminated) are revested, and shall be deemed to be, and shall be treated as
though they are, executory contracts that are assumed under this Article VIII,
but only to the extent that rights under such programs are held by Persons who
are employees of Southern Mineral as of the Confirmation Date. Southern
Mineral's obligations under such programs to persons who are employees of
Southern Mineral on the Confirmation Date shall survive confirmation of the
Plan, except for (i) executory contracts or plans specifically rejected
pursuant to prior Final Order or the Plan (to the extent such rejection does
not violate Sections 1114 and 1129(a)(13) of the Bankruptcy Code) and (ii)
executory contracts or plans as have previously been rejected, are the subject
of a motion to reject, or have been specifically waived by the beneficiaries of
any plans or contracts; provided, however, that Southern Mineral's obligations,
if any, to pay all "retiree benefits" as defined in Section 1114(a) of the
Bankruptcy Code shall continue.
IX. PROCEDURES FOR RESOLVING DISPUTED, CONTINGENT, AND UNLIQUIDATED CLAIMS
A. Objection Deadline; Prosecution of Objections
1. As soon as practicable, but in no event later than 120 days after the
Consummation Date (unless extended by an order of the Bankruptcy Court),
Southern Mineral or Reorganized Southern Mineral, as the case
A-12
<PAGE>
may be, shall file objections to Claims with the Bankruptcy Court and serve
such objections upon the holders of each of the Claims to which objections are
made. Nothing contained herein, however, shall limit Reorganized Southern
Mineral's right to object to Claims, if any, filed or amended more than 120
days after the Consummation Date.
B. No Distributions Pending Allowance
1. Notwithstanding any other provision of the Plan, no payments or
distributions shall be made with respect to all or any portion of a Disputed
Claim unless and until all objections to such Disputed Claim have been settled
or withdrawn or have been determined by Final Order and the Disputed Claim, or
some portion thereof, has become an Allowed Claim.
C. Distribution Reserve
1. The Disbursing Agent shall withhold the Distribution Reserve from the
Cash, New Securities, or other property to be distributed under the Plan. As to
any Disputed Claim, upon a request for estimation by Southern Mineral or any
other party in interest, the Bankruptcy Court shall determine what amount is
sufficient to withhold as the Distribution Reserve. Southern Mineral or any
other party in interest may request estimation for every Disputed Claim that is
unliquidated and the Disbursing Agent shall withhold the Distribution Reserve
based upon the estimated amount of such Claim as set forth in a Final Order. If
Southern Mineral elects not to request such an estimation from the Bankruptcy
Court with respect to a Disputed Claim that is liquidated, the Disbursing Agent
shall withhold the Distribution Reserve based upon the face amount of such
Claim. Nothing in the Plan or herein shall be deemed to entitle the holder of a
Disputed Claim to post-petition interest on such Claim and such holder shall
not be entitled to any such interest.
a) Neither the Disbursing Agent, nor any other party, shall be entitled
to vote any shares of the New Securities held in the Distribution Reserve.
In the event that any matter requires approval by the shareholders of
Reorganized Southern Mineral prior to the distribution or cancellation of
all shares of New Securities from the Distribution Reserve, the shares of
New Securities held by the Disbursing Agent shall be deemed not to have
been issued, for voting purposes only.
b) If practicable, the Disbursing Agent shall invest any Cash that is
withheld as the Distribution Reserve in a manner that shall yield a
reasonable net return, taking into account the safety of the investment.
Any interest that is earned shall accrue to the benefit of and shall be
paid to Southern Mineral quarter annually.
D. Distributions After Allowance
1. The Reorganized Southern Mineral or the Disbursing Agent, as the case may
be, shall make payments and distributions from the Distribution Reserve to each
holder of a Disputed Claim that has become an Allowed Claim in accordance with
the provisions of the Plan governing the Class of Claims to which such holder
belongs. On the next succeeding interim distribution date after the date that
the order or judgment of the Bankruptcy Court allowing all or part of such
Claim becomes a Final Order, the Disbursing Agent shall distribute to the
holder of such Claim any Cash, New Securities, or other property in the
Distribution Reserve that would have been distributed on the Distribution Date
had such Allowed Claim been allowed on the Distribution Date. After a Final
Order has been entered, or other final resolution has been reached, with
respect to each Disputed Claim (i) any New Securities held in the Distribution
Reserve shall become the property of Reorganized Southern Mineral and (ii) any
Cash or other property remaining in the Distribution Reserve shall become
property of the Reorganized Southern Mineral. All distributions made under this
Article IX.D on account of an Allowed Claim shall be made together with any
dividends, payments or other distributions made on account of, as well as any
obligations arising from, the distributed property as if such Allowed Claim had
been an Allowed Claim on the Distribution Date. Notwithstanding the foregoing,
the Disbursing Agent shall not be required to make distributions under Article
IX.D more frequently than once every 180 days or to make any individual
payments in an amount less than $25.00
A-13
<PAGE>
X. CONDITIONS PRECEDENT TO CONFIRMATION AND CONSUMMATION OF THE PLAN
A. Conditions to Confirmation
The following are conditions precedent to confirmation of the Plan that must
be (i) satisfied or (ii) waived in accordance with Article X.C below.
1. The Plan shall have been accepted by at least one Impaired Class;
2. the Confirmation Order shall be in form and substance acceptable to
Southern Mineral and EnCap; and
3. the Bankruptcy Court finds the terms of the Confirmation Order
acceptable.
B. Conditions to Consummation
1. The following are conditions precedent to the occurrence of the
Consummation Date, each of which must be (i) satisfied or (ii) waived in
accordance with Article X. C below.
2. The Confirmation Order in form and substance reasonably acceptable to
Southern Mineral and EnCap confirming the Plan must have become a Final Order
and must, among other things, provide that:
a) Southern Mineral and Reorganized Southern Mineral are authorized and
directed to take actions necessary or appropriate to enter into, implement
and consummate the contracts, instruments, releases, leases and other
agreements or documents created in connection with the Plan and the EnCap
Transaction;
b) the provisions of the Confirmation Order are nonseverable and
mutually dependent;
c) all executory contracts or unexpired leases assumed or assumed and
assigned by Southern Mineral during the Chapter 11 Case or under the Plan
shall remain in full force and effect for the benefit of Reorganized
Southern Mineral or it assignees notwithstanding any provision in such
contract or lease (including those described in Sections 365(b)(2) and (f)
of the Bankruptcy Code) that prohibits such assignment or transfer or that
enables, permits or requires termination of such contract or lease;
d) all property of the Estate will vest in Reorganized Southern Mineral
with title to such property being free and clear of all liens, charges,
Claims, encumbrances, or interest, except as expressly provided in the Plan
or Confirmation Order;
e) except as expressly provided in the Plan, Southern Mineral and
Reorganized Southern Mineral are discharged effective upon the Confirmation
Date from any "debt" (as that term is defined in Section 101(12) of the
Bankruptcy Code), and all liability in respect of such debt is extinguished
completely, whether reduced to judgment or not, liquidated or unliquidated,
contingent or noncontingent, asserted or unasserted, fixed or unfixed,
matured or unmatured, disputed or undisputed, legal or equitable, or known
or unknown, or that arose from any agreement of Southern Mineral that has
either been assumed or rejected in the Chapter 11 Case or pursuant to the
Plan, or obligation of Southern Mineral incurred before the Confirmation
Date, including, without limitation, all interest, if any, on any such
debts, whether such interest accrued before or after the Petition Date;
f) the Plan does not provide for the liquidation of all or substantially
all of the property of Southern Mineral and its confirmation is not likely
to be followed by liquidation of the Reorganized Southern Mineral or the
need for further financial reorganization;
g) the New Securities and Warrants issued under the Plan to holders of
Debentures are exempt from registration under the Securities Act of 1933
pursuant to Section 1145 of the Bankruptcy Code, except to the extent that
holders of the New Securities are "underwriters," as that term is defined
in Section 1145 of the Bankruptcy Code.
h) the following agreements in form and substance satisfactory to
Southern Mineral and EnCap, shall have been executed and delivered, and all
conditions precedent thereto shall have been satisfied:
(1) an amendment to the Restated Articles of Incorporation and of
Southern Mineral;
A-14
<PAGE>
(2) the Amended Credit Facility; and
(3) Stock Purchase Agreement for the EnCap Transaction.
i) All actions, documents and agreements necessary to implement the Plan
shall have been effected or executed.
C. Waiver of Conditions
Each of the conditions set forth in Articles X. above, other than those set
forth in Article X.A and X may be waived whole or in part by Southern Mineral
or Reorganized Southern Mineral in its sole and absolute discretion without any
notice to parties in interest or the Bankruptcy Court and without a hearing.
The failure to satisfy or waive any condition to the Consummation Date may be
satisfied (including any action or inaction by Southern Mineral or Reorganized
Southern Mineral). The failure of Southern Mineral or Reorganized Southern
Mineral to exercise any of the foregoing rights shall not be deemed a waiver of
any other rights, and each such right shall be deemed an ongoing right that may
be asserted at any time.
XI. MODIFICATIONS AND AMENDMENTS
Southern Mineral may alter, amend, or modify the Plan or any Exhibits
thereto under Section 1127(a) of the Bankruptcy Code at any time prior to the
Confirmation Date. After the Confirmation Date and prior to substantial
consummation of the Plan, as defined in Section 1101(2) of the Bankruptcy Code,
Southern Mineral may, under Section 1127(b) of the Bankruptcy Code, institute
proceedings in the Bankruptcy Court to remedy any defect or omission or
reconcile any inconsistencies in the Plan, the Disclosure Statement, or the
Confirmation Order, and such matters as may be necessary to carry out the
purposes and effects of the Plan so long as such proceedings do not materially
adversely affect the treatment of holders of Claims or Interests under the
Plan; provided, however, that prior notice of such proceedings shall be served
in accordance with the Bankruptcy Rules or order of the Bankruptcy Court.
XII. RETENTION OF JURISDICTION
A. Under Sections 105(a) and 1142 of the Bankruptcy Code, and
notwithstanding entry of the Confirmation Order and occurrence of the
Consummation Date, the Bankruptcy Court shall retain exclusive jurisdiction
over all matters arising out of, and related to, the Chapter 11 Case and the
Plan to the fullest extent permitted by law, including, among other things,
jurisdiction to:
1. allow, disallow, determine, liquidate, classify, estimate or
establish the priority or secured or unsecured status of any Claim or
Interest, including the resolution of any request for payment of any
Administrative Claim and the resolution of and objections to the allowance
or priority of Claims or Interests;
2. hear and determine all applications for compensation and
reimbursement of expenses of Professionals under the Plan or under Sections
330, 331, 503(b), 1103 and 1129(a)(4) of the Bankruptcy Code; provided,
however, that from and after the Consummation Date, the payment of the fees
and expenses of the retained professionals of Reorganized Southern Mineral
shall be made in the ordinary course of business and shall not be subject
to the approval of the Bankruptcy Court;
3. hear and determine all matters with respect to the assumption or
rejection of any executory contact or unexpired lease to which Southern
Mineral is a party or with respect to which Southern Mineral may be liable,
including, if necessary, the nature or amount of any required Cure or the
liquidation or allowance of any Claims arising therefrom;
4. effectuate performance of and payments under the provisions of the
Plan;
5. hear and determine any and all adversary proceedings, motions,
applications, and contested or litigated matters arising out of, under, or
related to, the Chapter 11 Case;
A-15
<PAGE>
6. enter such orders as may be necessary or appropriate to execute,
implement, or consummate the provisions of the Plan and all contracts,
instruments, releases, and other agreements or documents created in
connection with the Plan, the Disclosure Statement or the Confirmation
Order;
7. hear and determine disputes arising in connection with the
interpretation, implementation, consummation or enforcement of the Plan,
including disputes arising under agreements, documents or instruments
executed in connection with the Plan;
8. consider any modifications of the Plan, cure any defect or omission,
or reconcile any inconsistency in any order of the Bankruptcy Court,
including, without limitation, the Confirmation Order;
9. issue injunctions, enter and implement other orders, or take such
other actions as may be necessary or appropriate to restrain interference
by any entity with implementation, consummation, or enforcement of the Plan
or the Confirmation Order;
10. enter and implement such orders as may be necessary or appropriate
if the Confirmation Order is for any reason reversed, stayed, revoked,
modified, or vacated;
11. hear and determine any matters arising in connection with or
relating to the Plan, the Disclosure Statement, the Confirmation Order, or
any contract, instrument, release, or other agreement or document created
in connection with the Plan, the Disclosure Statement or the Confirmation
Order;
12. enforce all orders, judgments, injunctions, releases, exculpations,
indemnifications and rulings entered in connection with the Chapter 11
Case;
13. recover all assets of Southern Mineral and property of Southern
Mineral's Estate, wherever located;
14. hear and determine matters concerning state, local, and federal
taxes that arise from facts in existence either prior to or after the
Petition Date in accordance with Sections 346, 505, and 1146 of the
Bankruptcy Code;
15. hear and determine all disputes involving the existence, nature, or
scope of Southern Mineral's discharge;
16. hear and determine such other matters as may be provided in the
Confirmation Order or as may be authorized under, or not inconsistent with,
provisions of the Bankruptcy Code; and
17. enter a final decree closing the Chapter 11 Case.
XIII. COMPROMISES AND SETTLEMENTS
Pursuant to Rule 9019(a), Bankruptcy Rules, Southern Mineral may compromise
and settle various Claims against it and/or claims that it may have against
other Persons. Southern Mineral expressly reserves the right (with Bankruptcy
Court approval, following appropriate notice and opportunity for a hearing) to
compromise and settle Claims against it and claims that it may have against
other Persons up to and including the Consummation Date. After the Consummation
Date, such right shall pass to Reorganized Southern Mineral.
XIV. MISCELLANEOUS PROVISIONS
A. Bar Dates for Certain Claims
1. Administrative Claims: Substantial Contribution Claims
The Confirmation Order will establish an Administrative Claims Bar Date for
filing of all Administrative Claims, including Substantial Contribution Claims
(but not including claims for Professional Fee Claims or the Claims for
expenses of the members of the Creditor's Committee (if one has been
appointed), which date will be 45 days after the Confirmation Date. Holders of
asserted Administrative Claims, other than Professional Fee Claims or the
Claims for expenses of the members of the Creditors' Committee (if one has been
appointed), not
A-16
<PAGE>
paid prior to the Confirmation Date must file and serve on Southern Mineral and
its counsel proofs of Administrative Claim (or application for compensation or
reimbursement of expenses in the case of Substantial Contribution Claims) on or
before such Administrative Claims Bar Date or forever be barred from doing so.
The notice of Confirmation to be delivered pursuant to Rules 3020(c) and
2002(f) Bankruptcy Rules will set forth such date and constitute notice of this
Administrative Claims Bar Date. Southern Mineral or Reorganized Southern
Mineral, as the case may be, shall have 45 days (or such longer period as may
be allowed by order of the Bankruptcy Court) following the Administrative
Claims Bar Date to review and object to such Administrative Claims before a
hearing for determination of allowance of such Administrative Claims.
2. Professional Fee Claims
All final requests for compensation or reimbursement of Professional Fee
Claims pursuant to Sections 327, 328, 330, 331, 503(b) or 1103 of the
Bankruptcy Code for services rendered to Southern Mineral or the Creditors'
Committee (if one has been appointed) prior to the Consummation Date (other
than Substantial Contribution Claims under Section 503(b)(4) of the Bankruptcy
Code) must be filed and served on the Reorganized Southern Mineral and its
counsel no later than 45 days after the Consummation Date, unless otherwise
ordered by the Bankruptcy Court. Objections to applications of such
Professionals or other entities for compensation or reimbursement of expenses
must be filed and served on the Reorganized Southern Mineral and its counsel
and the requesting Professional or other entity no later than 45 days (or such
longer period as may be allowed by order of the Bankruptcy Court) after the
date on which the applicable application for compensation or reimbursement was
served.
B. Payment of Statutory Fees
All fees payable pursuant to Section 1930 of title 28 of the United States
Code, as determined by the Bankruptcy Court at the Confirmation shall be paid
on or before the Consummation Date.
C. Severability of Plan Provisions
If, prior to Confirmation, any term or provision of the Plan is held by the
Bankruptcy Court to be invalid, void or unenforceable, the Bankruptcy Court, at
the request of Southern Mineral, shall have the power to alter and interpret
such term or provision to make it valid or enforceable to the maximum extent
practicable, consistent with the original purpose of the term or provision held
to be invalid, void or unenforceable, and such term or provision shall then be
applicable as altered or interpreted. Notwithstanding any such holding,
alteration or interpretation, the remainder of the terms and provisions of the
Plan shall remain in full force and effect and shall in no way be affected,
impaired or invalidated by such holding, alteration or interpretation. The
Confirmation Order shall constitute a judicial determination and shall provide
that each term and provision of the Plan, as it may have been altered or
interpreted in accordance with the foregoing, is valid and enforceable pursuant
to its terms.
D. Successors and Assigns
The rights, benefits and obligations of any entity named or referred to in
the Plan shall be binding on, and shall inure to the benefit of, any heir,
executor, administrator, successor or assign of such entity.
E. Releases and Satisfaction of Subordination Rights
All Claims of the holders of the Secured Claims, Debentures and Claims
against Southern Mineral and all rights and claims between or among such
holders relating in any manner whatsoever to any claimed subordination rights,
if any, shall be deemed satisfied by the distributions under, described in,
contemplated by, and/or implemented by the Plan to holders of Claims having
such subordination rights, and such subordination rights shall be deemed
waived, released, discharged, and terminated as of the Consummation Date. All
actions related to the enforcement of such subordination rights shall be
permanently enjoined. Distributions under, described in, contemplated by, or
implemented by the Plan to the various Classes of Claims hereunder shall not be
subject to levy, garnishment, attachment, or like legal process by any holder
of a Claim by reason of any
A-17
<PAGE>
claimed subordination rights or otherwise, so that each holder of a Claim shall
have and receive the benefit of the distributions in the manner set forth in
the Plan.
F. Discharge of Southern Mineral
All consideration distributed under the Plan shall be in exchange for, and
in complete satisfaction, settlement, discharge, and release of, all Claims of
any nature whatsoever against Southern Mineral or any of its assets or
properties, and, except as otherwise provided herein or in the Confirmation
Order. Regardless of whether any property shall have been distributed or
retained pursuant to the Plan on account of such Claims, upon the Consummation
Date, Southern Mineral, shall be deemed discharged and released under Section
1141(d)(1)(A) of the Bankruptcy Code from any and all Claims, including, but
not limited to, (i) debts, demands and liabilities that arose before the
Confirmation Date, (ii) any liability (including withdrawal liability) to the
extent such Claims relate to services performed by employees of Southern
Mineral prior to the Petition Date and that arises from a termination of
employment or a termination of any employee or retiree benefit program
regardless of whether such termination occurred prior to or after the
Confirmation Date, and (iii) all debts of the kind specified in Sections
502(g), 502(h) or 502(i) of the Bankruptcy Code, whether or not (a) a proof of
Claim based upon such debt is filed or deemed filed under Section 501 of the
Bankruptcy Code, (b) a Claim based upon such debt is Allowed under Section 502
of the Bankruptcy Code, or (c) the holder of a Claim based upon such debt
accepted the Plan. The Confirmation Order shall be a judicial determination of
discharge of all liabilities of Southern Mineral, subject to the Consummation
Date occurring.
G. Committees
Effective on the Consummation Date, the duties of the Creditors' Committee
(if one has been appointed) shall terminate, except with respect to any appeal
of an order in the Chapter 11 Case and applications for Professional Fee
Claims.
H. Exculpation and Limitation of Liability
Neither the Reorganized Southern Mineral, nor any of its present or former
officers, directors, employees, advisors, attorneys, or agents, shall have or
incur any liability to any holder of a Claim or an Interest, or any other party
in interest, or any of their respective agents, employees, representatives,
financial advisors, attorneys, or affiliates, or any of their successors or
assigns, for any act or omission in connection with, relating to, or arising
out of, the Chapter 11 Case, the solicitation of acceptances of the Plan, the
pursuit of confirmation of the Plan, the consummation of the Plan, or the
administration of the Plan or the property to be distributed under the Plan,
except for their willful misconduct, and in all respects shall be entitled to
reasonably rely upon the advice of counsel with respect to their duties and
responsibilities under the Plan.
Notwithstanding any other provision of the Plan, no holder of a Claim or
Interest, no other party in interest, none of their respective agents,
employees, representatives, financial advisors, attorneys, or affiliates, and
no successors or assigns of the foregoing, shall have any right of action
against the Reorganized Southern Mineral, or any of its present or former
officers, directors, employees, advisors, attorneys, or agents, for any act or
omission in connection with, relating to, or arising out of the Chapter 11
Case, the solicitation of acceptances of the Plan, the pursuit of confirmation
of the Plan, the consummation of the Plan, or the administration of the Plan or
the property to be distributed under the Plan, except for their willful
misconduct.
The ongoing exculpation and limitation on liability shall not, however,
limit, abridge, or otherwise affect the rights, if any, of Reorganized Southern
Mineral to enforce, sue on, settle, or compromise the Litigation Claims
retained pursuant to the Plan.
I. Binding Effect
The Plan shall be binding upon and inure to the benefit of Southern Mineral,
all present and former holders of Claims against and Interests in Southern
Mineral, its respective successors and assigns, including, but not limited to,
the Reorganized Southern Mineral, and all other parties-in-interest in this
Chapter 11 Case.
A-18
<PAGE>
J. Revocation, Withdrawal, or Non-Consummation
Southern Mineral reserves the right to revoke or withdraw the Plan at any
time prior to the Confirmation Date and to file subsequent plans of
reorganization. If Southern Mineral revokes or withdraws the Plan, or if
Confirmation or Consummation does not occur, then (i) the Plan shall be null
and void in all respects, (ii) any settlement or compromise embodied in the
Plan (including the fixing or limiting to an amount certain any Claim or Class
of Claims), assumption or rejection of executory contracts or leases effected
by the Plan, and any document or agreement executed pursuant to the Plan shall
be deemed null and void, and (iii) nothing contained in the Plan, and no acts
taken in preparation for consummation of the Plan, shall (a) constitute or be
deemed to constitute a waiver or release of any Claims by or against, or any
Interests in, Southern Mineral or any other Person, (b) prejudice in any manner
the rights of Southern Mineral or any Person in any further proceedings
involving Southern Mineral, or (iv) constitute an admission of any sort by
Southern Mineral or any other Person.
K. Plan Supplement
Any and all exhibits, lists, or schedules not filed with the Plan shall be
contained in the Plan Supplement and filed with the Clerk of the Bankruptcy
Court at least ten (10) Business Days prior to date of the commencement of the
Confirmation Hearing. Upon its filing with the Bankruptcy Court, the Plan
Supplement may be inspected in the office of the Clerk of the Bankruptcy Court
during normal court hours. Holders of Claims or Interests may obtain a copy of
the Plan Supplement upon written request to Southern Mineral.
L. Notices
Any notice, request, or demand required or permitted to be made or provided
to or upon Southern Mineral or Reorganized Southern Mineral under the Plan
shall be (i) in writing, (ii) served by (a) certified mail, return receipt
requested, (b) hand delivery, (c) overnight delivery service, (d) first class
mail, or (e) facsimile transmission, and (iii) deemed to have been duly given
or made when actually delivered or, in the case of notice by facsimile
transmission, when received and telephonically confirmed, addresses as follows:
M. Indemnification Obligations
Except as otherwise specifically limited in the Plan, any obligations or
rights of Southern Mineral to indemnify its present and former directors,
officers or employees pursuant to Southern Mineral's Restated Articles of
Incorporation, by-laws, policy of providing employee indemnification,
applicable state law, or specific agreement in respect of any claims, demands,
suits, causes of action, or proceedings against such directors, officers, or
employees based upon any act or omission related to such present and former
directors', officers', or employees' service with, for, or on behalf of
Southern Mineral, shall survive confirmation of the Plan and remain unaffected
thereby, irrespective of whether indemnification is owed in connection with an
occurrence before or after the Petition Date.
N. Prepayment
Except as otherwise provided in the Plan or the Confirmation Order, Southern
Mineral shall have the right to prepay, without penalty, all or any portion of
an Allowed Claim at any time; provided, however, that any such prepayment shall
not violate, or otherwise prejudice, the relative priorities and parities among
the classes of Claims.
O. Term of Injunctions or Stays
Unless otherwise provided herein or in the Confirmation Order, all
injunctions or stays provided for in the Chapter 11 Case under Sections 105 or
362 of the Bankruptcy Code or otherwise, and extant on the Confirmation Date
(excluding any injunctions or stays contained in the Plan or the Confirmation
Order), shall remain in full force and effect until the Consummation Date.
A-19
<PAGE>
P. Governing Law
Unless a rule of law or procedure is supplied by federal law (including the
Bankruptcy Code and Bankruptcy Rules) the laws of (i) the State of Texas shall
govern the construction and implementation of the Plan and any agreements,
documents, and instruments executed in connection with the Plan and (ii) the
laws of the State of Nevada shall govern corporate governance matters with
respect to Southern Mineral and Reorganized Southern Mineral, in either case
without giving effect to the principles of conflicts of law thereof.
Dated: Houston, Texas
, 1999
SOUTHERN MINERAL CORPORATION
By:__________________________________
Name:
Title:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
Attorneys for Southern Mineral Corporation
By:__________________________________
H.Rey Stroube, III
A-20
<PAGE>
APPENDIX I-A
Administrative Claim........... a Claim for payment of an administrative
expense of a kind specified in Section 503(b)
or 1114(e)(2) of the Bankruptcy Code and
entitled to property pursuant to Section
507(a)(1) of the Bankruptcy Code.
Affiliate...................... any Person that is an affiliate as defined by
Section 101(2) of the Bankruptcy Code.
Allowed........................ when used in reference to a Claim or Interest
within a particular Class, an Allowed Claim
or Allowed Interest of the type described in
such Class.
Allowed Claim.................. a Claim or any portion thereof as to which
(a) no objection to allowance or request for
estimation has been interposed on or before
the Consummation Date or the expiration of
such other applicable period of limitation
fixed by the Bankruptcy Code, Bankruptcy
Rules, or the Bankruptcy Court, (b) the
Schedules of Southern Mineral do not list
such Claim as disputed, contingent or
unliquidated, (c) any objection to its
allowance has been settled, waived through
payment, or withdrawn, or has been denied by
a Final Order, (d) a Final Order is entered
allowing such Claim, (e) the liability of
Southern Mineral, and the amount thereof are
determined by final order of a court of
competent jurisdiction other than the
Bankruptcy Court, or (f) the Plan provides
for an express liquidated, agred amount;
provided, however, that with respect to an
Administrative Claim, "Allowed Claim" means
an Administrative Claim as to which a timely
request for payment has been made in
accordance with Article XIV.A.1 of the Plan
(if such written request is required) or
other Administrative Claim, in each case as
to which Southern Mineral (1) has not
interposed a timely objection or (2) has
interposed a timely objection and such
objection has been settled, waived through
payment, or withdrawn, or has been denied by
a Final Order.
Amended Credit Facility........ the loan and credit agreements among Southern
Mineral, Compass Bank-Houston and First Union
National Bank that provide for the repayment
of the Remaining Loan Balance on terms and
conditions in form and substance
substantially similar to the documents
attached as Appendix 2-a.
Ballots........................ each of the ballot forms distributed with
this Disclosure Statement to holders of
Impaired Claims or Interests entitled to vote
to accept or reject the Plan.
Bankruptcy Code................ the Bankruptcy Reform Act of 1978, as
codified in Title 11 of the United States
Code, 11 U.S.C. (S)(S) 101 et seq, as now in
effect or hereafter amended.
Bankruptcy Court...............
the United States Bankruptcy Court for the
District of Nevada or such other court as may
have jurisdiction over the Chapter 11 Case.
I-A-1
<PAGE>
Bankruptcy Rules............... the Federal Rules of Bankruptcy Procedure,
the Official Bankruptcy Forms, and the
Federal Rules of Civil Procedure as
incorporated in the Federal Rules of
Bankruptcy Procedure, and the Local Rules of
the Bankruptcy Court, as applicable to the
Chapter 11 Case or proceedings therein, as
the case may be.
Bar Date(s).................... the date(s), if any, designated by the
Bankruptcy Court as the last dates for filing
proofs of Claim in the Chapter 11 Case.
Borrowing Base Obligation...... as defined in the Credit Facility.
Canadian Credit Facility....... Credit Facility Agreement, dated February 26,
1999, between National Bank of Canada and
Neutrino, as amended.
Cash........................... legal tender of the United States or
equivalents thereof.
Chapter 11 Case................ This reorganization case filed by Southern
Mineral. pursuant to Chapter 11 of the
Bankruptcy Code
CIBC........................... CIBC World Markets Corp.
Claim.......................... a potential debt obligation of Southern
Mineral, whether or not asserted, as defined
in Section 101(5) of the Bankruptcy Code.
Class.......................... a category of holders of Claims or Interests
as defined by the Plan.
Collateral..................... any property or interest in property of
Southern Mineral that is property of its
Chapter 11 Estate (as defined by Section 541
of the Bankruptcy Code) subject to a valid
and enforceable lien or security interest to
secure the payment or performance of a Claim,
which lien is not subject to avoidance under
the Bankruptcy Code or otherwise invalid
under the Bankruptcy Code or applicable state
law.
Common Stock................... the Common Stock of Southern Mineral, par
value $.01 per share.
Confirmation................... the consequence of the entry by the
Bankruptcy Court of the Confirmation Order.
Confirmation Date.............. the date of entry by the clerk of the
Bankruptcy Court of the Confirmation Order.
Confirmation Hearing........... the hearing to consider confirmation of the
Plan convende pursuant to Section 1128 of the
Bankruptcy Code.
Confirmation Order............. the order entered by the Bankruptcy Court
pursuant to Section 1129 of the Bankruptcy
Code confirming the Plan.
Consummation Date.............. the Business Day on which all conditions to
the consummation of the Plan have been
satisfied or waived in accordance with
Article X.B. of the Plan.
Credit Facility................
Amended and Restated Credit Agreement, dated
February 26, 1999, among Southern Mineral,
Compass Bank-Houston and First Union National
Bank, as amended.
I-A-2
<PAGE>
Creditor....................... any Person who holds a Claim against Southern
Mineral.
Creditors' Committee........... the committee of unsecured creditors, if any,
appointed pursuant to Section 1102(a) of the
Bankruptcy Code in the Chapter 11 Case.
DD&A........................... depreciation, depreciation and amortization.
Debenture(s)................... Southern Mineral's 6.875% Convertible
Subordinated Debentures Due 2007.
DIP Facility................... the debtor-in-possession credit facility to
be provided to Southern Mineral during the
Chapter 11 Case in the aggregate principal
amount of $ , pursuant to the DIP Facility
Agreement.
DIP Facility Agreement......... the amended and restated secured credit
agreement, to be dated as of the Petition
Date, by and among Southern Mineral, ,
and the other signatories thereto.
DIP Lenders.................... the financial institutions that are the
parties to the DIP Facility Agreement.
DIP Notes...................... promissory notes issued under the DIP
Facility Agreement in an amount equal to
.
Disbursing Agent............... Reorganized Southern Mineral or any party
designated by Reorganized Southern Mineral,
in its sole discretion, to serve as a
disbursing agent under the Plan.
Disclosure Statement........... this disclosure statement, as it may be
amended, supplemented, or modified from time
to time, prepared and distributed in
accordance with Section 1125 and 1126(b) of
the Bankruptcy Code and Rule 3018, Bankruptcy
Rules.
Disputed Claim................. any Claim that is not an Allowed Claim or is
not paid pursuant to the Plan or an order of
the Bankruptcy Court (a) which is listed on
the Schedules as unliquidated, contingent, or
disputed and which has not been resolved by
written agreement of the parties or an order
of the Bankruptcy Court, (b) proof of which
was required to be filed by order of the
Bankruptcy Court but as to which a proof of
Claim was not timely or properly filed, (c)
proof of which was timely and properly filed
and is listed on the Schedules as
unliquidated, disputed or contingent, (d)
that is disputed in accordance with the
provisions of the Plan, or (e) as to which
Southern Mineral has interposed a timely
objection or request for estimation in
accordance with the Bankruptcy Code, the
Bankruptcy Rules, and any orders of the
Bankruptcy Court, or is otherwise disputed by
Southern Mineral in accordance with
applicable law, which objection, request for
estimation, or dispute has not been withdrawn
or determined by a Final Order, provided,
however, that for purposes of determining
whether a particular Claim is a Disputed
Claim prior to the expiration of any period
of limitation fixed for the interposition by
Southern
I-A-3
<PAGE>
Mineral of objections to the allowance of
Claims, any Claim that is not identified by
Southern Mineral, as an Allowed Claim shall
be deemed a Disputed Claim.
Distribution Date.............. the date, occurring as soon as practicable,
but in no event later than twenty (20)
Business Days after the Consummation Date,
upon which the initial distributions are made
by Reorganized Southern Mineral to holders of
Allowed Claims or Interests as provided in
Article VII of the Plan, which date will also
be considered the effective date of the Plan
for purposes of the applicable provisions of
the Bankruptcy Code .
Distribution Record Date....... the record date for purposes of making
distributions under the Plan on account of
Allowed Claims, which will be the first (1st)
Business Day following the Confirmation Date.
Distribution Reserve........... the reserve, if any, established and
maintained by the Reorganized Southern
Mineral, into which the Reorganized Southern
Mineral will deposit the amount of Cash,
Common Stock, or other property that would
have been distributed on the Distribution
Date to holders of (a) Disputed Claims, (b)
contingent liquidated Claims, if such Claims
is undisputed or not contingent on the
Distribution Date, pending (i) the allowance
of such Claims, (ii) the estimation of such
Claims for purposes of allowance or (iii) the
realization of the contingencies, and (c)
unliquidated Claims, if such Claims had been
liquidated on the Distribution Date, such
amount to be estimated by the Bankruptcy
Court or agreed upon by Southern Mineral and
the holders thereof as sufficient to satisfy
such unliquidated Claim upon such Claim's (x)
allowance, (y) estimation for purposes of
allowance, or (z) liquidation, pending the
occurrence of such estimation or liquidation.
EnCap.......................... EnCap Energy Capital Fund III, L.P., EnCap
Energy Capital Fund III-B, L.P., Energy
Capital Investment Company PLC, BOCP Energy
Partners, L.P. and EnCap Investments L.L.C.,
collectively.
EnCap Transaction.............. The investment by EnCap in New Securities of
Reorganized Southern Mineral pursuant to the
Stock Purchase Agreement dated July 20, 1999,
between EnCap and Southern Mineral, including
the payment of a Purchasers' Representative
Fee by Reorganized Southern Mineral.
Equity Securities Claim........ a Securities Claim arising from the ownership
of the Common Stock.
Estate......................... the estate of Southern Mineral in the Chapter
11 Case, created pursuant to Section 541 of
the Bankruptcy Code.
Final Order.................... an order or judgment of the Bankruptcy Court,
or other court of competent jurisdiction, as
entered on the docket in the Chapter 11 Case,
the operation or effect of which has not been
stayed, reversed, or amended and as to which
order or judgment (or any
I-A-4
<PAGE>
revision, modification, or amendment thereof)
the time to appeal or seek review or
rehearing has expired and as to which no
appeal or petition for review or rehearing
was filed or, if filed, remains pending.
Form 10-K/A.................... Southern Mineral's Annual Report on Form 10-
K/A for the fiscal year ended December 31,
1998 (Commission File Number 0-8043).
Form 10-Q...................... Southern Mineral's Quarterly Report on Form
10Q for the quarterly period ended March 31,
1999 (Commission File Number 0-8043).
Impaired....................... when used with reference to a Claim or
Interest, a Claim or Interest that is
impaired within the meaning of Section 1124
of the Bankruptcy Code.
Indenture...................... the Indenture relating to the Debentures,
dated September 17 1997, between Southern
Mineral and the Indenture Trustee.
Indenture Trustee.............. American Stock Transfer & Trust Company
Intercompany Claim............. any Claim of (a) any Affiliate against
Southern Mineral, (b) any Affiliate against
any other Affiliate, or (c) Southern Mineral
against any Affiliate, as the case may be.
Interest....................... the legal, equitable, contractual and other
right of any Person as owner or holder with
respect to the Common Stock and the legal,
equitable, contractual or other rights of any
Person to acquire or receive any of the
foregoing.
Litigation Claims.............. the claims, rights of action, suits or
proceedings, whether in law or in equity,
known or unknown, that Southern Mineral or
Estate may hold against any Person which are
retained by Reorganized Southern Mineral
pursuant to Article IV.G of the Plan.
Master Ballot.................. the ballot provided to a bank, brokerage firm
or other nominee, or agent or proxy holder
thereof holding Debentures in its own name on
behalf of a beneficial owner, or any agent
thereof.
Neutrino....................... Neutrino Resources Inc.
New Securities................. the newly authorized and issued shares Common
Stock of Reorganized Southern Mineral to be
issued pursuant to the provisions of Article
IV of the Plan and the EnCap Transaction
NOL............................ net operating loss carry forward.
Other Priority Claim........... a Claim entitled to priority pursuant to
Section 507(a) of the Bankruptcy Code other
than a DIP Facility Claim, Priority Tax Claim
or an Administrative Claim.
Other Unsecured Claim.......... a Claim that is not a DIP Facility Claim,
Administrative Claim, Priority Tax Claim,
Other Priority Claim, Secured Claim,
Debenture Claim, or Securities Claim.
I-A-5
<PAGE>
Person......................... an entity as defined in Section 101 (41) of
the Bankruptcy Code.
Petition Date.................. the date on which Southern Mineral files its
petition for relief commencing the Chapter 11
Case.
Plan........................... the Chapter 11 reorganization plan for
Southern Mineral, dated , 1999, as the
same may be amended, modified or supplemented
from time to time.
Plan Supplement................ the compilation of documents and forms of
documents specified in the Plan which will be
filed with the Bankruptcy Court not later
than ten (10) Business Days prior to the
commencement of the Confirmation Hearing.
Priority Tax Claim............. a Claim that is entitled to priority pursuant
to Section 507(a)(8) of the Bankruptcy Code.
Professional................... any professional employed in the Chapter 11
Case pursuant to Sections 327 or 1103 of the
Bankruptcy Code or otherwise and the Persons
seeking compensation or reimbursement of
expenses in connection with the Chapter 11
Case pursuant to Section 503(b)(4) of the
Bankruptcy Code.
Professional Fee Claim......... a Claim of a Professional for compensation or
reimbursement of costs and expenses relating
to services incurred after the Petition Date
and prior to and including the Consummation
Date.
Projections.................... the financial projections contained in Annex
to the Disclosure Statement.
Purchasers' Representative
Fee........................... the fee payable to EnCap Investments L.L.C.
pursuant to the Stock Purchase Agreement
equal to $600,000 cash and 2,127,660 shares
of New Securities.
Record Date.................... , 1999.
Remaining Loan Balance......... that portion of the Borrowing Base Obligation
that remains outstanding after application of
the payments provided for in Article III, B.
2. a. of this Plan.
Reorganized Southern Mineral... Southern Mineral as reorganized pursuant to
the Plan on and after the Consummation Date.
Requisite Acceptances.......... with respect to an impaired class of claims,
votes cast to accept the Plan in number and
amount equal to (a) at least two-thirds (
2/3) in amount of the Claims of the holders
in such Class who actually cast votes with
respect to the Plan and (b) more than one-
half ( 1/2) in number of the holders in such
Class who actually cast votes with respect to
the Plan.
Schedules...................... the schedules of assets and liabilities and
the statement of financial affairs, if any,
filed in the Bankruptcy Court by Southern
Mineral, as such schedules or statement may
be amended or supplemented from time to time
in accordance with Rule 1009, Bankruptcy
Rules or orders of the Bankruptcy Court.
I-A-6
<PAGE>
Section 341 Meeting............ the first meeting of creditors held pursuant
to Section 341 of the Bankruptcy Code.
Secured Claim.................. a Claim, other than a setoff Claim, that is
secured by a security interest in or lien
upon property, or the proceeds of the sale of
such property, in which Southern Mineral has
an interest to the extent of the value as of
the Consummation Date or such later date as
is established by the Bankruptcy Court of
such interest or lien as determined by a
Final Order of the Bankruptcy Court pursuant
to Section 506 of the Bankruptcy Code or as
otherwise agreed upon in writing by Southern
Mineral and the holder of such Claim.
Securities Act................. the Securities Act of 1933, 15 U.S.C. (S)(S)
77a-77aa, as now in effect or hereafter
amended.
Solicitation................... the solicitation by Southern Mineral from
holders of the Debentures and the Common
Stock of acceptances of the Plan pursuant to
Section 1126(b) of the Bankruptcy Code.
Solicitation Package........... the package provided by Southern Mineral that
includes the Disclosure Statement and related
materials and, where appropriate, Ballots or
Master Ballots.
Southern Mineral............... Southern Mineral Corporation, a Nevada
corporation.
Substantial Contribution
Claim......................... a Claim by a party in interest asserted
pursuant to Section 503(b) of the Bankruptcy
Code.
Stock Purchase Agreement....... the Stock Purchase Agreement, dated July 20,
1999, between EnCap and Southern Mineral.
Tranche A...................... as defined in the Credit Facility.
Unimpaired Claim............... a Claim that is not an Impaired Claim.
Unsecured Claim................ any Claim against Southern Mineral with
respect to which the Creditor has no interest
in and does not hold Collateral.
Voting Record Date............. with respect to identification of the holders
of Impaired Claims entitled to vote on the
Plan, , 1999.
Warrants....................... the three-year warrants to purchase an
aggregate of 7,820,460 shares of Common Stock
of Southern Mineral at a price of $1.50 per
share, to be issued to holders of Debentures
pursuant to the Plan.
I-A-7
<PAGE>
ANNEX B
SOUTHERN MINERAL CORPORATION
ESTIMATED LIQUIDATION PROCEEDS
ASSUMING CONVERSION TO CHAPTER 7
Introduction
Section 1129(a)(7)(A) of the Bankruptcy Code provides that the bankruptcy
court may not confirm a plan of reorganization as to creditors and equity
interest holders in impaired classes who do not vote to accept the plan, unless
the plan treatment provides the non-accepting creditors and equity interest
holders at least the amount or value they would receive if the debtor were
liquidated on the effective date of the plan in a hypothetical case under
Chapter 7 of the Bankruptcy Code. This statutory requirement is commonly
referred to as the "best interests of creditors" test.
This liquidation analysis presents estimated amounts that would be paid to
claimants and equity interest holders in impaired classes 2, 3 and 5 under a
hypothetical Chapter 7 liquidation. The assumptions and estimates utilized in
this liquidation analysis are considered reasonable by us and, with respect to
our oil and gas assets, incorporate the results of the strategic alternatives
evaluation program that we undertook prior to entering into the EnCap
investment. This liquidation analysis is also based on assumptions with regard
to management decisions that may be subject to change by a Chapter 7 trustee in
an actual liquidation. Accordingly, we can give you no assurances that the
values reflected in this liquidation analysis would be realized if we were, in
fact, to undergo such liquidation.
We believe that this liquidation analysis reflects all relevant information
known to management as of the date of this proxy
statement/prospectus/disclosure statement. We are not aware of any events
subsequent to such date that would materially affect this liquidation analysis.
We can give you no assurances that the assumptions underlying this liquidation
analysis would be made or accepted by the bankruptcy court.
The projections were not prepared with a view toward compliance with the
guidelines established by the American Institute of Certified Public
Accountants or the rules and regulations of the Securities and Exchange
Commission regarding projections. Furthermore, the projections have not been
audited, reviewed or compiled by KPMG LLP, our independent certified
accountants, and they express no opinion or any other form of assurances on
such information. Although presented with numerical specificity, the
projections are based upon a variety of assumptions, some of which have not
been achieved to date and may not be realized in the future, and are subject to
significant business, litigation, economic and competitive uncertainties and
contingencies, many of which are beyond our control. Consequently, the
projections should not be regarded as a representation or warranty by us, or
any other person, that the projections will be realized. Actual results may
vary materially from those presented in the projections.
Basis of Presentation
This liquidation analysis is based on our projected balance sheet as of
September 30, 1999 with various adjustments thereto, as reflected in the
significant assumptions section below and the footnote section following the
liquidation analysis, as well as other amounts we estimated. The liquidation
analysis assumes that our asset and liability values at September 30, 1999, the
hypothetical effective date of the conversion, would be based upon a
rollforward of the May 31, 1999 unaudited financial statements adjusted for our
estimates through September 30, 1999. Actual results through September 30, 1999
and recoveries in Chapter 7 liquidation may differ materially from the
projected balance sheet and estimate of recoveries included herein.
B-1
<PAGE>
Significant Assumptions
Oil and gas property liquidation value. The liquidation of our oil and gas
assets assumes that (1) the asset disposition process would take place on an
accelerated basis in the event of conversion to Chapter 7, (2) there would be
no extensive solicitation of new offers, and (3) the properties would be sold
in an "as is" condition and purchasers would not receive the normal contractual
representations and warranties typically provided in the acquisition of oil and
gas producing properties. The liquidation value was therefore determined based
on numerous assumptions that we believe are reasonable under such
circumstances, but may not necessarily occur if the liquidation were pursued.
The initial value was determined by applying an estimate of future oil and gas
prices and cost escalation to our estimated proved oil and gas reserves (except
Ecuador, which was estimated to have no value) as of October 1, 1999. The
product prices and cost escalation were derived from a current survey of oil
and gas prices used by middle market oil and gas acquisition companies in
determining their acquisition price. The product prices were adjusted for
quality, grade and locations specific to our oil and gas properties. The result
was a traditional reserves and economics analysis that discounted future net
revenues by 10%. These discounted values were further adjusted to approximate
the price that we believe oil and gas properties could be sold in an orderly,
non-liquidation sale over a reasonable period of time while providing the
purchaser with normal industry standard representations and warranties. The
adjustments to the present value of future net revenues by category are as
follows:
.Proved developed producing 95%
.Proved behind pipe 50%
.Proved undeveloped 25%
The total was then reduced by an additional 25% to reflect the discounted
associated with an accelerated Chapter 7 liquidation sale.
In addition, we also received proposals to acquire certain of our oil and
gas properties during our strategic alternatives evaluation program which taken
at face value would have resulted in similar results on an over-all basis.
Although these proposals were from independent third parties, for the most part
there were no negotiations to improve the initial proposals nor were there
extensive contacts to obtain other competing proposals for the individual asset
packages. Conversely, the proposals were not submitted under the context of
properties being sold in Chapter 7 and subject to the above referenced negative
assumptions associated with such a sale.
As outlined by CIBC WM in their bids received, net asset value summary
included in the prospectus, subject to the assumptions and limitations stated
therein (which bids were not received in anticipation of a Chapter 7
liquidation), the estimated value of (i) our oil and gas reserves estimated
from their compilation of the bids received and (ii) the present value of our
reserves discounted 10% that we estimated for those properties for which no
bids were received totaled approximately $58.8 million. The value of properties
located in the United States is $36.4 million and is comprised of several
proposals combined with our estimate where no proposals were received to be
paid in cash upon the closings. Two proposals for the Canadian properties were
received totaling $22.4 million to be paid in cash and equity securities of one
of the purchasers. The value of the U.S. properties does not include the $16.3
million agreement by ANR Production Company for our Brushy Creek Field and
Texan Gardens Field interests. We also assumed that we would receive only a
residual distribution from the various subsidiaries after the subsidiary had
paid all of its debts and claims in full. We assumed that the prospects held
for resale would need to be sold as part of the producing properties in order
to maximize the value of the proceeds. See also notes 8 and 9.
B-2
<PAGE>
Order of distribution. The hypothetical Chapter 7 liquidation assumes the
following order of distribution in accordance with Section 726 of the
Bankruptcy Code:
. Secured Claims entitle to a superpriority status approved by the
Bankruptcy Court;
. Allowed Secured Claims;
. Allowed Chapter 7 Administrative Claims;
. Allowed Chapter 11 Administrative Claims;
. Allowed Priority Claims;
. Allowed General Unsecured Claims; and
. Equity Interests.
Other assumptions.
. Our operations would immediately cease upon conversion of the case
to a Chapter 7 proceeding, and another operator would assume our oil
and gas business operating functions;
. A Chapter 7 trustee would liquidate the assets on an accelerated
schedule;
. Liquidation would commence on September 30, 1999 and be complete by
December 31, 1999;
. The oil and gas properties are assumed to be sold on October 1, 1999
with another operator commencing operations on October 1, 1999 on
properties operated by us;
. No asset value has been attributed to potential preferences,
fraudulent transfers or other possible recoveries through pending
lawsuits; and
. In the liquidation of the subsidiaries, the estimated contingent
liabilities attributable to our subsidiaries are as follows:
.BEC, Inc.--legal and settlement costs of $1 million
.Neutrino--decommissioning and plugging costs of $2.6 million
.Neutrino--Canadian employee severance costs of $500,000
. Amerac/Southern Mineral Production Co.--state income tax of
$100,000
Based upon the foregoing assumptions, the following liquidation analysis was
prepared, including a comparison of the estimated recoveries in a hypothetical
Chapter 7 liquidation with estimated recoveries under the prepackaged plan.
B-3
<PAGE>
SOUTHERN MINERAL CORPORATION
LIQUIDATION ANALYSIS--UNAUDITED
ESTIMATED AS OF 9/30/99
(in thousands)
<TABLE>
<S> <C>
CURRENT ASSETS
Cash.............................................................. $ 1,857(1)
Accounts receivable............................................... 1,317(2)
Prepaids/deposits................................................. -- (3)
-------
Total current assets............................................ 3,174
PROPERTY AND EQUIPMENT
Oil & gas properties.............................................. 9,882(4)
Mineral rights.................................................... -- (4)
Unproven properties............................................... -- (4)
Office equipment.................................................. -- (5)
Investment in subsidiaries........................................ 20,758(6)
Deferred bond costs............................................... -- (7)
Prospects held for resale......................................... -- (8)
Other............................................................. -- (9)
-------
ASSETS AVAILABLE FOR DISTRIBUTION................................... $33,814
=======
</TABLE>
B-4
<PAGE>
SOUTHERN MINERAL CORPORATION
SUBSIDIARIES LIQUIDATION ANALYSIS--UNAUDITED
ESTIMATED AS OF 9/30/99
(in thousands)
<TABLE>
<CAPTION>
Value of Investment In Subsidiaries:
- ------------------------------------
<S> <C>
ASSETS
Cash............................................................. $(1,626)(1)
Accounts receivable.............................................. 4,012 (2)
Other (Prepaids/deposits)........................................ -- (3)
Oil and gas producing properties................................. 47,707 (4)
Mineral rights................................................... -- (4)
Unproven properties.............................................. -- (4)
Office Equipment................................................. 82 (5)
Deferred bond costs.............................................. -- (7)
Prospects held for resale........................................ -- (8)
-------
Assets Available to pay debts/claims............................. 50,175
LIABILITIES
Accounts payable................................................. 5,604
Canadian bank loan............................................... 18,773
Other debt....................................................... --
Deferred taxes................................................... --
Liquidation fees................................................. 715
Big Escambia Creek lawsuit....................................... 1,000
Decommissioning of Edson Gas Plant............................... 1,200
Inverness P&A wells.............................................. 1,000
Alberta Province P&A of wells.................................... 100
Canada employee severence........................................ 425
Amerac/Southern Mineral Prod est. state taxes.................... 100
Neutrino drilling commitment..................................... 500
-------
NET ASSETS AVAILABLE FOR DISTRIBUTION............................ $20,758
=======
</TABLE>
B-5
<PAGE>
SOUTHERN MINERAL CORPORATION
BEST INTERESTS TEST--UNAUDITED
ESTIMATED AS OF 9/30/99
(in thousands)
<TABLE>
<CAPTION>
Chapter 7 Prepackaged Plan
------------------------------- -------------------------------
Estimated Estimated
Allowed Estimated Estimated Allowed Estimated Estimated
Amount $ Recovery $ Recovery % Amount $ Recovery $ Recovery % Notes
--------- ---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Chapter 7 Administrative
Expenses............... $ 2,550 $ 2,550 100.0% $ -- $ -- 100.0% (10) (11)
DIP Facility Claims..... 500 500 100.0% -- -- 100.0% (12)
Administrative Claims of
Chapter 11............. -- -- 100.0% -- -- N/A (13)
Priority Tax Claims..... 320 320 100.0% 320 320 N/A (14)
Southern Mineral Class
1--Other Priority
Claims................. -- -- 100.0% -- -- N/A (15)
Southern Mineral Class
2--Secured Claims of
Compass Bank and First
Union.................. 15,198 15,198 100.0% 15,198 15,198 N/A (12)
Southern Mineral Class
3--Unsecured Claims of
the Debentures......... 42,585 15,207 35.7% 42,585 17,468 41.0% (16)
Southern Mineral Class
4--Unsecured Claims of
all creditors not in
Class 3................ 109 39 35.7% 109 109 100.0% (17)
Southern Mineral Class
5--Interests of Common
Stockholders........... -- -- 0.0% -- 6,017 17.2% (18)
------- ------- ------- -------
$58,712 $33,814 $58,212 $39,112
======= ======= ======= =======
</TABLE>
B-6
<PAGE>
Notes to the Liquidation Analysis--Unaudited
Proceeds:
1) The cash balance at September 30, 1999 is an estimate of cash available
based upon our unaudited proforma balance sheet as of September 30, 1999. Our
cash balance assumes settlement to the extent of available cash of all
intercompany accounts receivable and payable as of September 30, 1999. The cash
balances of the subsidiaries will be segregated under our domestic centralized
cash management system and separate bank accounts for Neutrino.
2) Accounts receivable are assumed to be liquidated at estimated book value
and that any uncollectible receivables are written off prior to September 30,
1999.
3) Other current assets consist primarily of prepaid items and deposits and
are assumed to have no value in a liquidation scenario.
4) The oil and gas property values are estimated as described under the
caption "Significant Assumptions."
5) Owned computer equipment and office fixtures are assumed to have no value
in a liquidation scenario. Neither a physical inventory or evaluation has been
performed nor have third party proposals been received for these assets which
are primarily owned by various subsidiaries.
6) A Chapter 7 trustee, as the 100% owner of the equity of all Affiliates,
would undertake a contemporaneous liquidation of the assets of the Affiliates.
The result of asset liquidations is that investments in subsidiaries are valued
at the net proceeds amount available after liquidation of the oil and gas
properties (as noted in the significant assumption sections above), and payment
of all debts owed by the Affiliates (other than the amount owed to Compass
Bank-Houston and First Union National Bank) based on a projected balance sheet
as of September 30, 1999.
7) Deferred bond issuance costs are assumed to have no value in a
liquidation scenario.
8) Oil and gas properties held for resale are geological prospects and are
included in the value of the liquidation of the oil and gas property as
discussed in note 4.
9) Other includes primarily deposits, loan costs, and other miscellaneous
assets and is assumed to have no value in a liquidation scenario.
Application of Proceeds:
10) Estimated Chapter 7 administrative costs and expenses include the
Chapter 7 trustee's statutory fee of 3% of total disbursements ($1,847,000),
Chapter 7 professional fees ($125,000) and general and administrative costs
required to be paid by the trustee to all properties during the three-month
wind down period estimated to be approximately 37% of our gross general and
administrative expenses incurred for the first quarter of 1999 ($380,000).
11) We have assumed that CIBC WM or other property brokers would be retained
by the Chapter 7 trustee and charge a sales commission of 1.5% of proceeds to
assist the trustee in the sale of the oil and gas properties.
12) We have assumed that the DIP Facility Lenders will be our current
secured lenders of Compass Bank and First Union National Bank or another lender
and that the net proceeds of the sale of our Brushy Creek Field and Texan
Gardens Field interests will be applied to the secured claims of our lenders
prior to liquidation. The proceeds from the property sales of the subsidiaries
after payment of all debts owed except to Compass
B-7
<PAGE>
Bank--Houston and First Union National Bank would be distributed to us and
would be applied to the amounts owed our secured lenders after repayment of the
DIP facility. We have assumed that $500,000 will be drawn under the DIP
Facility. The amount drawn could be higher, particularly if cash flow from
affiliates in interrupted.
13) Administrative expenses consist of post-petition royalties, professional
fees, employee stay bonus, and cure for the assumption of executory contracts.
It is assumed that the professional and administrative fees would be paid as
part of the liquidation and is included in the Chapter 7 Administrative
Expenses described in notes 10 and 11.
14) Priority tax claims are the estimated alternative minimum tax
attributable to the sale of our Brushy Creek Field and Texan Gardens Field
interests to ANR Production Company. We have not projected that any other
priority tax claims would be owed for liquidation purposes.
15) Other priority claims in the liquidation analysis would include liens
and assumes that any oil and gas lien claimants will receive cash for the
secured portion of their claim. These claims have been estimated to have no
value. The amount of these claims in excess of the value of the property are
treated as a Class 4 claim and receive treatment as general unsecured claims.
16) The Class 3 Unsecured Claims attributable to the debentures are assumed
to share pro rata distributions with the Class 4 Other Unsecured Claims. The
distributions to debentureholders under the prepackaged plan would be
$10,000,000 in cash, 15,640,000 shares of our common stock valued at
approximately $7,350,800 (assuming $0.47 per share) and warrants to purchase an
additional 7,820,000 shares of our common stock valued at approximately
$117,308 (assuming $0.015 per warrant). The estimated value of the distribution
would be approximately $17,468,108.
17) The Class 4 Other Unsecured Claimants would share pro rata distributions
with the Class 3 Unsecured Claims.
18) The interest of Common Stockholders is valued at $0.47 per share for the
estimated outstanding shares as of liquidation.
B-8
<PAGE>
ANNEX C
The Board of Directors
Southern Mineral Corporation
July 13, 1999
Page 1
July 13, 1999
The Board of Directors
Southern Mineral Corporation
1201 Louisiana, Suite 3350
Houston, TX 77002-5609
Members of the Board:
You have asked CIBC World Markets Corp. ("CIBC WM") to render a written
opinion ("Opinion") to the Board of Directors as to the fairness to Southern
Mineral Corporation ("SMIN" or the "Company"), from a financial point of view,
of the $20.6 million in consideration to be paid pursuant to the Stock Purchase
Agreement, dated as of July 20, 1999 (the "Stock Purchase Agreement"), by EnCap
Energy Capital Fund III, L.P., EnCap Energy Capital Fund III-B, L.P., Energy
Capital Investment Company PLC and BOCP Energy Partners, L.P. (collectively,
the "Investors") for the issuance of approximately 43.8 million shares of SMIN
common stock (the "Investment"). In connection with the $20.6 million
consideration, EnCap Investments, L.C. will receive approximately 2.1 million
additional shares of SMIN common stock as a fee. Together with the Investment,
the Stock Purchase Agreement provides for the commencement of an exchange offer
(the "Exchange Offer") to redeem the Company's 6.875% Convertible Subordinated
Debentures due 2007 (the "Convertible Notes").
In arriving at our Opinion, CIBC WM has, among other things:
(a) Reviewed a draft of SMIN's Registration Statement on Form S-4;
(b) Reviewed the Stock Purchase Agreement;
(c) Reviewed SMIN's audited financial statements for the fiscal years
ended December 31, 1996, December 31, 1997 and December 31, 1998;
(d) Reviewed SMIN's unaudited financial statements for the three-month
period ended March 31, 1999;
(e) Reviewed financial and operational projections prepared by SMIN's
management;
(f) Reviewed the historical trading performance of SMIN's common stock
and SMIN's Convertible Notes;
(g) Prepared a model that analyzed SMIN's financial prospects based upon
various assumptions as to asset dispositions and capital infusions, such
analyses including a status quo scenario that excluded the Investment;
(h) Modeled a status quo scenario using certain assumptions of future
financial performance provided to us by the management of SMIN to determine
SMIN's financial prospects without the Investment;
(i) Reviewed and analyzed certain financial, stock market and other
publicly available information relating to the business of selected other
companies for comparison to SMIN;
(j) Reviewed and analyzed certain publicly available information for
selected transactions for comparison to the Investment; and
C-1
<PAGE>
(k) Performed such other analyses and reviewed such other information as
we deemed appropriate.
In addition, we have held discussions with members of the management teams
of both SMIN and the Investors in regard to selected aspects of SMIN's
financial and operating prospects and the Investment and have interviewed
representatives of SMIN's counsel as to certain legal matters relevant to the
Investment.
In rendering the Opinion, we relied upon and assumed, without independent
verification or investigation, the accuracy and completeness of the financial
and other information provided to or discussed with us by SMIN and its
employees, representatives and affiliates or otherwise reviewed by us, and we
have not assumed any responsibility or liability therefor. With respect to
forecasts of SMIN's future financial condition and operating results provided
to or discussed with CIBC WM, we assumed, at the direction of SMIN's
management and without independent verification or investigation, that such
forecasts were reasonably prepared in a manner that reflects the best
available information, estimates and judgments of SMIN's management. We have
also assumed that all material governmental, regulatory and other consents and
approvals necessary for the consummation of the transactions contemplated by
the Stock Purchase Agreement will be obtained without any meaningful adverse
effect on SMIN. Other than the reserve reports prepared by Ryder Scott
Company, Netherland, Sewell & Associates, Inc., Chapman Petroleum Engineering,
Ltd. and Gilbert Laustsen Jung Associates, Ltd. as of January 1, 1999, CIBC WM
neither made nor obtained any independent evaluations or appraisals of SMIN's
assets or liabilities or those of any affiliated entity. CIBC WM is not
expressing any opinion as to the underlying valuation, future performance or
long-term prospects of SMIN, or the price at which SMIN common stock will
trade subsequent to announcement of the Investment and the Exchange Offer.
CIBC WM's Opinion is necessarily based on the information available to us and
general economic, financial and stock market conditions and circumstances as
they exist and can be evaluated by us on the date hereof. Subsequent
developments may affect this Opinion, and we do not have any obligation to
update, revise or reaffirm the Opinion.
As part of our investment banking business, we regularly engage in
valuations of businesses and securities in connection with acquisitions and
mergers, underwritings, secondary distributions of securities and private
placements and valuations for other purposes.
CIBC WM has acted as financial advisor to SMIN in connection with the
Investment and to the Board of Directors of SMIN in rendering this Opinion and
will receive a fee for our services, a significant portion of which is
contingent upon the consummation of the Investment. We also will receive a fee
upon the delivery of this Opinion. We have also acted as financial advisor to
SMIN in connection with a sale of assets and will receive a fee for our
services. In the ordinary course of business, CIBC WM and its affiliates may
actively trade securities of SMIN for their own account and for the accounts
of customers and, accordingly, may at any time hold a long or short position
in such securities.
Based upon and subject to the foregoing, and such other factors as we
deemed relevant, it is our opinion that, as of the date hereof, the
consideration to be paid by the Investors is fair to SMIN from a financial
point of view. This Opinion is for the use of the Board of Directors of SMIN
in connection with and for the purposes of its evaluation of the Investment
and does not constitute a recommendation to any securityholder voting on any
matters relating to the Investment. Neither this Opinion nor the services
provided by CIBC WM in connection herewith may be publicly disclosed or
referred to in any manner by SMIN without the prior written approval of CIBC
WM.
Very truly yours,
CIBC World Markets Corp.
C-2
<PAGE>
ANNEX D
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (this "Agreement") is made as of this 20th day
of July, 1999, by and among EnCap Energy Capital Fund III, L.P., a Texas
limited partnership, EnCap Energy Capital Fund III-B, L.P., a Texas limited
partnership, Energy Capital Investment Company PLC, an English investment
company, and BOCP Energy Partners, L.P., a Texas limited partnership
(collectively, the "Purchasers" and individually, a "Purchaser"), and Southern
Mineral Corporation, a Nevada corporation (the "Company").
RECITALS:
WHEREAS, the Company desires to restructure and recapitalize its financial
structure, including certain of its outstanding indebtedness; and
WHEREAS, in connection with such restructuring, the Purchasers desire to
make a significant investment in the Company; and
WHEREAS, to implement such investment, the Purchasers desire to purchase
from the Company, and the Company desires to issue and sell to the Purchasers,
subject to the terms and conditions set forth herein, an aggregate of
43,829,787 shares of Common Stock (as hereinafter defined) of the Company;
NOW, THEREFORE, in consideration of the recitals and the mutual covenants
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree
as follows:
ARTICLE I
DEFINITIONS
For purposes of this Agreement, and in addition to terms defined elsewhere
in this Agreement, the following terms shall have the following meanings:
"Agreement" means this Stock Purchase Agreement, as the same may be amended,
supplemented or modified from time to time in accordance with the terms hereof.
"Applicable Environmental Laws" means any and all applicable laws pertaining
to health, safety or the environment currently in effect in any and all
jurisdictions in which the Company or the Subsidiaries have conducted
operations or activities or owned or leased property, including, without
limitation, the Clean Air Act, as amended, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, the Rivers and
Harbors Act of 1899, as amended, the Federal Water Pollution Control Act, as
amended, the Occupational Safety and Health Act of 1970, as amended, the
Resource Conservation and Recovery Act of 1976, as amended, the Safe Drinking
Water Act, as amended, the Toxic Substances Control Act, as amended, the
Superfund Amendments and Reauthorization Act of 1986, as amended, the Hazardous
Materials Transportation Act, as amended, the Texas Water Code, the Texas Solid
Waste Disposal Act, and other applicable environmental conservation or
protection laws.
"Bankruptcy Case" means the bankruptcy case that may be filed by the Company
under Chapter 11 of the Bankruptcy Code pursuant to the terms hereof if the
Exchange Offer Condition is not satisfied and the Bankruptcy Condition is
satisfied.
"Bankruptcy Code" shall mean Title 11 of the United States Code, 11 U.S.C.
(S)101, et seq., as now in effect or hereafter amended.
"Bankruptcy Condition" shall have the meaning set forth in Section 5.2(a)
hereof.
D-1
<PAGE>
"Bankruptcy Court" shall mean, if the Bankruptcy Case is filed, the United
States Bankruptcy Court in which the Bankruptcy Case is pending.
"Business Day" shall mean any day which is not a Saturday, Sunday or day on
which banks are authorized by law to close in the States of New York or Texas.
"Charter Amendment" shall mean that amendment to the Company's Restated
Articles of Incorporation in the form of Exhibit A hereto.
"CIBC WM" shall mean CIBC World Markets Corp., financial advisor to the
Company.
"Closing" shall have the meaning set forth in Section 2.2 hereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Common Stock" shall mean the Company's Common Stock, par value $.01 per
share.
"Company Disclosure Letter" shall mean the Disclosure Letter of the Company
dated as of the date of this Agreement from the Company to the Purchaser
Representative.
"Company Indemnified Costs" shall mean any and all damages, losses, claims,
liabilities, demands, charges, suits, penalties, costs and expenses (including
court costs and reasonable legal fees and expenses incurred in investigating
and preparing for any litigation or proceeding) that any of the Company
Indemnified Parties incurs and that arise out of any breach by any of the
Purchasers of any of its covenants or agreements under this Agreement or in any
certificate, instrument or document delivered pursuant hereto, in each case to
the extent such covenant or agreement survives the Closing.
"Company Indemnified Parties" shall mean each of the Company and its
Subsidiaries and their respective officers, directors, employees, shareholders
and affiliates.
"Confirmation Order" shall mean the final, nonappealable order entered by
the Bankruptcy Court in the Bankruptcy Case confirming the Prepackaged Plan
pursuant to Section 1129 of the Bankruptcy Code. The Confirmation Order shall
provide, inter alia that (i) the sale of Common Stock contemplated by the
Prepackaged Plan shall be free and clear of all liens, claims, interests,
rights of others or encumbrances of any kind, (ii) an express finding that the
Company and the Purchasers have acted in good faith, (iii) the Purchasers and
their affiliates, representatives, employees, attorneys, and agents are
released from any claims related to the Company and the Bankruptcy Case, and
(iv) the issuance of Common Stock under the Prepackaged Plan is exempt from
registration under the Securities Act.
"Convertible Debentures" shall mean the Company's 6.875% Convertible
Subordinated Debentures due 2007.
"ERISA" shall mean the Employee Retirement Income Security Act of 1976, as
amended.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Exchange Act Reports" shall have the meaning set forth in Section 3.1(i)
hereof.
"Exchange Offer" shall mean the exchange of the Company's Convertible
Debentures for the Exchange Offer Consideration, as described in Section 5.2
hereof.
"Exchange Offer Condition" shall have the meaning set forth in Section
5.2(a) hereof.
"Exchange Offer Consideration" shall have the meaning set forth in Section
5.2(a) hereof.
"GAAP" shall mean U.S. generally accepted accounting principles consistently
applied throughout the period or periods in question.
D-2
<PAGE>
"Governmental Authority" shall mean any foreign or domestic federal, state,
county, municipal, or other governmental or regulatory authority, agency,
board, body, commission, instrumentality or court or any political subdivision
thereof.
"Hazardous Material" shall mean any substance which is listed or defined as
a hazardous substance, hazardous constituent or solid waste pursuant to any
Applicable Environmental Laws.
"Lien" shall mean any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (including any agreement to give any of the
foregoing, any conditional sale or other title retention agreement and the
filing of or agreement to give any financing statement or like instrument
under the laws of any jurisdiction).
"Material Adverse Change" or "Material Adverse Effect" shall mean any
change, condition or effect (individually or in the aggregate), which is, or
is reasonably likely to (a) be materially adverse to the financial condition,
business or results of operations of the Company and its Subsidiaries, taken
as a whole, or (b) prevent or delay in any material respect the consummation
of the transactions contemplated hereby; provided, however, that such terms
shall not include (i) any adverse change or effect arising from changes in
economic conditions generally or the world energy industry in particular,
including those that might impact the energy market or commodity prices or the
value of oil and gas assets, the risks of which changes hereby are expressly
recognized by the Purchasers as an assumed risk of investing in the energy
industry; (ii) any adverse change or effect resulting from the delisting of
the Company's Common Stock from Nasdaq; (iii) any adverse change or effect
resulting from any reverse stock split that the Company may effect with the
Purchaser Representative's prior approval in order to maintain a listing on a
securities exchange; or (iv) any adverse change or effect resulting from any
announcement, proposal or approved modification of the Prepackaged Plan, the
filing of the Bankruptcy Case, the operation of the Company's business in
accordance with the Bankruptcy Code and any orders entered by the Bankruptcy
Court in the Bankruptcy Case, the pendency of the Bankruptcy Case, or any
actions taken by the Bankruptcy Court, or the failure of the Bankruptcy Court
to authorize the Company to take any action, in the Bankruptcy Case, other
than the appointment of a Trustee, the dismissal or conversion of the
Bankruptcy Case or the failure to obtain the Confirmation Order on or before
February 29, 2000.
"Officer's Certificate" shall mean a certificate signed in the name of the
delivering party, by its President, a Vice President, its Treasurer or other
authorized officer of the delivering party.
"Permits" shall mean all permits, licenses, franchises and authorizations
of any Governmental Authority.
"Person" shall mean and include an individual, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization, a limited
liability company and a government or any department or agency thereof.
"Prepackaged Plan" shall mean that certain "prepackaged" plan of
reorganization substantially in the form approved by the Purchaser
Representative as of the date hereof and included in the SEC Filing Documents,
which plan is to be filed with the Bankruptcy Court in the event the Company
commences the Bankruptcy Case, and shall include any modification of such
plan, whether prior to or after its filing with the Bankruptcy Court.
"Prior SEC Documents" shall have the meaning set forth in Section 3.1
hereof.
"Proposal" shall have the meaning set forth in Section 5.4(a) hereof.
"Proxy Statement/Prospectus" shall have the meaning set forth in Section
5.3 hereof.
"Purchase Price" shall have the meaning set forth in Section 2.1 hereof.
"Purchaser Disclosure Letter" shall mean the Disclosure Letter of the
Purchasers dated as of the date of this Agreement from the Purchasers to the
Company.
D-3
<PAGE>
"Purchaser Indemnified Costs" shall mean any and all damages, losses,
claims, liabilities, demands, charges, suits, penalties, costs and expenses
(including court costs and reasonable legal fees and expenses incurred in
investigating and preparing for any litigation or proceeding) that any of the
Purchaser Indemnified Parties incurs and that arise out of any breach by the
Company of any of its covenants or agreements of the Company under this
Agreement in any certificate, instrument or document delivered pursuant hereto,
in each case to the extent such covenant or agreement survives the Closing.
"Purchaser Indemnified Parties" shall mean the Purchasers, any partner,
shareholder or other owner or affiliate thereof, and their respective officers,
directors, employees or agents thereof, successors and permitted assigns.
"Purchaser Representative" shall mean EnCap Investments L.L.C., a Delaware
limited liability company, which is authorized to represent the Purchasers on
all matters relating to this Agreement, as set forth in Section 5.14 hereto.
"Registration Statement" shall have the meaning set forth in Section 5.3(a)
hereof.
"SEC Filing Documents" shall have the meaning set forth in Section 3.1(j)
hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Special Meeting" shall have the meaning set forth in Section 5.1 hereof.
"Subsidiary" shall mean any corporation or similar entity a majority of the
outstanding voting stock or other similar security which is owned, directly or
indirectly, by the Company.
"Substitute Purchaser" shall have the meaning set forth in Section 2.1
hereof.
"Superior Proposal" shall have the meaning set forth in Section 5.4(c)
hereof.
"Taxes" shall mean all taxes, levies, imposts, duties, charges or
withholdings, whether of the United States or elsewhere, and whether imposed by
a local, municipal, governmental, state, foreign, federal or other Governmental
Authority, or in connection with any agreement with respect to Taxes, including
all interest and penalties imposed with respect to such amounts, but excluding
any federal or state royalty payments.
"Tax Return" shall mean all federal, state, local, provincial and foreign
Tax returns, declarations, statements, reports, schedules, forms and
information returns, including any amendments thereto.
ARTICLE II
PURCHASE AND SALE OF COMMON STOCK; CLOSING
Section 2.1. Purchase and Sale of Common Stock. Subject to the terms and
conditions set forth herein, the Company hereby agrees to issue and sell to the
Purchasers, and each Purchaser hereby agrees to purchase from the Company, the
number of shares of the Company's Common Stock set forth besides such
Purchaser's name on Schedule I hereto, for an aggregate of 43,829,787 shares
(collectively, the "Shares"), and to pay therefor the purchase price set forth
beside such Purchaser's name on such Schedule for an aggregate purchase price
of $20,600,000 (the "Purchase Price"). In the event any Purchaser fails to
purchase its portion of the Shares, the Purchaser Representative shall use
reasonable efforts to reallocate the Shares and the Purchase Price obligations
of such defaulting Purchaser among the remaining Purchasers or to a third party
purchaser (a "Substitute Purchaser"), which Substitute Purchaser must be
approved by the Company in its sole discretion. Any Substitute Purchaser shall
enter into an additional party counterpart to this Agreement accepting all of
the
D-4
<PAGE>
obligations and liabilities hereunder and confirming all of the representations
and warranties herein. The approval by the Company of a Substitute Purchaser
shall in no way release a defaulting Purchaser from its obligations hereunder,
nor act as a waiver of or otherwise prejudice any rights the Company may have
against such defaulting Purchaser.
Section 2.2. Closing. The purchase and delivery of the Shares shall take
place at a closing (the "Closing") at the offices of King & Spalding, 1100
Louisiana, Suite 3300, Houston, Texas 77002, at 10:00 a.m., local time, on the
latest of (i) the date of consummation or termination of the Exchange Offer or
within five days after the entry of the Confirmation Order, (ii) the third
Business Day following satisfaction or waiver of all of the conditions set
forth in Article VI hereto, or (iii) on such other date or at such other time
and place as the parties hereto may agree (the "Closing Date"). On the Closing
Date, the Company will deliver the Shares in definitive form, and in such
authorized denominations as the Purchasers may request (such request to be in
writing and delivered to the Company at least forty-eight hours prior to the
Closing), against receipt of the Purchase Price therefor by wire transfer of
immediately available funds to the Company, or by such other payment method as
is mutually agreed to by the Purchaser Representative and the Company.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.1. Representations and Warranties of the Company. The Company
represents and warrants to the Purchasers that, except as set forth in the
Company Disclosure Letter:
(a) Corporate Existence. The Company is a corporation duly organized,
legally existing and in good standing under the laws of the State of Nevada
and has all requisite corporate power and authority to own, lease and
operate its business as now being conducted. No actions or proceedings to
dissolve the Company are pending. The Company is duly qualified or licensed
to transact business as a foreign corporation and is in good standing in
each of the jurisdictions listed in the Company Disclosure Letter (except
where the failure to be so qualified or in good standing would not have a
Material Adverse Effect), which are all of the jurisdictions required for
the conduct of its business, except where the failure to be so qualified or
licensed or in good standing is not reasonably expected to have a Material
Adverse Effect.
(b) Capitalization. The authorized capital stock of the Company is
55,000,000 shares, consisting of 50,000,000 shares of Common Stock and
5,000,000 shares of preferred stock, par value $.01 per share (the
"Preferred Stock"). As of June 30, 1999, (i) 12,819,488 shares of Common
Stock are issued and outstanding, all of which are validly issued, fully
paid and nonassessable and free of preemptive rights, (ii) 91,223 shares of
Common Stock are held in the treasury of the Company, (iii) 1,893,110
shares of Common Stock are issuable pursuant to outstanding options to
purchase shares of the Common Stock, (iv) 1,495,096 shares of Common Stock
are issuable upon exercise of outstanding warrants of the Company, (v)
5,012,107 shares of Common Stock are issuable upon conversion of the
Convertible Debentures, (vi) 6,705 shares of Common Stock are issuable
under existing employee benefit arrangements and (vii) there are no issued
and outstanding shares of Preferred Stock. Except as set forth above or
pursuant to existing employee benefit arrangements set forth in the Company
Disclosure Letter or the transactions contemplated hereby, there are no
options, warrants, convertible securities, subscriptions, stock
appreciation rights, phantom stock plans or stock equivalents or other
rights, agreements, arrangements or commitments (contingent or otherwise)
of any character issued or authorized by the Company relating to the issued
or unissued capital stock of the Company or obligating the Company to issue
or sell any shares of capital stock of, or options, warrants, convertible
securities, subscriptions or other equity interests in, the Company. All
shares of the Company's Common Stock subject to issuance as aforesaid, upon
issuance on the terms and conditions specified in the instruments pursuant
to which they are issuable, will be duly authorized, validly issued, fully
paid and nonassessable. Except pursuant to existing employee arrangements
set forth in the Company Disclosure Letter or the transactions contemplated
hereby or as
D-5
<PAGE>
otherwise set forth in the Company Disclosure Letter, there are no
outstanding contractual obligations of the Company to repurchase, redeem or
otherwise acquire any shares of Common Stock or to pay any dividend or make
any other distribution in respect hereof or to provide funds to, or make
any investment (in the form of a loan, capital contribution or otherwise)
in, any Person.
(c) Corporate Power and Authorization. Except as set forth in the
following sentence, the Company has the requisite corporate power and
authority to execute, deliver and perform its obligations under this
Agreement and, subject to (i) approval of the Charter Amendment and the
transactions contemplated by this Agreement by the holders of a majority of
the shares of Common Stock as of the record date for the Special Meeting
present in person or represented by proxy and (ii) satisfaction of the
Exchange Offer Condition or satisfaction of the Bankruptcy Condition and
entry of the Confirmation Order by the Bankruptcy Court, to consummate the
transactions contemplated hereby. The execution, delivery and performance
of this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby have been duly authorized by the Board of
Directors of the Company and, except as set forth in the preceding
sentence, no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement or issue the Shares. In addition, as
of the date hereof, the Company has taken all necessary corporate action to
ensure that (i) the terms and provisions of Article VII of the Company's
Bylaws shall not be applicable to the transactions contemplated hereunder
or to any subsequent "Business Combination" (as such term as used in such
Article VII) between the Company, on the one hand, and any Purchaser or any
"Related Person" (as such term is defined in the Company's Bylaws) to such
Purchaser, on the other hand; (ii) the terms and provisions of Sections
78.411 through 78.444 of the Nevada General Corporation Law ("NGCL") shall
not be applicable to the transactions contemplated hereunder or to any
subsequent "Combination" (as such term is defined in Section 78.416 of the
NGCL) between the Company, on the one hand, and any Purchaser or
"affiliate" or "associate" (as such terms are defined in Sections 78.412
and 78.413, respectively, of the NGCL) and (iii) the provisions of the
Nevada Control Shares Act shall not be applicable to the transactions
contemplated hereunder.
(d) Binding Obligation. Subject to the entry of the Confirmation Order
by the Bankruptcy Court if the Bankruptcy Case shall have been filed and
assuming that this Agreement constitutes a valid and binding obligation of
the Purchasers, this Agreement is enforceable against the Company in
accordance with its terms, except as such enforcement may be limited by (i)
any applicable bankruptcy, reorganization, insolvency, fraudulent
conveyance or similar laws generally affecting the enforcement of
creditors' rights and (ii) general principles of equity, regardless of
whether such enforcement is sought in a proceeding in equity or at law, and
except to the extent that enforceability of the indemnification provisions
may be limited under applicable securities or bankruptcy laws.
(e) No Violation. Neither the execution and delivery of this Agreement,
the consummation of the transactions contemplated hereby nor the
fulfillment by the Company of its obligations hereunder will (i) violate
any provision of the charter or bylaws of the Company (assuming approval of
the Charter Amendment by the Company's shareholders at the Special Meeting
or pursuant to order of the Bankruptcy Court), (ii) except as a result of
the filing of the Bankruptcy Case, result in a default, give rise to any
right of termination, cancellation, acceleration or imposition of any
indebtedness or Lien, or require any consent or approval (other than any
consent or approval that has previously been obtained or will be obtained
prior to the Closing and except for consents or approvals that will not
have a Material Adverse Effect), under the terms of any permits, mortgage,
indenture, loan or credit agreement, license, lease or instrument or
obligation to which the Company or any Subsidiary is a party or by which
the Company or any Subsidiary or any of their respective properties may be
bound (except where the failure to obtain such consent or approval will not
have a Material Adverse Effect), or (iii) violate any law, judgment, order,
writ, injunction, decree, statute, rule or regulation of any Governmental
Authority applicable to the Company or any subsidiary (except where such
violation will not have a Material Adverse Effect).
(f) Consents. All consents, approvals, qualifications, orders or
authorizations of, or filings with, any Governmental Authority, and all
consents under any material contracts, agreements or instruments by
D-6
<PAGE>
which the Company or any Subsidiary is bound or to which the Company or any
Subsidiary is subject (collectively, "Consents and Approvals"), and
required in connection with the Company's valid execution, delivery, or
performance of this Agreement, the offer, sale and delivery of the Shares
and the consummation of any other transactions contemplated on the part of
the Company have been obtained or made or will be obtained or made on or
prior to the Closing Date, except for those Consents and Approvals pursuant
to the Bankruptcy Code and the Exchange Act and other applicable federal
and state bankruptcy or securities, takeover and blue sky laws, and except
where the failure to obtain such Consents and Approvals would not have a
Material Adverse Effect.
(g) Financial Information.
(i) The consolidated balance sheet of the Company and its
Subsidiaries as of December 31, 1998, and the related consolidated
statements of operations, shareholders' equity and cash flows for the
12-month period then ended, including in each case the related
schedules and notes, reported on by KPMG LLP, fairly present, in all
material respects, the consolidated financial position of the Company
and its Subsidiaries as at the date thereof and the consolidated
results of operations and changes in cash flows for such period, in
accordance with GAAP, subject to any exceptions noted therein.
(ii) The unaudited consolidated balance sheet of the Company and its
Subsidiaries as of March 31, 1999, and the related unaudited
consolidated statements of operations, shareholders' equity and cash
flows for the three-month period then ended, as included in the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1999, copies of which have been previously delivered to the
Purchaser Representative, present fairly, in all material respects, the
consolidated financial position of the Company and its Subsidiaries as
at the date thereof and the consolidated results of operations and
changes in cash flows for such period in conformity with GAAP, subject
to any exceptions noted therein.
(iii) Since March 31, 1999, there has been no Material Adverse
Change to the consolidated financial position and results of operations
of the Company and its Subsidiaries.
(iv) Except as disclosed in the Exchange Act Reports (as defined
herein) and the financial statements included therein as of the dates
thereof, there were no material liabilities of the Company and its
Subsidiaries taken as a whole (contingent or otherwise), that are
reasonably expected to have a Material Adverse Effect and would be
required to be reflected in such financial statements in accordance
with GAAP.
(h) Legal Proceedings. Except as set forth in the Company Disclosure
Letter or as disclosed in the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999, there are no claims or charges filed
with, or proceedings or investigations by, any Governmental Authority or
actions or suits instituted or pending or, to the best of the Company's
knowledge, threatened against the Company or any of its Subsidiaries, or
against any property, asset, interest or right of any of them, that might
reasonably be expected to have a Material Adverse Effect or restrain,
enjoin or prevent in any material respect the consummation of the
transactions contemplated by this Agreement.
(i) Exchange Act Reports. Since January 1, 1997, the Company and each of
its Subsidiaries have filed all required reports and statements, together
with all amendments required to be made with respect thereto, that they
were required to file with the Securities and Exchange Commission
(collectively, the "Exchange Act Reports") on a timely basis in all
material respects, including, without limitation, all reports on Form 10-K,
10-Q and 8-K. As of their respective dates, the Exchange Act Reports
complied as to form in all material respects with the requirements of the
Exchange Act and the rules and regulations of the Securities and Exchange
Commission applicable to such Exchange Act Reports. No Exchange Act Report
with respect to periods beginning on or after January 1, 1997 contained, at
the time filed, any information that was false or misleading with respect
to any material fact or omitted to state any material fact required to be
stated or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
D-7
<PAGE>
(j) Information True and Correct. None of the information supplied or to
be supplied by the Company for inclusion in the documents to be filed by
the Company with the Securities and Exchange Commission in connection with
the transactions contemplated hereby (the "SEC Filing Documents") will, in
the case of the proxy statement/prospectus or Exchange Offer documents,
when first mailed to the shareholders of the Company and holders of its
Convertible Debentures, contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
made therein, in light of the circumstances under which such statements are
made, not misleading, or, in the case of any registration statement, when
it becomes effective, be false or misleading with respect to any material
fact, or omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which such
statements are made, not misleading, or, in the case of the proxy
statement/prospectus, Exchange Offer documents or any amendment thereof or
supplement thereto, at the time of the Special Meeting, be false or
misleading with respect to any material fact or omit to state any material
fact necessary to correct any statement or remedy any omission in any
earlier communication with respect to the solicitation of any proxy or
ballot for the Special Meeting or in connection with the Prepackaged Plan.
The SEC Filing Documents will comply with the requirements of Section 1126
of the Bankruptcy Code, to the extent applicable.
(k) Fees and Commissions. Except for CIBC WM, neither the Company nor
any of its Subsidiaries has retained any broker, finder or financial
advisor in connection with the transactions contemplated by this Agreement.
(l) Subsidiaries.
(i) The Company Disclosure Letter lists each Subsidiary, the
jurisdiction of incorporation of each Subsidiary and the authorized and
outstanding capital stock of each Subsidiary. Each Subsidiary is a
corporation duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation, except where the
failure to be so organized, existing or in good standing would not have
a Material Adverse Effect. As detailed in the Company Disclosure
Letter, each Subsidiary is duly qualified or licensed to transact
business as a foreign corporation and is in good standing in each of
the jurisdictions in which such qualification or licensing is required
for the conduct of its business, except where the failure to be so
qualified or licensed is not reasonably expected to have a Material
Adverse Effect. No actions or proceedings to dissolve any Subsidiary
are pending or, to the knowledge of the Company, threatened.
(ii) All of the outstanding capital stock or other equity interests
of each Subsidiary are owned directly or indirectly by the Company,
free and clear of all Liens, except for Liens that would not
individually or in the aggregate be expected to have a Material Adverse
Effect. All outstanding shares of capital stock of each Subsidiary have
been validly issued and are fully paid and nonassessable. No shares of
capital stock or other equity interests of any Subsidiary are subject
to, nor have any been issued in violation of, preemptive or similar
rights.
(iii) There are (and as of the Closing Date there will be)
outstanding (A) no shares of capital stock or other voting securities
of any Subsidiary not owned by the Company, (B) no securities of the
Company or any Subsidiary convertible into or exchangeable for shares
of capital stock or other voting securities of any Subsidiary, (C) no
options or other rights to acquire from the Company or any Subsidiary,
and no obligation of the Company or any Subsidiary to issue or sell,
any shares of capital stock or other voting securities of any
Subsidiary or any securities convertible into or exchangeable for
capital stock or voting securities of any Subsidiary, and (D) no equity
equivalents, interests in the ownership or earnings, or other similar
rights of or with respect to any Subsidiary not owned by the Company.
There are (and as of the Closing Date there will be) no outstanding
obligations of the Company or any Subsidiary to repurchase, redeem, or
otherwise acquire any of the foregoing shares, securities, options,
equity equivalents, interests or rights of any Subsidiary.
(m) Shares. The issuance of the Shares in accordance with the terms
hereof is not subject to any preemptive or similar rights.
D-8
<PAGE>
(n) Tax Matters. Except as disclosed in the Company Disclosure Letter:
(i) and except in each case as would not be reasonably expected to
have a Material Adverse Effect: all Tax Returns have been or will be
timely filed by the Company and the Subsidiaries when due in accordance
with all applicable laws; all Taxes shown on such Tax Returns have been
or will be timely paid when due; such Tax Returns have been properly
completed in compliance with all applicable laws and regulations and
accurately reflect the facts regarding the income, expenses,
properties, business and operations required to be shown thereon; and
such Tax Returns are not subject to penalties under Section 6662 of the
Code (or any corresponding provision of state, local or foreign tax
law);
(ii) The Company and the Subsidiaries have paid all Taxes required
to be paid by them in all material respects (whether or not shown on a
Tax Return) or for which they could be liable and such liability would
reasonably be expected to have a Material Adverse Effect (provided that
it shall not be considered a breach of this representation if it is
ultimately determined that additional Tax payments are due but such
assessment is based on an adjustment to a return or position, if such
party has a reasonable basis for the position taken with respect to
such Taxes), whether to taxing authorities or to other persons under
Tax allocation agreements or otherwise; and the charges, accruals, and
reserves for Taxes due, or accrued but not yet due, relating to their
income, properties, transactions or operations as reflected in the
financial statements included in the Company's Form 10-K for the fiscal
year ended December 31, 1998, are adequate in all material respects;
(iii) there are no agreements or consents currently in effect for
the extension or waiver of the time (A) to file any Tax Return or (B)
for assessment or collection of any Taxes relating to the income,
properties or operations of the Company or the Subsidiaries, nor has
the Company or a Subsidiary been requested to enter into any such
agreement or consent; and
(iv) there are no Liens for Taxes (other than for current Taxes not
yet due and payable or, if due and payable, to the extent being
contested in good faith by appropriate proceedings) upon the assets of
the Company or the Subsidiaries.
(o) Compliance With Laws. The business of the Company and the
Subsidiaries as presently conducted by them complies with all applicable
laws (including, without limitation, applicable laws relating to
securities, properties, business products and services, manufacturing
processes, advertising and sales practices, employment practices, terms and
conditions of employment, wages and hours, and civil rights, but other than
Applicable Environmental Laws, which are governed solely by Section 3.1(r)
below), except for violations or failures to comply, if any, that would not
reasonably be expected to have a Material Adverse Effect. Neither the
Company nor any Subsidiary is charged or, to the best knowledge of the
Company, threatened with or under investigation with respect to, any
violation of any applicable law relating to any aspect of the business of
the Company or any Subsidiary, except for violations, if any, that would
not reasonably be expected to have a Material Adverse Effect.
(p) Permits. The Company and the Subsidiaries hold all Permits necessary
or required for the conduct of the business of the Company and the
Subsidiaries as currently conducted, except where the failure to hold such
Permits would not reasonably be expected to have a Material Adverse Effect.
Each of such Permits is in full force and effect, the Company or such
Subsidiary is in compliance with all its obligations with respect thereto,
and, to the best knowledge of the Company, no event has occurred which
permits, or with or without the giving of notice or the passage of time or
both would permit, the revocation or termination of any thereof, except
where the failure to have or be in compliance with the terms of such
Permits would not reasonably be expected to have a Material Adverse Effect.
Except as disclosed in the Company Disclosure Letter, no notice has been
issued by any Governmental Authority and no proceeding is pending or, to
the best knowledge of the Company, threatened with respect to any alleged
failure by the Company or a Subsidiary to have any Permit the absence of
which would have a Material Adverse Effect.
D-9
<PAGE>
(q) Agreements.
(i) All legally binding contractual agreements or obligations
(collectively, for purposes of this subsection, "agreements") to which
the Company or any Subsidiary is a party or by which the Company or any
Subsidiary or any of their respective properties is otherwise bound,
regardless of amount or subject matter, that are material to the
business, assets, results of operations, condition (financial or
otherwise), or prospects of the Company and the Subsidiaries considered
as a whole are set forth in the Company Disclosure Letter, except for
agreements relating to the ongoing oil and gas ownership and operations
of the Company (including, but not limited to, operating agreements,
leases, joint venture agreements, seismic licenses, contracts for sale
of oil and gas or production and hedging and financing arrangements
less than one year in duration).
(ii) The Company has made available accurate and complete copies of
the agreements described in subsection (i) above. Each of such
agreements is a valid and binding agreement of the Company and the
Subsidiaries that are parties thereto, enforceable against them in
accordance with its terms.
(r) Environmental Matters.
(i) To the best knowledge of the Company, the properties, operations
and activities of the Company and the Subsidiaries comply with all
Applicable Environmental Laws, except for noncompliance that would not
reasonably be expected to have a Material Adverse Effect;
(ii) To the best knowledge of the Company, the Company and the
Subsidiaries and the properties, operations and activities of the
Company and the Subsidiaries are not subject to any existing, pending
or threatened proceeding under, or to any remedial obligations under,
any Applicable Environmental Laws that would reasonably be expected to
have a Material Adverse Effect;
(iii) To the best knowledge of the Company, all Permits, if any,
required to be obtained by the Company or any Subsidiary under any
Applicable Environmental Laws in connection with any aspect of the
business of the Company or the Subsidiaries, including without
limitation those relating to the treatment, storage, disposal or
release of a Hazardous Material, have been duly obtained and are in
full force and effect, and the Company and the Subsidiaries are in
compliance with the material terms and conditions of all such Permits,
except for noncompliance that would not reasonably be expected to have
a Material Adverse Effect;
(iv) To the best knowledge of the Company, the Company and the
Subsidiaries have satisfied and are currently in compliance with all
financial responsibility requirements applicable to their respective
operations and imposed by any Governmental Entity under any Applicable
Environmental Laws, and the Company and the Subsidiaries have not
received any notice of noncompliance with any such financial
responsibility requirements, except where such noncompliance or notice
thereof would not reasonably be expected to have a Material Adverse
Effect;
(v) To the best knowledge of the Company, there are no physical or
environmental conditions existing on any property owned or leased by
the Company or any Subsidiary or resulting from the Company's or any
Subsidiary's operations or activities, past or present, at any
location, that would give rise to any on-site or off-site remedial
obligations under any Applicable Environmental Laws, other than normal
and ordinary remedial work associated with plugging and abandoning of
oil and gas facilities, and except for obligations that, individually
or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect; and
(vi) To the best knowledge of the Company, since the effective date
of the relative requirements of Applicable Environmental Laws, all
hazardous materials generated by the Company or any Subsidiary or used
by them in connection with their activities on their respective
properties, operations or activities which have been transported off-
site, have been transported only by carriers authorized under
Applicable Environmental Laws to transport such materials, and have
been disposed of only at treatment, storage and disposal facilities
authorized under Applicable Environmental Laws
D-10
<PAGE>
to treat, store or dispose of such materials, and, to the best
knowledge of the Company, such carriers and facilities, at the time of
such transportation or disposal, were operating in compliance with such
authorizations, except where such noncompliance would not reasonably be
expected to have a Material Adverse Effect.
(s) ERISA.
(i) Set forth on the Company Disclosure Letter is a list identifying
each "employee benefit plan," as defined in Section 3(3) of ERISA, (i)
which is subject to any provision of ERISA, (ii) which is maintained,
administered, or contributed to by the Company or any affiliate of the
Company, and (iii) which covers any employee or former employee of the
Company or any affiliate of the Company or under which the Company or
any affiliate of the Company has any liability. The Company has made
available to the Purchaser Representative accurate and complete copies
of such plans (and, if applicable, the related trust agreements and IRS
favorable determination letters) and all amendments thereto and written
interpretations thereof, together with (A) the three most recent annual
reports (Form 5500 including, if applicable, Schedule B thereto)
prepared in connection with any such plan and (B) the most recent
actuarial valuation report prepared in connection with any such plan.
Such plans are referred to in this Section as the "Employee Plans." For
purposes of this Section only, an "affiliate" of any person means any
other person which, together with such person, would be treated as a
single employer under Section 414 of the Code. The only Employee Plans
which individually or collectively would constitute an "employee
pension benefit plan" as defined in Section 3(2) of ERISA are
identified as such in the Company Disclosure Letter.
(ii) Except as otherwise identified in the Company Disclosure
Letter, (A) no Employee Plan constitutes a "multiemployer plan," as
defined in Section 3(37) of ERISA (for purposes of this subsection, a
"Multiemployer Plan"), (B) no Employee Plan is maintained in connection
with any trust described in Section 501(c)(9) of the Code, (C) no
Employee Plan is subject to Title IV of ERISA or to the minimum funding
standards of ERISA and the Code, and (D) during the past five years,
neither the Company nor any of its affiliates have made or been
required to make contributions to any Multiemployer Plan. There are no
material accumulated funding deficiencies as defined in Section 412 of
the Code (whether or not waived) with respect to any Employee Plan. The
fair market value of the assets held with respect to each Employee Plan
that is an employee pension benefit plan (as defined in Section 3(2) of
ERISA) and which is subject to Title IV of ERISA exceeds the
actuarially determined present value of all benefit liabilities accrued
under such Employee Plan (whether or not vested) determined using
reasonable actuarial assumptions. Neither the Company nor any affiliate
of the Company has incurred any material liability under Title IV of
ERISA arising in connection with the termination of, or complete or
partial withdrawal from, any plan covered or previously covered by
Title IV of ERISA. The Company and all of the affiliates of the Company
have paid and discharged promptly when due all liabilities and
obligations arising under ERISA or the Code of a character which if
unpaid or unperformed might result in the imposition of a Lien against
any of the assets of the Company or any Subsidiary, except for such
liabilities and obligations that would not reasonably be expected to
have a Material Adverse Effect. Nothing done or omitted to be done and
no transaction or holding of any asset under or in connection with any
Employee Plan has or will make the Company or any Subsidiary or any
director or officer of the Company or any Subsidiary subject to any
liability under Title I of ERISA or liable for any Tax pursuant to
Section 4975 of the Code that would have a Material Adverse Effect.
There are no pending or, to the Company's knowledge, threatened claims
by or on behalf of the Employee Plans, or by any participant therein,
alleging a breach or breaches of fiduciary duties or violations of
applicable laws which could result in liability on the part of the
Company, its officers or directors, or such Employee Plans, under ERISA
or any other applicable law and there is no basis for any such claim,
except for liabilities that would not, individually or in the
aggregate, have a Material Adverse Effect.
D-11
<PAGE>
(iii) Except as otherwise identified in the Company Disclosure
Letter, no Employee Plan is intended to be qualified under Section
401(a) of the Code. The Company maintains a simplified employee pension
plan which is intended to satisfy the requirements of Section 408(k) of
the Code (the "Pension Plan"). The Pension Plan and each Employee Plan
has been maintained in substantial compliance in all material respects
with its terms and with the requirements prescribed by all applicable
laws, including but not limited to ERISA and the Code, which are
applicable to plans such as the Pension Plan, except where the failure
to so comply would not have a Material Adverse Effect.
(iv) Set forth in the Company Disclosure Letter is a list of each
currently outstanding employment, severance or other similar contract
(and all amendments thereto), arrangement or policy and each plan or
arrangement (written or oral) providing for insurance coverage
(including any self-insured arrangements), workers' compensation,
disability benefits, supplemental unemployment benefits, vacation
benefits, retirement benefits, deferred compensation, profit-sharing,
bonuses, stock options, stock appreciation rights or other forms of
incentive compensation or post-retirement insurance, compensation or
benefits which (A) is not an Employee Plan, (B) is entered into,
maintained or contributed to, as the case may be, by the Company or any
affiliate of the Company, and (C) covers any employee or former
employee of the Company or any affiliate of the Company or under which
the Company or any affiliate of the Company has any liability. Such
contracts, plans and arrangements as described in the preceding
sentence are referred to for purposes of this subsection as the
"Benefit Arrangements." Each Benefit Arrangement has been maintained in
substantial compliance with its terms and with the requirements
prescribed by applicable law, except where the failure to so comply
would not have a Material Adverse Effect.
(v) To the Company's knowledge, neither the Company nor any
affiliate of the Company has performed any act or failed to perform any
act, and there is no contract, agreement, plan or arrangement covering
any employee or former employee of the Company or any affiliate of the
Company, that, individually or collectively, could give rise to the
payment of any amount that would not be deductible pursuant to the
terms of Section 162(a)(1) or 280G of the Code or could give rise to
any penalty or excise Tax pursuant to Section 4980B or 4999 of the
Code.
(t) Oil and Gas Properties.
(i) Each of the Company and the Subsidiaries has good and defensible
title to, or valid leasehold or other ownership interests or rights in,
all of its material oil and gas properties, free and clear of all Liens
other than (i) preferential purchase rights, requirements for consent
to assignment and other encumbrances of a similar nature; (ii)
statutory liens not yet delinquent, or if delinquent, that are being
contested in good faith in the normal course of business; (iii) matters
disclosed in the Company Disclosure Letter; (iv) encumbrances that do
not materially detract from the value, or materially interfere with the
use of, any such property or otherwise materially impair the business
or operations being conducted thereon; and (v) any matter that a
reasonable and prudent operator knowledgeable in the oil and gas
business would not consider a material impairment of the Company's
title; provided, that no representation or warranty is made with
respect to any oil, gas or mineral property or interest to which no
proved oil or gas reserves are attributed.
(ii) The Company has made available to the Purchaser Representative
a copy of each of the reserve reports (the "Reserve Report") dated as
of January 1, 1999, prepared by the independent reserve engineers as
described in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998 (collectively, the "Reserve Engineers"),
relating to the oil and gas reserves of the Company and the
Subsidiaries. The factual information underlying the estimates of the
reserves of the Company and the Subsidiaries, which was supplied by the
Company to the Reserve Engineers for the purpose of preparing the
Reserve Report, including, without limitation, production, volumes,
sales prices for production, contractual pricing provisions under oil
or gas sales or marketing contracts under hedging arrangements, costs
of operations and development, and working interest and net revenue
information relating to the Company's and the Subsidiaries' ownership
interests in properties, was true and correct in all material respects
on the date that such
D-12
<PAGE>
information was so provided; the estimates of future capital
expenditures and other future exploration and development costs
supplied to the Reserve Engineers by the Company were prepared in good
faith and with a reasonable basis; and other than normal production of
the reserves, the disposition of interests in oil and gas properties
described in the Company Disclosure Letter or otherwise permitted in
this Agreement and intervening oil and gas price fluctuations, the
Company is not, as of the date hereof, and as of the Closing Date will
not be, aware of any facts or circumstances that should reasonably
cause the Company to conclude that the Reserve Report is incorrect in
any material respect that would result in a Material Adverse Effect.
Section 3.2. Representations and Warranties of the Purchasers. Each
Purchaser, only with respect to such Purchaser, represents and warrants to the
Company that:
(a) Purchase for Investment.
(i) Such Purchaser is acquiring the Shares for its own account and
not with a view to the public resale or distribution of all or any part
thereof in any transaction which would constitute a "distribution"
within the meaning of the Securities Act. Such Purchaser acknowledges
that it does not intend and is not permitted to assign its rights under
this Agreement to any third party prior to the Closing.
(ii) Such Purchaser acknowledges that the Shares have not been and
will not be registered under the Securities Act, except pursuant to the
Registration Rights Agreement, the form of which is attached hereto as
Exhibit B, to be entered into by the Company and the Purchasers at the
Closing.
(iii) Such Purchaser is an "accredited investor" within the meaning
of Rule 501 under Regulation D promulgated under the Securities Act, is
experienced in evaluating investments in companies such as the Company,
has such knowledge and experience in financial and business matters as
to be capable of evaluating the merits and risks of its investment and
has the ability to bear the entire economic risk of its investment in
the Company. Such Purchaser acknowledges and understands the distressed
financial condition of the Company, and that such condition may
deteriorate significantly between the date hereof and the Closing Date.
Such Purchaser has made its own evaluation of its investment in the
Common Stock, based upon such information as is available to it and
without reliance upon the Company or any other person or entity, and
such Purchaser agrees that neither the Company nor any other Person has
any obligation to furnish any additional information to such Purchaser
except as expressly set forth herein.
(iv) Such Purchaser is eligible to own stock in a corporation
holding oil and gas leases on federal lands, including offshore areas,
under U.S. federal laws or regulations in effect from time to time.
(v) Such Purchaser acknowledges that the Shares may not be sold,
transferred, pledged, hypothecated or otherwise disposed of without
registration under the Securities Act or an exemption therefrom and
that, in the absence of an effective registration statement covering
the Shares or an available exemption from registration under the
Securities Act, such shares must be held indefinitely.
(vi) Such Purchaser understands and agrees that certificates
representing the Shares shall bear legends in substantially the
following form:
"THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT
AND MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE TRANSFERRED,
EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR (ii) AN APPLICABLE EXEMPTION FROM REGISTRATION
UNDER THE SECURITIES ACT. ANY SALE PURSUANT TO CLAUSE (ii) OF THE
PRECEDING SENTENCE MUST BE ACCOMPANIED BY AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT SUCH
EXEMPTION FROM REGISTRATION IS AVAILABLE IN CONNECTION WITH SUCH
SALE."
D-13
<PAGE>
(b) Power and Authorization. Such Purchaser has all requisite power and
authority to execute, deliver and perform its obligations under this
Agreement and to consummate the transactions contemplated hereby. The
execution, delivery and performance of this Agreement by such Purchaser and
the consummation by such Purchaser of the transactions contemplated hereby
have been duly authorized in accordance with the governing documents of
such Purchaser, and all action on such Purchaser's part requisite for the
purchase of the Shares and for the due execution, delivery and performance
of this Agreement has been taken.
(c) Binding Obligation. Assuming that this Agreement constitutes a valid
and binding obligation of the Company, this Agreement is enforceable
against such Purchaser in accordance with its terms, except as such
enforcement may be limited by (i) any applicable bankruptcy,
reorganization, insolvency, fraudulent conveyance or similar laws generally
affecting the enforcement of creditors' rights and (ii) general principles
of equity, regardless of whether such enforcement is sought in a proceeding
in equity or at law, and except to the extent that enforceability of the
indemnification provisions may be limited under applicable securities or
bankruptcy laws.
(d) No Violation. Neither the execution and delivery of this Agreement,
the consummation of the transactions contemplated hereby nor the
fulfillment by such Purchaser of its obligations hereunder will (a) violate
any provision of the organizational documents of such Purchaser, (b) result
in a default, give rise to any right of termination, cancellation,
acceleration or imposition of any indebtedness or Lien, or require any
consent or approval (other than any consent or approval that has previously
been obtained or will be obtained prior to the Closing and except for
consents or approvals that will not have a material adverse effect on this
Agreement or the transactions contemplated hereby), under the terms of any
permits, mortgage, indenture, loan or credit agreement, license, lease or
instrument or obligation to which such Purchaser is a party or by which
such Purchaser may be bound (except where the failure to obtain such
consent or approval will not have a material adverse effect on this
Agreement or the transactions contemplated hereby), or (c) violate any law,
judgment, order, writ, injunction, decree, statute, rule, or regulation of
any Governmental Authority applicable to such Purchaser (except where such
violation will not have a material adverse effect on this Agreement or the
transactions contemplated hereby).
(e) Consents. All consents, approvals, qualifications, orders, or
authorizations of, or filings with, any Governmental Authority, and all
consents under any material contracts, agreements, or instruments by which
such Purchaser is bound or to which it is subject, and required in
connection with such Purchaser's valid execution, delivery, or performance
of this Agreement and the purchase of the Shares and the consummation of
any other transaction contemplated on the part of such Purchaser have been
obtained or made.
(f) Legal Proceedings. There are no claims or charges filed with, or
proceedings or investigations by, any Governmental Authority or actions or
suits instituted or pending or, to the best of such Purchaser's knowledge,
threatened against such Purchaser or any of its affiliates, or against any
property, asset, interest or right of any of them, that might reasonably be
expected to have a material adverse effect on such Purchaser or restrain,
enjoin or prevent in any material respect the consummation of the
transactions contemplated by this Agreement.
(g) Information True and Correct. None of the information supplied or to
be supplied by such Purchaser for inclusion in the SEC Filing Documents
will, in the case of the proxy statement/prospectus or Exchange Offer
documents, when first mailed to the shareholders of the Company and holders
of its Convertible Debentures, contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which such
statements are made, not misleading, or, in the case of any registration
statement, when it becomes effective, be false or misleading with respect
to any material fact, or omit to state any material fact necessary in order
to make the statements therein not misleading, or, in the case of the proxy
statement/prospectus or Exchange Offer documents, or any amendment thereof
or supplement thereto, at the time of the Special Meeting, be false or
misleading with respect to any material fact or omit to state any material
fact necessary to correct any statement or remedy any omission in any
earlier communication
D-14
<PAGE>
with respect to the solicitation of any proxy or ballot for the Special
Meeting or in connection with the Prepackaged Plan.
(h) Fees and Commissions. Except for the commitment fee described in
Section 9.1 hereof, there are no fees payable to any broker, finder or
financial advisor retained by such Purchaser or any of its affiliates or
associates in connection with the transactions contemplated by this
Agreement.
(i) Sufficient Funds. Such Purchaser has sufficient funds to acquire all
of the Shares to be purchased by it hereunder, and has no reason to believe
that such funds will not be available to purchase such Shares at the
Closing.
(j) Share Ownership. Except as set forth in the Purchaser Disclosure
Letter and in connection with the transactions contemplated by this
Agreement, to the best knowledge of each Purchaser, neither such Purchaser
nor any of its affiliates (including EnCap Investments L.L.C. and its
executive officers) or associates beneficially owns any shares of the
Common Stock or any other securities of the Company.
(k) Purchaser Representative. The Purchase Representative has full power
and authority to act on behalf of the Purchasers and to receive a
commitment fee pursuant to Section 9.1 hereof, which representation and
receipt of payment will not violate any law, statute, rule, regulation or
governing document of any Purchaser or require any further consents or
approvals.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
Section 4.1. Prudent Operations. Except as otherwise contemplated in this
Agreement or as set forth in the Company Disclosure Letter, and subject to the
fiduciary duties of the Company's directors under applicable law, from the date
of this Agreement to the Closing Date (except for transactions to which any
Purchaser is a party or as otherwise contemplated by the terms of this
Agreement), (i) prior to the filing of the Bankruptcy Case, if any, the Company
shall, and shall cause its Subsidiaries to, operate their businesses consistent
with prudent industry practices taking into account the Company's financial
condition; and (ii) after the Bankruptcy Case has been filed, the Company shall
operate its business and the business of its Subsidiaries in all material
respects in compliance with the Bankruptcy Code and any orders entered by the
Bankruptcy Court in the Bankruptcy Case, and shall use commercially reasonable
efforts to seek and obtain approval of the Bankruptcy Court to operate such
businesses consistent with prudent industry practices taking into account the
Company's financial condition. To the extent consistent with the foregoing, the
Company shall use commercially reasonable efforts to preserve intact its
current officers and employees and preserve its relationships with customers,
suppliers, licensors, licensees, distributors and others having business
dealings with it, in each case consistent with prudent industry practices
taking into account the Company's financial condition. Without limiting the
generality of the foregoing, and except as otherwise contemplated by this
Agreement or referred to in the Company Disclosure Letter, pursuant to the
transactions contemplated hereby and any related agreements or as may be
approved by the Purchaser Representative, the Company shall not, and shall not
permit any of its Subsidiaries to:
(a) (i) declare, set aside or pay any dividends on, or make any other
distributions in respect of, any of its capital stock, other than dividends
and distributions by any direct or indirect wholly owned Subsidiary of the
Company to the Company or a wholly owned Subsidiary of the Company, (ii)
split, combine or reclassify any of its capital stock or issue or authorize
the issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock (except for issuances pursuant
to this Agreement, the Exchange Offer and the Prepackaged Plan) or (iii)
purchase, redeem or otherwise acquire any shares of capital stock of the
Company (except pursuant to the Exchange Offer or the Prepackaged Plan) or
any of its Subsidiaries or any other securities thereof or any rights,
warrants or options to acquire any such shares or other securities other
than in connection with the exercise of outstanding stock options and
warrants and satisfaction of withholding obligations under outstanding
stock options and restricted stock;
D-15
<PAGE>
(b) issue, deliver, sell, pledge or otherwise encumber any shares of its
capital stock, any other voting securities or any securities convertible
into, or any rights, warrants or options to acquire, any such shares,
voting securities or convertible securities other than pursuant to existing
employee benefit arrangements and the issuance of shares of Common Stock
upon the exercise of stock options and warrants outstanding on the date of
this Agreement in accordance with their current terms or the issuance of
Common Stock, warrants or other securities pursuant to this Agreement, the
Exchange Offer or the Prepackaged Plan;
(c) except as required by the Bankruptcy Code as contemplated by the
Charter Amendment, amend its charter, bylaws or other comparable
organizational documents;
(d) acquire or agree to acquire (i) by merging or consolidating with, or
by purchasing a substantial portion of the stock or assets of, or by any
other manner, any business or any corporation, partnership, association,
joint venture, limited liability company or other entity or division
thereof or (ii) any assets valued at $100,000 or more, individually or in
the aggregate, to the Company and its Subsidiaries, taken as a whole;
(e) sell, lease, mortgage, pledge, grant a Lien on or otherwise encumber
or dispose of any of its properties or assets, except (i) sales or leases
in the ordinary course of business consistent with past practice not to
exceed $100,000 in the aggregate; (ii) farm-outs, farm-ins, sales,
transfers, leases, exchanges or similar transactions approved by the
Purchaser Representative (which approval shall not be unreasonably
withheld) with respect to the Company's prospects, (iii) as listed in the
Company Disclosure Letter; and (iv) other transactions not in excess of
$100,000 in the aggregate;
(f) (i) except for financing incurred with the approval of the Purchaser
and the Bankruptcy Court in the Bankruptcy Case, incur indebtedness for
borrowed money or guarantee any such indebtedness of another Person, issue
or sell any debt securities or warrants or other rights to acquire any debt
securities of the Company or any of its Subsidiaries, guarantee any debt
securities of another Person, enter into any "keep well" or other agreement
to maintain any financial statement condition of another Person or enter
into any arrangement having the economic effect of any of the foregoing,
except for working capital borrowings under currently existing revolving
credit facilities incurred in the ordinary course of business, or (ii) make
any loans, advances or capital contributions to, or investments in, any
other Person that would be material, individually or in the aggregate, to
the Company and its Subsidiaries taken as a whole (it being agreed that
$100,000, either individually or in the aggregate, would be deemed to be a
material amount for purposes of this subsection), other than to the Company
or any direct or indirect wholly owned Subsidiary of the Company;
(g) make or incur any new material capital expenditure other than as
provided in the Company's capital expenditure budget for 1999, a copy of
which has been delivered to and approved by the Purchaser Representative,
other than (i) capital expenditures that do not, in the aggregate, exceed
110% of the aggregate budgeted amount set forth in such budget and (ii)
capital expenditures that may be reasonably necessary or appropriate to
respond to an event of emergency, which emergency expenditures shall not be
material in the aggregate;
(h) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction (i) in accordance with their
terms, of liabilities reflected or reserved against in, or contemplated by,
the consolidated financial statements (or the notes thereto) of the Company
included in the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999 or incurred in the ordinary course of business
consistent with past practice or (ii) of transaction costs and expenses
associated with the transactions contemplated hereby (including, without
limitation, legal and advisory fees and expenses; printing fees; fees and
expenses of solicitation agents, exchange agents, warrant agents and
depositaries; Securities and Exchange Commission registration fees; listing
fees; and third party consent fees and expenses);
(i) adopt a plan of complete or partial liquidation or resolutions
providing for or authorizing such a liquidation or a dissolution, merger,
consolidation, restructuring, recapitalization or reorganization other than
the Prepackaged Plan; or
(j) authorize any of, or commit or agree in writing to take any of, the
foregoing actions.
D-16
<PAGE>
Section 4.2. Changes in Employment Arrangements. Except as set forth in the
Company Disclosure Letter, neither the Company nor any of its Subsidiaries
shall adopt or amend (except as may be confirmed by the Bankruptcy Court as a
part of the Prepackaged Plan or as may be required by law) any bonus, profit
sharing, compensation, stock option, pension, retirement, deferred
compensation, employment or other employee benefit plan, agreement, trust, fund
or other arrangement for the benefit or welfare of any employee, director or
former director or employee, increase the compensation or fringe benefits of
any officer of the Company or any of its Subsidiaries, or, except as required
by law or provided in an existing benefit plan, increase the compensation or
fringe benefits of any employee or former employee or pay any benefit not
required by any existing plan, arrangement or agreement, except for any
adoptions, amendments or increases within the constraints of the Company's 1999
general and administrative budget previously delivered to the Purchaser
Representative.
Section 4.3. Severance. Except as set forth in the Company Disclosure
Letter, neither the Company nor any of its Subsidiaries shall grant any new or
modified severance or termination arrangement or increase or accelerate any
benefits payable under its severance or termination pay policies in effect on
the date hereof, except as required by law or as may be confirmed by the
Bankruptcy Court as part of the Prepackaged Plan and except as may be within
the constraints of the Company's 1999 general and administrative budget
previously delivered to the Purchaser Representative.
ARTICLE V
ADDITIONAL AGREEMENTS
Section 5.1. Shareholder Approval. The Charter Amendment, the Prepackaged
Plan and the issuance of shares of Common Stock pursuant to the transactions
contemplated hereby, together with the election of directors, if appropriate,
shall be submitted for adoption and approval of the shareholders of the Company
at a meeting to be duly held for that purpose by the Company (such meeting,
including any adjournments thereof, the "Special Meeting"). The Proxy
Statement/Prospectus sent to the shareholders in connection with the approval
of the Charter Amendment and the issuance of shares at the Special Meeting will
also solicit the approval of such shareholders of the Prepackaged Plan. The
Company shall endeavor to hold the Special Meeting as soon as practicable after
the SEC Filing Documents have been declared effective and approved. Subject to
the fiduciary duties of the directors of the Company under applicable law, the
Board of Directors of the Company shall recommend that its shareholders approve
the matters set forth above and such recommendations shall be included in the
Proxy Statement/Prospectus.
Section 5.2. Solicitation of Bondholders.
(a) Each of the parties agrees to cooperate and use their best efforts
to cause the Exchange Offer to be consummated. Pursuant to the Exchange
Offer, each holder of the Company's Convertible Debentures will be asked to
surrender the Convertible Debentures owned by such holder for cancellation
by the Company in exchange for (i) $241.50 in cash, (ii) 377.8 shares of
Common Stock and (iii) three-year warrants to purchase an additional 188.9
shares of Common Stock at a price of $1.50 per share, as described in the
Warrant, the form of which is attached as Exhibit C hereto, for each $1,000
in principal amount of Convertible Debentures owned by such holder (such
consideration, the "Exchange Offer Consideration"); provided, however, that
cash will be issued in lieu of fractional shares and Warrants, unless the
Company opts, with respect to fractional Warrants, to round up to the
nearest whole Warrant. The SEC Filing Documents sent to the holders of the
Convertible Debentures in connection with the Exchange Offer will also
constitute a disclosure statement for the purpose of soliciting the
acceptances of such holders of the Prepackaged Plan. If at least 98% (or
such lower percentage as the Company and the Purchaser Representative may
mutually agree) of the outstanding principal amount of Convertible
Debentures are committed to be surrendered in the Exchange Offer (such
approval, the "Exchange Offer Condition"), the Exchange Offer will be
consummated, the Bankruptcy Case shall not be filed and the Prepackaged
Plan
D-17
<PAGE>
will be abandoned, unless the Company and the Purchaser Representative
otherwise mutually agree that the filing of the Bankruptcy Case and the
confirmation of the Prepackaged Plan are in the best interest of the
Company notwithstanding satisfaction of the Exchange Offer Condition.
However, if the Exchange Offer Condition is not satisfied but holders of at
least two-thirds of the outstanding principal amount of the Convertible
Debentures that actually are voted, and a majority in number of the holders
of the Convertible Debentures that actually vote, vote to accept the
Prepackaged Plan as determined in accordance with applicable law and the
Company's charter and bylaws (such acceptance, the "Bankruptcy Condition"),
the Company shall file the Bankruptcy Case and seek confirmation of the
Prepackaged Plan by the Bankruptcy Court. If neither the Exchange Offer
Condition nor the Bankruptcy Condition is satisfied, either party may
terminate this Agreement in accordance with Section 7.1(c) or (d) hereof,
as applicable.
(b) The parties further agree that they shall consult with each other
prior to contacting any holder of the Convertible Debentures with respect
to the Exchange Offer, the Exchange Consideration, the Prepackaged Plan or
any related matter in order to develop a mutually agreeable procedure for
such contacts and to ensure compliance with applicable securities laws and
disclosure requirements.
Section 5.3. SEC Filing Documents. (a) the Company shall file with the
Commission within two Business Days of the date hereof the SEC Filing Documents
substantially in the form approved by the Purchaser Representative as of the
date hereof (together with such changes, additions or deletions as the
Purchaser Representative may approve or as may be necessary or appropriate to
respond to comments of the Staff or to comply with applicable law). The Company
shall use all reasonable efforts, with assistance from the Purchasers, to the
extent reasonably applicable, to promptly respond to and satisfy any comments
of the Staff to the SEC Filing Documents and any request by the Staff for
amendments or supplements thereto. Each Purchaser shall provide promptly to the
Company all necessary information with respect to such Purchaser for inclusion
in the SEC Filing Documents, including any amendments or supplements thereto.
The Company shall use reasonable efforts to have the SEC Filing Documents
cleared by the Commission and the registration statement filed as part of the
SEC Filing Documents (the "Registration Statement") declared effective by the
Commission; provided, however, that the Company may withdraw the Registration
Statement prior to its being declared effective in the event it receives a
Superior Proposal, or terminates this Agreement, or upon filing of the
Bankruptcy Case, in each case if the Company deems such withdrawal to be
appropriate.
(b) As soon as practicable following clearance by the Commission of the SEC
Filing Documents and effectiveness of the Registration Statement, the Company
shall mail to all its shareholders and the holders of its Convertible
Debentures that portion of the SEC Filing Documents that relates to the proxy
solicitation and Exchange Offer, including the related forms of proxies and
ballots with respect to the Exchange Offer, the Special Meeting and the
Prepackaged Plan.
(c) Each of the Company and the Purchasers agrees to correct promptly any
information provided by it for inclusion in the SEC Filing Documents that shall
have become false or misleading in any material respect and to take all steps
necessary to file with the Commission and have declared effective or cleared by
the Commission any amendment or supplement to the SEC Filing Documents so as to
correct the same and the cause the Proxy Statement/Prospectus as so corrected
to be disseminated to the Company's shareholders and holders of its Convertible
Debentures. The parties shall work together to ensure that any amendments to
the SEC Filing Documents shall comply as to form in all material respects with
the provisions of the Securities Act, the Exchange Act, the Bankruptcy Code and
other applicable law.
Section 5.4. No Solicitation. (a) the Company shall not, nor shall it permit
any of its Subsidiaries to, nor shall it authorize or permit any officer,
director or employee of the Company or any of its subsidiaries or any
investment banker, attorney or other advisor, agent or representative of the
Company or any of its Subsidiaries to, directly or indirectly, (i) solicit,
initiate or encourage the submission of any Proposal (as defined below), (ii)
enter into any agreement with respect to any Proposal, or (iii) participate in
any discussions or negotiations regarding, or furnish to any Person any
information with respect to, or take any other action to facilitate any
inquiries or the making of any proposal that constitutes a Proposal; provided,
however, that the
D-18
<PAGE>
foregoing shall not prohibit the Company from furnishing information to, or
entering into discussions or negotiations with any Person in response to an
unsolicited inquiry, request for information or Superior Proposal at any time
during the period from the date of this Agreement to the Closing Date, to the
extent required by the fiduciary obligations of the Board of Directors of the
Company determined in good faith by the Board of Directors, or from taking any
action approved by the Purchaser Representative or otherwise permitted in this
Agreement. For purposes of this Agreement, a "Proposal" means any proposal, (i)
for a tender or exchange offer, merger or other business combination involving
the Company or any of its Subsidiaries, (ii) to acquire from the Company or any
of its affiliates in any manner, directly or indirectly, any securities or
beneficial ownership thereof (excluding de minimis amounts) of the Company or
any Subsidiary or, including by lease, the principal assets of the Company and
its Subsidiaries, taken as a whole, other than a proposal by the Purchasers or
any of their affiliates, (iii) to effect any recapitalization, restructuring,
liquidation, dissolution or other extraordinary transaction with respect to the
Company and any of its Subsidiaries or (iv) other than in connection with this
Agreement, involving a "solicitation" of "proxies" (as such terms are used in
the proxy rules of the Securities and Exchange Commission) or consents to vote
any voting securities of the Company.
(b) The Board of Directors of the Company shall not, except in connection
with the termination of this Agreement pursuant to Section 7.1 or to the extent
required by the fiduciary obligations of the directors under applicable law,
(i) withdraw or modify, or propose to withdraw or modify in a manner adverse to
the Purchasers the approval or recommendation by the Board of Directors of the
Company thereof of this Agreement or take any action having such effect;
provided, however, that a statement by the Board of Directors of the Company to
its securityholders as contemplated by Rule 14e-2 of the Exchange Act following
the Purchaser Representative's receipt of a Notice of Superior Proposal (as
defined below) shall not be deemed to constitute a withdrawal or modification
of its recommendation of this Agreement, or (ii) approve or recommend, or
propose to approve or recommend, any Proposal. Notwithstanding the foregoing,
in the event that the Board of Directors of the Company receives a Proposal
that, in the exercise of its fiduciary obligations, as determined in good faith
by the Board of Directors after consultation with counsel, it determines to be
a Superior Proposal, the Board of Directors of the Company may withdraw or
modify its approval or recommendation of this Agreement and may (subject to the
following sentence) terminate this Agreement, in each case at any time after
the fifth Business Day following the Purchaser Representative's receipt of
written notice (a "Notice of Superior Proposal") advising the Purchaser
Representative that the Board of Directors of the Company has received a
Proposal that it has determined to be a Superior Proposal, specifying the
material terms and conditions of such Superior Proposal and identifying the
Person making such Superior Proposal. The Purchaser shall have the right, for
five Business Days following the Purchaser Representative's receipt of the
Notice of Superior Proposal, to match the Superior Proposal on equal terms by
written notice to the Company. If the Purchasers elect to match the Superior
Proposal and timely notify the Company, the Company shall reject the Superior
Proposal and accept the Purchasers' matching offer, subject to the Board's
fiduciary obligations and any new Superior Proposals. Notwithstanding any
provision to the contrary herein, the Company may engage in discussions with
any Person that has made an unsolicited Proposal for the limited purpose of
determining whether such Proposal is a Superior Proposal. Nothing contained
herein shall prohibit the Company from taking and disclosing to its
securityholders a position contemplated by Rule 14e-2 of the Exchange Act
following the Purchaser Representative's receipt of a Notice of Superior
Proposal.
(c) For purposes of this Agreement, a "Superior Proposal" means any Proposal
that the Board of Directors of the Company determines in its good faith
reasonable judgment to be more favorable than the transactions contemplated by
this Agreement.
Section 5.5. The Prepackaged Plan. In the event the Bankruptcy Case is
commenced, the Company shall file the Prepackaged Plan with the Bankruptcy
Court. Any modifications or amendments to the Prepackaged Plan shall be subject
to timely review and approval of the Purchaser Representative in its sole
discretion. In the event the Company files the Bankruptcy Case, the parties
agree that Nevada shall be the appropriate venue for such filing, unless the
parties mutually agree on a different venue.
D-19
<PAGE>
Section 5.6. Valid Issuance. The Company covenants that the Shares will,
upon issuance and upon full payment therefor in accordance with the terms
hereof, be validly issued, fully paid and nonassessable.
Section 5.7. Confidentiality; Standstill. (a) The Purchasers agree to hold
in strict confidence all aspects of the terms and conditions of this Agreement
and all information and data concerning the Company and its Subsidiaries,
including, without limitation, information obtained in connection with the
transactions contemplated by this Agreement and all memoranda, notes, reports,
writings or other information (whatever the form or storage medium) however
reproduced or generated by the Purchasers or any of their representatives from
or with respect to any information or data disclosed by or on behalf of the
Company to the Purchasers or any of their representatives (other than
information and data that is or becomes generally available to the public other
than through disclosure by the Purchasers or any of their directors, officers,
employees or representatives in breach of this Agreement) (such information and
materials, the "Confidential Information") and will not, without the prior
written consent of the Company, disclose any such Confidential Information to
anyone other than to its directors, officers, employees and representatives
that have a need to know in connection with the furtherance of the transactions
contemplated hereby (such persons hereinafter referred to collectively as the
"Designated Individuals"); provided, that the Purchasers inform the Designated
Individuals of the confidential nature of the Confidential Information; and
provided, further, that the Purchasers direct the Designated Individuals to
treat the Confidential Information as confidential. In addition, without
limiting the foregoing, the Purchasers agree that the Confidential Information
will not be used, directly or indirectly, in the conduct of its business,
except in furtherance of the transactions contemplated by this Agreement.
(b) In the event that the Purchasers or any of their respective directors,
officers, employees or representatives receives a request or becomes legally
compelled (by deposition, interrogatory, request for documents, subpoena, civil
investigation demand, order or similar process) to disclose any of the
Confidential Information, the Purchasers agree, prior to any such disclosure,
to (i) promptly notify the Company, (ii) consult with the Company on the
advisability of taking steps to resist or narrow such request, and (iii)
cooperate with the Company in any attempt it may make to obtain a protective
order or other appropriate remedy or assurance that confidential treatment will
be afforded such Confidential Information. In the event such protective order
or other appropriate remedy is not obtained, the Purchasers agree to furnish
only that portion of such Confidential Information that it is advised by
written opinion of counsel is legally required.
(c) If this Agreement is terminated for any reason, the Purchasers shall, at
the Company's request, promptly return to the Company all Confidential
Information furnished, disclosed or made available by the Company to the
Purchasers or obtained or generated by the Purchasers or any of their
representatives in the course of their investigation of the Company and the
transactions contemplated by this Agreement, and the Purchasers agree not to
retain copies of any such Confidential Information (in any form whatsoever) in
such event, and not to disclose any such information or data to any third party
without obtaining the prior written consent of the Company, unless such
information and data have become generally available to the public other than
through disclosure by the Purchasers or any of their directors, officers,
employees or representatives in breach of this Agreement. In the event of any
such termination, the obligations of the Purchasers with respect to any
Confidential Information retained by the Purchasers shall survive such
termination and the Purchasers shall not utilize any such Confidential
Information to the competitive disadvantage of the Company.
(d) If this Agreement is terminated for any reason, the Purchasers shall
not, for a period of two years from the date of any such termination, except
pursuant to a transaction approved by the Company's Board of Directors,
directly or indirectly, (i) in any manner acquire, or attempt to acquire, alone
or with other persons, any of the securities of the Company (whether directly
by purchases or indirectly by merger or similar transaction or by public
proposal to the Company or its shareholders), (ii) make, or in any way
participate in, any "solicitation" of "proxies" (as such terms are used in the
rules of the Securities and Exchange Commission) to vote any of the voting
securities of the Company or (iii) without the prior written consent of the
Company, engage in any discussions or negotiations, or submit a proposal for,
any business combination or extraordinary transaction involving the Company or
its assets.
D-20
<PAGE>
Section 5.8. Best Efforts. Except as otherwise permitted by Section 5.4, the
parties agree to use their respective best efforts to cause the conditions to
Closing set forth in Article VI hereto to be satisfied.
Section 5.9. Public Announcements. Except as may be required by applicable
law or any regulations of any trading or quotation system on which the
Company's securities may be traded or quoted, any press release or other public
statements with respect to this Agreement or any of the transactions
contemplated hereby, shall be subject to the approval of the Company and the
Purchaser Representative, as applicable (which approval shall not be
unreasonably withheld).
Section 5.10. Notice of Certain Events. The Company shall promptly give
notice to the Purchaser Representative (i) of any material default or event of
default that has not been cured within any applicable grace period under any
contractual obligation of the Company or any of its Subsidiaries or (ii) of any
pending or threatened litigation, investigation or proceeding to which the
Company or any of its Subsidiaries is or is threatened to be a party and of
which the Company has been given notice; provided that any such default as
specified above, litigation, investigation or proceeding would have a Material
Adverse Effect on the business or financial condition of the Company and its
Subsidiaries, taken as a whole.
Section 5.11. Liquidation Analysis. If reasonably requested by the Purchaser
Representative, the Company shall prepare or cause to be prepared any
liquidation analysis, plan feasibility analysis or other economic analysis that
may be required pursuant to Section 1129 of the Bankruptcy Code.
Section 5.12. Director and Officer Insurance. For a period of six years
after the Closing Date, the parties agree that the Company shall maintain the
Company's existing director and officer liability insurance or equivalent
liability insurance ("D&O Insurance"), which insurance will provide equivalent
coverage for the Company's former and existing officers and directors;
provided, however, that if the cost of such coverage exceeds $100,000, the
Purchaser Representative shall have the right to approve such coverage, which
approval shall not be unreasonably withheld, and provided, further, that if the
cost of such coverage exceeds $200,000, the Company shall obtain as much
coverage as possible for such parties for $100,000, or such higher amount as
the Purchaser Representative may approve.
Section 5.13. Board Nominees. The Purchasers covenant and agree that at the
next annual meeting of the shareholders of the Company following the Closing
Date, at least two of the nominees for directors (or such increased number, if
necessary, pursuant to Section 6.1(j)) shall be either persons serving on the
Company's board of directors as of the date of this Agreement or then current
shareholders (other than nominal amounts) of the Company and, in either case,
not affiliated with the Purchasers.
Section 5.14. Decisions on Behalf of the Purchasers. Each Purchaser hereby
agrees that all decisions to be made hereunder and rights to review, approve,
consent to or waive any item, provision or condition hereof, shall be made by
and exclusively vested in EnCap Investments L.L.C. (the "Purchaser
Representative"); provided, however, that the Purchaser Representative shall
have no liability to the Company as a Purchaser hereunder. Each Purchaser
hereby further agrees that the Company shall be entitled to rely on all
agreements, approvals, consents and waivers of EnCap Investments L.L.C. as if
such agreements, approvals, consents and waivers had been received from such
Purchaser directly.
Section 5.15. Purchaser Warrants. In the event the disposition of assets in
the transaction with ANR Production Company referred to in the Company
Disclosure Letter is not consummated on substantially the terms set forth in
the applicable asset purchase and sale agreement (or on such other terms as the
Purchaser Representative may approve, which approval shall not be unreasonably
withheld) on or before the Closing Date, the parties agree that concurrently
with the Closing and for no additional consideration, (i) the Purchasers shall
be allocated warrants to purchase an aggregate of 3,000,000 shares of Common
Stock at a price of $1.50 per share, which warrants shall expire three years
from the date of issuance and shall be substantially in the form of Exhibit C
hereto, together with such additional terms for all warrants to be issued at
the Closing to the Purchasers and the holders of the Company's Convertible
Debentures to adjust such warrants upon the
D-21
<PAGE>
occurrence of certain events as the Purchaser Representative may request and
(ii) the Registration Rights Agreement shall be modified to include any shares
issued upon exercise of such warrants.
Section 5.16. Further Assurances. Each of the parties agrees that it shall
cooperate with the other and execute such further instruments and documents as
the other party may reasonably request to carry out to the satisfaction of such
other party the transactions contemplated by this Agreement.
ARTICLE VI
CONDITIONS TO CLOSING
Section 6.1. Purchasers' Conditions to Closing. Each Purchaser's obligation
to purchase and pay for the Shares is subject to the satisfaction or waiver, on
or before the Closing Date, of the following conditions:
(a) Representations and Warranties. The representations and warranties
of the Company contained in Section 3.1 hereof shall be true and correct in
all material respects on and as of the Closing Date, except to the extent
that such representations or warranties expressly relate to an earlier date
and except to the extent of changes caused by the transactions herein
contemplated; and the Company shall have delivered to the Purchaser
Representative an Officer's Certificate, dated the Closing Date, to such
effect.
(b) Performance of Obligations. The Company shall have performed in all
material respects all of the covenants and agreements required to be
performed by it on or before the Closing Date hereunder.
(c) Legal Opinions. The Purchasers shall have received a legal opinion
on behalf of the Company dated as of the Closing Date as to matters
customarily addressed by legal opinions in connection with the issuance of
the Shares, which opinion shall be in form and substance reasonably
satisfactory to the Purchaser Representative. In addition, the Purchasers
shall have received an opinion, dated as of the Closing Date, of Lionel,
Sawyer & Collins (or such other firm licensed to practice law in the State
of Nevada reasonably acceptable to the Purchaser Representative) in form
and substance reasonably satisfactory to the Purchaser Representative and
substantially to the effect that (i) the terms and provisions of Article
VII of the Company's Bylaws shall not be applicable to the transactions
contemplated hereunder or to any subsequent "Business Combination" (as such
term is used in such Article VII) between the Company, on the one hand, and
any Purchaser or any "Related Person" (as defined in such Bylaws) to such
Purchaser, on the other hand; (ii) the terms and provisions of Section
78.411 through 78.444 of the NGCL shall not be applicable to the
transactions contemplated hereunder or to any subsequent "Combination" (as
defined in Section 78.416 of the NGCL) between the Company, on the one
hand, and any Purchaser or "affiliate" or "associate" (as such terms are
defined in Sections 78.412 and 78.413, respectively, of the NGCL) and (iii)
the provisions of the Nevada Control Shares Act have been validly waived by
the Company with respect to the transactions contemplated hereunder.
(d) Charter Documents and Bylaws. The Purchaser Representative shall
have received a certificate, dated the Closing Date, of the Secretary of
the Company attaching (i) a true and complete copy of the Company's
charter, including all amendments thereto, as filed with the Secretary of
State of the State of Nevada, (ii) a true and complete copy of the
Company's bylaws in effect as of such date, (iii) a certificate of good
standing with respect to the Company in the State of Nevada and (iv)
resolutions of the Board of Directors of the Company authorizing the
execution and delivery of this Agreement and the issuance of the Shares.
(e) Shareholder Approval. The Company shall have either (i) obtained the
approval of its shareholders at the Special Meeting with respect to the
matters set forth in Section 5.1 hereof, or (ii) obtained the entry by the
Bankruptcy Court of the Confirmation Order such that the purchase and sale
of the Shares and the other matters contemplated herein may be consummated
without approval of the Company's shareholders.
(f) Exchange Offer. The Company shall have either (i) satisfied the
Exchange Offer Condition and opted not to file the Bankruptcy Case, such
that the Exchange Offer shall be consummated on the
D-22
<PAGE>
Closing Date or (ii) satisfied the Bankruptcy Condition and filed the
Bankruptcy Case and the Confirmation Order shall have been entered by the
Bankruptcy Court and shall not have been reversed, stayed, modified or
amended in any material respect prior to Closing, such that the Prepackaged
Plan shall be consummated on the Closing Date.
(g) Registration Rights Agreement. Each Purchaser shall have received a
copy of the Registration Rights Agreement, in the form of Exhibit B hereto
but with such modifications thereto as may be set forth in the Confirmation
Order, duly executed by the Company.
(h) No Adverse Action or Decision. There shall be no action, suit,
investigation or proceeding pending or, to the Company's knowledge,
threatened, against or affecting the Company or any of its Subsidiaries, or
any of their respective properties or rights, before any court, arbitrator
or administrative or governmental body that seeks to restrain, enjoin or
prevent the consummation of any of the transactions contemplated by, this
Agreement, declare unlawful any of the transactions contemplated hereby or
cause such transactions to be rescinded.
(i) Consents and Approvals. The Company shall have received all Consents
and Approvals of all federal, state and local governmental authorities and
third parties necessary for the issuance of the Shares by the Company and
the consummation of the transactions contemplated hereby including, without
limitation, its lenders.
(j) Board of Directors. If the Purchaser Representative shall have
requested at least five Business Days prior to the Closing Date, then
effective as of the Closing Date, the Company shall have increased the size
of its Board of Directors or exercised its best efforts to secure the
resignations of such number of directors as is necessary to enable three
nominees designated by the Purchaser Representative to be appointed to the
Company's five member Board of Directors or such other number so as to
ensure that a majority of the members are nominees of the Purchasers. Such
directors shall serve until the next annual meeting of shareholders of the
Company, unless otherwise provided in the Company's charter or bylaws, or
until their earlier resignation or removal.
(k) No Material Adverse Change. Since the date of this Agreement, there
shall not have occurred any Material Adverse Change.
(l) New Banking Arrangements. The Company shall have entered into new
banking arrangements with its current domestic lenders or other lenders to
restructure its domestic indebtedness to provide for interest at the prime
rate; semi-annual borrowing base redeterminations; a maturity not before
July 1, 2002; a borrowing base, when combined with the borrowing base under
arrangements with its other lenders, including its Canadian lenders, of not
less than $36 million in the aggregate for the Company and its Subsidiaries
($40 million if the sale of assets to ANR Production Company referred to in
the Company Disclosure Letter is not consummated); and such other terms as
may be satisfactory to the Purchaser Representative.
Section 6.2. Company's Conditions to Closing. The Company's obligations to
sell the Shares hereunder is subject to the satisfaction or waiver, on or
before the Closing Date, of the following conditions:
(a) Representations and Warranties. The representations and warranties
contained in Section 3.2 hereof shall be true and correct in all material
respects on and as of the Closing Date, except to the extent that such
representations or warranties expressly relate to an earlier date; and each
Purchaser shall have delivered to the Company an Officer's Certificate,
dated the Closing Date, to such effect.
(b) Performance of Obligations. Each Purchaser shall have performed in
all material respects all of the covenants and agreements required to be
performed by it on or before the Closing Date hereunder.
(c) Purchase of Shares. The Purchasers shall have purchased and paid the
Purchase Price for the Shares.
(d) Fairness Opinion. The Company shall have received, prior to
effectiveness of the SEC Filing Documents, the written "bring-down" of CIBC
WM's previously delivered opinion as to the fairness from a financial point
of view of the consideration to be received in connection with the
transactions contemplated by this Agreement, and such opinion shall not
have been withdrawn by CIBC WM.
D-23
<PAGE>
(e) Legal Opinion. The Company shall have received a legal opinion dated
as of the Closing Date as to matters customarily addressed by legal
opinions in connection with the issuance of the Shares, which opinion shall
be in form and substance reasonably satisfactory to the Company.
(f) Shareholder Approval. The Company shall have either (i) obtained the
approval of its shareholders at the Special Meeting with respect to the
matters set forth in Section 5.1 hereof, or (ii) obtained the entry by the
Bankruptcy Court of the Confirmation Order such that the purchase and sale
of the Shares and the other matters contemplated herein may be consummated
without approval of the Company's shareholders.
(g) Exchange Offer. The Company shall have either (i) satisfied the
Exchange Offer Condition and opted not to file the Bankruptcy Case, such
that the Exchange Offer shall be consummated on the Closing Date or (ii)
satisfied the Bankruptcy Condition and filed the Bankruptcy Case and the
Confirmation Order shall have been entered by the Bankruptcy Court and
shall not have been reversed, stayed, modified or amended in any material
respect prior to Closing, such that the Prepackaged Plan shall be
consummated on the Closing Date.
(h) No Adverse Action or Decision. There shall be no action, suit,
investigation or proceeding pending or, to the Company's knowledge,
threatened, against or affecting the Company or any of its Subsidiaries, or
any of their respective properties or rights, before any court, arbitrator
or administrative or governmental body that seeks to restrain, enjoin or
prevent the consummation of any of the transactions contemplated by, this
Agreement, declare unlawful any of the transactions contemplated hereby or
cause such transactions to be rescinded.
(i) Consents and Approvals. The Company shall have received all Consents
and Approvals of all federal, state and local governmental authorities and
third parties necessary for the issuance of the Shares by the Company and
the consummation of the transactions contemplated hereby including, without
limitation, its lenders.
(j) New Banking Arrangements. The Company shall have entered into new
banking arrangements with its current domestic lenders or other lenders to
restructure its domestic indebtedness to provide for interest at the prime
rate; semi-annual borrowing base redeterminations; a maturity not before
July 1, 2002; a borrowing base, when combined with the borrowing base under
arrangements with its other lenders, including its Canadian lenders, of not
less than $36 million in the aggregate for the Company and its Subsidiaries
($40 million if the sale of assets to ANR Production Company referred to in
the Company Disclosure Letter is not consummated); and such other terms as
may be satisfactory to the Purchaser Representative.
ARTICLE VII
TERMINATION
Section 7.1. Termination. This Agreement may be terminated at any time prior
to the Closing Date, whether before or after approval of matters presented in
connection with this Agreement by the shareholders of the Company:
(a) by mutual written consent of the Purchaser Representative and the
Company;
(b) by either the Purchaser Representative or the Company if:
(i) the transactions contemplated by this Agreement shall not have
been consummated on or before February 29, 2000, unless the failure to
consummate the transaction contemplated by this Agreement is the result
of a material breach of this Agreement by the party seeking to
terminate this Agreement; or
(ii) any permanent injunction or other order of a court or other
competent authority preventing the consummation of the transactions
contemplated by this Agreement or the Prepackaged Plan shall have
become final and nonappealable;
(c) by the Purchaser Representative if any of the conditions set forth
in Section 6.1 hereto have not been satisfied or waived by the Purchaser
Representative by the Closing Date;
D-24
<PAGE>
(d) by the Company if any of the conditions set forth in Section 6.2
have not been satisfied or waived by the Company by the Closing Date;
(e) by the Company to the extent permitted under Section 5.4 hereof; and
(f) by the Company, to allow the Company to respond to any involuntary
proceeding, concerning the reorganization, liquidation or dissolution or
recapitalization of the Company other than in connection with the
Bankruptcy Case.
Section 7.2. Effect of Termination. In the event of termination of this
Agreement by either the Company or the Purchaser Representative pursuant to
Section 7.1 above, this Agreement shall forthwith become void and have no
effect, without any liability or obligation on the part of the Purchasers or
the Company, except as set forth in Article IX below.
ARTICLE VIII
REMEDIES FOR BREACH OF THIS AGREEMENT
Section 8.1. No Survival. All of the representations and warranties set
forth in this Agreement shall terminate and cease to be of further force and
effect as of the Closing. The covenants and other agreements set forth herein
shall survive the Closing to the extent such covenants or agreements
specifically are to be performed after the Closing Date.
Section 8.2. Indemnification of Purchasers. Subject to the provisions of
this Article VIII, the Company agrees to indemnify and hold harmless the
Purchaser Indemnified Parties from and against any and all Purchaser
Indemnified Costs.
Section 8.3. Indemnification of Company. Subject to the provisions of this
Article VIII, each Purchaser agrees to indemnify and hold harmless the Company
Indemnified Parties from and against any and all Company Indemnified Costs.
Section 8.4. Defense of Third-Party Claims. Any party entitled to be
indemnified hereunder (an "Indemnified Party") shall give prompt written notice
to any person who is obligated to provide indemnification hereunder (an
"Indemnifying Party") of the commencement or assertion of any action,
proceeding, demand, or claim by a third party (collectively, a "third-party
action") in respect of which such Indemnified Party shall seek indemnification
hereunder. Any failure so to notify an Indemnifying Party shall not relieve
such Indemnifying Party from any liability that it, he, or she may have to such
Indemnified Party under this Section 8.4 unless the failure to give such notice
materially and adversely prejudices such Indemnifying Party. The Indemnifying
Party shall have the right to assume control of the defense of, settle, or
otherwise dispose of such third-party action on such terms as it deems
appropriate; provided, however, that:
(a) The Indemnified Party shall be entitled, at its own expense, to
participate in the defense of such third-party action (provided, however,
that the Indemnifying Party shall pay the attorneys' fees of one counsel
(provided that if any such third-party action is brought in a jurisdiction
other than Texas, the Indemnifying Party shall also pay the attorney's fees
of one local counsel) to the Indemnified Party if (i) the employment of
separate counsel shall have been authorized in writing by any such
Indemnifying Party in connection with the defense of such third-party
action, (ii) the Indemnifying Parties shall not have employed counsel
reasonably satisfactory to the Indemnified Party to have charge of such
third-party action, (iii) counsel to the Indemnified Party shall have
reasonably concluded that there may be defenses available to the
Indemnified Party that are different from or additional to those available
to the Indemnifying Party, (iv) counsel to the Indemnified Party and the
Indemnifying Party shall have advised their respective clients in writing,
with a copy delivered to the other party, that there is a conflict of
interest that could make it inappropriate under applicable standards of
professional conduct to have common counsel), or (v) the third-party action
is a proceeding brought by a security holder of the Company (in such
security holder's name or derivatively on behalf of the Company) in respect
of the transactions contemplated by this Agreement;
D-25
<PAGE>
(b) The Indemnifying Party shall obtain the prior written approval of
the Indemnified Party, which approval shall not be unreasonably withheld,
before entering into or making any settlement, compromise, admission or
acknowledgment of the validity of such third-party action or any liability
in respect thereof if, pursuant to or as a result of such settlement,
compromise, admission, or acknowledgment, injunctive or other equitable
relief would be imposed against the Indemnified Party or if, in the opinion
of the Indemnified Party, such settlement, compromise, admission, or
acknowledgment would have a material adverse effect on its business;
(c) No Indemnifying Party shall consent to the entry of any judgment or
enter into any settlement that does not include as an unconditional term
thereof the giving by each claimant or plaintiff to each Indemnified Party
of a release from all liability in respect of such third-party action; and
(d) The Indemnifying Party shall not be entitled to control (but shall
be entitled to participate at its own expense in the defense of), and the
Indemnified Party shall be entitled to have sole control over, the defense
or settlement, compromise, admission, or acknowledgment of any third-party
action (i) as to which the Indemnifying Party fails to assume the defense
within a reasonable length of time; or (ii) to the extent the third-party
action seeks an order, injunction, or other equitable relief against the
Indemnified Party which, if successful, would materially adversely affect
the business, operations, assets, or financial condition of the Indemnified
Party; provided, however, that the Indemnified Party shall make no
settlement, compromise, admission, or acknowledgment that would give rise
to liability on the part of any Indemnifying Party without the prior
written consent of such Indemnifying Party, which consent shall not be
unreasonably withheld.
The parties hereto shall extend reasonable cooperation in connection with
the defense of any third-party action pursuant to this Article VIII and, in
connection therewith, shall furnish such records, information and testimony and
attend such conferences, discovery proceedings, hearings, trials and appeals as
may be reasonably requested.
Section 8.5. Direct Claims. In any case in which an Indemnified Party seeks
indemnification hereunder which is not subject to Section 8.4 because no third-
party action is involved, the Indemnified Party shall notify the Indemnifying
Party in writing of any Indemnified Costs which such Indemnified Party claims
are subject to indemnification under the terms hereof. The failure of the
Indemnified Party to exercise promptness in such notification shall not amount
to a waiver of such claim unless the resulting delay materially prejudices the
position of the Indemnifying Party with respect to such claim.
ARTICLE IX
FEES AND EXPENSES
Section 9.1. Commitment Fee. Concurrently with the Closing of the
transactions contemplated hereby, the Company shall pay a commitment fee in the
aggregate amount of $1,600,000, $600,000 of which shall be paid in cash to the
Purchaser Representative and the remaining $1,000,000 of which shall be paid in
shares of Common Stock of the Company valued at $0.47 per share, or 2,127,660
shares in the aggregate, to the Purchasers (pro rata based on their respective
allocable share of the Shares as provided in Section 2.1). Prior to issuance of
such shares, the Purchaser Representative shall make, with respect to itself,
the representations contained in Section 3.2. If the Closing shall not occur
for any reason, no commitment fee shall be payable.
Section 9.2. Termination Fee. To compensate the Purchasers for entering into
this Agreement and for their time invested herein and the foregoing of other
opportunities, the parties agree as follows:
(a) provided that the Purchasers shall not be in breach of their
obligations under this Agreement, in the event the Company terminates this
Agreement in accordance with Section 5.4 hereof, the Company shall pay to
the Purchaser Representative, contemporaneously with the giving of notice
of such termination, a termination fee of $1,500,000;
(b) provided that the Purchasers shall not be in breach of their
obligations under this Agreement, in the event this Agreement is terminated
and the transactions contemplated herein are not consummated due
D-26
<PAGE>
to (i) the failure of the Company to satisfy the Exchange Offer Condition
or the Bankruptcy Condition, (ii) the failure of the Company's shareholders
to approve the matters set forth in Section 5.1 hereof and the failure of
the Bankruptcy Court to enter a Confirmation Order such that the
transactions contemplated hereby may be consummated without approval of
such shareholders or (iii) failure of the Bankruptcy Court to confirm the
Prepackaged Plan, the Company shall pay to the Purchaser Representative, no
later than two Business Days after the date of such termination, a
termination fee of $500,000, which fee may be paid in cash or in the form
of 1,063,829 shares of Common Stock (or in any combination of cash and
Common Stock, with shares of Common Stock valued at $0.47 per share), at
the option of the Company; and
(c) the termination fees set forth in subsections (a) and (b) above are
mutually exclusive. Under no circumstances will the Purchasers be entitled
to receive more than one termination fee, if any.
Section 9.3. Reimbursement of Expenses. The Company agrees that whether or
not the transactions contemplated hereby are consummated, it shall pay, in
accordance with that certain expense reimbursement letter agreement dated as of
June 18, 1999 (which letter supersedes the expense reimbursement letter
agreement dated May 18, 1999), all reasonable and documented out-of-pocket
third party expenses of the Purchaser Representative arising in connection with
the transactions and other agreements and instruments contemplated by this
Agreement, including reasonable fees and expenses of counsel incurred in
connection with the preparation and negotiation of this Agreement and any other
agreement or instrument to be executed and delivered in connection herewith;
provided, however, that the maximum amount payable by the Company under this
Section 9.3 and such letter agreement shall not exceed $282,000 in the
aggregate.
ARTICLE X
MISCELLANEOUS
Section 10.1. Amendment. This Agreement may be amended by the parties hereto
at any time before or after any required approval of matters presented in
connection with the transaction contemplated by this Agreement by the
shareholders of the Company; provided, however, that after any such approval,
there shall be made no amendment that by law requires further approval by such
shareholders without the further approval of such shareholders. This Agreement
may not be amended except by an instrument in writing signed on behalf of each
of the parties.
Section 10.2. Extension; Waiver. At any time prior to the Closing Date, the
parties may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or the other acts of the other parties,
(b) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto or (c) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party to any such extension or waiver shall be valid only if set
forth in an instrument in writing signed on behalf of such party. The failure
of any party to this Agreement to assert any of its rights under this Agreement
or otherwise shall not constitute a waiver of such rights.
Section 10.3. Assignment. Without the prior written consent of the affected
party, this Agreement shall not be assigned by operation of law or otherwise
before the Closing Date, and any attempt at assignment shall be void.
Section 10.4. Successors and Assigns; No Third Party. All covenants and
agreements in this Agreement contained by or on behalf of the parties hereto
shall bind and inure to the benefit of the respective successors and permitted
assigns of the parties hereto and, to the extent provided in this Agreement, to
the benefit of any future holders of any Common Stock. Subject to the foregoing
and except as provided in Article VIII, nothing in this Agreement shall confer
upon any person or entity not a party to this Agreement, or the legal
representatives of such person or entity, any rights or remedies of any nature
or kind whatsoever under or by reason of this Agreement.
D-27
<PAGE>
Section 10.5. Notices. All communications provided for hereunder shall be
sent by registered or certified mail or overnight courier or personally
delivered and, if to the Purchasers or the Purchaser Representative, to the
following: c/o EnCap Investments L.L.C., 1100 Louisiana, Suite 3150, Houston,
Texas 77002, Attention: Robert L. Zorich, with a copy to Thompson & Knight,
1700 Chase Tower, 600 Travis Street, Houston, Texas 77002, Attention: Michael
K. Pierce; if to the Company, addressed to it at Southern Mineral Corporation,
1201 Louisiana, Suite 3350, Houston, Texas 77002, Attention: Steven H. Mikel,
with a copy to King & Spalding, 1100 Louisiana, Suite 3300, Houston, Texas
77002, Attention: Christine B. LaFollette, or to such other address with
respect to any party as such party shall notify the other in writing. Five
Business Days after the date of such mailing or one Business Day after sending
via overnight courier or personal delivery, such communication shall be deemed
to have been received.
Section 10.6. Descriptive Headings. The descriptive headings used in this
Agreement are inserted for convenience only and do not constitute a part of
this Agreement, and shall not affect the construction or interpretation
thereof.
Section 10.7. Governing Law. This Agreement shall be construed and enforced
in accordance with, and the rights of the parties shall be governed by, the law
of the State of Texas without giving effect to the choice of law or conflicts
principles thereof.
Section 10.8. Entire Agreement. This Agreement, including the Exhibits and
Schedules hereto, and the other writings referred to herein or delivered
pursuant hereto contain the entire agreement among the parties with respect to
the subject matter hereof and supersede all prior and contemporaneous
arrangements or understandings with respect thereto.
Section 10.9. Severability. Any provisions of this Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
Section 10.10. Counterparts. This Agreement may be executed simultaneously
in two or more counterparts, each of which shall be deemed an original, but
which together shall constitute a single agreement.
Section 10.11. Disclosure Letter. The Company shall have the right to revise
and update the Company Disclosure Letter from time to time prior to the Closing
with respect to the representations and warranties set forth in Section 3.1
hereof to correct any inaccuracies or reflect any subsequent events; provided,
however, that for purposes of determining whether the condition precedent set
forth in Section 6.1(a) hereof has been satisfied, the Company Disclosure
Letter shall be deemed to include only those disclosures set forth therein as
of the date of original delivery thereof in connection with the execution of
this Agreement, notwithstanding any subsequent amendment, modification or
supplement to such Company Disclosure Letter as so originally delivered.
Section 10.12. Consent to Jurisdiction; Waiver of Jury Trial.
(a) Except as to matters relating to the Bankruptcy Case, the parties
hereby irrevocably submit to the jurisdiction of the courts of the State of
Texas and the federal courts of the United States of America located in
Houston, Texas, and appropriate appellate courts therefrom, over any
dispute arising out of or relating to this Agreement or any of the
transactions contemplated hereby, and each party hereby irrevocably agrees
that all claims in respect of such dispute or proceeding may be heard and
determined in such courts. The parties hereby irrevocably waive, to the
fullest extent permitted by applicable law, any objection which they may
now or hereafter have to the laying of venue of any dispute arising out of
or relating to this Agreement or any of the transactions contemplated
hereby brought in such court or any defense of inconvenient forum for the
maintenance of such dispute. Each of the parties hereto agrees that a
judgment in any such dispute may be enforced in other jurisdictions by suit
on the judgment or in any other manner provided by law. This consent to
jurisdiction is being given solely for purposes of this Agreement and is
not intended to, and shall not, confer consent to jurisdiction with respect
to any other dispute in which a party to this Agreement may become
involved.
D-28
<PAGE>
(b) Each of the parties hereto hereby consents to process being served
by any party to this Agreement in any suit, action or proceeding of the
nature specified in subsection (a) above in any manner specified by law to
the applicable party at the address listed in Section 10.5 hereof.
(c) Furthermore, all parties hereto waive any and all rights to have a
jury resolve or otherwise preside, in whole or in part, over any dispute or
proceeding involving any of the parties hereto and regarding (i) this
Agreement, (ii) the documents required hereby, or (iii) any of the
transactions contemplated hereby or thereby.
Section 10.13. DTPA Waiver. EACH PURCHASER HEREBY REPRESENTS AND
ACKNOWLEDGES THAT IT IS A "BUSINESS CONSUMER" FOR THE PURPOSES OF THE TEXAS
DECEPTIVE TRADE PRACTICES-CONSUMER PROTECTION ACT (SUBCHAPTER E OF CHAPTER 17
OF THE TEXAS BUSINESS AND COMMERCE CODE), THAT IT EITHER HAS ASSETS OF
$25,000,000 OR MORE OR IS OWNED OR CONTROLLED BY A CORPORATION OR ENTITY WITH
ASSETS OF $25,000,000 OR MORE (AS REFLECTED IN ITS MOST RECENT FINANCIAL
STATEMENTS PREPARED IN ACCORDANCE WITH GAAP), THAT IT HAS KNOWLEDGE AND
EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS THAT ENABLE IT TO EVALUATE THE
MERITS AND RISKS OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT AND BY THE
RELATED AGREEMENTS, THAT IT HAS BEEN REPRESENTED BY LEGAL COUNSEL OF ITS CHOICE
IN ENTERING INTO THIS AGREEMENT AND THE RELATED AGREEMENTS AND THE TRANSACTIONS
CONTEMPLATED HEREBY AND THEREBY, AND THAT IT IS NOT IN A SIGNIFICANTLY
DISPARATE BARGAINING POSITION WITH RESPECT TO THE PARTIES TO AND THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT AND ANY AGREEMENTS RELATED HERETO.
EACH PURCHASER HEREBY WAIVES THE PROVISIONS OF THE TEXAS DECEPTIVE TRADE
PRACTICES-CONSUMER PROTECTION ACT (OTHER THAN SECTION 17.555 THEREOF), AS FROM
TIME TO TIME AMENDED.
Section 10.14. Disclaimer of Warranties. NOTWITHSTANDING ANY OTHER PROVISION
OF THIS AGREEMENT TO THE CONTRARY, IT IS THE EXPLICIT INTENT OF EACH PARTY
HERETO THAT THE COMPANY IS MAKING NO REPRESENTATION OR WARRANTY WHATSOEVER,
EXPRESS OR IMPLIED, BEYOND THOSE EXPRESSLY GIVEN IN THIS AGREEMENT, AND THAT
SUCH REPRESENTATIONS AND WARRANTIES SHALL TERMINATE AND CEASE TO BE OF EFFECT
AS OF THE CLOSING. THE PARTIES UNDERSTAND AND AGREE THAT THE PURCHASERS TAKE
THE SHARES AND THE BUSINESS "AS IS" AND "WHERE IS". WITHOUT LIMITING THE
GENERALITY OF THE FOREGOING, BUT EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN
THIS AGREEMENT, THE COMPANY HEREBY (A) EXPRESSLY DISCLAIMS AND NEGATES ANY
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AT COMMON LAW, BY STATUTE, OR
OTHERWISE, RELATING TO (i) THE TITLE TO OR CONDITION OF THE COMPANY'S
PROPERTIES OR ASSETS (INCLUDING, WITHOUT LIMITATION, ANY EXPRESS OR IMPLIED
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE), (ii) ANY
INFRINGEMENT BY THE COMPANY OR THE SUBSIDIARIES OF ANY PATENT OR PROPRIETARY
RIGHT OF ANY THIRD PARTY; OR (iii) ANY INFORMATION, DATA OR OTHER MATERIALS
(WRITTEN OR ORAL) FURNISHED TO THE PURCHASERS BY OR ON BEHALF OF THE COMPANY
(INCLUDING, BUT NOT LIMITED TO, INFORMATION, DATA OR OTHER MATERIALS REGARDING
THE EXISTENCE OR EXTENT OF OIL, GAS OR OTHER MINERAL RESERVES, THE
RECOVERABILITY OF OR THE COST OF RECOVERING ANY SUCH RESERVES, THE VALUE OF
SUCH RESERVES, ANY PRODUCT PRICING ASSUMPTIONS, PRESENT OR PAST PRODUCTION
RATES, AND THE ABILITY OF THE COMPANY AND THE SUBSIDIARIES TO SELL OIL OR GAS
PRODUCTION AFTER CLOSING; AND (B) NEGATES ANY RIGHTS OF THE PURCHASERS UNDER
STATUTES TO CLAIM DIMINUTION OF CONSIDERATION AND ANY CLAIMS BY THE PURCHASERS
FOR DAMAGES BECAUSE OF REDHIBITORY VICES OR DEFECTS, WHETHER KNOWN OR UNKNOWN,
IT BEING THE INTENTION OF THE COMPANY AND THE PURCHASERS
D-29
<PAGE>
THAT THE INTERESTS IN THE BUSINESS AND PROPERTIES REPRESENTED BY THE SHARES ARE
TO BE ACCEPTED BY THE PURCHASERS IN THEIR PRESENT CONDITION AND STATE OF
REPAIR.
Section 10.15. Liability of Purchasers. Except pursuant to Section 2.1
hereof, the liability of each Purchaser with respect to the agreements,
covenants, representations and warranties of the Purchasers contained in this
Agreement or in any certificate, instrument or document delivered pursuant
hereto shall be to the extent such agreements, covenants, representations or
warranties applies to itself and not with respect to any other Purchaser.
Section 10.16. Interpretation. For purposes of this Agreement, the term
"best knowledge" of a party shall mean the actual knowledge after due inquiry
of the executive officers of such party, and the term "best efforts" means
efforts that are in accordance with reasonable commercial practices without
incurrence of material expense in the context of the particular undertaking
contemplated. Notwithstanding the foregoing, the "best knowledge" qualifiers
contained in Section 3.1(r) hereof shall apply only to the Company's non-
operated properties other than Big Escambia Creek. The "best knowledge"
qualifier shall not apply to the representations in such Section with respect
to Big Escambia Creek or properties operated by the Company directly.
D-30
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and delivered as of the date first above written.
SOUTHERN MINERAL CORPORATION
By: /s/ STEVEN H. MIKEL
----------------------------------
Name: Steven H. Mikel
Title: President
ENERGY CAPITAL INVESTMENT
COMPANY PLC
By: /s/ GARY R. PETERSEN
----------------------------------
Name: Gary R. Petersen
Title: Director
ENCAP ENERGY CAPITAL FUND III, L.P.
By EnCap Investments L.L.C., its
General Partner
By: /s/ D. MARTIN PHILLIPS
----------------------------------
Name: D. Martin Phillips
Title: Managing Director
ENCAP ENERGY CAPITAL FUND III-B,
L.P.
By EnCap Investments L.L.C., its
General Partner
By: /s/ D. MARTIN PHILLIPS
----------------------------------
Name: D. Martin Phillips
Title: Managing Director
BOCP ENERGY PARTNERS, L.P.
By EnCap Investments L.L.C., its
Manager
By: /s/ D. MARTIN PHILLIPS
----------------------------------
Name: D. Martin Phillips
Title: Managing Director
D-31
<PAGE>
SCHEDULE I
Allocation of Shares and Purchase Price
Energy Capital Investment Company PLC
Number of Shares: 6,574,468
Purchase Price: $3,090,000
EnCap Energy Capital Fund III, L.P.
Number of Shares: 18,618,455
Purchase Price: $8,750,674
EnCap Energy Capital Fund III-B, L.P.
Number of Shares: 14,081,152
Purchase Price: $6,618,141
BOCP Energy Partners, L.P.
Number of Shares: 4,555,712
Purchase Price: $2,141,185
D-32
<PAGE>
ANNEX E
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered
into as of , 1999, by and among Southern Mineral Corporation, a Nevada
corporation (the "Company"), and EnCap Energy Capital Fund III, L.P., a Texas
limited partnership, EnCap Energy Capital Fund III-B, L.P., a Texas limited
partnership, Energy Capital Investment Company PLC, an English investment
company, and BOCP Energy Partners, L.P., a Texas limited partnership
(collectively, the "EnCap Purchasers" and each individually an "EnCap
Purchaser").
This Agreement is made in connection with the Stock Purchase Agreement (the
"Stock Purchase Agreement"), dated as of July 20, 1999, among the Company and
the EnCap Purchasers with respect to the purchase by the EnCap Purchasers from
the Company of an aggregate of 43,829,787 newly issued shares of the Company's
common stock, par value $0.01 per share (the "Common Stock"), for an aggregate
purchase price of $20.6 million. In connection with the Stock Purchase
Agreement, the Company has agreed to provide the EnCap Purchasers with the
registration rights set forth in this Agreement.
In consideration of the foregoing, the parties hereto agree as follows:
Section 1. Certain Definitions:
For purposes of this Agreement, the following terms shall have the
respective meanings:
"Affiliate" shall mean, with respect to a specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person and, with respect to any fund or
trust, any Person which is a participant in or beneficiary of such fund or
trust. For purposes of this definition, "control" when used with respect to any
specified ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Common Stock" shall mean the common stock of the Company, par value $0.01
per share.
"Demand" shall have the meaning set forth in Section 3(a)(i).
"Eligible Common Stock" shall mean, as of any date of determination, shares
of Common Stock held by either an EnCap Purchaser or a Permitted Transferee of
an EnCap Purchaser.
"Eligible Holders" shall mean, as of any date of determination, the EnCap
Purchasers holding Eligible Common Stock and any Permitted Transferees holding
Eligible Common Stock to whom an EnCap Purchaser has assigned registration
rights pursuant to Section 10(d).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder.
"Permitted Transferee" shall mean pursuant to Section 10(d) hereof a Person
(i) to whom the EnCap Purchasers have transferred Common Stock acquired by the
EnCap Purchasers pursuant to the Stock Purchase Agreement and (ii) who has
executed and delivered to the Company an Additional Party Counterpart in the
form set forth in Exhibit A hereto.
"Person" shall mean any individual, partnership, corporation, trust, limited
liability company or unincorporated organization, or a government or agency or
political subdivision thereof.
"Prospectus" shall mean the prospectus included in a Registration Statement,
including any preliminary prospectus, and any such prospectus as amended or
supplemented by any prospectus supplement with respect to the terms of the
offering of the Common Stock covered by the Registration Statement, and by all
other
E-1
<PAGE>
amendments and supplements to such Prospectus, including post-effective
amendments, and in each case including all materials incorporated by reference
therein.
"Registration Statement" shall mean any registration statement of the
Company on an appropriate form under the Securities Act (other than any
registration statement with respect to securities filed on a Form S-4 or S-8 or
any other forms prescribed for the same or similar purposes) and all amendments
and supplements to such registration statement, including post-effective
amendments, in each case including the Prospectus contained therein, all
materials incorporated by reference therein and all exhibits thereto (including
those incorporated by reference).
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
"Seller" shall mean an EnCap Purchaser or any Permitted Transferee of
Eligible Common Stock for which the Company shall be required to file a
registration statement or which shall be registered under the Securities Act at
the request of such holder pursuant to any of the provisions of Section 3.
Neither the Company nor any Affiliate of the Company shall be deemed a "Seller"
for any purposes of this Agreement.
"underwritten registration" or "underwritten offering" shall mean an
offering of the Common Stock pursuant to a Registration Statement in which the
Common Stock of the Company is sold to the public by one or more underwriters.
Section 2. Common Stock Subject to Registration Rights.
Shares of Eligible Common Stock will cease to be Eligible Common Stock when
either (i) a Registration Statement covering such Eligible Common Stock has
been declared effective by the SEC, (ii) it has been sold pursuant to Rule 144
(or any similar rule or regulation then in force) under the Securities Act, or
(iii) it has otherwise been transferred and it may be sold without registration
under the Securities Act and without restriction under Rule 144 (or any similar
rule or regulation then in force).
Section 3. Registration Rights.
(a) Demand Registration.
(i) At any time commencing six months following the closing date of the
Stock Purchase Agreement, any Eligible Holder shall have the right to make
written requests (each, a "Demand") on the Company to cause the Company to
use its best efforts to file and cause to be declared effective a
Registration Statement on Form S-3 or any other similar registration under
the Securities Act with respect to the Eligible Common Stock, provided,
that (x) the expected offering price of the Eligible Common Stock held by
the requesting Eligible Holder requested to be registered is at least $5
million, and (y) the expected offering of Eligible Common Stock includes at
least one-half of all remaining shares of Eligible Common Stock held by the
Eligible Holders, and provided further that the requesting Eligible Holder
shall use reasonable efforts to sell such Eligible Common Stock requested
to be registered. This Section 3(a)(i) shall be applicable for so long as
the Eligible Common Stock cannot be freely transferred pursuant to Rule 144
under the Securities Act (or any similar rule or regulation hereafter
adopted by the SEC) without the imposition of volume, manner of sale and
holding period limitations.
(ii) Each Demand shall set forth the number of shares of Eligible Common
Stock proposed to be sold by the Eligible Holders and the intended method
of distribution of such shares.
(iii) In the case of any underwritten public offering of Eligible Common
Stock pursuant to a registration under this Section 3(a), if the managing
underwriter advises the Eligible Holders and the Company in its opinion
that (A) the inclusion in such registration of some or all of such Common
Stock
E-2
<PAGE>
requested to be registered (including without limitation, securities to be
registered by the Company included pursuant to incidental or "piggyback"
rights heretofore or hereafter granted by the Company to Persons other than
the Eligible Holders) will cause the proceeds or price per share to the
Eligible Holders to be reduced or (B) that the number of securities to be
registered at the request of the Eligible Holders pursuant to this Section
3(a) plus the number of securities sought to be registered by the Company
or such other Persons will materially and adversely affect the success of
the offering, then the number of securities sought to be registered by each
holder other than an Eligible Holder of Common Stock shall be reduced pro
rata in proportion to the number of shares of Common Stock sought to be
registered by such holders to the extent necessary to reduce the number of
securities to be registered to the number recommended by the managing
underwriter (the "Recommended Number").
(b) Piggyback Registration.
(i) In the event the Company proposes to file a Registration Statement
with respect to its Common Stock, whether of its own accord or at the
request of any holder or holders of such securities, it will give written
notice to the Eligible Holders of the Company's intention to do so and,
upon the written request of any of the Eligible Holders given within 7 days
after receipt of such notice, the Company will use its best efforts to
effect the registration of the Eligible Common Stock of the requesting
Eligible Holder (the "Piggyback Securities") which it shall have been so
requested to register by including such Piggyback Securities in the
Registration Statement ("Piggyback Registration Rights"). Piggyback
Securities are to be included in the Registration Statement on the same
terms and conditions as the shares of Common Stock otherwise being sold
through underwriters under such Registration Statement; unless the managing
underwriter or underwriters of any proposed underwritten offering
determines and advises the Company that the inclusion in the Registration
Statement of some or all Piggyback Securities proposed to be included would
cause the proceeds or price per share the Company or the requesting or
demanding holder of Common Stock will derive from such registration to be
reduced or that the number of securities to be registered at the instance
of the Company or such requesting or demanding holder plus the number of
shares sought to be registered by the requesting Eligible Holder is too
large a number to be reasonably sold or will materially and adversely
affect the success of the offering. If, in such opinion of such managing
underwriter or underwriters, not all of the Common Stock requested to be
included should be included in such registration, then the number of
securities to be included in such registration will be reduced as set forth
below:
(A) the number of shares of Common Stock sought to be registered
by any holders of shares of Common Stock other than the Eligible
Holders and holders of Common Stock at whose instance the registration
is being made shall be reduced to the extent necessary to reduce the
number of securities to be registered to the Recommended Number;
(B) if the reduction provided for in clause (A) above does not
reduce the number of shares of Common Stock to be registered to the
Recommended Number and the registration is at the instance of
(x) the Company, then the number of Piggyback Securities sought
to be registered by the Eligible Holders shall be reduced to the
extent necessary to reduce the number of securities to be registered
to the Recommended Number; or
(y) any holder of Common Stock that is granted registration
rights after the date of this Agreement (a "New Holder"), then the
number of shares of Common Stock sought to be registered by the New
Holder and the Eligible Holders shall be reduced in accordance with
their relative rights to the extent necessary to reduce the number
of shares of Common Stock to be registered to the Recommended
Number, but in any event the reduction in Piggyback Securities shall
not be greater than pro rata in proportion to the number of
Piggyback Securities and other shares of Common Stock sought to be
registered by such holders.
(ii) In connection with any offering by the Company to which the
Eligible Holders have Piggyback Registration Rights, the Company, in its
sole discretion, shall determine (A) whether to initiate, proceed with or
terminate such registration, (B) the pricing (including underwriting
discounts and
E-3
<PAGE>
commissions) for such offering and (C) the timing of such offering. The
Company may withdraw any Registration Statement and abandon any proposed
sale of Common Stock without the consent of the Eligible Holders,
notwithstanding the request of the Eligible Holders to participate therein
in accordance with this Agreement, if the Company determines in its sole
discretion to so withdraw and abandon such proposed sale.
(iii) The rights set forth in this Section 3(b) shall be unlimited and
exercisable with any Registration Statement covering Common Stock.
Section 4. Holdback Agreements.
(a) Each of the Eligible Holders agrees, and any transferee of the Eligible
Holders, by acceptance of any Eligible Common Stock agrees, that if it is
requested by the managing underwriter or underwriters in an underwritten
offering, not to effect any public or private sale or distribution of
securities of the Company of the same class as the securities included in the
Registration Statement, during the period requested by the managing
underwriters but not to exceed the shorter of (i) the period agreed to by the
Company or management of the Company or (ii) 120 days, beginning on the
effective date of such Registration Statement, including a sale pursuant to
Rule 144 or Rule 144A under the Securities Act, to the extent timely notified
in writing by the Company or the managing underwriters.
(b) The Company agrees (i) if requested by the managing underwriter or
underwriters of an underwritten public offering pursuant to Section 3(a), not
to effect a public or private sale or distribution of its Common Stock, or any
securities convertible into or exchangeable for such securities (other than any
such sale or distribution of such securities in connection with any merger or
consolidation by the Company or a subsidiary thereof or the acquisition by the
Company or a subsidiary thereof of the capital stock or substantially all of
the assets of any other Person) during the period requested by the managing
underwriters but not to exceed 120 days beginning on, the effective date of any
Registration Statement filed pursuant to Section 3(a) hereof and (ii) that any
agreement entered into after the date hereof pursuant to which the Company
issues or agrees to issue any privately placed Common Stock or securities
convertible into or exchangeable for Common Stock shall contain a provision
under which holders of such securities agree, and the Company shall use its
reasonable efforts to cause any existing holders of its privately placed equity
securities to agree, that if it is requested by the managing underwriter or
underwriters in an underwritten offering, not to effect any public sale or
distribution of any such securities during the 30 day period prior to, and
during the applicable period requested by such underwriters beginning on, the
effective date of any Registration Statement, including a sale pursuant to Rule
144 or Rule 144A under the Securities Act (except pursuant to a Registration
Statement); provided, however, that the provisions of this paragraph (b) shall
not prevent (i) the conversion or exchange of any securities that the Company
is obligated to make pursuant to an agreement existing on the date hereof or
hereafter adopted by the Board of Directors, (ii) the exercise of warrants by
the holders thereof and (iii) grants and exercises of options pursuant to any
stock option plans or employee incentive plans of the Company.
Section 5. Registration Procedures.
In connection with the Company's registration obligations pursuant to
Section 3 hereof, the Company will use its best efforts to effect the
registration of the Eligible Common Stock in accordance with the intended
method or methods of distribution thereof, and pursuant thereto the Company
shall:
(a) prepare and file with the SEC, as soon as practicable after receipt
of a Demand, a Registration Statement on the appropriate form under the
Securities Act, which form shall be available for the sale of the Eligible
Common Stock in accordance with the intended method or methods of
distribution thereof and shall include all financial statements and other
information required by the SEC to be filed therewith, and use its best
efforts to cause such Registration Statement to become and remain
effective; provided, that notwithstanding the foregoing, the Company shall
not be required to file a Registration Statement
E-4
<PAGE>
within a period of 135 days after the effective date of any other
Registration Statement for Eligible Stock other than a Registration
Statement on Form S-3; and further provided that no Registration Statement
will be filed by the Company until one counsel for Sellers shall have had a
reasonable opportunity to review the same and the right to reasonably
approve or disapprove any portion of such Registration Statement describing
or referring to Sellers;
(b) prepare and file with the SEC such amendments to the Registration
Statement as may be necessary to keep the Registration Statement effective
until the distribution of the Eligible Common Stock under the Registration
Statement is complete (which period shall not be required to exceed 270
days from the date the Registration Statement is declared effective)(such
270-day period to be extended by the number of days during which either (i)
any stop order suspending the effectiveness of such Registration Statement
shall be in effect or (ii) the Sellers or the underwriters, if any, shall
be prohibited from consummating sales pursuant to such Registration
Statement or the Prospectus pursuant to the penultimate paragraph of this
Section 5); cause the Prospectus to be supplemented by any required
prospectus supplement, and as so supplemented to be filed pursuant to Rule
424 under the Securities Act; and comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by
such Registration Statement;
(c) notify the Sellers and the managing underwriters, if any, (i) when
the Registration Statement has become effective and when any post-effective
amendment or supplements thereto become effective, (ii) of the issuance by
the SEC of any stop order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for the purpose, (iii) of
the receipt by the Company of any notification with respect to the
suspension of the qualification of the Eligible Common Stock for sale in
any jurisdiction or the initiation or threatening of any proceeding for
such purpose and (iv) during the period when the Registration Statement is
required to be effective, of the happening of any event as a result of
which the Prospectus included in the Registration Statement contains an
untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading, and the Company will forthwith prepare a supplement or
amendment to such Prospectus so that, as thereafter delivered to the
purchasers of such Eligible Common Stock, such Prospectus will not contain
an untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading;
(d) use its best efforts to obtain the withdrawal of any order
suspending the effectiveness of the Registration Statement at the earliest
possible time;
(e) furnish to Sellers, prior to filing a Registration Statement, copies
of such Registration Statement as proposed to be filed, each amendment and
supplement thereto, and the Prospectus included in such Registration
Statement (including each preliminary prospectus), which documents shall be
subject to the reasonable opportunity to review and approve of Sellers,
which approval shall not be unreasonably withheld;
(f) furnish to Sellers such number of copies of reports on Forms 10-K,
Form 10-Q and Form 8-K (or their equivalents) which the Company shall have
filed with the Commission and such financial statements, reports and proxy
statements mailed to stockholders of the Company as Sellers may reasonably
request in order to facilitate the disposition of the Eligible Common Stock
being offered;
(g) deliver to Sellers and each underwriter, if any, without charge, as
many copies of the Prospectus (including each preliminary prospectus) and
any amendment or supplement thereto as Sellers may reasonably request;
(h) prior to any public offering of Eligible Common Stock, use its best
efforts to register or qualify or cooperate with Sellers, the underwriters,
if any, and their respective counsel in connection with the registration or
qualification of such Eligible Common Stock for offer and sale under the
securities or blue sky laws of such jurisdictions as Sellers or any
underwriter reasonably requests in writing; provided that the Company will
not be required to (i) qualify generally to do business in any jurisdiction
where it is not then so qualified or (ii) take any action which would
subject it to general service of process or taxation in any such
jurisdiction where it is not then so subject;
E-5
<PAGE>
(i) cooperate with Sellers and the managing underwriters, if any, to
facilitate the timely preparation and delivery of certificates representing
the Eligible Common Stock to be sold; and enable such Eligible Common Stock
to be in such denominations and registered in such names as the managing
underwriters or Sellers, as the case may be, may request at least five
business days prior to any sale of the Eligible Common Stock;
(j) list all the Eligible Common Stock covered by the Registration
Statement on each securities exchange or automated quotation system, if
any, on which the Common Stock is then listed if requested by Sellers or by
the managing underwriters and such listing is permitted under the rules of
such exchange or automated quotation system, if any;
(k) if requested by Sellers, enter into an underwriting agreement with
an underwriter or underwriters providing for the sale of such Eligible
Common Stock in an underwritten offering which shall be customary in form,
substance and scope and shall contain customary requirements for
representations, warranties, covenants, opinions of counsel and
indemnification and contribution;
(l) make available upon reasonable notice and during business hours, for
inspection by a representative of Sellers and an underwriter, if any,
participating in any disposition pursuant to the Registration Statement,
and any attorney, accountant or other agent retained by Sellers or an
underwriter, all relevant financial and other records, pertinent corporate
documents and properties of the Company, and cause the Company's officers,
directors and employees to answer questions and to supply all information
reasonably requested by any such representative, underwriter, attorney,
accountant or agent in connection with such Registration Statement as shall
be reasonably necessary to enable them to exercise their due diligence
responsibilities; provided, however, that any records, information or
documents shall be kept confidential by such representative, underwriter,
attorney, accountant or agent unless disclosure of such records,
information or documents is required by securities laws in connection with
the sale of such Eligible Common Stock or by court or administrative order;
and provided, further, if such representative, underwriter, attorney,
accountant or agent is ordered to disclose any of such records, documents
or information, such representative, underwriter, attorney, accountant or
agent will provide the Company with prompt written notice of such
requirement so that the Company at its expense may seek a protective order
or other appropriate remedy and/or waive compliance with this Agreement. In
the event that such protective order or other remedy is not timely
obtained, or that the Company timely waives compliance with the provisions
hereof, such representative, underwriter, attorney, accountant or agent
agrees to furnish only that portion of such records, documents or
information which such representative, underwriter, attorney, accountant or
agent is legally required to disclose in the opinion of the special counsel
or counsel representing such representative, underwriter, accountant or
agent;
(m) otherwise use its best efforts to comply with all applicable rules
and regulations of the SEC, and make generally available to its security
holders earnings statements no later than 45 days after the end of any 12-
month period (or 90 days, if such period is a fiscal year) commencing at
the end of any fiscal quarter in which Eligible Common Stock is sold to
underwriters in an underwritten offering, which statements shall cover said
12-month period and shall satisfy the provisions of Section 11(a) of the
Securities Act; and
(n) furnish or cause to be furnished to Sellers any opinions of counsel
or customary accountants' "cold comfort" letters that might be reasonably
requested by Sellers and/or the underwriters, if any, in connection with
any registration of Eligible Common Stock in a Registration Statement and
take all such other reasonable actions in connection with such registration
to expedite or facilitate the disposition of the Eligible Common Stock as
contemplated by the Registration Statement and the related underwriting
agreement contemplated by Section 5(k).
The Company may require Sellers (i) to furnish to the Company such
information regarding Sellers and the distribution of the Eligible Common Stock
as may be required for inclusion in the Registration Statement and (ii) (A) in
connection with any Demand, to enter into an underwriting agreement in the form
and substance reasonably satisfactory to Sellers, (B) in connection with any
registration of Piggyback Securities with respect to any Registration Statement
filed by the Company of its own accord, to enter into an
E-6
<PAGE>
underwriting agreement in the form contemplated by Section 5(k); provided that
the Company uses its reasonable efforts to negotiate that the indemnification
and contribution provisions of any such underwriting agreement be substantially
as set forth in Section 7 hereof, or (C) in connection with any other
registration of Piggyback Securities, to enter into an underwriting agreement
in the form contemplated by Section 5(k).
Sellers agree that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 5(c) hereof, Sellers
will forthwith discontinue the offering and disposition of Eligible Common
Stock covered by such Registration Statement or Prospectus (i) until Sellers'
receipt of the copies of the supplemented or amended Prospectus contemplated by
Section 5(c) hereof or (ii) until Sellers are advised in writing (the "Advice")
by the Company that the use of the Prospectus may be resumed, and have received
copies of any additional or supplemental filings which are incorporated by
reference in the Prospectus, and, if so directed by the Company, Sellers will
deliver to the Company all copies, other than permanent file copies then in
Sellers' possession, of the Prospectus covering such Eligible Common Stock
current at the time of receipt of such notice. In the event the Company shall
give any such notice to suspend the offering and disposition of the Eligible
Common Stock, the time periods regarding the maintenance of the applicable
Registration Statement shall be extended by the number of days during the
period from and including the date of the giving of such notice pursuant to
Section 5(c) hereof to and including the date when Sellers shall have received
the copies of the supplemented or amended Prospectus hereof or the Advice.
Notwithstanding the foregoing, (a) the Company may delay the filing of any
Registration Statement, any amendment thereof or any supplement to the related
Prospectus, and may withhold efforts to cause any Registration Statement to
become effective, and (b) in the case of an effective Registration Statement,
upon the request of the Company, the holders of Eligible Common Stock
participating in such registration shall refrain from selling any shares
pursuant to such Registration Statement, if (i) the Company's Board of
Directors determines in good faith that such registration or sale would (A)
interfere with or adversely affect the negotiation or completion of any
material transaction that is being pursued by the Company at the time the
demand is made, (B) involve initial or continuing disclosure obligations with
respect to material non-public information not otherwise required by law or the
rules and regulations of the SEC, which disclosure would have a material
adverse effect on the Company or (C) would require the conduct of an audit
other than the regular audit conducted by the Company at the end of its fiscal
year, in which case the filing may be delayed until the completion of such
regular audit (unless Sellers agree to pay all expenses of the Company in
connection with such additional audit), or (ii) in the written opinion of a
nationally recognized investment bank with experience in the energy industry
and reasonably acceptable to Sellers, that the Company is unable to consummate
an underwritten offering on reasonable terms due to then currently prevailing
market conditions; provided however, that the duration of any such delay or
period in which shares of Eligible Common Stock may not be sold pursuant to an
effective Registration Statement shall only be for a reasonable period of time
(not to exceed a period of 135 days) and there shall not be more than one such
delay per calendar year).
Section 6. Registration Expenses.
All expenses incident to the Company's performance of or compliance with
this Agreement, including without limitation SEC, state and foreign
registration and filing fees, fees with respect to filings required to be made
with the National Association of Securities Dealers, Inc., printing expenses,
and fees and disbursements of counsel for the Company and one separate counsel
of Sellers, which for a Piggyback Registration by Sellers will constitute one
separate counsel for all holders selling Common Stock, and of all independent
certified public accountants of the Company (including the expenses of any
special audit and "cold comfort" letters required by or incident to such
performance), fees and expenses incurred in connection with any underwritten
offering, fees and expenses of independent engineering reports and other
experts and the fees and expenses incurred in connection with the listing of
the securities to be registered on each securities exchange on which similar
securities issued by the Company are then listed, in connection with the Demand
Registration and Piggyback Registration will be borne by the Company whether or
not any such Registration Statement becomes effective, provided that all
underwriting discounts and selling commissions applicable to the sale of the
Eligible
E-7
<PAGE>
Common Stock and all other expenses of Sellers incurred in connection with the
distribution of Eligible Common Stock (including all salaries of its officers
and employees and all relevant taxes, including transfer taxes) will be borne
by Sellers.
Section 7. Indemnification; Contribution.
(a) Indemnification by the Company. The Company agrees to indemnify and hold
harmless each Person who participates as an underwriter (any such Person, an
"Underwriter") and Sellers and each of their respective directors and officers
and each other Person, if any, who controls Sellers or any Underwriter within
the meaning of the Securities Act as follows: (i) against any and all loss,
liability, claim, damage and expense, joint or several, whatsoever, as
incurred, arising out of any untrue statement or alleged untrue statement of a
material fact contained in any Registration Statement (or any amendment
thereto) pursuant to which Eligible Common Stock was registered under the
Securities Act, including all documents incorporated therein by reference, or
the omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein not misleading or
arising out of any untrue statement or alleged untrue statement of a material
fact contained in any Registration Statement (or any amendment or supplement
thereto), including all documents incorporated therein by reference, or the
omission or alleged omission therefrom of a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; (ii) against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or investigation or proceeding by
any governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, if such settlement is effected with the
written consent of the Company, such consent not to be unreasonably withheld;
and (iii) against any and all expense whatsoever, as incurred (including,
subject to the provisions of Section 7(c), fees and disbursements of counsel),
reasonably incurred in investigating, preparing or defending against any
litigation, or investigation or proceeding by any governmental agency or body,
commenced or threatened, in each case whether or not a party, or any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, to the extent that any such expense is
not paid under (i) or (ii) above; provided, however, that the Company shall not
be liable in any such case to the extent that any such loss, liability, claim,
damage, liability or expense arises out of or is based upon an untrue statement
or alleged untrue statement or alleged omission in a Prospectus, if such untrue
statement or alleged untrue statement, omission or alleged omission is
corrected in an amendment or supplement to such Prospectus and Sellers or the
Underwriter, as the case may be, thereafter fails to deliver such Prospectus as
so amended or supplemented prior to or concurrently with the sale by Sellers or
the Underwriter, as the case may be, of the Eligible Common Stock to the Person
asserting such loss, liability, claim, damage, or expense if the Company had
furnished Sellers or the Underwriter, as the case may be, within a reasonable
period of time prior to such sale with the number of copies of such amended or
supplemented Prospectus reasonably requested by Sellers or the Underwriter, as
the case may be; and provided, further, that this indemnity agreement does not
apply to Sellers or any Underwriter with respect to any loss, liability, claim,
damage or expense to the extent arising out of any untrue statement or omission
or alleged untrue statement or omission made in reliance upon and in conformity
with information furnished in writing to the Company by Sellers or any
Underwriter specifically for inclusion in a Registration Statement (or any
amendment thereto) or any Prospectus (or any amendment or supplement thereto).
(b) Indemnification by Sellers. Sellers agree to jointly and severally
indemnify and hold harmless the Company and each Underwriter, if any, and each
of their respective directors and officers (including each officer and director
of the Company who signed the Registration Statement), and each other Person,
if any, who controls the Company or any Underwriter within the meaning of the
Securities Act, against any and all loss, liability, claim, damage and expense
described in the indemnity contained in Section 7(a) hereof, as incurred, but
only with respect to untrue statements or omissions, or alleged untrue
statements or omissions, made in a Registration Statement (or any amendment
thereto) or any Prospectus (or any amendment or supplement thereto) in reliance
upon and in conformity with information regarding Sellers furnished in writing
to the Company by Sellers specifically for inclusion in such Registration
Statement (or any amendment
E-8
<PAGE>
thereto) or such Prospectus (or any amendment or supplement thereto); provided,
however, that Sellers shall not be obligated to provide such indemnity to the
extent that such losses, liabilities, claims, damages, and expenses result,
directly or indirectly, from the failure of the Company to promptly amend or
take action to correct or supplement any such Registration Statement,
Prospectus, amendment or supplement based on corrected or supplemental
information promptly provided in writing by Sellers to the Company for such
purpose and the Company thereafter fails to furnish to Sellers or the
Underwriter, as the case may be, such Prospectus as so amended or supplemented
within a reasonable period of time, the number of copies of such amended or
supplemented Prospectus requested by Sellers or the Underwriter, as the case
may be, prior to or concurrently with the sale by Sellers or the Underwriter,
as the case may be, of the Eligible Common Stock to the person asserting such
loss, liability, claim, damage or expense. This indemnity shall be in addition
to, and not in lieu of any liability that Sellers may otherwise have.
(c) Conduct of Indemnification Proceedings. Each indemnified party shall
give prompt notice to each indemnifying party of any action or proceeding
commenced against it in respect of which indemnity may be sought hereunder, but
failure to so notify an indemnifying party shall not relieve it from any
liability which it may have under this indemnity agreement unless the
indemnifying party is materially prejudiced by such failure. If the
indemnifying party so elects within a reasonable time after receipt of such
notice, the indemnifying party may assume the defense of such action or
proceeding at such indemnifying party's own expense with counsel chosen by the
indemnifying party and approved by the indemnified parties defendant in such
action or proceeding, which approval shall not be unreasonably withheld;
provided, however, that, if such indemnified party or parties reasonably
determine that a conflict of interest exists where it is advisable for such
indemnified party or parties to be represented by separate counsel or that,
upon advice of counsel, there may be legal defenses available to them which are
different from or in addition to those available to the indemnifying party,
then the indemnifying party shall not be entitled to assume the defense and the
indemnified party or parties shall be entitled to one separate counsel chosen
by the indemnified party or parties. If an indemnifying party is not entitled
to assume the defense of such action or proceeding as a result of the proviso
to the preceding sentence, such indemnifying party's counsel shall be entitled
to conduct such indemnifying party's defense and counsel for the indemnified
party or parties shall be entitled to conduct the defense of such indemnified
party or parties, it being understood that both such counsel will cooperate
with each other to conduct the defense of such action or proceeding as
efficiently as possible. If an indemnifying party is not so entitled to assume
the defense of such action or does not assume such defense, after having
received the notice referred to in the first sentence of this paragraph, the
indemnifying party or parties will pay the reasonable fees and expenses of
counsel for the indemnified party or parties. In such event, however, no
indemnifying party will be liable for any settlement effected without the
written consent of such indemnifying party, which consent shall not be
unreasonably withheld. If an indemnifying party is entitled to assume, and
assumes, the defense of such action or proceeding in accordance with this
paragraph, such indemnifying party shall not be liable for any fees and
expenses of counsel for the indemnified parties incurred thereafter in
connection with such action or proceeding.
(d) Contribution. If for any reason the indemnification provided for in the
preceding subsections (a) and (b) of this Section 7 is unavailable to an
indemnified party or insufficient to hold it harmless as contemplated by such
preceding subsections, then the indemnifying party shall contribute to the
amount paid or payable by the indemnified party as a result of such
unavailability or insufficiency in proportion as is appropriate to reflect not
only the relative benefits received by the indemnified party and the
indemnifying party, but also the relative fault of the indemnified party and
the indemnifying party, as well as any other relevant equitable considerations,
provided that Sellers shall not be required to contribute in any amount greater
than the dollar amount of the proceeds received by Sellers with respect to the
sale of any Eligible Common Stock. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
(e) Investigation. Such indemnity provided in this Section 7 shall remain in
full force and effect regardless of any investigation made by or on behalf of
Sellers, the Underwriter, or such director, officer or
E-9
<PAGE>
controlling Person of Sellers or the Underwriter, or by or on behalf of the
Company, its officers or directors or any other Person controlling the Company
and shall survive the transfer of such securities by Sellers.
Section 8 Rule 144 and Rule 144A.
The Company covenants that it will provide the information required pursuant
to Rule 144A and Rule 144 under the Securities Act upon the request of Sellers
and it will take such further action as Sellers may reasonably request,
including, without limitation, the timely filing of all reports as required
with the SEC in order to enable Sellers, if they so elect, to utilize Rule 144
or Rule 144A, as such Rules may be amended from time to time or any similar
rules or regulations hereafter adopted by the SEC.
Section 9 Participation in Underwritten Registrations.
(a) The investment banker or investment bankers and manager or managers, if
any, that will administer the registration of the Eligible Common Stock
pursuant to a Demand will be selected by the Company; provided that such
investment bankers and managers must be reasonably satisfactory to the Eligible
Holders holding a majority of the Eligible Common Stock.
(b) The Company will not permit any other Person to participate in any
underwritten registration hereunder unless such Person (x) agrees to sell such
Person's securities on the basis provided in any underwriting arrangements
approved by the Persons entitled hereunder to approve such arrangements and (y)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required under the terms of such
underwriting arrangements. Nothing in this Section 9 shall be construed to
create any additional rights regarding the registration of Eligible Common
Stock in any Person otherwise than as set forth herein.
Section 10 Miscellaneous.
(a) No Inconsistent Agreements. The Company will not on or after the date of
this Agreement enter into any agreement with respect to its securities which
conflicts with the provisions hereof.
(b) Amendments and Waivers. The provisions of this Agreement may be amended,
modified or supplemented, and the Company may take any action herein
prohibited, or omit to perform any act herein required to be performed by it,
only if the Company shall have obtained the written consent to such amendment,
modification, supplement, action or omission to act of the Eligible Holders of
50% of the then outstanding shares of Eligible Common Stock.
(c) Notices. All notices and other communications provided for or permitted
hereunder shall be made in writing by hand delivery, registered first-class
mail, telex, telecopier, or air courier guaranteeing overnight delivery:
(i) if to the EnCap Purchasers, to the addresses set forth on the
signature pages; and
(ii) if to the Company, to the addresses set forth on the signature
pages.
All such notices and communications shall be deemed to have been duly given:
at the time delivered by hand, if personally delivered; five business days
after being deposited in the mail, postage prepaid, if mailed; when answered
back, if telexed; when receipt acknowledged, if telecopied; and on the next
business day, if timely delivered to any air courier guaranteeing overnight
delivery. The notice addresses may be changed at any time by notice given in
accordance with these provisions.
(d) Assignment of Registration Rights. Except as otherwise provided below,
no party may assign this Agreement or any of the rights and obligations of the
parties hereunder without the prior written consent of the other party:
(i) any EnCap Purchaser may assign to a Permitted Transferee the right
to participate with the EnCap Purchasers in any registration of Eligible
Common Stock held by the EnCap Purchasers pursuant to Section 3 hereof;
E-10
<PAGE>
(ii) any EnCap Purchaser may assign this Agreement and all or a
proportionate part of its rights and obligations hereunder to a Permitted
Transferee who acquires from such EnCap Purchaser all or a proportionate
part of the shares of Eligible Common Stock owned by the EnCap Purchaser,
respectively; or
(iii) a party may assign this Agreement and all its rights and
obligations under this Agreement to the assignee of all or substantially
all of the assets of such party including an acquisition through merger,
provided that such party shall in no event be released from its obligations
hereunder without the prior written consent of the other party.
(e) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(f) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(g) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT TO SUCH
JURISDICTION'S CONFLICTS OF LAW PROVISIONS.
(h) Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
such provision in every other respect and of the remaining provisions contained
herein shall not be affected or impaired thereby.
(i) Entire Agreement. This Agreement is intended by the parties as a final
expression of their agreement and intended to be complete and exclusive
statement of the agreement and understanding of the parties hereto in respect
of the subject matter contained herein. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
E-11
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
SOUTHERN MINERAL CORPORATION
a Nevada corporation
By:
----------------------------------
Steven H. Mikel
President
Address for Notices
Southern Mineral Corporation
1201 Louisiana, Suite 3300
Houston, Texas 77002-5609
Attention: President
Telephone: (713) 658-9444
Facsimile: (713) 658-0016
ENCAP ENERGY CAPITAL FUND III, L.P.
By EnCap Investments L.L.C., its
General Partner
By:
----------------------------------
D. Martin Phillips
Managing Director
ENCAP ENERGY CAPITAL FUND III-B, L.P.
By EnCap Investments L.L.C., its
General Partner
By:
----------------------------------
D. Martin Phillips
Managing Director
ENERGY CAPITAL INVESTMENT COMPANY,
PLC
By:
----------------------------------
Gary R. Petersen
Director
BOCP ENERGY PARTNERS, L.P.
By EnCap Investments L.L.C., its
General Partner
By:
----------------------------------
Name:
--------------------------------
Title:
---------------------------------
E-12
<PAGE>
Address for Notices
c/o EnCap Investments L.L.C.
1100 Louisiana Suite 3150
Houston, Texas 77002
Attention: Robert L. Zorich
Telephone: (713) 659-6100
Facsimile: (713) 659-6130
with a copy to:
Thompson & Knight
1700 Chase Tower
600 Travis Street
Houston, Texas 77002
Attention: Michael K. Pierce
Telephone: (713) 217-2800
Facsimile: (713) 217-2828
E-13
<PAGE>
Exhibit A
ADDITIONAL PARTY COUNTERPART
The undersigned, after having received and reviewed to its satisfaction a
copy of the Registration Rights Agreement, dated as of , 1999 (the
"Registration Rights Agreement"), by and among Southern Mineral Corporation
(the "Company") and the EnCap Purchasers, does hereby agree to become party to
the Registration Rights Agreement thereby accepting all the rights, benefits
and obligations of a holder of Eligible Common Stock thereunder. The Company
may attach this page as a counterpart to the Registration Rights Agreement and
the undersigned agrees that such attachment shall be deemed conclusive evidence
of its acknowledgment and acceptance of the terms thereof.
Defined terms used herein and not otherwise defined herein shall have the
meaning given such terms in the Registration Rights Agreement.
Dated:
[NAME]
[ADDRESS FOR NOTICES]
By:
----------------------------------
Name:
Title:
Acknowledged and Accepted this
day of , By:
SOUTHERN MINERAL CORPORATION
By:
-------------------------------
Name:
Title:
E-14
<PAGE>
ANNEX F
WARRANT AGREEMENT
This WARRANT AGREEMENT (the "Agreement") is made and dated as of , 1999, by
and between Southern Mineral Corporation, a Nevada corporation (the "Company"),
and American Stock Transfer and Trust Company, a New York corporation, with
offices at 40 Wall Street, New York, New York 10005, as Warrant Agent (the
"Warrant Agent").
RECITALS:
WHEREAS, the Company proposes to issue up to Common Stock Purchase
Warrants (which amount may be increased by an amount not to exceed Warrants to
accommodate the rounding up of fractional Warrants, if the Company so elects,
as hereinafter described (the "Warrants"), to purchase shares of newly issued
Common Stock, par value $.01 per share (the "Common Stock"), of the Company
(the Common Stock issuable on exercise of the Warrants are referred to herein
as the "Warrant Shares"). The Warrants will be issued to holders of the
Company's 6.875% Convertible Subordinated Debentures due 2007 (the "Convertible
Debentures") (the "Recipients") as partial consideration for the exchange of
such Convertible Debentures pursuant to the exchange offer described in the
Company's Registration Statement on Form S-4, as amended (Registration No. 333-
).
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance of Warrant Certificates (as defined below) and other matters as
provided herein;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto agree as follows:
Section 1. Appointment of Warrant Agent. The Company hereby appoints the
Warrant Agent to act as agent for the Company in accordance with the
instructions set forth hereinafter in this Agreement, and the Warrant Agent
hereby accepts such appointment. The Warrant Agent shall have the power and
authority granted to and conferred upon it in the Warrant Certificates (as
defined below) and hereby and such further powers and authority to act on
behalf of the Company as the Company may hereafter grant to or confer upon it.
All terms and provisions with respect to such powers and authority contained in
the Warrant Certificate are subject to and governed by the terms and provisions
hereof.
Section 2. Warrant Certificates. The certificates evidencing the Warrants
(the "Warrant Certificates") to be delivered pursuant to this Agreement shall
be in registered form, shall be substantially in the form set forth in Exhibit
A attached hereto, and may have such letters, numbers or other marks of
identification or designation and such legends or endorsements printed,
lithographed or engraved thereon as the officers of the Company executing the
same may approve (execution thereof to be conclusive evidence of such
approval), and as are not inconsistent with the provisions of this Agreement,
or as may be required to comply with any law or with any rule or regulation
made pursuant thereto or with any rule or regulation of any stock exchange or
quotation system on which the Warrants may be listed or traded, or to conform
to usage.
Section 3. Execution of Warrant Certificates. Warrant Certificates shall be
signed on behalf of the Company by its Chairman of the Board or President, or a
Vice President under its corporate seal. Each such signature upon the Warrant
Certificates may be in the form of a facsimile signature of any present or
future Chairman of the Board, President or Vice President, and may be imprinted
or otherwise reproduced on the Warrant Certificates and for that purpose the
Company may adopt and use the facsimile signature of any person who shall have
been Chairman of the Board, President or Vice President, notwithstanding the
fact that at the
F-1
<PAGE>
time the Warrant Certificates shall be countersigned and delivered or disposed
of he or she shall have ceased to hold such office. The seal of the Company may
be in the form of a facsimile thereof and may be impressed, affixed, imprinted
or otherwise reproduced on the Warrant Certificates.
In case any officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be such officer before the Warrant Certificates so
signed shall have been countersigned by the Warrant Agent, or disposed of by
the Company, such Warrant Certificates nevertheless may be countersigned and
delivered or disposed of as though such person had not ceased to be such
officer of the Company; and any Warrant Certificate may be signed on behalf of
the Company by any person who, at the actual date of the execution of such
Warrant Certificate, shall be a proper officer of the Company to sign such
Warrant Certificate, although at the date of the execution of this Warrant
Agreement any such person was not such an officer.
Warrant Certificates shall be dated the date of countersignature by the
Warrant Agent.
Section 4. Registration and Countersignature. The Warrant Agent, on behalf
of the Company, shall number and register the Warrant Certificates in a
register (the "Warrant Register") as they are issued by the Company. The
Warrant Register shall be kept at the office of the Warrant Agent designated
for such purpose and shall be in written form in the English language or in any
other form capable of being converted into such form within a reasonable time.
Subject to the limitations set forth in the immediately succeeding
paragraph, Warrant Certificates shall be manually countersigned by the Warrant
Agent and shall not be valid for any purpose unless so countersigned. The
Warrant Agent shall, upon written instructions of the Chairman of the Board,
the President, a Vice President, the Treasurer or the Controller of the
Company, initially countersign, issue and deliver Warrants entitling the
holders thereof (each, a "Holder" or "Warrant Holder") to purchase the Warrant
Shares referred to above in the first recital hereof and shall countersign and
deliver Warrants as otherwise provided in this Agreement.
Up to Warrant Certificates (which amount may be increased by an amount
not to exceed Warrant Certificates to accommodate the rounding up of
fractional shares under the Prepackaged Plan) may be executed by the Company
and delivered to the Warrant Agent upon the execution of this Agreement or from
time to time thereafter, evidencing the right to receive a like number of
Warrant Shares. Subsequent to such original issuance of the Warrant
Certificates, the Warrant Agent shall countersign a Warrant Certificate only if
the Warrant Certificate is issued upon registration of transfer or in exchange
or substitution for one or more previously countersigned Warrant Certificates,
as hereinafter provided.
In case at any time the name of the Warrant Agent shall be changed
(including by operation of Section 15), and at such time any of the Warrant
Certificates shall be countersigned, but not delivered, the Warrant Agent may
adopt the countersignature under its prior name; and in case at that time any
of the Warrant Certificates shall not have been countersigned, the Warrant
Agent may countersign such Certificates either in its prior name or in its
changed name and in all such cases such Warrant Certificates shall have the
full force provided in the Warrant Certificates and in this Agreement.
The Company, the Warrant Agent and all other Persons (as hereinafter
defined) may deem and treat the registered Holder of the Warrant Certificates
as the absolute owner(s) thereof (notwithstanding any notation of ownership or
other writing thereon made by anyone), for all purposes, and neither the
Company, the Warrant Agent, nor any other Person shall be affected by any
notice to the contrary. As used in this Agreement, the term "Person" means any
individual, sole proprietorship, joint venture, partnership, corporation,
association, cooperative, trust, estate, governmental body, administrative
agency, regulatory authority or other entity of any nature.
Section 5. Registration of Transfers and Exchanges. The Warrant Agent shall
from time to time register the transfer of any outstanding Warrant Certificates
in the Warrant Register, upon surrender thereof (together with the form of
assignment on the reverse side thereof duly filled in) to the Warrant Agent at
its office
F-2
<PAGE>
designated for such purpose accompanied (if so required by it or the Company)
by a written instrument or instruments of transfer (which shall be in a form
reasonably satisfactory to the Warrant Agent and the Company), duly executed by
the registered Holder or Holders thereof or by the duly appointed legal
representative thereof, or by a duly authorized attorney. Upon any such
registration of transfer, a new Warrant Certificate or Warrant Certificates (of
like tenor and representing in the aggregate a like number of Warrants) shall
be issued to the transferee(s) and the surrendered Warrant Certificate or
Warrant Certificates shall be canceled by the Warrant Agent. Canceled Warrant
Certificates shall thereafter be disposed of by such Warrant Agent in a manner
satisfactory to the Company.
Warrant Certificates may be exchanged at the option of the Holder thereof,
when surrendered to the Warrant Agent at its office designated for such
purpose, for another Warrant Certificate or other Warrant Certificates of like
tenor and representing in the aggregate a like number of Warrants. Warrant
Certificates surrendered for exchange shall be canceled by the Warrant Agent.
Such canceled Warrant Certificates shall thereafter be disposed of by such
Warrant Agent in a manner satisfactory to the Company.
The Warrant Agent is hereby authorized to countersign, in accordance with
the provisions of Section 4 and this Section 5, the new Warrant Certificates
required pursuant to the provisions of this Section 5, and the Company,
whenever requested by the Warrant Agent, will supply the Warrant Agent with
Warrant Certificates duly executed on behalf of the Company for such purposes.
The Company may require payment of a sum sufficient to cover such reasonable
charges (including, without limitation, any tax or other governmental charge
that may be imposed and the fees and expenses of the Warrant Agent) as the
Company or the Warrant Agent may prescribe in connection with any exchange or
registration of transfer of Warrant Certificates.
Section 6. Terms of Warrants; Exercise of Warrants. Subject to the terms of
this Agreement, each Warrant Holder shall have the right, which may be
exercised commencing at any time until 5:00 p.m., New York City time, on the
third anniversary of the Issuance Date, to purchase from the Company the number
of fully paid and nonassessable Warrant Shares that the Holder may at the time
be entitled to receive (the "Exercise Quantity") on exercise of such Warrants
and payment of the Exercise Price (as defined below) then in effect for such
Warrant Shares. Each Warrant not exercised prior to 5:00 p.m., New York City
time, on the third anniversary of the Issuance Date, shall become void and all
rights thereunder and all rights in respect thereof under this Agreement and
the Warrant Certificates shall cease as of such time. If the date on which the
Warrants expire (i.e., the third anniversary of the Issuance Date) shall not be
a business day, the Warrants shall expire on the next succeeding business day.
A Warrant may be exercised upon surrender to the Company at the office of
the Warrant Agent designated for such purpose of the Warrant Certificate or
Certificates evidencing the Warrants to be exercised with the form of election
to purchase on the reverse thereof duly filled in and signed, which signature
shall be guaranteed in accordance with the Medallion Signature Guarantee
Program by a bank or trust company having an office or correspondence in the
United States, or a broker or dealer which is a member of a registered
securities exchange or the National Association of Securities Dealers, Inc.
(together, in the case of a Non-Surviving Combination (as defined below), with
such other documentation required to be delivered by holders of Common Stock
before such Holders are entitled to receive consideration in respect of their
shares), and upon payment to the Warrant Agent for the account of the Company
of the Exercise Price for the number of Warrant Shares in respect of which such
Warrants are then exercised. Payment of the aggregate Exercise Price shall be
made in cash or by certified or official bank check to the order of the
Company. The Company shall have the right to accept personal checks, in its
sole and absolute discretion at any time and from time to time; provided,
however, that payment of the Exercise Price for any Warrant Shares shall not be
deemed to have been made until such personal check has been collected and such
funds credited to the Company's account.
Subject to the provisions of Section 7 hereof, upon such delivery of
Warrants, delivery of required documents and payment of the Exercise Price, the
Company (or the surviving entity in the case of a Non-
F-3
<PAGE>
Surviving Combination) shall issue and cause to be delivered with all
reasonable dispatch to the Warrant Holder in such name or names as the Warrant
Holder may designate, a certificate or certificates for the number of full
Warrant Shares (or other cash or property to which the Warrant Holder is
entitled) issuable (or deliverable) upon the exercise of such Warrants together
with cash as provided in Section 13; provided, however, that after the first
public announcement that any consolidation, merger or lease or sale of assets
is proposed to be effected by the Company as described in subsection (e) of
Section 12 hereof, or a tender offer or an exchange offer for shares of Common
Stock of the Company shall be made, upon such surrender of Warrants, delivery
of required documents and payment of the Exercise Price as aforesaid, the
Company shall, as soon as possible, but in any event not later than ten
business days thereafter, issue and cause to be delivered the full number of
Warrant Shares issuable upon the exercise of such Warrants in the manner
described in this sentence together with cash as provided in Section 13. Such
certificate or certificates (or such other cash or property) shall be deemed to
have been issued (or delivered), and any person so designated to be named
therein shall be deemed to have become a Holder of record of such Warrant
Shares (or such other cash or property) as of the date of the surrender of such
Warrants, the delivery of required documents and payment of the Exercise Price.
Subject to the provisions of this Agreement and the Warrant Certificates,
the Warrants shall be exercisable, at the election of the Holders thereof,
either in full or from time to time in part and, in the event that a
certificate evidencing Warrants is exercised in respect of fewer than all of
the Warrant Shares issuable on such exercise at any time prior to the date of
expiration of the Warrants, a new certificate evidencing the remaining Warrant
or Warrants will be issued, and the Warrant Agent is hereby irrevocably
authorized to countersign and to deliver the required new Warrant Certificate
or Certificates pursuant to the provisions of this Section and of Sections 3
and 4 hereof, and the Company, whenever required by the Warrant Agent, will
supply the Warrant Agent with Warrant Certificates duly executed on behalf of
the Company for such purpose.
All Warrant Certificates surrendered upon exercise of Warrants shall be
canceled by the Warrant Agent. Such canceled Warrant Certificates shall then be
disposed of by the Warrant Agent in a manner satisfactory to the Company. The
Warrant Agent shall account promptly to the Company with respect to Warrants
exercised and concurrently pay to the Company all monies received by the
Warrant Agent for the purchase of the Warrant Shares through the exercise of
such Warrants.
The Warrant Agent shall keep copies of this Agreement and any amendments
hereto and notices given or received hereunder available for inspection by the
Holders during normal business hours at its principal office. The Company shall
supply the Warrant Agent from time to time with such numbers of copies of this
Agreement as the Warrant Agent may reasonably request.
The Warrant Agent shall, from time to time, as promptly as practicable,
advise the Company of (i) the numbers of Warrants delivered to it in accordance
with the terms and conditions of this Agreement and the Warrant Certificates,
(ii) the instructions of each Holder of the Warrant Certificates evidencing
such Warrants with respect to delivery of the Warrant Shares or other cash or
property to which such Holder is entitled upon such delivery, (iii) the
delivery of Warrant Certificates evidencing the balance, if any, of the
Warrants remaining after such delivery, and (iv) such other information as the
Company shall reasonably request.
Warrant Holders, as such, shall not be entitled (i) to receive any dividends
in respect of such Holder's Warrant Shares, or (ii) to vote, or to receive
notice of any meeting of the Company's stockholders, or otherwise exercise any
rights of, or to receive any notices delivered to, Holders of Common Stock
until such Holder surrenders certificates representing such Holder's Warrants
to the Warrant Agent, pays the Exercise Price and delivers all other required
documentation, all as set forth in this Agreement and the Warrant Certificates,
and the Warrant Shares in respect of such Warrant are issued to such Holder.
Section 7. Payment of Taxes and Governmental Charges. The Company will pay
all documentary stamp taxes attributable to the initial issuance of Warrant
Shares upon the exercise of Warrants; provided, however, that the Company shall
not be required to pay any tax or other governmental charge which may
F-4
<PAGE>
be payable in respect of any transfer or exchange of any Warrants or Warrant
Certificates, as the case may be, including, without limitation, any transfer
involved in the issuance of any Warrant Shares, and if any such transfer is
involved, the Company shall not be required to issue or deliver any Warrant
Shares until such tax or other charge shall have been paid by the Holder, or it
has been established by the Holder to the Company's satisfaction that no such
tax or other charge is due.
Section 8. Mutilated or Missing Warrant Certificates. In case any of the
Warrant Certificates shall be mutilated, lost, stolen or destroyed, the Company
may, in its discretion, issue and the Warrant Agent may countersign, in
exchange and substitution for and upon cancellation of the mutilated Warrant
Certificate, or in lieu of and substitution for the Warrant Certificate lost,
stolen or destroyed, a new Warrant Certificate of like tenor and representing
an equivalent number of Warrants, but only upon receipt of evidence
satisfactory to the Company and the Warrant Agent of such loss, theft or
destruction of such Warrant Certificate and of an indemnity reasonably
satisfactory to the Company. The Holder requesting such substitute Warrant
Certificates shall also comply with such other reasonable regulations and pay
(prior to the issuance of any Warrant Certificates in accordance with this
Section 8) such other reasonable charges (including, without limitation, any
tax or other governmental charge that may be imposed in relation thereto, and
the fees and expenses of the Warrant Agent in connection therewith) as the
Company or the Warrant Agent may prescribe.
Section 9. Reservation of Warrant Shares. The Company will at all times
reserve and keep available, free from preemptive rights, from the aggregate of
its authorized but unissued Common Stock, or its authorized and issued Common
Stock held in its treasury, for the purpose of enabling it to issue Warrant
Shares upon exercise of Warrants, the maximum number of shares of Common Stock
which may then be deliverable upon the exercise of all outstanding Warrants.
The Company or, if appointed, the transfer agent for the Common Stock (the
"Transfer Agent") and every subsequent transfer agent for any shares of the
Company's capital stock issuable upon the exercise of any Warrants will be
irrevocably authorized and directed at all times to reserve such number of
authorized shares as shall be required for such purpose. The Company will keep
a copy of this Agreement on file with the Transfer Agent and with every
subsequent transfer agent for any shares of the Company's capital stock
issuable upon the exercise of the rights of purchase represented by the
Warrants. The Warrant Agent is hereby irrevocably authorized to requisition
from time to time from such Transfer Agent the stock certificates required to
honor the exercise of outstanding Warrants in accordance with the terms of this
Agreement. The Company will supply such Transfer Agent with duly executed
certificates for such purposes and will provide or otherwise make available any
cash which may be payable as provided in Section 13. The Company will furnish
such Transfer Agent a copy of all notices of adjustments and certificates
related thereto, transmitted to each Holder pursuant to Section 14 hereof.
Before taking any action which would cause an adjustment pursuant to Section
12 hereof to reduce the Exercise Price below the then par value (if any) of the
Warrant Shares, the Company will take any corporate action which may, in the
opinion of its counsel (which may be counsel employed by the Company), be
necessary in order that the Company may validly and legally issue fully paid
and nonassessable Warrant Shares at the Exercise Price as so adjusted, and
which shall not in any way adversely affect the interests of the Holders of
Warrants.
The Company covenants that all Warrant Shares which may be issued upon
exercise of Warrants will, upon issue and payment therefor, be fully paid,
nonassessable, free of preemptive rights and, subject to Section 7, free from
all taxes, liens, charges and security interests with respect to the issue
thereof.
Section 10. Obtaining Stock Market Listings.
(a) The Company will from time to time use its reasonable efforts to have
the Warrant Shares, immediately upon their issuance upon the exercise of
Warrants, listed or quoted on the Nasdaq National Market
F-5
<PAGE>
or the principal securities exchanges or other markets within the United States
of America, if any, on which other shares of Common Stock are then listed or
quoted, as the case may be.
(b) The Company will from time to time use its reasonable efforts to have
the Warrants listed or quoted on the Nasdaq National Market or the principal
securities exchanges or other markets within the United States of America, if
any, on which shares of Common Stock are then listed or quoted, as the case may
be.
Section 11. Exercise Price and Exercise Quantity.
(a) The "Exercise Price" per Warrant Share shall be $1.50, as adjusted from
time to time in accordance with this Warrant Agreement.
(b) The term "Exercise Quantity" shall mean one Warrant Share per Warrant,
as adjusted from time to time in accordance with this Warrant Agreement.
Section 12. Adjustment of Exercise Price and Exercise Quantity. The Exercise
Price and Exercise Quantity are subject to adjustment from time to time upon
the occurrence of the events enumerated in this Section 12.
(a) Adjustments for Change in Capital Stock.
If the Company:
(1) pays a dividend or makes a distribution on its Common Stock in the
form of shares of its Common Stock;
(2) subdivides its outstanding shares of Common Stock into a greater
number of shares;
(3) combines its outstanding shares of Common Stock into a smaller
number of shares; or
(4) issues by reclassification of its Common Stock any other shares of
its capital stock;
then the Exercise Price in effect immediately prior to such action shall be
proportionately adjusted (in conjunction with the adjustment proceed for in
Section 12(g) hereof) so that the Holder of any Warrant thereafter exercised
may receive the aggregate number and kind of shares of capital stock of the
Company that the Holder would have owned immediately following such action if
such Warrant had been exercised immediately prior to such action.
An adjustment made pursuant to this Section 12(a) shall become effective on
the effective date of an event referred to in clauses (1)--(4) above,
retroactive to the record date (if any) for such event.
If after an adjustment pursuant to this Section 12(a), a Holder of a Warrant
upon exercise of the Warrant may receive shares of two or more classes of
capital stock of the Company, the Company's Board of Directors shall determine
the allocation of the adjusted Exercise Price between the classes of capital
stock. After such allocation, the exercise privilege and the Exercise Price of
each class of capital stock shall thereafter be subject to adjustment on terms
comparable to those applicable to Common Stock in this Section.
Any adjustment pursuant to this Section 12(a) shall be made successively
whenever any event listed above shall occur.
(b) Occurrence of Transactions.
For the purpose of any adjustment made pursuant to this Section 12, any
specified event shall be deemed to have occurred at the close of business on
the date of its occurrence.
(c) When De Minimis Adjustment May Be Deferred.
No adjustment in the Exercise Price need be made unless the adjustment,
together with any adjustments not previously made and carried forward as
provided in the next sentence, would require an increase or
F-6
<PAGE>
decrease of at least 1% in the Exercise Price. Any adjustments that are not
made shall be carried forward and taken into account in any subsequent
adjustment.
All calculations under this Section shall be made to the nearest cent, or to
the nearest 1/100th of a share, as the case may be.
(d) Notice of Adjustment.
Whenever the Exercise Price is adjusted, the Company shall provide the
notices required by Section 14 hereof.
(e) Reorganization of Company.
If the Company effects a Non-Surviving Combination, upon consummation of
such transaction the Warrants shall automatically become exercisable for the
kind and amount of securities, cash or other assets which the Holder of a
Warrant would have owned immediately after the Non-Surviving Combination if the
Holder had exercised the Warrant immediately before the effective date of the
transaction. Concurrently with the consummation of such transaction, the Person
formed by or surviving any such consolidation, merger or other business
combination if other than the Company, or the Person to which such sale or
conveyance shall have been made, shall enter into a supplemental Warrant
Agreement so providing and further providing for adjustments which shall be as
nearly equivalent as may be practical to the adjustments provided for in this
Section. The successor Person shall provide the Escrow Agent for mailing to
Warrant Holders a notice describing the supplemental Warrant Agreement.
For purposes of this Warrant Agreement, "Non-Surviving Combination" means
any merger, consolidation or other business combination by the Company with one
or more other Persons in which any such other Person is the survivor, or a
sale, transfer, lease or other conveyance of all or substantially all of the
assets of the Company to one or more such other Persons (in one transaction or
in two or more related transactions), and with respect to which cash and/or
non-cash consideration is to be distributed to holders of Common Stock;
provided that if any such merger, consolidation, sale, transfer, lease or other
conveyance of assets or other business combination in which the holders of
Common Stock receive cash or non-cash consideration in exchange for Common
Stock is structured so that the Company is the surviving entity, such
transaction shall nevertheless be deemed a Non- Surviving Combination.
If the issuer of securities deliverable upon exercise of Warrants under the
supplemental Warrant Agreement is an affiliate of the formed, surviving,
transferee or lessee Person, that issuer shall join in the supplemental Warrant
Agreement.
(f) Warrant Agent's Disclaimer.
The Warrant Agent shall have no duty to determine when an adjustment under
this Section 12 should be made, how such adjustment should be made or the
amount of such adjustment. The Warrant Agent has no duty to determine whether
any provisions of a supplemental Warrant Agreement under subsection (e) of this
Section 12 are correct. The Warrant Agent shall make no representation as to
the validity or value of any securities or assets issued upon exercise of
Warrants. The Warrant Agent shall not be responsible for the Company's failure
to comply with this Section.
(g) Adjustment in Exercise Quantity.
Upon each adjustment of the Exercise Price pursuant to this Section 12, each
Warrant outstanding prior to the making of the adjustment in the Exercise Price
shall thereafter evidence the right to receive upon payment of the adjusted
Exercise Price that number of shares of Common Stock (calculated to the nearest
hundredth) obtained from the following formula:
F-7
<PAGE>
N' = N x E
E'
where:
N' = the adjusted number of Warrant Shares issuable upon exercise of a
Warrant by payment of the adjusted Exercise Price.
N = the number of Warrant Shares previously issuable upon exercise of a
Warrant by payment of the Exercise Price prior to adjustment.
E' = the adjusted Exercise Price.
E = the Exercise Price prior to adjustment.
(h) Form of Warrants.
Irrespective of any adjustments in the Exercise Price, or the number or kind
of shares purchasable upon the exercise of the Warrants, Warrants theretofore
or thereafter issued may continue to express the same price and number and kind
of shares as are stated in the Warrants initially issuable pursuant to this
Agreement.
Section 13. Fractional Interests. The Company shall not be required to
issue fractional Warrant Shares on the exercise of Warrants. If more than one
Warrant shall be presented for exercise in full at the same time by the same
Holder, the number of full Warrant Shares which shall be issuable upon the
exercise thereof shall be computed on the basis of the aggregate number of
Warrant Shares purchasable on exercise of the Warrants so presented. If any
fraction of a Warrant Share would, except for the provisions of this Section
13, be issuable on the exercise of any Warrants (or specified portion thereof),
the Company shall either (i) pay an amount in cash equal to the Closing Price
(as defined below) on the day immediately preceding the date the Warrant is
presented for exercise, multiplied by such fraction or (ii) round up to the
nearest whole Warrant Share, if the Company so elects. "Closing Price" shall
equal (i) the last reported sales price of the Common Stock on the principal
national securities exchange on which such Common Stock is listed or admitted
to trading or, if no such reported sale takes place on such date, the average
of the closing bid and asked prices thereon, as reported in The Wall Street
Journal, or (ii) if such Common Stock shall not be listed or admitted to
trading on a national securities exchange, the last reported sales price on the
Nasdaq National Market or, if no such reported sale takes place on any such
date, the average of the closing bid and asked prices thereon, as reported in
The Wall Street Journal, or (iii) if such Common Stock shall not be quoted on
the Nasdaq National Market nor listed or admitted to trading on a national
securities exchange, then the average of the closing bid and asked prices, as
reported by The Wall Street Journal for the over-the-counter market in which
such Common Stock is traded. In the absence of one or more such quotations, the
Board of Directors of the Company shall determine the Closing Price on the
basis of such quotations or other facts as it in its good faith judgment
considers appropriate.
Section 14. Notices to Warrant Holders.
(a) Upon any adjustment of the Exercise Price pursuant to Section 12, the
Company shall promptly thereafter (i) cause to be filed with the Warrant Agent
a certificate of the Company's President, or any Vice President, and by the
Chief Financial Officer (or his functional equivalent, however titled), setting
forth the Exercise Price after such adjustment and setting forth in reasonable
detail the method of calculation and the facts upon which such calculations are
based and setting forth the number of Warrant Shares (or portion thereof)
issuable after such adjustment in the Exercise Price, upon exercise of a
Warrant and payment of the adjusted Exercise Price, which certificate shall be
conclusive evidence of the correctness of the matters set forth therein, and
(ii) cause to be given to each of the registered Holders of the Warrant
Certificates at his address appearing on the Warrant register written notice of
such adjustments by first-class mail, postage prepaid. Where appropriate, such
notice may be given in advance and included as a part of the notice required to
be mailed under the other provisions of this Section 14.
F-8
<PAGE>
(b) In the event that at any time prior to the expiration of the Warrants:
(i) the Company shall authorize the issuance to all holders of shares
of Common Stock of rights, options or warrants to subscribe for or purchase
shares of Common Stock or of any other subscription rights or warrants; or
(ii) the Company shall authorize the distribution to all holders of
shares of Common Stock of evidences of its indebtedness or assets (other
than cash dividends or cash distributions payable out of consolidated
earnings or earned surplus or dividends payable in shares of Common Stock
or distributions referred to in subsection (a) of Section 12 hereof); or
(iii) the Board of Directors shall have approved of any consolidation
or merger to which the Company is a party and for which approval of any
shareholders of the Company is required, or any sale, lease, transfer or
other conveyance of the properties and assets of the Company substantially
as an entirety, or of any reclassification or change of Common Stock
issuable upon exercise of the Warrants (other than a change in par value,
or from par value to no par value, or from no par value to par value, or as
a result of a subdivision or combination), or a tender offer or exchange
offer for shares of Common Stock; or
(iv) the Board of Directors or shareholders of the Company shall have
approved of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
(v) the Company proposes to take any action (other than actions of the
character described in Section 12(a)) which would require an adjustment of
the Exercise Price pursuant to Section 12;
then the Company shall cause to be filed with the Warrant Agent and shall cause
to be given to each of the registered Holders of the Warrant Certificates at
such Holder's address appearing on the Warrant register, at least 15 days prior
to the applicable record date, or promptly in the case of events for which
there is no record date, by first-class mail, postage prepaid, a written notice
stating (i) the date as of which the holders of record of share of Common Stock
to be entitled to receive any such rights, options, warrants or distribution
are to be determined, or (ii) the initial expiration date set forth in any
tender offer or exchange offer for shares of Common Stock, or (iii) the date on
which any such consolidation, merger, sale, lease, transfer or other
conveyance, reclassification, change, dissolution, liquidation or winding up is
expected to become effective or consummated, and the date as of which it is
expected that holders of record of shares of Common Stock shall be entitled to
exchange such shares for securities or other property, if any, deliverable upon
such reclassification, consolidation, merger, conveyance, transfer,
dissolution, liquidation or winding up.
(c) The failure to give the notice required by this Section 14 or any defect
therein shall not affect the legality or validity of the transaction to which
it relates.
Section 15. Merger, Consolidation or Change of Name of Warrant Agent. Any
Person into which the Warrant Agent may be merged or with which it may be
consolidated, or any Person resulting from any merger or consolidation to which
the Warrant Agent shall be a party, or any Person succeeding to the corporate
trust or shareholder services business of the Warrant Agent, shall be the
successor to the Warrant Agent hereunder without the execution or filing of any
paper or any further act on the part of any of the parties hereto, provided
that such Person would be eligible for appointment as a successor warrant agent
under the provisions of Section 17. In case at the time such successor to the
Warrant Agent shall succeed to the agency created by this Agreement, and in
case at that time any of the Warrant Certificates shall have been countersigned
but not delivered, any such successor to the Warrant Agent may adopt the
countersignature of the original Warrant Agent; and in case at that time any of
the Warrant Certificates shall not have been countersigned, any successor to
the Warrant Agent may countersign such Warrant Certificates either in the name
of the predecessor Warrant Agent or in the name of the successor to the Warrant
Agent; and in all such cases such Warrant Certificates shall have the full
force and effect provided in the Warrant Certificates and in this Agreement.
In case at any time the name of the Warrant Agent shall be changed and at
such time any of the Warrant Certificates shall have been countersigned but not
delivered, the Warrant Agent whose name has been changed may adopt the
countersignature under its prior name, and in case at that time any of the
Warrant Certificates
F-9
<PAGE>
shall not have been countersigned, the Warrant Agent may countersign such
Warrant Certificates either in its prior name or in its changed name, and in
all such cases such Warrant Certificates shall have the full force and effect
provided in the Warrant Certificates and in this Agreement.
Section 16. Warrant Agent. The Warrant Agent undertakes the duties and
obligations imposed by this Agreement upon the following terms and conditions,
by all of which the Company and the Holders of Warrants, by their acceptance
thereof, shall be bound:
(a) The Warrant Agent acts hereunder as agent and in a ministerial capacity
for the Company, and its duties shall be determined solely by the provisions
hereof. The Warrant Agent shall not, by issuing and delivering Warrant
Certificates, or by any other act hereunder, be deemed to make any
representations as to the validity or value or authorization of the Warrant
Certificates or the Warrants represented thereby or of any securities or other
property delivered upon exercise of any Warrant or whether any stock issued
upon exercise of any Warrant is fully paid and non-assessable.
(b) The Warrant Agent shall not (i) be liable for any recital or statement
of fact contained herein or for any action taken, suffered or omitted by it in
reliance on any Warrant Certificate or other document or instrument believed by
it in good faith to be genuine and to have been signed or presented by the
proper party or parties; (ii) be responsible for any failure on the part of the
Company to comply with any of its covenants and obligations contained in this
Agreement or in any Warrant Certificate; (iii) be liable for any act or
omission in connection with this Agreement except for its own negligence or
willful misconduct; or (iv) be liable for any act or omission made in reliance
upon verbal instructions of an authorized representative of the Company,
including its legal counsel.
(c) The Warrant Agent shall be liable hereunder only for its own negligence
or willful misconduct or any actions taken in bad faith. The Company agrees to
indemnify the Warrant Agent and save it harmless against any and all
liabilities, including judgments, costs and reasonable attorneys' fees, for
anything done or omitted by the Warrant Agent in the execution of this
Agreement, except as a result of the Warrant Agent's negligence, willful
misconduct or bad faith.
(d) The Warrant Agent may at any time consult with counsel satisfactory to
it (who may be counsel for the Company) and shall incur no liability or
responsibility for any action taken, suffered or omitted by it in good faith in
accordance with the opinion or advice of such counsel.
(e) Any notice, statement, instruction, request, direction, order or demand
of the Company shall be sufficiently evidenced by an instrument signed by the
Chairman of the Board of Directors, President or any Vice President (unless
other evidence in respect thereof is herein specifically prescribed). The
Warrant Agent shall not be liable for any action taken, suffered or omitted by
it in accordance with such notice, statement, instruction, request, direction,
order or demand.
(f) The Company agrees to pay the Warrant Agent reasonable compensation for
its services hereunder and to reimburse it for its reasonable expenses
hereunder; the Company further agrees to indemnify the Warrant Agent and save
it harmless against any and all losses, expenses and liabilities arising as a
result of the Warrant Agent's actions or omissions hereunder, except as a
result of the Warrant Agent's negligence or willful misconduct.
(g) The Warrant Agent shall be under no obligation to institute any action,
suit or legal proceeding or to take any other action likely to involve expense
unless the Company or one or more registered Holders of Warrant shall furnish
the Warrant Agent with reasonable security and indemnity for any costs and
expenses which may be incurred. All rights of action under this Agreement, or
under any of the Warrants may be enforced by the Warrant Agent without the
possession of any of the Warrants or the production thereof at any trial or
other proceeding relative thereto, and any such action, suit or proceeding
relative thereto, and any such action, suit or proceeding instituted by the
Warrant Agent shall be brought in its name as Warrant Agent, and
F-10
<PAGE>
any recovery of judgment shall before the ratable benefit of the registered
Holders of the Warrants, as their respective rights or interests may appear.
(h) The Warrant Agent and any stockholder, director, officer or employee of
the Warrant Agent may buy, sell or deal in any of the Warrants or other
securities of the Company, or become pecuniarily interested in any transaction
in which the Company may be interested, or contract with or lend money to or
otherwise act as fully and freely as though it were not Warrant Agent under
this Agreement. Nothing herein shall preclude the Warrant Agent from acting in
any other capacity for the Company, or for any other legal entity.
Section 17. Change of Warrant Agent.
(a) The Warrant Agent may resign its duties and be discharged from all
further duties and liabilities hereunder (except liabilities arising as a
result of the Warrant Agent's own negligence or willful misconduct) after
giving 60 days' prior written notice of the Company. At least fifteen (15) days
prior to the date such resignation is to become effective, the Warrant Agent
shall cause a copy of such notice of resignation to be mailed to the registered
Holder of each Warrant Certificate at the Company's expense. The Warrant Agent
hereunder may be removed at any time by the filing with it of an instrument in
writing signed by or on behalf of the Company and specifying such removal and
the date when it shall become effective. Upon such resignation or removal, the
Company shall appoint in writing a new warrant agent. Any removal shall not
take effect until the appointment by the Company, as hereinafter provided, of a
successor Warrant Agent.
(b) Any new warrant agent, whether appointed by the Company or by a court,
shall be a bank or trust company having a capital and surplus, as shown by its
last published report to stockholders, of not less than $10,000,000, or a stock
transfer company doing business in the Northeastern United States. After
acceptance in writing of such appointment by the new warrant agent is received
by the Company, such new warrant agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named herein
as the warrant agent, without any further assurance, conveyance, act or deed,
but if for any reason it shall be necessary or expedient to execute and deliver
any further assurance, conveyance, act or deed, the same shall be done at the
expense of the Company and shall be legally and validly executed and delivered
by the resigning Warrant Agent. The Warrant Agent shall promptly transfer the
books and records relating to the Warrants to such successor warrant agent. Not
later than the effective date of any such appointment the Company shall file
notice hereof with the resigning Warrant Agent and shall forthwith cause a copy
of such notice to be mailed to the registered Holder of each Warrant
Certificate.
(c) In case at any time the Warrant Agent shall resign, or shall be removed,
or shall become incapable of acting, or shall be adjudged a bankrupt or
insolvent, or a receiver or liquidator of the Warrant Agent or of its property
shall be appointed, or any public officer shall take charge or control of the
Warrant Agent or of its property or affairs for the purpose of rehabilitation,
conservation or liquidation, a successor Warrant Agent, qualified as aforesaid,
shall be appointed by the Company by an instrument in writing, filed with the
successor Warrant Agent and, upon acceptance by the latter of such appointment,
the Warrant Agent so succeeded shall cease to be Warrant Agent hereunder.
(d) Any successor Warrant Agent appointed hereunder shall execute,
acknowledge and deliver to its predecessor and to the Company an instrument
accepting such appointment hereunder, and thereupon such successor Warrant
Agent, without further act, deed or conveyance, shall become vested with all
the authority, rights, powers, immunities, duties and obligations of such
predecessor with like effect as if originally named as Warrant Agent hereunder,
and such predecessor, upon payment of its charges and disbursements then
unpaid, shall thereupon become obligated to transfer, deliver and pay over, and
such successor Warrant Agent shall be entitled to receive, all monies,
securities and other property on deposit with or held by such predecessor as
Warrant Agent hereunder.
(e) If the Company shall fail to make any appointment as provided in this
Section 17 within a period of 30 days, then the registered Holder of any
Warrant Certificate may apply to any court of competent jurisdiction for
F-11
<PAGE>
the appointment of a successor to the Warrant Agent. Pending appointment of a
successor Warrant Agent, either by the Company or by such a court, the duties
of the Warrant Agent shall be carried out by the Company.
Section 18. Notices to Company and Warrant Agent. Any notice or demand
authorized by this Agreement to be given or made by the Warrant Agent or by the
registered Holder of any Warrant Certificate to or on the Company shall be
sufficiently given or made if sent by first class or registered mail, postage
prepaid or by private courier or overnight delivery service, addressed (until
another address is filed in writing by the Company with the Warrant Agent), as
follows:
Southern Mineral Corporation
1201 Louisiana, Suite 3300
Houston, Texas 77002
Attention: President
In case the Company shall fail to maintain such office or agency or shall
fail to give such notice of the location or of any change in the location
thereof, presentations may be made and notices and demands may be served at the
principal office of the Warrant Agent.
Any notice pursuant to this Agreement to be given by the Company or by the
registered Holder of any Warrant Certificate to the Warrant Agent shall be
sufficiently given or made if sent by first-class or registered mail, postage
prepaid, or by private courier or overnight delivery service, addressed (until
another address is filed in writing by the Warrant Agent with the Company) to
the Warrant Agent as follows:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
Any notice pursuant to this Agreement to be given by the Company or the
Warrant Agent to the Warrant Holders shall be sufficiently given when and if
deposited in the mail, first-class or registered mail, postage prepaid or sent
by private courier or overnight delivery service, addressed to the Warrant
Holder at its address as it appears on the Warrant Register. The Company hereby
irrevocably authorizes the Warrant Agent, in the name and at the expense of the
Company, upon the written request of the Company, to mail any such notice to
the Holders upon receipt thereof from the Company. Any notice which is mailed
in the manner herein provided shall be presumed to have been duly given and
received when mailed, whether or not the Holder receives the notice. Neither
the failure to mail such notice nor any defect in any notice so mailed to any
particular Holder shall affect the sufficiency of such notice with respect to
any other Holder.
Section 19. Supplements and Amendments. The Company and the Warrant Agent
may from time to time supplement or amend this Agreement without the approval
of any Holders of Warrant Certificates in order to cure any ambiguity or to
correct or supplement any provision contained herein which may be defective or
inconsistent with any other provision herein and which shall not in any way
adversely affect the interests of the Holders of Warrants, or to make any other
provisions in regard to matters or questions arising hereunder which the
Company and the Warrant Agent may deem necessary or desirable and which shall
not in any way adversely affect the interests of the Holders of Warrants. Any
other supplement or amendment to this Agreement may be made by an instrument in
writing signed by the Company and the Holders of a majority of the Warrants
outstanding hereunder; provided, that no such amendment shall, without the
written consent of all Holders of Warrants outstanding hereunder, amend this
Section 19.
Section 20. Successors. All the covenants and provisions of this Agreement
by or for the benefit of the Company or the Warrant Agent shall bind and inure
to the benefit of their respective successors and assigns hereunder.
F-12
<PAGE>
Section 21. Termination. This Agreement shall terminate at 5:00 p.m., New
York City time, on the thirtieth business day after the third anniversary of
the Issuance Date. Notwithstanding the foregoing, this Agreement will terminate
on any earlier date if all Warrants covered hereby have been exercised. The
provisions of Section 16 shall survive any termination hereof.
Section 22. Return of Unclaimed Cash or Property. Notwithstanding any
provision of this Agreement to the contrary, cash or other property (including,
without limitation, Warrant Shares) deposited with or paid to the Warrant Agent
for distribution or issuance to Warrant Holders, but remaining unclaimed by the
Warrant Holders for two years after the date upon which such Holders became
entitled to receive such cash or other property, as the case may be, shall be
repaid to the Company by the Warrant Agent on demand and all liability of the
Warrant Agent shall thereupon cease with respect to such cash or property; and
any Warrant Holder shall thereafter look only to the Company for any payment or
distribution which such Holder may be entitled to collect.
Section 23. Governing Law. THIS AGREEMENT AND EACH WARRANT CERTIFICATE
ISSUED HEREUNDER SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE
STATE OF NEW YORK AND FOR ALL PURPOSES SHALL BE CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS OF SAID STATE.
Section 24. Benefits of this Agreement. This Agreement shall be for the
sole and exclusive benefit of the Company, the Warrant Agent and the registered
Holders of the Warrant Certificates. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company, the
Warrant Agent and the registered Holders of the Warrant Certificates any legal
or equitable right, remedy or claim under this Agreement.
Section 25. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed, as of the day and year first above written.
[SEAL] SOUTHERN MINERAL CORPORATION
Attest:
------------------------------- By:
-----------------------------------
Title:
---------------------------------
[SEAL] AMERICAN STOCK TRANSFER AND
TRUST COMPANY
Attest:
------------------------------- By:
Secretary -----------------------------------
Title:
---------------------------------
F-13
<PAGE>
EXHIBIT A
[Form of Warrant Certificate]
WARRANTS TO ACQUIRE COMMON STOCK,
PAR VALUE $.01 PER SHARE, OF SOUTHERN MINERAL CORPORATION
EXERCISABLE AFTER THROUGH
WARRANT CERTIFICATE NO.
This Warrant Certificate entitles that , or registered assigns, is the
registered holder of Warrants expiring at 5:00 P.M., New York City time,
on or, if such date is not a business day, the next succeeding business
day (the "Warrants") to purchase Common Stock, par value $.01 per share (the
"Common Stock"), of Southern Mineral Corporation, a Nevada corporation (the
"Company"). The Common Stock issuable upon exercise of Warrants is hereinafter
referred to as the "Warrant Shares." Subject to the immediately succeeding
paragraph, each Warrant entitles the holder upon exercise to purchase from the
Company on or before 5:00 P.M., New York City time, on or, if such date is
not a business day, the next succeeding business day, one fully paid and
nonassessable share of Common Stock per Warrant (a "Warrant Share" and,
collectively, the "Warrant Shares") (the "Exercise Quantity") at an initial
exercise price equal to $1.50 per Warrant Share (the "Exercise Price"). Such
purchase shall be payable in lawful money of the United States of America in
cash or by certified or official bank check to the order of the Company at the
office or agency of the Warrant Agent, but only subject to the conditions set
forth herein and in the Warrant Agreement (the "Warrant Agreement") referred to
on the reverse side hereof. The Exercise Price and Exercise Quantity are
subject to adjustment upon the occurrence of certain events set forth in the
Warrant Agreement. Terms used herein but not otherwise defined shall have the
meanings set forth in the Warrant Agreement.
No Warrant may be exercised before 9:00 A.M., New York City time, on
or, if such date is not a business day, the next succeeding business day, or
after 5:00 P.M., New York City time, on or, if such date is not a business
day, the next succeeding business day, and to the extent not exercised by such
time, such Warrants shall become void.
Reference is hereby made to the further provisions of this Warrant
Certificate set forth on the reverse hereof and such further provisions shall
for all purposes have the same effect as though fully set forth at this place.
This Warrant Certificate shall not be valid unless countersigned by the
Warrant Agent, as such term is used in the Warrant Agreement.
THIS WARRANT CERTIFICATE SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS OF THE STATE OF NEW YORK.
F-14
<PAGE>
WITNESS the facsimile seal of the Company and the facsimile signatures of
its duly authorized officers.
Dated:
------------------------------ SOUTHERN MINERAL CORPORATION
ATTEST:
- ------------------------------ By:
---------------------------------
Name: Name:
Secretary President
Countersigned:
AMERICAN STOCK TRANSFER & TRUST COMPANY
as Warrant Agent
By:
------------------------------
Authorized Signature
F-15
<PAGE>
[Form of Warrant Certificate]
[Reverse]
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of up to Warrants (which amount may be increased by an
amount not to exceed Warrants to accommodate the rounding up of fractional
Warrants under the Prepackaged Plan) expiring at 5:00 P.M., New York City time,
on or, if such date is not a business day, the next succeeding business
day, entitling the holder on exercise to purchase shares of Common Stock, par
value $.01 per share of the Company (the "Common Stock"), and are issued or to
be issued pursuant to a Warrant Agreement dated as of , 1999 (the "Warrant
Agreement"), duly executed and delivered by the Company to American Stock
Transfer and Trust Company, a New York corporation, as warrant agent (the
"Warrant Agent"), which Warrant Agreement is hereby incorporated by reference
in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Warrant Agent, the Company and the holders (the
words "holders" or "holder" meaning the registered holders or registered
holder) of the Warrants. A copy of the Warrant Agreement may be obtained by the
holder hereof upon written request to the Company or the Warrant Agent.
Warrants may be exercised at any time on and after 9:00 A.M., New York City
time, on the date hereof or, if such date is not a business day, the next
succeeding business day, and on or before 5:00 P.M., New York City time, on
or, if such date is not a business day, the next succeeding business day.
The holder of Warrants evidenced by this Warrant Certificate may exercise them
by surrendering this Warrant Certificate, with the form of election to purchase
set forth hereon properly completed and executed, together with payment of the
Exercise Price in cash or by certified or official bank check to the order of
the Company and the other required documentation. In the event that upon any
exercise of Warrants evidenced hereby the number of Warrants exercised shall be
less than the total number of Warrants evidenced hereby, there shall be issued
to the holder hereof or his or her assignee a new Warrant Certificate
evidencing the number of Warrants not exercised. No adjustment shall be made
for any cash dividends on any Common Stock issuable upon exercise of this
Warrant.
The Warrant Agreement provides that upon the occurrence of certain events,
the Exercise Price set forth on the face hereof may, subject to certain
conditions, be adjusted. If the Exercise Price is adjusted, the Warrant
Agreement provides that the number of shares of Common Stock issuable upon the
exercise of each Warrant shall be adjusted. No fractions of a share of Common
Stock will be issued upon the exercise of any Warrant, but the Company will
either pay the cash value thereof determined as provided in the Warrant
Agreement or round up to the nearest whole share if it so elects.
Warrant Certificates, when surrendered at the office of the Warrant Agent by
the registered holder thereof in person or by legal representative or attorney
duly authorized in writing, may be exchanged, in the manner and subject to the
limitations provided in the Warrant Agreement, for another Warrant Certificate
or Warrant Certificates of like tenor evidencing in the aggregate a like number
of Warrants.
Upon due presentation for registration of transfer of this Warrant
Certificate at the office of the Warrant Agent, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like
number of Warrants shall be issued to the transferee in exchange for this
Warrant Certificate, subject to the limitations provided in the Warrant
Agreement. The Company may require payment of a sum sufficient to cover such
reasonable charges (including, without limitation, any tax or other
governmental charge that may be imposed and the fees and expenses of the
Warrant Agent) as the Company or the Warrant Agent may prescribe in connection
with any exchange or registration of transfer of Warrant Certificates.
F-16
<PAGE>
Form of Election to Purchase
(To Be Executed Upon Exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right, represented
by this Warrant Certificate, to receive shares of Common Stock and
herewith tenders payment for such shares to the order of in the amount of
$ in cash or by certified or official bank check in accordance with the
terms hereof. The undersigned requests that a certificate for such shares be
registered in the name of , whose address is and that such shares be
delivered to whose address is . If said number of shares is less than
all of the shares of Common Stock purchasable hereunder, the undersigned
requests that a new Warrant Certificate representing the remaining balance of
such shares be registered in the name of , whose address is , and that
such Warrant Certificate be delivered to , whose address is .
Signature:
------------------------------
Note: The above signature must correspond with the name as written upon the
face of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatever and must be guaranteed in accordance with
the Medallion Signature Guarantee Program by a bank or trust company having an
office or correspondence in the United States, or a broker or dealer which is a
member of a registered securities exchange or the National Association of
Securities Dealers, Inc.
Signature Guaranteed By:
-------------------------------------
F-17
<PAGE>
Form of Assignment
(To Be Executed Upon Assignment of the Warrant)
For value received, hereby sells, assigns and transfers unto the
Warrants represented by this Warrant Certificate, together with all right,
title and interest therein, and does hereby irrevocably constitute and appoint
attorney, to transfer this Warrant Certificate on the books of the
Company, with full power of substitution.
Dated:
-------------------------------
Signature:
-----------------------------
Note: The above signature must correspond with the name as written upon the
face of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatever and must be guaranteed in accordance with
the Medallion Signature Guarantee Program by a bank or trust company having an
office or correspondence in the United States, or a broker or dealer which is a
member of a registered securities exchange or the National Association of
Securities Dealers, Inc.
Signature Guaranteed By:
-------------------------------------
F-18
<PAGE>
ANNEX G
PURCHASE AND SALE AGREEMENT
This Purchase and Sale Agreement (this "Agreement") is entered into this
9th day of July, 1999, by and between SOUTHERN MINERAL CORPORATION, a Nevada
corporation, and AMERAC ENERGY CORPORATION, a Delaware corporation
(collectively, the "Seller") and ANR PRODUCTION COMPANY, a Delaware
corporation, ("Buyer"). Buyer and Seller are collectively referred to herein
as the "Parties" and sometimes individually referred to as a "Party."
WITNESSETH:
In consideration of the mutual agreements contained in this Agreement,
Buyer and Seller agree as follows:
1. SALE AND PURCHASE OF THE ASSETS.
1.1 Acquired Assets. Subject to the terms and conditions of this
Agreement, Seller agrees to sell, convey and deliver to Buyer and Buyer
agrees to purchase and acquire from Seller all of Seller's right, title and
interest in and to the following, to the extent attributable to the period
of time after the Effective Time (collectively, the "Assets"):
(A) All of Seller's oil and gas and associated hydrocarbons ("Oil
and Gas") and related rights, titles and interests, including,
but not limited to, leasehold interests, royalty interests,
overriding royalty interests, payments out of production,
reversionary rights, and contractual rights to production in and
to (i) those interests described in the leases, subleases,
assignments and other instruments described in Exhibit A
(collectively "Leases"); (ii) those wells described in Exhibit A
(the "Wells"); (iii) all easements, rights of way, and other
rights, privileges, benefits and powers with respect to the use
and occupation of the surface of, and the subsurface depths
under, the land covered by the Leases; (iv) all rights in
respect of any pooled or unitized acreage located in whole or in
part within each Lease, including all production from the pool
or unit allocated to any such Lease and all interests in any
wells within the unit or pool associated with such Lease,
regardless of whether such unit or pool production comes from
wells located within or without the Leases;
(B) All licenses, servitudes, gas purchase and sale contracts
(including interests and rights, if any, with respect to any
prepayments, take-or-pay, buydown and buyout agreements)to the
extent that the same pertain or relate to periods after the
Effective Time, as hereinafter defined, crude purchase and sale
agreements, farmin agreements, farmout agreements, bottom hole
agreements, acreage contribution agreements, operating
agreements, unit agreements, processing agreements, options,
leases of equipment or facilities, joint venture agreements,
pooling agreements, transportation agreements, rights-of-way and
other contracts, agreements and rights, which are owned by
Seller, in whole or in part, and are (i) appurtenant to the
Leases, or (ii) used or held for use in connection with the
ownership or operation of the Leases, or the sale, distribution
or disposal of oil and gas or water, (collectively, the
"Contracts");
(C) All of the real, personal and mixed property and facilities
located in, on or adjacent to the Leases or used in the
operation thereof (whether located on or off such Leases), which
is owned by Seller, in whole or in part, including, without
limitation, well equipment; casing; tanks; crude oil, natural
gas, condensate or products in storage severed after the
Effective Time; tubing; compressors; pumps; motors; fixtures;
machinery and other equipment; pipelines; field processing
equipment; inventory and all other improvements used or useful
in the operation thereof (the "Related Assets");
(D) All governmental permits, licenses and authorizations including
environmental permits, licenses and authorizations, as well as
any applications for the same, related to the Leases or the use
thereof;
G-1
<PAGE>
(E) All of the files, records and data relating to the items
described in subsections (A), (B), (C), and (D) above,
including, without limitation, title records (title curative
documents); surveys, maps and drawings; contracts;
correspondence; Federal Energy Regulation Commission files;
microfiche lists; geological, geophysical and seismic records,
data and information; production records, electric logs, core
data, pressure data, decline curves, graphical production
curves and all related matters and construction documents
(except to the extent the delivery or copying of such records
may be restricted by contract with a third party, in which
event Seller shall cooperate with Buyer in efforts to provide
on site access to such records until a release from such
restriction may be obtained) (the "Records");
(F) To the extent assignable, all rights of Seller in or under any
warranty or indemnification contained in any agreement relating
to the Assets which Seller obtained on or after it acquired the
Assets; and
(G) Any and all other assets of Seller appurtenant or related to or
used or useful in connection with the Leases.
1.2 Contracts and Records. Seller shall deliver to Buyer within ten (10)
days after Closing all of the Contracts and Records. Seller shall have the
right to make and retain copies of the Contracts and Records as Seller may
desire prior to the delivery of the Contracts and Records to Buyer. Buyer,
for a period of seven years after the Closing, defined below, shall make
available to Seller (at the location of such Contracts and Records in
Buyer's organization) access to such copies of the Contracts and Records as
Buyer may have in its possession (or to which it may have access) upon
written request of Seller, during normal business hours; provided, however,
that Buyer shall not be liable to Seller for the loss of any Contracts or
Records by reason of clerical error or inadvertent loss or destruction of
Contracts or Records.
2. PURCHASE PRICE.
2.1 Purchase Price. The purchase price for the Assets is Sixteen Million
Two Hundred Eighty Thousand Dollars ($16,280,000.00), subject to the
adjustments provided for herein (the "Purchase Price").
2.2 Payment. The Purchase Price shall be paid by Buyer to Seller, by wire
transfer of readily available funds on the Closing Date (hereinafter
defined).
2.3 Allocation. The Purchase Price shall be allocated to the Assets in
accordance with the schedule set forth in Exhibit B. Seller and Buyer
covenant and agree that the values allocated to various portions of the
Assets, which are set forth on Exhibit B (singularly with respect to each
item, the Allocated Value and, collectively, the Allocated Values), shall
be binding on Seller and Buyer for purposes of adjusting the Purchase Price
pursuant to Section 7.6 hereof (relating to Title Failures).
3. EFFECTIVE TIME AND CLOSING DATE.
3.1 Closing. Subject to Conditions Precedent set forth at Articles 12 and
13 and any termination pursuant to Article 14 or Section 15.1, the sale and
purchase of the Assets ("Closing") shall be held on or before August 6,
1999 ("Closing Date"). The Closing will take place at the offices of Buyer
at 9 Greenway Plaza, Houston, Texas, or at such other place as mutually
agreed upon by Seller and Buyer.
3.2 Effective Time. The sale shall be effective as of 7:00 A.M., local
time of the location of the Assets on May 1, 1999 ("Effective Time").
G-2
<PAGE>
3.3 Ownership Prior to Effective Time. Seller shall be entitled to all of
the rights and incidents of ownership generated from or attributable to the
Assets prior to the Effective Time, including the right to all Oil and Gas
produced from or attributable to the Assets prior to the Effective Time.
Seller shall bear and be responsible for the duties, liabilities, costs,
expenses and obligations of ownership attributable to ordinary operation of
the Assets prior to the Effective Time, except as may be otherwise provided
herein, including, but not limited to, the indemnification provided for in
Article 4.
3.4 Ownership After Effective Time. Buyer shall be entitled to all of the
rights and incidents of ownership generated from or attributable to the
Assets after the Effective Time, including the right to all Oil and Gas
thereafter produced from or attributable to the Assets after the Effective
Time. Buyer shall bear and be responsible for the duties, liabilities,
costs, expenses and obligations of ownership attributable to ordinary
operation of the Assets from and after the Effective Time, except as may be
otherwise provided herein, including, but not limited to, the
indemnification provided for in Article 4.
4. INDEMNIFICATION/ASSUMED OBLIGATIONS.
4.1 Assumed Obligations. Buyer shall not assume, be obligated to or be
liable for any liabilities of Seller, whether known or unknown, absolute or
contingent, including, without limitation, any claims, demands, obligations
or expenses of any kind whatsoever occurring, arising out of or relating to
Seller's (or Seller's predecessors in title) interest in the Assets prior
to the Closing Date including, but not limited to, Environmental Laws
(defined below), tax, securities law, personal injury, and royalty and
other contractual liabilities, except for those arising out of Buyer's
gross negligence or willful misconduct.
"Environmental Laws" means all applicable local, state, and federal
laws, rules, regulations, and orders regulating or otherwise pertaining to
(a) the use, generation, migration, storage, removal, treatment, remedy,
discharge, release, transportation, disposal, or cleanup of pollutants,
contamination, hazardous wastes, hazardous substances, hazardous materials,
toxic substances or toxic pollutants, (b) surface waters, ground waters,
ambient air and any other environmental medium on or off any Lease or (c)
the environment or health and safety-related matters; including the
following as from time to time amended and all others whether similar or
dissimilar: the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended by the Superfund Amendments and
Reauthorization Act of 1986, the Resource Conservation and Recovery Act of
1976, as amended by the Used Oil Recycling Act of 1980, the Solid Waste
Disposal Act Amendments of 1980, and the Hazardous and Solid Waste
Amendments of 1984, the Hazardous Materials Transportation Act, as amended,
the Toxic Substance Control Act, as amended, the Clean Air Act, as amended,
the Clean Water Act, as amended, and all regulations promulgated pursuant
thereto.
4.2 SELLER'S INDEMNIFICATION. SELLER AGREES TO DEFEND, INDEMNIFY AND HOLD
BUYER HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS, LOSSES,
DAMAGES, LIABILITIES, JUDGMENTS, CAUSES OF ACTION, REASONABLE COSTS OR
EXPENSES (INCLUDING, WITHOUT LIMITATION, ANY AND ALL REASONABLE COSTS,
EXPENSES, ATTORNEYS' FEES, CONSEQUENTIAL DAMAGES AND OTHER COSTS INCURRED
IN DEFENSE OF ANY CLAIM OR LAWSUIT ARISING THEREFROM), OF WHATSOEVER NATURE
ARISING OUT OF OR RELATING TO SELLER'S OWNERSHIP, OPERATION OR
ADMINISTRATION OF THE ASSETS ON OR PRIOR TO THE CLOSING DATE, INCLUDING,
WITHOUT LIMITATION, (I) DAMAGES TO PERSONS OR PROPERTY, (II) FINES,
PENALTIES, MONETARY SANCTIONS OR OTHER AMOUNTS PAYABLE FOR FAILURE TO
COMPLY WITH THE REQUIREMENTS OF APPLICABLE ENVIRONMENTAL, SECURITIES,
SAFETY OR HEALTH LAWS (WHETHER FEDERAL, STATE OR LOCAL), (III) THE
VIOLATION BY SELLER OF ANY LAW OR REGULATION OR THE TERMS OF ANY AGREEMENT
BINDING UPON THE SELLER, (IV) CLAIMS OF SELLER'S CO-OWNERS, PARTNERS, JOINT
VENTURERS AND OTHER PARTICIPANTS; (V) CLAIMS ARISING OUT OF ANY TAX AUDITS;
AND (VI) THE
G-3
<PAGE>
IMPROPER PAYMENT OF ROYALTIES UNDER THE LEASES, EXCEPT IN EACH CASE FOR
THOSE ARISING OUT OF BUYER'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. In no
event will Seller's liability to Buyer pursuant to the indemnification
provisions of this Section 4.2 ever exceed the aggregate sum of the
Purchase Price. Seller's liability under this Section 4.2 shall be limited
to claims as to which Seller is given notice on or prior to the date which
is thirty (30) months from the Closing.
4.3 BUYER'S INDEMNIFICATION. BUYER AGREES TO DEFEND, INDEMNIFY AND HOLD
SELLER HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS, LOSSES,
DAMAGES, LIABILITIES, JUDGMENTS, CAUSES OF ACTION, REASONABLE COSTS OR
EXPENSES (INCLUDING, WITHOUT LIMITATION, ANY AND ALL REASONABLE COSTS,
EXPENSES, ATTORNEYS' FEES, CONSEQUENTIAL DAMAGES AND OTHER COSTS INCURRED
IN DEFENSE OF ANY CLAIM OR LAWSUIT ARISING THEREFROM), OF WHATSOEVER NATURE
ARISING OUT OF OR RELATING TO BUYER'S OWNERSHIP, OPERATION OR
ADMINISTRATION OF THE ASSETS AFTER THE CLOSING DATE, INCLUDING, WITHOUT
LIMITATION; (I) DAMAGES TO PERSONS OR PROPERTY; (II) FINES, PENALTIES,
MONETARY SANCTIONS OR OTHER AMOUNTS PAYABLE FOR FAILURE TO COMPLY WITH THE
REQUIREMENTS OF APPLICABLE ENVIRONMENTAL, SECURITIES, SAFETY OR HEALTH LAWS
(WHETHER FEDERAL, STATE OR LOCAL); (III) THE VIOLATION BY BUYER OF ANY LAW
OR REGULATION OR THE TERMS OF ANY AGREEMENT BINDING UPON THE BUYER; (IV)
CLAIMS OF BUYER'S CO-OWNERS, JOINT VENTURERS AND OTHER PARTICIPANTS; (V)
CLAIMS ARISING OUT OF ANY TAX AUDITS; AND(VI) THE IMPROPER PAYMENT OF
ROYALTIES UNDER THE LEASES, EXCEPT IN EACH CASE FOR THOSE ARISING OUT OF
SELLER'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
4.4 Notification. As soon as reasonably practical after obtaining
knowledge thereof, the indemnified Party shall notify the indemnifying
Party of any claim or demand which the indemnified Party has determined has
given or could give rise to a claim for indemnification under this Article
4. Such notice shall specify the agreement, representation or warranty with
respect to which the claim is made, the facts giving rise to the claim and
the alleged basis for the claim, and the amount (to the extent then
determinable) of liability for which indemnity is asserted. In the event
any action, suit or proceeding is brought with respect to which a Party may
be liable under this Article 4, the defense of the action, suit or
proceeding (including all settlement negotiations and arbitration, trial,
appeal, or other proceeding) shall be at the discretion of and conducted by
the indemnifying Party. If an indemnified Party shall settle any such
action, suit or proceeding without the written consent of the indemnifying
Party (which consent shall not be unreasonably withheld), the right of the
indemnified Party to make any claim against the indemnifying Party on
account of such settlement shall be deemed conclusively denied. An
indemnified Party shall have the right to be represented by its own counsel
at its own expense in any such action, suit or proceeding, and if an
indemnified Party is named as the defendant in any action, suit or
proceeding, it shall be entitled to have its own counsel and defend such
action, suit or proceeding with respect to itself at its own expense.
Subject to the foregoing provisions of this Article 4, neither Party shall,
without the other Party's written consent, settle, compromise, confess
judgment or permit judgment by default in any action, suit or proceeding if
such action would create or attach liability or obligation to the other
Party. The Parties agree to make available to each other, and to their
respective counsel and accountants, all information and documents
reasonably available to them which relate to any action, suit or
proceeding, and the Parties agree to render to each other such assistance
as they may reasonably require of each other in order to ensure the proper
and adequate defense of any such action, suit or proceeding.
5. CLOSING.
5.1 Delivery by Seller. At Closing, Seller shall deliver to Buyer, in the
form attached hereto as Exhibit C, an Assignment and Bill of Sale effecting
the sale, transfer, conveyance and assignment of the Assets.
G-4
<PAGE>
5.2 Delivery by Buyer. At Closing, Buyer shall deliver to Seller the
Purchase Price, as adjusted.
5.3 Further Cooperation. At the Closing and thereafter as may be
necessary, Seller and Buyer shall execute and deliver such other
instruments and documents and take such other actions as may be reasonably
necessary to evidence and effectuate the transactions contemplated by this
Agreement.
6.ACCOUNTING ADJUSTMENTS.
6.1 Closing Adjustments. With respect to matters that can be determined
as of the Closing, Seller shall prepare, in accordance with the provisions
of this Article 6, a statement (the "Closing Adjustment Statement") with
relevant supporting information setting forth each adjustment to the
Purchase Price submitted by Seller. Seller shall submit the Closing
Adjustment Statement to Buyer, together with all records or data supporting
the calculation of amounts presented on the Closing Adjustment Statement,
no later than five (5) business days prior to the scheduled Closing Date.
Prior to the Closing, Buyer and Seller will review the adjustments proposed
by Seller in the Closing Adjustment Statement. Agreed upon adjustments
shall be taken into account in computing any adjustments to be made to the
Purchase Price at the Closing.
6.2 Strapping and Gauging. The Oil and Gas in such storage facilities
above the pipeline connection or through the meters on the pipelines as of
the Effective Time shall belong to Seller, and the Oil and Gas placed in
such storage facilities after the Effective Time and production upstream of
the aforesaid meters shall belong to Buyer and become part of the Assets.
6.3 Taxes. Ad valorem, property or similar taxes shall be prorated
between Buyer and Seller, using the Effective Time as the applicable
proration date, and the Purchase Price shall be adjusted accordingly. The
proration shall be based upon ad valorem, property or similar taxes
assessed against the Assets for the most recent year.
6.4 Adjustments to Purchase Price. At Closing, appropriate adjustments to
the Purchase Price will be made as follows:
(A) The Purchase Price shall be adjusted upward by:
(i) any amounts determined to be due Seller pursuant to Sections
6.2 and 6.3 hereof; and
(ii) an amount equal to the costs and expenses paid by Seller in
accordance with this Agreement that are attributable to the
Assets for the period from the Effective Time to the
Closing Date (including, without limitation, applicable
general and administrative expense and overhead charges
attributable to the Assets pursuant to the terms of the
relevant joint operating agreements covering the Assets);
and
(iii) all amounts due or the market value of Oil and Gas owed to
Seller by third parties as of the Effective Time under the
Contracts with respect to any imbalances existing at the
Effective Time, such value to be determined by Seller and
Buyer, including any severances taxes and royalties paid
thereon, as of the Effective Time; and
(iv) any other amount agreed upon in writing by Seller and
Buyer.
(B) The Purchase Price shall be adjusted downward by:
(i) any amounts determined to be due Buyer pursuant to Sections
6.2 and 6.3 hereof; and
(ii) an amount equal to the amount of proceeds derived from the
sale of Oil and Gas, net of royalties and severance taxes
paid by Seller, received by Seller prior to the Closing and
attributable to the Wells which proceeds are, in accordance
with generally accepted accounting procedures, attributable
to production of Oil and Gas after the Effective Time; and
G-5
<PAGE>
(iii) all amounts due or the market value of Oil and Gas owed by
Seller to third parties as of the Effective Time under the
Contracts with respect to any imbalances existing at the
Effective Time, such value to be determined by Seller and
Buyer, including any severance taxes and royalties paid
thereon, as of the Effective Time; and
(iv) an amount equal to all expenditures, liabilities and costs
relating to the Assets (including, without limitation, all
ad valorem, property, production, severance and similar
taxes) that are unpaid as of the Closing Date and assessed
for or attributable to periods of time prior to the
Effective Time regardless of how such taxes, expenditures,
liabilities and costs are calculated provided that to the
extent the actual amounts cannot be determined prior to the
agreement of Buyer and Seller with respect to the Closing
Adjustment Statement, a reasonable estimate of such taxes,
expenditures, liabilities and costs shall be used; and
(v) any other amount agreed upon in writing by Seller and Buyer.
6.5 Actual Figures. When available, actual figures will be used for the
adjustments at Closing. To the extent actual figures are not available,
estimates will be used subject to final adjustments as described in Section
6.6 below.
6.6 Post-Closing Adjustments. A post-closing adjustment statement (the
"Post-Closing Adjustment Statement") based on the actual income and
expenses shall be prepared and delivered by Seller to Buyer within one
hundred twenty (120) days after the Closing, proposing further adjustments
to the Purchase Price based on the information then available. Seller or
Buyer, as the case may be, shall be given access to and shall be entitled
to review and audit the other Party's records pertaining to the computation
of amounts claimed in such Post-Closing Adjustment Statement. Within sixty
(60) days after receipt of the Post-Closing Adjustment Statement, the
Parties hereto will use their best efforts to agree upon the proposed
adjustments and the Seller or Buyer, as the case may be, shall pay to the
other such sums as may be agreed to be due. Additional adjustments shall be
made from time to time as required to settle accounts between the Parties.
7. DUE DILIGENCE; TITLE MATTERS.
7.1 General Access. Prior to Closing, Seller will:
(A) Give Buyer and its representatives, employees, consultants,
independent contractors, attorneys and other advisors full
access to the Assets at any reasonable time for any and all
inspections and investigations, including, but not limited to,
platform inspections and investigations for environmental and
other matters;
(B) Use its best efforts to obtain and submit to Buyer or its
representatives as promptly as practicable, copies of any
existing documents as Buyer may reasonably request; and
(C) Furnish to Buyer all other information with respect to the
Assets as Buyer may from time to time reasonably request,
unless Seller is prohibited therefrom by any agreement or
contract by which it is bound or by the necessity of any third
party approval; provided that, if requested by Buyer, Seller
shall use its best efforts to promptly obtain the waiver of any
such prohibition.
7.2 Covenants Relating to Title. From and after the Effective Time,
Seller covenants and agrees to use commercially reasonable efforts to:
(A) Obtain all consents, approvals, waivers (including preferential
rights) and agreements of all other parties and governmental
authorities (other than approvals of the assignment of the
Leases which must be obtained after the Closing) which are
necessary to effect the transactions provided for herein,
including the assignment and transfer to Buyer of the ownership
of the Assets; and
G-6
<PAGE>
(B) Make all filings which must be made and record all instruments
that may be recorded to accurately reflect Seller's current
interests in the Assets.
7.3 Seller's Title. In the documents to be executed and delivered by
Seller to Buyer transferring title to the Assets, Seller shall warrant and
defend the Assets unto Buyer against every person lawfully claiming the
Assets or any part thereof, by, through or under Seller, but not otherwise.
However, notwithstanding any other provisions of this Agreement to the
contrary all of Seller's interest in equipment and personal property is to
be sold AS IS AND WHERE IS AND WITHOUT WARRANTY OF MERCHANTABILITY,
CONDITION OR FITNESS FOR A PARTICULAR PURPOSE, EITHER EXPRESS OR IMPLIED.
7.4 Good and Marketable Title. As used herein the term "good and
marketable title" shall mean:
(A) As to each of the Wells, that record title of Seller which:
(i) entitles Seller to receive from each Well not less than the
interests shown in Exhibit A as the "Net Revenue Interest"
of all Oil and Gas produced, saved and marketed from each
Well and of all Oil and Gas produced, saved and marketed
from any unit of which each Well is a part and allocated to
such Well, all without reduction, suspension or termination
of the interests in each Well throughout the duration of the
Lease upon which such Well is located, except as stated in
such Exhibit; and
(ii) obligates Seller to bear a percentage of the costs and
expenses relating to the maintenance and development of,
and operations relating to, the Wells not greater than the
"Working Interest" shown in Exhibit A, all without increase
of the interests in each Well throughout the duration of
such Well, except as stated in such Exhibit.
(B) That title of Seller to the Assets which:
(i) at or prior to Closing, is free and clear (except for
Permitted Encumbrances as defined in subsection (ii) below)
of liens and encumbrances and (a) with respect to real
property interests to be transferred to Buyer, real property
interests are of record in the relevant counties and
governmental offices; and (b) with respect to any Asset
subject to preferential rights, such rights have been waived
and consents obtained from all third parties, and
(ii) "Permitted Encumbrances" shall mean (i) lessor's royalties,
overriding royalties, reversionary interests and other
burdens on production that, in the aggregate, do not
operate to reduce the Net Revenue Interest of Seller in
each of the Wells to an amount less than that shown on
Exhibit A; (ii) division orders, and sales contracts
covering hydrocarbons and associated products that are
terminable upon no more than thirty (30) days notice; (iii)
preferential purchase rights and required third party
consents to assignments and similar rights with respect to
which waivers or consents are obtained from the appropriate
parties or the appropriate time period for asserting such
rights has expired without an exercise thereof; (iv)
easements, rights-of-way, servitudes, permits, surface
leases and other rights in respect of surface operations,
pipelines, grazing, logging, canals, ditches, reservoirs,
or the like; use conditions, covenants or other
restrictions in the chain of title; (v) minor
irregularities in title which do not (a) materially
interfere with the occupation, use and enjoyment by Seller
of any of the Assets in the normal course of business as
presently conducted; or (b) materially impair the value
thereof for such Assets; (vi) all interests in the Assets
securing obligations owed to, or claimed by, any person
whether such interest is based on the common law, statute
or contract, and whether such interest includes liens or
security interests arising by virtue of mortgage,
encumbrance, pledge, security agreement, conditional sale
or trust receipt or lease, consignment or bailment for
G-7
<PAGE>
security purposes, so long as each said interest has been
expressly consented to by Buyer in writing or will be
released in full at or prior to the Closing; and (vii)
specific exceptions and encumbrances affecting each of the
Assets as described in Exhibit A INSOFAR ONLY as said
exceptions and encumbrances are valid and subsisting and are
enforceable against the particular Asset which is made
subject to said exceptions and encumbrances.
7.5 Defect Letters.
(A) Buyer may from time to time prior to the date which is five (5)
days prior to the Closing Date notify Seller in writing (a
"Notice") of any liens, charges, contracts, agreements
obligations, encumbrances, defects and irregularities of title
which would cause title to all or part of the Assets not to be
good and marketable as defined in Section 7.4 hereof, or which
would cause a breach of a representation or warranty of Seller
("Title Defect").
(B) A Title Defect as set forth in a Notice, which is given to
Seller on or before the date which is five (5) days prior to
the Closing Date and is not cured on or before the Closing,
unless the time for cure is extended in writing by Buyer, shall
be a "Title Failure," unless waived by Buyer. Any Title Defect
waived by Buyer under this Section or any Title Defect for
which timely notice shall not have been given in accordance
with Section 7.5 (A) shall become a Permitted Encumbrance as
defined in Section 7.4(B)(ii) and Buyer shall have no claim or
other right against Seller with respect thereto.
7.6 Effect of Title Failure. In the event of a Title Failure pursuant to
Section 7.5, the Buyer shall have the right not to accept the Asset(s) or
portion thereof to which such Title Failure relates and to an adjustment of
the Purchase Price in the amount of the Allocated Value(s) or portion
thereof attributable to such Title Failure. Buyer shall not be liable for
any portion of the cost of any title curative performed by Seller.
8. REPRESENTATIONS AND WARRANTIES OF SELLER.
8.1 Seller's Representations and Warranties. Seller represents and
warrants (which representations and warranties shall survive the Closing
hereof) that as of the date hereof, and as of the Closing:
(A) Each Seller is a corporation duly incorporated, validly
existing and in good standing under the laws of the State
listed on the first page of this Agreement and is duly
qualified to do business and is in good standing with the
governmental agencies having jurisdiction over the Assets;
(B) Seller owns the Assets and has the requisite power and
authority to enter into this Agreement, to carry out the
transactions contemplated hereby, to transfer the Assets in the
manner contemplated by this Agreement, and to undertake all of
the obligations of Seller set forth in this Agreement;
(C) This Agreement and any documents or instruments delivered by
Seller at the Closing shall constitute legal, valid and binding
obligations of Seller, enforceable in accordance with their
terms;
(D) Seller has good and marketable title to the Assets and the
interests in the Leases are true, correct, complete and in full
force and effect;
(E) To the best of Seller's knowledge, the production data and
computer printouts or other data or documentation furnished by
Seller to Buyer, and any supplement thereto, is materially
complete and the information reported therein is materially
correct, in all respects, as of the date of such delivery,
except that no representation or warranty is made
G-8
<PAGE>
as to interpretive data included therein. From the date of this
Agreement until the Closing Date, should Seller become aware of
any material change in the matters reflected in such data and
documentation theretofore furnished by Seller to Buyer, Seller
shall promptly notify Buyer of such change;
(F) Seller has incurred no obligation or liability, contingent or
otherwise, for brokers' or finders' fees in respect of the
matters provided for in this Agreement, and, if any such
obligation or liability exists, it shall remain an obligation of
Seller, and Buyer shall have no responsibility therefor;
(G) To the best of Seller's knowledge, with respect to the Leases
and Contracts: (i) Seller has fulfilled all requirements for
filings, certificates, disclosures of parties in interest, and
other similar matters contained in (or otherwise applicable
thereto by law, rule or regulation) the Leases and Contracts and
is fully qualified to own and hold the Assets; (ii) there are no
express obligations to engage in continuous development
operations in order to maintain any Lease, except as reflected
in the Leases; (iii) there are no provisions applicable to such
Leases or other documents which increase the royalty share of
the lessor thereunder except as such increases are reflected in
the Leases; and (iv) each of the foregoing are valid and
subsisting and all rental payments, royalty payments, shut-in
payments, or other payments or commitments required thereunder
have been made and are current to date, and no default exists
with regard thereto;
(H) With respect to the joint, unit or other operating agreements
relating to the Assets, to the best of Seller's knowledge: (i)
there are no outstanding calls or payments under authorities for
expenditures for payments which are due or which Seller has
committed to make which have not been made; (ii) pursuant to
balancing arrangements contained therein, Seller does not have
obligations to other parties thereto which would operate to have
a portion of Seller's share of production from any Well
delivered after the Effective Time without receipt by Buyer of
that price which would have been received in the absence of such
arrangement or situation, except as set forth in Exhibit D;
(iii) Seller has informed Buyer of, or Exhibit A reflects, the
status of all operations by less than all parties; and (iv)
there are no operations under the operating agreements with
respect to which Seller has become a non-consenting party,
except as reflected on Exhibit A;
(I) Seller has not entered into any contracts for or received
prepayments, take-or-pay arrangements, buydowns, buyouts for Oil
and Gas, storage of the same, or other balancing arrangements
which Buyer will be obligated to honor and make deliveries of
Oil and Gas or refunds of amounts previously made under such
contracts or arrangements;
(J) To the best of Seller's knowledge, all of the Wells have been
drilled and completed at legal locations within the boundaries
of the appropriate Lease; and all drilling and completion of the
Wells and all development and operations of the Assets have been
conducted in all respects in compliance with all applicable
laws, ordinances, rules, regulations, permits, and judgments,
orders and decrees of any court or governmental body or agency,
including but not limited to Environmental Laws. To the best of
Seller's knowledge, no Well is subject to penalties on
allowables after the date hereof because of any overproduction
or violation of applicable laws, rules, regulations, permits or
judgments, orders or decrees of any court or governmental body
or agency which would prevent such Well from being entitled to
its full legal and regular allowance from and after the date
hereof as prescribed by any court or governmental body or
agency;
(K) To the best of Seller's knowledge, all personal property and
fixtures to be conveyed pursuant to this Agreement, including,
but not limited to, the Related Assets, have been maintained in
all respects in a state of repair so as to be adequate for
normal operations and are in all respects in good working order;
G-9
<PAGE>
(L) There is no suit, action, claim, investigation or inquiry
pending or threatened arising out of or with respect to the
ownership, operation or environmental condition of the Assets;
(M) Seller is not aware of any facts relating to the condition of
the Assets which may result in a suit, action, claim,
investigation or inquiry with respect to Environmental Laws or
regulations or other legal requirements thereunder. To the best
of Seller's knowledge, the Assets have not been used by Seller
to generate, treat, transport or dispose of any hazardous
wastes, hazardous substances or any contaminant in violation of
any Environmental Law;
(N) To the best of Seller's knowledge, Seller has acquired all
permits, licenses, approvals and consents from appropriate
governmental bodies, authorities and agencies necessary to
conduct operations on the Assets in compliance with all
applicable laws, rules, regulations, ordinances and orders.
Seller is in compliance with all such permits, licenses,
approvals and consents and with all applicable Environmental
Laws. There are no proceedings pending or threatened
challenging, or seeking revocation or limitation of any such
permits, licenses, approvals and consents. All plans,
applications, reports, certificates and other instruments filed
with or furnished to any governmental body, authority or agency
do not (1) contain any untrue statement of fact or (2) omit any
statement of fact necessary to make the statements therein not
misleading;
(O) No person shall have any call upon, option to purchase, or
similar rights with respect to any portion of the production
from the Leases;
(P) Except for immaterial obligations incurred by Seller in normal
day-to-day operations of the Assets, there are no borrowings,
loan agreements, promissory notes, pledges, mortgages,
guaranties, liens and similar liabilities (direct and indirect)
which are secured by or constitute an encumbrance on the Assets
that will not be released as of the Closing;
(Q) There are no preferential rights providing a third party the
option to purchase any of the Assets;
(R) To the best of Sellers knowledge, the gas imbalances reflected
on Exhibit D are true and correct; and
(S) None of the Assets are involved in, covered by or included in
any tax partnerships.
9. REPRESENTATIONS AND WARRANTIES OF BUYER.
9.1 Buyer's Representations and Warranties. Buyer represents and warrants
(which representations and warranties shall survive the Closing) that at
the date hereof and at Closing:
(A) Buyer is a corporation duly incorporated, validly existing and
in good standing under the laws of the State listed on the
first page of this Agreement;
(B) Buyer has the requisite power and authority to enter into this
Agreement, to carry out the transactions contemplated hereby
and to undertake all of the obligations of Buyer set out in
this Agreement;
(C) The consummation of the transactions contemplated by this
Agreement will not in any respect violate, nor be in conflict
with, any provision of Buyer's charter, by-laws or other
governing documents, or any agreement or instrument to which
Buyer is a party or is bound, or any judgment, decree, order,
statute, rule or regulation applicable to Buyer (subject to
governmental consents and approvals customarily obtained after
the Closing);
(D) This Agreement constitutes legal, valid and binding obligations
of Buyer, enforceable in accordance with its terms;
G-10
<PAGE>
(E) Buyer has incurred no obligation or liability, contingent or
otherwise, for brokers' or finders' fees in respect of the
matters provided for in this Agreement, and, if any such
obligation or liability exists, it shall remain an obligation
of Buyer, and Seller shall have no responsibility therefor; and
(F) There is no suit, action, claim, investigation, administrative
proceeding or inquiry by any person, entity, administrative
agency or governmental body pending or, to Buyer's best
knowledge, threatened against Buyer or any affiliate of Buyer
which has or will affect Buyer's ability to consummate the
transactions contemplated herein.
10. CERTAIN AGREEMENTS OF SELLER. Seller agrees and covenants that, unless Buyer
shall have otherwise agreed in writing, the following provisions shall apply:
10.1 Maintenance of Assets. From the Effective Time until Closing, Seller
agrees that it will:
(A) Administer and operate the Assets in good and workmanlike
manner, and conduct its business and operations in a prudent
manner, and in substantially the same manner as prior to the
date of this Agreement;
(B) Not introduce any new methods of management, operation or
accounting with respect to any or all of the Assets;
(C) Maintain and keep the Assets in good condition and working
order; preserve the Assets in full force and effect; and
fulfill all contractual or other covenants, obligations and
conditions imposed upon Seller with respect to the Assets,
including, but not limited, to payment of royalties, delay
rentals, shut-in gas royalties and any and all other required
payments;
(D) Operate or cause to be operated the Wells in accordance with
generally accepted oil field practices and standards;
(E) Not enter into agreements to drill new wells or to rework, plug
back, deepen, plug or abandon any Well, nor commence any
drilling, reworking or completing or other operations on the
Leases which requires an authority for expenditure (AFE) to be
issued under the terms of the operating agreement covering such
operations or make or authorize any expenditures for such
operations (except for emergency operations and operations
required under presently existing contractual obligations)
without obtaining the prior written consent of Buyer; provided
that the terms of this paragraph (E) shall not apply to any
expenditures of Seller which will not be charged to Buyer;
(F) Not voluntarily relinquish its position as operator to anyone
other than Buyer with respect to any of the Assets or abandon
any of the Assets;
(G) Not, without the prior written consent of Buyer, (i) enter into
any agreement or arrangement transferring, selling or
encumbering any of the Assets; (ii) grant any preferential or
other right to purchase or agree to require the consent of any
party to the transfer and assignment of the Assets to Buyer;
(iii) enter into any new sales contracts or supply contracts;
or (iv) incur or agree to incur any contractual obligation or
liability (absolute or contingent) with respect to the Assets
except as otherwise provided herein; and
(H) Promptly provide Buyer with written notice of (i) any claims,
demands, suits or actions made against Seller which affect the
Assets; or (ii) any proposal from a third party to engage in
any transaction (e.g., a farmout) with respect to the Assets.
10.2 Consents. By Closing, Seller will obtain all such permissions,
approvals and consents by governmental authorities and others which are
obtainable by Closing and are required to vest good and
G-11
<PAGE>
marketable title to the Assets in Buyer as provided in Article 7 hereof, or
as may be otherwise reasonably requested by Buyer. Seller will execute all
necessary or appropriate transfer orders (or letters in lieu thereof)
designating Buyer as the appropriate party for payment effective as of the
Closing Date.
10.3 Cooperation. Seller will cooperate with Buyer to assist Buyer in
carrying out the agreements of Buyer.
11. CERTAIN AGREEMENTS OF BUYER. Buyer agrees and covenants that unless Seller
shall have consented otherwise in writing, the following provisions shall
apply:
11.1 Cooperation. Buyer will cooperate with Seller to assist Seller in
carrying out the agreements of Seller.
11.2 Disclosure. Until the Closing Date and to the extent not already
public, Buyer shall exercise all due diligence in safeguarding and
maintaining secure all engineering, geological and geophysical data,
reports and maps, and other data relating to the Assets in the possession
of Buyer.
12. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER. All obligations of Buyer under
this Agreement are, at its election, subject to the fulfillment, prior to or at
the Closing, of each of the following conditions:
12.1 No Litigation. At the Closing, no suit, action or other proceeding
shall be pending nor shall there be a substantial threat of such proceeding
before any court or governmental agency which attempts to prevent the
occurrence of the transactions contemplated by this Agreement.
12.2 Representations, Warranties and Covenants. All representations and
warranties of Seller contained in this Agreement shall be true as of the
Closing as if such representations and warranties were made as of the
Closing Date in all respects, and Seller shall have performed and satisfied
all covenants and fulfilled all conditions required by this Agreement to be
performed and satisfied by Seller at or prior to the Closing in all
respects.
12.3 Consents. All necessary permissions, approvals and consents of
federal authorities required pursuant to Section 10.2 hereof which are
obtainable by the Closing shall be in full force and effect.
12.4 Board Approval. The Board of Directors of The Coastal Corporation
shall have approved the purchase of the Assets by Buyer as contemplated in
this Agreement.
13. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER. All obligations of Seller
under this Agreement are, at Seller's election, subject to the fulfillment,
prior to or at the Closing, of each of the following conditions:
13.1 No Litigation. At the Closing no suit, action or other proceeding
shall be pending nor shall there be a substantial threat of such proceeding
before any court or governmental agency which attempts to prevent the
occurrence of the transactions contemplated by this Agreement.
13.2 Representations and Warranties. All representations and warranties
of Buyer contained in this Agreement shall be true as of the Closing, as if
such representations and warranties were made as of the date of Closing and
Buyer shall have performed and satisfied all covenants and fulfilled all
conditions required by this Agreement to be performed and satisfied by
Buyer at or prior to the Closing in all respects.
13.3 Consents. All necessary consents from third parties, which are
identified on Exhibit E, shall have been obtained if the effect of Closing
in the absence of such consents would expose the Seller to any material
liability.
G-12
<PAGE>
14. TERMINATION.
14.1 Causes of Termination. This Agreement and the transactions
contemplated herein shall be completely terminated:
(A) At any time by mutual consent of the Parties;
(B) By either Party if the Closing shall not have occurred by
September 1, 1999, despite the good faith reasonable efforts of
the Parties, and if the Party desiring to terminate is not in
breach of this Agreement;
(C) By either Party at its election in the event of a Casualty Loss
pursuant to Section 15.1(B);
(D) By either Party if more than ten percent (10%) of the Allocated
Value of the Assets is subject to a Title Failure;
14.2 Effect of Termination. In the event of the termination of this
Agreement pursuant to the provisions of this Article 14 or elsewhere in
this Agreement, this Agreement shall become void and have no further force
and effect and neither Party shall have any further right, duty or
liability to the other hereunder. Upon termination as provided in this
section, each Party agrees, upon request, to use its best efforts to return
to the other or destroy, all materials, documents and copies thereof
provided, obtained or discovered in the course of any due diligence
investigations.
15. MISCELLANEOUS.
15.1 Casualty Loss.
(A) As used herein the term "Casualty" means an adverse change in
the Assets taken as a whole caused by an event of casualty,
including but not limited to, volcanic eruptions, acts of God,
fire, explosion, earthquake, wind storm, strike, lockout, labor
dispute, flood, drought, war, embargo, riot, condemnation, the
exercise of any right of eminent domain, confiscation, seizure,
activities of armed forces, blowout, casing collapse or other
event causing a Well failure, operation of laws, rules or
regulations (regardless of whether covered by insurance), but
excepting depletion due to normal production, depreciation of
equipment through ordinary wear and tear and transactions
permitted under this Agreement).
(B) If, prior to the Closing, a Casualty occurs (or Casualties
occur) which results in a reduction in the value of the Assets
("Casualty Loss") in excess of ten percent (10%) of the
Purchase Price, either Party may elect to terminate this
Agreement. If this Agreement is not so terminated, then this
Agreement shall remain in full force and effect notwithstanding
any such Casualty Loss, and, at the sole option of the Buyer,
(i) Seller may retain such Asset and such Asset shall be
subject to the adjustment of Purchase Price in the same manner
set forth in Section 7.6 hereof, or (ii) at the Closing Seller
shall pay to Buyer all sums paid to Seller by reason of such
Casualty Loss, provided however, that the Purchase Price shall
not be adjusted by reason of such payment, and Seller shall
assign, transfer and set over unto Buyer all of the right,
title and interest of Seller in and to such Asset and any
unpaid awards or other payments arising out of such Casualty
Loss. Seller shall not voluntarily compromise, settle or adjust
any amounts payable by reason of such Casualty Loss without
first obtaining the written consent of Buyer.
(C) For purposes of determining the value of a Casualty Loss, the
Parties shall use the same methodology as applied in
determining the value of a Title Failure as set forth in
Section 7.6.
G-13
<PAGE>
15.2 Non-Compete.
(A) The Parties agree that the area outlined on Exhibit F is
designated as a Non-Compete Area. For a period terminating on
the earlier of (i) two (2) years after Closing or (ii) the date
on which Buyer shall have conveyed to non-affiliated third
parties a substantial portion of the Assets, Seller agrees that
it will, either directly or indirectly, acquire any oil and gas
leases or oil and gas rights covering lands within the Non-
Compete Area;
(B) If Seller should acquire, either directly or indirectly, any
interest in any property or lease rights, either wholly or
partially within the Non-Compete Area, within the time period
referenced in Section 13.2 (A) Buyer shall have the right, but
not the obligation, to acquire from Seller, all of the interest
acquired by Seller. After receipt of written notice from Seller
of its acquisition, Buyer shall have thirty (30) days after
receipt of such notice to exercise its right to acquire such
interest from Seller by paying to Seller Seller's cost of such
acquisition; and
(C) This Non-Compete provision shall terminate and have no further
force or effect if Seller is merged or enters into a corporate
reorganization with an unrelated company or entity that already
owns oil and gas leases within the Non-Compete Area, or if
Seller makes an acquisition of oil and gas assets that
includes, in part, oil and gas leases within the Non-Compete
Area; provided that, in either case, the oil and gas leases
within the Non-Compete Area shall comprise no more than 25% of
the assets of the unrelated company or the oil and gas asset
acquisition, as applicable.
15.3 Notice. Any notice, request, demand, or consent required or
permitted to be given hereunder shall be in writing and delivered in person
or by certified letter, with return receipt requested, by telecopy or pre-
paid telegram addressed to the party for whom intended at the following
addresses:
SELLER:
Southern Mineral Corporation
1201 Louisiana Street, Suite 3350
Houston, Texas 77002-5609
Attn: Michael E. Luttrell
Tel: (713) 658-9444
Fax: (713) 658-9447
BUYER:
ANR Production Company
Nine Greenway Plaza, Suite 2702
Greenway Plaza, 77046
Attn: Jon R. Nelsen
Tel: (713) 877-5527
Fax: (713) 297-1912
or at such other address as any of the above shall specify by like notice
to the other.
15.4 Survival of Representations and Warranties. All of the
representations, warranties, covenants, indemnities and agreements of or by
the Parties to this Agreement will survive the Closing, the execution and
delivery of the assignment documents and other instruments under this
Agreement, and the transfer of the Assets between the Parties; and they
shall not be merged into or superseded by the assignment documents or other
documents delivered at Closing. Notwithstanding the foregoing, Seller shall
not have any liability for the breach or inaccuracy of any representation,
warranty, covenant, indemnity or other agreement herein, unless notice of
the claim with respect thereto is given by Buyer to Seller prior to the
G-14
<PAGE>
date which is thirty (30) months from the Closing Date; provided, however
that there shall be no time limitation for notice of claims pursuant to
Section 4.2(V) and (VI). Sellere's liability to Buyer under all of the
provisions of this agreement, in the aggregate, shall not exceed the amount
of the Purchase Price. THERE ARE NO WARRANTIES THAT EXTEND BEYOND THE FACE
OF THIS AGREEMENT OR THE CONVEYANCING DOCUMENTS DELIVERED PURSUANT TO THIS
AGREEMENT. THE EXPRESS REPRESENTATIONS AND WARRANTIES OF SELLER AND BUYER
CONTAINED IN THIS AGREEMENT ARE EXCLUSIVE AND ARE IN LIEU OF, AND SELLER
AND BUYER, AS APPLICABLE, EXPRESSLY DISCLAIM, NEGATE AND WAIVE, AS
APPLICABLE, ALL OTHER REPRESENTATIONS AND WARRANTIES, EXPRESS, IMPLIED,
STATUTORY OR OTHERWISE.
15.5 COMPLIANCE WITH EXPRESS NEGLIGENCE TEST. THE PARTIES AGREE THAT THE
OBLIGATIONS OF THE INDEMNIFYING PARTY TO INDEMNIFY THE INDEMNIFIED PARTY
SHALL BE WITHOUT REGARD TO THE NEGLIGENCE OR STRICT LIABILITY OF THE
INDEMNIFIED PARTY, WHETHER THE NEGLIGENCE OR STRICT LIABILITY IS ACTIVE,
PASSIVE, JOINT, CONCURRENT OR SOLE.
15.6 Public Announcements. Neither Party may make press releases or other
public announcements concerning this transaction without Buyer's and
Seller's written approval and agreement to the form of the announcements,
except as may be required by applicable laws or rules and regulations of
any governmental agency or stock exchange.
15.7 Governing Law. This Agreement is governed by and must be construed
according to the laws of the State of Texas, excluding any conflicts-of-law
rule or principle that might apply the law of another jurisdiction. All
disputes related to this Agreement which are not subject to the binding
arbitration provisions hereof shall be submitted to the jurisdiction of the
courts of the State of Texas and venue shall be in the civil district
courts of Harris County, Texas.
15.8 Exhibits. The Exhibits attached to this Agreement are incorporated
into and made a part of this Agreement for all purposes.
15.9 Fees, Expenses and Taxes.
(A) Each Party shall be solely responsible for all expenses
incurred by it in connection with this transaction (including,
but not limited to fees and expenses of its counsel and
accountants) and shall not be entitled to any reimbursements
therefor from the other Party, except as otherwise provided in
this Agreement.
(B) Buyer shall pay any filing or recording fees required in
connection with the transactions contemplated by this
Agreement.
(C) Sales and use tax, or any other transfer tax, if any, due in
connection with the transactions represented by this Agreement
shall be paid by the Party upon which such tax is imposed by
law.
15.10 Assignment. This Agreement or any part hereof may not be assigned
by either Party without the prior written consent of the other Party;
provided, however, upon notice to the other Party, either Party shall have
the right to assign all or part of its rights (but none of its obligations)
under this Agreement in order to qualify transfer of the Assets as a
"deferred exchange" for federal tax purposes. Subject to the foregoing,
this Agreement is binding upon the Parties hereto and their respective
successors and assigns.
15.11 Entire Agreement. This Agreement constitutes the entire agreement
reached by the Parties with respect to the subject matter hereof,
superseding all prior negotiations, discussions, agreements and
understandings, whether oral or written, relating to such subject matter.
G-15
<PAGE>
15.12 Severability. In the event that any one or more covenants, clauses
or provisions of this Agreement shall be held invalid or illegal, such
invalidity or unenforceability shall not affect any other provisions of
this Agreement.
15.13 Captions. The captions in this Agreement are for convenience only
and shall not be considered a part of or affect the construction or
interpretation of any provision of this Agreement.
15.14 Confidentiality. Prior to Closing, to the extent not already
public, both Parties shall exercise all due diligence in safeguarding and
maintaining secure all engineering, geological and geophysical data,
seismic data, reports and maps and other data relating to the Assets
(collectively the "Confidential Information"). Both Parties acknowledge
that, prior to Closing, all Confidential Information shall be treated as
confidential and shall not be disclosed to third parties without the prior
written consent of the other Party.
(A) In the event of termination of this Agreement for any reason,
Buyer will not use or knowingly permit others to use such
Confidential Information in a manner detrimental to Seller, and
will not disclose any such Confidential Information to any
person, firm, corporation, association or other entity for any
reason or purpose whatsoever, except to Seller or to a
governmental agency pursuant to a valid subpoena or other order
or pursuant to applicable governmental regulations, rules or
statutes. The covenants of Buyer contained in this Section
shall survive any termination of this Agreement.
(B) After Closing, Seller shall not use or knowingly permit others
to use such Confidential Information in a manner detrimental to
Buyer, and will not disclose any such Confidential Information
to any person, firm, corporation, association or other entity
for any reason or purpose whatsoever, except to Buyer or to a
governmental agency pursuant to a valid subpoena or other order
or pursuant to applicable governmental regulations, rules or
statutes. The covenants of Seller contained in this Section
shall survive the Closing.
Executed as of the day and year first above written.
SELLER:
SOUTHERN MINERAL CORPORATION
/s/ Michael E. Luttrell
By:__________________________________
Michael E. Luttrell
Vice President and
Chief Operating Officer
AMERAC ENERGY CORPORATION
/s/ Steven H. Mikel
By:__________________________________
Steven H. Mikel
President
BUYER:
ANR PRODUCTION COMPANY
/s/ Gregory W. Hutson
By:__________________________________
Gregory W. Hutson
Senior Vice President
G-16
<PAGE>
ANNEX H
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K/A
Amendment No. 1
----------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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 (Zip Code)
offices)
----------------
Registrant's telephone number, including area code: (713) 658-9444
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each Exchange
Title of each Class on which Registered
------------------- ---------------------
<S> <C>
None None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01
6.875% Convertible Subordinated Debentures Due 2007
(Title of Class)
----------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 15, 1999, 12,803,449 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 $0.625 per share) held by
non-affiliates of the Registrant was approximately $8.0 million. 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
H-1
<PAGE>
In filing the Annual Report on Form 10-K of Southern Mineral Corporation
(the "Company" or the "Registrant"), the Company incorporated certain
information required by Part III by reference to the Company's Proxy Statement
for the 1999 Annual Meeting of Stockholders. The Company's Proxy Statement for
the 1999 Annual Meeting of Stockholders will not be filed within the 120-day
period following the end of the Company's fiscal year ended December 31, 1998.
Accordingly, the Registrant hereby amends Part III of its Annual Report on Form
10-K as set forth below to include such information:
PART I
ITEM 1. Description of Business
General
Southern Mineral Corporation, a Nevada corporation, with its subsidiaries
("Southern Mineral" or 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 of the United States, in Canada and in Ecuador. The
Company conducts its operations in Canada exclusively through its subsidiary,
Neutrino Resources Inc. ("Neutrino"). The Company's business strategy is to
increase reserves and shareholder value through a balanced program of
acquisitions, exploitation and exploration.
In February 1999, the Board of Directors of the Company retained CIBC
Oppenheimer Corp. as independent advisors to assist in studying strategic
alternatives for maximizing shareholder value. The Company expects to evaluate
a number of alternatives including, but not limited to, asset divestiture,
joint ventures or alliances, a sale or merger of the Company, and other
restructuring and recapitalization opportunities. The Company can give no
assurances as to its success in pursuing any of the strategic alternatives or
as to the terms of any transaction.
Background
The Company was incorporated in 1937 as a vehicle to consolidate mineral
tracts retained as its parent company lumbered large tracts of southern
Mississippi forestlands. 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-1980s, 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 exploration.
Acquisition Activities
Neutrino Resources Inc. In July 1998, the Company acquired, for cash, all of
the outstanding shares of Neutrino, an independent oil and gas company located
in Calgary, Canada. Following the acquisition, the Company consolidated its
other Canadian assets into Neutrino and began to operate in Canada exclusively
through Neutrino.
Neutrino's principal assets include three core areas in central and southern
Alberta, Canada: (i) the Pine Creek Field, (ii) the Inverness/Swan Hills Field
and (iii) the Medicine River/Sylvan Lake Field. In late 1998, an oil discovery
was made at Gift Lake in north central Alberta. At year-end 1998, Neutrino's
proved reserves totaled 4.0 million barrels of liquids (oil, condensate and
natural gas liquids) and 27.3 billion cubic feet (Bcf ) of natural gas. In the
second half of 1998, the Company's Canadian production was 284,532 barrels of
liquids and 1,918 million cubic feet (MMcf) of natural gas.
H-2
<PAGE>
The total purchase price of Neutrino was $57,198,000, including assumption
of debt and working capital deficit. Additionally, approximately 324,000 shares
of Southern Mineral Common Stock were issued to key Neutrino management
personnel in consideration for retention and other obligations.
Amerac Energy Corporation. In January 1998, the Company issued 3,333,333
shares of its Common Stock for all the outstanding shares of Amerac Energy
Corporation ("Amerac") in a merger effective January 28, 1998. At January 1,
1998, Amerac had proved reserves of 32.7 billion cubic feet of gas equivalent
(Bcfe) according to a report prepared by a major independent engineering firm.
Subsequent to the acquisition, a number of non-strategic Amerac properties were
sold and the remainder became a part of the Company's U.S. oil and gas asset
base.
Big Escambia Creek, Alabama. During 1997 and 1998, the Company acquired
working interests in the Big Escambia Creek Field and the surrounding area in a
series of six transactions. The largest acquisition was the purchase of BEC
Energy, Inc. in May 1997, for $10.6 million. Thereafter, the Company acquired
additional working interests in the area for $12.1 million.
The Big Escambia Creek area represents the Company's largest asset in terms
of reserves with approximately 2.6 million barrels of oil equivalent (MMboe)
proved reserves as of December 31, 1998. In addition to sales of oil and gas,
the Company earned $700,000 in revenues during 1998 from the sale of sulfur
from the area.
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 for $5.4 million and subsequently drilled a successful third
well there. In addition, the Company has recently received a 10,000 acre farm-
out from Exxon, providing further development potential to the project. Proved
reserves at year-end 1998 were 684,000 barrels of oil equivalent (boe).
Santa Elena Project, Ecuador. In June 1997, the Company acquired a 10%
interest in the Santa Elena Project for approximately $2.8 million. The Ancon
Field, in the Santa Elena concession, was originally discovered in 1921 and has
produced over 128 million barrels of oil, with peak production rates of 10,000
barrels per day in 1955. In July 1996, Compania General de Combustibles S.A.
("CGC") acquired a 20 year concession for the Santa Elena Project. CGC
implemented a redevelopment plan consisting primarily of mechanical remediation
and improvements in field delineation. The remediation and delineation efforts
to improve and sustain higher production rates have generally been
disappointing.
A key consideration in acquiring the Santa Elena interest was the
significant exploration potential contained on the concession. Over 400
kilometers of new 2-D seismic has been acquired with the expectation that
exploratory drilling will commence in mid-1999. However, given the significant
decline in world oil prices during 1998 and other factors, the project
participants may request a restructuring of the concession agreement. Such a
request may affect the timing and cost of the exploratory drilling program.
Exploitation and Exploration Activities
The Company has either initiated or agreed to participate in various
exploration opportunities in addition to those described herein. The Company
intends that its exploration effort be composed primarily of internally
generated projects. However, a portion of the Company's exploration programs
may be brought to the Company by outside individuals and other companies.
Brushy Creek Field, Texas. Discovered in late 1997, Brushy Creek Field
(Matthews Prospect) is located within the prolific Wilcox producing trend of
the Texas Gulf Coast. The field straddles the DeWitt and Lavaca County line.
Production has been established from several Wilcox sand reservoirs, including
the 13,900-Foot Sand and the 11,700-Foot Sand, but the majority of the current
production and future upside potential is from the Carroll Sand at
approximately 11,100 feet in depth. Since its discovery, the field has produced
more than 3.5 Bcf of gas (gross). Southern Mineral, in a joint effort with the
operator, generated and marketed the
H-3
<PAGE>
prospect to industry partners, and has retained non-operated working interests
ranging from 25% to 30% in the drilling of seven wells to date. The Company
believes that significant additional exploration and exploitation opportunities
exist in the field and surrounding area.
Gift Lake, Alberta, Canada. In late 1998, the Company discovered oil in its
first well at Gift Lake. Additional acreage was subsequently acquired in the
area to expand the Company's position. A second well was drilled on a separate
feature at Gift Lake, but was unsuccessful. The Company operates and holds
working interests ranging from 50% to 55% in 6,720 gross acres at Gift Lake,
and has identified a number of leads and prospects on this acreage.
Alta Loma Prospect, Texas. The Company operates and owns a 50% working
interest in the Alta Loma Prospect in Galveston County, Texas. The prospect is
a redevelopment project of an abandoned field previously discovered and
delineated by a major integrated oil company. Application of modern 3-D seismic
technology has identified significant potential in undrilled fault blocks. The
Company is currently seeking additional partners to participate in funding the
capital expenditures necessary to evaluate the prospect.
Osprey Prospect, Offshore, Texas. The Osprey Prospect is located in shallow
waters offshore Texas near Matagorda Island. The Company has leased 1,360 acres
and obtained a farm-in on an additional 640 acres to complete the prospective
lease block. The Company operates and owns a 100% interest in the prospect and
is currently seeking industry partners to participate in an exploratory test.
North Cove Prospect, Offshore, Texas. The Company operates and owns a 100%
interest in North Cove, a prospect adjacent to a large offshore gas field. In a
State of Texas lease sale during the fourth quarter of 1998, the Company was
successful in acquiring 720 acres comprising the prospect. The Company is
currently seeking industry partners to participate in testing the potential of
the prospect.
Risk Factors
Forward-Looking Statements. All statements other than statements of
historical fact contained in this report, including statements in Item 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations, are forward-looking statements. When used herein, the words
"budget", "expressions", "anticipate", "expects", "believes", "seeks", "goals",
"plans", "strategy", "intends", or "projects" and similar expressions are
intended to identify forward-looking statements. It is important to note that
the Company's actual results could differ materially from those projected by
such forward-looking statements and no assurance can be given that the
expectations will prove correct. In reliance upon the Private Securities
Litigation Reform Act of 1995, factors identified by the Company that could
cause the Company's future results to differ materially from the results
discussed in such forward-looking statements include the following risks
described under "Risk Factors." All forward-looking statements in this report
are expressly qualified in their entirety by the cautionary statements in this
paragraph and shall be deemed in the future to be modified in their entirety by
the Company's public pronouncements, including those contained in all future
reports and other documents filed by the Company with the Securities and
Exchange Commission.
High Financial Leverage and Liquidity. As of March 15, 1999, the Company's
total outstanding indebtedness was approximately $97.1 million, which is
secured by substantially all of the assets of the Company and its subsidiaries.
Cash on hand at March 15, 1999 was approximately $5.4 million as a result of
the sale of certain assets. See Note 14 to the Consolidated Financial
Statements. This substantial leverage poses certain risks, including the risk
that the Company may not generate sufficient cash flow to service its
indebtedness or that the Company may be unable to obtain additional financing
in the future and, as a result, may not have the necessary resources to respond
to market conditions and opportunities. At March 15, 1999, the Company had no
borrowing availability under its domestic credit facility and estimates that
very little is available under its Canadian credit facility after considering
the minimum working capital requirement. See Note 3 to the Consolidated
Financial Statements. The Company's high level of indebtedness, covenant
requirements and working capital deficit subjects it to risks of default, which
may significantly impair its ability
H-4
<PAGE>
to meet its liquidity needs. The Company's domestic bank credit agreement
contains provisions whereby a default under the Company's Canadian credit
facility or pursuant to the 6.875% Convertible Subordinated Debentures
indenture would create a default condition under the domestic credit facility.
In such a default condition, the banks may declare amounts under the domestic
credit facility to become immediately due and payable. The holders of
convertible subordinated debentures have acceleration rights if the Company is
in payment default under either its domestic or Canadian credit facilities. The
Canadian credit facility is a revolving demand loan. See Note 3 to the
Consolidated Financial Statements. The Company's ability to meet its
obligations is dependent upon a number of factors, many of which are outside of
the Company's control. See Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company believes that it will be necessary to sell significant oil and
gas assets to raise the substantial additional funds necessary to meet the
September 1, 1999 maturity of $12,500,000 of principal that will be due under
its domestic credit facility. See Note 3 to the Consolidated Financial
Statements. No assurance can be given that such transactions can be consummated
on terms acceptable to the Company or its lenders, whose approval may be
required. If the Company is unable to raise the necessary funds, further
restructuring of its domestic credit facility will be required or the Company
could become in default on the full amount of its indebtedness, as discussed
above. The Company has retained CIBC Oppenheimer Corp. to assist in evaluating
various strategic alternatives, which may include asset divestitures, joint
ventures or alliances, a sale or merger of the Company or other restructuring
or recapitalization opportunities. There can be no assurance that the Company
will be successful in pursuing any of such strategic alternatives or as to the
terms of any transaction that may be pursued. See Note 14 to the Consolidated
Financial Statements.
The Company has been advised that it is not in compliance with Nasdaq Stock
Market listing requirements due to the recent low price per share of its Common
Stock. If such requirements are not satisfied prior to April 19, 1999, the
Company's Common Stock may be subject to delisting from the Nasdaq National
Market. Such delisting would impair the liquidity of the Common Stock and
capital raising flexibility of the Company. The Company intends to pursue a
remedy and is considering steps to come into compliance with the listing
requirements. The Company cannot assure that it will be successful in
maintaining its Nasdaq listing. See Item 5 "Market for the Company's Common
Equity and Related Stockholder Matters."
Volatility of Prices and Availability of Markets. The Company's revenues,
profitability and future rate of growth are highly dependent upon the prices of
and demand for oil and gas, which can be extremely volatile. The volatile
energy market makes it difficult to estimate future prices and sales volumes of
natural gas, crude oil and natural gas liquids ("NGLs"), which are affected by
a number of factors beyond the control of the Company, including worldwide
supplies of and demand for oil and gas, changing international economic and
political conditions, contract enforceability, negotiations with other parties,
availability of capital, insolvency of other parties, domestic and foreign
energy legislation, weather, environmental conditions, regulations and events,
and actions by major petroleum producers including members of the Organization
of Petroleum Exporting Countries. The Company's financial condition, operating
results and liquidity may be materially affected by any significant
fluctuations in the sales prices of natural gas, crude oil and NGLs. The
Company's ability to service its long-term obligations and to generate funds
internally for capital expenditures will be similarly affected.
Uncertainties in Reserve Estimation, Production Success and Reserve
Replacement. There are numerous uncertainties inherent in estimating quantities
of reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond the control of the
producer. The reserve data set forth herein represents only estimates.
Underground accumulations of oil and gas cannot be measured in an exact way.
The accuracy of any reserve estimate is a function of the quality and quantity
of available data and of engineering and geological interpretation and
judgment. As a result, estimates by engineers often vary. In addition, results
of drilling, testing and production subsequent to the date of an estimate may
justify revision of such estimates. Accordingly, reserve estimates at a
specific point in time are often different from the quantities of oil and gas
that are ultimately recovered, which differences may be significant.
Additionally, the
H-5
<PAGE>
estimates of future net revenues are based upon certain assumptions about
future production levels, prices and costs that may not prove correct over
time. The meaningfulness of such estimates is highly dependent upon the
assumptions upon which they were based.
In general, the Company's volume of production from oil and gas properties
declines with the passage of time. Except to the extent the Company acquires
additional properties containing proved reserves or conducts successful
exploration or development activities, or both, the proved reserves of the
Company, and the revenues generated from production thereof (assuming no price
increases), will decline as reserves are produced. Drilling activities are
expensive and subject to numerous risks, including the risk that no
commercially productive oil or gas production will be obtained. The decision to
purchase a property interest or explore or develop a property will depend in
part on geophysical and geological analysis and engineering studies, the
results of which may be inconclusive or subject to varying interpretations. The
cost of drilling, completing and operating wells is often uncertain. Drilling
may be curtailed, delayed or canceled as a result of many factors, including
title problems, project approvals by joint venture partners, weather
conditions, compliance with government regulation, shortages or delays in
obtaining equipment, or limitations in the transportation, storage or market
for products. No assurance can be given that wells will be able to sustain
production rates commensurate with the drill stem tests. Increases or decreases
in prices of oil and gas and in cost levels, along with the timing of
development projects, will also affect revenues generated by the Company and
the present value of estimated future net cash flows from its properties.
Revenues generated from future activities of the Company are highly dependent
upon the level of success in finding, developing or acquiring additional
reserves.
Business Risks
The Company's activities are subject to the risks normally associated with
oil and gas operations. The nature of the oil and gas business involves a
variety of risks usually associated with exploration for, and development and
production and transportation of, oil and gas, including blowouts, cratering,
oil spills, fires, geologic uncertainties and adverse or seasonal weather
conditions. Offshore operations are also subject to marine perils and extensive
governmental regulations, as well as interruption or termination by
governmental authorities based on environmental or other considerations. The
occurrence of any of these events could cause injury to life or property,
interruptions in operations, failure to produce oil or gas in commercial
quantities, inability to fully produce discovered reserves, loss of revenues or
increases in the costs of operations.
The Company's operations are subject to numerous foreign, federal, state and
local laws, rules and regulations relating to the protection of the
environment, health and safety, including 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 or those that may be enacted in the
future, would have a material adverse effect on its capital expenditures,
earnings or competitive position.
The Company's international operations are subject to certain risks,
including expropriation of assets, governmental reinterpretation of applicable
laws and contract terms, increases in or assessments of taxes and government
royalties, renegotiations of contracts with governments or customers,
government approvals of lease, permit or similar applications and of
exploration and development plans, political and economic instability, guerilla
activity, disputes between governments, payment delays, export and import
restrictions, limits on allowable levels of exploration and production, and
currency shortages, currency rate fluctuations, exchange losses and
repatriation restrictions, as well as changes in laws and policies governing
operations of companies with overseas operations, including more strict
environmental regulation. In addition, in the event of a dispute arising from
foreign operations, the Company may be subject to the exclusive jurisdiction of
foreign courts or may not be successful in subjecting foreign persons to the
jurisdiction of courts in the U. S. The
H-6
<PAGE>
Company may also be hindered or prevented from enforcing its rights with
respect to a governmental instrumentality because of the doctrine of sovereign
immunity. Foreign operations and investments may also be subject to laws and
policies of the U. S. affecting foreign trade, investment and taxation,
including but not limited to creditability of foreign taxes, that could affect
the conduct and profitability of those operations.
Approximately 31% of the Company's revenues during the year ended December
31, 1998 were derived from Canadian properties. The costs and revenues
associated with the Company's Canadian operations are denominated in Canadian
dollars. The Company prepares its consolidated 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 oil and gas exploration and
production industry. Consequently, the Company competes with many other
entities for capital and 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.
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 permits
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,
impose restrictions on the injection of liquid into subsurface formations,
require remedial measures to mitigate pollution from former operations (such as
pit closure and plugging abandoned wells), and impose substantial liabilities
for pollution resulting from drilling and production operations. Moreover,
state and federal environmental laws and regulations may become more stringent,
and public interest in the protection of the environment has increased
dramatically in recent years. 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. 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.
The Company generates wastes that may be subject to the federal Resource
Conservation and Recovery Act of 1976, as amended ("RCRA") and comparable state
statutes. The U.S. Environmental Protection Agency ("EPA") and various state
agencies have limited the approved methods of disposal for certain hazardous
and non-hazardous wastes. Moreover, legislation has been proposed in Congress
from time to time that would amend 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.
The Company currently owns or leases numerous properties that for many years
have been used for the exploration and production of oil and gas. Although the
Company believes that it has used good operating and
H-7
<PAGE>
waste disposal practices, prior owners and operators of these properties may
not have used similar practices, and hydrocarbons or other wastes may have been
disposed of or released on or under the properties owned or leased by the
Company or on or under locations where such wastes have been taken for
disposal. In addition, many of these properties have been operated by third
parties whose treatment and disposal or release of hydrocarbons or other wastes
was not under the Company's control. These properties and the wastes disposed
thereon may be subject to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA" or "Superfund"),
RCRA and analogous state laws as well as state laws governing the management of
oil and gas wastes. Under such laws, the Company could be required to remove or
remediate previously disposed wastes (including wastes disposed of or released
by prior owners or operators) or property contamination (including groundwater
contamination) or to perform remedial plugging operations to prevent future
contamination.
The Oil Pollution Act ("OPA") contains numerous requirements relating to the
prevention of and response to oil spills into waters of the United States. The
OPA subjects persons responsible for "offshore facilities" to strict joint and
several liability for all containment and cleanup costs and certain other
damages arising from a spill, including, but not limited to, the costs of
responding to a release of oil to surface waters. The OPA also requires owners
and operators of offshore facilities that could be the source of an oil spill
into federal or state waters, including wetlands, to post a bond, letter of
credit or other form of financial assurance in amounts ranging from $10 million
in specified state waters to $35 million in federal outer continental shelf
waters to covers costs that could be incurred by governmental authorities in
responding to an oil spill. Such financial assurances may be increased by as
much as $150 million if a formal risk assessment indicates that the increase is
warranted. Noncompliance with OPA may result in varying civil and criminal
penalties and liabilities.
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, as amended, commonly known as the
Clean Water Act ("CWA"), and comparable state laws and regulations require
certain owners or operators of facilities that store or otherwise handle oil,
such as the Company, to prepare and implement spill prevention, control,
countermeasure and response plans relating to the possible discharge of oil
into the surface waters. The CWA also 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 CWA 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 severely restrict 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 has experienced or is
experiencing similar costs and the Company believes that these costs will not
have a material adverse impact on the Company's financial condition and results
of operations. Some oil and gas exploration
H-8
<PAGE>
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.
The Company's operations may be subject to the Clean Air Act ("CAA") and
comparable state and local requirements. Amendments to the CAA were adopted in
1990 and contain provisions that may result in the gradual imposition of
certain pollution control requirements with respect to air emissions from the
operations of the Company. The EPA and various states have been developing
regulations to implement these requirements. The Company may be required to
incur certain capital expenditures in the next several years for air pollution
control equipment in connection with maintaining or obtaining operating permits
and approvals addressing other air emission-related issues. However, the
Company does not believe its operations will be materially adversely affected
by any such requirements.
International Environmental Regulation. Operations of the Company in Canada
and Ecuador 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. In Canada, 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 licenses and authorizations, and the
suspension of operations, as well as the imposition of clean-up orders, fines
and penalties. In addition, certain types of operations may require
environmental assessment and reviews to be completed before approvals are
obtained and before exploration or development projects are begun. The Company
does not anticipate that it will be required to make capital or other
expenditures by reason of international 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 regulations, 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 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.
As a producer and seller of natural gas, the Company depends on
transportation and storage services offered by various interstate and
intrastate pipeline companies for the delivery and sale of its gas supplies.
Transportation and storage services rendered by interstate natural gas
pipelines are subject to the jurisdiction of the Federal Energy Regulatory
Commission ("FERC") under the Natural Gas Act of 1938 and the Natural Gas
Policy Act of 1978. Competition across the natural gas industry has intensified
in recent years as a result of certain major rulemakings promulgated by FERC
requiring interstate natural gas pipelines to unbundle transportation and sales
services and to render open-access transportation service on a
nondiscriminatory basis for third-party gas supplies. These FERC initiatives
have resulted in interstate pipelines abandoning their
H-9
<PAGE>
traditional merchant function and offering various types and levels of services
to their customers, which, in turn, has greatly enhanced the ability of
producers and others to market natural gas supplies to local distribution
companies and large commercial and industrial end users.
The rates charged for interstate natural gas pipeline services are often
subject to negotiation between customers and the pipeline within certain FERC-
approved parameters. These rates are subject to change depending upon
individual system usage and other variables. Additionally, the availability of
interstate transportation and storage service necessary for the Company to make
sales or deliveries of gas can at times be preempted by other users of a
particular pipeline system in accordance with FERC-approved methods for
allocating open-access pipeline capacity.
The regulations affecting interstate pipeline services are subject to
ongoing review and amendment. Within the past year, FERC has issued several
notices of proposed rulemakings and inquiry through which it has indicated that
it is considering modifying certain existing regulations and policies in an
effort to (i) maximize competition in short-term transportation markets, (ii)
provide interstate pipelines with additional flexibility in order to better
tailor rates and terms and conditions of service to individual customer needs,
and (iii) better fashion regulatory policies that provide the correct
incentives and price signals for all segments of the industry while continuing
to guard against the exercise of market power. While these and other potential
FERC-initiatives may further facilitate market access for natural gas
producers, they will also likely result in increased competition in markets in
which the Company's natural gas is sold which could negatively affect revenues
in the future.
As a producer and seller of oil, the Company depends on services offered by
various interstate and intrastate oil pipelines. Services provided by
intrastate oil pipelines are subject to the jurisdiction of individual state
regulatory commissions, and the rules and regulations of these individual
commissions are subject to ongoing review and possible amendment. The rates,
terms and conditions of service and certain other aspects of interstate oil
pipeline service are subject to regulation under the Interstate Commerce Act,
which jurisdiction is administered by the FERC.
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 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):
<TABLE>
<CAPTION>
Customer 1998 1997 1996
-------- ------ ------ ------
<S> <C> <C> <C>
G C Marketing Company............................... $ -- $2,267 $3,212
Damsco Distribution................................. 3,747 1,656 --
Diasu Oil & Gas Co., Inc............................ -- 1,631 --
</TABLE>
H-10
<PAGE>
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. There
can be no assurance that such coverage will continue to be available or as to
the cost of such coverage. The occurrence of a significant event that is not
fully insured against could have a material adverse effect on the Company's
financial condition or results of operations.
Employees
At March 15, 1999, the Company employed 38 full-time persons and 13
consultants. The Company believes that its relations with its employees and
consultants are good.
ITEM 2. Description of Properties
General
At December 31, 1998, the Company held working interests in 444 gross wells
in the continental United States, 862 in Ecuador and 1,471 in Canada.
Approximately 36% of the Company's proved reserves are oil and liquids, and
approximately 64% are gas, measured in energy equivalent barrels of oil
(natural gas is converted at the rate of six thousand cubic feet of gas for
each barrel of oil).
H-11
<PAGE>
Oil and Gas Reserve Information
The following table reflects the estimated proved reserves of the Company.
The Company's estimates of reserves filed with federal agencies, including the
Securities Exchange Commission, agree with the information set forth below. The
oil and gas reserves are principally onshore in the continental United States,
Canada and Ecuador. The Company's reserve information has been based on
estimates prepared by or audited by independent petroleum engineers.
Netherland, Sewell & Associates, Inc. ("NSA") prepared the domestic reserve
estimates as of December 31, 1995 and 1997 and audited the December 31, 1996
domestic reserve estimates prepared by the Company. NSA prepared most of the
domestic reserve estimates as of December 31, 1998. The Company prepared the
remaining reserve estimates, and Ryder Scott Company ("RSC") audited those
results. McDaniel & Associates Consultants Ltd. prepared the Canadian reserve
estimates as of December 31, 1995, 1996 and 1997. Chapman Petroleum Engineering
Ltd. prepared most of the Canadian reserve estimates as of December 31, 1998,
while Gilbert Laustsen Jung Associates Ltd. prepared the remaining Canadian
reserve estimates as of such date. The Ecuador reserves were prepared by RSC as
of December 31, 1997. As a result of the decline in world oil prices, the
Company's reserves in Ecuador are not economic as of December 31, 1998. The
Company's U.S. oil reserves (including, oil, condensate and natural gas
liquids) have been prepared using average prices of $9.67, $16.91 and $24.41
per barrel and gas reserves were prepared using average natural gas prices of
$2.17, $2.20 and $3.91 per Mcf, as of December 31, 1998, 1997 and 1996,
respectively. The Canadian reserves have been prepared using average oil prices
of $8.71, $15.30 and $23.66 per barrel and average natural gas prices of $1.72,
$1.34 and $1.62 per Mcf, as of December 31, 1998, 1997 and 1996, respectively.
Ecuador reserves were prepared using an average oil price of $18.00 per barrel
as of December 31, 1997. See Item 1 "Risk Factors" and "Business Risks" and
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Notes to the Consolidated Financial Statements".
<TABLE>
<CAPTION>
U.S. Ecuador Canada Total
--------------------- --------------- --------------------- ---------------------
Oil Gas Oil Gas Oil Gas Oil Gas
Proved Reserves (Bbls) (Mcf) (Bbls) (Mcf) (Bbls) (Mcf) (Bbls) (Mcf)
- --------------- --------- ---------- -------- ----- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... 687,401 20,644,438 -- -- 729,135 4,716,121 1,416,536 25,360,559
Extensions, discoveries
and additions.......... 6,081 479,336 -- -- 31,351 1,506,458 37,432 1,985,794
Revisions of previous
estimates.............. 33,975 (519,051) -- -- (12,623) 79,948 21,352 (439,103)
Purchase and sale of
minerals in place
(net).................. 109,252 4,590,014 -- -- -- -- 109,252 4,590,014
Production.............. (120,855) (2,396,379) -- -- (112,563) (961,527) (233,418) (3,357,906)
--------- ---------- -------- ---- --------- ---------- --------- ----------
Balance, December 31,
1996................... 715,854 22,798,358 -- -- 635,300 5,341,000 1,351,154 28,139,358
Extensions, discoveries
and additions.......... 20,480 2,869,630 26,395 -- 15,774 95,139 62,649 2,964,769
Revisions of previous
estimates.............. 53,743 (814,731) (26,395) -- (30,595) 384,760 (3,247) (429,971)
Purchase and sale of
minerals in place
(net).................. 1,746,890 7,702,198 489,971 -- (1,793) (295,974) 2,235,068 7,406,224
Production.............. (186,759) (2,554,072) (23,966) -- (93,486) (942,625) (304,211) (3,496,697)
--------- ---------- -------- ---- --------- ---------- --------- ----------
Balance, December 31,
1997................... 2,350,208 30,001,383 466,005 -- 525,200 4,582,300 3,341,413 34,583,683
Extensions, discoveries
and additions.......... 237,189 12,903,760 -- -- 170,912 -- 408,101 12,903,760
Revisions of previous
estimates.............. (192,935) (2,362,293) (437,413) -- -- -- (630,348) (2,362,293)
Purchase and sale of
minerals in place
(net).................. 1,004,373 12,066,855 -- -- 3,656,928 24,914,483 4,661,301 36,981,338
Production.............. (406,920) (4,219,528) (28,592) -- (321,040) (2,212,983) (756,552) (6,432,511)
--------- ---------- -------- ---- --------- ---------- --------- ----------
Balance, December 31,
1998................... 2,991,915 48,390,177 -- -- 4,032,000 27,283,800 7,023,915 75,673,977
========= ========== ======== ==== ========= ========== ========= ==========
<CAPTION>
Proved Developed
Reserves
- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... 608,705 19,361,667 -- -- 635,300 5,341,000 1,244,005 24,702,667
Balance, December 31,
1997................... 2,334,122 29,156,068 466,005 -- 525,200 4,582,300 3,325,327 33,738,368
Balance, December 31,
1998................... 2,731,986 40,605,557 -- -- 3,899,100 26,773,600 6,631,086 67,379,157
</TABLE>
H-12
<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>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Production:
Oil and NGLs (Bbls)
U.S..................................... 406,920 186,759 120,855
Ecuador................................. 28,592 23,966 --
Canada.................................. 321,040 93,486 112,563
---------- ---------- ----------
Total................................. 756,552 304,211 233,418
========== ========== ==========
Gas (Mcf)
U.S..................................... 4,219,528 2,554,072 2,396,379
Ecuador................................. -- -- --
Canada.................................. 2,212,983 942,625 961,527
---------- ---------- ----------
Total................................. 6,432,511 3,496,697 3,357,906
========== ========== ==========
Average sales prices:
Oil and NGLs ($ per Bbl)
U.S..................................... $ 12.11 $ 17.73 $ 19.69
Ecuador................................. 10.15 16.10 --
Canada.................................. 10.51 17.58 18.09
---------- ---------- ----------
Average................................. $ 11.36 $ 17.55 $ 18.92
========== ========== ==========
Gas ($ per Mcf)
U.S..................................... $ 2.13 $ 2.49 $ 2.29
Canada.................................. 1.42 1.45 1.17
---------- ---------- ----------
Average................................. $ 1.89 $ 2.21 $ 1.97
========== ========== ==========
Average costs ($ per Mcfe)
Operating expenses and production taxes.. $ 0.78 $ 0.69 $ 0.58
Depreciation, depletion and
amortization............................ 0.96 0.79 0.60
</TABLE>
Productive Wells Statistics
The following table sets forth information concerning productive wells in
which the Company has an interest as of December 31, 1998. 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.
<TABLE>
<CAPTION>
Oil Gas Total
----------- ---------- -----------
Gross Net Gross Net Gross Net
----- ----- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Canada.................................... 1,199 87.6 272 11.8 1,471 99.4
Ecuador................................... 862 86.2 -- -- 862 86.2
U. S. .................................... 188 42.2 256 35.3 444 77.5
----- ----- --- ---- ----- -----
Total..................................... 2,249 216.0 528 47.1 2,777 263.1
===== ===== === ==== ===== =====
</TABLE>
H-13
<PAGE>
Development and Exploratory Wells Drilled
The following table sets forth the drilling results of wells in which the
Company has a working interest for the year ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ----------
Gross Net Gross Net Gross Net
----- ----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Exploratory:
Oil..................................... 2 1.002 0 .000 0 .000
Gas..................................... 1 .250 2 .489 1 .150
Dry..................................... 6 2.586 3 .495 3 .335
Development:
Oil..................................... 11 .970 34 1.282 21 .246
Gas..................................... 26 2.588 4 .116 15 .257
Dry..................................... 5 2.135 8 2.246 6 .174
Total:
Productive.............................. 40 4.810 40 1.887 37 .653
Dry..................................... 11 4.721 11 2.741 9 .509
</TABLE>
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, 1998. This table does not
reflect certain mineral acreage owned by the Company at December 31, 1998, but
subsequently sold, as described below. In the following data "Gross" refers to
the total acres in which the Company has a working interest and "Net" refers to
gross acres multiplied by the percentage of the working interest owned by the
Company.
<TABLE>
<CAPTION>
Developed Undeveloped
Acreage Acreage
-------------- ---------------
United States Gross Net Gross Net
------------- ------- ------ ------- -------
<S> <C> <C> <C> <C>
Alabama....................................... 7,350 1,478 188 7
Arkansas...................................... 0 0 1,799 450
Colorado...................................... 288 21 0 0
Kansas........................................ 204 53 0 0
Louisiana..................................... 4,959 1,391 625 486
Louisiana-Offshore............................ 5,000 1,150 392 131
Michigan...................................... 96 2 0 0
Mississippi................................... 908 112 1,207 132
Montana....................................... 24 2 0 0
New Mexico.................................... 3,012 213 0 0
Oklahoma...................................... 2,800 592 0 0
Texas......................................... 25,588 7,901 23,024 17,354
Texas-Offshore................................ 5,760 105 5,120 5,120
Wyoming....................................... 10,384 500 0 0
Utah.......................................... 672 148 12,460 4,850
------- ------ ------- -------
Total-United States......................... 67,045 13,668 44,815 28,530
======= ====== ======= =======
<CAPTION>
Canada
------
<S> <C> <C> <C> <C>
Alberta....................................... 154,855 39,218 296,468 46,018
Saskatchewan.................................. 3,363 323 10,470 6,483
British Columbia.............................. 2,085 259 13,914 600
Manitoba...................................... 2,220 2,060 1,033 472
------- ------ ------- -------
Total-Canada................................ 162,523 41,860 321,885 53,573
======= ====== ======= =======
Ecuador....................................... 15,400 1,540 279,819 27,982
======= ====== ======= =======
Total Leasehold Acreage..................... 244,968 57,068 646,519 110,085
======= ====== ======= =======
</TABLE>
H-14
<PAGE>
Developed acreage consists of lease acres spaced or assignable to production
on which wells have been drilled or completed to a point that would permit
production of commercial quantities of oil or gas.
The Company's ownership of mineral rights as of December 31, 1998, is set
forth below:
<TABLE>
<CAPTION>
Gross Net
State Mineral Acres Mineral Acres
----- ------------- -------------
<S> <C> <C>
Mississippi................................... 262,000 118,000
Wisconsin..................................... 121,000 110,000
Texas......................................... 212,514 84,183
New Mexico.................................... 67,634 32,577
Other......................................... 2,000 2,000
------- -------
Total....................................... 665,148 346,760
======= =======
</TABLE>
On March 11, 1999, the Company sold its mineral interests and substantially
all of its royalty interests in Texas, New Mexico and Mississippi for $6.0
million, subject to certain adjustments. The sale encompassed 235,000 net
mineral acres and proved reserves of 4.4 Bcfe as of December 31, 1998. Of the
$6.0 million sales price, $5.4 million was closed and funded on March 11, 1999.
The remainder of the transaction is expected to close before May 11, 1999,
following the satisfaction of certain conditions.
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.
ITEM 3. Legal Proceedings
The Company is involved in several lawsuits arising in the ordinary course
of business, only one of which presents the possibility of a material loss. The
Company's Canadian subsidiary, Neutrino Resources Inc., has been sued alleging
damages resulting from the calculation of third party facility and processing
fees at its Pine Creek Field, Alberta, Canada. The suit was filed on January
27, 1999 in the Court of Queen's Bench of Alberta in the Judicial District of
Calgary by EnerMark Inc. The amount of alleged damages approximates U.S.
$870,000. Although the outcome of litigation cannot be predicted with
certainty, management believes (based on discussions with its legal counsel)
that the outcome of these legal actions will not have a material adverse effect
on the Company's consolidated financial condition or results of operations.
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.
H-15
<PAGE>
PART II
ITEM 5. Market for the Company's Common Equity and Related Stockholder Matters
Market for the 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 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 Nasdaq Stock Market rules require issuers listed on the Nasdaq National
Market and SmallCap Market to maintain a minimum closing bid price equal to or
greater than $1.00 per share and meet certain other maintenance requirements.
On January 19, 1999, the Company was advised that its Common Stock was not in
compliance with Nasdaq Stock Market minimum bid requirement.
Unless the Company's Common Stock satisfies the Nasdaq minimum bid
requirement before April 19, 1999, or unless the Company is granted an
extension, the Company's Common Stock will be scheduled for delisting. The
Company believes that continued listing on the Nasdaq is important to
maintaining the liquidity of its Common Stock and the ability of the Company to
raise capital. The Company intends to pursue a remedy and is considering steps
to come into compliance with the listing requirements. The Company cannot
assure that it will be successful in maintaining its Nasdaq listing.
The following table sets forth the high and low sales prices on the market
systems noted above for the Company's Common Stock for the periods indicated:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
High Low High Low
----- ----- ----- -----
<S> <C> <C> <C> <C>
First Quarter..................................... $5.06 $3.19 $7.75 $4.00
Second Quarter.................................... 4.00 3.31 5.50 3.50
Third Quarter..................................... 3.38 2.00 5.13 4.13
Fourth Quarter.................................... 2.19 .44 8.13 5.13
----- ----- ----- -----
For the Year...................................... $5.06 $ .44 $8.13 3.50
===== ===== ===== =====
</TABLE>
On March 15, 1999, the closing sale price of the Company's Common Stock, as
reported by the Nasdaq National Market System was $0.625 per share.
The Company did not declare any dividends in fiscal 1998, 1997 or 1996. The
payment of future dividends on the Common Stock, if any, will be reviewed
periodically by the Company's Board of Directors, and will depend upon, among
other things, the Company's financial condition, funds available from
operations, the amount of anticipated capital and other expenditures, and the
Company's future business prospects. The Company does not expect, under its
existing capital structure, to be able to pay dividends for the foreseeable
future. Payment of dividends is currently prohibited by the terms of the
Company's domestic bank credit agreement. See Item 7 "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
There were 1,011 stockholders of record on March 15, 1999.
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 ("1996 SOP"). Pursuant to the 1996 SOP,
the Company may grant options to purchase up to 300,000 shares (subject to
H-16
<PAGE>
customary anti-dilution adjustments) of its Common Stock to key employees of
the Company. The 1996 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 thereof reported on the Nasdaq Systems.
1997 Stock Option Plan. During 1998 and 1997, the Company granted options
exercisable for 359,200 and 135,000 shares of Common Stock, respectively, under
the Company's 1997 Stock Option Plan ("1997 SOP"). Pursuant to the 1997 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 1997 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 Systems.
Repricing of Options. The 1996 and 1997 Stock Option Plans were amended on
December 21, 1998 to provide for the exchange and repricing of all the
outstanding options held by current Company employees, except the President and
CEO, for new options exercisable at a price lower than that of the cancelled
options, bearing the same exercise term. The exercise price for the repriced
options equaled $1.00, which was higher than the $0.625 per share closing price
of the Company's Common Stock on the date of grant.
Non-Qualified Stock Options. During 1998, and in conjunction with the
acquisition of Neutrino, the Company granted Non-Qualified Stock Options
exercisable for 550,000 shares of Common Stock under individual agreements with
key members of Neutrino management. The issuance of these Non-Qualified Stock
Options was 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 non-qualified option granted in 1998 was at the market
price for the Company's Common Stock on the date of the grant. However, in
conjunction with repricing of options pursuant to the 1996 and 1997 SOPs, as
described above, the option price of Non-Qualified options issued in 1998 were
also repriced, to $1.00, on December 21, 1998.
1996 Employee Stock Purchase Plan. During 1998 and 1997, the Company granted
options exercisable for 5,211 and 6,297 shares of Common Stock, respectively,
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 during the 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 Systems.
The Company's Form S-8 Registration Statement generally covers the issuance
and resale (subject, in the case of affiliates, to Rule 144 under the
Securities Act of 1933) of Common Stock issuable upon exercise of options under
the 1996 and 1997 SOPs and SPP.
H-17
<PAGE>
ITEM 6. Selected Financial Data
The following table sets forth certain selected financial data of the
Company for each of the last five years derived from the audited Consolidated
Financial Statements of the Company and should be read in connection with the
financial statements and the related notes included elsewhere herein.
COMPARATIVE CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
ASSETS
------
Current assets...................... $ 7,776 13,455 $ 2,918 $ 2,071 $1,973
Property and equipment-net.......... 114,187 42,293 20,599 18,042 1,347
Oil and gas properties held for sale
and other.......................... 6,327 6,127 869 1,554 50
-------- ------- ------- ------- ------
$128,290 $61,875 $24,386 $21,667 $3,370
======== ======= ======= ======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities................. $ 41,914 2,956 $ 683 $ 5,960 $ 290
Deferred income taxes............... 7,279 1,039 1,169 606 --
Long-term debt...................... 64,370 41,400 3,900 9,920 --
Stockholders' equity................ 14,727 16,480 18,634 5,181 3,080
-------- ------- ------- ------- ------
$128,290 $61,875 $24,386 $21,667 $3,370
======== ======= ======= ======= ======
WORKING CAPITAL..................... $(34,138) $10,499 $ 2,235 $(3,889) $1,683
======== ======= ======= ======= ======
</TABLE>
COMPARATIVE CONSOLIDATED OPERATING DATA
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Revenues
Oil and gas...................... $ 21,722 $13,790 $11,780 $2,044 $ 1,747
Gains (losses) on sales of
properties...................... (250) 413 453 170 66
-------- ------- ------- ------ -------
21,472 14,203 12,233 2,214 1,813
Expenses......................... 35,624 14,815 8,164 2,488 5,580
-------- ------- ------- ------ -------
Income (loss) from operations.... (14,152) (612) 4,069 (274) (3,767)
Other income, expenses and
deductions
Interest and other income...... 330 328 286 146 76
Interest and debt expense...... (5,362) (1,591) (1,242) -- --
-------- ------- ------- ------ -------
Income (loss) before income
taxes........................... (19,184) (1,875) 3,113 (128) (3,691)
Provision (benefit) for income
taxes........................... (2,775) 174 679 9 (558)
-------- ------- ------- ------ -------
Net income (loss)................ $(16,409) $(2,049) $ 2,434 $ (137) $(3,133)
======== ======= ======= ====== =======
Earnings (Loss) per share of
Common Stock:
Basic.......................... $ (1.32) $ (.22) $ .37 $(0.02) $ (0.75)
======== ======= ======= ====== =======
Diluted........................ $ (1.32) $ (.22) $ .34 $(0.02) $ (0.75)
======== ======= ======= ====== =======
Weighted average number of
shares-basic.................... 12,422 9,109 6,621 5,701 4,162
======== ======= ======= ====== =======
Weighted average number of
shares-diluted.................. 12,422 9,109 7,114 5,701 4,162
======== ======= ======= ====== =======
</TABLE>
- --------
Note: In 1998, 1997, 1996 and 1994, the Company recognized a pre-tax non-cash
expense of $9,344, $2,838, $603 and $1,724, respectively, in connection
with the writedown of its investment in certain oil and gas producing
properties.
H-18
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations For the Year Ended December 31, 1998 As Compared to the
Year Ended December 31, 1997
Oil and gas revenues for the year ended December 31, 1998 were $21,722,000,
up 58% compared to oil and gas revenues for 1997 of $13,790,000. The increase
in revenues reflects higher production volumes of both natural gas and crude
oil, partially offset by lower commodity prices. Higher production volumes were
primarily the result of two significant acquisitions made by the Company during
1998 and new production from a natural gas discovery at Brushy Creek Field in
Texas. The Company purchased Neutrino Resources Inc. as of June 30, 1998 and
Amerac Energy Corporation in January 1998.
Natural gas production in 1998 was 6,433 million cubic feet ("MMcf"), an 84%
increase compared to 1997 production of 3,497 MMcf. The Company's crude and
natural gas liquids production in 1998 increased 149% to 756,552 barrels
compared to 304,211 barrels in 1997.
The average natural gas price in 1998 decreased 14% to $1.89 per Mcf
compared to an average price of $2.21 per Mcf in 1997. Crude oil prices
decreased 34% in 1998 to $11.74 per barrel compared to $17.85 per barrel in
1997.
As part of the Company's ongoing operations, the Company may sell non-
strategic assets or oil and gas properties. The proceeds may be used to pay
down debt or redeploy capital to opportunities that may have a higher rate of
return. These activities resulted in losses on the sale of assets of $250,000
in 1998 and gains of $413,000 in 1997. The loss on the sale of assets in 1998
was primarily the result of the sale of numerous marginal properties
principally in the United States. The gain on sale of assets during 1997 was
primarily the result of the sale of non-strategic oil and gas properties in
both Canada and the United States.
Production costs, including production and ad valorem taxes, increased in
1998 to $8,518,000, up 131% from $3,682,000 in 1997, primarily due to the above
mentioned acquisitions. On an average cost per Mcfe basis, production costs for
1998 increased to $0.78 per Mcfe, or 13%, from $0.69 per Mcfe in 1997.
General and administrative expenses increased to $3,622,000 in 1998, up 57%
from $2,308,000 in 1997. On an average cost per Mcfe basis, general and
administrative expenses decreased to $0.33 per Mcfe, or 23%, from $0.43 per
Mcfe in 1997.
Exploration expenses increased in 1998 to $3,635,000, up 105% compared to
$1,776,000 in 1997. This is primarily due to a dry hole drilled in Lafourche
Parish, Louisiana in 1998, for which the Company incurred expenses of
$1,639,000. Since the Company uses the successful efforts method of accounting,
exploration expenses may vary greatly from year to year based upon the success
and level of exploration activity during the year.
Depreciation, depletion and amortization ("DD&A") expense for 1998 increased
to $10,505,000, up 149% from $4,211,000 in 1997, due primarily to the
acquisitions described above. 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 1998 to
$0.96 up 22% from $0.79 per Mcfe in 1997.
Proved property impairment expenses increased to $9,344,000, up 229%
compared to $2,838,000 in 1997. Significant declines in world oil prices during
1998 resulted in a writedown in the book value of a significant number of
proved oil and gas properties during the fourth quarter of 1998.
Interest and debt expense for 1998 increased to $5,362,000, up 237% from
$1,591,000 in 1997, primarily due to the increased debt used to fund
acquisition activity.
H-19
<PAGE>
A tax benefit of $2,775,000 was recognized in 1998, compared to a tax
expense of $174,000 in 1997. The year to year change is due primarily to the
tax effects of the Canadian portion of the 1998 impairment of proved properties
recorded during the fourth quarter of 1998.
The Company reported a loss in 1998 of $16,409,000 or $1.32 per basic share,
compared to a loss of $2,049,000, or $0.22 per basic share in 1997.
For the Year Ended December 31, 1997 As Compared to the Year 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, partially offset by lower
commodity 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,
and the acquisition of an interest in the Santa Elena Project in Ecuador, in
June 1997 for $2.8 million.
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 and
natural gas liquids production in 1997 increased 30% to 304,211 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 6% in 1997 to
$17.85 per barrel, compared to $18.92 per barrel in 1996.
As part of the Company's ongoing operations, the Company may sell non-
strategic assets or oil and gas properties. The proceeds may 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 the sale of assets of $413,000 in
1997 and $453,000 in 1996. The gain on sale of assets 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 of assets 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 $0.69 per Mcfe or 19%, 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 expenses increased in 1997 to $1,776,000, up 578% compared to
$262,000 in 1996. The increase is due primarily to four dry holes drilled in
1997, and higher geological and geophysical expense associated with seismic
acquisition for the Matthews Project. Since the Company uses the successful
efforts method of accounting, exploration expenses may vary greatly from year
to year based upon the success and 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, 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 in 1997 to $0.79
per Mcfe, up 32% from $0.60 per Mcfe in 1996.
Proved property impairment expenses increased 371% to $2,838,000 in 1997
compared to $603,000 in 1996. The increase resulted primarily from the 1997
impairment of a well in Lafourche Parish, Louisiana, which encountered a
mechanical failure and was abandoned.
H-20
<PAGE>
Interest and debt expense in 1997 increased to $1,591,000, up 28% from
$1,242,000 in 1996, primarily due to increased bank debt used to fund
acquisition activity and the issuance of $41,400,000 of 6.875% convertible
subordinated debentures in October 1997. A portion of the debenture proceeds
were used to retire $20,700,000 of existing bank debt incurred to make 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
tax 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.
Liquidity and Capital Resources
The Company has historically funded its operations, acquisitions,
exploration and development expenditures from cash flows from operating
activities, bank borrowing, issuance of common stock and debt securities, and
the sale of non-strategic assets.
The Company's cash flow provided by operating activities for the years ended
December 31, 1998, 1997 and 1996 was $6,670,000, $6,808,000 and $5,098,000,
respectively. Additional cash in the amounts of $199,000, $1,063,000 and
$258,000 were received in 1998, 1997 and 1996, respectively, from the sale of
assets.
Effective May 29, 1998, the Company amended its domestic bank credit
facility from $38,400,000 to $45,000,000. Subsequently, the credit facility has
been reduced and restructured as a result of lower oil and natural gas price
assumptions, the sale of certain domestic assets and the scheduled reduction
discussed below. A restructured and amended credit facility ("Amended Credit
Facility") was closed on March 29, 1999. The Amended Credit Facility provides
for a borrowing base of $19,353,000, plus a principal tranche of $12,500,000
("Tranche A") that matures on September 1, 1999. The borrowing base reflects
the $5,400,000 received in March 1999 for the sale of the Company's mineral
interests in Texas, Mississippi and New Mexico. Upon closing of the remaining
$600,000 in proceeds from the sale, the borrowing base will be reduced to
$18,820,000. In addition to reductions which result from the sale of assets,
the borrowing base under the Amended Credit Facility reduces $40,000 per month
and is subject to semi-annual borrowing base redeterminations until maturity on
June 1, 2001. The next borrowing base review is July 1, 1999. As of December
31, 1998, Tranche A principal was classified as current portion of long-term
debt in the Company's Consolidated Balance Sheet.
The Amended Credit Facility requires the Company, among other provisions,
to: (i) apply the majority of proceeds from asset sales to reduction in the
outstanding principal under the credit facility (to the extent the assets are
not otherwise encumbered), (ii) obtain lender's approval of the Company's
domestic general and administrative expense budget and (iii) pay a $187,500
restructuring fee upon completion of a transaction that allows the Company to
repay Tranche A principal. The Amended Credit Facility also reduces the
Company's tangible net worth requirement at December 31, 1998, thereby allowing
the Company to be in compliance with the terms of its domestic credit agreement
as of such date.
The obligations under the Amended Credit Facility are secured by
substantially all of the assets of the Company and its subsidiaries other than
Neutrino. The Amended Credit Facility prohibits the payment of dividends and
contains certain covenants relating to the financial condition of the Company.
Outstanding borrowings under the domestic bank credit facility were $35,910,000
at December 31, 1998. On March 29, 1999, outstanding borrowings under the
Amended Credit Facility were $31,853,000 with no further borrowing
availability. Outstanding principal under the Amended Credit Facility will bear
interest at the Bank Index Rate (8.0% at December 31, 1998) to the extent of
the borrowing base and at Bank Index Rate plus 1% on Tranche A principal.
The Company believes that it will be necessary to sell significant oil and
gas assets to raise the substantial additional funds necessary to meet the
September 1, 1999 maturity of Tranche A principal. No assurance can
H-21
<PAGE>
be given that such transactions can be consummated on terms acceptable to the
Company or its lenders, whose approval may be required. If the Company is
unable to raise the necessary funds, further restructuring of its Amended
Credit Facility will be required or the Company could become in default on the
full amount of its indebtedness, as discussed below. In February, 1999, the
Board of Directors of the Company retained CIBC Oppenheimer Corp. as
independent advisors to assist in evaluating various strategic alternatives,
which may include asset divestitures, joint ventures or alliances, a sale or
merger of the Company or other restructuring or recapitalization opportunities.
There can be no assurance that the Company will be successful in pursuing any
of such strategic alternatives or as to the terms of any transaction that may
be pursued. See Note 14 to the Consolidated Financial Statements.
Effective June 25, 1998, Neutrino entered into a new Cdn $40,000,000 (U.S.
$25,838,000) revolving demand loan facility (the "Canadian Credit Facility")
under which it could borrow at bank prime or Bankers Acceptance Rates plus a 1%
stamping fee. At December 31, 1998, the Canadian Bank prime rate was 6.75% and
the Bankers Acceptance Rate for 30-day maturities was 5.15%. Effective February
26, 1999 the borrowing base under the Canadian Credit Facility was reduced to
Cdn $33,000,000 (U.S. $21,316,000) and the interest rate was increased to prime
plus 1/4% and the stamping fee on Bankers Acceptance was increased to 1 1/4%
per annum. These changes were a result of a lender review giving effect to
lower world oil prices, the sale of certain non-strategic oil and gas
properties, and the Company's financial condition. At December 31, 1998,
outstanding borrowings under the Canadian Credit Facility were Cdn $28,625,000
(U.S.$18,490,000). At March 15, 1999, outstanding borrowings under the Canadian
Credit Facility were Cdn $29,530,000 (U.S.$19,730,000). However, after giving
consideration to the minimum working capital requirement contained in the
Canadian Credit Facility, the Company estimates that at March 15, 1999, there
is very little remaining borrowing availability under the facility. The
Canadian Credit Facility contains certain covenants relating to the financial
condition of Neutrino, including, at each quarter's end, maintenance of a
working capital ratio of 1:1. In calculation of this ratio, any undrawn portion
of the credit facility may be treated as if advanced and held in cash. The
obligations under the Canadian Credit Facility are secured by substantially all
of the assets of Neutrino. As of December 31, 1998, Neutrino was in compliance
with the terms of the Canadian Credit Facility. The outstanding balance under
the Canadian Credit Facility is classified as a current liability because of
the demand feature of the loan. However, it is Management's intention that the
facility be utilized to provide long-term financing for the Company.
The Company's financial condition and liquidity are impacted by prices the
Company receives for its oil and natural gas. In the first quarter of 1999, oil
and natural gas prices continued to be weak. Judgments by both domestic and
Canadian lenders regarding the level of future oil and natural gas prices will
impact their borrowing base determinations for the Company's credit facilities.
On October 2, 1997, the Company issued $41,400,000 of 6.875% convertible
subordinated debentures due on October 1, 2007. The debentures are convertible
into Common Stock of the Company at any time prior to maturity, at a conversion
price of $8.26 per share. Proceeds of the offering were used to reduce bank
debt and fund subsequent acquisitions. Pursuant to the debenture indenture, in
the event of a change of control of the Company, debenture holders have the
right to require the Company to repurchase the security at face value plus
accrued interest.
The Company's substantial leverage poses certain risks, including the risk
that the Company may not generate sufficient cash flow to service its
indebtedness or that the Company may be unable to obtain additional financing
in the future and, as a result, may not have the necessary resources to respond
to market conditions and opportunities. The Company's high level of
indebtedness, covenant requirements and working capital deficit subjects it to
risks of default, which may significantly impair its ability to meet its
liquidity needs. The Company's domestic bank credit agreement contains
provisions whereby a default under the Company's Canadian Credit Facility or
pursuant to the 6.875% Convertible Subordinated Debentures indenture, would
create a default condition under the domestic credit facility. In such a
default condition, the banks may declare amounts under the domestic Amended
Credit Facility to become immediately due and payable. The holders of
convertible subordinated debentures have acceleration rights if the Company is
in payment default under either its domestic or Canadian credit facilities.
H-22
<PAGE>
The Company's ability to meet its obligations is dependent upon a number of
factors, many of which are outside of the Company's control. See Item 1 "Risk
Factors". The Company has retained CIBC Oppenheimer Corp. to assist in
evaluating various strategic alternatives, which may include asset
divestitures, joint ventures or alliances, a sale or merger of the Company or
other restructuring or recapitalization opportunities. There can be no
assurance that the Company will be successful in pursuing any of such strategic
alternatives or as to the terms of any transaction that may be pursued. See
Note 14 to the Consolidated Financial Statements.
The Company has been advised that it is not in compliance with Nasdaq Stock
Market listing requirements due to the recent low price per share of its Common
Stock. If such requirements are not satisfied prior to April 19, 1999, the
Company's Common Stock may be subject to delisting from the Nasdaq National
Market. Such delisting would impair the liquidity of the Common Stock and
capital raising flexibility of the Company. The Company intends to pursue a
remedy and is considering steps to come into compliance with the listing
requirements. The Company cannot assure that it will be successful in
maintaining its Nasdaq listing. See Item 5 "Market for the Company's Common
Equity and Related Stockholder Matters."
Capital spending in 1998 for acquisitions, development and exploration
totaled $89,877,000, and was funded from cash flows from operating activities,
bank debt and common stock issuance. The Company's capital spending during 1999
is expected to be reduced significantly from 1998, and will be greatly
influenced by the level of oil and gas prices, and the availability of excess
funds beyond repayment of the September 1, 1999 Tranch A maturity. Capital
availability from outside sources, including debt and equity markets, is
expected to be limited.
The Company's ratio of debt to total capitalization was 87% at December 31,
1998, compared to 72% at December 31, 1997. The Company's interest coverage
ratio (calculated as income from operations plus depreciation, depletion,
impairments and amortization and exploration expenses divided by interest
expense) was 1.74 to 1 in 1998 compared to 5.16 to 1 in 1997.
The Company did not declare dividends in fiscal 1998, 1997 and 1996. The
Company does not expect, under its existing capital structure, to be able to
pay dividends for the foreseeable future. Payment of dividends is currently
prohibited by the terms of the Company's domestic bank credit agreement.
Year 2000 Compliance
The Company's State of Readiness
The "Year 2000" problem concerns the ability of technology to properly
recognize and process date sensitive information beyond December 31, 1999. The
Company is in the process of evaluating its information technology (IT) and
non-information technology. Year 2000 Committees have been formed at the
Company's office in Houston and at the Company's Canadian subsidiary
headquarters in Calgary. The Committees include members of senior management
and key employees from major business units. The Committee assesses Year 2000
issues; directs remedial actions necessary to minimize systems disruptions and
other risks; contacts significant third party purchasers, suppliers, vendors
and operators with whom there are material transactions and data exchange;
tests internal hardware and software; and makes appropriate contingency plans.
Neutrino has engaged a consulting firm, which has prepared a report on the
status of Neutrino, including a detailed inventory of hardware and software
priorities for action and an implementation plan. Additionally, the Company, on
behalf of itself and its other subsidiaries, has contacted principal software
vendors. Thus far, the Company has received a letter of compliance for its
accounting and payroll systems and product conformity assurance for its
reservoir engineering system. Additionally, the land lease record systems
vendor has informed the Company that the system is Year 2000 compatible. The
Company has no proprietary software. Purchased software and hardware systems
have been installed and assembled by third party vendors that provide network
and software IT services to the Company. Vendors have been engaged to evaluate
the systems for Year 2000 compliance.
H-23
<PAGE>
Costs to Address the Company's Year 2000 Issues
It has been estimated that the costs of compliance will not exceed $120,000,
which includes the evaluation, planning, replacement of the land and lease
records systems at Neutrino and the replacement of several desktop computers
and other hardware. Approximately $9,000 was expended in 1998, with the balance
to be incurred in 1999.
Risks of the Company's Year 2000 Issues
Risks associated with the Year 2000 problem are potentially significant.
Failure to remedy a critical system problem could have a material affect on the
results of operations and financial condition. The Company has interests in
operated and non-operated properties in the United States, Canada and Ecuador.
The Company will continue to review and monitor software and equipment within
its control. The Company will continue to contact operators of its non-operated
properties and other third parties to determine their Year 2000 compliance
procedures, but cannot warrant the readiness of those systems. As the Company
is in the process of collecting this information from third parties, the
Company cannot currently state whether its operations will be materially
affected by third party compliance. However, the Company is not currently aware
of any third party that could cause a significant business disruption. The
Company believes that it will be able to achieve Year 2000 compliance by the
end of 1999 with respect to the Company's internal systems, and does not
currently anticipate any disruption in its operations or any materially adverse
effects to its financial condition, results of operations or cash flows as the
result of any failure by the Company to be in compliance.
In a recent Securities and Exchange Commission ("SEC") release regarding
Year 2000 disclosures, the SEC required public companies to disclose the most
likely worst case Year 2000 scenario. Situations which must be included in any
worst case scenario include: the possibility of widespread failure of oil and
gas transportation systems, the inability of Company personnel to gain access
to offices and other facilities, and the inability of customers to make payment
for purchases. The effects of such occurrences would have a cumulative material
adverse impact on the Company, although not quantifiable at this time.
The Company's Contingency Plan
Contingency plans are being developed at this time, and will be monitored
and modified after the initial evaluation by the Year 2000 Committees is
complete. The Company intends to have such plans in place by June 30, 1999.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), was issued by the
Financial Accounting Standards Board in June 1998. SFAS 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts. Under the standard, entities are required to carry
all derivative instruments in the statement of financial position at fair
value. The Company will adopt SFAS 133 beginning in fiscal 2000. The Company
has not yet determined the impact that SFAS 133 will have on its financial
statements.
ITEM 7a. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to a variety of market risks including the potential
for adverse changes in oil and gas natural gas prices, foreign currency
exchange rates and interest rates.
The Company's revenue stream is significantly affected by the level of oil
and natural gas prices, which can be volatile and over which the Company has no
control or influence. The Company has utilized natural gas price swaps on a
limited basis to hedge a portion of its exposure to commodity price
fluctuations. The effect of price swaps is to fix the price for a specific
quantity of gas for a specific time. The Company uses the deferral method of
accounting for its natural gas price swaps and therefore offsets any gain or
loss on the swap
H-24
<PAGE>
contracts with the realized prices for its production. At December 31, 1998,
the Company had fixed natural gas prices on approximately 420 MMcf of natural
gas for the period of April through October 1999 at an average price of $2.135
per Mcf. The estimated gain from liquidating the Company's swap position at
December 31, 1998 was approximately $86,000. The volume of fixed price natural
gas is equivalent to about 6% of the Company's 1998 natural gas production.
Based on the Company's 1998 production, a 10% change in commodity price
realizations would impact the Company's oil and liquids revenues by $860,000,
and its natural gas revenues by $1,200,000.
The Company operates in Canada and Ecuador as well as the United States and,
as a result, is exposed to some foreign exchange rate risk. Natural gas prices
in Canada and oil prices in Canada and Ecuador tend to respond to changes in
the value of the local currencies versus the U.S. dollar. Therefore, the
Company believes the economic exposure to it from fluctuations in currency
exchange rates is not material to its financial condition, results of
operations or cash flows.
The Company has three primary sources of debt financing: (i) its domestic
bank credit facility, (ii) its Canadian bank credit facility, and (iii)
$41,400,000 in 6.875% convertible subordinated debentures due in 2007 (the
"6.875% Convertible Debentures"). In Canada, the Company has utilized interest
rate swaps as a means of fixing the interest rate on a large portion of its
indebtedness. The following table presents the Company's indebtedness at
December 31, 1998 as it relates to interest rate type and maturity. Given the
amount of the Company's variable rate indebtedness at December 31, 1998, and
taking into account the interest rate hedge arrangements currently in place, a
10% change in interest rates would imply an annualized change in pre-tax
interest expense of approximately $314,000.
<TABLE>
<CAPTION>
1999 2000 2001 Thereafter Total Fair Value
----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Variable Rate
Domestic Bank Debt..... $12,940,000 $ 480,000 $22,490,000 $35,910,000 $35,910,000
Canadian Bank Debt..... 2,340,000 2,340,000 2,340,000
----------- ---------- ----------- ----------- -----------
38,250,000 480,000 22,490,000 38,250,000 38,250,000
Average Rate.......... 8.545% 8.000% 8.000% 8.218%
Fixed Rate
6.875% Convertible
Debentures............ $41,400,000 $41,400,000 $10,350,000
Canadian Bank Debt..... $ 3,230,000 $9,690,000 $ 3,230,000 16,150,000 16,085,000
Other.................. 184,000 184,000 184,000
----------- ---------- ----------- ----------- ----------- -----------
3,414,000 9,690,000 3,230,000 41,400,000 57,734,000 26,619,000
Average Rate.......... 6.208% 6.340% 6.000% 6.875% 6.697%
</TABLE>
The Company's 6.875% Convertible Debentures trade on the Nasdaq SmallCap
Market under the symbol "SMING". At December 31,1998 the closing price of the
debentures was 25% of face value. The interest rate on the Company's Canadian
fixed rate swaps at December 31, 1998 was approximately equivalent to the
Canadian floating rate. The estimated cost to liquidate the Company's Canadian
fixed rate swap position at December 31, 1998 was approximately $65,000.
ITEM 8. Financial Statements and Supplementary Data
Financial Statements are filed as a part of this report. See page 24, Index
to Financial Statements. The Financial Statements Schedules are not applicable
and have been omitted.
H-25
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Description Number
- ----------- ------
<S> <C>
Financial Statements:
Independent Auditors' Report.......................................... H-27
Consolidated Balance Sheets at December 31, 1998 and 1997............. H-28
Statements of Consolidated Operations for the Years Ended December 31,
1998, 1997 and 1996.................................................. H-29
Statements of Consolidated Stockholders' Equity and Comprehensive
Income (Loss) for the Years Ended December 31, 1996, 1997 and 1998... H-30
Statements of Consolidated Cash Flows for the Years Ended December 31,
1998, 1997 and 1996.................................................. H-31
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1998, 1997 and 1996..................................... H-33
</TABLE>
H-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Southern Mineral Corporation:
We have audited the accompanying consolidated balance sheets of Southern
Mineral Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income (loss), and cash flows for each of the years in the three-
year period ended December 31, 1998. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
years in the three- year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 3 to the consolidated financial statements, the Company's substantial
indebtedness, covenant requirements and working capital deficit raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
KPMG LLP
Houston, Texas
March 9, 1999, except as to Notes 3 and 14
which are dated March, 29, 1999
H-27
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
-------- -------
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents................................. $ 1,541 $10,011
Receivables............................................... 5,602 3,280
Other..................................................... 633 164
-------- -------
Total current assets.................................... 7,776 13,455
Property and equipment, at cost using successful efforts
method for oil and gas activities
Oil and gas producing properties.......................... 136,833 53,437
Mineral rights............................................ 167 167
Unproven properties....................................... 5,454 494
Office equipment.......................................... 580 363
Accumulated depreciation, depletion and amortization...... (28,847) (12,168)
-------- -------
114,187 42,293
Properties held for sale and other.......................... 6,327 6,127
-------- -------
Total assets.............................................. $128,290 $61,875
======== =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities
Accounts payable.......................................... $ 10,300 $ 2,749
Note payable.............................................. -- 207
Canadian bank loan........................................ 18,490
Current portion of long-term debt......................... 13,124 --
-------- -------
Total current liabilities............................... 41,914 2,956
Long-Term Debt (less current portion)....................... 64,370 41,400
Deferred Income Taxes....................................... 7,279 1,039
Stockholders' Equity
Preferred stock, par value $.01 per share; authorized
5,000,000 shares at December 31, 1998; none issued Common
stock, par value $.01 per share; authorized 50,000,000
shares at December 31, 1998; issued 12,884,672 and
9,133,033 at December 31, 1998 and 1997, respectively;
outstanding 12,793,449 and 9,041,849 shares at December
31, 1998 and 1997, respectively.......................... 128 91
Additional paid-in capital................................ 30,848 14,152
Accumulated other comprehensive loss-foreign currency
translation adjustment................................... (2,304) (227)
Retained earnings (deficit)............................... (13,893) 2,516
Less: treasury stock...................................... (52) (52)
-------- -------
Total stockholders' equity.............................. 14,727 16,480
-------- -------
Total liabilities and stockholders' equity.............. $128,290 $61,875
======== =======
</TABLE>
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and
subsidiaries are an integral part of these statements.
H-28
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Revenues
Oil and gas............................ $ 21,722 $ 13,790 $ 11,780
Gains (loss) on sales of properties and
other assets.......................... (250) 413 453
----------- ---------- ----------
21,472 14,203 12,233
Expenses
Production............................. 8,518 3,682 2,742
Exploration............................ 3,635 1,776 262
Depreciation, depletion and
amortization.......................... 10,505 4,211 2,875
General and administrative............. 3,622 2,308 1,682
Impairment of proved oil and gas
properties............................ 9,344 2,838 603
----------- ---------- ----------
35,624 14,815 8,164
----------- ---------- ----------
Income (loss) from operations............ (14,152) (612) 4,069
Other income, expenses and deductions
Interest and other income.............. 330 328 286
Interest and debt expense.............. (5,362) (1,591) (1,242)
----------- ---------- ----------
Income (loss) before income taxes........ (19,184) (1,875) 3,113
Provision (benefit) for foreign, federal
and state income taxes
Current provision...................... 6 304 400
Deferred provision (benefit)............. (2,781) (130) 279
----------- ---------- ----------
(2,775) 174 679
----------- ---------- ----------
Net income (loss)........................ $ (16,409) $ (2,049) $ 2,434
=========== ========== ==========
Net income (loss) per share-basic........ $ (1.32) $ (.22) $ .37
=========== ========== ==========
Net income (loss) per share-diluted...... $ (1.32) $ (.22) $ .34
=========== ========== ==========
Weighted average number of shares
outstanding-basic....................... 12,422 9,109 6,621
=========== ========== ==========
Weighted average number of shares
outstanding-diluted..................... 12,422 9,109 7,114
=========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and
subsidiaries are an integral part of these statements.
H-29
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS'
EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Treasury Stock Total
------------- Paid-in Retained Comprehensive ----------------- Stockholder's
Shares Amount Capital Earning Income (Loss) Shares Amount Equity
------ ------ ---------- -------- ------------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1996........ 6,370 $ 64 $ 3,038 $ 2,131 $ -- 91 $ 52 $ 5,181
Stock issued for
directors' fees........ 24 -- 72 -- -- -- -- 72
Issuance of common stock
for private placement.. 2,500 25 10,596 -- -- -- -- 10,621
Issuance of common stock
for property
acquisitions and
acquisition services... 195 2 324 -- -- -- -- 326
Comprehensive income:
Net income............ -- -- -- 2,434 -- -- -- 2,434
-------
Total comprehensive
income................. 2,434
------ ---- ------- -------- ------- ------- ------- -------
Balance at
December 31, 1996...... 9,089 91 14,030 4,565 -- 91 52 18,634
Stock issued for
directors' fees........ 31 -- 181 -- -- -- -- 181
Stock issued for stock
purchase plan.......... 9 -- 29 -- -- -- -- 29
Stock issued for stock
option plan, net....... 4 -- -- -- -- -- -- --
Issuance costs for
private placement...... -- -- (88) -- -- -- -- (88)
Comprehensive loss:
Net loss................ -- -- -- (2,049) -- -- -- (2,049)
Foreign currency
translation
adjustment........... -- -- -- -- (227) -- -- (227)
-------
Total comprehensive
loss................... (2,276)
------ ---- ------- -------- ------- ------- ------- -------
Balance at
December 31, 1997...... 9,133 91 14,152 2,516 (227) 91 52 16,480
Stock issued for
directors' fees........ 43 -- 139 -- -- -- -- 139
Stock issued for stock
purchase plan.......... 8 -- 22 -- -- -- -- 22
Issuance of common stock
for property
acquisition............ 8 -- 50 -- -- -- -- 50
Issuance of common stock
in corporate
acquisitions........... 3,693 37 16,485 -- -- -- -- 16,522
Comprehensive loss:
Net loss.............. -- -- -- (16,409) -- -- -- (16,409)
Foreign currency
translation
adjustment........... -- -- -- -- (2,077) -- -- (2,077)
-------
Total comprehensive
loss................... (18,486)
------ ---- ------- -------- ------- ------- ------- -------
Balance at
December 31, 1998...... 12,885 $128 $30,848 $(13,893) $(2,304) 91 $ 52 $14,727
====== ==== ======= ======== ======= ======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and
subsidiaries are an integral part of these statements.
H-30
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net (loss) income....................... $ (16,409) $ (2,049) $ 2,434
Adjustments to reconcile net income
(loss) to cash provided by operating
activities:
Depreciation, depletion and
amortization.......................... 10,505 4,211 2,875
Loss/(gains) on sales of properties
and other assets...................... 250 (413) (453)
Impairment of proved oil and gas
properties............................ 9,344 2,838 603
Dry hole costs......................... 2,470 930 262
(Decrease) increase in deferred
taxes................................. (2,781) (130) 279
Other.................................. 418 351 72
Change in assets and liabilities, net
of effects of acquisitions and
dispositions:
Decrease (Increase) in receivables... 2,205 (987) (1,224)
(Increase) decrease in other current
assets.............................. (136) (9) 231
(Increase) in other assets........... -- -- (115)
Increase in payables................. 804 2,066 134
----------- ---------- ----------
Net cash provided by operating
activities ....................... 6,670 6,808 5,098
Cash Flows from Operating Activities
Proceeds from sales of:
Proved properties...................... 11,425 26 258
Properties held for sale and unproved
properties............................ 83 1,037 --
Capital expenditures:
Acquisition, exploration and
development........................... (17,103) (16,168) (2,836)
Properties held for sale............... (1,083) (2,203) (470)
Acquisition of Amerac, net of cash..... (9,387) -- --
Acquisition of Neutrino, net of cash... (35,926) -- --
Acquisition of partnership interest,
net of cash........................... -- -- (2,590)
Acquisition of BEC Energy, Inc., net
of cash............................... -- (10,683) --
Acquisition of SMC Ecuador, Inc., net
of cash............................... -- (2,816) --
Cash received for sale of Venture
Resources, Inc., net of cash
transferred............................ -- -- 1,143
Other................................... -- (24) --
----------- ---------- ----------
Net cash used in investing
activities........................ (51,991) (30,831) (4,495)
Cash Flows from Financing Activities
Proceeds from debenture offering, net... (7) 41,400 --
Debenture offering costs................ (12) (2,536) --
Proceeds from revolving loan............ 50,813 19,200 4,300
Payments on revolving loan.............. (10,280) (23,100) (15,615)
Payments on note payable................ (208) (1,262) ----
Loan acquisition costs.................. (259) (45) ----
Proceeds from equity offering, net...... -- (88) 10,621
Payment on Canadian subordinated
debentures............................... (3,270) -- --
----------- ---------- ----------
Net cash provided by (used in)
financing activities.............. 36,777 33,569 (694)
Effect of Exchange Valuation on Cash...... 74 (6) --
----------- ---------- ----------
Net (decrease) increase in cash and
cash equivalents.................. (8,470) 9,540 (91)
Cash and cash equivalents at beginning
of year................................ 10,011 471 562
----------- ---------- ----------
Cash and cash equivalents at end of
year................................... $ 1,541 $ 10,011 $ 471
=========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and
subsidiaries are an integral part of these statements.
H-31
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS--(Continued)
(in thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Supplemental disclosure of cash flow
information:
Cash paid for taxes......................... $ 159 $ 984 $ 363
Cash paid for interest...................... 3,753 916 1,210
Non Cash Transactions
Issuance of common stock for Amerac common
stock...................................... 15,433 -- --
Issuance of common stock to key Neutrino
employees.................................. 1,095 -- --
Issuance of common stock for property
acquisition services....................... 50 -- 326
Change in deferred tax liability on property
acquisitions............................... 9,562 -- 284
Directors' fees paid in stock............... 139 181 72
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.
H-32
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
General Business--Southern Mineral Corporation, a Nevada corporation, with
its subsidiaries ("Southern Mineral" or 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 of the United States, in Canada and in Ecuador.
The Company conducts its operations in Canada exclusively through its
subsidiary, Neutrino Resources Inc. ("Neutrino"). The Company's business
strategy is to increase reserves and shareholder value through a balanced
program of acquisitions, exploitation and exploration.
In February 1999, the Board of Directors of the Company retained CIBC
Oppenheimer Corp. as independent advisors to assist in studying strategic
alternatives for maximizing shareholder value. The Company expects to evaluate
a number of alternatives including, but not limited to, asset divestiture,
joint ventures or alliances, a sale or merger of the Company, and other
restructuring and recapitalization opportunities. The Company can give no
assurances as to its success in pursuing any of the strategic alternatives or
as to the terms of any transaction.
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 is also recorded
using the sales method. The Company believes that imbalances related to the
sales of natural gas are insignificant.
Foreign Currency Translation--Translation adjustments results from the
process of translating foreign subsidiaries' financial statements into U.S.
dollars in circumstances where the subsidiaries functional currency is not the
U.S. dollar. The Canadian dollar is the functional currency for the Company's
Canadian subsidiaries as substantially all transactions are conducted in the
local currency. Balance sheet accounts are translated at exchange rates in
effect at the balance sheet date. Income statement accounts are translated at
average exchange rates during the year. Resulting translation adjustments are
reported as a component of other comprehensive income in stockholders' equity.
Comprehensive Income--In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (" SFAS 130"). SFAS 130 establishes standards for the
reporting and display of comprehensive income and its components in a full set
of financial statements. Comprehensive income is defined as the change in
equity during a period from transactions and other events and circumstances
from non-owner sources. The Company adopted SFAS 130, and has reported and
displayed comprehensive income, which includes foreign currency translation
adjustments. Adoption of this statement did not have an impact on the Company's
financial condition or results of operations as it only relates to changes in,
or additions to, the financial statement disclosures.
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.
H-33
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
For U. S. onshore properties, the Company estimates that residual salvage
values of equipment approximate any future dismantlement, restoration and
abandonment costs. For Canadian onshore properties, the Company provides for
estimated dismantlement, restoration and abandonment on a unit of production
basis. For offshore properties, the Company has fully provided for estimated
dismantlement, restoration and abandonment costs.
Maintenance and repairs are charged to expense as incurred.
Long-Lived Assets--Long-lived assets to be held and used are reviewed for
impairment whenever events or changes in circumstances indicate that the
related carrying amount may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset based on Company's
engineering estimates of recoverable reserves and the Company's estimates of
future oil and natural gas prices. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
carrying amount of the assets exceed the fair value of the assets.
Fair Value is estimated to be the net present value of the future cash flows
based on the reserves and price estimates described above. During 1998, the
Company recorded pre-tax impairment charges of $9,344,000 as a result of its
determination of future cash flows based on lower oil price assumptions than
previously applied. In 1997, an impairment of $2,838,000 was recognized
primarily as a result of mechanical problems encountered in a well in Lafourche
Parish, Louisiana that resulted in its abandonment. An impairment of $603,000
was recognized in 1996.
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 fair value.
Environmental Liabilities--Environmental related costs, if any, are
capitalized or expensed as appropriate. Environmental costs, if any, that
relate to past events and are not associated with future production are
expensed when incurred.
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 financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized as part of the provision for income taxes in the period that
includes the enactment date.
Cash Equivalents--Management considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
H-34
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Use of Estimates in the Preparation of Financial Statements--The preparation
of financial statements in conformity with generally accepted accounting
principles require 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.
Stock-Based Compensation--The Company accounts for stock-based compensation
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and
related Interpretation, and has provided pro forma disclosures of net earnings
and earnings per share in accordance with the provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the exercise price of the option.
Derivative Financial Instruments--The Company uses swap contracts to hedge
the effects of fluctuations in the prices of natural gas and interest rates.
These transactions meet the requirements for hedge accounting, including
designation and correlation. The resulting gains or losses, measured by quoted
market prices, termination values or other methods, are accounted for as part
of the transactions being hedged.
Statement of Financial Accounting Standards No. 133--The Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") in June 1998. SFAS 133 standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts. Under SFAS 133, entities are required to carry all derivative
instruments in the consolidated balance sheet at fair value. The Company will
adopt SFAS 133 beginning in fiscal year 2000. The Company has not determined
the impact that SFAS 133 will have on its financial statements.
Earnings (loss) per Share--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.
Common stock equivalents of 493,000 shares are reflected in the calculation
of diluted earnings per share for the year ended December 31, 1996. Common
stock equivalents of 693,000 and 717,000 are not considered in the calculation
of diluted earnings per share in 1998 and 1997, respectively, as the amounts
are antidilutive. No adjustment to net income (loss) was made in calculating
diluted per share earnings for 1998, 1997 and 1996. A reconciliation of the
1996 basic and diluted earnings per share is as follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Net income Per Share
(loss) Shares Amounts
---------- ------ ---------
<S> <C> <C> <C>
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
====== ===== ====
</TABLE>
Reclassifications--Certain amounts in prior financial statements have been
reclassified to conform to the 1998 financial statement presentation.
H-35
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2. Acquisitions
Neutrino
On June 23, 1998, the Company agreed to acquire 92.3% of the outstanding
common shares of Neutrino, which was effective as of June 30, 1998 and funded
on July 2, 1998. On July 3, 1998, the Company initiated a compulsory
acquisition of the remaining shares outstanding, which was effective as of June
30, 1998 and funded on July 21, 1998. The Company acquired Neutrino through a
cash tender offer for the common shares outstanding, and assumed Neutrino's
bank debt and working capital deficit. Neutrino is an independent oil and gas
company located in Calgary, Canada. The merger was accounted for as a purchase.
The total purchase price of approximately $57,198,000, consisted of the
following:
<TABLE>
<S> <C>
Cash consideration for common stock......................... $ 34,091,000
Fair value of 324,430 shares of common stock................ 1,095,000
Debt assumed and working capital deficit.................... 20,307,000
Legal, accounting and transaction costs..................... 1,705,000
------------
$ 57,198,000
============
The allocation of the purchase price is summarized as follows:
Oil and gas properties and other assets (net)............... $ 66,760,000
Deferred income taxes....................................... (9,562,000)
------------
$ 57,198,000
============
</TABLE>
Following the acquisition of Neutrino, the purchase price was reduced to
reflect the proceeds from the sale of non-strategic assets in the amount of
$3,390,000.
Amerac
On January 28, 1998, the shareholders of both the Company and Amerac Energy
Corporation ("Amerac") approved the merger of Amerac into a subsidiary of the
Company. Pursuant to the merger agreement, the Company issued 3,333,333 shares
of its Common Stock to acquire the common stock of Amerac and assumed Amerac's
outstanding debt, which was approximately $8,700,000. The debt was retired upon
consummation of the acquisition. The merger was effective on January 28, 1998,
and was accounted for as a purchase. The total purchase price was approximately
$24,820,000:
<TABLE>
<S> <C>
Issuance of Common Stock................................... $ 15,433,000
Debt assumed and working capital........................... 8,714,000
Legal, accounting and transaction costs.................... 673,000
------------
$ 24,820,000
============
</TABLE>
Subsequent to the acquisition of Amerac, the purchase price was reduced by
$7,919,000 for the sale of non-strategic assets, including Amerac's Golden
Trend properties for $6,969,000 on June 30, 1998 and the Riffe Field for
$510,000 on July 1, 1998.
H-36
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Big Escambia Creek
During 1997 and 1998, the Company acquired interests in the Big Escambia
Creek Field and surrounding area in a series of six transactions. The largest
acquisition was the purchase of the outstanding capital stock of BEC Energy,
Inc. on May 10, 1997, for $10,640,000. BEC's assets consisted of working
interests in fourteen oil and gas wells located in the Big Escambia Creek
Field, Escambia County, Alabama. Thereafter, the Company acquired additional
working interests in the area for $12.1 million. Each acquisition was accounted
for as a purchase.
Pro forma
The following summarized pro forma (unaudited) information assumes the
acquisitions had occurred on January 1, 1997:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1997
------------ -----------
(in thousands, except
per share data)
<S> <C> <C>
Revenues...................................... $ 27,160 $ 37,124
Net loss...................................... (19,333) (6,841)
Net loss per share-basic...................... $ (1.50) $ (.54)
Net loss per share-diluted.................... (1.50) (.54)
</TABLE>
The above pro forma results are not necessarily indicative of those that
would have occurred had the acquisitions taken place at the beginning of 1998
or 1997, respectively. The above amounts reflect adjustments for interest on
indebtedness incurred as part of the transaction and DD&A on revalued property,
plant and equipment. During 1997 the Company made additional acquisitions, none
of which would have had a material effect on the historical results of
operations of the Company.
Note 3. Long-Term Debt
Effective May 29, 1998, the Company amended its domestic bank credit
facility from $38,400,000 to $45,000,000. Subsequently, the credit facility has
been reduced and restructured as a result of lower oil and natural gas price
assumptions, the sale of certain domestic assets and the scheduled reduction
discussed below. A restructured and amended credit facility ("Amended Credit
Facility") was closed on March 29, 1999. The Amended Credit Facility provides
for a borrowing base of $19,353,000, plus a principal tranche of $12,500,000
("Tranche A") that matures on September 1, 1999. The borrowing base reflects
the $5,400,000 received in March 1999 for the sale of the Company's mineral
interests in Texas, Mississippi and New Mexico. Upon closing of the remaining
$600,000 in proceeds from the sale, the borrowing base will be reduced to
$18,820,000. In addition to reductions which result from the sale of assets,
the borrowing base under the Amended Credit Facility reduces $40,000 per month
and is subject to semi-annual borrowing base redeterminations until maturity on
June 1, 2001. The next borrowing base review is July 1, 1999. As of December
31, 1998, Tranche A principal was classified as current portion of long-term
debt in the Company's Consolidated Balance Sheet.
The Amended Credit Facility requires the Company, among other provisions,
to: (i) apply the majority of proceeds from asset sales to reduction in the
outstanding principal under the credit facility (to the extent the assets are
not otherwise encumbered), (ii) obtain lender's approval of the Company's
domestic general and administrative expense budget and (iii) pay a $187,500
restructuring fee upon completion of a transaction that allows the Company to
repay Tranche A principal. The Amended Credit Facility also reduces the
Company's tangible net worth requirement at December 31, 1998, thereby allowing
the Company to be in compliance with the terms of its domestic credit agreement
as of such date.
H-37
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The obligations under the Amended Credit Facility are secured by
substantially all of the assets of the Company and its subsidiaries other than
Neutrino. The Amended Credit Facility prohibits the payment of dividends and
contains certain covenants relating to the financial condition of the Company.
Outstanding borrowings under the domestic bank credit facility were $35,910,000
at December 31, 1998. On March 29, 1999, outstanding borrowings under the
Amended Credit Facility were $31,853,000 with no further borrowing
availability. Outstanding principal under the Amended Credit Facility will bear
interest at the Bank Index Rate (8.0% at December 31, 1998) to the extent of
the borrowing base and at Bank Index Rate plus 1% on Tranche A principal.
The Company believes that it will be necessary to sell significant oil and
gas assets to raise the substantial additional funds necessary to meet the
September 1, 1999 maturity of Tranche A principal. No assurance can be given
that such transactions can be consummated on terms acceptable to the Company or
its lenders, whose approval may be required. If the Company is unable to raise
the necessary funds, further restructuring of its Amended Credit Facility will
be required or the Company could become in default on the full amount of its
indebtedness, as discussed below. In February, 1999, the Board of Directors of
the Company retained CIBC Oppenheimer Corp. as independent advisors to assist
in evaluating various strategic alternatives, which may include asset
divestitures, joint ventures or alliances, a sale or merger of the Company or
other restructuring or recapitalization opportunities. There can be no
assurance that the Company will be successful in pursuing any of such strategic
alternatives or as to the terms of any transaction that may be pursued. See
Note 14 to the Consolidated Financial Statements.
Effective June 25, 1998, Neutrino entered into a new Cdn $40,000,000 (U.S.
$25,838,000) revolving demand loan facility (the "Canadian Credit Facility")
under which it could borrow at bank prime or Bankers Acceptance Rates plus a 1%
stamping fee. At December 31, 1998, the Canadian Bank prime rate was 6.75% and
the Bankers Acceptance Rate for 30-day maturities was 5.15%. Effective February
26, 1999 the borrowing base under the Canadian Credit Facility was reduced to
Cdn $33,000,000 (U.S. $21,316,000) and the interest rate was increased to prime
plus 1/4% and the stamping fee on Bankers Acceptance was increased to 1 1/4%
per annum. These changes were a result of a lender review giving effect to
lower world oil prices, the sale of certain non-strategic oil and gas
properties, and the Company's financial condition. At December 31, 1998,
outstanding borrowings under the Canadian Credit Facility were Cdn $28,625,000
(U.S. $18,490,000). At March 15, 1999, outstanding borrowings under the
Canadian Credit Facility were Cdn $29,530,000 (U.S. $19,730,000). However,
after giving consideration to the minimum working capital requirement contained
in the Canadian Credit Facility, the Company estimates that at March 15, 1999,
there is very little remaining borrowing availability under the facility. The
Canadian Credit Facility contains certain covenants relating to the financial
condition of Neutrino, including, at each quarter's end, maintenance of a
working capital ratio of 1:1. In calculation of this ratio, any undrawn portion
of the credit facility may be treated as if advanced and held in cash. The
obligations under the Canadian Credit Facility are secured by substantially all
of the assets of Neutrino. As of December 31, 1998, Neutrino was in compliance
with the terms of the credit facility. The outstanding balance under the
Canadian Credit Facility is classified as a current liability because of the
demand feature of the loan. However, it is Management's intention that the
facility be utilized to provide long-term financing for the Company.
The Company's financial condition and liquidity are impacted by prices the
Company receives for its oil and natural gas. In the first quarter of 1999, oil
and natural gas prices continued to be weak. Judgments by both domestic and
Canadian lenders regarding the level of future oil and natural gas prices will
impact their borrowing base determinations for the Company's credit facilities.
On October 2, 1997, the Company issued $41,400,000 of 6.875% convertible
subordinated debentures due on October 1, 2007. The debentures are convertible
into Common Stock of the Company at any time prior to
H-38
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
maturity, at a conversion price of $8.26 per share. Proceeds of the offering
were used to reduce bank debt and fund subsequent acquisitions. Pursuant to the
debenture indenture, in the event of a change of control of the Company,
debenture holders have the right to require the Company to repurchase the
security at face value plus accrued interest.
The Company's substantial leverage poses certain risks, including the risk
that the Company may not generate sufficient cash flow to service its
indebtedness or that the Company may be unable to obtain additional financing
in the future and, as a result, may not have the necessary resources to respond
to market conditions and opportunities. The Company's high level of
indebtedness, covenant requirements and working capital deficit subjects it to
risks of default, which may significantly impair its ability to meet its
liquidity needs. The Company's domestic bank credit agreement contains
provisions whereby a default under the Company's Canadian Credit Facility or
pursuant to the 6.875% Convertible Subordinated Debentures indenture, would
create a default condition under the domestic Amended Credit Facility. In such
a default condition, the banks may declare amounts under the domestic credit
facility to become immediately due and payable. The holders of convertible
subordinated debentures have acceleration rights if the Company is in payment
default under either its domestic or Canadian credit facilities.
The Company's ability to meet its obligations is dependent upon a number of
factors, many of which are outside of the Company's control. The Company has
retained CIBC Oppenheimer Corp. to assist in evaluating various strategic
alternatives, which may include asset divestitures, joint ventures or
alliances, a sale or merger of the Company or other restructuring or
reorganization alternatives. There can be no assurance that the Company will be
successful in pursuing any of such strategic alternatives or as to the terms of
any transaction that may be pursued.
Long-term debt consisted of the following at December 31, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Domestic bank credit facility............................ $35,910 $ --
Canadian bank credit facility (U.S.Dollars).............. 18,490 --
Convertible subordinated debentures...................... 41,400 41,400
Other.................................................... 184 --
------- -------
Total indebtedness................................... 95,984 41,400
Less: Current maturities of long-term debt............... 13,124 --
Canadian bank credit facility (U.S.Dollars)............ 18,490 --
------- -------
64,370 $41,400
======= =======
</TABLE>
Maturities of long-term debt over the next five years are as follows (in
thousands):
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 & beyond Total
---- ---- ------- ---- ------------- -------
<S> <C> <C> <C> <C> <C>
$13,124 $480 $22,490 -- $41,400 $77,494
</TABLE>
H-39
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4. Fair Value of Financial Instruments
The Company has estimated the fair value of financial instruments based on
arms length transactions or quoted market values. The estimated fair values are
summarized below (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1998 1997
------------- ---------------
Book Fair Book Fair
Value Value Value Value
------ ------ ------- -------
<S> <C> <C> <C> <C>
Assets
Cash and equivalents........................ $1,541 $1,541 $10,011 $10,011
Liabilities
Debt (including current portion)............ 95,984 64,869 41,400 37,881
Commodity price swaps-Receivable position... -- 86 -- --
</TABLE>
The estimated fair value of cash and equivalents approximates book value
because the amounts primarily represent cash on hand and overnight investments.
The fair value of the Company's indebtedness is estimated based on market
interest rates and quoted prices for the Company's 6.875% convertible
subordinated debentures. During 1998, the Company fixed the rate of interest on
the majority of its outstanding bank borrowings under its Canadian bank credit
facility through interest rate swaps. At December 31, 1998, 87% of the
Company's Canadian bank debt had been fixed at rates approximately equivalent
to the variable rates available to the Company at year-end 1998. The estimated
cost to liquidate the swap position at December 31, 1998 was $65,000.
During 1997, the Company issued $41,400,000 of 6.875% convertible
subordinated debentures. The debentures are publicly traded on the Nasdaq
SmallCap Market under the symbol "SMING". The fair value was estimated based on
the closing market price of the security. The closing prices on December 31,
1998 and 1997 were 25% and 92% of face value, respectively.
During 1998, the Company entered into natural gas price swaps with third
parties to hedge a portion of its production from the effects of fluctuations
in the market price of natural gas. The Company uses the deferral method of
accounting for its natural gas price swaps and, therefore, offsets any gain or
loss on the swap contract with the realized prices for its production. While
the swaps reduce the Company's exposure to declines in the market price of
natural gas, this also limits the Company's gains from increases in market
price. At December 31, 1998, the Company had swap contracts on approximately
420 MMcf of natural gas for the period April through October 1999 at an average
price of $2.135. The Company estimates the gain from unwinding the position to
be approximately $86,000 at December 31, 1998.
Note 5. Federal and State Income Taxes
United States and foreign income (loss) before income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1997 1996
-------- ------- ------
<S> <C> <C> <C>
United States................................... $ (8,504) $(2,697) $2,018
Foreign......................................... (10,680) 822 1,095
-------- ------- ------
Total........................................... $(19,184) $(1,875) $3,113
======== ======= ======
</TABLE>
H-40
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income tax expense (benefit) attributable to income from continuing
operations consists of (in thousands):
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -------
<S> <C> <C> <C>
Year ended December 31, 1998:
U.S. Federal................................... $ -- $ -- $ --
State and local................................ (5) -- (5)
Foreign........................................ 11 (2,781) (2,770)
==== ======= =======
$ 6 $(2,781) $(2,775)
==== ======= =======
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
==== ======= =======
</TABLE>
The Company allocated state taxes of approximately $250,000 to the purchase
price of Amerac as a result of the gain on sale of the Golden Trend properties
in the second quarter of 1998.
Differences between the effective tax rate and the statutory federal rate
are as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Expected statutory rate........... (34.0)% (34.0)% 34.0%
Changes in valuation allowance.... 23.7 38.9 (13.1)
Foreign taxes, net of federal
benefit.......................... (4.2) 9.7 7.6
State taxes, net of federal
benefit.......................... -- 4.0 0.7
Percentage depletion.............. -- (12.1) (8.1)
Other............................. -- 2.8 0.7
---------- ---------- ----------
Effective tax rate................ (14.5)% 9.3% 21.8%
========== ========== ==========
</TABLE>
H-41
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred taxes consist of the following (in thousands):
<TABLE>
<CAPTION>
For the Year Ended
December 31,
---------------------
1998 1997
---------- ---------
<S> <C> <C>
Deferred tax assets:
Oil and gas properties............................... $ -- $ 56
Net operating loss carryforward...................... 49,689 276
Accounts receivable.................................. 34 --
Accrued liabilities not currently deductible......... 99 --
Foreign tax credits.................................. 187 --
Minimum tax credits.................................. 11 11
Statutory depletion carryforward..................... 4,950 386
---------- --------
54,970 729
Valuation allowance.................................... (53,238) (729)
---------- --------
Deferred tax asset................................. 1,732 --
Deferred tax liabilities:
Oil and gas properties--U. S. and other.............. 1,732 --
Oil and gas properties--Canadian taxes............... 7,279 1,039
---------- --------
Deferred tax liability............................. 9,011 1,039
---------- --------
Net deferred tax liability........................... $ 7,279 $ 1,039
========== ========
</TABLE>
In 1998, the Company acquired Amerac, which has net operating loss
carryforwards of approximately $139,827,000 and alternative minimum net
operating loss carryforwards of $112,687,000. These loss carryforwards expire
in years 2000 through 2018 and their utilization is subject to stringent
limitations under the Internal Revenue Code. The Company maintains a valuation
allowance to reduce certain deferred tax assets to amounts that are more likely
than not be realized. This allowance primarily relates to the deferred tax
assets established for the loss carryforwards.
The valuation allowance for deferred tax assets as of December 31, 1998,
1997 and 1996 was $53,238,000, $729,000 and $ 0 respectively. The net change in
the total valuation allowance for the year ended December 31, 1998, 1997 and
1996 was an increase of $52,509,000, $729,000 and $ 0, respectively. 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 be unable to fully utilize the benefits of these deductible
differences and has therefore established the valuation allowance set forth
above.
For federal tax purposes, the Company had a net operating loss carryforward
("NOL") of approximately $146,144,000, $812,000 and $271,000 for the years
ended December 31, 1998, 1997 and 1996. These NOLs must be utilized prior to
their expiration, which is between 1999 and 2018. The Company also has
statutory depletion carryforwards of $14,558,000, $1,136,000 and $468,000 at
December 31, 1998, 1997 and 1996, respectively.
H-42
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6. Related Party Transactions
On January 1, 1998 the Company acquired certain U. S. onshore oil and gas
properties from Petroleum Resource Management Company in exchange for 8,333
shares of Southern Mineral Common Stock. Petroleum Resource Management Company
is owned and controlled by Timothy R. Weddle. Concurrent with this transaction,
Mr. Weddle became an officer of Southern Mineral Corporation in the capacity of
Vice President-Operations.
In conjunction with the acquisition of Neutrino in July, 1998, 324,430
shares of Southern Mineral Common Stock were issued to key Neutrino management
personnel in consideration for retention and other obligations.
In September 1995, the Company entered into the 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 agreed to fund the third party costs of Southern Links.
Any proceeds from the sale of prospects or oil and gas from such prospects is
distributed 100% to the Company until it receives an amount equal to the return
of its invested capital, after which time all such proceeds and property
interests, if any, are to be distributed 75% to the Company and 25% to Links.
In December 1998, the Company made the determination to discontinue further
evaluation of certain non-producing State of Texas offshore leases which were
held within the Southern Links Venture. Such leases were scheduled to expire in
January 1999 unless additional rental payments were made. Pursuant to the Joint
Venture agreement, the Company assigned six State of Texas leases to Links for
nominal cash consideration and retention of an overriding royalty interest of
1% of 8/8th in and to the leases.
Note 7. Major Customers
The Company is engaged in a single industry segment: the exploration,
development and production of oil and gas reserves. Sales of oil and gas to
customers accounting for 10% or more of revenues were as follows (in
thousands):
<TABLE>
<CAPTION>
Customer 1998 1998 1996
-------- ------ ------ ------
<S> <C> <C> <C>
G C Marketing Company............................... $ -- $2,267 $3,212
Damsco Distribution................................. 3,747 1,656 --
Diasu Oil & Gas Co., Inc............................ -- 1,631 --
</TABLE>
Note 8. Stock Options and 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 ("1996 SOP"). Pursuant to the 1996 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 1996 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 thereof reported on the Nasdaq.
During 1998 and 1997, the Company granted options exercisable for 359,200
and 135,000 shares of Common Stock, respectively, under the Company's 1997
Stock Option Plan ("1997 SOP"). Pursuant to the 1997 SOP, the Company may grant
options to purchase up to 700,000 shares (subject to customary anti-
H-43
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
dilution adjustments) of its Common Stock to key employees of the Company. The
1997 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 Systems.
The 1996 and 1997 Stock Option Plans were amended on December 21, 1998 to
provide for the exchange and repricing of all the outstanding options held by
current Company employees, except the President and CEO, for new options
exercisable at a price lower than that of the cancelled options, bearing the
same exercise term. The exercise price for the repriced options equaled $1.00,
which was higher than the $0.625 per share closing price of the Company's
Common Stock on the date of grant.
During 1998, and in conjunction with the acquisition of Neutrino, the
Company granted Non-Qualified Stock Options exercisable for 550,000 shares of
Common Stock under individual agreements with key members of Neutrino
management. The issuance of these Non-Qualified Stock options was 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 non-qualified option granted in 1998 was at the market price for the
Company's Common Stock on the date of the grant. However, in conjunction with
repricing of options pursuant to the 1996 and 1997 SOP, as described above, the
option price of Non-Qualified options issued in 1998 were also repriced, to
$1.00, on December 21, 1998.
In January 1999, the FASB issued an Exposure Draft of an Interpretation
regarding APB 25 that would require the cancellation of an option and new
option grant with a lower exercise price to be considered in substance a
modified option. Variable-plan accounting would be required to be applied to
the modified option from the date of the modification until the date of
exercise. Consequently, the final measurement of compensation expense would
occur at the date of exercise. The FASB determined that the proposed effective
date would be the issuance date of the final interpretation that would be
applied prospectively but would cover events that occur after December 15,
1998. As the option repricings described above, occurred after December 15,
1998, the new option grants will qualify for variable-plan accounting at each
quarterly reporting date, beginning September 30,1999 and continuing until the
options are exercised or cancelled, if the exposure draft becomes effective in
its present form. The amount of compensation expense, if any, will be
determined by the closing price of the Company's Common Stock at December 31,
1999.
During 1998 and 1997, the Company granted options exercisable for 5,211 and
6,297 shares of Common Stock, respectively, 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 during the
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
Systems.
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
H-44
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the method of prescribed in SFAS 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):
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- ------
<S> <C> <C> <C> <C>
Net income (loss).................. As reported $(16,409) $(2,049) $2,434
Pro forma (16,951) (2,127) 1,938
Basic earnings per share........... As reported $ (1.32) $ (0.22) $ .37
Pro forma (1.36) (0.23) .29
Fully diluted earnings per share... As reported (1.32) (0.22) .34
Pro forma (1.36) (0.23) .27
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following assumptions
used for the grants issued in 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Expected volatility............. 65.63% 54.52% 52.52%
Risk free interest rate 4.48 to 5.47% 4.48 to 5.47% 5.64 to 6.27%
Expected life of options 3 years 3 years 3 to 7 years
Expected dividend yield......... 0% 0% 0%
</TABLE>
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 initiating the transactions pursuant to which the
Company acquired Diverse Production Company ("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 connection with the acquisition of 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 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 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.
In conjunction with the acquisition of Amerac in 1998, outstanding warrants
to purchase 477,357 shares of Amerac Common Stock were exchanged for warrants
to purchase 406,218 shares of Southern Mineral Common Stock at an average price
of $6.773 per share. The warrants expire November 18, 1999. Additionally,
options to purchase 201,619 shares of Amerac Common Stock at an average price
of $5.88 per share were exchanged for options to purchase 171,574 shares of
Southern Mineral Common Stock at an average price of $6.91 per share. Options
on 35,955 Southern Mineral shares expired during 1998 and the remaining options
expired on January 28, 1999.
H-45
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the Company's stock options and warrants as of December 31,
1998, 1997 and 1996, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ------------------------ -----------------------
Weighted Avg. Weighted Avg. Weighted Avg.
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 1,965,788 $2.37 1,668,878 $1.71 818,878 $1.09
Granted................. 2,590,399 3.18 305,000 5.97 850,000 2.49
Exercised............... -- -- (8,090) 3.00 -- --
Forfeited............... (1,132,661) 4.00 -- -- -- --
---------- --------- ---------
Outstanding at end of
year................... 3,423,526 2.71 1,965,788 2.37 1,668,878 $1.71
========== ========= =========
Options exercisable at
end of year............ 2,593,036 1,548,878 1,548,878
========== ========= =========
</TABLE>
Options granted during 1998 include the grant of repriced options; options
forfeited during 1998 include the cancellation of higher priced options. The
weighted-average fair value of compensatory options granted during 1998, 1997
and 1996 were $0.84, $2.51 and $1.04, respectively, per option. The following
table summarizes information about options and warrants outstanding at December
31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- ----------------------------
Weighted Avg. Weighted-
Number Remaining Average Number Weighted Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Outstanding Exercise Price
- ------------------------ ----------- ---------------- -------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$1.00 to 1.50........... 1,951,715 4.05 years $ 1.04 1,121,225 $ 1.08
2.00 to 3.50........... 704,333 1.80 years 2.14 704,333 2.14
4.00 to 5.50........... 241,203 1.85 years 4.81 241,203 4.18
6.00 to 7.50........... 518,386 0.80 years 6.78 518,386 6.78
8.00 and over.......... 7,889 0.08 years 31.66 7,889 31.66
--------- ---------
3,423,526 2,593,036
========= =========
</TABLE>
Note 9. Commitments and Contingencies
The Company leases its headquarters office space and its Calgary, Canada
office space under a noncancellable operating leases expiring April 14, 2003
and August 31, 2000, respectively. Lease commitments at December 31, 1998 are:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Total
---- -------- -------- -------- ------- ----------
<S> <C> <C> <C> <C> <C>
$309,139 $279,623 $225,581 $225,581 $65,408 $1,105,332
</TABLE>
Lease expenses in 1998, 1997 and 1996 were $336,461, $136,192 and $133,755
respectively.
The Company is involved in several lawsuits arising in the ordinary course
of business, only one of which presents the possibility of a material loss. The
Company's Canadian subsidiary, Neutrino Resources Inc., has been sued alleging
damages resulting from the calculation of third party facility and processing
fees at its Pine Creek Field, Alberta, Canada. The suit was filed on January
27, 1999 in the Court of Queen's Bench of Alberta in the Judicial District of
Calgary by EnerMark Inc. The amount of alleged damages approximates U.S.
$870,000. Although the outcome of litigation cannot be predicted with
certainty, management believes (based on discussions with its legal counsel)
that the outcome of these legal actions will not have a material adverse affect
on the Company's consolidated financial condition or results of operations.
H-46
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1998 and 1997.
Note 10. Quarterly Financial Data (Unaudited)
Selected quarterly financial data of the Company are presented below for
the years ended December 31, 1998 and 1997 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Fully
Income Basic Diluted
(Loss) Net Income Income
from Income (Loss) (Loss)
1998 Quarter Revenues Operations (Loss) Per Share Per Share
------------ -------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
March 31................ $ 4,414 $ 442 $ (295) $ (.03) $ (.03)
June 30................. 4,360 (1,651) (2,537) (.20) (.20)
September 30............ 6,740 (528) (1,992) (.16) (.16)
December 31............. 5,958 (12,415) (11,585) (.90) (.90)
------- -------- -------- ------ ------
$21,472 $(14,152) $(16,409) $(1.32) $(1.32)
======= ======== ======== ====== ======
<CAPTION>
1997 Quarter
------------
<S> <C> <C> <C> <C> <C>
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) (.03) (.03)
December 31............. 3,447 (3,144) (3,442) (.38) (.38)
------- -------- -------- ------ ------
$14,203 $ (612) $ (2,049) $ (.22) $ (.22)
======= ======== ======== ====== ======
</TABLE>
Note 11. Retirement Benefits
The Company terminated its 401(k) Retirement Plan in 1995, and adopted a
Simplified Employee Pension Plan ("SEP"). The SEP allows employees to defer
part of their salary. Employer contributions are optional, and the Company will
determine annually whether it will contribute and at what level. The maximum
amount that can be contributed annually per SEP plan participant, particularly
from a combination of salary deferrals plus Company optional contributions, is
$22,500. The Company's contributions amounted to $0, $33,784 and $22,554 in
1998, 1997 and 1996, respectively, and was 50% of the amount contributed by
each of the participants in the plan during 1997 and 1996.
H-47
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12. Geographic Segment Financial Data
The Company is an independent oil and gas Company engaged in the
acquisition, development and exploration of oil and natural gas properties.
Information about the Company's operations by geographic area for the year
ended December 31, 1998, 1997 and 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
U.S. Ecuador Canada Total
------- ------- ------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Oil and gas sales (1)..................... $14,647 $ 290 $ 6,785 $ 21,722
Loss on sales of properties............... (234) -- (16) (250)
------- ------- ------- --------
14,413 290 6,769 21,472
------- ------- ------- --------
Expenses:
Production.............................. 5,348 371 2,799 8,518
Exploration............................. 2,910 -- 725 3,635
Impairment of proved oil and gas
properties............................. 2,047 2,703 4,594 9,344
Depreciation, depletion and
amortization........................... 6,221 244 4,040 10,505
General & administrative................ 2,004 11 1,607 3,622
------- ------- ------- --------
18,530 3,329 13,765 35,624
------- ------- ------- --------
Interest & other income, net.............. 262 25 43 330
Interest expense.......................... (4,649) -- (713) (5,362)
------- ------- ------- --------
Net loss before income taxes.............. (8,504) (3,014) (7,666) (19,184)
Income tax benefit........................ (5) -- (2,770) (2,775)
------- ------- ------- --------
Net loss.................................. $(8,499) $(3,014) $(4,896) $(16,409)
======= ======= ======= ========
Identifiable assets as of December 31,
1998..................................... $63,440 $ 1,482 $61,827 $126,749
Corporate assets--cash and cash
equivalents.............................. 1,541
--------
Total assets.............................. $128,290
========
Year ended December 31, 1997
Oil and gas sales (1)..................... $10,002 $ 386 $ 3,402 $ 13,790
Gains on sales of properties.............. 114 -- 299 413
------- ------- ------- --------
10,116 386 3,701 14,203
------- ------- ------- --------
Expenses:
Production.............................. 2,785 278 619 3,682
Exploration............................. 1,672 76 28 1,776
Impairment of proved 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 income (loss) before income taxes..... (2,697) (154) 976 (1,875)
Income taxes.............................. (295) -- 469 174
------- ------- ------- --------
Net income (loss)......................... $(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
========
</TABLE>
H-48
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
U.S. Ecuador Canada Total
------- ------- ------ -------
<S> <C> <C> <C> <C>
Year ended December 31,
1996
Oil and gas sales (1)..... $ 8,136 $-- $3,644 $11,780
Gains on sales of
properties............... 424 -- 29 453
------- --- ------ -------
8,560 -- 3,673 12,233
------- --- ------ -------
Expenses:
Production.............. 1,880 -- 862 2,742
Exploration............. 218 -- 44 262
Impairment of proved 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) -- -- (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>
- --------
(1) Includes sulfur revenues of $700,000, $250,100 and $0 in 1998, 1997 and
1996, respectively.
Note 13. Oil and Gas Producing Activities
The Company's capitalized costs of all oil and gas properties and related
allowances for depreciation and depletion are as follows at December 31 (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Proved properties.......................... $136,833 $ 53,437 $24,888
Unproved properties........................ 5,454 494 525
Less accumulated depreciation, depletion
and amortization.......................... (28,546) (11,905) (5,072)
-------- -------- -------
Total...................................... $113,741 $ 42,026 $20,341
======== ======== =======
</TABLE>
The Company's depreciation, depletion and amortization costs per Mcfe in
1998, 1997 and 1996 were $0.94, $0.78 and $0.60, respectively. The Company's
share of oil and gas revenues produced from its royalty interests was $966,000,
$1,053,000 and $979,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
H-49
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Costs incurred in oil and gas property acquisition, exploration and
development activities were as follows (in thousands):
<TABLE>
<CAPTION>
United
States Ecuador Canada Total
------- ------- ------- -------
<S> <C> <C> <C> <C>
As of December 31, 1998
Property acquisition costs
Proved..................................... $22,885 $ -- $50,452 $73,337
Unproved................................... 1,979 -- 3,812 5,791
Exploration costs............................ 4,150 -- 923 5,073
Development cost............................. 3,838 505 1,410 5,753
------- ------ ------- -------
Total costs incurred..................... $32,852 $ 505 $56,597 $89,954
======= ====== ======= =======
As of December 31, 1997
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................................... -- -- -- --
Exploration costs............................ 373 -- -- 373
Development cost............................. 426 -- 642 1,068
------- ------ ------- -------
Total costs incurred..................... $ 5,394 $ -- $ 642 $ 6,036
======= ====== ======= =======
</TABLE>
H-50
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reserve Quantity Information (unaudited)
The following three tables reflect the estimated proved reserves of the
Company. The oil and gas reserves are principally onshore in the continental
United States, Canada and Ecuador. The Company's reserve information has been
based on estimates prepared by or audited by independent petroleum engineers.
Netherland, Sewell & Associates, Inc. ("NSA") prepared the domestic reserve
estimates as of December 31, 1995 and 1997 and audited the December 31, 1996
domestic reserve estimates prepared by the Company. NSA prepared most of the
domestic reserve estimates as of December 31, 1998. The Company prepared the
remaining reserve estimates, and Ryder Scott Company ("RSC") audited those
results. McDaniel & Associates Consultants Ltd. prepared the Canadian reserve
estimates as of December 31, 1995, 1996 and 1997. Chapman Petroleum Engineering
Ltd. prepared most of the Canadian reserve estimates as of December 31, 1998,
while Gilbert Laustsen Jung Associates Ltd. prepared the remaining reserve
estimates as of such date. The Ecuador reserves were prepared by RSC as of
December 31, 1997. As a result of the decline in world oil prices, the
Company's reserves in Ecuador are not economic as of December 31, 1998. The
Company's U.S. oil reserves (including, oil, condensate and natural gas
liquids) have been prepared using average prices of $9.67, $16.91 and $24.41
per barrel and average natural gas prices of $2.17, $2.20 and $3.91 per Mcf, as
of December 31, 1998, 1997 and 1996, respectively. The Canadian reserves have
been prepared using average oil prices of $8.71, $15.30 and $23.66 per barrel
and average gas prices of $1.72, $1.34 and $1.62 per Mcf, as of December 31,
1998, 1997 and 1996, respectively. Ecuador reserves were prepared using an
average oil price of $18.00 per barrel as of December 31, 1997.
<TABLE>
<CAPTION>
U.S. Ecuador Canada Total
--------------------- --------------- --------------------- ---------------------
Oil Gas Oil Gas Oil Gas Oil Gas
(Bbls) (Mcf) (Bbls) (Mcf) (Bbls) (Mcf) (Bbls) (Mcf)
--------- ---------- -------- ----- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Proved Reserves
Balance,
December 31, 1995..... 687,401 20,644,438 -- -- 729,135 4,716,121 1,416,536 25,360,559
Extensions, discoveries
and additions......... 6,081 479,336 -- -- 31,351 1,506,458 37,432 1,985,794
Revisions of previous
estimates............. 33,975 (519,051) -- -- (12,623) 79,948 21,352 (439,103)
Purchase and sale of
minerals in place
(net)................. 109,252 4,590,014 -- -- -- -- 109,252 4,590,014
Production............. (120,855) (2,396,379) -- -- (112,563) (961,527) (233,418) (3,357,906)
--------- ---------- -------- --- --------- ---------- --------- ----------
Balance,
December 31, 1996..... 715,854 22,798,358 -- -- 635,300 5,341,000 1,351,154 28,139,358
Extensions, discoveries
and additions......... 20,480 2,869,630 26,395 -- 15,774 95,139 62,649 2,964,769
Revisions of previous
estimates............. 53,743 (814,731) (26,395) -- (30,595) 384,760 (3,247) (429,971)
Purchase and sale of
minerals in place
(net)................. 1,746,890 7,702,198 489,971 -- (1,793) (295,974) 2,235,068 7,406,224
Production............. (186,759) (2,554,072) (23,966) -- (93,486) (942,625) (304,211) (3,496,697)
--------- ---------- -------- --- --------- ---------- --------- ----------
Balance,
December 31, 1997..... 2,350,208 30,001,383 466,005 -- 525,200 4,582,300 3,341,413 34,583,683
Extensions, discoveries
and additions......... 237,189 12,903,760 -- -- 170,912 -- 408,101 12,903,760
Revisions of previous
estimates............. (192,935) (2,362,293) (437,413) -- -- -- (630,348) (2,362,293)
Purchase and sale of
minerals in place
net................... 1,004,373 12,066,855 -- -- 3,656,928 24,914,483 4,661,301 36,981,338
Production............. (406,920) (4,219,528) (28,592) -- (321,040) (2,212,983) (756,552) (6,432,511)
--------- ---------- -------- --- --------- ---------- --------- ----------
Balance,
December 31, 1998..... 2,991,915 48,390,177 -- -- 4,032,000 27,283,800 7,023,915 75,673,977
========= ========== ======== === ========= ========== ========= ==========
</TABLE>
H-51
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
U.S. Ecuador Canada Total
-------------------- ------------- -------------------- --------------------
Oil Gas Oil Gas Oil Gas Oil Gas
(Bbls) (Mcf) (Bbls) (Mcf) (Bbls) (Mcf) (Bbls) (Mcf)
--------- ---------- ------- ----- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Proved Developed
Reserves
Balance,
December 31, 1996..... 608,705 19,361,667 -- -- 635,300 5,341,000 1,244,005 24,702,667
Balance,
December 31, 1997..... 2,334,122 29,156,068 466,005 -- 525,200 4,582,300 3,325,327 33,738,368
Balance,
December 31, 1998..... 2,731,986 40,605,557 -- -- 3,899,100 26,773,600 6,631,086 67,379,157
</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 of Financial Accounting Standards 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 (in thousands):
<TABLE>
<CAPTION>
U.S. Ecuador Canada Total
-------- ------- ------- --------
<S> <C> <C> <C> <C>
At December 31, 1998
Future cash inflows..................... $142,303 $ -- $91,260 $233,563
Future production and development
costs.................................. (50,542) -- (36,274) (86,816)
Future income taxes..................... (13,061) -- (9,423) (22,484)
-------- ------- ------- --------
Future net cash flows............... 78,700 -- 45,563 124,263
10% Annual discount..................... (35,241) -- (18,312) (53,553)
-------- ------- ------- --------
Standardized measure of discounted
future net cash flows.................. $ 43,459 $ -- $27,251 $ 70,710
======== ======= ======= ========
At December 31, 1997
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
======== ======= ======= ========
</TABLE>
H-52
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
U.S. Ecuador Canada Total
-------- ------- ------- --------
<S> <C> <C> <C> <C>
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
======== === ======= ========
</TABLE>
The following are the principal sources of change in the standardized
measure of discounted future net cash flows (in thousands):
<TABLE>
<CAPTION>
Total
Company
--------
<S> <C>
At December 31, 1998
Standardized measure--beginning of year............................... $ 47,972
Oil and gas sales, net of production costs............................ (12,685)
Purchases and sales of reserves in place (net)........................ 34,630
Net changes in prices, net of production costs........................ (12,578)
Extensions and discoveries............................................ 14,576
Revisions to previous quantity estimates.............................. (2,681)
Net change in income taxes............................................ (8,926)
Accretion of discount................................................. 4,870
Changes in estimated future development costs......................... (2,345)
Development costs incurred during the period.......................... 5,686
Other................................................................. 2,191
--------
Standardized measure--end of year..................................... $ 70,710
========
At December 31, 1997
Standardized measure--beginning of year............................... $ 49,334
Oil and gas sales, net of production costs............................ (10,108)
Purchases and sales of reserves in place (net)........................ 21,950
Net changes in prices, net of production costs........................ (29,801)
Extensions and discoveries............................................ 3,282
Revisions to previous quantity estimates.............................. (225)
Net change in income taxes............................................ 12,117
Accretion of discount................................................. 6,408
Changes in estimated future development costs......................... (129)
Changes in production rates and other................................. (4,856)
--------
Standardized measure--end of year..................................... $ 47,972
========
</TABLE>
H-53
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Total
Company
--------
<S> <C>
At December 31, 1996
Standardized measure--beginning of year............................... $ 24,600
Oil and gas sales, net of production costs............................ (9,038)
Purchases and sales of reserves in place (net)........................ 12,835
Net changes in prices, net of production costs........................ 21,735
Extensions and discoveries............................................ 6,259
Revisions to previous quantity estimates.............................. (1,528)
Net change in income taxes............................................ (11,930)
Accretion of discount................................................. 2,725
Changes in estimated future development costs......................... (786)
Changes in production rates and other................................. 4,463
--------
Standardized measure--end of year..................................... $ 49,335
========
</TABLE>
The Company's foreign reserves per Mcfe in 1998, 1997 and 1996 were 44%, 19%
and 25% of total reserves, respectively.
Note 14. Subsequent Events
On March 29, 1999, the Company executed amendments to its domestic bank
credit agreement. See Note 3 to the Consolidated Financial Statements.
On March 11, 1999, the Company sold its mineral interests and substantially
all of its royalty interests in Texas, New Mexico and Mississippi for $6.0
million, subject to certain adjustments. The sale encompassed 235,000 net
mineral acres and proved reserves of 4.4 Bcfe as of December 31, 1998. Of the
$6.0 million sales price, $5.4 million was closed and funded on March 11, 1999.
The remainder of the transaction is expected to close before May 11, 1999,
following the satisfaction of certain conditions. Proceeds will be used to
reduce indebtedness and for other corporate purposes.
In February 1999, the Board of Directors of the Company retained CIBC
Oppenheimer Corp. as independent advisors to assist in studying strategic
alternatives for maximizing shareholder value. The Company expects to evaluate
a number of alternatives, including but not limited to, asset divestiture,
joint ventures or alliances, a sale or merger of the Company, and other
restructuring and recapitalization opportunities. The Company can give no
assurances to its success in pursuing any of the strategic alternatives or as
to the terms of any transactions.
On January 19, 1999, the Company was advised that its Common Stock was not
in compliance with Nasdaq Stock Market listing qualifications. A key
requirement for Nasdaq listing is maintenance of a minimum closing bid price
equal to or greater than $1.00 per share of common stock.
Unless the Company's Common Stock satisfies the Nasdaq minimum bid
requirement before April 19, 1999, or unless the Company is granted an
extension, the Company's Common Stock will be scheduled for delisting. The
Company believes that continued listing on the Nasdaq is important to
maintaining the liquidity of its common stock and is considering steps to come
into compliance with the listing requirements. The Company cannot assure that
it will be successful in maintaining its Nasdaq listing.
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
H-54
<PAGE>
In filing the Annual Report on Form 10-K of Southern Mineral Corporation
(the "Company" or the "Registrant"), the Company incorporated certain
information required by Part III by reference to the Company's Proxy Statement
for the 1999 Annual Meeting of Stockholders. The Company's Proxy Statement for
the 1999 Annual Meeting of Stockholders will not be filed within the 120-day
period following the end of the Company's fiscal year ended December 31, 1998.
Accordingly, the Registrant hereby amends Part III of its Annual Report on Form
10-K as set forth below to include such information:
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The Company's directors and executive officers and their ages as of April
30, 1999 are as follows:
<TABLE>
<CAPTION>
Director Since Age Position
-------------- --- --------
<S> <C> <C> <C>
Jeffrey W.C. Arsenych... 1998 41 Director and Chief Executive Officer of Neutrino
B. Travis Basham........ 1995 60 Director
David W. Beckwermert.... 1998 41 Director and President of Neutrino
Michael R. Dawson....... N/A 45 Vice President-Finance and Chief Financial Officer
Thomas R. Fuller........ 1995 51 Director
Robert R. Hillery....... 1993 70 Director
E. Ralph Hines, Jr...... 1985 70 Director
Howell H. Howard........ 1960 71 Chairman of the Board of Directors
Billy W. Lee............ N/A 53 Vice President-Engineering
Steven H. Mikel......... 1995 47 Director, President, Chief Executive Officer and Secretary
James E. Nielson........ 1993 68 Director
Jeffrey B. Robinson..... 1998 54 Director
John A. Walker.......... N/A 49 Vice President-Exploration
Michael D. Watford...... 1998 45 Director
Timothy R. Weddle....... N/A 52 Vice President-Operations
Donald H. Wiese, Jr..... 1995 57 Director
Spencer L. Youngblood... 1995 53 Director
</TABLE>
Jeffrey W.C. Arsenych is the Chairman and Chief Executive Officer of
Neutrino Resources Inc., a Canadian subsidiary of the Company ("Neutrino"), and
has served as the Chief Executive Officer of Neutrino since its inception in
1993. From 1990 to 1993, Mr. Arsenych was Senior Coordinator of Business
Development with Saskatchewan Oil and Gas Corporation (now Wascana Energy,
Inc.). Prior to 1990, Mr. Arsenych was Manager of Exploration Ventures and
subsequently Manager of Corporate Development with Triton Canada Resources,
Ltd. (now Transwest Energy Ltd.). Mr. Arsenych is a founder of Neutrino. Mr.
Arsenych holds a B.A. from the University of Regina and an M.B.A. from the
University of Western Ontario.
B. Travis Basham has served, since 1988, as a Manager of four Texas general
partnerships operating under the Diverse name and headquartered in San Antonio,
Texas, all of which are engaged in the oil and gas exploitation and production
business (collectively, the "Diverse Partnerships"). Mr. Basham also has served
as President of Venucot, Inc., an oil and gas production and management
company, since 1987. Mr. Basham is a certified public accountant with prior
administrative and financial positions with New London, Inc. (1985-1986), Gulf
Energy and Development Corp. (1976-1983), and Enserch (1959-1976). Mr. Basham
received a B.B.A. in accounting from Southern Methodist University.
David W. Beckwermert is the President of Neutrino. Mr. Beckwermert has over
15 years of entrepreneurial business experience in various businesses. In 1983,
he joined a Canadian chartered bank's regional office in Saskatoon as a
management officer, later advancing to Program Review Analyst for the Treasury
Board Division of the Saskatchewan Department of Finance. Mr. Beckwermert
subsequently served
H-55
<PAGE>
as Manager-Capital Financing and Forecasting and as a Director in the Technical
Services Division of SPMC. In 1992 he became Director of Policy and Legislation
for the Saskatchewan Department of Environment and Resource Management. Mr.
Beckwermert is one of the founders of Neutrino where he has held various
management positions in the past five years. He graduated from Lakehead
University with degrees in Business Administration and Forestry.
Michael R. Dawson joined the Company in October 1998 and is Vice President-
Finance. Mr. Dawson has in excess of twenty years of experience in the oil and
gas finance industry, beginning his career at Shell Oil Company in Houston,
Texas and New Orleans, Louisiana. Mr. Dawson served most recently at Union
Texas Petroleum Holdings, Inc. of Houston, Texas as Director of Acquisitions
and Portfolio Management. Mr. Dawson received his B.B.A. from the University of
Iowa in 1975 and his CPA certification from the State of Texas.
Thomas R. Fuller has been a Manager of the Diverse Partnerships since 1988.
Since 1983, he has served as President of Wyogram Oil Company, which is engaged
in the oil and gas production business. In addition, he has served as President
of Michmatt, Inc. since 1992. He has also served as a vice president of Hillin
Oil Company (1980-1986) and First City National Bank (1974-1980), and a
drilling and reservoir engineer with Exxon Company, U.S.A. (1970-1974). He
holds a B.S. in petroleum engineering from the University of Wyoming, and
attended Louisiana State University's Graduate School of Banking.
Robert R. Hillery has served as President and Chief Executive Officer of The
Links Group, Inc. ("LGI") since 1984. From 1984 until 1992, Mr. Hillery was
Director and President of Gulf Exploration Consultants, Inc. ("GEC"). Both LGI
and GEC are engaged in oil and gas exploration. He also has been a member of
the Board of Trustees of Phillips University since 1982. Mr. Hillery graduated
from Phillips University with a B.A. in geology, mathematics and physics.
E. Ralph Hines, Jr. has been a partner of Moon & Hines Oil Exploration, an
oil and gas exploration partnership, since 1994. Since 1994, he also has been
Vice President of Moon-Hines-Tigrett Operating Co., Inc., an oil and gas
operating company.
Howell H. Howard has been Trustee of the Ehlco Liquidating Trust since 1986
and was Chairman of the Board of Edward Hines Lumber Company from 1981 until
its liquidation in January 1989. Mr. Howard is a director of Harris Bank. Mr.
Howard has been Chairman of the Board of the Company since July 1981.
Billy W. Lee has been Vice President-Engineering of the Company since June
1997. He served as President of an independent oil and gas company from 1984
through June 1997. He earned a B.S. in petroleum engineering and an M.B.A. from
Texas A&M University. Mr. Lee has worked with Tenneco and BP Huddleston Company
in Houston.
Steven H. Mikel has been the Company's President, Chief Executive Officer
and a director since January 1995. He has also been the Company's Secretary
since April 1999. From May 1993 to December 1994, he was an independent
consultant in the oil and gas industry, acting as a financial advisor to small
and medium-sized independent oil and gas companies in their capital formation
activities. Mr. Mikel was a co-founder and served as the Managing Director of
Resource Investors Management Company (RIMCO), an oil and gas investment
management company, from October 1985 to April 1993. He began his career as a
corporate finance attorney in Hartford, Connecticut, and then worked in finance
with Aetna Life and Casualty, where he specialized in natural resource
industries. Mr. Mikel received his B.A. and J.D. degrees from Syracuse
University and his M.B.A. from the University of Connecticut.
James E. Nielson has held the position of President and Chief Executive
Officer of Nielson & Associates, Inc. since 1992. From 1979 through 1992, he
was President and Chief Executive Officer of JN Oil and Gas Company, an oil and
gas exploration company. He has served as Director of the American Petroleum
Institute, Rocky Mountain Oil and Gas Association and Shoshone First Bank since
1974, 1989 and 1992, respectively.
H-56
<PAGE>
Mr. Nielson was President of Rocky Mountain Oil and Gas Association from 1993
to 1995. Mr. Nielson received a B.S. in business administration from the
University of Wyoming.
Jeffrey B. Robinson has served as the President and Chief Executive Officer
of Fremont Exploration, Inc. since April 1999, an Oklahoma-based international
oil and gas company. He was the former President and Chief Executive Officer of
Centas Technical Services, L.L.C. from February 1998 through March 1999 and was
President and Chief Executive Officer of Amerac Energy Corporation from July
1994 through January 1998. He was previously with Amax Oil and Gas Inc. Mr.
Robinson joined the Company's Board of Directors in January of 1998 following
the merger of Amerac with and into the Company. Mr. Robinson received a B.S. in
petroleum engineering from Marietta College in Marietta, Ohio.
John A. Walker has been Vice President-Exploration of the Company since May
1996. He has twenty-one years of petroleum exploration and production
experience with major and independent companies, most recently as Exploration
Manager of Stone & Webster Oil Company, Inc. from January 1994 to January 1996,
and as an independent geological/geophysical consultant from March 1987 to
December 1993. Mr. Walker received a B.S. in geology (1972) and an M.S. in
geology (1975) from Ohio University. Mr. Walker is an AAPG Certified Petroleum
Geologist, No. 4378.
Michael D. Watford has served as Chairman and Chief Executive Officer of
Ultra Petroleum since January 1999. He was President, Chief Operating Officer
and Chief Executive Officer of Nuevo Energy Company from 1994 through September
1997. He was President of Torch Energy Marketing, Inc. from 1990 until 1993.
Mr. Watford began his career in 1975 with Shell Oil Company where he held
various positions in exploration and production, refining, chemicals, and
mining. He later held a number of positions of increasing responsibility at
Superior Oil Company and Meridian Oil, Inc. Mr. Watford has a B.S. in finance
from the University of Florida and an M.B.A. from the University of New
Orleans.
Timothy R. Weddle Vice President-Operations of the Company since January 1,
1998, has twenty-seven years of petroleum engineering and management
experience. Mr. Weddle joined the Company in 1998. Mr. Weddle held various
engineering and supervisory positions with Exxon Corporation domestically and
overseas, onshore and offshore. He managed the operations of a domestic
exploration company for fourteen years and was President and owner of Petroleum
Resource Management Co., an oil and gas operating company from 1993 through
1997. Mr. Weddle is a Registered Professional Engineer in Texas. He graduated
with honors from the University of Texas at Austin with a B.S. in chemical
engineering.
Donald H. Wiese, Jr. has been, since 1986, a Manager of the Diverse
Partnerships, and since 1981, has been President of Heathery Resources, Inc.,
an oil and gas consulting company. He has served as President of BHW Energy,
Inc. since 1994. He was retained by Primary Fuels, Inc. to establish and manage
its oil and gas acquisition program and was responsible for $240,000,000 in
producing property acquisitions from 1981 to 1987. Mr. Wiese was President of
Nord Petroleum Corporation from 1979 to 1981 and Vice-President of American
Express' international oil and gas project financing group from 1976 to 1979.
His technical training includes evaluation and appraisal experience as Vice
President of DeGolyer and MacNaughton (1973-1976), and oil and gas operations
with Texaco, Inc. (1965-1973). Mr. Wiese is a graduate of New Mexico State
University and a Registered Professional Engineer.
Spencer L. Youngblood has been an independent oil and gas investor and
President of Kona, Inc., an oil and gas production company, since 1990. From
1984 to 1990, he was Senior Vice President with Geodyne Resources, Inc., where
he directed more than $200,000,000 in acquisitions. Mr. Youngblood began his
career at Aminoil in 1975 and worked with Gulf Energy and Development Corp.
from 1981 to 1984. He earned a B.S. in petroleum engineering from Louisiana
State University and an M.B.A. from Florida Technological University.
Terms of Office
Each of the Company's directors will hold office until the Company's Annual
Meeting of Stockholders or until his successor is duly elected and qualified.
All executive officers of the Company serve at the discretion of the Board of
Directors.
H-57
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, officers and persons holding more than ten percent of a registered
class of the Company's equity securities to file with the Securities and
Exchange Commission and any stock exchange or automated quotation system on
which the Common Stock may then be listed or quoted (i) initial reports of
ownership, (ii) reports of changes in ownership and (iii) annual reports of
ownership of Common Stock and other equity securities of the Company. Such
directors, officers and ten percent stockholders are also required to furnish
the Company with copies of all such filed reports.
Based solely upon review of the copies of such reports furnished to the
Company and written representations that no other reports were required during
1998, the Company believes that all of the Company's executive officers and
directors complied with Section 16(a) reporting requirements during 1998 except
as follows: each of Jeffrey W.C. Arsenych, David W. eckwermert, Michael R.
Dawson, Billy W. Lee, John A. Walker and Timothy R. Weddle failed to file a
Form 5 on a timely basis with respect to the repricing of options to purchase
the Company's Common Stock.
ITEM 11. Executive Compensation.
Director Compensation
The Company reimburses each director for his actual and necessary expenses
reasonably incurred in connection with attending meetings of the Board of
Directors and its committees. In April 1997, the Board of Directors adopted the
1997 Non-Employee Director Compensation Plan ("1997 Plan") which is effective
through May 2002. Under the 1997 Plan, non-employee directors are entitled to
receive 1,000 shares of Common Stock for each Board of Directors meeting
attended, excluding telephonic meetings. No retainer or other compensation for
serving as a director of the Company was paid during 1998.
H-58
<PAGE>
Executive Officer Compensation
The following table reflects all forms of compensation for Steven H. Mikel,
John A. Walker, Billy W. Lee, Timothy R. Weddle and James H. Price's services
to the Company during the applicable years ended December 31, 1998, December
31, 1997 and December 31, 1996 by the Company:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
-----------------------------------
Annual Compensation Awards Payouts
------------------------------- --------------------- -------
Securities
Restricted Underlying
Other Annual Stock Options/ LTIP All Other
Name and Principal Bonus Compensation Awards SARs Payouts Compensation
Position Year Salary ($) ($) ($) ($) (#) ($) ($)
------------------ ---- ---------- ------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Steven H. Mikel......... 1998 $175,000 -- -- -- -- -- $ 515(1)
President, Chief 1997 $150,000 $60,000 -- -- -- -- $ 5,265(1)(2)
Executive Officer and 1996 $125,750 $50,000 -- -- 10,000 -- $ 5,265(1)(2)
Secretary
John A. Walker.......... 1998 $125,000 -- -- -- 120,000(3)(4) -- $ 477(5)
Vice President-- 1997 $ 90,000 $24,000 -- -- -- -- $ 5,227(2)(5)
Exploration 1996 $ 73,125 $20,000 -- -- -- -- $ 2,887(5)(6)
Billy W. Lee............ 1998 $125,000 -- -- -- 100,000(4)(7) -- $ 985(8)
Vice President
Engineering 1997 $ 45,243 $24,000 -- -- -- -- $ 187(9)
Timothy R. Weddle....... 1998 $110,000 -- -- -- -- --
Vice President
Operations -- -- -- -- -- 50,000(4)(10)
James H. Price(11)...... 1998 $ 78,750 -- -- -- -- -- $89,644(5)(12)
Vice President-Finance 1997 $ 90,000 $20,000 -- -- 70,000 -- $ 5,227(2)(5)
1996 $ 73,125 -- -- -- 50,000 -- $ 5,227(2)(5)
</TABLE>
- --------
(1) Includes $515 per year computed in accordance with Internal Revenue Service
guidelines for premiums paid on term life insurance exceeding $50,000 in
coverage. Substantially all employees of the Company are covered by term
life insurance policies.
(2) Includes $4,750 contributed by the Company to each officer's account in the
Company's Simplified Employee Pension Plan in which substantially all of
the Company's employees are eligible to participate.
(3) Comprised of an option originally granted on May 15, 1996 to purchase
50,000 shares, an option originally granted on March 4, 1997 to purchase
20,000 shares and an option originally granted on November 14, 1997 to
purchase 50,000 shares, with exercise prices ranging from $3.00 to $6.75
per share. All of such options were repriced to $1.00 per share by the
Compensation Committee effective December 21, 1998.
(4) See "Option/SAR Grants in Last Fiscal Year" table below.
(5) Includes $477 for each year computed in accordance with Internal Revenue
Service guidelines for premiums paid on term life insurance exceeding
$50,000 in coverages. Substantially all employees of the Company are
covered by term life income policies.
(6) Includes $2,410 contributed by the Company for Mr. Walker's account in the
Company's Simplified Employee Pension Plan in which substantially all of
the Company's employees are eligible to participate.
(7) Comprised of an option originally granted in July 1, 1997 to purchase
50,000 shares at $5.00 per share and an option originally granted on
November 14, 1997 to purchase 50,000 shares at $6.75 share. All of such
options were repriced to $1.00 per share by the Compensation Committee
effective December 21, 1998.
(8) Includes $985 for 1998 computed in accordance with Internal Revenue Service
guidelines for premiums paid on term life insurance exceeding $50,000 in
coverage.
(9) Includes $187 contributed by the Company for Mr. Lee's account in the
Company's Simplified Employee Pension Plan in which substantially all of
the Company's employees are eligible to participate.
(10) Comprised of an option originally granted on January 1, 1995 to purchase
50,000 shares at $5.50 per share. This option was repriced to $1.00 per
share by the Compensation Committee effective December 21, 1998.
(11) Mr. Price was no longer employed by the Company effective September 1998.
(12) Includes compensation of $89,167 pursuant to a Severance Agreement by and
between the Company and James H. Price as of September 30, 1998, $26,250
of which was paid in 1998 and $62,917 of which is to be paid in 1999.
H-59
<PAGE>
OPTION/SAR GRANTS GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Percent of Total
Number of Securities Options/SARs
Underlying Granted to Exercise or Grant Date
Options/SARs Granted Employees in Base Price Expiration Present
Name(1) (#)(2) 1998 ($/Share) Date(3) Value ($)(4)
------- -------------------- ---------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Billy W. Lee............ 50,000 4.3% $1.00 07/01/02 $5,648
50,000 4.3% $1.00 11/14/02 $5,545
John A. Walker.......... 50,000 4.3% $1.00 05/15/01 $5,923
20,000 1.7% $1.00 03/04/02 $2,292
50,000 4.3% $1.00 11/14/02 $5,545
Timothy R. Weddle....... 50,000 4.3% $1.00(5) 01/01/03 $5,525
</TABLE>
- --------
(1) Except for Mr. Weddle, neither Mr. Mikel nor any of the other named
executive officers was granted any options or SARs during 1998.
(2) The options become exercisable as to one-third of the shares after the
expiration of one year from the date of grant, as to two-thirds after the
expiration of two years and in full after the expiration of three years
from the date of grant. Options are granted for a term of five years,
subject to termination 90 days following termination of employment. Each
option vests in full upon death, disability, normal retirement or a change
of control of the Company.
(3) Reflects the original expiration date of the original grant of options
which was not affected by repricing of the options.
(4) The dollar amounts represent the value calculated using the Black-Scholes
option pricing model and using December 21, 1998, the date on which such
options were repriced, as the applicable grant date. The actual value, if
any, realized will depend on the excess of the stock price over the
exercise price at the date the option is exercised. The estimated values
under that model are based on assumptions that include (i) a stock price
volatility of 65.63%, (ii) a discount rate of 4.48% and (iii) a dividend
yield of 0%. The Company's use of the Black-Scholes model to indicate the
present value of each grant is not an endorsement of this valuation.
(5) Reflects the repricing of options by the Compensation Committee of the
Board of Directors effective December 21, 1998. The last sales price for
the Common Stock on December 21, 1998, as reported in the consolidated
reporting system for Nasdaq National Market issues, was $0.625.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND OPTION/SAR VALUE AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-the-
Unexercised Options/SARs Money Options/SARs at
Shares at December 31, 1998 December 31, 1998(1)
Acquired Value ----------------------------------- -----------------------------
Name On Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ---------------- ---------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Steven H. Mikel......... 0 $ 0 460,000 0 $ 0 $ 0
Billy W. Lee............ 0 $ 0 33,332 66,668 $ 0 $ 0
John A. Walker.......... 0 $ 0 56,665 63,335 $ 0 $ 0
James H. Price.......... 0 $ 0 27,446 667 $ 0 $ 0
Timothy R. Weddle....... 0 $ 0 -- 50,000 $ 0 $ 0
</TABLE>
- --------
(1) Based upon the last sales price of $0.719 per share on December 31, 1998,
as reported in the consolidated reporting system for Nasdaq National Market
issues.
Simplified Employee Pension Plan
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, particularly
from a combination of salary deferrals plus Company optional contributions, is
$22,500. The Company's contributions amounted to $0, $33,784 and $22,554 in
1998, 1997 and 1996, respectively, and was 50% of the amount contributed by
each of the participants in the plan during 1997 and 1996.
H-60
<PAGE>
Compensation Committee
The following persons served on the compensation committee of the Company's
Board of Directors during the fiscal year ended December 31, 1998: Howell H.
Howard, E. Ralph Hines, Jr. and James E. Nielson.
Employment Contracts and Change in Control Arrangements
Effective July 1, 1998, the Company entered into an employment agreement
with each of Messrs. Arsenych and Beckwermert in connection with the Neutrino
acquisition. The agreement with Mr. Arsenych provides for a one-year initial
term of employment at Cdn.$170,000 per year, plus a grant of options to
purchase 200,000 shares of the Company's Common Stock at a price of $3.75 per
share (which options were repriced to $1.00 per share effective December 21,
1998) and a grant of certain additional shares of the Company's Common Stock to
be held in escrow pending completion of certain term of service requirements or
a change of control of the Company. The agreement with Mr. Beckwermert provides
for a one-year initial term of employment at Cdn.$160,000 per year, plus a
grant of options to purchase 200,000 shares of the Company's Common Stock at a
price of $3.75 per share (which options were repriced to $1.00 per share
effective December 21, 1998) and a grant of certain additional shares of the
Company's Common Stock to be held in escrow pending completion of certain term
of service requirements or a change of control of the Company. See "Item 13.
Certain Relationships and Related Transactions." These agreements will
terminate effective June 30, 1999.
In addition, pursuant to a retention plan established by resolution of the
Board effective January 7, 1999, each officer is entitled to one year's salary,
payable in a lump sum, upon termination resulting from a change of control.
Pursuant to this retention plan, in the event of termination in connection with
a change of control, Messrs. Mikel, Lee, Walker and Weddle would be entitled to
receive payments of $175,000, $125,000, $125,000 and $110,000, respectively.
In September 1998, the Company entered into a severance agreement with James
H. Price, formerly Vice President--Finance of the Company. In connection with
the termination of his employment pursuant to such severance agreement, he is
entitled to salary continuation and benefits through June 30, 1999. The total
amount of such salary is $89,167, $26,250 of which was paid in 1998 and $62,917
of which is to be paid in 1999.
H-61
<PAGE>
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of March 31, 1999, the number of shares
of the Company's Common Stock owned by each director and director nominee of
the Company, executive officer named in the Summary Compensation Table above,
and all of the Company's directors and executive officers as a group. Based on
publicly-available filings with the Securities and Exchange Commission, the
Company knows of no person or entity, other than those listed below, who is the
holder of more than five percent of its voting securities. Unless otherwise
indicated, each holder has sole voting and investment power with respect to the
shares of Common Stock owned by such holder, and is a United States citizen,
except that Messrs. Arsenych and Beckwermert are Canadian citizens.
<TABLE>
<CAPTION>
Amount and
Nature of Percent
Beneficial of
Name and Address of Beneficial Owner Ownership Class
------------------------------------ ---------- -------
<S> <C> <C>
Centennial Associates, L.P. and affiliates ...... 762,009(1) 6.0%
900 Third Avenue
New York, NY 10022
Jeffrey W.C. Arsenych............................ 163,758 1.3%
B. Travis Basham................................. 522,807(2) 4.1%
David W. Beckwermert............................. 94,192 *
Michael R. Dawson................................ 10,000 *
Thomas R. Fuller................................. 522,807(3) 4.1%
Robert R. Hillery................................ 72,828(4) *
E. Ralph Hines, Jr............................... 59,108(5) *
Howell H. Howard................................. 570,417(6) 4.5%
Billy W. Lee..................................... 34,332(7) *
Steven H. Mikel.................................. 547,421(8) 4.3%
James E. Nielson................................. 33,147(9) *
Jeffrey B. Robinson.............................. 86,497(10) *
John A. Walker................................... 86,959(11) *
Michael D. Watford............................... 4,000 *
Timothy R. Weddle................................ 25,974(12) *
Donald H. Wiese, Jr. ............................ 516,307(13) 4.0%
Spencer L. Youngblood............................ 516,807(14) 4.0%
All Directors and Officers as a group (17
persons)........................................ 3,867,361 30.2%
</TABLE>
- --------
* Less than one percent of outstanding Common Stock.
(1) As reported in the Schedule 13G filed by Centennial Energy Partners, L.P.
("Centennial") on March 25, 1999, consists of 350,399 shares of Common
Stock, 373,479 shares of Common Stock, 38,131 shares of Common Stock,
723,878 shares of Common Stock, 762,009 shares of Common Stock, 762,009
shares of Common Stock owned by Centennial, Tercentennial Energy Partners,
L.P. ("Tercentennial"), Joseph H. Reich & Co., Inc. ("JHR & Co."),
Centennial Energy Partners, L.L.C. ("Energy"), Joseph H. Reich and Peter K.
Seldin, respectively. All of the foregoing parties share voting and
dispositive powers over such shares. JHR & Co. has the power to dispose of
the shares of Common Stock held by it in the Managed Account, which power
may be exercised by the employees of JHR & Co. who have investment
authority. Energy, the general partner of Centennial and Tercentennial, has
the power to dispose of and the power to vote the shares of Common Stock
beneficially owned by each of the foregoing. Joseph H. Reich, as the
Managing Member of Energy, has the power to vote and dispose of the Common
Stock beneficially held by Energy and as President of JHR & Co., has the
power to dispose of the shares of the Managed Account. Peter K. Seldin is a
non-managing member of Energy who has been delegated the authority to vote
and dispose of the shares of Energy and as Vice President of JHR & Co. has
the power to dispose of the shares of Common Stock held by it in the
Managed Account.
H-62
<PAGE>
(2) Includes 376,985 shares held by Venucot, Inc., a corporation controlled by
Mr. Basham, and 7,924 and 69,576 shares issuable upon exercise of presently
exercisable options held by Mr. Basham and Venucot, Inc., respectively.
(3) Includes 376,985 shares held by Michmatt, Inc., a corporation controlled by
Mr. Fuller, and 7,924 and 69,576 shares issuable upon exercise of presently
exercisable options held by Mr. Fuller and Michmatt, Inc., respectively.
(4) Includes 43,878 shares issuable upon exercise of a presently exercisable
option, and 6,054 shares issuable upon conversion of $50,000 of the
Company's 6.875% Convertible Subordinated Debentures ("Convertible
Debentures") at a conversion rate of 121.07 shares of Common Stock per
$1,000 of Convertible Debentures (the "Convertible Rate").
(5) Includes 41,750 shares owned by Mr. Hines' wife and 4,358 shares issuable
upon conversion of $36,000 of Convertible Debentures at the Conversion
Rate.
(6) Includes 363,633 shares held in trusts of which Mr. Howard or his wife
serves as a co-trustee and shares voting and dispositive power, and 26,488
shares owned directly by Mr. Howard's wife.
(7) Includes 33,332 shares issuable upon exercise of presently exercisable
options.
(8) Includes 460,000 shares issuable upon exercise of presently exercisable
options, and 2,421 shares issuable upon conversion of $20,000 of
Convertible Debentures at the Conversion Rate, which Convertible Debentures
are held in trusts of which Mr. Mikel is trustee and possesses voting and
dispositive power.
(9) Includes 4,000 shares held by Nielson & Associates, Inc., a corporation
controlled by Mr. Nielson, and 847 issuable upon conversion of $7,000 of
Convertible Debentures at the Conversion Rate.
(10) Includes 1,276 shares indirectly held by Mr. Robinson's children.
(11) Includes 79,999 shares issuable upon exercise of presently exercisable
options and 484 shares issuable upon conversion of $4,000 of Convertible
Debentures at the Conversion Rate.
(12) Includes 8,133 shares held by Petroleum Resource Management Company, a
company controlled by Mr. Weddle, and 16,666 shares issuable upon exercise
of presently exercisable options.
(13) Includes 369,485 shares held by DHW Energy, Inc., a corporation controlled
by Mr. Wiese, and 7,924 and 69,576 shares issuable upon exercise of
presently exercisable options held by Mr. Wiese and DHW Energy, Inc.,
respectively.
(14) Includes 376,985 shares held by Kona, Inc., a corporation controlled by
Mr. Youngblood, and 7,924 and 69,576 shares issuable upon exercise of
presently exercisable options held by Mr. Youngblood and Kona, Inc.,
respectively.
ITEM 13. Certain Relationships and Related Transactions.
On January 1, 1998, the Company acquired certain U.S. onshore oil and gas
properties from Petroleum Resource Management Company in exchange for 8,333
shares of the Company's Common Stock. Petroleum Resource Management Company is
owned and controlled by Timothy R. Weddle. Concurrent with this transaction,
Mr. Weddle became an officer of Southern Mineral Corporation in the capacity of
Vice President-Operations.
In conjunction with the acquisition of Neutrino in July 1998, 324,430 shares
of the Company's Common Stock were issued to key Neutrino management personnel
(including 144,407 shares to Mr. Arsenych and 86,333 shares to Mr. Beckwermert)
in consideration for retention and other obligations. The total purchase price
for the Neutrino shares was $57,198,000, including assumption of debt and
working capital deficit.
In September 1995, the Company entered into the Southern Links Group Joint
Venture ("Southern Links") to acquire, develop and market exploration
prospects. The Company's joint venture partner is LGI, a company that is
controlled by Robert Hillery, a director of the Company. The Company agreed to
fund the 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 LGI. In December 1998, the Company
made the determination to discontinue further evaluation of certain
H-63
<PAGE>
non-producing State of Texas offshore leases which were held within the
Southern Links Venture. Such leases were scheduled to expire in January 1999
unless additional rental payments were made. Pursuant to the Joint Venture
agreement, the Company assigned six State of Texas leases to LGI for nominal
cash consideration and retention of an overriding royalty interest of 1% of
8/8th in and to the leases.
In January 1998, the Company consummated the transactions contemplated by an
Amended and Restated Agreement and Plan of Merger ("Merger Agreement") executed
November 17, 1997 by and among Amerac Energy Corporation ("Amerac"), SMC
Acquisition Corp., a Delaware Corporation, and the Company. Pursuant to the
Merger Agreement, the Company acquired all of Amerac's outstanding capital
stock in consideration for issuing to Amerac's stockholders (including Mr.
Robinson) the right to receive 3,333,333 shares of the Company's Common Stock.
Subsequent to the acquisition, a number of non-strategic Amerac properties were
sold and the remainder became a part of the Company's U.S. oil and gas asset
base. Pursuant to the Merger Agreement, Mr. Robinson became a director of the
Company.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) The following documents are filed as a part of this report:
The following consolidated financial statements of the Company are
included in Part II, Item 8. of this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Statements of Income.................................... H-27
Consolidated Balance Sheets.......................................... H-28
Consolidated Statements of Cash Flows................................ H-29
Consolidated Statements of Stockholders' Equity...................... H-30
Notes to Consolidated Financial Statements........................... H-31
Report of independent accountants.................................... H-32
</TABLE>
(a)(2) Exhibits
<TABLE>
<CAPTION>
Exhibit
Numbers Description
------- -----------
<C> <S>
2.1 Agreement by 779776 Alberta Ltd. to purchase all of the outstanding
Common Shares of Neutrino at a price of $1.80 (Canadian) per Common
Share, dated May 29, 1998. (filed with Form 8-K of Registrant dated
July 2, 1998 (Commission File No. 0-8043 and incorporated herein by
reference).
2.2 Agreement and Plan of Merger, dated as of November 17, 1997, by and
among the Company, AEC Acquisition Corp. and Amerac (filed with
original Form 8-K of Registrant dated
November 17, 1997 (Commission File No. 0-8043 and incorporated
herein by reference)).
3.1 Restated Articles of Incorporation of the Company (filed as Exhibit
3.1 to the Company's
Form 8-K dated January 28, 1998 (Commission File No. 0-8043) and
incorporated herein by reference).
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 (Commission File No. 0-8043)).
4.1 Indenture pursuant to which the Company's 6.875% Convertible
Subordinated Debentures due 2007 are issued (incorporated by
reference to Form S-2 Registration 333-35843 dated
September 17, 1997).
</TABLE>
H-64
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Numbers Description
------- -----------
<C> <S>
*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 1989 (Commission File No. 0-
8043)).
*10.2 Southern Mineral Corporation 1995 Non-Employee Director
Compensation Plan (incorporated by reference to Exhibit (k) to the
Company's annual report on Form 10-K dated December 31, 1994
(Commission File No. 0-8043)).
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 (Commission File No. 0-
8043)).
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 (Commission File No. 0-8043)).
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
(Commission File No. 0-8043)).
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 (Commission File
No. 0-8043)).
*10.7 1996 Stock Option Plan (incorporated by reference to Exhibit 10.10
to Form 10-KSB dated December 31, 1995 (Commission File No. 0-
8043)).
*10.8 1996 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.11 to
Form 10-KSB dated December 31, 1995 (Commission File No. 0-8043)).
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 10-KSB dated December 31, 1995 (Commission File No. 0-
8043)).
*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 10-KSB dated December 31, 1995 (Commission File No.
0-8043)).
*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 10-KSB dated December 31, 1995
(Commission File No. 0-8043)).
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 10-KSB/A-1 dated December 31, 1995 (Commission File
No. 0-8043)).
</TABLE>
H-65
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Numbers Description
------- -----------
<C> <S>
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 (Commission File No. 0-8043)).
10.14 Second Amendment to Credit Agreements between the Company and
Compass Bank dated December 17, 1996 (incorporated by reference to
Exhibit 10.14 to Form 10-KSB dated December 31, 1996 (Commission
File No. 0-8043)).
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 (Commission
File No. 0-8043)).
*10.17 Incentive Stock Option Agreement between the Company and M. M.
Jenson, 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 (Commission File No. 0-
8043)).
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 (Commission File No. 0-8043 )).
10.20 Letter Agreement between the Company and Amerac, dated November 17,
1997 (incorporated by reference to Exhibit 10.18 to Form S-4
(Commission File No. 333-42045)).
10.21 Letter Agreement between the Company and Amerac, dated November 21,
1997 (incorporated by reference to Exhibit 10.19 to Form S-4
(Commission File No. 333-42045)).
10.22 Amended and Restated Credit Agreement between the Company, Compass
Bank-Houston and First Union National Bank dated June 19, 1998
(incorporated by reference to Exhibit 10.1 to Form 10-QSB for the
quarterly period ended June 30, 1998 (Commission File No. 0-8043)).
10.23 Letter Amendment dated November 4, 1998, to the Amended and
Restated Credit Agreement between the Company, Compass Bank-Houston
and First Union National Bank dated June 19, 1998 (incorporated by
reference to Exhibit 10.1 to the Company's Form 10-QSB for the
quarterly period ended September 30, 1998).
*10.24 1997 Stock Option Plan (incorporated by reference to Form S-8,
filed April 28, 1998, Registration No. 333-51237 (Commission File
No. 333-420450)).
10.25 Neutrino Resources Inc. Credit Facility Agreement with National
Bank of Canada as amended February 26, 1999 (filed herewith).
*10.26 Neutrino Resources Inc. Employee Stock Savings Plan effective July
8, 1998 (filed herewith).
10.27 Second Amendment to Amended and Restated Credit Agreement between
the Company, Compass Bank-Houston and First Union National Bank
dated March 29, 1999 (filed herewith).
*10.28 Amendment to Incentive Stock Option Agreement of the Company (filed
herewith).
*10.29 Board Resolution of the Company establishing a Retention Plan in
the event of a change of control of the Company dated January 7,
1999 (filed herewith).
21.1 Subsidiaries of the Company (filed herewith).
23.1 Consent of KPMG LLP (filed herewith).
23.2 Consent of Netherland, Sewell & Associates, Inc. (filed herewith).
</TABLE>
H-66
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Numbers Description
------- -----------
<C> <S>
23.3 Consent of McDaniel & Associates Consultants, Ltd. (filed
herewith).
23.4 Consent of Ryder Scott Company (filed herewith).
23.5 Consent of Chapman Petroleum Engineering, Ltd. (filed herewith).
23.6 Consent of Gilbert Laustsen Jung Associates Ltd. (filed herewith).
27.1 Financial Data Schedule (filed herewith).
</TABLE>
- --------
* Management Contracts, Plans or Arrangements to Item 601(b)(10)(iii)(A) of
regulation S-K.
(a) Reports on Form 8-K
Form 8-K/A filed September 11, 1998, reporting the acquisition of Neutrino
Resources, Inc. financial statements and exhibits and filed as an exhibit to
the Form 8-K filed on July 17, 1998.
H-67
<PAGE>
SIGNATURES
Pursuant to the requirements of 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
/s/ Steven H. Mikel
By __________________________________
Steven H. Mikel
President and Chief Executive
Officer
Date: March 29, 1999
Pursuant 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.
Date: March 29, 1999
Pursuant with the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jeffrey W.C. Arsenych Director, Chairman and Chief March 29, 1999
____________________________________ Executive Officer Neutrino
Jeffrey W.C. Arsenych Resources Inc.
/s/ B. Travis Basham Director March 29, 1999
____________________________________
B. Travis Basham
/s/ David W. Beckwermert Director, President & Chief March 29, 1999
____________________________________ Operating Officer--Neutrino
David W. Beckwermert Resources, Inc.
/s/ Michael R. Dawson Vice President--Finance and March 29, 1999
____________________________________ Chief Financial Officer
Michael R. Dawson
/s/ Thomas R. Fuller Director March 29, 1999
____________________________________
Thomas R. Fuller
/s/ Robert R. Hillery Director March 29, 1999
____________________________________
Robert R. Hillery
/s/ E. Ralph Hines, Jr. Director March 29, 1999
____________________________________
E. Ralph Hines, Jr.
/s/ Howell H. Howard Director and Chairman of the March 29, 1999
____________________________________ Board of Directors
Howell H. Howard
</TABLE>
H-68
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ M. M. Jenson Treasurer March 29, 1999
____________________________________ (principal accounting
M. M. Jenson officer)
/s/ Steven H. Mikel Director, President and March 29, 1999
____________________________________ Chief Executive Officer
Steven H Mikel
/s/ James E. Nielson Director March 29, 1999
____________________________________
James E. Nielson
/s/ Jeffrey B. Robinson Director March 29, 1999
____________________________________
Jeffrey B. Robinson
/s/ Michael D. Watford Director March 29, 1999
____________________________________
Michael D. Watford
/s/ Donald H. Wiese, Jr. Director March 29, 1999
____________________________________
Donald H. Wiese, Jr.
/s/ Spencer L. Youngblood Director March 29, 1999
____________________________________
Spencer L. Youngblood
</TABLE>
H-69
<PAGE>
ANNEX I
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended March 31, 1999
OR
[_]TRANSITION REPORT UNDER 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
Incorporation or Organization) Identification No.)
1201 Louisiana, Suite 3350 77002-5609
Houston, Texas (Zip Code)
(Address of Principal Executive
Offices)
Registrant's Telephone Number, Including Area Code: (713) 658-9444
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 (or such shorter period that the Registrant was required to
file such reports) and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of May 4, 1999, there were
12,803,488 shares of the Registrant's common stock outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
I-1
<PAGE>
SOUTHERN MINERAL CORPORATION
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of March 31, 1999 (unaudited) and December
31, 1998................................................................ 3
Unaudited Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998........................................... 4
Unaudited Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998........................................... 5
Notes to Consolidated Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition and Results of Operations............................ 11
Liquidity and Capital Resources.......................................... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk......... 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................... 17
</TABLE>
I-2
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1999
- ------------------------------------------------------ ---------- ------------
(Unaudited)
<S> <C> <C>
Current Assets
Cash................................................ $ 677 $ 1,541
Receivables......................................... 4,810 5,602
Other............................................... 680 633
-------- --------
Total current assets.............................. 6,167 7,776
Property and equipment, at cost using successful
efforts method for
oil and gas activities
Oil and gas producing properties.................... 138,339 136,833
Mineral rights...................................... -- 167
Unproven properties................................. 3,673 3,634
Office equipment.................................... 547 580
Accumulated depreciation, depletion and
amortization....................................... (30,149) (27,027)
-------- --------
112,410 114,187
Properties held for sale and other.................... 6,543 6,327
-------- --------
Total assets...................................... $125,120 $128,290
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------
<S> <C> <C>
Current Liabilities
Accounts payable.................................... $ 7,455 $ 10,300
Canadian bank loan.................................. 18,590 18,490
Current portion of long-term debt................... 13,169 13,124
-------- --------
Total current liabilities......................... 39,214 41,914
Long-Term Debt (less current portion)................. 60,273 64,370
Deferred Income Taxes................................. 7,204 7,279
Stockholders' Equity
Preferred stock, par value $.01 per share;
authorized 5,000,000 shares at March 31, 1999; none
issued............................................. -- --
Common stock, par value $.01 per share; authorized
50,000,000 shares at March 31, 1999; issued
12,894,711 and 12,884,672 shares at March 31, 1999
and December 31, 1998, respectively; outstanding
12,803,488 and 12,793,449 shares at March 31, 1999
and December 31, 1998, respectively................ 129 128
Additional paid-in capital.......................... 30,852 30,848
Accumulated other comprehensive loss-foreign
currency translation adjustment.................... (1,535) (2,304)
Retained deficit.................................... (10,965) (13,893)
Less: Treasury stock................................ (52) (52)
-------- --------
Total stockholders' equity........................ 18,429 14,727
-------- --------
Total liabilities and stockholders' equity........ $125,120 $128,290
======== ========
</TABLE>
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation
and subsidiaries are an integral part of these statements.
I-3
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
Revenue
Oil and gas ........................................... $ 5,621 $ 4,410
Gains on sales of properties and other assets.......... 5,073 4
-------- ---------
10,694 4,414
Expenses
Production............................................. 2,081 1,163
Exploration ........................................... 47 139
Depreciation, depletion and amortization .............. 3,081 1,610
General and administrative ............................ 1,040 1,060
-------- ---------
6,249 3,972
-------- ---------
Income from operations .................................. 4,445 442
Other income, expenses and deductions
Interest and other income ............................. 27 92
Interest and debt expense ............................. (1,774) (834)
-------- ---------
Income (loss) before income taxes........................ 2,698 (300)
Provision (benefit) for foreign, federal and state income
taxes
Current provision...................................... 33 25
Deferred benefit....................................... (263) (30)
-------- ---------
(230) (5)
-------- ---------
Net income (loss)........................................ $ 2,928 $ (295)
======== =========
Net income (loss) per share-basic........................ $ .23 $ (0.03)
======== =========
Net income (loss) per share-diluted...................... $ .20 $ (0.03)
======== =========
Weighted average number of shares outstanding-basic...... 12,800 11,486
======== =========
Weighted average number of shares outstanding-diluted.... 17,812 11,486
======== =========
</TABLE>
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and subsidiaries are an integral part of these statements.
I-4
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) ...................................... $ 2,928 $ (295)
Adjustments to net income .............................. (4,439) (176)
-------- ---------
Net cash used in operating activities ................ (1,511) (471)
Cash Flows from Investing Activities
Proceeds from sales of properties ...................... 6,204 5
Acquisition of Amerac, net of cash received ............ -- (8,242)
Acquisition of Neutrino, net of cash received .......... 285 --
Capital expenditures ................................... (1,161) (8,136)
-------- ---------
Net cash provided by (used in) investing activities... 5,328 (16,373)
Cash Flows from Financing Activities
Payments of long-term debt ............................. (4,437) --
Proceeds from long-term debt............................ -- 7,800
Debenture offering costs ............................... -- (12)
Payments on note payable ............................... -- (208)
Loan acquisition costs.................................. (258) (68)
-------- ---------
Net cash (used in) provided by financing activities... (4,695) 7,512
Effect of exchange rate changes on cash .................. 14 --
-------- ---------
Net decrease in cash and cash equivalents............. (864) (9,332)
Cash and cash equivalents at beginning of period ....... 1,541 10,011
-------- ---------
Cash and cash equivalents at end of period ............. $ 677 $ 679
======== =========
Supplemental disclosure of cash flow information
Cash paid for interest ................................. $ 2,940 $ 1,412
Cash paid for taxes .................................... 45 27
Non-cash Investing and Financing Activities
Issuance of common stock in exchange for Amerac common
stock.................................................. $ 0 $ 15,000
Issuance of common stock for property acquisition....... 0 50
Directors' fees paid in stock........................... 5 82
</TABLE>
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and subsidiaries are an integral part of these statements.
I-5
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and note disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, though the Company believes that the disclosures are
adequate to make the information presented not misleading. These consolidated
financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's latest Annual Report
to the Securities and Exchange Commission on Form 10-K, as amended, for the
year ended December 31, 1998. In the opinion of the Company, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the financial position as of March 31, 1999 and December 31, 1998, the results
of operations for the three months ended March 31, 1999 and 1998 and statements
of cash flows for the three months then ended have been included.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount 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.
Earnings (loss) per Share--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.
For the period ended March 31, 1998, the issuance or conversion of potential
common shares of 5,164,000 would have had an antidilutive effect on the diluted
earnings per share calculation and therefore were not considered in the
calculation of the diluted weighted average number of shares outstanding.
Reclassifications--Certain amounts in prior financial statements may have
been reclassified to conform to the 1999 financial statement presentation.
Comprehensive Income--Comprehensive income includes all changes in a
company's equity, including, among other things, foreign currency translation
adjustments and unrealized gains (losses) on marketable securities classified
as available-for-sale. The Company's total comprehensive income (loss) for the
three months ended March 31, 1999 and 1998 was as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
1999 1998
--------- ---------
<S> <C> <C>
Net income (loss).................................... $ 2,928 $ (295)
Foreign currency translation adjustment.............. 769 26
--------- --------
Total comprehensive income (loss).................. $ 3,697 $ (269)
========= ========
</TABLE>
Note 2. Acquisitions and Divestitures
Neutrino
On June 23, 1998, the Company agreed to acquire 92.3% of the outstanding
common shares of Neutrino Resources Inc. ("Neutrino"), which was effective as
of June 30, 1998 and funded on July 2, 1998. On July 3, 1998, the Company
initiated a compulsory acquisition of the remaining Neutrino shares
outstanding, which was
I-6
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
effective as of June 30, 1998 and funded on July 21, 1998. The Company acquired
Neutrino through a cash tender offer for the common shares outstanding, and
assumed Neutrino's bank debt and working capital deficit. Neutrino is an
independent oil and gas company located in Calgary, Canada. The merger was
accounted for as a purchase. The total purchase price of approximately
$56,903,000, consisted of the following:
<TABLE>
<S> <C>
Cash consideration for common stock........................ $ 34,091,000
Fair value of 324,430 shares of common stock............... 1,095,000
Debt assumed and working capital deficit................... 20,050,000
Legal, accounting and transaction costs.................... 1,667,000
-------------
$ 56,903,000
=============
The allocation of the purchase price is summarized as follows:
Oil and gas properties and other assets (net).............. $ 66,333,000
Deferred income taxes...................................... (9,430,000)
-------------
$ 56,903,000
=============
</TABLE>
Following the acquisition of Neutrino, the purchase price was reduced to
reflect the proceeds from the sale of non-strategic assets in the amount of
$3,390,000.
Amerac
On January 28, 1998, the shareholders of both the Company and Amerac Energy
Corporation ("Amerac") approved the merger of Amerac into a subsidiary of the
Company. Pursuant to the merger agreement, the Company issued 3,333,333 shares
of its Common Stock to acquire all of the outstanding common stock of Amerac
and assumed Amerac's outstanding debt, which was approximately $8,700,000. The
debt was retired upon consummation of the acquisition. The merger was effective
on January 28, 1998, and was accounted for as a purchase. The total purchase
price of approximately $24,820,000 consisted of the following :
<TABLE>
<S> <C>
Issuance of Common Stock.................................... $ 15,433,000
Debt assumed and working capital............................ 8,714,000
Legal, accounting and transaction costs..................... 673,000
------------
$ 24,820,000
============
</TABLE>
Subsequent to the acquisition of Amerac, the purchase price was reduced by
$7,919,000 to reflect the sale of non-strategic assets, including Amerac's
Golden Trend properties for $6,969,000 on June 30, 1998 and the Riffe Field for
$510,000 on July 1, 1998.
Pro forma
The following summarized pro forma (unaudited) information assumes the
acquisitions of Neutrino and Amerac had occurred on January 1, 1998:
<TABLE>
<CAPTION>
Three Months
Ended March 31, 1998
--------------------
(in thousands,
except per share
data)
<S> <C>
Revenues............................................. $ 7,759
Net loss............................................. (1,878)
Net loss per share-basic............................. $ (.15)
Net loss per share-diluted........................... (.15)
</TABLE>
I-7
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The above pro forma results are not necessarily indicative of those that
would have occurred had the acquisitions taken place at the beginning of 1998.
The above amounts reflect adjustments for interest on indebtedness incurred in
connection with the transactions and depreciation, depletion and amortization
on revalued property, plant and equipment. During 1998, the Company made
additional acquisitions, none of which would have had a material effect on the
historical results of operations of the Company. During the first quarter of
1999, the Company sold its mineral interests and substantially all of its
royalty interests in Texas, Mississippi and New Mexico for approximately
$6,000,000. The effect of this divestiture would not have had a material effect
on the Company's historical results of operations.
Note 3. Long-Term Debt
Effective May 29, 1998, the Company amended its domestic bank credit
facility to increase the borrowing base from $38,400,000 to $45,000,000.
Subsequently, the credit facility has been reduced and restructured as a result
of lower oil and natural gas price assumptions, the sale of certain domestic
assets and the scheduled reduction discussed below. A restructured and amended
credit facility ("Amended Credit Facility") was entered into on March 29, 1999.
The Amended Credit Facility provides for a borrowing base of $19,353,000, plus
a principal tranche of $12,500,000 ("Tranche A") that matures on September 1,
1999. The borrowing base reflects the $5,400,000 received in March 1999 for the
sale of the Company's mineral interests in Texas, Mississippi and New Mexico.
Following the closing of the remaining $600,000 in proceeds from the sale, the
borrowing base was reduced to $18,830,000 on April 1, 1999. In addition to
reductions which may result from the sale of assets, the borrowing base under
the Amended Credit Facility reduces $40,000 per month and is subject to semi-
annual redeterminations until maturity on June 1, 2001. The next borrowing base
review is July 1, 1999. As of March 31, 1999 and December 31, 1998, Tranche A
principal was classified as current portion of long-term debt in the Company's
Consolidated Balance Sheet.
The Amended Credit Facility requires the Company, among other provisions,
to: (i) apply the majority of proceeds from asset sales to reduction in the
outstanding principal under the credit facility (to the extent the assets are
not otherwise encumbered), (ii) obtain lender's approval of the Company's
domestic general and administrative expense budget and (iii) pay a $187,500
restructuring fee upon completion of a transaction that allows the Company to
repay Tranche A principal. The Amended Credit Facility also reduced the
Company's tangible net worth requirement beginning December 31, 1998. As of
March 31, 1999 and May 4, 1999, the Company was in compliance with the terms
and conditions of the Amended Credit Facility.
The obligations under the Amended Credit Facility are secured by
substantially all of the assets of the Company and its subsidiaries other than
Neutrino. The Amended Credit Facility prohibits the payment of dividends and
contains certain covenants relating to the financial condition of the Company.
Outstanding borrowings under the domestic bank credit facility were $31,853,000
at March 31, 1998. On May 4, 1999, outstanding borrowings under the Amended
Credit Facility were $31,209,000 with no further borrowing availability.
Outstanding principal under the Amended Credit Facility bears interest at the
Bank Index Rate (7.75% at March 31, 1999) to the extent of the borrowing base
and at Bank Index Rate plus 1% on Tranche A principal.
The Company believes that it may be necessary to sell significant oil and
gas assets to raise the substantial additional funds necessary to meet the
September 1, 1999 maturity of Tranche A principal. No assurance can be given
that such transactions can be consummated on terms acceptable to the Company or
its lenders, whose approval may be required. If the Company is unable to raise
the necessary funds, further restructuring of its Amended Credit Facility will
be required or the Company could become in default on the full amount of its
indebtedness, as discussed below. These circumstances resulted in the Company's
independent auditors, in their opinion on the 1998 financial statements,
disclosing their substantial doubt about the Company's ability to
I-8
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
continue as a going concern. In February 1999, the Board of Directors of the
Company retained CIBC Oppenheimer Corp. as independent advisors to assist in
evaluating various strategic alternatives for maximizing shareholder value. The
Board is considering a number of proposals including a sale or merger of the
Company, restructuring or a recapitalization. No assurance can be given as to
whether the Company will be successful in implementing any of these current
strategic alternatives on terms acceptable to the Company or its lenders.
Effective June 25, 1998, Neutrino entered into a new Cdn $40,000,000 (U.S.
$26,512,000) revolving demand loan facility (the "Canadian Credit Facility")
under which it could borrow at bank prime or Bankers Acceptance Rates plus a 1%
stamping fee. At March 31, 1999, the Canadian Bank prime rate was 6.75% and the
Bankers Acceptance Rate for 30-day maturities was 5.08%. Effective February 26,
1999, the borrowing base under the Canadian Credit Facility was reduced to Cdn
$33,000,000 (U.S. $21,872,000) and the interest rate was increased to prime
plus 1/4% and the stamping fee on Bankers Acceptance was increased to 1 1/4%
per annum. These changes were a result of a lender review giving effect to
lower world oil prices, the sale of certain non-strategic oil and gas
properties, and the Company's financial condition. At March 31, 1999,
outstanding borrowings under the Canadian Credit Facility were Cdn $28,047,000
(U.S. $18,590,000). On May 4, 1999, outstanding borrowings under the Canadian
Credit Facility were Cdn $30,663,000 (U.S. $21,106,000). However, after giving
consideration to the minimum working capital requirement contained in the
Canadian Credit Facility, the Company estimates that at May 4, 1999, there is
very little remaining borrowing availability under the facility. The Canadian
Credit Facility contains certain covenants relating to the financial condition
of Neutrino, including, at each quarter's end, maintenance of a working capital
ratio of 1:1. In calculation of this ratio, any undrawn portion of the credit
facility may be treated as if advanced and held in cash. The obligations under
the Canadian Credit Facility are secured by substantially all of the assets of
Neutrino. As of March 31, 1999 and May 4, 1999, Neutrino was in compliance with
the terms of the credit facility. The outstanding balance under the Canadian
Credit Facility is classified as a current liability because of the demand
feature of the loan. However, it is management's intention that the facility be
utilized to provide long-term financing for the Company.
The Company's financial condition and liquidity are impacted by prices the
Company receives for its oil and natural gas. In the first quarter of 1999, oil
and natural gas prices continued to be weak, but began to strengthen early in
the second quarter. Judgments by both domestic and Canadian lenders regarding
the level of future oil and natural gas prices, among other things, will impact
their borrowing base determinations for the Company's credit facilities.
On October 2, 1997, the Company issued $41,400,000 of 6.875% convertible
subordinated debentures due on October 1, 2007. The debentures are convertible
into Common Stock of the Company at any time prior to maturity, at a conversion
price of $8.26 per share. Proceeds of the offering were used to reduce bank
debt and fund subsequent acquisitions. Pursuant to the debenture indenture, in
the event of a change of control of the Company, debenture holders have the
right to require the Company to repurchase the security at face value plus
accrued interest.
The Company's substantial leverage poses certain risks, including the risk
that the Company may not generate sufficient cash flow to service its
indebtedness or that the Company may be unable to obtain additional financing
in the future and, as a result, may not have the necessary resources to respond
to market conditions and opportunities. The Company's high level of
indebtedness, covenant requirements and working capital deficit subjects it to
risks of default, which may significantly impair its ability to meet its
liquidity needs. The Company's Amended Credit Facility contains provisions
whereby a default under the Company's Canadian Credit Facility or pursuant to
the 6.875% Convertible Subordinated Debentures indenture would create a default
condition under the Amended Credit Facility. In such a default condition, the
banks may declare amounts outstanding under the Amended Credit Facility to
become immediately due and payable. In addition,
I-9
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the holders of Convertible Subordinated Debentures have acceleration rights if
the Company is in payment default under either its Amended Credit Facility or
Canadian Credit Facility.
Long-term debt consisted of the following at March 31, 1999 and December 31,
1998 (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Domestic bank credit facility................ $31,853 $35,910
Canadian bank credit facility (U.S.
Dollars).................................... 18,590 18,490
Convertible subordinated debentures.......... 41,400 41,400
Other........................................ 189 184
------- -------
Total indebtedness......................... 92,032 95,984
Less: Current maturities of long-term debt... 13,169 13,124
Canadian bank credit facility (U.S.
Dollars)................................. 18,590 18,490
------- -------
$60,273 $64,370
======= =======
</TABLE>
Note 4. Natural Gas Hedging
During 1998, the Company entered into natural gas price swaps with third
parties to hedge a portion of its production from the effects of fluctuations
in the market price of natural gas. The Company uses the deferral method of
accounting for its natural gas price swaps and, therefore, offsets any gain or
loss on the swap contract with the realized prices for its production. While
the swaps reduce the Company's exposure to declines in the market price of
natural gas, this also limits the Company's gains from increases in market
price. At March 31, 1999, the Company had swap contracts on approximately 420
MMcf of natural gas for the period April through October 1999 at an average
price of $2.135. The Company estimates the gain from unwinding the position to
be approximately $42,000 at March 31, 1999.
Note 5. Commitments and Contingencies
The Company is involved in several lawsuits arising in the ordinary course
of business, only one of which management believes presents the possibility of
a material payment. The Company's Canadian subsidiary, Neutrino Resources Inc.,
was sued alleging damages resulting from the calculation of third party
facility and processing fees at its Pine Creek Field, Alberta, Canada. The suit
was filed on January 27, 1999 in the Court of Queen's Bench of Alberta in the
Judicial District of Calgary by EnerMark Inc. The amount of alleged damages
approximated Cdn $1,350,000 (U.S. $900,000). On April 27, 1999 the lawsuit was
discontinued following agreement by both parties to have their dispute dealt
with in a final and binding arbitration. In advance of the arbitration process,
Neutrino disbursed approximately Cdn $500,000 (U.S. $330,000) to EnerMark Inc.
and placed an additional Cdn $500,000 in a trust account pending the conclusion
of the arbitration process. Although the outcome of the dispute cannot be
predicted with certainty, management believes (based on discussions with its
legal counsel) that the outcome of the arbitration process will not have a
material adverse effect on the Company's consolidated financial condition or
results of operations.
Note 6. Nasdaq National Market Listing
The Company has been advised that it is not in compliance with Nasdaq Stock
Market listing requirements due to the recent low price per share of its Common
Stock. The Company has been granted a hearing on May 27, 1999 to present a plan
to the Nasdaq National Market for compliance with the $1.00 per share minimum
bid requirement. The previously scheduled delisting action has been stayed
pending the hearing and the Nasdaq determination. The Company believes a
delisting of its Common Stock would impair the liquidity of the Common Stock
and capital raising flexibility of the Company. The Company cannot assure that
it will be successful in maintaining its Nasdaq listing.
I-10
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition and Results of Operations
Results of Operations for the Quarter Ended March 31, 1999 As Compared to the
Quarter Ended March 31, 1998
Oil and gas revenues for the quarter ended March 31, 1999 were $5,621,000
compared to oil and gas revenues of $4,410,000 for the same period in 1998. The
increase in revenues reflects an increase in oil and NGL production of 83% to
235,784 barrels and an increase in natural gas production of 40% to 1,722 MMcf
in the first quarter of 1999 compared to the first quarter of 1998. The higher
production levels in the first quarter of 1999 are due primarily to the
acquisition of Neutrino Resources Inc. in July 1998, and the development of a
discovery at the Brushy Creek Field in Texas during 1998. Declines in commodity
prices offset much of the impact of the higher volumes.
The average realized oil price declined 28% from $14.47 per barrel in the
first quarter of 1998 to $10.46 per barrel in the first quarter of 1999.
Average realized natural gas prices declined 12% to $1.71 per Mcf during the
first quarter of 1999 compared to $1.95 per Mcf in same period a year earlier.
During the first quarter of 1999, the Company sold its mineral interests and
substantially all of its royalty interests in Texas, New Mexico and Mississippi
for approximately $6,000,000. The gain on the sale of these assets was
$5,073,000 compared to a gain of $4,000 on the sale of assets in the first
quarter of 1998. The proceeds from asset sales in the first quarter of 1999
were used to reduce bank indebtedness and for other corporate purposes.
First quarter 1999 production costs, including production and ad valorem
taxes, rose 79% to $2,081,000 compared to $1,163,000 in the first quarter of
1998. However, on an energy equivalent unit basis, production costs rose only
14% quarter-over-quarter.
General and administrative expenses were $1,040,000 in the first quarter of
1999, essentially unchanged from $1,060,000 in the prior year's first quarter.
However, on an energy equivalent unit basis, costs declined 37% from the first
quarter of 1998 to the same period in 1999.
Depreciation, depletion and amortization ("DD&A") increased 91% to
$3,081,000 in the first quarter of 1999 compared to $1,610,000 in 1998. On a
unit of equivalent production basis, DD&A increased 22% from $0.80 per Mcfe to
$0.98 per Mcfe. The increase reflects the acquisition of Neutrino during 1998
at a higher per unit average cost.
Interest and debt expense in the quarter ended March 31, 1999 was $1,774,000
compared to $834,000 in the same period in 1998. The increase primarily
reflects the additional indebtedness incurred and acquired in the Neutrino
transaction in July 1998.
Tax benefits in the first quarter 1999 were $230,000 compared to $5,000 in
the same period in 1998. The increase primarily reflects the increased pre-tax
loss from the Company's Canadian operations in the first quarter of 1999
compared to the same period in 1998.
The Company recorded net income of $2,928,000, or $0.23 per basic share for
the quarter ended March 31, 1999 compared to a net loss of $295,000 or $0.03
per basic share for the quarter ended March 31, 1998.
I-11
<PAGE>
For the Quarter Ended March 31, 1998 As Compared to the Quarter Ended March
31, 1997
Oil and gas revenues for the quarter ended March 31, 1998, were $4,410,000,
compared to oil and gas revenues for the same period in 1997 of $3,832,000. The
increase in revenues reflects higher production volumes of both natural gas and
crude oil, which are partially offset by lower commodity prices for both
natural gas and crude oil. High production volumes were primarily due to the
acquisition of Amerac Energy Corporation on January 28, 1998 and BEC Energy,
Inc. on May 20, 1997, as well as the acquisition of a working interest in the
A. Philyaw 8-1 #1 on April 7, 1997, and the acquisition on June 13, 1997 of a
10% interest in the Santa Elena Concession located in the Santa Elena Peninsula
in Ecuador.
Natural gas production in the three months ended March 31, 1998 was 1,233
MMcf, a 38% increase as compared to production for the same period in 1997 of
893 MMcf. The Company's crude oil and NGL production for the three months ended
March 31, 1998 increased 149% to 128,699 barrels as compared to 51,652 barrels
for the same period in 1997.
Average realized natural gas prices in the first quarter of 1998 decreased
32% to $1.95 per Mcf compared to $2.88 per Mcf in the same quarter of 1997.
During the first quarter of 1998, crude oil prices decreased 34% to $14.47 per
barrel, compared to $21.76 per barrel in the same period in 1997.
Production costs, including production and ad valorem taxes, increased in
the first quarter of 1998 to $1,163,000, up 45% from $801,000 in the same
period in 1997, due in part to the above mentioned acquisitions. On a cost per
Mcfe basis, production costs for the three months ended March 31, 1998
decreased to $.58 per Mcfe, or 12% from $0.66 per Mcfe in 1997.
General and administrative expenses increased to $1,060,000 in the first
quarter of 1998, up 70% from $622,000 in the first quarter of 1997. However, on
a cost per Mcfe basis, general and administrative first quarter expenses
increased only 4% in the first three months of 1998 to $0.53 per Mcfe from
$0.51 per Mcfe in the same period of 1997. The increase in general and
administrative expenses is due in part to $220,000 in accrued and paid bonuses
in the first quarter of 1998 compared to $99,800 in the first quarter of 1997,
and due to the acquisition of Amerac Energy Corporation in January 1998.
Exploration, dry hole and lease impairment expenses decreased in the quarter
ended March 31, 1998 to $139,000, compared to $283,000 in the same period of
1997. The amount recorded in the quarter ended March 31, 1998 was primarily for
seismic costs incurred in Ecuador, compared to costs associated with a dry hole
drilled in Lavaca County, Texas in the same period in 1997. Since the Company
uses the successful efforts method of accounting, exploration expenses may vary
greatly from period to period based upon the level of exploration activity.
DD&A expense for the first quarter of 1998 increased to $1,610,000, up 133%
from $691,000 in the first quarter of 1997, due primarily to the above
mentioned acquisitions. The Company computes depreciation and depletion on each
producing property on a unit-of-production method. Since this method employs
estimates of remaining reserves, depreciation and depletion expenses may vary
from period to period because of revisions to reserve estimates, production
rates, and other factors. DD&A expenses increased in the first three months of
1998 to $.80 per Mcfe, up 40% from $0.57 per Mcfe in the same period of 1997.
Interest and debt expense in the quarter ended March 31, 1998 was $834,000,
compared to $65,000 in the same period in 1997. Interest expense increased as a
result of an increase in the outstanding bank debt and the issuance of
$41,400,000 in 6.875% convertible subordinated debentures, which was used
primarily to finance the above-mentioned acquisitions.
Tax (benefit) expense in the first quarter of 1998 and 1997 was ($5,000) and
$458,000, respectively, with the decrease related to a loss in the 1998 period.
The Company reported a loss in the quarter ended March 31, 1998, of
$295,000, or $.03 per basic share, compared to earnings of $1,111,000, or $0.12
per basic share, in the same period in 1997.
I-12
<PAGE>
Liquidity and Capital Resources
The Company has historically funded its operations, acquisitions,
exploration and development expenditures from cash flows from operating
activities, bank borrowing, issuance of common stock and debt securities, and
the sale of non-strategic assets.
The Company's cash flow used in operating activities for the three months
ended March 31, 1999 and 1998 was $1,511,000 and $471,000, respectively.
Effective May 29, 1998, the Company amended its domestic bank credit
facility to increase the borrowing base from $38,400,000 to $45,000,000.
Subsequently, the credit facility has been reduced and restructured as a result
of lower oil and natural gas price assumptions, the sale of certain domestic
assets and the scheduled reduction discussed below. A restructured and amended
credit facility ("Amended Credit Facility") was entered into on March 29, 1999.
The Amended Credit Facility provides for a borrowing base of $19,353,000,
plus a principal tranche of $12,500,000 ("Tranche A") that matures on September
1, 1999. The borrowing base reflects the $5,400,000 received in March 1999 for
the sale of the Company's mineral interests in Texas, Mississippi and New
Mexico. Following the closing of the remaining $600,000 in proceeds from the
sale, the borrowing base was reduced to $18,830,000 on April 1, 1999. In
addition to reductions which may result from the sale of assets, the borrowing
base under the Amended Credit Facility reduces $40,000 per month and is subject
to semi-annual redeterminations until maturity on June 1, 2001. The next
borrowing base review is July 1, 1999. As of March 31, 1999 and December 31,
1998, Tranche A principal was classified as current portion of long-term debt
in the Company's Consolidated Balance Sheet.
The Amended Credit Facility requires the Company, among other provisions,
to: (i) apply the majority of proceeds from asset sales to reduction in the
outstanding principal under the credit facility (to the extent the assets are
not otherwise encumbered), (ii) obtain lender's approval of the Company's
domestic general and administrative expense budget and (iii) pay a $187,500
restructuring fee upon completion of a transaction that allows the Company to
repay Tranche A principal. The Amended Credit Facility also reduced the
Company's tangible net worth requirement beginning December 31, 1998. As of
March 31, 1999 and May 4, 1999, the Company was in compliance with the terms
and conditions of the Amended Credit Facility.
The obligations under the Amended Credit Facility are secured by
substantially all of the assets of the Company and its subsidiaries other than
Neutrino. The Amended Credit Facility prohibits the payment of dividends and
contains certain covenants relating to the financial condition of the Company.
Outstanding borrowings under the domestic bank credit facility were $31,853,000
at March 31, 1998. On May 4, 1999, outstanding borrowings under the Amended
Credit Facility were $31,209,000 with no further borrowing availability.
Outstanding principal under the Amended Credit Facility bears interest at the
Bank Index Rate (7.75% at March 31, 1999) to the extent of the borrowing base
and at Bank Index Rate plus 1% on Tranche A principal.
The Company believes that it may be necessary to sell significant oil and
gas assets to raise the substantial additional funds necessary to meet the
September 1, 1999 maturity of Tranche A principal. No assurance can be given
that such transactions can be consummated on terms acceptable to the Company or
its lenders, whose approval may be required. If the Company is unable to raise
the necessary funds, further restructuring of its Amended Credit Facility will
be required or the Company could become in default on the full amount of its
indebtedness, as discussed below. These circumstances resulted in the Company's
independent auditors, in their opinion on the 1998 financial statements,
disclosing their substantial doubt about the Company's ability to continue as a
going concern. In February 1999, the Board of Directors of the Company retained
CIBC Oppenheimer Corp. as independent advisors to assist in evaluating various
strategic alternatives for maximizing shareholder value. The Board is
considering a number of proposals including a sale or merger of the Company,
restructuring or a recapitalization. No assurance can be given as to whether
the Company will be successful in implementing any of these current strategic
alternatives on terms acceptable to the Company or its lenders.
I-13
<PAGE>
Effective June 25, 1998, Neutrino entered into a new Cdn $40,000,000 (U.S.
$26,512,000) revolving demand loan facility (the "Canadian Credit Facility")
under which it could borrow at bank prime or Bankers Acceptance Rates plus a 1%
stamping fee. At March 31, 1999, the Canadian Bank prime rate was 6.75% and the
Bankers Acceptance Rate for 30-day maturities was 5.08%. Effective February 26,
1999, the borrowing base under the Canadian Credit Facility was reduced to Cdn
$33,000,000 (U.S. $21,872,000) and the interest rate was increased to prime
plus 1/4% and the stamping fee on Bankers Acceptance was increased to 1 1/4%
per annum. These changes were a result of a lender review giving effect to
lower world oil prices, the sale of certain non-strategic oil and gas
properties, and the Company's financial condition. At March 31, 1999,
outstanding borrowings under the Canadian Credit Facility were Cdn $28,047,000
(U.S. $18,590,000). On May 4, 1999, outstanding borrowings under the Canadian
Credit Facility were Cdn $30,663,000 (U.S. $21,106,000). However, after giving
consideration to the minimum working capital requirement contained in the
Canadian Credit Facility, the Company estimates that at May 4, 1999, there is
very little remaining borrowing availability under the facility. The Canadian
Credit Facility contains certain covenants relating to the financial condition
of Neutrino, including, at each quarter's end, maintenance of a working capital
ratio of 1:1. In calculation of this ratio, any undrawn portion of the credit
facility may be treated as if advanced and held in cash. The obligations under
the Canadian Credit Facility are secured by substantially all of the assets of
Neutrino. As of March 31, 1999 and May 4, 1999, Neutrino was in compliance with
the terms of the credit facility. The outstanding balance under the Canadian
Credit Facility is classified as a current liability because of the demand
feature of the loan. However, it is management's intention that the facility be
utilized to provide long-term financing for the Company.
The Company's financial condition and liquidity are impacted by prices the
Company receives for its oil and natural gas. In the first quarter of 1999, oil
and natural gas prices continued to be weak, but began to strengthen early in
the second quarter. Judgments by both domestic and Canadian lenders regarding
the level of future oil and natural gas prices, among other things, will impact
their borrowing base determinations for the Company's credit facilities.
On October 2, 1997, the Company issued $41,400,000 of 6.875% convertible
subordinated debentures due on October 1, 2007. The debentures are convertible
into Common Stock of the Company at any time prior to maturity, at a conversion
price of $8.26 per share. Proceeds of the offering were used to reduce bank
debt and fund subsequent acquisitions. Pursuant to the debenture indenture, in
the event of a change of control of the Company, debenture holders have the
right to require the Company to repurchase the security at face value plus
accrued interest.
The Company's substantial leverage poses certain risks, including the risk
that the Company may not generate sufficient cash flow to service its
indebtedness or that the Company may be unable to obtain additional financing
in the future and, as a result, may not have the necessary resources to respond
to market conditions and opportunities. The Company's high level of
indebtedness, covenant requirements and working capital deficit subjects it to
risks of default, which may significantly impair its ability to meet its
liquidity needs. The Company's Amended Credit Facility contains provisions
whereby a default under the Company's Canadian Credit Facility or pursuant to
the 6.875% Convertible Subordinated Debentures indenture would create a default
condition under the Amended Credit Facility. In such a default condition, the
banks may declare amounts outstanding under the Amended Credit Facility to
become immediately due and payable. In addition, the holders of Convertible
Subordinated Debentures have acceleration rights if the Company is in payment
default under either its Amended Credit Facility or Canadian Credit Facility.
The Company has been advised that it is not in compliance with Nasdaq Stock
Market listing requirements due to the recent low price per share of its Common
Stock. The Company has been granted a hearing on May 27, 1999 to present a plan
to the Nasdaq National Market for compliance with the $1.00 per share minimum
bid requirement. The previously scheduled delisting action has been stayed
pending the hearing and the Nasdaq determination. The Company believes a
delisting of its Common Stock would impair the liquidity of the Common Stock
and capital raising flexibility of the Company. The Company cannot assure that
it will be successful in maintaining its Nasdaq listing.
I-14
<PAGE>
Capital spending in the first quarter of 1999 for development and
exploration totaled $1,161,000 and was funded from cash flows from operating
activities and bank debt. The Company's capital spending during 1999 is
expected to be reduced significantly from 1998, and will be greatly influenced
by the level of oil and gas prices, and the availability of excess funds, if
any, beyond repayment of the September 1, 1999 Tranch A maturity. Capital
availability from outside sources, including debt and equity markets, is
expected to be limited.
The Company did not declare dividends in the three months ended March 31,
1999 and 1998. The Company does not expect, under its existing capital
structure, to be able to pay dividends for the foreseeable future. Payment of
dividends is currently prohibited by the terms of the Company's Amended Credit
Facility.
Year 2000 Compliance
The Company's State of Readiness
The "Year 2000" problem concerns the ability of technology to properly
recognize and process date sensitive information beyond December 31, 1999. The
Company is in the process of evaluating its information technology (IT) and
non-information technology. Year 2000 Committees have been formed at the
Company's office in Houston and at the Company's Canadian subsidiary
headquarters in Calgary. The Committees include members of senior management
and key employees from major business units. The Committees assess Year 2000
issues; direct remedial actions necessary to minimize systems disruptions and
other risks; contact significant third party purchasers, suppliers, vendors and
operators with whom there are material transactions and data exchange; test
internal hardware and software; and make appropriate contingency plans.
Neutrino has engaged a consulting firm which has prepared a report on the Year
2000 readiness of Neutrino, including a detailed inventory of hardware and
software priorities for action and an implementation plan. Additionally, the
Company, on behalf of itself and its other subsidiaries, has contacted
principal software vendors. Thus far, the Company has received a letter of
compliance for its accounting and payroll systems and product conformity
assurance for its reservoir engineering system. Additionally, the land lease
record systems vendor has informed the Company that the system is Year 2000
compatible. The Company has no proprietary software. Purchased software and
hardware systems have been installed and assembled by third party vendors that
provide network and software IT services to the Company. Vendors have been
engaged to evaluate the systems for Year 2000 compliance.
Costs to Address the Company's Year 2000 Issues
Management expects the costs of compliance, excluding internal costs, will
not exceed $120,000, which includes the evaluation, planning, replacement of
the land and lease records systems at Neutrino and the replacement of several
desktop computers and other hardware. Approximately $9,000 was expended in
1998, with the balance to be incurred in 1999. The amount spent during the
first quarter of 1999 was not significant.
Risks of the Company's Year 2000 Issues
Risks associated with the Year 2000 problem are potentially significant.
Failure to remedy a critical system problem could have a material affect on the
results of operations and financial condition. The Company has interests in
operated and non-operated properties in the United States, Canada and Ecuador.
The Company will continue to review and monitor software and equipment within
its control. The Company will continue to contact operators of its non-operated
properties and other third parties to determine their Year 2000 compliance
procedures, but cannot warrant the readiness of those systems. As the Company
is in the process of collecting this information from third parties, the
Company cannot currently state whether its operations will be materially
affected by third party compliance. However, the Company is not currently aware
of any third party that could cause a significant business disruption. While
there can be no assurance, the Company believes that it will be able to achieve
Year 2000 compliance by the end of 1999 with respect to the Company's internal
systems, and does not currently anticipate any disruption in its operations or
any materially adverse effects to its financial condition, results of
operations or cash flows as the result of any failure by the Company to be in
compliance.
I-15
<PAGE>
In a recent Securities and Exchange Commission ("SEC") release regarding
Year 2000 disclosures, the SEC required public companies to disclose the most
likely worst case Year 2000 scenario. Situations which must be included in any
worst case scenario include: the possibility of widespread failure of oil and
gas transportation systems, the inability of Company personnel to gain access
to offices and other facilities, and the inability of customers to make payment
for purchases. The effects of such occurrences would have a cumulative material
adverse impact on the Company, although not quantifiable at this time.
The Company's Contingency Plan
Contingency plans are being developed at this time, and will be monitored
and modified after the initial evaluation by the Year 2000 Committees is
complete. The Company intends to have such plans in place by June 30, 1999.
Definitions
As used herein:
Thousand cubic feet ("Mcf")
Million cubic feet ("MMcf")
Natural gas liquids ("NGL")
Energy Equivalents Units (1 barrel of liquids = 6 Mcf of natural gas)
Thousand cubic feet of gas equivalent ("Mcfe")
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), was issued by the
Financial Accounting Standards Board in June 1998. SFAS 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts. Under the standard, entities are required to carry
all derivative instruments in the statement of financial position at fair
value. The Company will adopt SFAS 133 beginning in fiscal year 2000. The
Company has not yet determined the impact that SFAS 133 will have on its
financial statements.
Forward-Looking Statements
All statements other than statements of historical fact contained in this
report, including statements in Management's Discussion and Analysis of
Financial Condition and Results of Operations, are forward-looking statements.
When used herein, the words "budget", "expressions", "anticipate", "expects",
"believes", "seeks", "goals", "plans", "strategy", "intends", or "projects" and
similar expressions are intended to identify forward-looking statements. It is
important to note that the Company's actual results could differ materially
from those projected by such forward-looking statements and no assurance can be
given that the expectations will prove correct. In reliance upon the Private
Securities Litigation Reform Act of 1995, factors identified by the Company
that could cause the Company's future results to differ materially from the
results discussed in such forward-looking statements include the risks
described under "Risk Factors" in Item 1 of its Annual Report on Form 10-K, as
amended, for the year ended December 31, 1998. All forward-looking statements
in this report are expressly qualified in their entirety by the cautionary
statements in this paragraph and shall be deemed in the future to be modified
in their entirety by the Company's public pronouncements, including those
contained in all future reports and other documents filed by the Company with
the Securities and Exchange Commission.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to a variety of market risks including the potential
for adverse changes in oil and gas prices, foreign currency exchange rates and
interest rates. There have been no material changes to the Company's
disclosures about market risk from those contained in its 10-K, as amended, for
the year ended December 31, 1998.
I-16
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is involved in several lawsuits arising in the ordinary course
of business, only one of which management believes presents the possibility of
a material payment. The Company's Canadian subsidiary, Neutrino Resources Inc.,
was sued alleging damages resulting from the calculation of third party
facility and processing fees at its Pine Creek Field, Alberta, Canada. The suit
was filed on January 27, 1999 in the Court of Queen's Bench of Alberta in the
Judicial District of Calgary by EnerMark Inc. The amount of alleged damages
approximated Cdn $1,350,000 (U.S. $900,000). On April 27, 1999 the lawsuit was
discontinued following agreement by both parties to have their dispute dealt
with in a final and binding arbitration. In advance of the arbitration process,
Neutrino disbursed approximately Cdn $500,000 (U.S. $330,000) to EnerMark Inc.
and placed an additional Cdn $500,000 in a trust account pending the conclusion
of the arbitration process. Although the outcome of the dispute cannot be
predicted with certainty, management believes (based on discussions with its
legal counsel) that the outcome of the arbitration process will not have a
material adverse effect on the Company's consolidated financial condition or
results of operations.
Items 2, 3, 4 and 5 for which provision is made in the applicable
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Report on Form 8-K:
None
I-17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SOUTHERN MINERAL CORPORATION
Date: May 7, 1999 By: /s/ Michael R. Dawson
----------------------------------
Michael R. Dawson
Vice President-Finance and Chief
Financial Officer
I-18
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Ninth of the Registrant's amended and restated articles of
incorporation permits, and Article VII of the Registrant's Bylaws contains
indemnification provisions which make mandatory the indemnification permitted
by Section 78.7502 and Section 78.751 of the General Corporation Law of Nevada
("NGCL"). Accordingly, the Registrant generally must indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, except an action by or in the right of the
Registrant, by reason of the fact that such person is or was a director,
officer, employee or agent of the Registrant or is or was serving at the
request of the Registrant as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding. However with respect to an action or suit
brought to obtain a judgment in the Registrant's favor, whether by the
Registrant itself or derivatively by a stockholder, (i) such indemnification is
limited to expenses, including amounts paid in settlement and attorneys' fees
actually and reasonably incurred by him in connection with the defense or
settlement of the action of suit, and (ii) indemnification may not be made for
any claim, issue or matter as to which such a person has been adjudged by a
court of competent jurisdiction, after exhaustion of all appeals therefrom, to
be liable to the Registrant or for amounts paid in settlement to the
Registrant, unless and only to the extent that the court in which the action or
suit was brought or other court of competent jurisdiction determines upon
application that in view of all the circumstances of the case, the person is
fairly and reasonably entitled to indemnity for such expenses as the court
deems proper. In all cases, the person seeking indemnification must have acted
in good faith and in a manner such person reasonably believed to be in, or not
opposed to, the Registrant's best interests. In the case of criminal actions or
proceedings, the person must also have had no reasonably cause to believe such
person's conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent, does not, of itself, create a presumption that
such person did not act in good faith and in a manner in which that person
reasonably believe to be in or not opposed to the best interests of the
Registrant, and that, with respect to any criminal actions or proceedings, that
person had reasonable cause to believe that such person's conduct was unlawful.
The determination as to whether a person seeking indemnification has met the
required standard of conduct must be made by the Registrant's stockholders, by
a majority vote of a quorum of its disinterested directors, or by independent
legal counsel in a written opinion if such a quorum does not exist or if a
majority vote of a quorum of the disinterested directors so directs. To the
extent that a director, officer, employee or agent of the Registrant has been
successful on the merits or otherwise in defending any action, suit or
proceeding for which indemnification is permissible under the NGCL, or in
defending any claim, issue or matter therein, the Registrant must, under both
the NGCL and its bylaws, indemnify such person against expenses, including
attorneys' fees, actually and reasonably incurred by such person in connection
with the defense. As permitted by the NGCL, the Registrant's bylaws require it
to advance expenses which its officers and directors incur in defending any
civil or criminal action, suit or proceeding upon receipt of an undertaking by
such person or on such person's behalf to repay such amounts if it is
ultimately determined by a court of competent jurisdiction that such person is
not entitled to be indemnified by the Registrant. The NGCL and the Registrant's
Bylaws provide that the indemnification and advancement of expenses authorized
therein are not exclusive. Accordingly, the Registrant could provide for other
indemnification of its directors and officers acting in either or both of their
official capacities or other capacities while holding office. However,
excepting advancement of expenses and court-ordered indemnification explicitly
provided for by the NGCL, the NGCL and the Registrant's bylaws prohibit the
Registrant from indemnifying any director or officer if a final adjudication
establishes that such person's acts or omissions involved intentional
misconduct, fraud, or a knowing violation of the law and was material to the
cause of action. Consistent with Section 78.752 of the NGCL, the Registrant's
bylaws empower it to procure and maintain insurance on behalf of any person who
is or was a director, officer, employee or agent of the Registrant, or at the
Registrant's request, of another entity,
II-1
<PAGE>
against any liability asserted against such person and incurred by such person
in such capacity, or arising out of such person's status as such, regardless of
whether the Registrant could indemnify such person against such liability. The
Registrant has purchased insurance on behalf of its directors and officers
against certain liabilities that may be asserted against, or incurred by, such
persons in their capacities as directors or officers of the Registrant, or that
may arise out of their status as directors or officers of the Registrant,
including liabilities under federal and state securities laws. As permitted by
Section 78.037 of the NGCL, the Registrant's current amended and restated
articles of incorporation eliminate the liability of its directors and officers
to the Registrant and its stockholders for damages for breach of fiduciary
duty, except for acts or omissions which involve intentional misconduct, fraud
or a knowing violation of law, or for the payment of distributions in violation
of Section 78.300 of NGCL. To the extent that this provisions limits the
remedies of the Registrant and its stockholders to equitable remedies, it might
reduce the likelihood of derivative litigation and discourage the Registrant's
management of stockholders from initiating litigation against its directors or
officers for breach of their fiduciary duties. Additionally, equitable remedies
may not be effective in many situations. If a stockholder's only remedy is to
enjoin the completion of an action, such remedy would be ineffective if the
stockholder does not become aware of a transaction or event until after it has
been completed. In such a situation, it is possible that the Registrant and its
stockholders would have no effective remedy against directors or officers. The
Registrant has purchased insurance on behalf of its directors and officers
against certain liabilities that may be asserted against, or incurred by, such
persons in their capacities as directors or officers of the Registrant, or that
may arise out of their status as directors or officers of the Registrant,
including liabilities under the federal and state securities laws.
The above discussion of the NGCL and the Registrant's current amended and
restated articles of incorporation and bylaws is not intended to be exhaustive
and is qualified in its entirety by the NGCL and such articles of incorporation
and bylaws.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following exhibits and documents are filed as part of this Registration
Statement:
(a) Exhibits:
The exhibits to this Registration Statement are listed in the
Exhibit Index and are incorporated herein by reference.
(b) Financial Statement Schedules:
None.
(c) Reports, Opinions and Appraisals:
Opinion of CIBC World Markets Corp. relating to the fairness of the
consideration to be received by the Registrant [in the restructuring
(See Appendix E of the Proxy Statement/Prospectus/Disclosure
Statement).
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) to file, during any period in which it offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration
II-2
<PAGE>
statement (notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement);
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof; and
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to section 15(d) of the Securities Exchange Act
of 1934) that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(d) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (c) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-3
<PAGE>
(f) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form S-4, within one business day of receipt
of such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(g) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-4 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Houston, State of Texas, on the 21 day of July
1999.
Southern Mineral Corporation
(Registrant)
/s/ Steven H. Mikel
By: _________________________________
Steven H. Mikel,
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Steven H. Mikel and Michael E. Luttrell and each
of them, with the power to act without the other, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him or her in his or her name, place and stead, in any and
all capacities, to sign on his or her behalf individually and in each capacity
stated below any or all amendments or post-effective amendments to this
Registration Statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or either of them,
or their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities indicated
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Steven H. Mikel Director and President and July 21, 1999
______________________________________ Chief Executive Officer
Steven H. Mikel (principal executive
officer)
/s/ Michael E. Luttrell Vice President--Finance July 21, 1999
______________________________________ and Chief Financial
Michael E. Luttrell Officer
/s/ M. M. Jenson Treasurer (principal July 21, 1999
______________________________________ accounting officer)
M. M. Jenson
/s/ Howell H. Howard Chairman of the Board and July 21, 1999
______________________________________ Director
Howell H. Howard
/s/ B. Travis Basham Director July 21, 1999
______________________________________
B. Travis Basham
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Thomas R. Fuller Director July 21, 1999
______________________________________
Thomas R. Fuller
/s/ Robert R. Hillery Director July 21, 1999
______________________________________
Robert R. Hillery
/s/ E. Ralph Hines, Jr. Director July 21, 1999
______________________________________
E. Ralph Hines, Jr.
/s/ James E. Nielson Director July 21, 1999
______________________________________
James E. Nielson
/s/ Donald H. Weise, Jr. Director July 21, 1999
______________________________________
Donald H. Weise, Jr.
/s/ Spencer L. Youngblood Director July 21 , 1999
______________________________________
Spencer L. Youngblood
/s/ Jeffrey B. Robinson Director July 21, 1999
______________________________________
Jeffrey B. Robinson
/s/ Michael D. Watford Director July 21, 1999
______________________________________
Michael D. Watford
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
*2.1 Disclosure Statement in connection with Pre-Petition Solicitations of
Ballots for the Registrant's Plan of Reorganization under Chapter 11
of the United States Bankruptcy Code (included in Part I of Proxy
Statement/Prospectus/Disclosure Statement).
*2.2 Plan of Reorganization for the Registrant under Chapter 11 of the
United States Bankruptcy Code (included in Part I of Proxy
Statement/Prospectus/Disclosure Statement).
2.3 Agreement by 779776 Alberta Ltd. to purchase all of the outstanding
Common Shares of Neutrino at a price of $1.80 (Canadian) per Common
Share, dated May 29, 1998. (filed with Form 8-K of Registrant, dated
July 2, 1998 (Commission File No. 0-8043 and incorporated herein by
reference).
2.3 Agreement and Plan of Merger, dated as of November 17, 1997, by and
among the Registrant, AEC Acquisition Corp. and Amerac (filed with
original Form 8-K of Registrant, dated November 17, 1997 (Commission
File No. 0-8043 and incorporated herein by reference)).
*3.1 Form of Amendment to Restated Articles of Incorporation of the
Registrant
3.2 Restated articles of incorporation of the Registrant, as amended
(incorporated by reference in Exhibit 3.1 to Form 8-K, dated January
28, 1998 (Commission File No. 0-8043)).
3.3 Amended and Restated Bylaws of the Registrant, as amended
(incorporated by reference to Exhibit (a)(3)(b) of Item 14, Part IV on
Form 10-K for fiscal year ended December 31, 1989; Commission File
Reference No. 0-8043).
4.1 Indenture relating to the Registrant's 6.875% Convertible Subordinated
Debentures due 2007, dated September 17, 1997, between Registrant and
American Stock Transfer & Trust Company (incorporated by reference to
Exhibit 4.5 to Form S-2 (Commission File No. 333-35843)).
*4.2 Warrant Agreements, dated July , 1999, between the Registrant and
American Stock Transfer and Trust Company.
*4.3 Form of Warrant Certificate (included in Exhibit 4.2).
**5.1 Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
**8.1 Tax Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
10.1 Stock Option Agreement effective as of December 31, 1994 between the
Registrant and Steven H. Mikel (incorporated by reference to Exhibit
(h) to Form 10-K for fiscal year ended December 31, 1994 (Commission
File No. 0-8043)).
10.2 Southern Mineral Corporation 1995 Non-Employee Director Compensation
Plan (incorporated by reference to Exhibit (k) to Form 10-K dated
December 31, 1994 (Commission File No. 0-8043)).
10.3 Credit Agreement, dated December 20, 1995, between the Registrant,
Southern Mineral 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 up to $25,000,000
(incorporated by reference to Exhibit 10.1 to Form 8-K dated December
20, 1995 (Commission File No. 0-8043)).
10.4 Promissory Debenture, dated December 20, 1995 in the original
principal amount of $25,000,000 made by the Registrant, Southern
Mineral 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
dated December 20, 1995 (Commission File No. 0-8043)).
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
10.5 Credit Agreement, dated December 20, 1995, between the Registrant,
Southern Mineral 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 dated December 20, 1995 (Commission File No.
0-8043)).
10.6 Promissory Debenture, dated December 20, 1995, in the original
principal amount of $3,500,000 made by the Registrant, Southern
Mineral 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
dated December 20, 1995 (Commission File No. 0-8043)).
10.7 Southern Mineral Corporation 1996 Stock Option Plan (incorporated by
reference to Exhibit 10.10 to Form 10-KSB dated December 31, 1995
(Commission File No. 0-8043)).
10.8 Southern Mineral Corporation 1996 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.11 to Form 10-KSB dated
December 31, 1995 (Commission File No. 0-8043)).
10.9 Joint Venture Agreement, dated October 1, 1995, between the Registrant
and The Links Group, Inc. (incorporated by reference to Exhibit 10.12
to Form 10-KSB dated December 31, 1995 (Commission File No. 0-8043)).
10.10 Option Agreement, dated January 5, 1996, between the Registrant and
Diasu Oil & Gas Company, Inc. covering the exploration joint venture
(incorporated by reference to Exhibit 10.13 to Form 10-KSB dated
December 31, 1995 (Commission File No. 0-8043)).
10.11 Stock Option Agreement, dated April 6, 1995, between the Registrant
and Robert R. Hillery (incorporated by reference to Exhibit 10.14 to
From 10-KSB dated December 31, 1995 (Commission File No. 0-8043)).
10.12 Subscription Agreement and Assumption of Obligations, dated January 5,
1995, between the Registrant and Gary L. Chitty, and Thomas J. McMinn
(incorporated by reference to Exhibit 10.15 to Form 10-KSB/A-1 dated
December 31, 1995 (Commission File No. 0-8043)).
10.13 Amendment to Credit Agreement between the Registrant and Compass Bank-
Houston, dated August 30, 1996 (incorporated by reference to Exhibit
10.1 to Form 8-K dated August 30, 1996 (Commission File No. 0-8043)).
10.14 Second Amendment to Credit Agreements between the Registrant and
Compass Bank, dated December 17, 1996 (incorporated by reference to
Exhibit 10.14 to Form 10-KSB dated December 31, 1996 (Commission File
No. 0-8043)).
10.15 Third Amendment to Credit Agreement between the Registrant 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 Registrant 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 (Commission File No. 0-8043)).
10.17 Incentive Stock Option Agreement between the Registrant and M. Michael
Jenson, 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 Registrant and Compass
Bank, dated December 31, 1997 (incorporated by reference to Exhibit
10.1 to Form 8-K dated January 28, 1998 (Commission File No. 0-8043)).
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
10.19 Sixth Amendment to Credit Agreement between the Registrant and Compass
Bank, dated January 28, 1998 (incorporated by reference to Exhibit
10.2 to Form 8-K dated January 28, 1998 (Commission File No. 0-8043)).
10.20 Letter Agreement between the Registrant and Amerac, dated November 17,
1997 (incorporated by reference to Exhibit 10.18 to Form S-4
(Commission File No. 333-42045)).
10.21 Letter Agreement between the Registrant and Amerac, dated November 21,
1997 (incorporated by reference to Exhibit 10.19 to Form S-4
(Commission File No. 333-42045)).
10.22 Amended and Restated Credit Agreement between the Registrant, Compass
Bank-Houston and First Union National Bank dated June 19, 1998
(incorporated by reference to Exhibit 10.1 to Form 10-QSB for the
quarterly period ended June 30, 1998 (Commission File No. 0-8043)).
10.23 Letter Amendment dated November 4, 1998, to the Amended and Restated
Credit Agreement between the Registrant, Compass Bank-Houston and
First Union National Bank dated June 19, 1998 (incorporated by
reference to Exhibit 10.1 to Form 10-QSB for the quarterly period
ended September 30, 1998 (Commission File No. 0-80430)).
10.24 1997 Stock Option Plan (incorporated by reference to Form S-8, filed
April 28, 1998, Registration No. 333-51237 (Commission File No. 333-
420450)).
10.25 Neutrino Resources Inc. Credit Facility Agreement with National Bank
of Canada, as amended February 26, 1999 (incorporated by reference to
Exhibit 10.25 to Form 10-K dated December 31, 1998 (Commission File
No. 0-8043).
10.26 Neutrino Resources Inc. Employee Stock Savings Plan effective July 8,
1998 (incorporated by reference to Exhibit 10.26 to Form 10-K dated
December 31, 1998 (Commission File No. 0-8043)).
10.27 Second Amendment to Amended and Restated Credit Agreement Between the
Registrant, Compass Bank-Houston and First Union National Bank dated
March 29, 1999 (incorporated by Reference to Exhibit 10.27 to Form 10-
K dated December 31, 1998 (Commission File No. 0-8043)).
10.28 Amendment to Incentive Stock Option Agreement of the Registrant
(incorporated by reference to Exhibit 10.28 to Form 10-K dated
December 31, 1998 (Commission File No. 0-8043)).
10.29 Board Resolution of the Registrant establishing a Retention Plan in
the event of a change of control of the Registrant dated January 7,
1999 (incorporated by reference to Exhibit 10.29 to Form 10-K dated
December 31, 1998 (Commission File No. 0-8043)).
10.30 Employment Agreement between Jeffrey W. C. Arsenych and Neutrino
Resources, Inc., dated as of July 1, 1998 (incorporated by reference
to Exhibit 10.30 to Form 10-K/A dated December 31, 1998 (Commission
File No. 0-8043)).
10.31 Employment Agreement between David W. Beckwermert and Neutrino
Resources, Inc., dated as of July 1, 1998 (incorporated by reference
to Exhibit 10.31 to Form 10-K/A dated December 31, 1998 (Commission
File No. 0-8043)).
*10.32 Stock Purchase Agreement, dated July 20, 1999, among EnCap Energy
Capital Fund III, L.P., EnCap Energy Capital Fund III-B, L.P., Energy
Capital Investment Company PLC, BOCP Energy Partners, L.P. and the
Registrant.
*10.33 Registration Rights Agreement, dated , 1999, among EnCap Energy
Capital Fund III, L.P., EnCap Energy Capital Fund III-B, L.P., Energy
Capital Investment Company PLC, BOCP Energy Partners, L.P. and the
Registrant.
*10.34 Purchase and Sale Agreement, July 9, 1999, between the Registrant,
Amerac Energy Corporation and ANR Production Company.
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
**11.1 Computation of earnings per common and equivalent share.
*13.1 Annual Report on Form 10-KSB/A for the fiscal year ended December 31,
1996.
*13.2 Quarterly Report on Form 10-QSB for the quarterly period ended
September 30, 1996.
21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit
21.1 to Form 10-K dated December 31, 1998 (Commission File No. 0-
8043)).
*23.1 Consent of KPMG LLP.
**23.2 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in its
opinions filed as Exhibit 5.1 and Exhibit 8.1).
*23.3 Consent of CIBC World Markets Corp.
*24.1 Power of Attorney (included with signature page of this registration
statement).
27.1 Financial Data Schedule (incorporated by reference to Exhibit 27.1 to
Form 10-K dated December 31, 1998 (Commission File No. 0-8043)).
**99.1 Form of Letter of Transmittal for Debentureholders.
**99.2 Form of Proxy for Stockholders.
**99.3 Form of Master Ballot for Debentureholders.
**99.4 Form of Ballot for Debentureholders.
**99.5 Form of Master Ballot for Stockholders.
**99.6 Form of Ballot for Stockholders.
</TABLE>
- --------
* Filed herewith.
** To be filed by amendment.
II-10
