UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[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
incorporation or organization) Identification No.)
1201 Louisiana, Suite 3350
Houston, Texas 77002-5609
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 658-9444
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers in response 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.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for the 1999 Annual
Meeting of Stockholders are incorporated herein by reference
in Part III.
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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.
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.
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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 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.
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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 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."
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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
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
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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 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.
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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 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
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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.
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 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.
8
<PAGE>
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 basis 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):
CUSTOMER 1998 1997 1996
- - -------------------------------------- ------ ------ ------
G C Marketing Company ................ $ -- $2,267 $3,212
Damsco Distribution .................. 3,747 1,656 --
Diasu Oil & Gas Co., Inc. ............ -- 1,631 --
9
<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.
10
<PAGE>
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).
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
========== =========== ======== ===== ========== =========== ========== ===========
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>
11
<PAGE>
PRODUCTION AND PRICE HISTORY
The following table sets forth certain information concerning the
Company's annual net oil and gas production and average price information for
the year ended December 31:
<TABLE>
<CAPTION>
Production: 1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
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.
OIL GAS TOTAL
------------- ------------- -------------
GROSS NET GROSS NET GROSS NET
----- ----- ----- ----- ----- -----
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
===== ===== ===== ===== ===== =====
12
<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:
1998 1997 1996
------------- ------------- -------------
GROSS NET GROSS NET GROSS NET
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
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.
DEVELOPED UNDEVELOPED
ACREAGE ACREAGE
----------------- -----------------
GROSS NET GROSS NET
UNITED STATES ------- ------- ------- -------
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
======= ======= ======= =======
CANADA
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
======= ======= ======= =======
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.
13
<PAGE>
The Company's ownership of mineral rights as of December 31, 1998, is
set forth below:
GROSS NET
STATE MINERAL ACRES MINERAL ACRES
------------- -------------
Mississippi .................................. 262,000 118,000
Wisconsin .................................... 121,000 110,000
Texas ........................................ 212,514 84,183
New Mexico ................................... 67,634 32,577
Other ........................................ 2,000 2,000
------------- -------------
Total .............................. 665,148 346,760
============= =============
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
US $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.
14
<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:
1998 1997
--------------- ---------------
HIGH LOW HIGH LOW
----- ----- ----- -----
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
===== ===== ===== =====
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 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.
15
<PAGE>
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 Aemployee 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.
16
<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.
<TABLE>
<CAPTION>
COMPARATIVE CONSOLIDATED BALANCE SHEETS
(in thousands)
AS OF DECEMBER 31,
-------------------------------------------------------------
ASSETS 1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
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
========= ========= ========= ========= =========
COMPARATIVE CONSOLIDATED OPERATING DATA
(in thousands, except per share amounts)
FOR THE YEAR ENDING DECEMBER 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
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.
17
<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.
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.
18
<PAGE>
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.
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.
19
<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 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 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
(US $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 (US $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 (US $18,490,000). At
March 15, 1999, outstanding borrowings under the Canadian Credit Facility were
Cdn $29,530,000 (US $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
20
<PAGE>
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.
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.
21
<PAGE>
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.
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 Comission ("SEC") release regarding Year
2000 disclosures, the SEC required public companies to disclose the most likely
worst case Year 2000 scenario. Situations which 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.
22
<PAGE>
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 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
----------- ----------- ----------- ----------- ----------- -----------
Variable Rate
<S> <C> <C> <C> <C> <C>
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.
23
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
DESCRIPTION NUMBER
Financial Statements:
Report of Independent Certified Public Accountants ........................ 25
Consolidated Balance Sheets at December 31, 1998 and 1997 ................. 26
Statements of Consolidated Operations for the Years Ended
December 31, 1998, 1997 and 1996 ....................................... 27
Statements of Consolidated Stockholders' Equity and
Comprehensive Income (Loss) for the Years Ended December 31,
1996, 1997 and 1998 .................................................... 28
Statements of Consolidated Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 ....................................... 29
Notes to Consolidated Financial Statements
for the Years Ended December 31, 1998, 1997 and 1996 ................... 31
24
<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.
25
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
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
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
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.
26
<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.
27
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS'
EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNING
-------- -------- ---------- --------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 ............. 6,370 $ 64 $ 3,038 $ 2,131
Stock issued for directors' fees ....... 24 -- 72 --
Issuance of common stock for private
placement ........................... 2,500 25 10,596 --
Issuance of common stock for property
acquisitions and acquisition services 195 2 324 --
Comprehensive income:
Net income .......................... -- -- -- 2,434
Total comprehensive income ............. -- -- -- --
-------- -------- ---------- --------
BALANCE AT DECEMBER 31, 1996 ........... 9,089 91 14,030 4,565
Stock issued for directors' fees ....... 31 -- 181 --
Stock issued for stock purchase plan ... 9 -- 29 --
Stock issued for stock option plan, net 4 -- -- --
Issuance costs for private placement ... -- -- (88) --
Comprehensive loss:
Net loss ............................ -- -- -- (2,049)
Foreign currency translation
adjustment ....................... -- -- -- --
Total comprehensive loss ............... -- -- -- --
-------- -------- ---------- --------
BALANCE AT DECEMBER 31, 1997 ........... 9,133 91 14,152 2,516
Stock issued for directors' fees ....... 43 -- 139 --
Stock issued for stock purchase plan ... 8 -- 22 --
Issuance of common stock for property
acquisition ......................... 8 -- 50 --
Issuance of common stock in corporate
acquisitions ......................... 3,693 37 16,485 --
Comprehensive loss:
Net loss ............................. -- -- -- (16,409)
Foreign currency translation
adjustment ....................... -- -- -- --
Total comprehensive loss ............... -- -- -- --
-------- -------- ---------- --------
BALANCE AT DECEMBER 31, 1998 ........... 12,885 $ 128 $ 30,848 $(13,893)
======== ======== ========== ========
ACCUMULATED
OTHER TREASURY STOCK TOTAL
COMPREHENSIVE ------------------- STOCKHOLDER'S
INCOME (LOSS) SHARES AMOUNT EQUITY
------------- -------- -------- -------------
BALANCE AT JANUARY 1, 1996 ............. $ -- 91 $ 52 $ 5,181
Stock issued for directors' fees ....... -- -- -- 72
Issuance of common stock for private
placement ........................... -- -- -- 10,621
Issuance of common stock for property
acquisitions and acquisition services -- -- -- 326
Comprehensive income:
Net income .......................... -- -- -- 2,434
-------------
Total comprehensive income ............. -- -- -- 2,434
------------- -------- -------- -------------
BALANCE AT DECEMBER 31, 1996 ........... -- 91 52 18,634
Stock issued for directors' fees ....... -- -- -- 181
Stock issued for stock purchase plan ... -- -- -- 29
Stock issued for stock option plan, net -- -- -- --
Issuance costs for private placement ... -- -- -- (88)
Comprehensive loss:
Net loss ............................ -- -- -- (2,049)
Foreign currency translation
adjustment ....................... (227) -- -- (227)
-------------
Total comprehensive loss ............... -- -- -- (2,276)
------------- -------- -------- -------------
BALANCE AT DECEMBER 31, 1997 ........... (227) 91 52 16,480
Stock issued for directors' fees ....... -- -- -- 139
Stock issued for stock purchase plan ... -- -- -- 22
Issuance of common stock for property
acquisition ......................... -- -- -- 50
Issuance of common stock in corporate
acquisitions ......................... -- -- -- 16,522
Comprehensive loss:
Net loss ............................. -- -- -- (16,409)
Foreign currency translation
adjustment ....................... (2,077) -- -- (2,077)
-------------
Total comprehensive loss ............... -- -- -- (18,486)
------------- -------- -------- -------------
BALANCE AT DECEMBER 31, 1998 ........... $ (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.
28
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
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.
29
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS - (CONTINUED)
(in thousands
<TABLE>
<CAPTION>
<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.
30
<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.
31
<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.
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
32
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
NET INCOME PER SHARE
YEAR ENDED DECEMBER 31, 1996 (LOSS) SHARES AMOUNTS
---------- ------ ---------
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
========== ====== =========
RECLASSIFICATIONS - Certain amounts in prior financial statements
have been reclassified to conform to the 1998 financial statement presentation.
33
<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:
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
============
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:
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
===========
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.
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.
34
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA
The following summarized pro forma (unaudited) information assumes the
acquisitions had occurred on January 1, 1997:
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997
---------- ----------
(in thousands, except per share data)
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)
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.
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.
35
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
(US $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 (US $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 (US $18,490,000). At
March 15, 1999, outstanding borrowings under the Canadian Credit Facility were
Cdn $29,530,000 (US $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 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
36
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
1998 1997
------- -------
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
======= =======
Maturities of long-term debt over the next five years are as follows
(in thousands):
1999 2000 2001 2002 2003 & BEYOND TOTAL
------- ---- -------- ---- ------------- -------------
$13,124 $480 $ 22,490 -- $ 41,400 $ 77,494
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):
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997
----------------- -----------------
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
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 -- --
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.
37
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
-------- -------- --------
United States ............. $ (8,504) $ (2,697) $ 2,018
Foreign ................... (10,680) 822 1,095
-------- -------- --------
Total ..................... $(19,184) $ (1,875) $ 3,113
======== ======== ========
Income tax expense (benefit) attributable to income from continuing
operations consists of (in thousands):
CURRENT DEFERRED TOTAL
------- -------- -------
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
======= ======== =======
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.
38
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Differences between the effective tax rate and the statutory federal
rate are as follows:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
------ ------ ------
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%
====== ====== ======
Deferred taxes consist of the following (in thousands):
FOR THE YEAR ENDED
DECEMBER 31,
---------------------
Deferred tax assets: 1998 1997
-------- -------
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
======== =======
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 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
39
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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):
CUSTOMER 1998 1998 1996
- - -------- ---------- ------ ------
G C Marketing Company ............... $ -- $2,267 $3,212
Damsco Distribution ................. 3,747 1,656 --
Diasu Oil & Gas Co., Inc. ........... -- 1,631 --
40
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-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 report
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
41
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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>
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:
1998 1997 1996
------------- ------------- -------------
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%
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.
42
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.00 to 1.50 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:
1999 2000 2001 2002 2003 TOTAL
- - -------- -------- -------- -------- ------- ----------
$309,139 $279,623 $225,581 $225,581 $65,408 $1,105,332
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.
43
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 US $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.
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):
FULLY
INCOME BASIC DILUTED
(LOSS) NET INCOME INCOME
1998 FROM INCOME (LOSS) (LOSS)
QUARTER REVENUES OPERATIONS (LOSS) PER SHARE PER SHARE
-------- ---------- -------- --------- ---------
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)
======== ========== ======== ========= =========
1997
QUARTER
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)
======== ========== ======== ========= =========
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.
44
<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>
45
<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.
46
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. OIL AND GAS PRODUCING ACTIVITIES
The Company's capitalized costs of all oil and gas properties and
related allowances for depreciation and depletion are as follows at December 31
(in thousands):
1998 1997 1996
--------- --------- ---------
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
========= ========= =========
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.
Costs incurred in oil and gas property acquisition, exploration and development
activities were as follows (in thousands):
AS OF DECEMBER 31, 1998 UNITED STATES ECUADOR CANADA TOTAL
------------- ------- ------- -------
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
============= ======= ======= =======
47
<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
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
========== =========== ======== ===== ========== =========== ========== ===========
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>
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
AT DECEMBER 31, 1998 U.S. ECUADOR CANADA TOTAL
--------- ------- -------- ---------
<S> <C> <C> <C> <C>
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
========= ======= ======== =========
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>
49
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following are the principal sources of change in the standardized
measure of discounted future net cash flows (in thousands):
AT DECEMBER 31, 1998 TOTAL COMPANY
--------------
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
==============
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
==============
The Company's foreign reserves per Mcfe in 1998, 1997 and 1996 were
44%, 19% and 25% of total reserves, respectively.
50
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
51
<PAGE>
PART III
ITEMS 10 THROUGH 13 of this Part III are omitted since the Company expects to
file with the Securities and Exchange Commission within 120 days after the close
of its fiscal year ended December 31, 1998 a definitive proxy statement pursuant
to Regulation 14A under the Securities Exchange Act of 1934 which involves the
election of directors. Items 10 through 13 are hereby incorporated by reference
herein from such proxy statement. If, for any reason, such proxy statement is
not filed within such period, this Form 10-K will be appropriately amended.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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:
PAGE
Consolidated Statements of Income .............................. 27
Consolidated Balance Sheets .................................... 26
Consolidated Statements of Cash Flows .......................... 29
Consolidated Statements of Stockholders' Equity ................ 28
Notes to Consolidated Financial Statements ..................... 31
Report of independent accountants .............................. 25
(A)(2) EXHIBITS
(a) EXHIBIT
NUMBERS DESCRIPTION
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).
52
<PAGE>
EXHIBIT
NUMBERS DESCRIPTION
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).
*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)).
53
<PAGE>
EXHIBIT
NUMBERS DESCRIPTION
*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)).
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)).
54
<PAGE>
EXHIBIT
NUMBERS DESCRIPTION
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).
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).
55
<PAGE>
27.1 Financial Data Schedule (filed herewith).
* 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.
56
<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
BY:/s/STEVEN H. MIKEL
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.
/s/JEFFREY W. C. ARSENYCH Director, Chairman and March 29, 1999
Jeffrey W. C. Arsenych Chief Executive Officer
Neutrino Resources Inc.
/s/B. TRAVIS BASHAM Director March 29, 1999
B. Travis Basham
/s/DAVID W. BECKWERMERT Director, President & Chief March 29, 1999
David W. Beckwermert Operating Officer-Neutrino
Resources Inc.
/s/MICHAEL R. DAWSON Vice President-Finance and March 29, 1999
Michael R. Dawson Chief Financial Officer
/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 March 29, 1999
Howell H. Howard of the Board of Directors
/s/M. M. JENSON Treasurer March 29, 1999
M. M. Jenson (principal accounting
officer)
57
<PAGE>
/s/STEVEN H. MIKEL Director, President and March 29, 1999
Steven H. Mikel Chief Executive Officer
/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
58
EXHIBIT 10.25
Western Canada Corporate Banking
Energy Division
NATIONAL
BANK
OF CANADA
February 26,1999 -
Neutrino Resources Inc. Southern Minerals Corporation
#1400, 300 - 5th Avenue SW 1201 Louisiana
Calgary, Alberta Suite 3350
T2P 3C4 Houston) Texas 77002-5609
ATTENTION: Mr. David Beckwermert ATTENTION: Mr. Michael Dawson
President & COO Vice President, Finance
Dear Sirs:
RE: CREDIT FACILITIES - NATIONAL BANK OF CANADA/NEUTRINO RESOURCES INC.
- - --------------------------------------------------------------------------
Further to our recent discussions, we are pleased to advise that National
Bank of Canada has approved the following amendments to the Credit Facilities
for Neutrino Resource Inc. All other terms and conditions of the accepted
Offering Letter dated June 25, 1998, as amended December 9, 1998, remain in
full force and effect unless superseded below.
BORROWER: NEUTRINO RESOURCES INC. (the "Borrower").
- - ---------
LENDER: NATIONAL BANK OF CANADA (the "Bank").
- - -------
CREDIT FACILITY A: REVOLVING OPERATING DEMAND LOAN ("the Credit Facility A").
- - ------------------
MAXIMUM AMOUNT: $33,000,000. Sublimit of $5,000,000 for Letters of Credit
- - --------------- and/or Letters of Guarantee ("L/C/Gs").
PURPOSE: Reduction in availability per Interim Review.
- - --------
INTEREST RATE: At the option of the Borrower:
- - --------------
(1) CANADIAN DOLLAR ADVANCES
The Borrower shall pay interest calculated daily and
payable monthly, not in advance, on the principal
amount of the Credit Facility A and on overdue
interest, if any, outstanding from time to time, at
a rate per annum equal to the Prime Rate as
designated from time to time by the Bank plus
one-quarter percent (Prime + "1/4% p.a.). Interest at
the aforesaid rate shall be due and payable on the
26th day of each and every month until all amounts
owing to the Bank are paid in full. Interest shall
be paid via automatic debit to the Borrower's
account at the Calgary Branch of the Bank.
As of this date, the Bank's Prime Rate is 6 3/4% per
annum.
600, 407 Eighth Avenue South West
Calgary, Alberta T2P 1E5
Telephone:(403) 294-4990
Fax: (403) 294-4993
<PAGE>
Neutrino Resources Inc.
Re: Amending Offering Letter
February 26, 1992 Page 2
- - --------------------------------------------------------------------------------
(2) CANADIAN DOLLAR BAs
-------------------
Subject to market availability, in multiples
of $100,000 and minimum draw of $1,000,000. BAs at a
stamping fee of one and one-quarter percent per
annum (1 1/4% p.a.). BAs shall have a minimum term of
30 days and maximum term of 180 days, and shall not
include any days of grace. The BAs shall remain in
effect until the maturity of the term selected. If
the Bank does not receive instructions from the
Borrower concerning renewal of the BAs, then
Canadian Dollar Advances shall be automatically
utilized until written instructions are received from
the Borrower.
REPAYMENT: Interest only but always subject to Availability and
- - ---------- the Bank's right of demand. Subject to Annual Review.
CREDIT FACILITY B: Cancelled.
- - ------------------
FOR ALL CREDIT FACILITIES
CONDITIONS -------------------------
PRECEDENT: 1. All Security, denoted in the following Security To
- - ---------- Be Obtained section, shall be completed, duly
authorized, executed, and delivered by the Borrower
to the satisfaction of the Bank and its counsel;
SECURITY: All Security shall be completed, duly executed,
- - --------- delivered, and registered, where necessary, to the
entire satisfaction of the Bank and its counsel. All
Security and the terms thereof shall be retained in
full force and effect as Security for repayment of all
loans and advances made hereunder and for other loans
and advances that may be made from time to time in the
future whether hereunder or otherwise.
TO BE OBTAINED:
---------------
1. Accepted Amending Offering Letterdated February 26,
1999.
2. Accepted Amending Offering Letter dated December 9,
1998 (copy attached).
AFFIRMATIVE
COVENANTS: 1. Maintain a consolidated working capital ratio, in
- - ---------- accordance with GAAP, of greater than or equal to
1.0:1.0. In calculation of this quarterly test, any
undrawn portion of the Credit Facility A may be
treated as if advanced and held as cash. A quarterly
compliance certificate shall be provided to the
Bank.
EXPIRY DATE: This Amending Offering Letter is open for acceptance
- - ------------ until March 2, 1999, at which time it will expire
unless extended by mutual consent.
<PAGE>
Neutrino Resources Inc.
Re: Amending Offering Letter
February 26, 1999 Page 3
- - --------------------------------------------------------------------------------
If the foregoing terms and conditions are acceptable, please sign both copies
of this Amending Offering Letter and return one copy to the Bank by the expiry
date.
National Bank of Canada appreciates the opportunity of providing this revised
commitment to Neutrino Resources Inc. We look forward to our continuing and
mutually beneficial relationship.
Yours truly,
NATIONAL BANK OF CANADA
/s/ TIMOTHY D. BACON /s/ HENRY A. DETHMERS
Timothy D. Bacon Henry A. Dethmers
Manager Senior Manager
Corporate and Energy Group Corporate and Energy Group
cc: M. Dawson, Southern Minerals Corporation, Houston
AGREED AND ACCEPTED this 1 day of March, 1999.
NEUTRINO RESOURCES INC.
Per: /s/ DAVID BECKWERMERT
David Beckwermert (Corporate Seal)
President & C.O.O
Per: __________________________________
EXHIBIT 10.26
NEUTRINO RESOURCES INC.
EMPLOYEE STOCK SAVINGS PLAN
1.PURPOSE
The Plan is hereby established as an employee stock savings plan
to foster the support of the employees of the Corporation for the on-going
well-being of the Corporation by encouraging employees to acquire common
shares of the Corporation via payroll deductions supplemented with
financial contributions provided by the Corporation.
2. DEFINITIONS
As used in the Plan:
(a) "Account" means the records maintained by the Trustee for
the credit of Member Contributions, Corporation
Contributions, interest earned in respect of Member
Contributions and Shares purchased therefrom;
(b) "Business Day" means a day other than a Saturday or Sunday
on which Canadian chartered banks are open to accept
deposits in Calgary, Alberta;
(c) "Contribution Percentage" means the percentage of Earnings
which the Member has directed the Corporation to deduct from
the Member's Earnings in each calendar month as a Member
Contribution;
(d) "Corporation" means Neutrino Resources Inc.;
(e) "Corporation Contributions" means the contributions
which are made by the Corporation to the Plan pursuant
to the provisions of paragraph 6;
(f) "Earnings" means the gross amount of remuneration
received before any source deductions by the Employee
as regular cash compensation as determined by the
Corporation from time to time;
(g) "Employee" means a person who is employed on a regular
full-time basis by the Corporation or who provides
services to the Corporation on a full-time basis and
is designated as an employee for purposes of the Plan
by the Corporation;
(h) "Member" means an Employee who has elected to
participate in the Plan pursuant to the provisions of
paragraph 4;
(i) "Member Contributions" means contributions to the Plan
which are made by the Member pursuant to the
provisions of paragraph 5;
<PAGE>
-2-
(j) "Notice" means the notice of participation, in the form
attached as Schedule A, to be delivered to the
Corporation by an Employee who elects to participate in
the Plan;
(k) "Plan" means the Employee Stock Savings Plan of the
Corporation, as created hereby;
(l) "Salary Payment Date" means the date in each month upon
which the Corporation normally pays salary to its
employees, as determined from time to time by the
Corporation;
(m) "Shares" means common stock, par value $0.01 per
share, of Southern;
(n) "Southern" means Southern Mineral Corporation, the sole
shareholder of the Corporation; and
(o) "Trustee" means the securities dealer, trust company or
insurance company appointed by the Corporation from
time to time to administer the Plan on behalf of the
Corporation and the Members.
3. ELIGIBILITY
Except as otherwise specifically determined by the Corporation, each
individual who has been an Employee for three continuous months shall be
eligible to participate in the Plan. As soon as reasonably practicable after an
Employee becomes eligible to participate in the Plan, the Corporation will
notify the Employee of such eligibility and provide to the Employee information
in reasonable detail concerning the operation of the Plan. Notwithstanding the
foregoing, if an Employee has been a Member but has given notice that he/she no
longer wishes to be a Member or wishes his or her Contribution Percentage to be
adjusted to nil, such Employee shall not be eligible to participate in the Plan
for a period of six months from the date of such notice.
4. PARTICIPATION
(a) Participation in the Plan shall be entirely voluntary and shall
not be construed to give any Member the right to continue to be
employed by the Corporation or to any other benefits from the
Corporation.
(b) An Employee who is eligible may elect to participate in the Plan
by submitting a Notice or otherwise as may be prescribed from time
to time by the Corporation, and such Notice shall for all purposes
be deemed to be an application to participate in the
<PAGE>
-3-
Plan and an agreement, if such application is accepted, to
participate in the Plan in accordance with, and be bound by, the
terms of this document.
(c) If an Employee elects to participate in the Plan at least five
Business Days prior to the first Salary Payment Date in a
calendar month, the Employee will become a Member effective in
such Calender Month. Otherwise the Employee will become a Member
effective in the next calendar month.
(d) By giving notice to the Corporation pursuant to this paragraph 4,
an Employee elects to participate in the Plan in accordance with
the terms of this document and authorizes the Corporation to
deduct Member Contributions from the Member's Earnings, to make
any deductions required from the Member's Earnings in respect of
income tax relating to the Corporation Contributions, all as
provided for herein.
5. MEMBER CONTRIBUTIONS
(a) Member Contributions shall be made by means of the Corporation
making deductions from the Member's Earnings on each Salary
Payment Date.
(b) A Member shall indicate on the Notice that percentage of the
Member's Earnings, if any, which is to be deducted initially by
the Corporation as Member Contributions and deposited in the Plan
on behalf of the Member. Member Contributions in respect of any
calendar month cannot exceed 5% of the Earnings of the particular
Member in respect of such calendar month.
(c) A Member may change his or her Contribution Percentage at any
time, but in any event no more than twice in any calendar year,
by giving notice to the Corporation, but any such change will
only take effect:
(i) if given at least five Business Days prior to the first
Salary Payment Date in a calendar month, in that
calendar month; or
(ii) otherwise, in the next calendar month.
(d) Notwithstanding the fact that during any calendar month a
Member's Contribution Percentage is less than the maximum
permitted under the Plan, the Member will not be entitled to make
a Member Contribution in any subsequent calendar month which is
greater than as permitted in (b) above.
6. CORPORATION CONTRIBUTIONS
<PAGE>
-4-
Corporation Contributions in respect of a calendar month shall be made to
the Plan in respect of each member on the first Business Day of the next
calendar month. Corporation Contributions for each Member in respect of a
calendar month shall be an amount equal to the amount of Member Contributions
made in accordance with paragraph 5 by that Member to the Plan for the calendar
month, to a maximum of 5% of the amount of the Earnings of the Member in the
calendar month; provided, however, that Members shall not be entitled to
interest payments from Corporate Contributions, as is provided in 7(b) below.
7. ACCOUNTS AND ALLOCATIONS TO MEMBERS
(a) The Trustee shall establish and maintain an Account for each
Member showing the total number of Shares purchased on
behalf of such Member and the total amount of Member
Contributions, Corporation Contributions and other amounts
allocated to the Member's Account. The amount of each
Member's Account at any time shall be the total number of
Shares and cash then held for such Account.
(b) All Member Contributions made to the Plan shall be deposited
immediately by the Trustee in an Account with a Canadian
financial institution which pays interest monthly and all
such interest payments shall be allocated to the Member's
Account.
(c) All distributions received in respect of the Shares held in
the Account of a Member shall be distributed by the Trustee
to the Member as soon as reasonably practicable.
8. VESTING
Corporation Contributions made to a Member's Account shall vest
irrevocably in that Member immediately upon being so made. Shares will be
purchased with Member Contributions and interest earned thereon and Corporation
Contributions.
9. PURCHASE OF SRARES
(a) Amounts allocated in accordance with paragraph 7 to the Account of
a Member shall be used to purchase Shares on a monthly basis on
behalf of the Member. Shares purchased on behalf of a Member will
be purchased by the Trustee in the open market on a stock
exchange, in which case all brokerage commissions will be paid by
the Corporation. All purchases of Shares by the Trustee shall be
made in accordance with
<PAGE>
-5-
applicable law, including, without limitation Rule lOb-18 as
promulgated under the United States Securities Exchange Act
of 1934, as amended.
(b) Shares purchased on behalf of Members from time to time
during each calendar month in the open market on a stock
exchange will be purchased at prevailing market prices. The
purchase price of the Shares to Members will be the weighted
average of such prices. No fractional Shares will be
purchased. If the amount of the Member's Account is
insufficient to purchase a whole number of Shares, the
balance shall remain in the Member's Account for the next
calendar month.
(c) All Shares purchased by the Trustee pursuant to the
provisions of this paragraph 9 shall be held by the Trustee
in trust on behalf of the applicable Member and the
certificates in respect thereof shall be registered in the
name of the Member.
(d) All rights with respect to Shares held in a Member's Account
by the Trustee on behalf of a Member, including rights of
conversion and voting, shall be exercisable by the Member,
and any distribution paid on such Shares shall be paid to
the Member even though such Shares are held by the Trustee
on behalf of the Member. In the absence of instruction, the
Trustee shall be authorized to exercise on behalf of the
Member all voting rights attached to such Shares.
10. DELIVERY OF CERTIFICATES AND TERMINATION OF EMPLOYMENT
(a) Except as provided below, the Trustee shall deliver
certificates representing Shares held for a Member to that
Member within one month after the calendar year-end.
(b) Effective with respect to the calendar month in which the
Member's employment with the Corporation is terminated for
any reason whatsoever, including dismissal with or without
cause, resignation, disability or death, the Member's
participation in the Plan will cease automatically and
without further notice from, or action by, the Corporation,
the Member shall not be entitled to be paid any of the
Corporation Contributions for any part of such calendar
month and, as soon as reasonably practicable following such
termination, the Trustee shall deliver to the Member or the
Member's executors or personal representatives certificates
representing all Shares held for the Member and a cheque
representing the aggregate of the Member's Account including
<PAGE>
-6-
Member Contributions and interest received thereon in each
case not used to purchase Shares.
11. REPORTING
The Trustee shall provide each Member with a statement at least once
during each calendar year setting forth the amount of Member Contributions and
Corporation Contributions in respect of the Member and the number of Shares
purchased for the Member.
12. THE CORPORATION
(a) Neither the Corporation nor any person acting on its behalf
and no director, officer, employee, representative or agent
of the Corporation shall be liable for any action or failure
to act under or in connection with the Plan unless such
action or failure to act resulted from gross negligence or
wilful misconduct.
(b) For all purposes relating to the administration and the
operation of the Plan, the Corporation shall be entitled to
rely on certificates, reports, opinions and other documents
furnished by the Trustee or any broker, accountant, auditor
or counsel to the Corporation.
13. MEMBER'S RIGHT NOT TRANSFERABLE OR ASSIGNABLE
Except as otherwise provided herein, no right or interest of any Member in
the Plan or any of the Shares or the Account held by the Trustee on behalf of
the Member under the Plan shall be assignable or transferable, in whole or in
part, either directly or by operation of law or otherwise in any manner but
excluding devolution by death or mental incompetency.
14. INTERPRETATION AND REGULATIONS
(a) The Corporation may modify, amend or repeal the Plan at any
time. In particular, the Corporation may delegate to any person,
group of persons or corporation such administrative duties and
powers as it may see fit.
(b) The Corporation shall have the power to interpret the
provisions of the Plan and any rules or regulations applicable
thereto as the Corporation deems proper and in its best interests.
All decisions and interpretations of the Corporation respecting the
Plan and all rules and regulations applicable thereto shall be
binding and conclusive on the Corporation and on all Members of the
Plan and their respective legal representatives and on all
Employees eligible under the Plan to participate herein.
<PAGE>
-7-
15. COSTS
All costs of administering and operating the Plan will be paid for by the
Corporation.
16. APPLICABLE LAW
The Plan, the Member's participation therein and all matters relating to
the administration and operation of the Plan shall be governed by and construed
in accordance with the laws of the Province of Alberta.
17. NOTICES
Any notice or other communication or delivery made under or in relation to
the Plan shall be made, if to the Corporation, to Neutrino Resources Inc., 1750,
300 - 5th Avenue S.W., Calgary, Alberta, T2P 3C4, Attention: President with a
copy to Southern Mineral Corporation, 1201 Louisiana, Suite 3350, Houston, Texas
77002-4609, Attention: Corporate Secretary and, if to the Employee, at the
address of the Employee on the Notice given by the Employee pursuant to
paragraph 4(b), or to such other place of which notice shall have been given.
Any such notice may be given by mail or by personal delivery and shall be deemed
to have been given, if given by mail, on the third business day following
mailing and, if given by personal delivery, on the business day of such
delivery.
<PAGE>
Schedule A
NOTICE OF PARTICIPATION
TO: NEUTRINO RESOURCES INC. ("Neutrino")
RE: EMPLOYEE STOCK SAVINGS PLAN (the "Plan")
The undersigned employee (the "Employee") elects to participate in the
Plan and directs Neutrino to deduct *% (if zero, please so indicate) of the
Employee's Earnings (as defined in the Plan Document) and deposit that amount in
the Plan.
The Employee:
(a) having received a copy of the document (the "Plan Document") which
sets out the terms and conditions of the Plan; and
(b) that the delivery of this Notice to Neutrino is an application to
participate in the Plan and an agreement, if Neutrino accepts such
application, by the Employee to participate in the Plan in
accordance with, and to be bound by, the terms of the Plan
Document.
The Employee may change the percentage of the Employee's Earnings to be
deducted by giving notice to Neutrino.
Dated on the day of , 199* , in the of ,
Province of Alberta
_______________________________ ______________________________________
Witness
Employee Name_________________________
Address:______________________________
EXHIBIT 10.27
SECOND AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
BETWEEN
SOUTHERN MINERAL CORPORATION
SMC ECUADOR, INC.
SMC PRODUCTION CO.
BEC ENERGY, INC.
AND
AMERAC ENERGY CORPORATION
AND
COMPASS BANK, AS AGENT AND LENDER
AND
FIRST UNION NATIONAL BANK AS A LENDER
MARCH 29, 1999
------------------------------------
REVOLVING LINE OF CREDIT OF UP TO $200,000,000
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I. DEFINITIONS ..................................... 1
1.01 Terms Defined Above ........................................ 1
1.02 Terms Defined in Agreement ................................. 1
1.03 References ................................................. 2
1.04 Articles and Sections ...................................... 2
1.05 Number and Gender .......................................... 2
ARTICLE II. AMENDMENTS ..................................... 2
2.01 Amendment of Section 1.2 ................................... 2
2.02 Addition of Section 2.5(a) ................................. 4
2.03 Amendment of Section 2.9(a) ................................ 4
2.04 Amendment of Section 2.10 .................................. 4
2.05 Amendment of Section 2.12 .................................. 5
2.07 Amendment of Section 3.1 ................................... 6
2.09 Addition of Section 5.22 ................................... 7
2.10 Addition of Section 5.23 ................................... 7
2.11 Addition of Section 5.24 ................................... 9
2.12 Addition of Section 5.25 ................................... 10
2.13 Amendment of Section 6.14 .................................. 10
2.14 Addition of Section 6.15 ................................... 10
2.15 Additions to Section 7.1 ................................... 11
ARTICLE III CONDITIONS ................................................ 11
3.01 Receipt of Documents ....................................... 11
3.02 Accuracy of Representations and Warranties ................. 12
3.03 Matters Satisfactory to Parties ............................ 13
ARTICLE IV. REPRESENTATIONS AND WARRANTIES ................. 13
4.01 Restatement of Representations and Warranties .............. 13
ARTICLE V. RATIFICATION .................................... 13
ARTICLE VI. MISCELLANEOUS .................................. 13
6.01 Scope of Second Amendment .................................. 13
6.02 Agreement as Amended ....................................... 14
6.03 Parties in Interest ........................................ 14
6.04 Rights of Third Parties .................................... 14
6.05 GOVERNING LAW .............................................. 14
6.06 JURISDICTION AND VENUE ..................................... 14
6.07 ENTIRE AGREEMENT ........................................... 14
6.08 Confidentiality ............................................ 15
<PAGE>
SECOND AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
This SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this
"SECOND AMENDMENT") is made and entered into effective as of March 29, 1999,
between SOUTHERN MINERAL CORPORATION, a Nevada corporation, ("Borrower"), SMC
PRODUCTION CO., a Texas corporation, AMERAC ENERGY CORPORATION, a Delaware
corporation, SMC ECUADOR, INC., a Texas corporation, and BEC ENERGY, INC., a
Texas corporation ("CO-BORROWERS") and COMPASS BANK, an Alabama state chartered
banking institution ("COMPASS") and FIRST UNION NATIONAL BANK, a national
banking association ("FIRST UNION") with each other lender that becomes a
signatory hereto as provided in Section 9.1, individually and together with
their successors and assigns, (the "Lenders"), and Compass, as Agent for the
Lenders in such capacity together with its successors in such capacity pursuant
to the terms hereof, the "Agent."
W I T N E S S E T H:
WHEREAS, the above named parties did execute and exchange
counterparts of that certain Amended and Restated Credit Agreement dated June
19, 1998, as amended by First Amendment to Amended and Restated Credit Agreement
dated effective as of September 1, 1998 (the "AGREEMENT"), to which reference is
here made for all purposes;
WHEREAS, the parties subject to and bound by the Agreement are
desirous of amending the Agreement in the particulars hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements of the parties to the Agreement, as set forth therein, and the mutual
covenants and agreements of the parties hereto, as set forth in this Second
Amendment, the parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
1.01 TERMS DEFINED ABOVE. As used herein, each of the terms "AGENT,"
"AGREEMENT," "BORROWER," "CO-BORROWERS," "COMPASS," "FIRST UNION," "LENDERS" and
"SECOND AMENDMENT" shall have the meaning assigned to such term hereinabove.
1.02 TERMS DEFINED IN AGREEMENT. As used herein, each term defined in the
Agreement shall have the meaning assigned thereto in the Agreement, unless
expressly provided herein to the contrary.
1.03 REFERENCES. References in this Second Amendment to Article or Section
numbers shall be to Articles and Sections of this Second Amendment, unless
expressly stated
<PAGE>
herein to the contrary. References in this Second Amendment to "hereby,"
"herein," "hereinafter," "hereinabove," "hereinbelow," "hereof," and "hereunder"
shall be to this Second Amendment in its entirety and not only to the particular
Article or Section in which such reference appears.
1.04 ARTICLES AND SECTIONS. This Second Amendment, for convenience only,
has been divided into Articles and Sections and it is understood that the
rights, powers, privileges, duties, and other legal relations of the parties
hereto shall be determined from this Second Amendment as an entirety and without
regard to such division into Articles and Sections and without regard to
headings prefixed to such Articles and Sections.
1.05 NUMBER AND GENDER. Whenever the context requires, reference herein
made to the single number shall be understood to include the plural and likewise
the plural shall be understood to include the singular. Words denoting sex shall
be construed to include the masculine, feminine, and neuter, when such
construction is appropriate, and specific enumeration shall not exclude the
general, but shall be construed as cumulative. Definitions of terms defined in
the singular and plural shall be equally applicable to the plural or singular,
as the case may be.
ARTICLE II.
AMENDMENTS
The Borrower, Co-Borrowers and the Agent and the Lenders hereby amend the
Agreement in the following particulars:
2.01 AMENDMENT OF SECTION 1.02. Section 1.2 of the Agreement is hereby
amended as follows:
The following definitions are added, deleted, and/or amended to read
as follows:
"AVAILABLE COMMITMENT" shall mean, at any time, an amount equal to the
remainder, if any, of (a) the Borrowing Base in effect at such time plus
the Tranche A Principal MINUS (b) the sum of the Loan Balance at such time
and the L/C Exposure at such time.
"BOND INTEREST PAYMENT" shall mean the scheduled interest payments due
under the 6.875% Convertible Subordinated Debenture due 2007.
"BORROWING BASE UTILIZATION" shall mean the aggregate principal amount
of Loans outstanding hereunder, plus any L/C Exposure hereunder as a
percentage of the Borrowing Base, plus the Tranche A Principal.
<PAGE>
"COMMITMENT AMOUNT" shall mean for Compass, $23,289,500 and for First
Union, $12,540,500 as of the closing of the Second Amendment.
"DEBT SERVICE" shall mean an amount equal to (i) actual principal
amounts paid, other than principal payment required as a result of asset
sales, on Indebtedness other than the Obligations during each quarter,
including all consolidated debt of the Borrower and/or the Co-Borrowers,
plus (ii) principal amounts required to be paid, other than principal
payments required as a result of asset sales, on the Obligations during
such quarter with the exception of Tranche A Principal.
"LOCKBOX" shall mean P.O. Box 4927, Houston, Texas 77210-4927,
established by the Borrower with the Agent, to which each purchaser of
production and disburser of the proceeds of production from or attributable
to the Mortgaged Properties shall be directed to make remittance.
"LOCKBOX ACCOUNTS" shall mean Account Nos. 75092717, 75092695, and
75092709 of the Borrower and Co-Borrowers established with the Agent in
association with the Lockbox.
"LOCKBOX AGREEMENT" shall mean the lockbox agreement between the
Borrower and the Agent relating to the Lockbox and being in form and
substance satisfactory to the Lenders, as the same may be amended,
restated, or supplemented from time to time.
"MINERAL INTERESTS SALE" shall mean the sale of certain Oil and Gas
Properties referred to in Borrower's press release dated March 12, 1999.
"PROTECTED ACCOUNT" shall mean an account with Agent where Borrower
shall deposit the sum of $1,423,125, which is the amount of the Bond
Interest Payment due April 1, 1999.
"RESTRUCTURE FEE" shall mean the fee payable to the Lenders by the
Borrower and the Co-Borrowers pursuant to Section 2.26.
"TRANCHE A PRINCIPAL" shall mean the sum of $12,500,000.
<PAGE>
The following definitions will be deleted:
"ADJUSTED LIBO RATE", "APPLICABLE MARGIN", "LIBO Rate", "LIBO RATE LOAN"
and "FIXED RATE LOAN" and any reference to such terms in the Agreement
shall be deleted, and the Borrower and/or the Co-Borrowers shall not have
the option to make Fixed Rate Loans.
2.02 ADDITION OF SECTION 2.5(a). Section 2.5(a) shall be added to the
Agreement as follows:
"2.5(a) REPAYMENT OF TRANCHE A PRINCIPAL AND INTEREST. Accrued and
unpaid interest at the Floating Rate, plus one percent (1%) on Tranche A
Principal shall be due and payable monthly commencing on the first day of
April, 1999, and continuing on the first day of each calendar month
thereafter until September 1, 1999, when all accrued interest and principal
if not sooner paid as required under Section 5.23 below shall be due and
payable. Any payments on the Tranche A Principal shall permanently reduce
Tranche A Principal by a like amount. Borrower shall not be allowed to
reborrow under the Tranche A Principal.
2.03 AMENDMENT OF SECTION 2.9(a) Section 2.9(a) of the Agreement is amended
to read as follows:
"2.9(a) BORROWING BASE DETERMINATIONS (a) The Borrowing Base as of
March 1, 1999, is acknowledged by the Borrower and the Co-Borrowers and the
Lenders to be $23,330,000. Commencing on April 1, 1999, and continuing on
the first day of each calendar month thereafter until the earlier of the
date such amount is redetermined or the Commitment Termination Date, the
Scheduled Reduction Amount shall be $40,000. In addition the Borrower
and/or Co-Borrowers shall make principal payments on the Loan Balance equal
to required mandatory prepayment of principal on the Borrowing Base upon
the reductions of the Borrowing Base of (i) $3,976,875 from the proceeds of
the Mineral Interests Sale upon the closing of this Second Amendment; (ii)
$523,125 from the proceeds of the remainder of the Mineral Interests Sale
upon completion of the remainder of the Mineral Interests Sale which
payment shall occur no later than April 30, 1999; provided that Lenders
consent to such remainder of the Mineral Interest Sale and deliver
necessary releases on such property, and (iii) $1,423,125 at 12:00 noon
central time on April 30, 1999, in the event that by such date and time the
Borrower has not paid in full the April 1, 1999 scheduled Bond Interest
Payment. The next Borrowing Base redetermination shall be July 1, 1999.
2.04 AMENDMENT OF SECTION 2.10. Section 2.10 of the Agreement is amended to
read as follows:
<PAGE>
"2.10 MANDATORY PREPAYMENTS. If at any time the sum of the Loan
Balance and the L/C Exposure exceeds the sum of Borrowing Base and the
Tranche A Principal and the then in effect, the Borrower and the
Co-Borrowers shall, within 30 days of notice from the Agent of such
occurrence except for the payments required under Section 5.23, where
payments are required without notice from the Agent, (a) prepay, or make
arrangements acceptable to the Lenders for the prepayment of, the amount of
such excess for application on the Loan Balance, (b) provide additional
Collateral, of character and value satisfactory to the Lenders in their
sole discretion, to secure the amount of such excess by the execution and
delivery to the Lenders of Security Instruments in form and substance
satisfactory to the Lenders, or (c) effect any combination of the
alternatives described in clauses (a) and (b) of this Section and
acceptable to the Lenders in their sole discretion. In the event that a
mandatory prepayment is required under this Section and the Loan Balance is
less than the amount required to be prepaid, the Borrower and the
Co-Borrowers shall repay the entire Loan Balance and, in accordance with
the provisions of the relevant Letter of Credit Applications executed by
the Borrower and/or the Co-Borrowers or otherwise to the satisfaction of
the Lenders, deposit with the Agent for the benefit of the Lenders, as
additional collateral securing the Obligations, an amount of cash, in
immediately available funds, equal to the L/C Exposure minus the lesser of
the aggregate Commitment Amounts or the sum of Borrowing Base plus Tranche
A Principal. The cash deposited with the Agent for the benefit of the
Lenders in satisfaction of the requirement provided in this Section may be
invested, at the sole discretion and at the express direction of the
Borrower and/or Co-Borrowers as to investment vehicle and maturity (which
shall be no later than the latest expiry date of any then outstanding
Letter of Credit), for the account of the Borrower and/or Co-Borrowers in
cash or cash equivalent investments offered by or through the Lenders.
2.05 AMENDMENT OF SECTION 2.12. Section 2.12 of the Agreement is amended to
read as follows:
"2.12 COMMITMENT FEE. In addition to interest on the Notes as provided
herein and other fees payable hereunder and to compensate the Lenders for
maintaining funds available, the Borrower and Co-Borrowers shall pay to the
Agent for the account of the Lenders in immediately available funds, on the
first day of July, 1998, and on the first day of each third calendar month
thereafter during the Commitment Period and on the Commitment Termination
Date, a fee in the amount per annum as set forth below, calculated on the
basis of a year of 365 or 366 days, as the case may be, and actual days
elapsed (including the first day but excluding the last day), on the
average daily amount of the Available Commitment during the preceding
quarterly period as follows:
<PAGE>
BORROWING BASE
UTILIZATION COMMITMENT FEE
-------------------------- ----------------------------
1) greater than 50% one-half percent (1/2%)
of the sum of the
Borrowing Base plus
the Tranche Principal
2) less than or equal to 50% three-eighths percent (3/8%)
of the sum of the Borrowing
Base plus the Tranche Principal
The Borrowing Base Utilization and the corresponding Commitment Fee shall
be set at each quarter end for the next quarter.
2.06 ADDITION OF SECTION 2.26. Section 2.26 shall be added to the Agreement
to read as follows:
"2.26 RESTRUCTURE FEE. In addition to interest on the Notes as
provided herein and other fees payable hereunder and to compensate the
Lenders for the restructuring of the facility, the Borrower and/or the
Co-Borrowers shall pay to the Agent for the account of the Lenders, a
Restructure Fee equal to one and one half percent of the Tranche A
Principal (i.e. $187,500.00) which amount is deemed earned by the Lenders
as of the closing of this Second Amendment but payable upon the Borrower
and/or the Co-Borrowers' completion of a transaction that will enable the
Borrower and/or the Co-Borrowers to pay the Tranche A Principal in full.
2.07 AMENDMENT OF SECTION 3.1 Section 3.1 of the Agreement is amended to
read as follows by adding the following subparagraph:
"(p) the Lockbox Agreement and Collateral Assignment
of Deposit Account and Security Agreement."
2.08 AMENDMENT OF SECTION 5.15. Section 5.15 is amended to read as follows:
"5.15 SUBSEQUENT FEES AND EXPENSES OF AGENT AND LENDERS. Upon request
by the Agent and/or the Lenders, promptly (within 45 days of receipt of
monthly invoices) reimburse the Agent and/or the Lenders (to the fullest
extent permitted by law) for all amounts reasonably expended, advanced, or
incurred by or on behalf of the Agent or the Lenders to ratify, amend,
restate, or prepare additional
<PAGE>
Loan Documents, as the case may be; for the filing and recordation of
Security Instruments. Promptly reimburse the Agent and each Lender to
satisfy any obligation of the Borrower and/or the Co-Borrowers under any of
the Loan Documents; to collect the Obligations; to enforce the rights of
the Agent and each Lender under any of the Loan Documents; and to protect
the Properties or business of the Borrower and/or the Co-Borrowers,
including, without limitation, the Collateral, which amounts shall be
deemed compensatory in nature and liquidated as to amount upon notice to
the Borrower and/or the Co-Borrowers by the Agent and each Lender and which
amounts shall include, but not be limited to (a) all court costs, (b)
reasonable attorneys' fees, (c) reasonable fees and expenses of auditors
and accountants incurred to protect the interests of the Agent and each
Lender, (d) fees and expenses incurred in connection with the participation
by the Agent and each Lender as a member of the creditors' committee in a
case commenced under any Insolvency Proceeding, (e) fees and expenses
incurred in connection with lifting the automatic stay prescribed in ss.362
Title 11 of the United States Code, and (f) fees and expenses incurred in
connection with any action pursuant to ss.1129 Title 11 of the United
States Code all reasonably incurred by the Agent and each Lender in
connection with the collection of any sums due under the Loan Documents,
together with interest at the per annum interest rate equal to the Floating
Rate, calculated on a basis of a calendar year of 365 or 366 days, as the
case may be, counting the actual number of days elapsed, on each such
amount from the date of notification that the same was expended, advanced,
or incurred by the Agent and each Lender until the date it is repaid to the
Agent and each Lender, with the obligations under this Section surviving
the non-assumption of this Agreement in a case commenced under any
Insolvency Proceeding and being binding upon the Borrower and/or the
Co-Borrowers and/or a trustee, receiver, custodian, or liquidator of the
Borrower and/or the Co-Borrowers appointed in any such case.
2.09 ADDITION OF SECTION 5.22. Section 5.22 shall be added to the Agreement
to read as follows:
"5.22 ADDITIONAL REPORTING REQUIREMENTS. Deliver to the Agent and each
Lender within 15 days of each month end (i) a capital expenditure forecast
for the next six month period; and (ii) a report of accounts payable that
represents amounts due aged according to invoice date in form acceptable to
Lenders.
Borrower shall also furnish the Agent and each Lender to the extent
provided to the Borrower by CIBC any written status report regarding CIBC's
sales efforts immediately upon receipt by the Borrower and/or Co-Borrowers.
2.10 ADDITION OF SECTION 5.23. Section 5.23 shall be added to the Agreement
to read as follows:
<PAGE>
"5.23 APPLICATION OF PROCEEDS FROM PROPERTY SALES. Proceeds from the
sales of Property by the Borrower and/or the Co-Borrowers shall be made to
the Lenders by the Borrowers and/or Co-Borrowers on the same day such
proceeds are received by the Borrower and/or Co-Borrowers and applied as
follows:
CATEGORY 1. Oil and Gas Properties currently assigned value under the
Borrowing Base (excluding the Oil and Gas Properties included in the
Mineral Interests Sale) - Proceeds from the sale of such properties
will be applied in the following order, subject to Lenders' prior
consent to the release of their mortgages/liens in connection with any
such sale:
(a) first, to the payment of the reasonable costs of such sales, if any;
(b) next, to the payment of past due interest and/or fees due to Lenders,
if any;
(c) next, to the reduction of the Borrowing Base to the extent of the
allocated Borrowing Base value for such assets sold;
(d) next, to the payment of the Tranche A Principal; and
(e) finally, 100% of the remainder, if any, to reduce the Loan Balance. The
Borrowing Base shall reduce by a like amount.
CATEGORY 2. THE OIL AND GAS PROPERTIES INCLUDED IN THE MINERAL
INTERESTS SALE. Proceeds from the Mineral Interests Sale, to which
the Lenders will consent, in the amount of $6,000,000 which will be
applied in the following order:
(a) first, to the payment of the reasonable costs of such sales, which is
$35,500;
(b) next, to advance the amount of $1,423,125 into the Protected Account to
provide for the April 1, 1999 scheduled Bond Interest Payment (if such Bond
Interest Payment has not already been provided for);
(c) next, to principal payments on the Loan Balance equal to the reduction
payment of the Borrowing Base by $4,500,000, which is the allocated
Borrowing Base value for the Oil and Gas Properties included in the Mineral
Interests Sale (this reduction shall be applied toward the required
reductions in 2.9(a)(i) and (ii) of this Agreement;
(d) next, to the payment of the Tranche A Principal; and
(e) finally, 100% of the remainder, if any, to reduce the Loan Balance. The
Borrowing Base shall reduce by a like amount.
CATEGORY 3. Neutrino Resources Inc. ("NTO") - Proceeds from the sale
of the stock of NTO or the assets of NTO (after satisfaction of NTO
creditors), will be applied in the following order:
(a) first, to the payment of the reasonable costs of such sales, if any;
<PAGE>
(b) next, to the payment of past due interest and/or fees due to Lenders,
if any;
(c) next, to advance the amount of $1,423,125 into the Protected Account to
provide for the April 1, 1999 scheduled Bond Interest Payment (if such Bond
Interest Payment has not already been provided for);
(d) next, to the payment of the Tranche A Principal; and
(e) finally, 50% of the proceeds, if any, to reduce the Loan Balance. The
Borrowing Base shall reduce by a like amount. The remaining 50% of the
remaining proceeds, if any, will be retained by the Borrower and the
Co-Borrowers for capital investment and general corporate purposes.
CATEGORY 4. Any other Property sales not included in Categories 1,
2, or 3 above - Proceeds from the sale of such assets will be
applied in the following order:
(a) first, to the payment of the reasonable costs of such sales, if any;
(b) next, to the payment of past due interest and/or fees due to Lenders,
if any;
(c) next, to advance the amount of $1,423,125 into the Protected Account to
provide for the April 1, 1999 scheduled Bond Interest Payment (if such Bond
Interest Payment has not already been provided for);
(d) next, to the payment of the Tranche A Principal; and
(e) finally, 50% of the remaining proceeds to reduce the Loan Balance. The
Borrowing Base shall reduce by a like amount. The remaining 50% will be
retained by the Borrower and/or the Co-Borrowers for capital investment and
general corporate purposes.
2.11 ADDITION OF SECTION 5.24. Section 5.24 shall be added to the Agreement
to read as follows:
"5.24 LOCKBOX ARRANGEMENT. Execute, maintain in full force and effect,
and comply in all respects with the provisions of such documentation as may
be reasonably required by the Lenders to establish the Lockbox and the
Lockbox Accounts (including, without limitation, the Lockbox Agreement and
Collateral Assignment of Deposit Accounts and Security Agreement); direct
all purchasers of production from the Mortgaged Properties to make
remittance to the Lockbox; and deposit directly into the Lockbox Accounts
all funds received by the Borrower and/or the Co-Borrowers, if any, from
purchasers of production and/or dispersers of the proceeds of production
from the Mortgaged Properties. Funds received in the Lockbox shall be
transferred daily by the Agent to the Lockbox Accounts over which the Agent
shall have exclusive control and then provided there is no Event of Default
to Borrower's Operating Accounts. Upon the occurrence of an Event of
Default, the Agent may, at its option, apply any or all of such funds in
the Lockbox Account to the Obligations, whether matured or unmatured."
<PAGE>
2.12 ADDITION OF SECTION 5.25. Section 5.25 shall be added to the Agreement
to read as follows:
"5.25 PROCEEDS FROM MINERAL INTERESTS SALE. In addition to the
payments to the Lenders from the Mineral Interests Sale required in Section
5.23 Category 2(b), the Borrower and/or Co-Borrowers will deposit proceeds
from the Mineral Interests Sale totaling $1,423,125 in the Protected
Account at the closing of this Second Amendment. At all times until 12:00
noon central time on April 30, 1999, Agent shall (i) limit any transfer of
funds in the Protected Account to payment of the April 1, 1999 Bond
Interest Payment pursuant to written instructions of the Borrower, and (ii)
not exercise any of its rights and remedies with respect to the funds in
the Protected Account. Notwithstanding anything herein to the contrary, if
the April 1, 1999 scheduled Bond Interest Payment is not made by the
Borrower by 12:00 noon, central time on April 30, 1999, then at any time
thereafter, the Lenders may exercise any and all of their rights and
remedies with respect to any and all funds in the Protected Account,
including, without limitation, the right to offset such funds."
2.13 AMENDMENT OF SECTION 6.14. Section 6.14 of the Agreement is amended to
read as follows:
"6.14 TANGIBLE NET WORTH. Permit Tangible Net Worth as of the close of
any fiscal quarter to be less than $10,000,000, beginning December 31,
1998, plus (i) 50% of positive Net Income, (ii) 75% of other increases in
equity, and (iii) 100% of any unrealized positive Canadian currency
translation adjustments, less any unrealized negative Canadian currency
translation adjustments (as recognized on the balance sheet) for all fiscal
quarters ending subsequent to December 31, 1998."
2.14 ADDITION OF SECTION 6.15. Section 6.15 shall be added to the Agreement
to read as follows:
"6.15 EXPENDITURES IN CAPITAL EXPENDITURE FORECAST. If an Event of
Default has occurred and is continuing, the Borrower and/or Co-Borrowers
shall make no expenditures set forth in the capital expenditures forecast,
without the prior written consent of the Lenders."
2.15 ADDITIONS TO SECTION 7.1. Section 7.1 of the Agreement is amended to
read as follows by adding the following subparagraphs:
"(n) an Event of Default shall occur automatically and without any
notice to the Borrower or Co-Borrowers if any Scheduled
<PAGE>
Reduction Amount payment is not made on the first day of each month
beginning 2:00 p.m. central time April 1, 1999; and
(o) an Event of Default shall occur automatically and without any
notice to the Borrower or Co-Borrowers if the Bond Interest Payment is
not made within 30 days after the Interest Payment Date as defined in
the Indenture dated October 7, 1997, for the 6.875% Convertible
Subordinated Debenture due 2007."
ARTICLE III.
CONDITIONS
The obligation of the Agent and the Lenders to amend the Agreement as
provided herein is subject to the fulfillment of the following conditions
precedent:
3.01 RECIEPT OF DOCUMENTS. The Agent and the Lenders shall have received,
reviewed, and approved the following documents and other items, appropriately
executed when necessary and in form and substance satisfactory to the Agent and
the Lenders:
(a) multiple counterparts of this Second Amendment as requested by the
Lenders;
(b) Mortgage, Deed of Trust, Indenture, Security Agreement, Financing
Statement and Assignment of Production from Diverse GP III in certain
designated Oil and Gas Properties, and all improvements, personal
property, and fixtures related thereto;
(c) Financing Statements from Diverse GP III, as Debtor, constituent
to the instrument described above;
(d) Letters in lieu of transfer orders executed by Diverse GP III
constituent to the documents described above;
(e) Security Agreement (Stock Pledge) and blank Stock Power from
Spruce Hills Production Company, Inc. ("Spruce Hills"), as Debtor, to
Agent as Secured Party pledging 100% of the stock of Neutrino
Resources Inc. and Financing Statement as to dividends and proceeds;
(f) Security Agreement (Stock Pledge) and blank Stock Power from the
Borrower, as Debtor, to Agent as Secured Party pledging 100% of the
stock of Spruce Hills Production Company, Inc. and Financing Statement
as to dividends and proceeds;
<PAGE>
(g) Collateral Assignment of Deposit Accounts and Security Agreement
from the Borrower pledging certain accounts with Compass;
(h) Financing Statement from the Borrower, as Debtor, constituent to
the instrument described in (h); and
(i) notification letters to be mailed on the date of execution of the
Second Amendment in form and substance satisfactory to the Agent, from
the Borrower and/or the Co-Borrowers to each purchaser of production
and disburser of proceeds of production from or attributable to the
Mortgaged Properties, authorizing and directing the addressees to make
future payments attributable to production from the Mortgaged
Properties directly to the Lockbox and with a provision that such
instructions cannot be changed without the prior consent of the Agent
and the Borrower and Co-Borrowers;
(j) 1999 capital expenditure budget;
(k) 1999 general and administrative budget approved by the Lenders,
which approval shall not be unreasonably withheld. Such budget may not
be changed without prior written consent of the Lenders, which consent
shall not be unreasonably withheld; and
(l) such other agreements, documents, items, instruments, opinions,
certificates, waivers, consents, and evidence as the Agent and the
Lenders may reasonably request.
3.02 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties contained in Article IV of the Agreement and this Second Amendment
shall be true and correct, except that (i) the last sentence of Section 4.6 of
the Agreement is amended to read as follows: "No event or circumstance has
occurred since December 31, 1998, which could reasonably be expected to have a
Material Adverse Effect," and (ii) Exhibit VI to the Agreement is amended to add
Neutrino Resources, Inc.
3.03 MATTERS SATISFACTORY TO PARTIES. All matters incident to the
consummation of the transactions contemplated hereby shall be satisfactory to
the parties hereto.
<PAGE>
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
4.01 RESTATEMENT OF REPRESENTATIONS AND WARRANTIES. The Borrower and
Co-Borrowers hereby expressly re-make, in favor of the Agent and the Lenders,
all of the representations and warranties set forth in Article IV of the
Agreement, and represents and warrants that all such representations and
warranties remain true and unbreached except that (i) the last sentence of
Section 4.6 of the Agreement is amended to read as follows: "No event or
circumstance has occurred since December 31, 1998, which could reasonably be
expected to have a Material Adverse Effect," and (ii) Exhibit VI to the
Agreement is amended to add Neutrino Resources, Inc.
ARTICLE V.
RATIFICATION
Each of the parties hereto does hereby adopt, ratify, and confirm the
Agreement and the other Loan Documents, in all things in accordance with the
terms and provisions thereof, as amended by this Second Amendment.
ARTICLE VI.
MISCELLANEOUS
6.01 SCOPE OF SECOND AMENDMENT. The scope of this Second Amendment is
expressly limited to the matters addressed herein and this Second Amendment
shall not operate as a waiver of any past, present, or future breach, Default,
or Event of Default under the Agreement, except to the extent, if any, that any
such breach, Default, or Event of Default is remedied by the effect of this
Second Amendment.
6.02 AGREEMENT AS AMENDED. All references to the Agreement in any document
heretofore or hereafter executed in connection with the transactions
contemplated in the Agreement shall be deemed to refer to the Agreement as
amended by this Second Amendment.
6.03 PARTIES IN INTEREST. All provisions of this Second Amendment shall be
binding upon and shall inure to the benefit of the Borrower, the Co-Borrowers,
the Agent, the Lenders and their respective successors and assigns.
6.04 RIGHTS OF THIRD PARTIES. All provisions herein are imposed solely and
exclusively for the benefit of the Agent and the Lenders, the Borrower and
Co-Borrowers, and no other Person shall have standing to require satisfaction of
such provisions in accordance with their terms and any or all of such provisions
may be freely waived in whole or in part by the Lenders at any time if in their
sole discretion they deem it advisable to do so.
<PAGE>
6.05 GOVERNING LAW. THIS SECOND AMENDMENT, THE AGREEMENT AND THE NOTES
SHALL BE DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO
PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW; PROVIDED, HOWEVER, THAT TEX.
FIN. CODE ANN. SS. 303.301 (VERNON 1998) (WHICH REGULATES CERTAIN REVOLVING
CREDIT LOAN ACCOUNTS AND REVOLVING TRIPARTY ACCOUNTS) SHALL NOT APPLY; AND
PROVIDED FURTHER, THE PARTIES AGREE THAT THE LAWS OF NORTH CAROLINA SHALL GOVERN
AND CONTROL THE LAWFULNESS OF THE AMOUNT OR RATE OF INTEREST CONTRACTED FOR,
CHARGED OR RECEIVED UNDER THE LOAN DOCUMENTS.
6.06 JURISDICTION AND VENUE. ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO,
ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO, OR FROM
THIS SECOND AMENDMENT, THE AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE
LITIGATED, AT THE SOLE DISCRETION AND ELECTION OF THE LENDERS, IN COURTS HAVING
SITUS IN HOUSTON, HARRIS COUNTY, TEXAS. THE BORROWER AND THE CO-BORROWERS HEREBY
SUBMIT TO THE JURISDICTION OF ANY LOCAL, STATE, OR FEDERAL COURT LOCATED IN
HOUSTON, HARRIS COUNTY, TEXAS, AND HEREBY WAIVE ANY RIGHTS THEY MAY HAVE TO
TRANSFER OR CHANGE THE JURISDICTION OR VENUE OF ANY LITIGATION BROUGHT AGAINST
THEM BY THE LENDERS IN ACCORDANCE WITH THIS SECTION.
6.07 ENTIRE AGREEMENT. THIS SECOND AMENDMENT CONSTITUTES THE ENTIRE
AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND
SHALL SUPERSEDE ANY PRIOR AGREEMENT BETWEEN THE PARTIES HERETO, WHETHER WRITTEN
OR ORAL, RELATING TO THE SUBJECT HEREOF. FURTHERMORE, IN THIS REGARD, THIS
SECOND AMENDMENT AND THE OTHER WRITTEN LOAN DOCUMENTS REPRESENT, COLLECTIVELY,
THE FINAL AGREEMENT AMONG THE PARTIES THERETO AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF SUCH
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG SUCH PARTIES.
6.08 CONFIDENTIALITY. Lenders agree to keep confidential any information
furnished or made available to them by or on behalf of Borrower and/or
Co-Borrowers pursuant to this Agreement; PROVIDED that nothing herein shall
prevent Lenders from disclosing such information (a) to any affiliate of
Lenders, or any officer, director, employee, agent, or advisor of Lenders or
affiliate of any Lenders, (b) to any other Person if necessary to the
administration of this Agreement, (c) as required by any law, rule, or
regulations, (d) upon the order of any court or administrative agency, (e) upon
the written request or demand of any regulatory agency or
<PAGE>
authority, (f) that is or becomes available to the public or that is or becomes
available to Lenders other than as a result of a disclosure by Lenders
prohibited by this Agreement, (g) in connection with any litigation relating to
this Agreement to which Lenders or any of its affiliates is a party, (h) to the
extent necessary in connection with the exercise of any remedy of Lender under
this Agreement and to any actual or proposed participant or assignee of the
Lender.
6.09 RELEASE OF CLAIMS. The Borrower and Co-Borrowers hereby release the
Agent and the Lenders from any and all known or suspected claims, actions,
demands or causes of action of whatever kind or character arising on or prior to
the date hereof. IT IS EXPRESSLY AGREED THAT THE CLAIMS RELEASED BY THE BORROWER
AND THE CO-BORROWERS HEREBY INCLUDE THOSE ARISING FROM OR IN ANY MANNER
ATTRIBUTABLE TO THE NEGLIGENCE (SOLE, CONCURRENT, ORDINARY, OR OTHERWISE), OF
THE AGENT AND THE LENDERS, THEIR RESPECTIVE REPRESENTATIVES, AGENTS, OFFICERS,
DIRECTORS, EMPLOYEES, SUCCESSORS AND ASSIGNS. Notwithstanding any provision of
this Second Amendment or any other Loan Document, this section shall remain in
full force and effect and shall survive the delivery and payment of the Notes,
this Second Amendment and the other Loan Documents and the making, extension,
renewal, modification, amendment or restatement of any thereof.
IN WITNESS WHEREOF, this Second Amendment is deemed executed
effective as of the date first above written.
BORROWER:
SOUTHERN MINERAL CORPORATION
By:
Steven H. Mikel
President and Chief Executive
Officer
CO-BORROWERS:
SMC ECUADOR, INC.
SMC PRODUCTION CO.
BEC ENERGY, INC.
AMERAC ENERGY CORPORATION
<PAGE>
BY:
Steven H. Mikel
President and Chief Executive
Officer
LENDER AND AGENT:
COMPASS BANK
By:
Allison Hammer
Vice-President
LENDER:
FIRST UNION NATIONAL BANK
By:
Robert Wetteroff
Senior Vice-President
EXHIBIT 10.28
AMENDMENT TO
INCENTIVE STOCK OPTION AGREEMENT
AS UNANIMOUSLY APPROVED BY THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
DECEMBER 21, 1998
- - --------------------------------------------------------------------------
On December 21, 1998 the Compensation Committee of the Board of Directors of
Southern Mineral Corporation (the "COMPANY") elected to reprice the options
issued under the Incentive Stock Option Agreement to all employees, save and
except for Steven H. Mikel, as of December 21, 1998.
The Agreement is amended, as follows:
EXERCISE PRICE. The exercise price of this Incentive Option is $1.00 per
share of Common Stock acquired on exercise, which price is not less than
100% (or, if the Optionee, at the date of the grant of this Incentive
Option, owns more than 10% of the total combined voting power of all the
Company's outstanding voting securities, 110%) of the Fair Market Value,
as determined in accordance with the Plan, of a share of Common Stock on
the date of grant of this Incentive Option.
The effective date of this Amendment is December 21, 1998. This Amendment shall
supersede and replace Section 2 of all prior agreements and understandings, oral
or written, between the Company and the Optionee regarding the exercise price of
the Incentive Option covered hereby. In all other respects, the applicable terms
and provisions of the Plan shall govern and prevail.
EXHIBIT 10.29
RETENTION PLAN
AS UNANIMOUSLY APPROVED BY
THE BOARD OF DIRECTORS
JANUARY 7, 1999
------------------------------------------------------------------------------
The following resolutions were approved in a nine to zero vote with Messrs.
Arsenych, Beckwermert and Mikel abstaining due to the terms of such plans being
applicable to them as officers of the Company and Neutrino Resources Inc.
WHEREAS, the Retention Plan proposed by the Compensation Committee was
discussed, modified, and deemed to be in the best interest of the Company,
the Board unanimously approved the following resolutions:
RESOLVED, that "Change of Control" occurs when (i) any person becomes (after
the effective date of the Plan) the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing more than 50% of the combined voting power of the
Company's then outstanding securities; (ii) the sale of all or substantially
all of the assets of the Company or Neutrino occurs; (iii) as a result of or
in connection with a contested election of directors, the persons who were
directors of the Company before such election cease to constitute a majority
of the Board; or (iv) the Board determines in its sole and absolute
discretion that there has been a change in control of the Company.
RESOLVED, that upon a change of control of the Company prior to December 31,
1999, Vice President level officers and above shall receive upon termination
(i) one year base annual rate, payable in a lump sum within 15 days of
termination, less any amounts required to be withheld under applicable
local, state or federal law; plus (ii) vesting of any and all stock options;
if not retained for a one year period following such change of control in
equivalent positions within the same metropolitan area, with equivalent
salaries and benefits. All other personnel shall receive upon termination
(i) six months base annual rate, payable in a lump sum within 15 days of
termination, less any amounts required to be withheld under applicable
local, state or federal law; plus (ii) vesting of all stock options; if not
retained for a six month period following such change of control in
equivalent positions within the same metropolitan area, with equivalent
salaries and benefits.
FURTHER RESOLVED that the above described retention plan shall apply to
Neutrino Resources Inc. officers and employees if there is a change of
control of the Company or Neutrino Resources Inc.
FURTHER RESOLVED, these rights are vested in the officers and employees of
the Company and Neutrino as of the date of this meeting and may not be
adversely amended or waived.
EXHIBIT 21.1
OTHER NAME UNDER WHICH JURISDICTION OF
NAME OF SUBSIDIARY SUBSIDIARY CONDUCTS BUSINESS INCORPORATION
Neutrino Resources Inc. None Alberta, Canada
SMC Production Co. None Texas
BEC Energy, Inc. None Texas
SMC Ecuador, Inc. None Delaware
Amerac Energy Corporation None Delaware
Spruce Hills Production Company, Inc. None Delaware
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Southern Mineral Corporation:
We consent to the incorporation by reference in the registration statements on
Forms S-8(No. 33-60571 and No. 333-12375) of Southern Mineral Corporation of our
report dates March 9, 1999, except as to Notes 3 and 14 which are dated March
29, 1999, relating to the consolidated balance sheet 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 which report appears in the December 31, 1998 annual
report on Form 10-K of Southern Mineral Corporation.
KPMG LLP
Houston, Texas
March 30, 1999
EXHIBIT 23.2
[LETTERHEAD OF NETHERLAND, SEWELL AND ASSOCIATES]
CONSENT OF NETHERLAND, SEWELL & ASSOCIATES, INC.
We hereby consent to the incorporation by reference in the Annual
Report on Form 10-K of Southern Mineral Corporation, a Nevada corporation
(the "Company"), of the references to this firm and to its reports listed
below for the Company's estimated domestic proved reserves contained in
the Annual Report on Form 10-K for the year ended December 31, 1998.
1. Report of domestic proved reserves estimates as of January 1, 1996
dated March 1, 1996.
2. Audit of domestic proved reserves estimates as of January 1, 1997
dated February 25, 1997.
3. Report of domestic proved reserves estimates as of January 1, 1998
dated February 16, 1998.
4. Report of domestic proved reserves estimates as of January 1, 1999
dated February 11, 1999.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By:/s/ DANNY D. SIMMONS
Danny D. Simmons
Senior Vice President
Houston, Texas
March 24, 1999
4500 THANKSGIVING TOWER * 1601 ELM STREET * DALLAS, TEXAS 75201-4754 *
(214) 969-5401 * FAX: (214) 969-5411
4950 THREE ALLEN CENTER * 333 CLAY STREET * HOUSTON, TEXAS 77002-4103 *
(713) 654-4950 * FAX: (713) 654-4951
TELEX: 49615767 * CABLE: NSAIINTL
EXHIBIT 23.3
[McDANIELS & ASSOCIATES LETTERHEAD]
INDEPENDENT PETROLEUM ENGINEER'S CONSENT
We hereby consent to the incorporation by reference in the Annual Report on Form
10-K of Southern Mineral Corporation, a Nevada corporation (the "Company"), of
the references to this firm and to its reports listed below for the Company's
estimated Canadian proved reserves contained in the Annual Report on Form 10-K
for the year ended December 31, 1998.
1. Report of Canadian estimates as of December 31, 1995
2. Report of Canadian estimates as of December 31, 1996
3. Report of Canadian estimates as of December 31, 1997
McDANIELS & ASSOCIATES CONSULTANTS LTD.
/s/B.H. EMSLIE
B.H. Emslie, P. Eng.
Vice President
Calgary, Alberta
Dated: March 26, 1999
EXHIBIT 23.4
INDEPENDENT PETROLEUM ENGINEER'S CONSENT
We hereby consent to the incorporation by reference in the
Annual Report on Form 10-K of Southern Mineral Corporation, a Nevada
corporation (the "Company"), of the references to this firm and to its
reports listed below for the Company's estimated domestic proved reserves
contained in the Annual Report on Form 10-K for the year ended December 31,
1998.
1. Report of Ecuador reserves as of January 1, 1998.
2. Audit of certain domestic reserves as of January 1, 1999.
/s/ RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
3700, 700 - 2ND STREET, S.W. CALGARY, ALBERTA T2P 2W2 TEL (403) 262-2799 FAX (403) 262-2790
600 17TH STREET, SUITE 1610N DENVER, COLORADO 80202-5416 TEL (303) 623-9147 FAX (403) 623-4258
</TABLE>
EXHIBIT 23.5
[CHAPMAN PETROLEUM ENGINEERING LTD. LETTERHEAD]
March 17,1999
Neutrino Resources Inc.
1400, 300 - 5TH Avenue SW
Calgary, Alberta
T2P 3C4
Attention: Mr. Al Smith
Dear Sir:
Re: Neutrino Resources Inc. (the "Company")
CONSENT LETTER
--------------------------------------
We hereby consent to the use of and reference to our name and material from our
reports entitled:
i) "Reserve and Economic Evaluation, Oil and Gas Properties, Owned by
Neutrino Resources Inc., January 1, 1999," dated December 29, 1998.
and
ii) "Reserve and Economic Evaluation, Oil and Gas Properties, Spruce Hills
Production Company Inc., Owned by Neutrino Resources Inc., January 1,
1999," dated December 30, 1998; and
iii) any other supplemental reports prepared by us referring to the above
reports.
in the Company's annual report and in any required filings with the
Securities Exchange Commission (SEC) or any other securities
regulatory bodies.
Yours very truly,
Chapman Petroleum Engineering Ltd.
/s/ C.W. CHAPMAN
C.W. Chapman P. Eng.
President
PERMIT TO PRACTICE
CHAPMAN PETROLEUM ENGINEERING LTD.
Signature /s/ C.W. CHAPMAN
Date 3/17/99
PERMIT NUMBER: P 4201
The Association of Professional
Engineers Geologists and
Geophysicists of Alberta
EXHIBIT 23.6
GILBERT LAUSTSEN JUNG
ACCOCIATES LTD. PETROLEUM CONSULTANTS
4100, 400 - 3RD AVENUE S.W., CALGARY, ALBERTA, CANADA T2P 4H2 (403) 266-9500
FAX (403) 262-1855
LETTER OF CONSENT
TO: Southern Mineral Corporation
The Securities and Exchange Commission
Re: NEUTRINO RESOURCES INC.
-----------------------------
We refer to the following report prepared by Gilbert Laustsen Jung
Associates Ltd.:
o the Reserve Determination and Evaluation of the Canadian Oil and Gas
Properties of Neutrino Resources Inc. effective January 1, 1999, dated
January 11, 1999.
We hereby consent to the use of our name, reference to and excerpts from the
said reports by Southern Mineral Corporation in its annual report and SEC
10K filing.
Yours very truly,
GILBERT LAUSTSEN JUNG ASSOCIATES LTD.
/s/ WAYNE W. CHOW
Wayne W. Chow, P Eng.
Vice-President
Calgary, Alberta
Date: March 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,541
<SECURITIES> 0
<RECEIVABLES> 5,602
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,776
<PP&E> 143,034
<DEPRECIATION> 28,847
<TOTAL-ASSETS> 128,290
<CURRENT-LIABILITIES> 23,424
<BONDS> 41,400
0
0
<COMMON> 128
<OTHER-SE> 14,599
<TOTAL-LIABILITY-AND-EQUITY> 128,290
<SALES> 21,722
<TOTAL-REVENUES> 21,472
<CGS> 0
<TOTAL-COSTS> 8,518
<OTHER-EXPENSES> 27,106
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,362
<INCOME-PRETAX> (19,184)
<INCOME-TAX> (2,775)
<INCOME-CONTINUING> (16,409)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,409)
<EPS-PRIMARY> (1.32)
<EPS-DILUTED> (1.32)
</TABLE>
